|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 September 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 November 9, 20011,535,502
|---------------------------------- | ----------------------------------------

|QNB CORP. AND
SUBSIDIARY


FORM 10-Q


QUARTER ENDED SEPTEMBER 30, 2001




INDEX


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

|        |  | PAGE                                                                                             
|------- |  | -------------------------------------------------------------------------------------------------
|ITEM 1. |  | FINANCIAL STATEMENTS (Unaudited)                                                                 
|       
|        |  | Consolidated Statements of Income for Three and     Nine Months Ended September 30, 2001 and 2000
|       
|        |  | Consolidated Balance Sheets at September 30, 2001     and December 31, 2000                      
|       
|        |  | Consolidated Statements of Cash Flows for Nine     Months Ended September 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) | 
|---------------------------------------------------- | -------------------------------------------- | 
|                                                     |                                              | 
|                                                     | Three MonthsEnded September 30,              | 
|                                                     |                                              | 
|                                                     |                                              | 
|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 $42,480 and $42,815)                                              |                           | 
|Total loans, net of unearned income of $237 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;                       |                           | 
|1,539,440 and 1,480,109 shares outstanding                                                       |                           | 
|Surplus                                                                                          |                           | 
|Retained earnings                                                                                |                           | 
|Accumulated other comprehensive gain (loss)                                                      |                           | 
|Treasury stock, at cost; 49,405 and 32,646 shares at September 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) | 
|-------------------------------------------------------------------------------------- | ------------------------- | 
|                                                                                       |                           | 
|Nine Months Ended September 30,                                                        |                           | 
|                                                                                       |                           | 
|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 (increase) 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 (decrease) 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                                              |                           | 
|                                                                                       |                           | 
|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, 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 STATEMENTSSEPTEMBER 30, 2001 AND 2001, 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 September 30, 2001, as well as the respective statements of income
and cash flows for the three and the nine month periods ended September 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 29, 2001):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                        | For the Three MonthsEnded September 30, |  | For the Nine MonthsEnded September 30, |          
|--------------------------------------------------------------------------------------- | --------------------------------------- |  | -------------------------------------- | ---------
|                                                                                        |                                         |  |                                        | 2001     
|Numerator for basic and diluted earnings per share-net income                           |                                         |  | $                                      | 1,209,004
|                                                                                       
|Denominator for basic earnings per share-weighted average shares outstanding            |                                         |  |                                        | 1,540,562
|                                                                                       
|Effect of dilutive securities-employee stock options                                    |                                         |  |                                        | 3,976    
|                                                                                       
|Denominator for diluted earnings per share-adjusted weighted average shares outstanding |                                         |  |                                        | 1,544,538
|                                                                                       
|Earnings per share-basic                                                                |                                         |  | $                                      | .78      
|Earnings per share-diluted                                                              |                                         |  | $                                      | .78      

|There were 27,445 and
50,470 stock options that were anti-dilutive for the three-month periods ended
September 30, 2001 and 2000 and 37,641 and 50,470 stock options that were
anti-dilutive for the nine-month period ended September 30, 2001 and 2000.


Page 4
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP.
AND SUBSIDIARY


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 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
September 30, 2001 and 2000 (net of the income tax effect):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                               | For the Three MonthsEnded September 30, |  | For the Nine MonthsEnded September 30, |       
|-------------------------------------------------------------------------------------------------------------- | --------------------------------------- |  | -------------------------------------- | ------
|                                                                                                               |                                         |  |                                        | 2001  
|Unrealized  holding gains arising during the period on securities held                                         |                                         |  |                                        | $1,018
|                                                                                                              
|Reclassification adjustment for sold securities                                                                |                                         |  |                                        | (53   
|                                                                                                              
|Net change in unrealized during the period                                                                     |                                         |  |                                        | 965   
|                                                                                                              
|Unrealized holding (losses) gains, beginning of period                                                         |                                         |  |                                        | 973   
|                                                                                                              
|Unrealized holding (losses) gains, end of period                                                               |                                         |  |                                        | $1,938
|                                                                                                              
|Net income                                                                                                     |                                         |  |                                        | $1,209
|Other comprehensive (loss) income, net of tax:   Unrealized holding gains (losses)   arising during the period |                                         |  |                                        | 965   
|Comprehensive Income                                                                                           |                                         |  |                                        | $2,174

|4. STOCK REPURCHASE PLAN


In March of 2001, 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. As of September 30, 2001 QNB Corp. repurchased 49,405 shares
at an average cost of $27.69 per share.


Page 5
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP.
AND SUBSIDIARY


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 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 was no 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.


Asset Retirement
Obligations


In June 2001, the FASB issued
Statement No. 143, Accounting for Asset Retirement Obligations. This Statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement costs. It
applies to legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in this Statement, a
legal obligation is an obligation that a party is required to settle as a result of an
existing or enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. This Statement
requires that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of fair value
can be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset.


Page 6
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP.
AND SUBSIDIARY


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


5. RECENT ACCOUNTING PRONOUNCEMENTS
(Continued):


This Statement amends FASB
Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing
Companies,and it applies to all entities. It is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Earlier
application is encouraged. There is no expected impact on earnings,
financial condition, or equity upon adoption of Statement No. 143.


Impairment or Disposal
of Long-Lived Assets


In August 2001, the FASB issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. This Statement addresses financial accounting and reporting for
the impairment or disposal of long-lived assets and supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. However, the Statement retains the fundamental provisions
of Statement 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale.


This Statement supersedes
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. However, this
Statement retains the requirement of Opinion 30 to report discontinued
operations separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by
abandonment, or in distribution to owners) or is classified as held for sale.
This Statement also amends ARB No. 51, Consolidated Financial Statements,to eliminate the exception to consolidation for a temporarily controlled
subsidiary.


The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with earlier application encouraged. The provisions of this Statement
generally are to be applied prospectively. There is no expected impact on
earnings, financial condition, or equity upon adoption of Statement No. 144.


Page 7
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP.
AND SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTSOF 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-SUMMARY


QNB recorded earnings of
$1,209,000 or $.78 per share on a diluted basis for the three month period ended
September 30, 2001. This represents an 18.5 percent increase from net income of
$1,020,000 or $.65 per share-diluted reported for the third quarter of 2000. For
the nine month periods ended September 30, 2001 and 2000, net income was
$3,381,000 and $3,200,000, respectively, an increase of 5.7 percent. Net income
per share diluted was $2.18 and $2.03 for the corresponding nine-month periods.
The results for both the three and nine month periods ended September 30, 2001
represent record earnings for QNB.


When comparing the two
quarters an increase in both net interest income and non-interest income offset
an increase in non-interest expense. Net interest income increased 8.4 percent
to $3,442,000 for the quarter ended September 30, 2001 as compared to $3,175,000
for the quarter ended September 30, 2000. The increase in net interest income
was a result of a 13.1 percent increase in average earning assets partially
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 5.9 percent.


Page 8
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP.
AND SUBSIDIARY


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


RESULTS OF
OPERATIONS-SUMMARY (Continued)


The net interest margin
declined from 3.88 percent during the third quarter of 2000 to 3.77 percent for
the third quarter of 2001. Excluding the impact of the wholesale funding
transaction the net interest margin for the third quarter of 2001 would have
been 3.94 percent, an increase of six basis points. QNB has benefited in the
short-term from the actions of the Federal Reserve Bank to lower interest rates,
as rates paid on its funding sources, deposits and short-term borrowings have
declined faster than the rates on its earning assets, which tend to be more
fixed rate in nature. Also positively impacting the net interest margin was the
growth in loans. Average total loans increased 7.1 percent when comparing the
third quarter of 2001 to the third quarter of 2000. Total loans at September 30,
2001 were $202,423,000 compared to $181,638,000 at September 30, 2000, an
increase of 11.4 percent.


Non-interest income
increased from $669,000 for the third quarter of 2000 to $777,000 for the three
months ended September 30, 2001, an increase of 16.1 percent. Excluding gains
and losses on the sale of investment securities and loans during both periods,
non-interest income increased approximately $30,000 or 5.0 percent. An increase
in fee income from deposit accounts and check card income contributed to the
increase in non-interest income. Gains on the sale of loans increased from
$16,000 to $64,000 when comparing the two quarters. Lower interest rates on
mortgage loans has led to an increase in the amount of refinancing activity and
has provided an opportunity to record gains on the sale of these loans.


Non-interest expense
increased $145,000 or 5.7 percent from $2,536,000 for the third quarter of 2000
to $2,681,000 for the three months ended September 30, 2001. Contributing to the
increase in non-interest expense were costs associated with the new branch in
Souderton, the computer system installed during the fourth quarter of 2000 and
the operation of the recently formed trust department. Personnel costs increased
6.7 percent or $94,000, reflecting higher staffing levels and an increase in
medical insurance premiums when comparing the two quarters.


Return on average assets
was 1.14 percent and 1.09 percent while the return on average equity was 14.52
percent and 13.03 percent for the three months ended September 30, 2001 and
2000, respectively. For the nine-month periods ended September 30, 2001 and
2000, return on average assets was 1.11 percent and 1.18 percent and the return
on average equity was 13.93 percent and 13.87 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 8.4 percent to $3,442,000 for the quarter ended September 30, 2001 as
compared to $3,175,000 for the quarter ended September 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
10.2 percent from $3,412,000 for the three months ended September 30, 2000 to
$3,760,000 for the same period ended September 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 7.18 percent for the third quarter of 2001
versus 7.52 percent for the third quarter of 2000, while
the rate paid on interest-bearing liabilities was 3.87 percent and 4.21 percent
for the same periods. While both the yield on earning assets and the rate paid
on interest-bearing liabilities declined by 34 basis points, the net interest
margin declined by 11 basis points as a result of a greater proportion of
earning assets to interest-bearing liabilities. The net interest margin on a
tax-equivalent basis declined to 3.77 percent for the three-month period ended
September 30, 2001 compared with 3.88 percent for the same period in 2000. A
13.1 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. Excluding the impact of this
transaction, the net interest margin for the three months ended September 30,
2001 would have been 3.94 percent, an increase of six basis points from the
third quarter of 2000.


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|QNB CORP.
AND SUBSIDIARY


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


NET INTEREST INCOME
(Continued)



The decline in the yield on
both earning assets and interest-bearing liabilities when comparing the two
quarters is a result of dramatically falling interest rates, as represented by
the United States Treasury yield curve, during the later part of 2000 and the
first nine months of 2001. This decline in interest rates accelerated during the
third quarter of 2001 as economic statistics indicated a slowing economy, an
increase in unemployment and a decline in consumer confidence. These concerns
were further exacerbated as a result of the events of September 11, 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 8 times and 350 basis points since the beginning of 2001 to September 30,
2001. Subsequent to September 30, 2001 the Federal Reserve Bank has cut the
Federal funds rate another two times and 100 basis points. The Federal funds
rate which started the year at 6.50 percent is down to 2.00 percent as of
November 6, 2001, its lowest rate in 40 years. The change in the Treasury yield
curve is a good indication how rates have fallen during the year and between the
second and third quarter of 2001. The three-month, two-year and ten-year
treasury rates were 5.89 percent, 5.09 percent and 5.11 percent, respectively at
December 29, 2000, an inverted yield curve. At June 29, 2001 these same rates
were 3.65 percent, 4.24 percent and 5.41 percent, respectively, while at
September 28, these rates were 2.37 percent, 2.85 percent and 4.59 percent.
Subsequent to September 30, 2001 these rates have declined another 25 to 40
basis points.


These declining rates have
had a negative impact on the yield on loans which has decreased 38 basis points
to 8.00 percent when comparing the third quarter of 2000 to the third 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 nine months of 2001 the
prime rate has decreased from 9.50 percent to 6.00 percent at September 30,
2001. The prime rate has further declined to 5.00 percent as of November 7,
2001. The yield on loans has not decreased to the magnitude that the prime rate
has decreased because of the fixed rate nature of QNBs loan portfolio.
However, the decline in interest rates will continue to have a negative impact
on the yield on loans during the remainder of 2001 and 2002 as loans with
re-pricing features price lower and customers with fixed rate loans refinance at
lower rates. Subsequent to September 30, 2001 QNB has seen an increase in both
refinancing activity from consumer and commercial loan customers and rate
reduction requests from commercial borrowers. Another factor in the decline in
the yield on loans is the 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 6.61 percent for the third quarter of 2000 to 6.49 percent for
the third quarter of 2001. However, it represents a 34 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
the remainder of 2001 and 2002 as additional cash flow from called bonds as well
as from mortgage-backed securities continues to be reinvested at significantly
lower rates.


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|QNB CORP.
AND SUBSIDIARY


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


NET INTEREST INCOME
(Continued)



The 34 basis point decline
in the rate paid on interest-bearing liabilities was a result of the decline in
the yield on interest-bearing deposits and short-term borrowings. The yield on
interest-bearing deposits declined from 4.10 percent for the third quarter of
2000 to 3.60 percent for the third quarter of 2001 while the rates paid on
short-term borrowings have decreased from 4.15 percent to 3.03 percent for the
same periods. Positively impacting the yield on interest-bearing deposits was
the decrease in the rates on time deposits. The average rate paid on time
deposits decreased from 5.54 percent for the third quarter of 2000 to 5.20
percent for the third quarter of 2001. Many of QNBs time deposits mature
or re-price in twelve months or less, so as rates have decreased over the past
year the higher rate time deposits have re-priced at significantly lower rates.
The average rate paid on time deposits should continue to decline over the next
several quarters as the higher yielding time deposits mature and re-price at
lower rates.


Also contributing to the
decrease in rates paid on interest-bearing liabilities were lower rates on
interest-bearing demand deposit accounts, money market accounts and savings
accounts. The average rate paid on these accounts were .86 percent, 2.60 percent
and 1.59 percent, respectively for the third quarter of 2001. This compares to
1.53 percent, 4.09 percent, and 2.04 percent for the same period in 2000. The
decline in the rate paid on interest bearing demand accounts as well as the rate
paid on short-term borrowings mentioned above 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 2001 has led to the decline in the average rate paid on money market
accounts.


Negatively impacting the
rate paid on interest bearing liabilities was an increase in the rate paid on
Federal Home Loan Bank advances from 5.49 percent for the third quarter of 2000
to 5.63 percent for the third quarter of 2001. The increase in the rate on
Federal Home Loan Bank advances is a result of the new borrowing related to the
wholesale funding transaction.


For the nine-month period
ended September 30, 2001, net interest income increased $314,000 or 3.3 percent
to $9,887,000. On a tax-equivalent basis net interest income increased $557,000
or 5.4 percent. The 12.0 percent growth in average earning assets was partially
offset by a 24 basis point decline in the net interest margin. The net interest
margin on a tax-equivalent basis was 3.79 percent for the nine-month period
ended September 30, 2001 compared with 4.03 percent for the same period in 2000.
Excluding the impact of the wholesale funding transaction average earning assets
increased 5.4 percent and the net interest margin declined by 9 basis points.
Total interest income increased $1,606,000 from $18,417,000 to $20,023,000 when
comparing the nine-month periods ended September 30, 2000 to September 30, 2001.
The yield on earning assets decreased from 7.50 percent to 7.35 percent,
with the yield on loans and Federal funds sold declining 12 basis points and 203
basis points between the nine-month periods. The yield on loans decreased from
8.28 percent to 8.16 percent while the yield on total investment securities
remained stable at 6.65 percent for the nine-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 16.8 percent to $184,892,000 while average loans increased
5.7 percent to $188,421,000 for the nine-month period ended September 30, 2001.
Total interest expense increased $1,292,000 from $8,844,000 to $10,136,000 for
the nine-month periods with interest on the Federal Home Loan Bank advances and
time deposits accounting for $986,000 and $463,000 of the increase. The yield on
interest-bearing liabilities increased slightly from 4.03 percent to 4.04
percent when comparing the nine-month periods ended September 30, 2000 to
September 30, 2001. Average interest-bearing deposits increased 5.9 percent to
$271,774,000, while total average interest-bearing liabilities increased 14.6
percent to $335,680,000. 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 $6,140,000 increase in average
commercial cash management accounts. These types of funding sources tend to be
higher costing than retail deposits.


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|QNB CORP.
AND SUBSIDIARY


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



NET INTEREST INCOME
(Continued)




QNB anticipates the net
interest margin to increase slightly during the fourth quarter of 2001 as
compared to the third quarter of 2001 as a result of rates on interest-bearing
liabilities reacting quicker to the falling interest rate environment than
earning assets. However, the net interest margin will likely decline during
2002, as the lag on the re-pricing of earning assets catches up to the reduction
in rates on interest bearing liabilities that has occurred during 2001. Rates on
interest bearing liabilities may be close to reaching a floor whereby there is
no room to lower them any further.


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 loss 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 nine-month periods ended September 30,
2001. 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 a net recovery of $5,000 during the third quarter of 2001
compared to net charge-offs of $163,000 during the third quarter of 2000.
Approximately $154,000 of the total loans charged off during the third quarter
of 2000 represented a loan to one borrower. For the nine-month periods ended
September 30, 2001 and 2000, QNB had net charge-offs of $22,000 and $251,000,
respectively. Net charge-offs represent .01 percent and .14 percent of average
loans for the nine months ended September 30, 2001.


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|QNB CORP.
AND SUBSIDIARY


MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTSOF 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) were $462,000 or .11 percent of total assets at September 30, 2001. This
compares to $456,000 or .12 percent at September 30, 2000 and .25 percent at
December 31, 2000. Non-accrual loans were $246,000 and $450,000 at September 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 $216,000 at September 30, 2001 compared to $6,000 at
September 30, 2000 and $31,000 at December 31, 2000. The increase in past due
loans primarily relates to one borrower. QNB did not have any other real estate
owned as of September 30, 2001, December 31, 2000 or September 30, 2000.


There were no restructured
loans as of September 30, 2001, December 31, 2000 or September 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 $2,928,000 and $2,950,000 at September 30, 2001 and December 31,
2000, respectively. The ratio of the allowance to total loans was 1.45 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 September 30, 2001 and
2000, the recorded investment in loans for which impairment has been recognized
in accordance with SFAS No. 114 totaled $196,000 and $389,000, respectively, of
which $81,000 and $344,000 related to loans with no valuation allowance. At
September 30, 2001 and 2000 there were $115,000 and $45,000 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 currently underway, the increase in the unemployment rate and the growth in
the loan portfolio, it is possible that QNB may have to increase its allowance
for loan losses with a provision for loan losses in the future. QNB will continue to
closely monitor the adequacy of its allowance for loan losses.


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|QNB CORP.
AND SUBSIDIARY


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



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
$108,000 or 16.1 percent to $777,000 for the quarter ended September 30, 2001
when compared to September 30, 2000. For the nine-month period total
non-interest income increased $400,000 or 20.2 percent to $2,377,000. Excluding
gains on the sale of investment securities and loans during both periods,
non-interest income for the three-month period increased $30,000 or 5.0 percent
and for the nine-month period increased $113,000 or 6.4 percent.


Fees for services to
customers, the largest component of total non-interest income, is primarily
comprised of service charges on deposit accounts. These fees increased 5.8
percent, to $348,000 from $329,000, when comparing the two quarters and 13.2
percent to $1,057,000 when comparing the nine-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 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 September 30, 2001 were $17,000
which represents a $5,000 decrease from the same period in 2000. For the
nine-month period mortgage servicing fees decreased $11,000 or 13.4 percent to
$71,000. The decrease in mortgage servicing fees for both the quarter and the
nine-month period is primarily the 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. During the third quarter of 2001 and 2000, QNB amortized approximately
$19,000 and $18,000 of the mortgage servicing asset. For both nine-month periods
approximately $40,000 was amortized. The average balance of mortgages serviced
for others was $59,796,000 for the third quarter of 2001 compared to $62,445,000
for the third quarter of 2000. The average balance of mortgages serviced was
approximately $59,917,000 for the nine-month period ended September 30, 2001
compared to $63,824,000 for the first nine months of 2000, a decline of 6.1
percent. Lower mortgage rates resulting from a declining interest rate environment 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. Offsetting this may be
an increase in the amortization of the mortgage servicing asset as existing sold
loans are paid off or as the asset becomes impaired due to lower interest rates
and an increase in prepayments. The timing of mortgage payments and
delinquencies also impacts the amount of servicing fees recorded.


Net gains on the sale of
investment securities were $81,000 and $321,000 for the three-month and
nine-month periods ended September 30, 2001. This compares to net gains of
$51,000 in the third quarter of 2000 and $156,000 for the first nine months of
2001. Included in the net gains for the three and nine month periods ended
September 30, 2001 is a loss of $623,000 related to the write down of marketable
equity securities whose decline in market value below cost was deemed to be
other than temporary. These individual securities were written down to a new
cost basis and the $623,000 was accounted for as a realized loss. Offsetting
this loss were gains on marketable equity securities during the quarter of
$287,000 and gains on the sale of fixed income securities of $417,000. QNB sold
approximately $15,000,000 in callable agency securities and collateralized mortgage
obligations (CMO) at a gain of $363,000. Mortgage-backed securities were
purchased with the proceeds from this transaction. The purpose of this
transaction was to reduce the exposure to callable agency securities and
increased cash flow from the CMOs in a falling interest rate environment.
QNB also recorded a gain of $54,000 from the receipt of stock from an insurance
company that converted from a mutual holding company to a stock company. All of
the gains for the three and nine month periods ended September 30, 2000 are from
the sale of marketable equity securities.


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|QNB CORP.
AND SUBSIDIARY


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


NON-INTEREST
INCOME (Continued)



QNB recorded a gain of
$64,000 on the sale of loans during the third quarter of 2001. This compares to
a $16,000 gain for the same period in 2000. For the nine-month periods ended
September 30, 2001 and 2000 net gains on the sale of loans were $180,000 and
$58,000, respectively. The sale of student loans accounts for $4,000 and $3,000
of the gains during the third quarters of 2001 and 2000. QNB sold approximately
$190,000 and $193,000 in student loans during the third quarters of 2001 and
2000, respectively. Gains on the sale of student loans accounted for $47,000 and
$39,000 of the total gains during the nine-month periods ended September 30,
2001 and 2000. For the nine-month periods ended September 30, 2001 and 2000, QNB
sold approximately $2,497,000 and $2,134,000 in student loans.


The net gain on the sale of
residential mortgage loans was $60,000 and $13,000 for the three-month periods
ended September 30, 2001 and 2000 and $133,000 and $19,000 for the respective
nine-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 2001 increased
the amount of mortgage origination and sales activity. QNB originated $2,397,000
and $441,000 in residential mortgages held for sale during the third quarter of
2001 and 2000 and $7,084,000 and $1,258,000 during the respective nine-month
periods. Proceeds from the sale of residential mortgages were approximately
$2,629,000 and $531,000 during the third quarters of 2001 and 2000,
respectively. For the nine-month periods proceeds from the sale of residential
mortgage loans amounted to $6,732,000 and $1,143,000, respectively. At September
30, 2001 and 2000, QNB had approximately $468,000 and $95,000 in mortgage loans
classified as held for sale. These loans are accounted for at lower of cost or
market. Given the continuing decline in mortgage rates after September 30, 2001,
QNB anticipates that origination and sales volume will remain strong during the
fourth quarter of 2001 and the first quarter of 2002 as the refinancing of
existing mortgages takes place.


Other operating income
increased $16,000 or 6.4 percent to $267,000 when comparing the three-month
periods ended September 30, 2001 and 2000. For the nine-month periods other
operating income was $748,000 and $747,000, respectively. Increasing usage of
the debit card resulted in a $23,000 increase in income for the three-month
period and $48,000 for the nine-month period. Income from an ATM surcharge,
implemented during the second quarter of 2000 and increased during the second
quarter of 2001, increased by $3,000 when comparing the three month periods and
$57,000 when comparing the nine-month periods. The increase in ATM surcharge
income was partially offset by a $6,000 and $34,000 decrease in ATM interchange
income for the three and nine month periods. This is a result of fewer
transactions at QNB machines by non-QNB customers.


Declining interest rates
had an impact on official check income resulting in a reduction of $11,000 for
the quarter and $13,000 for the nine-month period. Commissions on mutual fund
sales declined $5,000 for the quarter and $15,000 for the nine-month period.
This is a result of a transition to a new program in 2001 and a slowdown of
funds into mutual funds at a result of poor stock market performance.


Further positively
impacting the nine-month results was a $10,000 increase in merchant processing
income. Included in other operating income in 2000 was rental income on other
real estate owned of $15,000, a Pennsylvania sales tax refund of $16,000
relating to prior years payments and insurance refunds of $6,000 for the repair of equipment. The
rental income decreased as a result of the sale of the remaining properties in 2000.


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|QNB CORP.
AND SUBSIDIARY


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


NON-INTEREST INCOME
(Continued)




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 $2,681,000 for the quarter ended September 30, 2001
represents an increase of $145,000 or 5.7 percent from levels reported in the
third quarter of 2000. Total non-interest expense for the nine months ended
September 30, 2001 was $8,020,000, an increase of $606,000 or 8.2 percent over
2000 levels.


Salaries and benefits, the
largest component of non-interest expense, increased $94,000 or 6.7 percent to
$1,494,000 for the quarter ended September 30, 2001 compared to the same quarter
in 2000. Salary expense increased $63,000 or 5.5 percent during the period to
$1,206,000 while benefits expense increased $31,000 or 12.1 percent to $288,000.
For the nine-month period ended September 30, 2001 salaries and benefits expense
increased $202,000 or 4.8 percent to $4,427,000 compared to 2000. Salary expense
increased $130,000 or 3.8 percent while benefits expense increased $72,000 or
9.1 percent. Excluding the accrual for incentive compensation in 2000, salary
expense increased $200,000 or 6.0 percent for the nine-month period. There was
no incentive compensation accrual in either the third quarter of 2001 or 2000.
The increase in salary expense 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. When comparing the two quarters the number of full-time
equivalent employees has increased by five.


The increase in benefits
expense for the quarter is a result of a $19,000 or 23.9 percent increase in
medical and dental premiums, a $5,000 increase in payroll tax expense related to
the increased payroll costs and a $5,000 increase in retirement plan expense.
For the nine month period these same costs increased $42,000, $20,000 and
$13,000, respectively. The large increase in medical costs for the quarter is
partially a result of the addition of new eligible employees and a retroactive
adjustment for one employee. Medical insurance premiums are anticipated to
continue to increase in the 10 to 15 percent range in 2002.


Net occupancy expense
increased $16,000 or 8.0 percent when comparing the third quarter of 2001 to the
third quarter of 2000. An increase in branch rent expense of $15,000 was
primarily attributable to the opening of the new branch in Souderton in January
2001 and an increase in the monthly rent for another branch during the third
quarter of 2001. Depreciation expense in leasehold improvements increased by
$4,000 while real estate tax expense increased by $5,000. These were offset by
reductions in utility costs of $4,000 and repairs and maintenance costs of
$2,000. For the nine-month period net occupancy expense increased $101,000 or
19.0 percent to $632,000. Branch rent expense increased $62,000 as a result of
the opening of the Souderton branch and the expansion of the Country Square
location. The higher rent expense for the expanded location
did not begin until the second quarter of 2000. Depreciation expense on
leasehold improvements increased $16,000, utility costs increased $8,000, real
estate taxes increased $8,000 and building repairs and maintenance expense
increased $15,000 for the nine-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
especially during the first half of 2001. The increase in building repairs and
maintenance costs for the nine-month period is primarily a result of higher
cleaning, landscaping and snow removal expense.


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|QNB CORP.
AND SUBSIDIARY


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


NON-INTEREST EXPENSE
(Continued)




Furniture and equipment
expense decreased $20,000 or 7.8 percent when comparing the three-month periods
ended September 30, 2001 and 2000. For the respective nine-month periods
furniture and equipment expense increased $21,000 or 3.0 percent. For the
three-month period depreciation expense decreased by $9,000 as some software and
equipment reached the end of their depreciable lives during the first half of
2001. This was enough to offset the additional depreciation expense related to
the purchase of the new computer system installed at the end of 2000 and the
equipment acquired for the new branch in 2001. Also positively impacting
furniture and equipment expense when comparing the two quarters was a decrease
in equipment maintenance expense of $11,000. Lower annual maintenance agreements
on the new equipment as well as the discontinuing of maintenance on some older
equipment contributed to the savings. For the nine-month period depreciation
expense increased $44,000 while equipment maintenance costs and disaster recover
costs decreased by $18,000 and $5,000 respectively.


Marketing expense increased
$15,000 or 19.7 percent to $91,000 for the quarter ended September 30, 2001 and
$58,000 or 21.2 percent when comparing the nine-month periods. For the
three-month and nine-month periods sales promotion expense increased $12,000 and
$34,000 as a result of an increase in promotional items and giveaways related to
the Souderton branch and the Youth Trek account. For the nine-month period
advertising expense increased $11,000 and public relations expense increased by
$10,000. The increase in advertising costs relates to the opening of the branch,
the introduction of the Trust and Investment Management area and the use of
television as an additional medium of advertising. The increase in public
relations expense is a result of an increase in contributions and sponsorships
to clubs and community events in the local communities we serve.


Total other expense for the
three months ended September 30, 2001 was $645,000, an increase of $40,000 or
6.6 percent over the same period in 2000. For the nine-month period other
expense increased $224,000 or 13.3 percent to $1,902,000. 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 three and nine month periods was
$15,000 and $30,000 in expenses related to the startup and operation of the
Trust department. Costs associated with services provided by third party vendors
increased $18,000 and $43,000 for the three and nine 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.
Legal expense increased $5,000 for the three-month period and $30,000 for the
nine-month period. The amounts for the year 2000 include reimbursements of prior
years legal expense related to the payoff of non-performing loans. Other
operating expense for the third quarter of 2000 include $33,000 in conversion
related expense for the computer system and a $10,000 gain on the sale of other
real estate. Also impacting the third quarter of 2000 was a $6,000 increase in
postage expense and a $6,000 increase in insurance costs. These same items
increased $14,000 and $16,000 for the nine-month period.


INCOME TAXES


Applicable income taxes and
effective tax rates were $329,000 or 21.4 percent for the three-month period
ended September 30, 2001, and $288,000 or 22.0 percent for the same period in
2000. For the nine-month period applicable income
taxes and effective rates were $863,000 or 20.3 percent and $936,000 or 22.6
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.


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


INCOME TAXES (Continued):


QNB utilizes an asset and
liability approach for financial accounting and reporting of income taxes. As of
September 30, 2001, QNB had a net deferred tax liability of $224,000. This
deferred tax liability was a result of the SFAS No. 115 adjustment for
available-for-sale securities of $998,000 relating to the unrealized holding
gain on these securities. Partially offsetting this liability was a deferred tax
asset of $753,000 relating to the allowance for loan losses. 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 change from a deferred tax asset to a deferred tax
liability.


BALANCE SHEET
ANALYSIS


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


Average earning assets for
the nine-month period ended September 30, 2001 increased $40,854,000 or 12.0
percent to $381,103,000 from $340,249,000 for the nine months ended September
30, 2000. Average investments increased $26,575,000 while average loans and
Federal funds sold increased $10,174,000 and $4,137,000, 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 $22,363,000 for the first nine-months
of 2001.


The 5.7 percent increase in
average loans is a result of the implementation 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 $8,107,000 while average consumer loans and residential mortgage
loans increased $1,556,000 and $643,000 when comparing the first nine months of
2001 to the first nine 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. Significant
growth in loans took place during the third quarter of 2001 as total loans
increased from $189,854,000 at June 30, 2001 to $202,423,000 at September 30,
2001.


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 $15,126,000 or 5.9 percent,
while average short-term borrowings increased $5,305,000 or 47.2 percent. The
growth in average interest-bearing deposit accounts is centered in time deposits
and money market accounts, which increased by $11,161,000 and $3,030,000 when
comparing the nine-month periods.


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|QNB CORP.
AND SUBSIDIARY


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


BALANCE SHEET ANALYSIS
(Continued)


Time deposits rates have
lagged the decrease in other deposit rates and still provide higher yields than
other interest bearing deposits. In addition, QNB offers a Flex 12
time deposit which provides for ongoing deposits into the account and allows for
one withdrawal during the 12 month term. These reasons combined with fallout
from the stock markets contributed to the large increase in time deposits during
2001. 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 when comparing the nine-month average balances. Some of
the balances in the Treasury Select product have recently moved to time deposits
as the rates on this product have declined significantly as the 91-day Treasury
bill has declined. 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 short-term
borrowings is a result of a $6,140,000 increase in commercial cash management
balances when comparing the nine-month periods. Partially offsetting the
increase in cash management accounts was a reduction in average Federal funds
purchased of $751,000. 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 4.8 percent when comparing the nine-month
periods. Average non-interest bearing deposits have decreased $1,214,000 or 3.4
percent between the two nine-month periods. Some of this decline is due to the
movement of customers to the cash management product.


Total assets at September
30, 2001 were $429,791,000, compared with $371,671,000 at December 31, 2000, an
increase of 15.6 percent for the nine months. This growth was partially 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 $324,165,000 at September 30, 2001. A $25,957,000 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. Time deposits over $100,000 have increased from $17,659,000 at
December 31, 2000 to $29,908,000 at September 30, 2001. These accounts tend to
have short maturity dates and are more likely to move to other products or other
financial instruments as interest rates and market conditions change.


The increase in assets from
December 31, 2000 is primarily in investment securities and loans, which
increased by $44,976,000 and $17,189,000, respectively. Other assets declined
from $6,630,000 at December 31, 2000 to $5,748,000 principally as a result of
the reduction in the deferred tax asset. 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 September 30, 2000 the
fair value of investment securities available-for-sale was $160,505,000 or
$2,935,000 above the amortized cost of $157,570,000. 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 $1,938,000 was
recorded as an increase to shareholders equity at September 30, 2001. An
unrealized holding loss, net of taxes of $64,000 was recorded as a decrease to
shareholders equity at December 31, 2000. Declining interest rates during
2001 has resulted in the unrealized gain in the portfolio as of September 30,
2001 as the value of the fixed income securities have increased.


The growth in the
portfolio, as a result of the leverage transaction as well as the replacement of
callable agency securities with corporate bonds, collateralized mortgage
obligations (CMOs) and mortgage backed securities has resulted in a change
in the sector composition of the entire investment portfolio. The percentage
of the portfolio in agency bonds has decreased to 13.3 percent of the portfolio at September 30, 2001
versus 27.0 percent as of December 31, 2001. During this same time period
corporate bonds have increased to 8.6 percent of the portfolio from .6 percent
and mortgage-backed securities have increased to 23.5 percent of the portfolio
from 16.2 percent. CMOs and tax-exempt securities represent 27.3 percent
and 17.9 percent of the portfolio at September 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.


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|QNB CORP.
AND SUBSIDIARY


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


BALANCE SHEET ANALYSIS
(Continued)


The available-for-sale
portfolio had a weighted average life of approximately 4 years, 11 months at
September 30, 2001 and 5 years, 4 months at December 31, 2000. The weighted
average tax-equivalent yield was 6.57 percent and 6.73 percent at September 30,
2001 and December 31, 2000. The weighted average life is based on the stated
contractual maturity of all securities except for mortgage related 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 re-pricing term of
the available-for-sale portfolio was 4 years at September 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 September 30, 2001 and
December 31, 2000, QNB had securities classified as held-to-maturity with an
amortized cost of $41,698,000 and $42,982,000 and a market value of $42,480,000
and $42,815,000, respectively. The held-to-maturity portfolio had a re-pricing
term of approximately 2 years, 3 months and 4 years, 8 months at September 30,
2001 and December 31, 2000. The decline in the re-pricing term during the nine
month period is a result of an increase in prepayments on mortgage related
securities and the pre-funding of municipal bonds 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
$175,799,000 and $131,587,000 at September 30, 2001 and December 31, 2000. These
sources were adequate to meet deposit withdrawals and loan growth during the
first nine months of 2001 and should be adequate to meet normal fluctuations in
loan demand and or deposit withdrawals. Approximately $42,640,000 and
$43,019,000 of available-for-sale securities at September 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.


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|QNB CORP.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTSOF 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
decreased $488,000 to $13,978,000 at September 30, 2001. This compares to a
$5,517,000 decrease during the first nine months of 2000. 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 $5,284,000 in cash flow
in the first nine months of 2001, compared to $5,022,000 in the same period of
2000. Lower interest rates during 2001 have increased the amount of residential
mortgage activity. For the first nine months of 2001, $7,084,000 of mortgages
held-for-sale was originated compared to $1,258,000 for the same period in 2000.
Proceeds from the sale of residential mortgages were $6,732,000 and $1,143,000
during the first nine months of 2001 and 2000, respectively. Proceeds from the
sale of student loans increased from $2,173,000 during 2000 to $2,543,000 during
2001.


Net cash used by investing
activities was $58,380,000 during the first nine months of 2001 and $22,906,000
during the first nine months of 2000. During the first nine months of 2001,
$45,092,000 in securities matured or were called. This compares to $22,012,000
during the first nine months of 2000. 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. Proceeds from the sale of securities was
$17,193,000 and $3,735,000 during the first nine months of 2001 and 2000, while
the purchase of investment securities amounted to $103,939,000 and $33,332,000
during the same time periods. The net increase in investment securities during
the first nine months of 2001 was $41,654,000. 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 nine months of 2001.
Growth in loans created a net increase in loans of $19,222,000 during the first
nine months of 2001 and $10,125,000 for the same time period in 2000. A decrease
in federal funds sold of $2,678,000 provided cash during the first nine months
of 2001. This compares to a $4,212,000 increase in Federal funds sold during the
first nine months of 2000. The net purchase of premises and equipment of
$1,350,000 were a use of cash during 2000. The purchase of a new computer system
and cash outlays related to the new branch were the major purchases of fixed
assets.


Net cash provided by
financing activities was $52,608,000 during the first nine months of 2001 and
$12,367,000 during the nine months of 2000. The $25,000,000 in advances from the
Federal Home Loan Bank as well as a $25,957,000 increase in time deposits
account for the large increase in cash provided by financing activities in 2001.
Time deposits rates have lagged the decrease in other deposit rates and still
provide higher yields than other interest bearing deposits. In addition, QNB
offers a Flex 12 time deposit which provides for ongoing deposits
into the account and allows for one withdrawal during the 12 month term. These
reasons combined with fallout from the stock markets contributed to the large
increase in time deposits during 2001. The cash dividend, which was increased by
12.5 percent in 2001, of $1,240,000 and the purchase of $435,000 of treasury
stock during the first nine months of 2001 were both a use of cash and a
reduction to shareholders equity.


With regard to the increase
in cash provided by financing activities in 2000, an increase in
interest-bearing deposits provided $9,601,000 during the first nine months of
2000. The introduction of the Treasury Select Money Market Account provided the
impetus for much of the growth in interest-bearing deposits. As of September 30,
2001 the balance in these accounts were $16,904,000. Short-term borrowings
increased $4,776,000 during the first nine months of 2000, with cash management
accounts increasing $5,252,000 and Federal funds purchased decreasing
$476,000 during this period. The cash dividend of $1,070,000 and the purchase of
$723,000 of treasury stock during the first nine months of 2000 were a use of
cash during 2000.


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|QNB CORP.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTSOF 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 September 30, 2001 was $35,521,000 or 8.26 percent
of total assets compared to shareholders equity of $31,794,000 or 8.55
percent at December 31, 2000. Shareholders equity at September 30, 2001
includes a positive adjustment of $1,938,000 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 7.81 percent and 8.57 percent at September 30, 2001 and December
31, 2000. The decline in the capital to asset ratio is a result of the growth in
assets exceeding the growth rate of equity. Contributing to the growth in assets
was the $25,000,000 leverage transaction and the 10.3 percent growth in total
deposits. Impacting the growth in equity is the success of the stock repurchase
plan and the increase in the cash dividend.


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 September 30, 2001 49,405 shares had
been repurchased at an average cost of $27.69 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 $32,452,000 for the first nine months of 2001 and $30,991,000 during
all of 2000, an increase of 4.7 percent. The ratio of average total equity to
average total assets declined to 8.00 percent for 2001, compared to 8.53 percent
for 2000. The decrease in the equity to asset ratio is a function of the 11.6
percent growth in average assets exceeding the growth rate in average equity.


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 12.41 percent and 13.99 percent, a total risk-based ratio of
13.51 percent and 15.24 percent and a leverage ratio of 7.86 percent and 8.60
percent at September 30, 2001 and December 31, 2000, respectively. The decline
in the capital ratios reflects the growth in assets, both investments and loans,
since December as well as changes in the types of investment securities
purchased. Corporate bonds, mortgage related securities and equity securities
have a higher risk weighting than U.S. Agency securities. The 9.3 percent
increase in loans since December 31, 2000 increases the amount of risk weighted
assets as most of these loans are included in the 100 percent risk
weighting category. 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.


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|QNB CORP.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTSOF OPERATIONS AND FINANCIAL CONDITION


CAPITAL ADEQUACY
(Continued)



The Federal Deposit
Insurance Corporation Improvement Act of 1991 established five capital level
designations ranging from well capitalized to critically
undercapitalized. At September 30, 2001 and December 31, 2000 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.


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 September 30,
2001, interest-earning assets scheduled to mature or likely to be called,
re-priced or repaid in one year were $149,413,000. Interest-sensitive
liabilities scheduled to mature or re-price within one year were $161,711,000.
The one year cumulative gap, which reflects QNBs interest sensitivity over
a period of time, was a negative $12,298,000 at September 30, 2001. The
cumulative one-year gap equals -3.03 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.


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|QNB CORP.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTSOF OPERATIONS AND FINANCIAL CONDITION


INTEREST RATE
SENSITIVITY (Continued):


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 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.


If interest rates are 100
basis points lower than managements most likely interest rate environment,
the simulation model projects net interest income for the next twelve months to
be less than the most likely scenario. If interest rates are 100 basis points
higher than managements most likely interest rate environment, the model
projects net interest income for the next twelve months to be slightly higher
than the most likely scenario. These results are contrary to the results
indicated by the gap analysis and show some of the inherent weaknesses of gap
analysis. For example, gap analysis does not take into consideration interest
rate floors on deposit accounts.


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 September 30, 2001, QNB did not have any hedging transactions
in place such as interest rate swaps, caps or floors.


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|QNB CORP.  AND SUBSIDIARY


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


INTEREST RATE
SENSITIVITY (Continued):


The table below summarizes
estimated changes in net interest income over a twelve-month period beginning October 1, 2001, under
alternative interest rate scenarios.
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|                 
|+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.


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.


Page 25
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|QNB CORP.
AND SUBSIDIARY


PART II.
OTHER INFORMATION


SEPTEMBER
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
|------- |  | ---------------------------------------------------

| | None.
| | -----

|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).
| |  | ------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26
|--

|QNB CORP.
AND SUBSIDIARY


PART II.
OTHER INFORMATION


SEPTEMBER
30, 2001
|--------------------------------------------------------------------------

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

| |  | 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).
| |  | ------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exhibit 10.5 |  | QNB Corp. 1996 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 10.9 |  | QNB Corp. 2001 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 99.1
to Registration Statement No. 333-67588 on Form S-8, filed with the Commission on August
15, 2001).
| |  | ------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|27
|--

|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:  November 13, 2001 |  | QNB Corp.By: 
Thomas J. BiskoPresident/CEO
|------------------------ |  | --------------------------------------------------------

|Date:  November 13, 2001 |  | By: 
Robert C. WernerVice President
|------------------------ |  | -------------------------------------------------

|Date:  November 13, 2001 |  | By: 
Bret H. KrevolinChief Accounting Officer
|------------------------ |  | -----------------------------------------------------------