Summary of PAMRAPO BANCORP INC

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

Forward-Looking Statements

This Form 10-Q may include certain forward-looking statements based on current management expectations. The actual results of the Company could differ materially from those management expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of loan and investment portfolios of the Bank, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices.

Recent Developments

As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and its 2008 Annual Report to Shareholders, in August 2008, management became aware that certain commission payments from a third-party broker, which were payable to Pamrapo Service Corporation, Inc. (the "Corporation"), a wholly-owned subsidiary of the Bank, as required by its policies and procedures, were being paid directly to the manager of the Corporation (the "Manager"). The direct payments to the Manager were made pursuant to a letter between a third-party broker and the president of the Corporation. These direct payments constituted a change in commission structure, which was made without the approval of the Board of Directors of the Corporation, as required by its policies and procedures. Following an internal inquiry into this matter, the Bank determined, based upon the knowledge and understanding at the time of the individuals who conducted the inquiries, that $270,357 was owed by the Manager to the Corporation for commissions paid directly to the Manager for the period from August 2007 to December 2008. The $270,357 was repaid by or on behalf of the Manager to the Corporation, and the Company and the Bank recognized the amount of $270,357 in earnings during the fourth quarter of 2008. For further information, please see Note 22 to the Consolidated Financial Statements in the Company's 2008 Annual Report to Shareholders, which is filed as Exhibit 13 and incorporated by reference to its Annual Report on Form 10-K for fiscal 2008.

On February 24, 2009, the Audit Committee of the Company engaged independent forensic accountants to assist with an internal investigation of the business and financial records of the Corporation. On May 5, 2009, the independent forensic accountants issued a report to the Company's Audit Committee with respect to the results of their internal investigation (the "Report"). The Report indicates that, based upon the information presented to the forensic accountants on or before April 24, 2009 and the procedures that they performed, the forensic accountants determined that the Manager received funds in the form of commission income directly from broker-dealers and insurance carriers beginning in the year 2005 through his termination on February 12, 2009. According to the Report, the independent forensic accountants determined that, as of May 5, 2009, excluding the $270,357 previously paid to the Corporation, an additional $224,559 in commission revenue for

the fiscal years 2005 through 2008 is due to the Corporation by the Manager and certain other individuals previously affiliated with the Corporation. Recovery of any of these amounts is subject to several contingencies, including any claims or defenses put forth by any person or entity that the Company would choose to seek recovery from, including, but not limited to, the former Manager of the Corporation. The amounts are subject to change based on the receipt of further information. Management has determined that the item is a gain contingency and in accordance with Financial Accounting Standard No. 5, "Accounting for Contingencies (As Amended)," has not reflected any amounts in its consolidated financial statements as of March 31, 2009 and December 31, 2008 and for the three month periods ended March 31, 2009 and 2008. If it is determined that the Corporation is in fact entitled to any of these amounts and they are in fact recovered, the amounts could be material to the Company's current and previously issued consolidated financial statements, and restatements of certain consolidated financial statements may be necessary.

The Report reflects the determinations of the independent forensic accountants based upon information received and procedures performed through the date of the Report. The Company's management and Board of Directors are still in the process of evaluating the Report.

Changes in Financial Condition

The Company's assets at March 31, 2009 totaled $592.4 million, which represents a decrease of $5.6 million as compared with $598.0 million at December 31, 2008.

Total cash and cash equivalents of $19.3 million at March 31, 2009 increased $5.7 million or 41.9% when compared with $13.6 million at December 31, 2008. The increase during the three months ended March 31, 2009 resulted primarily from an increase in interest-bearing deposits in other banks which more than offset a decrease in cash and amounts due from depository institutions.

Securities available for sale at March 31, 2009 decreased $45,000 or 5.8% to $726,000 when compared with $771,000 at December 31, 2008. The decrease during the three months ended March 31, 2009 resulted primarily from repayments on securities available for sale of $18,000 and an increase in net unrealized losses of $27,000.

Investment securities held to maturity at March 31, 2009 totaled $11.3 million as compared with $11.4 million at December 31, 2008. Mortgage-backed securities held to maturity at March 31, 2009 decreased $6.4 million or 5.5% to $111.0 million when compared with $117.4 million at December 31, 2008. During the three months ended March 31, 2009, principal repayments of mortgage-backed securities held to maturity totaled $6.4 million.

Net loans receivable amounted to $430.7 million at March 31, 2009, as compared to $437.6 million at December 31, 2008, which represents a decrease of $6.9 million or 1.6%. The decrease during the three months ended March 31, 2009 resulted primarily from principal repayments exceeding loan originations.

Foreclosed real estate consists of two single family residences.

Deposits at March 31, 2009 totaled $434.1 million as compared with $444.0 million at December 31, 2008, representing a decrease of $9.9 million or 2.2%. The decrease during the three months ended March 31, 2009 resulted primarily from the sale of the Bank's Fort Lee, New Jersey branch with deposits of approximately $14.5 million.

Advances from the Federal Home Loan Bank of New York ("FHLB") amounted to $91.6 million at March 31, 2009 as compared with $89.5 million at December 31, 2008 representing an increase of $2.1 million or 2.3%.

Stockholders' equity totaled $54.4 million and $54.7 million at March 31, 2009 and December 31, 2008, respectively. The decrease of $300,000 for the three months ended March 31, 2009 resulted primarily from net income of $438,000 offset by cash dividends paid of $740,000.

Comparison of Operating Results for the Three Months Ended March 31, 2009 and 2008

Net income for the three months ended March 31, 2009 totaled $438,000 as compared with $1.0 million for the three months ended March 31, 2008 representing a decrease of $572,000 or 57.2%. The decrease in net income during the 2009 period resulted from a decrease in total interest income and increases in the provision for loan losses and non-interest expenses, which more than offset decreases in total interest expense and income taxes along with an increase in non-interest income.

Interest income on loans decreased by $215,000 or 3.1% to $6.8 million during the three months ended March 31, 2009, when compared with $7.0 million for the same 2008 period. The decrease during the 2009 period resulted from a decrease of $1.2 million or 0.3% in the average balance of loans outstanding, along with a decrease of eighteen basis points in the yield earned on loans. Interest on mortgage-backed securities decreased $95,000 or 6.8% to $1.3 million during the three months ended March 31, 2009, when compared with $1.4 million for the same 2008 period. The decrease during the 2009 period resulted from a decrease of $9.3 million or 7.5% in the average balance of mortgage-backed securities outstanding, which more than offset a three basis point increase in the yield earned on the mortgage-backed securities. Interest earned on investments increased $42,000 or 21.9% to $234,000 during the three months ended March 31, 2009, when compared to $192,000 during the same 2008 period primarily due to an increase of $932,000 million or 8.7% in the average balance of such assets outstanding, along with an increase of eighty-seven basis points in the yield on the portfolio. Interest earned on other interest-earning assets decreased by $515,000 or 93.5% to $36,000 during the three months ended March 31, 2009, when compared to $551,000 during the same 2008 period primarily due to a decrease of $47.7 million or 72.5% in the average balance of such assets outstanding, along with a decrease of two hundred fifty-five basis points in the yield on the portfolio. Approximately $38.0 million of the decrease relates to withdrawals from one interest bearing demand deposit account.

Interest expense on deposits decreased $993,000 or 29.2% to $2.4 million during the three months ended March 31, 2009, when compared to $3.4 million during the same 2008 period. Such decrease was primarily attributable to a decrease of $64.4 million or 13.9% in the average balance of interest-bearing deposits, along with a decrease of fifty-two basis points in the cost of interest-bearing deposits. Interest expense on advances and other borrowed money decreased by $146,000 or 14.6% to $891,000 during the three months ended March 31, 2009, when compared with $1.0 million during the same 2008 period, primarily due to a decrease of seventy-six basis points in the cost of advances and other borrowed money, which more than offset an increase of $1.3 million or 1.5% in the average balance of advances and other borrowed money outstanding.

Net interest income increased $356,000 or 7.6% during the three months ended March 31, 2009 when compared with the same 2008 period. Such increase was due to a decrease in total interest expense of $1.1 million, which more than offset a decrease in total interest income of $783,000. The Bank's net interest rate spread was 3.05% in 2009 and 2.51% in 2008. During the three months ended March 31, 2009, there was a decrease in the cost of interest-bearing liabilities of fifty-two basis points, along with an increase of two basis points in the yield on interest-earning assets.

During the three months ended March 31, 2009 and 2008, the Bank provided $525,000 and $77,500, respectively, as a provision for loan losses. The allowance for loan losses is based on management's evaluation of the risk inherent in its loan portfolio and gives due consideration to the changes in general market conditions and in the nature and volume of the Bank's loan activity. The Bank intends to continue to provide for loan losses based on its periodic review of the loan portfolio and general market conditions. The increase in the provision for loan losses was primarily due to an increase in the Bank's non-performing loans. At March 31, 2009 and 2008, the Bank's non-performing loans, which were delinquent ninety days or more, totaled $16.0 million or 2.70% of total assets and $5.4 million or 0.90% of total assets, respectively. At March 31, 2009, $8.8 million of non-performing loans were accruing interest and $7.2 million were on non-accrual status.

Included in the non-performing loans were $7.1 million in one-to-four family mortgage loans, $2.5 million in multi-family mortgage loans, $2.2 million in non-residential mortgage loans, $2.0 million in construction

loans, and $2.2 million in commercial loans. The Bank's largest non-accruing commercial loan of $1.9 million is to a local hospital. In October 2006, $1.0 million of the total $3.0 million due on the loan was paid and the remaining balance of approximately $1.9 million was secured by a mortgage on real estate. The $1.9 million was due on June 1, 2007. As of March 31, 2009, the $1.9 million loan balance had not been paid. The repayment of the loan is subject to bankruptcy proceedings. In September 2008, the creditor's committee for the hospital filed a complaint against the Bank seeking to recover the $1.0 million previously paid on the loan and to set aside the mortgage securing the $1.9 million still owed to the Bank. The methodology used to determine the collectability of this loan was based on the fair value of the collateral of the loan. The fair value of the physical collateral was valued on December 15, 2006 at $2.04 million, which is greater than the loan balance at March 31, 2009. While management believes that the mortgage on the property is valid, the unsecured creditors in the bankruptcy proceedings have brought suit against the Bank charging that the mortgage is a "voidable preference." Litigation is in the discovery phase. At this point, management believes, based on discussions with its litigation counsel, the Bank will likely prevail in its defense. However, due to the normal uncertainties of any litigation, the loan has been deemed impaired and is included in the net recorded investment in impaired loans with recorded allowances totaling $2.2 million at March 31, 2009. The hospital property is in close proximity to the Bank and is routinely observed by management. Given the proximity of the property, management's knowledge of the real estate and the fact that the appraisal of the property is higher than the carrying value of the loan, management does not believe that a new appraisal is needed at this time. The Company has not charged off this loan against the allowance for loan losses based on the fact that the loan is collateralized by properties that have a greater value than the carrying amount of the loan. However, due to the uncertainty of any litigation, the Bank decided to establish an allowance for the hospital loan and will continue to monitor this loan and evaluate its collectability as necessary.

During the three months ended March 31, 2009 and 2008, the Bank charged off no loans. There were also no recoveries during either period. The allowance for loan losses amounted to $5.2 million at March 31, 2009, representing 1.19% of total loans and 32.32% of loans delinquent ninety days or more, and $3.2 million at March 31, 2008, representing 0.75% of total loans and 59.43% of loans delinquent ninety days or more.

Non-interest income increased $377,000 or 70.1% to $915,000 during the three months ended March 31, 2009, from $538,000 during the same 2008 period. Fees and service charges and commissions from the sale of financial products decreased $69,000 and $81,000 respectively, which were more than offset by the gain on the sale of the Fort Lee branch of $492,000 and an increase in other income of $36,000.

Non-interest expenses increased $1.2 million or 34.3% to $4.7 million during the three months ended March 31, 2009, when compared with $3.5 million during the same 2008 period. Salaries and employee benefits, professional fees, and miscellaneous expenses increased $124,000, $1,022,000, and $105,000 respectively, sufficient to offset decreases in net occupancy of premises, equipment, advertising, and loss on foreclosed real estate of $4,000, $12,000, $26,000 and $22,000 respectively. The increase in professional fees was predominately due to fees paid to consultants that the Bank engaged as a result of the Cease and Desist Order issued by the Office of Thrift Supervision ("OTS"), effective September 26, 2008, and expenses incurred for legal, accounting and other professional services as a result of the federal grand jury investigation by the United States Attorney's Office for the District of New Jersey ("U.S. Attorney's Office").

Income taxes totaled $262,000 and $591,000 during the three months ended March 31, 2009 and 2008, respectively. The decrease during the 2009 period resulted from a decrease in pre-tax income of $901,000. The effective income tax rate was 37.5% and 36.9% for the three months ended March 31, 2009 and 2008, respectively.

Liquidity and Capital Resources

The Bank is required by OTS regulations to maintain sufficient liquidity to ensure the Bank's safe and sound operation. The Bank's liquidity averaged 3.84% during the month of March 2009. The Bank adjusts its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, when applicable, and loan funding commitments. The Bank also adjusts its liquidity levels as appropriate to meet its asset/liability objectives.

The Bank's primary sources of funds are deposits, amortization and prepayments of loans and mortgage-backed securities, FHLB advances, maturities of investment securities and funds provided from operations. While scheduled loan and mortgage-backed securities amortization and maturing investment securities are a relatively predictable source of funds, deposit flow and loan and mortgage-backed securities prepayments are greatly influenced by market interest rates, economic conditions and competition.

The Bank's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities.

Cash was generated by operating activities during the three months ended March 31, 2009 and 2008.

The primary sources of investing activities are lending and mortgage-backed securities. Loans receivable amounted to $430.7 million and $437.6 million at March 31, 2009 and December 31, 2008, respectively. Securities available for sale totaled $726,000 and $771,000 at March 31, 2009 and December 31, 2008, respectively. Mortgage-backed securities held to maturity totaled $111.0 million and $117.4 million at March 31, 2009, and December 31, 2008, respectively. In addition to funding new loan production and mortgage-backed securities purchases through operating and financing activities such activities were funded by principal repayments on existing loans and mortgage-backed securities.

The main sources of financing activities are deposits, advances and dividends. Deposits were $386.0 million and $403.3 million at March 31, 2009 and December 31, 2008, respectively. Advances totaled $91.6 million and $89.5 million at March 31, 2009 and December 31, 2008, respectively. Cash dividends of $740,000 and $1.1 million were paid during the three months ended March 31, 2009 and 2008, respectively.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds and interest-bearing deposits. If the Bank requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB which provide an additional source of funds. At March 31, 2009, advances from the FHLB amounted to $91.6 million.

The Bank anticipates that it will have sufficient funds available to meet its current loan commitments. At March 31, 2009, the Bank had outstanding commitments to originate loans of $4.9 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2009, totaled $196.9 million. Management believes that, based upon its experience and the Bank's deposit flow history, a significant portion of such deposits will remain with the Bank.

Under OTS regulations, three separate measurements of capital adequacy (the "Capital Rule") are required. The Capital Rule requires each savings institution to maintain tangible capital equal to at least 1.5% and core capital equal to at least 4.0% of its adjusted total assets. The Capital Rule further requires each savings institution to maintain total capital equal to at least 8.0% of its risk-weighted assets.

The following table sets forth the Bank's capital position at March 31, 2009, as compared to the minimum regulatory capital requirements (dollars in thousands):

                                                                               To Be Well
                                                                            Capitalized Under
                                                    Minimum Capital         Prompt Corrective
                                   Actual             Requirements         Actions Provisions
                               Amount    Ratio       Amount     Ratio        Amount       Ratio
 Total Capital                $ 59,204   15.56 %   $   30,438    8.00 %   $     38,047    10.00 %
 (to risk-weighted assets)

 Tier 1 Capital                 55,248   14.52             -       -            22,828     6.00
 (to risk-weighted assets)

 Core (Tier 1) Capital          55,248    9.35         23,638    4.00 %         29,548     5.00
 (to adjusted total assets)

 Tangible Capital               55,248    9.35          8,864    1.50 %             -        -
 (to adjusted total assets)

Contractual Obligations and Off-Balance Sheet Arrangements

The following table sets forth the Bank's contractual obligations and commercial
commitments at March 31, 2009:



                                                                        Payment Due By Period
                                                                More Than One      More Than Three
                                                  One Year      Year Through        Years Through       More Than
Contractual Obligations                Total       or Less       Three Years         Five Years         Five Years
                                                                     (In Thousands)
FHLB-NY advances                     $  91,600    $  40,600    $        33,000    $               0    $     18,000
Certificates of deposit                212,994      196,918             14,358                1,718              -
Lease obligations                        2,665          487                954                  773             451
Benefit plans                            7,059          694              1,390                1,379           3,596

Total                                $ 314,318    $ 238,699    $        49,702    $           3,870    $     22,047

In the normal course of business, the Bank enters into off-balance sheet arrangements consisting of commitments to fund mortgage loans and lines of credit secured by real estate. The following table presents these off-balance sheet arrangements at March 31, 2009.