<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
                                       OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
           For the transition period from ____________ to ____________

                        Commission File Number: 000-51385

                            COLONIAL BANKSHARES, INC.
            --------------------------------------------------------
                 (Name of Small Business Issuer in its Charter)

           FEDERAL                                     90-0183739
-------------------------------         ---------------------------------------
(State or Other Jurisdiction of         (I.R.S. Employer Identification Number)
Incorporation or Organization)

85 WEST BROAD STREET, BRIDGETON, NEW JERSEY                       08302
-------------------------------------------                   --------------
  (Address of Principal Executive Office)                       (Zip Code)

                                 (856) 451-5800
            --------------------------------------------------------
                 (Issuer's Telephone Number including area code)

           Securities Registered Pursuant to Section 12(b) of the Act:

                                      NONE
                                      ----

           Securities Registered Pursuant to Section 12(g) of the Act:

                     COMMON STOCK, PAR VALUE $0.10 PER SHARE
                     ---------------------------------------
                                (Title of Class)

        Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Registrant was required to file reports) and (2)
has been subject to such requirements for the past 90 days.

(1)  YES  X  .    NO     .
        -----       -----

(2)  YES  X  .    NO     .
        -----       -----

        Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. [X]

        The Registrant's revenues for the fiscal year ended December 31, 2005
were $15.7 million.

        Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] YES [X] NO

        Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]

        As of March 15, 2006, there were 4,521,696 shares issued and outstanding
of the Registrant's Common Stock, including 2,441,716 shares owned by Colonial
Bankshares, MHC. The aggregate value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the closing price of the Common
Stock as of March 15, 2006 was $20.3 million.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.      Portions of Annual Report to Stockholders (Parts II and IV)

<PAGE>

                                     PART I

ITEM 1.    BUSINESS

FORWARD LOOKING STATEMENTS

        This Annual Report contains certain "forward-looking statements" which
may be identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage, and other loans,
real estate values, competition, changes in accounting principles, policies, or
guidelines, changes in legislation or regulation, and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing products and services.

COLONIAL BANKSHARES, MHC

        Colonial Bankshares, MHC is the federally chartered mutual holding
company parent of Colonial Bankshares, Inc. Colonial Bankshares, MHC has not
engaged in any significant business activity other than owning a majority of the
outstanding shares of common stock of Colonial Bankshares, Inc. So long as
Colonial Bankshares, MHC exists, it will own a majority of the outstanding
shares of common stock of Colonial Bankshares, Inc. The executive offices of
Colonial Bankshares, MHC are located at 85 West Broad Street, Bridgeton, New
Jersey 08302, and its telephone number is (856) 451-5800. Colonial Bankshares,
MHC is subject to comprehensive regulation and examination by the Office of
Thrift Supervision.

COLONIAL BANKSHARES, INC.

        Colonial Bankshares, Inc. is the mid-tier stock holding company of
Colonial Bank, FSB. Colonial Bankshares, Inc. is a federally chartered
corporation and owns 100% of the outstanding shares of common stock of Colonial
Bank, FSB. Colonial Bankshares, Inc. has not engaged in any significant business
activity other than owning all of the shares of common stock of Colonial Bank,
FSB. At December 31, 2005, Colonial Bankshares, Inc. had consolidated assets of
$336.9 million, total deposits of $284.7 million and equity of $35.9 million.
Colonial Bankshares, Inc.'s net income for the year ended December 31, 2005 was
$1.8 million. The executive offices of Colonial Bankshares, Inc. are located at
85 West Broad Street, Bridgeton, New Jersey 08302, and its telephone number is
(856) 451-5800. Colonial Bankshares, Inc. is subject to comprehensive regulation
and examination by the Office of Thrift Supervision.

        On March 25, 2005, the Company filed a Registration Statement on Form
SB-2 with the Securities and Exchange Commission in connection with the
Company's offer and sale of shares of its common stock in a public offering. The
Registration Statement was declared effective by the Securities and Exchange
Commission on May 16, 2005. The offering was completed on June 30, 2005. In the
offering, the Company sold 2,079,980 shares of its common stock at a price of
$10.00 per share, and issued an additional 2,441,716 shares of its common stock
to Colonial Bankshares, MHC.

COLONIAL BANK, FSB

        Colonial Bank, FSB is a federally chartered savings bank headquartered
in Bridgeton, New Jersey. Colonial Bank, FSB was originally founded in 1913.
Colonial Bank, FSB conducts business from its main office located at 85 West
Broad Street in Bridgeton, New Jersey, and its five branch offices located in
Cumberland and Gloucester Counties, New Jersey. The telephone number at its main
office is (856) 451-5800.

        Our principal business activity is the origination of one- to
four-family residential real estate loans. We also offer home equity loans and
lines of credit, commercial real estate loans, commercial business loans and, to

                                       2
<PAGE>

a lesser extent, construction and consumer loans. We also invest in
mortgage-backed securities and other investment securities. We offer a variety
of deposit accounts, including demand accounts, NOW accounts, money market
accounts, savings accounts and certificates of deposit. Deposits are our primary
source of funds for our lending and investing activities. We have also used
borrowed funds as a source of funds, and we borrow principally from the Federal
Home Loan Bank of New York. We emphasize exceptional personal service for our
customers. Colonial Bank, FSB is subject to comprehensive regulation and
examination by the Office of Thrift Supervision. Colonial Bank, FSB is a member
of the Federal Home Loan Bank system.

GENERAL

        Our principal business consists of attracting retail deposits from the
general public in the areas surrounding our main office in Bridgeton, New Jersey
and five branch offices in Cumberland and Gloucester Counties, New Jersey and
investing those deposits, together with funds generated from operations,
primarily in one- to four-family residential mortgage loans, home equity loans
and lines of credit and commercial real estate loans and, to a lesser extent,
construction loans, commercial business loans, consumer loans, and investment
securities. Our revenues are derived principally from interest on loans and
securities. We also generate revenues from fees and service charges and other
income. Our primary sources of funds are deposits, borrowings and principal and
interest payments on loans and securities.

MARKET AREA

        We primarily serve communities located in Cumberland and Gloucester
Counties, New Jersey. Our primary market for loans and deposits is concentrated
in these counties.

        There are many manufacturing and service industry companies in
Cumberland County, while Gloucester County is a community for people who work in
the greater Philadelphia, Pennsylvania area. As of November 2004, unemployment
rates in Cumberland and Gloucester Counties were 6.4% and 4.4%, respectively,
compared to 4.2% for the State of New Jersey and the national average of 5.2%.
The population of Cumberland and Gloucester Counties increased at annual growth
rates of approximately 0.3% and 1.3%, respectively, between 2000 and 2004,
compared to an annual growth rate of 1.0% for the United States as a whole
during the same period.

COMPETITION

        We face significant competition in both originating loans and attracting
deposits. Cumberland and Gloucester Counties, New Jersey, which is our primary
market area, have a high concentration of financial institutions, many of which
are significantly larger and have greater financial resources than we, and many
of which are our competitors to varying degrees. As of June 30, 2005 (the latest
date for which information is available), our market share of deposits
represented 13.55% of deposits in Cumberland County, making us the third largest
financial institution out of ten financial institutions in Cumberland County
based upon deposit share as of that date. As of June 30, 2005, our market share
of deposits represented 0.89% of deposits in Gloucester County, making us the
sixteenth largest financial institution out of twenty-four financial
institutions based on deposit share as of that date. Some of our competitors
offer products and services that we currently do not offer, such as trust
services and private banking. Our competition for loans comes principally from
commercial banks, savings banks, mortgage banking companies and credit unions.
Our most direct competition for deposits has historically come from commercial
banks, savings banks and credit unions. We face additional competition for
deposits from nondepository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies.

        We seek to meet this competition by emphasizing personalized banking,
competitive pricing strategies and the advantage of local decision-making in our
banking business. Specifically, we promote and maintain relationships and build
customer loyalty within our market area by emphasizing decentralized regional
management and by focusing our marketing and community involvement on the
specific needs of local communities. In addition, we seek to meet competition
for loans by offering our current and prospective borrowers preferred rates and
terms on

                                       3
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deposit products for new lending business. We do not rely on any individual,
group, or entity for a material portion of our deposits.

LENDING ACTIVITIES

        GENERAL. We originate one- to four-family residential real estate loans,
home equity loans and lines of credit, commercial real estate loans, commercial
business loans, construction loans, consumer loans and multi-family mortgage
loans. At December 31, 2005, our gross loan portfolio totaled $159.3 million
compared to $127.1 million at December 31, 2004. We had no loans held for sale
at December 31, 2005.

        As of December 31, 2005, $77.7 million, or 48.8% of our total loan
portfolio, consisted of one- to four-family residential mortgage loans, $31.4
million, or 19.7% of our total loan portfolio, consisted of commercial real
estate loans, $33.1 million, or 20.8% of our total loan portfolio, consisted of
home equity loans and lines of credit, $6.9 million, or 4.3% of our total loan
portfolio, consisted of commercial loans, $6.3 million, or 3.9% of our total
loan portfolio, consisted of construction loans, $2.3 million, or 1.4% of our
total loan portfolio, consisted of consumer loans and $1.7 million, or 1.1% of
our total loan portfolio, consisted of multi-family mortgage loans.

        ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. We offer conforming
and non-conforming, fixed-rate and adjustable-rate residential real estate loans
with maturities of up to 30 years and maximum loan amounts generally of up to
$1.5 million, although we will originate loans in excess of this amount. This
portfolio totaled $77.7 million, or 48.8% of our total loan portfolio at
December 31, 2005.

        We currently offer fixed-rate conventional mortgage loans with terms of
10 to 30 years that are fully amortizing with monthly loan payments, and
adjustable-rate conventional residential real estate loans with initial terms of
one, three or five years that amortize up to 30 years, although in recent years,
due to the current market interest rate environment, we have not originated many
adjustable-rate residential real estate loans. One- to four-family residential
real estate loans are generally underwritten according to Fannie Mae guidelines,
and loans that conform to such guidelines are referred to as "conforming loans."
We generally originate both fixed- and adjustable-rate loans in amounts up to
the maximum conforming loan limits as established by Fannie Mae, which for 2006
is currently $417,000 for single-family homes. Private mortgage insurance is
required for first mortgage loans with loan-to-value ratios in excess of 80%. We
also originate loans above conforming limits, referred to as "jumbo loans,"
although the significant majority of the loans we have originated have been
within conforming loan limits.

        We currently offer several adjustable-rate loan products secured by
residential properties with rates that are fixed for an initial period ranging
from one year to five years. After the initial fixed-rate period, the interest
rate on these loans resets based upon a contractual spread or margin above the
average yield on U.S. Treasury securities, adjusted to a constant maturity of
one, three or five years, as published weekly by the Federal Reserve Board,
subject to certain periodic and lifetime limitations on interest rate changes.
Adjustable-rate residential real estate loans generally pose different credit
risks than fixed-rate loans primarily because the underlying debt service
payments of the borrowers rise as interest rates rise, thereby increasing the
potential for default. At December 31, 2005, our adjustable-rate, one- to
four-family residential real estate portfolio totaled $3.7 million.

        We require title insurance on all of our one- to four-family residential
real estate loans, and we also require that borrowers maintain fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) in an amount
at least equal to the lesser of the loan balance or the replacement cost of the
improvements. Nearly all residential real estate loans must have a mortgage
escrow account from which disbursements are made for real estate taxes. We do
not conduct environmental testing on residential real estate loans unless
specific concerns for hazards are determined by the appraiser utilized in
connection with the loan.

        HOME EQUITY LOANS AND LINES OF CREDIT. In addition to traditional one-
to four-family residential real estate loans, we offer home equity loans and
home equity lines of credit that are secured by the borrower's primary
residence. At December 31, 2005, the outstanding balances of home equity loans
totaled $29.1 million, or 18.3% of our total loan portfolio, and the outstanding
balance of home equity lines of credit totaled $4.0 million, or 2.5% of our
total loan portfolio. The borrower is permitted to draw on a home equity line of
credit at any time after it is

                                       4
<PAGE>

originated and may repay the outstanding balance over a term not to exceed 15
years from the date of the borrower's last draw on the home equity line of
credit. We review each performing line of credit every six years to determine
whether to continue to offer the unused portion of the line of credit to the
borrower. Our home equity loans are generally originated as mortgages with fixed
terms of five to fifteen years or with balloon maturities of three or five
years. Home equity loans and lines of credit are generally underwritten with the
same criteria that we use to underwrite fixed-rate, one- to four-family
residential mortgage loans. We underwrite home equity loans and lines of credit
with a loan-to-value ratio of up to 90% when combined with the principal balance
of the existing mortgage loan. We appraise the property securing the loan at the
time of the loan application in order to determine the value of the property
securing the home equity loan or line of credit. At the time we close a home
equity loan or line of credit, we file a mortgage to perfect our security
interest in the underlying collateral.

        COMMERCIAL REAL ESTATE LENDING. We also originate real estate loans
secured by first liens on commercial real estate. The commercial real estate
properties are predominantly professional offices, manufacturing and retail
facilities and shopping centers and, to a lesser extent, more specialized
properties such as nursing homes and other healthcare facilities. We only
purchase commercial real estate loan participations through the Thrift
Institution Community Investment Council, which originates loans for Community
Reinvestment Act purposes. However, we will consider additional types of
participation loans in the future. We emphasize commercial real estate loans
with initial principal balances between $100,000 and $2.0 million. Loans secured
by commercial real estate totaled $31.4 million, or 19.7% of our total loan
portfolio, at December 31, 2005, and consisted of 154 loans outstanding with an
average loan balance of approximately $204 thousand, although we have originated
loans with balances substantially greater than this average. Substantially all
of our commercial real estate loans are secured by properties located in our
primary market area.

        Our commercial real estate loans are generally written as mortgages with
balloon maturities of five or seven years. Amortization of these loans is
typically based on 10- to 20-year payout schedules. We also originate some
15-year, fixed-rate, fully amortizing loans. We establish margins for commercial
real estate loans based upon our cost of funds, but we also consider rates
offered by our competitors in our market area.

        In the underwriting of commercial real estate loans, we generally lend
up to 80% of the property's appraised value. We base our decisions to lend on
the economic viability of the property and the creditworthiness of the borrower.
In evaluating a proposed commercial real estate loan, we emphasize the ratio of
the property's projected net cash flow to the loan's debt service requirement
(generally requiring a minimum ratio of 120%), computed after deduction for a
vacancy factor and property expenses we deem appropriate. Personal guarantees
are usually obtained from commercial real estate borrowers. We require title
insurance insuring the priority of our lien, fire and extended coverage casualty
insurance, and, if appropriate, flood insurance, in order to protect our
security interest in the underlying property.

        Commercial real estate loans generally have higher interest rates and
shorter terms than those on one- to four-family residential mortgage loans.
Commercial real estate loans, however, entail significant additional credit
risks compared to one- to four-family residential mortgage loans, as they
typically involve larger loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the repayment of loans secured by
income-producing properties typically depends on the successful operation of the
related real estate project and thus may be subject to a greater extent to
adverse conditions in the real estate market and in the general economy.

        COMMERCIAL LOANS. We make various types of secured and unsecured
commercial loans to customers in our market area for the purpose of expansion,
working capital and other general business purposes. The terms of these loans
generally range from less than one year to five years. The loans are either
negotiated on a fixed-rate basis or carry adjustable interest rates indexed to a
lending rate that is determined internally, or a short-term market rate index,
although the significant majority of our commercial loans are fixed-rate loans.
At December 31, 2005, we had 122 commercial loans outstanding with an aggregate
balance of $6.9 million, or 4.3% of the total loan portfolio. These totals
include 22 unsecured commercial loans with an aggregate outstanding balance of
$254 thousand. As of December 31, 2005, the average commercial loan balance
(secured and unsecured loans) was approximately $56 thousand, although we have
originated loans with balances substantially greater than this average.

                                       5
<PAGE>

        Commercial credit decisions are based upon our credit assessment of the
loan applicant. We determine the applicant's ability to repay in accordance with
the proposed terms of the loans and we assess the risks involved. We also
evaluate the applicant's credit and business history and ability to manage the
loan and its business. We usually obtain personal guarantees of the principals.
In addition to evaluating the loan applicant's financial statements, we consider
the adequacy of the primary and secondary sources of repayment for the loan. We
supplement our analysis of the applicant's creditworthiness with credit agency
reports of the applicant's credit history. We may also check with other banks
and conduct trade investigations. Collateral supporting a secured transaction
also is analyzed to determine its marketability. Commercial business loans
generally have higher interest rates than residential loans of like duration
because they have a higher risk of default since their repayment generally
depends on the successful operation of the borrower's business and the
sufficiency of any collateral. Our pricing of commercial business loans is based
primarily on the credit risk of the borrower, with due consideration given to
borrowers with appropriate deposit relationships.

        CONSTRUCTION LOANS. We originate construction loans to individuals and
builders in our market area. These loans totaled $6.3 million, or 3.9% of our
total loan portfolio at December 31, 2005. These loans are often originated in
conjunction with development loans. In the case of residential subdivisions,
these loans finance the cost of completing homes on the improved property.
Advances on construction loans are made in accordance with a schedule reflecting
the cost of construction, but are generally limited to 80% of actual
construction costs and, as required by applicable regulations, a 75% loan to
completed appraised value ratio. Repayment of construction loans on residential
subdivisions is normally expected from the sale of units to individual
purchasers.

        Construction lending exposes us to greater credit risk than permanent
mortgage financing. The repayment of construction loans may depend upon the sale
of the property to third parties or the availability of permanent financing upon
completion of all improvements. Construction loans also expose us to the risk
that improvements will not be completed on time in accordance with
specifications and projected costs. In addition, the ultimate sale or rental of
the property may not occur as anticipated.




                                       6
<PAGE>

        LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of our loan portfolio, by type of loan at the dates indicated. We
held no loans for sale as of the dates presented in the table below.

<TABLE>
<CAPTION>
                                                                         AT DECEMBER 31,
                                   -----------------------------------------------------------------------------------------
                                            2005                   2004                   2003                   2002
                                   --------------------   --------------------   --------------------   --------------------
                                    AMOUNT     PERCENT     AMOUNT     PERCENT     AMOUNT     PERCENT     AMOUNT     PERCENT
                                   --------   ---------   --------   ---------   --------   ---------   --------   ---------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                <C>           <C>      <C>           <C>      <C>           <C>      <C>           <C>
Real estate loans:
   One- to four-family
     residential.............      $  77,738      48.8%   $  56,478      44.4%   $  34,641      39.5%   $  25,739      42.8%
   Home equity loans and
     lines of credit.........         33,067      20.8       31,883      25.1       28,452      32.4       19,407      32.3
   Multi-family..............          1,676       1.1        1,825       1.4          167       0.2          170       0.3
   Commercial................         31,392      19.7       25,786      20.3       13,396      15.3        7,277      12.1
   Construction..............          6,267       3.9        2,265       1.8        1,934       2.2        1,017       1.7
Commercial...................          6,880       4.3        6,055       4.8        6,627       7.6        3,650       6.1
Consumer and other...........          2,258       1.4        2,824       2.2        2,499       2.8        2,872       4.7
                                   ---------  --------    ---------  --------    ---------  --------    ---------  --------

Total loans receivable.......      $ 159,278     100.0%   $ 127,116     100.0%   $  87,716     100.0%   $  60,132     100.0%
                                              ========               ========               ========               ========
Deferred loan costs (fees)...           (336)                  (326)                  (208)                  (188)
Allowance for loan losses....         (1,168)                  (990)                  (667)                  (421)
                                   ---------              ---------              ---------              ---------

Total loans receivable, net..      $ 157,774              $ 125,800              $  86,841              $  59,523
                                   =========              =========              =========              =========


                                      AT DECEMBER 31,
                                   --------------------
                                           2001
                                   --------------------
                                    AMOUNT     PERCENT
                                   --------   ---------
                                  (DOLLARS IN THOUSANDS)
Real estate loans:
   One- to four-family
     residential.............      $  26,670      49.2%
   Home equity loans and
     lines of credit.........         17,936      33.1
   Multi-family..............            173       0.3
   Commercial................          4,068       7.5
   Construction..............          1,321       2.4
Commercial...................            883       1.6
Consumer and other...........          3,141       5.9
                                   ---------  --------

Total loans receivable.......      $  54,192     100.0%
                                              ========
Deferred loan costs (fees)...           (201)
Allowance for loan losses....           (259)
                                   ---------

Total loans receivable, net..      $  53,732
                                   =========
</TABLE>



                                       7
<PAGE>

        LOAN PORTFOLIO MATURITIES AND YIELDS. The following table summarizes the
scheduled repayments of our loan portfolio at December 31, 2005. Demand loans,
loans having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.

<TABLE>
<CAPTION>
                             ONE- TO FOUR-FAMILY     HOME EQUITY LOANS AND
                                 RESIDENTIAL            LINES OF CREDIT          MULTI-FAMILY         COMMERCIAL REAL ESTATE
                           -----------------------  -----------------------  -----------------------  -----------------------
                                         WEIGHTED                 WEIGHTED                 WEIGHTED                WEIGHTED
                                         AVERAGE                  AVERAGE                  AVERAGE                 AVERAGE
                              AMOUNT      RATE        AMOUNT       RATE        AMOUNT       RATE         AMOUNT      RATE
                           ----------- -----------  ----------- -----------  ----------- -----------  ----------- -----------
                                                                 (DOLLARS IN THOUSANDS)
Due During the Years
Ending December 31,
-------------------
<S>                         <C>             <C>      <C>             <C>      <C>             <C>      <C>             <C>
2006...................     $      65       6.61%    $   4,277       7.01%    $      --         --%    $   5,885       7.77%
2007...................           453       4.98%          918       5.73%           --         --%        2,592       6.58%
2008...................           238       6.46%        4,918       4.75%           --         --%        5,205       5.60%
2009 to 2010...........           611       6.28%        7,157       5.06%           --         --%       10,877       6.10%
2011 to 2015...........         3,143       5.57%        5,528       6.17%           33       7.95%        4,792       5.76%
2016 to 2020...........        19,049       5.06%        9,170       6.16%           --         --%        2,041       6.50%
2020 and beyond........        54,179       5.52%        1,099       5.44%        1,643       6.52%           --         --%
                            ---------                ---------                ---------                ---------

         Total.........     $  77,738       5.42%    $  33,067       5.79%    $   1,676       6.55%    $  31,392       6.34%
                            =========                =========                =========                =========

                                  CONSTRUCTION             COMMERCIAL          CONSUMER AND OTHER             TOTAL
                           -----------------------  -----------------------  -----------------------  -----------------------
                                         WEIGHTED                 WEIGHTED                 WEIGHTED                WEIGHTED
                                         AVERAGE                  AVERAGE                  AVERAGE                 AVERAGE
                              AMOUNT      RATE        AMOUNT       RATE        AMOUNT       RATE         AMOUNT      RATE
                           ----------- -----------  ----------- -----------  ----------- -----------  ----------- -----------
                                                                 (DOLLARS IN THOUSANDS)
Due During the Years
Ending December 31,
-------------------
2006...................     $   6,267       6.76%    $     559       7.32%    $     339        9.35%   $  17,392       7.23%
2007...................            --         --%          984       6.20%          377       10.11%       5,324       6.48%
2008...................            --         --%        1,563       5.30%          607        9.97%      12,531       5.46%
2009 to 2010...........            --         --%        2,516       6.24%          685        6.44%      21,846       5.79%
2011 to 2015...........            --         --%        1,258       5.40%          250        6.80%      15,004       5.86%
2016 to 2020...........            --         --%           --         --%           --          --%      30,260       5.49%
2020 and beyond........            --         --%           --         --%           --          --%      56,921       5.55%
                            ---------                ---------                ---------                ---------

         Total.........     $   6,267       6.76%    $   6,880       5.95%    $   2,258        8.48%   $ 159,278       5.81%
                            =========                =========                =========                =========
</TABLE>

        The following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at December 31, 2005 that are contractually due after
December 31, 2006.

                                            DUE AFTER DECEMBER 31, 2006
                                    -----------------------------------------
                                        FIXED       ADJUSTABLE       TOTAL
                                    ------------- ------------- -------------
                                                 (IN THOUSANDS)
        Real estate loans:
           One- to four-family
             residential.......      $    74,008   $     3,665   $    77,673
           Home equity loans
             and lines of
             credit............           28,724            66        28,790
           Multi-family........            1,676            --         1,676
           Commercial..........           25,507            --        25,507
           Construction........               --            --            --
        Commercial.............            6,321            --         6,321
        Consumer and other.....            1,919            --         1,919
                                     -----------   -----------   -----------

                 Total loans...      $   138,155   $     3,731   $   141,886
                                     ===========   ===========   ===========

        LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. While we originate
both fixed-rate and adjustable-rate loans, our ability to generate each type of
loan depends upon borrower demand, market interest rates, borrower preference
for fixed- versus adjustable-rate loans, and the interest rates offered on each
type of loan by other lenders competing in our market area. Loan originations
are derived from a number of sources, including branch office

                                       8
<PAGE>

personnel, existing customers, borrowers, builders, attorneys, accountants and
other professionals, real estate broker referrals and walk-in customers.

        Our loan origination activity may be adversely affected by a rising
interest rate environment that typically results in decreased loan demand, while
declining interest rates may stimulate increased loan demand. Accordingly, the
volume of loan originations, the mix of fixed and adjustable-rate loans, and the
profitability of this activity can vary from period to period. One- to
four-family residential mortgage loans are generally underwritten to current
Fannie Mae seller/servicer guidelines, and are closed on documents that conform
to Fannie Mae guidelines.

        During 2005, we sold approximately $990 thousand in loans. We have not
purchased any loans in recent periods.

        We have recently been approved as a qualified loan seller/servicer for
Fannie Mae. We intend to sell conforming loans in the future, and we may retain
the servicing rights for the conforming loans we sell, and to continue to
collect payments on the loans, maintain tax escrows and applicable fire and
flood insurance coverage, and supervise foreclosure proceedings if necessary. We
would retain a portion of the interest paid by the borrower on the loans as
consideration for our servicing activities.

        LOAN APPROVAL AUTHORITY AND UNDERWRITING. Our Board of Directors grants
lending authority to our Management Loan Committee and individual executive
officers and loan officers. Our lending activities are subject to written
policies established by the Board. These policies are reviewed periodically.

        The Management Loan Committee may approve loans in accordance with
applicable loan policies, including our policy governing loans to one borrower.
This policy places limits on the aggregate dollar amount of credit that may be
extended to any one borrower and related entities. The Management Loan Committee
may approve real estate loans in amounts up to $300,000, and other loans in
amounts up to $100,000. As of December 31, 2005, the maximum loan-to-one
borrower limit was $1.5 million, although with Board approval we have originated
loans in excess of this limit. In February 2006, this amount was increased to
$3.0 million.

        In connection with our residential and commercial real estate loans, we
generally require property appraisals to be performed by independent appraisers
who are approved by the Board. Appraisals are then reviewed by the appropriate
loan underwriting areas. Under certain conditions, we may not require appraisals
for loans under $250,000, but we obtain appraisals in many of these cases. We
also require title insurance, hazard insurance and, if necessary, flood
insurance on property securing mortgage loans.

        LOAN ORIGINATION FEES AND COSTS. In addition to interest earned on
loans, we also receive loan origination fees. Such fees vary with the volume and
type of loans and commitments made, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money. We defer
loan origination fees and costs and amortize such amounts as an adjustment to
yield over the term of the loan by use of the level-yield method. Deferred loan
origination fees (net of deferred costs) were $336 thousand at December 31,
2005.

        LOANS TO ONE BORROWER. At December 31, 2005, our five largest aggregate
amounts loaned to any one borrower and related interests (including any unused
lines of credit) totaled $2.4 million, $2.3 million, $2.1 million, $2.0 million
and $2.0 million. These loans are all secured loans. Under federal banking
regulations, at December 31, 2005 our maximum loan-to-one borrower limit was
$5.2 million, although we generally require a maximum loan-to-one borrower limit
of $1.5 million. In February 2006, this amount was increased to $3.0 million.
See "Supervision and Regulation--Federal Banking Regulation--Loans to One
Borrower" for a discussion of applicable regulatory limitations.

DELINQUENT LOANS, OTHER REAL ESTATE OWNED AND CLASSIFIED ASSETS

        COLLECTION PROCEDURES. We send a computer-generated late notice on the
tenth day after the payment due date on a loan, which requests the payment due
plus any late charge that is assessed. When a loan is more than 15 days
delinquent, we contact the borrower by telephone to determine the reason for
delinquency and arrange for

                                       9
<PAGE>

payment, and accounts are monitored electronically for receipt of payments. If
payments are not received within 30 days of the original due date, a letter
demanding payment of all arrearages is sent and contact efforts are continued.
If payment is not received within 60 days of the due date, we generally
accelerate loans and demand payment in full. Failure to pay within 90 days of
the original due date generally results in legal action, notwithstanding ongoing
collection efforts. Unsecured consumer loans are generally charged-off after 120
days. For commercial loans, procedures with respect to demand letters and legal
action may vary depending upon individual circumstances.

        LOANS PAST DUE AND NONPERFORMING ASSETS. Loans are reviewed on a regular
basis, and generally are placed on nonaccrual status when either principal or
interest is 90 days or more past due. In addition, we place loans on nonaccrual
status when we believe that there is sufficient reason to question the
borrower's ability to continue to meet contractual principal or interest payment
obligations. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is reversed from interest income. Interest payments received
on nonaccrual loans are not recognized as income unless warranted based on the
borrower's financial condition and payment record.

        Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until such time as it is sold. We
have had no real estate owned in recent periods. When real estate is acquired
through foreclosure or by deed in lieu of foreclosure, it is recorded at its
fair value, less estimated costs of disposal. If the fair value of the property
is less than the loan balance, the difference is charged against the allowance
for loan losses.

                                       10
<PAGE>

        The following table sets forth certain information with respect to our
loan portfolio delinquencies at the dates indicated. Loans delinquent for 90
days or more are generally classified as nonaccrual loans.

<TABLE>
<CAPTION>
                                                  LOANS DELINQUENT FOR
                                   --------------------------------------------------
                                          60-89 DAYS              90 DAYS AND OVER              TOTAL
                                   ------------------------  ------------------------  ------------------------
                                     NUMBER        AMOUNT      NUMBER        AMOUNT      NUMBER        AMOUNT
                                   ----------    ----------  ----------    ----------  ----------    ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                        <C>   <C>                  <C>  <C>                 <C>   <C>
At December 31, 2005
--------------------
   Real estate loans:
     One- to four-family
       residential..............            1    $       41           2    $       37           3    $       78
     Home equity loans and
       lines of credit..........            4           147           1            39           5           186
     Multi-family...............           --            --          --            --          --            --
     Commercial.................           --            --          --            --          --            --
     Construction...............           --            --          --            --          --            --
   Commercial...................           --            --          --            --          --
   Consumer and other...........           11           209           1             4          12           213
                                   ----------    ----------  ----------    ----------  ----------    ----------
     Total......................           16    $      397           4    $       80          20    $      477
                                   ==========    ==========  ==========    ==========  ==========    ==========

At December 31, 2004
--------------------
   Real estate loans:
     One- to four-family
       residential..............            2    $       25           1    $       22           3    $       47
     Home equity loans and
       lines of credit..........            5           129           2            60           7           189
     Multi-family...............           --            --          --            --          --            --
     Commercial.................           --            --          --            --          --            --
     Construction...............           --            --          --            --          --            --
   Commercial...................           --            --          --            --          --            --
   Consumer and other...........            9            32           2            25          11            57
                                   ----------    ----------  ----------    ----------  ----------    ----------
     Total......................           16    $      186           5    $      107          21    $      293
                                   ==========    ==========  ==========    ==========  ==========    ==========

At December 31, 2003
--------------------
   Real estate loans:
     One- to four-family
       residential..............            3    $      944           2    $       95           5    $    1,039
     Home equity loans and
       lines of credit..........            2            63          --            --           2            63
     Multi-family...............           --            --          --            --          --            --
     Commercial.................           --            --          --            --          --            --
     Construction...............           --            --          --            --          --            --
   Commercial...................           --            --          --            --          --            --
   Consumer and other...........           --            --           2            17           2            17
                                   ----------    ----------  ----------    ----------  ----------    ----------
     Total......................            5    $    1,007           4    $      112           9    $    1,119
                                   ==========    ==========  ==========    ==========  ==========    ==========
</TABLE>



                                       11
<PAGE>

        NONPERFORMING ASSETS. The table below sets forth the amounts and
categories of our nonperforming assets at the dates indicated. At each date
presented, we had no troubled debt restructurings (loans for which a portion of
interest or principal has been forgiven and loans modified at interest rates
materially less than current market rates).

<TABLE>
<CAPTION>
                                                                         AT DECEMBER 31,
                                                ------------------------------------------------------------------
                                                   2005          2004          2003          2002          2001
                                                ----------    ----------    ----------    ----------    ----------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                              <C>          <C>           <C>           <C>           <C>
     Non-accrual loans:
        Real estate loans:
          One- to four-family residential....    $      37    $       --    $       95    $       --    $       --
          Home equity loans and lines of
            credit...........................           39            --            --            --            --
          Multi-family.......................           --            --            --            --            --
          Commercial.........................           --            --            --            --            --
          Construction.......................           --            --            --            --            --
        Commercial...........................           --            --            --            --            --
        Consumer and other...................            4            --            --            --            --
                                                ----------    ----------    ----------    ----------    ----------
          Total..............................           80            --            95            --            --
                                                ----------    ----------    ----------    ----------    ----------

     Accruing loans 90 days or more past due:
        Real estate loans:
          One- to four-family residential....           --            22            --            --            70
          Home equity loans and lines of
            credit...........................           --            60            --            57            --
          Multi-family.......................           --            --            --            --            --
          Commercial.........................           --            --            --            --            --
          Construction.......................           --            --            --            --            --
        Commercial...........................           --            --            --            --            --
        Consumer and other...................           --            25            17            27            --
                                                ----------    ----------    ----------    ----------    ----------
          Total loans 90 days or more
            past due.........................           --           107            17            84            70
                                                ----------    ----------    ----------    ----------    ----------

          Total non-performing loans.........           80           107           112            84            70
                                                ----------    ----------    ----------    ----------    ----------

     Foreclosed real estate..................           --            --            --            --            --
     Other non-performing assets.............           --            --            --            --            --
                                                ----------    ----------    ----------    ----------    ----------

     Total non-performing assets.............   $       80    $      107    $      112    $       84    $       70
                                                ==========    ==========    ==========    ==========    ==========

     Ratios:
        Total non-performing loans to total
          loans..............................         0.05%         0.08%         0.12%         0.14%         0.13%
        Total non-performing loans to total
          assets.............................         0.02          0.03          0.04          0.03          0.03
        Total non-performing assets to total
          assets.............................         0.02          0.03          0.04          0.03          0.03
</TABLE>

        The amount of the allowance for loan losses allocated to the $80
thousand of non-performing loans at December 31, 2005, noted above, was $7
thousand. We have calculated this amount by applying our allowance for loan
losses methodology to each of the respective loan categories. This amount
represents general allowances.

        CLASSIFICATION OF ASSETS. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets that are
considered to be of lesser quality as substandard, doubtful, or loss assets. An
asset is considered substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that we will sustain some loss if the deficiencies are not corrected. Assets
classified as doubtful have all of the weaknesses inherent in those classified
substandard with the added characteristic that the weaknesses present make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. Assets classified as
loss are those considered uncollectible and of such little value that their
continuance as assets is not warranted. Assets that do not expose us to risk
sufficient to warrant classification in one of the aforementioned categories,
but which possess potential weaknesses that deserve our close attention, are
required to be designated as special mention. As of December 31, 2005, we had
$3.2 million of assets designated as special mention.

        When we classify assets as either substandard or doubtful, we allocate a
portion of the related general loss allowances to such assets as we deem
prudent. The allowance for loan losses represents amounts that have been

                                       12
<PAGE>

established to recognize losses inherent in the loan portfolio that are both
probable and reasonably estimable at the date of the financial statements. When
we classify problem assets as loss, we charge-off such amount. Our determination
as to the classification of our assets and the amount of our loss allowances are
subject to review by our regulatory agencies, which can require that we
establish additional loss allowances. We regularly review our asset portfolio to
determine whether any assets require classification in accordance with
applicable regulations. On the basis of our review of our assets at December 31,
2005, classified assets consisted of special mention assets of $3.2 million,
substandard assets of $124 thousand, doubtful assets of $162 thousand and no
loans classified as loss assets. The classified assets total includes $80
thousand of nonperforming loans.

        ALLOWANCE FOR LOAN LOSSES. We provide for loan losses based on the
allowance method. Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the allowance for
loan losses are provided by charges to income based on various factors which, in
our judgment, deserve current recognition in estimating probable losses. We
regularly review the loan portfolio and make provisions for loan losses in order
to maintain the allowance for loan losses in accordance with accounting
principles generally accepted in the United States of America. The allowance for
loan losses consists of three components:

        (1)     specific allowances established for any impaired commercial real
                estate, commercial, construction and multi-family mortgage loans
                for which the recorded investment in the loan exceeds the
                measured value of the loan;

        (2)     allowances for loan losses for each loan type based on
                historical loan loss experience; and

        (3)     adjustments to historical loss experience (general allowances),
                maintained to cover uncertainties that affect our estimate of
                probable losses for each loan type.

        The adjustments to historical loss experience are based on our
evaluation of several factors, including:

        o       levels of, and trends in, charge-offs and recoveries;

        o       national and local economic trends and conditions;

        o       trends in volume and terms of loans, including any credit
                concentrations in the loan portfolio; and

        o       experience, ability, and depth of lending management and other
                relevant staff.

        We evaluate the allowance for loan losses based upon the combined total
of the specific, historical loss and general components. Generally when the loan
portfolio increases, absent other factors, the allowance for loan loss
methodology results in a higher dollar amount of estimated probable losses than
would be the case without the increase. Generally when the loan portfolio
decreases, absent other factors, the allowance for loan loss methodology results
in a lower dollar amount of estimated probable losses than would be the case
without the decrease.

        We consider commercial loans, commercial real estate loans and
construction loans to be riskier than one- to four-family residential mortgage
loans. Commercial loans involve a higher risk of default than residential loans
of like duration since their repayment generally depends on the successful
operation of the borrower's business and the sufficiency of collateral, if any.
Commercial real estate loans also have greater credit risks compared to one- to
four-family residential mortgage loans, as they typically involve large loan
balances concentrated with single borrowers or groups of related borrowers. In
addition, the payment experience on loans secured by income-producing properties
typically depends on the successful operation of the related real estate project
and thus may be subject to a greater extent to adverse conditions in the real
estate market and in the general economy. Construction loans have greater credit
risk than permanent mortgage financing. The repayment of these loans depends
upon the sale of the property to third parties or the availability of permanent
financing upon completion of all improvements. In the event we make an
acquisition loan on property that is not yet approved for the planned
development, there is the risk that approvals will not be granted or will be
delayed. These events may adversely affect the borrower and the collateral value
of the property. Construction loans also expose us to the risk that improvements
will not be

                                       13
<PAGE>

completed on time in accordance with specifications and projected costs. In
addition, the ultimate sale or rental of the property may not occur as
anticipated.

        We periodically evaluate the carrying value of loans and the allowance
is adjusted accordingly. While we use the best information available to make
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the information used in making the evaluations. In
addition, as an integral part of their examination process, our regulatory
agencies periodically review the allowance for loan losses. Such agencies may
require us to recognize additions to the allowance based on their evaluation of
information available to them at the time of their examination.

        The following table sets forth activity in our allowance for loan losses
for the periods indicated.

<TABLE>
<CAPTION>
                                                                                             AT OR FOR
                                                                                              THE NINE
                                                                                               MONTHS
                                                 AT OR FOR THE YEARS ENDED DECEMBER 31,        ENDED
                                         --------------------------------------------------   DECEMBER
                                            2005          2004         2003        2002      31, 2001(1)
                                         -----------  -----------  -----------  -----------  -----------
                                                               (DOLLARS IN THOUSANDS)
<S>                                       <C>          <C>          <C>          <C>          <C>
Balance at beginning of period......      $      990   $      667   $      421   $      259   $      193

Charge-offs:
   Real estate loans:
     One- to four-family
       residential..................              --           (4)          (2)          --           --
     Home equity loans and lines
       of credit....................              --           --           --           (4)          --
     Multi-family...................              --           --           --           --           --
     Commercial.....................              --           --           --           --           --
     Construction...................              --           --           --           --           --
   Commercial.......................              --           --           --           --           --
   Consumer and other...............             (31)         (38)         (47)         (60)         (55)
                                         -----------  -----------  -----------  -----------  -----------
     Total charge-offs..............             (31)         (42)         (49)         (64)         (55)

Recoveries:
   Real estate loans:
     One- to four-family
       residential..................              --           --           --           --           --
     Home equity loans and lines
       of credit....................              --           --           --           --           --
     Multi-family...................              --           --           --           --           --
     Commercial.....................              --           --           --           --           --
     Construction...................              --           --           --           --           --
   Commercial.......................              --           --           --           --           --
   Consumer and other...............               5           11           12            8           14
                                         -----------  -----------  -----------  -----------  -----------
     Total recoveries...............               5           11           12            8           14
                                         -----------  -----------  -----------  -----------  -----------

Net charge-offs.....................             (26)         (31)         (37)         (56)         (41)
Provision for loan losses...........             204          354          283          218          107
                                         -----------  -----------  -----------  -----------  -----------

Balance at end of year..............      $    1,168   $      990   $      667   $      421   $      259
                                         ===========  ===========  ===========  ===========  ===========

Ratios:
Net charge-offs to average
   loans outstanding................           (0.02)%      (0.03)%      (0.05)%      (0.10)%      (0.11)%
Allowance for loan losses to
   non-performing loans at end of
   period...........................         1,460.0%      925.23%      595.54%      501.19%      370.00%
Allowance for loan losses to
   total loans at end of period.....            0.73%        0.77%        0.76%        0.71%        0.48%
</TABLE>
-----------
(1)     Colonial Bank, FSB changed its fiscal year from March 31 to December 31
        in 2001.


                                       14
<PAGE>

        ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following tables set forth
the allowance for loan losses allocated by loan category, the percent of the
allowance to the total allowance and the percent of loans in each category to
total loans at the dates indicated. The allowance for loan losses allocated to
each category is not necessarily indicative of future losses in any particular
category and does not restrict the use of the allowance to absorb losses in
other categories.

<TABLE>
<CAPTION>
                                                              AT DECEMBER 31,
                               ------------------------------------------------------------------------------
                                                2005                                   2004
                               --------------------------------------  --------------------------------------
                                             PERCENT OF    PERCENT OF                PERCENT OF    PERCENT OF
                                            ALLOWANCE TO    LOANS IN                ALLOWANCE TO    LOANS IN
                                                TOTAL     CATEGORY TO                  TOTAL      CATEGORY TO
                                  AMOUNT      ALLOWANCE   TOTAL LOANS     AMOUNT     ALLOWANCE    TOTAL LOANS
                               ------------ ------------ ------------  ------------ ------------ ------------
                                                           (DOLLARS IN THOUSANDS)
<S>                             <C>              <C>         <C>        <C>              <C>         <C>
Real estate loans:
  One- to four-family
    residential..............   $      205        17.5%       48.8%     $      146        14.8%       44.4%
  Home equity loans and
    lines  of credit.........           83         7.1        20.8              80         8.1        25.1
  Multi-family...............           --          --         1.1              --          --         1.4
  Commercial.................          640        54.8        19.7             518        52.3        20.3
  Construction...............           --          --         3.9              --          --         1.8
Commercial...................          155        13.3         4.3             156        15.8         4.8
Consumer and other...........           85         7.3         1.4              90         9.0         2.2
                                ----------    --------    --------      ----------    --------    --------

Total allowance for loan
  losses.....................   $    1,168       100.0%      100.0%     $      990       100.0%      100.0%
                                ==========    ========    ========      ==========    ========    ========


                                                              AT DECEMBER 31,
                               ------------------------------------------------------------------------------
                                                2003                                   2002
                               --------------------------------------  --------------------------------------
                                             PERCENT OF    PERCENT OF                PERCENT OF    PERCENT OF
                                            ALLOWANCE TO    LOANS IN                ALLOWANCE TO    LOANS IN
                                                TOTAL     CATEGORY TO                  TOTAL      CATEGORY TO
                                  AMOUNT      ALLOWANCE   TOTAL LOANS     AMOUNT     ALLOWANCE    TOTAL LOANS
                               ------------ ------------ ------------  ------------ ------------ ------------
                                                           (DOLLARS IN THOUSANDS)
Real estate loans:
  One- to four-family
    residential..............   $      159        23.8%       39.5%     $       69        16.4%       42.8%
  Home equity loans and
    lines  of credit.........          127        19.0        32.4              76        18.0        32.3
  Multi-family...............           --          --         0.2              --          --         0.3
  Commercial.................          321        48.1        15.3             228        54.2        12.1
  Construction...............           --          --         2.2              --          --         1.7
Commercial...................           --          --         7.6              --          --         6.1
Consumer and other...........           60         9.1         2.8              48        11.4         4.7
                                ----------    --------    --------      ----------    --------    --------
Total allowance for loan
  losses.....................   $      667       100.0%      100.0%     $      421       100.0%      100.0%
                                ==========    ========    ========      ==========    ========    ========


                                           AT DECEMBER 31,
                               --------------------------------------
                                                2001
                               --------------------------------------
                                             PERCENT OF    PERCENT OF
                                            ALLOWANCE TO    LOANS IN
                                                TOTAL     CATEGORY TO
                                  AMOUNT      ALLOWANCE   TOTAL LOANS
                               ------------ ------------ ------------
                                        (DOLLARS IN THOUSANDS)
Real estate loans:
  One- to four-family
    residential..............   $       82        31.7%        49.2%
  Home equity loans and
    lines  of credit.........           31        12.0         33.1
  Multi-family...............           --          --          0.3
  Commercial.................           99        38.2          7.5
  Construction...............           --          --          2.4
Commercial...................           --          --          1.6
Consumer and other...........           47        18.1          5.9
                                ----------    --------    --------
Total allowance for loan
  losses.....................   $      259       100.0%      100.0%
                                ==========    ========    ========
</TABLE>


                                       15
<PAGE>

SECURITIES ACTIVITIES

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

        Our current investment policy generally permits securities investments
in debt securities issued by the U.S. Government and U.S. Government agencies,
municipal bonds, and corporate debt obligations, as well as investments in
preferred and common stock of U.S. Government agencies and U.S. Government
sponsored enterprises such as Fannie Mae, Freddie Mac and the Federal Home Loan
Bank of New York. Securities in these categories are classified as "investment
securities" for financial reporting purposes. The policy also permits
investments in mortgage-backed securities, including pass-through securities
issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as
collateralized mortgage obligations ("CMOs") issued or backed by securities
issued by these government agencies or government-sponsored enterprises. Also
permitted are investments in securities issued or backed by the Small Business
Administration. As of December 31, 2005, we held no asset-backed securities
(securities collateralized by automobile loans, credit card receivables and home
equity loans), and we held no preferred securities issued by either Fannie Mae
or Freddie Mac. Our current investment strategy uses a risk management approach
of diversified investing in fixed-rate securities with short- to
intermediate-term maturities, as well as adjustable-rate securities, which may
have a longer term to maturity. The emphasis of this approach is to increase
overall investment securities yields while managing interest rate risk.

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

        MORTGAGE-BACKED SECURITIES. We invest in mortgage-backed securities in
order to generate positive interest rate spreads with minimal administrative
expense, lower credit risk as a result of the guarantees provided by Freddie
Mac, Fannie Mae and Ginnie Mae, and increased liquidity. We invest primarily in
mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac, and
Ginnie Mae. At December 31, 2005, our mortgage-backed securities portfolio had a
fair value of $56.6 million, consisting of pass-through securities.

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

                                       16
<PAGE>

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

        CORPORATE DEBT SECURITIES AND MUNICIPAL BONDS. At December 31, 2005, we
held $12.3 million in corporate debt securities, at fair value, $9.3 million of
which were classified as available for sale and $3.0 million of which were
classified as held to maturity. At December 31, 2005, we held $34.1 million in
bonds issued by states and political subdivisions, $10.0 million of which were
classified as held to maturity at amortized cost and $24.1 million of which were
classified as available for sale at fair value. Although corporate debt
securities and municipal bonds may offer a higher yield than a U.S. Treasury or
agency security of comparable duration, these securities also have a higher risk
of default due to adverse changes in the creditworthiness of the issuer. In
recognition of this potential risk, we generally limit investments in corporate
bonds to securities rated in one of the four highest categories by at least one
nationally recognized rating agency, and to a total investment of no more than
$1.0 million per issuer. We also generally limit investments in municipal bonds
to issues that are insured unless the issuer is a local government entity within
our service area. Such local entity obligations generally are not rated, and are
subject to internal credit reviews. In addition, our investment policy imposes
an investment limitation of $1.5 million per municipal issuer.

        EQUITY SECURITIES. At December 31, 2005, our equity securities consisted
of Federal Home Loan Bank of New York common stock and mutual funds. We hold the
Federal Home Loan Bank of New York common stock to qualify for membership in the
Federal Home Loan Bank System and to be eligible to borrow funds under the
Federal Home Loan Bank of New York's advance program. There is no market for the
common stock, but it is the current practice of the Federal Home Loan Bank of
New York to redeem shares at par value. The aggregate fair value of our Federal
Home Loan Bank of New York common stock as of December 31, 2005 was $1.0 million
based on its par value. No unrealized gains or losses have been recorded because
the par value of the common stock represents its fair value. Our mutual funds
consist solely of Shay Asset Management Funds. We selected these mutual funds
because the underlying securities bear similar risk characteristics to
investments that we purchase directly. These mutual funds provide us with
increased liquidity since we can redeem our shares within several days and also
provide us with a higher yield than other short-term earning assets such as
federal funds.

        U.S. GOVERNMENT AGENCY SECURITIES. At December 31, 2005, we held U.S.
Government agency securities available for sale with a fair value of $29.1
million and U.S. Government agency securities held to maturity of $1.0 million.
Generally, these securities have short- to medium-term maturities (one to five
years) and may have call or step-up features. While these securities generally
provide lower yields than other investments such as mortgage-backed securities,
our current investment strategy is to maintain investments in such instruments
to the extent appropriate for liquidity purposes, as collateral for borrowings,
and for prepayment protection.

                                       17
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                AT DECEMBER 31,
                                               -------------------------------------------------------------------------------
                                                          2005                       2004                       2003
                                               -------------------------  -------------------------  -------------------------
                                                AMORTIZED                  AMORTIZED                  AMORTIZED
                                                  COST       FAIR VALUE      COST       FAIR VALUE      COST       FAIR VALUE
                                               -----------   -----------  -----------   -----------  -----------   -----------
                                                                               (IN THOUSANDS)
<S>                                            <C>           <C>          <C>           <C>          <C>           <C>
SECURITIES AVAILABLE-FOR-SALE:
  Mortgage-backed...........................   $    53,771   $    53,030  $    43,670   $    43,709  $    28,889   $    29,269
  U.S. Government agency....................        29,509        29,051       25,096        25,152       16,932        16,944
  Corporate.................................         9,341         9,263       10,600        10,732       15,569        15,837
  Mutual funds..............................        13,314        13,116       12,865        12,839       12,731        12,719
  Municipal.................................        23,902        24,061       23,634        23,928       24,259        24,307
  SBA pools.................................        10,597        10,735       14,695        14,799       19,004        19,157
                                               -----------   -----------  -----------   -----------  -----------   -----------
     Total securities available-for-sale....   $   140,434   $   139,256  $   130,560   $   131,159  $   117,384   $   118,233
                                               ===========   ===========  ===========   ===========  ===========   ===========

SECURITIES HELD-TO-MATURITY:
  Mortgage-backed...........................   $     3,499   $     3,592  $     4,966   $     5,217  $    10,245   $    10,752
  U.S. Government agency....................         1,000           998        1,000         1,007        1,777         1,835
  Corporate.................................         2,964         3,130        8,683         9,209        8,654         9,059
  Municipal.................................        10,011        10,511        3,935         4,261        3,922         4,254
                                               -----------   -----------  -----------   -----------  -----------   -----------
     Total securities held-to-maturity......   $    17,474   $    18,231  $    18,584   $    19,694  $    24,598   $    25,900
                                               ===========   ===========  ===========   ===========  ===========   ===========
</TABLE>



                                       18
<PAGE>

        PORTFOLIO MATURITIES AND YIELDS. The composition and maturities of the
investment debt securities portfolio and the mortgage-backed securities
portfolio at December 31, 2005 are summarized in the following table. Maturities
are based on the final contractual payment dates, and do not reflect the impact
of prepayments or early redemptions that may occur. State and municipal
securities yields have been adjusted to a tax-equivalent basis.

<TABLE>
<CAPTION>
                                                                MORE THAN ONE YEAR       MORE THAN FIVE YEARS
                                        ONE YEAR OR LESS        THROUGH FIVE YEARS         THROUGH TEN YEARS
                                   ------------------------  ------------------------  ------------------------
                                                  WEIGHTED                 WEIGHTED                  WEIGHTED
                                    AMORTIZED     AVERAGE     AMORTIZED     AVERAGE     AMORTIZED     AVERAGE
                                      COST         YIELD        COST         YIELD        COST         YIELD
                                   -----------  -----------  -----------  -----------  -----------  -----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                  <C>            <C>       <C>             <C>       <C>             <C>
SECURITIES AVAILABLE-FOR-SALE:
  Mortgage-backed................    $  2,676       3.41%     $ 10,520        4.17%     $  4,293        4.77%
  U.S. Government agency.........      18,278       4.11%        5,745        4.68%        4,500        4.85%
  Corporate......................       1,877       5.29%        6,148        4.85%        1,316        5.45%
  Mutual funds...................      13,314       4.05%           --          --%           --          --%
  Municipal......................       1,052       5.81%        8,645        5.56%       12,939        6.35%
  SBA pools......................          27       6.28%        6,619        6.06%        2,730        6.83%
                                     --------                 --------                  --------
     Total securities
       available-for-sale........    $ 37,224       4.15%     $ 37,677        5.01%     $ 25,778        5.83%
                                     ========                 ========                  ========

SECURITIES HELD-TO-MATURITY:
  Mortgage-backed................    $    273       6.20%     $    273        6.57%     $  2,292        6.08%
  U.S. Government agency.........       1,000       3.97%           --          --%           --          --%
  Corporate......................       1,301       7.19%          478        7.01%           --          --%
  Municipal......................       2,171       4.77%        3,268        6.84%        2,161        7.07%
                                     --------                 --------                  --------
     Total securities
       held-to-maturity..........    $  4,745       5.35%     $  4,019        6.84%     $  4,453        6.56%
                                     ========                 ========                  ========

(Continued)

                                      MORE THAN TEN YEARS              TOTAL SECURITIES
                                   ------------------------  ------------------------------------
                                                  WEIGHTED                             WEIGHTED
                                    AMORTIZED     AVERAGE     AMORTIZED       FAIR     AVERAGE
                                      COST         YIELD        COST         VALUE      YIELD
                                   -----------  -----------  -----------  ----------- -----------
                                                       (DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE-FOR-SALE:
  Mortgage-backed................    $ 36,282       4.54%     $ 53,771     $ 53,030      4.43%
  U.S. Government agency.........         986       5.14%       29,509       29,051      4.37%
  Corporate......................          --         --%        9,341        9,263      5.02%
  Mutual funds...................          --         --%       13,314       13,116      4.05%
  Municipal......................       1,266       7.03%       23,902       24,061      6.08%
  SBA pools......................       1,221       3.39%       10,597       10,735      5.95%
                                     --------                 --------     --------
     Total securities
       available-for-sale........    $ 39,755       4.60%     $140,434     $139,256      4.82%
                                     ========                 ========     ========

SECURITIES HELD-TO-MATURITY:
  Mortgage-backed................    $    661       5.79%     $  3,499     $  3,592      6.07%
  U.S. Government agency.........          --         --%        1,000          998      3.97%
  Corporate......................       1,185       7.12%        2,964        3,130      7.14%
  Municipal......................       2,411       7.92%       10,011       10,511      6.70%
                                     --------                 --------     --------
     Total securities
       held-to-maturity..........    $  4,257       7.37%     $ 17,474     $ 18,231      6.49%
                                     ========                 ========     ========
</TABLE>


                                       19
<PAGE>

SOURCES OF FUNDS

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

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

        Our deposits are obtained predominantly from the areas in which our
branch offices are located. We rely on our customer service and competitive
pricing to attract and retain these deposits. We accept certificates of deposit
in excess of $100,000 for which we may provide preferential rates. At December
31, 2005, we had no brokered certificates of deposits though we may utilize this
source of funds in the future.

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

<TABLE>
<CAPTION>
                                                                      AT DECEMBER 31,
                               -------------------------------------------------------------------------------------------
                                            2005                           2004                          2003
                               -----------------------------  -----------------------------  -----------------------------
                                                    WEIGHTED                       WEIGHTED                       WEIGHTED
                                                    AVERAGE                        AVERAGE                        AVERAGE
                                BALANCE   PERCENT    RATE      BALANCE   PERCENT    RATE      BALANCE   PERCENT     RATE
                               --------- --------- ---------  --------- --------- ---------  --------- --------- ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                            <C>         <C>        <C>     <C>         <C>         <C>    <C>         <C>         <C>
DEPOSIT TYPE:
Non-interest bearing
   demand...................   $ 13,638      4.79%      --%   $  9,587      3.70%       --%  $ 10,529      4.71%       --%
Savings.....................     61,635     21.65     1.50      68,152     26.27      1.31     61,638     27.57      1.33
NOW accounts................     33,844     11.89     1.43      28,579     11.02      0.61     20,695      9.26        --
Super NOW accounts..........     17,492      6.14     1.00      16,218      6.25      1.00     16,460      7.36      1.00
Money market demand.........     18,778      6.59     2.39      21,999      8.48      1.70     11,258      5.03      1.26
                               --------   -------             --------   -------             --------   -------
   Total transaction
    accounts................    145,387     51.06     1.39     144,535     55.72      0.71    120,580     53.93      0.93

Certificates of deposit.....    139,338     48.94     3.96     114,872     44.28      3.19    102,989     46.07      2.60
                               --------   -------             --------   -------             --------   -------

   Total deposits...........   $284,725    100.00%    2.65%   $259,407    100.00%     2.04%  $223,569    100.00%     1.70%
                               ========   =======             ========   =======             ========   =======
</TABLE>

        As of December 31, 2005, the aggregate amount of outstanding
certificates of deposit in amounts greater than or equal to $100,000 was
approximately $52.7 million. The following table sets forth the maturity of
those certificates as of December 31, 2005.

                                                                AT
                                                        DECEMBER 31, 2005
                                                        -----------------
                                                          (IN THOUSANDS)

        Three months or less....................           $    13,906
        Over three months through six months....                 4,503
        Over six months through one year........                 8,306
        Over one year to three years............                11,322
        Over three years........................                14,623
                                                           -----------

        Total...................................           $    52,660
                                                           ===========

        At December 31, 2005, $65.2 million of our certificates of deposit had
maturities of one year or less. We monitor activity on these accounts and, based
on historical experience and our current pricing strategy, we believe we will
retain a large portion of these accounts upon maturity.

                                       20
<PAGE>

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

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                           -------------------------------------------
                                               2005            2004           2003
                                           -------------  -------------  -------------
                                                          (IN THOUSANDS)
<S>                                         <C>            <C>            <C>
Beginning balance.....................      $   249,820    $   213,040    $   211,415
Net deposits (withdrawals) before
   interest credited..................           14,839         32,362         (2,558)
Interest credited.....................            6,428          4,418          4,183
                                            -----------    -----------    -----------
Ending balance........................      $   271,087    $   249,820    $   213,040
                                            ===========    ===========    ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                               AT OR FOR THE YEAR ENDED DECEMBER 31,
                                           -------------------------------------------
                                               2005            2004           2003
                                           -------------  -------------  -------------
                                                     (DOLLARS IN THOUSANDS)
<S>                                         <C>            <C>            <C>
Balance at end of year.................     $    15,415    $    13,890    $     4,070
Average balance during year............     $     5,912    $    15,024    $     7,636
Maximum outstanding at any month end...     $    15,740    $    25,181    $    12,070
Weighted average interest rate at
   end of year.........................            4.17%          2.12%          1.04%
Average interest rate during year......            3.30%          1.62%          1.20%
</TABLE>

        At December 31, 2005, we had the ability to borrow approximately $45.2
million under our credit facilities with the Federal Home Loan Bank of New York
of which $15.4 million was outstanding.

EMPLOYEES

        As of December 31, 2005, we had 64 full-time employees and 11 part-time
employees. The employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.

LEGAL PROCEEDINGS

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

                           FEDERAL AND STATE TAXATION

TAX ALLOCATION

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


FEDERAL TAXATION

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

                                       21
<PAGE>

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

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

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

        At December 31, 2005, our total federal pre-1988 base year reserve was
approximately $1.5 million. However, under current law, pre-1988 base year
reserves remain subject to recapture should Colonial Bank, FSB make certain
non-dividend distributions, repurchase any of its stock, pay dividends in excess
of tax earnings and profits, or cease to maintain a financial institution
charter.

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

        NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. At December 31, 2005, Colonial Bank, FSB had no net
operating loss carryforwards for federal income tax purposes.

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

STATE TAXATION

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

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

                                       22
<PAGE>

                           SUPERVISION AND REGULATION

GENERAL

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

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

FEDERAL BANKING REGULATION

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

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

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

                                       23
<PAGE>

        At December 31, 2005, Colonial Bank, FSB's capital exceeded all
applicable requirements.

        LOANS TO ONE BORROWER. A federal savings bank generally may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of unimpaired capital and surplus. An additional amount may be loaned, equal to
10% of unimpaired capital and surplus, if the loan is secured by readily
marketable collateral, which generally does not include real estate. As of
December 31, 2005, Colonial Bank, FSB was in compliance with the
loans-to-one-borrower limitations.

        QUALIFIED THRIFT LENDER TEST. As a federal savings bank, Colonial Bank,
FSB must satisfy the qualified thrift lender, or "QTL," test. Under the QTL
test, Colonial Bank, FSB must maintain at least 65% of its "portfolio assets" in
"qualified thrift investments" in at least nine of the most recent 12-month
period. "Portfolio assets" generally means total assets of a savings
institution, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the
conduct of the savings bank's business.

        "Qualified thrift investments" include various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
portfolio assets. "Qualified thrift investments" also include 100% of an
institution's credit card loans, education loans and small business loans.
Colonial Bank, FSB also may satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code.

        A savings bank that fails the qualified thrift lender test must either
convert to a bank charter or operate under specified restrictions. At December
31, 2005, Colonial Bank, FSB held 77.9% of its "portfolio assets" in "qualified
thrift investments," and satisfied this test.

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

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

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

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

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

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

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

        o       the association would be undercapitalized following the
                distribution;

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

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

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

                                       24
<PAGE>

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

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

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

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

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

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

                                       25
<PAGE>

transactions with non-affiliates. The Office of Thrift Supervision requires
savings banks to maintain detailed records of all transactions with affiliates.

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

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

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

        PROMPT CORRECTIVE ACTION REGULATIONS. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings banks. For this purpose, a
savings bank is placed in one of the following five categories based on the
association's capital:

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

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

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

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

                                       26
<PAGE>

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

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

        At December 31, 2005, Colonial Bank, FSB met the criteria for being
considered "well-capitalized."

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

        On February 15, 2006, federal legislation to reform federal deposit
insurance was signed into law. This new legislation requires, among other
things, the merger of the Savings Association Insurance Fund and the Bank
Insurance Fund into a unified insurance deposit fund, an increase in the amount
of federal deposit insurance coverage from $100,000 to $130,000 (with a cost of
living adjustment to become effective in five years), and the reserve ratio to
be modified to provide for a range between 1.15% and 1.40% of estimated insured
deposits. The new legislation requires the FDIC to issue regulations
implementing the law and changes required by the law will not be effective until
final regulations have been issued, which must be no later than 270 days from
the date of the enactment of the legislation.

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

        FEDERAL HOME LOAN BANK SYSTEM. Colonial Bank, FSB is a member of the
Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan
Banks. The Federal Home Loan Bank System provides a central credit facility
primarily for member institutions. As a member of the Federal Home Loan Bank of
New York, Colonial Bank, FSB is required to acquire and hold shares of capital
stock in the Federal Home Loan Bank. Currently, the capital stock requirement is
comprised of: 1) Membership Stock, which equals 0.20% of Colonial Bank FSB's
mortgage-related assets as of December 31, 2005 and 2) Activity-Based Stock,
which equals 4.5% of

                                       27
<PAGE>

outstanding borrowings from the Federal Home Loan Bank. As of December 31, 2005,
Colonial Bank, FSB was in compliance with this requirement.

FEDERAL RESERVE SYSTEM

        The Federal Reserve Board regulations require savings banks to maintain
noninterest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At December 31,
2005, Colonial Bank, FSB was in compliance with these reserve requirements.

INTERNET BANKING

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

THE USA PATRIOT ACT

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

SARBANES-OXLEY ACT OF 2002

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

HOLDING COMPANY REGULATION

        GENERAL. Colonial Bankshares, MHC and Colonial Bankshares, Inc. are
non-diversified savings and loan holding companies within the meaning of the
Home Owners' Loan Act. As such, Colonial Bankshares, MHC and Colonial
Bankshares, Inc. are registered with the Office of Thrift Supervision and are
subject to Office of Thrift Supervision regulations, examinations, supervision
and reporting requirements. In addition, the Office of Thrift Supervision has
enforcement authority over Colonial Bankshares, Inc. and Colonial Bankshares,
MHC, and their subsidiaries. Among other things, this authority permits the
Office of Thrift Supervision to restrict or prohibit

                                       28
<PAGE>

activities that are determined to be a serious risk to the subsidiary savings
institution. As federal corporations, Colonial Bankshares, Inc. and Colonial
Bankshares, MHC are generally not subject to state business organization laws.

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

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

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

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

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

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

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

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

        (viii)  acting as trustee under deeds of trust;

        (ix)    any other activity:

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

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

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

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

        The Home Owners' Loan Act prohibits a savings and loan holding company,
including Colonial Bankshares, Inc. and Colonial Bankshares, MHC, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
another savings institution or holding company thereof, without prior written
approval of the Office of Thrift Supervision. It also prohibits the acquisition
or retention of, with certain exceptions, more than 5% of a nonsubsidiary
company engaged in activities other than those permitted by the Home Owners'
Loan Act, or acquiring or retaining control of an institution that is not
federally insured. In evaluating applications by holding

                                       29
<PAGE>

companies to acquire savings institutions, the Office of Thrift Supervision must
consider the financial and managerial resources, future prospects of the company
and institution involved, the effect of the acquisition on the risk to the
federal deposit insurance fund, the convenience and needs of the community and
competitive factors.

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

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

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

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

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

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

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

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

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

                                       30
<PAGE>

FEDERAL SECURITIES LAWS

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

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

ITEM 2.    DESCRIPTION OF PROPERTY

        The following table provides certain information with respect to our six
banking offices as of December 31, 2005:

<TABLE>
<CAPTION>
<S>                                                                           <C>
                                                OWNED OR     DATE OF LEASE    NET BOOK VALUE OF
                 LOCATION                        LEASED       EXPIRATION        REAL PROPERTY
--------------------------------------------  ------------  ---------------  -------------------
                                                                                (IN THOUSANDS)
MAIN OFFICE:
85 West Broad Street                              Owned          N/A             $      376
Bridgeton, New Jersey 08302

BRANCH OFFICES:
1107 North High Street
Millville, New Jersey 08332                       Owned          N/A             $      331

227 Bridgeton Pike
Mantua, New Jersey 08051                          Owned          N/A             $      529

Route 77 and Big Oak Road
Upper Deerfield Township, New Jersey 08302        Owned          N/A             $      131

1771 South Lincoln Avenue
Vineland, New Jersey 08361                        Owned          N/A             $      351

271 Lambs Road
Sewell, New Jersey 08080                          Owned          N/A             $      317
</TABLE>

        In addition, we plan to build a new administrative
headquarters/full-service office in Vineland, New Jersey and a branch office in
Buena, New Jersey. We have budgeted approximately $6.3 million for the
construction of these new banking facilities, for which we have already spent
$1.9 million as of December 31, 2005. We cannot assure you that construction and
other costs will not exceed this budget estimate. We anticipate opening the
administrative headquarters in the first calendar quarter of 2007, and opening
the branch office in the second calendar quarter of 2007. However, because
building these facilities is subject to state and local government approval, we
cannot assure you that we will be able to open these facilities at these dates,
or that we will be able to complete construction even if we expend significant
funds on the construction projects.

        The net book value of our premises, land and equipment was approximately
$4.5 million at December 31, 2005.

                                       31
<PAGE>

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

ITEM 3.    LEGAL PROCEEDINGS

        From time to time, we are involved as plaintiff or defendant in various
legal proceedings arising in the ordinary course of business. At December 31,
2005, we were not involved in any legal proceedings, the outcome of which would
be material to our financial condition or results of operations.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

                                     PART II

ITEM 5.    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
           BUSINESS ISSUER PURCHASES OF SECURITIES

        (a)     Reference is made to the "Market for Common Stock" section of
Colonial Bankshares' 2005 Annual Report to Stockholders, which is incorporated
herein by reference.

        (b)     Not applicable.

        (c)     Colonial Bankshares did not repurchase any shares of its common
stock during the relevant period.

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

        The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of Colonial Bankshares' 2005 Annual Report to
Stockholders is incorporated herein by reference (see Exhibit 13).

ITEM 7.    FINANCIAL STATEMENTS

        The consolidated financial statements included in Colonial Bankshares'
2005 Annual Report to Stockholders are incorporated herein by reference (see
Exhibit 13).

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

        None.

ITEM 8A.   CONTROLS AND PROCEDURES

        Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934, is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms. There has been no
change in the Company's internal control over financial reporting during the
Company's fourth quarter of fiscal year 2005 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.

ITEM 8B.   OTHER INFORMATION

        None.

                                       32
<PAGE>

                                    PART III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

        Colonial Bankshares has adopted a Code of Ethics that applies to
Colonial Bankshares' principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similar
functions. The Code of Ethics is filed as Exhibit 14 to this Form 10-KSB. A copy
of the Code will be furnished without charge upon written request to the
Secretary, Colonial Bankshares, Inc., 85 West Broad Street, Bridgeton, NJ 08302.

        Information concerning Directors and executive officers of Colonial
Bankshares will be filed with the Securities and Exchange Commission by
amendment to this Form 10-KSB.

ITEM 10.   EXECUTIVE COMPENSATION

        Information concerning executive compensation will be filed with the
Securities and Exchange Commission by amendment to this Form 10-KSB.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
           RELATED STOCKHOLDER MATTERS

        Information concerning security ownership of certain owners and
management will be filed with the Securities and Exchange Commission by
amendment to this Form 10-KSB.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Information concerning relationships and transactions will be filed with
the Securities and Exchange Commission by amendment to this Form 10-KSB.

ITEM 13.   EXHIBITS

        3.1     Charter of Colonial Bankshares, Inc.*
        3.2     Bylaws of Colonial Bankshares, Inc.*
        4       Form of Common Stock Certificate of Colonial Bankshares, Inc.*
        10      Form of Employee Stock Ownership Plan*
        13      Portions of 2005 Annual Report to Stockholders
        14      Code of Ethics
        21      Subsidiaries of Registrant*
        23.1    Consent of Independent Registered Public Accounting Firm

<PAGE>

        31.1    Certification of Chief Executive Officer pursuant to Rule
                13a-14(a) of the Securities Exchange Act of 1934, as amended, as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002
        31.2    Certification of Chief Financial Officer pursuant to Rule
                13a-14(a) of the Securities Exchange Act of 1934, as amended, as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002
        32      Certification of Chief Executive Officer and Chief Financial
                Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002

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

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

        Information concerning principal accountant fees and services will be
filed with the Securities and Exchange Commission by amendment to this Form
10-KSB.




                                       33
<PAGE>

                                   SIGNATURES

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

                                             COLONIAL BANKSHARES, INC.


Date: March 27, 2006                         By: /s/ Edward J. Geletka
                                                 ---------------------
                                             Edward J. Geletka
                                             President, Chief Executive Officer
                                             and Director
                                             (Duly Authorized Representative)

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

<TABLE>
<CAPTION>
<S>                                                                           <C>
           Signatures                                    Title                              Date
           ----------                                    -----                              -----

/s/ Edward J. Geletka                         President, Chief Executive                March 27, 2006
--------------------------------              Officer and Director (Principal
Edward J. Geletka                             Executive Officer)


/s/ L. Joseph Stella, III                     Executive Vice President and              March 27, 2006
--------------------------------              Chief Financial Officer
L. Joseph Stella, III                         (Principal Financial and
                                              Accounting Officer)


/s/ Frank M. Hankins                          Chairman of the Board                     March 27, 2006
--------------------------------
Frank M. Hankins


/s/ Albert A. Fralinger                       Vice Chairman of the Board                March 27, 2006
--------------------------------
Albert A. Fralinger


/s/ Richard S. Allen                          Director                                  March 27, 2006
--------------------------------
Richard S. Allen


/s/ Gregory J. Facemyer                       Director                                  March 27, 2006
--------------------------------
Gregory J. Facemyer


/s/ John Fitzpatrick                          Director                                  March 27, 2006
--------------------------------
John Fitzpatrick


/s/ James Quinn                               Director                                  March 27, 2006
--------------------------------
James Quinn
</TABLE>