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, 1997
  
                                         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 April 30, 1997
  
   Common Stock ($2.50 par value)                       (No.) 8,006,886 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 ...7
  
  Part II - Other Information.
  
           Item 1.  Legal Proceedings .......................................12
  
           Item 2.  Changes in Securities ...................................12
  
           Item 3.  Defaults Upon Senior Securities .........................12
  
           Item 4.  Submission of Matters to a Vote of
                             Security Holders ...............................12
  
           Item 5.  Other Information .......................................12
  
           Item 6.  Exhibits and Reports on Form 8-K ........................13
  
  Signatures.................................................................14
  
                                         2
  
  <PAGE>
                           PART I - FINANCIAL INFORMATION
  
  Item 1.  Financial Statements
  
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED BALANCE SHEET
  (Dollars in thousands, except per share data)
  <TABLE>
  <CAPTION>
  
                                                                      March 31              Dec. 31
                                                                        1997                 1996
                                                                     (Unaudited)            (Note)
  <S>                                                               <C>                   <C>        
  ASSETS
  Cash and due from banks                                           $    44,877           $    40,194
  Interest bearing deposits in banks                                      2,700                 1,802
  Federal funds sold                                                     11,500                    --
                                                                    -----------           -----------
      Total cash and cash equivalents                                    59,077                41,996
  Investment securities available for sale at market value              222,961               236,814
  Loans, less allowance for loan losses of $23,340 and
    $22,746 in 1997 and 1996 respectively                             1,049,080             1,028,334
  Other assets                                                           54,022                50,869
                                                                    -----------           -----------
      Total Assets                                                  $ 1,385,140           $ 1,358,013
                                                                    ===========           ===========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                     $   148,765           $   145,107
  Interest bearing deposits
    (Includes certificates of deposit $100,000 or greater:
    1997 - $112,122; 1996- $97,115)                                     882,981               835,701
                                                                    -----------           -----------
      Total deposits                                                  1,031,746               980,808
  Securities sold under repurchase agreements
    and federal funds purchased                                         113,745               164,996
  Short-term borrowings                                                   6,919                 6,931
  Long-term obligations                                                 101,110                76,110
  Accrued interest and other liabilities                                 17,167                14,447
                                                                    -----------           -----------
      Total Liabilities                                               1,270,687             1,243,292
  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;
      authorized 20,000,000 shares; issued and outstanding
      1997 - 7,995,590; 1996 - 8,002,648, net of shares
      in Treasury: 1997 - 38,262; 1996 - 31,204                          20,085                20,085
    Additional paid-in-capital                                           83,718                83,707
    Retained earnings                                                     9,975                 4,398
    Net unrealized gains on securities available for sale                 1,812                 7,357
    Treasury stock, at cost                                              (1,137)                 (826)
                                                                    -----------           -----------
      Total Shareholders' Equity                                        114,453               114,721
                                                                    -----------           -----------
      Total Liabilities and Shareholders' Equity                    $ 1,385,140           $ 1,358,013
                                                                    ===========           ===========
  </TABLE>
  
  The accompanying notes are an integral part of these condensed financial
  statements.
  
  Note: The Balance Sheet at Dec. 31, 1996 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
                                                                    1997              1996
  <S>                                                             <C>               <C>     
  INTEREST INCOME
  Loans, including fees                                           $ 24,384          $ 21,892
  Deposits in banks                                                     17                 9
  Federal funds sold                                                    18               100
  Investment securities                                              3,749             3,718
                                                                  --------          --------
      Total interest income                                         28,168            25,719
                                                                  --------          --------
  INTEREST EXPENSE
  Deposits                                                           9,193             8,198
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                      3,276             3,071
                                                                  --------          --------
      Total interest expense                                        12,469            11,269
                                                                  --------          --------
      Net interest income                                           15,699            14,450
  Provision for loan losses                                          1,200               975
                                                                  --------          --------
      Net interest income after provision
        for loan losses                                             14,499            13,475
                                                                  --------          --------
  OTHER INCOME
  Trust income                                                         636               631
  Service charges on deposit accounts                                  954               783
  Net gains (losses) on sale of securities and mortgages               916              (103)
  Other                                                                789               634
                                                                  --------          --------
      Total other income                                             3,295             1,945
                                                                  --------          --------
  OTHER EXPENSES
  Salaries, wages and employee benefits                              6,406             5,024
  Net premises and equipment                                         1,940             1,804
  Other operating                                                    2,872             2,621
                                                                  --------          --------
      Total other expenses                                          11,218             9,449
                                                                  --------          --------
      Income before income taxes                                     6,576             5,971
  Applicable income tax expense                                      2,042             1,856
                                                                  --------          --------
      Net income                                                  $  4,534          $  4,115
                                                                  ========          ========
  
  PER SHARE OF COMMON STOCK
  Net income                                                          0.57              0.51
  Dividends paid in cash                                              0.24              0.21
  </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>
                                                                                    Three Months Ended March 31,
  (Dollars in thousands)                                                              1997                1996
  <S>                                                                               <C>                <C>     
  CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                      $  4,534           $  4,115
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan losses                                                        1,200                975
      Depreciation and amortization                                                      827                747
      Net gains (losses) on sale of securities and mortgages                             916               (103)
      Mortgage loans originated for resale                                            (4,249)            (7,307)
      Sale of mortgage loans originated for resale                                     4,249              7,307
      Other                                                                              (71)            (1,135)
                                                                                    --------           --------
        Net cash provided by operating activities                                      7,406              4,599
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale                 11,655                 --
    Proceeds from maturities of investment securities - held to maturity                  --                 --
    Proceeds from maturities of investment securities - available for sale            10,830             15,518
    Purchase of investment securities - available for sale                           (12,610)           (14,852)
    Proceeds from sales of loans                                                          --                 --
    Net increase in loans                                                            (21,946)            (9,684)
    Purchases of premises & equipment                                                   (690)              (822)
                                                                                    --------           --------
        Net cash (used in) investing activities                                      (12,761)            (9,840)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                        50,938             22,919
      Repurchase agreements, fed funds & short-term borrowings                       (51,263)            17,125
      Long-term borrowings                                                            25,000            (15,000)
    (Increase) decrease in treasury stock                                               (311)               426
    Issuance of common stock under dividend reinvestment plan                            (11)               (13)
    Cash dividends                                                                    (1,917)            (1,752)
                                                                                    --------           --------
        Net cash provided by financing activities                                     22,436             23,705
  
  Net increase in cash and cash equivalents                                           17,081             18,464
  
  Cash and cash equivalents at January 1                                              41,996             41,209
                                                                                    --------           --------
  
  Cash and cash equivalents at March 31                                             $ 59,077           $ 59,673
                                                                                    ========           ========
  </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, 1996.
  
  2. The results of operations for the three month period ended March 31, 1997 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 7,996,948  and 7,994,472  for 1997 and 1996,  respectively,  and are computed
  after giving retroactive effect to a 5% stock dividend paid on October 31, 1996.
  
  4. New Accounting  Pronouncement - The Financial  Accounting Standards Board has
  issued  Statement of  Financial  Accounting  Standards  No. 128,  "Earnings  Per
  Share," which is effective for financial  statements  issued after  December 15,
  1997.  Early  adoption of the new  standard is not  permitted.  The new standard
  eliminates   primary  and  fully   diluted   earnings  per  share  and  requires
  presentation of basic and diluted earnings per share together with disclosure of
  how the per share  amounts were  computed.  The adoption of this new standard is
  not expected to have a material  impact on the  disclosure of earnings per share
  in the  financial  statements.  The effect of adopting this new standard has not
  been determined.
  
  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 $8,407,000 at March 31, 1997,
  all of which are non-accrual  loans. The allowance for loan loss associated with
  these impaired  loans was  $1,070,000 at March 31, 1997. 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.
  
                                         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 $1.385 billion,  an increase of $27.1 million
  or 2.0% over the $1.358 billion at December 31, 1996. This increase is reflected
  primarily  in the loan  category  and  federal  funds  sold,  the  result of the
  investment of deposits, the Company's primary source of funds.
  
           Total cash and cash  equivalents  increased  $17.1  million or 40.7% at
  March 31, 1997 when  compared to December 31, 1996.  This increase was primarily
  in federal funds sold and cash and due from banks.
  
           Loans  increased to $1.049  billion at March 31, 1997.  The increase of
  $20.7  million or 2.0% compared to December 31, 1996 was primarily the result of
  the  investment  of deposits and  long-term  borrowings.  Loans  originated  for
  immediate  resale  during the first  three  months of the year  amounted to $4.2
  million.  The Company's  credit quality is reflected by the annualized  ratio of
  net charge-offs to total loans of .23% for the first quarter of 1997 versus .14%
  for the year  1996,  and the ratio of  non-performing  assets to total  loans of
  1.27% at March 31, 1997  compared to 1.21% at December 31, 1996.  Non-performing
  assets,  including non-accruals,  loans 90 days past due, restructured loans and
  other real estate owned,  were $13.6 million at March 31, 1997 compared to $12.7
  million at December 31, 1996. Of these amounts,  non-accrual  loans  represented
  $8.4  million  and  $8.7  million  at March  31,  1997 and  December  31,  1996,
  respectively.  Loans 90 days  past due and  still  accruing  interest  were $4.9
  million and $3.7 million at March 31, 1997 and December 31, 1996,  respectively.
  Other real estate owned was $231,000 and $319,000 at March 31, 1997 and December
  31, 1996, respectively.  The Company had no restructured loans at March 31, 1997
  or  December  31,  1996.  The  allowance  for loan  and  lease  losses  to total
  non-performing  assets was 171.8% and 179.2% at March 31, 1997 and  December 31,
  1996,  respectively.  The  Company  has no  significant  exposure  to energy and
  agricultural-related loans.
  
           Investments,  the  Company's  secondary use of funds,  decreased  $13.9
  million or .5.8% to $223.0  million at March 31, 1997 when  compared to December
  31,  1996.  The  decrease  is due to  investment  sales and  maturities  and the
  amortization  of  mortgage-backed  securities,  which  was  partially  offset by
  investment purchases of $12.6 million.
  
           As the primary source of funds, aggregate deposits of $1.032 billion at
  March 31, 1997  increased  $50.9  million or 5.2% compared to December 31, 1996.
  The increase in deposits  during the first three months of 1997 was primarily in
  interest  bearing  deposits  which  increased  $47.3 million while  non-interest
  bearing  deposits  increased $3.7 million.  Certificates of deposit in excess of
  $100,000  increased $15.0 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
  $221.8  million at March 31, 1997,  and $248.0 million at December 31, 1996. The
  decrease  of $26.3  million  represents  a shift  from  short-term  obligations,
  primarily securities sold under repurchase agreement and federal funds purchased
  to long-term obligations and federal funds sold.
  
           Shareholders'  equity  decreased  slightly through March 31, 1997. 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 1997 increased  $248,000 or 14.8% compared to the cash
  dividends paid during the first three months of 1996.  Earnings  retained during
  the first three  months of 1997 were 57.7%  compared  to 59.4%  during the first
  three months of 1996.
  
                                         7
  
  <PAGE>
  
  
                                RESULTS OF OPERATIONS
  
           Net income for the quarter ended March 31, 1997 was $4.5 million, 10.2%
  more than the $4.1 million  reported for the same period in 1996.  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 $1.2 million
  or 8.6% to $15.7 million  during the first quarter of 1997 from $14.5 million in
  the first quarter 1996. 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, 1997 to March 25, 1997 was 8.25%.  On March 26, 1997,  the prime rate
  changed  to  8.50%.  Interest  expense  during  the first  three  months of 1997
  increased  $1.2  million or 10.6%  compared to the prior  year's  three  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 first quarter of 1997 compared to the same period in
  1996. The allowance for loan and lease losses of $23.3 million at March 31, 1997
  and $22.7 million at December 31, 1996, as a percentage of total loans, was 2.2%
  at both dates. The Company's net charge-offs of $606,000 and $617,000 during the
  first three months of 1997 and 1996, respectively,  continue to be comparable to
  those  of  the  Company's  peers,  as  reported  in  the  Bank  Holding  Company
  Performance Report.
  
           "Total other income"  increased  $1.4 million or 69.4% during the first
  quarter of 1997, as a result of increased  gains on the sale of  securities  and
  mortgages of $1.0  million,  increased  service  charges on deposit  accounts of
  $171,000,  increased  other income of $155,000,  and  increased  trust income of
  $5,000.  "Total  other  expenses"  increased  $1.8  million or 18.7%  during the
  quarter  ended March 31,  1997.  Of this  amount,  salaries,  wages and employee
  benefits increased $1.4 million,  other expenses increased $251,000 and premises
  and equipment increased $136,000.
  
           Income before income taxes  increased by $605,000 or 10.1%  compared to
  the first quarter of 1996. Income taxes increased $186,000 or 10.0%, compared to
  the first quarter of 1996.
  
                       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,  decreased  $325,000 from year end 1996.
  Long-term  borrowings  increased  $25.0 million during the first three months of
  1997.
  
           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.
  
                                         8
  
  <PAGE>
  
  
           The following table shows  separately the interest rate  sensitivity of
  each category of  interest-earning  assets and  interest-bearing  liabilities at
  March 31, 1997:
  <TABLE>
  <CAPTION>
                                                               Repricing Periods
                                                         Three Months     One Year
                                          Within Three   Through One    Through five  Over Five Years
                                             Months         Year           Years
  Assets                                                         (in thousands)
  <S>                                          <C>           <C>           <C>             <C>   
      Interest-bearing deposits at
            banks                          $   2,700      $    --        $    --        $    --
      Investment securities                    9,422         30,423        112,623         70,493
      Loans and leases                       299,933        146,277        445,998        156,872
      Other assets                            18,870           --             --           91,529
                                           ---------      ---------      ---------      ---------
                                             330,925        176,700        558,621        318,894
                                           ---------      ---------      ---------      ---------
  Liabilities and equity
      Noninterest-bearing deposits           148,765           --             --             --
      Interest-bearing deposits              216,934        162,184        269,880        233,983
      Borrowed funds                         116,175         76,000         15,110         14,489
      Other liabilities                         --             --             --           17,167
      Hedging instruments                     80,000           --          (80,000)          --
      Shareholder's equity                      --             --             --          114,453
                                           ---------      ---------      ---------      ---------
                                             561,874        238,184        204,990        380,092
                                           ---------      ---------      ---------      ---------
  
  Interest sensitivity gap                  (230,949)       (61,484)       353,631        (61,198)
                                           ---------      ---------      ---------      ---------
  
  Cumulative interest rate sensitivity
   gap                                     $(230,949)     $(292,433)     $  61,198      $    --
                                           =========      =========      =========      =========
  <FN>
   (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 1997. 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, 24.8% of these deposits are considered repriceable within
           three  months  and 75.2% are  considered  repriceable  in the over five
           years category.
  </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
  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
  
                                         9
  
  <PAGE>
  
  
  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 1997, with no clear indication of sustainable  rising or falling rates. Given
  this assumption,  the Company's asset/liability strategy for 1997 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,  December 31,
                                                    1997        1996
  CAPITAL LEVELS
       Tier 1 leverage ratio                         7.83%      7.83%
       Tier 1 risked-based ratio                    10.65      10.82
       Total risked-based ratio                     11.91      12.09
  
  
  CAPITAL PERFORMANCE
       Return on average assets (annualized)         1.33       1.31
       Return on average equity (annualized)        15.60      15.60
       Earnings retained                            57.70      58.50
       Internal capital growth                       9.12       7.60
  
           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,
  1997,  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 based
  compensation  plans. To date, a total of 76,250 shares have been  repurchased at
  an aggregate cost of $2.0 million.
  
                                         10
  
  <PAGE>
  
  
           During the  remainder of 1997,  the Company  intends to open up one new
  supermarket  branch..  The Company  also intends to install up to eight new cash
  dispenser  ATMs at off-site or remote  locations  throughout  its general market
  area.  These  new  initiatives,   if  completed,   are  not  expected  to  start
  contributing  to  profits  until 1998 and  beyond so that 1997  earnings  may be
  somewhat negatively impacted by the initial costs of these new facilities.
  
           For 1997,  FDIC insurance  premiums have been reduced on  approximately
  $225 million of the Company's  deposits at branches  acquired from  Sellersville
  Savings and Loan Association and Central  Pennsylvania Savings Association to an
  annual rate of 6.44 cents per hundred  dollars of deposits,  more  comparable to
  the 1.29 cents per hundred  dollars of deposits now charged on  commercial  bank
  deposits.  This is the result of the FDIC recapitalizing the Savings Association
  Insurance   Fund  through   one-time   assessments  in  1996  on  all  financial
  institutions  owning thrift deposits.  The Company's one-time assessment paid to
  this fund on November  30, 1996  amounted  to $1.2  million,  and will result in
  lower FDIC costs in 1997.
  
           Penncore Financial Services Corporation,  Newtown, PA has announced its
  intent to be acquired by ML Bancorp,  Inc.,  Villanova PA. The Company has a 20%
  ownership interest in Penncore and, at the deal price of $36.56 per share, gives
  the Company an unrealized gain of approximately $1 million on this  transaction.
  The merger is expected to be completed in late August or early September of this
  year, although no assurance can be given that it will be completed.  The Company
  has two remaining 20% ownership interests in de novo banks.
  
           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 1996,  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.
  
                                         11
  
  <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.
  
           The Registrant's  banking  subsidiary,  National Penn Bank (the "Bank")
  relocated its Emaus branch (Lehigh  County) to the Valley Farm Market during the
  first  quarter 1997,  and the Bank's First Main Line Bank Division  opened a new
  branch in Wynnewood ( Montgomery County).
  
           During April 1997, the Bank installed six new automated teller machines
  ("ATMs") in various  convenience  store locations in Berks County and Montgomery
  County.
  
           During first quarter  1997,  the Bank also entered into an agreement to
  sell  the real  estate  where it  presently  operates  its  branch  facility  in
  Warminster  (Bucks County).  The Registrant  anticipates  that later in 1997 the
  Bank will relocate its present  Warminster  branch to a new full-service  branch
  located elsewhere in Warminster.
  
           The Registrant also  anticipates that the Bank will open one additional
  supermarket branch in Boyertown (Berks County) later this year and install eight
  new ATMs in various  locations in second  quarter 1997.  Seven of these new ATMs
  are expected to be installed in convenience store locations.
  
           During the first quarter,  Bruce G. Kilroy joined the Bank as President
  of the Bank's newly  formed  Lehigh  Valley  Division.  In April 1997,  Bruce L.
  Ressler was named Senior Vice President - Chief Information Officer of the Bank.
  
           In  June  1996,  the  Registrant's  Board  of  Directors  approved  the
  repurchase  of up to 380,000  common  shares of the  Registrant,  to be used for
  general corporate  purposes,  including the Registrant's  dividend  reinvestment
  plan and stock based  compensation  plans.  The stock repurchase plan authorizes
  the Registrant to make repurchases from time to time in open market or privately
  negotiated  transactions.  At March 31, 1997, a total of 76,250 shares have been
  repurchased at an aggregate cost of $2.0 million.
  
                                         12
  
  <PAGE>
  
  
  Item 6.  Exhibits and Reports on Form 8-K.
  
           (a)      Exhibits.
  
                    Exhibit  10.1  -  National  Penn   Bancshares,   Inc.  Capital
  Accumulation Plan Amendment 1997-1.
  
                    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, 1997.
  
  
                                         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 6, 1997               By /s/ Wayne R. Weidner
                                      ---------------------
                                      Wayne R. Weidner, Executive
                                      Vice President
  
  Dated:  May 6, 1997               By /s/ Gary L. Rhoads
                                       -------------------
                                       Gary L. Rhoads, Principal
                                       Financial Officer
  
                                         14
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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: March 31, 1997
  
                                         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 April 30, 1997
  
   Common Stock ($2.50 par value)                       (No.) 8,006,886 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 ...7
  
  Part II - Other Information.
  
           Item 1.  Legal Proceedings .......................................12
  
           Item 2.  Changes in Securities ...................................12
  
           Item 3.  Defaults Upon Senior Securities .........................12
  
           Item 4.  Submission of Matters to a Vote of
                             Security Holders ...............................12
  
           Item 5.  Other Information .......................................12
  
           Item 6.  Exhibits and Reports on Form 8-K ........................13
  
  Signatures.................................................................14
  
                                         2
  PART I - FINANCIAL INFORMATION
  
  Item 1.  Financial Statements
  
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED BALANCE SHEET
  (Dollars in thousands, except per share data)
  March 31              Dec. 31
                                                                        1997                 1996
                                                                     (Unaudited)            (Note)
  ASSETS
  Cash and due from banks                                           $    44,877           $    40,194
  Interest bearing deposits in banks                                      2,700                 1,802
  Federal funds sold                                                     11,500                    --
                                                                    -----------           -----------
      Total cash and cash equivalents                                    59,077                41,996
  Investment securities available for sale at market value              222,961               236,814
  Loans, less allowance for loan losses of $23,340 and
    $22,746 in 1997 and 1996 respectively                             1,049,080             1,028,334
  Other assets                                                           54,022                50,869
                                                                    -----------           -----------
      Total Assets                                                  $ 1,385,140           $ 1,358,013
                                                                    ===========           ===========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                     $   148,765           $   145,107
  Interest bearing deposits
    (Includes certificates of deposit $100,000 or greater:
    1997 - $112,122; 1996- $97,115)                                     882,981               835,701
                                                                    -----------           -----------
      Total deposits                                                  1,031,746               980,808
  Securities sold under repurchase agreements
    and federal funds purchased                                         113,745               164,996
  Short-term borrowings                                                   6,919                 6,931
  Long-term obligations                                                 101,110                76,110
  Accrued interest and other liabilities                                 17,167                14,447
                                                                    -----------           -----------
      Total Liabilities                                               1,270,687             1,243,292
  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;
      authorized 20,000,000 shares; issued and outstanding
      1997 - 7,995,590; 1996 - 8,002,648, net of shares
      in Treasury: 1997 - 38,262; 1996 - 31,204                          20,085                20,085
    Additional paid-in-capital                                           83,718                83,707
    Retained earnings                                                     9,975                 4,398
    Net unrealized gains on securities available for sale                 1,812                 7,357
    Treasury stock, at cost                                              (1,137)                 (826)
                                                                    -----------           -----------
      Total Shareholders' Equity                                        114,453               114,721
                                                                    -----------           -----------
      Total Liabilities and Shareholders' Equity                    $ 1,385,140           $ 1,358,013
                                                                    ===========           ===========
  The accompanying notes are an integral part of these condensed financial
  statements.
  
  Note: The Balance Sheet at Dec. 31, 1996 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
                                                                    1997              1996
  INTEREST INCOME
  Loans, including fees                                           $ 24,384          $ 21,892
  Deposits in banks                                                     17                 9
  Federal funds sold                                                    18               100
  Investment securities                                              3,749             3,718
                                                                  --------          --------
      Total interest income                                         28,168            25,719
                                                                  --------          --------
  INTEREST EXPENSE
  Deposits                                                           9,193             8,198
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                      3,276             3,071
                                                                  --------          --------
      Total interest expense                                        12,469            11,269
                                                                  --------          --------
      Net interest income                                           15,699            14,450
  Provision for loan losses                                          1,200               975
                                                                  --------          --------
      Net interest income after provision
        for loan losses                                             14,499            13,475
                                                                  --------          --------
  OTHER INCOME
  Trust income                                                         636               631
  Service charges on deposit accounts                                  954               783
  Net gains (losses) on sale of securities and mortgages               916              (103)
  Other                                                                789               634
                                                                  --------          --------
      Total other income                                             3,295             1,945
                                                                  --------          --------
  OTHER EXPENSES
  Salaries, wages and employee benefits                              6,406             5,024
  Net premises and equipment                                         1,940             1,804
  Other operating                                                    2,872             2,621
                                                                  --------          --------
      Total other expenses                                          11,218             9,449
                                                                  --------          --------
      Income before income taxes                                     6,576             5,971
  Applicable income tax expense                                      2,042             1,856
                                                                  --------          --------
      Net income                                                  $  4,534          $  4,115
                                                                  ========          ========
  
  PER SHARE OF COMMON STOCK
  Net income                                                          0.57              0.51
  Dividends paid in cash                                              0.24              0.21
  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
  Three Months Ended March 31,
  (Dollars in thousands)                                                              1997                1996
  CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                      $  4,534           $  4,115
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan losses                                                        1,200                975
      Depreciation and amortization                                                      827                747
      Net gains (losses) on sale of securities and mortgages                             916               (103)
      Mortgage loans originated for resale                                            (4,249)            (7,307)
      Sale of mortgage loans originated for resale                                     4,249              7,307
      Other                                                                              (71)            (1,135)
                                                                                    --------           --------
        Net cash provided by operating activities                                      7,406              4,599
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale                 11,655                 --
    Proceeds from maturities of investment securities - held to maturity                  --                 --
    Proceeds from maturities of investment securities - available for sale            10,830             15,518
    Purchase of investment securities - available for sale                           (12,610)           (14,852)
    Proceeds from sales of loans                                                          --                 --
    Net increase in loans                                                            (21,946)            (9,684)
    Purchases of premises & equipment                                                   (690)              (822)
                                                                                    --------           --------
        Net cash (used in) investing activities                                      (12,761)            (9,840)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                        50,938             22,919
      Repurchase agreements, fed funds & short-term borrowings                       (51,263)            17,125
      Long-term borrowings                                                            25,000            (15,000)
    (Increase) decrease in treasury stock                                               (311)               426
    Issuance of common stock under dividend reinvestment plan                            (11)               (13)
    Cash dividends                                                                    (1,917)            (1,752)
                                                                                    --------           --------
        Net cash provided by financing activities                                     22,436             23,705
  
  Net increase in cash and cash equivalents                                           17,081             18,464
  
  Cash and cash equivalents at January 1                                              41,996             41,209
                                                                                    --------           --------
  
  Cash and cash equivalents at March 31                                             $ 59,077           $ 59,673
                                                                                    ========           ========
  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, 1996.
  
  2. The results of operations for the three month period ended March 31, 1997 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 7,996,948  and 7,994,472  for 1997 and 1996,  respectively,  and are computed
  after giving retroactive effect to a 5% stock dividend paid on October 31, 1996.
  
  4. New Accounting  Pronouncement - The Financial  Accounting Standards Board has
  issued  Statement of  Financial  Accounting  Standards  No. 128,  "Earnings  Per
  Share," which is effective for financial  statements  issued after  December 15,
  1997.  Early  adoption of the new  standard is not  permitted.  The new standard
  eliminates   primary  and  fully   diluted   earnings  per  share  and  requires
  presentation of basic and diluted earnings per share together with disclosure of
  how the per share  amounts were  computed.  The adoption of this new standard is
  not expected to have a material  impact on the  disclosure of earnings per share
  in the  financial  statements.  The effect of adopting this new standard has not
  been determined.
  
  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 $8,407,000 at March 31, 1997,
  all of which are non-accrual  loans. The allowance for loan loss associated with
  these impaired  loans was  $1,070,000 at March 31, 1997. 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.
  
                                         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 $1.385 billion,  an increase of $27.1 million
  or 2.0% over the $1.358 billion at December 31, 1996. This increase is reflected
  primarily  in the loan  category  and  federal  funds  sold,  the  result of the
  investment of deposits, the Company's primary source of funds.
  
           Total cash and cash  equivalents  increased  $17.1  million or 40.7% at
  March 31, 1997 when  compared to December 31, 1996.  This increase was primarily
  in federal funds sold and cash and due from banks.
  
           Loans  increased to $1.049  billion at March 31, 1997.  The increase of
  $20.7  million or 2.0% compared to December 31, 1996 was primarily the result of
  the  investment  of deposits and  long-term  borrowings.  Loans  originated  for
  immediate  resale  during the first  three  months of the year  amounted to $4.2
  million.  The Company's  credit quality is reflected by the annualized  ratio of
  net charge-offs to total loans of .23% for the first quarter of 1997 versus .14%
  for the year  1996,  and the ratio of  non-performing  assets to total  loans of
  1.27% at March 31, 1997  compared to 1.21% at December 31, 1996.  Non-performing
  assets,  including non-accruals,  loans 90 days past due, restructured loans and
  other real estate owned,  were $13.6 million at March 31, 1997 compared to $12.7
  million at December 31, 1996. Of these amounts,  non-accrual  loans  represented
  $8.4  million  and  $8.7  million  at March  31,  1997 and  December  31,  1996,
  respectively.  Loans 90 days  past due and  still  accruing  interest  were $4.9
  million and $3.7 million at March 31, 1997 and December 31, 1996,  respectively.
  Other real estate owned was $231,000 and $319,000 at March 31, 1997 and December
  31, 1996, respectively.  The Company had no restructured loans at March 31, 1997
  or  December  31,  1996.  The  allowance  for loan  and  lease  losses  to total
  non-performing  assets was 171.8% and 179.2% at March 31, 1997 and  December 31,
  1996,  respectively.  The  Company  has no  significant  exposure  to energy and
  agricultural-related loans.
  
           Investments,  the  Company's  secondary use of funds,  decreased  $13.9
  million or .5.8% to $223.0  million at March 31, 1997 when  compared to December
  31,  1996.  The  decrease  is due to  investment  sales and  maturities  and the
  amortization  of  mortgage-backed  securities,  which  was  partially  offset by
  investment purchases of $12.6 million.
  
           As the primary source of funds, aggregate deposits of $1.032 billion at
  March 31, 1997  increased  $50.9  million or 5.2% compared to December 31, 1996.
  The increase in deposits  during the first three months of 1997 was primarily in
  interest  bearing  deposits  which  increased  $47.3 million while  non-interest
  bearing  deposits  increased $3.7 million.  Certificates of deposit in excess of
  $100,000  increased $15.0 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
  $221.8  million at March 31, 1997,  and $248.0 million at December 31, 1996. The
  decrease  of $26.3  million  represents  a shift  from  short-term  obligations,
  primarily securities sold under repurchase agreement and federal funds purchased
  to long-term obligations and federal funds sold.
  
           Shareholders'  equity  decreased  slightly through March 31, 1997. 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 1997 increased  $248,000 or 14.8% compared to the cash
  dividends paid during the first three months of 1996.  Earnings  retained during
  the first three  months of 1997 were 57.7%  compared  to 59.4%  during the first
  three months of 1996.
  
                                         7
  RESULTS OF OPERATIONS
  
           Net income for the quarter ended March 31, 1997 was $4.5 million, 10.2%
  more than the $4.1 million  reported for the same period in 1996.  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 $1.2 million
  or 8.6% to $15.7 million  during the first quarter of 1997 from $14.5 million in
  the first quarter 1996. 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, 1997 to March 25, 1997 was 8.25%.  On March 26, 1997,  the prime rate
  changed  to  8.50%.  Interest  expense  during  the first  three  months of 1997
  increased  $1.2  million or 10.6%  compared to the prior  year's  three  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 first quarter of 1997 compared to the same period in
  1996. The allowance for loan and lease losses of $23.3 million at March 31, 1997
  and $22.7 million at December 31, 1996, as a percentage of total loans, was 2.2%
  at both dates. The Company's net charge-offs of $606,000 and $617,000 during the
  first three months of 1997 and 1996, respectively,  continue to be comparable to
  those  of  the  Company's  peers,  as  reported  in  the  Bank  Holding  Company
  Performance Report.
  
           "Total other income"  increased  $1.4 million or 69.4% during the first
  quarter of 1997, as a result of increased  gains on the sale of  securities  and
  mortgages of $1.0  million,  increased  service  charges on deposit  accounts of
  $171,000,  increased  other income of $155,000,  and  increased  trust income of
  $5,000.  "Total  other  expenses"  increased  $1.8  million or 18.7%  during the
  quarter  ended March 31,  1997.  Of this  amount,  salaries,  wages and employee
  benefits increased $1.4 million,  other expenses increased $251,000 and premises
  and equipment increased $136,000.
  
           Income before income taxes  increased by $605,000 or 10.1%  compared to
  the first quarter of 1996. Income taxes increased $186,000 or 10.0%, compared to
  the first quarter of 1996.
  
                       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,  decreased  $325,000 from year end 1996.
  Long-term  borrowings  increased  $25.0 million during the first three months of
  1997.
  
           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.
  
                                         8
  The following table shows  separately the interest rate  sensitivity of
  each category of  interest-earning  assets and  interest-bearing  liabilities at
  March 31, 1997:
  Repricing Periods
                                                         Three Months     One Year
                                          Within Three   Through One    Through five  Over Five Years
                                             Months         Year           Years
  Assets                                                         (in thousands)
  Interest-bearing deposits at
            banks                          $   2,700      $    --        $    --        $    --
      Investment securities                    9,422         30,423        112,623         70,493
      Loans and leases                       299,933        146,277        445,998        156,872
      Other assets                            18,870           --             --           91,529
                                           ---------      ---------      ---------      ---------
                                             330,925        176,700        558,621        318,894
                                           ---------      ---------      ---------      ---------
  Liabilities and equity
      Noninterest-bearing deposits           148,765           --             --             --
      Interest-bearing deposits              216,934        162,184        269,880        233,983
      Borrowed funds                         116,175         76,000         15,110         14,489
      Other liabilities                         --             --             --           17,167
      Hedging instruments                     80,000           --          (80,000)          --
      Shareholder's equity                      --             --             --          114,453
                                           ---------      ---------      ---------      ---------
                                             561,874        238,184        204,990        380,092
                                           ---------      ---------      ---------      ---------
  
  Interest sensitivity gap                  (230,949)       (61,484)       353,631        (61,198)
                                           ---------      ---------      ---------      ---------
  
  Cumulative interest rate sensitivity
   gap                                     $(230,949)     $(292,433)     $  61,198      $    --
                                           =========      =========      =========      =========
  (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 1997. 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, 24.8% of these deposits are considered repriceable within
           three  months  and 75.2% 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
  
                                         9
  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 1997, with no clear indication of sustainable  rising or falling rates. Given
  this assumption,  the Company's asset/liability strategy for 1997 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,  December 31,
                                                    1997        1996
  CAPITAL LEVELS
       Tier 1 leverage ratio                         7.83%      7.83%
       Tier 1 risked-based ratio                    10.65      10.82
       Total risked-based ratio                     11.91      12.09
  
  CAPITAL PERFORMANCE
       Return on average assets (annualized)         1.33       1.31
       Return on average equity (annualized)        15.60      15.60
       Earnings retained                            57.70      58.50
       Internal capital growth                       9.12       7.60
  
           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,
  1997,  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 based
  compensation  plans. To date, a total of 76,250 shares have been  repurchased at
  an aggregate cost of $2.0 million.
  
                                         10
  During the  remainder of 1997,  the Company  intends to open up one new
  supermarket  branch..  The Company  also intends to install up to eight new cash
  dispenser  ATMs at off-site or remote  locations  throughout  its general market
  area.  These  new  initiatives,   if  completed,   are  not  expected  to  start
  contributing  to  profits  until 1998 and  beyond so that 1997  earnings  may be
  somewhat negatively impacted by the initial costs of these new facilities.
  
           For 1997,  FDIC insurance  premiums have been reduced on  approximately
  $225 million of the Company's  deposits at branches  acquired from  Sellersville
  Savings and Loan Association and Central  Pennsylvania Savings Association to an
  annual rate of 6.44 cents per hundred  dollars of deposits,  more  comparable to
  the 1.29 cents per hundred  dollars of deposits now charged on  commercial  bank
  deposits.  This is the result of the FDIC recapitalizing the Savings Association
  Insurance   Fund  through   one-time   assessments  in  1996  on  all  financial
  institutions  owning thrift deposits.  The Company's one-time assessment paid to
  this fund on November  30, 1996  amounted  to $1.2  million,  and will result in
  lower FDIC costs in 1997.
  
           Penncore Financial Services Corporation,  Newtown, PA has announced its
  intent to be acquired by ML Bancorp,  Inc.,  Villanova PA. The Company has a 20%
  ownership interest in Penncore and, at the deal price of $36.56 per share, gives
  the Company an unrealized gain of approximately $1 million on this  transaction.
  The merger is expected to be completed in late August or early September of this
  year, although no assurance can be given that it will be completed.  The Company
  has two remaining 20% ownership interests in de novo banks.
  
           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 1996,  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.
  
                                         11
  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.
  
           The Registrant's  banking  subsidiary,  National Penn Bank (the "Bank")
  relocated its Emaus branch (Lehigh  County) to the Valley Farm Market during the
  first  quarter 1997,  and the Bank's First Main Line Bank Division  opened a new
  branch in Wynnewood ( Montgomery County).
  
           During April 1997, the Bank installed six new automated teller machines
  ("ATMs") in various  convenience  store locations in Berks County and Montgomery
  County.
  
           During first quarter  1997,  the Bank also entered into an agreement to
  sell  the real  estate  where it  presently  operates  its  branch  facility  in
  Warminster  (Bucks County).  The Registrant  anticipates  that later in 1997 the
  Bank will relocate its present  Warminster  branch to a new full-service  branch
  located elsewhere in Warminster.
  
           The Registrant also  anticipates that the Bank will open one additional
  supermarket branch in Boyertown (Berks County) later this year and install eight
  new ATMs in various  locations in second  quarter 1997.  Seven of these new ATMs
  are expected to be installed in convenience store locations.
  
           During the first quarter,  Bruce G. Kilroy joined the Bank as President
  of the Bank's newly  formed  Lehigh  Valley  Division.  In April 1997,  Bruce L.
  Ressler was named Senior Vice President - Chief Information Officer of the Bank.
  
           In  June  1996,  the  Registrant's  Board  of  Directors  approved  the
  repurchase  of up to 380,000  common  shares of the  Registrant,  to be used for
  general corporate  purposes,  including the Registrant's  dividend  reinvestment
  plan and stock based  compensation  plans.  The stock repurchase plan authorizes
  the Registrant to make repurchases from time to time in open market or privately
  negotiated  transactions.  At March 31, 1997, a total of 76,250 shares have been
  repurchased at an aggregate cost of $2.0 million.
  
                                         12
  Item 6.  Exhibits and Reports on Form 8-K.
  
           (a)      Exhibits.
  
                    Exhibit  10.1  -  National  Penn   Bancshares,   Inc.  Capital
  Accumulation Plan Amendment 1997-1.
  
                    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, 1997.
  
                                         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 6, 1997               By /s/ Wayne R. Weidner
                                      ---------------------
                                      Wayne R. Weidner, Executive
                                      Vice President
  
  Dated:  May 6, 1997               By /s/ Gary L. Rhoads
                                       -------------------
                                       Gary L. Rhoads, Principal
                                       Financial Officer
  
                                         14