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 quarter ended March 31, 2009, 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.

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 impairment;
· deferred tax assets, liabilities, and uncertain tax positions;
· fair value measurements, including assessment of other-than-temporary impairment; and
· Business combinations.

There have been no material changes in the Company's critical accounting policies, judgments and estimates including assumptions or estimation techniques utilized other than those described in Note 2 as compared to the Company's most recent Annual Report on Form 10-K.

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 subsidiaries, National Penn Bank and Christiana, as well as an array of investment, insurance and employee benefit services through its non-bank subsidiaries.

The Company's business is primarily accepting deposits from customers through its 127 community offices, and investing those deposits, together with funds generated from operations and borrowings, in loans, including commercial real estate loans, commercial business loans, residential mortgages, consumer loans, and investment securities. Additionally, the Company offers wealth management and trust services as well as various insurance products.

The Company's strategic plan provides for it to operate within growth markets while performing at a profitability level which exceeds peer averages. Specifically, management is focused on diversification of revenue sources and increased market penetration in growing geographic areas through balanced acquisition and organic growth.

At March 31, 2009, National Penn was one of the largest banking companies headquartered in eastern Pennsylvania. At March 31, 2009, it operated 119 community banking offices throughout thirteen counties in eastern Pennsylvania, 5 community offices in Centre County, Pennsylvania, 1 community office in Cecil County, Maryland, and 2 community offices in Delaware.

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

For the three months ended March 31, 2009, the Company recorded net income available to common shareholders totaling $1.8 million, ($3.8 million before preferred dividend and accretion of warrants), a $19.8 million or 91.7% decrease as compared with $21.6 million over the same 2008 period. Diluted earnings per share was $0.02 for the three month period ending March 31, 2009, a $0.31 or 93.9% decrease over the same period in 2008. Core diluted earnings per share were $0.10 for the three month period ended March 31, 2009, compared to $0.34 for the same period in 2008, a 29.4% decrease.

For the three month period ended March 31, 2009, the annualized return on average shareholders' equity and annualized return on average assets were 1.31% and 0.16%, compared to 10.54% and 1.10% for the comparable period in 2008. The return on average tangible equity was 2.64% as of March 31, 2009 and 21.84% as of March 31, 2008.

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. One such measure, annualized return on average tangible equity, excludes the average balance of acquisition-related goodwill and intangibles in determining average tangible shareholders' equity. Banking and financial institution regulators also exclude goodwill and intangibles from shareholders' equity when assessing the capital adequacy of a financial institution. The other such measure, core net income (or core earnings), excludes the effects of non-cash, after-tax unrealized gains and losses. Management believes the presentation of these financial measures, excluding the impact of the specified items, provides useful supplemental information that is essential to a proper understanding of the financial results of National Penn. In the case of annualized return on average tangible equity, it provides a method to assess management's success in utilizing the company's tangible capital. In the case of core net income (or core earnings), it provides a method to assess earnings performance excluding one-time items. This disclosure should not be viewed as a substitute for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

                                                               Three Months Ended
(dollars in thousands)                                March 31, 2009         March 31,2008
Net Income                                           $           1,745      $        21,593
After tax unrealized fair market value gain on NPB
Capital Trust II Preferred Securities                            1,234                  658
After tax other than temporary impairment charge
on investments                                                   5,060                    -
Core net income                                      $           8,039      $        22,251

Diluted earnings per share                           $            0.02      $          0.33
After tax unrealized fair market value gain on NPB
Capital Trust II Preferred Securities                             0.02                 0.01
After tax other than temporary impairment charge
on investments                                                    0.06                    -
Core diluted earnings per share                      $            0.10      $          0.34

The following table reconciles the non-GAAP performance measure, return on average tangible equity, to the GAAP performance measure, return on average shareholders' equity:

                                                      Three Months Ended March 31,
  (dollars in thousands, percentages annualized)               2009             2008
  Return on average shareholders' equity                       1.31 %          10.54 %
  Effect of goodwill and intagibles                            1.33 %          11.30 %
  Return on average tangible equity                            2.64 %          21.84 %

  Average tangible equity excludes acquisition
  related average goodwill and intangibles:
  Average shareholders' equity                      $     1,176,494       $  823,757
  Average goodwill and intangibles                         (592,816 )       (426,039 )
  Average tangible equity                           $       583,678       $  397,718
  Average common equity                                   1,031,883          823,757 *
  Average tangible common equity                            439,067          397,718

Comparison of Financial Condition as of March 31, 2009 and December 31, 2008

Assets

The Company's total assets were $9.63 billion at March 31, 2009, an increase of $229.6 million or 2.4% from the $9.40 billion at December 31, 2008. The increase was primarily the result of total cash and cash equivalents increasing $193.2 million or 98.7% to $389.0 million, as compared to $195.8 million total at December 31, 2008. In addition, the Company's gross loans and leases, including loans held for sale increased $49.2 million or 0.8% to $6.36 billion, as compared with $6.32 billion at December 31, 2008.

The primary reason for the increase in total cash and due from banks was a result of significant customer deposit growth as a result of which, the Company achieved higher than expected liquidity. The growth in the Company's loan portfolio was primarily the result of increases in the Company's commercial lending and personal loan portfolios. The growth in the Company's loan portfolio was primarily the result of increases in commercial real estate, home equity and consumer loan portfolios. These categories increased $22.3 million, $8.3 million and $6.8 million, respectively, at March 31, 2009 over December 31, 2008. The growth in 2009 was a result of our continued commitment to funding the credit needs of our community, even as other financial service institutions in our footprint reduced lending.

As of March 31, 2009, the Company's total loan portfolio consisted of three broad categories of loans:

· Loans to individuals to finance the purchase of personal assets or activities were $974.5 million or 15.3% of total loans, substantially collateralized by residential real estate.

· Residential mortgage loans for the purchase or financing of an individual's private residence were $1.04 billion or 16.4% of total loans. The Company's residential mortgage loan portfolio consists substantially of "prime/agency" loans, which are based on 80% of appraised value and are made to borrowers with average or better credit ratings.

· Commercial loans were $4.35 billion or 68.3% of the total loan portfolio. This category includes commercial real estate, commercial construction and commercial and industrial loans.

Investment securities (including both available-for-sale and held-to-maturity) totaled $1.91 billion at March 31, 2009, a slight decrease of $5.8 million or 0.3%. The Company intends to maintain a level of investment securities that is sufficient to maintain its pledging and collateralized borrowing requirements.

The Company early adopted FSP FAS 115-2 and FAS 124-2 issued by the FASB on April 9, 2009. This new guidance requires that credit-related OTTI be recognized in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss) ("OCI"). Refer to Note 2, Investment Securities for a further discussion of securities impairment.

Also under the new guidance, the Company reclassified the noncredit-related portion of OTTI losses previously recognized in earnings during 2008. The $12.4 million after-tax amount was reflected as a cumulative effect adjustment that increased retained earnings and decreased accumulated OCI. This reclassification had a positive impact on regulatory capital and no impact on tangible common equity.

Allowance for Loan and Lease Losses and Non-Performing Assets

Management conducts a quarterly analysis of the loan portfolio which includes any loan designated as having a high risk profile including but not limited to, loans classified as "Substandard" or "Doubtful" as defined by regulation, loans criticized internally or designated as "Special Mention", delinquencies, expirations, overdrafts, loans to customers having experienced recent operating losses and loans identified by management as impaired. The analysis is performed to determine the amount which would be adequate to absorb probable losses contained in the loan portfolio and results in the adjustment of the allowance for loan and lease losses ("ALLL"). The analytical process is regularly reviewed and adjustments may be made based on the assessments of internal and external influences on credit quality. During the first quarter 2009 analysis of the ALLL, a variety of factors were considered, some of which included:

· General economic conditions;
· Trends in charge-offs for each loan type;
· The level of delinquent and nonperforming assets, including loans over 90 days delinquent and impaired loans;
· A review of portfolio concentration of any type, either customer, industry loan type, collateral or risk grade; and
· Levels of criticized loans.

The following table shows the composition of the Allowance for Loan and Lease Losses:

(dollars in
thousands)          3/31/2009       12/31/2008       12/31/2007       12/31/2006       12/31/2005

Specific
reserves          $     3,400     $      5,086     $        613     $      1,307     $      1,716
Allocated
reserves               81,558           72,368           54,162           56,787           52,189
Unallocated
reserves                1,315            6,552              122              212            2,159
                  $    86,273     $     84,006     $     54,897     $     58,306     $     56,064

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

(dollars in thousands)           3/31/2009       12/31/2008      12/31/2007      12/31/2006      12/31/2005

Nonperforming loans            $    63,144      $    35,586     $    15,285     $     8,648     $    12,144
Nonperforming loans to total
loans                                 0.99 %           0.56 %          0.39 %          0.24 %          0.40 %
Delinquent loans               $    28,542      $    20,782     $     7,041     $     8,196     $     3,399
Delinquent loans to total
loans                                 0.45 %           0.33 %          0.18 %          0.23 %          0.11 %
Classified loans               $   263,332      $   196,349     $    68,970     $    66,390     $    74,756
Classified loans to total
loans                                 4.14 %           3.11 %          1.78 %          1.83 %          2.45 %
Tier 1 capital and ALLL        $   850,699      $   825,628     $   454,063     $   423,390     $   374,478
Classified loans to tier
1capital and ALLL                    30.95 %          23.78 %         15.19 %         15.68 %         19.96 %
Total gross loans              $ 6,365,053      $ 6,315,874     $ 3,875,253     $ 3,631,937     $ 3,049,808

Specific Reserve

The first element of the ALLL is an estimation of losses specific to individual impaired loans. In this process, specific reserves are established based on an analysis of the most probable sources of repayment including liquidation of collateral or the market value of the loan itself. The specific allowances related to impaired loans are set forth in the previous table detailing the components of the ALLL. Specific reserves have historically represented a small component of the overall reserve, and fluctuate based on changes in the underlying loans and charge-offs.

Allocated Reserves

The second element of the ALLL, the allocated reserves, represents a general allowance for loan pools where the loans are not individually evaluated, though rated according to a ten-point quality matrix. This amount is determined by applying loss factors to pools of loans within the portfolio having similar risk characteristics. The allocated reserves are determined using a baseline factor that is an average of the rolling twelve month net charge-off ratios over the past five years multiplied by the average life and loan balance of each pool of loans. Adjustments may be made to baseline factors for some or all pools based on the assessment of internal and external influences on credit quality not fully reflected in the historical loss or risk-rating data. These may include elements such as changes in credit underwriting, concentration risk and/or other recent observable asset quality trends, as well as an assessment of current economic conditions. The Company evaluates the ALLL methodology for appropriate enhancements. During the third quarter of 2008, the Company made adjustments to its methodology which added quantitative factors to the measurements of these internal and external influences, and which resulted in a redistribution of the allocated and unallocated reserves. It is likely that the methodology will continue to evolve over time. Allocated reserves are presented in the previous table detailing the components of the ALLL.

The Company's net charge-offs were $15.3 million for the three months ended March 31, 2009 compared to the $2.6 million net charge-offs during the same three month period in 2008. The increase is the result of increased charge-offs in the Commercial, Financial and Agricultural category along with an increased level of charge-offs in the Real Estate Construction and Consumer Private Banking product lines. This increase in charge-offs in these sectors is a direct result of the economic downturn in both the national and regional economy. When annualized, the three months of 2009 and 2008 had net charge-off rates expressed as a percentage of total loans of 0.96% and 0.17% respectively.

As referenced in the asset quality table, the levels of delinquency and nonperforming loans have trended upward for the periods presented. These are primary factors in the determination of the ALLL as described previously. At March 31, 2009, nonperforming assets totaled $65.0 million as compared with $37.1 million and $15.3 million at December 31, 2008 and 2007, respectively. When compared to total loans, nonperforming loans have risen from 0.39% at December 31, 2007 to 0.99% at March 31, 2009. Increases within the Commercial, Financial and Agricultural category and Real Estate Construction areas were the product categories primarily responsible for the increases.

Delinquent loans ranged between 0.11% and 0.45% of total loans during the periods from December 2005 through March 31, 2009. These loans are considered performing and exclude nonaccrual loans, restructured loans and loans 90 days or more delinquent and still accruing interest (all of which are considered nonperforming). Since delinquency often precedes charge-off, and delinquent loans are reviewed for possible risk classification changes, the ALLL is sensitive to increases in this category. Delinquent loans at March 31, 2009 were $28.5 million, compared to $20.8 million at December 31, 2008 and $19.5 million at September 30, 2008. Delinquent loans equaled 0.45%, 0.33% and 0.31%, of total loans as of the aforementioned dates, respectively. Delinquent loan balances were $7.0 million or 0.18% at December 31, 2007.

Classified loan balances have a direct impact on the ALLL. As of March 31, 2009, classified loans relative to total loans amounted to 4.14%, as compared with 3.11% at December 31, 2008, 2.69% at September 30, 2008, with 1.80% at June 30, 2008, 1.74% at March 31, 2008 and 1.78% at December 31, 2007. The increase in the first quarter, 2009 resulted in recognition of the increased risk associated with real estate development projects and evidence that borrowers have experienced the effects of an economic slow down. Management also finds it relevant to compare classified loans to Tier 1 capital, including the ALLL. This ratio at year end 2008 was 23.78% as compared to 30.95% at March 31, 2009.

Unallocated Reserve

The third element of the ALLL is the unallocated reserve that addresses inherent probable losses not included elsewhere in the ALLL. The decrease in the unallocated portion of the reserve was due to allocations for higher historical losses and a higher percentage allocated to qualitative factors for internal and external influences. While calculating allocated reserve, the unallocated reserve supports uncertainties within the loan portfolios.

The Company considers overall adequacy subsequent to acquisitions. Historical factors have been updated where appropriate to reflect the relevant experience of the acquired portfolios prior to the merger.

Allowance Adequacy

Based on the Company's quarterly analysis of the allowance for loan and lease losses, the Company made a provision for the first quarter 2009 of $17.5 million. This represents a decrease of $1.0 million as compared to the provision for the quarter ended December 31, 2008. Company management believes that the allowance for loan and lease losses of $86.3 million, or 1.36% of total loans and leases at March 31, 2009, is adequate based on its review of overall credit quality indicators and ongoing loan monitoring processes.

The following table shows detailed information and ratios pertaining to the Company's loans and asset quality:

 (dollars in thousands)                            March 31,            December 31,
                                                     2009                   2008
 Restructured loans                              $         614         $          623
 Nonaccrual loans and leases                            59,871                 31,972
 Loans past due 90 or more days as to interest
 or principal                                            2,659                  2,991
   Total non-performing loans                           63,144                 35,586
 Other real estate owned                                 1,862                  1,552
   Total non-performing assets                   $      65,006         $       37,138

 Total loans and leases, including loans held
 for sale                                        $   6,365,053         $    6,315,874

 Average total loans and leases                  $   6,366,859         $    5,936,805

 Allowance for loan and lease losses             $      86,273         $       84,006

 Allowance for loan and lease losses to:
   Non-performing assets                                132.72  %              226.20 %
   Total loans and leases                                 1.36  %                1.33 %
   Average total loans and leases                         1.36  %                1.42 %

An analysis of loan and lease charge-offs for the three months ended March 31, 2009 compared to 2008 is as follows:

                                                  For Three Months Ended
          (dollars in thousands)                         March 31,
                                                        2009           2008
          Net charge-offs                       $     15,258       $  2,561

          Net charge-offs (annualized) to:
          Total loans and leases                        0.96 %         0.17 %
          Average total loans and leases                0.96 %         0.19 %
          Allowance for loan and lease losses          70.70 %        12.55 %

The foregoing data is considered in the context of economic conditions prevailing in our trading area, principally eastern and central Pennsylvania. The Company's loan portfolio reflects a reasonably diverse cross-section of industries located in this trading area, generally reflecting the local business environment. Typically, this area has not experienced the high levels of growth experienced by certain other areas of the United States during periods of economic expansion; similarly, this area has not experienced the high levels of economic contraction experienced elsewhere in the United States during periods of economic stagnation or decline. Accordingly, the Company does not expect the current economic downturn, while significant, to be as severe in its trading area as in many other parts of the United States.

Liabilities

Liabilities totaled $8.46 billion at March 31, 2009 an increase of $233.5 million or 2.8% compared to liabilities of $8.22 billon at December 31, 2008. Aggregate deposits, the primary source of the Company's funds, increased $270.3 million or 4.2% to $6.66 billion at March 31, 2009 as compared with $6.39 billion at December 31, 2008. The increase in interest earning deposits is a reflection of both the Company's attractive deposit products and the economic environment, causing consumers to be conservative in their approach to investing and to seek safety. The Company's deposit growth of $270.3 million in the first quarter of 2009 has outpaced its loan growth, leaving it with an increase in cash of $192.5 million compared to December 31, 2008. These funds are temporarily invested in short-term low yield vehicles, thereby reducing the Company's net interest margin in first quarter 2009. As loan yields have remained steady, the Company expects to see the net interest margin improve in the latter part of 2009 as these funds are utilized for loans and further debt reduction.

In addition to deposits, earning assets are funded to an extent through purchased funds and borrowings. These include securities sold under repurchase agreements, federal funds purchased, short-term borrowings, long-term debt obligations and subordinated debt. In the aggregate, these funds totaled $1.71 billion at March 31, 2009, a decrease of $20.8 million or 1.2% over $1.74 billion at December 31, 2008. Short-term borrowings decreased $2.5 million or 24.4% to $7.9 million. The Company reduced long-term borrowings to $930.8 million, a $25.2 million or 2.6% decrease as compared to $956.0 million at December 31, 2008. The Company utilized a portion of its increased liquidity to reduce debt.

Shareholders' Equity

Shareholders' equity decreased $3.9 million or 0.3% to $1.18 billion at March 31, 2009 compared to December 31, 2008. Common stock increased $16.4 million or 1.6% to $1.02 billion primarily due to the Company approved enhancements to its Dividend Reinvestment and Stock Purchase Plan to provide a 10% discount on dividends reinvested as well as for new cash purchases made under the plan. Optional cash contributions during the first three months of 2009 could be made in amounts up to $50,000 per month.

. . .