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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: June 30, 2003
------------------------------------------------

OR

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

For the transition period from: to
-------------------- -----------------------

Commission file number: 0-22537-01
----------

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 by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.) 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 August 8, 2003
----- ------------------------------

Common Stock (no stated par value) (No.) 23,058,065 Shares


Page 1 of 32 pages





TABLE OF CONTENTS
- -----------------

Part I - Financial Information. Page
- ------------------------------- ----


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

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 12

Item 3. Quantitative and Qualitative Disclosures about
Market Risk....................................... 28

Item 4. Controls and Procedures........................... 28

Part II - Other Information.
- ----------------------------

Item 1. Legal Proceedings................................. 29

Item 2. Changes in Securities............................. 29

Item 3. Defaults Upon Senior Securities................... 29

Item 4. Submission of Matters to a Vote of
Security Holders.................................. 29

Item 5. Other Information ................................ 29

Item 6. Exhibits and Reports on Form 8-K.................. 31

Signatures.................................................................. 32

Exhibits.................................................................... 33





2






PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET June 30
(Dollars in thousands, except per share data) 2003 Dec. 31
(Unaudited) 2002
---------------- ----------------

ASSETS
Cash and due from banks $133,517 $83,831
Interest bearing deposits in banks 4,533 2,616
Federal funds sold - 48,000
---------------- ----------------
Total cash and cash equivalents 138,050 134,447
Investment securities available for sale , at fair value 931,914 733,774
Loans held for sale 63,633 52,992
Loans, less allowance for loan losses of $47,715 and
$42,587 in 2003 and 2002 respectively 2,011,373 1,789,995
Premises and equipment, net 43,440 30,589
Accrued interest receivable 15,649 15,235
Bank owned life insurance 66,476 58,360
Goodwill and other intangibles 81,473 21,381
Unconsolidated investments under the equity method 2,818 2,702
Other assets 16,308 18,787
---------------- ----------------
Total Assets $3,371,134 $2,858,262
================ ================

LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $436,718 $353,853
Interest bearing deposits 2,021,326 1,758,787
---------------- ----------------
Total Deposits 2,458,044 2,112,640
Securities sold under repurchase agreements
and federal funds purchased 338,832 253,325
Short-term borrowings 7,281 10,614
Long-term borrowings 172,149 169,703
Guaranteed preferred beneficial interests in
Company's subordinated debentures 63,250 63,250
Accrued interest payable and other liabilities 36,316 26,370
---------------- ----------------
Total Liabilities 3,075,872 2,635,902
Shareholders' equity
Preferred stock, no stated par value;
authorized 1,000,000 shares, none issued - -
Common stock, no stated par value;
authorized 62,500,000 shares; issued and outstanding
2003 - 23,058,392; 2002 - 20,699,782; net of shares
in Treasury: 2003 - 46,770; 2002 - 0 227,989 172,471
Retained earnings 41,129 30,593
Accumulated other comprehensive income 27,522 19,296
Treasury stock at cost (1,378) -
---------------- -----------------
Total Shareholders' Equity 295,262 222,360
---------------- -----------------
Total Liabilities and Shareholders' Equity $3,371,134 $2,858,262
================ ================



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





3








NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
(Dollars in thousands, except per share data) June 30 June 30
----------------------------------------------------------------------

2003 2002 2003 2002
-------------- ---------------- ---------------- --------------

INTEREST INCOME
Loans and leases, including fees $34,741 $33,010 $67,631 $66,627
Investment securities
Taxable 6,049 6,972 12,229 13,620
Tax-exempt 3,371 3,155 6,703 6,311
Federal funds sold 86 55 286 70
Deposits in banks 15 16 31 46
-------------- ---------------- ---------------- --------------
Total interest income 44,262 43,208 86,880 86,674
-------------- ---------------- ---------------- --------------
INTEREST EXPENSE
Deposits 9,362 11,423 18,533 23,752
Securities sold under repurchase agreements and
federal funds purchased 943 1,081 1,858 2,251
Short-term borrowings 9 19 17 54
Long-term borrowings 3,460 3,307 6,858 6,457
-------------- ---------------- ---------------- --------------
Total interest expense 13,774 15,830 27,266 32,514
-------------- ---------------- ---------------- --------------
Net interest income 30,488 27,378 59,614 54,160
Provision for loan and lease losses 2,370 2,800 4,640 6,750
-------------- ---------------- ---------------- --------------
Net interest income after provision
for loan and lease losses 28,118 24,578 54,974 47,410
-------------- ---------------- ---------------- --------------
OTHER INCOME
Trust income 1,354 1,420 2,653 2,738
Service charges on deposit accounts 3,478 3,079 6,785 6,004
Bank owned life insurance income 1,080 966 1,732 1,886
Other service charges and fees 3,935 2,930 7,195 6,190
Net (losses) on sale of investment securities - - - (250)
Mortgage banking income 1,618 1,106 3,111 2,024
Equity in undistributed net earnings of affiliates 68 67 115 121
-------------- ---------------- ---------------- --------------
Total other income 11,533 9,568 21,591 18,713
-------------- ---------------- ---------------- --------------
OTHER EXPENSES
Salaries, wages and employee benefits 14,626 11,659 28,181 23,740
Net premises and equipment 4,030 3,042 7,667 6,070
Advertising and marketing expenses 1,097 1,111 1,788 1,653
Other operating 5,984 6,695 11,396 12,051
-------------- ---------------- ---------------- --------------
Total other expenses 25,737 22,507 49,032 43,514
-------------- ---------------- ---------------- --------------
Income before income taxes 13,914 11,639 27,533 22,609
Income tax expense 3,151 2,601 6,380 4,806
-------------- ---------------- ---------------- --------------
Net income $10,763 $9,038 $21,153 $17,803
============== ================ ================ ==============


PER SHARE OF COMMON STOCK
Net income per share - basic $0.47 $0.44 $0.93 $0.86
Net income per share - diluted 0.46 0.43 0.91 0.84
Dividends paid in cash 0.23 0.21 0.46 0.42



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


4







NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


SIX MONTHS ENDED JUNE 30, 2003
(Dollars in thousands)

Accumulated
Common Stock other
------------------------------- Retained conprehensive Treasury Comprehensive
Shares Value earnings income stock Total income
-----------------------------------------------------------------------------------------------


Balance at December 31, 2002 20,699,782 $ 172,471 $ 30,593 $ 19,296 $ - 222,360
Net income - - 21,153 - - 21,153 $ 21,153
Cash dividends declared - - (10,617) - - (10,617)
Shares issued under stock-based
plans 795 13 - - - 13
Shares issued for acquisition
of FirstService Bank 2,563,552 61,262 - - 1,924 63,186
Other comprehensive income, net
of reclassification adjustment
and taxes - - - 8,226 - 8,226 8,226
-----------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - $ 29,379
-----------------------------------------------------------------------------------------------
Effect of treasury
stock transactions (205,737) (5,757) - - (3,302) (9,059)
-----------------------------------------------------------------------------------------------
Balance at June 30, 2003 23,058,392 $ 227,989 $ 41,129 $ 27,522 $ (1,378) $ 295,262



June 30, 2003
----------------------------------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
----------------------------------------------------------------
Unrealized gains on securities
Less: Unrealized holding gains
arising during period 13,792 (4,429) 9,363
Change in the fair value of
cash flow hedges (1,137) - (1,137)
---------------------------------------------------------------
Other comprehensive income, net 12,655 (4,429) 8,226
===============================================================



SIX MONTHS ENDED JUNE 30, 2002
(Dollars in thousands

Accumulated
Common Stock other
------------------------------- Retained conprehensive Treasury Comprehensive
Shares Value earnings income stock Total income
-----------------------------------------------------------------------------------------------

Balance at December 31, 2001 19,926,863 $ 166,138 $ 29,333 $ 3,119 $ (2,908) 195,682
Net income - - 17,803 - - 17,803 $ 8,765
Cash dividends declared - - (8,708) - - (8,708
Shares issued under stock-based
plans - - - - - -
Other comprehensive income, net
of reclassification
adjustment and taxes - - - 8,605 - 8,605 8,605
Total comprehensive income - - - - - - $ 17,370
------------------------------------------------------------------------------------------------
Effect of treasury
stock transactions (91,197) (1,887) (2,668) (4,555)
------------------------------------------------------------------------------------------------
Balance at June 30, 2002 19,835,666 $ 164,251 $ 38,428 $ 11,724 $ (5,576) 208,827


June 30, 2002
-------------------------------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
-------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains
arising during period 13,488 (4,721) 8,767
Less: reclassification adjustment
for losses realized in net income (250) 88 (162)
-------------------------------------------------------------
Other comprehensive income, net 13,238 (4,633) 8,605
=============================================================






The accompanying notes are an integral part of these statements.

5





CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Six Months Ended June 30,
2003 2002
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- --------------------------------------------------------------------------------------------------------------------------

Net income $ 21,153 $ 17,803
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and lease losses 4,640 6,750
Depreciation and amortization 2,851 2,323
Deferred tax (benefit) expense 1,787 (4,633)
Amortization of premiums and discounts on investment
securities, net (136) 1,109
Investment securities losses, net - 250
Mortgage loans originated for resale (60,372) (62,256)
Sale of mortgage loans originated for resale 62,905 62,846
Changes in assets and liabilities
Decrease in accrued interest receivable 872 1,525
(Decrease) in accrued interest payable (2,940) (2,072)
(Increase) decrease in other assets (2,985) 9,090
Increase in other liabilities 8,559 3,810
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 36,334 36,545
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- --------------------------------------------------------------------------------------------------------------------------
Cash paid in excess of cash equivalents for business acquired (221) -
Proceeds from sales of investment securities available for sale 860 1,750
Proceeds from maturities of investment securities available for sale 136,106 54,361
Purchase of investment securities available for sale (222,339) (150,324)
Net (increase) decrease in loans (18,508) 22,057
Purchases of premises and equipment (3,479) (3,258)
Purchase of bank-owned life insurance (1,620) (1,085)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (109,201) (76,499)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- --------------------------------------------------------------------------------------------------------------------------
Net increase in interest and non-interest
bearing demand deposits and savings accounts 131,737 32,433
Net (decrease) in certificates of deposit (75,206) (34,989)
Net increase (decrease) in securities sold under
agreements to repurchase and federal funds purchased 44,952 (12,006)
Net (decrease) increase in short-term borrowings (3,333) 451
Proceeds from new long-term borrowings - 70,000
Repayments of long-term borrowings (2,555) (12,635)
Issuance of common stock under dividend
reinvestment and stock option plans 13 -
Effect of Treasury stock transactions (9,059) (4,555)
Cash dividends (10,079) (8,728)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in ) financing activities 76,470 29,971
- --------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 3,603 (9,983)
Cash and cash equivalents at beginning of year 134,447 107,798
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30 $138,050 $97,815
==========================================================================================================================


The accompanying notes are an integral part of these statements.

6



NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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, 2002.

The results of operations for the six-month period ended June 30, 2003 are not
necessarily indicative of the results to be expected for the full year.

2. ACQUISITIONS

On April 30, 2003, the Company and its principal banking subsidiary, National
Penn Bank, entered into an agreement and plan of merger with HomeTowne Heritage
Bank which provides, among other things, for the merger of HomeTowne Heritage
Bank into National Penn Bank, with National Penn Bank surviving the merger as a
subsidiary of the Company. The merger agreement provides for the exchange of
$13.697 in cash for each outstanding share of common stock of HomeTowne Heritage
Bank, or total cash consideration of approximately $37.6 million. The
transaction will be accounted for in accordance with SFAS No. 141, Business
Combinations, and, subject to various regulatory approvals and other closing
conditions, is expected to close in fourth quarter 2003.

On February 25, 2003, the Company completed a merger with FirstService Bank
(FirstService). Under the terms of the merger, 4,304,762 shares of FirstService
stock were each converted into 0.5954 share of the Company's common stock plus
$3.90, resulting in the issuance of 2,563,552 shares of the Company's common
stock and payment of approximately $16.8 million in cash. In addition,
outstanding stock options to purchase FirstService common stock were converted
into stock options to purchase 643,169 shares of the Company's common stock,
with an exercise price of either $6.69 or $13.38 per share. This transaction was
accounted for under the purchase method of accounting. Accordingly, the results
of operations of the Company include FirstService's results from and after
February 25, 2003. The acquisition resulted in the recording of approximately
$54.0 million of goodwill and other intangible assets. The Company acquired
assets, loans and deposits of $367.1 million, $219.2 million, and $288.9
million, respectively.

On February 10, 2003, the Company, Panasia Bank, N.A., and Woori America Bank, a
New York banking institution, entered into an agreement providing for, among
other things, the sale of Panasia to Woori America Bank for $34.5 million in
cash and the subsequent merger of Panasia into Woori America Bank. All required
regulatory approvals have been obtained. Subject to various other closing
conditions, the Company and Panasia anticipate that the transaction will close
in third quarter 2003. No assurance can be given that all other closing
conditions will be satisfied or waived, or that the transactions will in fact be
consummated.

3. LOANS

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 $21.2 million at June 30, 2003, all
of which are non-accrual loans. The allowance for loan loss associated with
these impaired loans was $4.1 million at June 30, 2003. The Company recognizes
income on an impaired loan under the cash basis when the loan is current and the
collateral on the loan is sufficient to cover the outstanding obligation to the
Company. If these factors do not exist, the Company will not recognize income on
an impaired loan.



7


4. SHAREHOLDERS' EQUITY

On June 25, 2003 the Company's Board of Directors declared a cash dividend of
$.23 per share payable on August 17, 2003, to shareholders of record on July 31,
2003.

On October 23, 2002, the Company's Board of Directors declared a 5% stock
dividend payable on December 27, 2002, to shareholders of record on December 6,
2002. All weighted average, share and per share information has been
retroactively restated.

On June 26, 2002, the Company's Board of Directors authorized the repurchase of
up to one million shares of the company's common stock to be used to fund the
Company's dividend reinvestment plan, stock option plans, stock-based benefit
plans and employee stock purchase plan. No timetable has been set for these
repurchases. As of June 30, 2003, 802,955 shares have been repurchased at an
average price of $27.00 under the 2002 repurchase program.

5. EARNINGS PER SHARE



Three months ended June 30, 2003

Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------

Basic earnings per share
Net income available to common stockholders $10,763 23,043 $0.47
Effect of dilutive securities
Options --- 578 (0.01)
------- ------ ------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $10,763 23,621 $0.46
======= ====== =====

Year To Date June 30, 2003

Income Shares Per Share
(numerator) (denominator) Amount
Basic earnings per share ----------- ------------- ------
Net income available to common stockholders $21,153 22,657 $0.93
Effect of dilutive securities
Options --- 557 (0.02)
------- ------ ------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $21,153 23,214 $0.91
======= ====== =====



There were no stock options outstanding for the three and six months ended June
30, 2003 that were not included in the computation of diluted earnings per share
because the option exercise price was greater than the average market price.






8




Three months ended June 30, 2002


Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------

Basic earnings per share
Net income available to common stockholders $9,038 20,824 $0.44
Effect of dilutive securities
Options --- 307 (0.01)
------ ------ ------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $9,038 21,131 $0.43
====== ====== =====


Year To Date June 30, 2002

Income Shares Per Share
(numerator) (denominator) Amount
Basic earnings per share ----------- ------------- ------

Net income available to common stockholders $17,803 20,825 $0.86
Effect of dilutive securities
Options --- 266 (0.02)
------ ------ ------
Diluted earnings per share
Net income available to common stockholders
Plus assumed conversions $17,803 21,091 $0.84
======= ====== =====


Options to purchase 256,626 shares of common stock at $26.00 per share were
outstanding for the three and six months ended June 30, 2002. They were not
included in the computation of diluted earnings per share because the option
exercise price was greater than the average market price.

6. SEGMENT REPORTING

SFAS NO. 131, Segment Reporting, identifies operating segments as components of
an enterprise which are evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and assess performance. The
Company's chief operating decision maker is the President and Chief Executive
Officer. The Company has applied the aggregation criteria set forth in SFAS No.
131 for its National Penn Bank and Panasia (the Banks) operating segments to
create a reportable operating segment as "Community Banking."

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 provided
by the Banks. For example, commercial lending is dependent upon the ability of
the Banks to fund themselves with retail deposits and other borrowings and to
manage interest rate and credit risk. This situation is also similar for
consumer and residential mortgage lending.

Nonreportable operating segments of the Company's operations which do not have
similar characteristics to the community banking operations and do not meet the
quantitative thresholds requiring disclosure are included in the "Other"
category. These nonreportable segments include Investors Trust Company, Penn
Securities Inc., National Penn Leasing Company, FirstService Insurance Agency,
Inc., FirstService Capital Inc., National Penn Life Insurance Company, NPB
Capital Trust II, and the Company.

The accounting policies used in this disclosure of business segments are the
same as those described in the summary of significant accounting policies. The
consolidating adjustments reflect certain eliminations of intersegment revenues,
cash and investment in subsidiaries.



9

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




Community Banking Other Consolidated
----------------- ----- ------------



(in thousands)
As of, and for the six months
Ended, June 30, 2003
Total Assets $3,311,400 $ 59,734 $3,371,134
Total Deposits 2,458,044 --- 2,458,044
Net interest income (loss) 65,006 (5,392) 59,614
Total noninterest income 16,265 5,326 21,591
Total noninterest expense 44,183 4,849 49,032
Net income (loss) $ 21,632 $(479) $ 21,153

As of, and for the six months
Ended, June 30, 2002
Total Assets $2,741,359 $44,240 $2,785,599
Total Deposits 2,074,239 --- 2,074,239
Net interest income (loss) 58,617 (4,457) 54,160
Total noninterest income 14,623 4,090 18,713
Total noninterest expense 38,230 5,284 43,514
Net income (loss) $ 18,859 $(1,056) $ 17,803


7. STOCK BASED COMPENSATION

The Company accounts for stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair
value-based method of valuing stock-based compensation that entities may use,
which measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, SFAS No. 123 permits entities to
continue accounting for employee stock options and similar equity instruments
under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued
to Employees. Entities that continue to account for stock options using APB
Opinion 25 are required to make pro forma disclosures of net income and earnings
per share, as if the fair value-based method of accounting defined in SFAS No.
123 had been applied.

At June 30, 2003, the Company had two stock-based employee compensation plans.
The Company accounts for these plans under recognition and measurement
principles of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Stock-based employee compensation costs are not reflected in
net income, as all options granted under the plans had an exercise price equal
to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation (in thousands, except per share amounts).
These results are not indicative of results for the year ended December 31,
2003.





10





Three Months Ended June 30,

2003 2002
---- ----

Net income, as reported $10,763 $9,038
Less: stock based compensation costs determined under fair value-
based method for all awards (200) (108)
------- ------
Net income, pro forma $10,563 $8,930
======= ======

Earnings per share of common stock - basic As reported 0.47 0.44
Pro forma 0.47 0.43

Earnings per share of common stock - diluted As reported 0.46 0.43
Pro forma 0.45 0.42





Year to Date Ended June 30,

2003 2002
---- ----

Net income, as reported $21,153 $17,803
Less: stock based compensation costs determined under fair value-
based method for all awards (412) (248)
------- -------
Net income, pro forma $20,741 $17,555
======= =======

Earnings per share of common stock - basic As reported 0.93 0.86
Pro forma 0.92 0.84

Pro forma

Earnings per share of common stock - diluted As reported 0.91 0.84
Pro forma 0.89 0.83
Pro forma


The Company granted options for 9,846 and 10,940 shares in the first six months
of 2003 and 2002, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes options-pricing model with the
following weighted average assumptions used for grants in 2003 and 2002,
respectively: dividend yield of 2.90% and 3.85%; expected volatility of 25.0%
and 35.1%; risk-free interest rates for each plan of 4.22% and 3.93% for 2003
and 5.50% and 3.93% for 2002; and expected lives of 8.50 years and 6.83 years
for each plan in 2003 and 8.50 and 6.83 years for each plan in 2002.
















11









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 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. These are unaudited financial
statements and, as such, are subject to year end examination. In addition to
historical information, this Form 10-Q contains forward-looking statements.

Forward-looking statements in this document are subject to risks and
uncertainty. Forward-looking statements include information concerning possible
or assumed future results of operations by the Company. When we use words such
as "believe", "expect", "anticipate", or similar expressions, we are making
forward-looking statements. Additional information concerning forward-looking
statements is contained later on within this discussion.

The Company recorded a 19.1% increase in second quarter net income and
an 18.8% net income increase in six months results compared to comparable
periods in 2002. Diluted earnings per share for the three and six month periods
of $0.46 and $0.91 increased 7.0% and 8.3%, respectively, compared to comparable
periods in 2002. The large difference in the percentage increase in net income
when compared to the percentage increase in earnings per share is due to the
larger number of common shares outstanding, principally resulting from the
acquisition of FirstService Bank.

For the six month period ended June 30, 2003, the annualized return on
average shareholders' equity and annualized return on average assets were 15.9%
and 1.34% compared to 17.7% and 1.31% for the comparable period in 2002.

The Company's strategic plan provides for a highly profitable,
independent financial services company within the markets it serves.
Specifically, management is focused on increased market penetration in selected
geographic areas, "client intimacy" and excellence in both retail and commercial
lines of business. The acquisition of FirstService Bank in first quarter 2003,
the pending sale of Panasia Bank, N.A. in third quarter 2003, and the pending
acquisition of HomeTowne Heritage Bank in the fourth quarter 2003, represent
strategic initiatives by the Company in furtherance of its focused goals.

The current economic climate and interest rate environment present
challenges for all financial institutions in achieving their business goals.
During this low interest rate environment, the Company is considering strategic
balance sheet opportunities that may include such things as restructuring long
term, high rate borrowings in order to reduce future interest expense.


CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
-----------------------------------------------------

The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America 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 Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated probable loan losses. Management's determination
of the adequacy of the allowance is based on periodic evaluations of the loan
portfolio and other relevant factors. However, this evaluation is inherently
subjective as it requires material estimates, including, among others, expected
default probabilities, loss given default, expected commitment usage, the
amounts and timing of expected



12


future cash flows on impaired loans, value of collateral, estimated losses on
consumer loans and residential mortgages, and general amounts for historical
loss experience. The process also considers economic conditions, uncertainties
in estimating losses and inherent risks in the loan portfolio. All of these
factors may be susceptible to significant change. To the extent actual outcomes
differ from management estimates, additional provisions for loan losses may be
required that would adversely impact earnings in future periods.

Goodwill is subject to impairment testing at least annually to
determine whether write-downs of the recorded balances are necessary. The
Company tests for impairment based on the goodwill maintained at each defined
reporting unit. A fair value is determined for each reporting unit based on at
least one of three various market valuation methodologies. If the fair values of
the reporting units exceed their book values, no write-down of recorded goodwill
is necessary. If the fair value of the reporting unit is less, an expense may be
required on the Company's books to write-down the related goodwill to the proper
carrying value. Through its annual analysis as of June 30, 2003, the Company
determined that no impairment write-offs were necessary. No assurance can be
given that future goodwill impairment tests will not result in a charge to
earnings.

The Company recognizes deferred tax assets and liabilities for the
future tax effects of temporary differences, net operating loss carryforwards
and tax credits. Deferred tax assets are subject to management's judgment based
upon available evidence that future realization is more likely than not. If
management determines that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
expected realizable amount.


RESULTS OF OPERATIONS
---------------------

Net income for the quarter ended June 30, 2003 was $10.8 million, 19.1%
more than for the second quarter 2002. For the first six months, net income
reached $21.2 million or 18.8% more than the $17.8 million reported for the
first six months of 2002. 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. The results of operation of FirstService Bank are included
from the date of its acquisition, February 25, 2003, through June 30, 2003.

Net interest income is the difference between interest income earned on
assets and interest expense paid on liabilities. Net interest income for the
second quarter of 2003 was $30.5 million, which increased $3.1 million or 11.4%
over the $27.4 million for the second quarter of 2002. For six months ended June
30, 2003, net interest income improved $5.4 million or 10.1% over six months
ended June 30, 2002. Interest income for the second quarter of 2003 increased
$1.1 million due to an increase in loan income of $1.7 million and a decrease in
investment and federal funds sold income of $677 thousand. Interest expense for
second quarter 2003 decreased $2.1 million due to a decrease in interest on
deposits of $2.1 million, with a slight change in interest paid on borrowed
funds. The improvement in net interest income reflects that the Company was well
positioned to benefit from the now three-year decline in interest rates. Despite
the current low rate environment, the cost of attracting and holding deposited
funds is an ever-increasing expense in the banking industry. These increases are
the real costs of deposit accumulation and retention, including FDIC insurance
costs and branch overhead expenses. Such costs are necessary for continued
growth and to maintain and increase market share of available deposits. The
addition of interest income from FirstService contributed to the increase in net
interest income for first half of 2003 compared to the same period in 2002.



13




The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels and volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate. The information is presented on a taxable equivalent
basis, using an effective rate of 35% (in thousands).

Net interest income, on a taxable equivalent basis, increased $5.8
million. This increase is due to a $6.9 million increase due to volume,
attributable for the most part to the FirstService Bank acquisition, offset by a
$1.0 million margin compression.




Six Months ended June 30, 2003 over 2002
-----------------------------------------------

Volume Rate Total
------ ---- -----

Increase (decrease) in:
Interest income:
Interest bearing deposits in banks $2 ($17) ($15)
Federal Funds sold 253 (37) 216
Investment Securities 3,040 (3,578) (538)
Total Loans 7,704 (6,780) 924
------- --------- -----
Total interest income $10,999 ($10,412) $ 587
------- --------- -----

Interest expense:
Interest bearing deposits $3,139 $ (8,358) $(5,219)
Short-term borrowings 488 (918) (430)
Long-term borrowings 512 (111) 401
------- --------- -----
Total interest expense $4,139 $ (9,387) $(5,248)
Increase (decrease) in net interest
income $ 6,860 $ (1,025) $ 5,835
======= ========= =======



Net interest margin, defined as net interest income divided by total
interest earning assets, decreased to 4.37% during this year's second quarter
compared to 4.58% during the second quarter of 2002, and 4.52% during the first
quarter of 2003. Six basis points of the decline in the net interest margin was
attributable to the sale of approximately $17.3 million of manufactured housing
loans, a line of business the Company has exited as discussed in the 10-Q for
first quarter 2003. These loans involved high yield, high loss, and high
overhead. The remainder of the margin decline is due to the extended decreased
interest rate environment, in which interest bearing assets have begun to
reprice and catch up to the lower costing interest-bearing liabilities that
decreased at a faster rate in the earlier period of this low rate cycle.

During the quarterly review of the allowance for loan losses, the
Company considers a variety of factors that include: the persisting weak
economic conditions and market volatility, the continued concern that a slower
economy will result in operating losses for the Company's commercial customers,
and the overall concerns of consumer confidence, including international
concerns. Despite these concerns, the reduction in charge-offs for the first six
months of 2003 compared to the same period in 2002 allowed the Company to reduce
its provision for loan and lease losses while maintaining the allowance for loan
and lease losses at a level believed adequate to absorb probable losses on
existing loans. The Company's net charge-offs of $3.4 million for the first six
months of 2003 decreased by $2.8 million compared to the $6.2 million in net
charge-offs at June 30, 2002. The higher net chargeoffs in 2002 were driven by
two large commercial real estate credits totalling $3.7 million. The provision
for loan and lease losses was $2.4 million for the three months ended June 30,
2003, and $4.6 million for the six months ended June 30, 2003 -- a decrease of
$430 thousand compared to the three months ended June 30, 2002 and $2.11 million




14


compared to the six months ended June 30, 2002. The decrease in the provision
reflects management's analysis of the loan portfolio and the continued
monitoring and maintenance of the loan portfolio.

Other income increased $2.0 million or 20.5% during the second quarter
of 2003 compared to the same period in 2002, as a result of increased mortgage
banking income of $512 thousand, increased service charges on deposit accounts
of $399 thousand, and increased other service charges and fees of $1.0 million.
The increase in other service charges and fees is due largely to the addition of
FirstService Insurance, which contributed $679 thousand in second quarter 2003.
Mortgage banking income was up $1.1 million and service charges on deposit
accounts up $781 thousand for the first six months of 2003 compared to the first
six months of 2002. FirstService Insurance contributed $1.1 million for the
first six months of 2003. There were no sales of investment securities during
the first six months of 2003 compared to a $250,000 net loss on the sale of
investment securities in the first six months of 2002. Increased mortgage
banking income is primarily due to increased mortgage refinance volume,
resulting from the historically low interest rate environment. Mortgage banking
income is vulnerable as interest rates rise and mortgage refinance volume
contracts. Management is working to identify alternative strategies to replace
the refinance volume. Increased service charges on deposit accounts is due
primarily to an increase in the collection of fees on a larger deposit base,
resulting from the FirstService acquisition.

Other expenses increased $3.2 million or 14.4% during the second
quarter of 2003. Salaries, wages and benefits increased $3.0 million or 25.4%,
net premises and equipment increased $988 thousand or 32.5%, other operating
expenses decreased $711 thousand or 10.6%, and advertising and marketing
expenses decreased $14 thousand or 1.3%. Salaries, wages and benefits increased
due to normal salary increases and the addition of 137 employees from the
acquisition of FirstService. The increase in net premises and equipment expense
is also partially associated with the acquisition of FirstService, which
included a community office network of seven offices. Other operating expenses
decreased because other operating expenses in the second quarter of 2002
included a writedown of a minority ownership interest in a non-banking,
non-public financial services business. Year to date in 2003, salaries and
benefits increased $4.4 million or 18.7%, net premises and equipment expense
increased $1.6 million or 26.3%, marketing and advertising expense increased
$135 thousand or 8.2% while other operating expenses decreased $655 thousand or
5.4%.

Income before income taxes increased $2.3 million or 19.5% in the
second quarter of 2003 compared to the same time period in 2002. Income taxes
increased $550 thousand or 21.1% for the quarter ended June 30, 2003 due to
higher income before income taxes. Income before income taxes increased $4.9
million or 21.8% in the first half of 2003 compared to the same time period in
2002. Income taxes increased $1.6 million or 32.8% for the half-year ended June
30, 2003 due to the higher income before income taxes. The Company's effective
tax rate remained relatively stable at 22.6% for the second quarter of 2003
compared to 22.3% for 2002. The Company's effective tax rate also remained
relatively stable at 23.2% for the first half of 2003 compared to 21.3% for
2002. The increase in the effective tax rate year to date in 2003 is due to the
decrease in tax-free income relative to total income.

FINANCIAL CONDITION
-------------------

At June 30, 2003, total assets were $3.371 billion, an increase of
$512.9 million or 17.9% from the $2.858 billion at December 31, 2002. This
increase is primarily due to the addition of FirstService Bank on February 25,
2003, which had $367.1 million in assets. Net loans and leases, including loans
held for sale, which totaled $2.075 billion at June 30, 2003, increased $232.0
million. $219.2 million of the increase is due to the addition of FirstService
Bank, offset by the sale of $17.3 million in manufactured housing loans and the
securitization of $42.8 million in residential mortgages into a mortgage-backed
security. The Company does not retain the servicing on loans sold. Adjusting for
these transactions, core loan growth was 7.1% during the past year. Loans
continue to increase at a modest pace as a result of the overall slow economy
and the lack of capital goods spending by the Company's business customers.
Loans originated for immediate resale during the first six months of 2003
amounted to $60.4 million.



15




In second quarter 2000, the Company ceased originating loans
collateralized by manufactured housing. In April 2003, the Company sold
substantially all its manufactured housing loan portfolio of $17.3 million, some
of which were on non-accrual status. The future impact of this transaction is
not expected to be material to the Company's overall performance.

Total cash and cash equivalents increased $3.6 million or 2.7% at June
30, 2003 when compared to December 31, 2002. The increase is comprised of cash
and due from banks of $49.7 million, of which $16.6 million is related to the
addition of FirstService, and an increase in interest bearing deposits of $1.9
million. This was partially offset by a decrease in federal funds sold of $48.0
million.

Approximately sixty-two percent of the Company's gross revenue is
derived from loans it makes to individuals and business owners throughout its
market place. The Company's total loan portfolio, including loans held for sale,
as of June 30, 2003 was $2.123 billion and consisted of three broad categories
of loans:

o Loans to individuals to finance the purchase of personal assets or
activities was $248.0 million or 11.7% of total loans

o Residential mortgage loans for the purchase or financing of an
individual's private residence was $214.0 million or 10.1% of total
loans

o Commercial loans of $1.661 billion or 78.2% of the total portfolio.
This includes commercial real estate, commercial construction and
commercial and industrial loans.

Loans to individuals consisted primarily of loans with fixed terms and
lines of credit secured by liens on the individual's residence. The principal
risk associated with these credits is the overall creditworthiness of the
individual borrower. Changes in an individual's employment or life circumstances
can have an effect on the repayment of these assets.

Residential mortgage loans are extended to individuals for the purchase
or financing of their residence. These loans are secured by a first lien title
insured mortgage on their home. Again, the primary risk in these credits is the
financial soundness of the individual borrower.

Commercial loans consist of lines of credit, term loans, mortgages, and
leases extended to business owners or to individuals for business purposes. The
types of business borrowers represented in the portfolio consist of
manufacturing companies, wholesalers, distributors and warehouses, professional
service providers, retailers, commercial real estate investors, and land
developers. The commercial portfolio does have a concentration in loans to
commercial real estate investors and developers with loans outstanding to this
group of $288.0 million, which is 17.3% of the commercial portfolio and 13.6% of
the total portfolio.

There are numerous risks associated with commercial loans that could
impact the borrower's ability to repay on a timely basis. They include but are
not limited to: the owner's business expertise, changes in local, national, and
in some cases international economies, competition, governmental regulation, and
the general financial stability of the borrowing entity.

The Company attempts to mitigate these risks by making an analysis of
the borrower's business and industry history, its financial position, as well as
that of the business owner. The Company will also require the borrower to
provide financial information on the operation of the business periodically over
the life of the loan. In addition, most commercial loans are secured by assets
of the business or those of the business owner, which can be liquidated if the
borrower defaults, along with the personal surety of the business owner.

All of the aforementioned loan types can be made on a floating or fixed
rate basis, either of which can pose an interest risk to the Company as
financial markets change. Interest rate risk is discussed in further detail in
the Liquidity and Interest Rate Sensitivity section of this report.



16


The following table shows detailed information and ratios pertaining to
the Company's loans and asset quality (dollars in thousands):




June 30, 2003 December 31, 2002
------------- -----------------


Nonaccrual loans $21,152 $14,639
Loans past due 90 or more days
as to interest or principal 813 987
------- ------
Total nonperforming loans 21,965 15,626
Other real estate owned 771 318
------- ------
Total nonperforming assets $22,736 $15,944
======= =======

Total loans and leases, including loans
held for sale $2,122,721 $1,885,574

Average total loans and leases $2,043,742 $1,857,174

Allowance for loan and lease losses $47,715 $42,587

For 6 months ended 6/30/2003 For 6 months ended 6/30/2002
---------------------------- ----------------------------
Net charge-offs $3,437 $6,237

Net charge-offs to: (annualized)
Total loans and leases .32% .68%
Average total loans and leases .34% .69%
Allowance for loan and lease losses 14.4% 29.2%

Nonperforming assets to:
Total loans and leases 1.07 % 1.49%

Allowance for loan and lease losses to:
Nonperforming assets 209.9% 156.4%
Total loans and leases 2.25% 2.34%
Average total loans and leases 2.33% 2.35%



The increase in nonperforming assets is due to a $6.5 million increase
in nonaccrual loans, from $14.6 million at December 31, 2002 to $21.2 million at
June 30, 2003. The increase in nonaccrual loans is due primarily to the negative
effects of the weak economy on our commercial and industrial borrowers,
especially the manufacturing segment, as well as the reclassification of a
FirstService Bank credit of $1.1 million. It is not the result of any large
credits, but made up of numerous credits identified in the watch loan process.
Commercial real estate and commercial and industrial loans account for 76.7% of
the total nonaccrual loans.

The investment portfolio is primarily a secondary source of liquidity,
but it also serves as a source of income. As such, the investment portfolio
consists of shorter-term investments that provide current liquidity and
longer-term investments that provide higher income. Over the past two years, the
Company has worked to shorten the duration of the investment portfolio in
response to lower interest rates and to help improve liquidity. Regardless of
classification as to shorter-term or longer-term, the majority of the Company's
investments are readily marketable securities held as available for sale, and
the majority of the Company's investments qualify as collateral for deposit
pledging needs.

Investments increased $198.1 million or 27.0% to $931.9 million at June
30, 2003 compared to December 31, 2002. The increase is due primarily to the
addition of FirstService with investments of


17


$105.0 million and the securitization of $42.8 in residential mortgages into a
mortgage-backed security, servicing released. The primary purpose of the
securitization was to improve the liquidity of the assets, as the security
becomes immediately saleable on the bond market. The secondary purpose is to
provide collateral for the Company's cash management program. Investment
purchases during the first six months of 2003 were $222.3 million, primarily
mortgage-backed securities. This increase was partially offset by investment
calls and maturities and the amortization of mortgage-backed securities totaling
$136.1 million.

Other assets on the balance sheet increased to $226.1 million, an
increase of $79.1 million from the $147.1 million at December 31, 2002. These
assets include net premises and equipment, accrued interest receivable, bank
owned life insurance, goodwill and other intangibles, unconsolidated
investments, and other assets. This increase is due primarily to an increase in
goodwill and other intangibles attributable to the FirstService acquisition. In
addition there was an increase in premises and equipment of $12.9 million, of
which $11.8 million is related to FirstService. There was an increase in bank
owned life insurance of $8.1 million, of which $6.5 million is related to
FirstService. The decrease in other assets of $2.4 million is the result of a
decrease in the deferred tax asset of $4.1 million, offset by an increase in
prepaid expenses of $1.7 million.



As the primary source of funds, aggregate deposits of $2.458 billion at
June 30, 2003 increased $345.4 million or 16.3% compared to December 31, 2002.
The increase in deposits during the first six months of 2003 was primarily in
interest bearing deposits, which increased $262.5 million, while non- interest
bearing deposits increased $82.9 million. Deposits increased primarily due to
approximately $288.9 million in deposits acquired in the FirstService merger, of
which $57.9 million were non-interestbearing and $231 million were interest
bearing. 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, long-term
debt obligations, and subordinated debentures. In the aggregate, these funds
totaled $581.5 million at June 30, 2003, and $496.9 million at December 31,
2002. The increase of $84.6 million is due primarily to an increase in
securities sold under repurchase agreements and federal funds purchased of $85.5
million, of which $40.6 million is related to FirstService, and increase in
long-term borrowings of $2.4 million that was partially offset by a decrease in
short-term borrowings of $3.3 million. The decrease in short-term borrowings is
the result of treasury tax and loan calls made from the Company's note option
account through the Federal Reserve Bank.

Shareholders' equity increased $72.9 million through June 30, 2003.
This was due primarily to the issuance of 2,563,552 shares of common stock in
conjunction with the acquisition of FirstService, which resulted in an increase
of $63.2 million of shareholders' equity. Retained earnings increased $10.5
million due to first and second quarter 2003 net income, offset by dividends
declared. Accumulated other comprehensive income increased $8.2 million due to
an increase in market value of available for sale securities and adjustments to
the fair value of cash flow hedges. Cash dividends paid during the first six
months of 2003 increased $1.35 million or 15.5% to $10.1 million compared to the
cash dividends paid during the first six months of 2002. Earnings retained
during the first six months of 2003 were 52.4% compared to 51.0% during the
first six months of 2002.

REGULATORY/COMPLIANCE AND INTERNAL CONTROL
------------------------------------------

Management has anticipated changes in regulations and compliance and is
in the process of enhancing documentation of internal controls in preparation
for the additional corporate governance requirements of the Sarbanes-Oxley Act
that become effective in 2004 as well as other new regulations. Management has
an effective means of monitoring existing and new regulatory developments. The
increased reporting and documentation requirements will likely result in
increased operating costs.




18



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. In the past twelve to twenty-four months, the Company's
liquidity has improved as people have removed money from the declining equity
market. During this time, many customers have preferred the safety of
FDIC-insured deposits compared to the declining equity market, despite
historically low interest rates. This has allowed the Company to grow its core
deposit base and significantly reduce reliance on non-core sources of funds.

The Company's main liquidity concern is when the current environment
reverses course - that is, the economy and consequently the equity markets
strengthen and the Company suffers disintermediation back to the equity market.
The Company is currently preparing for this potential disintermediation by
working to build its share of customers' banking business (on the theory that
even if some funds move back to the equity market, the Company will still retain
a larger share than it had two years ago), growing its government banking unit,
reviewing its deposit product offerings, establishing additional non-core
sources of funding, maintaining a more liquid investment portfolio, and
continuing to develop its capability to securitize assets.

The Company's acquisition of FirstService during the first quarter of
2003 did not have an immediate material impact on the Company's current
liquidity position. FirstService has retained its name and management.
Accordingly, the Company expects no material run-off in deposits over the long
term, and as a result, does not anticipate a negative material impact on the
Company's overall long-term liquidity position.

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.









Intentionally left blank
------------------------








19



The following table shows separately the interest rate sensitivity of
each category of interest-earning assets and interest-bearing liabilities at
June 30, 2003:



Repricing Periods (1)
-----------------------------------------------
Three Months One Year
Within Three Through One Through Five Over
Months Year Years Five Years
--------------------------------------------------------------
(In Thousands)


Assets
Interest bearing deposits
at banks $ 4,533 $ - - $ - - $ - -
Investment securities 144,829 187,349 378,125 221,611
Loans (1) 876,858 337,102 744,119 116,927
Other assets - - - - - - 359,681
----------- ---------- ----------- ---------
1,026,220 524,451 1,122,244 698,219
----------- ---------- ----------- ---------
Liabilities and equity
Non-interest bearing deposits 436,718 - - - - - -
Interest bearing deposits (2) 808,607 230,960 402,340 579,419
Borrowed funds 200,645 10,000 75,421 232,196
Preferred securities - - - - - - 63,250
Other liabilities - - - - - - 36,316
Hedging instruments 0 - - 0 - -
Shareholders' equity - - - - - - 295,262
----------- ---------- ----------- ---------
1,445,970 240,960 477,761 1,206,443
----------- ---------- ----------- ---------
Interest sensitivity gap (419,750) 283,491 644,483 (508,224)
----------- ---------- ----------- ---------

Cumulative interest rate
sensitivity gap ($419,750) ($136,259) $508,224 $ - -
=========== ========== ========= =========


(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 second calendar quarter of 2003. 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.

(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, 50.0% of these deposits are considered repriceable
within three months and 50.0% 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;



20



variations occur daily as the Company adjusts its interest sensitivity
throughout the year. Fourth, assumptions must be made to construct such a table.
For example, non-interest bearing deposits are assigned a repricing interval
within three months, 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.

At the current level of interest rates, the Company has some exposure
to a movement in rates in either direction due to the optionality of the
financial instruments on both sides of the balance sheet. Optionality exists
because customers have choices regarding their deposit accounts or loans. For
example, if a customer has a fixed rate mortgage, he/she may choose to refinance
the mortgage if interest rates decline. One way to reduce this option risk is to
sell the Company's long-term fixed rate mortgages in the secondary market. The
impact of a rising or falling interest rate environment on net interest income
is not expected to be significant to the Company's results of operations.
Nonetheless, the Company's asset/liability management committee's priority is to
manage this optionality and therefore limit the level of interest rate risk.

The Company recently announced an agreement providing for its
acquisition of HomeTowne Heritage Bank for approximately $37.6 million in cash.
The cash to be paid to HomeTowne Heritage shareholders is expected to come
primarily from the Company's pending sale of Panasia Bank, N.A. The Company has
other sources of funding available, if necessary. Any further effect on the
liquidity position of the Company is not expected to be material.

The Company currently does not have any off-balance sheet special
purpose entities.


CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
---------------------------------------------

The following table sets forth contractual obligations and other
commitments representing required and potential cash outflows as of June 30,
2003:




One to Four to
Less than Three Five After Five
(dollars in thousands) Total One Year Years Years Years
----- -------- ----- ----- -----

Minimum annual rentals or noncancellable $ 17,339 $ 3,097 $ 4,390 $ 2,401 $ 7,451
Operating leases
Remaining contractual maturities of time
deposits 785,246 378,718 338,992 63,149 4,387
Loan commitments 679,208 459,370 40,739 11,516 167,583
Long-term borrowed funds 172,149 29,145 37,500 25,421 80,083
Guaranteed preferred beneficial interests in
Company's subordinated debentures 63,250 --- --- --- 63,250
Standby letters of credit 42,330 40,263 1,874 75 118
---------- -------- -------- -------- --------
Total $1,759,522 $910,593 $423,495 $102,562 $322,872
---------- -------- -------- -------- --------


The Company had no capital leases at June 30, 2003.


21





CAPITAL LEVELS


Tier 1 Capital to Tier 1 Capital to Risk- Total Capital to Risk-
Average Assets Ratio Weighted Assets Ratio Weighted Assets Ratio
------------------------------------------------------------------------
Jun. 30, Dec. 31, Jun. 30, Dec. 31, Jun. 30, Dec. 31,
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----


The Company 7.81% 8.66% 10.28% 11.81% 11.54% 13.08%
National Penn Bank 6.87% 6.91% 8.91% 9.33% 10.17% 10.59%
Panasia Bank, N.A. 6.20% 5.61% 11.13% 10.10% 12.38% 11.36%
"Well Capitalized" institution 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
(under banking regulations)


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 June 30,
2003, 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 4.0%. In
order for the Company to be considered "well capitalized", as defined by banking
regulators, the Company must have Tier 1 and total capital ratios of 6.0% and
10.0%, respectively, and a minimum Tier 1 leverage ratio of 5.0%. The Company
currently meets the criteria for a well capitalized institution, and management
believes that, under current regulations, the Company will continue to meet its
minimum capital requirements in the foreseeable future. At present, the Company
has no commitments for significant capital expenditures.

The Company's acquisition of FirstService Bank during the first quarter
of 2003 had the effect of lowering the Company's three regulatory capital
ratios. As seen in the above table, these three ratios at June 30, 2003 still
remain in excess of regulatory "well capitalized" levels. The Company does not
expect a material impact on its future dividends. The dividend payout ratio is
expected to remain in the historical 45% to 50% range.

Regarding the Company's recent agreement to acquire HomeTowne Heritage
Bank, taken in conjunction with the Company's pending sale of Panasia Bank,
N.A., there is expected to be no further material change in the Company's three
regulatory capital ratios. Because no additional shares of the Company's stock
are to be issued in the HomeTowne Heritage Bank acquisition, there should not be
a negative impact on the Company's dividend payout ratio.

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.


RELATED PARTY TRANSACTIONS
--------------------------

The Company has no material transactions with related parties as
defined in SFAS No. 57 Related Party Disclosures or with any other persons who,
because of a prior relationship with the Company, i.e. former members of senior
management or individuals with former management relationships with the Company,
had the ability to negotiate transactions with the Company on more favorable
terms to themselves than had they not had such prior relationships with the
Company.


22



ACQUISITION OF FIRSTSERVICE BANK
--------------------------------

On February 25, 2003, the Company completed a merger with FirstService
Bank (FirstService). This transaction was accounted for under the purchase
method of accounting and the results of operations of the Company include
FirstService's results from and after February 25, 2003. The acquisition
resulted in the recording of approximately $54 million of goodwill and other
intangibles. The Company believes that the FirstService Bank acquisition will be
dilutive to the Company's earnings in 2003, but will be accretive to earnings in
2004.

PENDING SALE OF PANASIA BANK, N.A.
----------------------------------

On February 10, 2003, the Company, Panasia Bank, N.A., and Woori
America Bank, a New York banking institution, entered into an agreement
providing for, among other things, the sale of Panasia to Woori America Bank for
$34.5 million in cash and the subsequent merger of Panasia into Woori America
Bank. All required regulatory approvals have been obtained. Subject to various
other closing conditions, the Company and Panasia anticipate that the
transaction will close in third quarter 2003. No assurance can be given that all
other closing conditions will be satisfied or waived, or that the transactions
will in fact be consummated.


PENDING ACQUISITION OF HOMETOWNE HERITAGE BANK
----------------------------------------------

As previously reported, on April 30, 2003, the Company and its
principal banking subsidiary, National Penn Bank, entered into an Agreement and
Plan of Merger with HomeTowne Heritage Bank which provides, among other things,
for the merger of HomeTowne Heritage Bank into National Penn Bank, with National
Penn Bank surviving the merger as a subsidiary of the Company.

The Merger Agreement provides for the exchange of $13.697 in cash for
each outstanding share of common stock of HomeTowne Heritage Bank, or total cash
consideration of approximately $37.6 million.

The merger is subject to a number of conditions, including approval by
the Office of the Comptroller of the Currency, the Pennsylvania Department of
Banking, and the shareholders of HomeTowne Heritage Bank. No assurance can be
given that all required approvals will be obtained, that all other closing
conditions will be satisfied or waived, or that the transaction will in fact be
consummated.

The foregoing description does no purport to be complete and is
qualified in its entirety by reference to the Merger Agreement and related
letter agreements. Additional information is provided in the Company's Report on
Form 8-K dated April 30, 2003, including copies of the Merger Agreement and the
form of related letter agreement filed as exhibits to the 8-K Report.


NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

Off Balance Sheet Commitments
- -----------------------------

The Company adopted FIN 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others, on January 1, 2003. FIN 45 requires a guarantor entity, at the inception
of a guarantee covered by the measurement provisions of the interpretation, to
record a liability for the fair value of the obligation undertaken in issuing
the guarantee. The Company issues financial and performance letters of credit.
Financial letters of credit require the Company to make payment if the
customer's financial condition deteriorates, as defined in the agreements.
Performance letters of credit require the Company to make payments if the
customer fails to perform identified non-financial contractual obligations. The
Company previously did not record an initial liability when guaranteeing
obligations unless it became probable that the Company would have to perform
under


23


the guarantee. FIN 45 applies prospectively to guarantees the Company issues or
modifies subsequent to December 31, 2002.

The Company defines the initial fair value of these letters of credit
as the fee received from the customer. The maximum potential undiscounted amount
of future payments on these letters of credit as of June 30, 2003 is $42.3
million and they expire through 2008. The amounts due under these letters of
credit would be reduced by any proceeds that the Company would be able to obtain
in liquidating the collateral for these loans. The adoption of FIN 45 did not
have a material impact on the Company's consolidated financial position or
results of operations.

Variable Interest Entities
- --------------------------

In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, for certain
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both.

FIN 46 applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. The Company has not acquired any variable interest entities subsequent
to February 1, 2003.

The Company is in the process of determining what impact, if any, the
adoption of the provisions of FIN 46 will have on entities held by the Company
prior to the issuance of FIN 46 and the impact on the Company's financial
condition or results of operations. The Company has also evaluated the impact of
FIN 46 on variable interest entities consolidated by the Company prior to the
issuance of FIN 46. Management has determined that NPB Capital Trust II
qualifies as a variable interest entity under FIN 46. NPB Capital Trust II
issued mandatorily redeemable preferred stock to investors and loaned the
proceeds to the Company. NPB Capital Trust II holds, as its sole asset,
subordinated debentures issued by the Company in 2002. The timing and amount of
payments on the subordinated debentures are the same as the timing and amount of
payments by NPB Capital Trust II on the mandatorily redeemable preferred stock.
NPB Capital Trust II is currently included in the Company's consolidated balance
sheet and statements of income. Management believes that NPB Capital Trust II
should continue to be included in the Company's consolidated financial
statements after the effective date of FIN 46. However, as additional
interpretations related to entities such as NPB Capital Trust II become
available, management will reevaluate its conclusion that NPB Capital Trust II
should be included in the consolidated financial statements and its potential
impact to its Tier I capital calculation under such interpretations.


Amendment to SFAS 133 on Derivative Instruments and Hedging Activities
- ----------------------------------------------------------------------

The Company adopted Statement of Financial Accounting Standard 149
(SFAS No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies or amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends paragraph SFAS No. 133 to require a lender to account for loan
commitments related to mortgage loans that will be held for sale as derivatives.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003. The Company periodically enters into commitments with its customers, which
it intends to sell in the future. Management is currently evaluating the
provisions of SFAS no. 149, however, the



24



Company does not anticipate the adoption of SFAS No. 149 will have a material
impact on the Company's financial position or results of operations.


Financial Instruments with Characteristics of Both Liabilities and Equity
- -------------------------------------------------------------------------

The FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, on May 15,
2003. SFAS No. 150 changes the classification in the statement of financial
position of certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial statements
to recognize changes in fair value or redemption amount, as applicable, in
earnings. SFAS No. 150 is effective for public companies for financial
instruments entered into or modified after May 31, 2003 and is effective at the
beginning of the first interim period beginning after June 15, 2003. Management
has not entered into any financial instruments that would qualify under SFAS No.
150. The Company currently classifies its Guaranteed Preferred Beneficial
Interest in the Company's Subordinated Debt as a liability. As a result,
management does not anticipate the adoption of SFAS No. 150 will have a material
impact on the Company's financial position or results of operations.

FUTURE OUTLOOK
--------------

On June 25, 2003, the Company's Board of Directors declared a cash
dividend of $.23 per share payable on August 17, 2003, to shareholders of record
on July 31, 2003.

On July 26, 2002, the Company's Board of Directors authorized the
repurchase of up to one million shares of the company's common stock to be used
to fund the Company's dividend reinvestment plan, stock option plans,
stock-based benefit plans, and employee stock purchase plan. No timetable has
been set for these repurchases. As of June 30, 2003, 802,955 shares have been
repurchased at an average price of $27.00.

The Company is considering strategic balance sheet opportunities that
may include such things as restructuring long term, high rate borrowings in
order to reduce future interest expense.

The Company's market area, while diverse, is subject to many of the
same weakened economic forces being experienced regionally and nationally:

o The continuing softness in the general economy will likely generate
only modest loan growth in 2003, possibly in the range of three to
eight percent.

o In second quarter 2003, net charge-offs improved significantly over
those in first quarter 2003. The

The Company, like many of its peers, continues to be concerned about
current and near term economic conditions and their continued negative effect on
its loan volume as well as its overall credit quality.

FORWARD-LOOKING STATEMENTS
--------------------------

From time to time, the Company or its representatives make written or oral
statements that may include "forward-looking statements" with respect to its:

* Financial condition.

* Results of operations.

* Asset quality.

25



* Product, geographic and other business expansion plans and
activities.

* Investments in new subsidiaries and other companies.

* Capital expenditures, including investments in technology.

* Pending or completed mergers with or acquisitions of financial
or non-financial companies or their assets, loans, deposits
and branches, including the pending National Penn
Bank/HomeTowne Heritage Bank merger, and the revenue
enhancements, cost savings and other benefits anticipated in
those transactions.

* Pending or completed sales of businesses or assets, including
the pending sale of Panasia, and the benefits anticipated in
those transactions.

* Other matters.

Many of these statements can be identified by looking for words such as
"believes," "expects," "anticipates," "estimates", "projects" or similar words
or expressions.

These forward-looking statements involve substantial risks and
uncertainties. There are many factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements. These
factors include, among other things, the following possibilities:

* The Company's unified branding campaign and other marketing
initiatives may be less effective than expected in building
name recognition and greater customer awareness of the
Company's products and services. Use of non-Company brands may
be counter-productive.

* The Company may be unable to differentiate itself from its
competitors by a higher level of customer service, as intended
by its business strategy.

* Expansion of the Company 's products and services offerings
may take longer, and may meet with more effective competitive
resistance from others already offering such products and
services, than expected.

* New product development by new and existing competitors may be
more effective, and take place more quickly, than expected.

* Competitors with substantially greater resources may enter
product market, geographic or other niches currently served by
the Company.

* Geographic expansion may be more difficult, take longer, and
present more operational and management risks and challenges,
than expected.

* Business development in newly entered geographic areas,
including those entered by mergers and acquisitions, may be
more difficult, and take longer, than expected.

* Competitive pressures may increase significantly and have an
adverse effect on the Company 's pricing, spending,
third-party relationships and revenues.

* Customers may substitute competitors' products and services
for the Company 's products and services, due to price
advantage, technological advantages, or otherwise.


26



* The Company may be less effective in cross-selling its various
products and services, and in utilizing alternative delivery
systems such as the Internet, than expected.

* Projected business increases following new product
development, geographic expansion, and productivity and
investment initiatives, may be lower than expected, and
recovery of associated costs may take longer than expected.

* The Company may be unable to retain key executives and other
key personnel due to intense competition for such persons or
otherwise.

* Increasing interest rates may increase funding costs and
reduce interest margins, and may adversely affect business
volumes, including mortgage origination levels.

* Growth and profitability of the Company 's non-interest income
or fee income may be less than expected.

* General economic or business conditions, either nationally or
in the regions in which the Company will be doing business,
may be less favorable than expected, resulting in, among other
things, a deterioration in credit quality or a reduced demand
for credit, including the resultant effect on the Company 's
loan portfolio and allowance for loan losses.

* Expected synergies and cost savings from mergers and
acquisitions, including reductions in interest and
non-interest expense, may not be fully realized or realized as
quickly as expected.

* Revenues and loan growth following mergers and acquisitions,
may be lower than expected.

* Loan losses, deposit attrition, operating costs, customer and
key employee losses, and business disruption following mergers
and acquisitions may be greater than expected.

* Business opportunities and strategies potentially available to
the Company after mergers and acquisitions may not be
successfully or fully acted upon.

* Costs, difficulties or delays related to the integration of
businesses of acquired companies with the Company 's business
may be greater or take longer than expected.

* The Company 's pending sale of Panasia could fail to close due
to lack of one or more required regulatory approvals or
otherwise, resulting in the Company 's indefinite retention of
the Panasia franchise and the need to fund the pending
HomeTowne Heritage Bank merger from sources other than the
redeployment of funds from the pending Panasia sale.

* Technological changes may be harder to make or more expensive
than expected or present unanticipated operational issues.

* Recent and proposed legislative or regulatory changes,
including changes in accounting rules and practices, and
customer privacy and data protection requirements, and
intensified regulatory scrutiny of the financial services
industry in general, may adversely affect the Company 's costs
and business.

* Market volatility may continue in the securities markets, with
an adverse effect on the Company 's securities and asset
management activities.


27



* There may be unanticipated regulatory rulings or developments.

* Changes in consumer spending and savings habits could
adversely affect the Company 's business.

* Negative publicity with respect to any of the Company's
products or services, whether legally justified or not, could
adversely affect the Company's reputation and business.

* Various domestic or international military or terrorist
activities or conflicts may have a negative impact on the
Company 's business as well as the foregoing and other risks.

* The Company 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.

Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
statements. The Company cautions shareholders not to place undue reliance on
such statements.

All written or oral forward-looking statements attributable to the
Company or any person acting on its behalf made after the date of this Report
are expressly qualified in their entirety by the cautionary statements contained
in this Report. The Company 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 3. Quantitative and Qualitative Disclosures About Market Risk.
- -------------------------------------------------------------------

There has been no material change in the Company's assessment of its
sensitivity to market risk since its presentation in the 2002 Annual Report on
Form 10-K filed with the SEC.

Item 4. Controls and Procedures.
- --------------------------------

National Penn's chief executive officer and chief financial officer
evaluated National Penn's "disclosure controls and procedures" as of June 30,
2003. Disclosure controls and procedures are defined in SEC Rule 13a-15(e) as
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 specified in the SEC's rules and
forms. For National Penn, these reports are its annual reports on Form 10-K, its
quarterly reports on Form 10-Q (including this report), and its reports on Form
8-K. These officers concluded that such controls and procedures are adequate and
effective.

There were no changes in the registrant's internal control over
financial reporting during the fiscal quarter ended June 30, 2003 that
materially affected, or are reasonably likely to materially affect, National
Penn's internal control over financial reporting.






28



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 a Vote of Security Holders.
- ------------------------------------------------------------

The 2003 annual meeting of the shareholders of National Penn
Bancshares, Inc. was held on April 22, 2003. Notice of the meeting was mailed to
shareholders of record on or about March 24, 2003, together with proxy
solicitation materials prepared in accordance with Section 14(a) of the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder.

The annual meeting was held to elect four Class I directors to hold
office for three years from the date of election and until their successors are
elected and qualified.

There was no solicitation in opposition to the nominees of the Board of
Directors for election to the Board of Directors and all such nominees were
elected. The number of votes cast for or withheld, as well as the number of
abstentions and broker non-votes, for each of the nominees for election to the
Board of Directors were as follows:




Abstentions and
Nominee For Withheld Broker Nonvotes
------- --- -------- ---------------


John H. Body 17,160,268 71,066 -0-

J. Ralph Borneman, Jr. 17,153,288 78,046 -0-

Glenn E. Moyer 17,175,922 55,412 -0-

Robert E. Rigg 17,163,639 67,695 -0-




Item 5. Other Information.
- --------------------------

Cash Dividend
-------------

On June 25, 2003, the Board of Directors of National Penn declared a
cash dividend of $.23 per share payable on August 17, 2003 to shareholders of
record as of July 31, 2003.

Pending Sale of Panasia Bank, N.A.
----------------------------------

As previously reported, National Penn Bancshares, Inc. and its
subsidiary, Panasia Bank, N.A., entered into an Agreement on February 10, 2003
with Woori America Bank, a New York banking institution, providing for, among
other things, the sale of Panasia to Woori America Bank for $34.5 million in
cash and the subsequent merger of Panasia into Woori America Bank.



29


All required regulatory approvals have been obtained. Subject to
various other closing conditions, National Penn and Panasia anticipate that the
transactions will close in third quarter 2003. No assurance can be given that
all other closing conditions will be satisfied or waived, or that the
transactions will in fact be consummated.

The foregoing description does not purport to be complete and is
qualified in its entirety by reference to the Agreement and related Guaranty
Agreement. Additional information is provided in National Penn's Report on Form
8-K dated February 10, 2003, including copies of the Agreement and related
Guaranty Agreement filed as exhibits to the 8-K Report.

Pending Acquisition of HomeTowne Heritage Bank
----------------------------------------------

As previously reported, on April 30, 2003, National Penn and its
principal banking subsidiary, National Penn Bank, entered into an Agreement and
Plan of Merger with HomeTowne Heritage Bank which provides, among other things,
for the merger of HomeTowne Heritage Bank with National Penn Bank, with National
Penn Bank surviving the merger as a subsidiary of National Penn.

The Merger Agreement provides for the exchange of $13.697 in cash for
each outstanding share of common stock of HomeTowne Heritage Bank, or total cash
consideration of approximately $37.6 million.

The merger is subject to a number of conditions, including approval by
the Office of the Comptroller of the Currency, the Pennsylvania Department of
Banking, and the shareholders of HomeTowne Heritage Bank. No assurance can be
given that all required approvals will be obtained, that all other closing
conditions will be satisfied or waived, or that the transaction will in fact be
consummated.

The foregoing description does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement and related
letter agreements. Additional information is provided in National Penn's Report
on Form 8-K dated April 30, 2003, including copies of the Merger Agreement and
the form of related letter agreement filed as exhibits to the 8-K Report.

Wayne Weidner - Exercise of Stock Options
-----------------------------------------

On July 24, 2003, Wayne R. Weidner, Chairman, President and Chief
Executive Officer of National Penn, exercised stock options for 19,692 shares of
National Penn common stock under a plan adopted in February 2003. Under the
plan, Mr. Weidner also intends to exercise stock options for 19,692 National
Penn shares on October 17, 2003. The plan was adopted in accordance with SEC
Rule 10b5-1(c), and was approved by National Penn's board of directors under its
insider trading policy.

Office and ATM Openings and Closings
------------------------------------

In April 2003, National Penn Bank closed ten automated teller machines
(ATMs) in various supermarkets located in Berks, Bucks, Lebanon, Montgomery and
Northampton Counties, Pennsylvania.

On May 19, 2003, National Penn Bank opened a new community office at
1660 Cedar Crest Boulevard, Allentown, Lehigh County, Pennsylvania, and closed a
supermarket office located nearby at 1500 Cedar Crest Boulevard.

On June 27, 2003, National Penn Bank consolidated its community offices
located at 1537 North Broad Street, Lansdale and 356 York Road, Warminster,
Bucks County, Pennsylvania, into its FirstService Bank Division community
offices located in Lansdale at 139 South Broad Street and Warminster at 320 West
Street Road.

On July 31, 2003, National Penn Bank closed a community office located
at 300 Welsh Road, Horsham, Montgomery County, Pennsylvania.



30


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

(a) Exhibits.

2.1 - Agreement dated April 30, 2003 between National Penn Bancshares,
Inc., National Penn Bank and HomeTowne Heritage Bank.
(Incorporated by reference to Exhibit 2.1 of National Penn's
Current Report on Form 8-K dated April 30, 2003.)

2.2 - Form of Letter Agreement between HomeTowne Heritage Bank
directors and National Penn Bancshares, Inc. (Incorporated by
reference to Exhibit 2.2 of National Penn's Current Report on
Form 8-K dated April 30, 2003.)

10.1 - Amendment No. 4 to National Penn Bancshares, Inc. Capital
Accumulation Plan (Amended and Restated Effective January 1,
1997).

31.1 - Certification of Chairman, 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 Treasurer and 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 Chairman, 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 Treasurer and 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.).

(b) Reports on Form 8-K. During the quarter ended June 30, 2003, National
Penn filed the following Reports on Form 8-K:

* Report dated February 25, 2003. The Report provided information under
Item 5 on National Penn's completion of its acquisition of
FirstService Bank, including the related appointment of two additional
National Penn directors and one additional executive officer. The
Report also provided under Item 9 the press release issued by National
Penn in connection with the completion of the FirstService Bank
acquisition (which was filed as an exhibit under Item 7). The Report
did not contain any financial statements.

* Report dated April 15, 2003. The Report provided information under
Items 9 and 12 on National Penn's earnings for first quarter 2003. The
Report did not contain any financial statements.

* Report dated April 30, 2003. The Report provided information under
Item 5 on the execution by National Penn and National Penn's principal
subsidiary, National Penn Bank, of an Agreement and Plan of Merger
providing for the merger of HomeTowne Heritage Bank, a Pennsylvania
state bank headquartered in Lancaster County, Pennsylvania, with
National Penn Bank. The Report did not contain any financial
statements.



31





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: August 14, 2003 By /s/ Wayne R. Weidner
----------------------------
Wayne R. Weidner, President
and Chief Executive Officer

Dated: August 14, 2003 By /s/ Gary L. Rhoads
-----------------------------
Gary L. Rhoads, Principal
Financial Officer


32