EXHIBIT
13


PORTIONS
OF ANNUAL REPORT TO STOCKHOLDERS
 
 COLONIAL
BANKSHARES, INC.
  SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA
  The
following information is derived from the audited consolidated financial
statements of Colonial Bankshares, Inc.  For additional information,
reference is made to “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Consolidated Financial Statements
of Colonial Bankshares, Inc. and related notes included elsewhere in this Annual
Report.
  At
      December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(In
      thousands)Selected
      Financial Condition Data:Total
      assets
              
              $
              457,860
              
              
              $
              383,597
              
              
              $
              336,852
              
              
              $
              291,050
              
              
              $
              243,535Cash
      and amounts due from banks
              
              
              15,978
              
              
              
              13,257
              
              
              
              10,669
              
              
              
              5,282
              
              
              
              5,264Investment
      securities held to maturity
              
              
              17,213
              
              
              
              18,722
              
              
              
              17,474
              
              
              
              18,584
              
              
              
              24,598Investment
      securities available for sale
              
              
              163,549
              
              
              
              136,925
              
              
              
              139,256
              
              
              
              131,159
              
              
              
              118,233Loans
      receivable, net
              
              
              241,040
              
              
              
              198,519
              
              
              
              157,774
              
              
              
              125,800
              
              
              
              86,841Deposits
              
              
              371,382
              
              
              
              337,254
              
              
              
              284,725
              
              
              
              259,407
              
              
              
              223,569Borrowings
              
              
              45,939
              
              
              
              8,324
              
              
              
              15,415
              
              
              
              13,890
              
              
              
              4,070Stockholders’
      equity
              
              
              39,028
              
              
              
              36,663
              
              
              
              35,861
              
              
              
              16,848
              
              
              
              15,154
 
 For
      the Years Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(In
      thousands)Selected
      Operating Data:Interest
      income
              
              $
              23,045
              
              
              $
              18,509
              
              
              $
              14,706
              
              
              $
              12,351
              
              
              $
              10,734Interest
      expense
              
              
              14,432
              
              
              
              10,208
              
              
              
              6,623
              
              
              
              4,662
              
              
              
              4,275Net
      interest income
              
              
              8,613
              
              
              
              8,301
              
              
              
              8,083
              
              
              
              7,689
              
              
              
              6,459Provision
      for loan losses
              
              
              84
              
              
              
              179
              
              
              
              204
              
              
              
              354
              
              
              
              283Net
      interest income afterprovision
      for loan losses
              
              
              8,529
              
              
              
              8,122
              
              
              
              7,879
              
              
              
              7,335
              
              
              
              6,176Non-interest
      income
              
              
              1,114
              
              
              
              1,043
              
              
              
              956
              
              
              
              902
              
              
              
              929Non-interest
      expense
              
              
              8,866
              
              
              
              7,430
              
              
              
              6,567
              
              
              
              5,824
              
              
              
              4,955Income
      before income taxes
              
              
              777
              
              
              
              1,735
              
              
              
              2,268
              
              
              
              2,413
              
              
              
              2,150Income
      tax expense (benefit)
              
              
              (454
              )
              
              
              124
              
              
              
              499
              
              
              
              566
              
              
              
              483Net
      income
              
              $
              1,231
              
              
              $
              1,611
              
              
              $
              1,769
              
              
              $
              1,847
              
              
              $
              1,667
 
 
 1
  
 At
      or For the Years Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Selected
      Financial Ratios and Other Data:Performance
      Ratios:Return
      on average assets
              
              
              0.29
              %
              
              
              0.45
              %
              
              
              0.57
              %
              
              
              0.67
              %
              
              
              0.71
              %Return
      on average equity
              
              
              3.33
              %
              
              
              4.49
              %
              
              
              6.69
              %
              
              
              11.96
              %
              
              
              11.75
              %Interest
      rate spread (1)
              
              
              1.95
              %
              
              
              2.17
              %
              
              
              2.65
              %
              
              
              2.84
              %
              
              
              2.79
              %Net
      interest margin (2)
              
              
              2.20
              %
              
              
              2.47
              %
              
              
              2.80
              %
              
              
              2.95
              %
              
              
              2.89
              %Efficiency
      ratio (3)
              
              
              91.15
              %
              
              
              79.52
              %
              
              
              72.65
              %
              
              
              67.79
              %
              
              
              67.07
              %Noninterest
      expense to average total assets
              
              
              2.09
              %
              
              
              2.07
              %
              
              
              2.10
              %
              
              
              2.12
              %
              
              
              2.10
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              106.73
              %
              
              
              109.99
              %
              
              
              106.70
              %
              
              
              106.15
              %
              
              
              105.47
              %Asset
      Quality Ratios:Non-performing
      assets as a percent of total assets
              
              
              0.25
              %
              
              
              0.06
              %
              
              
              0.02
              %
              
              
              0.03
              %
              
              
              0.04
              %Non-performing
      loans as a percent of total loans
              
              
              0.48
              %
              
              
              0.12
              %
              
              
              0.05
              %
              
              
              0.08
              %
              
              
              0.12
              %Allowance
      for loan losses as a percent of non-performing loans
              
              
              119.38
              %
              
              
              589.27
              %
              
              
              1460.00
              %
              
              
              925.23
              %
              
              
              595.54
              %Allowance
      for loan losses as a percent of total loans
              
              
              0.57
              %
              
              
              0.69
              %
              
              
              0.73
              %
              
              
              0.77
              %
              
              
              0.76
              %Capital
      Ratios:Total
      risk-based capital (to risk weighted assets)
              
              
              14.96
              %
              
              
              18.26
              %
              
              
              20.20
              %
              
              
              12.22
              %
              
              
              13.11
              %Tier
      1 risk-based capital (to risk weighted assets)
              
              
              14.42
              %
              
              
              17.57
              %
              
              
              19.53
              %
              
              
              11.53
              %
              
              
              12.54
              %Tangible
      capital (to tangible assets)
              
              
              8.03
              %
              
              
              9.09
              %
              
              
              9.85
              %
              
              
              5.67
              %
              
              
              6.02
              %Tier
      1 leverage (core) capital (to adjusted tangible assets)
              
              
              8.03
              %
              
              
              9.09
              %
              
              
              9.85
              %
              
              
              5.67
              %
              
              
              6.02
              %Equity
      to total assets
              
              
              8.52
              %
              
              
              9.56
              %
              
              
              10.65
              %
              
              
              5.79
              %
              
              
              6.21
              %Other
      Data:Number
      of full service offices
              
              
              7
              
              
              
              6
              
              
              
              6
              
              
              
              6
              
              
              
              6Earnings per share(4):Basic
      and diluted
              
              $
              0.29
              
              
              $
              0.37
              
              
              $
              0.20
              
              
              $
              NA
              
              
              $
              NADividends
      declared per share
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
  ___________________________
 (1)
              Represents
      the difference between the weighted-average yield on interest-earning
      assets and the weighted-average cost of interest-bearing liabilities for
      the period.(2)
              The
      net interest margin represents net interest income as a percent of average
      interest-earning assets for the period.(3)
              The
      efficiency ratio represents non-interest expense divided by the sum of net
      interest income and non-interest income.(4)
              For
      2005, represents earnings per share for the six-month period from June 30,
      2005 (date of public offering) to December 31,
  2005.
  2
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  Forward
Looking Statements
  This
document 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, and 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.
  Overview
  Our
results of operations depend primarily on our net interest
income.  Net interest income is the difference between the interest
income we earn on our interest-earning assets, consisting primarily of loans,
investment securities, mortgage-backed securities and other interest-earning
assets (primarily cash equivalents), and the interest we pay on our
interest-bearing liabilities, consisting primarily of savings accounts, NOW
accounts, money market accounts, time deposits and borrowings.  Our
results of operations also are affected by our provisions for loan losses,
non-interest income and non-interest expense.  Non-interest income
consists primarily of fees and service charges, income from bank-owned life
insurance and miscellaneous other income.  Non-interest expense
consists primarily of salaries and employee benefits, occupancy and equipment,
data processing, professional fees, advertising and other administrative
expenses.  Our results of operations also may be affected
significantly by general and local economic and competitive conditions, changes
in market interest rates, governmental policies and actions of regulatory
authorities.
  Management
of Market Risk
  General.  The
majority of our assets and liabilities are monetary in
nature.  Consequently, our most significant form of market risk is
interest rate risk.  Our assets, consisting primarily of mortgage
loans, have longer maturities than our liabilities, consisting primarily of
deposits.  As a result, a principal part of our business strategy is
to manage interest rate risk and reduce the exposure of our net interest income
to changes in market interest rates.  Accordingly, our Board of
Directors has established an Asset/Liability Management Committee, consisting of
senior management, which is responsible for evaluating the interest rate risk
inherent in our assets and liabilities, for determining the level of risk that
is appropriate given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with
the guidelines approved by the Board of Directors.  The
Asset/Liability Committee monitors the level of interest rate risk and our Board
of Directors reviews our asset/liability policies and interest rate risk
position.
  We have
sought to manage our interest rate risk in order to minimize the exposure of our
earnings and capital to changes in interest rates.  During the low
interest rate environment that has existed in recent years, we have implemented
the following strategies to manage our interest rate risk:
  ·
              increasing
      our origination of shorter-term loans, including commercial real estate
      loans and home equity loans;·
              maintaining
      adjustable-rate and shorter-term investments; and·
              maintaining
      pricing strategies that encourage deposits in longer-term, certificates of
      deposit.
  3
  In
addition, we are an approved qualified loan seller/servicer for Fannie Mae and
an approved loan seller to IndyMac Bank, which will facilitate our sale of
long-term, fixed-rate residential mortgage loans in the future.  By
following these strategies, we believe that we are better positioned to react to
increases in market interest rates.  However, investments in
shorter-term assets generally bear lower yields than longer-term
investments.
  Net Portfolio
Value.  The Office of
Thrift Supervision requires the computation of amounts by which the net present
value of an institution’s cash flow from assets, liabilities and off balance
sheet items (the institution’s net portfolio value or “NPV”) would change in the
event of a range of assumed changes in market interest rates.  The
Office of Thrift Supervision provides all institutions that file a Consolidated
Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with
an interest rate sensitivity report of net portfolio value.  The
Office of Thrift Supervision simulation model uses a discounted cash flow
analysis and an option-based pricing approach to measuring the interest rate
sensitivity of net portfolio value.  Historically, the Office of
Thrift Supervision model estimated the economic value of each type of asset,
liability and off-balance sheet contract under the assumption that the United
States Treasury yield curve increases or decreases instantaneously by 100 to 300
basis points in 100 basis point increments.  However, given the
current low level of market interest rates, we did not prepare a NPV calculation
for an interest rate decrease of greater than 200 basis points.  A
basis point equals one-hundredth of one percent, and 100 basis points equals one
percent.  An increase in interest rates from 3% to 4% would mean, for
example, a 100 basis point increase in the “Change in Interest Rates” column
below.
  The table
below sets forth, as of December 31, 2007, the estimated changes in our net
portfolio value that would result from the designated instantaneous changes in
the United States Treasury yield curve.  Computations of prospective
effects of hypothetical interest rate changes are based on numerous assumptions
including relative levels of market interest rates, loan prepayments and deposit
decay, and should not be relied upon as indicative of actual
results.
  NPV
      as a Percentage ofEstimated
      Increase
              
              
              Present Value of Assets
      (3)Change
in
              
              
              
              
              
              (Decrease) in
    NPV
              
              
              
              
              
              IncreaseInterest
      Rates
              
              
              Estimated
              
              
              
              
              
              
              
              
              NPV
              
              
              (Decrease)(basis
      points) (1)
              
              
              NPV
      (2)
              
              
              Amount
              
              
              Percent
              
              
              Ratio
      (4)
              
              
              (basis
      points)(Dollars
      in thousands)+300
              
              
              $
              27,874
              
              
              $
              (20,697
              )
              
              
              (43
              %)
              
              
              6.27
              %
              
              
              (399
              )+200
              
              
              
              35,849
              
              
              
              (12,722
              )
              
              
              (26
              %)
              
              
              7.88
              %
              
              
              (238
              )+100
              
              
              
              43,534
              
              
              
              (5,037
              )
              
              
              (10
              %)
              
              
              9.36
              %
              
              
              (90
              )—
              
              
              
              48,571
              
              
              
              —
              
              
              
              —
              
              
              
              10.26
              %
              
              
              —-100
              
              
              
              51,145
              
              
              
              2,574
              
              
              
              5
              %
              
              
              10.68
              %
              
              
              42-200
              
              
              
              51,932
              
              
              
              3,361
              
              
              
              7
              %
              
              
              10.75
              %
              
              
              49
 
 ________________________(1)
              Assumes
      an instantaneous uniform change in interest rates at all
      maturities.(2)
              NPV
      is the discounted present value of expected cash flows from assets,
      liabilities and off-balance sheet contracts.(3)
              Present
      value of assets represents the discounted present value of incoming cash
      flows on interest-earning assets.(4)
              NPV
      Ratio represents NPV divided by the present value of
    assets.
 
 The table
above indicates that at December 31, 2007, in the event of a 200 basis point
decrease in interest rates, we would experience a 7% increase in net portfolio
value.  In the event of a 200 basis point increase in interest rates,
we would experience a 26% decrease in net portfolio value.  Both of
these calculations are based against the calculated net portfolio value of $48.6
million.
  Certain
shortcomings are inherent in the methodology used in the above interest rate
risk measurement.  Modeling changes in net portfolio value require
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest
rates.  In this regard, the net portfolio value table presented
assumes that the composition of our interest-sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and assumes that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration or repricing of
specific assets and liabilities.  Accordingly, although the net
portfolio value table provides an indication of our interest rate risk exposure
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
our net interest income and will differ from actual results.
  4
  Average
Balance Sheet
  The
following table sets forth average balances, average yields and costs, and
certain other information for the periods indicated.  Tax-equivalent
yield adjustments have not been made for tax-exempt securities.  All
average balances are daily average balances.  Non-accrual loans were
included in the computation of average balances, but have been reflected in the
table as loans carrying a zero yield.  The yields set forth below
include the effect of deferred fees, discounts and premiums that are amortized
or accreted to interest income or expense.
   For
      the Years Ended December 31,2007
              
              
              2006
              
              
              2005Average
                  Balance
              
              
              Interest
                  Income/
                  Expense
              
              
              Yield/
                  Cost
              
              
              Average
                  Balance
              
              
              Interest
                  Income/
                  Expense
              
              
              Yield/
                  Cost
              
              
              Average
                  Balance
              
              
              Interest
                  Income/
                  Expense
              
              
              Yield/
                  Cost(Dollars
      in thousands)Interest-earning
      assets:Loans
              
              $
              221,179
              
              
              $
              14,034
              
              
              
              6.35
              %
              
              $
              180,469
              
              
              $
              11,088
              
              
              
              6.14
              %
              
              $
              140,069
              
              
              $
              8,268
              
              
              
              5.90
              %SecuritiesTaxable
              
              
              139,533
              
              
              
              7,689
              
              
              
              5.51
              %
              
              
              123,701
              
              
              
              6,046
              
              
              
              4.89
              %
              
              
              116,843
              
              
              
              5,150
              
              
              
              4.41
              %Tax-exempt
              
              
              30,460
              
              
              
              1,322
              
              
              
              4.34
              %
              
              
              31,902
              
              
              
              1,375
              
              
              
              4.31
              %
              
              
              31,382
              
              
              
              1,288
              
              
              
              4.10
              %Total
      interest-earning assets
              
              
              391,172
              
              
              
              23,045
              
              
              
              5.89
              %
              
              
              336,072
              
              
              
              18,509
              
              
              
              5.51
              %
              
              
              288,294
              
              
              
              14,706
              
              
              
              5.10
              %Noninterest-earning
      assets
              
              
              32,395
              
              
              
              
              
              
              
              
              
              
              
              22,703
              
              
              
              
              
              
              
              
              
              
              
              24,058Total
      assets
              
              $
              423,567
              
              
              
              
              
              
              
              
              
              
              $
              358,775
              
              
              
              
              
              
              
              
              
              
              $
              312,352Interest-bearing
      liabilities:Savings
      accounts
              
              $
              56,576
              
              
              
              1,188
              
              
              
              2.10
              %
              
              $
              59,781
              
              
              
              992
              
              
              
              1.66
              %
              
              $
              66,200
              
              
              
              979
              
              
              
              1.48
              %NOW
      accounts
              
              
              57,521
              
              
              
              1,299
              
              
              
              2.26
              %
              
              
              49,201
              
              
              
              805
              
              
              
              1.64
              %
              
              
              50,177
              
              
              
              507
              
              
              
              1.01
              %Money
      market demand
              
              
              19,316
              
              
              
              678
              
              
              
              3.51
              %
              
              
              19,806
              
              
              
              587
              
              
              
              2.96
              %
              
              
              19,184
              
              
              
              385
              
              
              
              2.01
              %Certificates
      of deposit
              
              
              215,480
              
              
              
              10,467
              
              
              
              4.86
              %
              
              
              161,264
              
              
              
              7,073
              
              
              
              4.39
              %
              
              
              128,714
              
              
              
              4,557
              
              
              
              3.54
              %Total
      interest-bearing deposits
              
              
              348,893
              
              
              
              13,632
              
              
              
              3.91
              %
              
              
              290,052
              
              
              
              9,457
              
              
              
              3.26
              %
              
              
              264,275
              
              
              
              6,428
              
              
              
              2.43
              %Borrowings
              
              
              17,605
              
              
              
              800
              
              
              
              4.54
              %
              
              
              15,505
              
              
              
              751
              
              
              
              4.84
              %
              
              
              5,912
              
              
              
              195
              
              
              
              3.30
              %Total
      interest-bearingliabilities
              
              
              366,498
              
              
              
              14,432
              
              
              
              3.94
              %
              
              
              305,557
              
              
              
              10,208
              
              
              
              3.34
              %
              
              
              270,187
              
              
              
              6,623
              
              
              
              2.45
              %Noninterest-bearing
      liabilities
              
              
              20,110
              
              
              
              
              
              
              
              
              
              
              
              17,358
              
              
              
              
              
              
              
              
              
              
              
              15,729Total
      liabilities
              
              
              386,608
              
              
              
              
              
              
              
              
              
              
              
              322,915
              
              
              
              
              
              
              
              
              
              
              
              285,916Equity
              
              
              36,959
              
              
              
              
              
              
              
              
              
              
              
              35,860
              
              
              
              
              
              
              
              
              
              
              
              26,436Total
      liabilities and equity
              
              $
              423,567
              
              
              
              
              
              
              
              
              
              
              $
              358,775
              
              
              
              
              
              
              
              
              
              
              $
              312,352Net
      interest income
              
              
              
              
              
              $
              8,613
              
              
              
              
              
              
              
              
              
              
              $
              8,301
              
              
              
              
              
              
              
              
              
              
              $
              8,083Interest
      rate spread
              
              
              
              
              
              
              
              
              
              
              1.95
              %
              
              
              
              
              
              
              
              
              
              
              2.17
              %
              
              
              
              
              
              
              
              
              
              
              2.65
              %Net
      interest-earning assets
              
              $
              24,674
              
              
              
              
              
              
              
              
              
              
              $
              30,515
              
              
              
              
              
              
              
              
              
              
              $
              18,107Net
      interest margin
              
              
              
              
              
              
              
              
              
              
              2.20
              %
              
              
              
              
              
              
              
              
              
              
              2.47
              %
              
              
              
              
              
              
              
              
              
              
              2.80
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              106.73
              %
              
              
              
              
              
              
              
              
              
              
              109.99
              %
              
              
              
              
              
              
              
              
              
              
              106.70
              %
 
 5
  Rate/Volume
Analysis
  The
following table presents the effects of changing rates and volumes on our net
interest income for the periods indicated.  The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior
volume).  The volume column shows the effects attributable to changes
in volume (changes in volume multiplied by prior rate).  The net
column represents the sum of the prior columns.  For purposes of this
table, changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionately based on the changes due to rate and the
changes due to volume.
  Years
      Ended December 31,
                  2007
      vs. 2006
              
              
              Years
      Ended December 31,
                  2006
      vs. 2005Increase
      (Decrease) Due to
              
              
              Net
              
              
              Increase
      (Decrease) Due to
              
              
              NetVolume
              
              
              Rate
              
              
              Volume
              
              
              Rate(In
      thousands)Interest-earning
      assets:Loans
              
              $
              2,573
              
              
              $
              373
              
              
              $
              2,946
              
              
              $
              2,470
              
              
              $
              350
              
              
              $
              2,820SecuritiesTaxable
              
              
              826
              
              
              
              817
              
              
              
              1,643
              
              
              
              314
              
              
              
              582
              
              
              
              896Tax-exempt
              
              
              (64
              )
              
              
              11
              
              
              
              (53
              )
              
              
              21
              
              
              
              66
              
              
              
              87Total
      interest-earningassets
              
              
              3,335
              
              
              
              1,201
              
              
              
              4,536
              
              
              
              2,805
              
              
              
              998
              
              
              
              3,803Interest-bearing
      liabilities:Savings
      accounts
              
              
              (49
              )
              
              
              245
              
              
              
              196
              
              
              
              (51
              )
              
              
              64
              
              
              
              13NOW
      accounts
              
              
              152
              
              
              
              342
              
              
              
              494
              
              
              
              (10
              )
              
              
              308
              
              
              
              298Money
      market demand
              
              
              (15
              )
              
              
              106
              
              
              
              91
              
              
              
              13
              
              
              
              189
              
              
              
              202Certificates
      of deposit
              
              
              2,574
              
              
              
              820
              
              
              
              3,394
              
              
              
              1,290
              
              
              
              1,226
              
              
              
              2,516Total
      interest-bearing deposits
              
              
              2,662
              
              
              
              1,513
              
              
              
              4,175
              
              
              
              1,242
              
              
              
              1,787
              
              
              
              3,029Borrowings
              
              
              91
              
              
              
              (42
              )
              
              
              49
              
              
              
              432
              
              
              
              124
              
              
              
              556Total
      interest-bearing liabilities
              
              
              2,753
              
              
              
              1,471
              
              
              
              4,224
              
              
              
              1,674
              
              
              
              1,911
              
              
              
              3,585Net
      change in interest income
              
              $
              582
              
              
              $
              (270
              )
              
              $
              312
              
              
              $
              1,131
              
              
              $
              (913
              )
              
              $
              218
  Critical
Accounting Policies
  Critical
accounting policies are those that involve significant judgments and assumptions
by management and that have, or could have, a material impact on our income or
the carrying value of our assets.  Our critical accounting policies
are those related to our allowance for loan losses, the evaluation of
other-than-temporary impairment of investment securities and the valuation of
and our ability to realize deferred tax assets.
  Allowance for
Loan Losses.The allowance for loan losses is calculated with
the objective of maintaining an allowance necessary to absorb estimated probable
loan losses inherent in the loan portfolio.  Management’s
determination of the adequacy of the allowance is based on periodic evaluations
of the loan portfolio and other relevant factors.  However, this
evaluation is inherently subjective, as it requires an estimate of the loss
content for each risk rating and for each impaired loan, an estimate of the
amounts and timing of expected future cash flows, and an estimate of the value
of collateral.
  We have
established a systematic method of periodically reviewing the credit quality of
the loan portfolio in order to establish an allowance for losses on
loans.  The allowance for losses on loans is based on our current
judgments about the credit quality of individual loans and segments of the loan
portfolio.  The allowance for losses on loans is established through a
provision for loan losses based on our evaluation of the probable losses
inherent in the loan portfolio, and considers all known internal and external
factors that affect loan collectibility as of the reporting date.  Our
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, our knowledge of inherent losses in
the portfolio that are probable and reasonably estimable and other factors that
warrant recognition in providing an appropriate loan loss
allowance.  Management believes this is a critical accounting policy
because this evaluation involves a high degree of complexity and requires us to
make subjective judgments that often require assumptions or estimates about
various matters.  Historically, we believe our estimates and
assumptions have proven to be relatively accurate.  For example, over
the past three years, our allowance for loan losses as a percentage of average
loans outstanding has ranged from 0.57% to 0.73%, while our net recoveries
(charge-offs) as a percentage of average loans outstanding has ranged from
(0.03)% to 0.01%.  Nevertheless, because a small number of
non-performing loans could result in net charge-offs significantly in excess of
the estimated losses inherent in our loan portfolio, you should not place undue
reliance on the accuracy of past estimates.
  6
  The
analysis of the allowance for loan losses has three components: specific,
general allocations and unallocated.  Specific allocations are made
for loans that are determined to be impaired.  Impairment is measured
by determining the present value of expected future cash flows or, for
collateral-dependent loans, the fair value of the collateral adjusted for market
conditions and selling expenses.  The general allocation is determined
by segregating the remaining loans by type of loan, risk weighting (if
applicable) and payment history.  We also analyze delinquency trends,
general economic conditions and geographic and industry
concentrations.  This analysis establishes factors that are applied to
the loan groups to determine the amount of the general allowance.  The
principal assumption used in deriving the allowance for loan losses is the
estimate of loss content for each risk rating.  To illustrate, if
recent loss experience dictated that the projected loss ratios changed by 10%
(of the estimate) across all risk ratings, the allocated allowance as of
December 31, 2007 would have changed by approximately $139
thousand.  Actual loan losses may be significantly more than the
allowances we have established, which could have a material negative effect on
our financial results.
  Other-Than-Temporary
Impairment.  In estimating
other-than-temporary impairment of investment securities, securities are
evaluated on at least a quarterly basis, to determine whether a decline in their
value is other-than-temporary.  To determine whether a loss in value
is other-than-temporary, management reviews criteria such as the reasons
underlying the decline, the magnitude and duration of the decline and the intent
and ability of the Company to retain its investment in the security for a period
of time sufficient to allow for an anticipated recovery in the fair value or
until maturity.  The term “other-than-temporary” is not intended to
indicate that the decline is permanent, but indicates that the prospects for a
near-term recovery of value are not necessarily favorable, or that there is a
lack of evidence to support a realizable value equal to or greater than the
carrying value of the investment.  Once a decline in value is
determined to be other-than-temporary, the value of the security is reduced and
a corresponding charge to earnings is recognized.
 
 Valuation of
Deferred Tax Assets.  In evaluating our ability to realize
deferred tax assets, management considers all positive and negative information,
including our past operating results and our forecast of future taxable
income.  In determining future taxable income, management utilizes a
budget process that makes business assumptions and the implementation of
feasible and prudent tax planning strategies.  These assumptions
require us to make judgments about our future taxable income and are consistent
with the plans and estimates we use to manage our business.  Any
reduction in estimated future taxable income may require us to record a
valuation allowance against our deferred tax assets which would result in
additional income tax expense in the period.
  Comparison
of Financial Condition at December 31, 2007 and 2006
  Total
assets increased $74.3 million, or 19.4%, to $457.9 million at December 31,
2007, from $383.6 million at December 31, 2006.  The increase was the
result of increases in loans receivable, investment securities available for
sale, office properties and equipment, Federal Home Loan Bank stock, accrued
interest receivable and cash and amounts due from banks partially offset by
decreases in investment securities held to maturity, interest-bearing time
deposits and other assets.
  Net loans
receivable increased by $42.5 million, or 21.4%, to $241.0 million at December
31, 2007 from $198.5 million at December 31, 2006.  One- to
four-family residential real estate loans, which comprise almost half of our
loan portfolio, increased $12.4 million, or 12.1%, to $114.7 million at December
31, 2007 from $102.3 million at December 31, 2006.  Commercial real
estate loans increased $16.4 million, or 41.8%, to $55.6 million at December 31,
2007 from $39.2 million at December 31, 2006. The increased commercial
real estate loan balances reflected our continued emphasis on originating this
type of loan, resulting, in part, from the expansion of our commercial lending
staff in recent years.  Home equity loans and lines of credit
increased $2.2 million, or 5.8%, to $40.3 million at December 31, 2007 from
$38.1 million at December 31, 2006.  Construction loans increased $1.7
million, or 20.2%, to $10.1 million at December 31, 2007 from $8.4 million at
December 31, 2006.  Commercial loans increased $5.3 million, or 72.6%,
to $12.6 million at December 31, 2007 from $7.3 million at December 31,
2006.
  7
  Investment
securities available for sale increased $26.6 million, or 19.4%, to $163.5
million at December 31, 2007 from $136.9 million at December 31,
2006.  The increase was the result of purchases of $63.8 million of
mortgaged-backed and investment securities and a $969 thousand increase in the
market value of investment securities available for sale offset by $14.7 million
in principal amortization, $19.2 million in sales of investments securities
available for sale, $4.3 million in calls and maturities of investment
securities available for sale and an other-than-temporary investment writedown
of $284 thousand.   In addition, securities held to maturity
decreased $1.5 million, or 8.7%, to $17.2 million at December 31, 2007 from
$18.7 million at December 31, 2006.  The decrease was the result of
principal amortization of $940 thousand and $3.2 million in calls and maturities
of investment securities held to maturity offset by purchases in the amount of
$2.4 million in mortgaged-backed and investment securities held to
maturity.
  Deposits
increased $34.1 million, or 10.1%, to $371.4 million at December 31, 2007 from
$337.3 million at December 31, 2006.  The largest increase was in
certificates of deposit, which increased $27.7 million, or 14.5%, to $218.1
million at December 31, 2007 from $190.4 million at December 31,
2006.  Included in the increase in certificates of deposits were
brokered deposits in the amount of $28.0 million.  Non-interest
bearing demand accounts decreased $3.0 million, or 16.6%.  The
decrease in non-interest bearing demand accounts was due to decreases in
commercial accounts.  NOW accounts, Super NOW accounts and money
market deposit accounts increased by $8.5 million, $2.3 million and $117
thousand, respectively, while savings accounts decreased by $1.6 million,
respectively.
  Borrowings
increased to $45.9 million at December 31, 2007 from $8.3 million at December
31, 2006.  We increased our outstanding borrowings because our net
increase in deposits and the proceeds received from the calls, maturities and
pay downs of securities, discussed above, exceeded our cash needs to fund loan
originations and investment security purchases.
  Total stockholders’ equity increased
$2.3 million to $39.0 million at December 31, 2007 from $36.7 million at
December 31, 2006.  This increase was primarily attributable to net
income of $1.2 million and a decrease in accumulated other comprehensive loss of
$615 thousand.  Accumulated other comprehensive loss decreased as a
result of a reduction in the net unrealized losses on investment securities
available for sale due to a combination of $284 thousand impairment charge being
recorded as a realized loss and an increase in the fair value of the remaining
portfolio.  Because of interest rate volatility, accumulated other
comprehensive income (loss) could materially fluctuate for future interim
periods and years depending on economic and interest rate
conditions.
  Comparison
of Operating Results for the Years Ended December 31, 2007 and December 31,
2006
  General.  Net
income decreased $380 thousand, or 23.6%, to $1.2 million for the year ended
December 31, 2007 from $1.6 million for the year ended December 31,
2006.  The principal reasons for the decrease were a $1.4 million
increase in non-interest expense and a $284 thousand impairment charge on
investment securities partially offset by a $312 thousand increase in net
interest income, a $95 thousand reduction in the provision for loan losses, a
$355 thousand increase in non-interest income and a $578 thousand reduction in
income tax expense.
  Interest
Income.Interest income
increased $4.5 million, or 24.3%, to $23.0 million for the year ended
December 31, 2007 from $18.5 million for the year ended December 31,
2006.  The increase in interest income resulted from a $2.9 million
increase in interest income on loans and a $1.6 million increase in income on
investment securities and mortgage-backed securities.
  Interest
income on loans increased $2.9 million, or 26.1%, to $14.0 million for the
year ended December 31, 2007 from $11.1 million for the year ended December
31, 2006.  The average balance of loans increased $40.7 million, or
22.5%, to $221.2 million for the year ended December 31, 2007 from $180.5
million for the year ended December 31, 2006.  The increase in average
balance of loans accounted for the increase in interest income along with an
increase in the average yield to 6.35% for the year ended December 31, 2007 from
6.14% for the year ended December 31, 2006.  The increase in average
balance of loans resulted primarily from increases in the average balances of
one- to four-family residential real estate loans, commercial real estate loans
and consumer loans.  The increase in average balance of commercial
real estate loans reflected our continued emphasis on originating this type of
loan, resulting, in part, from expanding our commercial lending staff in recent
years.
  8
  Interest
income on securities increased by $1.6 million to $9.0 million for the year
ended December 31, 2007 from $7.4 million for the year ended December 31,
2006.  The increase in interest income on securities was due to an
increase in the average balance of tax and tax-exempt securities to $170.0
million for the year ended December 31, 2007 from $155.6 million for the year
ended December 31, 2006.  Also, the average yield on tax and
tax-exempt securities increased to 5.30% for the year ended December 31, 2007
from 4.77%  for the year ended December 31, 2006.  The
yields for the tax-exempt securities are not tax-effected.
  Interest
Expense.Interest expense
increased $4.2 million, or 41.2%, to $14.4 million for the year ended
December 31, 2007 from $10.2 million for the year ended December 31,
2006.
  Interest expense on interest-bearing
deposits increased by $4.1 million, or 43.2%, to $13.6 million for the year
ended December 31, 2007 from $9.5 million for the year ended December 31,
2006.  The increase in interest expense on interest-bearing deposits
was due to a $58.8 million, or 20.3%, increase in the average balance of
interest-bearing deposits to $348.9 million for the year ended December 31,
2007 from $290.1 million for the year ended December 31, 2006.  In
addition, the average rate paid on interest-bearing deposits increased 65 basis
points to 3.91% for the year ended December 31, 2007 from 3.26% for the year
ended December 31, 2006.  We experienced increases in the average
balances of certificates of deposits, NOW accounts and Super NOW accounts while
we experienced decreases in the average balance of savings accounts and money
market accounts.  The average cost of all deposit account categories
increased for the year ended December 31, 2007.
  Interest
expense on borrowings increased $49 thousand to $800 thousand for the year ended
December 31, 2007 from $751 thousand for the year ended December 31,
2006.  This increase was due to a $2.1 million increase in the average
balance of borrowings to $17.6 million for the year ended December 31, 2007 from
$15.5 million for the year ended December 31, 2006 offset by a 30 basis
point decrease in the average cost of such borrowings to 4.54% for the year
ended December 31, 2007 from 4.84% for the year ended December 31,
2006.
  Net Interest
Income.Because the
increase in our interest income was greater than our increase in interest
expense, net interest income increased by $312 thousand, or 3.8%, to
$8.6 million for the year ended December 31, 2007 from $8.3 million
for the year ended December 31, 2006.  Our net interest margin
decreased 27 basis points to 2.20% for the year ended December 31, 2007 from
2.47% for the year ended December 31, 2006, and our net interest rate spread
decreased 22 basis points to 1.95% for the year ended December 31, 2007 from
2.17% for the year ended December 31, 2006.
  Provision for
Loan Losses.We establish provisions for loan losses, which are charged
to operations in order to maintain the allowance for loan losses at a level we
consider necessary to absorb probable credit losses inherent in the loan
portfolio.  In determining the level of the allowance for loan losses,
we consider past and current loss experience, evaluation of real estate
collateral, current economic conditions, volume and type of lending, adverse
situations that may affect a borrower’s ability to repay a loan and the levels
of nonperforming and other classified loans.  The amount of the
allowance is based on estimates and the ultimate losses may vary from such
estimates as more information becomes available or later events
change.  We assess the allowance for loan losses on a quarterly basis
and make provisions for loan losses in order to maintain the
allowance.  Based on our evaluation of the above factors, we recorded
a provision for loan losses of $84 thousand for the year ended December 31, 2007
and a provision for loan losses of $179 thousand for the year ended December 31,
2006.  The provisions recorded reflected net charge-offs of
approximately $65 thousand for the year ended December 31, 2007 and net
recoveries of $26 thousand for the year ended December 31, 2006.  The
allowance for loan losses was $1.4 million, or 0.57% of total loans at December
31, 2007 compared to $1.4 million, or 0.69%, of total loans at December 31,
2006.  The allowance for loan losses represented 119.4% of
nonperforming loans at December 31, 2007 and 589.3% of nonperforming loans at
December 31, 2006.  To the best of our knowledge, we have recorded all
losses that are both probable and reasonable to estimate for the years ended
December 31, 2007 and 2006.
  Non-interest
Income.Non-interest
income was $1.1 million for the year ended December 31, 2007 and $1.0 million
for the year ended December 31, 2006.  Fees and service charges on
deposit accounts, gains on the sales of loans, gains on the sales of investment
securities, earnings on life insurance and other non-interest income
increased.  The increase in fees and services charges on deposit
accounts was attributable to the implementation of new fees charged on deposit
accounts and a slight increase in the volume of several service
charges.  Non-interest income for the year ended December 31, 2007 was
reduced by an other-than-temporary writedown of an investment security of $284
thousand.  This impairment was determined after a review of the mutual
fund and its net asset value.  We do not believe that this impairment
is related to credit quality but rather to the widening of the spreads in the
bond market for mortgage related securities.  This widening of spreads
has negatively impacted the market value of the securities in the fund and the
net asset value of the fund itself.  While the underlying securities
in the fund continue to carry investment grades and acceptable market yields,
current accounting rules and related SEC guidance resulted in our determination
that the impairment was other-than-temporary.
  9
  Non-interest
Expense.  Non-interest
expense increased $1.5 million, or 20.2%, to $8.9 million for the year ended
December 31, 2007 from $7.4 million for the year ended December 31,
2006.  Compensation and benefits expense increased $754 thousand, or
17.5%, to $5.1 million for the year ended December 31, 2007 from $4.3 million
for the year ended December 31, 2006.  Normal salary increases,
increases in benefit costs, increases in payroll taxes and the expense of the
stock-based incentive plans accounted for the increase in compensation and
benefit expense.  Occupancy and equipment expense increased $313
thousand, or 33.8%, to $1.2 million for the year ended December 31, 2007 from
$927 thousand for the year ended December 31, 2006.  This increase was
mainly due to increased depreciation expense, utility expense and real estate
taxes due to the opening of the new main office in May 2007.  Data
processing expense increased $126 thousand.  This increase was mainly
due to data processing costs associated with the growth of savings and loans and
prices increases.  Other expenses increased $204
thousand.  This increase was attributable to increases in
correspondent bank fees, advertising and promotions, supervisory examination,
organizational dues and subscription, loan acquisition, telephone and postage
expenses offset by decreases in employee related, contribution, and insurance
and surety bond expenses.
  Income Tax
Expense.We
recorded a benefit for income taxes of $454 thousand for the year ended December
31, 2007, compared to an expense of $124 thousand for the year ended December
31, 2006, reflecting effective tax rates of (58.4)% and 7.2%,
respectively.  The income tax benefit is primarily attributable to the
formation of the Delaware operating subsidiary in September 2006 which has
resulted in the Bank being in a net operating loss position for state tax
purposes.  For the year ended December 31, 2007, the Bank incurred a
net operating loss of approximately $6.3 million for state tax purposes and
recorded a deferred tax benefit of $423 thousand though no tax benefit was
recorded for losses incurred the last two quarters.
  Liquidity
and Capital Resources
  Liquidity
is the ability to meet current and future financial obligations of a short-term
nature.  Our primary sources of funds consist of deposit inflows, loan
repayments and maturities and sales of securities. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
  We
regularly adjust our investments in liquid assets based upon our assessment of
expected loan demand, expected deposit flows, yields available on
interest-earning deposits and securities, and the objectives of our
asset/liability management program.  Excess liquid assets are invested
generally in interest-earning deposits with other banks and short- and
intermediate-term securities.
  Our most
liquid assets are cash and cash equivalents. The levels of these assets are
dependent on our operating, financing, lending and investing activities during
any given period. At December 31, 2007, cash and cash equivalents totaled $16.0
million.  Securities classified as available-for-sale, which provide
additional sources of liquidity, totaled $163.5 million at December 31, 2007. In
addition, at December 31, 2007, we had the ability to borrow approximately
$112.9 million from the Federal Home Loan Bank of New York.  On that
date, we had $45.9 million in advances outstanding.
  At
December 31, 2007, we had $10.2 million in loan commitments
outstanding.  In addition to commitments to originate loans, we had
$24.1 million in unadvanced funds to borrowers and $1.9 million of commitments
issued under standby letters of credit. Certificates of deposit due within one
year of December 31, 2007 totaled $150.4 million, or 40.5% of total deposits. If
these deposits do not remain with us, we will be required to seek other sources
of funds, including other certificates of deposit and Federal Home Loan Bank
advances. Depending on market conditions, we may be required to pay higher rates
on such deposits or other borrowings than we currently pay on the certificates
of deposit due on or before December 31, 2008. We believe, however, based on
past experience, that a significant portion of our certificates of deposit will
remain with us. We have the ability to attract and retain deposits by adjusting
the interest rates offered.
  10
  We have
no material commitments or demands that are likely to affect our liquidity other
than set forth below. In the event loan demand were to increase at a pace
greater than expected, or any unforeseen demand or commitment were to occur, we
would access our borrowing capacity with the Federal Home Loan Bank of New
York.
  Our
primary investing activities are the origination of loans and the purchase of
securities. In 2007, we originated $90.3 million of loans and purchased $68.2
million of securities. In 2006, we originated $87.6 million of loans and
purchased $27.5 million of securities. We have not purchased any loans in recent
periods.
  Financing
activities consist primarily of activity in deposit accounts and Federal Home
Loan Bank advances.  We experienced a net increase in total deposits
of $34.1 million and $52.6 million for the years ended December 31, 2007 and
2006, respectively.  Deposit flows are affected by the overall level
of interest rates, the interest rates and products offered by us and our local
competitors and other factors.  We generally manage the pricing of our
deposits so that we are competitive in our market area.
  Federal
Home Loan Bank advances increased by $37.6 million during the year ended
December 31, 2007 and decreased by $7.1 million during the year ended
December 31, 2006.  Federal Home Loan Bank advances have primarily
been used to fund new loans and purchase securities.
  We
completed construction and opened our new administrative
headquarters/full-service office in Vineland, New Jersey in May
2007.  Total construction costs including land was approximately $6.4
million.  We have spent $269 thousand for the acquisition of land in
the Borough of Buena in Atlantic County, New Jersey as a possible branch
location.  In January 2007, we purchased land in Harrison Township,
New Jersey as a possible branch location.  We purchased the land for
$984 thousand.
  Colonial
Bank, FSB is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision, including a risk-based capital measure. The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories.  At December 31,
2007, Colonial Bank, FSB exceeded all Office of Thrift Supervision regulatory
capital requirements. Colonial Bank, FSB is considered “well capitalized” under
regulatory guidelines.
  The
capital from the initial public offering significantly increased our liquidity
and capital resources.  Our financial condition was enhanced by the
capital from the offering, resulting in increased net interest-earning assets.
However, due to the increase in equity resulting from the capital raised in the
offering, our return on equity is lower than it was prior to the
offering.
  Impact
of Inflation and Changing Prices
  The
consolidated financial statements and related notes of Colonial Bankshares, Inc.
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”).  GAAP generally requires the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation.  The impact of inflation is
reflected in the increased cost of our operations.  Unlike industrial
companies, our assets and liabilities are primarily monetary in
nature.  As a result, changes in market interest rates have a greater
impact on performance than the effects of inflation.
  11
  Market
for Common Stock
  Our
shares of common stock are traded on the NASDAQ Global Market under the symbol
“COBK”. Colonial Bankshares, MHC owns 2,441,716 shares, or 54.0% of our
outstanding shares of common stock.  The approximate number of holders
of record of Colonial Bankshares’ common stock as of March 15, 2008 was 380.
Certain shares of Colonial Bankshares are held in “nominee” or “street” name and
accordingly, the number of beneficial owners of such shares is not known or
included in the foregoing number.  The following table presents
quarterly market information for Colonial Bankshares’ common stock for the years
ended December 31, 2007 and 2006.  Colonial Bankshares began trading
on the NASDAQ National Market on June 30, 2005.  Accordingly, no
information prior to this date is available. The following information was
provided by the NASDAQ Global Market.
  High
              
              
              Low
              
              
              DividendsQuarter
      ended March 31, 2006
              
              
              12.86
              
              
              
              10.25
              
              
              
              -Quarter
      ended June 30, 2006
              
              
              12.99
              
              
              
              11.14
              
              
              
              -Quarter
      ended September 30, 2006
              
              
              13.14
              
              
              
              12.15
              
              
              
              -Quarter
      ended December 31, 2006
              
              
              14.77
              
              
              
              12.41
              
              
              
              -Quarter
      ended March 31, 2007
              
              
              14.90
              
              
              
              13.28
              
              
              
              -Quarter
      ended June 30, 2007
              
              
              16.05
              
              
              
              13.40
              
              
              
              -Quarter
      ended September 30, 2007
              
              
              14.75
              
              
              
              10.05
              
              
              
              -Quarter
      ended December 31, 2007
              
              
              12.00
              
              
              
              9.75
              
              
              
              -
  Dividend
payments by Colonial Bankshares are dependent primarily on dividends it receives
from Colonial Bank, FSB, because Colonial Bankshares has no source of income
other than dividends from Colonial Bank, FSB, earnings from the investment of
proceeds from the sale of shares of common stock retained by Colonial
Bankshares, and interest payments with respect to Colonial Bankshares’ loan to
the Employee Stock Ownership Plan.
  Under the
rules of the Office of Thrift Supervision, Colonial Bank, FSB is not permitted
to pay dividends on its capital stock to Colonial Bankshares, Inc., its sole
stockholder, if Colonial Bank, FSB’s stockholder’s equity would be reduced below
the amount of the liquidation account established in connection with the
conversion.  In addition, Colonial Bank, FSB is not permitted to make
a capital distribution if, after making such distribution, it would be
undercapitalized.
  In
addition to the foregoing, earnings of Colonial Bank, FSB appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by Colonial Bank, FSB on the amount of
earnings removed from the reserves for such distributions.  Colonial
Bankshares, Inc. intends to make full use of this favorable tax treatment and
does not contemplate any distribution by Colonial Bank, FSB in a manner that
would create a federal tax liability.
  12




COLONIAL
BANKSHARES, INC.
 
 TABLE
OF CONTENTS
 
 
 
 
 
 Page
      No.CONSOLIDATED
      FINANCIAL STATEMENTS:Report
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Statements of Financial Condition
              F-3Consolidated
      Statements of Income
              F-4Consolidated
      Statements of Stockholders’ Equity
              F-5Consolidated
      Statements of Cash Flows
              F-6Notes
      to Consolidated Financial Statements
              F-7
 
 F-1
  Report
of Independent Registered Public Accounting Firm
 
 
 To the
Board of Directors and Stockholders
 Colonial
Bankshares, Inc.
 
 
 We have
audited the accompanying consolidated statements of financial condition of
Colonial Bankshares, Inc. and its subsidiaries as of December 31, 2007 and 2006,
and the related consolidated statements of income, changes in stockholders’
equity, and cash flows for each of the years in the two-year period ended
December 31, 2007.  Colonial Bankshares, Inc.’s management is
responsible for these consolidated financial statements.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, also assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Colonial Bankshares, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
 
 
 /s/ Beard
Miller Company LLP
 
 
 Malvern,
Pennsylvania
 March 25,
2008
 
 F-2
  COLONIAL
BANKSHARES, INC.
 
 CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
 
 
 December
      31,2007
              
              
              2006(Dollars
      In Thousands, Except Share Data)AssetsCash
      and amounts due from banks
              
              $
              15,978
              
              
              $
              13,257Interest-bearing
      time deposits in banks
              
              
              208
              
              
              
              717Investment
      securities available for sale
              
              
              163,549
              
              
              
              136,925Investment
      securities held to maturity (fair value 2007 - $17,976; 2006 -
      $19,500)
              
              
              17,213
              
              
              
              18,722Loans
      receivable (net of allowance for loan losses 2007 - $1,392; 2006 -
      $1,373)
              
              
              241,040
              
              
              
              198,519Federal
      Home Loan Bank stock, at cost
              
              
              2,545
              
              
              
              775Office
      properties and equipment, net
              
              
              10,273
              
              
              
              7,337Bank-owned
      life insurance
              
              
              2,578
              
              
              
              2,485Accrued
      interest receivable
              
              
              2,185
              
              
              
              1,781Other
      assets
              
              
              2,291
              
              
              
              3,079Total
      Assets
              
              $
              457,860
              
              
              $
              383,597Liabilities
      and Stockholders’ EquityLiabilitiesDeposits:Non-interest-bearing
              
              $
              15,141
              
              
              $
              18,055Interest-bearing
              
              
              356,241
              
              
              
              319,199Total
      deposits
              
              
              371,382
              
              
              
              337,254Federal
      Home Loan Bank short-term borrowings
              
              
              23,380
              
              
              
              1,450Federal
      Home Loan Bank long-term borrowings
              
              
              22,559
              
              
              
              6,874Advances
      from borrowers for taxes and insurance
              
              
              581
              
              
              
              793Other
      liabilities
              
              
              930
              
              
              
              563Total
      Liabilities
              
              
              418,832
              
              
              
              346,934Stockholders’
      EquityPreferred
      stock, 1,000,000 shares authorized and unissued
              
              
              —
              
              
              
              —Common
      stock, par value $0.10 per share; authorized 10,000,000 shares;issued
      4,521,696 shares; outstanding: 4,450,796 in 2007 and 4,433,071 in
      2006
              
              
              452
              
              
              
              452Additional
      paid-in capital
              
              
              19,922
              
              
              
              19,519Unearned
      shares held by Employee Stock Ownership Plan (ESOP)
              
              
              (1,316
              )
              
              
              (1,432
              )Treasury
      stock, at cost, 88,625 shares
              
              
              (1,189
              )
              
              
              (1,189
              )Retained
      earnings
              
              
              21,094
              
              
              
              19,863Accumulated
      other comprehensive income (loss)
              
              
              65
              
              
              
              (550
              )Total
      Stockholders’ Equity
              
              
              39,028
              
              
              
              36,663Total
      Liabilities and Stockholders’ Equity
              
              $
              457,860
              
              
              $
              383,597
 
 
 
 
 
 
 See
notes to consolidated financial statements
 F-3
   COLONIAL
BANKSHARES, INC.
 
 CONSOLIDATED
STATEMENTS OF INCOME
 
 
 Years
      Ended December 31,2007
              
              
              2006(Dollars
      in Thousands, Except Per Share Data)Interest
      IncomeLoans,
      including fees
              
              $
              14,034
              
              
              $
              11,088Mortgage-backed
      securities
              
              
              3,320
              
              
              
              2,528Securities:Taxable
              
              
              4,369
              
              
              
              3,518Tax-exempt
              
              
              1,322
              
              
              
              1,375Total
      Interest Income
              
              
              23,045
              
              
              
              18,509Interest
      ExpenseDeposits
              
              
              13,632
              
              
              
              9,457Borrowings
              
              
              800
              
              
              
              751Total
      Interest Expense
              
              
              14,432
              
              
              
              10,208Net
      Interest Income
              
              
              8,613
              
              
              
              8,301Provision
      for Loan Losses
              
              
              84
              
              
              
              179Net
      Interest Income after Provision for Loan Losses
              
              
              8,529
              
              
              
              8,122Non-Interest
      IncomeFees
      and service charges
              
              
              990
              
              
              
              873Gain
      on sale of loans
              
              
              56
              
              
              
              45Net
      gain on sales and calls of securities
              
              
              229
              
              
              
              5Impairment
      charge on investment security
              
              
              (284
              )
              
              
              -Earnings
      on bank-owned life insurance
              
              
              93
              
              
              
              88Other
              
              
              30
              
              
              
              32Total
      Non-Interest Income
              
              
              1,114
              
              
              
              1,043Non-Interest
      ExpensesCompensation
      and benefits
              
              
              5,063
              
              
              
              4,309Occupancy
      and equipment
              
              
              1,240
              
              
              
              927Data
      processing
              
              
              743
              
              
              
              617Office
      supplies
              
              
              170
              
              
              
              129Professional
      fees
              
              
              349
              
              
              
              351Other
              
              
              1,301
              
              
              
              1,097Total
      Non-Interest Expenses
              
              
              8,866
              
              
              
              7,430Income
      before Income Tax Expense (Benefit)
              
              
              777
              
              
              
              1,735Income
      Tax expense (benefit)
              
              
              (454
              )
              
              
              124Net
      Income
              
              $
              1,231
              
              
              $
              1,611Per
      Share Data (Note 3):Earnings
      per share - basic
              
              $
              0.29
              
              
              $
              0.37Earnings
      per share - diluted
              
              $
              0.29
              
              
              $
              0.37
 
 
 See
notes to consolidated financial statements
 F-4
   COLONIAL
BANKSHARES, INC.
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 
 Common
                Stock
              
              
              Additional
                Paid-in
                Capital
              
              
              Unearned
                Shares
                Held
      by
                ESOP
              
              
              Retained
                Earnings
              
              
              Treasury
                Stock
              
              
              Accumu-
                lated
                Other
                Compre-
                hensive
                Income
                (Loss)
              
              
              Total
                Stock-
                holders’
                EquityBalance,
      January 1, 2006
              
              $
              452
              
              
              $
              19,414
              
              
              $
              (1,548
              )
              
              $
              18,252
              
              
              $
              -
              
              
              $
              (709
              )
              
              $
              35,861Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,611
              
              
              
              -
              
              
              
              -
              
              
              
              1,611Net
      change in unrealized loss on securities available for sale, net of tax
      expense of $180
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              159
              
              
              
              159Total
      Comprehensive Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,770ESOP
      shares committed to be released
              
              
              -
              
              
              
              27
              
              
              
              116
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              143Purchase
      of treasury stock – 88,625 shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,189
              )
              
              
              -
              
              
              
              (1,189
              )Stock-based
      compensation expense (restricted stock awards)
              
              
              -
              
              
              
              46
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              46Stock-based
      compensation expense (stock options)
              
              
              -
              
              
              
              32
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              32Balance,
      December 31, 2006
              
              
              452
              
              
              
              19,519
              
              
              
              (1,432
              )
              
              
              19,863
              
              
              
              (1,189
              )
              
              
              (550
              )
              
              
              36,663Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,231
              
              
              
              -
              
              
              
              -
              
              
              
              1,231Net
      change in unrealized loss on securities available for sale, net of tax
      expense of $354
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              615
              
              
              
              615Total
      Comprehensive Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,846ESOP
      shares committed to be released
              
              
              -
              
              
              
              33
              
              
              
              116
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              149Stock-based
      compensation expense (restricted stock awards)
              
              
              -
              
              
              
              222
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              222Stock-based
      compensation expense (stock options)
              
              
              -
              
              
              
              148
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              148Balance,
      December 31, 2007
              
              $
              452
              
              
              $
              19,922
              
              
              $
              (1,316
              )
              
              $
              21,094
              
              
              $
              (1,189
              )
              
              $
              65
              
              
              $
              39,028
  
 
 See
notes to consolidated financial statements
 F-5
  COLONIAL
BANKSHARES, INC.
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 Years
      Ended December 31,2007
              
              
              2006Cash
      Flows from Operating Activities:
              
              (In
      Thousands)Net
      income
              
              $
              1,231
              
              
              $
              1,611Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
              
              
              84
              
              
              
              179Depreciation
      expense
              
              
              536
              
              
              
              390ESOP
      expense
              
              
              149
              
              
              
              143Stock-based
      compensation expense
              
              
              370
              
              
              
              78Impairment
      charge on investment security
              
              
              284
              
              
              
              -Deferred
      income taxes
              
              
              (315
              )
              
              
              (185
              )Net
      earnings on bank-owned life insurance
              
              
              (93
              )
              
              
              (88
              )Net
      gain on sales and calls of investment securities
              
              
              (229
              )
              
              
              (5
              )Loans
      originated for sale
              
              
              (2,802
              )
              
              
              (2,746
              )Proceeds
      from sale of loans
              
              
              2,858
              
              
              
              2,647Gain
      on sale of loans
              
              
              (56
              )
              
              
              (45
              )Net
      amortization of loan fees
              
              
              (42
              )
              
              
              (13
              )Accretion
      of premium and discount on investment securities, net
              
              
              (521
              )
              
              
              (287
              )Increase
      in accrued interest receivable
              
              
              (404
              )
              
              
              (227
              )Decrease
      (increase) in other assets
              
              
              748
              
              
              
              (902
              )Increase
      in other liabilities
              
              
              367
              
              
              
              217Net
      cash provided by operating activities
              
              
              2,165
              
              
              
              767Cash
      Flows from Investing Activities:Proceeds
      from sales of:Investment
      securities available for sale
              
              
              19,174
              
              
              
              -Proceeds
      from calls and maturities of:Investment
      securities available for sale
              
              
              6,335
              
              
              
              6,241Investment
      securities held to maturity
              
              
              3,162
              
              
              
              4,971Purchase
      of:Investment
      securities available for sale
              
              
              (27,858
              )
              
              
              (6,228
              )Investment
      securities held to maturity
              
              
              (1,666
              )
              
              
              (5,545
              )Mortgage-backed
      securities available for sale
              
              
              (37,955
              )
              
              
              (13,849
              )Mortgage-backed
      securities held to maturity
              
              
              (719
              )
              
              
              (1,860
              )Office
      properties and equipment
              
              
              (3,473
              )
              
              
              (3,192
              )Principal
      repayments from:Investment
      securities
              
              
              2,334
              
              
              
              2,693Mortgage-backed
      securities
              
              
              13,515
              
              
              
              15,291Net
      (increase) decrease in Federal Home Loan Bank stock
              
              
              (1,770
              )
              
              
              246Maturity
      (purchase) of interest-bearing time deposits
              
              
              509
              
              
              
              (717
              )Net
      increase in loans receivable
              
              
              (42,563
              )
              
              
              (40,767
              )Net
      cash used for investing activities
              
              
              (70,975
              )
              
              
              (42,716
              )Cash
      Flows from Financing Activities:Net
      increase in deposits
              
              
              34,128
              
              
              
              52,529Increase
      (decrease) in Federal Home Loan Bank short-term borrowings
              
              
              21,930
              
              
              
              (13,965
              )Proceeds
      from Federal Home Loan Bank long-term borrowings
              
              
              16,000
              
              
              
              7,000Repayment
      of Federal Home Loan Bank long-term borrowings
              
              
              (315
              )
              
              
              (126
              )(Decrease)
      increase in advances from borrowers for taxes and
insurance
              
              
              (212
              )
              
              
              288Acquisition
      of treasury stock
              
              
              -
              
              
              
              (1,189
              )Net
      cash provided by financing activities
              
              
              71,531
              
              
              
              44,537Increase
      in cash and cash equivalents
              
              
              2,721
              
              
              
              2,588CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              13,257
              
              
              
              10,669CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              15,978
              
              
              $
              13,257Supplemental
      Cash Flow Disclosures:Cash
      paid:Interest
              
              $
              14,243
              
              
              $
              9,834Income
      taxes
              
              $
              5
              
              
              $
              463
 
 
 See
notes to consolidated financial statements
 F-6
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
1 – ORGANIZATION AND NATURE OF OPERATIONS
 
 In 2003,
Colonial Bank, FSB (the “Bank”) reorganized into the two-tier mutual holding
company structure.  As part of the reorganization, the Bank formed
Colonial Bankshares, Inc. (the “Company”) and Colonial Bankshares, MHC (the
“Mutual Holding Company”), a federally-chartered, mid-tier, stock holding
company and mutual holding company, respectively.  Colonial Bank, FSB
became a federally-chartered capital stock savings bank, and a wholly-owned
subsidiary of Colonial Bankshares, Inc.  Colonial Bankshares, Inc.
became the wholly-owned subsidiary of Colonial Bankshares, MHC, whose activity
is not included in the accompanying consolidated financial
statements.  The same directors and officers who manage Colonial Bank,
FSB manage Colonial Bankshares, Inc. and Colonial Bankshares,
MHC.  The MHC, the Company and the Bank are subject to regulation and
supervision 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 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.
 
 In
September 2006, the Bank established a Delaware corporation, CB Delaware
Investments, Inc. (the “Operating Subsidiary”) whose purpose is to invest in and
manage securities.  The Operating Subsidiary was funded by the Bank
with cash and investments with an approximate value of $134.0 million in
exchange for all the outstanding stock of the operating subsidiary.
 
 In May
2007, the Bank opened its new administrative headquarters/full-service office in
Vineland, New Jersey.  The Bank also   maintains branch
offices in Bridgeton, Mantua, Millville, Upper Deerfield, Vineland and Sewell,
New Jersey.  The Bank’s principal business consists of attracting
customer deposits and investing these deposits primarily in single-family
residential, commercial, and consumer loans and investments.
 
 
 NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
 
 Principles
of Consolidation
 
 The
consolidated financial statements include the accounts of Colonial Bankshares,
Inc., its wholly-owned subsidiary, Colonial Bank, FSB and the Bank’s
wholly-owned subsidiary, CB Delaware Investments, Inc.  All material
intercompany transactions and balances have been eliminated.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period.  Actual results could differ from those
estimates.  Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses, the evaluation of other than temporary impairment of investment
securities and the valuation of deferred tax assets.
 
 F-7
 
 COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Significant
Group Concentrations of Credit Risk
 
 Most of
the Bank’s activities are with customers located within Southern New
Jersey.  Note 4 discusses the types of investment securities that the
Bank invests in.  Note 5 discusses the types of lending that the Bank
engages in.  The Bank does not have any significant concentrations to
any one industry or customer.  Although the Bank has a diversified
portfolio, its debtors’ ability to honor their contracts is influenced by the
region’s economy.
 
 Cash
and Cash Equivalents
 
 For
purposes of reporting cash flows, cash and cash equivalents include cash on hand
and amounts due from banks.
 
 The
Company and the Bank maintain cash deposits in other depository institutions
that occasionally exceed the amount of deposit insurance
available.  Management periodically assesses the financial condition
of these institutions and believes that the risk of any possible credit loss is
minimal.
 
 The Bank
is required to maintain average reserve balances in vault cash, with the Federal
Reserve Bank or with the Federal Home Loan Bank based upon outstanding balances
of deposit transaction accounts.  Based upon the Bank’s outstanding
transaction deposit balances, the Bank maintained a deposit account at the
Federal Home Loan Bank of New York in the amount of $2.4 million and $1.2
million at December 31, 2007 and 2006, respectively.
 
 Interest-Bearing
Time Deposits in Banks
 
 Interest-bearing
time deposits in banks mature within two years and are carried at
cost.
 
 Investment
Securities
 
 Debt
securities that management has the positive intent and ability to hold until
maturity are classified as held to maturity and are carried at their remaining
unpaid principal balance, net of unamortized premiums, or unaccreted
discounts.  Premiums are amortized and discounts are accreted using a
method which produces results which approximate the interest method over the
estimated remaining term of the underlying security.
 
 Securities
that will be held for indefinite periods of time, including securities that may
be sold in response to changes in market interest or prepayment rates, needs for
liquidity and changes in the availability of and the yield of alternative
investments are classified as available for sale.  These securities
are carried at estimated fair value, which is determined using published quotes
where available. If published quotes are not available, fair values are based on
quoted market prices of comparable instruments.  Unrealized gains and
losses are excluded from earnings and are reported net of tax in other
comprehensive income.  Realized gains and losses are included in the
statements of income and are determined based on the adjusted cost of the
specific security sold.
 
 Management
determines the appropriate classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet
date.
 
 Declines
in the fair value of held to maturity and available for sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses.  In estimating other-than-temporary impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Bank to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
 
 F-8
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Loans
Held for Sale
 
 At
December 31, 2007, the Bank had no loans held for sale.  At December
31, 2006, the Bank had $144 thousand in loans held for sale which is included in
total loans receivable on the balance sheet.  These loans are carried
at the lower of cost or estimated fair value.  Net unrealized losses,
if any, are recognized through a valuation allowance by charges to
income.
 
 Loans
Receivable
 
 The Bank
grants mortgage, commercial and consumer loans to customers.  A
substantial portion of the loan portfolio is represented by mortgage loans
throughout the counties of Cumberland and Gloucester of New
Jersey.  The ability of the Bank’s debtors to honor their contracts is
dependent upon the real estate and general economic conditions in this
area.
 
 Loans
receivable that management has the intent and ability to hold until maturity or
payoff are stated at their outstanding unpaid principal balances, net of an
allowance for loan losses and any deferred fees and costs.  Interest
income is accrued on the unpaid principal balance.  Loan origination
fees and costs are deferred and recognized as an adjustment of the yield
(interest income) of the related loans.  The Bank is generally
amortizing these amounts over the contractual life of the loan.
 
 The
accrual of interest is generally discontinued when the contractual payment of
principal or interest have become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing.  A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well
secured.  When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest accrued
in prior years is charged against the allowance for loan
losses.  Interest received on nonaccrual loans generally is either
applied against principal or reported as interest income, according to
management’s judgment as to the collectibility of
principal.  Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time, and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.
 
 Allowance
for Loan Losses
 
 The
allowance for loan losses is established through provisions for loan losses
charged against income.  Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance.
 
 The
allowance for loan losses is maintained at a level considered necessary to
provide for estimated probable loan losses.  Management’s periodic
evaluation of the adequacy of the allowance is based on the Bank’s past loan
loss experience, adverse situations that may affect the borrower’s ability to
repay, the estimated value of any underlying collateral, composition of the loan
portfolio, current economic conditions, and other relevant
factors.  This evaluation is inherently subjective as it requires
material estimates that may be susceptible to significant revision as more
information becomes available.
 
 A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payments status, collateral value, and the probability of collecting
scheduled principal and interest payments when due.  Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired.  Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.  Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
  F-9
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly, the Bank does not separately identify
individual consumer and mortgage loans for impairment disclosures, unless they
are subject to a restructuring agreement.
 
 The
allowance consists of specific, general and unallocated
components.  The specific component relates to loans that are
classified as doubtful, substandard or special mention.  For such
loans that are also classified as impaired, an allowance is established when the
discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value for that loan.  The
general component covers non-classified loans and is based on historical loss
experience adjusted for qualitative estimate of probable losses.  The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
 
 Federal
Home Loan Bank Stock
 
 Federal
law requires a member institution of the Federal Home Loan Bank system to hold
restricted stock of its district Federal Home Loan Bank according to a
predetermined formula.  The restricted stock is carried at
cost.
 
 Office
Properties and Equipment
 
 Office
properties and equipment are recorded at cost.  Depreciation is
computed using the straight-line method over the expected useful lives of the
related assets.
 
 Transfers
of Financial Assets
 
 Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered.  Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
 
 Bank-Owned
Life Insurance
 
 The Bank
invests in bank owned life insurance (“BOLI”) as a source of funding for
employee benefit expenses.  BOLI involves the purchasing of life
insurance by the Bank on a chosen group of employees.  The Bank is the
owner and beneficiary of the policies.  This life insurance investment
is carried at the cash surrender value of the underlying
policies.  Income from the increase in cash surrender value of the
policies is included in non-interest income on the statements of
income.
 
 Advertising
Costs
 
 The Bank
follows the policy of charging the costs of advertising to expense as
incurred.  Advertising expense was $141 thousand and $82 thousand for
the years ended December 31, 2007 and 2006, respectively.
  F-10
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Stock
Compensation Plans
 
 In 2006,
Board of Directors of the Company approved the Colonial Bankshares, Inc. 2006
Stock-based Incentive Plan (the “Stock Plan”).  Prior to 2006, the
Company had no stock option plans or stock-based compensation other than the
ESOP.  The Company accounts for stock-based compensation under the
fair value recognition provisions of FASB Statement No. 123(R), “Share-Based
Payment.”  Statement No. 123(R) replaces Statement No. 123, and
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements over the period that an employee provides
service in exchange for the award.  For the years ended
December 31, 2007 and 2006, there were stock options outstanding and the
related compensation expense of approximately $148 thousand and $32 thousand,
respectively is included in the accompanying statement of income.  For
the years ended December 31, 2007 and 2006, there was a tax benefit
recognized related to this stock-based compensation of approximately $51
thousand and $11 thousand, respectively.
 
 Income
Taxes
 
 Deferred
taxes are provided on the liability method whereby deferred tax assets are
recognized for deductible temporary differences and deferred tax liabilities are
recognized for taxable temporary differences.  Temporary differences
are the differences between the reported amounts of assets and liabilities and
their tax basis.  Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion of the deferred tax assets will not be
realized.  Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of
enactment.  Colonial Bankshares, Inc. and its subsidiary file a
consolidated federal income tax return.
 
 Earnings
Per Share
 
 Basic
earnings per share (EPS) is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period.  Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock, such as unvested
restricted stock awards and outstanding stock options, were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. Diluted EPS is calculated by
adjusting the weighted average number of shares on common stock outstanding to
include the effect of contracts or securities exercisable or which could be
converted into common stock, if dilutive, using the treasury stock
method.
 
 Off-Balance
Sheet Financial Instruments
 
 In the
ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and letters of
credit.  Such financial instruments are recorded in the statement of
financial condition when they are funded.
 
  F-11
 
 COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Comprehensive
Income
 
 Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income.  Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
investment securities, are reported as a separate component of the stockholders’
equity section of the statement of financial condition, such items, along with
net income, are components of comprehensive income.
 
 The
components of other comprehensive income (loss) and related tax effects are as
follows:
 
 Years
      Ended December 31,2007
              
              
              2006(In
      Thousands)Unrealized
      holding gains (losses) on available for sale securities
              
              $
              914
              
              
              $
              344Reclassification
      adjustment for net (gains) on sales and calls of
securities
              
              
              (229
              )
              
              
              (5
              )Impairment
      charge on investment security
              
              
              284
              
              
              
              -Net
      unrealized gains (losses)
              
              
              969
              
              
              
              339Income
      tax effect
              
              
              354
              
              
              
              180Net
      of tax amount
              
              $
              615
              
              
              $
              159
 
 
 Recent
Accounting Pronouncements
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 141(R), “Business Combinations.”  This Statement establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The
Statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. The guidance will become effective as of
the beginning of a company’s fiscal year beginning after December 15, 2008. This
new pronouncement will impact the Company’s accounting for business combinations
completed beginning January 1, 2009.
 
 FASB
Statement No. 160, “Noncontrolling Interests in Consolidated Financial
Statements—an amendment of Accounting Research Bulletin (“ARB”) No. 51”, was
issued in December of 2007. This Statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective as of the
beginning of a company’s fiscal year beginning after December 15, 2008. The
Company is currently evaluating the potential impact the new pronouncement will
have on its consolidated financial statements.
 
 Staff
Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of
Section D.2 of Topic 14,“Share-Based Payment,” of the Staff Accounting Bulletin series. Question
6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use
of the “simplified” method in developing an estimate of expected term of “plain
vanilla” share options and allows usage of the “simplified” method for share
option grants prior to December 31, 2007. SAB 110 allows public companies
which do not have historically sufficient experience to provide a reasonable
estimate to continue use of the “simplified” method for estimating the expected
term of “plain vanilla” share option grants after December 31,
2007.  SAB 110 is effective January 1, 2008.
  F-12
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Staff
Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded at
Fair Value Through Earnings" expresses the views of the staff regarding written
loan commitments that are accounted for at fair value through earnings under
generally accepted accounting principles. To make the staff's views consistent
with current authoritative accounting guidance, the SAB revises and rescinds
portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments."  Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect SAB 109 to have a material impact on its consolidated
financial statements.
 
 In June
2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should
recognize a realized tax benefit associated with dividends on nonvested equity
shares, nonvested equity share units and outstanding equity share options
charged to retained earnings as an increase in additional paid in
capital. The amount recognized in additional paid in capital should be
included in the pool of excess tax benefits available to absorb potential future
tax deficiencies on share-based payment awards. EITF 06-11 should be
applied prospectively to income tax benefits of dividends on equity-classified
share-based payment awards that are declared in fiscal years beginning after
December 15, 2007. The Company expects that EITF 06-11 will not have
an impact on its consolidated financial statements.
 
 In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48), which
clarifies the accounting for uncertainty in tax positions.  This
interpretation requires that companies recognize in their financial statements
the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position.  The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained
earnings.  The implementation of this standard did not have a material
impact on our consolidated financial statements.
 
 In May
2007, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No.
48” (FSP FIN 48-1).  FSP FIN 48-1 provides guidance on how to
determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits.  FSP FIN 48-1 is
effective retroactively to January 1, 2007.  The implementation of
this standard did not have a material impact on our consolidated financial
statements.
 
 In
March 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for
Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11
requires companies to recognize the income tax benefit realized from dividends
or dividend equivalents that are charged to retained earnings and paid to
employees for nonvested equity-classified employee share-based payment awards as
an increase to additional paid-in capital.  EITF 06-11 is effective
for fiscal years beginning after September 15, 2007.   The
Company does not expect EITF 06-11 will have a material impact on its
consolidated financial statements.
 
 In March
2007, the FASB ratified EITF Issue No. 06-10, “Accounting for Collateral
Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10).  EITF
06-10 provides guidance for determining a liability for the postretirement
benefit obligation as well as recognition and measurement of the associated
asset on the basis of the terms of the collateral assignment
agreement.  EITF 06-10 is effective for fiscal years beginning after
December 15, 2007.  The Company is currently assessing the impact of
EITF 06-10 on its consolidated financial statements.
 
 
 F-13
 
 COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 In
February 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement No.
115.   SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date.  SFAS No. 159 is effective for the Company on January
1, 2008.  The Company does not expect the implementation of SFAS No.
159 will have an impact on our consolidated financial statements.
 
 In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value
Measurements”, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value
measurements.  FASB Statement No. 157 applies to other accounting
pronouncements that require or permit fair value measurements.  The
new guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those
fiscal years.  We are currently evaluating the potential impact, if
any, of the adoption of FASB Statement No. 157 on our consolidated
financial statements.
 
 In
December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b,
“Effective Date of FASB Statement No. 157, “that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items) that
are not recognized or disclosed at fair value in an entity’s financial
statements on a recurring basis (at least annually).  Therefore, if
the change in fair value of a non-financial item is not required to be
recognized or disclosed in the financial statements on an annual basis or more
frequently, the effective date of application of Statement 157 to that item is
deferred until fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years.  This deferral does not apply,
however, to an entity that applies Statement 157 in interim or annual financial
statements before proposed FSB 157-b is finalized.  The Company is
currently evaluating the impact, if any, that the adoption of FSP 157-b will
have on its consolidated financial statements.
 
 On
September 7, 2006, the EITF reached a conclusion on EITF Issue
No. 06-5, “Accounting for Purchases of Life Insurance – Determining the
Amount That Could Be Realized in Accordance with FASB Technical Bulletin
No. 85-4, Accounting for Purchases of Life Insurance” (“EITF
06-5”).  The scope of EITF 06-5 consists of six separate issues
relating to accounting for life insurance policies purchased by entities
protecting against the loss of “key persons.”  The six issues are
clarifications of previously issued guidance on FASB Technical Bulletin
No. 85-4.  EITF 06-5 is effective for fiscal years beginning
after December 15, 2006.  The adoption of EITF 06-5 had no effect
on the Company’s consolidated financial statements.
 
 In
September 2006, FASB ratified the consensus reached by the EITF in Issue 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements.”  EITF 06-4
applies to life insurance arrangements that provide an employee with a specified
benefit that is not limited to the employee’s active service period, including
certain bank-owned life insurance (“BOLI”) policies.  EITF 06-4
requires an employer to recognize a liability and related compensation costs for
future benefits that extend to postretirement periods.   EITF
06-4 is effective for fiscal years beginning after December 31, 2007, with
earlier application permitted.  The Company is continuing to evaluate
the impact of this consensus, which may require it to recognize an additional
liability and compensation expense related to its BOLI policies.
 
  F-14
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
3 – EARNINGS PER SHARE
 
 There are
no convertible securities which would affect the net income (numerator) in
calculating basic and diluted earnings per share; therefore the net income for
each calculation in 2007 is $1.2 million and the net income for 2006 is $1.6
million.  Basic and diluted earnings per share data are based on the
weighted-average number of common shares outstanding during each
period.  Diluted earnings per share are further adjusted for potential
common shares that were dilutive and outstanding during the
period.  Potential common shares consist of stock options outstanding
and non-vested stock grants under the stock-based incentive
plans.  The dilutive effect of potential common shares is computed
using the treasury stock method.  The following table sets forth the
composition of the weighted average common shares (denominator) used in the
basic and diluted earnings per share computation.
 
 
 For
      the year
                ended
                December
      31,
                2007
              
              
              For
      the year
                ended
                December
      31,
                2006Net
      Income
              
              $
              1,231,000
              
              
              $
              1,611,000Weighted
      average common shares outstanding
              
              
              4,521,696
              
              
              
              4,521,696Average
      unearned ESOP shares
              
              
              (143,160
              )
              
              
              (154,763
              )Average
      treasury stock shares
              
              
              (88,625
              )
              
              
              (11,718
              )Weighted
      average common shares outstanding - basic
              
              
              4,289,911
              
              
              
              4,355,215Effect
      of dilutive non-vested shares and stock options
outstanding
              
              
              22,564
              
              
              
              33,561Weighted
      average common shares outstanding - diluted
              
              
              4,312,475
              
              
              
              4,388,776Earnings
      per share-basic
              
              $
              0.29
              
              
              $
              0.37Earnings
      per share-diluted
              
              $
              0.29
              
              
              $
              0.37
 
 
 
 
 F-15
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
4 – INVESTMENT SECURITIES
 
 Investment
securities are summarized as follows:
 
 Amortized
                Cost
              
              
              Gross
                Unrealized
                Gains
              
              
              Gross
                Unrealized
                Losses
              
              
              Fair
      Value(In
      Thousands)AVAILABLE
      FOR SALE:DECEMBER
      31, 2007U.
      S. Government agency
              
              $
              44,052
              
              
              $
              350
              
              
              $
              (127
              )
              
              $
              44,275Corporate
              
              
              12,880
              
              
              
              56
              
              
              
              (669
              )
              
              
              12,267Mutual
      funds
              
              
              14,385
              
              
              
              -
              
              
              
              -
              
              
              
              14,385Municipal
      securities
              
              
              5,402
              
              
              
              113
              
              
              
              (11
              )
              
              
              5,504SBA
      pools
              
              
              7,614
              
              
              
              119
              
              
              
              (69
              )
              
              
              7,664Mortgage-backed
      securities
              
              
              79,085
              
              
              
              669
              
              
              
              (300
              )
              
              
              79,454$
              163,418
              
              
              $
              1,307
              
              
              $
              (1,176
              )
              
              $
              163,549
 
 DECEMBER
      31, 2006U.
      S. Government agency
              
              $
              29,534
              
              
              $
              43
              
              
              $
              (449
              )
              
              $
              29,128Corporate
              
              
              8,956
              
              
              
              37
              
              
              
              (333
              )
              
              
              8,660Mutual
      funds
              
              
              13,942
              
              
              
              -
              
              
              
              (226
              )
              
              
              13,716Municipal
      securities
              
              
              23,927
              
              
              
              403
              
              
              
              (71
              )
              
              
              24,259SBA
      pools
              
              
              7,759
              
              
              
              220
              
              
              
              (46
              )
              
              
              7,933Mortgage-backed
      securities
              
              
              53,646
              
              
              
              168
              
              
              
              (585
              )
              
              
              53,229$
              137,764
              
              
              $
              871
              
              
              $
              (1,710
              )
              
              $
              136,925HELD
      TO MATURITY:DECEMBER
      31, 2007U.
      S. Government agency
              
              $
              1,420
              
              
              $
              22
              
              
              $
              -
              
              
              $
              1,442Corporate
              
              
              2,173
              
              
              
              145
              
              
              
              (1
              )
              
              
              2,317Municipal
      securities
              
              
              9,854
              
              
              
              500
              
              
              
              -
              
              
              
              10,354Mortgage-backed
      securities
              
              
              3,766
              
              
              
              97
              
              
              
              -
              
              
              
              3,863$
              17,213
              
              
              $
              764
              
              
              $
              (1
              )
              
              $
              17,976DECEMBER
      31, 2006U.
      S. Government agency
              
              $
              1,412
              
              
              $
              -
              
              
              $
              (43
              )
              
              $
              1,369Corporate
              
              
              1,698
              
              
              
              131
              
              
              
              (1
              )
              
              
              1,828Municipal
      securities
              
              
              11,640
              
              
              
              599
              
              
              
              -
              
              
              
              12,239Mortgage-backed
      securities
              
              
              3,972
              
              
              
              92
              
              
              
              -
              
              
              
              4,064$
              18,722
              
              
              $
              822
              
              
              $
              (44
              )
              
              $
              19,500
 
 
 All of
the Company’s mortgage-backed securities at December 31, 2007 and 2006 have been
issued by government agencies.
 
 F-16
 
   COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
4 – INVESTMENT SECURITIES (CONTINUED)
 
 The
amortized cost and estimated fair value of investment securities at December 31,
2007, by contractual maturity, are shown below.  Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
 
 
 Held
      to Maturity
              
              
              Available
      for SaleAmortized
                Cost
              
              
              Fair
      Value
              
              
              Amortized
                Cost
              
              
              Fair
      Value(In
      Thousands)Due
      in one year or less
              
              $
              2,184
              
              
              $
              2,183
              
              
              $
              19,751
              
              
              $
              19,766Due
      after one year through five years
              
              
              2,458
              
              
              
              2,503
              
              
              
              24,824
              
              
              
              24,877Due
      after five year through ten years
              
              
              3,848
              
              
              
              4,065
              
              
              
              28,553
              
              
              
              28,499Due
      thereafter
              
              
              8,723
              
              
              
              9,225
              
              
              
              90,290
              
              
              
              90,407$
              17,213
              
              
              $
              17,976
              
              
              $
              163,418
              
              
              $
              163,549
 
 At
December 31, 2007 and 2006, $64.9 million and $35.7 million, respectively, of
securities were pledged as collateral to secure certain deposits and FHLB
advances.
 
 Gross
gains and losses of $312 thousand and $83, respectively, for the year ended
December 31, 2007, and $5 thousand and $0 thousand, respectively, for the year
ended December 31, 2006, were realized on sales and calls of investment
securities.
 
 The
following table shows the Company’s available for sale investments’ gross
unrealized losses and fair value, and length of time that individual securities
have been in a continuous unrealized loss position:
 
 
 At
      December 31, 2007
              
              Less
      than 12 months
              
              
              12
      months or more
              
              
              TotalFair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses(In
      Thousands)U.
      S. Government agency
              
              $
              4,091
              
              
              $
              48
              
              
              $
              10,414
              
              
              $
              79
              
              
              $
              14,505
              
              
              $
              127Corporate
              
              
              5,295
              
              
              
              137
              
              
              
              2,945
              
              
              
              532
              
              
              
              8,240
              
              
              
              669Municipal
      securities
              
              
              -
              
              
              
              -
              
              
              
              303
              
              
              
              11
              
              
              
              303
              
              
              
              11SBA
      pools
              
              
              2,888
              
              
              
              16
              
              
              
              1,613
              
              
              
              53
              
              
              
              4,501
              
              
              
              69Mortgage-backed
      securities
              
              
              10,144
              
              
              
              14
              
              
              
              13,864
              
              
              
              286
              
              
              
              24,008
              
              
              
              300Total
              
              $
              22,418
              
              
              $
              215
              
              
              $
              29,139
              
              
              $
              961
              
              
              $
              51,557
              
              
              $
              1,176
 
 
 
 
 F-17
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
4 – INVESTMENT SECURITIES (CONTINUED)
 
 At
      December 31, 2006
              
              Less
      than 12 months
              
              
              12
      months or more
              
              
              TotalFair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses(In
      Thousands)U.
      S. Government agency
              
              $
              1,983
              
              
              $
              1
              
              
              $
              23,708
              
              
              $
              448
              
              
              $
              25,691
              
              
              $
              449Corporate
              
              
              -
              
              
              
              -
              
              
              
              4,809
              
              
              
              333
              
              
              
              4,809
              
              
              
              333Mutual
      funds
              
              
              444
              
              
              
              1
              
              
              
              12,960
              
              
              
              225
              
              
              
              13,404
              
              
              
              226Municipal
      securities
              
              
              769
              
              
              
              3
              
              
              
              6,591
              
              
              
              68
              
              
              
              7,360
              
              
              
              71SBA
      pools
              
              
              544
              
              
              
              1
              
              
              
              1,789
              
              
              
              45
              
              
              
              2,333
              
              
              
              46Mortgage-backed
      securities
              
              
              14,280
              
              
              
              154
              
              
              
              19,998
              
              
              
              431
              
              
              
              34,278
              
              
              
              585Total
              
              $
              18,020
              
              
              $
              160
              
              
              $
              69,855
              
              
              $
              1,550
              
              
              $
              87,875
              
              
              $
              1,710
 
 The
following table shows the Company’s held to maturity investments’ gross
unrealized losses and fair value, and length of time that individual securities
have been in a continuous unrealized loss position:
 
 
 At
      December 31, 2007
              
              Less
      than 12 months
              
              
              12
      months or more
              
              
              TotalFair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses(In
      Thousands)Corporate
              
              $
              986
              
              
              $
              1
              
              
              $
              -
              
              
              $
              -
              
              
              $
              986
              
              
              $
              1Total
              
              $
              986
              
              
              $
              1
              
              
              $
              -
              
              
              $
              -
              
              
              $
              986
              
              
              $
              1
 
 
 
 At
      December 31, 2006
              
              Less
      than 12 months
              
              
              12
      months or more
              
              
              TotalFair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses(In
      Thousands)U.
      S. Government agency
              
              $
              875
              
              
              $
              43
              
              
              $
              -
              
              
              $
              -
              
              
              $
              875
              
              
              $
              43Corporate
              
              
              429
              
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              429
              
              
              
              1Total
              
              $
              1,304
              
              
              $
              44
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1,304
              
              
              $
              44
 
 
 Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability
of the Bank to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.  In
management’s opinion, the unrealized losses reflect changes in interest rates
subsequent to the acquisition of specific securities.
 
 For the
quarter and year ended December 31, 2007, the Company made a determination to
write down a mutual fund held in its available for sale investment portfolio for
“other than temporary impairment.”  The Company took an investment
write down of $284 thousand (pre-tax), or an after-tax charge of $196
thousand.  The Company’s decision was based on the length of time the
mutual fund was in a loss position and based on the fact that the mutual fund
had not made any recovery during the recent reduction in interest
rates.  The Company does not believe this impairment is related to
credit quality but rather to the widening of spreads in the bond market for
mortgage related securities.
 
 F-18
 
 COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
4 – INVESTMENT SECURITIES (CONTINUED)
 
 At
December 31, 2007, there were 32 securities in the less-than-twelve-months
category and 51 securities in the twelve-months-or-more category for the
available for sale portfolio.  At December 31, 2007, there was one
security in the less-than-twelve-months category and no securities in the
twelve-months-or-more category for the held to maturity portfolio.
 
 The
Company believes the unrealized losses on the investment in U. S. Government
agency securities are caused by interest rate increases.  The
contractual terms of those investments do not permit the issuer to settle the
securities at a price less than the amortized cost of the
investment.  Because the Company has the ability and intent to hold
these investments until a recovery of fair value, which may be maturity, the
Company does not consider the investments to be other-than temporarily impaired
at December 31, 2007.
 
 The
Company believes the unrealized losses on the investment in corporate securities
are caused by interest rate increases.  The contractual terms of those
investments do not permit the individual corporations to settle the security at
a price less than par at maturity.  Because the decline in market
value is attributable to changes in interest rates and not credit quality, and
because the Company has the ability and intent to hold these investments until a
recovery of fair value, which may be maturity, the Company does not consider the
investments to be other-than temporarily impaired at December 31,
2007.
 
 The
Company believes the unrealized losses on the investment in municipal securities
are caused by interest rate increases.  The contractual terms of those
investments do not permit the municipality to settle the security at a price
less than par.  Because the decline in market value is attributable to
changes in interest rates and not credit quality, and because the Company has
the ability and intent to hold these investments until a recovery of fair value,
which may be maturity, the Company does not consider the investments to be
other-than temporarily impaired at December 31, 2007.
 
 The
Company believes the unrealized losses on the investment in SBA loan pools and
the U. S. Government agency mortgage-backed securities are caused by interest
rate fluctuations.  The contractual cash flows of those investments
are guaranteed by an agency of the United States government.  Because
the decline in market value is attributable to changes in interest rates and not
credit quality, and because the Company has the ability and intent to hold these
investments until a recovery of fair value, which may be maturity, the Company
does not consider the investments to be other-than temporarily impaired at
December 31, 2007.
 
 
 NOTE
5 - LOANS RECEIVABLE
 
 Loans
receivable at December 31, 2007 and 2006 consist of the following:
 
 2007
              
              
              2006(In
      Thousands)Mortgage
      loans:One-to-four
      family
              
              $
              114,745
              
              
              $
              102,328Multi-family
              
              
              5,609
              
              
              
              2,492Commercial
              
              
              55,606
              
              
              
              39,186Construction
              
              
              10,137
              
              
              
              8,371Home
      equity loans and credit lines
              
              
              40,264
              
              
              
              38,074Commercial
      loans
              
              
              12,600
              
              
              
              7,337Consumer
      and other loans
              
              
              3,752
              
              
              
              2,427242,713
              
              
              
              200,215Deferred
      loan fees
              
              
              (281
              )
              
              
              (323
              )Allowance
      for loan losses
              
              
              (1,392
              )
              
              
              (1,373
              )$
              241,040
              
              
              $
              198,519
 
 
 F-19
 
 COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
5 - LOANS RECEIVABLE (CONTINUED)
 
 In the
normal course of business, the Bank has extended loans to executive officers,
directors and principal stockholders, their immediate families and affiliated
companies (commonly referred to as related parties) on the same terms including
interest rates and collateral as those prevailing at the time for comparable
transactions with others.  A summary of loan activity to related
parties is as follows (in thousands):
 
 Balance
                January
      1,
              
              
              Additions
              
              
              Amounts
                Collected
              
              
              Balance
                December
      31,2007
              
              $
              2,601
              
              
              $
              5,478
              
              
              $
              1,502
              
              
              $
              6,577
 
 At
December 31, 2007, the Bank had $345 thousand of impaired loans and at December
31, 2006, the Bank had no impaired loans.  The total amount of
interest not recognized into income on the impaired loans totaled approximately
$17 thousand and $0 in 2007 and 2006, respectively. Loans on which the accrual
of interest has been discontinued amounted to $1.2 million and $233 thousand at
December 31, 2007 and 2006, respectively.  The Bank had no loan
balances past due 90 days or more and still accruing interest at December 31,
2007 and 2006, respectively.
 
 The
following is a summary of changes in the allowance for loan losses:
 
 2007
              
              
              2006(In
      Thousands)Balance,
      beginning of year
              
              $
              1,373
              
              
              $
              1,168Provision
      charged to operations
              
              
              84
              
              
              
              179Charge-offs
              
              
              (68
              )
              
              
              (10
              )Recoveries
              
              
              3
              
              
              
              36Balance,
      end of year
              
              $
              1,392
              
              
              $
              1,373
 
 
 NOTE
6 – OFFICE PROPERTIES AND EQUIPMENT
 
 Office
properties and equipment at December 31, 2007 and 2006 are summarized by major
classification as follows:
 
 Estimated
                Useful
      Life
                in
      Years
              
              
              2007
              
              
              2006(In
      Thousands)Land
              
              Indefinite
              
              
              $
              2,929
              
              
              $
              1,804Buildings
              
              25
              
              
              
              7,596
              
              
              
              2,987Furniture,
      Fixtures and equipment
              
              3 –
      7
              
              
              
              2,843
              
              
              
              1,946Construction
      in progress
              
              
              
              
              
              91
              
              
              
              3,25313,459
              
              
              
              9,990Accumulated
      depreciation
              
              
              
              
              
              (3,186
              )
              
              
              (2,653
              )$
              10,273
              
              
              $
              7,337
 
 The
Company completed construction and opened our new administrative
headquarters/full-service office in Vineland, New Jersey in May
2007.  Total construction costs including land was $6.4
million.
 
 We have
spent $269 thousand for the acquisition of land in the Borough of Buena in
Atlantic County, New Jersey, we have spent $141 thousand for the acquisition of
land in Millville, Cumberland County, New Jersey and we have spent $984 thousand
for the acquisition of land in Harrison Township, Gloucester County, New Jersey
as possible branch locations.  The cost of the land for all of the
above properties is included in the Land total.  As we are in the
early stages of planning, we cannot determine completion dates or estimated
costs to complete.
  In
February 2008, the Company signed an agreement to purchase property in Vineland,
New Jersey.  The settlement is expected to occur in the second quarter
of 2008 and the purchase price is $325 thousand.
  F-20
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
7 - DEPOSITS
 
 Deposits
at December 31, 2007 and 2006 consist of the following major classifications
(dollars in thousands):
 
 2007
              
              
              2006Amount
              
              
              Average
                Rate
              
              
              Amount
              
              
              Average
                RateCertificates
      of deposit:2.01%
      - 4.00%
              
              
              $
              13,155
              
              
              
              3.80
              %
              
              $
              27,034
              
              
              
              3.62
              %4.01%
      - 6.00%
              
              
              
              204,761
              
              
              
              4.92
              
              
              
              163,412
              
              
              
              4.936.01%
      - 8.00%
              
              
              
              141
              
              
              
              7.77
              
              
              
              -
              
              
              
              -More
      than 8.00%
              
              
              
              23
              
              
              
              9.65
              
              
              
              -
              
              
              
              -Total
      certificates of deposit
              
              
              
              218,080
              
              
              
              4.86
              
              
              
              190,446
              
              
              
              4.74Non-interest
      bearing demand
              
              
              
              15,141
              
              
              
              -
              
              
              
              18,055
              
              
              
              -NOW
              
              
              
              45,255
              
              
              
              2.12
              
              
              
              36,740
              
              
              
              1.89Super
      NOW
              
              
              
              16,520
              
              
              
              1.77
              
              
              
              14,200
              
              
              
              1.71Savings
              
              
              
              55,716
              
              
              
              2.18
              
              
              
              57,260
              
              
              
              1.72Money
      market demand
              
              
              
              20,670
              
              
              
              3.72
              
              
              
              20,553
              
              
              
              3.54$
              371,382
              
              
              
              3.72
              %
              
              $
              337,254
              
              
              
              3.46
              %
 
 A summary
of certificates of deposit by maturity at December 31, 2007 is as follows (in
thousands):
 
 2008
              
              $
              150,4462009
              
              
              28,2752010
              
              
              23,0862011
              
              
              8,8632012
              
              
              5,058Thereafter
              
              
              2,352$
              218,080
 
 
 The
aggregate amount of certificates of deposit with a minimum denomination of $100
thousand was $119.7 million and $94.4 million at December 31, 2007 and 2006,
respectively.  Amounts above $100 thousand are not insured by the
Federal Deposit Insurance Corporation (“FDIC”).  Included in the
certificate of deposit balances at December 31, 2007 are brokered certificates
of deposit in the amount of $28.0 million at a weighted average rate of 5.30%
with maturities as follows, $5.0 million in October 2008, $5.0 million in
November 2008, $3.9 million in July 2009, $1.5 million in December 2009, $2.5
million in February 2010, $4.2 million in August 2010, $2.0 million in February
2011, and $3.9 million in August 2011.  The Bank had $11.5 million at
a weighted average rate of 5.24% in brokered deposits at December 31,
2006.
 
 A summary
of interest expense on deposits for the years ended December 31, 2007 and 2006
are as follows:
 
 
 2007
              
              
              2006(In
      Thousands)NOW
      and Super NOW
              
              $
              1,299
              
              
              $
              805Savings
              
              
              1,188
              
              
              
              992Money
      market demand
              
              
              678
              
              
              
              587Certificates
      of deposit
              
              
              10,467
              
              
              
              7,073$
              13,632
              
              
              $
              9,457
 
 F-21
 
 COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
8 – FEDERAL HOME LOAN BANK BORROWINGS
 
 Federal
Home Loan Bank (FHLB) borrowings at December 31 are as follows:
 
 Maturity
              
              Interest
      Rate
              
              
              2007
              
              
              2006(In
      Thousands)January
      2, 2007
              
              5.39%
              
              
              $
              -
              
              
              $
              1,450January
      2, 2008
              
              3.61%
              
              
              
              15,000
              
              
              
              -January
      2, 2008
              
              4.11%
              
              
              
              380March
      24, 2008
              
              4.79%
              
              
              
              4,000
              
              
              
              -November
      20, 2008
              
              4.42%
              
              
              
              4,000October
      19, 2009
              
              4.65%
              
              
              
              4,000
              
              
              
              -November
      20, 2009
              
              4.23%
              
              
              
              4,000
              
              
              
              -December
      03, 2009
              
              3.89%
              
              
              
              4,000
              
              
              
              -October
      18, 2010
              
              4.70%
              
              
              
              4,000
              
              
              
              -June
      30, 2021
              
              5.57%
              
              
              
              6,559
              
              
              
              6,874$
              45,939
              
              
              $
              8,324
 
 
 At
December 31, 2007, the Bank had a borrowing capacity of $112.9 million available
from the FHLB of New York, of which $45.9 million was outstanding, which is
based on the amount of FHLB stock held or levels of other assets, including
United States Government agency securities, which are available for
collateral.
 
 NOTE
9 – INCOME TAXES
 
 Retained
earnings include $1.5 million at December 31, 2007 and 2006, for which no
provision for federal income tax has been made.  These amounts
represent deductions for bad debt reserves for tax purposes which were only
allowed to savings institutions which met certain definitional tests prescribed
by the Internal Revenue Code of 1986, as amended.  The Small Business
Job Protection Act of 1996 eliminated the special bad debt deduction granted
solely to thrifts.  Under the terms of the Act, there would be no
recapture of the pre-1988 (base year) reserves.  However, these
pre-1988 reserves would be subject to recapture under the rules of the Internal
Revenue Code if the Bank itself pays a cash dividend in excess of earnings and
profits, or liquidates.  The Act also provides for the recapture of
deductions arising from “applicable excess reserve” defined as the total amount
of reserve over the base year reserve.  The Bank’s total reserve
exceeds the base year reserve and deferred taxes have been provided for this
excess.
 
 The
income tax provision consists of the following for the years ended December
31:
 
 2007
              
              
              2006(In
      Thousands)Current:Federal
              
              $
              (139
              )
              
              $
              351State
              
              
              –
              
              
              
              (42
              )Total
      current
              
              
              (139
              )
              
              
              309Deferred
              
              
              (315
              )
              
              
              (185
              )Total
              
              $
              (454
              )
              
              $
              124
 
 
 
 F-22
 
 COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
9 – INCOME TAXES (CONTINUED)
 
 A
reconciliation of the statutory federal income tax at a rate of 34% to the
income tax expense included in the statements of income for the years ended
December 31 is as follows (dollars in thousands):
 
 2007
              
              
              2006Amount
              
              
              %
      of Pretax
                Income
              
              
              Amount
              
              
              %
      of Pretax
                IncomeFederal
      income tax at statutory rate
              
              $
              264
              
              
              
              34.0
              %
              
              $
              590
              
              
              
              34.0
              %State
      tax, net of federal benefit
              
              
              (243
              )
              
              
              (31.3
              )
      %
              
              
              (53
              )
              
              
              (2.9
              )  %Tax
      exempt income
              
              
              (392
              )
              
              
              (50.5
              )
      %
              
              
              (402
              )
              
              
              (23.2
              )
      %Life
      insurance income
              
              
              (32
              )
              
              
              (4.1
              )
      %
              
              
              (30
              )
              
              
              (1.7
              )
      %Other
              
              
              (51
              )
              
              
              (6.6
              )
      %
              
              
              19
              
              
              
              1.0
              %Total
              
              $
              (454
              )
              
              
              (58.4
              )
      %
              
              $
              124
              
              
              
              7.2
              %
 
 The
      components of the net deferred tax asset, included in other assets, are as
      follows:
 
 December
      31,2007
              
              
              2006(In
      Thousands)Deferred
      tax assets:Deferred
      loan fees
              
              $
              112
              
              
              $
              129Allowance
      for loan losses
              
              
              556
              
              
              
              548Securities
      impairment
              
              
              113
              
              
              
              -Net
      operating loss carryforwards
              
              
              243
              
              
              
              -Stock-based
      compensation
              
              
              112
              
              
              
              27AMT
      credit carryforward
              
              
              88
              
              
              
              88Prepaid
      expenses
              
              
              29
              
              
              
              28Net
      unrealized loss on securities available for sale
              
              
              -
              
              
              
              289Other
              
              
              -
              
              
              
              12Total
      deferred tax assets
              
              
              1,253
              
              
              
              1,121Valuation
      allowance
              
              
              (103
              )
              
              
              -Deferred
      tax liabilities:Depreciation
              
              
              (23
              )
              
              
              (23
              )Net
      unrealized loss on securities available for sale
              
              
              (66
              )
              
              
              -Other
              
              
              (3
              )
              
              
              -Total
      deferred tax liabilities
              
              
              (92
              )
              
              
              (23
              )Net
      Deferred Tax Asset
              
              $
              1,058
              
              
              $
              1,098
 
 
 NOTE
10 – BENEFIT PLANS
 
 The Bank
has a 401(k) Savings Plan (the “Plan”).  All employees are eligible to
participate after completing one year of eligible service.  The
employees may contribute up to fifteen percent of their compensation to the Plan
with the Bank matching fifty percent of the first six percent or a maximum of
three percent of total salary.  Full vesting in the Plan is prorated
equally over a five-year period.  The Bank’s contributions to the Plan
for the years ended December 31, 2007 and 2006 were $64 thousand and $55
thousand, respectively.
 
 The Bank
has an Employee Stock Ownership Plan (“ESOP”) for the benefit of employees who
meet the eligibility requirements as defined in the plan.  The ESOP
trust acquired 166,398 shares of common stock in the initial public offering
using proceeds of a loan from the Company.  The Bank will make cash
contributions to the ESOP on an annual basis sufficient to enable the ESOP to
make the required loan payments to the Company.  The loan bears an
interest rate of 6.00% with principal and interest payable annually in equal
installments over fifteen years.  The loan is secured by the shares of
the stock purchased.
 
 F-23
 
 COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
10 – BENEFIT PLANS (CONTINUED)
 
 As the
debt is repaid, shares are released from the collateral and allocated to
qualified employees.  Accordingly, the shares pledged as collateral
are reported as unearned ESOP shares in the Consolidated Statements of Financial
Condition.  As the shares are released from collateral, the Company
reports compensation expense equal to the average market price of the shares,
and the shares become outstanding for earnings per share
computations.  The Company’s compensation expense for the ESOP was
$149 thousand and $143 thousand for the years ended December 31, 2007 and 2006,
respectively.  The following table presents the components of the ESOP
shares:
 
 December
      31,2007
              
              
              2006Shares
      released for allocation
              
              
              34,809
              
              
              
              23,206Unreleased
      shares
              
              
              131,589
              
              
              
              143,192Total
      ESOP shares
              
              
              166,398
              
              
              
              166,398Fair
      value of unreleased shares
              
              $
              1,335,628
              
              
              $
              2,013,280
 
 
 NOTE
11 – STOCK-BASED COMPENSATION
 
 At the
Company’s annual stockholders’ meeting held on July 20, 2006, stockholders of
the Company approved the Colonial Bankshares, Inc. 2006 Stock-Based Incentive
Plan (the “2006 Plan”).  Under this plan, the Company may grant
options to purchase up to 221,563 shares of Company stock and may grant up to
88,625 shares of common stock as restricted stock awards.
 
 The 2006
Plan enables the Board of Directors to grant stock options to executives, other
key employees and nonemployee directors.  The options granted under
the Plan may be either non-qualified stock options (NQOs) or incentive stock
options (ISOs).  Only NQOs may be granted to nonemployee directors
under this plan and ISOs may be granted to employees.  The Company has
reserved 221,563 shares of common stock for issuance upon the exercise of
options granted under the 2006 Plan.  The 2006 Plan will terminate ten
years from the grant date.  Options may not be granted with an
exercise price that is less than 100% of the fair market value of the Company’s
common stock on the date of grant.  Options may not be granted with a
term longer than 10 years.  Stock options granted under the Incentive
Plan are subject to limitations under Section 422 of the Internal Revenue
Code.  The number of shares available under the 2006 Plans, the number
of shares subject to outstanding options and the exercise price of outstanding
options will be adjusted to reflect any stock dividend, stock split, merger,
reorganization or other event generally affecting the number of the Company’s
outstanding shares.  At December 31, 2007, there are 25,095
shares available for option grants under the 2006 Plan.
 
 On
October 19, 2006, 88,625 shares of restricted stock were awarded.  The
restricted shares awarded had a grant date fair value of $12.47 per
share.  The restricted stock awarded will vest 20% annually beginning
October 19, 2007.  During the years ended December 31, 2007 and 2006,
$222 thousand and $46 thousand in compensation expense was recognized in regard
to these restricted stock awards, respectively.  The tax benefits
recognized related to such stock-based compensation was $75 thousand and $16
thousand for the years ended December 31, 2007 and 2006.  At December
31, 2007, there was $838 thousand of unrecognized compensation expense related
to the restricted stock awards which is expected to be recognized over a period
of 3.75 years.
 
 Number
      of
                shares
              
              
              Weighted
                Average
                Grant
      Date
                Fair
      ValueRestricted
      stock, beginning of year
              
              
              88,625
              
              
              $
              12.47Granted
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -Vested
              
              
              17,725
              
              
              
              12.47Restricted
      stock, end of year
              
              
              70,900
              
              
              $
              12.47
  F-24
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
11 – STOCK-BASED COMPENSATION (CONTINUED)
 
 On
October 19, 2006, options to purchase 196,468 shares of common stock at $12.47
per share were awarded.  The options awarded will vest 20% annually
beginning October 19, 2007.  The following is a summary of the
Company’s stock option activity for the years ended December 31, 2007 and
2006:
 
 Options
              
              
              Weighted
                Average
                Exercise
                PriceOutstanding
      at January 1, 2006
              
              
              -
              
              
              
              -Granted
      during 2006
              
              
              196,468
              
              
              $
              12.47Exercised
              
              
              -
              
              
              
              -Forfeitures
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2007 and 2006
              
              
              196,468
              
              
              $
              12.47Exercisable
      at December 31, 2007
              
              
              39,294
              
              
              $
              12.47
 
 The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 2006:  dividend yield of 0%, risk-free
interest rate of 4.79%, expected life of 6.5 years, and expected volatility of
15.00%.  The weighted average fair value of options granted in 2006
was $3.79 per share. Weighted average contractual term of options outstanding
and exercisable were 8.75 years at December 31, 2007, and 9.75 years at December
31, 2006. Aggregate intrinsic value of options outstanding was $0 and $312
thousand at December 31, 2007 and 2006, respectively.
 
 Stock-based
compensation expense related to stock options for the years ended December 31,
2007 and 2006 was $148 thousand and $32 thousand, respectively, with a related
tax benefit of $51 thousand and $11 thousand, respectively.  No
options were granted in 2007.  As of December 31, 2007, there was
approximately $565 thousand of unrecognized compensation
cost.    The cost will be recognized on a graded vesting
method over a period of 3.75 years.
 
 NOTE
12 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
 
 The Bank
is a party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit and letters of credit.  Such commitments involve, to varying
degrees, elements of credit, and interest rate risk in excess of the amount
recognized in the statements of financial condition.
 
 The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and letters of
credit is represented by the contractual amount of those
instruments.  The Bank uses the same credit policies in making
commitments and conditional obligations as its does for on-balance sheet
instruments.
 
 At
December 31, 2007 and 2006, the following financial instruments were outstanding
whose contract amounts represent credit risk:
 
 2007
              
              
              2006(In
      Thousands)Commitments
      to grant loans
              
              $
              10,210
              
              
              $
              9,962Unfunded
      commitments under lines of credit
              
              
              24,080
              
              
              
              20,046Standby
      letters of credit
              
              
              1,863
              
              
              
              2,441$
              36,153
              
              
              $
              32,449
 
 F-25
 
 COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
12 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
 
 Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  The Bank evaluates each customer’s credit
worthiness on a case-by-case basis.  The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management’s credit evaluation.  Collateral held varies but generally
includes personal or commercial real estate.
 
 Unfunded
commitments under lines of credit are collateralized except for the overdraft
protection lines of credit and commercial unsecured lines of
credit.  The amount of collateral obtained is based on management’s
credit evaluation, and generally includes personal or commercial real
estate.  The overdraft protection lines and the commercial unsecured
lines of credit total approximately $3.7 million and usually do not contain
specified maturity dates and may not be drawn upon to the extent to which the
Bank is committed.
 
 Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party.  The majority of these
standby letters of credit expire within the next twelve months.  The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending other loan commitments.  The Bank requires
collateral supporting these letters of credit when deemed
necessary.  Management believes that the proceeds obtained through
liquidation of such collateral would be sufficient to cover the maximum
potential amount of future payments required under the corresponding
guarantees.  The amount of the liability as of December 31, 2007 and
2006 for guarantees under standby letters of credit issued is not
material.
 
 
 NOTE
13 – REGULATORY CAPITAL REQUIREMENTS
 
 The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies.  Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements.  Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank’s assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices.  The Bank’s
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk-weightings and other factors.
 
 Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of
tangible and core capital (as defined in the regulations) to total adjusted
assets (as defined) and of risk-based capital (as defined) to risk-weighted
assets (as defined).  Management believes, as of December 31, 2007,
that the Bank meets all capital adequacy requirements to which it is
subject.
 
 As of
December 31, 2007, the most recent notification from the regulators categorized
the Bank as well-capitalized under the regulatory framework for prompt
corrective action.  To be categorized as well-capitalized, the Bank
must maintain minimum tangible, core and risk-based ratios as set forth in the
table.  There are no conditions or events since that notification that
management believes have changed the Bank’s category.
 
 F-26
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
13 – REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
 
 The
Bank’s actual capital amounts and ratios are presented in the
table.
 
 Actual
              
              
              For
      Capital Adequacy
                Purposes
              
              
              To
      be Well Capitalized
                under
      Prompt Corrective
                Action
      ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio(In
      Thousands)As
      of December 31, 2007:Tangible
      Capital (to Adjusted Total Assets)
              
              $
              36,725
              
              
              
              8.03
              %
              
              $
              >6,859
              
              
              >1.50%
              
              
              
              N/A
              
              
              
              N/ACore
      Capital (to Adjusted Total Assets)
              
              
              36,725
              
              
              
              8.03
              %
              
              
              >18,291
              
              
              >4.00%
              
              
              $
              $>22,863
              
              
              >5.00%Tier
      1 Capital (to Risk-Weighted Assets)
              
              
              36,262
              
              
              
              14.42
              %
              
              
              N/A
              
              
              
              N/A
              
              
              >15,088
              
              
              >6.00%Total
      Capital (to Risk-Weighted Assets)
              
              
              37,617
              
              
              
              14.96
              %
              
              >20,118
              
              
              >8.00%
              
              
              >25,147
              
              
              >10.00%As
      of December 31, 2006:Tangible
      Capital (to Adjusted Total Assets)
              
              $
              34,885
              
              
              
              9.09
              %
              
              $
              >5,757
              
              
              >1.50%
              
              
              
              N/A
              
              
              
              N/ACore
      Capital (to Adjusted Total Assets)
              
              
              34,885
              
              
              
              9.09
              %
              
              >15,352
              
              
              >4.00%
              
              
              $
              $>19,190
              
              
              >5.00%Tier
      1 Capital (to Risk-Weighted Assets)
              
              
              34,885
              
              
              
              17.57
              %
              
              
              N/A
              
              
              
              N/A
              
              
              >11,913
              
              
              >6.00%Total
      Capital (to Risk-Weighted Assets)
              
              
              36,244
              
              
              
              18.26
              %
              
              >15,883
              
              
              >8.00%
              
              
              >19,854
              
              
              >10.00%
 
 Office of
Thrift Supervision regulations imposes limitations upon all capital
distributions by savings institutions, like the Bank, such as dividends and
payments to repurchase or otherwise acquire shares.  The Company may
not declare or pay cash dividends on or repurchase any of its shares of common
stock if the effect thereof would cause stockholders’ equity to be reduced below
applicable regulatory capital maintenance requirements, or if such declaration
and payments would otherwise violate regulatory requirements.
 
 
 NOTE
14 – FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 The fair
value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation.
 
 The
following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, “Disclosures About
Fair Value of Financial Instruments.”  The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methods.  However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value.  Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company would realize in a current
market exchange.  The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.  SFAS No. 107 excludes certain financial instruments and all
non-financial instruments from its disclosure
requirements.  Accordingly, the aggregate fair value amounts presented
may not necessarily represent the underlying fair value of the
Company.
 
 F-27
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
14 – FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
 
 The fair
value estimates presented herein are based on pertinent information available to
management as of December 31, 2007 and 2006.  Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since December 31, 2007 and 2006 and, therefore,
current estimates of fair value may differ significantly from the amounts
prescribed herein.
 
 The
following assumptions were used to estimate the fair value of the Company’s
financial instruments:
 
 Cash
and Amounts Due From Banks
 For cash
and amounts due from banks, the carrying amount is a reasonable estimate of fair
value.
 
 Interest-bearing
Time Deposits
 The
carrying values approximate the fair values for these assets.
 
 Investment
Securities
 The fair
value of investment securities is based on quoted market prices.
 
 Loans
Receivable
 The fair
value of loans is estimated based on the present value of cash flows using
interest rates currently offered for loans with similar terms to borrowers of
similar credit quality.
 
 Federal
Home Loan Bank Stock
 The
carrying amount of Federal Home Loan Bank stock approximates fair value based on
the stock’s redemption provisions which are at par value.
 
 Accrued
Interest Receivable and Payable
 The
carrying amount of accrued interest receivable and payable approximates fair
value.
 
 Deposits
 The fair
value of non-interest bearing demand, NOW, Super NOW, passbook savings and money
market demand accounts is the amount reported in the financial
statements.  The fair value of certificates of deposits is based on a
present value of cash flows estimate using rates currently offered for deposits
with similar remaining maturities.
 
 Federal
Home Loan Bank Borrowings
 The fair
value of advances from the Federal Home Loan Bank is estimated using discounted
cash flow analyses, based on rates currently available to the Bank for advances
from the Federal Home Loan Bank with similar terms and remaining
maturities.
 
 Off-Balance
Sheet Financial Instruments
 Fair
values for the Bank’s off-balance sheet financial instruments (lending
commitments and letters of credit) are based on fees currently charged to enter
into similar agreements, taking into account, the remaining terms of the
agreements and the counterparties’ credit standing.
  F-28
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
14 – FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
 
 The
estimated fair value of the Company’s financial instruments at December 31, 2007
and 2006 are as follows:
 
 2007
              
              
              2006Carrying
                Amount
              
              
              Fair
      Value
              
              
              Carrying
                Amount
              
              
              Fair
      Value(In
      Thousands)Assets:Cash
      and amounts due from banks
              
              $
              15,978
              
              
              $
              15,978
              
              
              $
              13,257
              
              
              $
              13,257Interest-bearing
      time deposits
              
              
              208
              
              
              
              208
              
              
              
              717
              
              
              
              717Investment
      securities
              
              
              180,762
              
              
              
              181,525
              
              
              
              155,647
              
              
              
              156,425Federal
      Home Loan Bank stock
              
              
              2,545
              
              
              
              2,545
              
              
              
              775
              
              
              
              775Loans
      receivable, net
              
              
              241,040
              
              
              
              242,052
              
              
              
              198,519
              
              
              
              195,917Accrued
      interest receivable
              
              
              2,185
              
              
              
              2,185
              
              
              
              1,781
              
              
              
              1,781Liabilities:Deposits
              
              
              371,382
              
              
              
              374,990
              
              
              
              337,254
              
              
              
              336,919Federal
      Home Loan Bank borrowings
              
              
              45,939
              
              
              
              46,367
              
              
              
              8,324
              
              
              
              8,539Accrued
      interest payable
              
              
              646
              
              
              
              646
              
              
              
              457
              
              
              
              457Off-balance
      sheet financial instruments:Commitments
      to extend credit and letters of credit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
 
 NOTE
15 – PARENT COMPANY ONLY FINANCIAL INFORMATION
 
 
 CONDENSED
STATEMENTS OF FINANCIAL CONDITION
 
 December
      31,2007
              
              
              2006ASSETS
              
              (In
      Thousands)Cash
      and cash equivalents
              
              $
              843
              
              
              $
              717Equity
      investment in Colonial Bank, FSB
              
              
              36,796
              
              
              
              34,476Loan
      receivable – ESOP
              
              
              1,380
              
              
              
              1,464Other
      assets
              
              
              9
              
              
              
              6Total
      Assets
              
              $
              39,028
              
              
              $
              36,663LIABILITIES
      AND STOCKHOLDERS’ EQUITYSTOCKHOLDERS’
      EQUITYTotal
      Stockholders’ Equity
              
              $
              39,028
              
              
              $
              36,663Total
      Liabilities and Stockholders’ Equity
              
              $
              39,028
              
              
              $
              36,663
 
 
 F-29
  COLONIAL
BANKSHARES, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
15 – PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
 
 CONDENSED
STATEMENTS OF INCOME
 
 Years
      Ended December 31,2007
              
              
              2006(In
      Thousands)Interest
      income
              
              $
              107
              
              
              $
              160Equity
      in earnings of Colonial Bank, FSB
              
              
              1,556
              
              
              
              1,630Total
      income
              
              
              1,663
              
              
              
              1,790General,
      administrative and other expenses
              
              
              432
              
              
              
              179Net
      income
              
              $
              1,231
              
              
              $
              1,611
 
 
 CONDENSED
STATEMENTS OF CASH FLOWS
 
 Years
      Ended December 31,2007
              
              
              2006(In
      Thousands)Cash
      flows from operating activities:Net
      income
              
              $
              1,231
              
              
              $
              1,611Share-based
      compensation expense
              
              
              370
              
              
              
              78Equity
      in undistributed earnings Colonial Bank, FSB
              
              
              (1,556
              )
              
              
              (1,630
              )Increase
      in cash from ESOP loan repayment
              
              
              84
              
              
              
              78Increase
      in other assets
              
              
              (3
              )
              
              
              (6
              )Net
      cash from operating activities
              
              
              126
              
              
              
              131Cash
      flows from financing activities:Acquisition
      of treasury stock
              
              
              -
              
              
              
              (1,189
              )Net
      cash (used in) provided by financing activities
              
              
              -
              
              
              
              (1,189
              )Net
      (decrease) increase in cash and cash equivalents
              
              
              126
              
              
              
              (1,058
              )Cash
      and cash equivalents at beginning of period
              
              
              717
              
              
              
              1,775Cash
      and cash equivalents at end of period
              
              $
              843
              
              
              $
              717




F-30




STOCKHOLDER
INFORMATION







Annual
      Meeting
              Transfer
      AgentThe
      Annual Meeting of Stockholders will be held at 3:00 p.m.
              Registrar
      and Transfer Companyon
      May 15, 2008 at the main office,
              10
      Commerce Drive2745
      S. Delsea Drive, Vineland, New Jersey 08360.
              Cranford,
      New Jersey 07016Stock
      Listing
              If
      you have any questions concerning your stockholder account, please call
      our transfer agent, noted above, at (800) 368-5948.  This is the
      number to call if you require a change of address, records or information
      about lost certificates.The
      Company’s Common Stock trades on the NasdaqGlobal
      Market System under the symbol “COBK”Special
      Counsel
              Annual
      Report on Form 10-KSBLuse
      Gorman Pomerenk & Schick, P.C.
              A
      copy of the Company’s Form 10-KSB for the fiscal year ended December 31,
      2007, will be furnished without charge to stockholders upon written
      request to the Secretary, Colonial Bankshares, Inc., 2745 S. Delsea Drive,
      Vineland, New Jersey 08360.5335
      Wisconsin Avenue, N.W., Suite 400Washington,
      D.C.  20015Independent
      Registered Public Accounting FirmBeard
      Miller Company LLP1200
      Atwater DriveSuite
      225Malvern,
      Pennsylvania 19355









DIRECTORS
AND OFFICERS





Directors
            
            OfficersFrank
      M. Hankins, Jr.
              Chairman
      of the Board
              Retired
      Chairman, H. H. Hankins
              &
      Brothers Lumber
            
            John
      Fitzpatrick, CPA
              President,
      Premier Accounting
              Services,
      PC
            
            Edward
      J. Geletka
              President
      and
              Chief
      Executive OfficerAlbert
      A. Fralinger, Jr.
              Vice
      Chairman of the Board
              Chairman
      and Chief Financial
              Officer,
      Fralinger Engineering
            
            Edward
      J. Geletka
              President
      and Chief Executive
              Officer,
      Colonial Bank, FSB
            
            L.
      Joseph Stella, III, CPA
              Executive
      Vice President and
              Chief
      Financial OfficerRichard
      S. Allen
              President,
      Allen Associates,
              Insurance
      Services
            
            James
      Quinn
              Owner,
      Quinn Broadcasting, Inc.
              Mayor,
      Millville, NJ
            
            William
      F. Whelan
              Executive
      Vice President and
              Operations
      OfficerGregory
      J. Facemyer, CPA
              Self-Employed
      Certified Public
              Accountant
            
            
            
            Richard
      W. Dapp
              Senior
      Vice President and
              Chief
      Credit Officer