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, 1995
  
                                         OR
  
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
  
  For the transition period from: ___________________ to ___________________
  
  Commission file number: 0-10957
  
                           NATIONAL PENN BANCSHARES, INC.
               (Exact name of registrant as specified in its charter)
  
                Pennsylvania                                23-2215075
       (State or other jurisdiction of                   (I.R.S. Employer
        incorporation or organization)                  Identification No.)
  
            Philadelphia and Reading Avenues, Boyertown, PA       19512
                (Address of principal executive offices)        (Zip Code)
  
                                   (610) 367-6001
                (Registrant's telephone number, including area code)
  
                                        N/A
                (Former name, former address and former fiscal year,
                           if changed since last report)
  
       Indicate  by check mark  whether the  Registrant  (1) has filed all reports
  required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
  1934  during  the  preceding  12 months  (or for such  shorter  period  that the
  Registrant was required to file such reports),  and (2) has been subject to such
  filing requirements for the past 90 days. Yes X No .
  
       Indicate the number of shares  outstanding of each of the issuer's  classes
  of common stock, as of the latest practicable date.
  
                    Class                         Outstanding at November 8, 1995
  
      Common Stock ($2.50 par value)                  (No.) 7,572,541 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 ................................15
  
           Item 2.           Changes in Securities ............................15
  
           Item 3.           Defaults Upon Senior Securities ..................15
  
           Item 4.           Submission of Matters to a Vote of
                             Security Holders .................................15
  
           Item 5.           Other Information ................................15
  
           Item 6.           Exhibits and Reports on Form 8-K .................15
  
  Signatures ..................................................................16
  
  
                                         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)                               1995             1994
                                                                            (Unaudited)        (Note)
  <S>                                                                    <C>             <C>
  ASSETS
  Cash and due from banks                                                     $35,361          $33,195
  Interest bearing deposits in banks                                            2,228              964
  Federal funds sold                                                              ---              ---
                                                                           ----------       ----------
      Total cash and cash equivalents                                          37,589           34,159
  Securities held to maturity
    (approximate market value of $87,708 and
    $97,459 at 1995 and 1994, respectively)                                    85,718           99,229
  Securities available for sale at market value                               157,953          138,873
                                                                           ----------       ----------
      Total Investment Securities                                             243,671          238,102
  Loans, net of unearned discount                                             915,186          830,612
    Less allowance for possible loan losses                                   (19,693)         (19,310)
                                                                           ----------       ----------
      Net Loans                                                               895,493          811,302
  Other assets                                                                 51,766           53,611
                                                                           ----------       ----------
      Total Assets                                                         $1,228,519       $1,137,174
                                                                           ==========       ==========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                              $124,814         $121,273
  Interest bearing deposits
    (Includes certificates of deposit in excess of $100:
    1995 - $91,649; 1994 - $65,630)                                           780,656          743,367
                                                                           ----------       ----------
      Total Deposits                                                          905,470          864,640
  Securities sold under repurchase agreements
    and federal funds purchased                                               129,831           50,274
  Short-term borrowings                                                         6,168           47,967
  Long-term obligations                                                        71,778           77,777
  Accrued interest and other liabilities                                       15,898           11,645
                                                                           ----------       ----------
      Total Liabilities                                                     1,129,145        1,052,303
  Commitments and contingent liabilities                                          ---              ---
  Shareholders' equity
    Preferred stock, no stated par value;
      authorized 1,000,000 shares, none issued                                    ---              ---
    Common stock, par value $2.50 per share;
      20,000,000 shares  authorized;  7,269,494 
      shares issued and 7,206,407 shares
      outstanding at September 30, 1995; 
      7,234,126 shares issued and 7,135,347
      shares outstanding at December 31, 1994                                  18,173           18,083
    Additional paid-in-capital                                                 57,283           57,263
    Retained earnings                                                          23,298           16,598
    Valuation adjustment for securities 
      available for sale, net of tax                                            2,346           (4,011)
    Treasury stock (63,087 shares at cost at 
      September 30, 1995 and 98,779 shares at 
      cost at December 31, 1994)                                               (1,726)          (3,062)
                                                                           ----------       ----------
      Total Shareholders' Equity                                               99,374           84,871
                                                                           ----------       ----------
      Total Liabilities and Shareholders' Equity                           $1,228,519       $1,137,174
                                                                           ==========       ==========
  </TABLE>
  
  
  The  accompanying  notes  are an  integral  part of  these  condensed  financial
  statements.
  Note: The Balance Sheet at Dec. 31, 1994 has been derived from the audited
        financial statements at that date.
  
                                         3
  
  <PAGE>
  
  
  <TABLE>
  <CAPTION>
  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
                                                                           1995          1994             1995          1994
  <S>                                                                   <C>            <C>             <C>           <C>
  INTEREST INCOME
  Loans including fees                                                    $21,214       $17,791          $60,917       $51,399
  Deposits in banks                                                            21            12               51            68
  Federal funds sold                                                          105             8              110            22
  Investment securities                                                     4,096         3,866           12,062        10,098
                                                                          -------       -------          -------       -------
      Total interest income                                                25,436        21,677           73,140        61,587
                                                                          -------       -------          -------       -------
  INTEREST EXPENSE
  Deposits                                                                  8,381         6,070           24,254        16,263
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                             3,156         1,470            7,978         3,981
                                                                          -------       -------          -------       -------
      Total interest expense                                               11,537         7,540           32,232        20,244
                                                                          -------       -------          -------       -------
      Net interest income                                                  13,899        14,137           40,908        41,343
  Provision for loan losses                                                   750           750            2,250         2,450
                                                                          -------       -------          -------       -------
      Net interest income after provision
        for loan losses                                                    13,149        13,387           38,658        38,893
                                                                          -------       -------          -------       -------
  OTHER INCOME
  Trust Services                                                              481           368            1,329         1,044
  Service charges on deposit accounts                                         685           644            1,982         1,930
  Net gains (losses) on sale of securities and mortgages                      125           (46)             428          (358)
  Other                                                                       855           462            2,100         1,448
                                                                          -------       -------          -------       -------
      Total other income                                                    2,146         1,428            5,839         4,064
                                                                          -------       -------          -------       -------
  OTHER EXPENSES
  Salaries, wages and employee benefits                                     5,015         4,910           14,865        13,860
  Net premises and equipment                                                1,617         1,390            4,336         4,111
  Other operating                                                           3,084         3,187            9,012         9,146
                                                                          -------       -------          -------       -------
      Total other expenses                                                  9,716         9,487           28,213        27,117
                                                                          -------       -------          -------       -------
      Income before income taxes                                            5,579         5,328           16,284        15,840
  Applicable income tax expense                                             1,684         1,619            4,914         4,874
                                                                          -------       -------          -------       -------
      Net income                                                           $3,895        $3,709          $11,370       $10,966
                                                                           ======        ======          =======       =======
  
  PER SHARE OF COMMON STOCK
  Net income                                                                $0.54         $0.52            $1.58         $1.53
  Dividends paid in cash                                                     0.22          0.19             0.64          0.54
  </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)
                                                                                1995             1994
  <S>                                                                       <C>              <C>
  CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                 $11,370          $10,966
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan and lease losses                                        2,250            2,450
      Depreciation and amortization                                              2,166            1,744
      Net gains  (losses) on sale of securities and mortgages                      428             (357)
      Mortgage loans originated for resale                                      (7,046)         (15,273)
      Sale of mortgage loans originated for resale                               7,046           15,273
      Other                                                                      7,235           (8,920)
                                                                               -------          -------
  
        Net cash provided by (used in) operating activities                     23,449            5,883
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale            6,578              ---
    Proceeds from maturities of investment securities - held to maturity         8,375           29,350
    Proceeds from maturities of investment securities - available for sale         740
    Purchase of investment securities                                          (14,905)        (115,031)
    Proceeds from sales of loans                                                   ---              ---
    Net increase in loans                                                      (86,441)         (65,642)
    Purchases of premises & equipment                                           (3,731)          (5,649)
                                                                               -------          -------
  
        Net cash provided by (used in) investing activities                    (89,384)        (156,972)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                  40,830          126,428
      Repurchase agreements, fed funds & short-term borrowings                  37,758           21,121
      Long-term borrowings & subordinated capital note                          (5,999)          16,500
    (Increase) decrease in treasury stock                                        1,336           (3,832)
    Issuance of common stock under dividend reinvestment plan                      110              710
    Cash dividends                                                              (4,670)          (4,023)
                                                                               -------          -------
  
        Net cash provided by (used in) financing activities                     69,365          156,904
  
  Net increase (decrease) in cash and cash equivalents                           3,430            5,815
  
  Cash and cash equivalents at January 1                                        34,159           29,767
                                                                               -------          -------
  
  Cash and cash equivalents at September 30                                    $37,589          $35,582
                                                                               =======          =======
  
  </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, 1994.
  
  2. The results of operations for the nine-month  period ended September 30, 1995
  are not necessarily indicative of the results to be expected for the full year.
  
  3. Per share data are based on the weighted average number of shares outstanding
  of 7,185,698  and 7,165,367  for 1995 and 1994,  respectively,  and are computed
  after giving retroactive effect to a 5% stock dividend paid on October 31, 1994.
  
  4. On July 26,  1995,  the  Company's  Board of  Directors  declared  a 5% stock
  dividend  payable on October 31, 1995 to shareholders of record on September 29,
  1995.
  
  5. On January 1, 1995 the Company  adopted  Statement  of  Financial  Accounting
  Standards  (SFAS) NO. 114,  "Accounting for Creditors for Impairment of a Loan,"
  as amended by SFAS No. 118, "Accounting for Creditors for Impairment of a Loan -
  Income  Recognition  and  Disclosures."  SFAS No. 114  requires  that a creditor
  measure  impairment  based on the present  value of  expected  future cash flows
  discounted at the loan's  effective  interest  rate,  except that as a practical
  expedient, a creditor may measure impairment based on a loan's observable market
  price,  or the fair value of  collateral  if the loan is  collateral  dependent.
  Regardless of the measurement  method, a creditor must measure  impairment based
  on  the  fair  value  of  the  collateral  when  the  creditor  determines  that
  foreclosure is probable.  SFAS No. 118 allows  creditors to use existing methods
  for recognizing interest income on impaired loans.
  
       The Company has  identified  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 accrual of interest is discontinued in such loans and
  no income is recognized until all recorded amounts of interest and principal are
  recovered in full.
  
  
  
  
                                         6
  
  <PAGE>
  
  
  
       Loan  impairment is measured by estimating  the expected  future cash flows
  and discounting them at the respective effective interest rate or by valuing the
  underlying collateral.  The recorded investment in these loans and the valuation
  for credit losses related to loan impairment are as follows:
  
                                                         September 30,
                                                             1995
  
           Principal amount of impaired loans            $7,988,000
           Accrued interest                                  ---
           Deferred loan costs                               ---
                                                          ---------
                                                          7,988,000
           Less valuation allowance                       1,097,000
                                                          ---------
                                                         $6,891,000
                                                         ==========
  
       On January 1, 1995 a valuation for credit losses  related to impaired loans
  was  established.  The  activity in this  allowance  for the nine months  ending
  September 30, 1995 is as follows:
  
           Valuation allowance at beginning of period    $1,913,000
           Provision for loan impairment                    161,000
           Direct charge-offs                            (1,346,000)
           Recoveries                                       369,000
                                                         ----------
           Valuation allowance at end of period          $1,097,000
  
       Total  cash  collected  on  impaired  loans  during the nine  months  ended
  September 30, 1995 was $842,000, of which $369,000 was credited to the principal
  balance  outstanding  on such loans and  $473,000  was  recognized  as  interest
  income. Interest that would have been accrued on impaired loans during the first
  nine months of 1995 was $539,000.
  
  
  
  
  
  
  
  
  
  
  
                                         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 $1.229 billion,  an increase of $91.3 million or
  8.0% over the $1.137  billion at December 31, 1994.  This  increase is reflected
  primarily in the loan category,  the result of the  investment of deposits,  the
  Company's primary source of funds.
  
       Total  cash  and  cash  equivalents  increased  $3.4  million  or  10.0% at
  September 30, 1995 when compared to December 31, 1994.  This increase was due to
  an increase in due from banks and interest bearing deposits in banks.
  
       Loans  increased to $915.2  million at September 30, 1995.  The increase of
  $84.6 million or 10.2% compared to December 31, 1994 was primarily the result of
  the investment of deposits.  Loans  originated  for immediate  resale during the
  first nine months of the year  amounted to $7.0 million.  The  Company's  credit
  quality is reflected by the annualized ratio of net charge-offs to average total
  loans of .29% for the third  quarter  and the level of  non-performing  loans to
  total loans of .87% at  September  30,  1995.  The  Company  has no  significant
  exposure to energy and  agricultural-  related  loans.  Non-performing  loans at
  December 31, 1994 were 1.12% of total loans.
  
       Investments,  the Company's secondary use of funds,  increased $5.6 million
  or 2.3% to $243.7  million at September  30, 1995 when  compared to December 31,
  1994.  The increase was primarily in  Mortgage-Backed  Securities and Marketable
  Equity Securities.
  
       As the primary  source of funds,  aggregate  deposits of $905.5  million at
  September  30, 1995  increased  $40.8  million or 4.7%  compared to December 31,
  1994.  Interest-bearing  deposits  increased  $37.3  million  or 5.0% to  $780.7
  million at September 30, 1995  compared to $743.4  million at December 31, 1994.
  Certificates  of deposit  in excess of  $100,000  increased  $26.0  million.  In
  addition to deposits, earning assets are funded to some extent through purchased
  funds and borrowings. These include securities sold under repurchase agreements,
  federal funds purchased,  short-term  borrowings and long-term debt obligations.
  In the  aggregate,  these funds totaled  $207.8 million at September 30, 1995, a
  $31.8 million or 18.0% increase  compared to $176.0  million  December 31, 1994.
  The increase is reflected in short-term  obligations,  primarily securities sold
  under repurchase agreement and federal funds purchased.
  
                                         8
  
  <PAGE>
  
  
       Shareholders' equity increased $14.5 million or 17.1% at September 30, 1995
  to $99.4  million  compared to the $84.9  million at  December  31,  1994.  This
  increase  was due to the  retention  of  earnings  and the  change in  valuation
  adjustment  for  securities  available for sale.  Cash dividends paid during the
  first nine  months of 1995  increased  $679,000  or 17.4%  compared  to the cash
  dividends paid during the first nine months of 1994.  Earnings  retained  during
  the first nine  months of 1995 were 59.7% of total  earnings  compared  to 64.4%
  during the first nine months of 1994.
  
                               RESULTS OF OPERATIONS
  
       Net income for the quarter ended September 30, 1995 was $3.9 million,  5.0%
  more than the $3.7 million  reported for the same period in 1994.  For the first
  nine  months,  net income  reached  $11.4  million,  or 3.7% more than the $10.9
  million  reported for the first nine months of 1994.  The Company's  performance
  has been and will  continue  to be in part  influenced  by the  strength  of the
  economy and conditions in the real estate market.
  
       Net interest income is the difference between interest income on assets and
  interest  expense on liabilities.  Net interest income  decreased $.2 million or
  1.7% to $13.9 million during the third quarter of 1995 from $14.1 million in the
  third quarter 1994. For the comparative  nine month period,  net interest income
  decreased $.4 million or 1.1%.  The decrease in net interest  income is a result
  of growth in loan  outstandings  and  higher  rates on loans  that was more than
  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, 1995 to January 31, 1995 was 8.50%.  From
  February 1, 1995 to July 6, 1995,  the prime rate was 9.0%. On July 7, 1995, the
  prime rate changed to 8.75%.  The  Company's  prime rate was 6.0% from January 1
  through  March 23,  1994.  From March 24 to April 18,  1994,  the prime rate was
  6.25%.  From April 19 to May 17,  1994,  the prime rate was 6.75%.  From May 18,
  1994 to August 15, 1994, the prime rate was 7.25%. On August 16, 1994, the prime
  rate was changed to 7.75%. Interest expense during the first nine months of 1995
  increased  $11.9  million or 59.2%  compared to the prior  year's  nine  months.
  Despite  the  current  rate  environment,  the cost of  attracting  and  holding
  deposited funds is an  ever-increasing  expense in the banking  industry.  These
  increases are the real costs of deposit  accumulation  and retention,  including
  FDIC insurance costs and branch overhead expenses.  Such costs are necessary for
  continued  growth  and to  maintain  and  increase  market  share  of  available
  deposits.
  
       The provision  for loan and lease losses is determined by periodic  reviews
  of loan quality,  current economic conditions,  loss experience and loan growth.
  Based on these factors, the provision
  
                                         9
  
  <PAGE>
  
  
  
  for loan and lease losses remained  constant for the third quarter and decreased
  $200,000 for the first nine months of 1995 compared to the same periods in 1994.
  The  allowance  for loan and lease losses of $19.7 million at September 30, 1995
  and $19.3  million at December 31, 1994 as a percentage  of total loans was 2.2%
  and  2.3%,  respectively.  The  Company's  net  charge-offs  of  $1,867,000  and
  $1,690,000  during  the  first  nine  months  of 1995  and  1994,  respectively,
  continues to be comparable to that of the  Company's  peers,  as reported in the
  Bank Holding Company Performance Report.
  
       "Total other income"  increased  $718,000 or 50.3% during the third quarter
  of 1995, as a result of increases in other income of $393,000,  gains on sale of
  securities  and  mortgages  of  $171,000,  trust  income of $113,000 and service
  charges on deposit  accounts of $41,000.  Year to date,  other income  increased
  $1,775,000  or 43.7% when  compared to the first nine months of 1994 as a result
  of gains on the sale of securities  and  mortgages of $786,000,  other income of
  $652,000,  trust income of $285,000 and service  charges on deposit  accounts 0f
  $52,000.  "Total other expenses"  increased  $229,000 or 2.4% during the quarter
  ended  September 30, 1995 as a result of increases in net premises and equipment
  of $227,000,  salaries, wages and employee benefits of $105,000. These increases
  were  partially  offset by a decrease in other  operating  expenses of $103,000.
  Year to date, other expenses  increased  $1,096,000 or 4.0% when compared to the
  first nine months of 1994. Of this year-to-date increase,  salaries and benefits
  increased $1,005,000 and net premises amd equipment of $225,000. These increases
  were partially offset by a decrease in other operating expenses of $134,000.
  
       Income  before  income taxes  increased by $251,000 or 4.7% compared to the
  third  quarter of 1994.  In  comparing  the first  nine  months of 1995 to 1994,
  income before income taxes  increased  $444,000 or 2.8%.  Income taxes increased
  $65,000 for the quarter and $40,000 the nine month period.
  
                      LIQUIDITY AND INTEREST RATE SENSITIVITY
  
       The primary functions of asset/liability  management are to assure adequate
  liquidity and maintain an appropriate  balance between  interest-earning  assets
  and interest-bearing  liabilities.  Liquidity management involves the ability to
  meet the cash  flow  requirements  of  customers  who may be  either  depositors
  wanting to withdraw funds or borrowers  needing  assurance that sufficient funds
  will be available  to meet their  credit  needs.  Funding  affecting  short-term
  liquidity,  including deposits,  repurchase agreements, fed funds purchased, and
  short-term  borrowings,  increased  $78.6 million from year end 1994.  Long-term
  borrowings decreased $6.0 million during the first nine months of 1995.
  
       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.
  
                                         10
  
  <PAGE>
  
  
  
  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, 1995:
  
                                                 Repricing Periods (1)
                                                       One Year
                                     Within            Through            Over
                                    One Year         Five Years        Five Years
                                                   (In Thousands)
  Assets
    Interest-bearing deposits
      at banks                       $  2,228          $   --           $   --
    Investment securities              53,882            68,315          121,474
    Loans and leases                  383,195           374,538          157,453
    Other assets                        4,627              --             82,500
                                     --------         --------          --------
                                      443,932           442,853          361,427
                                     --------          --------         --------
  Liabilities and equity
    Noninterest-bearing deposits      124,814              --               --
    Interest-bearing deposits         319,403           228,105          233,148
    Borrowed funds                    182,190             4,085           21,502
    Other liabilities                    --                --             35,591
    Hedging instruments               100,000           (90,000)         (10,000)
    Shareholders' equity                 --                --             99,374
                                     --------          --------         --------
                                      726,407           142,190          379,615
                                     --------          --------         --------
  
  Interest sensitivity gap           (282,475)          300,663          (18,188)
                                     --------          --------        ---------
  
  Cumulative interest rate
      sensitivity gap               ($282,475)         $ 18,188         $   --
                                   ==========         =========         ========
  
  (1)      Savings  and  NOW  deposits  are  scheduled  for  repricing   based  on
           historical  deposit decay rate analyses,  as well as historical  moving
           averages of run-off for the Company's deposits in these categories.
  
       Interest rate sensitivity is a function of the repricing characteristics of
  the Company's assets and liabilities.  These characteristics  include the volume
  of assets  and  liabilities  repricing,  the  timing of the  repricing,  and the
  relative  levels  of  repricing.   Attempting  to  minimize  the  interest  rate
  sensitivity gaps is a continual challenge in a changing rate environment.  Based
  on the Company's gap position as reflected in the above table,  current accepted
  theory would indicate that net interest  income would 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
  
                                         11
  
  <PAGE>
  
  
  
  assets and liabilities equally or simultaneously. Second, assets and liabilities
  which can contractually reprice within the same period may not, in fact, reprice
  at the same time or to the same extent.  Third,  the table  represents a one-day
  position; variations occur daily as the Company adjusts its interest sensitivity
  throughout the year. Fourth, assumptions must be made to construct such a table.
  For example,  non-interest  bearing  deposits are assigned a repricing  interval
  within  one year,  although  history  indicates  a  significant  amount of these
  deposits  will not move  into  interest  bearing  categories  regardless  of the
  general level of interest rates. Finally, the repricing distribution of interest
  sensitive assets may not be indicative of the liquidity of those assets.
  
       The Company anticipates  volatile interest rate levels for the remainder of
  1995,  with no clear  indication of sustainable  rising or falling rates.  Given
  this  assumption,  the  Company's  asset/liability  strategy for 1995 is to move
  toward a smaller negative gap (interest-bearing liabilities subject to repricing
  equal  interest-earning  assets  subject to repricing) for periods up to a year.
  The impact of a volatile interest rate environment on net interest income is not
  expected to be  significant to the Company's  results of  operations.  Effective
  monitoring of these interest  sensitivity  gaps is the priority of the Company's
  asset/liability management committee.
  
                                  CAPITAL ADEQUACY
  
       The following table sets forth certain capital performance ratios.
  
                                            Sept. 30,        Dec. 31,
                                              1995             1994
  CAPITAL LEVELS
    Tier 1 leverage ratio                     7.41%            7.35%
    Tier 1 risk-based ratio                  10.86            10.85
    Total risk-based ratio                   12.13            12.11
  
  
  CAPITAL PERFORMANCE
    Return on average assets(annualized)      1.29             1.41
    Return on average equity(annualized)     16.46            17.30
    Earnings retained                        59.70            63.50
    Internal capital growth(annualized)       8.00            11.32
  
       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, 1995,  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
  
                                         12
  
  <PAGE>
  
  
  
  3.0%. In order for the Company to be considered "well  capitalized",  as defined
  by banking regulators,  the Company must have Tier 1 and total capital ratios of
  6.0% and 10.0%,  respectively,  and a minimum Tier 1 leverage ratio of 5.0%. The
  Company  currently meets the criteria for a well  capitalized  institution,  and
  management believes that, under current  regulations,  the Company will continue
  to meet its minimum capital  requirements in the foreseeable future. At present,
  the Company has no commitments for significant capital expenditures.
  
       The Company is not under any agreement with  regulatory  authorities nor is
  the Company aware of any current  recommendations by the regulatory  authorities
  which, if such recommendations were implemented, would have a material effect on
  liquidity, capital resources or operations of the Company.
  
                                   FUTURE OUTLOOK
  
       In February 1994, the Company's Board of Directors  approved the repurchase
  of up to  200,000  shares  of its  common  stock in open  market  or  negotiated
  transactions.  To date, a total of 167,140  shares have been  repurchased  at an
  aggregate cost of $5,112,000.
  
       In August 1995, the Company opened two more supermarket branches located in
  Allentown and Bethlehem,  PA. The Company considers supermarket branches to be a
  strategic delivery system for banks in the future.
  
       The  Company  will  continue  its  work  on the  installation  of  platform
  automation  during 1995.  Through  platform  automation,  the Company expects to
  increase efficiencies and re-focus its efforts to improve productivity, in order
  to  provide  faster and  improved  service  to our  customers,  at the same time
  reducing costs to contrubute to improved profitability.  The platform automation
  project may lead to in excess of $1 million in capital expenditures.
  
       On August 8, 1995,  the FDIC reduced the  insurance  assessments  that most
  Bank Insurance  Fund-member  banks must pay on insured deposits to $.04 per $100
  of  deposits  from the then  current  rate of $.23  per  $100 of  deposits,  but
  continued Savings Association  Insurance Fund premiums at the then current level
  of $.23 per $100 of deposits.  Because the Company acquired  approximately  $225
  million of  SAIF-insured  deposits  from savings  associations  from 1990 to the
  present,  the  Company  must  continue  to pay  insurance  assessments  on these
  acquired  deposits  at $.23  per  $100 of  deposits.  The  reduction  in rate on
  BIF-insured  deposits to $.04 was retroactive to June 1, 1995. As a result,  the
  Company received a refund of approximately $400,000.
  
       On November 7, 1995, U.S. Senate and House negotiators reached agreement on
  legislation to recapitalize the SAIF through a one-
  
                                         13
  
  <PAGE>
  
  
  time  assessment of $.85 per $100 of SAIF-insured  deposits,  to be paid in late
  1995 or early 1996.  Commercial  banking companies which purchased  SAIF-insured
  deposits,  such as the  Company,  may be assessed  at a 20% lower  rate.  If the
  Company is subjected  to the full  assessment  of $.85 per $100 of  SAIF-insured
  deposits,  it could result in a total payment of  approximately  $1.9 million by
  the Company.  The Company's  $400,000 refund  discussed above was not taken into
  income but was placed in a  designated  reserve  account to be used as a partial
  offset to the anticipated one-time assessment.
  
       The Company  cannot predict if the pending  legislation  will be enacted as
  presently  proposed,  but expects that any legislation  recapitalizing SAIF will
  likely impose additional deposit insurance costs on the Company  attributable to
  its  acquired  SAIF-insured  deposits.  These costs may have a material  adverse
  effect on the Company's earnings when incurred.
  
  
  
  
  
  
                                         14
  
  <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.
  
       The  registrant's  banking  subisidiary,   National  Penn  Bank,  opened  a
  full-service supermarket branch in Bethlehem,  Northampton County, on August 21,
  1995.  National Penn Bank opened remote ATMs at Commons  Boulevard and Tuckerton
  Road, Reading,  Muhlenberg Township, on September 11, 1995, at Alvernia College,
  Reading,  Berks County,  on September 14, 1995 and at Boyertown Area Senior High
  School,  Boyertown,  Berks County on September  20, 1995.  The  Registrant  also
  anticipates  that  National  Penn Bank  will  close its  Hamilton  Mall  Branch,
  Allentown, Lehigh County, in early 1996.
  
       In  February  1994,  the  Registrant's  Board  of  Directors  approved  the
  repurchase  of up to  200,000  shares  of its  common  stock in open  market  or
  negotiated  transactions.  At September 30, 1995, a total of 167,140 shares have
  been repurchased at an aggregate cost of $5,112,000.
  
       On  October  31,  1995,  the  Registrant   paid  a  5%  stock  dividend  to
  shareholders of record as of September 29, 1995.
  
  
  Item 6.  Exhibits and Reports on Form 8-K.
  
           (a)      Exhibits.
  
                    Exhibit 27 - Financial Data Schedule.
  
           (b)  Reports  on Form 8-K.  The  Registrant  filed a Report on Form 8-K
  dated September 28, 1995, reporting information under Item 5, Other Events.
  
                                         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 8, 1995                    By /s/ Lawrence T. Jilk, Jr.
                                                 --------------------------
                                                  Lawrence T. Jilk, Jr., President
                                                  and Chief Executive Officer
  
  Dated:  November 8, 1995                    By /s/ Gary L. Rhoads
                                                 -------------------
                                                  Gary L. Rhoads, Principal
                                                  Financial Officer
  
  
                                         16
metadata_documents: [{"type": "10-Q", "sequence": "1", "secsgml_size_bytes": 44815}]
metadata_filer: {"company-data": {"conformed-name": "NATIONAL PENN BANCSHARES INC", "cik": "0000700733", "assigned-sic": "6021", "irs-number": "232215075", "state-of-incorporation": "PA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "000-10957", "film-number": "95589386"}, "business-address": {"street1": "POST OFFICE BOX 547", "city": "BOYERTOWN", "state": "PA", "zip": "19512", "phone": "6103696341"}, "mail-address": {"street1": "POST OFFICE BOX 547", "street2": "POST OFFICE BOX 547", "city": "BOYERTOWN", "state": "PA", "zip": "19512"}}
text: FORM 10-Q
  
                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549
  
  (Mark One)
  
            [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
  
  For the quarterly period ended:      September 30, 1995
  
                                         OR
  
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
  
  For the transition period from: ___________________ to ___________________
  
  Commission file number: 0-10957
  
                           NATIONAL PENN BANCSHARES, INC.
               (Exact name of registrant as specified in its charter)
  
                Pennsylvania                                23-2215075
       (State or other jurisdiction of                   (I.R.S. Employer
        incorporation or organization)                  Identification No.)
  
            Philadelphia and Reading Avenues, Boyertown, PA       19512
                (Address of principal executive offices)        (Zip Code)
  
                                   (610) 367-6001
                (Registrant's telephone number, including area code)
  
                                        N/A
                (Former name, former address and former fiscal year,
                           if changed since last report)
  
       Indicate  by check mark  whether the  Registrant  (1) has filed all reports
  required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
  1934  during  the  preceding  12 months  (or for such  shorter  period  that the
  Registrant was required to file such reports),  and (2) has been subject to such
  filing requirements for the past 90 days. Yes X No .
  
       Indicate the number of shares  outstanding of each of the issuer's  classes
  of common stock, as of the latest practicable date.
  
                    Class                         Outstanding at November 8, 1995
  
      Common Stock ($2.50 par value)                  (No.) 7,572,541 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 ................................15
  
           Item 2.           Changes in Securities ............................15
  
           Item 3.           Defaults Upon Senior Securities ..................15
  
           Item 4.           Submission of Matters to a Vote of
                             Security Holders .................................15
  
           Item 5.           Other Information ................................15
  
           Item 6.           Exhibits and Reports on Form 8-K .................15
  
  Signatures ..................................................................16
  
                                         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)                               1995             1994
                                                                            (Unaudited)        (Note)
  ASSETS
  Cash and due from banks                                                     $35,361          $33,195
  Interest bearing deposits in banks                                            2,228              964
  Federal funds sold                                                              ---              ---
                                                                           ----------       ----------
      Total cash and cash equivalents                                          37,589           34,159
  Securities held to maturity
    (approximate market value of $87,708 and
    $97,459 at 1995 and 1994, respectively)                                    85,718           99,229
  Securities available for sale at market value                               157,953          138,873
                                                                           ----------       ----------
      Total Investment Securities                                             243,671          238,102
  Loans, net of unearned discount                                             915,186          830,612
    Less allowance for possible loan losses                                   (19,693)         (19,310)
                                                                           ----------       ----------
      Net Loans                                                               895,493          811,302
  Other assets                                                                 51,766           53,611
                                                                           ----------       ----------
      Total Assets                                                         $1,228,519       $1,137,174
                                                                           ==========       ==========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                              $124,814         $121,273
  Interest bearing deposits
    (Includes certificates of deposit in excess of $100:
    1995 - $91,649; 1994 - $65,630)                                           780,656          743,367
                                                                           ----------       ----------
      Total Deposits                                                          905,470          864,640
  Securities sold under repurchase agreements
    and federal funds purchased                                               129,831           50,274
  Short-term borrowings                                                         6,168           47,967
  Long-term obligations                                                        71,778           77,777
  Accrued interest and other liabilities                                       15,898           11,645
                                                                           ----------       ----------
      Total Liabilities                                                     1,129,145        1,052,303
  Commitments and contingent liabilities                                          ---              ---
  Shareholders' equity
    Preferred stock, no stated par value;
      authorized 1,000,000 shares, none issued                                    ---              ---
    Common stock, par value $2.50 per share;
      20,000,000 shares  authorized;  7,269,494 
      shares issued and 7,206,407 shares
      outstanding at September 30, 1995; 
      7,234,126 shares issued and 7,135,347
      shares outstanding at December 31, 1994                                  18,173           18,083
    Additional paid-in-capital                                                 57,283           57,263
    Retained earnings                                                          23,298           16,598
    Valuation adjustment for securities 
      available for sale, net of tax                                            2,346           (4,011)
    Treasury stock (63,087 shares at cost at 
      September 30, 1995 and 98,779 shares at 
      cost at December 31, 1994)                                               (1,726)          (3,062)
                                                                           ----------       ----------
      Total Shareholders' Equity                                               99,374           84,871
                                                                           ----------       ----------
      Total Liabilities and Shareholders' Equity                           $1,228,519       $1,137,174
                                                                           ==========       ==========
  The  accompanying  notes  are an  integral  part of  these  condensed  financial
  statements.
  Note: The Balance Sheet at Dec. 31, 1994 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
                                                                           1995          1994             1995          1994
  INTEREST INCOME
  Loans including fees                                                    $21,214       $17,791          $60,917       $51,399
  Deposits in banks                                                            21            12               51            68
  Federal funds sold                                                          105             8              110            22
  Investment securities                                                     4,096         3,866           12,062        10,098
                                                                          -------       -------          -------       -------
      Total interest income                                                25,436        21,677           73,140        61,587
                                                                          -------       -------          -------       -------
  INTEREST EXPENSE
  Deposits                                                                  8,381         6,070           24,254        16,263
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                             3,156         1,470            7,978         3,981
                                                                          -------       -------          -------       -------
      Total interest expense                                               11,537         7,540           32,232        20,244
                                                                          -------       -------          -------       -------
      Net interest income                                                  13,899        14,137           40,908        41,343
  Provision for loan losses                                                   750           750            2,250         2,450
                                                                          -------       -------          -------       -------
      Net interest income after provision
        for loan losses                                                    13,149        13,387           38,658        38,893
                                                                          -------       -------          -------       -------
  OTHER INCOME
  Trust Services                                                              481           368            1,329         1,044
  Service charges on deposit accounts                                         685           644            1,982         1,930
  Net gains (losses) on sale of securities and mortgages                      125           (46)             428          (358)
  Other                                                                       855           462            2,100         1,448
                                                                          -------       -------          -------       -------
      Total other income                                                    2,146         1,428            5,839         4,064
                                                                          -------       -------          -------       -------
  OTHER EXPENSES
  Salaries, wages and employee benefits                                     5,015         4,910           14,865        13,860
  Net premises and equipment                                                1,617         1,390            4,336         4,111
  Other operating                                                           3,084         3,187            9,012         9,146
                                                                          -------       -------          -------       -------
      Total other expenses                                                  9,716         9,487           28,213        27,117
                                                                          -------       -------          -------       -------
      Income before income taxes                                            5,579         5,328           16,284        15,840
  Applicable income tax expense                                             1,684         1,619            4,914         4,874
                                                                          -------       -------          -------       -------
      Net income                                                           $3,895        $3,709          $11,370       $10,966
                                                                           ======        ======          =======       =======
  
  PER SHARE OF COMMON STOCK
  Net income                                                                $0.54         $0.52            $1.58         $1.53
  Dividends paid in cash                                                     0.22          0.19             0.64          0.54
  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)
                                                                                1995             1994
  CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                 $11,370          $10,966
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan and lease losses                                        2,250            2,450
      Depreciation and amortization                                              2,166            1,744
      Net gains  (losses) on sale of securities and mortgages                      428             (357)
      Mortgage loans originated for resale                                      (7,046)         (15,273)
      Sale of mortgage loans originated for resale                               7,046           15,273
      Other                                                                      7,235           (8,920)
                                                                               -------          -------
  
        Net cash provided by (used in) operating activities                     23,449            5,883
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale            6,578              ---
    Proceeds from maturities of investment securities - held to maturity         8,375           29,350
    Proceeds from maturities of investment securities - available for sale         740
    Purchase of investment securities                                          (14,905)        (115,031)
    Proceeds from sales of loans                                                   ---              ---
    Net increase in loans                                                      (86,441)         (65,642)
    Purchases of premises & equipment                                           (3,731)          (5,649)
                                                                               -------          -------
  
        Net cash provided by (used in) investing activities                    (89,384)        (156,972)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                  40,830          126,428
      Repurchase agreements, fed funds & short-term borrowings                  37,758           21,121
      Long-term borrowings & subordinated capital note                          (5,999)          16,500
    (Increase) decrease in treasury stock                                        1,336           (3,832)
    Issuance of common stock under dividend reinvestment plan                      110              710
    Cash dividends                                                              (4,670)          (4,023)
                                                                               -------          -------
  
        Net cash provided by (used in) financing activities                     69,365          156,904
  
  Net increase (decrease) in cash and cash equivalents                           3,430            5,815
  
  Cash and cash equivalents at January 1                                        34,159           29,767
                                                                               -------          -------
  
  Cash and cash equivalents at September 30                                    $37,589          $35,582
                                                                               =======          =======
  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, 1994.
  
  2. The results of operations for the nine-month  period ended September 30, 1995
  are not necessarily indicative of the results to be expected for the full year.
  
  3. Per share data are based on the weighted average number of shares outstanding
  of 7,185,698  and 7,165,367  for 1995 and 1994,  respectively,  and are computed
  after giving retroactive effect to a 5% stock dividend paid on October 31, 1994.
  
  4. On July 26,  1995,  the  Company's  Board of  Directors  declared  a 5% stock
  dividend  payable on October 31, 1995 to shareholders of record on September 29,
  1995.
  
  5. On January 1, 1995 the Company  adopted  Statement  of  Financial  Accounting
  Standards  (SFAS) NO. 114,  "Accounting for Creditors for Impairment of a Loan,"
  as amended by SFAS No. 118, "Accounting for Creditors for Impairment of a Loan -
  Income  Recognition  and  Disclosures."  SFAS No. 114  requires  that a creditor
  measure  impairment  based on the present  value of  expected  future cash flows
  discounted at the loan's  effective  interest  rate,  except that as a practical
  expedient, a creditor may measure impairment based on a loan's observable market
  price,  or the fair value of  collateral  if the loan is  collateral  dependent.
  Regardless of the measurement  method, a creditor must measure  impairment based
  on  the  fair  value  of  the  collateral  when  the  creditor  determines  that
  foreclosure is probable.  SFAS No. 118 allows  creditors to use existing methods
  for recognizing interest income on impaired loans.
  
       The Company has  identified  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 accrual of interest is discontinued in such loans and
  no income is recognized until all recorded amounts of interest and principal are
  recovered in full.
  
                                         6
  Loan  impairment is measured by estimating  the expected  future cash flows
  and discounting them at the respective effective interest rate or by valuing the
  underlying collateral.  The recorded investment in these loans and the valuation
  for credit losses related to loan impairment are as follows:
  
                                                         September 30,
                                                             1995
  
           Principal amount of impaired loans            $7,988,000
           Accrued interest                                  ---
           Deferred loan costs                               ---
                                                          ---------
                                                          7,988,000
           Less valuation allowance                       1,097,000
                                                          ---------
                                                         $6,891,000
                                                         ==========
  
       On January 1, 1995 a valuation for credit losses  related to impaired loans
  was  established.  The  activity in this  allowance  for the nine months  ending
  September 30, 1995 is as follows:
  
           Valuation allowance at beginning of period    $1,913,000
           Provision for loan impairment                    161,000
           Direct charge-offs                            (1,346,000)
           Recoveries                                       369,000
                                                         ----------
           Valuation allowance at end of period          $1,097,000
  
       Total  cash  collected  on  impaired  loans  during the nine  months  ended
  September 30, 1995 was $842,000, of which $369,000 was credited to the principal
  balance  outstanding  on such loans and  $473,000  was  recognized  as  interest
  income. Interest that would have been accrued on impaired loans during the first
  nine months of 1995 was $539,000.
  
                                         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 $1.229 billion,  an increase of $91.3 million or
  8.0% over the $1.137  billion at December 31, 1994.  This  increase is reflected
  primarily in the loan category,  the result of the  investment of deposits,  the
  Company's primary source of funds.
  
       Total  cash  and  cash  equivalents  increased  $3.4  million  or  10.0% at
  September 30, 1995 when compared to December 31, 1994.  This increase was due to
  an increase in due from banks and interest bearing deposits in banks.
  
       Loans  increased to $915.2  million at September 30, 1995.  The increase of
  $84.6 million or 10.2% compared to December 31, 1994 was primarily the result of
  the investment of deposits.  Loans  originated  for immediate  resale during the
  first nine months of the year  amounted to $7.0 million.  The  Company's  credit
  quality is reflected by the annualized ratio of net charge-offs to average total
  loans of .29% for the third  quarter  and the level of  non-performing  loans to
  total loans of .87% at  September  30,  1995.  The  Company  has no  significant
  exposure to energy and  agricultural-  related  loans.  Non-performing  loans at
  December 31, 1994 were 1.12% of total loans.
  
       Investments,  the Company's secondary use of funds,  increased $5.6 million
  or 2.3% to $243.7  million at September  30, 1995 when  compared to December 31,
  1994.  The increase was primarily in  Mortgage-Backed  Securities and Marketable
  Equity Securities.
  
       As the primary  source of funds,  aggregate  deposits of $905.5  million at
  September  30, 1995  increased  $40.8  million or 4.7%  compared to December 31,
  1994.  Interest-bearing  deposits  increased  $37.3  million  or 5.0% to  $780.7
  million at September 30, 1995  compared to $743.4  million at December 31, 1994.
  Certificates  of deposit  in excess of  $100,000  increased  $26.0  million.  In
  addition to deposits, earning assets are funded to some extent through purchased
  funds and borrowings. These include securities sold under repurchase agreements,
  federal funds purchased,  short-term  borrowings and long-term debt obligations.
  In the  aggregate,  these funds totaled  $207.8 million at September 30, 1995, a
  $31.8 million or 18.0% increase  compared to $176.0  million  December 31, 1994.
  The increase is reflected in short-term  obligations,  primarily securities sold
  under repurchase agreement and federal funds purchased.
  
                                         8
  Shareholders' equity increased $14.5 million or 17.1% at September 30, 1995
  to $99.4  million  compared to the $84.9  million at  December  31,  1994.  This
  increase  was due to the  retention  of  earnings  and the  change in  valuation
  adjustment  for  securities  available for sale.  Cash dividends paid during the
  first nine  months of 1995  increased  $679,000  or 17.4%  compared  to the cash
  dividends paid during the first nine months of 1994.  Earnings  retained  during
  the first nine  months of 1995 were 59.7% of total  earnings  compared  to 64.4%
  during the first nine months of 1994.
  
                               RESULTS OF OPERATIONS
  
       Net income for the quarter ended September 30, 1995 was $3.9 million,  5.0%
  more than the $3.7 million  reported for the same period in 1994.  For the first
  nine  months,  net income  reached  $11.4  million,  or 3.7% more than the $10.9
  million  reported for the first nine months of 1994.  The Company's  performance
  has been and will  continue  to be in part  influenced  by the  strength  of the
  economy and conditions in the real estate market.
  
       Net interest income is the difference between interest income on assets and
  interest  expense on liabilities.  Net interest income  decreased $.2 million or
  1.7% to $13.9 million during the third quarter of 1995 from $14.1 million in the
  third quarter 1994. For the comparative  nine month period,  net interest income
  decreased $.4 million or 1.1%.  The decrease in net interest  income is a result
  of growth in loan  outstandings  and  higher  rates on loans  that was more than
  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, 1995 to January 31, 1995 was 8.50%.  From
  February 1, 1995 to July 6, 1995,  the prime rate was 9.0%. On July 7, 1995, the
  prime rate changed to 8.75%.  The  Company's  prime rate was 6.0% from January 1
  through  March 23,  1994.  From March 24 to April 18,  1994,  the prime rate was
  6.25%.  From April 19 to May 17,  1994,  the prime rate was 6.75%.  From May 18,
  1994 to August 15, 1994, the prime rate was 7.25%. On August 16, 1994, the prime
  rate was changed to 7.75%. Interest expense during the first nine months of 1995
  increased  $11.9  million or 59.2%  compared to the prior  year's  nine  months.
  Despite  the  current  rate  environment,  the cost of  attracting  and  holding
  deposited funds is an  ever-increasing  expense in the banking  industry.  These
  increases are the real costs of deposit  accumulation  and retention,  including
  FDIC insurance costs and branch overhead expenses.  Such costs are necessary for
  continued  growth  and to  maintain  and  increase  market  share  of  available
  deposits.
  
       The provision  for loan and lease losses is determined by periodic  reviews
  of loan quality,  current economic conditions,  loss experience and loan growth.
  Based on these factors, the provision
  
                                         9
  for loan and lease losses remained  constant for the third quarter and decreased
  $200,000 for the first nine months of 1995 compared to the same periods in 1994.
  The  allowance  for loan and lease losses of $19.7 million at September 30, 1995
  and $19.3  million at December 31, 1994 as a percentage  of total loans was 2.2%
  and  2.3%,  respectively.  The  Company's  net  charge-offs  of  $1,867,000  and
  $1,690,000  during  the  first  nine  months  of 1995  and  1994,  respectively,
  continues to be comparable to that of the  Company's  peers,  as reported in the
  Bank Holding Company Performance Report.
  
       "Total other income"  increased  $718,000 or 50.3% during the third quarter
  of 1995, as a result of increases in other income of $393,000,  gains on sale of
  securities  and  mortgages  of  $171,000,  trust  income of $113,000 and service
  charges on deposit  accounts of $41,000.  Year to date,  other income  increased
  $1,775,000  or 43.7% when  compared to the first nine months of 1994 as a result
  of gains on the sale of securities  and  mortgages of $786,000,  other income of
  $652,000,  trust income of $285,000 and service  charges on deposit  accounts 0f
  $52,000.  "Total other expenses"  increased  $229,000 or 2.4% during the quarter
  ended  September 30, 1995 as a result of increases in net premises and equipment
  of $227,000,  salaries, wages and employee benefits of $105,000. These increases
  were  partially  offset by a decrease in other  operating  expenses of $103,000.
  Year to date, other expenses  increased  $1,096,000 or 4.0% when compared to the
  first nine months of 1994. Of this year-to-date increase,  salaries and benefits
  increased $1,005,000 and net premises amd equipment of $225,000. These increases
  were partially offset by a decrease in other operating expenses of $134,000.
  
       Income  before  income taxes  increased by $251,000 or 4.7% compared to the
  third  quarter of 1994.  In  comparing  the first  nine  months of 1995 to 1994,
  income before income taxes  increased  $444,000 or 2.8%.  Income taxes increased
  $65,000 for the quarter and $40,000 the nine month period.
  
                      LIQUIDITY AND INTEREST RATE SENSITIVITY
  
       The primary functions of asset/liability  management are to assure adequate
  liquidity and maintain an appropriate  balance between  interest-earning  assets
  and interest-bearing  liabilities.  Liquidity management involves the ability to
  meet the cash  flow  requirements  of  customers  who may be  either  depositors
  wanting to withdraw funds or borrowers  needing  assurance that sufficient funds
  will be available  to meet their  credit  needs.  Funding  affecting  short-term
  liquidity,  including deposits,  repurchase agreements, fed funds purchased, and
  short-term  borrowings,  increased  $78.6 million from year end 1994.  Long-term
  borrowings decreased $6.0 million during the first nine months of 1995.
  
       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.
  
                                         10
  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, 1995:
  
                                                 Repricing Periods (1)
                                                       One Year
                                     Within            Through            Over
                                    One Year         Five Years        Five Years
                                                   (In Thousands)
  Assets
    Interest-bearing deposits
      at banks                       $  2,228          $   --           $   --
    Investment securities              53,882            68,315          121,474
    Loans and leases                  383,195           374,538          157,453
    Other assets                        4,627              --             82,500
                                     --------         --------          --------
                                      443,932           442,853          361,427
                                     --------          --------         --------
  Liabilities and equity
    Noninterest-bearing deposits      124,814              --               --
    Interest-bearing deposits         319,403           228,105          233,148
    Borrowed funds                    182,190             4,085           21,502
    Other liabilities                    --                --             35,591
    Hedging instruments               100,000           (90,000)         (10,000)
    Shareholders' equity                 --                --             99,374
                                     --------          --------         --------
                                      726,407           142,190          379,615
                                     --------          --------         --------
  
  Interest sensitivity gap           (282,475)          300,663          (18,188)
                                     --------          --------        ---------
  
  Cumulative interest rate
      sensitivity gap               ($282,475)         $ 18,188         $   --
                                   ==========         =========         ========
  
  (1)      Savings  and  NOW  deposits  are  scheduled  for  repricing   based  on
           historical  deposit decay rate analyses,  as well as historical  moving
           averages of run-off for the Company's deposits in these categories.
  
       Interest rate sensitivity is a function of the repricing characteristics of
  the Company's assets and liabilities.  These characteristics  include the volume
  of assets  and  liabilities  repricing,  the  timing of the  repricing,  and the
  relative  levels  of  repricing.   Attempting  to  minimize  the  interest  rate
  sensitivity gaps is a continual challenge in a changing rate environment.  Based
  on the Company's gap position as reflected in the above table,  current accepted
  theory would indicate that net interest  income would 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
  
                                         11
  assets and liabilities equally or simultaneously. Second, assets and liabilities
  which can contractually reprice within the same period may not, in fact, reprice
  at the same time or to the same extent.  Third,  the table  represents a one-day
  position; variations occur daily as the Company adjusts its interest sensitivity
  throughout the year. Fourth, assumptions must be made to construct such a table.
  For example,  non-interest  bearing  deposits are assigned a repricing  interval
  within  one year,  although  history  indicates  a  significant  amount of these
  deposits  will not move  into  interest  bearing  categories  regardless  of the
  general level of interest rates. Finally, the repricing distribution of interest
  sensitive assets may not be indicative of the liquidity of those assets.
  
       The Company anticipates  volatile interest rate levels for the remainder of
  1995,  with no clear  indication of sustainable  rising or falling rates.  Given
  this  assumption,  the  Company's  asset/liability  strategy for 1995 is to move
  toward a smaller negative gap (interest-bearing liabilities subject to repricing
  equal  interest-earning  assets  subject to repricing) for periods up to a year.
  The impact of a volatile interest rate environment on net interest income is not
  expected to be  significant to the Company's  results of  operations.  Effective
  monitoring of these interest  sensitivity  gaps is the priority of the Company's
  asset/liability management committee.
  
                                  CAPITAL ADEQUACY
  
       The following table sets forth certain capital performance ratios.
  
                                            Sept. 30,        Dec. 31,
                                              1995             1994
  CAPITAL LEVELS
    Tier 1 leverage ratio                     7.41%            7.35%
    Tier 1 risk-based ratio                  10.86            10.85
    Total risk-based ratio                   12.13            12.11
  
  CAPITAL PERFORMANCE
    Return on average assets(annualized)      1.29             1.41
    Return on average equity(annualized)     16.46            17.30
    Earnings retained                        59.70            63.50
    Internal capital growth(annualized)       8.00            11.32
  
       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, 1995,  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
  
                                         12
  3.0%. In order for the Company to be considered "well  capitalized",  as defined
  by banking regulators,  the Company must have Tier 1 and total capital ratios of
  6.0% and 10.0%,  respectively,  and a minimum Tier 1 leverage ratio of 5.0%. The
  Company  currently meets the criteria for a well  capitalized  institution,  and
  management believes that, under current  regulations,  the Company will continue
  to meet its minimum capital  requirements in the foreseeable future. At present,
  the Company has no commitments for significant capital expenditures.
  
       The Company is not under any agreement with  regulatory  authorities nor is
  the Company aware of any current  recommendations by the regulatory  authorities
  which, if such recommendations were implemented, would have a material effect on
  liquidity, capital resources or operations of the Company.
  
                                   FUTURE OUTLOOK
  
       In February 1994, the Company's Board of Directors  approved the repurchase
  of up to  200,000  shares  of its  common  stock in open  market  or  negotiated
  transactions.  To date, a total of 167,140  shares have been  repurchased  at an
  aggregate cost of $5,112,000.
  
       In August 1995, the Company opened two more supermarket branches located in
  Allentown and Bethlehem,  PA. The Company considers supermarket branches to be a
  strategic delivery system for banks in the future.
  
       The  Company  will  continue  its  work  on the  installation  of  platform
  automation  during 1995.  Through  platform  automation,  the Company expects to
  increase efficiencies and re-focus its efforts to improve productivity, in order
  to  provide  faster and  improved  service  to our  customers,  at the same time
  reducing costs to contrubute to improved profitability.  The platform automation
  project may lead to in excess of $1 million in capital expenditures.
  
       On August 8, 1995,  the FDIC reduced the  insurance  assessments  that most
  Bank Insurance  Fund-member  banks must pay on insured deposits to $.04 per $100
  of  deposits  from the then  current  rate of $.23  per  $100 of  deposits,  but
  continued Savings Association  Insurance Fund premiums at the then current level
  of $.23 per $100 of deposits.  Because the Company acquired  approximately  $225
  million of  SAIF-insured  deposits  from savings  associations  from 1990 to the
  present,  the  Company  must  continue  to pay  insurance  assessments  on these
  acquired  deposits  at $.23  per  $100 of  deposits.  The  reduction  in rate on
  BIF-insured  deposits to $.04 was retroactive to June 1, 1995. As a result,  the
  Company received a refund of approximately $400,000.
  
       On November 7, 1995, U.S. Senate and House negotiators reached agreement on
  legislation to recapitalize the SAIF through a one-
  
                                         13
  time  assessment of $.85 per $100 of SAIF-insured  deposits,  to be paid in late
  1995 or early 1996.  Commercial  banking companies which purchased  SAIF-insured
  deposits,  such as the  Company,  may be assessed  at a 20% lower  rate.  If the
  Company is subjected  to the full  assessment  of $.85 per $100 of  SAIF-insured
  deposits,  it could result in a total payment of  approximately  $1.9 million by
  the Company.  The Company's  $400,000 refund  discussed above was not taken into
  income but was placed in a  designated  reserve  account to be used as a partial
  offset to the anticipated one-time assessment.
  
       The Company  cannot predict if the pending  legislation  will be enacted as
  presently  proposed,  but expects that any legislation  recapitalizing SAIF will
  likely impose additional deposit insurance costs on the Company  attributable to
  its  acquired  SAIF-insured  deposits.  These costs may have a material  adverse
  effect on the Company's earnings when incurred.
  
                                         14
  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.
  
       The  registrant's  banking  subisidiary,   National  Penn  Bank,  opened  a
  full-service supermarket branch in Bethlehem,  Northampton County, on August 21,
  1995.  National Penn Bank opened remote ATMs at Commons  Boulevard and Tuckerton
  Road, Reading,  Muhlenberg Township, on September 11, 1995, at Alvernia College,
  Reading,  Berks County,  on September 14, 1995 and at Boyertown Area Senior High
  School,  Boyertown,  Berks County on September  20, 1995.  The  Registrant  also
  anticipates  that  National  Penn Bank  will  close its  Hamilton  Mall  Branch,
  Allentown, Lehigh County, in early 1996.
  
       In  February  1994,  the  Registrant's  Board  of  Directors  approved  the
  repurchase  of up to  200,000  shares  of its  common  stock in open  market  or
  negotiated  transactions.  At September 30, 1995, a total of 167,140 shares have
  been repurchased at an aggregate cost of $5,112,000.
  
       On  October  31,  1995,  the  Registrant   paid  a  5%  stock  dividend  to
  shareholders of record as of September 29, 1995.
  
  Item 6.  Exhibits and Reports on Form 8-K.
  
           (a)      Exhibits.
  
                    Exhibit 27 - Financial Data Schedule.
  
           (b)  Reports  on Form 8-K.  The  Registrant  filed a Report on Form 8-K
  dated September 28, 1995, reporting information under Item 5, Other Events.
  
                                         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 8, 1995                    By /s/ Lawrence T. Jilk, Jr.
                                                 --------------------------
                                                  Lawrence T. Jilk, Jr., President
                                                  and Chief Executive Officer
  
  Dated:  November 8, 1995                    By /s/ Gary L. Rhoads
                                                 -------------------
                                                  Gary L. Rhoads, Principal
                                                  Financial Officer
  
                                         16