NATIONAL PENN BANCSHARES INC, 10-Q, 1997-11-10

NATIONAL PENN BANCSHARES INC
10-Q, 1997-11-10
NATIONAL COMMERCIAL BANKS

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _________ to ________

Commission file number: 0-10957

NATIONAL PENN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

Pennsylvania 23-2215075
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

Philadelphia and Reading Avenues, Boyertown, PA 19512
(Address of principal executive offices) (Zip Code)

(610) 367-6001
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Class Outstanding at October 31, 1997

Common Stock ($1.875 par value) (No.) 10,618,645 Shares

Page 1 of 16 pages
<PAGE>

TABLE OF CONTENTS

Part I - Financial Information. Page

Item 1. Financial Statements............................ 3

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .. 8

Part II - Other Information.

Item 1. Legal Proceedings .............................. 14

Item 2. Changes in Securities .......................... 14

Item 3. Defaults Upon Senior Securities ................ 14

Item 4. Submission of Matters to a Vote of
Security Holders ............................... 14

Item 5. Other Information .............................. 14

Item 6. Exhibits and Reports on Form 8-K ............... 14

Signatures ................................................................ 15

2
<PAGE>

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
<TABLE>
<CAPTION>
NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET Sept. 30 Dec. 31
(Dollars in thousands, except per share data) 1997 1996
(Unaudited) (Note)
----------- -----------
ASSETS
<S> <C> <C>
Cash and due from banks $50,533 $40,194
Interest bearing deposits in banks 1,280 1,802
Federal funds sold 2,500 --
----------- -----------
Total cash and cash equivalents 54,313 41,996
Investment securities available for sale at market value 316,276 236,814
Loans, less allowance for loan losses of $24,851 and
$22,746 in 1997 and 1996 respectively 1,080,297 1,028,334
Other assets 56,052 50,869
----------- -----------
Total Assets $1,506,938 $1,358,013
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $147,900 $145,107
Interest bearing deposits
(Includes certificates of deposit in excess of $100,000 or greater:
1997 - $116,887; 1996 - $97,115) 925,489 835,701
----------- -----------
Total Deposits 1,073,389 980,808
Securities sold under repurchase agreements
and federal funds purchased 93,555 164,996
Short-term borrowings 8,161 6,931
Long-term obligations 155,460 76,110
Guaranteed preferred beneficial interests in
Company's subordinated debentures 40,250 --
Accrued interest and other liabilities 16,498 14,447
----------- -----------
Total Liabilities 1,387,313 1,243,292
Commitments and contingent liabilities -- --
Shareholders' equity
Preferred stock, no stated par value;
authorized 1,000,000 shares, none issued -- --
Common stock, par value $1.875 per share;
authorized 26,666,667 shares; issued and outstanding
1997 - 10,675,006; 1996 - 8,002,648, net of shares
in Treasury: 1997 - 43,032; 1996 - 31,204 20,085 20,085
Additional paid-in-capital 82,476 83,707
Retained earnings 14,573 4,398
Net unrealized gains on securities available for sale 3,611 7,357
Treasury stock at cost (1,120) (826)
----------- -----------
Total Shareholders' Equity 119,625 114,721
----------- ===========
Total Liabilities and Shareholders' Equity $1,506,938 $1,358,013
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.

Note: The Balance Sheet at Dec. 31, 1996 has been derived from the audited
financial statements at that date.

<PAGE>

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) September 30 September 30
------------------------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans including fees $26,033 $23,196 $75,656 $67,123
Deposits in banks 22 15 66 44
Federal funds sold 42 47 93 160
Investment securities 4,414 3,893 11,727 11,410
-------- -------- -------- --------
Total interest income 30,511 27,151 87,542 78,737
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 10,564 8,675 29,663 25,400
Federal funds purchased, borrowed funds and
securities sold under repurchase agreements 3,684 3,052 9,905 8,750
-------- -------- -------- --------
Total interest expense 14,248 11,727 39,568 34,150
-------- -------- -------- --------
Net interest income 16,263 15,424 47,974 44,587
Provision for loan losses 1,200 975 3,600 2,925
-------- -------- -------- --------
Net interest income after provision
for loan losses 15,063 14,449 44,374 41,662
-------- -------- -------- --------
OTHER INCOME
Trust and investment management income 683 548 2,006 1,752
Service charges on deposit accounts 1,013 885 2,974 2,478
Net gains (losses) on sale of securities and mortgages 620 (57) 1,462 (72)
Other 979 978 2,782 2,227
-------- -------- -------- --------
Total other income 3,295 2,354 9,224 6,385
-------- -------- -------- --------
OTHER EXPENSES
Salaries, wages and employee benefits 6,563 5,703 19,450 16,161
Net premises and equipment 1,818 1,726 5,544 5,123
Other operating 3,267 3,216 8,946 8,858
-------- -------- -------- --------
Total other expenses 11,648 10,645 33,940 30,142
-------- -------- -------- --------
Income before income taxes 6,710 6,158 19,658 17,905
Applicable income tax expense 1,991 1,872 6,020 5,511
-------- -------- -------- --------
Net income $4,719 $4,286 $13,638 $12,394
======== ======== ======== ========

PER SHARE OF COMMON STOCK
Net income $0.45 $0.40 $1.30 $1.16
Dividends paid in cash 0.21 0.16 0.58 0.48
</TABLE>

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

<PAGE>

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(Dollars in thousands)
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $13,638 $12,394
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Provision for loan and lease losses 3,600 2,925
Depreciation and amortization 2,627 2,406
Net gains (losses) on sale of securities and mortgages 1,462 (72)
Mortgage loans originated for resale (15,610) (16,045)
Sale of mortgage loans originated for resale 15,610 16,045
Other (4,888) (3,892)
--------- ---------

Net cash provided by (used in) operating activities 16,439 13,761

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities - available for sale l12,584 30,034
Proceeds from maturities of investment securities - held to maturity 4,008 18,133
Proceeds from maturities of investment securities - available for sale 740 740
Purchase of investment securities (107,581) (54,776)
Proceeds from sales of loans -- --
Net increase in loans (55,563) (73,380)
Purchases of premises & equipment (2,333) (2,070)
--------- ---------

Net cash provided by (used in) investing activities (138,145) (81,319)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in:
Deposits 92,581 56,680
Repurchase agreements, fed funds & short-term borrowings (70,211) 53,101
Long-term borrowings & subordinated capital note 119,600 (35,479)
(Increase) decrease in treasury stock (294) 389
Issuance of common stock under dividend reinvestment plan (1,231) 49
Cash dividends (6,422) (5,252)
--------- ---------

Net cash provided by (used in) financing activities 134,023 69,488

Net increase (decrease) in cash and cash equivalents 12,317 1,930

Cash and cash equivalents at January 1 41,996 41,209
--------- ---------

Cash and cash equivalents at September 30 $54,313 $43,139
========= =========

</TABLE>

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

<PAGE>

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

1. The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. The financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.

2. The results of operations for the nine-month period ended September 30, 1997,
are not necessarily indicative of the results to be expected for the full year.

3. Per share data are based on the weighted average number of shares outstanding
of 10,504,038 and 10,671,969 for 1997 and 1996, respectively, and are computed
after giving retroactive effect to a 4-for-3 stock split paid July 31, 1997 and
a 5% stock dividend paid on October 31, 1996.

4. On September 24, 1997, the Company's Board of Directors declared a cash
dividend of .21 per share payable on November 17, 1997, to shareholders of
record on October 31, 1997.

5. New Accounting Pronouncements - The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," which is effective for financial statements issued after December 15,
1997. Early adoption of the new standard is not permitted. The new standard
eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed. The adoption of this new standard is
not expected to have a material impact on the disclosure of earnings per share
in the financial statements. The effect of adopting this new standard has not
been determined.

The Financial Accounting Standards Board has issued Statement of
Accounting Standards No. 130, "Reporting Comprehensive Income," which is
effective for years beginning after December 15, 1997. This new standard
requires entities presenting a complete set of financial statements to include
details of comprehensive income. Comprehensive income consists of net income or
loss for the current period and income, expenses, gains, and losses that bypass
the income statement and are reported directly in a separate component of
equity. The Company has not analyzed this statement nor determined the effect on
its financial statements at the present time.

The Financial Accounting Standards Board has issued Statement of
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in June of 1997, which is effective for all periods
beginning after December 15, 1997. SFAS 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. The Company
has not yet adopted this statement, but does not expect its effects to be
material.

6. The Company identifies a loan as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of the
loan agreement. The balance of impaired loans was $6,953,000 at September 30,
1997, all of which are nonaccrual loans. The allowance for loan loss associated
with these impaired loans was $593,000 at September 30, 1997. The Company
recognizes income on impaired loans under the cash basis when the loans are both
current and the collateral on the

6
<PAGE>

loan is sufficient to cover the outstanding obligation to the Company. If these
factors do not exist, the Company will not recognize income on such loans.

7. On May 22, 1997, the Company issued 41.5 million of 9.00% of junior
subordinated deferrable interest debentures (the "debentures") to NPB Capital
Trust (the "Trust"), a Delaware business trust, in which the Company owns all of
the common equity. The debentures are the sole asset of the Trust. The Trust
issued $40.25 million of preferred securities to investors. The Company's
obligations under the debentures and related documents, taken together,
constitute a full and unconditional guarantee by the Company of the Trust's
obligations under the preferred securities. Although the debentures will be
treated as debt of the Company, they currently qualify for tier 1 capital
treatment in an amount up to 25% of total tier 1 capital. The preferred
securities are redeemable by the Company on or after June 30, 2002, or earlier
in the event the deduction of related interest for federal income taxes is
prohibited, treatment as tier 1 capital is no longer permitted or certain other
contingencies arise. The preferred securities must be redeemed upon maturity of
the debentures in 2027. See "Liquidity and Interest Rate Sensitivity" and
"Capital Adequacy" below.

7
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

The following discussion and analysis is intended to assist in
understanding and evaluating the major changes in the financial condition and
earnings performance of the Company with a primary focus on an analysis of
operating results.

FINANCIAL CONDITION

Total assets increased to $1.507 billion, an increase of $148.9
million, or 11.0% over the $1.358 billion at December 31, 1996. This increase is
reflected primarily in the loan and investment categories, the result of the
investment of deposits, the Company's primary source of funds.

Total cash and cash equivalents increased $12.3 million, or 29.3% at
September 30, 1997, when compared to December 31, 1996. This increase was
primarily in cash and due from banks.

Loans increased to $1.080 billion at September 30, 1997. The increase
of $52.0 million, or 5.1% compared to December 31, 1996, was primarily the
result of the investment of deposits and long-term borrowings. Loans originated
for immediate resale during the first nine months of 1997 amounted to $15.6
million. The Company's credit quality is reflected by the annualized ratio of
net chargeoffs to total loans of .18% through the third quarter of 1997 versus
.14% for the year 1996, and the ratio of nonperforming assets to total loans of
1.23% at September 30, 1997, compared to 1.21% at December 31, 1996.
Nonperforming assets, including nonaccruals, loans 90 days past due,
restructured loans and other real estate owned, were $10.2 million at September
30, 1997, compared to $12.7 million at December 31, 1996. Of these amounts,
nonaccrual loans represented $7.0 million and $8.7 million at September 30,
1997, and December 31, 1996, respectively. Loans 90 days past due and still
accruing interest were $2.6 million and $3.7 million at September 30, 1997, and
December 31, 1996, respectively. Other real estate owned was $662,000 and
$319.000 at September 30, 1997, and December 31, 1996, respectively. The Company
had no restructured loans at September 30, 1997, or December 31, 1996. The
allowance for loan losses to nonperforming assets was 243.3% and 179.2% at
September 30, 1997, and December 31, 1996, respectively. As is evident from the
above amounts relative to nonperforming assets, there have been no significant
changes between December 31, 1996, and September 30, 1997. The Company has no
significant exposure to energy and agricultural-related loans.

Investments, the Company's secondary use of funds, increased $79.5
million, or 33.6% to $316.3 million at September 30, 1997, when compared to
December 31, 1996. The increase is due to investment purchases of $107.6
million, primarily in municipal securities, which was partially offset by
investment sales and maturities and the amortization of mortgage-backed
securities.

As the primary source of funds, aggregate deposits of $1.073 billion at
September 30, 1997, increased $92.6 million, or 9.4% compared to December 31,
1996. The increase in deposits during the first nine months of 1997 was
primarily in interest bearing deposits which increased $89.8 million while
noninterest-bearing deposits increased $2.8 million. Certificates of deposit in
excess of $100,000 increased $19.8 million. In addition to deposits, earning
assets are funded to some extent through purchased funds and borrowings. These
include securities sold under repurchase agreements, federal funds purchased,
short-term borrowings, and long-term debt obligations. In aggregate, these funds
totaled $297.4 million at September 30, 1997, and $248.0 million at December 31,
1996. The increase of $49.4 million represents the issuance of $40.25 million in
junior subordinated deferrable interest debentures and an increase in long-term
obligations of $79.4 million which was partially offset by a decrease in
short-term borrowings, primarily securities sold under repurchase agreements and
federal funds purchased.

Shareholders' equity increased slightly through September 30, 1997.
This increase was due to an increase in earnings retained offset by a decrease
in the change in valuation adjustment for securities

8
<PAGE>

available for sale, which represents the accounting treatment required under
Statement of Financial Accounting Standards 115, "Accounting for Certain
Investments in Debt and Equity Securities," applied to the decrease in market
value of the Company's investment portfolio. Cash dividends paid during the
first nine months of 1997 increased $930,000, or 18.0%, compared to the cash
dividends paid during the first nine months of 1996. Earnings retained during
the first nine months of 1997 were 55.3% compared to 57.6% during the first nine
months of 1996.

RESULTS OF OPERATIONS

Net income for the quarter ended September 30, 1997, was $4.7 million,
10.1% more than the $4.3 million reported for the same period in 1996. For the
first nine months, net income reached $13.6 million, or 10.0% more than the
$12.4 million reported for the first nine months of 1996. The Company's
performance has been and will continue to be in part influenced by the strength
of the economy and conditions in the real estate market.

Net interest income is the difference between income on assets and
interest expense on liabilities. Net interest income increased $.8 million, or
5.4% to $16.3 million during the third quarter of 1997 from $15.4 million in the
third quarter 1996. For the comparative nine-month period, net interest income
increased $3.4 million, or 7.6% to $48.0 million from $44.6 million in 1996. The
increase in interest income is a result of growth in loan outstandings and
higher rates on loans that was partially offset by growth in deposits and higher
rates on deposits and borrowings. Interest rate risk is a major concern in
forecasting earnings potential. The Company's prime rate from January 1, 1997,
to March 25, 1997, was 8.25%. On March 26, 1997, the prime rate changed to
8.50%. Interest expense during the first nine months of 1997 increased $2.5
million, or 21.5% compared to the prior year's first nine months. Despite the
current rate environment, the cost of attracting and holding deposited funds is
an every-increasing expense in the banking industry. These increases are the
real costs of deposit accumulation and retention, including FDIC insurance costs
and branch overhead expenses. Such costs are necessary for continued growth and
to maintain and increase market share of available deposits.

The provision for loan and lease losses is determined by periodic
reviews of loan quality, current economic conditions, loss experience and loan
growth. Based on these factors, the provision for loan and lease losses
increased $225,000 for the third quarter and $675,000 for the first nine months
of 1997 compared to the same periods in 1996. The allowance for loan and lease
losses of $24.9 million at September 30, 1997, and $22.7 million at December 31,
1996, as a percentage of total loans was 2.2% at both dates. The Company's net
chargeoffs of $1,495,000 and $1,113,000 during the first nine months of 1997 and
1996, respectively, continue to be comparable to those of the Company's peers,
as reported in the Bank Holding Company Performance Report.

"Total other income" increased $941,000, or 40.0% during the third
quarter of 1997, as a result of increased gains on sales of securities and
mortgages of $677,000 increased trust and investment management income of
$135,000, and increased service charges on deposit accounts of $128,000. Year to
date, other income increased $2.8 million, or 44.5% when compared to the first
nine months of 1996 as a result of increased gains on sales of securities and
mortgages of $1,534,000, increased other income of $555,000, increased service
charges on deposit accounts of $496,000 and increased trust and investment
management income of $254,000. "Total other expenses" increased $1.0 million, or
9.4% during the quarter ended September 30, 1997, and increased $3.8 million, or
12.6% for the nine-month period. Of this year-to-date increase, salaries, wages,
and employee benefits increased $3.3 million, or 20.4%, premises and equipment
increased $421,000, or 8.2%, and other operating expenses increased $88,000, or
1.0%.

Income before income taxes increased by $552,000, or 9.0%, compared to
the third quarter of 1996. In comparing the first nine months of 1997 to 1996,
income before income taxes increased $1.8

9
<PAGE>

million, or 9.8% . Income taxes increased $119,000 for the quarter and increased
509,000 for the nine-month period.

LIQUIDITY AND INTEREST RATE SENSITIVITY

The primary functions of asset/liability management are to assure
adequate liquidity and maintain an appropriate balance between interest-earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. Funding affecting
short-term liquidity, including deposits, repurchase agreements, fed funds
purchased, and short-term borrowings, increased $22.4 million from year end
1996. Long-term borrowings increased $119.6 million during the first nine months
of 1997. As described in note 7 to the financial statements included herein at
Item #1, cash inflow was increased by a $40.25 million debt offering on May 22,
1997.

The goal of interest rate sensitivity management is to avoid
fluctuating net interest margins and to enhance consistent growth of net
interest income through periods of changing interest rates. Such sensitivity is
measured as the difference in the volume of assets and liabilities in the
existing portfolio that are subject to repricing in a future time period.

The following table shows separately the interest rate sensitivity of
each category of interest-earning assets and interest-bearing liabilities at
September 30, 1997:
<TABLE>
<CAPTION>
Repricing Periods (1)
Three Months One Year
Within Three Through One Through Five Over
Months Year Years Five Years
Assets
<S> <C> <C> <C> <C>
Interest-bearing deposits at banks $1,280 $ -- $ -- $ --
Investment securities 18,963 43,106 140,914 113,293
Loans and leases 329,273 150,206 437,789 163,029
Other assets 2,500 -- -- 106,585
--------- --------- --------- ---------
352,016 193,312 578,703 382,907
--------- --------- --------- ---------
Liabilities and equity
Noninterest-bearing deposits 147,900 -- -- --
Interest-bearing deposits 197,333 247,684 256,938 223,534
Borrowed funds 155,761 11,979 68,131 21,315
Preferred securities -- -- -- 40,250
Other liabilities -- -- -- 16,498
Hedging instruments 80,000 -- (80,000) --
Shareholders' equity -- -- -- 119,625
--------- --------- --------- ---------
580,994 259,663 245,069 421,212
--------- --------- --------- ---------
Interest sensitivity gap (228,978) (66,351) 333,634 (38,305)
--------- --------- --------- ---------

Cumulative interest rate sensitivity gap ($228,978) ($295,329) $38,305 $ --
========= ========= ========= =========
</TABLE>

(1) Adjustable rate loans are included in the period in which interest rates are
next scheduled to adjust rather than in the period in which they are due. Fixed
rate loans are included in the period in which they are scheduled to be repaid
and are adjusted to take into account estimated prepayments based upon
assumptions estimating prepayments in the interest rate environment prevailing
during the third calendar quarter of 1997. The table assumes prepayments and
scheduled principal amortization of fixed-

10
<PAGE>

rate loans and mortgage-backed securities and assumes that adjustable rate
mortgages will reprice at contractual repricing intervals. There has been no
adjustment for the impact of future commitments and loans in process.

(2) Savings and NOW deposits are scheduled for repricing based on historical
deposit decay rate analyses, as well as historical moving averages of run-off
for the Company's deposits in these categories. While generally subject to
immediate withdrawal, management considers a portion of these accounts to be
core deposits having significantly longer effective maturities based upon the
Company's historical retention of such deposits in changing interest rate
environments. Specifically, 28.7% of these deposits are considered repriceable
within three months and 71.3% are considered repriceable in the over five-years
category.

Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These characteristics
include the volume of assets and liabilities repricing, the timing of the
repricing, and the relative levels of repricing. Attempting to minimize the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. Based on the Company's gap position as reflected in the above
table, current accepted theory would indicate that net interest income would
increase in a falling rate environment and would decrease in a rising rate
environment. An interest rate gap table does not, however, present a complete
picture of the impact of interest rate changes on net interest income. First,
changes in the general level of interest rates do not affect all categories of
assets and liabilities equally or simultaneously. Second, assets and liabilities
which can contractually reprice within the same period may not, in fact, reprice
at the same time or to the same extent. Third, the table represents a one-day
position; variations occur daily as the Company adjusts its interest sensitivity
throughout the year. Fourth, assumptions must be made to construct such a table.
For example, noninterest bearing deposits are assigned a repricing interval
within one year, although history indicates a significant amount of these
deposits will not move into interest bearing categories regardless of the
general level of interest rates. Finally, the repricing distribution of interest
sensitive assets may not be indicative of the liquidity of those assets.

The Company anticipates volatile interest rate levels for the remainder
of 1997, with no clear indication of sustainable rising or falling rates. Given
this assumption, the Company's asset/liability strategy for 1997 is to maintain
a negative gap (interest-bearing liabilities subject to repricing exceed
interest-earning assets subject to repricing) for periods up to a year. The
impact of a volatile interest rate environment on net interest income is not
expected to be significant to the Company's results of operations. Effective
monitoring of these interest sensitivity gaps is the priority of the Company's
asset/liability management committee.

11
<PAGE>

CAPITAL ADEQUACY

The following table sets forth certain capital performance ratios.

September 30 Dec. 31
1997 1996
CAPITAL LEVELS
Tier 1 leverage ratio 10.29% 7.83%
Tier 1 risk-based ratio 14.11% 10.82%
Total risk-based ratio 15.52% 12.09%

CAPITAL PERFORMANCE
Return of average assets (annualized) 1.30 1.31
Return on average equity (annualized) 15.60 15.60
Earnings retained 55.30 58.50
Internal capital growth (annualized) 8.80 7.60

The Company's capital ratios above compare favorably to the minimum
required amounts of Tier 1 and total capital to "risk-weighted" assets and the
minimum Tier 1 leverage ratio, as defined by banking regulators. At September
30, 1997, the Company was required to have minimum Tier 1 and total capital
ratios of 4.0% and 8.0% , respectively, and a minimum Tier 1 leverage ratio of
3.0%. In order for the Company to be considered "well capitalized," as defined
by banking regulators, the Company must have Tier 1 and total capital ratios of
6.0% and 10.0%, respectively, and a minimum Tier 1 leverage ratio of 5.0%. The
Company currently meets the criteria for a well capitalized institution, and
management believes that, under current regulations, the Company will continue
to meet its minimum capital requirements in the foreseeable future. At present,
the Company has no commitments for significant capital expenditures. As
described in note 7 to the financial statements included therein at Item #1,
capital ratios were increased by a $40.25 million debt offering on May 22, 1997.

The Company is not under any agreement with regulatory authorities nor
is the company aware of any current recommendations by the regulatory
authorities, which, if such recommendations were implemented, would have a
material effect on liquidity, capital resources or operations of the Company.

FUTURE OUTLOOK

In June 1996, the Company's Board of Directors approved the repurchase
of up to 506,667 shares of its common stock from time to time in open market or
negotiated transactions. Repurchased shares will be used for general corporate
purposes, including the Company's dividend reinvestment plan and stock based
compensation plans. To date, a total of 234,950 shares have been repurchased at
an aggregate cost of $5.4 million. Repurchased shares have been restated for the
4-for-3 stock split paid July 31, 1997.

The Company's banking subsidiary, National Penn Bank, (the "Bank"), has
agreed to acquire certain deposits and the physical facility of the Topton
Branch of Patriot Bank. This acquisition will enable the Bank to consolidate its
Mertztown Office into the Topton Office and add new services such as ATM and
safe deposit boxes for the former Patriot customers and service an expanded
market. This transaction, subject to regulatory approval, is expected to be
completed during the fourth quarter 1997. This transaction, while not material,
is expected to be accretive to earnings in 1999.

Two new products at the Bank are Empower PC Banking and Empower Phone
Banking with Telephone Bill Payment Service. Empower PC Banking allows customers
to do their banking from their home or business computers using Microsoft(R)
Money, Quicken(R), or QuickBooks(R). Empower Phone

12
<PAGE>

Banking allows customers to pay their bills anywhere there is a telephone. These
two new products are not expected to have a significant effect on earnings in
1997 and beyond.

This report contains forward-looking statements concerning earnings,
asset quality, and other future events. Actual results could differ materially
due to, among other things, the risks and uncertainties discussed in Exhibit 99
to the Company's Report on Form 10-K for 1996, which is incorporated herein by
reference. Readers are cautioned not to place undue reliance on these
statements. The Company undertakes no obligation to publicly release or update
any of these statements.

13
<PAGE>

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 2. Changes in Securities.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to Vote of Security Holders.

None.

Item 5. Other Information.

In June 1996, the Registrant's Board of Directors approved the
repurchase of up to 506,667 shares of its common stock to be used for general
corporate purposes, including the Registrant's dividend reinvestment plan and
stock option plans. The stock repurchase plan authorizes the Registrant to make
repurchases from time to time in open market or privately negotiated
transactions. To date, a total of 234,950 shares have been repurchased at an
aggregate cost of $5.4 million. (The foregoing totals have been restated for the
4-for-3 stock split paid July 31, 1997.)

During third quarter 1997, the Registrant's banking subsidiary,
National Penn Bank (the "Bank"), opened a supermarket branch in Boyertown
(Montgomery County) and installed 3 new automated teller machines ("ATMs") in
supermarket locations and 2 new ATMs in fast-food locations in southeastern
Pennsylvania.

During fourth quarter 1997, the Bank anticipates opening a loan center
in Bethlehem (Northampton County) and obtaining messenger service branch
authority throughout its 8-county trading area.

In September 1997, Garry D. Koch was promoted to Executive Vice
President and Chief Lending/Credit Officer of the Bank, and Sharon L. Weaver was
promoted to Executive Vice President of the Bank.

During third quarter 1997, the Registrant and the Bank entered into
agreements with various senior officers of the Bank providing them with certain
severance benefits in the event of a change in control of the Registrant. Copies
of such agreements entered into with executive officers of the Bank are included
in this Report as Exhibits 10.1, 10.2 and 10.3.

14
<PAGE>

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

Exhibit 10.1 - Executive Agreement dated July 23, 1997 between
National Penn Bancshares, Inc., National Penn Bank, and Gary
L. Rhoads.

Exhibit 10.2 - Executive Agreement dated July 23, 1997 between
National Penn Bancshares, Inc., National Penn Bank, and Sandra
L. Spayd.

Exhibit 10.3 - Executive Agreement dated September 24, 1997
between National Penn Bancshares, Inc., National Penn Bank,
and Garry D. Koch.

Exhibit 27 - Financial Data Schedule.

(b) Reports on Form 8-K. On September 9, 1997, the Registrant filed a
Report on Form 8-K dated August 28, 1997, under Item 5, Other Events. The Report
did not include any financial statements.

15
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

NATIONAL PENN BANCSHARES, INC.
(Registrant)

Dated: November 10, 1997 By /s/ Wayne R. Weidner
Wayne R. Weidner, Executive
Vice President

Dated: November 10, 1997 By /s/ Gary L. Rhoads
Gary L. Rhoads, Principal
Financial Officer

EXECUTIVE AGREEMENT

THIS AGREEMENT is made as of this 23rd day of July, 1997, among NATIONAL
PENN BANCSHARES, INC., a Pennsylvania business corporation having its principal
place of business in Boyertown, Pennsylvania ("NPB"), NATIONAL PENN BANK, a
national banking association having its principal place of business in
Boyertown, Pennsylvania ("Bank"), and Gary L. Rhoads, an individual residing in
Boyertown, Pennsylvania ("Executive").

W I T N E S S E T H :

WHEREAS, Executive is employed by [NPB] [Bank] as a Senior Vice President;
and

WHEREAS, the Boards of Directors of NPB and Bank deem it advisable to
provide Executive with certain additional benefits in the event of certain
changes in control of NPB or Bank so that Executive will continue to attend to
the business of NPB and Bank without distraction in the face of the potentially
disturbing circumstances arising therefrom.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants and promises set
forth herein, and each intending to be legally bound, NPB, Bank and Executive
agree as follows:

1. Definitions. The following terms have the meanings specified below:

a. "Affiliate" means any corporation which is included within a
"controlled group of corporations" including NPB, as determined under Code
Section 1563.

b. "Base Amount" means Executive's average annualized taxable
compensation for the five (5) years prior to the year in which a Change in
Control occurs, determined in accordance with the provisions of Code
Section 280G and regulations promulgated thereunder.

1
<PAGE>

c. "Cause" has the meaning set forth in Section 4 hereof.

d. "Change in Control" means:

i. An acquisition by any "person" or "group" (as those terms are
defined or used in Section 13(d) of the Exchange Act) of "beneficial
ownership" (within the meaning of Rule 13d-3 under the Exchange Act)
of securities of NPB representing 24.99% or more of the combined
voting power of NPB's securities then outstanding;

ii. A merger, consolidation or other reorganization of Bank,
except where the resulting entity is controlled, directly or
indirectly, by NPB;

iii. A merger, consolidation or other reorganization of NPB,
except where shareholders of NPB immediately prior to consummation of
any such transaction continue to hold at least a majority of the
voting power of the outstanding voting securities of the legal entity
resulting from or existing after any transaction and a majority of the
members of the Board of Directors of the legal entity resulting from
or existing after any such transaction are former members of NPB's
Board of Directors;

iv. A sale, exchange, transfer or other disposition of
substantially all of the assets of the Employer to another entity,
except to an entity controlled, directly or indirectly, by NPB;

v. A sale, exchange, transfer or other disposition of
substantially all of the assets of NPB to another entity, or a
corporate division involving NPB; or

vi. A contested proxy solicitation of the shareholders of NPB
that results in the contesting party obtaining the ability to cast 25%
or more of the

2
<PAGE>

votes entitled to be cast in an election of directors of NPB.

e. "Code" means the Internal Revenue Code of 1986, as amended,
and as the same may be amended from time to time.

f. "Employer" means Bank, NPB or any Affiliate which employs
Executive at any particular time.

g. "Employment" means Executive's employment by Bank, NPB or any
Affiliate at any particular time.

h. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

i. "Salary" means the Executive's annual base salary, established
either by contract or by the Board of Directors of Employer, prior to
any reduction of such salary pursuant to any contribution to a
tax-qualified plan under Section 401(k) of the Code.

2. Resignation of Executive. If a Change in Control shall occur and if
thereafter, at any time, there shall be:

a. Any involuntary termination of Executive's employment (other than
for Cause);

b. Any reduction in Executive's title, responsibilities or authority,
including such title, responsibilities or authority as such may be
increased from time to time;

c. Any reduction in Executive's Salary in effect immediately prior to
a Change in Control, or any failure to provide Executive with benefits at
least as favorable as those enjoyed by Executive under any of the pension,
life insurance, medical, health and accident, disability or other employee
plans of NPB or an Affiliate in which Executive participated immediately
prior to a Change in Control, or the taking of any action that would
materially reduce any of such compensation or benefits in effect at the
time of the Change

3
<PAGE>

in Control, unless such reduction relates to a reduction applicable to all
employees generally;

d. Any reassignment of Executive beyond a thirty (30) minute commute
by automobile from Boyertown, Pennsylvania; or

e. Any requirement that Executive travel in performance of his duties
on behalf of NPB or an Affiliate for a greater period of time during any
year than was required of Executive during the year preceding the year in
which the Change in Control occurred;

then, at the option of Executive, exercisable by Executive within one hundred
eighty (180) days of the occurrence of each and every of the foregoing events,
the Executive may resign from employment (or, if involuntarily terminated, give
notice of intention to collect benefits hereunder) by delivering a notice in
writing (the "Notice of Termination") to NPB, and the Continuing Compensation
and Benefits' provisions of this Agreement shall apply.

3. Continuing Compensation and Benefits.

a. At the time of termination of Executive's employment in accordance
with Section 2 hereof, Employer shall make a lump-sum cash payment to
Executive no later than thirty (30) days following the date of such
termination in an amount equal to 150% of Executive's Base Amount.

b. Notwithstanding the foregoing or any other provision of this
Agreement to the contrary, in no event shall any payment to Executive
pursuant to Subsection 3.a. above be greater than an amount equal to an
amount ("X") determined pursuant to the following formula:

D
X = (2.99A - B) x (1 + C) .

For purposes of the foregoing formula:

A = Executive's Base Amount (determined pursuant to Internal Revenue
Code Section 280G(b)(3)(A)) on the date of the Change in Control;

4
<PAGE>

B = The present value of all other amounts which qualify as parachute
payments under Code Section 280G(b)(2)(A) or (B) (without regard
to the provisions of Code Section 280G(b)(2)(A)(ii)), such
present value to be determined pursuant to the provisions of Code
Section 280G;

C = 120% times 0.5 times the lowest of the semiannual applicable
federal rates (determined pursuant to Code Section 1274(d)) in
effect on the date of the Change in Control; and

D = The number of whole semiannual periods plus any fraction of a
semiannual period from the date of the Change in Control to the
date of termination of the Executive's employment.

c. Executive shall not be required to mitigate the amount of any
payment provided for in Subsection 3.a. by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
subsection 3.a. be reduced by any compensation earned by Executive as the
result of employment by another employer or by reason of Executive's
receipt of or right to receive any retirement or other benefits after the
date of termination of employment or otherwise, except as otherwise
provided therein.

4. Termination for Cause. The Employer may terminate Executive's Employment
for "Cause". For purposes of this Agreement, "Cause" means the occurrence of
either of the following:

a. Executive's conviction of, or plea of guilty or nolo contendere to,
a felony or a crime of falsehood or involving moral turpitude; or

b. the willful failure by Executive to substantially perform his
duties to the Employer, other than a failure resulting from Executive's
incapacity as a result of the Executive's disability, which willful failure
results in demonstrable material injury and damage to the Employer.
Notwithstanding the foregoing, Executive's Employment shall

5
<PAGE>

not be deemed to have been terminated for Cause if such termination took
place as a result of:

i. questionable judgment on the part of Executive;

ii. any act or omission believed by Executive in good faith, to have
been in or not opposed to the best interests of the Employer; or

iii. any act or omission in respect of which a determination could
properly be made that Executive met the applicable standard of conduct
prescribed for indemnification or reimbursement or payment of expenses
under the By-laws of NPB or the laws of the Commonwealth of Pennsylvania,
or the directors and officers' liability insurance of NPB or any Employer,
in each case as in effect at the time of such act or omission.

If Executive's Employment is terminated for Cause, all rights of Executive
under this Agreement shall cease as of the effective date of such termination,
except that Executive (i) shall be entitled to receive accrued Salary through
the date of such termination and (ii) shall be entitled to receive the payments
and benefits to which he is then entitled under the employee benefit plans of
the Employer or any affiliate thereof as of the date of such termination.

5. Arbitration. Any dispute or controversy arising out of or relating to
this Agreement and any controversy as to a termination for Cause shall be
settled exclusively by arbitration, conducted before a panel of three
arbitrators, in Reading, Pennsylvania, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrators' award in any court having jurisdiction.

6. Exclusive Benefit. Executive shall have no right to commute, sell,
assign, transfer or otherwise convey the right to receive any payments
hereunder, which payment and the right thereto are expressly declared to be
non-assignable and non-transferrable. In the event of any attempted assignment
or transfer, Employer shall have no further liability hereunder.

<PAGE>

7. Notices. Any notice required or permitted to be given under this
Agreement shall be properly given if in writing and if mailed by registered or
certified mail, postage prepaid with return receipt requested, to Executive's
residence in the case of any notice to Executive, or to the principal office of
Bank, in the case of any notice to the Employer.

8. Entire Agreement. This Agreement contains the entire agreement relating
to the subject matter hereof and may not be modified, amended or changed orally
but only by an agreement in writing, consented to in writing by NPB, and signed
by the party against whom enforcement of any modification, amendment or change
is sought.

9. Benefits.

a. This Agreement shall be binding upon and inure to the benefit of
NPB and Bank and their respective successors and assigns. Each of NPB and
Bank shall requires any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all or substantially all of the
business and/or assets of NPB or Bank to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that NPB
or Bank would be required to perform it if no such succession had taken
place. Failure to obtain such assumption and agreement prior to the
effectiveness of any such succession shall constitute a breach of this
Agreement and the provisions of Section 2 of this Agreement shall apply. As
used in this Agreement, "NPB" or "Bank" shall mean NPB or Bank as defined
previously and any successor to the business and/or assets of NPB or Bank
as aforesaid which assumes and agrees to perform this Agreement by
operation of law or otherwise.

b. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by Executive's personal or legal representatives,
executors, administrators, heirs, distributees, devisees and legatees.

10. Applicable Law. This Agreement shall be governed by and construed in
accordance with the domestic internal law (but

<PAGE>

not the law of conflicts of law) of the Commonwealth of Pennsylvania.

11. Headings. The headings of the sections and subsections hereof are for
convenience only and shall not control or affect the meaning or construction or
limit the scope or intent of any of the sections or subsections of this
Agreement.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

<PAGE>

IN WITNESS WHEREOF, NPB and Bank have each duly caused this Agreement to be
executed on its behalf by its duly authorized officers, and Executive has
hereunto set his hand and seal, as of the day and year first above written.

NATIONAL PENN BANCSHARES, INC.

(SEAL) By: /s/ Lawrence T. Jilk, Jr.
Title: President & CEO

Attest:/s/ Sandra L. Spayd
Title: Corporate Secretary

NATIONAL PENN BANK

(SEAL) By:/s/ Wayne R. Weidner
Title: President & CEO

Attest:/s/ Sandra L. Spayd
Title: Corporate Secretary

Witness:

July 23, 1997 /s/ Gary L. Rhoads (SEAL)
[Executive]

EXECUTIVE AGREEMENT

THIS AGREEMENT is made as of this 23rd day of July, 1997, among NATIONAL
PENN BANCSHARES, INC., a Pennsylvania business corporation having its principal
place of business in Boyertown, Pennsylvania ("NPB"), NATIONAL PENN BANK, a
national banking association having its principal place of business in
Boyertown, Pennsylvania ("Bank"), and Sandra L. Spayd, an individual residing in
Boyertown, Pennsylvania ("Executive").

W I T N E S S E T H :

WHEREAS, Executive is employed by [NPB] [Bank] as a Senior Vice President;
and

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants and promises set
forth herein, and each intending to be legally bound, NPB, Bank and Executive
agree as follows:

1. Definitions. The following terms have the meanings specified below:

a. "Affiliate" means any corporation which is included within a
"controlled group of corporations" including NPB, as determined under Code
Section 1563.

1
<PAGE>

c. "Cause" has the meaning set forth in Section 4 hereof.

d. "Change in Control" means:

ii. A merger, consolidation or other reorganization of Bank,
except where the resulting entity is controlled, directly or
indirectly, by NPB;

iv. A sale, exchange, transfer or other disposition of
substantially all of the assets of the Employer to another entity,
except to an entity controlled, directly or indirectly, by NPB;

v. A sale, exchange, transfer or other disposition of
substantially all of the assets of NPB to another entity, or a
corporate division involving NPB; or

vi. A contested proxy solicitation of the shareholders of NPB
that results in the contesting party obtaining the ability to cast 25%
or more of the

<PAGE>

votes entitled to be cast in an election of directors of NPB.

e. "Code" means the Internal Revenue Code of 1986, as amended, and as
the same may be amended from time to time.

f. "Employer" means Bank, NPB or any Affiliate which employs Executive
at any particular time.

g. "Employment" means Executive's employment by Bank, NPB or any
Affiliate at any particular time.

h. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

i. "Salary" means the Executive's annual base salary, established
either by contract or by the Board of Directors of Employer, prior to any
reduction of such salary pursuant to any contribution to a tax-qualified
plan under Section 401(k) of the Code.

2. Resignation of Executive. If a Change in Control shall occur and if
thereafter, at any time, there shall be:

a. Any involuntary termination of Executive's employment (other than
for Cause);

b. Any reduction in Executive's title, responsibilities or authority,
including such title, responsibilities or authority as such may be
increased from time to time;

3
<PAGE>

in Control, unless such reduction relates to a reduction applicable to all
employees generally;

d. Any reassignment of Executive beyond a thirty (30) minute commute
by automobile from Boyertown, Pennsylvania; or

3. Continuing Compensation and Benefits.

D
X = (2.99A - B) x (1 + C) .

For purposes of the foregoing formula:

A = Executive's Base Amount (determined pursuant to Internal Revenue
Code Section 280G(b)(3)(A)) on the date of the Change in Control;

<PAGE>

C = 120% times 0.5 times the lowest of the semiannual applicable
federal rates (determined pursuant to Code Section 1274(d)) in
effect on the date of the Change in Control; and

D = The number of whole semiannual periods plus any fraction of a
semiannual period from the date of the Change in Control to the
date of termination of the Executive's employment.

4. Termination for Cause. The Employer may terminate Executive's Employment
for "Cause". For purposes of this Agreement, "Cause" means the occurrence of
either of the following:

a. Executive's conviction of, or plea of guilty or nolo contendere to,
a felony or a crime of falsehood or involving moral turpitude; or

<PAGE>

not be deemed to have been terminated for Cause if such termination took
place as a result of:

i. questionable judgment on the part of Executive;

ii. any act or omission believed by Executive in good faith, to
have been in or not opposed to the best interests of the Employer; or

iii. any act or omission in respect of which a determination
could properly be made that Executive met the applicable standard of
conduct prescribed for indemnification or reimbursement or payment of
expenses under the By-laws of NPB or the laws of the Commonwealth of
Pennsylvania, or the directors and officers' liability insurance of
NPB or any Employer, in each case as in effect at the time of such act
or omission.

<PAGE>

9. Benefits.

10. Applicable Law. This Agreement shall be governed by and construed in
accordance with the domestic internal law (but

<PAGE>

not the law of conflicts of law) of the Commonwealth of Pennsylvania.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

<PAGE>

NATIONAL PENN BANCSHARES, INC.

(SEAL) By:/s/ Lawrence T. Jilk, Jr.
Title: President & CEO

Attest:/s/ Pamela K. Koeshartanto
Title: Executive Assistant

NATIONAL PENN BANK

(SEAL) By:/s/ Wayne R. Weidner
Title: President & CEO

Attest:/s/ Pamela K. Koeshartanto
Title: Executive Assistant

Witness:

July 23, 1997 /s/ Sandra L. Spayd (SEAL)
[Executive]

EXECUTIVE AGREEMENT

THIS AGREEMENT is made as of this 24th day of September, 1997, among
NATIONAL PENN BANCSHARES, INC., a Pennsylvania business corporation having its
principal place of business in Boyertown, Pennsylvania ("NPB"), NATIONAL PENN
BANK, a national banking association having its principal place of business in
Boyertown, Pennsylvania ("Bank"), and Garry D. Koch, an individual residing in
Mertztown, Pennsylvania ("Executive").

W I T N E S E T H :

WHEREAS, Executive is employed by [NPB] [Bank] as an Executive Vice
President; and

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants and promises set
forth herein, and each intending to be legally bound, NPB, Bank and Executive
agree as follows:

1. Definitions. The following terms have the meanings specified below:

a. "Affiliate" means any corporation which is included within a
"controlled group of corporations" including NPB, as determined under Code
Section 1563.

c. "Cause" has the meaning set forth in Section 4 hereof.

d. "Change in Control" means:

<PAGE>

combined voting power of NPB's securities then outstanding;

ii. A merger, consolidation or other reorganization of Bank,
except where the resulting entity is controlled, directly or
indirectly, by NPB;

iv. A sale, exchange, transfer or other disposition of
substantially all of the assets of the Employer to another entity,
except to an entity controlled, directly or indirectly, by NPB;

v. A sale, exchange, transfer or other disposition of
substantially all of the assets of NPB to another entity, or a
corporate division involving NPB; or

vi. A contested proxy solicitation of the shareholders of NPB
that results in the contesting party obtaining the ability to cast 25%
or more of the votes entitled to be cast in an election of directors
of NPB.

e. "Code" means the Internal Revenue Code of 1986, as amended, and as
the same may be amended from time to time.

f. "Employer" means Bank, NPB or any Affiliate which employs Executive
at any particular time.

g. "Employment" means Executive's employment by Bank, NPB or any
Affiliate at any particular time.

h. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

i. "Salary" means the Executive's annual base salary, established
either by contract or by the Board of Directors of Employer, prior to any
reduction of such salary pursuant to any contribution to a tax-qualified
plan under Section 401(k) of the Code.

2
<PAGE>

2. Resignation of Executive. If a Change in Control shall occur and if
thereafter, at any time, there shall be:

a. Any involuntary termination of Executive's employment (other than
for Cause);

b. Any reduction in Executive's title, responsibilities or authority,
including such title, responsibilities or authority as such may be
increased from time to time;

d. Any reassignment of Executive beyond a thirty (30) minute commute
by automobile from Boyertown, Pennsylvania; or

3. Continuing Compensation and Benefits.

b. Notwithstanding the foregoing or any other provision of this
Agreement to the contrary, in no event shall any payment to Executive
pursuant to Subsection 3.a. above be

<PAGE>

greater than an amount equal to an amount ("X") determined pursuant to the
following formula:

D
X = (2.99A - B) x (1 + C) .

For purposes of the foregoing formula:

A = Executive's Base Amount (determined pursuant to Internal Revenue
Code Section 280G(b)(3)(A)) on the date of the Change in Control;

C = 120% times 0.5 times the lowest of the semiannual applicable
federal rates (determined pursuant to Code Section 1274(d)) in
effect on the date of the Change in Control; and

D = The number of whole semiannual periods plus any fraction of a
semiannual period from the date of the Change in Control to the
date of termination of the Executive's employment.

4. Termination for Cause. The Employer may terminate Executive's Employment
for "Cause". For purposes of this Agreement, "Cause" means the occurrence of
either of the following:

a. Executive's conviction of, or plea of guilty or nolo contendere to,
a felony or a crime of falsehood or involving moral turpitude; or

4
<PAGE>

Notwithstanding the foregoing, Executive's Employment shall not be deemed
to have been terminated for Cause if such termination took place as a
result of:

i. questionable judgment on the part of Executive;

ii. any act or omission believed by Executive in good faith, to
have been in or not opposed to the best interests of the Employer; or

iii. any act or omission in respect of which a determination
could properly be made that Executive met the applicable standard of
conduct prescribed for indemnification or reimbursement or payment of
expenses under the By-laws of NPB or the laws of the Commonwealth of
Pennsylvania, or the directors and officers' liability insurance of
NPB or any Employer, in each case as in effect at the time of such act
or omission.

<PAGE>

9. Benefits.

10. Applicable Law. This Agreement shall be governed by and construed in
accordance with the domestic internal law (but not the law of conflicts of law)
of the Commonwealth of Pennsylvania.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

<PAGE>

NATIONAL PENN BANCSHARES, INC.

(SEAL) By:/s/Wayne R. Weidner
Title: Executive Vice President

Attest:/s/ Sandra L. Spayd
Title:

NATIONAL PENN BANK

(SEAL) By:/s/ Wayne R. Weidner
Title: President & CEO

Attest:/s/ Sandra L. Spayd
Title:

Witness:

/s/ Pamela K. Koeshartanto /s/ Garry D. Koch (SEAL)
[Executive]

<ARTICLE> 9
<CIK> 0000700733
<NAME> NATIONAL PENN BANCSHARES, INC.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> Sep-30-1997
<CASH> 50,533
<INT-BEARING-DEPOSITS> 1,280
<FED-FUNDS-SOLD> 2,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 316,276
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 316,276
<LOANS> 1,105,148
<ALLOWANCE> 24,851
<TOTAL-ASSETS> 1,506,938
<DEPOSITS> 1,073,389
<SHORT-TERM> 101,716
<LIABILITIES-OTHER> 16,498
<LONG-TERM> 195,710
20,085
0
<COMMON> 0
<OTHER-SE> 99,540
<TOTAL-LIABILITIES-AND-EQUITY> 1,506,938
<INTEREST-LOAN> 75,656
<INTEREST-INVEST> 11,727
<INTEREST-OTHER> 159
<INTEREST-TOTAL> 87,542
<INTEREST-DEPOSIT> 29,663
<INTEREST-EXPENSE> 39,568
<INTEREST-INCOME-NET> 47,974
<LOAN-LOSSES> 3,600
<SECURITIES-GAINS> 1,462
<EXPENSE-OTHER> 33,940
<INCOME-PRETAX> 19,658
<INCOME-PRE-EXTRAORDINARY> 13,638
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,638
<EPS-PRIMARY> 1.30<F1>
<EPS-DILUTED> 1.30<F1>
<YIELD-ACTUAL> 4.93
<LOANS-NON> 6,953
<LOANS-PAST> 2,599
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 22,746
<CHARGE-OFFS> 2,132
<RECOVERIES> 637
<ALLOWANCE-CLOSE> 24,851
<ALLOWANCE-DOMESTIC> 20,163
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,688
<FN>
<F1> The registrant split its stock 4-for-3 effective July 31, 1997. Prior
financial data schedules have not been restated for this stock split.
</FN>

</TABLE>