**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-KSB**
 
 x ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 **For
        the Fiscal Year Ended December 31, 2006**
 OR
 o
        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: 000-51385
 
 **Colonial
                  Bankshares, Inc.**(Name
                  of Small Business Issuer in its
                  Charter)
 
 **Federal**
              ****
              **90-0183739**(State
                  or Other Jurisdiction of Incorporation or Organization)
              
              (I.R.S.
                  Employer Identification Number)
 
 **85
                  West Broad Street, Bridgeton, New Jersey**
              
              **08302**(Address
                  of Principal Executive Office)
              
              (Zip
                  Code)
 
 **(856)
                  451-5800**(Issuer’s
                  Telephone Number including area
                  code)
 
 Securities
        Registered Pursuant to Section 12(b) of the Act:
 
 Title
                  of Each Class
              
              Name
                  of Each Exchange on Which Registered**Common
                  Stock, par value $0.10 per share**
              ****
              **The
                  NASDAQ Stock Market, LLC**
 
 Securities
        Registered Pursuant to Section 12(g) of the Act: **NONE**
 
 Check
        whether the issuer is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange Act. o
 
 Check
        whether the issuer: (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past twelve months (or for such shorter
        period that the Registrant was required to file reports) and (2) has been
        subject to such requirements for the past 90 days.
 
 (1)  YES x .  NO o .
 
 (2)  YES x .  NO o .
 
 Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of Registrant’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendments to this Form 10-KSB. x ****
 
 Indicate
        by check mark whether the Registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 o
        YES x NO
 
 The
        Registrant’s revenues for the fiscal year ended December 31, 2006 were $19.6
        million.
 
 As
        of
        March 15, 2007, there were 4,433,071 shares issued and outstanding of the
        Registrant’s Common Stock, including 2,441,716 shares owned by Colonial
        Bankshares, MHC. The aggregate value of the voting stock held by non-affiliates
        of the Registrant, computed by reference to the closing price of the Common
        Stock as of March 15, 2007 was $24.8 million.
 
 Transitional
        Small Business Disclosure Format:  Yes o No x
 
 **DOCUMENTS
        INCORPORATED BY REFERENCE**
 
 1.
              Portions
                  of Annual Report to Stockholders. (Parts II and
                  IV)
 2.
              Portions
                  of the Proxy Statement for the 2007 Annual Meeting of Stockholders.
                  (Part
                  III)
 
 
 **PART
        I**
 
 **ITEM
        1.** **Business**
  **Forward
        Looking Statements**
  This
        Annual Report contains certain “forward-looking statements” which may be
        identified by the use of words such as “believe,” “expect,” “anticipate,”
“should,” “planned,” “estimated” and “potential.” Examples of forward-looking
        statements include, but are not limited to, estimates with respect to our
        financial condition, results of operations and business that are subject
        to
        various factors which could cause actual results to differ materially from
        these
        estimates and most other statements that are not historical in nature. These
        factors include, but are not limited to, general and local economic conditions,
        changes in interest rates, deposit flows, demand for mortgage, and other
        loans,
        real estate values, competition, changes in accounting principles, policies,
        or
        guidelines, changes in legislation or regulation, and other economic,
        competitive, governmental, regulatory, and technological factors affecting
        our
        operations, pricing products and services.
  **Colonial
        Bankshares, MHC**
  Colonial
        Bankshares, MHC is the federally chartered mutual holding company parent
        of
        Colonial Bankshares, Inc. Colonial Bankshares, MHC has not engaged in any
        significant business activity other than owning a majority of the outstanding
        shares of common stock of Colonial Bankshares, Inc. So long as Colonial
        Bankshares, MHC exists, it will own a majority of the outstanding shares
        of
        common stock of Colonial Bankshares, Inc. The executive offices of Colonial
        Bankshares, MHC are located at 85 West Broad Street, Bridgeton, New Jersey
        08302, and its telephone number is (856) 451-5800. Colonial Bankshares, MHC
        is
        subject to comprehensive regulation and examination by the Office of Thrift
        Supervision.
  **Colonial
        Bankshares, Inc.**
  Colonial
        Bankshares, Inc. is the mid-tier stock holding company of Colonial Bank,
        FSB.
        Colonial Bankshares, Inc. is a federally chartered corporation and owns 100%
        of
        the outstanding shares of common stock of Colonial Bank, FSB. Colonial
        Bankshares, Inc. has not engaged in any significant business activity other
        than
        owning all of the shares of common stock of Colonial Bank, FSB. At December
        31,
        2006, Colonial Bankshares, Inc. had consolidated assets of $383.6 million,
        total
        deposits of $337.3 million and equity of $36.7 million. Colonial
        Bankshares, Inc.’s net income for the year ended December 31, 2006 was $1.6
        million. The executive offices of Colonial Bankshares, Inc. are located at
        85
        West Broad Street, Bridgeton, New Jersey 08302, and its telephone number
        is
        (856) 451-5800. Colonial Bankshares, Inc. is subject to comprehensive regulation
        and examination by the Office of Thrift Supervision.
  On
        March
        25, 2005, the Company filed a Registration Statement on Form SB-2 with the
        Securities and Exchange Commission in connection with the
        Company’s offer
        and sale of shares of its common stock in a public offering. The Registration
        Statement was declared effective by the Securities and Exchange Commission
        on
        May 16, 2005. The offering was completed on June 30, 2005. In the offering,
        the
        Company sold 2,079,980 shares of its common stock at a price of $10.00 per
        share, and issued an additional 2,441,716 shares of its common stock to Colonial
        Bankshares, MHC.
  **Colonial
        Bank, FSB**
  Colonial
        Bank, FSB is a federally chartered savings bank headquartered in Bridgeton,
        New
        Jersey. Colonial Bank, FSB was originally founded in 1913. Colonial Bank,
        FSB
        conducts business from its main office located at 85 West Broad Street in
        Bridgeton, New Jersey, its five branch offices located in Cumberland and
        Gloucester Counties, New Jersey and through its Delaware operating subsidiary,
        CB Delaware Investments, Inc., which was formed in September 2006. The telephone
        number at its main office is (856) 451-5800.
  2
  Our
        principal business activity is the origination of one- to four-family
        residential real estate loans. We also offer home equity loans and lines
        of
        credit, commercial real estate loans, commercial business loans and, to a
        lesser
        extent, construction and consumer loans. We also invest in mortgage-backed
        securities and other investment securities. We offer a variety of deposit
        accounts, including demand accounts, NOW accounts, money market accounts,
        savings accounts and certificates of deposit. Deposits are our primary source
        of
        funds for our lending and investing activities. We have also used borrowed
        funds
        as a source of funds, and we borrow principally from the Federal Home Loan
        Bank
        of New York. We emphasize exceptional personal service for our customers.
        Colonial Bank, FSB is subject to comprehensive regulation and examination
        by the
        Office of Thrift Supervision. Colonial Bank, FSB is a member of the Federal
        Home
        Loan Bank system.
  **CB
        Delaware Investments, Inc.**
  CB
        Delaware Investments, Inc. is a 100% owned subsidiary of Colonial Bank, FSB.
        It
        is a Delaware corporation that was formed in September 2006 to invest in
        and
        manage investment securities that Colonial Bank, FSB is authorized to hold.
  **General**
  Our
        principal business consists of attracting retail deposits from the general
        public in the areas surrounding our main office in Bridgeton, New Jersey
        and
        five branch offices in Cumberland and Gloucester Counties, New Jersey and
        investing those deposits, together with funds generated from operations,
        primarily in one- to four-family residential mortgage loans, home equity
        loans
        and lines of credit and commercial real estate loans and, to a lesser extent,
        construction loans, commercial business loans, consumer loans, and investment
        securities. Our revenues are derived principally from interest on loans and
        securities. We also generate revenues from fees and service charges and other
        income. Our primary sources of funds are deposits, borrowings and principal
        and
        interest payments on loans and securities.
  **Market
        Area**
  We
        primarily serve communities located in Cumberland and Gloucester Counties,
        New
        Jersey. Our primary market for loans and deposits is concentrated in these
        counties.
  There
        are
        many manufacturing and service industry companies in Cumberland County, while
        Gloucester County is a community for people who work in the greater
        Philadelphia, Pennsylvania area. As of December 2006, unemployment rates
        in
        Cumberland and Gloucester Counties were 6.2% and 3.8%, respectively, compared
        to
        4.2% for the State of New Jersey and the national average of 4.5%. The
        population of Cumberland and Gloucester Counties increased at annual growth
        rates of approximately 0.3% and 1.3%, respectively, between 2000 and July
        2005,
        compared to an annual growth rate of 1.0% for the United States as a whole
        during the same period.
  **Competition**
  We
        face
        significant competition in both originating loans and attracting deposits.
        Cumberland and Gloucester Counties, New Jersey, which is our primary market
        area, have a high concentration of financial institutions, many of which
        are
        significantly larger and have greater financial resources than we, and many
        of
        which are our competitors to varying degrees. As of June 30, 2006 (the latest
        date for which information is available), our market share of deposits
        represented 14.35% of deposits in Cumberland County, making us the third
        largest
        financial institution out of ten **** financial
        institutions in Cumberland County based upon deposit share as of that date.
        As
        of June 30, 2006, our market share of deposits represented 1.06% of deposits
        in
        Gloucester County, making us the sixteenth largest financial institution
        out of
        twenty-three **** financial
        institutions based on deposit share as of that date. Some of our competitors
        offer products and services that we currently do not offer, such as trust
        services and private banking. Our competition for loans comes principally
        from
        commercial banks, savings banks, mortgage banking companies and credit unions.
        Our most direct competition for deposits has historically come from commercial
        banks, savings banks and credit unions. We face additional competition for
        deposits from nondepository competitors such as the mutual fund industry,
        securities and brokerage firms and insurance companies.
  3
  We
        seek
        to meet this competition by emphasizing personalized banking, competitive
        pricing strategies and the advantage of local decision-making in our banking
        business. Specifically, we promote and maintain relationships and build customer
        loyalty within our market area by emphasizing decentralized regional management
        and by focusing our marketing and community involvement on the specific needs
        of
        local communities. In addition, we seek to meet competition for loans by
        offering our current and prospective borrowers preferred rates and terms
        on
        deposit products for new lending business. We do not rely on any individual,
        group, or entity for a material portion of our deposits.
  **Lending
        Activities**
  ***General.*** We
        originate one- to four-family residential real estate loans, home equity
        loans
        and lines of credit, commercial real estate loans, commercial business loans,
        construction loans, consumer loans and multi-family mortgage loans. At
        December 31, 2006, our gross loan portfolio totaled $200.2 million
        compared to $159.3 million at December 31, 2005.
  As
        of
        December 31, 2006, $102.3 million, or 51.1% of our total loan portfolio,
        consisted of one- to four-family residential mortgage loans, $39.2 million,
        or 19.6% of our total loan portfolio, consisted of commercial real estate
        loans,
        $38.1 million, or 19.0% of our total loan portfolio, consisted of home
        equity loans and lines of credit, $7.3 million, or 3.7% of our total loan
        portfolio, consisted of commercial loans, $8.4 million, or 4.2% of our
        total loan portfolio, consisted of construction loans, $2.4 million, or
        1.2% of our total loan portfolio, consisted of consumer loans and
        $2.5 million, or 1.2% of our total loan portfolio, consisted of
        multi-family mortgage loans.
  ***One-
        to Four-Family Residential Real Estate Loans.*** We
        offer
        conforming and non-conforming, fixed-rate and adjustable-rate residential
        real
        estate loans with maturities of up to 30 years. This portfolio totaled
        $102.3 million, or 51.1% of our total loan portfolio at December 31,
        2006.
  We
        currently offer fixed-rate conventional mortgage loans with terms of 10 to
        30
        years that are fully amortizing with monthly loan payments, and adjustable-rate
        conventional residential real estate loans with initial fixed terms of one,
        three or five years that amortize up to 30 years. One- to four-family
        residential real estate loans are generally underwritten according to Fannie
        Mae
        guidelines, and loans that conform to such guidelines are referred to as
        “conforming loans.” We generally originate both fixed- and adjustable-rate loans
        in amounts up to the maximum conforming loan limits as established by Fannie
        Mae, which for 2007 is currently $417,000 for single-family homes. Private
        mortgage insurance is required for first mortgage loans with loan-to-value
        ratios in excess of 80%. We also originate loans above conforming limits,
        referred to as “jumbo loans,” although the significant majority of the loans we
        have originated have been within conforming loan limits.
  We
        currently offer several adjustable-rate loan products secured by residential
        properties with rates that are fixed for an initial period ranging from one
        year
        to five years. After the initial fixed-rate period, the interest rate on
        these
        loans resets based upon a contractual spread or margin above the average
        yield
        on U.S. Treasury securities, adjusted to a constant maturity of one, three
        or
        five years, as published weekly by the Federal Reserve Board, subject to
        certain
        periodic and lifetime limitations on interest rate changes. Adjustable-rate
        residential real estate loans generally pose different credit risks than
        fixed-rate loans primarily because the underlying debt service payments of
        the
        borrowers rise as interest rates rise, thereby increasing the potential for
        default. At December 31, 2006, our adjustable-rate, one- to four-family
        residential real estate portfolio totaled $9.7 million.
  We
        require title insurance on all of our one- to four-family residential real
        estate loans, and we also require that borrowers maintain fire and extended
        coverage casualty insurance (and, if appropriate, flood insurance) in an
        amount
        at least equal to the lesser of the loan balance or the replacement cost
        of the
        improvements. Nearly all residential real estate loans must have a mortgage
        escrow account from which disbursements are made for real estate taxes. We
        do
        not conduct environmental testing on residential real estate loans unless
        specific concerns for hazards are determined by the appraiser utilized in
        connection with the loan.
  4
  ***Home
        Equity Loans and Lines of Credit.*** In
        addition to traditional one- to four-family residential real estate loans,
        we
        offer home equity loans and home equity lines of credit that are secured
        by the
        borrower’s primary residence. At December 31, 2006, the outstanding balances of
        home equity loans totaled $34.4 million, or 17.2% of our total loan
        portfolio, and the outstanding balance of home equity lines of credit totaled
        $3.7 million, or 1.8% of our total loan portfolio. The borrower is
        permitted to draw on a home equity line of credit at any time after it is
        originated and may repay the outstanding balance over a term not to exceed
        15
        years from the date of the borrower’s last draw on the home equity line of
        credit. We review each performing line of credit every six years to determine
        whether to continue to offer the unused portion of the line of credit to
        the
        borrower. Our home equity loans are generally originated as mortgages with
        fixed
        terms of five to fifteen years or with balloon maturities of three or five
        years. Home equity loans and lines of credit are generally underwritten with
        the
        same criteria that we use to underwrite fixed-rate, one- to four-family
        residential mortgage loans. We underwrite home equity loans and lines of
        credit
        with a loan-to-value ratio of up to 90% when combined with the principal
        balance
        of the existing mortgage loan. We appraise the property securing the loan
        at the
        time of the loan application in order to determine the value of the property
        securing the home equity loan or line of credit. At the time we close a home
        equity loan or line of credit, we file a mortgage to perfect our security
        interest in the underlying collateral.
  ***Commercial
        Real Estate Lending.*** We
        also
        originate real estate loans secured by first liens on commercial real estate.
        The commercial real estate properties are predominantly professional offices,
        manufacturing and retail facilities and shopping centers and, to a lesser
        extent, more specialized properties such as nursing homes and other healthcare
        facilities. **** We
        have
        purchased commercial real estate loan participations through the Thrift
        Institution Community Investment Council, which originates loans for Community
        Reinvestment Act purposes. We have originated commercial real estate loans
        as a
        participant with other lenders. We emphasize commercial real estate loans
        with
        initial principal balances between $100,000 and $2.0 million. Loans secured
        by
        commercial real estate totaled $39.2 million, or 19.6% of our total loan
        portfolio, at December 31, 2006, and consisted of 192 loans outstanding
        with an average loan balance of approximately $204 thousand, although we
        have
        originated loans with balances substantially greater than this average.
        Substantially all of our commercial real estate loans are secured by properties
        located in our primary market area.
  Our
        commercial real estate loans are generally written as mortgages with balloon
        maturities of five or seven years. Amortization of these loans is typically
        based on 10- to 20-year payout schedules. We also originate some 15-year,
        fixed-rate, fully amortizing loans. We establish margins for commercial real
        estate loans based upon our cost of funds, but we also consider rates offered
        by
        our competitors in our market area.
  In
        the
        underwriting of commercial real estate loans, we generally lend up to 80%
        of the
        property’s appraised value. We base our decisions to lend on the economic
        viability of the property and the creditworthiness of the borrower. In
        evaluating a proposed commercial real estate loan, we emphasize the ratio
        of the
        property’s projected net cash flow to the loan’s debt service requirement
        (generally requiring a minimum ratio of 120%), computed after deduction for
        a
        vacancy factor and property expenses we deem appropriate. Personal guarantees
        are usually obtained from commercial real estate borrowers. We require title
        insurance insuring the priority of our lien, fire and extended coverage casualty
        insurance, and, if appropriate, flood insurance, in order to protect our
        security interest in the underlying property.
  Commercial
        real estate loans generally have higher interest rates and shorter terms
        than
        those on one- to four-family residential mortgage loans. Commercial real
        estate
        loans, however, entail significant additional credit risks compared to one-
        to
        four-family residential mortgage loans, as they typically involve larger
        loan
        balances concentrated with single borrowers or groups of related borrowers.
        In
        addition, the repayment of loans secured by income-producing properties
        typically depends on the successful operation of the related real estate
        project
        and thus may be subject to a greater extent to adverse conditions in the
        real
        estate market and in the general economy.
  ***Commercial
        Loans.*** We
        make
        various types of secured and unsecured commercial loans to customers in our
        market area for the purpose of expansion, working capital and other general
        business purposes. The terms of these loans generally range from less than
        one
        year to five years. The loans are either negotiated on a fixed-rate basis
        or
        carry adjustable interest rates indexed to a lending rate that is determined
        internally, or a short-term market rate index, although the significant majority
        of our commercial loans are fixed-rate loans. At December 31, 2006, we had
        124 commercial loans outstanding with an aggregate balance of $7.3 million,
        or 3.7% of the total loan portfolio. These totals include 22 unsecured
        commercial loans with an aggregate outstanding balance of $464 thousand.
        As of
        December 31, 2006, the average commercial loan balance (secured and unsecured
        loans) was approximately $59 thousand, although we have originated loans
        with
        balances substantially greater than this average.
  5
  Commercial
        credit decisions are based upon our credit assessment of the loan applicant.
        We
        determine the applicant’s ability to repay in accordance with the proposed terms
        of the loans and we assess the risks involved. We also evaluate the applicant’s
        credit and business history and ability to manage the loan and its business.
        We
        usually obtain personal guarantees of the principals. In addition to evaluating
        the loan applicant’s financial statements, we consider the adequacy of the
        primary and secondary sources of repayment for the loan. We supplement our
        analysis of the applicant’s creditworthiness with credit agency reports of the
        applicant’s credit history. We may also check with other banks and conduct trade
        investigations. Collateral supporting a secured transaction also is analyzed
        to
        determine its marketability. Commercial business loans generally have higher
        interest rates than residential loans of like duration because they have
        a
        higher risk of default since their repayment generally depends on the successful
        operation of the borrower’s business and the sufficiency of any collateral. Our
        pricing of commercial business loans is based primarily on the credit risk
        of
        the borrower, with due consideration given to borrowers with appropriate
        deposit
        relationships.
  ***Construction
        Loans.*** We
        originate construction loans to individuals and builders in our market area.
        These loans totaled $8.4 million, or 4.2% of our total loan portfolio at
        December 31, 2006. These loans are often originated in conjunction with
        development loans. In the case of residential subdivisions, these loans finance
        the cost of completing homes on the improved property. Advances on construction
        loans are made in accordance with a schedule reflecting the cost of
        construction, but are generally limited to 80% of actual construction costs
        and,
        as required by applicable regulations, a 75% loan to completed appraised
        value
        ratio. Repayment of construction loans on residential subdivisions is normally
        expected from the sale of units to individual purchasers.
  Construction
        lending exposes us to greater credit risk than permanent mortgage financing.
        The
        repayment of construction loans may depend upon the sale of the property
        to
        third parties or the availability of permanent financing upon completion
        of all
        improvements. Construction loans also expose us to the risk that improvements
        will not be completed on time in accordance with specifications and projected
        costs. In addition, the ultimate sale or rental of the property may not occur
        as
        anticipated.
  6
  ***Loan
        Portfolio Composition.*** The
        following table sets forth the composition of our loan portfolio, by type
        of
        loan at the dates indicated.
  **At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent****(Dollars
                  in thousands)**Real
                  estate loans:One-
                  to four-family residential
              
              $
              102,328
              
              
              51.1
              %
              $
              77,738
              
              
              48.8
              %
              $
              56,478
              
              
              44.4
              %
              $
              34,641
              
              
              39.5
              %
              $
              25,739
              
              
              42.8
              %Home
                  equity loans and lines of credit
              
              
              38,074
              
              
              19.0
              
              
              33,067
              
              
              20.8
              
              
              31,883
              
              
              25.1
              
              
              28,452
              
              
              32.4
              
              
              19,407
              
              
              32.3Multi-family
              
              
              2,492
              
              
              1.2
              
              
              1,676
              
              
              1.1
              
              
              1,825
              
              
              1.4
              
              
              167
              
              
              0.2
              
              
              170
              
              
              0.3Commercial
              
              
              39,186
              
              
              19.6
              
              
              31,392
              
              
              19.7
              
              
              25,786
              
              
              20.3
              
              
              13,396
              
              
              15.3
              
              
              7,277
              
              
              12.1Construction
              
              
              8,371
              
              
              4.2
              
              
              6,267
              
              
              3.9
              
              
              2,265
              
              
              1.8
              
              
              1,934
              
              
              2.2
              
              
              1,017
              
              
              1.7Commercial
              
              
              7,337
              
              
              3.7
              
              
              6,880
              
              
              4.3
              
              
              6,055
              
              
              4.8
              
              
              6,627
              
              
              7.6
              
              
              3,650
              
              
              6.1Consumer
                  and other
              
              
              2,427
              
              
              1.2
              
              
              2,258
              
              
              1.4
              
              
              2,824
              
              
              2.2
              
              
              2,499
              
              
              2.8
              
              
              2,872
              
              
              4.7Total
                  loans receivable
              
              $
              200,215
              
              
              100.0
              %
              $
              159,278
              
              
              100.0
              %
              $
              127,116
              
              
              100.0
              %
              $
              87,716
              
              
              100.0
              %
              $
              60,132
              
              
              100.0
              %Deferred
                  loan fees
              
              
              (323
              )
              
              
              
              
              (336
              )
              
              
              
              
              (326
              )
              
              
              
              
              (208
              )
              
              
              
              
              (188
              )Allowance
                  for loan losses
              
              
              (1,373
              )
              
              
              
              
              (1,168
              )
              
              
              
              
              (990
              )
              
              
              
              
              (667
              )
              
              
              
              
              (421
              )Total
                  loans receivable, net
              
              $
              198,519
              
              
              
              
              $
              157,774
              
              
              
              
              $
              125,800
              
              
              
              
              $
              86,841
              
              
              
              
              $
              59,523
 
 7
  ***Loan
        Portfolio Maturities and Yields.*** The
        following table summarizes the scheduled repayments of our loan portfolio
        at
        December 31, 2006. Demand loans, loans having no stated repayment schedule
        or
        maturity, and overdraft loans are reported as being due in one year or less.
  **One-
                  to Four-Family Residential**
              
              **Home
                  Equity Loans and Lines of Credit**
              
              **Multi-Family**
              
              **Commercial
                  Real Estate****Amount**
              
              **Weighted
                  Average Rate**
              
              **Amount**
              
              **Weighted
                  Average Rate**
              
              **Amount**
              
              **Weighted
                  Average Rate**
              
              **Amount**
              
              **Weighted
                  Average Rate****(Dollars
                  in thousands)**Due
                  During the Years
                Ending
                  December 31,2007
              
              $
              1,135
              
              
              6.55
              %
              $
              4,194
              
              
              7.91
              %
              $
              -
              
              
              -
              %
              $
              8,829
              
              
              7.78
              %2008
              
              
              258
              
              
              6.19
              %
              
              3,253
              
              
              4.73
              %
              
              837
              
              
              8.75
              %
              
              4,670
              
              
              6.05
              %2009
              
              
              340
              
              
              5.92
              %
              
              4,035
              
              
              5.25
              %
              
              -
              
              
              -
              %
              
              4,124
              
              
              5.64
              %2010
                  to 2011
              
              
              282
              
              
              5.92
              %
              
              6,119
              
              
              5.62
              %
              
              -
              
              
              -
              %
              
              9,831
              
              
              6.93
              %2012
                  to 2016
              
              
              4,193
              
              
              5.73
              %
              
              6,042
              
              
              6.27
              %
              
              32
              
              
              8.06
              %
              
              5,582
              
              
              6.14
              %2017
                  to 2021
              
              
              19,549
              
              
              5.13
              %
              
              13,561
              
              
              6.35
              %
              
              -
              
              
              -
              %
              
              4,761
              
              
              6.86
              %2021
                  and beyond
              
              
              76,571
              
              
              5.73
              %
              
              870
              
              
              5.23
              %
              
              1,623
              
              
              6.52
              %
              
              1,389
              
              
              7.72
              %Total
              
              $
              102,328
              
              
              5.63
              %
              $
              38,074
              
              
              6.11
              %
              $
              2,492
              
              
              7.29
              %
              $
              39,186
              
              
              6.79
              %
 
 **Construction**
              
              **Commercial**
              
              **Consumer
                  and Other**
              
              **Total****Amount**
              
              **Weighted
                  Average Rate**
              
              **Amount**
              
              **Weighted
                  Average Rate**
              
              **Amount**
              
              **Weighted
                  Average Rate**
              
              **Amount**
              
              **Weighted
                  Average Rate****(Dollars
                  in thousands)**Due
                  During the Years
                Ending
                  December 31,2007
              
              $
              8,371
              
              
              7.43
              %
              $
              1,397
              
              
              7.70
              %
              $
              395
              
              
              9.90
              %
              $
              24,321
              
              
              7.65
              %2008
              
              
              —
              
              
              —
              %
              
              769
              
              
              5.38
              %
              
              348
              
              
              10.61
              %
              
              10,135
              
              
              5.96
              %2009
              
              
              —
              
              
              —
              %
              
              1,334
              
              
              6.25
              %
              
              462
              
              
              10.08
              %
              
              10,295
              
              
              5.78
              %2010
                  to 2011
              
              
              —
              
              
              —
              %
              
              2,709
              
              
              6.82
              %
              
              981
              
              
              6.76
              %
              
              19,922
              
              
              6.49
              %2012
                  to 2016
              
              
              —
              
              
              —
              %
              
              1,128
              
              
              5.79
              %
              
              241
              
              
              7.38
              %
              
              17,218
              
              
              6.08
              %2017
                  to 2021
              
              
              —
              
              
              —
              %
              
              —
              
              
              —
              %
              
              —
              
              
              0.00
              %
              
              37,871
              
              
              5.79
              %2021
                  and beyond
              
              
              —
              
              
              —
              %
              
              —
              
              
              —
              %
              
              —
              
              
              0.00
              %
              
              80,453
              
              
              5.77
              %Total
              
              $
              8,371
              
              
              7.43
              %
              $
              7,337
              
              
              6.57
              %
              $
              2,427
              
              
              8.52
              %
              $
              200,215
              
              
              6.11
              %
 
 The
        following table sets forth the scheduled repayments of fixed- and
        adjustable-rate loans at December 31, 2006 that are contractually due after
        December 31, 2007.
  **Due
                  After December 31, 2007****Fixed**
              
              **Adjustable**
              
              **Total****(In
                  thousands)**Real
                  estate loans:One-
                  to four-family residential
              
              $
              91,469
              
              $
              9,724
              
              $
              101,193Home
                  equity loans and lines of credit
              
              
              33,880
              
              
              —
              
              
              33,880Multi-family
              
              
              2,492
              
              
              —
              
              
              2,492Commercial
              
              
              30,357
              
              
              —
              
              
              30,357Construction
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              5,940
              
              
              —
              
              
              5,940Consumer
                  and other
              
              
              2,032
              
              
              —
              
              
              2,032Total
                  loans
              
              $
              166,170
              
              $
              9,724
              
              $
              175,894
 
 ***Loan
        Originations, Purchases, Sales and Servicing.*** While
        we
        originate both fixed-rate and adjustable-rate loans, our ability to generate
        each type of loan depends upon borrower demand, market interest rates, borrower
        preference for fixed- versus adjustable-rate loans, and the interest rates
        offered on each type of loan by other lenders competing in our market area.
        Loan
        originations are derived from a number of sources, including branch office
        personnel, existing customers, borrowers, builders, attorneys, accountants
        and
        other professionals, real estate broker referrals and walk-in
        customers.
  8
  Our
        loan
        origination activity may be adversely affected by a rising interest rate
        environment that typically results in decreased loan demand, while declining
        interest rates may stimulate increased loan demand. Accordingly, the volume
        of
        loan originations, the mix of fixed and adjustable-rate loans, and the
        profitability of this activity can vary from period to period. One- to
        four-family residential mortgage loans are generally underwritten to current
        Fannie Mae seller/servicer guidelines, and are closed on documents that conform
        to Fannie Mae guidelines.
  During
        2006, we sold approximately $2.6 million in loans. We have not purchased
        any
        loans in recent periods.
  We
        have
        recently been approved as a qualified loan seller/ servicer
        for Fannie Mae. We may sell conforming loans in the future, and we may retain
        the servicing rights for the conforming loans we sell, and to continue to
        collect payments on the loans, maintain tax escrows and applicable fire and
        flood insurance coverage, and supervise foreclosure proceedings if necessary.
        We
        would retain a portion of the interest paid by the borrower on the loans
        as
        consideration for our servicing activities.
  ***Loan
        Approval Authority and Underwriting.*** Our
        Board
        of Directors grants lending authority to our Management Loan Committee and
        individual executive officers and loan officers. Our lending activities are
        subject to written policies established by the Board. These policies are
        reviewed periodically.
  The
        Management Loan Committee may approve loans in accordance with applicable
        loan
        policies, including our policy governing loans to one borrower. This policy
        places limits on the aggregate dollar amount of credit that may be extended
        to
        any one borrower and related entities. The Management Loan Committee may
        approve
        real estate loans in amounts up to $300,000, and other loans in amounts up
        to
        $100,000.
  In
        connection with our residential and commercial real estate loans, we generally
        require property appraisals to be performed by independent appraisers who
        are
        approved by the Board. Appraisals are then reviewed by the appropriate loan
        underwriting areas. Under certain conditions, we may not require appraisals
        for
        loans under $250,000, but we obtain appraisals in many of these cases. We
        also
        require title insurance, hazard insurance and, if necessary, flood insurance
        on
        property securing mortgage loans.
  ***Loan
        Origination Fees and Costs.*** In
        addition to interest earned on loans, we also receive loan origination fees.
        Such fees vary with the volume and type of loans and commitments made, and
        competitive conditions in the mortgage markets, which in turn respond to
        the
        demand and availability of money. We defer loan origination fees and costs
        and
        amortize such amounts as an adjustment to yield over the term of the loan
        by use
        of the level-yield method. Deferred loan origination fees (net of deferred
        costs) were $323 thousand and $336 thousand at December 31, 2006 and 2005,
        respectively.
  ***Loans
        to One Borrower.*** At
        December 31, 2006, our five largest aggregate amounts loaned to any one borrower
        and related interests (including any unused lines of credit) totaled
        $5.0 million, $4.6 million, $2.2 million, $2.2 million and
        $2.1 million. These loans are all secured loans. Under federal banking
        regulations, at December 31, 2006 our maximum loan-to-one borrower limit
        was
        $5.2 **** million,
        although we generally require a maximum loan-to-one borrower limit of
        $3.0 million. See “Supervision and Regulation—Federal Banking
        Regulation—Loans to One Borrower” for a discussion of applicable regulatory
        limitations.
  **Delinquent
        Loans, Other Real Estate Owned and Classified Assets**
  ***Collection
        Procedures.*** We
        send a
        computer-generated late notice on the tenth day after the payment due date
        on a
        loan, which requests the payment due plus any late charge that is assessed.
        When
        a loan is more than 15 days delinquent, we contact the borrower by telephone
        to
        determine the reason for delinquency and arrange for payment, and accounts
        are
        monitored electronically for receipt of payments. If payments are not received
        within 30 days of the original due date, a letter demanding payment of all
        arrearages is sent and contact efforts are continued. If payment is not received
        within 60 days of the due date, we generally accelerate loans and demand
        payment
        in full. Failure to pay within 90 days of the original due date generally
        results in legal action, notwithstanding ongoing collection efforts. Unsecured
        consumer loans are generally charged-off after 120 days. For commercial loans,
        procedures with respect to demand letters and legal action may vary depending
        upon individual circumstances.
  9
  ***Loans
        Past Due and Nonperforming Assets.*** Loans
        are
        reviewed on a regular basis, and generally are placed on nonaccrual status
        when
        either principal or interest is 90 days or more past due. In addition, we
        place
        loans on nonaccrual status when we believe that there is sufficient reason
        to
        question the borrower’s ability to continue to meet contractual principal or
        interest payment obligations. Interest accrued and unpaid at the time a loan
        is
        placed on nonaccrual status is reversed from interest income. Interest payments
        received on nonaccrual loans are not recognized as income unless warranted
        based
        on the borrower’s financial condition and payment record.
  Real
        estate acquired as a result of foreclosure or by deed in lieu of foreclosure
        is
        classified as real estate owned until such time as it is sold. We have had
        no
        real estate owned in recent periods. When real estate is acquired through
        foreclosure or by deed in lieu of foreclosure, it is recorded at its fair
        value,
        less estimated costs of disposal. If the fair value of the property is less
        than
        the loan balance, the difference is charged against the allowance for loan
        losses.
  10
  The
        following table sets forth certain information with respect to our loan
        portfolio delinquencies at the dates indicated. Loans delinquent for 90 days
        or
        more are generally classified as nonaccrual loans.
  **Loans
                  Delinquent For**
              
              **Total****60-89
                  Days**
              
              **90
                  Days and Over****Number**
              
              **Amount**
              
              **Number**
              
              **Amount**
              
              **Number**
              
              **Amount****(Dollars
                  in thousands)**At
                  December 31, 2006Real
                  estate loans:One-
                  to four-family residential
              
              
              1
              
              $
              52
              
              
              2
              
              $
              167
              
              
              3
              
              $
              219Home
                  equity loans and lines of credit
              
              
              5
              
              
              253
              
              
              2
              
              
              22
              
              
              7
              
              
              275Multi-family
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Construction
              
              
              —
              
              
              —
              
              
              1
              
              
              44
              
              
              1
              
              
              44Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
                  and other
              
              
              7
              
              
              115
              
              
              —
              
              
              —
              
              
              7
              
              
              115Total
              
              
              13
              
              $
              420
              
              
              5
              
              $
              233
              
              
              18
              
              $
              653At
                  December 31, 2005Real
                  estate loans:One-
                  to four-family residential
              
              
              1
              
              $
              41
              
              
              2
              
              $
              37
              
              
              3
              
              $
              78Home
                  equity loans and lines of credit
              
              
              4
              
              
              147
              
              
              1
              
              
              39
              
              
              5
              
              
              186Multi-family
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Construction
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
                  and other
              
              
              11
              
              
              209
              
              
              1
              
              
              4
              
              
              12
              
              
              213Total
              
              
              16
              
              $
              397
              
              
              4
              
              $
              80
              
              
              20
              
              $
              477At
                  December 31, 2004Real
                  estate loans:One-
                  to four-family residential
              
              
              2
              
              $
              25
              
              
              1
              
              $
              22
              
              
              3
              
              $
              47Home
                  equity loans and lines of credit
              
              
              5
              
              
              129
              
              
              2
              
              
              60
              
              
              7
              
              
              189Multi-family
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Construction
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
                  and other
              
              
              9
              
              
              32
              
              
              2
              
              
              25
              
              
              11
              
              
              57Total
              
              
              16
              
              $
              186
              
              
              5
              
              $
              107
              
              
              21
              
              $
              293
 
 11
  ***Nonperforming
        Assets.*** The
        table
        below sets forth the amounts and categories of our nonperforming assets at
        the
        dates indicated. At each date presented, we had no troubled debt restructurings
        (loans for which a portion of interest or principal has been forgiven and
        loans
        modified at interest rates materially less than current market rates).
  **At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(Dollars
                  in thousands)**Non-accrual
                  loans:Real
                  estate loans:One-
                  to four-family residential
              
              $
              167
              
              $
              37
              
              $
              —
              
              $
              95
              
              $
              —Home
                  equity loans and lines of credit
              
              
              22
              
              
              39
              
              
              —
              
              
              —
              
              
              —Multi-family
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Construction
              
              
              44
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
                  and other
              
              
              —
              
              
              4
              
              
              —
              
              
              —
              
              
              —Total
              
              
              233
              
              
              80
              
              
              —
              
              
              95
              
              
              —Accruing
                  loans 90 days or more past due:Real
                  estate loans:One-
                  to four-family residential
              
              
              —
              
              
              —
              
              
              22
              
              
              —
              
              
              —Home
                  equity loans and lines of credit
              
              
              —
              
              
              —
              
              
              60
              
              
              —
              
              
              57Multi-family
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Construction
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
                  and other
              
              
              —
              
              
              —
              
              
              25
              
              
              17
              
              
              27Total
                  loans 90 days or more past due
              
              
              —
              
              
              —
              
              
              107
              
              
              17
              
              
              84Total
                  non-performing loans
              
              
              233
              
              
              80
              
              
              107
              
              
              112
              
              
              84Foreclosed
                  real estate
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Other
                  non-performing assets
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  non-performingassets
              
              $
              233
              
              $
              80
              
              $
              107
              
              $
              112
              
              $
              84Ratios:Total
                  non-performing loans to total loans
              
              
              0.12
              %
              
              0.05
              %
              
              0.08
              %
              
              0.12
              %
              
              0.14
              %Total
                  non-performing loans to total assets
              
              
              0.06
              %
              
              0.02
              %
              
              0.03
              %
              
              0.04
              %
              
              0.03
              %Total
                  non-performing assets to total assets
              
              
              0.06
              %
              
              0.02
              %
              
              0.03
              %
              
              0.04
              %
              
              0.03
              %
 
 The
        amount of the allowance for loan losses allocated to the $233 thousand of
        non-performing loans at December 31, 2006, noted above, was $1 thousand.
        We have
        calculated this amount by applying our allowance for loan losses methodology
        to
        each of the respective loan categories.  This amount represents general
        allowances.
  ***Classification
        of Assets.*** Our
        policies, consistent with regulatory guidelines, provide for the classification
        of loans and other assets that are considered to be of lesser quality as
        substandard, doubtful, or loss assets. An asset is considered substandard
        if it
        is inadequately protected by the current net worth and paying capacity of
        the
        obligor or of the collateral pledged, if any. Substandard assets include
        those
        characterized by the distinct possibility that we will sustain some loss
        if the
        deficiencies are not corrected. Assets classified as doubtful have all of
        the
        weaknesses inherent in those classified substandard with the added
        characteristic that the weaknesses present make collection or liquidation
        in
        full, on the basis of currently existing facts, conditions and values, highly
        questionable and improbable. Assets classified as loss are those considered
        uncollectible and of such little value that their continuance as assets is
        not
        warranted. Assets that do not expose us to risk sufficient to warrant
        classification in one of the aforementioned categories, but which possess
        potential weaknesses that deserve our close attention, are required to be
        designated as special mention. As of December 31, 2006, we had $4.2 million
        of assets designated as special mention.
  When
        we
        classify assets as either substandard or doubtful, we allocate a portion
        of the
        related general loss allowances to such assets as we deem prudent. The allowance
        for loan losses represents amounts that have been established to recognize
        losses inherent in the loan portfolio that are both probable and reasonably
        estimable at the date of the financial statements. When we classify problem
        assets as loss, we charge-off such amounts. Our determination as to the
        classification of our assets and the amount of our loss allowances are subject
        to review by our regulatory agencies, which can require that we establish
        additional loss allowances. We regularly review our asset portfolio to determine
        whether any assets require classification in accordance with applicable
        regulations. On the basis of our review of our assets at December 31, 2006,
        classified assets consisted of special mention assets of $4.2 million,
        substandard assets of $320 thousand and no loans classified as doubtful or
        loss
        assets. The classified assets total includes $233 thousand of nonperforming
        loans.
  12
  ***Allowance
        for Loan Losses.*** We
        provide for loan losses based on the allowance method. Accordingly, all loan
        losses are charged to the related allowance and all recoveries are credited
        to
        it. Additions to the allowance for loan losses are provided by charges to
        income
        based on various factors which, in our judgment, deserve current recognition
        in
        estimating probable losses. We regularly review the loan portfolio and make
        provisions for loan losses in order to maintain the allowance for loan losses
        in
        accordance with accounting principles generally accepted in the United States
        of
        America. The allowance for loan losses consists of three
        components:
  (1)
              specific
                  allowances established for any impaired commercial real estate,
                  commercial, construction and multi-family mortgage loans for which
                  the
                  recorded investment in the loan exceeds the measured value of the
                  loan;
  (2)
              allowances
                  for loan losses for each loan type based on historical loan loss
                  experience; and
  (3)
              adjustments
                  to historical loss experience (general allowances), maintained
                  to cover
                  uncertainties that affect our estimate of probable losses for each
                  loan
                  type.
  The
        adjustments to historical loss experience are based on our evaluation of
        several
        factors, including:
  ·
              levels
                  of, and trends in, charge-offs and
                  recoveries;
  ·
              national
                  and local economic trends and
                  conditions;
  ·
              trends
                  in volume and terms of loans, including any credit concentrations
                  in the
                  loan portfolio; and
  ·
              experience,
                  ability, and depth of lending management and other relevant
                  staff.
  We
        evaluate the allowance for loan losses based upon the combined total of the
        specific, historical loss and general components. Generally when the loan
        portfolio increases, absent other factors, the allowance for loan loss
        methodology results in a higher dollar amount of estimated probable losses
        than
        would be the case without the increase. Generally when the loan portfolio
        decreases, absent other factors, the allowance for loan loss methodology
        results
        in a lower dollar amount of estimated probable losses than would be the case
        without the decrease.
  We
        consider commercial loans, commercial real estate loans and construction
        loans
        to be riskier than one- to four-family residential mortgage loans. Commercial
        loans involve a higher risk of default than residential loans of like duration
        since their repayment generally depends on the successful operation of the
        borrower’s business and the sufficiency of collateral, if any. Commercial real
        estate loans also have greater credit risks compared to one-to four-family
        residential mortgage loans, as they typically involve large loan balances
        concentrated with single borrowers or groups of related borrowers. In addition,
        the payment experience on loans secured by income-producing properties typically
        depends on the successful operation of the related real estate project and
        thus
        may be subject to a greater extent to adverse conditions in the real estate
        market and in the general economy. Construction loans have greater credit
        risk
        than permanent mortgage financing. The repayment of these loans depends upon
        the
        sale of the property to third parties or the availability of permanent financing
        upon completion of all improvements. In the event we make an acquisition
        loan on
        property that is not yet approved for the planned development, there is the
        risk
        that approvals will not be granted or will be delayed. These events may
        adversely affect the borrower and the collateral value of the property.
        Construction loans also expose us to the risk that improvements will not
        be
        completed on time in accordance with specifications and projected costs.
        In
        addition, the ultimate sale or rental of the property may not occur as
        anticipated.
  13
  We
        periodically evaluate the carrying value of loans and the allowance is adjusted
        accordingly. While we use the best information available to make evaluations,
        future adjustments to the allowance may be necessary if conditions differ
        substantially from the information used in making the evaluations. In addition,
        as an integral part of their examination process, our regulatory agencies
        periodically review the allowance for loan losses. Such agencies may require
        us
        to recognize additions to the allowance based on their evaluation of information
        available to them at the time of their examination.
  The
        following table sets forth activity in our allowance for loan losses for
        the
        periods indicated.
  **At
                  or For the Years Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(Dollars
                  in thousands)**Balance
                  at beginning of year
              
              $
              1,168
              
              $
              990
              
              $
              667
              
              $
              421
              
              $
              259Charge-offs:Real
                  estate loans:One-
                  to four-family residential
              
              
              —
              
              
              —
              
              
              (4
              )
              
              (2
              )
              
              —Home
                  equity loans and lines of credit
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (4
              )Multi-family
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Construction
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
                  and other
              
              
              (10
              )
              
              (31
              )
              
              (38
              )
              
              (47
              )
              
              (60
              )Total
                  charge-offs
              
              
              (10
              )
              
              (31
              )
              
              (42
              )
              
              (49
              )
              
              (64
              )Recoveries:Real
                  estate loans:One-
                  to four-family residential
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Home
                  equity loans and lines of credit
              
              
              15
              
              
              —
              
              
              —
              
              
              —
              
              
              —Multi-family
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Construction
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Commercial
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Consumer
                  and other
              
              
              21
              
              
              5
              
              
              11
              
              
              12
              
              
              8Total
                  recoveries
              
              
              36
              
              
              5
              
              
              11
              
              
              12
              
              
              8Net
                  recoveries (charge-offs)
              
              
              26
              
              
              (26
              )
              
              (31
              )
              
              (37
              )
              
              (56
              )Provision
                  for loan losses
              
              
              179
              
              
              204
              
              
              354
              
              
              283
              
              
              218Balance
                  at end of year
              
              $
              1,373
              
              $
              1,168
              
              $
              990
              
              $
              667
              
              $
              421Ratios:Net
                  recoveries (charge-offs) to average loans outstanding
              
              
              0.01
              %
              
              (0.02
              )%
              
              (0.03
              )%
              
              (0.05
              )%
              
              (0.10
              )%Allowance
                  for loan losses to non-performing loans at end of year
              
              
              589.27
              %
              
              1,460.0
              %
              
              925.23
              %
              
              595.54
              %
              
              501.19
              %Allowance
                  for loan losses to total loans at end of year
              
              
              0.69
              %
              
              0.73
              %
              
              0.77
              %
              
              0.76
              %
              
              0.71
              %
 
 14
  ***Allocation
        of Allowance for Loan Losses.*** The
        following tables set forth the allowance for loan losses allocated by loan
        category, the percent of the allowance to the total allowance and the percent
        of
        loans in each category to total loans at the dates indicated. The allowance
        for
        loan losses allocated to each category is not necessarily indicative of future
        losses in any particular category and does not restrict the use of the allowance
        to absorb losses in other categories.
  **At
                  December 31,****2006**
              
              **2005**
              
              **2004****Amount**
              
              **Percent
                  of Allowance to Total Allowance**
              
              **Percent
                  of Loans in Category to Total Loans**
              
              **Amount**
              
              **Percent
                  of Allowance to Total Allowance**
              
              **Percent
                  of Loans in Category to Total Loans**
              
              **Amount**
              
              **Percent
                  of Allowance to Total Allowance**
              
              **Percent
                  of Loans in Category to Total Loans****(Dollars
                  in thousands)**Real
                  estate loans:One-
                  to four-family residential
              
              $
              265
              
              
              19.3
              %
              
              51.1
              %
              $
              205
              
              
              17.5
              %
              
              48.8
              %
              $
              146
              
              
              14.8
              %
              
              44.4
              %Home
                  equity loans and lines of credit
              
              
              95
              
              
              6.9
              
              
              19.0
              
              
              83
              
              
              7.1
              
              
              20.8
              
              
              80
              
              
              8.1
              
              
              25.1Multi-family
              
              
              —
              
              
              —
              
              
              1.2
              
              
              —
              
              
              —
              
              
              1.1
              
              
              —
              
              
              —
              
              
              1.4Commercial
              
              
              695
              
              
              50.6
              
              
              19.6
              
              
              640
              
              
              54.8
              
              
              19.7
              
              
              518
              
              
              52.3
              
              
              20.3Construction
              
              
              —
              
              
              —
              
              
              4.2
              
              
              —
              
              
              —
              
              
              3.9
              
              
              —
              
              
              —
              
              
              1.8Commercial
              
              
              220
              
              
              16.0
              
              
              3.7
              
              
              155
              
              
              13.3
              
              
              4.3
              
              
              156
              
              
              15.8
              
              
              4.8Consumer
                  and other
              
              
              98
              
              
              7.2
              
              
              1.2
              
              
              85
              
              
              7.3
              
              
              1.4
              
              
              90
              
              
              9.0
              
              
              2.2Total
                  allowance for loan losses
              
              $
              1,373
              
              
              100.0
              %
              
              100.0
              %
              $
              1,168
              
              
              100.0
              %
              
              100.0
              %
              $
              990
              
              
              100.0
              %
              
              100.0
              %
 
 **At
                  December 31,****2003**
              
              **2002****Amount**
              
              **Percent
                  of Allowance to Total Allowance**
              
              **Percent
                  of Loans in Category to Total Loans**
              
              **Amount**
              
              **Percent
                  of Allowance to Total Allowance**
              
              **Percent
                  of Loans in Category to Total Loans****(Dollars
                  in thousands)**Real
                  estate loans:One-
                  to four-family residential
              
              $
              159
              
              
              23.8
              %
              
              39.5
              %
              $
              69
              
              
              16.4
              %
              
              42.8
              %Home
                  equity loans and lines of credit
              
              
              127
              
              
              19.0
              
              
              32.4
              
              
              76
              
              
              18.0
              
              
              32.3Multi-family
              
              
              —
              
              
              —
              
              
              0.2
              
              
              —
              
              
              —
              
              
              0.3Commercial
              
              
              321
              
              
              48.1
              
              
              15.3
              
              
              228
              
              
              54.2
              
              
              12.1Construction
              
              
              —
              
              
              —
              
              
              2.2
              
              
              —
              
              
              —
              
              
              1.7Commercial
              
              
              —
              
              
              —
              
              
              7.6
              
              
              —
              
              
              —
              
              
              6.1Consumer
                  and other
              
              
              60
              
              
              9.1
              
              
              2.8
              
              
              48
              
              
              11.4
              
              
              4.7Total
                  allowance for loan losses
              
              $
              667
              
              
              100.0
              %
              
              100.0
              %
              $
              421
              
              
              100.0
              %
              
              100.0
              %
 
 15


**Securities
      Activities**




Our
      securities investment policy is established by our Board of Directors. This
      policy dictates that investment decisions be made based on the safety of the
      investment, liquidity requirements, potential returns, cash flow targets, and
      consistency with our interest rate risk management strategy. Our Asset/Liability
      Management Committee, which consists of senior management, oversees our
      investing strategies. The Board of Directors reviews the Asset/Liability
      Management Committee’s activities and strategies, and evaluates on an ongoing
      basis our investment policy and objectives. Our chief executive officer and
      our
      chief financial officer are responsible for making securities portfolio
      decisions in accordance with established policies. Our chief executive officer
      and our chief financial officer have the authority to purchase and sell
      securities within specific guidelines established by the investment policy.
      In
      addition, all transactions are reviewed by the Asset/Liability Management
      Committee at least monthly.




Our
      current investment policy generally permits securities investments in debt
      securities issued by the U.S. Government and U.S. Government agencies, municipal
      bonds, and corporate debt obligations, as well as investments in preferred
      and
      common stock of U.S. Government agencies and U.S. Government sponsored
      enterprises such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank
      of
      New York. Securities in these categories are classified as “investment
      securities” for financial reporting purposes. The policy also permits
      investments in mortgage-backed securities, including pass-through securities
      issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as
      collateralized mortgage obligations (“CMOs”) issued or backed by securities
      issued by these government agencies or government-sponsored enterprises. Also
      permitted are investments in securities issued or backed by the Small Business
      Administration. As of December 31, 2006, we held no asset-backed securities
      (securities collateralized by automobile loans, credit card receivables and
      home
      equity loans), and we held no preferred securities issued by either Fannie
      Mae
      or Freddie Mac. Our current investment strategy uses a risk management approach
      of diversified investing in fixed-rate securities with short- to
      intermediate-term maturities, as well as adjustable-rate securities, which
      may
      have a longer term to maturity. The emphasis of this approach is to increase
      overall investment securities yields while managing interest rate risk.




Statement
      of Financial Accounting Standards No. 115 requires that, at the time of
      purchase, we designate a security as held to maturity, available-for-sale,
      or
      trading, depending on our ability and intent. Securities available-for-sale
      are
      reported at fair value, while securities held to maturity are reported at
      amortized cost. We do not have a trading portfolio.




***Mortgage-Backed
      Securities.*** We
      invest
      in mortgage-backed securities in order to generate positive interest rate
      spreads with minimal administrative expense, lower credit risk as a result
      of
      the guarantees provided by Freddie Mac, Fannie Mae and Ginnie Mae, and increased
      liquidity. We invest primarily in mortgage-backed securities issued or
      guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. At December 31, 2006,
      our
      mortgage-backed securities portfolio had a fair value of $57.3 million,
      consisting of pass-through securities.




Mortgage-backed
      securities are created by pooling mortgages and issuing a security
      collateralized by the pool of mortgages with an interest rate that is less
      than
      the interest rate on the underlying mortgages. Mortgage-backed securities
      typically represent a participation interest in a pool of single-family or
      multi-family mortgages, although most of our mortgage-backed securities are
      collateralized by single-family mortgages. The issuers of such securities
      (government sponsored enterprises, such as Fannie Mae, Freddie Mac and Ginnie
      Mae) pool and resell the participation interests in the form of securities
      to
      investors, such as Colonial Bank, FSB, and guarantee the payment of principal
      and interest to these investors. Investments in mortgage-backed securities
      involve a risk that actual prepayments will be greater or less than the
      prepayment rate estimated at the time of purchase, which may require adjustments
      to the amortization of any premium or accretion of any discount relating to
      such
      instruments, thereby affecting the net yield on such securities. We review
      prepayment estimates for our mortgage-backed securities at the time of purchase
      to ensure that prepayment assumptions are reasonable considering the underlying
      collateral for the securities at issue and current interest rates, and to
      determine the yield and estimated maturity of the mortgage-backed securities
      portfolio. Periodic reviews of current prepayment speeds are performed in order
      to ascertain whether prepayment estimates require modification that would cause
      amortization or accretion adjustments.




16




CMOs
      are
      types of debt securities issued by a special-purpose entity that aggregates
      pools of mortgages and mortgage-backed securities and creates different classes
      of securities with varying maturities and amortization schedules, as well as
      a
      residual interest, with each class possessing different risk characteristics.
      The cash flows from the underlying collateral are generally divided into
“tranches” or classes that have descending priorities with respect to the
      distribution of principal and interest cash flows, while cash flows on
      pass-through mortgage-backed securities are distributed pro rata to all security
      holders. Our practice is to limit fixed-rate CMO investments primarily to the
      early-to-intermediate tranches, which have the greatest cash flow stability.
      Floating rate CMOs are purchased with emphasis on the relative trade-offs
      between lifetime interest rate caps, prepayment risk and interest
      rates.




***Corporate
      Debt Securities and Municipal Bonds.*** At
      December 31, 2006, we held $10.5 million in corporate debt securities, at fair
      value, $8.7 million of which were classified as available for sale and $1.8
      million of which were classified as held to maturity. At December 31, 2006,
      we
      held $36.5 million in bonds issued by states and political subdivisions, $12.2
      million of which were classified as held to maturity at amortized cost and
      $24.3
      million of which were classified as available for sale at fair value. Although
      corporate debt securities and municipal bonds may offer a higher yield than
      a
      U.S. Treasury or agency security of comparable duration, these securities also
      have a higher risk of default due to adverse changes in the creditworthiness
      of
      the issuer. In recognition of this potential risk, we generally limit
      investments in corporate bonds to securities rated in one of the four highest
      categories by at least one nationally recognized rating agency, and to a total
      investment of no more than $1.0 million per issuer. We also generally limit
      investments in municipal bonds to issues that are insured unless the issuer
      is a
      local government entity within our service area. Such local entity obligations
      generally are not rated, and are subject to internal credit reviews. In
      addition, our investment policy imposes an investment limitation of $1.5 million
      per municipal issue.




***Equity
      Securities.*** At
      December 31, 2006, our equity securities consisted of Federal Home Loan Bank
      of
      New York common stock and mutual funds. We hold the Federal Home Loan Bank
      of
      New York common stock to qualify for membership in the Federal Home Loan Bank
      System and to be eligible to borrow funds under the Federal Home Loan Bank
      of
      New York’s advance program. There is no market for the common stock, but it is
      the current practice of the Federal Home Loan Bank of New York to redeem shares
      at par value. The aggregate fair value of our Federal Home Loan Bank of New
      York
      common stock as of December 31, 2006 was $775 thousand based on its par
      value. No unrealized gains or losses have been recorded because the par value
      of
      the common stock represents its fair value. Our mutual funds consist solely
      of
      Shay Asset Management Funds. We selected these mutual funds because the
      underlying securities bear similar risk characteristics to investments that
      we
      purchase directly. These mutual funds provide us with increased liquidity since
      we can redeem our shares within several days and also provide us with a higher
      yield than other short-term earning assets such as federal funds.




***U.S.
      Government Agency Securities.*** At
      December 31, 2006, we held U.S. Government agency securities available for
      sale
      with a fair value of $29.1 million and U.S. Government agency securities held
      to
      maturity of $1.4 million. Generally, these securities have short- to medium-term
      maturities (one to five years) and may have call or step-up features. While
      these securities generally provide lower yields than other investments such
      as
      mortgage-backed securities, our current investment strategy is to maintain
      investments in such instruments to the extent appropriate for liquidity
      purposes, as collateral for borrowings, and for prepayment
      protection.




17




The
      following table sets forth the composition of our securities portfolio
      (excluding Federal Home Loan Bank of New York common stock) at the dates
      indicated.




**At
                December 31,****2006**
            
            **2005**
            
            **2004****Amortized**
              **Cost**
            
            **Fair
                Value**
            
            **Amortized**
              **Cost**
            
            **Fair
                Value**
            
            **Amortized**
              **Cost**
            
            **Fair
                Value****(In
                thousands)****Securities
                available-for-sale:**Mortgage-backed
            
            $
            53,646
            
            $
            53,229
            
            $
            53,771
            
            $
            53,030
            
            $
            43,670
            
            $
            43,709U.S.
                Government agency
            
            
            29,534
            
            
            29,128
            
            
            29,509
            
            
            29,051
            
            
            25,096
            
            
            25,152Corporate
            
            
            8,956
            
            
            8,660
            
            
            9,341
            
            
            9,263
            
            
            10,600
            
            
            10,732Mutual
                funds
            
            
            13,942
            
            
            13,716
            
            
            13,314
            
            
            13,116
            
            
            12,865
            
            
            12,839Municipal
            
            
            23,927
            
            
            24,259
            
            
            23,902
            
            
            24,061
            
            
            23,634
            
            
            23,928SBA
                pools
            
            
            7,759
            
            
            7,933
            
            
            10,597
            
            
            10,735
            
            
            14,695
            
            
            14,799Total
                securities available-for-sale
            
            $
            137,764
            
            $
            136,925
            
            $
            140,434
            
            $
            139,256
            
            $
            130,560
            
            $
            131,159**Securities
                held-to-maturity:**Mortgage-backed
            
            $
            3,972
            
            $
            4,064
            
            $
            3,499
            
            $
            3,592
            
            $
            4,966
            
            $
            5,217U.S.
                Government agency
            
            
            1,412
            
            
            1,369
            
            
            1,000
            
            
            998
            
            
            1,000
            
            
            1,007Corporate
            
            
            1,698
            
            
            1,828
            
            
            2,964
            
            
            3,130
            
            
            8,683
            
            
            9,209Municipal
            
            
            11,640
            
            
            12,239
            
            
            10,011
            
            
            10,511
            
            
            3,935
            
            
            4,261Total
                securities held-to-maturity
            
            $
            18,722
            
            $
            19,500
            
            $
            17,474
            
            $
            18,231
            
            $
            18,584
            
            $
            19,694




18


***Portfolio
      Maturities and Yields.*** The
      composition and maturities of the investment debt securities portfolio and
      the
      mortgage-backed securities portfolio at December 31, 2006 are summarized in
      the
      following table. Maturities are based on the final contractual payment dates,
      and do not reflect the impact of prepayments or early redemptions that may
      occur. State and municipal securities yields have been adjusted to a
      tax-equivalent basis.




**One
                Year or Less**
            
            **More
                than One Year through Five Years**
            
            **More
                than Five Years through Ten Years**
            
            **More
                than Ten Years**
            
            **Total
                Securities****Amortized
                Cost**
            
            **Weighted
                Average Yield**
            
            **Amortized
                Cost**
            
            **Weighted
                Average Yield**
            
            **Amortized
                Cost**
            
            **Weighted
                Average Yield**
            
            **Amortized
                Cost**
            
            **Weighted
                Average Yield**
            
            **Amortized
                Cost**
            
            **Fair
                Value**
            
            **Weighted
                Average Yield****(Dollars
                in thousands)****Securities
                available-for-sale:**Mortgage-backed
            
            $
            —
            
            
            —
            %
            $
            1,078
            
            
            6.13
            %
            $
            —
            
            
            —
            %
            $
            52,568
            
            
            4.74
            %
            $
            53,646
            
            $
            53,229
            
            
            4.77
            %U.S.
                Government agency
            
            
            500
            
            
            4.20
            %
            
            10,756
            
            
            4.87
            %
            
            13,347
            
            
            4.96
            %
            
            4,931
            
            
            6.26
            %
            
            29,534
            
            
            29,128
            
            
            5.13
            %Corporate
            
            
            500
            
            
            5.79
            %
            
            5,185
            
            
            4.98
            %
            
            790
            
            
            5.81
            %
            
            2,481
            
            
            3.96
            %
            
            8,956
            
            
            8,660
            
            
            4.82
            %Mutual
                funds
            
            
            13,942
            
            
            5.05
            %
            
            —
            
            
            —
            %
            
            —
            
            
            —
            %
            
            —
            
            
            —
            %
            
            13,942
            
            
            13,716
            
            
            5.05
            %Municipal
            
            
            —
            
            
            —
            %
            
            1,939
            
            
            5.99
            %
            
            16,546
            
            
            6.72
            %
            
            5,442
            
            
            7.06
            %
            
            23,927
            
            
            24,259
            
            
            6.74
            %SBA
                pools
            
            
            —
            
            
            —
            %
            
            675
            
            
            7.91
            %
            
            5,913
            
            
            7.92
            %
            
            1,171
            
            
            3.41
            %
            
            7,759
            
            
            7,933
            
            
            7.24
            %Total
                securities available-for-sale
            
            $
            14,942
            
            
            5.05
            %
            $
            19,633
            
            
            5.18
            %
            $
            36,596
            
            
            6.25
            %
            $
            66,593
            
            
            4.99
            %
            $
            137,764
            
            $
            136,925
            
            
            5.36
            %**Securities
                held-to-maturity:**Mortgage-backed
            
            $
            7
            
            
            4.59
            %
            $
            123
            
            
            6.45
            %
            $
            1,743
            
            
            6.04
            %
            $
            2,099
            
            
            6.38
            %
            $
            3,972
            
            $
            4,064
            
            
            6.23
            %U.S.
                Government agency
            
            
            —
            
            
            —
            %
            
            —
            
            
            —
            %
            
            494
            
            
            6.16
            %
            
            918
            
            
            7.12
            %
            
            1,412
            
            
            1,369
            
            
            6.79
            %Corporate
            
            
            —
            
            
            —
            %
            
            —
            
            
            —
            %
            
            —
            
            
            —
            %
            
            1,698
            
            
            7.35
            %
            
            1,698
            
            
            1,828
            
            
            7.35
            %Municipal
            
            
            2,636
            
            
            5.94
            %
            
            2,561
            
            
            7.12
            %
            
            1,196
            
            
            7.51
            %
            
            5,247
            
            
            8.99
            %
            
            11,640
            
            
            12,239
            
            
            7.73
            %Total
                securities held-to-maturity
            
            $
            2,643
            
            
            5.94
            %
            $
            2,684
            
            
            7.08
            %
            $
            3,433
            
            
            6.57
            %
            $
            9,962
            
            
            7.99
            %
            $
            18,722
            
            $
            19,500
            
            
            7.31
            %







19


**Sources
      of Funds**




***General.*** Deposits,
      borrowings, repayments and prepayments of loans and securities, proceeds from
      sales of securities, proceeds from maturing securities and cash flows from
      operations are the primary sources of our funds for use in lending, investing
      and for other general purposes.




***Deposits.*** We
      offer
      a variety of deposit accounts with a range of interest rates and terms. Our
      deposit accounts consist of certificates of deposit, savings accounts, NOW
      accounts, checking accounts, money market accounts, club accounts
      and **** individual
      retirement accounts. **** We
      provide commercial checking accounts for businesses. In addition, we provide
      low-cost checking account services for low-income customers.




Our
      deposits are obtained predominantly from the areas in which our branch offices
      are located. We rely on our customer service and competitive pricing to attract
      and retain these deposits. We accept certificates of deposit in excess of
      $100,000 for which we may provide preferential rates. At December 31, 2006,
      we
      had $11.5 million in brokered certificates of deposits.




The
      following tables set forth the distribution of total deposit accounts, by
      account type, at the dates indicated.




**At
                December 31,****2006**
            
            **2005**
            
            **2004****Balance**
            
            **Percent**
            
            **Weighted
                Average Rate**
            
            **Balance**
            
            **Percent**
            
            **Weighted
                Average Rate**
            
            **Balance**
            
            **Percent**
            
            **Weighted
                Average Rate****(Dollars
                in thousands)****Deposit
                type:**Non-interest
                bearing demand
            
            $
            18,055
            
            
            5.35
            %
            
            —
            %
            $
            13,638
            
            
            4.79
            %
            
            —
            %
            $
            9,587
            
            
            3.70
            %
            
            —
            %Savings
            
            
            57,260
            
            
            16.98
            
            
            1.72
            
            
            61,635
            
            
            21.65
            
            
            1.50
            
            
            68,152
            
            
            26.27
            
            
            1.31NOW
                accounts
            
            
            36,740
            
            
            10.89
            
            
            1.89
            
            
            33,844
            
            
            11.89
            
            
            1.43
            
            
            28,579
            
            
            11.02
            
            
            0.61Super
                NOW accounts
            
            
            14,200
            
            
            4.21
            
            
            1.71
            
            
            17,492
            
            
            6.14
            
            
            1.00
            
            
            16,218
            
            
            6.25
            
            
            1.00Money
                market demand
            
            
            20,553
            
            
            6.10
            
            
            3.54
            
            
            18,778
            
            
            6.59
            
            
            2.39
            
            
            21,999
            
            
            8.48
            
            
            1.70Total
                transaction accounts
            
            
            146,808
            
            
            43.53
            
            
            1.81
            
            
            145,387
            
            
            51.06
            
            
            1.39
            
            
            144,535
            
            
            55.72
            
            
            0.71Certificates
                of deposit
            
            
            190,446
            
            
            56.47
            
            
            4.74
            
            
            139,338
            
            
            48.94
            
            
            3.96
            
            
            114,872
            
            
            44.28
            
            
            3.19Total
                deposits
            
            $
            337,254
            
            
            100.00
            %
            
            3.46
            %
            $
            284,725
            
            
            100.00
            %
            
            2.65
            %
            $
            259,407
            
            
            100.00
            %
            
            2.04
            %





As
      of
      December 31, 2006, the aggregate amount of outstanding certificates of deposit
      in amounts greater than or equal to $100,000 was approximately $94.4 million.
      The following table sets forth the maturity of those certificates as of December
      31, 2006.




**At**
              **December
                31, 2006****(In
                thousands)**Three
                months or less
            
            $
            37,600Over
                three months through six months
            
            
            13,729Over
                six months through one year
            
            
            11,738Over
                one year to three years
            
            
            22,177Over
                three years
            
            
            9,126Total
            
            $
            94,370





At
      December 31, 2006, $128.2 million of our certificates of deposit had maturities
      of one year or less. We monitor activity on these accounts and, based on
      historical experience and our current pricing strategy, we believe we will
      retain a large portion of these accounts upon maturity.




20




The
      following table sets forth the interest-bearing deposit activities for the
      years
      indicated.




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004****(In
                thousands)**Beginning
                balance
            
            $
            271,087
            
            $
            249,820
            
            $
            213,040Net
                deposits (withdrawals) before interest credited
            
            
            38,655
            
            
            14,839
            
            
            32,362Interest
                credited
            
            
            9,457
            
            
            6,428
            
            
            4,418Ending
                balance
            
            $
            319,199
            
            $
            271,087
            
            $
            249,820





***Borrowings.*** Our
      borrowings consist of short-term and long-term Federal Home Loan Bank advances.
      The following table sets forth information concerning the short-term borrowing
      balances and interest rates at the dates and for the years
      indicated.




**At
                or For the Year Ended December 31,****2006**
            
            **2005**
            
            **2004****(Dollars
                in thousands)**Balance
                at end of year
            
            $
            1,450
            
            $
            15,415
            
            $
            13,890Average
                balance during year
            
            $
            11,547
            
            $
            5,912
            
            $
            15,024Maximum
                outstanding at any month end
            
            $
            22,295
            
            $
            15,740
            
            $
            25,181Weighted
                average interest rate at end of year
            
            
            5.39
            %
            
            4.17
            %
            
            2.12
            %Average
                interest rate during year
            
            
            4.61
            %
            
            3.30
            %
            
            1.62
            %





At
      December 31, 2006, the long-term borrowing is an amortizing loan with a current
      balance of $6.9 million, an interest rate of 5.57% and a final maturity date
      in
      2021. At December 31, 2005, we did not have any long-term
      borrowings.




At
      December 31, 2006, we had the ability to borrow approximately $75.3 million
      under our credit facilities with the Federal Home Loan Bank of New
      York of which
      $ 8.3 million
      was outstanding .  Also,
      the Bank has an unused line of credit with its subsidiary, CB Delaware
      Investments, Inc., in the amount of $30.0 million at a interest rate of 1%
      less
      than the prime rate of interest published from time to time by the Wall Street
      Journal.




**Employees**




As
      of
      December 31, 2006, we had 71 full-time employees and 12 part-time employees.
      The
      employees are not represented by a collective bargaining unit and we consider
      our relationship with our employees to be good.




**Legal
      Proceedings**




We
      are
      not involved in any pending legal proceedings other than routine legal
      proceedings occurring in the ordinary course of business, which, in the
      aggregate, involve amounts that we believe are immaterial to our consolidated
      financial condition, results of operations and cash flows.




**FEDERAL
      AND STATE TAXATION**




**Tax
      Allocation**




Colonial
      Bank, FSB and Colonial Bankshares, Inc. have entered into an agreement to
      establish a method for allocating and for reimbursing the payment of their
      consolidated tax liability.




21




**Federal
      Taxation**




***General*** *.* Colonial
      Bankshares, Inc., Colonial Bank, MHC, Colonial Bank, FSB and CB Delaware
      Investments, Inc. are subject to federal income taxation in the same
      general manner as other corporations, with some exceptions discussed below.
      Colonial Bankshares, MHC’s and Colonial Bank, FSB’s federal tax returns are not
      currently under audit, and have not been audited during the past five years.
      The
      following discussion of federal taxation is intended only to summarize certain
      pertinent federal income tax matters and is not a comprehensive description
      of
      the applicable tax rules.




***Method
      of Accounting*** *.* For
      federal income tax purposes, Colonial Bankshares, Inc. reports income and
      expenses on the accrual method of accounting and uses a tax year ending December
      31 for filing its federal and state income tax returns.




***Bad
      Debt Reserves*** *.* Colonial
      Bank, FSB is permitted to establish a reserve for bad debts and to make annual
      additions to the reserve. These additions can, within specified formula limits,
      be deducted in arriving at our taxable income. Pursuant to the Small Business
      Protection Act of 1996 (the “1996 Act”), savings institutions were required to
      recapture any excess reserves over those established as of December 31, 1988
      (base year reserve). Colonial Bank, FSB recaptured approximately $50,000 of
      reserves over the six-year period ended December 31, 2002.




***Taxable
      Distributions and Recapture*** *.* Prior
      to
      the 1996 Act, bad debt reserves created prior to December 31, 1988 were subject
      to recapture into taxable income should Colonial Bank, FSB fail to meet certain
      thrift asset and definitional tests. Federal legislation has eliminated these
      thrift related recapture rules.




At
      December 31, 2006, our total federal pre-1988 base year reserve was
      approximately $1.5 million. However, under current law, pre-1988 base year
      reserves remain subject to recapture should Colonial Bank, FSB make certain
      non-dividend distributions, repurchase any of its stock, pay dividends in excess
      of tax earnings and profits, or cease to maintain a financial institution
      charter.




***Alternative
      Minimum Tax*** *.* The
      Internal Revenue Code of 1986, as amended (the “Code”) imposes an alternative
      minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus
      certain tax preferences (“alternative minimum taxable income”). The AMT is
      payable to the extent such alternative minimum taxable income is in excess
      of an
      exemption amount and the AMT exceeds the regular income tax. Net operating
      losses can offset no more than 90% of alternative minimum taxable income.
      Certain payments of alternative minimum tax may be used as credits against
      regular tax liabilities in future years. Colonial Bank, FSB has no such amounts
      available as credits for carryover.




***Net
      Operating Loss Carryovers*** *.* A
      financial institution may carry back net operating losses to the preceding
      two
      taxable years and forward to the succeeding 20 taxable years. At December 31,
      2006, Colonial Bank, FSB had no net operating loss carryforwards for federal
      income tax purposes.




***Corporate
      Dividends-Received Deduction*** *.* Colonial
      Bankshares, Inc. may exclude from its income 100% of dividends received from
      Colonial Bank, FSB as a member of the same affiliated group of corporations.
      The
      corporate dividends-received deduction is 80% in the case of dividends received
      from corporations with which a corporate recipient does not file a consolidated
      tax return, and corporations which own less than 20% of the stock of a
      corporation distributing a dividend may deduct only 70% of dividends received
      or
      accrued on their behalf.




**State
      Taxation**




***New
      Jersey State Taxation.*** **** Colonial
      Bankshares, MHC, Colonial Bankshares, Inc. and Colonial Bank, FSB file New
      Jersey Corporation Business tax returns for banking and financial corporations.
      Generally, the income of savings institutions in New Jersey is subject to the
      New Jersey Corporation Business tax at the rate of 9% on its taxable income,
      before net operating loss deductions and special deductions for federal income
      tax purposes. For this purpose, “taxable income” generally means federal taxable
      income subject to certain adjustments (including addition of interest income
      on
      state and municipal obligations).




22




Colonial
      Bankshares, MHC, Colonial Bankshares, Inc. and Colonial Bank, FSB are not
      currently under audit with respect to their New Jersey income tax returns and
      Colonial Bankshares, MHC’s, Colonial Bankshares, Inc.’s and Colonial Bank, FSB’s
      state tax returns have not been audited for the past five years.




***Delaware
      State Taxation.***CB Delaware Investments, Inc. is subject to
      a franchise tax which is based on the number of authorized common
      shares.




**S** **UPERVISION
      AND** **REGULATION**




**General**




Colonial
      Bank, FSB is examined and supervised by the Office of Thrift Supervision and
      the
      Federal Deposit Insurance Corporation. This regulation and supervision
      establishes a comprehensive framework of activities in which an institution
      may
      engage and is intended primarily for the protection of the Federal Deposit
      Insurance Corporation’s deposit insurance funds and depositors. Under this
      system of federal regulation, financial institutions are periodically examined
      to ensure that they satisfy applicable standards with respect to their capital
      adequacy, assets, management, earnings, liquidity and sensitivity to market
      interest rates. Following completion of its examination, the federal agency
      critiques the institution’s operations and assigns its rating (known as an
      institution’s CAMELS rating). Under federal law, an institution may not disclose
      its CAMELS rating to the public. Colonial Bank, FSB also is a member of and
      owns
      stock in the Federal Home Loan Bank of New York, which is one of the twelve
      regional banks in the Federal Home Loan Bank System. Colonial Bank, FSB is
      also
      regulated to a lesser extent by the Board of Governors of the Federal Reserve
      System, governing reserves to be maintained against deposits and other matters.
      The Office of Thrift Supervision examines Colonial Bank, FSB and prepares
      reports for the consideration of its Board of Directors on any operating
      deficiencies. Colonial Bank, FSB’s relationship with its depositors and
      borrowers also is regulated to a great extent by both federal and state laws,
      especially in matters concerning the ownership of deposit accounts and the
      form
      and content of Colonial Bank, FSB’s mortgage documents.




Any
      change in these laws or regulations, whether by the Federal Deposit Insurance
      Corporation, the Office of Thrift Supervision or Congress, could have a material
      adverse impact on Colonial Bankshares, Inc. and Colonial Bank, FSB and their
      operations.




**Federal
      Banking Regulation**




***Business
      Activities.*** A
      federal
      savings bank derives its lending and investment powers from the Home Owners’
Loan Act, as amended, and the regulations of the Office of Thrift Supervision.
      Under these laws and regulations, Colonial Bank, FSB may invest in mortgage
      loans secured by residential real estate without limitations as a percentage
      of
      assets and non-residential real estate loans which may not in the aggregate
      exceed 400% of capital, commercial business loans up to 20% of assets in the
      aggregate and consumer loans up to 35% of assets in the aggregate, certain
      types
      of debt securities and certain other assets. Colonial Bank, FSB also may
      establish subsidiaries that may engage in activities not otherwise permissible
      for Colonial Bank, FSB directly including real estate investment, and securities
      and insurance brokerage.




***Capital
      Requirements.*** Office
      of Thrift Supervision regulations require savings banks to meet three minimum
      capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for
      savings banks receiving the highest rating on the CAMELS rating system), and
      an
      8% risk-based capital ratio. The prompt corrective action standards discussed
      below, in effect, establish a minimum 2% tangible capital standard.




The
      risk-based capital standard for savings banks requires the maintenance of
      Tier 1 (core) and total capital (which is defined as core capital and
      supplementary capital) to risk-weighted assets of at least 4% and 8%,
      respectively. In determining the amount of risk-weighted assets, all assets,
      including certain off-balance sheet assets, are multiplied by a risk-weight
      factor of 0% to 100%, assigned by the Office of Thrift Supervision, based on
      the
      risks believed inherent in the type of asset. Core capital is defined as common
      stockholders’ equity (including retained earnings), certain noncumulative
      perpetual preferred stock and related surplus and minority interests in equity
      accounts of consolidated subsidiaries, less intangibles other than certain
      mortgage servicing rights and credit card relationships. The components of
      supplementary capital currently include cumulative preferred stock, long-term
      perpetual preferred stock, mandatory convertible securities, subordinated debt
      and intermediate preferred stock, the allowance for loan and lease losses
      limited to a maximum of 1.25% of risk-weighted assets and up to 46% of net
      unrealized gains on available-for-sale equity securities with readily
      determinable fair market values. Overall, the amount of supplementary capital
      included as part of total capital cannot exceed 100% of core capital.
      Additionally, a savings bank that retains credit risk in connection with an
      asset sale may be required to maintain additional regulatory capital because
      of
      the recourse back to the savings bank. Colonial Bank, FSB does not typically
      engage in asset sales.




23




At
      December 31, 2006, Colonial Bank, FSB’s capital exceeded all applicable
      requirements.




***Loans
      to One Borrower.*** **** A
      federal savings bank generally may not make a loan or extend credit to a single
      or related group of borrowers in excess of 15% of unimpaired capital and
      surplus. An additional amount may be loaned, equal to 10% of unimpaired capital
      and surplus, if the loan is secured by readily marketable collateral, which
      generally does not include real estate. As of December 31, 2006, Colonial Bank,
      FSB was in compliance with the loans-to-one-borrower limitations.




***Qualified
      Thrift Lender Test.*** **** As
      a
      federal savings bank, Colonial Bank, FSB must satisfy the qualified thrift
      lender, or “QTL,” test. Under the QTL test, Colonial Bank, FSB must maintain at
      least 65% of its “portfolio assets” in “qualified thrift investments” (primarily
      residential mortgages and related investments including mortgage-backed
      securities) in at least nine of the most recent 12-month period. “Portfolio
      assets” generally means total assets of a savings institution, less the sum of
      specified liquid assets up to 20% of total assets, goodwill and other intangible
      assets, and the value of property used in the conduct of the savings bank’s
      business.




Colonial
      Bank, FSB also may satisfy the QTL test by qualifying as a “domestic building
      and loan association” as defined in the Internal Revenue Code.




A
      savings
      bank that fails the qualified thrift lender test must either convert to a bank
      charter or operate under specified restrictions. At December 31, 2006, Colonial
      Bank, FSB held 79.43% of its “portfolio assets” in “qualified thrift
      investments,” and satisfied this test.




***Capital
      Distributions.*******Office
      of
      Thrift Supervision regulations govern capital distributions by a federal savings
      bank, which include cash dividends, stock repurchases and other transactions
      charged to the capital account. A savings bank must file an application for
      approval of a capital distribution if:




·
            the
                total capital distributions for the applicable calendar year exceed
                the
                sum of the association’s net income for that year to date plus the
                association’s retained net income for the preceding two years;




·
            the
                association would not be at least adequately capitalized following
                the
                distribution;




·
            the
                distribution would violate any applicable statute, regulation, agreement
                or Office of Thrift Supervision-imposed condition; or




·
            the
                association is not eligible for expedited treatment of its
                filings.




Even
      if
      an application is not otherwise required, every savings bank that is a
      subsidiary of a holding company must still file a notice with the Office of
      Thrift Supervision at least 30 days before the Board of Directors declares
      a
      dividend or approves a capital distribution.




The
      Office of Thrift Supervision may disapprove a notice or application
      if:




·
            the
                association would be undercapitalized following the
                distribution;




·
            the
                proposed capital distribution raises safety and soundness concerns;
                or




·
            the
                capital distribution would violate a prohibition contained in any
                statute,
                regulation or agreement.




24




In
      addition, the Federal Deposit Insurance Act provides that an insured depository
      institution shall not make any capital distribution, if after making such
      distribution the institution would be undercapitalized.




***Liquidity.*** A
      federal savings bank is required to maintain a sufficient amount of liquid
      assets to ensure its safe and sound operation.




***Community
      Reinvestment Act and Fair Lending Laws.*** All
      savings banks have a responsibility under the Community Reinvestment Act and
      related regulations of the Office of Thrift Supervision to help meet the credit
      needs of their communities, including low- and moderate-income neighborhoods.
      In
      connection with its examination of a federal savings bank, the Office of Thrift
      Supervision is required to assess the association’s record of compliance with
      the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act
      and the Fair Housing Act prohibit lenders from discriminating in their lending
      practices on the basis of characteristics specified in those statutes. A savings
      bank’s failure to comply with the provisions of the Community Reinvestment Act
      could, at a minimum, result in denial of certain corporate applications such
      as
      branches or mergers, or in restrictions on its activities. The failure to comply
      with the Equal Credit Opportunity Act and the Fair Housing Act could result
      in
      enforcement actions by the Office of Thrift Supervision, as well as other
      federal regulatory agencies and the Department of Justice. Colonial Bank, FSB
      received a “satisfactory” Community Reinvestment Act rating in its most recent
      federal examination.




***Privacy
      Standards.*** Financial institutions, including Colonial Bank, FSB, are subject to Federal
      Deposit Insurance Corporation regulations implementing the privacy protection
      provisions of the Gramm-Leach-Bliley Act. These regulations require Colonial
      Bank, FSB to disclose its privacy policy, including identifying with whom it
      shares “non-public personnel information” to customers at the time of
      establishing the customer relationship and annually thereafter.




The
      regulations also require Colonial Bank, FSB to provide its customers with
      initial and annual notices that accurately reflect its privacy policies and
      practices. In addition, Colonial Bank, FSB is required to provide its customers
      with the ability to “opt-out” of having Colonial Bank, FSB share their
      non-public personal information with unaffiliated third parties before it can
      disclose such information, subject to certain exceptions. The implementation
      of
      these regulations did not have a material adverse effect on Colonial Bank,
      FSB.
      The Gramm-Leach-Bliley Act also provides for the ability of each state to enact
      legislation that is more protective of consumers’ personal information. We
      cannot predict whether New Jersey may enact such legislation or what impact,
      if
      any, it would have if enacted.




The
      Federal Deposit Insurance Corporation and other federal banking agencies have
      adopted guidelines establishing standards for safeguarding customer information
      to implement certain provisions of the Gramm-Leach-Bliley Act. The guidelines
      describe the agencies’ expectations for the creation, implementation and
      maintenance of an information security program, which would include
      administrative, technical and physical safeguards appropriate to the size and
      complexity of the institution and the nature and scope of its activities. The
      standards set forth in the guidelines are intended to insure the security and
      confidentiality of customer records and information, protect against any
      anticipated threats or hazards to the security or integrity of such records
      and
      protect against unauthorized access to or use of such records or information
      that could result in substantial harm or inconvenience to any customer. Colonial
      Bank, FSB has implemented these guidelines and such implementation did not
      have
      a material adverse effect on our operations.




***Transactions
      with Related Parties.*** A
      federal savings bank’s authority to engage in transactions with its affiliates
      is limited by Office of Thrift Supervision regulations and by Sections 23A
      and
      23B of the Federal Reserve Act and its implementing Regulation W. An affiliate
      is a company that controls, is controlled by, or is under common control with
      an
      insured depository institution such as Colonial Bank, FSB. Colonial Bankshares,
      Inc. is an affiliate of Colonial Bank, FSB. In general, loan transactions
      between an insured depository institution and its affiliate are subject to
      certain quantitative and collateral requirements. In this regard, transactions
      between an insured depository institution and its affiliate are limited to
      10%
      of the institution’s unimpaired capital and unimpaired surplus for transactions
      with any one affiliate and 20% of unimpaired capital and unimpaired surplus
      for
      transactions in the aggregate with all affiliates. Collateral in specified
      amounts ranging from 100% to 130% of the amount of the transaction must usually
      be provided by affiliates in order to receive loans from the savings bank.
      In
      addition, Office of Thrift Supervision regulations prohibit a savings bank
      from
      lending to any of its affiliates that are engaged in activities that are not
      permissible for bank holding companies and from purchasing the securities of
      any
      affiliate, other than a subsidiary. Finally, transactions with affiliates must
      be consistent with safe and sound banking practices, not involve low-quality
      assets and be on terms that are as favorable to the institution as comparable
      transactions with non-affiliates. The Office of Thrift Supervision requires
      savings banks to maintain detailed records of all transactions with
      affiliates.




25




Colonial
      Bank, FSB’s authority to extend credit to its directors, executive officers and
      10% shareholders, as well as to entities controlled by such persons, is
      currently governed by the requirements of Sections 22(g) and 22(h) of the
      FRA and Regulation O of the Federal Reserve Board. Among other things, these
      provisions require that extensions of credit to insiders (i) be made on terms
      that are substantially the same as, and follow credit underwriting procedures
      that are not less stringent than, those prevailing for comparable transactions
      with unaffiliated persons and that do not involve more than the normal risk
      of
      repayment or present other unfavorable features, and (ii) not exceed certain
      limitations on the amount of credit extended to such persons, individually
      and
      in the aggregate, which limits are based, in part, on the amount of Colonial
      Bank, FSB’s capital. In addition, extensions of credit in excess of certain
      limits must be approved by Colonial Bank, FSB’s Board of Directors.




***Enforcement.*** The
      Office of Thrift Supervision has primary enforcement responsibility over federal
      savings institutions and has the authority to bring enforcement action against
      all “institution-affiliated parties,” including stockholders, and attorneys,
      appraisers and accountants who knowingly or recklessly participate in wrongful
      action likely to have an adverse effect on an insured institution. Formal
      enforcement action by the Office of Thrift Supervision may range from the
      issuance of a capital directive or cease and desist order, to removal of
      officers and/or directors of the institution and the appointment of a receiver
      or conservator. Civil penalties cover a wide range of violations and actions,
      and range up to $25,000 per day, unless a finding of reckless disregard is
      made,
      in which case penalties may be as high as $1 million per day. The Federal
      Deposit Insurance Corporation also has the authority to terminate deposit
      insurance or to recommend to the Director of the Office of Thrift Supervision
      that enforcement action be taken with respect to a particular savings
      institution. If action is not taken by the Director, the Federal Deposit
      Insurance Corporation has authority to take action under specified
      circumstances.




***Standards
      for Safety and Soundness.*** Federal
      law requires each federal banking agency to prescribe certain standards for
      all
      insured depository institutions. These standards relate to, among other things,
      internal controls, information systems and audit systems, loan documentation,
      credit underwriting, interest rate risk exposure, asset growth, compensation,
      and other operational and managerial standards as the agency deems appropriate.
      The federal banking agencies adopted Interagency Guidelines Prescribing
      Standards for Safety and Soundness to implement the safety and soundness
      standards required under federal law. The guidelines set forth the safety and
      soundness standards that the federal banking agencies use to identify and
      address problems at insured depository institutions before capital becomes
      impaired. The guidelines address internal controls and information systems,
      internal audit systems, credit underwriting, loan documentation, interest rate
      risk exposure, asset growth, compensation, fees and benefits. If the appropriate
      federal banking agency determines that an institution fails to meet any standard
      prescribed by the guidelines, the agency may require the institution to submit
      to the agency an acceptable plan to achieve compliance with the standard. If
      an
      institution fails to meet these standards, the appropriate federal banking
      agency may require the institution to submit a compliance plan.




***Prompt
      Corrective Action Regulations*** **.** Under
      the prompt corrective action regulations, the Office of Thrift Supervision
      is
      required and authorized to take supervisory actions against undercapitalized
      savings banks. For this purpose, a savings bank is placed in one of the
      following five categories based on the association’s capital:




·
            well-capitalized
                (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10%
                total risk-based capital);




·
            adequately
                capitalized (at least 4% leverage capital, 4% Tier 1 risk-based
                capital and 8% total risk-based capital);




·
            undercapitalized
                (less than 8% total risk-based capital, 4% Tier 1 risk-based capital
                or 3% leverage capital);






26




·
            significantly
                undercapitalized (less than 6% total risk-based capital, 3% Tier 1
                risk-based capital or 3% leverage capital);
                and




·
            critically
                undercapitalized (less than 2% tangible
                capital).




Generally,
      a banking regulator is required to appoint a receiver or conservator for an
      association that is “critically undercapitalized” within specific time frames.
      The regulations also provide that a capital restoration plan must be filed
      with
      the Office of Thrift Supervision within 45 days of the date an association
      receives notice that it is “undercapitalized,” “significantly undercapitalized”
or “critically undercapitalized.” The criteria for an acceptable capital
      restoration plan include, among other things, the establishment of the
      methodology and assumptions for attaining adequately capitalized status on
      an
      annual basis, procedures for ensuring compliance with restrictions imposed
      by
      applicable federal regulations, the identification of the types and levels
      of
      activities the savings bank will engage in while the capital restoration plan
      is
      in effect, and assurances that the capital restoration plan will not appreciably
      increase the current risk profile of the savings bank. Any holding company
      for
      the savings bank required to submit a capital restoration plan must guarantee
      the lesser of: an amount equal to 5% of the savings bank’s assets at the time it
      was notified or deemed to be undercapitalized by the Office of Thrift
      Supervision, or the amount necessary to restore the savings bank to adequately
      capitalized status. This guarantee remains in place until the Office of Thrift
      Supervision notifies the savings bank that it has maintained adequately
      capitalized status for each of four consecutive calendar quarters, and the
      Office of Thrift Supervision has the authority to require payment and collect
      payment under the guarantee. Failure by a holding company to provide the
      required guarantee will result in certain operating restrictions on the savings
      bank, such as restrictions on the ability to declare and pay dividends, pay
      executive compensation and management fees, and increase assets or expand
      operations. **** The
      Office of Thrift Supervision may also take any one of a number of discretionary
      supervisory actions against undercapitalized associations, including the
      issuance of a capital directive and the replacement of senior executive officers
      and directors.




At
      December 31, 2006, Colonial Bank, FSB met the criteria for being considered
      “well-capitalized.”




***Insurance
      of Deposit Accounts.*** ** Deposit
      accounts in Colonial Bank, FSB are insured by the Federal Deposit Insurance
      Corporation, generally up to a maximum of $100,000 per separately insured
      depositor and up to a maximum of $250,000 for self-directed retirement accounts.
      Colonial Bank, FSB’s deposits, therefore, are subject to Federal Deposit
      Insurance Corporation deposit insurance assessments. The Federal Deposit
      Insurance Corporation has adopted a risk-based system for determining deposit
      insurance assessments. The Federal Deposit Insurance Corporation is authorized
      to raise the assessment rates as necessary to maintain the required ratio of
      reserves to insured deposits of 1.25%. In addition, all Federal Deposit
      Insurance Corporation-insured institutions must pay assessments to the Federal
      Deposit Insurance Corporation at an annual rate of approximately 0.0144% of
      insured deposits to fund interest payments on bonds maturing in 2017 issued
      by a
      federal agency to recapitalize the predecessor to the Savings Association
      Insurance Fund.




On
      February 15, 2006, federal legislation to reform federal deposit insurance
      was
      signed into law. This new legislation required, among other things, the merger
      of the Savings Association Insurance Fund (“SAIF”) and the Bank Insurance Fund
      (“BIF”) into a unified insurance deposit fund, an increase in the amount of
      federal deposit insurance coverage per separately insured depositor (with a
      cost
      of living adjustment to become effective in five years), and the reserve ratio
      to be modified to provide for a range between 1.15% and 1.40% of estimated
      insured deposits. The new legislation requires the FDIC to issue regulations
      implementing the law and changes required by the law will not be effective
      until
      final regulations have been issued.




Effective
      March 31, 2006, the Federal Deposit Insurance Corporation merged the BIF and
      the
      SAIF into a single insurance fund called the Deposit Insurance Fund. As a result
      of the merger, the BIF and SAIF were abolished. The merger of the BIF and SAIF
      into the Deposit Insurance Fund does not affect the authority of the Financing
      Corporation (“FICO”) to impose and collect, with approval of the Federal Deposit
      Insurance Corporation, assessments for anticipated payments, insurance costs
      and
      custodial fees on bonds issued by the FICO in the 1980s to recapitalize the
      Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO
      are
      due to mature in 2017 through 2019. For the quarter ended December 31, 2006,
      the
      FICO assessment was equal to 1.24 basis points for each $100 in domestic
      deposits maintained at an institution.




27




On
      November 2, 2006, the Federal Deposit Insurance Corporation adopted final
      regulations establishing a risk-based assessment system that will enable the
      Federal Deposit Insurance Corporation to more closely tie each financial
      institution’s premiums to the risk it poses to the deposit insurance fund. Under
      the new risk-based assessment system, which becomes effective in the beginning
      of 2007, the Federal Deposit Insurance Corporation will evaluate the risk of
      each financial institution based on three primary sources of information: (1)
      its supervisory rating, (2) its financial ratios, and (3) its long-term debt
      issuer rating, if the institution has one. The new rates for nearly all of
      the
      financial institution industry will vary between five and seven cents for every
      $100 of domestic deposits. At the same time, the Federal Deposit Insurance
      Corporation also adopted final regulations designating the reserve ratio for
      the
      deposit insurance fund during 2007 at 1.25% of estimated insured
      deposits.




***Prohibitions
      Against Tying Arrangements*** **.** Federal
      savings banks are prohibited, subject to some exceptions, from extending credit
      to or offering any other service, or fixing or varying the consideration for
      such extension of credit or service, on the condition that the customer obtain
      some additional service from the institution or its affiliates or not obtain
      services of a competitor of the institution.




***Federal
      Home Loan Bank System.*** Colonial
      Bank, FSB is a member of the Federal Home Loan Bank System, which consists
      of 12
      regional Federal Home Loan Banks. The Federal Home Loan Bank System provides
      a
      central credit facility primarily for member institutions. As a member of the
      Federal Home Loan Bank of New York, Colonial Bank, FSB is required to acquire
      and hold shares of capital stock in the Federal Home Loan Bank. Currently,
      the
      capital stock requirement is comprised of: 1) Membership Stock, which equals
      0.20% of Colonial
      Bank FSB’s mortgage-related assets as of December 31, 2006 and 2) Activity-Based
      Stock, which equals 4.5% of outstanding borrowings from the Federal Home Loan
      Bank. As of December 31, 2006, Colonial Bank, FSB was in compliance with this
      requirement.




**Federal
      Reserve System**




The
      Federal Reserve Board regulations require savings banks to maintain
      noninterest-earning reserves against their transaction accounts, such as
      negotiable order of withdrawal and regular checking accounts. At December 31,
      2006, Colonial Bank, FSB was in compliance with these reserve
      requirements.




**Internet
      Banking**




Technological
      developments are significantly altering the ways in which most companies,
      including financial institutions, conduct their business. The growth of the
      Internet is prompting banks to reconsider business strategies and adopt
      alternative distribution and marketing systems. The federal bank regulatory
      agencies have conducted seminars and published materials targeted to various
      aspects of internet banking, and have indicated their intention to reevaluate
      their regulations to ensure that they encourage banks’ efficiency and
      competitiveness consistent with safe and sound banking practices. We cannot
      assure you that the bank regulatory agencies will adopt new regulations that
      will not materially affect any of our internet operations or restrict any such
      further operations.




**The
      USA PATRIOT Act**




The
      USA
      Patriot Act was signed into law on October 26, 2001. The USA Patriot Act gives
      the federal government new powers to address terrorist threats through enhanced
      domestic security measures, expanded surveillance powers, increased information
      sharing and broadened anti-money laundering requirements. The USA Patriot Act
      also requires the federal banking agencies to take into consideration the
      effectiveness of controls designed to combat money laundering activities in
      determining whether to approve a merger or other acquisition application of
      a
      member institution. Accordingly, if we engage in a merger or other acquisition,
      our controls designed to combat money laundering would be considered as part
      of
      the application process. We have established policies, procedures and systems
      designed to comply with these regulations.




**Sarbanes-Oxley
      Act of 2002**




The
      Sarbanes-Oxley Act of 2002 was enacted to address, among other issues, corporate
      governance, auditing and accounting, executive compensation, and enhanced and
      timely disclosure of corporate information. Under Section 302(a) of the
      Sarbanes-Oxley Act, the Chief Executive Officer and Chief Financial Officer
      of
      Colonial Bankshares, Inc. are required to certify that its quarterly and annual
      reports filed with the Securities and Exchange Commission do not contain any
      untrue statement of a material fact. Rules promulgated under the Sarbanes-Oxley
      Act require that these officers certify that: they are responsible for
      establishing, maintaining and regularly evaluating the effectiveness of our
      internal controls; they have made certain disclosures to our auditors and the
      audit committee of the Board of Directors about our internal controls; and
      they
      have included information in our quarterly and annual reports about their
      evaluation and whether there have been significant changes in our internal
      controls or in other factors that could significantly affect internal controls.
      Colonial Bankshares, Inc. is subject to additional reporting and audit
      requirements beginning with the year ending December 31, 2007 under the
      Sarbanes-Oxley Act. Colonial Bankshares, Inc. has existing policies, procedures
      and systems designed to comply with these regulations, and is further enhancing
      and documenting such policies, procedures and systems to ensure continued
      compliance with these regulations.




28




**Holding
      Company Regulation**




***General*** .
      Colonial Bankshares, MHC and Colonial Bankshares, Inc. are non-diversified
      savings and loan holding companies within the meaning of the Home Owners’ Loan
      Act. As such, Colonial Bankshares, MHC and Colonial Bankshares, Inc. are
      registered with the Office of Thrift Supervision and are subject to Office
      of
      Thrift Supervision regulations, examinations ,
      supervision and reporting requirements. In addition, the Office of Thrift
      Supervision has enforcement authority over Colonial Bankshares, Inc. and
      Colonial Bankshares, MHC, and their subsidiaries. Among other things, this
      authority permits the Office of Thrift Supervision to restrict or prohibit
      activities that are determined to be a serious risk to the subsidiary savings
      institution. As federal corporations, Colonial Bankshares, Inc. and Colonial
      Bankshares, MHC are generally not subject to state business organization
      laws.




***Permitted
      Activities*** .
      Pursuant to Section 10(o) of the Home Owners’ Loan Act and Office of Thrift
      Supervision regulations and policy, a mutual holding company and a federally
      chartered mid-tier holding company such as Colonial Bankshares, Inc. may engage
      in the following activities:




(i)
            investing
                in the stock of a savings bank;




(ii)
            acquiring
                a mutual association through the merger of such association into
                a savings
                bank subsidiary of such holding company or an interim savings bank
                subsidiary of such holding company;




(iii)
            merging
                with or acquiring another holding company, one of whose subsidiaries
                is a
                savings bank;




(iv)
            investing
                in a corporation, the capital stock of which is available for purchase
                by
                a savings bank under federal law or under the law of any state where
                the
                subsidiary savings bank or associations share their home offices;




(v)
            furnishing
                or performing management services for a savings bank subsidiary of
                such
                company;




(vi)
            holding,
                managing or liquidating assets owned or acquired from a savings subsidiary
                of such company;




(vii)
            holding
                or managing properties used or occupied by a savings bank subsidiary
                of
                such company;




(viii)
            acting
                as trustee under deeds of trust;




(ix)
            any
                other activity:




(A)
            that
                the Federal Reserve Board, by regulation, has determined to be permissible
                for bank holding companies under Section 4(c) of the Bank Holding
                Company
                Act of 1956, unless the Director, by regulation, prohibits or limits
                any
                such activity for savings and loan holding companies; or




29




(B)
            in
                which multiple savings and loan holding companies were authorized
                (by
                regulation) to directly engage on March 5,
                1987;




(x)
            any
                activity permissible for financial holding companies under Section
                4(k) of
                the Bank Holding Company Act, including securities and insurance
                underwriting; and




(xi)
            purchasing,
                holding, or disposing of stock acquired in connection with a qualified
                stock issuance if the purchase of such stock by such savings and
                loan
                holding company is approved by the Director. If a mutual holding
                company
                acquires or merges with another holding company, the holding company
                acquired or the holding company resulting from such merger or acquisition
                may only invest in assets and engage in activities listed in (i)
                through
                (x) above, and has a period of two years to cease any nonconforming
                activities and divest any nonconforming
                investments.




The
      Home
      Owners’ Loan Act prohibits a savings and loan holding company, including
      Colonial Bankshares, Inc. and Colonial Bankshares, MHC, directly or indirectly,
      or through one or more subsidiaries, from acquiring more than 5% of another
      savings institution or holding company thereof, without prior written approval
      of the Office of Thrift Supervision. It also prohibits the acquisition or
      retention of, with certain exceptions, more than 5% of a nonsubsidiary company
      engaged in activities other than those permitted by the Home Owners’ Loan Act,
      or acquiring or retaining control of an institution that is not federally
      insured. In evaluating applications by holding companies to acquire savings
      institutions, the Office of Thrift Supervision must consider the financial
      and
      managerial resources, future prospects of the company and institution involved,
      the effect of the acquisition on the risk to the federal deposit insurance
      fund,
      the convenience and needs of the community and competitive factors.




The
      Office of Thrift Supervision is prohibited from approving any acquisition that
      would result in a multiple savings and loan holding company controlling savings
      institutions in more than one state, subject to two exceptions:




(i)
            the
                approval of interstate supervisory acquisitions by savings and loan
                holding companies; and




(ii)
            the
                acquisition of a savings institution in another state if the laws
                of the
                state of the target savings institution specifically permit such
                acquisitions. The states vary in the extent to which they permit
                interstate savings and loan holding company
                acquisitions.




***Waivers
      of Dividends by Colonial Bankshares, MHC*** .
      Office
      of Thrift Supervision regulations require Colonial Bankshares, MHC to notify
      the
      Office of Thrift Supervision of any proposed waiver of its receipt of dividends
      from Colonial Bankshares, Inc. The Office of Thrift Supervision reviews dividend
      waiver notices on a case-by-case basis, and, in general, does not object to
      any
      such waiver if:




(i)
            the
                waiver would not be detrimental to the safe and sound operation of
                the
                subsidiary savings association; and




(ii)
            the
                mutual holding company’s Board of Directors determines that such waiver is
                consistent with such directors’ fiduciary duties to the mutual holding
                company’s members.




We
      anticipate that Colonial Bankshares, MHC will waive any dividends paid by
      Colonial Bankshares, Inc. Under Office of Thrift Supervision regulations, our
      public stockholders would not be diluted because of any dividends waived by
      Colonial Bankshares, MHC (and waived dividends would not be considered in
      determining an appropriate exchange ratio) in the event Colonial Bankshares,
      MHC
      converts to stock form.




30




***Conversion
      of Colonial Bankshares, MHC to Stock Form*** .
      Office
      of Thrift Supervision regulations permit Colonial Bankshares, MHC to convert
      from the mutual form of organization to the capital stock form of organization
      (a “Conversion Transaction”). There can be no assurance when, if ever, a
      Conversion Transaction will occur, and the Board of Directors has no current
      intention or plan to undertake a Conversion Transaction. In a Conversion
      Transaction a new stock holding company would be formed as the successor to
      Colonial Bankshares, Inc. (the “New Holding Company”), Colonial Bankshares,
      MHC’s corporate existence would end, and certain depositors and borrowers of
      Colonial Bank, FSB would receive the right to subscribe for additional shares
      of
      the New Holding Company. In a Conversion Transaction, each share of common
      stock
      held by stockholders other than Colonial Bankshares, MHC (“Minority
      Stockholders”) would be automatically converted into a number of shares of
      common stock of the New Holding Company determined pursuant an exchange ratio
      that ensures that Minority Stockholders own the same percentage of common stock
      in the New Holding Company as they owned in Colonial Bankshares, Inc.
      immediately prior to the Conversion Transaction. Under Office of Thrift
      Supervision regulations, Minority Stockholders would not be diluted because
      of
      any dividends waived by Colonial Bankshares, MHC (and waived dividends would
      not
      be considered in determining an appropriate exchange ratio), in the event
      Colonial Bankshares, MHC converts to stock form. The total number of shares
      held
      by Minority Stockholders after a Conversion Transaction also would be increased
      by any purchases by Minority Stockholders in the offering conducted as part
      of
      the Conversion Transaction.




Any
      Conversion Transaction would require the approval of a majority of the
      outstanding shares of common stock of Colonial Bankshares, Inc. held by Minority
      Stockholders and by two thirds of the total outstanding shares of common stock
      of Colonial Bankshares, Inc. Any second-step conversion transaction also would
      require the approval of a majority of the eligible votes of members of Colonial
      Bankshares, MHC.




**Federal
      Securities Laws**




Colonial
      Bankshares, Inc. common stock is registered with the Securities and Exchange
      Commission under the Securities Exchange Act of 1934. Colonial Bankshares,
      Inc.
      is subject to the information, proxy solicitation, insider trading restrictions
      and other requirements under the Securities Exchange Act of 1934.




The
      registration under the Securities Act of 1933 of shares of common stock issued
      in the offering does not cover the resale of those shares. Shares of common
      stock purchased by persons who are not affiliates of Colonial Bankshares, Inc.
      may be resold without registration. Shares purchased by an affiliate of Colonial
      Bankshares, Inc. are subject to the resale restrictions of Rule 144 under the
      Securities Act of 1933. If we meet the current public information requirements
      of Rule 144 under the Securities Act of 1933, each affiliate of Colonial
      Bankshares, Inc. that complies with the other conditions of Rule 144, including
      those that require the affiliate’s sale to be aggregated with those of other
      persons, would be able to sell in the public market, without registration,
      a
      number of shares not to exceed, in any three-month period, the greater of 1%
      of
      our outstanding shares, or the average weekly volume of trading in the shares
      during the preceding four calendar weeks. In the future, we may permit
      affiliates to have their shares registered for sale under the Securities Act
      of
      1933.




31




**ITEM
              2.**
            **Description
                of Property**




The
      following table provides certain information with respect to our six banking
      offices as of December 31, 2006:




**Location**
            
            **Owned
                or Leased**
            
            **Net
                Book Value of Real Property****(In
                thousands)****Main
                Office:**85
                West Broad Street
              Bridgeton,
                New Jersey 08302
            
            
            Owned
            
            $
            351**Branch
                Offices:**1107
                North High Street
              Millville,
                New Jersey 08332
            
            
            Owned
            
            $
            316227
                Bridgeton Pike
              Mantua,
                New Jersey 08051
            
            
            Owned
            
            $
            511Route
                77 and Big Oak Road
              Upper
                Deerfield Township, New Jersey 08302
            
            
            Owned
            
            $
            4161771
                South Lincoln Avenue
              Vineland,
                New Jersey 08361
            
            
            Owned
            
            $
            338271
                Lambs Road
              Sewell,
                New Jersey 08080
            
            
            Owned
            
            $
            308





In
      addition, we have begun construction on a new administrative
      headquarters/full-service office in Vineland, New Jersey. We have budgeted
      approximately $6.3 million for the construction of this new banking facilities,
      for which we have already spent $4.3 million, including the cost of land, as
      of
      December 31, 2006. We cannot assure you that construction and other costs will
      not exceed this budget estimate. We anticipate opening the administrative
      headquarters in the first half of 2007. We have
      also spent $269 thousand for the acquisition of land in Buena Township as a
      possible branch location.




The
      net
      book value of our premises, land and equipment was approximately $7.3 million
      at
      December 31, 2006.




In
      January 2007, the Company purchased land in Harrison Township, New Jersey as
      a
      possible branch location. The cost of the land was $984 thousand.




For
      information regarding the Company’s investment in mortgages and mortgage-related
      securities, see “Item 1. Business” herein.




**ITEM
              3.**
            **Legal
                Proceedings**




From
      time
      to time, we are involved as plaintiff or defendant in various legal proceedings
      arising in the ordinary course of business. At December 31, 2006, we were not
      involved in any legal proceedings, the outcome of which would be material to
      our
      financial condition or results of operations.




**ITEM
              4.**
            **Submission
                of Matters to a Vote of Security
                Holders**




No
      matters were submitted to a vote of stockholders during the fourth quarter
      of
      the year under report.




32




**PART
      II**




**ITEM
              5.**
            **Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of
                Securities**




(a)
            Reference
                is made to the “Market for Common Stock” section of Colonial Bankshares’
                2006 Annual Report to Stockholders, which is incorporated herein
                by
                reference.




(b)
            Not
                applicable.




(c)
            Purchases
                of Equity Securities




The
      Company’s repurchases of its common stock made during the quarter are set forth
      in the following table:




**Total
                Number of**
              **Shares
                Purchased**
            ****
            **Average
                Price Paid Per Share**
            ****
            **Total
                Number of Shares Purchased as Part of Publicly Announced
                Plan**
            ****
            **Maximum
                Number of Shares That May Yet be Purchased Under Publicly Announced
                Plan**October
                1 - October 31, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            88,625November
                1 - November 30, 2006
            
            
            88,625
            
            
            13.42
            
            
            88,625
            
            
            —December
                1 - December 31, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            
            88,625
            
            
            13.42
            
            
            88,625
            
            
            —




**ITEM
              6.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations**




The
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” section of Colonial Bankshares’ 2006 Annual Report to Stockholders
      is incorporated herein by reference.




**ITEM
              7.**
            **Financial
                Statements**




The
      consolidated financial statements included in Colonial Bankshares’ 2006 Annual
      Report to Stockholders are incorporated herein by reference. (See Exhibit 13)




**ITEM
              8.**
            **Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure**




None.




**ITEM
              8A.**
            **Controls
                and Procedures**




Under
      the
      supervision and with the participation of our management, including our
      Principal Executive Officer and Principal Financial Officer, we evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
      of
      1934) as of the end of the period covered by this report. Based upon that
      evaluation, the Principal Executive Officer and Principal Financial Officer
      concluded that, as of the end of the period covered by this report, our
      disclosure controls and procedures were effective to ensure that information
      required to be disclosed in the reports that the Company files or submits under
      the Securities Exchange Act of 1934, is recorded, processed, summarized and
      reported, within the time periods specified in the SEC’s rules and forms. There
      has been no change in the Company’s internal control over financial reporting
      during the Company’s fourth quarter of fiscal year 2006 that has materially
      affected, or is reasonably likely to materially affect, the Company’s internal
      control over financial reporting.




33




**ITEM
              8B.**
            **Other
                Information**




None.




**PART
      III**




**ITEM
              9.**
            **Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section
                16(a) of the Exchange
                Act**




Colonial
      Bankshares has adopted a Code of Ethics that applies to Colonial Bankshares’
principal executive officer, principal financial officer, principal accounting
      officer or controller or persons performing similar functions. The Code of
      Ethics is incorporated by reference to Exhibit 14 to the Annual Report on Form
      10-KSB for the year ended December 31, 2005, as originally filed with the
      Securities and Exchange Commission on March 30, 2006. A copy of the Code will
      be
      furnished without charge upon written request to the Secretary, Colonial
      Bankshares, Inc., 85 West Broad Street, Bridgeton, NJ 08302.




The
      information contained under the sections captioned “Proposal I - Election of
      Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the
      Company’s definitive Proxy Statement for the 2007 Annual Meeting of Stockholders
      is incorporated herein by reference.




**ITEM
              10.**
            **Executive
                Compensation**




The
      information contained under the section captioned “Executive Compensation” in
      the definitive Proxy Statement is incorporated herein by reference.




**ITEM
              11.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters**




(a)
            Security
                Ownership of Certain Beneficial
                Owners





The
      information required by this item is incorporated herein by reference to the
      section captioned “Voting Securities and Principal Holders” in the Proxy
      Statement.





(b)
            Security
                Ownership of Management





The
      information required by this item is incorporated herein by reference to the
      section captioned “Proposal I - Election of Directors” in the Proxy
      Statement.





(c)
            Changes
                in Control





Management
      of the Company know of no arrangements, including any pledge by any person
      of
      securities of the Company, the operation of which may at a subsequent date
      result in a change in control of the registrant.





34




(d)
            Securities
                Authorized for issuance Under Stock-Based Compensation
                Plans





Set
      forth
      below is information as of December 31, 2006 with respect to compensation plans
      under which equity securities of the Registrant are authorized for
      issuance.




STOCK-BASED
                COMPENSATION PLAN INFORMATION**Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            ****
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            ****
            **Number
                of securities remaining available for future issuance under stock-based
                compensation plans (excluding securities reflected in first
                column)**Stock-based
                compensation plans approved by stockholders
            
            
            285,093
            
            $
            12.47
            
            
            25,095Stock-based
                compensation plans not approved by stockholders
            
            
            N/A
            
            
            N/A
            
            
            N/ATotal
            
            
            285,093
            
            $
            12.47
            
            
            25,095








**ITEM
              12.**
            **Certain
                Relationships and Related
                Transactions**




The
      information required by this item is incorporated herein by reference to the
      section captioned “Proposal I - Election of Directors - Certain Relationships
      and Related Transactions” of the Proxy Statement.







**ITEM
              13.**
            **Exhibits**




3.1
            Charter
                of Colonial Bankshares, Inc. (1)


3.2
            Bylaws
                of Colonial Bankshares, Inc. (1)


4
            Form
                of Common Stock Certificate of Colonial Bankshares, Inc.
                (1)


10.1
            Form
                of Employee Stock Ownership Plan
                (1)


10.2
            Colonial
                Bankshares, Inc. 2006 Stock-Based Incentive Plan
                (2)


10.3
            Form
                of Colonial Bankshares, Inc. 2006 Stock-Based Incentive Plan Stock
                Option
                Agreement (Outside Directors) (3)


10.4
            Form
                of Colonial Bankshares, Inc. 2006 stock-Based Incentive Plan Stock
                Option
                Agreement (Employees) (3)


10.5
            Form
                of Colonial Bankshares, Inc. 2006 Stock-Based Incentive Plan Restricted
                Stock Award Notice (Outside Directors)
                (3)


10.6
            Form
                of Colonial Bankshares, Inc. 2006 Stock-Based Incentive Plan Restricted
                Stock Award Notice (Employees) (3)


10.7
            Employment
                Agreement By and Between Colonial Bank, FSB and Edward J. Geletka
                (4)


10.8
            Employment
                Agreement By and Between Colonial Bank, FSB and L. Joseph Stella,
                III
                (5)


10.9
            Employment
                Agreement By and Between Colonial Bank, FSB and William F. Whelan
                (6)


13
            Portions
                of Annual Report to Stockholders


14
            Code
                of Ethics (7)


21.0
            Subsidiaries
                of Registrant


23.0
            Consent
                of Independent Registered Public Accounting
                Firm


31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
                Exchange Act of 1934, as amended, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002


31.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
                Exchange Act of 1934, as amended, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002




35




32
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002







(1)
            Incorporated
                by reference to the Registration Statement on Form SB-2 of Colonial
                Bankshares (file no. 333-123583), originally filed with the Securities
                and
                Exchange Commission on March 25, 2005.


(2)
            Incorporated
                by reference to the Definitive Proxy Statement for the Annual Meeting
                of
                Stockholders of Colonial Bankshares held July 20, 2006 (file no.
                000-51385), filed with the Securities and Exchange Commission on
                June 15,
                2006.


(3)
            Incorporated
                by reference to the Current Report on Form 8-K of Colonial Bankshares,
                Inc. (file no. 000-51385), filed with the Securities and Exchange
                Commission on October 23, 2006.


(4)
            Incorporated
                by reference to Exhibit 10.5 to the Quarterly Report on Form 10-QSB
                for
                the quarter ended September 30, 2006 of Colonial Bankshares (file
                no.
                000-51385), filed with the Securities and Exchange Commission on
                November
                14, 2006.


(5)
            Incorporated
                by reference to Exhibit 10.6 to the Quarterly Report on Form 10-QSB
                for
                the quarter ended September 30, 2006 of Colonial Bankshares (file
                no.
                000-51385), filed with the Securities and Exchange Commission on
                November
                14, 2006.


(6)
            Incorporated
                by reference to Exhibit 10.7 to the Quarterly Report on Form 10-QSB
                for
                the quarter ended September 30, 2006 of Colonial Bankshares (file
                no.
                000-51385), filed with the Securities and Exchange Commission on
                November
                14, 2006.


(7)
            Incorporated
                by reference to Exhibit 14 to the Annual Report on Form 10-KSB for
                the
                year ended December 31, 2005 of Colonial Bankshares (file no. 000-51385),
                originally filed with the Securities and Exchange Commission on March
                30,
                2006.




**ITEM
              14.**
            **Principal
                Accountant Fees and
                Services**





The
      information required by this item is incorporated herein by reference to the
      section captioned “Proposal II - Ratification of Appointment of Independent
      Registered Public Accounting Firm” in the Proxy Statement.




36


**SIGNATURES**





Pursuant
      to the requirements of Section 13 of the Securities Exchange Act of 1934, the
      Company has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.


**COLONIAL
                BANKSHARES, INC.**Date: March28,
              2007
            By:
            /s/
              Edward J. GeletkaEdward
                J. Geletka
              President,
                Chief Executive Officer and Director
              (Duly
                Authorized Representative)




Pursuant
      to the requirements of the Securities Exchange of 1934, this report has been
      signed by the following persons on behalf of the Registrant and in the
      capacities and
      on
      the dates indicated .





**Signature**
            
            **Title**
            
            Date/s/
                Edward J. Geletka
            
            President,
                Chief Executive
            
            March
                28, 2007Edward
                J. Geletka
            
            Officer and
              Director
              (Principal Executive Officer)/s/
                L. Joseph Stella, III
            
            Executive
                Vice President and
            
            March
                28, 2007L.
                Joseph Stella, III
            
            Chief Financial
              Officer
              (Principal Financial and Accounting Officer)/s/
                Frank M. Hankins
            
            Chairman
                of the Board
            
            March
                28, 2007Frank
                M.Hankins/s/
                Albert A. Fralinger
            
            Vice
                Chairman of the Board
            
            March
                28, 2007Albert
                A. Fralinger/s/
                Richard S. Allen
            
            Director
            
            March
                28, 2007Richard
                S. Allen/s/
                Gregory J. Facemyer
            
            Director
            
            March
                28, 2007Gregory
                J. Facemyer/s/
                John Fitzpatrick
            
            Director
            
            March
                28, 2007John
                Fitzpatrick/s/
                James Quinn
            
            Director
            
            March
                28, 2007James
                Quinn