|SECURITIES AND
EXCHANGE COMMISSION 
WASHINGTON, DC 20549



FORM 10-Q


(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, 2001


OR
|-------------------------------------------------

||_| |  | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ----------------------------------------------------------------------------------------

|For the transition period from __________ to __________


Commission file number
0-17706


QNB Corp.
(Exact Name of Registrant as Specified in Its Charter)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------

|Pennsylvania(State or Other Jurisdiction of Incorporation or Organization)     | 23-2318082(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------------ | ----------------------------------------------
|10 North Third Street, Quakertown, PA (Address of Principal Executive Offices) | 18951-9005(Zip Code)                          

|Registrants Telephone Number, Including Area Code (215)538-5600


Not ApplicableFormer
Name, Former Address and Former Fiscal Year, if Changed Since Last Report.


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


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

|ClassCommon Stock, par value $1.25 | Outstanding at August 10, 20011,543,184
|---------------------------------- | ---------------------------------------

|QNB CORP. AND
SUBSIDIARY


FORM 10-Q


QUARTER ENDED JUNE 30,
2001




INDEX


PART I - FINANCIAL
INFORMATION
|-------------------------------------------------------------------------------------------------------------

|        |  | PAGE                                                                                        
|------- |  | --------------------------------------------------------------------------------------------
|ITEM 1. |  | FINANCIAL STATEMENTS (Unaudited)                                                            
|       
|        |  | Consolidated Statements of Income for Three and      Six Months Ended June 30, 2001 and 2000
|       
|        |  | Consolidated Balance Sheets at June 30, 2001      and December 31, 2000                     
|       
|        |  | Consolidated Statements of Cash Flows for Six      Months Ended June 30, 2001 and 2000      
|       
|        |  | Notes to Consolidated Financial Statements                                                  
|       
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF    OPERATIONS AND FINANCIAL CONDITION    
|       
|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT    MARKET RISK                                
|       
|        |  | PART II - OTHER INFORMATION                                                                 
|       
|ITEM 1. |  | LEGAL PROCEEDINGS                                                                           
|       
|ITEM 2. |  | CHANGES IN SECURITIES                                                                       
|       
|ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES                                                             
|       
|ITEM 4. |  | SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS                                      
|       
|ITEM 5. |  | OTHER INFORMATION                                                                           
|       
|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K                                                            

|CONSOLIDATED
STATEMENTS OF INCOME
|---------------------------------

|                                                     | (in thousands, except share data)(unaudited)
|---------------------------------------------------- | --------------------------------------------
|                                                    
|
|
|                                                    
|Interest Income                                      |                                             
|Interest and fees on loans                           |                                             
|Interest and dividends on investment securities:     |                                             
|Taxable                                              |                                             
|Tax-exempt                                           |                                             
|Interest on Federal funds sold                       |                                             
|Interest on interest-bearing balances                |                                             
|                                                    
|Total interest income                                |                                             
|                                                    
|Interest Expense                                     |                                             
|Interest on deposits                                 |                                             
|Interest-bearing demand accounts                     |                                             
|Money market accounts                                |                                             
|Savings                                              |                                             
|Time                                                 |                                             
|Time over $100,000                                   |                                             
|Interest on short-term borrowings                    |                                             
|Interest on Federal Home Loan Bank advances          |                                             
|                                                    
|Total interest expense                               |                                             
|                                                    
|Net interest income                                  |                                             
|Provision for loan losses                            |                                             
|                                                    
|Net interest income after provision for loan losses  |                                             
|                                                    
|Non-Interest Income                                  |                                             
|Fees for services to customers                       |                                             
|Mortgage servicing fees                              |                                             
|Net gain on investment securities available-for-sale |                                             
|Net gain on sale of loans                            |                                             
|Other operating income                               |                                             
|                                                    
|Total non-interest income                            |                                             
|                                                    
|Non-Interest Expense                                 |                                             
|Salaries and employee benefits                       |                                             
|Net occupancy expense                                |                                             
|Furniture and equipment expense                      |                                             
|Marketing expense                                    |                                             
|Other expense                                        |                                             
|                                                    
|Total non-interest expense                           |                                             
|                                                    
|Income before income taxes                           |                                             
|Provision for income taxes                           |                                             
|                                                    
|Net Income                                           |                                             
|                                                    
|Net Income Per Share - Basic                         |                                             
|                                                    
|Net Income Per Share - Diluted                       |                                             
|                                                    
|Cash Dividends Per Share                             |                                             
|                                                    

|The accompanying notes are an
integral part of the consolidated financial statements.


Page 1
|----------------------------------------------------------------------------------------------

|CONSOLIDATED BALANCE
SHEETS
|---------------------------

|                                                                                            | (in thousands)(unaudited)
|------------------------------------------------------------------------------------------- | -------------------------
|                                                                                           
|
|                                                                                           
|Assets                                                                                      |                          
|Cash and due from banks                                                                     |                          
|Federal funds sold                                                                          |                          
|Investment securities                                                                       |                          
|available-for-sale                                                                          |                          
|held-to-maturity (market value $45,857 and $42,815)                                         |                          
|Total loans, net of unearned income of $178 and $195                                        |                          
|Allowance for loan losses                                                                   |                          
|                                                                                           
|Net loans                                                                                   |                          
|Premises and equipment, net                                                                 |                          
|Accrued interest receivable                                                                 |                          
|Other assets                                                                                |                          
|                                                                                           
|Total assets                                                                                |                          
|                                                                                           
|                                                                                           
|Liabilities                                                                                 |                          
|Deposits                                                                                    |                          
|Demand, non-interest-bearing                                                                |                          
|Interest bearing demand accounts                                                            |                          
|Money market accounts                                                                       |                          
|Savings                                                                                     |                          
|Time                                                                                        |                          
|Time over $100,000                                                                          |                          
|                                                                                           
|Total deposits                                                                              |                          
|Short-term borrowings                                                                       |                          
|Federal Home Loan Bank advances                                                             |                          
|Accrued interest payable                                                                    |                          
|Other liabilities                                                                           |                          
|                                                                                           
|Total liabilities                                                                           |                          
|                                                                                           
|                                                                                           
|Commitments and contingencies                                                               |                          
|                                                                                           
|Shareholders Equity                                                                        |                          
|Common stock, par value $1.25 per share;                                                    |                          
|5,000,000 shares authorized; 1,588,845 shares and 1,512,755 shares issued;                  |                          
|1,543,184 and 1,480,109 shares outstanding                                                  |                          
|Surplus                                                                                     |                          
|Retained earnings                                                                           |                          
|Accumulated other comprehensive gain (loss)                                                 |                          
|Treasury stock, at cost; 45,661 and 32,646 shares at June 30, 2001 and December 31,    2000 |                          
|                                                                                           
|Total shareholders equity                                                                  |                          
|                                                                                           
|Total liabilities and shareholders equity                                                  |                          
|                                                                                           

|The accompanying notes are an
integral part of the consolidated financial statements.


Page 2
|----------------------------------------------------------------------------------------------

|CONSOLIDATED STATEMENTS
OF CASH FLOWS
|-------------------------------------

|                                                                                                       | (in thousands)(unaudited)
|------------------------------------------------------------------------------------------------------ | -------------------------
|                                                                                                      
|
|                                                                                                      
|Operating Activities                                                                                   |                          
|Net income                                                                                             |                          
|Adjustments to reconcile net income to net cash provided by operating activities                       |                          
|Depreciation and amortization                                                                          |                          
|Securities gains                                                                                       |                          
|Net gain on sale of loans                                                                              |                          
|Proceeds from sales of residential mortgages                                                           |                          
|Originations of residential mortgages held-for-sale                                                    |                          
|Proceeds from sales of student loans                                                                   |                          
|Gain on sale of other real estate owned                                                                |                          
|Deferred income tax provision                                                                          |                          
|Change in income taxes payable                                                                         |                          
|Net increase in interest receivable                                                                    |                          
|Net amortization of premiums and discounts                                                             |                          
|Net increase (decrease) in interest payable                                                            |                          
|Increase in other assets                                                                               |                          
|Decrease in other liabilities                                                                          |                          
|                                                                                                      
|Net cash provided by operating activities                                                              |                          
|                                                                                                      
|Investing Activities                                                                                   |                          
|Proceeds from maturities and calls of investment securities                                            |                          
|available-for-sale                                                                                     |                          
|held-to-maturity                                                                                       |                          
|Proceeds from sales of investment securities                                                           |                          
|available-for-sale                                                                                     |                          
|Purchase of investment securities                                                                      |                          
|available-for-sale                                                                                     |                          
|held-to-maturity                                                                                       |                          
|Net decrease in Federal funds sold                                                                     |                          
|Net increase in loans                                                                                  |                          
|Net purchases of premises and equipment                                                                |                          
|Proceeds from the sale of other real estate owned                                                      |                          
|                                                                                                      
|Net cash used by investing activities                                                                  |                          
|                                                                                                      
|Financing Activities                                                                                   |                          
|Net increase in non-interest-bearing deposits                                                          |                          
|Net increase in interest-bearing deposits                                                              |                          
|Net (decrease) increase  in short-term borrowings                                                      |                          
|Proceeds from Federal Home Loan Bank advances                                                          |                          
|Cash dividends paid                                                                                    |                          
|Proceeds from issuance of common stock                                                                 |                          
|Purchases of treasury stock                                                                            |                          
|                                                                                                      
|Net cash provided by financing activities                                                              |                          
|                                                                                                      
|Increase (decrease) in cash and cash equivalents                                                       |                          
|Cash and cash equivalents at beginning of year                                                         |                          
|                                                                                                      
|Cash and cash equivalents at end of period                                                             |                          
|                                                                                                      
|Supplemental Cash Flow Disclosures                                                                     |                          
|Interest paid                                                                                          |                          
|Income taxes paid                                                                                      |                          
|Non-Cash Transactions                                                                                  |                          
|Change in net unrealized holding gains (losses), net of taxes, on available-for-sale        securities |                          

|The accompanying notes are an
integral part of the consolidated financial statements.


Page 3
|----------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000, AND DECEMBER 31, 2000 (Unaudited)



1. REPORTING AND ACCOUNTING POLICIES


The accompanying
consolidated financial statements include the accounts of QNB Corp. and its
wholly owned subsidiary, The Quakertown National Bank, (QNB). All significant
intercompany accounts and transactions are eliminated in the consolidated
statements.


The consolidated balance
sheet as of June 30, 2001, as well as the respective statements of income and
cash flows for the three and the six month periods ended June 30, 2001 and 2000,
are unaudited. These financial statements should be read in conjunction with the
audited financial statements and notes thereto included in QNBs 2000
Annual Report incorporated in the Form 10-K.


The financial statements
reflect all adjustments, which in the opinion of management are necessary for a
fair presentation of the results of the interim periods and are of a normal and
recurring nature. The results for the periods presented are not necessarily
indicative of the full year.


2. PER SHARE DATA


The following sets forth
the computation of basic and diluted earnings per share (share and per share
data have been restated to reflect the 5% stock dividend issued June 30, 2001):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | For the Three MonthsEnded June 30, | For the Six MonthsEnded June 30,
|----------------------------------------- | ---------------------------------- | --------------------------------
|
|                                         
|Numerator for basic and diluted earnings  |                                    | $    1,184,545                  
|per share-net income                      |                                   
|                                         
|Denominator for basic earnings per share- |                                    | 1,546,834                       
|weighted average shares outstanding       |                                   
|                                         
|Effect of dilutive securities-employee    |                                    | 2,034                           
|stock options                             |                                   
|                                         
|Denominator for diluted earnings per      |                                    | 1,548,868                       
|share-adjusted weighted average           |                                   
|shares outstanding                        |                                   
|                                         
|Earnings per share-basic                  |                                    | $          .77                  
|Earnings per share-diluted                |                                    | $          .76                  

|There were 37,641 stock
options that were anti-dilutive for both the three and six-month periods ended
June 30, 2001 and 40,572 and 50,604 stock options that were anti-dilutive for
the three-month and six-month periods ended June 30, 2000.


Form 10-QPage 4
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000, AND DECEMBER 31, 2000 (Unaudited)



3. COMPREHENSIVE INCOME


Comprehensive income is
defined as the change in equity of a business entity during a period from
transactions and other events and circumstances, excluding those resulting from
investments by and distributions to owners. For QNB, the sole component of other
comprehensive income is the unrealized holding gains and losses on
available-for-sale investment securities.


The following shows the
components and activity of comprehensive income during the periods ended June
30, 2001 and 2000 (net of the income tax effect):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                 | For the Six MonthsEnded June 30,
|------------------------------------------------ | --------------------------------
|
|Unrealized holding gains (losses) arising during |                                 
|the period on securities held                    |                                 
|                                                
|Reclassification adjustment equal to             |                                 
|beginning unrealized for all sold securities     |                                 
|                                                 |                                 
|                                                
|Net change in unrealized during the              |                                 
|period                                           |                                 
|                                                
|Unrealized holding (losses) gains, beginning of  |                                 
|period                                           |                                 
|                                                 |                                 
|                                                
|Unrealized holding (losses) gains, end of period |                                 
|                                                 |                                 
|                                                 |                                 
|                                                
|Net income                                       |                                 
|Other comprehensive (loss) income, net of        |                                 
|tax:                                             |                                 
|Unrealized holding gains (losses) arising during |                                 
|the period                                       |                                 
|                                                 |                                 
|Comprehensive Income                             |                                 
|                                                 |                                 

|4. STOCK REPURCHASE PLAN


In March of 2000, the Board
of Directors of QNB Corp. authorized the repurchase of up to 4.99 percent or
79,180 of the shares of QNB Corps outstanding common stock. Such
repurchases may be made in open market or privately negotiated transactions. The
repurchased shares will be held in treasury and will be available for general
corporate purposes. Through June 30, 2001 QNB Corp. has repurchased 45,661 shares at
an average cost of $27.47 per share.


Form 10-QPage 5
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000, AND DECEMBER 31, 2000 (Unaudited)



5. RECENT ACCOUNTING PRONOUNCEMENTS


Business
Combinations


In June 2001, the FASB issued
Statement No. 141, Business Combinations. The Statement addresses financial accounting
and reporting for business combinations and supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. All business combinations in the scope of the Statement are to be
accounted for using the purchase method.


The provisions of the
Statement apply to all business combinations initiated after June 30, 2001. The
Statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001, or later.
There is no expected impact on earnings, financial condition, or equity upon
adoption of Statement No. 141.



Goodwill and
Other Intangible Assets


In June 2001, the FASB
issued Statement No. 142, Goodwill and Other Intangible Assets. The
Statement addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. The Statement also
addresses how goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements.


The provisions of the
Statement are required to be applied starting with fiscal years beginning after
December 15, 2001, except that goodwill and intangible assets acquired after
June 30, 2001, will be subject immediately to the nonamortization and
amortization provisions of the Statement. Early application is permitted for
entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not previously been issued. The
Statement is required to be applied at the beginning of an entitys fiscal
year and to be applied to all goodwill and other intangible assets recognized in
its financial statements at that date. There is no expected impact on earnings,
financial condition, or equity upon adoption of Statement No. 142.


Form 10-QPage 6
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
|----------------------------------------------------------------------------------------------------------------

|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
|------- |  | -------------------------------------------------------------------------------------

|QNB Corp. (the
Corporation) is a bank holding company headquartered in Quakertown,
Pennsylvania which provides a full range of commercial and retail banking
services through its banking subsidiary, The Quakertown National Bank (the
Bank), a 124 year old community bank with locations in Upper Bucks,
Northern Montgomery and Southern Lehigh Counties. The results of operations and
financial condition discussed herein are presented on a consolidated basis and
the consolidated entity is referred to herein as QNB. Per share data
has been adjusted to reflect the 5% stock dividend issued June 29, 2001.


This report includes
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act with respect to financial performance and other financial
and business matters. Forward-looking statements are typically identified by
words or phrases such as believe, expect,
anticipate, intend, estimate,
position and variations of such words and similar expressions, or
future or conditional verbs such as will, would,
should, could, may or similar expressions.
The Corporation cautions that these forward-looking statements are subject to
numerous assumptions, risks and uncertainties, all of which change over time,
and the Corporation assumes no duty to update forward looking statements. Actual
results could differ materially from those anticipated in these forward-looking
statements.


In addition to factors
previously disclosed by the Corporation and those identified elsewhere herein,
the following factors, among others, could cause actual results to differ
materially from forward looking statements: increased credit risk; the
introduction, withdrawal, success and timing of business initiatives and
strategies; changes in competitive conditions; the inability to sustain revenue
and earnings growth; changes in economic conditions, interest rates and
financial and capital markets; inflation; changes in investment performance;
customer disintermediation; customer borrowing, repayment, investment and
deposit practices; customer acceptance of QNB products and services; and the
impact, extent and timing of technological changes, capital management
activities, actions of the Federal Reserve Board and legislative and regulatory
actions and reforms.


RESULTS OF OPERATIONS


QNB reported record
earnings of $1,184,000 or $.76 per share on a diluted basis for the three month
period ended June 30, 2001. This represents an 9.1 percent increase from net
income of $1,085,000 or $.68 per share-diluted reported for the second quarter
of 2000. For the six month periods ended June 30, 2001 and 2000, net income was
$2,172,000 and $2,180,000, respectively, a decrease of .4 percent. Net income
per share diluted was $1.40 and $1.37 for the corresponding six-month periods.


A $221,000 increase in
non-interest income, primarily a result of gains on investment securities and
loans, as well as a slight increase in net interest income, contributed to the
higher reported net income when comparing the three-month periods. Non-interest
income increased 32.0 percent to $912,000 for the quarter ended June 30, 2001.
Excluding the gains on investment securities and loans during both periods,
non-interest income increased 4.7 percent. An increase in fee income from
deposit accounts contributed to this increase. Partially offsetting the higher
revenue was a $184,000 increase in non-interest expense. Contributing to the
increase in non-interest expense were costs related to the new branch in
Souderton, Pennsylvania and the new computer system installed during the fourth
quarter of 2000.


Form 10-QPage 7
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



RESULTS OF OPERATIONS
(Continued)


Net interest income which
represents interest income, dividends, and fees on earning assets, less interest
expense incurred on funding sources, increased 1.7 percent to $3,287,000 for the
quarter ended June 30, 2001 as compared to $3,232,000 for the quarter ended June
30, 2000. The increase in net interest income was a result of a 13.5 percent
increase in average earning assets offset by a decline in the net interest
margin. Contributing to the growth in average earning assets was an additional
$25,000,000 in investment securities that were purchased during the first
quarter of 2001 as part of a wholesale funding transaction. Excluding this
transaction average earning assets increased by 6.1 percent. On a tax-equivalent
basis, which allows for the comparison of tax-exempt loans and investments with
taxable loans and investments, net interest income increased by 4.1 percent from
$3,460,000 at June 30, 2000 to $3,600,000 at June 30, 2001. This is a result of
an increase in the proportion of tax-exempt assets to total assets. The net
interest margin declined from 4.10 percent during the second quarter of 2000 to
3.75 percent for the second quarter of 2001. Actions by the Federal Reserve Bank
to lower interest rates, the competitive nature of the local market for both
loans and deposits, and the impact of the wholesale funding transaction
contributed to the decline in the net interest margin.


Return on average assets
was 1.16 percent and 1.21 percent while the return on average equity was 14.67
percent and 14.08 percent for the three months ended June 30, 2001 and 2000,
respectively. For the six-month periods ended June 30, 2001 and 2000, return on
average assets was 1.10 percent and 1.23 percent and the return on average
equity was 13.61 percent and 14.30 percent, respectively.


NET INTEREST INCOME


Net interest income is the
primary source of operating income for QNB. Net interest income is interest
income, dividends, and fees on earning assets, less interest expense incurred
for funding sources. Earning assets primarily include loans, investment
securities and Federal funds sold. Sources used to fund these assets include
deposits, borrowed funds and shareholders equity. Net interest income is
affected by changes in interest rates, the volume and mix of earning assets and
interest-bearing liabilities, and the amount of earning assets funded by
non-interest-bearing deposits.


Net interest income increased 1.7
percent to $3,287,000 for the quarter ended June 30, 2001 as compared to $3,232,000 for
the quarter ended June 30, 2000. On a tax-equivalent basis, which allows for the
comparison of tax-exempt loans and investments to taxable loans and investments, net
interest income increased by 4.1 percent from $3,460,000 for the three months ended June
30, 2000 to $3,600,000 for the same period ended June 30, 2001. The larger increase in
tax-equivalent net interest income is a result of an increase in the proportion of
tax-exempt earning assets to total earning assets. The yield on earning assets on a
tax-equivalent basis was 7.33 percent for the second quarter of 2001 versus 7.54 percent
for the second quarter of 2000, while the rate paid on interest-bearing liabilities was
4.07 percent and 4.01 percent for the same periods. The decline in the yield on earnings
assets combined with the increase in the rate paid on interest-bearing liabilities
resulted in a decline in the net interest margin. The net interest margin on a
tax-equivalent basis declined 35 basis points to 3.75 percent for the three-month period
ended June 30, 2001 compared with 4.10 percent for the same period in 2000. A 13.5
percent increase in average earning assets helped offset the negative impact of a falling
net interest margin. Some of the growth in average earning assets was funded through a
wholesale funding transaction entered into during the first quarter of 2001, whereby QNB
borrowed $25,000,000 from the Federal Home Loan Bank at an average rate of 5.71 percent.
These funds were reinvested in securities with an average yield of 7.07 percent, for an
initial spread of 136 basis points. This transaction has the impact of increasing net
interest income, but lowering the net interest margin.


Form 10-QPage 8
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


NET INTEREST INCOME
(Continued)


Excluding the impact of
this transaction, the net interest margin for the three months ended June 30,
2001 would have been 3.91 percent, a decrease of 19 basis points.


The decline in the yield on
earning assets when comparing the two quarters is a result of falling interest
rates, as represented by the United States Treasury yield curve, during the
later part of 2000 and the first half of 2001. The concerns of a slowing
economy, falling consumer confidence and a possibility of recession has prompted
the Federal Reserve Bank to cut the Federal funds target rate 6 times and 275
basis points since the beginning of 2001. The yield on loans decreased 13 basis
points to 8.18 percent when comparing the second quarter of 2000 to the second
quarter of 2001. During the first quarter of 2000 the prime rate on loans
increased from 8.50 percent to 9.50 percent, while during the first half of 2001
the prime rate has decreased from 9.50 percent to 6.75 percent at June 30, 2001.
This decline in interest rates will continue to have a negative impact on the
yield on loans during 2001 as loans with re-pricing features price lower and
customers with fixed rate loans refinance at lower rates. Another factor in the
decline in the yield on loans is the current competitive environment for loans,
both commercial and consumer, from both banks and non-banks.


Also negatively impacting
the yield on earning assets was the decline in the yield on investment
securities when comparing the two quarters. The yield on investment securities
declined from 6.67 percent for the second quarter of 2000 to 6.65 percent for
the second quarter of 2001. However, it represents an 18 basis point decrease
from the 6.83 percent yield recorded in the first quarter of 2001. This larger
impact is a result of the pre-funding of higher yielding callable agency
securities and increased cash flow from mortgage-backed securities resulting
from the decline in interest rates in 2001. These proceeds were reinvested in
lower yielding securities resulting in the decline in the yield on the
portfolio. Partially negating the impact of the reinvestment of this cash flow
was the 7.07 percent yield from the investments purchased as part of the
wholesale funding transaction. The yield on investments is expected to continue
to decline during 2001 as additional cash flow from called bonds as well as from
mortgage-backed securities continues to be reinvested at lower rates.


The increase in the rates
paid on interest-bearing liabilities, despite the large decline in interest
rates during the first half of 2001, is primarily a result of higher rates on
time deposits as well as an increase in the rate paid on Federal Home Loan Bank
advances. The rate paid on time deposits increased from 5.38 percent for the
second quarter of 2000 to 5.51 percent for the second quarter of 2001. This is a
result of the competitive nature of the local market for certificates of
deposits and higher promotional rates paid during the second and third quarters
of 2000. The average rate paid on time deposits should decline over the next
several quarters as the higher yielding time deposits mature and re-price at
lower rates. The increase in the rate on Federal Home Loan Bank advances is a
result of the new borrowing related to the wholesale funding transaction.


Helping to offset the increase in
the rates on these liabilities were lower rates on interest-bearing demand deposits,
money market accounts, savings accounts and short-term borrowings. These accounts tend to
be less sensitive to changing interest rates and also re-price quicker than time
deposits. The average rate paid on these accounts were .98 percent, 3.04 percent, 1.66
percent and 3.62 percent, respectively for the second quarter of 2001. This compares to
1.28 percent, 3.37 percent, 1.83 percent and 4.39 percent for the same period in 2000.
The decline in the rate paid on interest bearing demand accounts and short-term
borrowings is partially correlated to the decline in the Federal funds rate as some of
these accounts are re-priced directly with this rate. The decline in the rate paid on
money market accounts is due principally to the Treasury Select Money Market product. The
Treasury Select Money Market is a variable rate account indexed to a percentage of the
monthly average rate of the 91-day Treasury bill rate based on balances in the account.
This product was introduced at the end of the first quarter of 2000 at a promotional rate
higher than the indexed rate. The combination of the end of the promotion at the end of
2000 and the decline in the 91-day Treasury bill rate during the first half of 2001 has
led to the decline in the average rate paid on money market accounts.


Form 10-QPage 9
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|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION




NET INTEREST INCOME
(Continued)


For the six-month period
ended June 30, 2001, net interest income increased $47,000 or .7 percent to
$6,445,000. On a tax-equivalent basis net interest income increased $209,000 or
3.1 percent. The 11.4 percent growth in average earning assets was partially
offset by a 30 basis point decline in the net interest margin. The net interest
margin on a tax-equivalent basis was 3.81 percent for the six-month period ended
June 30, 2001 compared with 4.11 percent for the same period in 2000. Excluding
the impact of the wholesale funding transaction average earning assets increased
5.2 percent and the net interest margin declined by 16 basis points. Total
interest income increased $1,145,000 from $12,042,000 to $13,187,000 when
comparing the six-month periods ended June 30, 2000 to June 30, 2001. The yield
on earning assets decreased from 7.49 percent to 7.45 percent, with the yield on
Federal funds sold declining 129 basis points between the six-month periods. The
yield on loans increased from 8.23 percent to 8.25 percent and the yield on
investment securities increased from 6.57 percent to 6.66 percent for the
six-month periods. The yield on the loan portfolio and investment portfolio are
slower to react to changes in interest rates compared to the yield on Federal
funds sold which changes immediately with action by the Federal Reserve Bank.
Average investment securities increased 14.4 percent to $179,625,000 while
average loans increased 5.0 percent to $186,035,000. Total interest expense
increased $1,098,000 from $5,644,000 to $6,742,000 for the six-month periods
with interest on the Federal Home Loan Bank advances and time deposits
accounting for $621,000 and $331,000 of the increase. The yield on
interest-bearing liabilities increased from 3.94 percent to 4.13 percent.
Average interest-bearing deposits increased 5.6 percent to $265,933,000, while
total average interest-bearing liabilities increased 14.3 percent to
$329,314,000. The primary difference in the percent change is the impact of the
additional borrowings from the Federal Home Loan Bank, entered into during the
first quarter of 2001 and a $6,860,000 increase in average commercial cash
management accounts. These types of funding sources tend to be higher costing
than retail deposits.


PROVISION FOR LOAN LOSSES


The provision for loan
losses represents managements determination of the amount necessary to be
charged to operations to bring the allowance for loan losses to a level
considered adequate in relation to the risk of known and inherent losses in the
loan portfolio. Actual loan losses, net of recoveries, serve to reduce the
allowance.


The determination of an
appropriate level of the allowance for loan losses is based upon an analysis of
the risk inherent in QNBs loan portfolio. Management uses various tools to
assess the adequacy of the allowance for loan losses. One tool is a model
recommended by the Office of the Comptroller of the Currency. This model
considers a number of relevant factors including: historical loan loss
experience, the assigned risk rating of the credit, current and projected credit
worthiness of the borrower, current value of the underlying collateral, levels
of and trends in delinquencies and non-accrual loans, trends in volume and terms
of loans, concentrations of credit, and national and local economic trends and
conditions. This model is supplemented with another analysis that also
incorporates exceptions to QNBs loan policy and QNBs portfolio
exposure to borrowers with large dollar concentration, defined as exceeding 25%
of QNBs legal lending limit. Other tools include ratio analysis and peer
group analysis.


There was no provision for
loan losses for either the three-month or six-month periods ended June 30, 2001
and 2000. QNB was not required to provide for loan losses as a result of
continued low levels of non-performing assets and delinquency relative to the
allowance for loan losses. QNB had net charge-offs of $13,000 and $59,000 during
the second quarter of 2001 and 2000, respectively. For the six-month periods
ended June 30, 2001 and 2000, QNB had net charge-offs of $27,000 and $88,000,
respectively. Net charge-offs represent .03 percent and .10 percent of average
loans for the six months ended June 30, 2001 and 2000.



Form 10-QPage 10
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|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


PROVISION FOR LOAN
LOSSES (Continued)


Non-performing assets
(non-accruing loans, loans past due 90 days or more, and other real estate
owned) remained relatively low, despite increasing during the second quarter of
2001. Non-performing assets amounted to .18 percent of total assets at June 30,
2001. This compares to .16 percent at June 30, 2000 and .06 percent at December
31, 2000. Non-accrual loans were $244,000 and $465,000 at June 30, 2001 and
2000. Non-accrual loans at December 31, 2000 were $205,000.


The increase in
non-performing assets was in the category of past due loans 90 days or more.
These loans amounted to $509,000 at June 30, 2001 compared to $11,000 at June
30, 2000 and $31,000 at December 31, 2000. The increase in past due loans
primarily relates to two borrowers, one of which has cured its delinquency subsequent to June
30, 2001. Overall delinquency, including loans past due 90 days or more, also
increased during the second quarter of 2001 and represented 1.35 percent of
total loans at June 30, 2001. This compares to .39 percent and .62 percent at
June 30, 2000 and December 31, 2000. QNB did not have any other real estate
owned as of June 30, 2001 and December 31, 2000. Other real estate owned was
$104,000 at June 30, 2000.


There were no restructured
loans as of June 30, 2001, December 31, 2000 or June 30, 2000 as defined in
Statement of Financial Accounting Standards No. 15, Accounting by Debtors
and Creditors for Troubled Debt Restructurings, that have not already been
included in loans past due 90 days or more or non-accrual loans.


The allowance for loan
losses was $2,923,000 and $2,950,000 at June 30, 2001 and December 31, 2000,
respectively. The ratio of the allowance to total loans was 1.54 percent and
1.59 percent for the respective periods. While QNB believes that its allowance
is adequate to cover losses in the loan portfolio, there remain inherent
uncertainties regarding future economic events and their potential impact on
asset quality.


A loan is considered
impaired, based on current information and events, if it is probable that QNB
will be unable to collect the scheduled payments of principal or interest when
due according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based on the present value of expected future cash
flows discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral.


At June 30, 2001 and 2000,
the recorded investment in loans for which impairment has been recognized in
accordance with SFAS No. 114 totaled $193,000 and $401,000, respectively, of
which $157,000 and $353,000 related to loans with no valuation allowance. At
June 30, 2001 and 2000 there were $36,000 and $48,000 in impaired loans that had
a valuation allowance against the entire amount. Most of the loans identified as
impaired are collateral-dependent.


Given the slowdown in the
United States economy and the slight increase in non-performing assets and
delinquency during the second quarter of 2001, QNB will continue to closely
monitor the adequacy of its allowance for loan losses.


NON-INTEREST INCOME


QNB, through its core banking
business, generates various fees and service charges. Total non-interest income is
composed of service charges on deposit accounts, mortgage servicing fees, gains on the
sale of investment securities, gains on the sale of residential mortgages and student
loans, and other miscellaneous fee income. QNB reviews all service charges and fee
schedules related to its products and services on an annual basis. Except for the
imposition of an ATM surcharge for non-QNB customers during the second quarter of 2000,
QNB has not materially changed these fee schedules during 2000 or 2001. Total
non-interest income increased $221,000 or 32.0 percent to $912,000 for the quarter ended
June 30, 2001 when compared to June 30, 2000. For the six-month period total non-interest
income increased $292,000 or 22.3 percent to $1,600,000. Excluding gains on the sale of
investment securities and loans during both periods, non-interest income for the
three-month period increased $29,000 or 4.7 percent and for the six-month period
increased $83,000 or 7.1 percent.

Form 10-QPage 11
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|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



NON-INTEREST INCOME
(Continued)



Fees for services to
customers, the largest component of total non-interest income, are primarily
comprised of service charges on deposit accounts. These fees increased 17.3
percent, to $360,000 from $307,000, when comparing the two quarters and 17.2
percent to $709,000 when comparing the six-month periods. An increase in
overdraft fee income resulting from a higher volume of overdrafts accounted for
the entire increase in fees for services to customers. Slight declines in
monthly maintenance fees on deposit accounts were offset by increases in sweep
fees from savings accounts, fees related to the use of out-of-network ATMs
and online bill pay fees.


To date, when QNB sells its
residential mortgages in the secondary market, it retains servicing rights. A
normal servicing fee is retained on all mortgage loans sold and serviced.
Mortgage servicing fees for the quarter ended June 30, 2001 were $27,000 which
represents a $4,000 decrease from the same period in 2000. For the six-month
period mortgage servicing fees decreased $6,000 or 10.0 percent to $54,000. The
decrease in mortgage servicing fees for both the quarter and six-month period is
primarily a result of a decline in the amount of mortgages serviced. QNB
recognizes its obligation to service financial assets that are retained in a
transfer of assets in the form of a servicing asset. The servicing asset is
amortized in proportion to and over a period of net servicing income or loss.
Servicing assets are assessed for impairment based on their fair value. The
average balance of mortgages serviced for others was $59,834,000 for the second
quarter of 2001 compared to $63,946,000 for the second quarter of 2000. The
average balance of mortgages serviced was approximately $59,979,000 for the
six-month period ended June 30, 2001 compared to $64,521,000 for the first six
months of 2000, a decline of 7.0 percent. Lower mortgage rates resulting from
declining Treasury rates during the end of 2000 and the beginning of 2001 have
resulted in an increase in the number of mortgage loans originated and sold.
This may result in higher mortgage servicing income as long as new sales exceed
prepayments on the existing portfolio of serviced loans. The timing of mortgage
payments and delinquencies also impacts the amount of servicing fees recorded.


Gains on the sale of
investment securities were $179,000 and $240,000 for the three-month and
six-month periods ended June 30, 2001. This compares to gains of $39,000 in the
second quarter of 2000 and $105,000 for the six-month period ended June 30,
2000. QNB owns a small portfolio of marketable equity securities. The gains
recorded during both 2001 and 2000 were a result of sales from this portfolio of
stocks. There were no sales out of the fixed income portfolio during all of 2001
and the second quarter of 2000.


QNB recorded a gain of
$90,000 on the sale of loans during the second quarter of 2001. This compares to
a $38,000 gain for the same period in 2000. For the six-month periods ended June
30, 2001 and 2000 net gains on the sale of loans were $116,000 and $42,000,
respectively. The sale of student loans accounts for $39,000 and $33,000 of the
gains during the second quarter of 2001 and 2000. QNB sold approximately
$2,041,000 and $1,719,000 in student loans during the second quarter of 2001 and
2000. Gains on the sale of student loans accounted for $43,000 and $36,000 of
the total gains during the six-month periods ended June 30, 2001 and 2000,
respectively.


The net gain on the sale of
residential mortgage loans was $51,000 and $5,000 for the three-month periods ended June
30, 2001 and 2000 and $73,000 and $6,000 for the respective six-month periods. The net
gain on residential mortgage sales is directly related to the volume of mortgages sold
and the timing of the sales relative to the interest rate environment. Declining interest
rates during late 2000 and early 2001 increased the amount of mortgage origination and
sales activity. QNB originated $3,027,000 and $683,000 in residential mortgages held for
sale during the second quarter of 2001 and 2000 and $4,687,000 and $817,000 during the
respective six-month periods. Proceeds from the sale of residential mortgages were
approximately $3,365,000 and $524,000 during the second quarters of 2001 and 2000,
respectively. For the six-month periods proceeds from the sale of residential mortgage
loans amounted to $4,103,000 and $626,000, respectively. At June 30, 2001 and 2000, QNB
had approximately $729,000 and $191,000 in mortgage loans classified as held for sale.
These loans are accounted for at lower of cost or market.

Form 10-QPage 12
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|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



NON-INTEREST INCOME
(Continued)


Other operating income
decreased $20,000 or 7.2 percent to $256,000 when comparing the three-month
periods ended June 30, 2001 and 2000 and $15,000 or 3.0 percent to $481,000 when
comparing the six-month periods. Included in other income during the second
quarter of 2000 was a Pennsylvania sales tax refund of $16,000 related to prior
years payments and insurance refunds of $6,000 for the repair of
equipment.


Income from an ATM
surcharge, implemented during the second quarter of 2000 and increased during
the second quarter of 2001, increased by $28,000 when comparing the three-month
periods and $53,000 when comparing the six-month periods. This was partially
offset by a $15,000 and $28,000 decrease in ATM interchange income for the three
and six month periods resulting from fewer transactions at QNB machines by
non-QNB customers. Higher debit card income resulting from an increase in the
number of transactions contributed $12,000 and $25,000 to the increase in other
income while merchant-processing income increased $4,000 and $8,000 when
comparing the respective three and six month periods. Offsetting these increases
were declines in the recognition of rental income on other real estate owned of
$7,000 and $15,000, insurance commissions on consumer loans of $5,000 and $6,000
and commissions on mutual fund sales of $5,000 and $10,000 for the three and six
month timeframes. The rental income decreased as a result of the sale of the
remaining properties in 2000. The decline in mutual fund commissions is a result
of a transition to a new program in 2001 and a slowdown of funds into mutual
funds as a result of poor stock market performance.


The development of new
products and services including the introduction of Trust and Investment
Management services and Title insurance services during the first quarter of
2001 should help generate additional non-interest income. QNB will continue to
analyze other opportunities to increase fee income.


NON-INTEREST EXPENSE


Non-interest expense is
comprised of costs related to salaries and employee benefits, net occupancy,
furniture and equipment, marketing, and various other operating expenses. Total
non-interest expense of $2,690,000 for the quarter ended June 30, 2001
represents an increase of $184,000 or 7.3 percent from levels reported in the
second quarter of 2000. Total non-interest expense for the six months ended June
30, 2001 was $5,339,000, an increase of $461,000 or 9.5 percent over 2000
levels.

Form 10-QPage 13
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|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



NON-INTEREST EXPENSE
(Continued)


Salaries and benefits, the largest
component of non-interest expense, increased $57,000 or 4.1 percent to $1,462,000 for the
quarter ended June 30, 2001 compared to the same quarter in 2000. Salary expense
increased $41,000 or 3.6 percent during the period to $1,190,000 while benefits expense
increased $16,000 or 6.3 percent to $272,000. For the six-month period ended June 30,
2001 salaries and benefits expense increased $108,000 or 3.8 percent compared to 2000.
Salary expense increased $66,000 or 2.9 percent while benefits expense increased $42,000
or 7.8 percent. Excluding the accrual for incentive compensation in 2000, salary expense
increased $81,000 or 7.3 percent for the quarter and $117,000 or 6.2 percent for the
six-month period. The increase is related to both merit increases and the increase in the
number of employees due in part to the addition of a new branch and the staffing of the
customer service center and the Trust and Investment Management department. The increase
in benefits expense for the quarter is a result of a $10,000 or 11.4 percent increase in
medical and dental premiums, a $4,000 increase in payroll tax expense related to the
increased payroll costs and a $3,000 increase in retirement plan expense. For the six
month period these same costs increased $23,000, $15,000 and $8,000, respectively. The
increase in medical and dental expense is a result of a large increase in premium costs
and the increase in the number of covered employees.


Net occupancy expense
increased $32,000 or 19.2 percent when comparing the second quarter of 2001 to
the second quarter of 2000. An increase in branch rent expense of $13,000 was
primarily attributable to the opening of the new branch in Souderton in January
2001. Depreciation on leasehold improvements increased $6,000; utility expense
increased $4,000 and building repairs and maintenance expense increased by
$7,000 when comparing the three-month periods. For the six-month period net
occupancy expense increased $85,000 or 25.6 to $417,000. Branch rent expense
increased $47,000 as a result of the opening of the Souderton branch and the
expansion of the Country Square location at the end of 1999. The higher rent
expense for the expanded location did not begin until the second quarter of
2000. Depreciation on leasehold improvements increased $12,000, utility costs
increased $12,000 and building repairs and maintenance expense increased $18,000
for the six- month period. The increase in depreciation on leasehold
improvements is primarily the result of the new branch. The increase in utility
costs is a result of the new branch as well as the overall increase in gas, oil
and electric costs. The increase in building repairs and maintenance costs for
the three-month and six-month periods is primarily a result of higher cleaning,
landscaping and snow removal expense.


Furniture and equipment
expense increased $30,000 or 13.2 percent when comparing the three-month periods
ended June 30, 2001 and 2000 and $41,000 or 9.1 percent when comparing the
six-month periods. The increase in furniture and equipment expense for both the
three-month and six-month periods is centered in depreciation expense, which
increased $27,000 for the three-month period and $53,000 for the six-month
period. The increase is primarily the result of the new computer system
installed at the end of 2000 and the equipment acquired for the new branch.
Partially offsetting this increase in the six-month period was a reduction in
equipment maintenance costs of $7,000 and disaster recovery costs on the
computer system of $4,000.


Marketing expense decreased
$21,000 or 16.3 percent to $108,000 for the quarter ended June 30, 2001 but
increased $43,000 or 21.7 percent when comparing the six-month periods.
Advertising expense was $14,000 higher for the three-month period in 2000 as a
result of the introduction of QNB-Online and the Treasury Select Money Market
Product along with an increase in the advertising of loan products. For the six
month period advertising costs increased $13,000 and sales promotional expense
increased $23,000. The increase in these costs relates to the opening of the
branch and the introduction of the Trust and Investment Management area. The
timing of the purchase of some promotional items also contributed to the
increase in marketing expense.


Total other expense for the
three months ended June 30, 2001 was $664,000, an increase of $86,000 or 14.9
percent over the same period in 2000. For the six-month period other expense
increased $184,000 or 17.1 percent to $1,257,000. The major categories that
comprise other expense are postage, supplies, professional services,
telecommunication costs, insurance expense and state taxes. Contributing to the
increase in other expense when comparing the two quarters was a $20,000 expense
related to QNB Corps Pennsylvania net income tax that resulted from an
increase in earnings at the corporate entity. Costs associated with services
provided by third party vendors increased $18,000 and $26,000 for the three and
six month periods. The use of a temporary employment agency and the outsourcing
of the supply management function were the main contributors to the increase in
third party services. Costs associated with the Trust department start up and
operation contributed $5,000 and $16,000 to the increase in other expense for
the respective timeframes.

Form 10-QPage 14
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---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


NON-INTEREST EXPENSE
(Continued)


Supplies expense increased
$6,000 for the quarter and $24,000 for the six-month period. The increase in
supplies expense is a combination of timing, the start-up of the new branch and
an increase related to the computer conversion. In addition, supply purchases
were less than normal during the first quarter of 2000 as many supplies were
purchased at end of 1999 in preparation for Year 2000 concerns. Bank membership
fees increased $7,000 and $12,000 for the respective periods. Contributing to
this increase was QNBs role as the sole banking sponsor in the Upper Bucks
Family Business Center. Courier expense increased $7,000 for the three-month
period and $16,000 for the six-month period. The increase in courier expense
relates the outsourcing of that function during the second quarter of 2000. Also
contributing to the increase in other expense were higher ATM network management
costs of $8,000 and $16,000 for the three and six month periods. These higher
costs are primarily related to the increase in the volume of debit card
transactions. For the six month period legal expense increased $25,000. The
first quarter of 2000 included the recovery of approximately $16,000 in legal
costs from prior years.



INCOME TAXES


Applicable income taxes and
effective tax rates were $325,000 or 21.5 percent for the three-month period
ended June 30, 2001, and $332,000 or 23.4 percent for the same period in 2000.
For the six-month period applicable income taxes and effective rates were
$534,000 or 19.7 percent and $648,000 or 22.9 percent, respectively. The
reduction in the effective tax rate when comparing 2001 to 2000 is a result of
an increase in income from tax-exempt municipal securities and loans and an
increase in dividend income subject to the 70 percent exclusion relative to
total pre-tax income.


QNB utilizes an asset and
liability approach for financial accounting and reporting of income taxes. As of
June 30, 2001, QNBs net deferred tax asset was $290,000. A deferred tax
asset of $752,000 relating to the allowance for loan losses was partially offset
by a deferred tax liability of $501,000 resulting from the SFAS No. 115
adjustment for available-for-sale investment securities. At December 31, 2000,
QNBs net deferred tax asset was $877,000. Included in the deferred tax
asset was $761,000 relating to the allowance for loan losses and $33,000
resulting from the SFAS No. 115 adjustment. An increase in the market value of
the available-for-sale investment portfolio resulting from declining interest
rates accounts for the decline in the deferred tax asset.


BALANCE SHEET ANALYSIS


The Balance Sheet Analysis
reviews average balance sheet data for the six months ended June 30, 2001 and
2000, as well as the period ending balances as of June 30, 2001 and December 31,
2000.


Average earning assets for
the six-month period ended June 30, 2001 increased $38,335,000 or 11.4 percent
to $373,750,000 from $335,415,000 for the six months ended June 30, 2000.
Average investments increased $22,561,000 while average loans and Federal funds
sold increased $8,864,000 and $6,842,000, respectively. The large increase in
the investment portfolio is primarily the result of the leverage transaction and
the additional $25,000,000 in advances from the Federal Home Loan Bank entered
into during the first quarter of 2001. The additional advance from the Federal
Home Loan Bank averaged $21,022,000 for the first half of 2001.

Form 10-QPage 15
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|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION




BALANCE SHEET ANALYSIS
(Continued)


The 5.0 percent increase in
average loans is a result of the development of a business development and
calling program encompassing lending personnel, branch personnel and executive
management. The focus of this program is to both develop new lending and deposit
relationships as well as strengthen existing relationships. Average commercial
loans increased $6,873,000 while average consumer loans increased $1,848,000
when comparing the first six months of 2001 to the first six months of 2000. The
increase in commercial loans was also positively impacted by the entrance into
the Souderton market. QNB has been able to develop several new relationships and
will continue to cultivate this market for new opportunities. The increase in
consumer loans is the result of aggressive fixed rate home equity loan
promotions and pricing.


In addition to borrowing
from the Federal Home Loan Bank, the growth in average earning assets was funded
by increases in interest-bearing deposit accounts and short-term borrowings.
Average interest-bearing deposit accounts increased $14,088,000 or 5.6 percent,
while average short-term borrowings increased $5,968,000 or 52.4 percent. The
growth in average interest-bearing deposit accounts is centered in money market
accounts and time deposits, which increased by $6,828,000 and $7,052,000 when
comparing the six-month periods. The popularity of the Treasury Select Money
Market product introduced at the end of the first quarter of 2000 is the primary
reason for the increase in money market accounts. As for the increase in time
deposits, with the decline in market interest rates during the first half of
2001, time deposit rates have stayed high relative to rates on money market and
savings accounts. This is due to the competitive local market for time deposits.
The increase in short-term borrowings is a result of a $7,314,000 increase in
commercial cash management balances when comparing the six-month periods.
Partially offsetting the increase in cash management accounts was a reduction in
average Federal funds purchased of $1,250,000. With the successful growth in
deposit balances during 2001, QNB has not had the need to purchase Federal funds
to fund loan growth. Average total deposits increased 4.3 percent when comparing
the six-month periods. Average non-interest bearing deposits have decreased
$1,739,000 or 5.0 percent between the two six month periods. Some of this
decline is due to the movement of customers to the cash management product.


Total assets at June 30,
2001 were $416,069,000, compared with $371,671,000 at December 31, 2000, an
increase of 11.9 percent for the six months. This growth was primarily funded by
the $25,000,000 advance from the Federal Home Loan Bank during the first quarter
of 2001. In addition, total deposits increased from $293,822,000 at December 31,
2000 to $311,576,000 at June 30, 2001. A $17,176,000 increase in time deposits
is the primary reason for the increase in total deposits. As stated above, time
deposit rates have stayed high relative to rates on alternative investments
including money market and savings accounts. In addition, QNB promoted its time
deposit products heavily during the second quarter of 2001. Money market
accounts have declined $3,231,000 since December 31, 2000 to $35,995,000 at
June, 30 2001. The primary reason for this decline is the reduction in rate on
the Treasury Select account. This product had an above market rate until
December 31, 2000 and than re-priced to be indexed to the 91-day Treasury bill.
As this rate has fallen this product has become less attractive relative to
other products including short-term time deposits.


The increase in assets from
December 31, 2000 is primarily in investment securities and loans, which
increased by $36,905,000 and $4,620,000, respectively. The increase in
investment securities is primarily the result of the leverage transaction and
the growth in deposits and short-term borrowings exceeding the demand for loans.


At June 30, 2000 the fair value of
investment securities available-for-sale was $148,666,000 or $1,474,000 above the
amortized cost of $147,192,000. This compares to a fair value of $114,245,000 or $98,000
below the amortized cost of $114,343,000 at December 31, 2000. An unrealized holding
gain, net of taxes, of $973,000 was recorded as an increase to shareholdersequity
at June 30, 2001. An unrealized holding loss, net of taxes of $64,000 was recorded as a
decrease to shareholdersequity at December 31, 2000. Falling interest rates during
the first half of 2001 resulted in the unrealized gain in the portfolio as of June 30,
2001 as the value of the fixed income securities increased.

Form 10-QPage 16
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|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


BALANCE SHEET ANALYSIS
(Continued)


The growth in the portfolio
as a result of the leverage transaction as well as the replacement of callable
agency securities with corporate bonds and collateralized mortgage obligations
(CMOs) has resulted in a change in a change in the sector composition of
the entire investment portfolio. The percentage of the portfolio in agency bonds
has decreased to 14.0 percent of the portfolio at June 30, 2001 versus 27.0
percent as of December 31, 2001. During this same time period corporate bonds
have increased to 8.8 percent of the portfolio from .6 percent of the portfolio
and mortgage-backed securities have increased to 16.8 percent of the portfolio
from 16.2 percent. CMOs and tax-exempt securities represent 32.4 percent
and 18.1 percent of the portfolio at June 30, 2001 compared to 26.1 and 19.2
percent at December 31, 2000. Management believes that given the interest rate
environment of 2001 CMOs and mortgage-backed securities provide better
value than callable agency bonds because of the nature of the cash flow of these
securities.


The available-for-sale
portfolio had a weighted average maturity of approximately 6 years and 1 month
at June 30, 2001 and 5 years, 4 months at December 31, 2000. The weighted
average tax-equivalent yield was 6.69 percent and 6.73 percent at June 30, 2001
and December 31, 2000. The weighted average maturity is based on the stated
contractual maturity of all securities except for mortgage-backed securities,
which are based on estimated average life. The maturity of the portfolio may be
shorter because of call features in many debt securities and because of
prepayments on mortgage-backed securities. The interest rate sensitivity
analysis reflects the expected maturity distribution of the securities portfolio
based upon estimated call dates and anticipated cash flows assuming
managements most likely interest rate environment. The expected weighted
average life of the available-for-sale portfolio was 4 years, 10 months at June
30, 2001 and 4 years, 2 months at December 31, 2000, based on these assumptions.


Investment securities
held-to-maturity are reported at amortized cost. As of June 30, 2001 and
December 31, 2000, QNB had securities classified as held-to-maturity with an
amortized cost of $45,466,000 and $42,982,000 and a market value of $45,857,000
and $42,815,000, respectively. The held-to-maturity portfolio had an expected
weighted average maturity of approximately 3 years, 6 months and 4 years, 8
months at June 30, 2001 and December 31, 2000. The decline in the expected
weighted average maturity during the six month period is a result of an increase
in prepayments on mortgage related securities as interest rates have declined.



LIQUIDITY


Liquidity represents an
institutions ability to generate cash or otherwise obtain funds at
reasonable rates to satisfy commitments to borrowers and demands of depositors.
QNB manages its mix of cash, Federal funds sold, investment securities and loans
in order to match the volatility, seasonality, interest sensitivity and growth
trends of its deposit funds. Liquidity is provided from asset sources through
maturities and repayments of loans and investment securities, net interest
income and fee income. The portfolio of investment securities available-for-sale
and QNBs policy of selling certain residential mortgage originations and
student loans in the secondary market also provide sources of liquidity.
Additional sources of liquidity are provided by The Quakertown National
Banks membership in the Federal Home Loan Bank and a $5,000,000 unsecured
Federal funds line granted by the Banks correspondent.


Cash and due from banks, Federal
funds sold, available-for-sale securities and loans held-for-sale were $170,091,000 and
$131,587,000 at June 30, 2001 and December 31, 2000. These sources were adequate to meet
seasonal deposit withdrawals during the first half of 2001 and should be adequate to meet
normal fluctuations in loan demand and or deposit withdrawals. Approximately $39,340,000
and $43,019,000 of available-for-sale securities at June 30, 2001 and December 31, 2000
were pledged as collateral for repurchase agreements and deposits of public funds as
required by law. In addition, under terms of its agreement with the Federal Home Loan
Bank, QNB maintains otherwise unencumbered qualifying assets (principally 1-4 family
residential mortgage loans and U.S. Government and Agency notes, bonds, and
mortgage-backed securities) in the amount of at least as much as its advances from the
Federal Home Loan Bank.

Form 10-QPage 17
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|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


LIQUIDITY (Continued)


The consolidated statements
of cash flows present the changes in cash and cash equivalents from operating,
investing and financing activities. QNBs cash and cash equivalents
increased $5,285,000 to $19,751,000 at June 30, 2001. This compares to a
$4,387,000 decrease during the first six months of 2000. The increase in cash in
2001 is a result of a late delivery of a $5,586,000 cash letter on June 29,
2001. These funds would have been invested in Federal funds sold. The large
decrease in cash in 2000 is a result of liquidity planning for potential Year
2000 concerns. QNB increased cash at the end of 1999 as a contingency plan for
any potential Year 2000 problems. This excess cash was reinvested in investment
securities in January and February of 2000 after Year 2000 concerns passed.


After adjusting net income
for non-cash transactions, operating activities provided $3,467,000 in cash flow
in the first six months of 2001, compared to $3,874,000 in the same period of
2000. An increase in residential mortgage activity as well as the reduction in
accrued liabilities and payables during the first six months of 2001 accounted
for most of the difference between the periods.


Net cash used by investing
activities was $39,510,000 during the first half of 2001. The purchase of
investment securities exceeded the maturity, call and sale of securities by
$35,101,000 during the first six months of 2001. This increase relates primarily
to the $25,000,000 in purchases as part of the leverage transaction as well as
the result of the increase in deposits during the first six months of 2001. The
large increase in proceeds from investment securities relates to the decline in
interest rates which resulted in the pre-funding of callable agency bonds and
increased the influx of cash flow on mortgage related securities. Growth in
loans created a net increase in loans of $6,297,000 during the first six months
of 2001. A decrease in federal funds sold of $2,006,000 provided cash during the
first six months of 2001. Net cash used by investing activities was $18,526,000
during the first six months of 2000. Loan growth, particularly during the second
quarter of 2000, created a net increase in loans and a use of cash of
$10,826,000 during the first six months of 2000. In addition, the purchase of
investment securities exceeded the maturity, call and sale of securities by
$7,286,000 during the first half of 2000. Most of this activity relates to the
reinvestment of the excess Year 2000 cash buildup. With the increase in interest
rates at the end of 1999 and early 2000, cash flow from mortgage-backed
securities and from callable bonds slowed, reducing liquidity and the amount of
cash available for reinvestment.


Net cash provided by financing
activities was $41,328,000 during the first half of 2001 and $10,265,000 during the six
months of 2000. The $25,000,000 in advances from the Federal Home Loan Bank as well as a
$17,176,000 increase in time deposits account for the large increase in cash provided by
financing activities in 2001. The cash dividend, which was increased by 12.5 percent in
2001, of $825,000 and the purchase of $321,000 of treasury stock during the first six
months of 2001 were both a use of cash and a reduction to shareholdersequity. With
regard to the first six months of 2000, increases in both non-interest bearing demand
accounts and interest-bearing deposits provided $9,021,000 in funding. The introduction
of the Treasury Select Money Market Account provided the impetus for much of the growth
in interest-bearing deposits. Short-term borrowings increased $2,397,000 during the first
half of 2000, with cash management accounts increasing $2,747,000 and Federal funds
purchased decreasing $476,000 during this period. The cash dividend of $712,000 and the
purchase of $466,000 of treasury stock during the first six months of 2000 were a use of
cash.

Form 10-QPage 18
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


CAPITAL ADEQUACY


A strong capital position
is fundamental to support continued growth and profitability, to serve the needs
of depositors, and to yield an attractive return for shareholders. QNBs
shareholders equity at June 30, 2001 was $33,876,000 or 8.14 percent of
total assets compared to shareholders equity of $31,794,000 or 8.55
percent at December 31, 2000. Shareholders equity at June 30, 2001
includes a positive adjustment of $973,000 related to unrealized holding gains,
net of taxes, on investment securities available-for-sale, while
shareholders equity at December 31, 2000 includes a negative adjustment of
$64,000. Without these adjustments shareholders equity to total assets
would have been 7.91 percent and 8.57 percent at June 30, 2001 and December 31,
2000. The decline in the capital to asset ratio is a result of the growth in
assets primarily related to the leverage transaction as well as the success of
the stock repurchase plan.


On March 30, 2000, the
Board of Directors of QNB Corp. approved a plan to repurchase up to 4.99 percent
or 79,180 shares of QNB Corps outstanding common stock in open market and
privately negotiated transactions. As of June 30, 2001, 45,661 shares had been
repurchased at an average cost of $27.47 per share. These shares are recorded as
Treasury stock at cost and reduce total shareholders equity. During the
second quarter of 2001 the Board of Directors declared a 5 percent stock
dividend payable June 29, 2001. Per share information has been adjusted to
reflect the impact of the stock dividend.


Shareholders equity
averaged $32,172,000 for the first six months of 2001 and $30,991,000 during all
of 2000, an increase of 3.8 percent. The ratio of average total equity to
average total assets declined to 8.09 percent for 2001, compared to 8.53 percent
for 2000. The decrease in the equity to asset ratio is a function of the growth
in average assets, the increase in the cash dividend and the impact of the stock
repurchase plan mentioned above.


QNB Corp. and the
Quakertown National Bank are subject to various regulatory capital requirements
as issued by Federal regulatory authorities. Regulatory capital is defined in
terms of Tier I capital (shareholders equity excluding unrealized gains or
losses on available-for-sale securities), Tier II capital which includes a
portion of the allowance for loan losses, and total capital (Tier I plus II).
Risk-based capital ratios are expressed as a percentage of risk-weighted assets.
Risk-weighted assets are determined by assigning various weights to all assets
and off-balance sheet arrangements, such as letters of credit and loan
commitments, based on associated risk. Regulators have also adopted minimum Tier
I leverage ratio standards, which measure the ratio of Tier I capital to total
assets.


The minimum regulatory
capital ratios are 4.00 percent for Tier I, 8.00 percent for the total
risk-based and 4.00 percent for leverage. Under the requirements, QNB has a Tier
I capital ratio of 12.89 percent and 13.99 percent, a total risk-based ratio of
14.05 percent and 15.24 percent and a leverage ratio of 7.92 percent and 8.60
percent at June 30, 2001 and December 31, 2000, respectively. The decline in the
capital ratios reflects the growth in assets, both investment securities and
loans, since December as well as the changes in the types of investment
securities purchased. Corporate bonds have a higher risk weighting than U.S.
Agency securities. The capital ratios were also impacted by the increase in the
cash dividend and the repurchase of treasury stock, both of which reduce total
capital.


The Federal Deposit
Insurance Corporation Improvement Act of 1991 established five capital level
designations ranging from well capitalized to critically
undercapitalized. At June 30, 2000 and December 31, 1999 QNB met the
well capitalized criteria which requires minimum Tier I and total
risk-based capital ratios of 6.00 percent and 10.00 percent, respectively, and a
Tier I leverage ratio of 5.00 percent.

Form 10-QPage 19
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


INTEREST RATE SENSITIVITY


Since the assets and
liabilities of QNB have diverse re-pricing characteristics that influence net
interest income, management analyzes interest sensitivity through the use of gap
analysis and simulation models. Interest rate sensitivity management seeks to
minimize the effect of interest rate changes on net interest margins and
interest rate spreads, and to provide growth in net interest income through
periods of changing interest rates. The Asset/Liability Management Committee
(ALCO) is responsible for managing interest rate risk and for evaluating the
impact of changing interest rate conditions on net interest income.


Gap analysis measures the
difference between volumes of rate-sensitive assets and liabilities and
quantifies these re-pricing differences for various time intervals. Static gap
analysis describes interest rate sensitivity at a point in time. However, it
alone does not accurately measure the magnitude of changes in net interest
income since changes in interest rates do not impact all categories of assets
and liabilities equally or simultaneously. Interest rate sensitivity analysis
also involves assumptions on certain categories of assets and deposits. For
purposes of interest rate sensitivity analysis, assets and liabilities are
stated at their contractual maturity, estimated likely call date, or earliest
re-pricing opportunity. Mortgage-backed securities and amortizing loans are
scheduled based on their anticipated cash flow. Savings accounts, including
passbook, statement savings, money market accounts; except for the Treasury
Select product, and interest-bearing demand accounts, do not have a stated
maturity or re-pricing term and can be withdrawn or re-priced at any time. This
may impact QNBs margin if more expensive alternative sources of deposits
are required to fund loans or deposit runoff. Management projects the re-pricing
characteristics of these accounts based on historical performance and
assumptions that it believes reflect their rate sensitivity. The Treasury Select
Indexed Money Market account re-prices monthly based on a percentage of the
average of the 91-day Treasury bill.


A positive gap results when
the amount of interest rate sensitive assets exceeds interest rate sensitive
liabilities. A negative gap results when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets.


QNB primarily focuses on
the management of the one-year interest rate sensitivity gap. At June 30, 2001,
interest-earning assets scheduled to mature or likely to be called, re-priced or
repaid in one year were $109,892,000. Interest-sensitive liabilities scheduled
to mature or re-price within one year were $144,631,000. The one year cumulative
gap, which reflects QNBs interest sensitivity over a period of time, was a
negative $34,739,000 at June 30, 2001. The cumulative one-year gap equals -9.06
percent of total earning assets. This negative or liability sensitive gap will
generally benefit QNB in a falling interest rate environment, while rising
interest rates could negatively impact QNB.


QNB also uses a simulation
model to assess the impact of changes in interest rates on net interest income.
The model reflects managements assumptions related to asset yields and
rates paid on liabilities, deposit sensitivity, and the size, composition and
maturity or re-pricing characteristics of the balance sheet. The assumptions are
based on what management believes at that time to be the most likely interest
rate environment. Management also evaluates the impact of higher and lower
interest rates.


Actual results may differ
from simulated results due to various factors including time, magnitude and
frequency of interest rate changes, the relationship or spread between various
rates, loan pricing and deposit sensitivity, and asset/liability strategies.
Based on the simulation model, net interest income for the next twelve months is
expected to increase slightly compared to the prior twelve months. The projected
increase in net interest income is primarily the result of growth in earning
assets offsetting the anticipated decline in the net interest margin.

Form 10-QPage 20
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


INTEREST RATE
SENSITIVITY (Continued):


If interest rates are 100
basis points lower or higher than managements most likely interest rate
environment, the simulation model projects net interest income for the next
twelve months to slightly fall short of the most likely scenario. Net interest
income declines in both a higher or lower interest rate environment primarily as
a result of the optionality found in the investment portfolio. When rates
decline, cash flow from the investment portfolio increases as bonds are called.
These funds are reinvested in lower rate instruments. This, when combined with
the inability for interest rates on non-maturity deposits to decline to the same
degree as rates on loans and investment securities in a falling rate scenario
leads to a potential decline in net interest income. When rates increase, QNB,
because of the fixed rate nature of its earning assets, both loans and
investments, does not benefit to the same degree. Rates on deposits,
particularly time deposits will likely increase by a greater magnitude.


Management believes that
the assumptions utilized in evaluating the vulnerability of QNBs net
interest income to changes in interest rates approximate actual experience.
However, the interest rate sensitivity of QNBs assets and liabilities as
well as the estimated effect of changes in interest rates on net interest income
could vary substantially if different assumptions are used or actual experience
differs from the experience on which the assumptions were based.


In the event QNB should
experience a mismatch in its desired gap ranges or an excessive decline in its
net interest income subsequent to an immediate and sustained change in interest
rates; it has a number of options that it could utilize to remedy such a
mismatch. QNB could restructure its investment portfolio through the sale or
purchase of securities with more favorable re-pricing attributes. It could also
emphasize loan products with appropriate maturities or re-pricing attributes, or
it could attract deposits or obtain borrowings with desired maturities.


The nature of QNBs
current operation is such that it is not subject to foreign currency exchange or
commodity price risk. Additionally, neither the Corporation nor the Bank owns
trading assets. At June 30, 2001, QNB did not have any hedging transactions in
place such as interest rate swaps, caps or floors.


The table below summarizes
estimated changes in net interest income over a twelve-month period, under
alternative interest rate scenarios.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                 
|-----------------
|
|                 
|+300 Basis Points
|+200 Basis Points
|+100 Basis Points
|FLAT RATE        
|-100 Basis Points
|-200 Basis Points
|-300 Basis Points

|Management believes, given
the current interest rate environment that it is unlikely that interest rates
would decline by 200 or 300 basis points.


Form 10-QPage 21
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



OTHER ITEMS


Management is not aware of
any current specific recommendations by regulatory authorities or proposed
legislation, which if they were implemented, would have a material adverse
effect upon the liquidity, capital resources, or results of operations, although
the general cost of compliance with numerous and multiple federal and state laws
and regulations does have, and in the future may have, a negative impact on
QNBs results of operations.


ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK.


The information required
herein is set forth in Item 2, above.

Form 10-QPage 22
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP. AND
SUBSIDIARY



PART II. OTHER
INFORMATION


JUNE 30, 2001
|----------------------------------------------------------------------

|Item 1. |  | Legal Proceedings
|------- |  | -----------------

| | None.
| | -----

|Item 2. |  | Changes in Securities
|------- |  | ---------------------

| | None.
| | -----

|Item 3. |  | Default Upon Senior Securities
|------- |  | ------------------------------

| | None.
| | -----

|Item 4. |  | Submission of Matters to Vote of Securities Holders
|------- |  | ---------------------------------------------------

| | The
2001 Annual Meeting (the Meeting) of the shareholders of QNB Corp. (the Registrant)
was held on May 15, 2001. Notice of the Meeting was mailed to shareholders of record on
or about April 13, 2001, 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
Meeting was held for the following purpose: (1) To elect three (3) Directors; and (2) To
approve the 2001 Employee Stock Purchase Plan.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | 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:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nominee | For                      | Withhold
| | ------- | ------------------------ | --------
| |         | Norman L. Baringer       |         
| |         | Charles M. Meredith, III |         
| |         | Gary S. Parzych          |         

| | The
continuing directors of the Registrant are: Kenneth F. Brown, Jr., Henry L. Rosenberger,
Edgar L. Stauffer, Thomas J. Bisko, Dennis Helf and Donald T. Knauss.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Form 10-QPage 23
|----------------

|QNB CORP. AND
SUBSIDIARY



PART II. OTHER
INFORMATION


JUNE 30, 2001
|----------------------------------------------------------------------

| | Item
4. Submission of Matters to Vote of Securities Holders (Continued)
| | -----------------------------------------------------------------------

| | There
was no solicitation in opposition to Proposal No. 2 to approve the Registrants; 2001
Employee Stock Purchase Plan, and the Plan was approved. The number of votes cast for or
against as well as the number of abstentions and broker non-votes, for the proposal were
as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For | Against   | Abstentions
| | --- | --------- | -----------
| |     | 1,143,165 |            

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

| | None.
| | -----

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

| | (a)
Exhibits
| | ------------

| | The
following Exhibits are included in this Report:
| | ---------------------------------------------------

| |  | Exhibit 3(i) |  | Articles of Incorporation of Registrant, as amended. (Incorporated by reference to
Exhibit 3(i) of Registrants Form 10-Q filed with the Commission on August 13,1998).
| |  | ------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 3(ii) |  | Bylaws of Registrant, as amended. (Incorporated by reference to Exhibit 3(ii) of
Registrants Form 10-Q filed with the Commission on August 13,1998).
| |  | ------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.1 |  | Employment
Agreement between the Registrant and Thomas J. Bisko. (Incorporated by reference to
Exhibit 10.1 of Registrants Form 10-K filed with the Commission on March 31, 1999).
| |  | ------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.2 |  | Salary
Continuation Agreement between the Registrant and Thomas J. Bisko. (Incorporated by
reference to Exhibit 10.2 of Registrants Form 10-K filed with the Commission on March 31,
1999).
| |  | ------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.3 |  | QNB Corp. 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.3 to
Registration Statement No. 333-91201 on Form S-8, filed with the Commission on November
18, 1999).
| |  | ------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.4 |  | QNB
Corp. 1988 Stock Incentive Plan. (Incorporated by reference to Exhibit 4A to Registration
Statement No. 333-16627 on Form S-8, filed with the Commission on November 22, 1996).
| |  | ------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Form 10-QPage 24
|----------------

|QNB CORP. AND
SUBSIDIARY



PART II. OTHER
INFORMATION


JUNE 30, 2001



Item 6. Exhibits and Reports on Form
8-K (Continued)
|------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.5 |  | QNB
Corp. Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 4B to
Registration Statement No. 333-16627 on Form S-8, filed with the Commission on November
22, 1996).
| |  | ------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.6 |  | The
Quakertown National Bank Profit Sharing and Section 401(k) Salary Deferral Plan.
(Incorporated by reference to Exhibit 4C to Registration Statement No. 333-16627 on Form
S-8, filed with the Commission on November 22, 1996).
| |  | ------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.7 |  | Change
of Control Agreement between Registrant and Robert C. Werner (Incorporated by reference
to Exhibit 10.7 of Registrants Form 10-Q filed with the Commission on November 13, 2000.)
| |  | ------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.8 |  | Change
of Control Agreement between Registrant and Bret H. Krevolin (Incorporated by reference
to Exhibit 10.8 of Registrants Form 10-Q filed with the Commission on November 13, 2000.)
| |  | ------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 11 |  | Statement Re: Computation of Earnings Per Share. (Included in Part I, Item I, hereof.)
| |  | ---------- |  | --------------------------------------------------------------------------------------

| | (b)   Reports on Form 8-K        None
| | -------------------------------------

|Form 10-QPage 25
|----------------

|SIGNATURES


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

|Date:  August 13, 2001 |  | QNB Corp.By: /s/ Thomas J. Bisko
Thomas J. BiskoPresident/CEO
|---------------------- |  | ---------------------------------------------------------------------------

|Date:  August 13, 2001 |  | QNB Corp.By: /s/ Robert C. Werner
Robert C. WernerVice President
|---------------------- |  | ------------------------------------------------------------------------------

|Date:  August 13, 2001 |  | QNB Corp.By: /s/ Bret H. Krevolin
Bret H. KrevolinChief Accounting Officer
|---------------------- |  | ----------------------------------------------------------------------------------------

|Form 10-QPage 26
|----------------