UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

000-22537-01

(Commission File Number)

NATIONAL PENN BANCSHARES, INC.

(Exact Name of Registrant as Specified in Charter)

Pennsylvania	23-2215075
(State or Other Jurisdiction of Incorporation)	IRS Employer Identification No.

Philadelphia and Reading Avenues,

Boyertown, PA  19512

(Address of Principal Executive Offices)

(800) 822-3321

Registrant’s telephone number, including area code

(Former Name or Former Address, if Changed Since Last Report):  N/A

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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x	Accelerated filer  ¨
Non-accelerated filer   o  (Do not check if a smaller reporting company)	Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o        No  x

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 July 31, 2012
Common Stock, no stated par value	150,276,575 shares

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	3
Item 1.  Financial Statements	3
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.  Controls and Procedures	46
PART II - OTHER INFORMATION	47
Item 1.  Legal Proceedings	47
Item 1A.  Risk Factors	47
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.  Defaults Upon Senior Securities	55
Item 4.  Mine Safety Disclosures	55
Item 5.  Other Information	55
Item 6.  Exhibits	56
SIGNATURES	57
EXHIBITS	58

2

 PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	Unaudited
(dollars in thousands)	June 30,			December 31,
	2012			2011
ASSETS
Cash and due from banks	$	115,564		$	129,637
Interest-earning deposits with banks		221,419			321,885
Total cash and cash equivalents		336,983			451,522
Investment securities available-for-sale, at fair value		1,769,359			1,747,019
Investment securities held-to-maturity
(Fair value $515,765 and $528,598 for 2012 and 2011, respectively)		481,341			496,574
Other securities		66,194			70,518
Loans held-for-sale		16,908			12,216
Loans and leases, net of allowance for loan and lease losses of $116,650 and $126,640 for 2012 and 2011, respectively		5,077,209			5,049,245
Premises and equipment, net		96,566			96,198
Accrued interest receivable		30,511			30,991
Bank owned life insurance		140,747			138,274
Other real estate owned and other repossessed assets		7,201			7,716
Goodwill		258,279			258,279
Other intangible assets, net		13,085			15,770
Unconsolidated investments		10,109			12,173
Other assets		91,372			99,786
TOTAL ASSETS	$	8,395,864		$	8,486,281
LIABILITIES
Non-interest bearing deposits	$	903,766		$	863,703
Interest bearing deposits		4,941,777			5,011,116
Total deposits		5,845,543			5,874,819
Customer repurchase agreements		533,389			523,978
Structured repurchase agreements		85,000			85,000
Federal Home Loan Bank advances		535,613			616,111
Subordinated debentures		144,475			145,310
Accrued interest payable and other liabilities		52,084			60,376
TOTAL LIABILITIES		7,196,104			7,305,594
SHAREHOLDERS' EQUITY
Common stock, no stated par value; authorized 250,000,000 shares, issued and
outstanding: June 30, 2012 - 150,258,232; December 31, 2011 - 151,883,036; net of
shares in Treasury: June 30, 2012 - 2,105,994; December 31, 2011 - 0		1,386,177			1,383,082
Accumulated deficit		(193,715	)		(223,189	)
Accumulated other comprehensive income		25,435			20,794
Treasury stock		(18,137	)		-
TOTAL SHAREHOLDERS' EQUITY		1,199,760			1,180,687
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	8,395,864		$	8,486,281
The accompanying notes are an integral part of these financial statements.

3

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Six Months Ended
(dollars in thousands, except per share data)	June 30,						June 30,
	2012			2011			2012			2011
INTEREST INCOME
Loans and leases, including fees	$	61,116		$	67,553		$	123,407		$	136,781
Investment securities
Taxable		10,941			11,552			22,150			22,909
Tax-exempt		7,636			8,401			15,417			16,894
Deposits with banks		203			234			336			514
Total interest income		79,896			87,740			161,310			177,098
INTEREST EXPENSE
Deposits		6,879			10,974			14,173			22,381
Customer repurchase agreements		545			645			1,095			1,357
Structured repurchase agreements		915			1,701			1,830			3,384
Federal Home Loan Bank advances		6,501			7,039			13,468			14,256
Subordinated debentures		1,857			2,386			3,727			4,755
Total interest expense		16,697			22,745			34,293			46,133
Net interest income		63,199			64,995			127,017			130,965
Provision for loan and lease losses		2,000			3,000			4,000			13,000
Net interest income after provision for loan and lease losses		61,199			61,995			123,017			117,965
NON-INTEREST INCOME
Wealth management		6,005			5,856			12,166			11,780
Service charges on deposit accounts		3,753			4,616			7,576			9,280
Insurance commissions and fees		3,211			3,520			6,507			6,741
Cash management and electronic banking fees		4,707			4,645			9,127			9,016
Mortgage banking		1,511			1,014			2,846			2,094
Bank owned life insurance		1,255			1,233			2,464			2,453
Earnings of unconsolidated investments		108			116			34			1,816
Other operating income		993			1,818			3,419			3,873
Net (losses) gains from fair value changes on subordinated debentures		(810	)		(430	)		835			(481	)
Net losses on sales of investment securities		(123	)		-			(123	)		-
Impairment losses on investment securities:
Impairment related losses on investment securities		(154	)		-			(154	)		-
Non credit-related losses on securities not expected to be sold
recognized in other comprehensive loss before tax		-			-			-			-
Net impairment losses on investment securities		(154	)		-			(154	)		-
Total non-interest income		20,456			22,388			44,697			46,572
NON-INTEREST EXPENSE
Salaries, wages and employee benefits		31,234			30,408			62,615			61,857
Premises and equipment		7,349			6,787			14,202			14,059
FDIC insurance		1,211			2,726			2,475			6,183
Other operating expenses		12,475			14,200			25,417			28,859
Total non-interest expense		52,269			54,121			104,709			110,958
Income before income taxes		29,386			30,262			63,005			53,579
Income tax expense		6,938			7,054			15,255			11,591
NET INCOME		22,448			23,208			47,750			41,988
Preferred dividends and accretion of preferred discount		-			-			-			(1,691	)
Accelerated accretion from redemption of preferred stock		-			-			-			(1,452	)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	22,448		$	23,208		$	47,750		$	38,845
PER SHARE OF COMMON STOCK
Basic earnings available to common shareholders	$	0.15		$	0.15		$	0.31		$	0.26
Diluted earnings available to common shareholders	$	0.15		$	0.15		$	0.31		$	0.26
Dividends paid in cash	$	0.07		$	0.01		$	0.12		$	0.02
The accompanying notes are an integral part of these financial statements.

4

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended June 30, 2012						Three Months Ended June 30, 2011
	Before				Net of		Before				Net of
(dollars in thousands)	Tax		Tax		Tax		Tax		Tax		Tax
	Amount		Expense		Amount		Amount		Expense		Amount
Net income	$	29,386	$	6,938	$	22,448	$	30,262	$	7,054	$	23,208
Unrealized gains on investment securities		5,792		2,027		3,765		20,012		7,004		13,008
Unrealized gains on cash flow hedges		-		-		-		528		-		528
Other comprehensive income		5,792		2,027		3,765		20,540		7,004		13,536
Total comprehensive income	$	35,178	$	8,965	$	26,213	$	50,802	$	14,058	$	36,744
	Six Months Ended June 30, 2012						Six Months Ended June 30, 2011
	Before				Net of		Before				Net of
(dollars in thousands)	Tax		Tax		Tax		Tax		Tax		Tax
	Amount		Expense		Amount		Amount		Expense		Amount
Net income	$	63,005	$	15,255	$	47,750	$	53,579	$	11,591	$	41,988
Unrealized gains on investment securities		7,140		2,499		4,641		31,245		10,936		20,309
Unrealized gains on cash flow hedges		-		-		-		1,045		-		1,045
Other comprehensive income		7,140		2,499		4,641		32,290		10,936		21,354
Total comprehensive income	$	70,145	$	17,754	$	52,391	$	85,869	$	22,527	$	63,342
The accompanying notes are an integral part of these financial statements.

5

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

									Accumulated
(dollars in thousands, except share data)									Other
	Common					Accumulated			Comprehensive		Treasury
	Shares			Value		Deficit			Income		Stock			Total
Balance at December 31, 2011		151,883,036		$	1,383,082	$	(223,189	)	$	20,794	$	-		$	1,180,687
Comprehensive income:
Net income							47,750								47,750
Other comprehensive income, net of taxes										4,641					4,641
Total comprehensive income															52,391
Cash dividends declared common							(18,276	)							(18,276	)
Shares issued under share-based plans,
net of excess tax benefits		532,698			3,095							465			3,560
Treasury stock purchased		(2,157,502	)									(18,602	)		(18,602	)
Balance at June 30, 2012		150,258,232		$	1,386,177	$	(193,715	)	$	25,435	$	(18,137	)	$	1,199,760
The accompanying notes are an integral part of these financial statements.

6

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)	Six Months Ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	47,750		$	41,988
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		4,000			13,000
Depreciation and amortization		7,038			8,242
Amortization of premiums and discounts on investment securities, net		1,767			948
Net losses from sales of investment securities		123			-
Impairment of investment securities		154			-
(Decrease) increase in fair value of subordinated debentures		(835	)		481
Bank owned life insurance policy income		(2,464	)		(2,453	)
Share-based compensation expense		2,044			2,182
Unconsolidated investment distributions (gains)		2,064			(845	)
Loans originated for resale		(93,357	)		(59,960	)
Proceeds from sale of loans		90,819			65,332
Gain on sale of loans, net		(2,153	)		(1,439	)
Losses (gains) on sale of other real estate owned, net		120			(7	)
Changes in assets and liabilities:
Decrease in accrued interest receivable		480			1,967
Decrease in accrued interest payable		(3,352	)		(4,260	)
Decrease in other assets		7,037			14,024
Decrease in other liabilities		(4,940	)		(10,915	)
Net cash provided by operating activities		56,295			68,285
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities held-to-maturity		15,002			28,087
Proceeds from maturities and repayments of investment securities available-for-sale		179,621			150,289
Proceeds from sale of investments available-for-sale		850			-
Purchase of investment securities available-for-sale		(197,484	)		(184,263	)
Proceeds from sale of other securities		4,324			-
Proceeds from sale of loans previously held for investment		1,883			2,764
Net (increase) decrease in loans and leases		(35,686	)		114,157
Purchases of premises and equipment		(5,064	)		(2,064	)
Proceeds from the sale of other real estate owned		1,332			375
Net cash (used in) provided by investing activities		(35,222	)		109,345
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in core deposits		62,989			(378	)
Net decrease in certificates of deposit		(92,265	)		(114,634	)
Net increase in customer repurchase agreements		9,411			4,173
Decrease in short-term borrowings		-			(3,610	)
Repayments of FHLB advances and structured repurchase agreements		(80,154	)		(75,963	)
Proceeds from shares issued - share-based plans		393			1,132
Excess tax benefit - share-based plans		(166	)		(221	)
Issuance of shares - share-based plans		1,058			548
Issuance of common stock in private placement		-			84,543
Purchase of treasury stock		(18,602	)		-
Cash dividends, common		(18,276	)		(3,031	)
Repayment of Series B Preferred stock		-			(150,000	)
Repurchase of common stock warrant		-			(1,000	)
Cash dividends, preferred		-			(2,521	)
Net cash used in financing activities		(135,612	)		(260,962	)
Net decrease in cash and cash equivalents		(114,539	)		(83,332	)
Cash and cash equivalents at beginning of year		451,522			702,382
Cash and cash equivalents at end of period	$	336,983		$	619,050
The accompanying notes are an integral part of these financial statements.

7

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

SUPPLEMENTAL CASH FLOW DISCLOSURES

The Company considers cash and due from banks and interest earning deposits with banks as cash equivalents for the purposes of reporting cash flows. Cash paid for interest and income taxes is as follows:

	Six Months Ended
(dollars in thousands)	June 30,
	2012		2011
Interest	$	37,645	$	50,393
Income taxes		8,614		13,703

The Company’s investing and financing activities that affected assets or liabilities but did not result in cash receipts or cash payments were as follows:

	Six Months Ended
(dollars in thousands)	June 30,
	2012		2011
Transfers of loans to other real estate (a)	$	1,839	$	1,798
Other than temporary impairment on investment securities		154		-

(a) $2.3 million and $0.9 million of OREO was disposed of during the periods ending June 30, 2012 and 2011, respectively.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”).  However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of these financial statements have been included.  These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for National Penn Bancshares, Inc. (the “Company” or “National Penn”) for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “Form 10-K”).  The results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The Company has prepared its accompanying consolidated financial statements in accordance with GAAP as applicable to the financial services industry.   The consolidated financial statements include the balances of the Company and its wholly owned subsidiary, National Penn Bank (“National Penn Bank”).  All material intercompany balances and transactions have been eliminated in consolidation.  References to the Company include all the Company’s subsidiaries unless otherwise noted.

8

2.  EARNINGS PER SHARE

The components of the Company’s basic and diluted earnings per share are as follows:

	Three Months Ended				Six Months Ended
(dollars in thousands, except per share data)	June 30,				June 30,
	2012		2011		2012		2011
Income for EPS:
Net income available to common shareholders	$	22,448	$	23,208	$	47,750	$	38,845
Calculation of shares:
Weighted average basic shares		151,732,402		151,601,052		151,915,974		151,034,207
Dilutive effect of:
Share-based compensation		279,593		234,350		286,181		269,390
Warrants				-				-
Weighted average fully diluted shares		152,011,995		151,835,402		152,202,155		151,303,597
Earnings per common share:
Basic	$	0.15	$	0.15	$	0.31	$	0.26
Diluted	$	0.15	$	0.15	$	0.31	$	0.26

The following stock options were excluded from the computation of earnings per share as they were anti-dilutive:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Stock options		4,802,182		3,494,093		4,802,182		3,354,531
Exercise price
Low	$	7.07	$	5.85	$	7.07	$	5.85
High	$	21.49	$	21.49	$	21.49	$	21.49

9

3.  INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities are summarized as follows:

(dollars in thousands)		June 30, 2012
		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Available-for-Sale
U.S. Government agencies		$	2,998	$	47	$	-		$	3,045
State and municipal bonds			297,375		16,961		(2,173	)		312,163
Agency mortgage-backed securities/
	collateralized mortgage obligations		1,381,364		46,747		(128	)		1,427,983
Non-agency collateralized mortgage obligations			11,566		324		(17	)		11,873
Corporate securities and other			10,006		414		(888	)		9,532
Marketable equity securities			3,594		1,205		(36	)		4,763
	Total	$	1,706,903	$	65,698	$	(3,242	)	$	1,769,359
Held-to-Maturity
State and municipal bonds		$	417,611	$	31,265	$	(202	)	$	448,674
Agency mortgage-backed securities/
	collateralized mortgage obligations		63,160		3,356		-			66,516
Non-agency collateralized mortgage obligations			570		5		-			575
	Total	$	481,341	$	34,626	$	(202	)	$	515,765
(dollars in thousands)		December 31, 2011
		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Available-for-Sale
U.S. Government agencies		$	2,997	$	75	$	-		$	3,072
State and municipal bonds			313,607		15,588		(3,573	)		325,622
Agency mortgage-backed securities/
	collateralized mortgage obligations		1,344,442		43,230		(56	)		1,387,616
Non-agency collateralized mortgage obligations			14,887		292		(63	)		15,116
Corporate securities and other			12,023		486		(1,320	)		11,189
Marketable equity securities			3,749		758		(103	)		4,404
	Total	$	1,691,705	$	60,429	$	(5,115	)	$	1,747,019
Held-to-Maturity
State and municipal bonds		$	421,046	$	29,284	$	(482	)	$	449,848
Agency mortgage-backed securities/
	collateralized mortgage obligations		74,714		3,197		-			77,911
Non-agency collateralized mortgage obligations			814		25		-			839
	Total	$	496,574	$	32,506	$	(482	)	$	528,598

10

Gains and losses from sales of investment securities are as follows:

	For the Three Months Ended					For the Six Months Ended
(dollars in thousands)	June 30,					June 30,
	2012			2011		2012			2011
Gains	$	-		$	-	$	-		$	-
Losses		(123	)		-		(123	)		-
Net losses from sales of investment securities	$	(123	)	$	-	$	(123	)	$	-

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011, respectively.

June 30, 2012
				Less than 12 months					12 months or longer					Total
(dollars in thousands)		No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
		Securities		Value		Losses			Value		Losses			Value		Losses
State and municipal bonds			62	$	20,502	$	(234	)	$	25,845	$	(2,141	)	$	46,347	$	(2,375	)
Agency mortgage-backed securities/
	collateralized mortgage obligations		8		50,519		(128	)		-		-			50,519		(128	)
Non-agency collateralized mortgage obligations			3		743		(17	)		-		-			743		(17	)
Corporate securities and other			7		4,504		(854	)		970		(34	)		5,474		(888	)
	Total debt securities		80		76,268		(1,233	)		26,815		(2,175	)		103,083		(3,408	)
Marketable equity securities			4		643		(36	)		-		-			643		(36	)
	Total		84	$	76,911	$	(1,269	)	$	26,815	$	(2,175	)	$	103,726	$	(3,444	)
December 31, 2011
				Less than 12 months					12 months or longer					Total
(dollars in thousands)		No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
		Securities		Value		Losses			Value		Losses			Value		Losses
State and municipal bonds			92	$	3,263	$	(33	)	$	55,715	$	(4,022	)	$	58,978	$	(4,055	)
Agency mortgage-backed securities/
	collateralized mortgage obligations		4		23,226		(56	)		-		-			23,226		(56	)
Non-agency collateralized mortgage obligations			3		-		-			742		(63	)		742		(63	)
Corporate securities and other			9		4,461		(909	)		2,576		(411	)		7,037		(1,320	)
	Total debt securities		108		30,950		(998	)		59,033		(4,496	)		89,983		(5,494	)
Marketable equity securities			5		588		(103	)		-		-			588		(103	)
	Total		113	$	31,538	$	(1,101	)	$	59,033	$	(4,496	)	$	90,571	$	(5,597	)

Investment securities were pledged as collateral for the following:

(dollars in thousands)	June 30,		December 31,
	2012		2011
Deposits	$	797,957	$	808,873
Repurchase agreements		714,034		688,924
Other		28,155		43,145
Total	$	1,540,146	$	1,540,942

11

The amortized cost and fair value of investment securities, by contractual maturity, at June 30, 2012 are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(dollars in thousands)	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	1,971	$	1,981	$	-	$	-
Due after one through five years		31,931		34,301		-		-
Due after five through ten years		150,451		161,226		54,571		57,619
Due after ten years		1,518,956		1,567,088		426,770		458,146
Marketable equity securities		3,594		4,763		-		-
Total	$	1,706,903	$	1,769,359	$	481,341	$	515,765

Evaluation of Impairment of Securities

The company recorded $0.2 million of other-than-temporary impairment losses on an equity security for the three and six months ended June 30, 2012, and there were no amounts recorded during the year ended December 31, 2011.

The majority of the investment portfolio is comprised of U.S. Government Agency, state and municipal bonds, mortgage-backed securities, and collateralized mortgage obligations.  The unrealized losses in the Company’s investments are primarily caused by the movement of interest rates, and the contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.

The majority of the unrealized losses for twelve months or longer are attributed to municipal bonds.  The Company evaluates a variety of factors in concluding whether the municipal bonds are other-than-temporarily impaired.  These factors include, but are not limited to, the type and purpose of the bond, the underlying rating of the bond issuer, and the presence of credit enhancements (i.e. state guarantees, municipal bond insurance, collateral requirements, etc.).  At June 30, 2012, approximately 70% of the Company’s municipal investment securities were general obligations of various municipalities and 30% were essential purpose revenue bonds.  As a result of its review and considering the attributes of these bonds, the Company concluded that the securities were not other-than-temporarily impaired since the decline in the fair value of these securities is due to changes in relative credit spreads for the industry.

Because the Company does not intend to sell these investments and it is not more likely than not it will be required to sell these investments before a recovery of fair value, which may be maturity, the Company does not consider the securities with unrealized losses for twelve months or longer to be other-than-temporarily impaired.

Other securities on the Company’s consolidated balance sheet totaled $66.2 million and $70.5 million as of June 30, 2012 and December 31, 2011, respectively. The balance includes FHLB of Pittsburgh stock and Federal Reserve Bank stock. These securities lack a market, and as such they are carried at par/cost since fair value is not readily determinable. The Company evaluates them for impairment each reporting period and has concluded the carrying value of these securities is not impaired. The Company will continue to monitor these investments for impairment each reporting period. During the first six months of 2012, the FHLB of Pittsburgh repurchased $4.3 million of its capital stock from the Company at par/cost.

12

4.  LOANS

The following table presents loan and lease classifications:

June 30, 2012	Performing
(dollars in thousands)	Pass Rated Loans		Special Mention Loans		Classified Loans		Non-Performing Loans		Total
Commercial and industrial loans and leases	$	2,206,341	$	84,553	$	142,194	$	33,984	$	2,467,072
CRE - permanent		789,882		24,808		53,483		6,397		874,570
CRE - construction		88,071		6,460		39,261		6,959		140,751
Commercial real estate		877,953		31,268		92,744		13,356		1,015,321
Residential mortgages		687,164		-		854		6,959		694,977
Home equity lines and loans		740,000		-		1,015		2,967		743,982
All other consumer		262,935		2,103		5,716		1,753		272,507
Consumer loans		1,690,099		2,103		7,585		11,679		1,711,466
Loans and leases	$	4,774,393	$	117,924	$	242,523	$	59,019	$	5,193,859
December 31, 2011	Performing
(dollars in thousands)	Pass Rated Loans		Special Mention Loans		Classified Loans		Non-Performing Loans		Total
Commercial and industrial loans and leases	$	2,113,637	$	75,988	$	199,262	$	31,140	$	2,420,027
CRE - permanent		746,741		42,259		56,663		9,861		855,524
CRE - construction		89,085		14,140		40,622		12,217		156,064
Commercial real estate		835,826		56,399		97,285		22,078		1,011,588
Residential mortgages		703,150		-		-		7,172		710,322
Home equity lines and loans		743,356		-		-		4,202		747,558
All other consumer		274,271		2,819		4,906		4,394		286,390
Consumer loans		1,720,777		2,819		4,906		15,768		1,744,270
Loans and leases	$	4,670,240	$	135,206	$	301,453	$	68,986	$	5,175,885

13

The following table presents the details for past due loans and leases:

June 30, 2012	30-59 Days Past Due and Still			60-89 Days Past Due and Still			90 Days or More Past Due and Still			Total Past Due and Still			Accruing Current		Non-Accrual			Total Loan
(dollars in thousands)	Accruing			Accruing			Accruing(1)			Accruing			Balances		Balances (2)			Balances
Commercial and industrial loans and leases	$	2,660		$	349		$	48		$	3,057		$	2,430,031	$	33,984		$	2,467,072
CRE - permanent		424			1,050			218			1,692			869,879		2,999			874,570
CRE - construction		912			-			-			912			132,880		6,959			140,751
Commercial real estate		1,336			1,050			218			2,604			1,002,759		9,958			1,015,321
Residential mortgages		5,416			1,719			854			7,989			682,687		4,301			694,977
Home equity lines and loans		3,737			1,329			1,014			6,080			735,347		2,555			743,982
All other consumer		2,332			790			1,292			4,414			266,340		1,753			272,507
Consumer loans		11,485			3,838			3,160			18,483			1,684,374		8,609			1,711,466
Loans and leases	$	15,481		$	5,237		$	3,426		$	24,144		$	5,117,164	$	52,551		$	5,193,859
Percent of loans and leases		0.30	%		0.10	%		0.07	%		0.46	%				1.01	%
December 31, 2011	30-59 Days Past Due and Still			60-89 Days Past Due and Still			90 Days or More Past Due and Still			Total Past Due and Still			Accruing Current		Non-Accrual			Total Loan
(dollars in thousands)	Accruing			Accruing			Accruing(1)			Accruing			Balances		Balances (2)			Balances
Commercial and industrial loans and leases	$	8,113		$	2,253		$	59		$	10,425		$	2,378,521	$	31,081		$	2,420,027
CRE - permanent		724			209			-			933			847,188		7,403			855,524
CRE - construction		1,324			389			-			1,713			142,133		12,218			156,064
Commercial real estate		2,048			598			-			2,646			989,321		19,621			1,011,588
Residential mortgages		2,209			603			4			2,816			703,002		4,504			710,322
Home equity lines and loans		2,953			756			728			4,437			740,075		3,046			747,558
All other consumer		2,325			933			1,219			4,477			278,737		3,176			286,390
Consumer loans		7,487			2,292			1,951			11,730			1,721,814		10,726			1,744,270
Loans and leases	$	17,648		$	5,143		$	2,010		$	24,801		$	5,089,656	$	61,428		$	5,175,885
Percent of loans and leases		0.34	%		0.10	%		0.04	%		0.48	%				1.19	%

(1) Loans 90 days or more past due remain on accrual status if they are well secured and collection of all principal and interest is probable.

(2) At June 30, 2012, non-accrual balances included troubled debt restructurings of $7.0 million commercial real estate and $11.6 million of commercial and industrial loans. At December 31, 2011, non-accrual balances included troubled debt restructurings of $8.6 million commercial real estate and $11.2 million of commercial and industrial loans.

14

Changes in the allowance for loan and lease losses by loan portfolio are as follows:

June 30, 2012
Three Months Ended
(dollars in thousands)	Commercial (1)			Commercial Real Estate (2)			Consumer (3)			Unallocated		Total
Allowance for loan and lease losses:
Beginning balance	$	54,887		$	40,016		$	18,433		$	8,116	$	121,452
Charge-offs		(5,443	)		(928	)		(1,536	)		-		(7,907	)
Recoveries		247			481			377			-		1,105
Provision		(160	)		(4,352	)		3,220			3,292		2,000
Ending balance	$	49,531		$	35,217		$	20,494		$	11,408	$	116,650
Six Months Ended
(dollars in thousands)	Commercial (1)			Commercial Real Estate (2)			Consumer (3)			Unallocated		Total
Allowance for loan and lease losses:
Beginning balance	$	55,815		$	40,722		$	19,660		$	10,443	$	126,640
Charge-offs		(8,135	)		(3,713	)		(4,781	)		-		(16,629	)
Recoveries		1,014			660			965			-		2,639
Provision		837			(2,452	)		4,650			965		4,000
Ending balance	$	49,531		$	35,217		$	20,494		$	11,408	$	116,650
Allowance for loan and lease losses:
Individually evaluated for impairment	$	3,823		$	1,307		$	1,110		$	-	$	6,240
Collectively evaluated for impairment		45,708			33,910			19,384			11,408		110,410
Total allowance for loan and lease losses	$	49,531		$	35,217		$	20,494		$	11,408	$	116,650
Loans and leases:
Individually evaluated for impairment	$	33,984		$	15,766		$	11,679		$	-	$	61,429
Collectively evaluated for impairment		2,433,088			999,555			1,699,787			-		5,132,430
Loans and leases	$	2,467,072		$	1,015,321		$	1,711,466		$	-	$	5,193,859

(1)	Commercial includes all C&I loans, including those secured by real estate, and capital leases.
(2)	CRE is defined here as loans secured by non-owner-occupied real estate which have a primary source of repayment of third-party rental income or the sale of the property securing the loan.
(3)	Consumer loans include direct consumer loans (secured by residential real estate and other collateral), indirect consumer loans, consumer lines of credit (secured residential real estate and other collateral), and overdrafts.

15

Changes in the allowance for loan and lease losses by loan portfolio are as follows:

June 30, 2011
Three Months Ended
(dollars in thousands)		Commercial (1)			Commercial Real Estate (2)			Consumer (3)			Unallocated		Total
Allowance for loan and lease losses:
Beginning balance		$	65,791		$	48,911		$	20,118		$	8,140	$	142,960
	Charge-offs		(5,430	)		(2,358	)		(2,724	)		-		(10,512	)
	Recoveries		364			288			1,809			-		2,461
	Provision		3,178			(2,299	)		(794	)		2,915		3,000
Ending balance		$	63,903		$	44,542		$	18,409		$	11,055	$	137,909
Six Months Ended
(dollars in thousands)		Commercial (1)			Commercial Real Estate (2)			Consumer (3)			Unallocated		Total
Allowance for loan and lease losses:
Beginning balance		$	69,655		$	51,177		$	20,897		$	8,325	$	150,054
	Charge-offs		(14,999	)		(7,671	)		(6,595	)		-		(29,265	)
	Recoveries		614			782			2,724			-		4,120
	Provision		8,633			254			1,383			2,730		13,000
Ending balance		$	63,903		$	44,542		$	18,409		$	11,055	$	137,909
Allowance for loan and lease losses:
	Individually evaluated for impairment	$	4,186		$	2,737		$	302		$	-	$	7,225
	Collectively evaluated for impairment		59,717			41,805			18,107			11,055		130,684
Total allowance for loan and lease losses		$	63,903		$	44,542		$	18,409		$	11,055	$	137,909
Loans and leases:
	Individually evaluated for impairment	$	31,275		$	30,219		$	10,122		$	-	$	71,616
	Collectively evaluated for impairment		2,377,666			959,408			1,770,236			-		5,107,310
Loans and leases		$	2,408,941		$	989,627		$	1,780,358		$	-	$	5,178,926

(1)	Commercial includes all C&I loans, including those secured by real estate, and capital leases.
(2)	CRE is defined here as loans secured by non-owner-occupied real estate which have a primary source of repayment of third-party rental income or the sale of the property securing the loan.
(3)	Consumer loans include direct consumer loans (secured by residential real estate and other collateral), indirect consumer loans, consumer lines of credit (secured residential real estate and other collateral), and overdrafts.

The Company did not have any loans acquired with deteriorated credit quality.

16

Impaired loan and lease details are as follows:

June 30, 2012
(dollars in thousands)	Recorded Investment With Related Allowance		Recorded Investment Without Related Allowance		Total Recorded Investment		Life-to-date Charge-offs		Total Unpaid Balances		Related Allowance		Average Recorded Investment
Commercial and industrial loans and leases	$	8,492	$	25,492	$	33,984	$	5,774	$	39,758	$	3,823	$	31,981
CRE - permanent		1,659		7,148		8,807		5,721		14,528		136		10,810
CRE - construction		6,246		713		6,959		8,183		15,142		1,171		12,252
Commercial real estate		7,905		7,861		15,766		13,904		29,670		1,307		23,062
Residential mortgages		2,629		4,330		6,959		271		7,230		617		7,011
Home equity lines and loans		755		2,212		2,967		2,383		5,350		493		3,054
All other consumer		-		1,753		1,753		61		1,814		-		2,223
Consumer loans		3,384		8,295		11,679		2,715		14,394		1,110		12,288
Total	$	19,781	$	41,648	$	61,429	$	22,393	$	83,822	$	6,240	$	67,331
December 31, 2011
(dollars in thousands)	Recorded Investment With Related Allowance		Recorded Investment Without Related Allowance		Total Recorded Investment		Life-to-date Charge-offs		Total Unpaid Balances		Related Allowance		Average Recorded Investment
Commercial and industrial loans and leases	$	13,363	$	17,718	$	31,081	$	5,992	$	37,073	$	4,003	$	31,845
CRE - permanent		2,285		7,575		9,860		6,586		16,446		1,160		14,079
CRE - construction		8,698		3,519		12,217		14,711		26,928		1,972		15,560
Commercial real estate		10,983		11,094		22,077		21,297		43,374		3,132		29,639
Residential mortgages		2,698		4,470		7,168		560		7,728		662		6,479
Home equity lines and loans		1,374		2,100		3,474		1,919		5,393		1,112		2,244
All other consumer		-		3,176		3,176		516		3,692		-		2,025
Consumer loans		4,072		9,746		13,818		2,995		16,813		1,774		10,748
Total	$	28,418	$	38,558	$	66,976	$	30,284	$	97,260	$	8,909	$	72,232

	Three Months Ended					Six Months Ended
(dollars in thousands)	June 30,					June 30,
	2012			2011		2012			2011
Gross interest due on impaired loans	$	1,237		$	1,523	$	2,517		$	3,671
Interest (received) reversed on impaired loans		(79	)		6		(99	)		(504	)
Net impact of impaired loans on interest income	$	1,158		$	1,529	$	2,418		$	3,167
Average recorded investment in impaired loans	$	65,349		$	73,405	$	67,331		$	77,684

The following table presents details of the Company’s loans which experienced a troubled debt restructuring and are performing according to the modified terms. The Company’s restructured loans are included within non-performing loans and impaired loans in the preceding tables.

(dollars in thousands)	June 30,		December 31,
	2012		2011
CRE - permanent	$	3,398	$	2,456
Residential mortgages		2,658		2,664
Home equity lines and loans		412		428
Total restructured loans	$	6,468	$	5,548
Undrawn commitments to lend on restructured loans	$	-	$	-

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5.  DEPOSITS

(dollars in thousands)	June 30, 2012					December 31, 2011
	Balance		Cost (a)			Balance		Cost (a)
NOW accounts	$	1,317,399		0.15	%	$	1,293,148		0.17	%
Money market accounts		1,641,947		0.37	%		1,686,909		0.44	%
Savings		497,640		0.12	%		454,003		0.15	%
CDs less than $100		1,063,688		1.28	%		1,138,908		1.43	%
CDs $100 or greater		421,103		1.22	%		438,148		1.22	%
Total interest bearing deposits		4,941,777		0.55	%		5,011,116		0.65	%
Non-interest bearing deposits		903,766		-			863,703		-
Total deposits	$	5,845,543		0.47	%	$	5,874,819		0.56	%
(a) Cost represents interest incurred during the respective quarter.

At June 30, 2012, the scheduled maturities of certificates of deposit were as follows:

(dollars in thousands)	2012	$	551,961
	2013		470,475
	2014		247,399
	2015		78,442
	2016		92,975
	Thereafter		43,539
	Total	$	1,484,791

6.  BORROWINGS

(dollars in thousands)	June 30, 2012					December 31, 2011
	Balance		Cost (a)			Balance		Cost (a)
Customer repurchase agreements	$	533,389		0.42	%	$	523,978		0.43	%
Structured repurchase agreements		85,000		4.33	%		85,000		4.05	%
Federal Home Loan Bank advances		535,613		4.54	%		616,111		4.50	%
Subordinated debentures accounted for at fair value		67,154		7.85	%		67,989		7.85	%
Subordinated debentures accounted for at amortized cost		77,321		3.00	%		77,321		3.84	%	(b)
Total borrowings and other debt obligations	$	1,298,477		2.97	%	$	1,370,399		3.07	%

(a) Cost represents interest incurred during the respective quarter.

(b) The cost includes the impact of the interest rate swaps until their expiration in the fourth quarter of 2011.

7.  CONTINGENCIES

In the normal course of business, the Company is named as a defendant in various lawsuits.  Accruals are established for legal proceedings when information related to the loss contingencies indicates that a loss settlement is both probable and can be estimated. At June 30, 2012, the Company did not have material amounts accrued for legal proceedings as it is the opinion of management that the resolution of such suits will not have a material effect on the financial position or results of operations of the Company. The outcome of legal proceedings is inherently uncertain, and as a result, the amounts recorded may not represent the ultimate loss upon resolution by the Company. Thus, the Company’s exposure and ultimate losses may be higher or lower than amounts accrued or estimated as reasonably possible exposure.

18

8.  ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income was comprised of the following components, after tax:

(dollars in thousands)	June 30,			December 31,
	2012			2011
Unrealized gains on investment securities	$	40,596		$	35,955
Pension		(15,161	)		(15,161	)
Total accumulated other comprehensive income	$	25,435		$	20,794

9.   EQUITY

On July 25, 2012, National Penn announced an increase to the third quarter cash dividend to nine cents per share from seven cents per share in the second quarter of 2012.

Additionally, the Board of Directors authorized the repurchase of up to 7.5 million shares of National Penn’s common stock throughout 2012, which represents approximately five percent (5%) of the outstanding shares. The authorization of this repurchase plan supersedes all pre-existing share repurchase plans. As of June 30, 2012, the Company repurchased 2.2 million shares for $18.6 million.

10.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Financial instruments whose contract amounts represent credit risk:
	As of:
(dollars in thousands)	June 30,  2012		December 31, 2011
Commitments to extend credit	$	1,530,509	$	1,452,348
Commitments to fund mortgages		43,591		27,067
Commitments to sell mortgages to investors		60,499		39,283
Letters of credit		145,137		157,240

The Company enters into interest rate lock commitments with its loan customers which are intended for sale in the future. These commitments are derivatives and, as such, are reported on the consolidated balance sheet at their estimated fair value. To hedge the fair value risk associated with changing interest rates on these commitments, the Company enters into forward commitments to sell the closed loans to investors. These hedges are economic hedges and are not designated in hedging relationships. The forward sale commitments are also derivatives and are recorded on the consolidated balance sheet at their estimated fair value.

19

Summary information regarding interest rate swap derivative positions which were not designated in hedging relationships are as follows:

(dollars in thousands)
			Notional						Receive			Pay			Life
June 30, 2012	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
Receive fixed - pay floating interest rate swaps		91	$	280,429	$	25,913	$	-		5.45	%		2.16	%		5.42
Pay fixed - receive floating interest rate swaps		91		280,429		-		25,913		2.16	%		5.45	%		5.42
Net interest rate swaps			$	560,859	$	25,913	$	25,913		3.81	%		3.81	%		5.42
December 31, 2011
Receive fixed - pay floating interest rate swaps		78	$	195,263	$	22,598	$	-		5.90	%		2.11	%		5.03
Pay fixed - receive floating interest rate swaps		78		195,263		-		22,598		2.11	%		5.90	%		5.03
Net interest rate swaps			$	390,526	$	22,598	$	22,598		4.01	%		4.01	%		5.03

The Company enters into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs.  These swaps are considered derivatives, but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them.  In response, the Company enters into offsetting interest rate swaps with counterparties for interest rate risk management purposes. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of operations.

The following summarizes the Company’s derivative activity:

		Income Statement Effect	Income Statement Effect
	Balance Sheet Effect at	for the Three Months Ended	for the Six Months Ended
Derivative Activity	June 30, 2012	June 30, 2012	June 30, 2012
Interest rate swaps:	Increase to other assets/liabilities	No net effect on other operating income from	No net effect on other operating income from
	of $25.9 million.	offsetting $4.2 million change.	offsetting $3.3 million change.
Other derivatives:
Interest rate locks	Increase to other assets of $0.8 million.	Increase to mortgage banking income of $1.0 million.	Increase to mortgage banking income of $0.2 million.
Forward sale commitments	Increase to other liabilities of $1.2 million.	Decrease to mortgage banking income of $1.7 million.	Decrease to mortgage banking income of $0.4 million.
		Income Statement Effect	Income Statement Effect
	Balance Sheet Effect at	for the Three Months Ended	for the Six Months Ended
Derivative Activity	December 31, 2011	June 30, 2011	June 30, 2011
Cash flow hedges:
Pay fixed - receive floating	There was no impact due to the	The ineffective portion is zero.	The ineffective portion is zero.
interest rate swaps	expiration of all cash flow hedges.	Increase to interest expense of $0.6 million for net	Increase to interest expense of $1.1 million for net
		settlements.	settlements.
Interest rate swaps:	Increase to other assets/liabilities	No net effect on other operating income from	No net effect on other operating income from
	of $22.6 million.	offsetting $2.0 million change.	offsetting $0.4 million change.
Other derivatives:
Interest rate locks	Increase to other assets of $0.6 million.	Decrease to mortgage banking income of $0.7 million.	Decrease to mortgage banking income of $0.6 million.
Forward sale commitments	Increase to other liabilities of $0.9 million.	Increase to mortgage banking income of $0.6 million.	Increase to mortgage banking income of $0.6 million.

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11.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company provides estimates of the fair value of its financial instruments. In general, fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, which is not adjusted for transaction costs. Accounting guidelines establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted, quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Basis of Fair Value Measurement:

Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The types of instruments valued based on quoted market prices in active markets include most U.S. Treasury securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.  The Company does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most U.S. Government agency securities, state and municipal bonds, mortgage-backed securities, collateralized mortgage obligations, and corporate securities. Such instruments are generally classified within Level 2 of the fair value hierarchy and their fair values are determined as follows:

·   The markets for U.S. Government agency securities are active, but the exact (cusip) securities owned by the Company are traded thinly or infrequently. Therefore the price for these securities is determined by reference to transactions in securities with similar yields, maturities and other features (matrix priced).

·   State and municipal bonds owned by the Company are traded thinly or infrequently, and as a result the fair value is estimated in reference to securities with similar yields, credit ratings, maturities, and in consideration of any prepayment assumptions obtained from market data.

·   Collateralized mortgage obligations and mortgage-backed securities are generally unique securities whose fair value is estimated using market information for new issues and adjusting for the features of a particular security by applying assumptions for prepayments, pricing spreads, yields and credit ratings.

·   Certain corporate securities owned by the Company are traded thinly or infrequently. Therefore, the fair value for these securities is determined by reference to transactions in other issues of these securities with similar yields and features.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula along with indicative exit pricing obtained from broker/dealers are used to fair value Level 3 investments.  

Management changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Fair values for securities classified within Level 3 are determined as follows:

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·   Certain corporate securities owned by the Company are not traded in active markets and prices for securities with similar features are unavailable. The fair value for each security is estimated in reference to benchmark transactions by security type based upon yields, credit spreads and option features.

·   Marketable equity securities are securities not subject to ownership restrictions but are traded thinly on exchanges or over-the-counter. As a result, prices are not available on a consistent basis from published sources, and therefore additional quotations from brokers may be obtained. Additional indications of pricing, which are considered, include subsequent financing rounds or pending transactions. The reported fair value is based upon the Company’s judgment with respect to the information it is able to reliably obtain.

Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active.  Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the Level 1 markets.  These markets do however have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair value.  These characteristics classify interest rate swap agreements as Level 2.

The Company has the option to measure eligible financial assets, financial liabilities and Company commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis. The election to use the fair value option is available when an entity first recognizes a financial asset or liability or upon entering into a Company commitment. Subsequent changes in fair value must be recorded in earnings.

Specifically, the fair value option was applied to the Company’s only fixed rate subordinated debenture liability with a cost basis of $65.2 million and fair value of $67.2 million at June 30, 2012.  Non-interest income included a gain of $0.8 million and a loss of $0.5 million for the change in fair value of the subordinated debenture for the six months ended June 30, 2012 and 2011, respectively.  This subordinated debenture has a fixed rate of 7.85% and a maturity date of September 30, 2032 with a call provision after September 30, 2007.  The Company elected the fair value option for asset/liability management purposes.  The subordinated debenture is measured based on an unadjusted, quoted price of the traded asset (Nasdaq: “NPBCO”) in an active market on the final day of each month.

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The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

			Quoted Prices		Significant
			in Active		Other		Significant
(dollars in thousands)	Total		Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
	June 30, 2012		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Government agencies	$	3,045	$	-	$	3,045	$	-
State and municipal bonds		312,163		-		312,163		-
Agency mortgage-backed securities/
collateralized mortgage obligations		1,427,983		-		1,427,983		-
Non-agency collateralized mortgage obligations		11,873		-		11,873		-
Corporate securities and other		9,532		61		7,781		1,690
Marketable equity securities		4,763		3,732		-		1,031
Investment securities, available-for-sale	$	1,769,359	$	3,793	$	1,762,845	$	2,721
Interest rate locks		778		-		778		-
Interest rate swap agreements		25,913		-		25,913		-
Liabilities
Subordinated debentures	$	67,154	$	67,154	$	-	$	-
Forward sale commitments		1,214		-		1,214		-
Interest rate swap agreements		25,913		-		25,913		-
			Quoted Prices		Significant
			in Active		Other		Significant
(dollars in thousands)	Total		Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Government agencies	$	3,072	$	-	$	3,072	$	-
State and municipal bonds		325,622		-		325,622		-
Agency mortgage-backed securities/
collateralized mortgage obligations		1,387,616		-		1,387,616		-
Non-agency collateralized mortgage obligations		15,116		-		15,116		-
Corporate securities and other		11,189		1,117		8,452		1,620
Marketable equity securities		4,404		3,278		-		1,126
Investment securities, available-for-sale	$	1,747,019	$	4,395	$	1,739,878	$	2,746
Interest rate locks		587		-		587		-
Interest rate swap agreements		22,598		-		22,598		-
Liabilities
Subordinated debentures	$	67,989	$	67,989	$	-	$	-
Forward sale commitments		852		-		852		-
Interest rate swap agreements		22,598		-		22,598		-

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The following table presents activity for assets measured at fair value on a recurring basis for the six months ended June 30, 2012:

(dollars in thousands)
Level 1	Beginning Balance January 1, 2012		Gains/(losses)/ (impairment) included in earnings			Gains/(losses) included in other comprehensive income			Purchases		Sales			Maturities/ Calls/Paydowns			Accretion/ Amortization			Transfers		Ending Balance June 30, 2012
Corporate securities and other	$	1,117	$	-		$	(25	)	$	-	$	-		$	(1,030	)	$	(1	)	$	-	$	61
Marketable equity securities		3,278		-			454			-		-			-			-			-	$	3,732
Total level 1	$	4,395	$	-		$	429		$	-	$	-		$	(1,030	)	$	(1	)	$	-	$	3,793
Level 2
U.S. Government agencies	$	3,072	$	-		$	(28	)	$	-	$	-		$	-		$	1		$	-	$	3,045
State and municipal bonds		325,622		-			2,773			-		-			(18,024	)		1,792			-	$	312,163
Agency mortgage-backed securities/
collateralized mortgage obligations		1,387,616		-			3,444			197,484		-			(157,235	)		(3,326	)		-	$	1,427,983
Non-agency collateralized
mortgage obligations		15,116		-			78			-		-			(3,332	)		11			-	$	11,873
Corporate securities and other		8,452		(123	)		315			-		(850	)		-			(13	)		-	$	7,781
Total level 2	$	1,739,878	$	(123	)	$	6,582		$	197,484	$	(850	)	$	(178,591	)	$	(1,535	)	$	-	$	1,762,845
Level 3
Corporate securities and other	$	1,620	$	-		$	70		$	-	$	-		$	-		$	-		$	-	$	1,690
Marketable equity securities		1,126		(154	)		59			-		-			-			-			-	$	1,031
Total level 3	$	2,746	$	(154	)	$	129		$	-	$	-		$	-		$	-		$	-	$	2,721
Total available-for-sale securities	$	1,747,019	$	(277	)	$	7,140		$	197,484	$	(850	)	$	(179,621	)	$	(1,536	)	$	-	$	1,769,359

The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a non-recurring basis. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	Quoted Prices
	in Active		Significant
(dollars in thousands)	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
June 30, 2012	(Level 1)		(Level 2)		(Level 3)		Balance
Assets
Loans held-for-sale	$	-	$	16,908	$	-	$	16,908
Impaired loans, net		-		-		55,189		55,189
OREO and other repossessed assets		-		-		7,201		7,201
December 31, 2011
Assets
Loans held-for-sale	$	-	$	12,216	$	-	$	12,216
Impaired loans, net		-		-		58,067		58,067
OREO and other repossessed assets		-		-		7,716		7,716

Fair value for loans held-for-sale is estimated based upon available market data for mortgage-backed securities with similar interest rates and maturities.  Lower of cost or estimated fair value write-downs recorded on loans held-for-sale were zero as of June 30, 2012 and December 31, 2011.

Impaired loans totaled $61.4 million with a specific reserve of $6.2 million at June 30, 2012, compared to $67.0 million with a specific reserve of $8.9 million at December 31, 2011. Fair value for impaired loans is primarily measured based on the value of the collateral securing these loans, less estimated costs to sell, or the present value of estimated cash flows discounted at the loan’s original effective interest rate.  Appraised values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.

Fair value for OREO and other repossessed assets is estimated based upon its appraised value less costs to sell. Additional write-downs recorded on OREO and other repossessed assets were $0.8 million for the three and six months ended June 30, 2012 and $0.1 million for the three and six months ended June 30, 2011.

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In addition to financial instruments recorded at fair value in the Company’s financial statements, disclosure of the estimated fair value of all of an entity’s assets and liabilities considered to be financial instruments is also required.  For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments.  However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.  Also, it is the Company’s general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities.  Fair values have been estimated using data that management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument.  

The estimation methodologies, resulting fair values and recorded carrying amounts are as follows:

(dollars in thousands)	June 30, 2012					December 31, 2011
	Carrying					Carrying
	Amount			Fair Value		Amount			Fair Value
ASSETS
Cash and cash equivalents	$	336,983		$	336,983	$	451,522		$	451,522
Investment securities available-for-sale		1,769,359			1,769,359		1,747,019			1,747,019
Investment securities held-to-maturity		481,341			515,765		496,574			528,598
Loans held-for-sale		16,908			17,344		12,216			12,482
Loans and leases		5,193,859			5,123,223		5,175,885			5,021,895
Allowance for loan and lease losses		(116,650	)		-		(126,640	)		-
Loans and leases, net	$	5,077,209		$	5,123,223	$	5,049,245		$	5,021,895
OREO and other repossessed assets	$	7,201		$	7,201	$	7,716		$	7,716
Interest rate locks		778			778		587			587
Interest rate swap agreements		25,913			25,913		22,598			22,598
LIABILITIES
Non-interest bearing deposits	$	903,766		$	903,766	$	863,703		$	863,703
Interest bearing deposits, non-maturity		3,456,986			3,456,986		3,434,060			3,434,060
Deposits with stated maturities		1,484,791			1,487,018		1,577,056			1,575,222
Customer repurchase agreements		533,389			533,389		523,978			523,978
Structured repurchase agreements		85,000			89,862		85,000			90,820
Federal Home Loan Bank advances		535,613			620,314		616,111			705,493
Subordinated debentures		144,475			144,475		145,310			145,310
Forward sale commitments		1,214			1,214		852			852
Interest rate swap agreements		25,913			25,913		22,598			22,598

The fair value of cash and cash equivalents has been estimated to equal the carrying amounts due to the short-term nature of these instruments.  Therefore, cash and cash equivalents are classified within Level 1of the fair value hierarchy.

The fair value of investment securities held-to-maturity has been estimated in a similar fashion to similar securities categorized as available-for-sale.  Held-to-maturity securities include state and municipal bonds, collateralized mortgage obligations and mortgage-backed securities.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of the loan portfolio has been estimated using a discounted cash flow methodology based upon prevailing market interest rates relative to the portfolios’ effective interest rate which includes assumptions concerning prepayment rates and net credit losses.  The loan portfolio is classified within Level 3 of the fair value hierarchy.

The fair value of non-interest bearing demand deposits has been estimated to equal the carrying amount, which is assumed to be the amount payable on demand at the balance sheet date and therefore are classified within Level 1 of the fair value hierarchy.

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The fair value for interest bearing deposits, excludes deposits with stated maturities, and is based on the average remaining term of the instruments with the assumption that the exit value of the instruments would be funded with like instruments by principal market participants.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of deposits with stated maturities is estimated at the present value of associated cash flows using contractual maturities and market interest rates.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value for customer repurchase agreements has been estimated at the present value of associated cash flows using contractual maturities and market interest rates for each instrument.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value for structured repurchase agreements is determined based on current market rates for similar borrowings, as well as a further calculation for valuing the optionality of the conversion features in certain of the instruments.  These instruments are classified within Level 2 of the fair value hierarchy.

Fair value for FHLB advances is determined based on current market rates for similar borrowings with similar credit ratings, as well as a further calculation for valuing the optionality of the conversion features in certain of the instruments.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value option was elected for the Company’s fixed rate subordinated debenture, and the fair value is measured on an unadjusted, quoted price for the traded assets (Nasdaq: “NPBCO”) and as such is classified within Level 1 of the fair value hierarchy. Subordinated debentures that float with LIBOR are callable at any time and the fair value is estimated to equal the par amount. These instruments are classified within Level 2 of the fair value hierarchy.

12.  RETIREMENT PLANS

The Company has a curtailed, non-contributory defined benefit pension plan (National Penn Bancshares, Inc. Employee Pension Plan) covering substantially all employees of the Company and its subsidiaries employed as of January 1, 2009.  The Company-sponsored pension plan provides retirement benefits under pension trust agreements based on years of service. Prior to April 1, 2006, benefits are based on the average of the employee compensation during the highest five consecutive years during the last ten consecutive years of employment. Beginning on April 1, 2006, eligible compensation was limited to $50,000 per year.  The Company does not expect to make a contribution in 2012 because the plan’s funding credit balance will be applied toward reducing the contribution requirement. The Company’s expected long-term rate of return on plan assets is 7.25%.

On February 12, 2010, the Company curtailed its pension plan effective March 31, 2010, whereby no additional service will accumulate for vested participants after March 31, 2010. Unvested participants still have the opportunity to meet the five year vesting requirement to earn a benefit.

Net periodic benefit costs included the following components:

(dollars in thousands)	Six Months Ended June 30,
	2012			2011
Service cost	$	63		$	60
Interest cost		1,148			1,165
Expected return on plan assets		(1,385	)		(1,370	)
Amortization of unrecognized net actuarial loss		278			145
Net periodic benefit cost	$	104		$	-

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13.  SHARE-BASED COMPENSATION

The Company has certain compensation plans authorizing the Company to grant various share-based employee and non-employee director awards, including common stock, options, restricted stock, restricted stock units and other stock-based awards (collectively the “Plans”).

A total of 5.3 million shares of common stock have been made available for awards to be granted under these Plans through November 30, 2014.  As of June 30, 2012, 1.4 million of these shares remain available for issuance.  The Company has 938,000 awards expiring during the next twelve months ending June 30, 2013.

As of June 30, 2012, there was approximately $1.7 million of total unrecognized compensation cost related to unvested stock options and approximately $3.8 million of unrecognized compensation cost for other share-based awards that is expected to be recognized within four years.

The table below summarizes activity related to share-based plans:

(dollars in thousands)	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Share-based compensation expense	$	1,101	$	637	$	2,044	$	2,182
Cash received		34		100		393		1,132
Intrinsic value of options exercised		11		90		209		858

14.  SEGMENT REPORTING

The Company’s operating segments are components, which are evaluated regularly by the Chief Executive Officer in deciding how to allocate and assess resources and assess performance.  The Company determines its segments based primarily upon product and service offerings and through types of income generated. The Company’s segments are “Community Banking” and “Other.”

The Company’s community banking segment consists of commercial and retail banking.  The community banking business segment is managed as a single strategic unit, which generates revenue from a variety of products and services it provides.  For example, commercial lending is dependent upon the availability of funding from retail deposits and other borrowings and the management of interest rate and credit risk.  This situation is also similar for consumer and residential mortgage lending.

The Company has also identified several other operating segments.  These non-reportable segments include National Penn Wealth Management, N.A., National Penn Capital Advisors, Inc., National Penn Insurance Services Group, Inc., Caruso Benefits Group, Inc., and the parent bank holding company and are included in the “Other” category.  These operating segments do not have similar characteristics to the community banking operations and do not individually or in the aggregate meet the quantitative thresholds requiring separate disclosure.  The operating segments in the “Other” category earn revenues primarily through the generation of fee income and are also aggregated based on their similar economic characteristics, products and services, type or class of customer, methods used to distribute products and services and/or nature of their regulatory environment.  The identified segments reflect the manner in which financial information is currently evaluated by management.  The accounting policies, used in this disclosure of operating segments, are the same as those described in the summary of significant accounting policies in the Company’s most recent Annual Report on Form 10-K.

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Reportable segment-specific information and reconciliation to consolidated financial information is as follows:

	As of and for the
	Three Months Ended June 30, 2012
(dollars in thousands)	Community
	Banking		Other			Consolidated
Total assets	$	8,342,297	$	53,567		$	8,395,864
Total deposits		5,845,543		-			5,845,543
Net interest income		63,062		137			63,199
Total non-interest income		11,092		9,364			20,456
Total non-interest expense		43,127		9,142			52,269
Net income (loss) available to common shareholders		23,597		(1,149	)		22,448
	As of and for the
(dollars in thousands)	Six Months Ended June 30, 2012
	Community
	Banking		Other			Consolidated
Net interest income (expense)	$	128,645	$	(1,628	)	$	127,017
Total non-interest income		23,179		21,518			44,697
Total non-interest expense		86,252		18,457			104,709
Net income (loss) available to common shareholders		48,264		(514	)		47,750
	As of and for the
	Three Months Ended June 30, 2011
(dollars in thousands)	Community
	Banking		Other			Consolidated
Total assets	$	8,573,827	$	59,314		$	8,633,141
Total deposits		5,944,161		-			5,944,161
Net interest income (expense)		67,131		(2,136	)		64,995
Total non-interest income		12,454		9,934			22,388
Total non-interest expense		46,192		7,929			54,121
Net income (loss) available to common shareholders		24,699		(1,491	)		23,208
	As of and for the
	Six Months Ended June 30, 2011
(dollars in thousands)	Community
	Banking		Other			Consolidated
Net interest income (expense)	$	135,183	$	(4,218	)	$	130,965
Total non-interest income		26,219		20,353			46,572
Total non-interest expense		94,663		16,295			110,958
Net income (loss) available to common shareholders		45,069		(6,224	)		38,845

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15.  GOODWILL

As of June 30, 2012, the carrying value of goodwill assigned to the “Community Banking” and “Other” reporting units was $235 million and $23 million, respectively. During the second quarter, the Company performed its annual, qualitative assessment of goodwill and determined that it is not more likely than not that the fair value of its reporting units are less than their carrying amounts. Therefore, no further analysis or testing was required.

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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 earnings performance and financial condition of the Company as of and for the three and six months ended June 30, 2012, with a primary focus on an analysis of operating results.  Current performance does not guarantee, and may not be indicative of similar performance in the future.  The Company’s consolidated financial statements included in this Report are unaudited, and as such, are subject to year-end examination.

Statement Regarding Non-GAAP Financial Measures:

This Report contains supplemental financial information determined by methods other than in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”). National Penn’s management uses these non-GAAP measures in its analysis of National Penn’s performance. These measures should not be considered a substitute for GAAP basis measures nor should they be viewed as a substitute for operating results determined in accordance with GAAP. Management believes the presentation of the following non-GAAP financial measures, which exclude the impact of the specified items, provides useful supplemental information that is essential to a proper understanding of the financial results of National Penn.

·   Tangible common equity excludes goodwill and intangible assets and preferred equity. Banking and financial institution regulators also exclude goodwill and intangible assets from shareholders’ equity when assessing the capital adequacy of a financial institution. Tangible common equity provides a method to assess the Company’s tangible capital trends.

·   Tangible book value expresses tangible common equity on a per-share basis. Tangible book value provides a method to assess the level of tangible net assets on a per-share basis.

·   Adjusted net income and return on assets exclude the effects of certain gains and losses, adjusted for taxes when applicable. Adjusted net income and returns provide methods to assess earnings performance by excluding items management believes are not comparable among the periods presented.

·   Efficiency ratio expresses operating expenses as a percentage of fully-taxable equivalent net interest income plus non-interest income. Operating expenses exclude items from non-interest expense that management believes are not comparable among the periods presented. Non-interest income is adjusted to also exclude items that management believes are not comparable among the periods presented. Efficiency ratio is used as a method for management to assess its operating expense level and to compare to financial institutions of varying sizes.

Management believes the use of non-GAAP measures will help readers compare National Penn’s current results to those of prior periods as presented in the accompanying Financial Highlights and financial data tables.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies of the Company conform to GAAP and predominant practice within the financial services industry.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.  The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results:

·   allowance for loan and lease losses;

·   goodwill and other intangible assets;

·   income taxes; and

·   other-than-temporary impairment.

There have been no material changes in the Company’s critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to the Company's most recent Annual Report on Form 10-K.

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FINANCIAL HIGHLIGHTS

Business and Industry

National Penn Bancshares, Inc. is a Pennsylvania business corporation and a registered bank holding company headquartered in Boyertown, Pennsylvania. National Penn operates as an independent community banking company that offers a diversified range of financial products principally through its bank subsidiary, National Penn Bank, as well as an array of investment, insurance and employee benefit services through its non-bank subsidiaries.  National Penn’s financial services affiliates consist of National Penn Wealth Management, N.A., including its National Penn Investors Trust Company division; National Penn Capital Advisors, Inc.; Institutional Advisors, LLC; National Penn Insurance Services Group, Inc., including its Higgins Insurance division; and Caruso Benefits Group, Inc.

The Company’s primary business is accepting deposits from customers through its retail branch offices, and investing those deposits, together with funds generated from operations and borrowings, in loans, including commercial business loans, commercial real estate loans, residential mortgages, home equity loans, other consumer loans, and investment securities.  The Company’s strategic plan provides for it to operate within growth markets focusing on diversification of revenue sources and increased market penetration in growing geographic areas.

At June 30, 2012, National Penn operated 121 retail branch offices. It has 120 retail branch offices in Pennsylvania and one retail branch office in Maryland through National Penn Bank and its KNBT and Nittany Bank divisions.

The Company’s results of operations are affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds; (2) the provision for loan and lease losses, or the amount added to the allowance for loan and lease losses to provide reserves for inherent losses on loans and leases; (3) non-interest income, which is made up primarily of banking fees, wealth management income, insurance income, fair value measurements and gains and losses from sales of securities or other transactions; (4) non-interest expense, which consists primarily of salaries, employee benefits and other operating expenses; and (5) income taxes. Results of operations are also significantly affected by general economic and competitive conditions, as well as changes in market interest rates, government policies and actions of regulatory authorities.

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Overview

(dollars in thousands, except per share data)	Three Months Ended									Six Months Ended
	June 30, 2012			March 31, 2012			June 30, 2011			June 30, 2012			June 30, 2011
EARNINGS
Total interest income	$	79,896		$	81,414		$	87,740		$	161,310		$	177,098
Total interest expense		16,697			17,596			22,745			34,293			46,133
Net interest income		63,199			63,818			64,995			127,017			130,965
Provision for loan and lease losses		2,000			2,000			3,000			4,000			13,000
Net interest income after provision for loan and lease losses		61,199			61,818			61,995			123,017			117,965
Net (losses) gains from fair value changes of subordinated debentures		(810	)		1,645			(430	)		835			(481	)
Losses on investment securities		(277	)		-			-			(277	)		-
Other non-interest income		21,543			22,596			22,818			44,139			47,053
Other non-interest expense		52,269			52,440			54,121			104,709			110,958
Income before income taxes		29,386			33,619			30,262			63,005			53,579
Income tax expense		6,938			8,317			7,054			15,255			11,591
Net income		22,448			25,302			23,208			47,750			41,988
Preferred dividends and accretion of preferred discount		-			-			-			-			(1,691	)
Accelerated accretion from redemption of preferred stock		-			-			-			-			(1,452	)
Net income available to common shareholders	$	22,448		$	25,302		$	23,208		$	47,750		$	38,845
Basic earnings available to common shareholders	$	0.15		$	0.17		$	0.15		$	0.31		$	0.26
Diluted earnings available to common shareholders		0.15			0.17			0.15			0.31			0.26
Dividends per common share		0.07			0.05			0.01			0.12			0.02
Net interest margin		3.48	%		3.55	%		3.53	%		3.52	%		3.56	%
Efficiency ratio (1)		58.42	%		57.47	%		58.25	%		57.94	%		58.94	%
Return on average assets		1.07	%		1.21	%		1.08	%		1.14	%		0.98	%
Asset Quality Metrics
Allowance / total loans and leases		2.24	%		2.33	%		2.66	%
Non-performing loans / total loans and leases		1.13	%		1.28	%		1.38	%
Delinquent loans / total loans and leases		0.46	%		0.46	%		0.39	%
Allowance / non-performing loans and leases		197.6	%		183.0	%		192.6	%
Annualized net charge-offs / total average loans and leases		0.53	%		0.56	%		0.61	%		0.54	%		0.96	%
(1) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

Net income available to common shareholders increased to $47.8 million for the six months ended June 30, 2012, as compared to $38.8 million in the same period of the prior year.  Improvements in net income available to common shareholders resulted from the following items:

·   Net interest income totaled $127 million for the six months ended June 30, 2012 compared to $131 million for the six months ended June 30, 2011.  Net interest margin declined slightly year over year to 3.52% for the six months ended June 30, 2012 from 3.56% for same period of 2011. The continued low interest rate environment has led to declining asset yields as loans and investments repay and are replaced with lower yielding assets. Reductions of higher-cost deposits continue to drive improvements in deposit mix and costs. Cost of deposits improved to 0.49% for the six months ended June 30, 2012, a 27 basis point improvement from the same period of 2011.

·   The Company continues to benefit from improving asset quality. Classified loans declined by 18.6% since December 31, 2011 and 25.2% since June 30, 2011, and non-performing loans remain at relatively low levels and declined to 1.13% of total loans and leases at June 30, 2012. The improvement in asset quality resulted in a $9.0 million decrease to the provision for loan and lease losses (“provision”) which totaled $4.0 million for the six months ended June 30, 2012, compared to $13.0 million for the six months ended June 30, 2011. The provision was unchanged from the first quarter of 2012 and the allowance to non-performing loans and leases increased to 198% at June 30, 2012.

·   Other non-interest income decreased modestly on a linked-quarter basis due to write downs on other real estate owned during the second quarter of 2012. Other non-interest income included earnings from unconsolidated investments of $1.8 million for the six months ended June 30, 2011. Service charges on deposit accounts for the six months ended June 30, 2012 decreased $1.7 million when compared to the six months ended June 30, 2011 due to declines in overdraft volume.

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·   Other non-interest expense continued to be well controlled during the six months ended June 30, 2012 at $105 million, as compared to $111 million in the prior year period. The decrease resulted primarily from reductions to other operating expenses and a reduction in FDIC insurance expense. These reductions led to a $6.2 million decline in non-interest expense for the six months ended June 30, 2012 compared to the prior year to date period. The efficiency ratio was relatively stable at 57.94% for the six months ended June 30, 2012, as management continued to effectively manage expense levels.

Adjusted net income and returns are non-GAAP measures and exclude certain items which management believes affect the comparability of results between periods. The following table reconciles the non-GAAP measure of adjusted net income to the GAAP measure of net income available to common shareholders and diluted earnings per share and calculates the adjusted return on average assets.

(dollars in thousands, except per share data)	Three Months Ended
	June 30, 2012			March 31, 2012			June 30, 2011
Adjusted net income reconciliation
Net income available to common shareholders	$	22,448		$	25,302		$	23,208
After tax unrealized fair value loss (gain) on subordinated debentures		527			(1,069	)		280
Adjusted net income available to common shareholders	$	22,975		$	24,233		$	23,488
Earnings per share
Net income available to common shareholders	$	0.15		$	0.17		$	0.15
After tax unrealized fair value loss (gain) on subordinated debentures		-			(0.01	)		-
Adjusted net income available to common shareholders	$	0.15		$	0.16		$	0.15
Average assets	$	8,473,164		$	8,397,381		$	8,599,923
Adjusted return on average assets		1.09	%		1.16	%		1.08	%

Adjusted net income was $23.0 million, or $0.15 per diluted share, for the second quarter of 2012 compared to $24.2 million, or $0.16 per diluted share, for the first quarter of 2012 and was consistent with $23.5 million, or $0.15 per diluted share, for the second quarter of 2011. Adjusted net income remains stable despite modest reductions to net interest income, as asset quality trends and expense controls continue to offset the trend in net interest income. The stable income trends resulted in an adjusted ROA of 1.09% and 1.13% for the quarter and six months ended June 30, 2012. Adjusted net income excluded the effects of the changes in the fair value of the Company’s subordinated debentures accounted for at fair value.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Comparison of Financial Condition

SUMMARY BALANCE SHEET
(dollars in thousands, except per share data)	June 30, 2012			March 31, 2012			December 31, 2011
Total cash and cash equivalents	$	336,983		$	453,179		$	451,522
Investment securities and other securities		2,316,894			2,335,421			2,314,111
Total loans and leases		5,210,767			5,201,656			5,188,101
Total assets		8,395,864			8,524,035			8,486,281
Deposits		5,845,543			5,888,383			5,874,819
Borrowings		1,298,477			1,387,235			1,370,399
Shareholders' equity		1,199,760			1,200,830			1,180,687
Tangible book value per common share (1)	$	6.18		$	6.09		$	5.97
Tangible common equity / tangible assets (1)		11.43	%		11.25	%		11.04	%
(1) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

Assets

Loans and Leases

Regional economic conditions impact the Company’s customers. Although the economy and credit environment continue to be uncertain, the Company’s loan portfolio has demonstrated continued asset quality improvement. Proactive management of lower quality credits has helped to mitigate the continuing impact of housing market conditions and decreased real estate and commercial property values. The Company remains focused on attracting and retaining high-quality commercial and retail customers to support quality loan growth.

Federal Reserve economic data suggests the following trends:

·   Contacts in the Third District have reported improved overall business activity, although results were mixed. Sectors such as retailers and auto dealers reported slight growth year-over-year, however, manufacturing activity slowed.

·   New home construction held steady and sales on existing homes showed improvement.

·   The outlook among Third District business contacts remains positive but cautious as a trend of slow but steady improvement is expected to continue throughout 2012.

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The Company’s loans are diversified by borrower, industry group, and geographical area throughout the markets it serves. The following table summarizes the composition of the Company’s loan portfolio:

(dollars in thousands)	June 30,		December 31,
	2012		2011		Increase/(decrease)
Commercial and industrial loans and leases	$	2,467,072	$	2,420,027	$	47,045		1.9	%
CRE - permanent		874,570		855,524		19,046		2.2	%
CRE - construction		140,751		156,064		(15,313	)	(9.8	) %
Commercial real estate		1,015,321		1,011,588		3,733		0.4	%
Residential mortgages		694,977		710,322		(15,345	)	(2.2	) %
Home equity lines and loans		743,982		747,558		(3,576	)	(0.5	) %
All other consumer		272,507		286,390		(13,883	)	(4.8	) %
Consumer loans		1,711,466		1,744,270		(32,804	)	(1.9	) %
Loans and leases	$	5,193,859	$	5,175,885	$	17,974		0.3	%
Allowance for loan and lease losses		116,650		126,640		(9,990	)	(7.9	) %
Loans and leases, net	$	5,077,209	$	5,049,245	$	27,964		0.6	%
Loans held-for-sale	$	16,908	$	12,216	$	4,692		38.4	%

Net loans and leases increased by $28.0 million, or 0.6%, to $5.1 billion at June 30, 2012. Emphasis on loans to commercial and industrial customers resulted in a $47.0 million increase to this portfolio during the six months ended June 30, 2012, while commercial real estate loan balances were stable. Prepayments of consumer loans and sales of residential mortgage loans in the secondary market offset the commercial loan growth by $32.8 million during the same period. Additionally, classified loans decreased $68.9 million, or 18.6%, since December 31, 2011 and resulted in a decrease to the allowance for loan and lease losses which totaled $117 million at June 30, 2012. Net charge-offs totaled $14.0 million and the provision was $4.0 million during the six months ended June 30, 2012.

The following table demonstrates select asset quality metrics:

	June 30,			March 31,			December 31,
(dollars in thousands)	2012			2012			2011
Non-performing loans	$	59,019		$	66,365		$	66,976
Non-performing loans to total loans and leases		1.13	%		1.28	%		1.29	%
Delinquent loans	$	24,144		$	24,068		$	24,801
Delinquent loans to total loans and leases		0.46	%		0.46	%		0.48	%
Classified loans	$	301,542		$	347,033		$	370,439
Classified loans to total loans and leases		5.79	%		6.67	%		7.14	%
Tier 1 capital and allowance	$	1,124,702		$	1,126,461		$	1,104,942
Classified loans to Tier 1 capital and allowance		26.81	%		30.81	%		33.53	%
Total loans and leases	$	5,210,767		$	5,201,656		$	5,188,101

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The following table summarizes the Company’s non-performing assets:

(dollars in thousands)		June 30,			March 31,			December 31,
		2012			2012			2011
Non-accrual commercial and industrial loans and leases		$	33,984		$	32,485		$	31,081
Non-accrual CRE-permanent			2,999			5,156			7,403
Non-accrual CRE-construction			6,959			14,336			12,218
Total non-accrual commercial real estate loans			9,958			19,492			19,621
Non-accrual residential mortgages			4,301			4,077			4,504
Non-accrual home equity lines and loans			2,555			2,110			3,046
All other non-accrual consumer loans			1,753			1,695			3,176
Total non-accrual consumer loans			8,609			7,882			10,726
	Total non-accrual loans		52,551			59,859			61,428
Restructured loans		(a)	6,468			6,506			5,548
	Total non-performing loans		59,019			66,365			66,976
Other real estate owned and repossessed assets			7,201			7,647			7,716
	Total non-performing assets		66,220			74,012			74,692
Loans 90+ days past due & still accruing			3,426			1,588			2,010
	Total non-performing assets and loans 90+ days past due	$	69,646		$	75,600		$	76,702
Total loans and leases		$	5,210,767		$	5,201,656		$	5,188,101
Average total loans and leases		$	5,196,803		$	5,179,220		$	5,202,255
Allowance for loan and lease losses		$	116,650		$	121,452		$	126,640
Allowance for loan and lease losses to:
	Non-performing assets and loans 90+ days past due		168	%		161	%		165	%
	Non-performing loans		198	%		183	%		189	%
	Total loans and leases		2.24	%		2.33	%		2.44	%
(a)	Restructured loans include $3.4 million of modified commercial loans and $3.1 million of consumer loans which were modified for customers who were experiencing financial difficulty and were in jeopardy of losing their homes to foreclosure.

The following table provides additional information for the Company’s non-accrual loans:

(dollars in thousands)	June 30,			March 31,			December 31,
	2012			2012			2011
Total non-accrual loans	$	52,551		$	59,859		$	61,428
Non-accrual loans and leases with partial charge-offs		20,947			22,887			28,919
Life-to-date partial charge-offs on non-accrual loans and leases		22,393			26,619			30,284
Charge-off rate of non-accrual loans and leases		51.7	%		53.8	%		51.2	%
Specific reserves on non-accrual loans		5,523			9,911			8,162

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At June 30, 2012, the Company’s non-accrual loans totaled $52.6 million and included $20.9 million of non-accrual loans which have been partially charged-off by 51.7% or $22.4 million. Non-accrual and non-performing loan and asset levels continue to improve and remain relatively low as a percentage of total loans and leases and total assets. Non-performing loans totaled 1.13% of total loans and leases at June 30, 2012. Additionally, non-performing loans are included in impaired loans and leases and are evaluated individually when determining the allowance. Impaired loans had a specific reserve in the allowance of $6.2 million related to $19.8 million of underlying principal balances. There is a portion of the Company’s impaired loans that have not been reserved or partially charged-off, since the principal appears to be collectible. The Company does not believe these amounts are material for purposes of further disclosure and analysis.

An analysis of net loan and lease charge-offs:

	Three Months Ended									Six Months Ended
(dollars in thousands)	June 30,			March 31,			June 30,			June 30,			June 30,
	2012			2012			2011			2012			2011
Commercial and industrial loans and leases	$	5,196		$	1,925		$	5,066		$	7,121		$	14,385
CRE - permanent		595			1,933			1,242			2,528			5,188
CRE - construction		(148	)		673			828			525			1,701
Commercial real estate		447			2,606			2,070			3,053			6,889
Residential mortgages		328			560			483			888			2,126
Home equity lines and loans		404			1,855			833			2,259			1,991
All other consumer loans		427			242			(401	)		669			(246	)
Consumer loans		1,159			2,657			915			3,816			3,871
Net loans and leases charged-off	$	6,802		$	7,188		$	8,051		$	13,990		$	25,145
Net charge-offs (annualized) to:
Total loans and leases		0.53	%		0.56	%		0.62	%		0.54	%		0.98	%
Average total loans and leases		0.53	%		0.56	%		0.62	%		0.54	%		0.96	%
Allowance for loan and lease losses		23.45	%		23.80	%		23.42	%		24.12	%		36.77	%

Net loan charge-offs totaled $14.0 million for the six months ended June 30, 2012, an $11.2 million, or 44.4%, decrease compared to the prior year to date period. The overall improvement in net charge-offs is the result of continued credit quality improvement. Annualized net charge-offs as a percentage of average loans and leases totaled 0.53% for the second quarter of 2012 compared to 0.56% for the first quarter of 2012 and 0.62% for the second quarter of 2011.

Changes in the allowance for loan and lease losses by loan portfolio:

	Three Months Ended				Six Months Ended
(dollars in thousands)	June 30,				June 30,
	2012		2011		2012		2011
Balance at beginning of period	$	121,452	$	142,960	$	126,640	$	150,054
Charge-offs:
Commercial and industrial loans and leases		5,443		5,430		8,135		14,999
Commercial real estate		928		2,358		3,713		7,671
Consumer loans		1,536		2,724		4,781		6,595
Total charge-offs		7,907		10,512		16,629		29,265
Recoveries:
Commercial and industrial loans and leases		247		364		1,014		614
Commercial real estate		481		288		660		782
Consumer loans		377		1,809		965		2,724
Total recoveries		1,105		2,461		2,639		4,120
Net charge-offs		6,802		8,051		13,990		25,145
Provision charged to expense		2,000		3,000		4,000		13,000
Balance at end of period	$	116,650	$	137,909	$	116,650	$	137,909

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The following table presents the components of the allowance:

(dollars in thousands)	June 30,		December 31,
	2012		2011
Specific reserves	$	6,240	$	8,909
Allocated reserves		99,002		107,288
Unallocated reserves		11,408		10,443
Total allowance for loan and lease losses	$	116,650	$	126,640

Overall, the allowance decreased to $117 million at June 30, 2012 and represented 2.24% of total loans and leases and 198% of non-performing loans, compared to $127 million at December 31, 2011, or 2.44% of total loans and leases and 189% of non-performing loans. The decrease of the allowance was due primarily to the reduction in classified loans and continued improvement in asset quality. These improvements resulted in a provision of $4.0 million for the six months ended June 30, 2012, a decrease of $9.0 million compared to $13.0 million for the six months ended June 30, 2011.

Liabilities

Liabilities totaled $7.2 billion at June 30, 2012, a decrease of $109 million, or 1.5%, from $7.3 billion at December 31, 2011. Total deposits, the Company’s primary source of funding, decreased $29.3 million during the first six months of 2012 primarily due to a reduction in time deposit balances which declined by $92.3 million during the period. Non-interest bearing deposits increased as a result of the Company’s continued efforts to improve deposit mix, and manage high-cost, non-relationship based wholesale and time deposit customers. These efforts increased transactions, savings and money market accounts to 75% of deposits at June 30, 2012 and helped to reduce the cost of deposits by nine basis points to 0.47% for the three months ended June 30, 2012 compared to the three months ended December 31, 2011.

(dollars in thousands)
	June 30, 2012			December 31, 2011			Increase/(decrease)
Non-interest bearing deposits	$	903,766		$	863,703		$	40,063		4.64	%
NOW accounts		1,317,399			1,293,148			24,251		1.88	%
Money market accounts		1,641,947			1,686,909			(44,962	)	(2.67	) %
Savings		497,640			454,003			43,637		9.61	%
CDs less than $100		1,063,688			1,138,908			(75,220	)	(6.60	) %
CDs $100 or greater		421,103			438,148			(17,045	)	(3.89	) %
Total deposits	$	5,845,543		$	5,874,819		$	(29,276	)	(0.50	) %
Non-time deposits / total deposits		75	%		73	%

Deposit funding is supplemented by additional sources of borrowings which include customer and structured repurchase agreements, Federal Home Loan Bank (“FHLB”) advances, and subordinated debentures. In the aggregate, these funding sources totaled $1.3 billion at June 30, 2012, which was a decrease of $71.9 million, or 5.2%, from December 31, 2011.

Significant borrowing activity during the six months ended June 30, 2012 included the maturity of $80.0 million of FHLB advances.

Shareholders’ Equity

Shareholders’ equity totaled $1.2 billion at June 30, 2012, an increase of $19.1 million from December 31, 2011. Significant activity during the six months ended June 30, 2012 included:

·   Net income of $47.8 million,

·   Cash dividends paid to common shareholders of $18.3 million,

·   Treasury stock purchased of $18.6 million.

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Results of operations for the six months ended June 30, 2012 and June 30, 2011

Net Interest Income

The following table presents average balances, average yields, and net interest margin information for the six months ended June 30, 2012 as compared to the same period in 2011.  Interest income and yields are presented on a fully taxable equivalent (“FTE”) basis using an effective tax rate of 35%.  Net interest margin is expressed as net interest income (FTE) as a percentage of average total interest earning assets.

Average Balances, Average Rates, and Net Interest Margin*

	For the Six Months Ended June 30,
(dollars in thousands)	2012								2011
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
INTEREST EARNING ASSETS:
Interest earning deposits at banks	$	306,537		$	336		0.22	%	$	487,806		$	515		0.21	%
U.S. Treasury		-			-		-			19,974			27		0.27	%
U.S. Government agencies		3,061			33		2.17	%		5,091			53		2.10	%
Mortgage-backed securities/collateralized mortgage obligations		1,491,828			20,310		2.74	%		1,369,276			21,496		3.17	%
State and municipal*		739,631			24,219		6.58	%		761,978			25,710		6.80	%
Other bonds and securities		84,231			1,307		3.12	%		95,602			1,333		2.81	%
Total investments		2,318,751			45,869		3.98	%		2,251,921			48,619		4.35	%
Commercial loans and leases*		3,457,129			84,062		4.89	%		3,430,280			89,644		5.27	%
Installment loans		1,020,778			22,275		4.39	%		918,946			22,993		5.05	%
Mortgage loans		710,105			18,325		5.19	%		920,330			25,561		5.60	%
Total loans and leases		5,188,012			124,662		4.83	%		5,269,556			138,198		5.29	%
Total earning assets		7,813,300			170,867		4.40	%		8,009,283			187,332		4.72	%
Allowance for loan and lease losses		(125,277	)							(152,189	)
Non-interest earning assets		747,249								793,411
Total assets	$	8,435,272							$	8,650,505
INTEREST BEARING LIABILITIES:
Interest bearing deposits	$	4,967,063		$	14,173		0.57	%	$	5,142,615		$	22,381		0.88	%
Customer repurchase agreements		524,859			1,095		0.42	%		534,057			1,357		0.51	%
Structured repurchase agreements		85,000			1,830		4.33	%		165,000			3,384		4.14	%
Short-term borrowings		-			-		-			6,781			-		0.00	%
Federal Home Loan Bank advances		595,854			13,468		4.55	%		639,301			14,256		4.50	%
Subordinated debentures		144,479			3,727		5.19	%		142,808			4,755		6.72	%
Total interest bearing liabilities		6,317,255			34,293		1.09	%		6,630,562			46,133		1.40	%
Non-interest bearing deposits		872,234								825,736
Other non-interest bearing liabilities		49,712								42,828
Total liabilities		7,239,201								7,499,126
Equity		1,196,071								1,151,379
Total liabilities and equity	$	8,435,272							$	8,650,505
NET INTEREST INCOME/MARGIN (FTE)					136,574		3.52	%					141,199		3.56	%
Tax equivalent interest					9,557								10,234
Net interest income				$	127,017							$	130,965
*Fully taxable equivalent basis, using a 35% effective tax rate.
Average loan balances include non-accruing loans and average net fees and costs.

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The following table allocates changes in FTE interest income and interest expense based upon volume and rate changes.  For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately.

(dollars in thousands)	Six Months Ended June 30,
	2012 compared to 2011
Increase (decrease) in:	Volume			Rate			Total
Interest Income:
Interest earning deposits at banks	$	(197	)	$	19		$	(178	)
U.S. Treasury		(27	)		-			(27	)
U.S. Government agencies		(22	)		2			(20	)
Mortgage-backed securities/collateralized mortgage obligations		1,821			(3,007	)		(1,186	)
State and municipal		(743	)		(748	)		(1,491	)
Other bonds and securities		(168	)		142			(26	)
Total investments		861			(3,611	)		(2,750	)
Commercial loans and leases		696			(6,279	)		(5,583	)
Installment loans		2,397			(3,115	)		(718	)
Mortgage loans		(5,523	)		(1,713	)		(7,236	)
Total loans and leases		(2,430	)		(11,107	)		(13,537	)
Total interest income	$	(1,766	)	$	(14,699	)	$	(16,465	)
Interest Expense:
Interest bearing deposits	$	(740	)	$	(7,468	)	$	(8,208	)
Customer repurchase agreements		(23	)		(239	)		(262	)
Structured repurchase agreements		(1,714	)		160			(1,554	)
Short-term borrowings		-			-			-
Federal Home Loan Bank advances		(980	)		192			(788	)
Subordinated debentures		55			(1,083	)		(1,028	)
Total borrowed funds		(2,662	)		(970	)		(3,632	)
Total interest expense		(3,402	)		(8,438	)		(11,840	)
Increase (decrease) in net interest income	$	1,636		$	(6,261	)	$	(4,625	)

Interest rates remain at historically low levels and continue to pressure asset yields as investments and loans mature and are replaced. Average earning assets contracted slightly due to disciplined deposit pricing and the maturity of long-term advances. These initiatives resulted in deposit mix improvement as transaction, savings and money market accounts comprised 75% of deposits at June 30, 2012 compared to 69% at June 30, 2011. Time deposits declined $366 million from June 30, 2011 to $1.5 billion at June 30, 2012. The improvement in mix combined with disciplined deposit pricing reduced the cost of deposits by 27 basis points to 0.49% for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The cost of deposits for the quarter ended June 30, 2012 was 0.47%.

Interest expense decreased by 25.6%, or $11.8 million, and totaled $34.3 million for the six months ended June 30, 2012. The reduction in interest expense mitigated the effect of decreasing asset yields. However, managed reductions to earning assets resulted in a 8.9%, or $15.8 million, decrease to interest income ($16.5 million on a FTE basis), which totaled $161 million for the six months ended June 30, 2012. Net interest income for the six months ended June 30, 2012, was $127 million, a decrease of $4.0 million, or 3.0%, compared to $131 million for the six months ended June 30, 2011. Net interest margin for the six months ended June 30, 2012 declined modestly by 4 basis points to 3.52% from 3.56% in the prior year period. 

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Provision for Loan and Lease Losses

Provision for the six months ended June 30, 2012 was $4.0 million, compared to $13.0 million for the same period in 2011. An $11.1 million reduction to net charge-offs for the six months ended June 30, 2012 combined with a continued decline of classified loans resulted in a reduction to the allowance, which totaled $117 million at June 30, 2012. The allowance as a percentage of non-performing loans increased to 198% at June 30, 2012 from 183% in the first quarter and 189% at December 31, 2011, and the allowance to total loans and leases totaled 2.24% at June 30, 2012.  For additional analysis of the allowance refer to “Loans and Leases.”

Non-Interest Income

(dollars in thousands)	Six Months Ended
	June 30,
NON-INTEREST INCOME	2012			2011			Increase (Decrease)
Wealth management income	$	12,166		$	11,780		$	386			3.28	%
Service charges on deposit accounts		7,576			9,280			(1,704	)		(18.36	) %
Insurance commissions and fees		6,507			6,741			(234	)		(3.47	) %
Cash management and electronic banking fees		9,127			9,016			111			1.23	%
Mortgage banking income		2,846			2,094			752			35.91	%
Bank owned life insurance income		2,464			2,453			11			0.45	%
Earnings of unconsolidated investments		34			1,816			(1,782	)		(98.13	) %
Other operating income		3,419			3,873			(454	)		(11.72	) %
Net gains (losses) from fair value changes of subordinated debentures		835			(481	)		1,316		NM
Net losses on sales of investment securities		(123	)		-			(123	)	NM
Credit related losses on investment securities		(154	)		-			(154	)	NM
Total non-interest income	$	44,697		$	46,572		$	(1,875	)		(4.03	) %

Non-interest income for the six months ended June 30, 2012 and 2011 totaled $44.7 million and $46.6 million, respectively, and its components changed primarily due to the following items:

Increases:

·   The change in fair value of the Company’s subordinated debentures accounted for at fair value (Nasdaq: “NPBCO”) increased non-interest income by $0.8 million in 2012 compared to a $0.5 million reduction in 2011.

·   The income derived from the Company’s mortgage banking operations increased $0.8 million for the six months ended June 30, 2012 compared to the prior year period as mortgage refinancing activity increased.

Decreases:

·   Service charges on deposit accounts decreased $1.7 million due to declines in overdraft volume.

·   The six months ended June 30, 2011 included $1.8 million of earnings from unconsolidated mezzanine debt fund investments, as the timing of the fund activities and “exits” vary.

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Non-Interest Expense

(dollars in thousands)	Six Months Ended
	June 30,
NON-INTEREST EXPENSE	2012			2011			Increase (Decrease)
Salaries, wages and employee benefits	$	62,615		$	61,857		$	758		1.23	%
Premises and equipment		14,202			14,059			143		1.02	%
FDIC insurance		2,475			6,183			(3,708	)	(59.97	) %
Other operating expenses		25,417			28,859			(3,442	)	(11.93	) %
Total non-interest expense	$	104,709		$	110,958		$	(6,249	)	(5.63	) %
RECONCILIATION TABLE FOR NON-GAAP FINANCIAL MEASURES - EFFICIENCY RATIO (1)
	Six Months Ended
	June 30,
Efficiency Ratio Calculation	2012			2011
Non-interest expense	$	104,709		$	110,958
Net interest income (taxable equivalent)	$	136,574		$	141,199
Non-interest income		44,697			46,572
Less:
Net gains (losses) from fair value changes on subordinated debentures		835			(481	)
Net losses on investment securities		(277	)		-
Adjusted revenue	$	180,713		$	188,252
Efficiency Ratio		57.94	%		58.94	%

  (1) Refer to the Statement regarding Non-GAAP Financial Measures in the beginning of Part I, Item 2.

Continued focus on expense controls reduced expenses overall, as demonstrated by an efficiency ratio of 57.94% for the first six months of 2012. Non-interest expense totaled $105 million, a $6.2 million decrease for the six months ended June 30, 2012, when compared to the same period in the prior year. FDIC insurance decreased $3.7 million compared to the six months ended June 30, 2011, due to a change to the assessment framework and the improving risk profile of the Company, and other operating expenses remain well controlled.

Income Tax Expense

Income tax expense for the six months ended June 30, 2012 was $15.3 million compared to $11.6 million for the six months ended June 30, 2011. During the first six months of 2012, pre-tax income increased while tax-free income and other permanent items remained stable, resulting in an effective tax rate of 24.2% compared to 21.6% for the prior year period. The Company’s net deferred tax asset (“DTA”) decreased to $55.1 million at June 30, 2012, primarily from the reduction of the allowance for loan and lease losses and an increase to the fair value of investment securities available-for-sale.

Each quarter, the Company evaluates the realizability of the DTA. As of June 30, 2012, the Company concluded that the DTA was realizable, and a valuation allowance was not required. In reaching this conclusion the Company carefully weighed both positive and negative evidence present. Since December 31, 2011, the Company has performed in line with management projections. Therefore, management believes that the DTA continues to be realizable and will be fully utilized as planned.

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LIQUIDITY, COMMITMENTS, CAPITAL AND INTEREST RATE SENSITIVITY

Analysis of Liquidity and Capital Resources

Liquidity

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of June 30, 2012:

			Payments Due by Period:
					After one		After three
(dollars in thousands)			One Year		year to		years to		More than
	Total		or less		three years		five years		5 Years
Maturities of time deposits	$	1,484,791	$	884,471	$	429,781	$	170,015	$	524
Structured repurchase agreements		85,000		35,000		50,000		-		-
Federal Home Loan Bank advances		535,613		22,000		52,500		304,745		156,368
Subordinated debentures		144,475		-		-		-		144,475
Minimum annual rentals on non-cancelable operating leases		41,112		6,478		10,834		8,292		15,508
Total	$	2,290,991	$	947,949	$	543,115	$	483,052	$	316,875

The Company does not presently have any commitments for significant capital expenditures.

The Company’s primary source of liquidity is deposits obtained from retail, business and institutional banking customers. The Company supplements liquidity with a mix of wholesale funding.   The Company’s wholesale sources of funds and levels of liquidity include:

·   Relationships with several correspondent banks to provide short-term borrowings in the form of federal funds purchased.

·   The Company is also a member of the FHLB and has the ability to borrow within applicable limits in the form of advances secured by pledges of certain qualifying assets.

·   Overnight funds are available from the Federal Reserve Bank via the discount window, and serve as an additional source of liquidity.

As measured using the consolidated statement of cash flows, the Company used $115 million and $83.3 million of net cash and equivalents for the six months ended June 30, 2012 and 2011, respectively. Operating activities generated $56.3 million of net cash for the six months ended June 30, 2012 compared to $68.3 million for the six months ended June 30, 2011.  During the six months ended June 30, 2012, cash was deployed in the following ways:

Investing activities

·   $197 million of investment security purchases

·   $35.7 million net increase in loans and leases

Financing activities

·   $92.3 million reduction in certificates of deposit

·   $80.2 million of repayments of FHLB advances

·   $18.6 million of treasury stock repurchased

·   $18.3 million of cash dividends paid to common shareholders

During the six months ended June 30, 2012, cash was generated from the following additional sources:

Investing activities

·   $195 million of proceeds from maturities and repayments of investment securities

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Financing activities

·   $63.0 million increase in core deposits

Capital

At June 30, 2012, National Penn and National Penn Bank’s capital ratios met the criteria to be considered a “well-capitalized” institution.  Management believes that, under current regulations, the Company and National Penn Bank will each continue to exceed the minimum capital requirements in the foreseeable future.

	Tier 1 Capital to		Tier 1 Capital to Risk-		Total Capital to Risk-
	Average Assets Ratio		Weighted Assets Ratio		Weighted Assets Ratio
	June 30,	December 31,	June 30,	December 31,	June 30,	December 31,
	2012	2011	2012	2011	2012	2011
The Company	12.44%	12.00%	17.45%	17.12%	18.71%	18.38%
National Penn Bank	10.42%	11.03%	14.75%	15.91%	16.01%	17.17%
"Well Capitalized" institution under banking regulations	5.00%	5.00%	6.00%	6.00%	10.00%	10.00%

National Penn and National Penn Bank exclude from regulatory capital a portion of deferred tax assets, since these regulations are more restrictive than GAAP as it relates to the usage and recognition of deferred tax assets.

Other Commitments

The following table sets forth the notional amounts of other commitments as of June 30, 2012:

					After one		After three
			Less than		year to		years to		More than
(dollars in thousands)	Total		one year		three years		five years		five years
Loan commitments	$	1,530,509	$	723,557	$	166,316	$	124,991	$	515,645
Letters of credit		145,137		113,946		31,097		94		-
Total	$	1,675,646	$	837,503	$	197,413	$	125,085	$	515,645

The Company evaluates and establishes an estimated reserve for credit and other risks associated with off-balance sheet positions based upon historical losses, expected performance under these arrangements and current trends in the economy. The reserve totaled $1.5 million at June 30, 2012.

The Company may be required to utilize cash or other financial instruments on its balance sheet, if called upon, to perform according to the contractual terms of the commitments.  The contract or notional amounts of the instruments reflect the extent of involvement the Company has for each class.

The Company uses derivative instruments for management of interest rate sensitivity.  The asset/liability management committee approves the use of derivatives in balance sheet hedging.  The derivatives employed by the Company may include forward sales of mortgage commitments, as well as fair value and cash flow hedges.  The Company does not use any of these instruments for trading purposes.  For details of derivatives, refer to Footnote 10 to the consolidated financial statements.

Interest Rate Risk Management

The Company’s largest business segment is its community banking segment, whose business activities principally include accepting deposits and making loans.  As a result, the Company’s largest source of revenue is net interest income, which subjects it to movements in market interest rates.  Management’s objective for interest rate risk management is to understand the Company’s susceptibility to changes in interest rates and develop and implement strategies to minimize volatility while maximizing net interest income.  The Board of Directors establishes policies that govern interest rate risk management.  This is accomplished via a centralized asset/liability management committee (“ALCO”).  ALCO is comprised of various members of the Company’s business lines who are responsible for managing the components of interest rate risk:

·   Timing differences between contractual maturities and or repricing of assets and liabilities (“gap risk”),

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·   Risk that assets will repay or customers withdraw prior to contractual maturity (“option risk”),

·   Non-parallel changes in the slope of the yield curve (“yield curve risk”), and

·   Variation in rate movements of different indices (“basis risk”).

ALCO employs various techniques and instruments to implement its developed strategies.  These generally include one or more of the following:

·   Changes to interest rates offered on products,

·   Changes to maturity terms offered on products,

·   Changes to types of products offered, and/or

·   Use of wholesale products such as advances from the FHLB or interest rate swaps.

Interest rate sensitivity is a function of the repricing characteristics of the Company’s assets and liabilities. Minimizing the balance sheet’s maturity and repricing risk is a continual focus in a changing rate environment.

The Company uses a simulation model to identify and manage its interest rate risk profile.  The model measures projected net interest income “at-risk” and anticipated changes in net income for a rolling twelve month period.  The model is based on expected cash flows and repricing characteristics for all financial instruments at a point in time and incorporates Company-developed, market-based assumptions regarding the impact of changing interest rates on these financial instruments.

The Company also incorporates assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates.  These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income.  While actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, this model is an important guidance tool for ALCO.

The following table demonstrates the anticipated impact of a parallel interest rate shift on the Company’s net interest income for the subsequent twelve months:

	Change in Net Interest Income
Change in Interest Rates	June 30,
(in basis points)	2012	2011
+ 300	7.44%	7.22%
+ 200	5.12%	4.64%
+ 100	2.60%	2.06%
- 100	N/A*	N/A*

* Certain short-term interest rates are currently below 1.00%. Therefore, in a scenario where interest rates decline by 100 basis points, short-term interest rates decline to zero, resulting in a non-parallel downward shift. In this interest rate scenario, net interest income is estimated to decline for the subsequent twelve months by 4.54% and 2.09% based upon net interest income for the twelve months ended June 30, 2012 and 2011, respectively.

As measured by the net interest income analysis, the Company reflects an asset sensitive risk profile. As a result, in the event that interest rates increase, the Company would benefit over the next twelve months.

The results of the net interest income analysis fall within the compliance guidelines established by ALCO and the Board of Directors.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information presented in the Liquidity and Interest Rate Risk Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report is incorporated herein by reference.

Item 4.  Controls and Procedures

National Penn’s management is responsible for establishing and maintaining effective disclosure controls and procedures.  Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be so disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  For National Penn, these reports are its annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K.

National Penn’s management is also responsible for establishing and maintaining adequate internal control over financial reporting.  A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

National Penn considers its internal control over financial reporting to be a subpart of its disclosure controls and procedures.  In accordance with SEC regulations, National Penn’s management evaluates National Penn’s disclosure controls and procedures at the end of each quarter, while it assesses the effectiveness of its internal control over financial reporting at the end of each year.

As of June 30, 2012, National Penn’s management, under the supervision of and with the participation of National Penn’s Chief Executive Officer and Chief Financial Officer, evaluated National Penn’s disclosure controls and procedures.  Based on that evaluation, National Penn’s management concluded that National Penn’s disclosure controls and procedures were effective as of June 30, 2012.

There were no changes in National Penn’s internal control over financial reporting during the quarter ended June  30, 2012 that materially affected, or are reasonably likely to materially affect, National Penn’s internal control over financial reporting.  

There are inherent limitations to the effectiveness of any control system.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Further, the design of a control system is limited by available resources, and the benefits of controls must be considered relative to their costs and their impact on National Penn’s business model.  National Penn intends to continue improving and refining its internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

Various actions and proceedings are currently pending to which National Penn or one or more of its subsidiaries is a party. These actions and proceedings arise out of routine operations and, in management’s opinion, are not expected to have a material impact on the Company’s financial position or results of operations.

During the first quarter of 2012, all claims against National Penn were dismissed in the putative class action lawsuit filed by Reynaldo Reyes against multiple defendants in the United States District Court for the Eastern District of Pennsylvania (Case No. 2:10-cv-00345), alleging the defendants were part of a fraudulent telemarketing scheme.

Item 1A.  Risk Factors

      National Penn’s failure to comply with the pervasive and comprehensive federal and state regulatory requirements to which its operations are subject may harm its business and financial results, its reputation, and its share price.

National Penn is supervised by the Federal Reserve, and National Penn Bank is supervised by the Office of the Comptroller of the Currency (the “OCC”). Accordingly, National Penn and its subsidiaries are subject to extensive federal and state legislation, regulation, and supervision that govern almost all aspects of business operations, which puts each of them at risk of being the subject of a formal or informal supervisory enforcement action. The expansive regulatory framework is primarily designed to protect consumers, depositors and the government’s deposit insurance funds, and to accomplish other governmental policy objectives such as combating terrorism.  Areas such as Bank Secrecy Act (“BSA”) compliance (including BSA and related anti-money laundering regulations) and real estate-secured consumer lending (such as Truth-in-Lending regulations, changes in Real Estate Settlement Procedures Act regulations, implementation of licensing and registration requirements for mortgage originators and more recently, heightened regulatory attention to mortgage and foreclosure-related activities and exposures) are being confronted with escalating regulatory expectations and scrutiny.  Failure by National Penn to comply with these requirements could result in adverse action by regulators, which would negatively affect National Penn’s reputation and could adversely affect National Penn’s ability to manage its business, and as a result, could be materially adverse to National Penn’s shareholders.

The impact of recent legislation, proposed legislation, and government programs intended to stabilize the financial markets cannot be predicted at this time, and such legislation is subject to change.  In addition, the failure of the financial markets to stabilize and a continuation or worsening of current financial market conditions could materially and adversely affect National Penn’s business, results of operations, financial condition, access to funding and the trading price of National Penn’s common stock.

New or changed governmental legislation or regulation and accounting industry pronouncements could adversely affect National Penn.

Changes in federal and state legislation and regulation may affect National Penn’s operations.  On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law.  The Dodd-Frank Act has, and will continue to, implement significant changes to the U.S. financial system, including among others:

·   New requirements on banking, derivative and investment activities, including the repeal of the prohibition on the payment of interest on business demand accounts, debit card interchange fee requirements, and the “Volcker Rule,” which restricts the sponsorship, or the acquisition or retention of ownership interests, in private equity funds.

·   The creation of a new Bureau of Consumer Financial Protection with supervisory authority, including the power to conduct examinations and take enforcement actions with respect to financial institutions with assets of $10 billion or more.

·   The creation of a Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk.

·   Provisions affecting corporate governance and executive compensation of all companies subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended.

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·   A provision that broadens the base for FDIC insurance assessments

·   A provision that requires bank regulators to set minimum capital levels for bank holding companies that are as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for holding companies with less than $15 billion in assets as of December 31, 2009.

·   The requirement that National Penn submit its executive compensation program to an advisory (non-binding) shareholder vote.

While a few of the Dodd-Frank Act’s provisions became effective immediately, many have yet to be implemented because the issuance of some rules has been delayed and the deadlines for adoption of other rules have not yet been reached.  In addition to the Dodd-Frank Act, the Federal Reserve Board issued in June 2012 proposed new capital rules consistent with Basel III, which includes the phase-out of Tier 1 capital treatment for trust preferred securities of banking companies of National Penn’s asset size. National Penn is also subject to changes in accounting rules and interpretations.  National Penn cannot predict what effect any presently contemplated or future changes in financial market regulation or accounting rules and interpretations will have on National Penn.  National Penn will have to devote a substantial amount of management and financial resources to ensure compliance with such regulatory changes, including all applicable provisions of the Dodd-Frank Act and its implementing rules as they are finalized and released.  Doing so may increase National Penn’s costs of operations.  In addition, in some cases, National Penn’s ability to comply with regulatory changes may be dependent on third party vendors taking timely action to achieve compliance.  Any such changes may also negatively affect National Penn’s financial performance, the calculation of its capital ratios, its ability to expand its products and services and/or to increase the value of its business and, as a result, could be materially adverse to National Penn’s shareholders.

Deterioration in credit quality, particularly in commercial, construction and real estate loans, has adversely impacted National Penn and may continue to adversely impact National Penn.

In late 2008, National Penn began to experience a downturn in the overall credit performance of its loan portfolio, as well as acceleration in the deterioration of general economic conditions.  National Penn believes that this deterioration, as well as a significant increase in national and regional unemployment levels and decreased sources of liquidity, have been the primary drivers of increased stress being placed on many borrowers and is negatively impacting borrowers’ ability to repay.

Deterioration in the quality of National Penn's credit portfolio could significantly increase non-performing loans, require additional increases in loan loss reserves, elevate charge-off levels and have a material adverse effect on National Penn's capital, financial condition and results of operations.

National Penn's allowance for loan and lease losses may prove inadequate or be negatively affected by credit risk exposure.

National Penn depends on the creditworthiness of its customers. National Penn periodically reviews the adequacy of its allowance for loan losses, considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and non-performing assets, classified assets and other regulatory requirements. As a result of these considerations, National Penn may increase or decrease its allowance for loan losses.  The allowance for loan losses may not be adequate over time to cover credit losses because of unanticipated adverse changes to the economy caused by recession, inflation, unemployment or other factors beyond National Penn's control.  If the credit quality of National Penn's customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for loan losses is not adequate, National Penn's business, financial condition, liquidity, capital and results of operations could be materially and adversely affected.

Because its operations are concentrated in eastern Pennsylvania, National Penn's performance and financial condition may be adversely affected by regional economic conditions and real estate values.

National Penn's loan activities are largely based in 13 counties in eastern Pennsylvania. To a lesser extent, National Penn's deposit base is also generated from this area. As a result, National Penn's consolidated financial performance depends largely upon economic conditions in this region and demand for its products and services. Weak local economic conditions from 2008 through 2012 have caused National Penn to experience an increase in loan delinquencies, an increase in the number of borrowers who defaulted on their loans and a reduction in the value of the collateral securing their loans. A continued downturn in the regional real estate market could further harm National Penn's financial condition and results of operations because of the geographic concentration of loans within this regional area and because a large percentage of its loans are secured by real property. If there is a further decline in real estate values, the collateral for National Penn's loans will provide less security. As a result, National Penn's ability to recover on defaulted loans by selling the underlying real estate will be diminished, and National Penn will be more likely to suffer losses on defaulted loans.

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Declines in asset values may result in impairment charges and adversely impact the value of National Penn's investments, financial performance and capital.

National Penn maintains an investment portfolio that includes, but is not limited to, municipal bonds, bank equity securities, and individual trust preferred securities. The market value of investments may be affected by factors other than the underlying performance of the issuer or composition of the bonds themselves, such as ratings downgrades, adverse changes in business climate and lack of liquidity for resales of certain investment securities. National Penn periodically, but not less than quarterly, evaluates investments and other assets for impairment indicators. National Penn may be required to record additional impairment charges if investments suffer a decline in value that is considered other-than-temporary. If National Penn determines that a significant impairment has occurred, National Penn would be required to charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on results of operations in the period in which the write-off occurs.

National Penn's investment portfolio includes approximately $40 million in capital stock of the Federal Home Loan Bank of Pittsburgh as of June 30, 2012. This stock ownership is required of all Home Loan Bank members as part of the overall Home Loan Bank capitalization. The Home Loan Bank is experiencing a potential capital shortfall, has suspended its quarterly cash dividend, and could possibly require its members, including National Penn, to make additional capital investments in the Home Loan Bank. If the Home Loan Bank were to cease operations, or if National Penn were required to write-off its investment in the Home Loan Bank, National Penn's business, financial condition, liquidity, capital and results of operations may be materially and adversely affected.

National Penn may incur impairments to goodwill.

At June 30, 2012, National Penn had approximately $258 million recorded as goodwill.  National Penn evaluates its goodwill for impairment at least annually during the second quarter of its fiscal year.  Significant negative industry or economic trends, including the lack of recovery in the market price of National Penn's common stock, or reduced estimates of future cash flows or disruptions to National Penn's business could result in impairments to goodwill. National Penn's valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. National Penn operates in competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If National Penn's analysis results in additional impairment to its goodwill, National Penn would be required to record an impairment charge to earnings in its financial statements during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on National Penn's results of operations and stock price.

National Penn’s ability to realize its deferred tax asset may be reduced, which may adversely impact results of operations.

Realization of a deferred tax asset requires National Penn to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. National Penn’s deferred tax asset may be reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax asset. If it is determined that a valuation allowance of its deferred tax asset is necessary, National Penn may incur a charge to earnings and a reduction to regulatory capital for the amount included therein.

Negative conditions in the general economy and financial services industry may limit National Penn's access to additional funding and adversely impact liquidity.

An inability to raise funds through deposits, borrowings and other sources could have a substantial negative effect on National Penn's liquidity. National Penn's access to funding sources in amounts adequate to finance its activities could be impaired by factors that affect it specifically or the financial services industry in general. Factors that could detrimentally impact National Penn's access to liquidity sources include a decrease in the level of its business activity due to a market downturn or adverse regulatory action against it. National Penn's ability to borrow could also be impaired by factors that are nonspecific to National Penn, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole as evidenced by recent turmoil in the domestic and worldwide credit markets.

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National Penn may need to, or may be compelled to, raise additional capital in the future.  However, capital may not be available when needed and on terms favorable to current shareholders.

Federal banking regulators require National Penn and National Penn Bank to maintain adequate levels of capital to support their operations. These capital levels are determined and dictated by law, regulation and banking regulatory agencies.  In addition, capital levels are also determined by National Penn's management and board of directors based on capital levels that they believe are necessary to support National Penn's business operations.  To be "well capitalized" under current bank regulatory guidelines, banking companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%.

If National Penn raises capital through the issuance of additional shares of its common stock or other securities, it would likely dilute the ownership interests of current investors and could dilute the per share book value and earnings per share of its common stock. Please refer to the risk factor below titled "There may be other dilution of National Penn's equity, which may adversely affect the market price of National Penn's common stock." Furthermore, a capital raise through issuance of additional shares may have an adverse impact on National Penn's stock price. New investors may also have rights, preferences and privileges senior to National Penn's current shareholders, which may adversely impact its current shareholders. National Penn's ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of its control, and on its financial performance. Accordingly, National Penn cannot be certain of its ability to raise additional capital on terms and time frames acceptable to it or to raise additional capital at all. If National Penn cannot raise additional capital in sufficient amounts when needed, its ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect National Penn's operations, financial condition and results of operations.

National Penn may be required to pay significantly higher FDIC premiums or special assessments that could adversely affect our earnings.

Bank failures over recent years severely depleted the FDIC’s insurance fund.  In response, the FDIC took various measures in 2009 and early 2010. The Dodd-Frank Act, adopted in July 21, 2010, requires the FDIC to increase reserves against future losses, which will require increased assessments that are to be borne primarily by institutions with assets of greater than $10 billion. Any future increases in assessments or higher periodic fees could adversely affect National Penn’s earnings.

Competition from other financial institutions may adversely affect National Penn's profitability.

National Penn Bank faces substantial competition in originating loans, both commercial and consumer. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of National Penn's competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. Additionally, several of National Penn's banking competitors are financial institutions that received multi-million or multi-billion dollar infusions of capital from the U.S. Treasury or other support from federal programs, which strengthened their balance sheets and enhanced their ability to withstand the uncertainty of the current economic environment. Intensified competition from these institutions and/or economic conditions could reduce National Penn's net income by decreasing the number and size of loans that National Penn Bank originates and the interest rates it may charge on these loans.

In attracting business and consumer deposits, National Penn Bank faces substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of National Penn's competitors enjoy advantages, including greater financial resources (from participation in the U.S. Treasury’s Capital Purchase Program or otherwise), more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than National Penn, which could decrease the deposits that National Penn attracts or require National Penn to increase its rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect National Penn's ability to generate the funds necessary for lending operations. As a result, National Penn may need to seek other sources of funds that may be more expensive to obtain and could increase National Penn's cost of funds.

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National Penn Bank and National Penn's non-banking subsidiaries also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and governmental organizations which may offer more favorable terms. Some of National Penn's non-bank competitors are subject to less extensive regulations than those governing National Penn's banking operations. As a result, such non-bank competitors may have advantages over National Penn Bank and non-banking subsidiaries in providing financial products and services. This competition may reduce or limit National Penn's margins on banking and non-banking services reduce its market share and adversely affect its earnings and financial condition.

Inability to hire or retain key personnel could adversely affect National Penn’s business.

National Penn's subsidiaries face intense competition with various other financial institutions, as well as from non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and government organizations, for the attraction and retention of key personnel, specifically those who generate and maintain National Penn's customer relationships and serve in other key operation positions in the areas of finance, credit administration, loan functions and information technology. These competitors may offer greater compensation and other benefits, which could result in the loss of potential and/or existing key personnel. The inability to hire or retain key personnel may result in the loss of potential and/or existing substantial customer relationships and may adversely affect National Penn's ability to compete effectively.

National Penn's financial performance is directly impacted by interest rates.

Changes in interest rates may reduce profits. The primary source of income for National Penn currently is the differential, or the net interest spread, between the interest earned on loans, securities and other interest-earning assets, and the interest paid on deposits, borrowings and other interest-bearing liabilities. Based upon prevailing interest rates, net interest spreads are affected by the difference between the maturities and re-pricing characteristics of interest-earning assets and interest-bearing liabilities. Interest rates could materially adversely affect National Penn's net interest spread, loan origination volume, asset quality and overall profitability.

If National Penn's information systems are interrupted or sustain a breach in security, those events may negatively affect National Penn's financial performance and reputation.

In conducting its business, National Penn relies heavily on its information systems. Maintaining and protecting those systems is difficult and expensive, as is dealing with any failure, interruption or breach in security of these systems, whether due to acts or omissions by National Penn or by a third party and whether intentional or not. Any such failure, interruption or breach could result in failures or disruptions in National Penn's customer relationship management, general ledger, deposit, loan and other systems.  A breach of National Penn’s information security may result from fraudulent activity committed against National Penn or its clients, resulting in financial loss to National Penn or its clients, or privacy breaches against National Penn’s clients.  Such fraudulent activity may consist of check fraud, electronic fraud, wire fraud, “phishing”, social engineering or other deceptive acts.  The policies, procedures and technical safeguards put in place by National Penn to prevent or limit the effect of any failure, interruption or security breach of its information systems may be insufficient to prevent or remedy the effects of any such occurrences.  The occurrence of any failures, interruptions or security breaches of National Penn's information systems could damage National Penn's reputation, cause National Penn to incur additional expenses, result in losses to National Penn or its clients, result in a loss of customer business and data, affect National Penn’s ability to grow its online services or other businesses, subject National Penn to regulatory sanctions or additional regulatory scrutiny, or expose National Penn to civil litigation and possible financial liability, any of which could have a material adverse effect on National Penn's financial condition and results of operations.

If National Penn's information technology is unable to keep pace with its growth or industry developments, National Penn's financial performance may suffer.

Effective and competitive delivery of National Penn's products and services is increasingly dependent upon information technology resources and processes, both those provided internally as well as those provided through third party vendors, such as firms which license their software solutions to National Penn. In addition to better serving customers, the effective use of technology increases efficiency and enables National Penn to reduce costs. National Penn's future success will depend, in part, upon its ability to address the needs of its customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in its operations. Many of National Penn's competitors have greater resources to invest in technological improvements. Additionally, as technology in the financial services industry changes and evolves, keeping pace becomes increasingly complex and expensive for National Penn.  There can be no assurance that National Penn will be able to effectively implement new technology-driven products and services, which could reduce its ability to compete effectively.

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National Penn's internal control systems are inherently limited.

National Penn's systems of internal controls, disclosure controls and corporate governance policies and procedures are inherently limited.  The inherent limitations of National Penn's system of internal controls include the use of judgment in decision-making that can be faulty; breakdowns can occur because of human error or mistakes; and controls can be circumvented by individual acts or by collusion of two or more people. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and may not be detected, which may have an adverse effect on National Penn's business, results of operations or financial condition. Additionally, any plans of remediation for any identified limitations may be ineffective in improving National Penn's internal controls.

National Penn may grow its business by acquiring other financial services companies, and these acquisitions present a number of risks and uncertainties related both to the acquisition transactions themselves and to the integration of the acquired businesses.

Acquisitions of other financial services companies or assets present risks to National Penn in addition to those presented by the nature of the business acquired. In general, acquisitions may be substantially more expensive to complete than expected (including unanticipated costs incurred in connection with the integration of the acquired company) and the anticipated benefits (including anticipated cost savings and strategic gains) may be significantly more difficult or take longer to achieve than expected. In some cases, acquisitions involve our entry into new businesses or new geographic or other markets, and these situations also present risks in instances where we may be inexperienced in these new areas. As a regulated financial institution, our ability to pursue or complete attractive acquisition opportunities could be negatively impacted by regulatory delays or other regulatory issues. The processes of integrating acquired businesses also pose many additional possible risks which could result in increased costs, liability or other adverse consequences.

There may be other dilution of National Penn's shareholders, which may adversely affect the market price of National Penn's common stock.

National Penn is not restricted from issuing additional common shares, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common shares. National Penn is currently authorized to issue up to 250 million common shares, of which 150 million shares were outstanding as of June 30, 2012, and up to one million shares of preferred stock, none of which are outstanding.  In addition, National Penn’s Board of Directors has made shares available for compensation purposes, including under its Employee Stock Purchase Plan, as well as for compensation including shares available for purchase under National Penn's Dividend Reinvestment and Stock Purchase Plan. The Employee Stock Purchase Plan allows employee shareholders to purchase shares of National Penn common shares at a 10% discount from market value.  In addition, shares are issuable upon the vesting of restricted stock units and/or exercise of stock options that have been, or stock options, stock appreciation rights, stock awards and restricted stock that may be, issued under National Penn's equity compensation plans.  Should National Penn experience strong participation in the Employee Stock Purchase Plan or the Dividend Reinvestment and Stock Purchase Plan, the issuance of the required shares of common stock may significantly dilute the ownership of National Penn's shareholders. National Penn's board of directors has authority, without action or vote of the shareholders, to issue all or part of its authorized but unissued shares. Authorized but unissued shares could be issued on terms or in circumstances that could dilute the interests of other shareholders.

National Penn relies on dividends it receives from its subsidiaries, may further reduce or eliminate cash dividends on its common stock, and is subject to restrictions on its ability to declare or pay cash dividends and repurchase shares of common stock.

As a bank holding company, National Penn's ability to pay dividends depends primarily on its receipt of dividends from its direct and indirect subsidiaries. Its bank subsidiary, National Penn Bank, is National Penn's primary source of dividends. Dividend payments from National Penn Bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by bank regulatory agencies. The ability of National Penn Bank to pay dividends is also subject to profitability, financial condition, regulatory capital requirements, capital expenditures and other cash flow requirements. As of June 30, 2012, National Penn Bank had the ability to pay dividends to National Penn without prior regulatory approval.  However, there is no assurance that National Penn Bank, and/or National Penn's other subsidiaries, will be able to pay dividends in the future.

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In July 2012, National Penn’s Board of Directors approved a third quarter 2012 cash dividend of $0.09 per share.  There can be no assurance that National Penn will pay dividends to its shareholders in the future, or if dividends are paid, that National Penn will increase its dividend to historical levels or otherwise.  National Penn's ability to pay dividends to its shareholders is subject to limitations and guidance issued by the Board of Governors of the Federal Reserve System, or the Federal Reserve.  For example, under Federal Reserve guidance, bank holding companies generally are advised to consult in advance with the Federal Reserve before declaring dividends, and to strongly consider reducing, deferring or eliminating dividends, in certain situations, such as when declaring or paying a dividend that would exceed earnings for the fiscal quarter for which the dividend is being paid, or when declaring or paying a dividend that could result in a material adverse change to the organization's capital structure.  National Penn's failure to pay dividends on its common stock could have a material adverse effect on its business, operations, financial condition, access to funding and the market price of its common stock.

National Penn may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on its financial condition, results of operations and cash flows.

National Penn and its subsidiaries have been and may continue to be involved from time to time in a variety of litigation arising out of its business. An increased number of lawsuits, including class action lawsuits and other consumer driven litigation, have been filed and will likely continue to be filed against financial institutions, which may involve substantial compensatory and/or punitive damages. National Penn believes the risk of litigation generally increases during downturns in the national and local economies.  National Penn's insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm National Penn's reputation and may cause it to incur significant expense.  Should the ultimate judgments or settlements in any litigation exceed National Penn's insurance coverage, they could have a material adverse effect on National Penn’s financial condition, results of operations and cash flows.  In addition, National Penn may not be able to obtain appropriate types or levels of insurance in the future, nor may National Penn be able to obtain adequate replacement policies with acceptable terms, if at all.

A Warning About Forward-Looking Information

This Report, including information incorporated by reference in this Report, contains forward-looking statements about National Penn and its subsidiaries.  In addition, from time to time, National Penn or its representatives may make written or oral forward-looking statements about National Penn and its subsidiaries.  These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “project,” “plan,” “goal,” “potential,” “pro forma,” “seek,” “target,” “intend” or “anticipate” or the negative thereof or comparable terminology.  Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, rationales, objectives, expectations or consequences of various proposed or announced transactions, and statements about the future performance, operations, products and services of National Penn and its subsidiaries.  National Penn cautions its shareholders and other readers not to place undue reliance on such statements.

National Penn’s businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth above, as well as the following:

·   National Penn’s branding and marketing initiatives may not be effective in building name recognition and customer awareness of National Penn’s products and services.

·   National Penn may be unable to differentiate itself from its competitors by a higher level of customer service, as intended by its business strategy and other marketing initiatives.

·   Expansion of National Penn’s product and service offerings may take longer, and may meet with more effective competitive resistance from others already offering such products and services, than expected.  Additionally, new product development by new and existing competitors may be more effective, and take place more quickly, than expected.

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·   National Penn may be unable to attract, motivate, and/or retain key executives and other key personnel due to intense competition for such persons; National Penn’s cost saving strategies, increased governmental oversight or otherwise.

·   Growth and profitability of National Penn’s non-interest income or fee income may be less than expected, particularly as a result of current financial market conditions.

·   General economic or business conditions, either nationally or in the regions in which National Penn does business, may continue to deteriorate or be more prolonged than expected, resulting in, among other things, a deterioration in credit quality, a reduced demand for credit, or a decision by National Penn to reevaluate staffing levels or to divest one or more lines of business.

·   In the current environment of increased investor activism, including hedge fund investment policies and practices, shareholder concerns or actions may require increased management/board attention, efforts and commitments, which could require a shift in focus from business development and operations.

·   Current stresses in the financial markets may inhibit National Penn's ability to access the capital markets or obtain financing on favorable terms.

·   Repurchase obligations with respect to real estate mortgages sold in the secondary market could adversely affect National Penn’s earnings.

·   Changes in consumer spending and savings habits could adversely affect National Penn’s business.

·   Negative publicity with respect to any National Penn product or service, employee, director or other associated individual or entity whether legally justified or not, could adversely affect National Penn’s reputation and business.

·   National Penn may be unable to successfully manage the foregoing and other risks and to achieve its current short-term and long-term business plans and objectives.

All written or oral forward-looking statements attributable to National Penn or any person acting on its behalf made after the date of this Report are expressly qualified in their entirety by the risk factors and cautionary statements contained in this Report. National Penn does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information on repurchases by National Penn of its common stock in each month of the quarter ended June 30, 2012:

Period	Total No. of Shares Purchased		Weighted-average Price Paid per Share		Total No. of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum No. of Shares that may yet be Purchased Under the Plans or Program
May 1, 2012 through May 31, 2012		646,400	$	8.74		646,400		6,853,600
June 1, 2012 through June 30, 2012		1,511,102	$	8.57		1,511,102		5,342,498
1. National Penn's current repurchase program was announced by the Board of Directors on April 2, 2012 and the program is authorized for the remainder of 2012.
2. The number of shares approved for repurchase under National Penn's current stock repurchase program is 7,500,000.
3. The authorization of this repurchase plan supersedes all pre-existing share repurchase plans.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

None.

Item 5.  Other Information

None.

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Item 6.  Exhibits

3.1	Articles of Incorporation, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn’s Report on Form 8-K dated April 24, 2009 as filed on April 24, 2009.)
3.2	Bylaws, as amended and restated, of National Penn Bancshares, Inc. (Incorporated by reference to  Exhibit 3.1 to National Penn’s Report on Form 8-K dated September 28, 2011, as filed on  October 3, 2011.)
31.1	Certification of President and Chief Executive Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of President and Chief Executive Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (Furnished, not filed.)
32.2	Certification of  Chief Financial Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (Furnished, not filed.)

101.INS XBRL	Instance Document **
101.SCH XBRL	Taxonomy Extension Schema Document **
101.CAL XBRL	Taxonomy Extension Calculation Linkbase Document **
101.DEF XBRL	Taxonomy Extension Definition Linkbase Document **
101.LAB XBRL	Taxonomy Extension Label Linkbase Document **
101.PRE XBRL	Taxonomy Extension Presentation Linkbase Document **

** Furnished herewith.

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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)
Date:	August 3, 2012	By:	/s/ Scott V. Fainor
			Name:	Scott V. Fainor
			Title:	President and Chief Executive Officer
Date:	August 3, 2012	By:	/s/ Michael J. Hughes
			Name:	Michael J. Hughes
			Title:	Chief Financial Officer

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