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, 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 October 31, 1997
  
   Common Stock ($1.875 par value)                      (No.) 10,618,645 Shares
  
  
  
                                 Page 1 of 16 pages
  <PAGE>
  
                                  TABLE OF CONTENTS
  
  Part I - Financial Information.                                            Page
  
           Item 1.           Financial Statements............................  3
  
           Item 2.           Management's Discussion and Analysis of
                             Financial Condition and Results of Operations ..  8
  
  Part II - Other Information.
  
           Item 1.           Legal Proceedings .............................. 14
  
           Item 2.           Changes in Securities .......................... 14
  
           Item 3.           Defaults Upon Senior Securities ................ 14
  
           Item 4.           Submission of Matters to a Vote of
                             Security Holders ............................... 14
  
           Item 5.           Other Information .............................. 14
  
           Item 6.           Exhibits and Reports on Form 8-K ............... 14
  
  Signatures ................................................................ 15
  
  
                                         2
  <PAGE>
  
                           PART I - FINANCIAL INFORMATION
  
  Item 1.  Financial Statements
  <TABLE>
  <CAPTION>
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED BALANCE SHEET                                           Sept. 30            Dec. 31
   (Dollars in thousands, except per share data)                                   1997                1996
                                                                               (Unaudited)            (Note)
                                                                               -----------         -----------
  ASSETS
  <S>                                                                              <C>                 <C>    
  Cash and due from banks                                                          $50,533             $40,194
  Interest bearing deposits in banks                                                 1,280               1,802
  Federal funds sold                                                                 2,500                  --
                                                                               -----------         -----------
      Total cash and cash equivalents                                               54,313              41,996
  Investment securities available for sale at market value                         316,276             236,814
  Loans, less allowance for loan losses of $24,851 and
    $22,746 in 1997 and 1996 respectively                                        1,080,297           1,028,334
  Other assets                                                                      56,052              50,869
                                                                               -----------         -----------
      Total Assets                                                              $1,506,938          $1,358,013
                                                                               ===========         ===========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                                   $147,900            $145,107
  Interest bearing deposits
    (Includes certificates of deposit in excess of $100,000 or greater:
    1997 - $116,887; 1996 - $97,115)                                               925,489             835,701
                                                                               -----------         -----------
      Total Deposits                                                             1,073,389             980,808
  Securities sold under repurchase agreements
    and federal funds purchased                                                     93,555             164,996
  Short-term borrowings                                                              8,161               6,931
  Long-term obligations                                                            155,460              76,110
  Guaranteed preferred beneficial interests in
     Company's subordinated debentures                                              40,250                  --
  Accrued interest and other liabilities                                            16,498              14,447
                                                                               -----------         -----------
      Total Liabilities                                                          1,387,313           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 $1.875 per share;
      authorized 26,666,667 shares; issued and outstanding
      1997 - 10,675,006; 1996 - 8,002,648, net of shares
      in Treasury: 1997 - 43,032; 1996 - 31,204                                     20,085              20,085
    Additional paid-in-capital                                                      82,476              83,707
    Retained earnings                                                               14,573               4,398
    Net unrealized gains on securities available for sale                            3,611               7,357
    Treasury stock at cost                                                          (1,120)               (826)
                                                                               -----------         -----------
      Total Shareholders' Equity                                                   119,625             114,721
                                                                               -----------         ===========
      Total Liabilities and Shareholders' Equity                                $1,506,938          $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         Nine Months Ended
  (Dollars in thousands, except per share data)                   September 30              September 30
                                                             ------------------------------------------------
                                                               1997         1996          1997          1996
                                                             --------     --------      --------     --------
  INTEREST INCOME
  <S>                                                         <C>          <C>           <C>          <C>    
  Loans including fees                                        $26,033      $23,196       $75,656      $67,123
  Deposits in banks                                                22           15            66           44
  Federal funds sold                                               42           47            93          160
  Investment securities                                         4,414        3,893        11,727       11,410
                                                             --------     --------      --------     --------
      Total interest income                                    30,511       27,151        87,542       78,737
                                                             --------     --------      --------     --------
  INTEREST EXPENSE
  Deposits                                                     10,564        8,675        29,663       25,400
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                 3,684        3,052         9,905        8,750
                                                             --------     --------      --------     --------
      Total interest expense                                   14,248       11,727        39,568       34,150
                                                             --------     --------      --------     --------
      Net interest income                                      16,263       15,424        47,974       44,587
  Provision for loan losses                                     1,200          975         3,600        2,925
                                                             --------     --------      --------     --------
      Net interest income after provision
        for loan losses                                        15,063       14,449        44,374       41,662
                                                             --------     --------      --------     --------
  OTHER INCOME
  Trust and investment management income                          683          548         2,006        1,752
  Service charges on deposit accounts                           1,013          885         2,974        2,478
  Net gains (losses) on sale of securities and mortgages          620          (57)        1,462          (72)
  Other                                                           979          978         2,782        2,227
                                                             --------     --------      --------     --------
      Total other income                                        3,295        2,354         9,224        6,385
                                                             --------     --------      --------     --------
  OTHER EXPENSES
  Salaries, wages and employee benefits                         6,563        5,703        19,450       16,161
  Net premises and equipment                                    1,818        1,726         5,544        5,123
  Other operating                                               3,267        3,216         8,946        8,858
                                                             --------     --------      --------     --------
      Total other expenses                                     11,648       10,645        33,940       30,142
                                                             --------     --------      --------     --------
      Income before income taxes                                6,710        6,158        19,658       17,905
  Applicable income tax expense                                 1,991        1,872         6,020        5,511
                                                             --------     --------      --------     --------
      Net income                                               $4,719       $4,286       $13,638      $12,394
                                                             ========     ========      ========     ========
  
  PER SHARE OF COMMON STOCK
  Net income                                                    $0.45        $0.40         $1.30        $1.16
  Dividends paid in cash                                         0.21         0.16          0.58         0.48
  </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)
                                                                                     1997              1996
                                                                                  ---------         ---------
  CASH FLOWS FROM OPERATING ACTIVITIES
  <S>                                                                               <C>               <C>    
    Net income                                                                      $13,638           $12,394
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan and lease losses                                             3,600             2,925
      Depreciation and amortization                                                   2,627             2,406
      Net gains  (losses) on sale of securities and mortgages                         1,462               (72)
      Mortgage loans originated for resale                                          (15,610)          (16,045)
      Sale of mortgage loans originated for resale                                   15,610            16,045
      Other                                                                          (4,888)           (3,892)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) operating activities                          16,439            13,761
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale               l12,584            30,034
    Proceeds from maturities of investment securities - held to maturity              4,008            18,133
    Proceeds from maturities of investment securities - available for sale              740               740
    Purchase of investment securities                                              (107,581)          (54,776)
    Proceeds from sales of loans                                                         --                --
    Net increase in loans                                                           (55,563)          (73,380)
    Purchases of premises & equipment                                                (2,333)           (2,070)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) investing activities                        (138,145)          (81,319)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                       92,581            56,680
      Repurchase agreements, fed funds & short-term borrowings                      (70,211)           53,101
      Long-term borrowings & subordinated capital note                              119,600           (35,479)
    (Increase) decrease in treasury stock                                              (294)              389
    Issuance of common stock under dividend reinvestment plan                        (1,231)               49
    Cash dividends                                                                   (6,422)           (5,252)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) financing activities                         134,023            69,488
  
  Net increase (decrease) in cash and cash equivalents                               12,317             1,930
  
  Cash and cash equivalents at January 1                                             41,996            41,209
                                                                                  ---------         ---------
  
  Cash and cash equivalents at September 30                                         $54,313           $43,139
                                                                                  =========         =========
  
  </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 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 nine-month period ended September 30, 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 10,504,038 and 10,671,969 for 1997 and 1996, respectively, and are computed
  after giving retroactive effect to a 4-for-3 stock split paid July 31, 1997 and
  a 5% stock dividend paid on October 31, 1996.
  
  4. On September 24, 1997, the Company's Board of Directors declared a cash
  dividend of .21 per share payable on November 17, 1997, to shareholders of
  record on October 31, 1997.
  
  5. New Accounting Pronouncements - 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.
  
           The Financial Accounting Standards Board has issued Statement of
  Accounting Standards No. 130, "Reporting Comprehensive Income," which is
  effective for years beginning after December 15, 1997. This new standard
  requires entities presenting a complete set of financial statements to include
  details of comprehensive income. Comprehensive income consists of net income or
  loss for the current period and income, expenses, gains, and losses that bypass
  the income statement and are reported directly in a separate component of
  equity. The Company has not analyzed this statement nor determined the effect on
  its financial statements at the present time.
  
           The Financial Accounting Standards Board has issued Statement of
  Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
  Related Information," in June of 1997, which is effective for all periods
  beginning after December 15, 1997. SFAS 131 requires that public business
  enterprises report certain information about operating segments in complete sets
  of financial statements of the enterprise and in condensed financial statements
  of interim periods issued to shareholders. It also requires that public business
  enterprises report certain information about their products and services, the
  geographic areas in which they operate, and their major customers. The Company
  has not yet adopted this statement, but does not expect its effects to be
  material.
  
  6. The Company identifies a loan as impaired when it is probable that interest
  and principal will not be collected according to the contractual terms of the
  loan agreement. The balance of impaired loans was $6,953,000 at September 30,
  1997, all of which are nonaccrual loans. The allowance for loan loss associated
  with these impaired loans was $593,000 at September 30, 1997. The Company
  recognizes income on impaired loans under the cash basis when the loans are both
  current and the collateral on the
  
                                         6
  <PAGE>
  
  loan is sufficient to cover the outstanding obligation to the Company. If these
  factors do not exist, the Company will not recognize income on such loans.
  
   7. On May 22, 1997, the Company issued 41.5 million of 9.00% of junior
  subordinated deferrable interest debentures (the "debentures") to NPB Capital
  Trust (the "Trust"), a Delaware business trust, in which the Company owns all of
  the common equity. The debentures are the sole asset of the Trust. The Trust
  issued $40.25 million of preferred securities to investors. The Company's
  obligations under the debentures and related documents, taken together,
  constitute a full and unconditional guarantee by the Company of the Trust's
  obligations under the preferred securities. Although the debentures will be
  treated as debt of the Company, they currently qualify for tier 1 capital
  treatment in an amount up to 25% of total tier 1 capital. The preferred
  securities are redeemable by the Company on or after June 30, 2002, or earlier
  in the event the deduction of related interest for federal income taxes is
  prohibited, treatment as tier 1 capital is no longer permitted or certain other
  contingencies arise. The preferred securities must be redeemed upon maturity of
  the debentures in 2027. See "Liquidity and Interest Rate Sensitivity" and
  "Capital Adequacy" below.
  
  
  
  
  
                                         7
  <PAGE>
  
  Item 2. Management's Discussion and Analysis of Financial Condition and Results
          of Operations.
  
           The following discussion and analysis is intended to assist in
  understanding and evaluating the major changes in the financial condition and
  earnings performance of the Company with a primary focus on an analysis of
  operating results.
  
                                 FINANCIAL CONDITION
  
           Total assets increased to $1.507 billion, an increase of $148.9
  million, or 11.0% over the $1.358 billion at December 31, 1996. This increase is
  reflected primarily in the loan and investment categories, the result of the
  investment of deposits, the Company's primary source of funds.
  
           Total cash and cash equivalents increased $12.3 million, or 29.3% at
  September 30, 1997, when compared to December 31, 1996. This increase was
  primarily in cash and due from banks.
  
           Loans increased to $1.080 billion at September 30, 1997. The increase
  of $52.0 million, or 5.1% 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 nine months of 1997 amounted to $15.6
  million. The Company's credit quality is reflected by the annualized ratio of
  net chargeoffs to total loans of .18% through the third quarter of 1997 versus
   .14% for the year 1996, and the ratio of nonperforming assets to total loans of
  1.23% at September 30, 1997, compared to 1.21% at December 31, 1996.
  Nonperforming assets, including nonaccruals, loans 90 days past due,
  restructured loans and other real estate owned, were $10.2 million at September
  30, 1997, compared to $12.7 million at December 31, 1996. Of these amounts,
  nonaccrual loans represented $7.0 million and $8.7 million at September 30,
  1997, and December 31, 1996, respectively. Loans 90 days past due and still
  accruing interest were $2.6 million and $3.7 million at September 30, 1997, and
  December 31, 1996, respectively. Other real estate owned was $662,000 and
  $319.000 at September 30, 1997, and December 31, 1996, respectively. The Company
  had no restructured loans at September 30, 1997, or December 31, 1996. The
  allowance for loan losses to nonperforming assets was 243.3% and 179.2% at
  September 30, 1997, and December 31, 1996, respectively. As is evident from the
  above amounts relative to nonperforming assets, there have been no significant
  changes between December 31, 1996, and September 30, 1997. The Company has no
  significant exposure to energy and agricultural-related loans.
  
           Investments, the Company's secondary use of funds, increased $79.5
  million, or 33.6% to $316.3 million at September 30, 1997, when compared to
  December 31, 1996. The increase is due to investment purchases of $107.6
  million, primarily in municipal securities, which was partially offset by
  investment sales and maturities and the amortization of mortgage-backed
  securities.
  
           As the primary source of funds, aggregate deposits of $1.073 billion at
  September 30, 1997, increased $92.6 million, or 9.4% compared to December 31,
  1996. The increase in deposits during the first nine months of 1997 was
  primarily in interest bearing deposits which increased $89.8 million while
  noninterest-bearing deposits increased $2.8 million. Certificates of deposit in
  excess of $100,000 increased $19.8 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 $297.4 million at September 30, 1997, and $248.0 million at December 31,
  1996. The increase of $49.4 million represents the issuance of $40.25 million in
  junior subordinated deferrable interest debentures and an increase in long-term
  obligations of $79.4 million which was partially offset by a decrease in
  short-term borrowings, primarily securities sold under repurchase agreements and
  federal funds purchased.
  
           Shareholders' equity increased slightly through September 30, 1997.
  This increase was due to an increase in earnings retained offset by a decrease
  in the change in valuation adjustment for securities
  
                                         8
  <PAGE>
  
  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 1997 increased $930,000, or 18.0%, compared to the cash
  dividends paid during the first nine months of 1996. Earnings retained during
  the first nine months of 1997 were 55.3% compared to 57.6% during the first nine
  months of 1996.
  
                                RESULTS OF OPERATIONS
  
           Net income for the quarter ended September 30, 1997, was $4.7 million,
  10.1% more than the $4.3 million reported for the same period in 1996. For the
  first nine months, net income reached $13.6 million, or 10.0% more than the
  $12.4 million reported for the first nine months of 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 income on assets and
  interest expense on liabilities. Net interest income increased $.8 million, or
  5.4% to $16.3 million during the third quarter of 1997 from $15.4 million in the
  third quarter 1996. For the comparative nine-month period, net interest income
  increased $3.4 million, or 7.6% to $48.0 million from $44.6 million in 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 nine months of 1997 increased $2.5
  million, or 21.5% compared to the prior year's first nine months. Despite the
  current rate environment, the cost of attracting and holding deposited funds is
  an every-increasing expense in the banking industry. These increases are the
  real costs of deposit accumulation and retention, including FDIC insurance costs
  and branch overhead expenses. Such costs are necessary for continued growth and
  to maintain and increase market share of available deposits.
  
           The provision for loan and lease losses is determined by periodic
  reviews of loan quality, current economic conditions, loss experience and loan
  growth. Based on these factors, the provision for loan and lease losses
  increased $225,000 for the third quarter and $675,000 for the first nine months
  of 1997 compared to the same periods in 1996. The allowance for loan and lease
  losses of $24.9 million at September 30, 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
  chargeoffs of $1,495,000 and $1,113,000 during the first nine 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 $941,000, or 40.0% during the third
  quarter of 1997, as a result of increased gains on sales of securities and
  mortgages of $677,000 increased trust and investment management income of
  $135,000, and increased service charges on deposit accounts of $128,000. Year to
  date, other income increased $2.8 million, or 44.5% when compared to the first
  nine months of 1996 as a result of increased gains on sales of securities and
  mortgages of $1,534,000, increased other income of $555,000, increased service
  charges on deposit accounts of $496,000 and increased trust and investment
  management income of $254,000. "Total other expenses" increased $1.0 million, or
  9.4% during the quarter ended September 30, 1997, and increased $3.8 million, or
  12.6% for the nine-month period. Of this year-to-date increase, salaries, wages,
  and employee benefits increased $3.3 million, or 20.4%, premises and equipment
  increased $421,000, or 8.2%, and other operating expenses increased $88,000, or
  1.0%.
  
           Income before income taxes increased by $552,000, or 9.0%, compared to
  the third quarter of 1996. In comparing the first nine months of 1997 to 1996,
  income before income taxes increased $1.8 
  
                                         9
  <PAGE>
  
  million, or 9.8% . Income taxes increased $119,000 for the quarter and increased
  509,000 for 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 $22.4 million from year end
  1996. Long-term borrowings increased $119.6 million during the first nine months
  of 1997. As described in note 7 to the financial statements included herein at
  Item #1, cash inflow was increased by a $40.25 million debt offering on May 22,
  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.
  
           The following table shows separately the interest rate sensitivity of
  each category of interest-earning assets and interest-bearing liabilities at
  September 30, 1997:
  <TABLE>
  <CAPTION>
                                                               Repricing Periods (1)
                                                            Three Months     One Year
                                             Within Three    Through One   Through Five        Over
                                                 Months         Year          Years         Five Years
  Assets
  <S>                                             <C>         <C>            <C>            <C>      
    Interest-bearing deposits at banks            $1,280      $      --      $      --      $      --
    Investment securities                         18,963         43,106        140,914        113,293
    Loans and leases                             329,273        150,206        437,789        163,029
    Other assets                                   2,500             --             --        106,585
                                               ---------      ---------      ---------      ---------
                                                 352,016        193,312        578,703        382,907
                                               ---------      ---------      ---------      ---------
  Liabilities and equity
    Noninterest-bearing deposits                 147,900             --             --             --
    Interest-bearing deposits                    197,333        247,684        256,938        223,534
    Borrowed funds                               155,761         11,979         68,131         21,315
    Preferred securities                              --             --             --         40,250
    Other liabilities                                 --             --             --         16,498
    Hedging instruments                           80,000             --        (80,000)            --
    Shareholders' equity                              --             --             --        119,625
                                               ---------      ---------      ---------      ---------
                                                 580,994        259,663        245,069        421,212
                                               ---------      ---------      ---------      ---------
  Interest sensitivity gap                      (228,978)       (66,351)       333,634        (38,305)
                                               ---------      ---------      ---------      ---------
  
  Cumulative interest rate sensitivity gap     ($228,978)     ($295,329)       $38,305      $      --
                                               =========      =========      =========      =========
  </TABLE>
  
  (1) Adjustable rate loans are included in the period in which interest rates are
  next scheduled to adjust rather than in the period in which they are due. Fixed
  rate loans are included in the period in which they are scheduled to be repaid
  and are adjusted to take into account estimated prepayments based upon
  assumptions estimating prepayments in the interest rate environment prevailing
  during the third calendar quarter of 1997. The table assumes prepayments and
  scheduled principal amortization of fixed-
  
                                         10
  <PAGE>
  
  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, 28.7% of these deposits are considered repriceable
  within three months and 71.3% are considered repriceable in the over five-years
  category.
  
           Interest rate sensitivity is a function of the repricing
  characteristics of the Company's assets and liabilities. These characteristics
  include the volume of assets and liabilities repricing, the timing of the
  repricing, and the relative levels of repricing. Attempting to minimize the
  interest rate sensitivity gaps is a continual challenge in a changing rate
  environment. Based on the Company's gap position as reflected in the above
  table, current accepted theory would indicate that net interest income would
  increase in a falling rate environment and would decrease in a rising rate
  environment. An interest rate gap table does not, however, present a complete
  picture of the impact of interest rate changes on net interest income. First,
  changes in the general level of interest rates do not affect all categories of
  assets and liabilities equally or simultaneously. Second, assets and liabilities
  which can contractually reprice within the same period may not, in fact, reprice
  at the same time or to the same extent. Third, the table represents a one-day
  position; variations occur daily as the Company adjusts its interest sensitivity
  throughout the year. Fourth, assumptions must be made to construct such a table.
  For example, noninterest bearing deposits are assigned a repricing interval
  within one year, although history indicates a significant amount of these
  deposits will not move into interest bearing categories regardless of the
  general level of interest rates. Finally, the repricing distribution of interest
  sensitive assets may not be indicative of the liquidity of those assets.
  
           The Company anticipates volatile interest rate levels for the remainder
  of 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.
  
  
                                         11
  <PAGE>
  
                                  CAPITAL ADEQUACY
  
           The following table sets forth certain capital performance ratios.
  
                                                        September 30     Dec. 31
                                                           1997           1996
  CAPITAL LEVELS
           Tier 1 leverage ratio                           10.29%         7.83%
           Tier 1 risk-based ratio                         14.11%        10.82%
           Total risk-based ratio                          15.52%        12.09%
  
  CAPITAL PERFORMANCE
           Return of average assets (annualized)            1.30          1.31
           Return on average equity (annualized)           15.60         15.60
           Earnings retained                               55.30         58.50
           Internal capital growth (annualized)             8.80          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 September
  30, 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. As
  described in note 7 to the financial statements included therein at Item #1,
  capital ratios were increased by a $40.25 million debt offering on May 22, 1997.
  
           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 506,667 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 234,950 shares have been repurchased at
  an aggregate cost of $5.4 million. Repurchased shares have been restated for the
  4-for-3 stock split paid July 31, 1997.
  
           The Company's banking subsidiary, National Penn Bank, (the "Bank"), has
  agreed to acquire certain deposits and the physical facility of the Topton
  Branch of Patriot Bank. This acquisition will enable the Bank to consolidate its
  Mertztown Office into the Topton Office and add new services such as ATM and
  safe deposit boxes for the former Patriot customers and service an expanded
  market. This transaction, subject to regulatory approval, is expected to be
  completed during the fourth quarter 1997. This transaction, while not material,
  is expected to be accretive to earnings in 1999.
  
           Two new products at the Bank are Empower PC Banking and Empower Phone
  Banking with Telephone Bill Payment Service. Empower PC Banking allows customers
  to do their banking from their home or business computers using Microsoft(R)
  Money, Quicken(R), or QuickBooks(R). Empower Phone
  
                                         12
  <PAGE>
  
  Banking allows customers to pay their bills anywhere there is a telephone. These
  two new products are not expected to have a significant effect on earnings in
  1997 and beyond.
  
           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.
  
  
  
                                         13
  <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 June 1996, the Registrant's Board of Directors approved the
  repurchase of up to 506,667 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. To date, a total of 234,950 shares have been repurchased at an
  aggregate cost of $5.4 million. (The foregoing totals have been restated for the
  4-for-3 stock split paid July 31, 1997.)
  
           During third quarter 1997, the Registrant's banking subsidiary,
  National Penn Bank (the "Bank"), opened a supermarket branch in Boyertown
  (Montgomery County) and installed 3 new automated teller machines ("ATMs") in
  supermarket locations and 2 new ATMs in fast-food locations in southeastern
  Pennsylvania.
  
           During fourth quarter 1997, the Bank anticipates opening a loan center
  in Bethlehem (Northampton County) and obtaining messenger service branch
  authority throughout its 8-county trading area.
  
           In September 1997, Garry D. Koch was promoted to Executive Vice
  President and Chief Lending/Credit Officer of the Bank, and Sharon L. Weaver was
  promoted to Executive Vice President of the Bank.
  
           During third quarter 1997, the Registrant and the Bank entered into
  agreements with various senior officers of the Bank providing them with certain
  severance benefits in the event of a change in control of the Registrant. Copies
  of such agreements entered into with executive officers of the Bank are included
  in this Report as Exhibits 10.1, 10.2 and 10.3.
  
  
  
  
  
                                         14
  <PAGE>
  
  
  Item 6.  Exhibits and Reports on Form 8-K.
  
           (a)      Exhibits.
  
                    Exhibit 10.1 - Executive Agreement dated July 23, 1997 between
                    National Penn Bancshares, Inc., National Penn Bank, and Gary
                    L. Rhoads.
  
                    Exhibit 10.2 - Executive Agreement dated July 23, 1997 between
                    National Penn Bancshares, Inc., National Penn Bank, and Sandra
                    L. Spayd.
  
                    Exhibit 10.3 - Executive Agreement dated September 24, 1997
                    between National Penn Bancshares, Inc., National Penn Bank,
                    and Garry D. Koch.
  
                    Exhibit 27 - Financial Data Schedule.
  
           (b) Reports on Form 8-K. On September 9, 1997, the Registrant filed a
  Report on Form 8-K dated August 28, 1997, under Item 5, Other Events. The Report
  did not include any financial statements.
  
  
  
  
  
                                         15
  <PAGE>
  
                                     SIGNATURES
  
           Pursuant to the requirements of Section 13 of the Securities Exchange
  Act of 1934, the Registrant has caused this report to be signed on its behalf by
  the undersigned thereunto duly authorized.
  
                                              NATIONAL PENN BANCSHARES, INC.
                                                         (Registrant)
  
  Dated:  November 10, 1997                    By /s/ Wayne R. Weidner
                                                  Wayne R. Weidner, Executive
                                                  Vice President
  
  
  Dated:  November 10, 1997                   By /s/ Gary L. Rhoads
                                                 Gary L. Rhoads, Principal
                                                 Financial Officer
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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, 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 October 31, 1997
  
   Common Stock ($1.875 par value)                      (No.) 10,618,645 Shares
  
                                 Page 1 of 16 pages
  TABLE OF CONTENTS
  
  Part I - Financial Information.                                            Page
  
           Item 1.           Financial Statements............................  3
  
           Item 2.           Management's Discussion and Analysis of
                             Financial Condition and Results of Operations ..  8
  
  Part II - Other Information.
  
           Item 1.           Legal Proceedings .............................. 14
  
           Item 2.           Changes in Securities .......................... 14
  
           Item 3.           Defaults Upon Senior Securities ................ 14
  
           Item 4.           Submission of Matters to a Vote of
                             Security Holders ............................... 14
  
           Item 5.           Other Information .............................. 14
  
           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)                                   1997                1996
                                                                               (Unaudited)            (Note)
                                                                               -----------         -----------
  ASSETS
  Cash and due from banks                                                          $50,533             $40,194
  Interest bearing deposits in banks                                                 1,280               1,802
  Federal funds sold                                                                 2,500                  --
                                                                               -----------         -----------
      Total cash and cash equivalents                                               54,313              41,996
  Investment securities available for sale at market value                         316,276             236,814
  Loans, less allowance for loan losses of $24,851 and
    $22,746 in 1997 and 1996 respectively                                        1,080,297           1,028,334
  Other assets                                                                      56,052              50,869
                                                                               -----------         -----------
      Total Assets                                                              $1,506,938          $1,358,013
                                                                               ===========         ===========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                                   $147,900            $145,107
  Interest bearing deposits
    (Includes certificates of deposit in excess of $100,000 or greater:
    1997 - $116,887; 1996 - $97,115)                                               925,489             835,701
                                                                               -----------         -----------
      Total Deposits                                                             1,073,389             980,808
  Securities sold under repurchase agreements
    and federal funds purchased                                                     93,555             164,996
  Short-term borrowings                                                              8,161               6,931
  Long-term obligations                                                            155,460              76,110
  Guaranteed preferred beneficial interests in
     Company's subordinated debentures                                              40,250                  --
  Accrued interest and other liabilities                                            16,498              14,447
                                                                               -----------         -----------
      Total Liabilities                                                          1,387,313           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 $1.875 per share;
      authorized 26,666,667 shares; issued and outstanding
      1997 - 10,675,006; 1996 - 8,002,648, net of shares
      in Treasury: 1997 - 43,032; 1996 - 31,204                                     20,085              20,085
    Additional paid-in-capital                                                      82,476              83,707
    Retained earnings                                                               14,573               4,398
    Net unrealized gains on securities available for sale                            3,611               7,357
    Treasury stock at cost                                                          (1,120)               (826)
                                                                               -----------         -----------
      Total Shareholders' Equity                                                   119,625             114,721
                                                                               -----------         ===========
      Total Liabilities and Shareholders' Equity                                $1,506,938          $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         Nine Months Ended
  (Dollars in thousands, except per share data)                   September 30              September 30
                                                             ------------------------------------------------
                                                               1997         1996          1997          1996
                                                             --------     --------      --------     --------
  INTEREST INCOME
  Loans including fees                                        $26,033      $23,196       $75,656      $67,123
  Deposits in banks                                                22           15            66           44
  Federal funds sold                                               42           47            93          160
  Investment securities                                         4,414        3,893        11,727       11,410
                                                             --------     --------      --------     --------
      Total interest income                                    30,511       27,151        87,542       78,737
                                                             --------     --------      --------     --------
  INTEREST EXPENSE
  Deposits                                                     10,564        8,675        29,663       25,400
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                 3,684        3,052         9,905        8,750
                                                             --------     --------      --------     --------
      Total interest expense                                   14,248       11,727        39,568       34,150
                                                             --------     --------      --------     --------
      Net interest income                                      16,263       15,424        47,974       44,587
  Provision for loan losses                                     1,200          975         3,600        2,925
                                                             --------     --------      --------     --------
      Net interest income after provision
        for loan losses                                        15,063       14,449        44,374       41,662
                                                             --------     --------      --------     --------
  OTHER INCOME
  Trust and investment management income                          683          548         2,006        1,752
  Service charges on deposit accounts                           1,013          885         2,974        2,478
  Net gains (losses) on sale of securities and mortgages          620          (57)        1,462          (72)
  Other                                                           979          978         2,782        2,227
                                                             --------     --------      --------     --------
      Total other income                                        3,295        2,354         9,224        6,385
                                                             --------     --------      --------     --------
  OTHER EXPENSES
  Salaries, wages and employee benefits                         6,563        5,703        19,450       16,161
  Net premises and equipment                                    1,818        1,726         5,544        5,123
  Other operating                                               3,267        3,216         8,946        8,858
                                                             --------     --------      --------     --------
      Total other expenses                                     11,648       10,645        33,940       30,142
                                                             --------     --------      --------     --------
      Income before income taxes                                6,710        6,158        19,658       17,905
  Applicable income tax expense                                 1,991        1,872         6,020        5,511
                                                             --------     --------      --------     --------
      Net income                                               $4,719       $4,286       $13,638      $12,394
                                                             ========     ========      ========     ========
  
  PER SHARE OF COMMON STOCK
  Net income                                                    $0.45        $0.40         $1.30        $1.16
  Dividends paid in cash                                         0.21         0.16          0.58         0.48
  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)
                                                                                     1997              1996
                                                                                  ---------         ---------
  CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                      $13,638           $12,394
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan and lease losses                                             3,600             2,925
      Depreciation and amortization                                                   2,627             2,406
      Net gains  (losses) on sale of securities and mortgages                         1,462               (72)
      Mortgage loans originated for resale                                          (15,610)          (16,045)
      Sale of mortgage loans originated for resale                                   15,610            16,045
      Other                                                                          (4,888)           (3,892)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) operating activities                          16,439            13,761
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale               l12,584            30,034
    Proceeds from maturities of investment securities - held to maturity              4,008            18,133
    Proceeds from maturities of investment securities - available for sale              740               740
    Purchase of investment securities                                              (107,581)          (54,776)
    Proceeds from sales of loans                                                         --                --
    Net increase in loans                                                           (55,563)          (73,380)
    Purchases of premises & equipment                                                (2,333)           (2,070)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) investing activities                        (138,145)          (81,319)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                       92,581            56,680
      Repurchase agreements, fed funds & short-term borrowings                      (70,211)           53,101
      Long-term borrowings & subordinated capital note                              119,600           (35,479)
    (Increase) decrease in treasury stock                                              (294)              389
    Issuance of common stock under dividend reinvestment plan                        (1,231)               49
    Cash dividends                                                                   (6,422)           (5,252)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) financing activities                         134,023            69,488
  
  Net increase (decrease) in cash and cash equivalents                               12,317             1,930
  
  Cash and cash equivalents at January 1                                             41,996            41,209
                                                                                  ---------         ---------
  
  Cash and cash equivalents at September 30                                         $54,313           $43,139
                                                                                  =========         =========
  The accompanying notes are an integral part of these condensed financial
  statements.
  
                                          5
  NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                     (UNAUDITED)
  
  1. The accompanying unaudited condensed financial statements have been prepared
  in accordance with generally accepted accounting principles for interim
  financial information. The financial information included herein is unaudited;
  however, such information reflects all adjustments (consisting solely of normal
  recurring adjustments) which are, in the opinion of management, necessary to a
  fair statement of the results for the interim periods. For further information,
  refer to the consolidated financial statements and footnotes thereto included in
  the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
  
  2. The results of operations for the nine-month period ended September 30, 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 10,504,038 and 10,671,969 for 1997 and 1996, respectively, and are computed
  after giving retroactive effect to a 4-for-3 stock split paid July 31, 1997 and
  a 5% stock dividend paid on October 31, 1996.
  
  4. On September 24, 1997, the Company's Board of Directors declared a cash
  dividend of .21 per share payable on November 17, 1997, to shareholders of
  record on October 31, 1997.
  
  5. New Accounting Pronouncements - 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.
  
           The Financial Accounting Standards Board has issued Statement of
  Accounting Standards No. 130, "Reporting Comprehensive Income," which is
  effective for years beginning after December 15, 1997. This new standard
  requires entities presenting a complete set of financial statements to include
  details of comprehensive income. Comprehensive income consists of net income or
  loss for the current period and income, expenses, gains, and losses that bypass
  the income statement and are reported directly in a separate component of
  equity. The Company has not analyzed this statement nor determined the effect on
  its financial statements at the present time.
  
           The Financial Accounting Standards Board has issued Statement of
  Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
  Related Information," in June of 1997, which is effective for all periods
  beginning after December 15, 1997. SFAS 131 requires that public business
  enterprises report certain information about operating segments in complete sets
  of financial statements of the enterprise and in condensed financial statements
  of interim periods issued to shareholders. It also requires that public business
  enterprises report certain information about their products and services, the
  geographic areas in which they operate, and their major customers. The Company
  has not yet adopted this statement, but does not expect its effects to be
  material.
  
  6. The Company identifies a loan as impaired when it is probable that interest
  and principal will not be collected according to the contractual terms of the
  loan agreement. The balance of impaired loans was $6,953,000 at September 30,
  1997, all of which are nonaccrual loans. The allowance for loan loss associated
  with these impaired loans was $593,000 at September 30, 1997. The Company
  recognizes income on impaired loans under the cash basis when the loans are both
  current and the collateral on the
  
                                         6
  loan is sufficient to cover the outstanding obligation to the Company. If these
  factors do not exist, the Company will not recognize income on such loans.
  
   7. On May 22, 1997, the Company issued 41.5 million of 9.00% of junior
  subordinated deferrable interest debentures (the "debentures") to NPB Capital
  Trust (the "Trust"), a Delaware business trust, in which the Company owns all of
  the common equity. The debentures are the sole asset of the Trust. The Trust
  issued $40.25 million of preferred securities to investors. The Company's
  obligations under the debentures and related documents, taken together,
  constitute a full and unconditional guarantee by the Company of the Trust's
  obligations under the preferred securities. Although the debentures will be
  treated as debt of the Company, they currently qualify for tier 1 capital
  treatment in an amount up to 25% of total tier 1 capital. The preferred
  securities are redeemable by the Company on or after June 30, 2002, or earlier
  in the event the deduction of related interest for federal income taxes is
  prohibited, treatment as tier 1 capital is no longer permitted or certain other
  contingencies arise. The preferred securities must be redeemed upon maturity of
  the debentures in 2027. See "Liquidity and Interest Rate Sensitivity" and
  "Capital Adequacy" below.
  
                                         7
  Item 2. Management's Discussion and Analysis of Financial Condition and Results
          of Operations.
  
           The following discussion and analysis is intended to assist in
  understanding and evaluating the major changes in the financial condition and
  earnings performance of the Company with a primary focus on an analysis of
  operating results.
  
                                 FINANCIAL CONDITION
  
           Total assets increased to $1.507 billion, an increase of $148.9
  million, or 11.0% over the $1.358 billion at December 31, 1996. This increase is
  reflected primarily in the loan and investment categories, the result of the
  investment of deposits, the Company's primary source of funds.
  
           Total cash and cash equivalents increased $12.3 million, or 29.3% at
  September 30, 1997, when compared to December 31, 1996. This increase was
  primarily in cash and due from banks.
  
           Loans increased to $1.080 billion at September 30, 1997. The increase
  of $52.0 million, or 5.1% 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 nine months of 1997 amounted to $15.6
  million. The Company's credit quality is reflected by the annualized ratio of
  net chargeoffs to total loans of .18% through the third quarter of 1997 versus
   .14% for the year 1996, and the ratio of nonperforming assets to total loans of
  1.23% at September 30, 1997, compared to 1.21% at December 31, 1996.
  Nonperforming assets, including nonaccruals, loans 90 days past due,
  restructured loans and other real estate owned, were $10.2 million at September
  30, 1997, compared to $12.7 million at December 31, 1996. Of these amounts,
  nonaccrual loans represented $7.0 million and $8.7 million at September 30,
  1997, and December 31, 1996, respectively. Loans 90 days past due and still
  accruing interest were $2.6 million and $3.7 million at September 30, 1997, and
  December 31, 1996, respectively. Other real estate owned was $662,000 and
  $319.000 at September 30, 1997, and December 31, 1996, respectively. The Company
  had no restructured loans at September 30, 1997, or December 31, 1996. The
  allowance for loan losses to nonperforming assets was 243.3% and 179.2% at
  September 30, 1997, and December 31, 1996, respectively. As is evident from the
  above amounts relative to nonperforming assets, there have been no significant
  changes between December 31, 1996, and September 30, 1997. The Company has no
  significant exposure to energy and agricultural-related loans.
  
           Investments, the Company's secondary use of funds, increased $79.5
  million, or 33.6% to $316.3 million at September 30, 1997, when compared to
  December 31, 1996. The increase is due to investment purchases of $107.6
  million, primarily in municipal securities, which was partially offset by
  investment sales and maturities and the amortization of mortgage-backed
  securities.
  
           As the primary source of funds, aggregate deposits of $1.073 billion at
  September 30, 1997, increased $92.6 million, or 9.4% compared to December 31,
  1996. The increase in deposits during the first nine months of 1997 was
  primarily in interest bearing deposits which increased $89.8 million while
  noninterest-bearing deposits increased $2.8 million. Certificates of deposit in
  excess of $100,000 increased $19.8 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 $297.4 million at September 30, 1997, and $248.0 million at December 31,
  1996. The increase of $49.4 million represents the issuance of $40.25 million in
  junior subordinated deferrable interest debentures and an increase in long-term
  obligations of $79.4 million which was partially offset by a decrease in
  short-term borrowings, primarily securities sold under repurchase agreements and
  federal funds purchased.
  
           Shareholders' equity increased slightly through September 30, 1997.
  This increase was due to an increase in earnings retained offset by a decrease
  in the change in valuation adjustment for securities
  
                                         8
  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 1997 increased $930,000, or 18.0%, compared to the cash
  dividends paid during the first nine months of 1996. Earnings retained during
  the first nine months of 1997 were 55.3% compared to 57.6% during the first nine
  months of 1996.
  
                                RESULTS OF OPERATIONS
  
           Net income for the quarter ended September 30, 1997, was $4.7 million,
  10.1% more than the $4.3 million reported for the same period in 1996. For the
  first nine months, net income reached $13.6 million, or 10.0% more than the
  $12.4 million reported for the first nine months of 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 income on assets and
  interest expense on liabilities. Net interest income increased $.8 million, or
  5.4% to $16.3 million during the third quarter of 1997 from $15.4 million in the
  third quarter 1996. For the comparative nine-month period, net interest income
  increased $3.4 million, or 7.6% to $48.0 million from $44.6 million in 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 nine months of 1997 increased $2.5
  million, or 21.5% compared to the prior year's first nine months. Despite the
  current rate environment, the cost of attracting and holding deposited funds is
  an every-increasing expense in the banking industry. These increases are the
  real costs of deposit accumulation and retention, including FDIC insurance costs
  and branch overhead expenses. Such costs are necessary for continued growth and
  to maintain and increase market share of available deposits.
  
           The provision for loan and lease losses is determined by periodic
  reviews of loan quality, current economic conditions, loss experience and loan
  growth. Based on these factors, the provision for loan and lease losses
  increased $225,000 for the third quarter and $675,000 for the first nine months
  of 1997 compared to the same periods in 1996. The allowance for loan and lease
  losses of $24.9 million at September 30, 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
  chargeoffs of $1,495,000 and $1,113,000 during the first nine 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 $941,000, or 40.0% during the third
  quarter of 1997, as a result of increased gains on sales of securities and
  mortgages of $677,000 increased trust and investment management income of
  $135,000, and increased service charges on deposit accounts of $128,000. Year to
  date, other income increased $2.8 million, or 44.5% when compared to the first
  nine months of 1996 as a result of increased gains on sales of securities and
  mortgages of $1,534,000, increased other income of $555,000, increased service
  charges on deposit accounts of $496,000 and increased trust and investment
  management income of $254,000. "Total other expenses" increased $1.0 million, or
  9.4% during the quarter ended September 30, 1997, and increased $3.8 million, or
  12.6% for the nine-month period. Of this year-to-date increase, salaries, wages,
  and employee benefits increased $3.3 million, or 20.4%, premises and equipment
  increased $421,000, or 8.2%, and other operating expenses increased $88,000, or
  1.0%.
  
           Income before income taxes increased by $552,000, or 9.0%, compared to
  the third quarter of 1996. In comparing the first nine months of 1997 to 1996,
  income before income taxes increased $1.8 
  
                                         9
  million, or 9.8% . Income taxes increased $119,000 for the quarter and increased
  509,000 for 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 $22.4 million from year end
  1996. Long-term borrowings increased $119.6 million during the first nine months
  of 1997. As described in note 7 to the financial statements included herein at
  Item #1, cash inflow was increased by a $40.25 million debt offering on May 22,
  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.
  
           The following table shows separately the interest rate sensitivity of
  each category of interest-earning assets and interest-bearing liabilities at
  September 30, 1997:
  Repricing Periods (1)
                                                            Three Months     One Year
                                             Within Three    Through One   Through Five        Over
                                                 Months         Year          Years         Five Years
  Assets
  Interest-bearing deposits at banks            $1,280      $      --      $      --      $      --
    Investment securities                         18,963         43,106        140,914        113,293
    Loans and leases                             329,273        150,206        437,789        163,029
    Other assets                                   2,500             --             --        106,585
                                               ---------      ---------      ---------      ---------
                                                 352,016        193,312        578,703        382,907
                                               ---------      ---------      ---------      ---------
  Liabilities and equity
    Noninterest-bearing deposits                 147,900             --             --             --
    Interest-bearing deposits                    197,333        247,684        256,938        223,534
    Borrowed funds                               155,761         11,979         68,131         21,315
    Preferred securities                              --             --             --         40,250
    Other liabilities                                 --             --             --         16,498
    Hedging instruments                           80,000             --        (80,000)            --
    Shareholders' equity                              --             --             --        119,625
                                               ---------      ---------      ---------      ---------
                                                 580,994        259,663        245,069        421,212
                                               ---------      ---------      ---------      ---------
  Interest sensitivity gap                      (228,978)       (66,351)       333,634        (38,305)
                                               ---------      ---------      ---------      ---------
  
  Cumulative interest rate sensitivity gap     ($228,978)     ($295,329)       $38,305      $      --
                                               =========      =========      =========      =========
  (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 third calendar quarter of 1997. The table assumes prepayments and
  scheduled principal amortization of fixed-
  
                                         10
  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, 28.7% of these deposits are considered repriceable
  within three months and 71.3% are considered repriceable in the over five-years
  category.
  
           Interest rate sensitivity is a function of the repricing
  characteristics of the Company's assets and liabilities. These characteristics
  include the volume of assets and liabilities repricing, the timing of the
  repricing, and the relative levels of repricing. Attempting to minimize the
  interest rate sensitivity gaps is a continual challenge in a changing rate
  environment. Based on the Company's gap position as reflected in the above
  table, current accepted theory would indicate that net interest income would
  increase in a falling rate environment and would decrease in a rising rate
  environment. An interest rate gap table does not, however, present a complete
  picture of the impact of interest rate changes on net interest income. First,
  changes in the general level of interest rates do not affect all categories of
  assets and liabilities equally or simultaneously. Second, assets and liabilities
  which can contractually reprice within the same period may not, in fact, reprice
  at the same time or to the same extent. Third, the table represents a one-day
  position; variations occur daily as the Company adjusts its interest sensitivity
  throughout the year. Fourth, assumptions must be made to construct such a table.
  For example, noninterest bearing deposits are assigned a repricing interval
  within one year, although history indicates a significant amount of these
  deposits will not move into interest bearing categories regardless of the
  general level of interest rates. Finally, the repricing distribution of interest
  sensitive assets may not be indicative of the liquidity of those assets.
  
           The Company anticipates volatile interest rate levels for the remainder
  of 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.
  
                                         11
  CAPITAL ADEQUACY
  
           The following table sets forth certain capital performance ratios.
  
                                                        September 30     Dec. 31
                                                           1997           1996
  CAPITAL LEVELS
           Tier 1 leverage ratio                           10.29%         7.83%
           Tier 1 risk-based ratio                         14.11%        10.82%
           Total risk-based ratio                          15.52%        12.09%
  
  CAPITAL PERFORMANCE
           Return of average assets (annualized)            1.30          1.31
           Return on average equity (annualized)           15.60         15.60
           Earnings retained                               55.30         58.50
           Internal capital growth (annualized)             8.80          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 September
  30, 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. As
  described in note 7 to the financial statements included therein at Item #1,
  capital ratios were increased by a $40.25 million debt offering on May 22, 1997.
  
           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 506,667 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 234,950 shares have been repurchased at
  an aggregate cost of $5.4 million. Repurchased shares have been restated for the
  4-for-3 stock split paid July 31, 1997.
  
           The Company's banking subsidiary, National Penn Bank, (the "Bank"), has
  agreed to acquire certain deposits and the physical facility of the Topton
  Branch of Patriot Bank. This acquisition will enable the Bank to consolidate its
  Mertztown Office into the Topton Office and add new services such as ATM and
  safe deposit boxes for the former Patriot customers and service an expanded
  market. This transaction, subject to regulatory approval, is expected to be
  completed during the fourth quarter 1997. This transaction, while not material,
  is expected to be accretive to earnings in 1999.
  
           Two new products at the Bank are Empower PC Banking and Empower Phone
  Banking with Telephone Bill Payment Service. Empower PC Banking allows customers
  to do their banking from their home or business computers using Microsoft(R)
  Money, Quicken(R), or QuickBooks(R). Empower Phone
  
                                         12
  Banking allows customers to pay their bills anywhere there is a telephone. These
  two new products are not expected to have a significant effect on earnings in
  1997 and beyond.
  
           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.
  
                                         13
  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 June 1996, the Registrant's Board of Directors approved the
  repurchase of up to 506,667 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. To date, a total of 234,950 shares have been repurchased at an
  aggregate cost of $5.4 million. (The foregoing totals have been restated for the
  4-for-3 stock split paid July 31, 1997.)
  
           During third quarter 1997, the Registrant's banking subsidiary,
  National Penn Bank (the "Bank"), opened a supermarket branch in Boyertown
  (Montgomery County) and installed 3 new automated teller machines ("ATMs") in
  supermarket locations and 2 new ATMs in fast-food locations in southeastern
  Pennsylvania.
  
           During fourth quarter 1997, the Bank anticipates opening a loan center
  in Bethlehem (Northampton County) and obtaining messenger service branch
  authority throughout its 8-county trading area.
  
           In September 1997, Garry D. Koch was promoted to Executive Vice
  President and Chief Lending/Credit Officer of the Bank, and Sharon L. Weaver was
  promoted to Executive Vice President of the Bank.
  
           During third quarter 1997, the Registrant and the Bank entered into
  agreements with various senior officers of the Bank providing them with certain
  severance benefits in the event of a change in control of the Registrant. Copies
  of such agreements entered into with executive officers of the Bank are included
  in this Report as Exhibits 10.1, 10.2 and 10.3.
  
                                         14
  Item 6.  Exhibits and Reports on Form 8-K.
  
           (a)      Exhibits.
  
                    Exhibit 10.1 - Executive Agreement dated July 23, 1997 between
                    National Penn Bancshares, Inc., National Penn Bank, and Gary
                    L. Rhoads.
  
                    Exhibit 10.2 - Executive Agreement dated July 23, 1997 between
                    National Penn Bancshares, Inc., National Penn Bank, and Sandra
                    L. Spayd.
  
                    Exhibit 10.3 - Executive Agreement dated September 24, 1997
                    between National Penn Bancshares, Inc., National Penn Bank,
                    and Garry D. Koch.
  
                    Exhibit 27 - Financial Data Schedule.
  
           (b) Reports on Form 8-K. On September 9, 1997, the Registrant filed a
  Report on Form 8-K dated August 28, 1997, under Item 5, Other Events. The Report
  did not include any financial statements.
  
                                         15
  SIGNATURES
  
           Pursuant to the requirements of Section 13 of the Securities Exchange
  Act of 1934, the Registrant has caused this report to be signed on its behalf by
  the undersigned thereunto duly authorized.
  
                                              NATIONAL PENN BANCSHARES, INC.
                                                         (Registrant)
  
  Dated:  November 10, 1997                    By /s/ Wayne R. Weidner
                                                  Wayne R. Weidner, Executive
                                                  Vice President
  
  Dated:  November 10, 1997                   By /s/ Gary L. Rhoads
                                                 Gary L. Rhoads, Principal
                                                 Financial Officer