NATIONAL PENN BANCSHARES INC - FORM 10-Q

Attached files

file	filename
EX-10.8 - EXHIBIT 10.7 - NATIONAL PENN BANCSHARES INC	ex10-7.htm
EX-32.2 - EXHIBIT 32.2 - NATIONAL PENN BANCSHARES INC	ex32-2.htm
EX-10.3 - EXHIBIT 10.3 - NATIONAL PENN BANCSHARES INC	ex10-3.htm
EX-31.2 - EXHIBIT 31.2 - NATIONAL PENN BANCSHARES INC	ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - NATIONAL PENN BANCSHARES INC	ex32-1.htm
EX-10.7 - EXHIBIT 10.6 - NATIONAL PENN BANCSHARES INC	ex10-6.htm
EX-10.2 - EXHIBIT 10.2 - NATIONAL PENN BANCSHARES INC	ex10-2.htm
EX-31.1 - EXHIBIT 31.1 - NATIONAL PENN BANCSHARES INC	ex31-1.htm

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 March 31, 2011
		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 xNo 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 o 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 May 6, 2011
Common Stock, no stated par value		151,627,686 shares

TABLE OF CONTENTS

Part I - Financial Information.			Page

	Item 1.	Financial Statements	3

	Item 2.	Management’s Discussion and Analysis of
		Financial Condition and Results of Operation	27

	Item 3.	Quantitative and Qualitative Disclosures About
		Market Risk	45

	Item 4.	Controls and Procedures	45

Part II - Other Information.

	Item 1.	Legal Proceedings	45

	Item 1A.	Risk Factors	45

	Item 2.	Unregistered Sales of Equity Securities
		and Use of Proceeds	53

	Item 3.	Defaults Upon Senior Securities	53

	Item 4.	[Removed and Reserved by the SEC]	N/A

	Item 5.	Other Information	53

	Item 6.	Exhibits	54

Signatures			55

Exhibits			56

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	Unaudited
(dollars in thousands)	March 31,			December 31,
	2011			2010
ASSETS
Cash and due from banks	$	113,031		$	90,283
Interest-earning deposits with banks		392,337			612,099
Total cash and cash equivalents		505,368			702,382

Investment securities available for sale, at fair value		1,622,395			1,632,118
Investment securities held to maturity
(Fair value $533,369 and $537,932 for 2011 and 2010, respectively)		535,488			546,957
Other securities		77,894			80,615
Loans and leases held for sale		5,561			12,785
Loans and leases, net of allowance for loan and lease losses of $142,960 and $150,054
for 2011 and 2010, respectively		5,096,625			5,163,884
Premises and equipment, net		103,771			105,483
Accrued interest receivable		34,264			33,829
Bank owned life insurance		135,373			134,154
Other real estate owned and other repossessed assets		7,653			7,453
Goodwill		258,279			258,279
Other intangible assets, net		20,530			22,217
Unconsolidated investments under the equity method		12,211			11,482
Other assets		127,855			132,982
TOTAL ASSETS	$	8,543,267		$	8,844,620

LIABILITIES
Non-interest bearing deposits	$	834,321		$	808,835
Interest bearing deposits		5,098,695			5,250,338
Total deposits		5,933,016			6,059,173

Securities sold under repurchase agreements		696,256			734,455
Short-term borrowings		6,184			10,000
Federal Home Loan Bank advances		627,716			703,761
Subordinated debentures		142,831			142,780
Accrued interest payable and other liabilities		39,655			57,014
TOTAL LIABILITIES		7,445,658			7,707,183

SHAREHOLDERS' EQUITY
Preferred stock, no stated par value; authorized 1,000,000 shares
Series B, $1,000 liquidation preference, 5% cumulative; 150,000 shares issued and
outstanding as of December 31, 2010		-			148,441
Common stock, no stated par value; authorized 250,000,000 shares, issued and
outstanding: March 31, 2011 - 151,506,511; December 31, 2010 - 136,792,414		1,379,014			1,292,342
Accumulated deficit		(279,817	)		(293,940	)
Accumulated other comprehensive loss		(1,588	)		(9,406	)
TOTAL SHAREHOLDERS' EQUITY		1,097,609			1,137,437

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	8,543,267		$	8,844,620

The accompanying notes are an integral part of these financial statements.

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months
(dollars in thousands, except per share data)	Ended March 31,
	2011			2010
INTEREST INCOME
Loans and leases, including fees	$	69,228		$	78,654
Investment securities
Taxable		11,357			11,098
Tax-exempt		8,493			8,838
Federal funds sold and deposits in banks		280			247
Total interest income		89,358			98,837
INTEREST EXPENSE
Deposits		11,407			18,281
Securities sold under repurchase agreements		2,395			2,874
FHLB advances and subordinated debentures		9,586			10,423
Total interest expense		23,388			31,578
Net interest income		65,970			67,259
Provision for loan and lease losses		10,000			32,500
Net interest income after provision for loan and lease losses		55,970			34,759
NON-INTEREST INCOME
Wealth management		5,924			7,101
Service charges on deposit accounts		4,664			5,341
Insurance commissions and fees		3,221			3,771
Cash management and electronic banking fees		4,371			4,158
Mortgage banking		1,080			1,153
Bank owned life insurance		1,220			1,983
Equity in undistributed net earnings of unconsolidated investments		1,700			163
Gain on pension plan curtailment		-			4,066
Other operating income		2,055			2,733
Net (losses) from fair value changes on subordinated debentures		(51	)		(7,261	)

IMPAIRMENT LOSSES ON INVESTMENT SECURITIES:
Impairment losses on investment securities		-			(634	)
Non credit-related losses on securities not expected to be sold
recognized in other comprehensive loss before tax		-			-
Net impairment losses on investment securities		-			(634	)
Total non-interest income		24,184			22,574

NON-INTEREST EXPENSE
Salaries, wages and employee benefits		31,449			29,429
Net premises and equipment		7,272			7,998
FDIC insurance		3,457			4,097
Other operating expenses		14,659			16,133
Total non-interest expense		56,837			57,657
Income (loss) before income taxes		23,317			(324	)
Income tax expense (benefit)		4,537			(4,250	)
NET INCOME		18,780			3,926
Preferred dividends and accretion of preferred discount		(1,691	)		(2,005	)
Accelerated accretion from redemption of preferred stock		(1,452	)		-
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	15,637		$	1,921
PER SHARE OF COMMON STOCK
Basic earnings available to common shareholders	$	0.10		$	0.02
Diluted earnings available to common shareholders	$	0.10		$	0.02
Dividends paid in cash	$	0.01		$	0.01

The accompanying notes are an integral part of these financial statements.

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

											Accumulated
(dollars in thousands, except share data)					Series B						Other
	Common				Preferred			Accumulated			Comprehensive
	Shares		Value		Stock			Deficit			Loss			Total
Balance at December 31, 2010		136,792,414	$	1,292,342	$	148,441		$	(293,940	)	$	(9,406	)	$	1,137,437
Comprehensive income:
Net Income									18,780						18,780
Other comprehensive income, net of taxes												7,818			7,818
Total comprehensive income															26,598

Cash dividends declared common									(1,515	)					(1,515	)
Cash dividends declared preferred									(1,583	)					(1,583	)
Shares issued under share-based plans,
net of excess tax benefits		383,518		2,129											2,129
Shares issued in private placement		14,330,579		84,543											84,543
Amortization of preferred discount						1,559			(1,559	)					-
Repayment of Series B Preferred Stock						(150,000	)								(150,000	)

Balance at March 31, 2011		151,506,511	$	1,379,014	$	-		$	(279,817	)	$	(1,588	)	$	1,097,609

The accompanying notes are an integral part of these financial statements.

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)	Three Months Ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	18,780		$	3,926
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		10,000			32,500
Share-based compensation expense		1,528			296
Depreciation and amortization		4,179			4,041
Amortization (accretion) of premiums and discounts on investment securities, net		622			(44	)
Impairment losses on investment securities		-			634
Gain on equity-method investments, net of distributions		(729	)		(21	)
Loans originated for resale		(33,951	)		(43,161	)
Proceeds from sale of loans		41,906			55,456
Gain on sale of loans, net		(731	)		(828	)
Loss on sale of other real estate owned, net		-			401
Increase in fair value of subordinated debtentures		51			7,261
Bank-owned life insurance policy income		(1,220	)		(1,983	)
Gain on pension plan curtailment		-			(4,066	)
Changes in assets and liabilities:
Increase in accrued interest receivable		(435	)		(610	)
Decrease in accrued interest payable		(3,890	)		(3,488	)
Decrease (increase) in other assets		3,639			(4,633	)
(Decrease) increase in other liabilities		(12,014	)		2,901
Net cash provided by operating activities		27,735			48,582
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities held to maturity		11,295			10,458
Proceeds from sales of investment securities available for sale		-			460
Proceeds from maturities and repayments of investment securities available for sale		81,222			63,291
Purchase of investment securities available for sale		(60,716	)		(136,180	)
Proceeds from sale of loans previously held for investment		2,007			2,814
Net decrease in loans and leases		54,800			68,577
Purchases of premises and equipment		(546	)		(1,429	)
Claims from bank owned life insurance		-			1,722
Proceeds from the sale of other real estate owned		65			2,923
Net cash provided by investing activities		88,127			12,636
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in core deposits		(18,709	)		(54,521	)
Net decrease in certificates of deposit		(107,448	)		(272,967	)
Net (decrease) increase in securities sold under repurchase agreements		(38,199	)		21,505
Net (decrease) increase in short-term borrowings		(3,816	)		265
Repayments of FHLB advances		(75,812	)		(12,642	)
Proceeds from shares issued under share-based plans		678			101
Excess tax expense on share-based plans		(351	)		(20	)
Issuance of shares under dividend reinvestment plan		274			362
Issuance of common stock in private placement		84,543			-
Repayment of Series B Preferred stock		(150,000	)		-
Cash dividends, common		(1,515	)		(1,260	)
Cash dividends, preferred		(2,521	)		(1,875	)
Net cash used in financing activities		(312,876	)		(321,052	)
Net decrease in cash and cash equivalents		(197,014	)		(259,834	)
Cash and cash equivalents at beginning of year		702,382			603,257
Cash and cash equivalents at end of period	$	505,368		$	343,423

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

SUPPLEMENTAL CASH FLOW DISCLOSURES

The Company considers cash and due from banks, interest bearing deposits in banks and federal funds sold as cash equivalents for the purposes of reporting cash flows. Cash paid for interest and taxes is as follows:

	Three Months Ended
(dollars in thousands)	March 31,
	2011		2010
Interest	$	27,278	$	35,066
Taxes		8,604		-

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:

	Three Months Ended
(dollars in thousands)	March 31,
	2011		2010
Transfers of loans to other real estate¹	$	452	$	1,479
Other than temporary impairment on investment securities		-		634
Dividends accrued not paid on Series B Preferred Stock		-		938

¹$0.3 million and $3.3 million of OREO was disposed of during the periods ending March 31, 2011 and 2010, 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, 2010, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (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, 2011.

The consolidated statement of operations includes Christiana Bank & Trust Company’s (“Christiana”), a Delaware state-chartered bank and trust company, results of operations until its divestiture on December 3, 2010, for the period it was owned by National Penn.

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.

2. EARNINGS PER SHARE

(dollars in thousands, except per share data )	Three months ended March 31,
	2011		2010
Income for EPS:
Net income available to common shareholders	$	15,637	$	1,921

Calculation of shares:
Weighted average basic shares		150,461,063		125,875,061
Dilutive effect of:
Share-based compensation		304,820		164,051
Warrants		-		-
Weighted average fully diluted shares		150,765,883		126,039,112

Earnings per common share:
Basic	$	0.10	$	0.02
Diluted	$	0.10	$	0.02

Certain stock options and warrants were not included in the computation of diluted earnings per share because the option exercise and strike prices were greater than the average market price for the period. The three months ended March 31, 2011, excluded 3.4 million stock options ranging from $5.85 to $21.49 per share and 8,951 restricted shares and units with an average grant price of $17.92 because they were anti-dilutive. The three months ended March 31, 2010, excluded 4.6 million stock options with exercise prices ranging from $6.88 to $21.49 per share and 9,000 restricted shares and units with an average grant price of $6.36 because they were anti-dilutive.

3. INVESTMENT SECURITIES

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

	March 31, 2011
			Gross		Gross
(dollars in thousands)	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
Available for Sale
U.S. Treasury securities	$	19,965	$	11	$	-		$	19,976
U.S. Government agency securities		4,995		94		-			5,089
State and municipal bonds		339,893		5,476		(12,800	)		332,569
Agency mortgage-backed securities/
collateralized mortgage obligations		1,205,281		27,970		(7,284	)		1,225,967
Non-agency collateralized mortgage obligations		20,394		274		(185	)		20,483
Corporate securities and other		14,187		173		(605	)		13,755
Marketable equity securities		3,759		801		(4	)		4,556
Total	$	1,608,474	$	34,799	$	(20,878	)	$	1,622,395

Held to Maturity
State and municipal bonds	$	427,353	$	3,355	$	(7,707	)	$	423,001
Agency mortgage-backed securities/
collateralized mortgage obligations		106,975		2,197		-			109,172
Non-agency collateralized mortgage obligations		1,160		36		-			1,196
Total	$	535,488	$	5,588	$	(7,707	)	$	533,369

	December 31, 2010
			Gross		Gross
(dollars in thousands)	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
Available for Sale
U.S. Treasury securities	$	19,952	$	-	$	(3	)	$	19,949
U.S. Government agency securities		4,995		99		-			5,094
State and municipal bonds		345,310		4,880		(16,836	)		333,354
Agency mortgage-backed securities/
collateralized mortgage obligations		1,216,153		26,854		(11,648	)		1,231,359
Non-agency collateralized mortgage obligations		25,071		280		(277	)		25,074
Corporate securities and other		14,189		90		(1,245	)		13,034
Marketable equity securities		3,759		506		(11	)		4,254
Total	$	1,629,429	$	32,709	$	(30,020	)	$	1,632,118

Held to Maturity
State and municipal bonds	$	427,720	$	1,281	$	(12,593	)	$	416,408
Agency mortgage-backed securities/
collateralized mortgage obligations		117,756		2,241		-			119,997
Non-agency collateralized mortgage obligations		1,481		46		-			1,527
Total	$	546,957	$	3,568	$	(12,593	)	$	537,932

During the three months ended March 31, 2011 and 2010 the Company did not sell investment securities.

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at March 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		627	$	319,378	$	(9,406	)	$	69,874	$	(11,101	)	$	389,252	$	(20,507	)
Agency mortgage-backed securities/ collateralized mortgage obligations		61		339,601		(7,270	)		287		(14	)		339,888		(7,284	)
Non-agency collateralized mortgage obligations		5		-		-			3,662		(185	)		3,662		(185	)
Corporate securities and other		10		1,042		(20	)		5,450		(585	)		6,492		(605	)
Total debt securities		703		660,021		(16,696	)		79,273		(11,885	)		739,294		(28,581	)
Marketable equity securities		2		129		(4	)		-		-			129		(4	)
Total		705	$	660,150	$	(16,700	)	$	79,273	$	(11,885	)	$	739,423	$	(28,585	)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2010:

			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
U. S. Treasury securities		1	$	19,949	$	(3	)	$	-	$	-		$	19,949	$	(3	)
State and municipal bonds		907		474,765		(17,811	)		67,841		(11,618	)		542,606		(29,429	)
Agency mortgage-backed securities/ collateralized mortgage obligations		66		382,356		(11,647	)		2,016		(1	)		384,372		(11,648	)
Non-agency collateralized mortgage obligations		7		3,363		(58	)		4,195		(219	)		7,558		(277	)
Corporate securities and other		11		1,854		(151	)		5,471		(1,094	)		7,325		(1,245	)
Total debt securities		992		882,287		(29,670	)		79,523		(12,932	)		961,810		(42,602	)
Marketable equity securities		2		50		(11	)		-		-			50		(11	)
Total		994	$	882,337	$	(29,681	)	$	79,523	$	(12,932	)	$	961,860	$	(42,613	)

The amortized cost and fair value of investment securities, by contractual maturity, at March 31, 2011 are shown below. Expected maturities will differ from contractual maturities because investment securities may be called or prepaid 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	$	36,166	$	36,280	$	14,808	$	14,887
Due after one through five years		43,466		45,142		-		-
Due after five through ten years		199,848		208,830		29,512		29,949
Due after ten years		1,325,235		1,327,587		491,168		488,533
Marketable equity securities		3,759		4,556		-		-
	$	1,608,474	$	1,622,395	$	535,488	$	533,369

Investment securities were pledged as collateral for the following:

(dollars in thousands)	March 31,		December 31,
	2011		2010
Deposits	$	744,190	$	893,532
Repurchase agreements		775,548		835,640
Other		46,519		126,091
	$	1,566,257	$	1,855,263

Evaluation of Impairment of Securities

As of March 31, 2011 and December 31, 2010, there were no amounts recorded in OCI for the non credit-related component of OTTI.

The majority of the investment portfolio is comprised of U.S. Treasury, Government Agency, state and municipal securities, 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 Company primarily owns general obligation bonds and essential purpose revenue bonds), the underlying rating of the bond issuer, and the presence of credit enhancements (i.e. state guarantees, municipal bond insurance, collateral requirements, etc.). At March 31, 2011, approximately 70% of the Company’s municipal investment securities were general obligations of various municipalities. 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 these investments to be other-than-temporarily impaired.

Other securities on the Company’s consolidated balance sheet totaled $77.9 million and $80.6 million as of March 31, 2011 and December 31, 2010, 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 cost since fair value is not readily determinable. The Company evaluates these securities 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 quarter of 2011, the FHLB of Pittsburgh repurchased $2.7 million of its capital stock from the Company at par.

4. LOANS

The following tables represent loan and lease classifications as of March 31, 2011 and December 31, 2010:

	Performing
March 31, 2011	Pass Rated Loans		Special Mention Loans		Classified Loans		Non-Performing Loans		Total Loans
(dollars in thousands)
Commercial and industrial loans and leases	$	2,039,772	$	94,899	$	242,098	$	34,162	$	2,410,931

CRE - permanent		688,965		55,866		59,533		15,511		819,875
CRE - construction		105,344		36,752		46,816		18,012		206,924
Commercial real estate		794,309		92,618		106,349		33,523		1,026,799

Residential mortgages		740,543		-		-		6,385		746,928
Home equity lines and loans		738,498		-		33		2,254		740,785
All other consumer		301,856		4,376		10,642		2,829		319,703
Consumer loans		1,780,897		4,376		10,675		11,468		1,807,416

Total loans and leases	$	4,614,978	$	191,893	$	359,122	$	79,153	$	5,245,146


	Performing
December 31, 2010	Pass Rated Loans		Special Mention Loans		Classified Loans		Non-Performing Loans		Total Loans
(dollars in thousands)
Commercial and industrial loans and leases	$	2,032,157	$	101,667	$	266,179	$	34,957	$	2,434,960

CRE - permanent		649,122		48,213		53,832		17,821		768,988
CRE - construction		159,410		36,045		66,209		19,392		281,056
Commercial real estate		808,532		84,258		120,041		37,213		1,050,044

Residential mortgages		759,605		-		-		5,809		765,414
Home equity lines and loans		742,177		-		33		2,914		745,124
All other consumer		315,213		3,778		9,219		2,971		331,181
Consumer loans		1,816,995		3,778		9,252		11,694		1,841,719

Total loans and leases	$	4,657,684	$	189,703	$	395,472	$	83,864	$	5,326,723

The following tables represent the details for past-due loans and leases as of March 31, 2011 and December 31, 2010:

March 31, 2011	30-59 Days Past Due and Still Accruing			60-89 Days Past Due and Still Accruing			90 Days or More Past Due and Still Accruing (1)			Total Past Due and Still Accruing			Accruing Current Balances		Non-Accrual Balances			Total Loan Balances
(dollars in thousands)
Commercial and industrial loans and leases	$	4,381		$	2,103		$	40		$	6,524		$	2,370,285	$	34,122		$	2,410,931

CRE - permanent		3,628			744			104			4,476			799,992		15,407			819,875
CRE - construction		827			-			-			827			188,085		18,012			206,924
Commercial real estate		4,455			744			104			5,303			988,077		33,419			1,026,799

Residential mortgages		4,191			490			731			5,412			736,213		5,303			746,928
Home equity lines and loans		3,156			653			289			4,098			734,722		1,965			740,785
All other consumer		2,081			905			1,019			4,005			313,888		1,810			319,703
Consumer loans		9,428			2,048			2,039			13,515			1,784,823		9,078			1,807,416

Total loans and leases	$	18,264		$	4,895		$	2,183		$	25,342		$	5,143,185	$	76,619		$	5,245,146

Percent of total loans and leases		0.35	%		0.09	%		0.04	%		0.48	%				1.46	%

December 31, 2010	30-59 Days Past Due and Still Accruing			60-89 Days Past Due and Still Accruing			90 Days or More Past Due and Still Accruing (1)			Total Past Due and Still Accruing			Accruing Current Balances		Non-Accrual Balances			Total Loan Balances
(dollars in thousands)
Commercial and industrial loans and leases	$	2,541		$	2,740		$	88		$	5,369		$	2,394,722	$	34,869		$	2,434,960

CRE - permanent		2,176			1,310			-			3,486			747,681		17,821			768,988
CRE - construction		1,061			2,500			-			3,561			258,103		19,392			281,056
Commercial real estate		3,237			3,810			-			7,047			1,005,784		37,213			1,050,044

Residential mortgages		5,240			1,487			7			6,734			752,878		5,802			765,414
Home equity lines and loans		3,688			745			781			5,214			737,777		2,133			745,124
All other consumer		2,185			380			877			3,442			325,645		2,094			331,181
Consumer loans		11,113			2,612			1,665			15,390			1,816,300		10,029			1,841,719

Total loans and leases	$	16,891		$	9,162		$	1,753		$	27,806		$	5,216,806	$	82,111		$	5,326,723

Percent of total loans and leases		0.32	%		0.17	%		0.03	%		0.52	%				1.54	%

(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.

Additional details for changes in the allowance for loan and lease losses by loan portfolio as of March 31, 2011 and March 31, 2010:

March 31, 2011	Commercial 1			Commercial Real Estate 2			Consumer 3			Unallocated			Total
(dollars in thousands)
Allowance for loan and lease losses:
Beginning balance	$	69,655		$	51,177		$	20,897		$	8,325		$	150,054
Charge-offs		(9,569	)		(5,313	)		(3,871	)		-			(18,753	)
Recoveries		250			494			915			-			1,659
Provision		5,455			2,553			2,177			(185	)		10,000
Divested reserves		-			-			-			-			-
Ending balance	$	65,791		$	48,911		$	20,118		$	8,140		$	142,960

Ending balance: individually evaluated for impairment	$	3,147		$	1,453		$	73		$	-		$	4,673

Ending balance: collectively evaluated for impairment	$	62,644		$	47,458		$	20,045		$	8,140		$	138,287

Total loans and leases	$	2,410,931		$	1,026,799		$	1,807,416		$	-		$	5,245,146

Ending balance: individually evaluated for impairment	$	34,122		$	33,419		$	9,429		$	-		$	76,970

Ending balance: collectively evaluated for impairment	$	2,376,809		$	993,380		$	1,797,987		$	-		$	5,168,176

March 31, 2010	Commercial 1			Commercial Real Estate 2			Consumer 3			Unallocated		Total
(dollars in thousands)
Allowance for loan and lease losses:
Beginning balance	$	73,031		$	55,652		$	13,828		$	3,760	$	146,271
Charge-offs		(3,135	)		(19,990	)		(4,357	)		-		(27,482	)
Recoveries		874			1,204			483			-		2,561
Provision		9,527			14,960			5,203			2,810		32,500
Divested reserves		-			-			-			-		-
Ending balance	$	80,297		$	51,826		$	15,157		$	6,570	$	153,850

Ending balance: individually evaluated for impairment	$	9,273		$	3,240		$	1,969		$	-	$	14,482

Ending balance: collectively evaluated for impairment	$	71,024		$	48,586		$	13,188		$	6,570	$	139,368

Total loans and leases	$	2,728,143		$	1,230,644		$	1,956,432		$	-	$	5,915,219

Ending balance: individually evaluated for impairment	$	38,675		$	53,983		$	25,059		$	-	$	117,717

Ending balance: collectively evaluated for impairment	$	2,689,468		$	1,176,661		$	1,931,373		$	-	$	5,797,502

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. All Other 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.

Additional disclosures for impaired loans and lease losses as of March 31, 2011 and December 31, 2010 are as follows:

March 31, 2011	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
(dollars in thousands)
Commercial and industrial loans and leases	$	12,337	$	21,785	$	34,122	$	8,497	$	42,619	$	3,147	$	34,648

CRE - permanent		2,468		12,939		15,407		10,413		25,820		70		17,668
CRE - construction		2,102		15,910		18,012		20,145		38,157		1,383		18,869
Commercial real estate		4,570		28,849		33,419		30,558		63,977		1,453		36,537

Residential mortgages		383		5,271		5,654		648		6,302		73		6,626
Home equity lines and loans		-		1,965		1,965		322		2,287		-		2,649
All other consumer		-		1,810		1,810		-		1,810		-		1,507
Consumer loans		383		9,046		9,429		970		10,399		73		10,782

Total loans and leases	$	17,290	$	59,680	$	76,970	$	40,025	$	116,995	$	4,673	$	81,967



December 31, 2010	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
(dollars in thousands)
Commercial and industrial loans and leases	$	17,800	$	17,069	$	34,869	$	3,729	$	38,598	$	6,473	$	33,970

CRE - permanent		9,656		8,165		17,821		8,725		26,546		2,087		15,419
CRE - construction		-		19,392		19,392		20,163		39,555		-		35,302
Commercial real estate		9,656		27,557		37,213		28,888		66,101		2,087		50,721

Residential mortgages		-		5,802		5,802		648		6,450		-		13,965
Home equity lines and loans		-		2,133		2,133		390		2,523		-		2,789
All other consumer		-		2,094		2,094		4,182		6,276		-		3,058
Consumer loans		-		10,029		10,029		5,220		15,249		-		19,812

Total loans and leases	$	27,456	$	54,655	$	82,111	$	37,837	$	119,948	$	8,560	$	104,503

Impaired and restructured loans:

(dollars in thousands)	March 31, 2011				December 31, 2010
	Balance		Allowance		Balance		Allowance
Impaired loans without a specific reserve	$	59,680	$	-	$	54,655	$	-
Impaired loans with a specific reserve		16,939		4,600		27,456		8,560
Restructured loans (1)		351		73		-		-
Total impaired and restructured loans	$	76,970	$	4,673	$	82,111	$	8,560

Undrawn commitments to lend on restructured loans	$	-			$	-

(1) Restructed loans are residential mortgages of customers who were experiencing financial difficulty and were in jeopardy of losing their homes to foreclosure.

	For the three months
(dollars in thousands)	ended March 31,
	2011			2010
Gross interest due on impaired loans	$	2,148		$	2,124
Interest received on impaired loans		(510	)		(79	)
Net impact of interest income on impaired loans	$	1,638		$	2,045

Average recorded investment in impaired loans	$	81,967		$	125,055

5. DEPOSITS

(dollars in thousands)	March 31, 2011					December 31, 2010
	Balance		Cost			Balance		Cost
Savings	$	457,395		0.19	%	$	438,879		0.20	%
NOW accounts		1,128,644		0.22	%		1,181,850		0.23	%
Money market accounts		1,655,115		0.59	%		1,664,620		0.60	%
CDs $100 or less		1,433,808		1.78	%		1,378,060		1.89	%
CDs greater than $100		423,733		1.70	%		586,929		1.75	%
Total interest bearing deposits		5,098,695		0.90	%		5,250,338		0.97	%
Total non-interest bearing deposits		834,321		-			808,835		-
Total deposits	$	5,933,016		0.78	%	$	6,059,173		0.84	%

At March 31, 2011 maturities of certificates of deposits were as follows:

(dollars in thousands)
2011	$	1,107,346
2012		423,796
2013		91,890
2014		145,753
2015		60,659
Thereafter		28,097
	$	1,857,541

6. BORROWINGS

(dollars in thousands)	March 31, 2011					December 31, 2010
	Balance		Effective rate			Balance		Effective rate
Securities sold under repurchase agreements	$	696,256		1.37	%	$	734,455		1.48	%
Short-term borrowings		6,184		-			10,000		-
Federal Home Loan Bank advances		627,716		4.49	%		703,761		4.35	%
Subordinated debentures accounted for at fair value		65,510		7.85	%		65,459		7.85	%
Subordinated debentures accounted for at amortized cost¹		77,321		5.71	%		77,321		5.73	%
Total borrowings and other debt obligations	$	1,472,987		3.21	%	$	1,590,996		3.22	%

¹The effective rate includes the impact of the interest rate swaps.

7. EQUITY

Common Stock

On January 7, 2011, Warburg Pincus LLC invested $86.7 million in National Penn Bancshares, Inc. common stock, with the purchase of 14,330,579 newly issued common shares. This transaction completed Warburg Pincus’ $150 million investment in the Company, and as a result, Warburg Pincus owns 16.4% of the Company’s common stock, at March 31, 2011.

Series B Preferred Stock

On March 16, 2011, National Penn redeemed the entire amount of Series B Preferred Stock issued to the U.S. Treasury under the TARP Capital Purchase Program. The Company paid $150.6 million, including approximately $0.6 million of accrued and unpaid dividends. The preferred shares had a carrying value of $148.4 million at December 31, 2010, net of unaccreted discount. National Penn accelerated the accretion of the discount in the first quarter, reducing net income available to common shareholders by $1.5 million or $0.01 per share. On April 13, 2011, National Penn repurchased the remaining 735,294 outstanding warrants held by the U.S. Treasury that were issued in conjunction with the preferred shares for $1.0 million.

8. ACCUMULATED OTHER COMPREHENSIVE INCOME

Total comprehensive income includes net income and certain other items which affect equity during the three months ended March 31, 2011:

	Three months ended March 31, 2011
	Before				Net of
(dollars in thousands)	Tax		Tax		Tax
	Amount		Expense		Amount

Net income	$	23,317	$	4,537	$	18,780

Unrealized gains on investment securities		11,232		3,931		7,301
Unrealized gain on cash flow deriviatives		517		-		517
Other comprehensive income		11,749		3,931		7,818

Total comprehensive income	$	35,066	$	8,468	$	26,598

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

(dollars in thousands)	March 31,			December 31,
	2011			2010
Unrealized gains on investment securities	$	9,049		$	1,748
Unrealized (losses) on cash flow hedges		(1,288	)		(1,805	)
Pension		(9,349	)		(9,349	)
Total accumulated other comprehensive loss	$	(1,588	)	$	(9,406	)

9. CONTINGENCIES

On January 26, 2010, Plaintiff Reynaldo Reyes filed a putative class action lawsuit pursuant to the RICO Act, 18 U.S.C. § 1961, et seq., in the United States District Court for the Eastern District of Pennsylvania against multiple defendants, including National Penn Bank (Case No. 2:10-cv-00345). The complaint essentially alleges that the defendants were part of a fraudulent telemarketing scheme whereby funds were unlawfully withdrawn from Plaintiff's bank account by telemarketers, deposited into the telemarketers' accounts with the bank defendants (including National Penn Bank) via payment processors, and then transferred to offshore accounts. Plaintiff seeks to recover damages on behalf of himself and a purported nationwide class. National Penn plans on vigorously defending this lawsuit. Each of the defendants filed a motion to dismiss in response to the complaint. In late March 2011, the Court dismissed all defendants' motions without prejudice and ordered the Plaintiff to file a "RICO Statement" and set forth in detail the factual basis for Plaintiff's claims. Plaintiff's RICO Statement was filed in April 2011. National Penn expects that it will renew its motion to dismiss in May 2011 and that a decision will be issued in the second or third quarter of 2011. If National Penn's renewed motion to dismiss is denied, the parties will take discovery and the Court will establish a schedule for a class certification motion and related briefing. To date, a class has not been certified.

10. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

Contract or notional amounts are as follows:

	For the period ending
(dollars in thousands)	March 31,		December 31,
	2011		2010
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,410,737	$	1,497,983
Commitments to fund mortgages held for sale		5,561		12,785
Commitments to sell mortgages to investors		13,061		17,145
Letters of credit		150,504		157,096

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 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.

Shown below is a summary of the derivatives designated as accounting hedges at March 31, 2011 and December 31, 2010:

(dollars in thousands)		Notional						Receive			Pay			Life
	Positions	Amount		Asset		Liability		Rate			Rate			(Years)
March 31, 2011
Pay fixed - receive floating interest rate swaps	3	$	75,000	$	-	$	1,288		0.30	%		3.26	%		0.58
Total derivatives used in hedging relationships		$	75,000	$	-	$	1,288		0.30	%		3.26	%		0.58

December 31, 2010
Pay fixed - receive floating interest rate swaps	3	$	75,000	$	-	$	1,805		0.29	%		3.26	%		0.83
Total derivatives used in hedging relationships		$	75,000	$	-	$	1,805		0.29	%		3.26	%		0.83

In October 2008, the Company entered into interest rate swap contracts to hedge the cash flows of $75.0 million of subordinated debentures. The interest rate swap transactions involved the exchange of the Company’s floating rate interest payments on the subordinated debentures for fixed rate interest payments without the exchange of the underlying principal amount. The term of these swaps were for a period of three years. These swaps were designated, and qualify, for hedge accounting. Cash collateral pledged for these swaps totaled $1.8 million at March 31, 2011.

Summary information regarding interest rate swap derivative positions which were not designated in hedging relationships at March 31, 2011 and December 31, 2010 is as follows:

(dollars in thousands)		Notional						Receive			Pay			Life
	Positions	Amount		Asset		Liability		Rate			Rate			(Years)
March 31, 2011
Receive fixed - pay floating interest rate swaps	81	$	197,002	$	17,900	$	-		6.11	%		1.85	%		4.79
Pay fixed - receive floating interest rate swaps	81		197,002		-		17,900		1.85	%		6.11	%		4.79
Net interest rate swaps		$	394,004	$	17,900	$	17,900		3.98	%		3.98	%		4.79

December 31, 2010
Receive fixed - pay floating interest rate swaps	82	$	202,643	$	20,384	$	-		6.10	%		1.90	%		4.95
Pay fixed - receive floating interest rate swaps	82		202,643		-		20,384		1.90	%		6.10	%		4.95
Net interest rate swaps		$	405,286	$	20,384	$	20,384		4.00	%		4.00	%		4.95

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. These interest rate 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 financial statement line items were impacted by the Company’s derivative activity as of and for the three months ended March 31, 2011:

	Balance Sheet Effect at	Income Statement Effect For The Three Months Ended
Derivative Activity	March 31, 2011	March 31, 2011

Cash flow hedges:
Pay fixed - receive floating	Increase to other liabilities of $1.3 million	The ineffective portion is zero.
interest rate swaps	and a corresponding decrease to OCI.	Increase to interest expense of $0.6 million for net
		settlements.

Interest rate swaps:	Increase to other assets/liabilities	No net effect on other operating income from
	of $17.9 million.	offsetting $2.5 million change.

Other derivatives:
Interest rate locks	Increase to other assets of $114,000.	Increase to mortgage banking income of $54,000.

Forward sale commitments	Increase to other liabilities of $138,000.	Decrease to mortgage banking income of $85,000.

The following financial statement line items were impacted by the Company's derivative activity as of December 31, 2010 and the three months ended March 31, 2010:

	Balance Sheet Effect at	Income Statement Effect For The Three Months Ended
Derivative Activity	December 31, 2010	March 31, 2010

Cash flow hedges:
Pay fixed - receive floating	Increase to other liabilities of $1.8 million	The ineffective portion is zero.
interest rate swaps	and a corresponding decrease to OCI.	Increase to interest expense of $0.6 million for net
		settlements.

Interest rate swaps:	Increase to other assets/liabilities	No net effect on other operating income from
	of $20.4 million.	$1.7 million change.

Other derivatives:
Interest rate locks	Increase to other assets of $60,000.	Increase to mortgage banking income of $109,000.

Forward sale commitments	Increase to other liabilities of $53,000.	Decrease to mortgage banking income of $82,000.

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 are 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.
·	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:

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 market 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, that are otherwise not permitted to be accounted for at fair value under other accounting standards. 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. The fair value as of March 31, 2011 was $65.5 million. Non-interest income included a loss of $51,000 and $7.3 million for the change in fair value of the subordinated debenture for the three months ended March 31, 2011 and 2010, 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 in an active market on the final day of each month.

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair values on a recurring basis as of March 31, 2011 and December 31, 2010 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
	Total		Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
	March 31, 2011		(Level 1)		(Level 2)		(Level 3)
(dollars in thousands)
Assets
U.S. Treasury securities	$	19,976	$	19,976	$	-	$	-
U.S. Government agency securities		5,089		-		5,089		-
State and municipal bonds		332,569		-		332,569		-
Agency mortgage-backed securities/
collateralized mortgage obligations		1,225,967		-		1,225,967		-
Non-agency collateralized mortgage
obligations		20,483		-		20,483		-
Corporate securities and other		13,755		2,193		9,562		2,000
Marketable equity securities		4,556		3,448		-		1,108
Investment securities, available for sale		1,622,395		25,617		1,593,670		3,108

Interest rate lock		114				114
Interest rate swap agreements		17,900				17,900

Liabilities
Subordinated debentures	$	65,510	$	65,510	$	-	$	-
Forward sale commitments		138		-		138		-
Interest rate swap agreements		19,188		-		19,188		-

	Total Fair Value at December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(dollars in thousands)
Assets
U.S. Treasury securities	$	19,949	$	19,949	$	-	$	-
U.S. Government agency securities		5,094		-		5,094		-
State and municipal bonds		333,354		-		333,354		-
Agency mortgage-backed securities/
collateralized mortgage obligations		1,231,359		-		1,231,359		-
Non-agency collateralized mortgage
obligations		25,074		-		25,074		-
Corporate securities and other		13,034		2,130		9,904		1,000
Marketable equity securities		4,254		3,140		-		1,114
Investment securities, available-for-sale		1,632,118		25,219		1,604,785		2,114

Interest rate locks		60		-		60		-
Interest rate swap agreements		20,384		-		20,384		-

Liabilities
Subordinated debentures	$	65,459	$	65,459	$	-	$	-
Forward sale commitments		53		-		53		-
Interest rate swap agreements		22,189		-		22,189		-

The following table presents activity for assets measured at fair value on a recurring basis for the three months ended March 31, 2011:

(dollars in thousands)
Level 1	Beginning Balance January 1, 2011		Gains/(losses) included in earnings		Gains/(losses) included in other comprehensive income			Purchases		Maturities/ Calls/Paydowns			Accretion/ Amortization			Transfers			Ending Balance March 31, 2011
U.S. Treasury securities	$	19,949	$	-	$	14		$	-	$	-		$	13		$	-		$	19,976
Corporate securities and other		2,130		-		64			-		-			(1	)		-			2,193
Marketable equity securities		3,140		-		308			-		-			-			-			3,448
Total level 1	$	25,219	$	-	$	386		$	-	$	-		$	12		$	-		$	25,617

Level 2

U.S. Government agencies	$	5,094	$	-	$	(6	)	$	-	$	-		$	1		$	-		$	5,089
State and municipal bonds		333,354		-		4,632			-		(6,290	)		873			-			332,569
Agency mortgage-backed securities/ collateralized mortgage obligations		1,231,359				5,481			60,716		(70,241	)		(1,348	)		-			1,225,967
Non-agency collateralized mortgage obligations		25,074		-		86			-		(4,691	)		14			-			20,483
Corporate securities and other		9,904		-		660			-		-			(2	)		(1,000	)		9,562
Total level 2	$	1,604,785	$	-	$	10,853		$	60,716	$	(81,222	)	$	(462	)	$	(1,000	)	$	1,593,670

Level 3

Corporate securities and other	$	1,000	$	-	$	-		$	-	$	-		$	-		$	1,000		$	2,000
Marketable equity securities		1,114		-		(6	)		-		-			-			-			1,108
Total level 3	$	2,114	$	-	$	(6	)	$	-	$	-					$	1,000		$	3,108

Total available for sale securities	$	1,632,118	$	-	$	11,233		$	60,716	$	(81,222	)	$	(450	)	$	-		$	1,622,395

Transfers of securities between levels in the table above result from changes in the availability of market data for similar instruments and are measured as of the beginning of the period.

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

	Quoted Prices
(dollars in thousands)	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
March 31, 2011:	(Level 1)		(Level 2)		(Level 3)		Balance
Assets
Loans and leases held for sale	$	-	$	5,561	$	-	$	5,561
Impaired loans, net		-		-		72,297		72,297
OREO and other repossessed assets		-		-		7,653		7,653

December 31, 2010:
Assets
Loans and leases held for sale	$	-	$	12,785	$	-	$	12,785
Impaired loans, net		-		-		73,551		73,551
OREO and other repossessed assets		-		-		7,453		7,453

Fair value for loans and leases held for sale is estimated based upon available market data for similar pools of loans, more specifically mortgage backed securities with similar interest rates and maturities. There were no write-downs recorded to loans held for sale as of March 31, 2011 and December 31, 2010.

Impaired and restructured loans totaled $77.0 million with a specific reserve of $4.7 million at March 31, 2011, compared to $82.1 million with a specific reserve of $8.6 million at December 31, 2010. Fair value for impaired and restructured loans is primarily measured based on the value of the collateral securing these loans 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. There were no additional write-downs recorded on OREO and other repossessed assets as of March 31, 2011 and December 31, 2010.

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 at March 31, 2011 and December 31, 2010 were as follows:

(dollars in thousands)	March 31, 2011					December 31, 2010
	Carrying					Carrying
	Amount			Fair Value		Amount			Fair Value
ASSETS
Cash and cash equivalents	$	505,368		$	505,368	$	702,382		$	702,382
Investment securities available for sale		1,622,395			1,622,395		1,632,118			1,632,118
Investment securities held to maturity		535,488			533,369		546,957			537,932
Loans and leases held for sale		5,561			5,585		12,785			12,795

Commercial and industrial loans and leases		962,800			950,217		960,765			947,722
Real estate loans:
Construction and land development		270,584			258,953		339,242			325,640
Residential		2,367,299			2,321,918		2,372,182			2,329,578
Other (non-farm, non-residential)		1,409,998			1,295,606		1,405,642			1,294,090
Loans to individuals		228,904			212,362		236,107			223,350
Total loans		5,239,585			5,039,056		5,313,938			5,120,380
Allowance for loan and lease losses		(142,960	)		-		(150,054	)		-
Net loans	$	5,096,625		$	5,039,056	$	5,163,884		$	5,120,380

OREO and other repossessed assets		7,653			7,653		7,453			7,453
Interest rate locks		114			114		60			60

LIABILITIES
Non-interest bearing deposits	$	834,321		$	834,321	$	808,835		$	808,835
Interest-bearing deposits		3,241,154			3,241,154		3,285,349			3,285,349
Deposits with stated maturities		1,857,541			1,871,017		1,964,989			1,979,819
Repurchase agreements, federal funds
purchased and short-term borrowings		702,440			702,440		744,455			744,455
FHLB advances		627,716			697,552		703,761			783,164
Subordinated debentures		142,831			142,831		142,780			142,780
Forward sale commitments		138			138		53			53

* The loan classifications in this table are based upon regulatory classifications.

For March 31, 2011 and December 31, 2010, 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.

Fair value of non-interest bearing demand deposits has been estimated to equal the carrying amount, which is assumed to be the amount at which they could be settled.

Fair value for interest bearing deposits is based on the assumption that the exit value of the instruments would be funded with like instruments by principal market participants.

Fair value of deposits with stated maturities is estimated at the present value of associated cash flows using contractual maturities and market interest rates.

Fair value for repurchase agreements, federal funds purchased and short-term borrowings has been estimated at the present value of associated cash flows using contractual maturities and market interest rates for each instrument.

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.

Fair value for subordinated debentures that float with LIBOR are estimated to equal the carrying amount exclusive of related hedges.

12. RETIREMENT PLANS

The Company has a non-contributory defined benefit pension plan covering substantially all employees of the Company and its subsidiaries. The Company-sponsored pension plan provides retirement benefits under pension trust agreements. The benefits are based on years of service and the employee’s compensation during the highest five consecutive years during the last ten consecutive years of employment. The expected contribution to the pension plan for plan year 2011 is approximately $0.6 million. This expected contribution may be eliminated if the plan’s credit balance is applied toward reducing the contribution requirement.

On February 12, 2010, the Company curtailed the National Penn Bancshares, Inc. Employee 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. The curtailment resulted in a gain of $4.1 million in the statement of operations for the three months ended March 31, 2010.

Net periodic defined benefit pension expense for the three months ended March 31, 2011 and 2010 included the following components:

(dollars in thousands)	Three Months Ended March 31,
	2011			2010
Service cost	$	30		$	718
Interest cost		583			518
Expected return on plan assets		(686	)		(592	)
Amortization of prior service cost		-			(129	)
Amortization of unrecognized net actual loss		73			336
Net periodic benefit (gain) cost - recurring	$	-		$	851
Non-recurring curtailment gain		-			(4,066	)
Net periodic benefit (gain) cost	$	-		$	(3,215	)

13. SHARE-BASED COMPENSATION

At March 31, 2011, the Company had 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, “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 March 31, 2011, 2.0 million of these shares remain available for issuance. The Company has 268,000 awards expiring during the next twelve months ending March 31, 2012.

Share-based compensation expense is included in salaries, wages and employee benefits expense in the Consolidated Statements of Operations. Share-based compensation expense of $1.5 million and $0.3 million was recognized for the three months ended March 31, 2011 and 2010, respectively. Total cash received during the three months ended March 31, 2011 for activity under the Plans was $0.7 million.

The total intrinsic value (market value on the date of exercise less the grant price) of stock options exercised during the three months ended March 31, 2011 and 2010 was $2.6 million and $0.1 million, respectively.

As of March 31, 2011, there was approximately $2.1 million of total unrecognized compensation cost related to unvested stock options and approximately $3.0 million of unrecognized compensation cost for other share-based awards that is expected to be recognized over a weighted-average period of less than five years.

14. SEGMENT REPORTING

The Company’s operating segments are components, which are evaluated regularly by the chief operating decision-maker in deciding how to allocate and assess resources and assess performance. The Company’s chief operating decision-maker is the Chief Executive Officer. 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.

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

	As of and for the Three Months Ended
	March 31, 2011
	Community
(dollars in thousands)	Banking		Other			Consolidated
Total assets	$	8,483,313	$	59,954		$	8,543,267
Total deposits		5,933,016		-		$	5,933,016
Net interest income (expense)		68,052		(2,082	)	$	65,970
Total non-interest income		13,765		10,419		$	24,184
Total non-interest expense		48,471		8,366		$	56,837
Net (loss) income available to common shareholders		20,370		(4,733	)	$	15,637



	As of and for the Three Months Ended
	March 31, 2010
	Community
(dollars in thousands)	Banking		Other			Consolidated
Total assets	$	9,093,397	$	78,364		$	9,171,761
Total deposits		6,411,364		-			6,411,364
Net interest income (expense)		69,118		(1,859	)		67,259
Total non-interest income		18,598		3,976			22,574
Total non-interest expense		50,752		6,905			57,657
Net (loss) income available to common shareholders		8,981		(7,060	)		1,921

15. SUBSEQUENT EVENTS

On April 13, 2011, National Penn repurchased the Warrant issued on December 12, 2008, to the U.S. Treasury as part of its participation in the U.S. Treasury’s TARP Capital Purchase Program, for $1.0 million. The Warrant gave the U.S. Treasury the right to acquire up to 735,294 shares of National Penn stock at any time until December 12, 2018.

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 months ended March 31, 2011, 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 excludes the effects of certain gains and losses, adjusted for applicable taxes. Adjusted net income provides a method to assess earnings performance by excluding items that 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.

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 business is primarily accepting deposits from customers through its community 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 March 31, 2011, National Penn operated 123 offices. It has 122 community banking offices in Pennsylvania and one office in Maryland through National Penn Bank and its KNBT, HomeTowne Heritage Bank, 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 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.

Overview

Three months ended March 31, 2011 compared to March 31, 2010

(dollars in thousands, except per share data)	Three Months Ended
	March 31, 2011			March 31, 2010
EARNINGS
Total interest income	$	89,358		$	98,837
Total interest expense		23,388			31,578
Net interest income		65,970			67,259
Provision for loan and lease losses		10,000			32,500
Net interest income after provision
for loan and lease losses		55,970			34,759
Net losses from fair value changes of					-
subordinated debentures		(51	)		(7,261	)
Other non-interest income		24,235			29,835
Other non-interest expense		56,837			57,657
Income (loss) before income taxes		23,317			(324	)
Income tax expense (benefit)		4,537			(4,250	)
Net income		18,780			3,926
Preferred dividends and accretion of preferred discount		(1,691	)		(2,005	)
Accelerated accretion from redemption of preferred stock		(1,452	)		-
Net income available to common shareholders	$	15,637		$	1,921

Basic earnings available to common shareholders	$	0.10		$	0.02
Diluted earnings available to common shareholders		0.10			0.02
Dividends per common share		0.01			0.01

Net interest margin		3.58	%		3.44	%
Efficiency ratio (1)		59.61	%		58.54	%

Asset Quality Metrics
Allowance / total loans and leases		2.73	%		2.60	%
Non-performing loans / total loans and leases		1.51	%		2.03	%
Delinquent loans / total loans and leases		0.44	%		0.54	%
Allowance / non-performing loans and leases		180.6	%		127.8	%
Annualized net charge-offs		1.31	%		1.69	%

(1) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 2.

Net income available to common shareholders increased to $15.6 million for the three months ended, March 31, 2011 as compared to $1.9 million in the prior year. Improvements in net income available to common shareholders resulted from the following items:

·	Disciplined deposit pricing resulted in contraction of interest earning assets and net interest income which totaled $66.0 million, but improvement in deposit mix increased net interest margin which expanded to 3.58% as compared to 3.44% in the prior year.
·	The provision for loan and lease losses decreased to $10.0 million from $32.5 million as a result of sustained improvement in asset quality trends. Delinquencies remain low, and levels of non-performing and classified loans continue to decline. Despite the reduced provision, allowance coverage ratios remain strong.
·	Other non-interest income totaled $24.2 million for the quarter ended March 31, 2011, which is a decrease from $29.8 million primarily due to the divestiture of Christiana in December 2010, which contributed $1.5 million to wealth management income in the prior year, and a gain of $4.1 million from the curtailment of the Company’s pension plan during the first quarter of 2010.

·	Non-interest expense totaled $56.8 million for the first quarter of 2011 and the efficiency ratio was stable at 59.61%, reflective of management’s consistent focus on expense controls.
·	Income tax expense totaled $4.5 million as compared to a benefit of $4.3 million in the first quarter of 2010 as a result of pre-tax income, as tax free income remained at a relatively consistent level.
·	On March 16, 2011, the Company redeemed all of its Series B preferred stock issued to the U.S. Treasury under its TARP Capital Repurchase Program for $150 million. As a result, the first quarter of 2011 includes $1.5 million of accelerated accretion from the redemption of the shares.

The following table reconciles the non-GAAP adjusted net income performance measure to the GAAP performance measure of net income available to common shareholders and diluted earnings per share. A more detailed description of these items is included in the beginning of Item 2 to this Report.

(dollars in thousands, except per share data)	Three months ended March 31,
	2011		2010
Adjusted net income reconciliation
Net income available to common shareholders	$	15,637	$	1,921
After tax gain on pension plan curtailment		-		(2,643	)
After tax unrealized fair market value loss on
NPB Capital Trust II Preferred Securities		-		4,720
Accelerated accretion from redemption of preferred stock		1,452		-
Adjusted net income available to common shareholders	$	17,089	$	3,998

Earnings per share
Net income available to common shareholders	$	0.10	$	0.02
After tax gain on pension plan curtailment		-		(0.02	)
After tax unrealized fair market value loss on
NPB Capital Trust II Preferred Securities		-		0.03
Accelerated accretion from redemption of preferred stock		0.01		-
Adjusted net income available to common shareholders	$	0.11	$	0.03

Adjusted net income excludes certain items which management believes affect the comparability of results between periods and totaled $17.1 million for the first quarter of 2011, or $0.11 per diluted share, compared to $4.0 million, or $0.03 per diluted share for the first quarter of 2010. Adjusted net income excluded the effects of the following items during the periods presented:

The first quarter of 2011 included accelerated accretion of $1.5 million from the repayment of TARP.

Non-interest income in 2010 included a $7.3 million loss, or $4.7 million after-tax, on the Company’s subordinated debentures accounted for at fair value, and a $4.1 million, or $2.6 million after-tax, gain on the curtailment of the Company’s defined benefit pension plan.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Comparison of Financial Condition as of March 31, 2011 and December 31, 2010

SUMMARY BALANCE SHEET	March 31, 2011			December 31, 2010			% Change
Total cash and cash equivalents	$	505,368		$	702,382			-28.05	%
Total assets		8,543,267			8,844,620			-3.41	%
Investment securities and other securities		2,235,777			2,259,690			-1.06	%
Total loans and leases		5,245,146			5,326,723			-1.53	%
Deposits		5,933,016			6,059,173			-2.08	%
Borrowings		1,472,987			1,590,996			-7.42	%
Shareholders' equity		1,097,609			1,137,437			-3.50	%
Tangible book value per common share (1)	$	5.40		$	5.18			4.25	%
Tangible common equity / tangible assets (1)		9.91	%		8.27	%

(1) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 2.

Assets

Loans and Leases

The Company’s customers continue to be affected by economic conditions. Conditions in the housing market have been difficult over the past few years. Declining real estate and commercial property values, as well as financial stress on borrowers, resulted in higher than historic levels of charge-offs throughout 2010 and 2009. Although the economy and credit environment continue to be uncertain, the Company has experienced stabilization in both its commercial portfolio and the consumer loan portfolios. The Company will continue to focus on customers’ needs and provide solutions for them.

Federal Reserve economic data suggests the following trends:

·	Business activity has improved overall with retailers, auto dealers, and manufacturers reporting increases in sales, shipments and new orders. Third District banks reported minimal change in loan volume outstanding, although a few reported increased lending on home equity credit lines and growth in small business lending.
·	Residential real estate has shown an increase in inquiries, showings and traffic, but little pickup in sales or construction. Demographic and employment trends resulting from the economic downturn continue to impact demand for housing in the region, which has resulted in weakness in real estate and collateral values.
·	Employment data suggests that the stress in local labor markets has subsided somewhat with a slight year over year improvement.
·	The outlook among Third District business contacts is positive and has strengthened slightly. Most agreed that slight growth will occur and improve throughout 2011.

The Company’s loans are diversified by borrower, industry group, and geographical area in the Company’s market areas. The following summary shows the composition of the Company’s loan portfolio for March 31, 2011 and December 31, 2010:

(dollars in thousands)	March 31,		December 31,
	2011		2010		Increase/(decrease)
Commercial and industrial loans and leases	$	2,410,931	$	2,434,960	$	(24,029	)	(0.99	) %

CRE - permanent		819,875		768,988		50,887		6.62	%
CRE - construction		206,924		281,056		(74,132	)	(26.38	) %
Commercial real estate		1,026,799		1,050,044		(23,245	)	(2.21	) %

Residential mortgages		746,928		765,414		(18,486	)	(2.42	) %
Home equity lines and loans		740,785		745,124		(4,339	)	(0.58	) %
All other consumer		319,703		331,181		(11,478	)	(3.47	) %
Consumer loans		1,807,416		1,841,719		(34,303	)	(1.86	) %

Total loans and leases	$	5,245,146	$	5,326,723	$	(81,577	)	(1.53	) %

Allowance for loan and lease losses		142,960		150,054		(7,094	)	(4.73	) %

Loans and leases, net	$	5,102,186	$	5,176,669		(74,483	)	(1.44	) %

Loans and leases, net of the allowance decreased $74.5 million, or 1.4%, to $5.1 billion at March 31, 2011 from $5.2 billion at December 31, 2010. The allowance for loan and lease losses decreased to $143.0 million at March 31, 2011 from $150.1 million at December 31, 2010 due to net charge-offs of $17.1 million and a provision of $10 million for the three months ended March 31, 2011. Management’s efforts to reduce credit risk on the balance sheet contributed to the decrease in loans as customers deleveraged their balance sheets and lower quality loans were impacted by charge-offs and external refinancing. Improving overall asset quality metrics resulted in the reduction in provision and allowance during the first quarter. Residential mortgages continued to decline as a result of refinance activity, which the Company primarily sells to investors.

The following table shows asset quality indicators for the periods presented:

(dollars in thousands)	March 31,			December 31,
	2011			2010

Nonperforming loans	$	79,153		$	83,864
Nonperforming loans to total loans		1.51	%		1.57	%
Delinquent loans	$	23,159		$	26,053
Delinquent loans to total loans		0.44	%		0.49	%
Classified loans	$	438,275		$	479,336
Classified loans to total loans		8.36	%		9.00	%
Tier 1 capital and ALLL	$	1,032,433		$	1,074,197
Classified loans to Tier 1 capital and ALLL		42.45	%		44.62	%
Total loans and leases, including loans held for sale	$	5,245,146		$	5,326,723

The following table shows detailed information and ratios pertaining to the Company’s non-performing assets:

(dollars in thousands)	March 31,			December 31,
	2011			2010
Non-accrual commercial and industrial loans and leases	$	34,122		$	34,869

Non-accrual commercial real estate-permanent		15,407			17,821
Non-accrual commercial real estate-construction		18,012			19,392
Total non-accrual commercial real estate loans		33,419			37,213

Non-accrual residential mortgages		5,303			5,802
Non-accrual home equity lines and loans		1,965			2,133
All other non-accrual consumer loans		1,810			2,094
Total non-accrual consumer loans		9,078			10,029

Total non-accrual loans		76,619			82,111

Restructured loans (1)		351			-
Loans 90+ days past due & still accruing		2,183			1,753
Total non-performing loans		79,153			83,864

Other real estate owned and other assets		7,653			7,453

Total non-performing assets	$	86,806		$	91,317


Total loans and leases, including loans held for sale	$	5,245,146		$	5,326,723
Average total loans and leases	$	5,311,204		$	5,761,647
Allowance for loan and lease losses	$	142,960		$	150,054

Allowance for loan and lease losses to:
Non-performing assets		165	%		164	%
Non-performing loans		181	%		179	%
Total loans and leases		2.73	%		2.82	%
Average total loans and leases		2.69	%		2.60	%

(1) Restructed loans are residential mortgages of customers who were experiencing financial difficulty and were in jeopardy of losing their homes to foreclosure.

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

(dollars in thousands)	March 31,			December 31,
	2011			2010
Total non-accrual loans	$	76,619		$	82,111

Non-accrual loans and leases with partial charge-offs		43,257			33,351
Life-to-date partial charge-offs on nonaccrual loans and leases		40,025			37,837

Charge-off rate of nonaccrual loans and leases with partial charge-offs		48.1	%		53.2	%

Specific reserves on non-accrual loans		4,673			8,560

At March 31, 2011, the Company’s non-accrual loans totaled $76.6 million and included $43.3 million of non-accrual loans which have been charged-off by 48.1% or $40.0 million. Non-accrual loans declined in all categories from December 31, 2010 to March 31, 2011. The Company’s non-accrual loans are its impaired loans and leases and are evaluated individually. Non-accrual loans have a specific reserve in the allowance of $4.7 million related to $17.3 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 collection of interest and principal is not assured but 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 for the three months ended March 31, 2011 as compared to March 31, 2010 and December 31, 2010 is as follows:

	March 31,			December 31,			March 31,
(dollars in thousands)	2011			2010			2010

Commercial and industrial loans and leases	$	9,319		$	7,363		$	2,261

Commercial real estate-permanent		3,946			2,903			359
Commercial real estate-construction		873			1,973			18,427
Total commercial real estate loans		4,819			4,876			18,786

Residential mortgages		1,643			5,620			2,700
Home equity lines and loans		1,158			1,280			466
All other consumer loans		155			874			708
Total consumer loans		2,956			7,774			3,874

Net loans charged-off	$	17,094		$	20,013		$	24,921

Net charge-offs (annualized) to:
Total loans and leases		1.32	%		1.49	%		1.71	%
Average total loans and leases		1.31	%		1.44	%		1.69	%
Allowance for loan and lease losses		48.49	%		52.91	%		65.69	%

Net loan charge-offs decreased to $17.1 million in the first quarter of 2011, compared to net loan charge-offs of $24.9 million during the same period in 2010. On a linked quarter basis, charge-offs declined by $2.9 million from the fourth quarter 2010. Annualized net charge-offs as a percentage of average loans and leases decreased to 1.31% for the first quarter of 2011 compared to 1.69% for the prior year period and 1.44% for the quarter ending December 31, 2010. Efforts to reduce exposure to commercial real estate-construction loans throughout 2009 and 2010 has reduced the portfolio to $207 million or 3.9% of total loans and leases at March 31, 2011, compared to $281 million or 5.3% of total loans and leases at December 31, 2010, which has resulted in consistent declines in net charge-off levels throughout those periods. Net charge-offs for commercial and industrial loans increased to $9.3 million for the first quarter of 2011, from $2.3 million during the same period in 2010 as charge-off levels for the first quarter 2011 reflect current economic conditions. Management believes that timely resolution of lower quality credits is an efficient strategy for minimizing the overall cost of workouts.

The following table shows a roll-forward of the allowance for loan and lease losses:

(dollars in thousands)	March 31,		March 31,
	2011		2010
Balance at beginning of year	$	150,054	$	146,271
Charge-offs:
Commercial and industrial loans and leases		9,569		3,135
Commercial real estate		5,313		19,990
Consumer loans		3,871		4,357
Total charge-offs		18,753		27,482

Recoveries:
Commercial and industrial loans and leases		250		874
Commercial real estate		494		1,204
Consumer loans		915		483
Total recoveries		1,659		2,561
Net charge-offs		17,094		24,921
Provision charged to expense		10,000		32,500
Balance at end of period	$	142,960	$	153,850

The following table shows the composition of the allowance for loan and lease losses:

(dollars in thousands)	March 31,		December 31,
	2011		2010
Specific reserves	$	4,673	$	8,560
Allocated reserves		130,147		133,169
Unallocated reserves		8,140		8,325
Total allowance for loan and lease losses	$	142,960	$	150,054

Overall, the allowance decreased to $143.0 million at March 31, 2011 and covered total loans and leases by 2.73% and non-performing loans by 181%, compared to $150.0 million at December 31, 2010, or 2.82% of total loans and leases and 179% of non-performing loans. The decrease of the allowance was due primarily to the reduction in classified loans, the charge-off of a specific credit, and continued improvement in asset quality throughout 2010 and continuing in the first quarter of 2011. These improvements resulted in a provision for loan and lease losses of $10.0 million for the first quarter of 2011, a decrease from $32.5 million for the quarter ended March 31, 2010.

Liabilities

Liabilities totaled $7.4 billion at March 31, 2011 a decrease of $262 million, or 3.4%, from $7.7 billion at December 31, 2010.

(dollars in thousands)
	March 31, 2011		December 31, 2010		Increase/(decrease)
Non-interest bearing deposits	$	834,321	$	808,835	$	25,486		3.15	%
Savings		457,395		438,879		18,516		4.22	%
NOW accounts		1,128,644		1,181,850		(53,206	)	(4.50	) %
Money market accounts		1,655,115		1,664,620		(9,505	)	(0.57	) %
CDs $100 or less		1,433,808		1,378,060		55,748		4.05	%
CDs greater than $100		423,733		586,929		(163,196	)	(27.81	) %
Total deposits	$	5,933,016	$	6,059,173	$	(126,157	)	(2.08	) %

Total deposits, the Company’s primary source of funding, decreased $126 million during the first quarter of 2011. The decrease in interest bearing deposits was the result of the Company’s continued focus on improving deposit mix and managing high cost, non-relationship based wholesale, municipal, and time deposit customers. At March 31, 2011, transaction, savings and money market accounts comprised 69% of deposits and were consistent with 68% at December 31, 2010. The changes in mix combined with disciplined deposit pricing reduced the cost of deposits by 6 basis points to 0.78% at March 31, 2011.

Deposit funding is supplemented by additional sources of borrowings which include securities sold under repurchase agreements, short-term borrowings, Federal Home Loan Bank (“FHLB”) advances, and subordinated debentures. In the aggregate, these funding sources totaled $1.5 billion at March 31, 2011, which was a decrease of $118 million or 7.4% from, December 31, 2010.

·	Securities sold under repurchase agreements totaled $696 million at March 31, 2011, a decrease of $38.2 million, or 5.2%, from $734 million at December 31, 2010 due to a reduction in cash management account balances.
·	FHLB advances decreased $76.0 million, or 10.8%, to $628 million at March 31, 2011 from $704 million at December 31, 2010, due to advances that matured and were not replaced during the period.

Shareholders’ Equity

Shareholders’ equity totaled $1.1 billion at March 31, 2011, a decrease of $39.8 million from December 31, 2010. Activity during the three months ended March 31, 2011 included:

·	Net income of $18.8 million;
·	Net proceeds from the Warburg Pincus second closing of $84.5 million.
·	Redemption of Series B preferred stock, including accelerated accretion of $1.5 million, for $150 million.
·	Accumulated other comprehensive income of $7.8 million.
·	Cash dividends on preferred stock of $1.6 million; and
·	Cash dividends on common stock of $1.5 million.

Results of operations for the three months ended March 31, 2011 and March 31, 2010

Net Interest Income

The following table presents average balances, average yields, interest rate spread and net interest margin information for the three months ended March 31, 2011 as compared to the same period in 2010. Interest income and yields are presented on a full taxable equivalent (“FTE”) basis, using a 35% effective tax rate. Net interest margin is expressed as net interest income (FTE) as a percentage of average total interest earning assets.

Average Balances, Average Rates, and Interest Rate Margin

	For the three months ended March 31,
	2011								2010
(dollars in thousands)	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
INTEREST EARNING ASSETS:
Interest earning deposits at banks	$	508,684		$	280		0.22	%	$	411,100		$	247		0.24	%

U.S. Treasury		19,963			13		0.27	%		145,864			156		0.43	%
U.S. Government agencies		1,366,138			10,673		3.17	%		1,143,672			10,319		3.66	%
State and municipal*		762,305			12,926		6.88	%		799,040			13,457		6.83	%
Other bonds and securities		97,010			671		2.80	%		96,310			623		2.62	%
Total investments		2,245,416			24,283		4.39	%		2,184,886			24,555		4.56	%

Commercial loans and lease financing*		3,481,370			45,625		5.31	%		4,033,790			52,551		5.28	%
Installment loans		919,015			11,586		5.11	%		962,303			12,518		5.28	%
Mortgage loans		910,819			12,726		5.67	%		989,460			14,434		5.92	%
Total loans and leases		5,311,204			69,937		5.34	%		5,985,553			79,503		5.39	%
Total earning assets		8,065,304			94,500		4.75	%		8,581,539			104,305		4.93	%
Allowance for loan and lease losses		(156,582	)							(160,879	)
Non-interest earning assets		792,926								916,673

Total assets	$	8,701,648							$	9,337,333

INTEREST BEARING LIABILITIES:
Interest bearing deposits		5,136,953			11,407		0.90	%		5,824,492			18,281		1.27	%
Securities sold under repurchase agreements		711,100			2,395		1.37	%		742,089			2,874		1.57	%
Short-term borrowings		6,850			-		0.00	%		7,024			-		0.00	%
Long-term borrowings		793,989			9,586		4.90	%		885,293			10,423		4.78	%
Total interest bearing liabilities		6,648,892			23,388		1.43	%		7,458,898			31,578		1.72	%
Non-interest bearing deposits		813,704								767,398
Other non-interest bearing liabilities		47,973								35,985
Total liabilities		7,510,569								8,262,281
Equity capital		1,191,080								1,075,052
Total liabilities and equity capital	$	8,701,649							$	9,337,333
INTEREST RATE MARGIN**					71,112		3.58	%					72,727		3.44	%
Tax equivalent interest					5,142								5,468
Net interest income				$	65,970							$	67,259

*Full taxable equivalent basis, using a 35% effective tax rate.
**Represents the difference between interest earned and interest paid, divided by total earning assets.
Loans outstanding, net of unearned income, include non-accruing loans.
Fee income included.

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

(dollars in thousands)	Three Months Ended March 31,
	2011 compared to 2010
	Volume			Rate			Total
Interest Income
Interest earning deposits at banks	$	55		$	(22	)	$	33
Securities
U.S. Treasury		(98	)		(45	)		(143	)
U.S. Agencies		1,848			(1,494	)		354
State and municipal		(623	)		92			(531	)
Other bonds and securities		5			43			48
Total investment securities		1,132			(1,404	)		(272	)
Loans
Commercial loans and leases		(7,238	)		312			(6,926	)
Installment loans		(553	)		(379	)		(932	)
Mortgage loans		(1,117	)		(592	)		(1,709	)
Total loans		(8,908	)		(659	)		(9,567	)
Total interest income	$	(7,721	)	$	(2,085	)	$	(9,806	)

Interest Expense
Interest bearing deposits	$	(1,976	)	$	(4,898	)	$	(6,874	)

Securities sold under repurchase agreements		(116	)		(363	)		(479	)
Short-term borrowings		-			-			-
FHLB advances and subordinated debentures		(1,097	)		260			(837	)
Total borrowed funds		(1,213	)		(103	)		(1,316	)
Total interest expense		(3,189	)		(5,001	)		(8,190	)
Increase (decrease) in interest income	$	(4,532	)	$	2,916		$	(1,616	)

Overall average earning assets declined to $8.1 billion as a result of management’s focus on improving deposit mix and managing high cost, non-relationship based wholesale, municipal, and time deposit customers and due to the divestiture of Christiana. At March 31, 2011, transaction, savings and money market accounts comprised 69% of deposits compared to 64% at March 31, 2010. Time deposits were the largest source of decline and decreased $480 million to $1.9 billion at March 31, 2011, including approximately $35 million of time deposits at Christiana. The changes in mix combined with disciplined deposit pricing reduced the cost of deposits by 34 basis points to 0.78% at March 31, 2011.

The improvements in deposit mix combined with declining overall interest rates reduced interest expense by 26%, or $8.2 million. Interest expense totaled $23.4 million in the first quarter of 2011, compared to $31.6 million for the first quarter of 2010. The improvement in interest expense mitigated the effect of decreasing interest rates and managed reductions to earning assets. Interest income declined by 9.6%, or $9.5 million, $9.8 million on a FTE basis, from the first quarter of 2010, and interest income totaled $89.4 million for the first quarter of 2011. Net interest income for the three months ended March 31, 2011 was $66.0 million, a decrease of $1.3 million or 1.9% compared to the $67.3 million for the first quarter of 2010. The net interest margin expanded 14 basis points to 3.58% for the three months ended March 31, 2011 from 3.44% in the prior year period.

Provision for Loan and Lease Losses

The provision for loan and lease losses totaled $10.0 million for the quarter ended March 31, 2011, compared to $32.5 million for the same period in 2010. The reduction to the provision was due to sustained improvement in asset quality. For the quarter ended March 31, 2011, delinquencies remained stable at 0.44% of total loans and leases, net charge-offs declined to $17.1 million or 1.31% of average loans. The decrease in charge-offs during the first quarter of 2011 was the fifth quarter of decline which began in the first quarter of 2010. Classified loans declined 8.6% from December 31, 2010 and non-performing loans declined by 5.6% to 1.51% of total loans and leases. The allowance as a percentage of non-performing loans increased to 181% at March 31, 2011, and the allowance to total loans and leases remained strong at 2.73%. For additional analysis of the allowance refer to “Loans and Leases.”

Non-Interest Income

(dollars in thousands)	Three Months
	Ended March 31,
NON-INTEREST INCOME	2011			2010			Increase (Decrease)
Wealth management income	$	5,924		$	7,101		$	(1,177	)		(16.58	) %
Service charges on deposit accounts		4,664			5,341			(677	)		(12.68	) %
Insurance commissions and fees		3,221			3,771			(550	)		(14.58	) %
Cash management and electronic banking fees		4,371			4,158			213			5.12	%
Mortgage banking income		1,080			1,153			(73	)		(6.33	) %
Bank owned life insurance income		1,220			1,983			(763	)		(38.48	) %
Equity in undistributed net earnings of unconsolidated investments		1,700			163			1,537		NM
Gain on pension plan curtailment		-			4,066			(4,066	)		(100.00	) %
Other operating income		2,055			2,733			(678	)		(24.81	) %
Net losses from fair value changes of subordinate debentures		(51	)		(7,261	)		7,210			(99.30	) %
Net gains (losses) on sales of investment securities		-			-			-			0.00
Impairment losses on investment securities:
Impairment losses on investment securities		-			(634	)		634			(100.00	) %
Non credit-related losses on securities not expected to be sold recognized								-			0.00
in other comprehensive loss before tax		-			-			-			0.00
Net impairment losses on investment securities		-			(634	)		634			(100.00	) %
Total non-interest income	$	24,184		$	22,574		$	1,610			7.13	%


"NM" - Denotes a value displayed as a percentage change is not meaningful

The $1.6 million increase in non-interest income for the three months ended March 31, 2011 compared to the quarter ended March 31, 2010 was primarily due to the following items:

Increases:

·	Equity in undistributed net earnings of unconsolidated investments represents earnings of a mezzanine debt fund and increased $1.5 million to $1.7 million, as the timing of fund activities and “exits” vary.
·	Loss on the Company’s subordinated debentures accounted for at fair value reduced non-interest income in 2010 by $7.3 million.

Decreases:

·	The first quarter of 2010 included a gain of $4.1 million from the curtailment of the Company’s defined benefit pension plan.
·	Wealth management income decreased modestly by $1.2 million, to $5.9 million for the first quarter of 2011, primarily from the sale of Christiana in the fourth quarter of 2010. Christiana contributed $1.5 million of wealth management income during the first quarter of 2010. Exclusive of Christiana’s divestiture, wealth management income increased $0.3 million due to increased commission income on retail investment product sales and appreciation of the equity markets and its positive impact on fee-based business.
·	Service charges on deposit accounts declined $0.7 million to $4.7 million for the first quarter of 2011 as a result of the impact from the reduction in overdraft volume, resulting from improved customer savings levels, which resulted in an increase in the average balance per account, and the impact of regulatory changes affecting electronic customer transactions.

Non-Interest Expense

(dollars in thousands)	Three Months
	Ended March 31,
NON-INTEREST EXPENSE	2011			2010			Increase (Decrease)
Salaries, wages and employee benefits	$	31,449		$	29,429		$	2,020		6.86	%
Net premises and equipment		7,272			7,998			(726	)	(9.08	) %
FDIC insurance		3,457			4,097			(640	)	(15.62	) %
Other operating expenses		14,659			16,133			(1,474	)	(9.14	) %
Total non-interest expense	$	56,837		$	57,657		$	(820	)	(1.42	) %


RECONCILIATION TABLE FOR NON-GAAP FINANCIAL MEASURES - EFFICIENCY RATIO (1)

Efficiency Ratio Calculation
Non-interest expense	$	56,837		$	57,657

Net interest income (taxable equivalent)	$	71,112		$	72,727

Non-interest income		24,184			22,574
Less:
Gain on pension plan curtailment		-			4,066
Net losses from fair value changes		(51	)		(7,261	)
Adjusted revenue	$	95,347		$	98,496

Efficiency Ratio		59.61	%		58.54	%

(1) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Item 2.

Non-interest expense, exclusive of $2.1 million of Christiana expenses included in 2010, increased $1.3 million in the first quarter of 2011 when compared to the prior year. The majority of the increase was due to salaries, wages, and employee benefits which included $2.0 million from the impact of annual merit increases, additional benefits expense, and accelerated vesting of share-based awards from the repayment of TARP. Continued focus on expense controls reduced expenses in other categories as demonstrated by the efficiency ratio remaining stable at 59.6%.

Income Tax Expense

Income tax expense for the three months ended March 31, 2011 was $4.5 million compared to a benefit of $4.3 million for the three months ended March 31, 2010. The increase in income tax expense was due to the increase in income before income taxes with a similar level of tax free income level and permanent differences. The Company’s net deferred tax asset (“DTA”) decreased to $81.3 million at March 31, 2011 primarily from a reduction to the allowance and an increase in the fair value of investment securities available for sale.

Each quarter, the Company evaluates the realizability of the DTA. As of March 31, 2011, 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, 2010, the Company has continued to demonstrate increased profitability and performance in line with management projections. Therefore, management believes that the DTA continues to be realizable and will be fully utilized as planned.

If there are substantial, adverse economic developments that deteriorate credit quality or profitability, the judgments made regarding the Company’s ability to utilize the DTA may change. This would result in additional income tax expense being recorded in the Consolidated Statement of Operations. These types of events or a valuation allowance would impact regulatory capital by the amount no longer disallowed.

LIQUIDITY, CAPITAL AND INTEREST RATE SENSITIVITY

Analysis of Liquidity and Capital Resources

Liquidity

The following table sets forth contractual obligations representing required cash outflows as of March 31, 2011:

			Payments Due by Period:
					After one		After three
			One Year		year to		years to		More than
(dollars in thousands)	Total		or less		three years		five years		5 Years

Remaining contractual maturities of time deposits	$	1,857,541	$	1,318,872	$	262,304	$	200,210	$	76,155
Federal Home Loan Bank Advances		627,716		10,682		102,000		106,500		408,534
Subordinated debentures		142,831		-		-		-		142,831
Minimum annual rentals or non-cancelable operating leases		43,843		6,554		10,583		8,469		18,237
Total	$	2,671,931	$	1,336,108	$	374,887	$	315,179	$	645,757

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 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 Federal Home Loan Bank of Pittsburgh (“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 serves as an additional source of liquidity.

As measured using the Consolidated Statement of Cash Flows, the Company used $197 million and $260 million in net cash and equivalents for the three months ended March 31, 2011 and 2010, respectively. Cash deployed during the first three months of 2011, in the following ways:

Financing activities

·	$150 million repayment of Series B Preferred stock
·	$107 million reduction of certificate of deposits
·	$75.8 million of payments for maturing of FHLB advances
·	$38.2 million decrease in securities sold under repurchase agreements

Investing activities

·	$60.7 million of investment security purchases

Operating activities generated $27.7 million of net cash for the three months ended March 31, 2011 compared to $48.6 million for the three months ended March 31, 2010. During the three months ended March 31, 2011, cash was generated from the following additional sources:

Investing activities

·	$81.2 million of maturities and repayments of investment securities available-for-sale
·	$54.8 million net maturities and repayments from loans and leases held for investment

Financing activities

·	$84.5 million of issuance of common stock in private placement

Capital

At March 31, 2011, 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. In addition, National Penn Bank is in compliance with the individual minimum capital ratios resulting from its informal agreement with its primary regulator which requires the following minimum capital ratios: Tier 1 leverage of at least 8.0%, Tier 1 risk-based capital ratio of at least 10.0%, and total risk-based capital of at least 12.0%.

		Tier 1 Capital to		Tier 1 Capital to Risk-		Total Capital to Risk-
		Average Assets Ratio		Weighted Assets Ratio		Weighted Assets Ratio
		March 31,	December 31,	March 31,	December 31,	March 31,	December 31,
		2011	2010	2011	2010	2011	2010

The Company		10.66%	10.59%	15.66%	16.12%	16.91%	17.38%
National Penn Bank		9.52%	8.89%	14.13%	13.39%	15.39%	14.65%
"Well Capitalized" institution		5.00%	5.00%	6.00%	6.00%	10.00%	10.00%
	under banking regulations

Beginning at September 30, 2009, National Penn and National Penn Bank eliminated from inclusion in their regulatory capital the net amount of deferred tax assets, since these regulations are more restrictive than GAAP as it relates to the usage and recognition of the deferred tax asset. Beginning in the second quarter of 2010, a portion of the net deferred tax asset was included in the computation of National Penn and National Penn Bank’s capital and as of March 31, 2011 continues to be included in the computation.

Other Commitments

The following table sets forth the notional amounts of other commitments as of March 31, 2011:

					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	$	1,410,737	$	718,572	$	198,592	$	99,954	$	393,619
Letters of credit		150,504		110,784		35,669		1,390		2,661
Total	$	1,561,241	$	829,356	$	234,261	$	101,344	$	396,280

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 March 31, 2011.

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 currently 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, see 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 includes 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 of assets and liabilities (“repricing gap”),
·	Risk that assets will repay or customers withdraw prior to contractual maturity (“prepayments”),
·	Changes in yields and the shape of the yield curve (“yield curve risk”), and
·	Timing of changes in interest rates – the time period it takes for one interest rate index to change compared to another, given changes in market conditions (“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.

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 and economic value of equity. 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 has proven to be an important guidance tool for ALCO.

The following table demonstrates the timing of repriced assets and scheduled maturities for each category of interest earning assets and interest bearing liabilities at March 31, 2011:

	Repricing Periods
				Three Months			One Year
	Within			Through			Through		Over
(dollars in thousands)	Three Months			One Year			Five Years		5 Years
Interest-earning assets:
Interest bearing deposits at banks	$	392,337		$	-		$	-	$	-
Investment securities and other securities		133,126			299,066			519,911		1,283,674
Loans and leases (1)		2,245,125			772,046			1,821,010		406,965
Total interest-earning assets		2,770,588			1,071,112			2,340,921		1,690,639
Cumulative total interest-earning assets		2,770,588			3,841,700			6,182,621		7,873,260

Interest-bearing liabilities:
Non maturity deposits		3,241,154			-			-		-
Time deposits		500,206			830,554			525,864		916
Borrowed funds		537,700			11,166			376,938		404,352
Subordinated debt		77,321			-			-		65,510
Total interest-bearing liabilities		4,356,381			841,720			902,802		470,778
Cumulative total interest-bearing liabilities	$	4,356,381		$	5,198,101		$	6,100,903	$	6,571,681

Interest-earning assets less interest -bearing liabilities		(1,585,793	)		229,392			1,438,119		1,219,861

Cumulative interest-rate sensitivity gap	$	(1,585,793	)	$	(1,356,401	)	$	81,718	$	1,301,579

(1)

Adjustable rate loans are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due. Fixed rate loans are included in the period in which they are scheduled to be repaid and are adjusted to take into account estimated prepayments based upon assumptions estimating the expected prepayments in the prevailing interest rate environment. The table assumes prepayments and scheduled principal amortization of fixed rate loans and mortgage-backed securities, and assumes that adjustable-rate mortgages will reprice at contractual repricing intervals. There has been no adjustment for the impact of future commitments and loans in process.

Interest rate sensitivity is a function of the repricing characteristics of the Company’s assets and liabilities. Gap analysis is a useful measurement of asset and liability management. Minimizing the balance sheet’s maturity and repricing risk is a continual focus in a changing rate environment. To supplement the above gap analysis the Company prepares net interest income simulations to measure the overall interest rate risk exposures under various rate shocks.

The following table demonstrates the expected effect that a parallel interest rate shift would have on the Company’s net interest income:

(dollars in thousands)
Change in	March 31, 2011					March 31, 2010
Interest Rates	Change in Net Interest Income					Change in Net Interest Income
(in basis points)
+ 300	$	18,113		6.88	%	$	20,157		7.12	%
+ 200		11,621		4.42	%		12,416		4.38	%
+ 100		5,090		1.93	%		5,328		1.88	%
- 100		829		0.31	%		(6,884	)	-2.43	%
- 200		(14,293	)	-5.43	%		(18,600	)	-6.57	%

As measured by the net interest income analysis, the Company reflects an asset sensitive risk profile and should benefit over the next twelve months by an increase in interest rates.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The information presented in the Liquidity and Interest Rate Risk 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 March 31, 2011, 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 March 31, 2011.

There were no changes in National Penn’s internal control over financial reporting during the quarter ended March 31, 2011 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.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

The information presented in Footnote 9 to the unaudited interim financial statements included in Part I, Item 1 of this Report is incorporated herein by reference.

Item 1A. RISK FACTORS

National Penn’s failure to comply with regulatory requirements may harm its business and financial results.

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”). As such, both National Penn and National Penn Bank are subject to extensive regulation and may be the subject of supervisory enforcement action.

On January 27, 2010, National Penn Bank entered into a memorandum of understanding with the OCC. Under this informal agreement, National Penn Bank agreed to develop and implement initiatives to enhance the oversight of problem assets, to enhance its process for the allowance for loan and lease losses, and to strengthen its internal loan review and credit administration functions. Implementing and completing these initiatives have required, and may continue to require, substantial oversight of our senior management team and directors and may constrain our operations. Additionally, National Penn Bank agreed to maintain, after March 31, 2010, a Tier 1 leverage ratio of at least 8.0%, a Tier 1 risk-based capital ratio of at least 10.0% and a total risk-based capital ratio of at least 12.0%. (At March 31, 2011, National Penn Bank’s Tier 1 leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 9.52%, 14.13% and 15.39%, respectively.)

If National Penn Bank fails to comply with the memorandum of understanding or is unable to maintain its capital ratios at the agreed upon levels, or if National Penn or National Penn Bank fail to meet any other regulatory requirements, National Penn may be subject to further, formal supervisory enforcement actions, which could have a material adverse effect on its financial condition, results of operation and business.

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%. As noted above, National Penn Bank is required to maintain a Tier 1 leverage ratio of at least 8.0%, a Tier 1 risk-based capital ratio of at least 10.0% and a total risk-based capital ratio of at least 12.0%.

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 future sales or 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.

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.

National Penn’s credit quality may remain challenging and at elevated levels of risk throughout 2011. Further 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 has from time to time increased 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. Weak local economic conditions from 2008 through 2011 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.

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, or 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 $52 million in capital stock of the Federal Home Loan Bank of Pittsburgh as of March 31, 2011. 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. In order to avail itself of correspondent banking services offered by the Home Loan Bank, National Penn must remain a member of 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 March 31, 2011, National Penn had approximately $258 million recorded as goodwill. National Penn tests its goodwill for impairment at least annually as of June 30th. 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.

National Penn’s business operations are subject to pervasive and comprehensive federal and state legislation, regulation and supervision which could adversely affect National Penn.

Business operations of National Penn and its subsidiaries are subject to extensive federal and state legislation, regulation, and supervision that govern almost all aspects of business operations. This 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.

	·	A provision that would broaden the base for FDIC insurance assessments.

	·	A provision that would require 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.

In addition, under the Dodd-Frank Act, National Penn is required to 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, most are to be implemented by rules promulgated within six to eighteen months of signing. In addition to the regulatory requirements of the Dodd-Frank Act, National Penn is 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 any implementing rules, which 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, 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.

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

Recent bank failures have severely depleted the FDIC’s insurance fund. In response, the FDIC adopted a final rule effective April 1, 2009, which differentiates for risk in calculating assessment rates. The FDIC levied a special assessment to all insured institutions payable June 30, 2009 to replenish the fund and at December 30, 2009, required insured institutions to pay 2010-2012 insurance premiums in advance. On April 13, 2010, the FDIC voted to propose assessing higher fees on large, higher-risk financial institutions and possibly lower fees for many small and less-risky big banks.

The Dodd-Frank Act 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. Although the precise impact on National Penn will not be clear until implementing rules are adopted, 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.

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 not be subject to federal taxation and 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.

Variations in interest rates may negatively affect National Penn's financial performance.

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. As prevailing interest rates change, net interest spreads are affected by the difference between the maturities and re-pricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. An increase in the general level of interest rates may also adversely affect the ability of certain borrowers to repay their obligations. In a declining interest rate environment, National Penn may be unable to re-price deposits downward in the same magnitude and/or with the same timing as the movement in its interest-sensitive assets. Accordingly, changes in levels of market interest rates, whether upward or downward, 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. 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, result in a loss of customer business and data, subject National Penn to 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. 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.

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.

There may be future sales or 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 151.5 million shares were outstanding as of March 31, 2011, 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 will dilute the ownership of National Penn's shareholders. National Penn also has the ability to issue an unlimited amount of securities including common stock, preferred stock, debt securities, depositary shares and securities warrants, from time to time at prices and on terms to be determined at the time of sale under an active shelf registration statement, which it filed with the SEC on November 7, 2008. National Penn's board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares. These 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 March 31, 2011, National Penn Bank did not have the ability to pay dividends to National Penn without prior regulatory approval. There is no assurance that National Penn Bank, and/or National Penn's other subsidiaries will be able to pay dividends in the future.

In April 2011, National Penn’s Board of Directors approved a second quarter 2011 cash dividend of $0.01 per share. The $0.01 common stock cash dividend is reduced from levels in prior years and is intended to preserve capital and strengthen National Penn's tangible common equity levels. 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 preferred stock or 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 may be involved from time to time in a variety of litigation arising out of its business. 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.

	·	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.

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

There were no repurchases by National Penn of its common stock at any time during the quarter ended March 31, 2011.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. [Removed and Reserved]

Item 5. Other Information.

None.

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, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn’s Report on Form 8-K dated March 24, 2010, as filed on March 29, 2010.)
3.3	Bylaws, as amended of National Penn Bank (Incorporated by reference to Exhibit 3.2 to National Penn’s Report on Form 8-K dated December 2, 2008, as filed on December 2, 2008.)
10.1	Investment Agreement dated as of October 5, 2010, by and between National Penn Bancshares, Inc. and Warburg Pincus Private Equity X, L.P. (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated October 6, 2010, as filed on October 6, 2010.)
10.2	Amendatory Agreement dated as of January 25, 2011, among National Penn Bancshares, Inc., National Penn Bank and H. Anderson Ellsworth. *
10.3	Amendatory Agreement dated as of January 26, 2011, among National Penn Bancshares, Inc., National Penn Bank and Keene S. Turner. *
10.4	National Penn Bancshares, Inc. Executive Incentive Plan (Amended and Restated Effective January 1, 2011.) (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated January 24, 2011, as filed on January 27, 2011.) *
10.5	National Penn Bancshares, Inc. Executive Incentive Plan/Performance Goals – Plan Year 2011. (Incorporated by reference to Exhibit 10.2 to National Penn’s Report on Form 8-K dated January 24, 2011, as filed on January 27, 2011.) *
10.6	Amendment to 2010 Restricted Stock Agreement between National Penn Bancshares, Inc. and Sandra L. Bodnyk dated March 8, 2011. *
10.7	Amendment to 2010 Restricted Stock Agreement between National Penn Bancshares, Inc. and Michael J. Hughes dated March 8, 2011. *
10.8	Letter Agreement between National Penn Bancshares, Inc. and the United States Department of the Treasury. (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated March 16, 2011, as filed on March 16, 2011.)
10.9	Letter Agreement between National Penn Bancshares, Inc. and the United States Department of the Treasury. (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated April 13, 2011, as filed on April 13, 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.)

* Denotes a compensatory plan or arrangement.

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:	May 9, 2011	By:	/s/ Scott V. Fainor
			Name:	Scott V. Fainor
			Title:	President and Chief Executive Officer

Date:	May 9, 2011	By:	/s/ Michael J. Hughes
			Name:	Michael J. Hughes
			Title:	Chief Financial Officer

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