Exhibit
13





PORTIONS OF ANNUAL REPORT
TO STOCKHOLDERS




COLONIAL
BANKSHARES, INC.




SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA




The
following information is derived from the audited consolidated financial
statements of Colonial Bankshares, Inc.  For additional information,
reference is made to “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Consolidated Financial Statements
of Colonial Bankshares, Inc. and related notes included elsewhere in this Annual
Report.




At
      December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(In
      thousands)Selected
      Financial Condition Data:Total
      assets
                  
                  $
                  530,576
                  
                  
                  $
                  457,860
                  
                  
                  $
                  383,597
                  
                  
                  $
                  336,852
                  
                  
                  $
                  291,050Cash
      and amounts due from banks
                  
                  
                  23,407
                  
                  
                  
                  15,978
                  
                  
                  
                  13,257
                  
                  
                  
                  10,669
                  
                  
                  
                  5,282Investment
      securities held to maturity
                  
                  
                  16,897
                  
                  
                  
                  17,213
                  
                  
                  
                  18,722
                  
                  
                  
                  17,474
                  
                  
                  
                  18,584Investment
      securities available for sale
                  
                  
                  165,462
                  
                  
                  
                  163,549
                  
                  
                  
                  136,925
                  
                  
                  
                  139,256
                  
                  
                  
                  131,159Loans
      receivable, net
                  
                  
                  303,151
                  
                  
                  
                  241,040
                  
                  
                  
                  198,519
                  
                  
                  
                  157,774
                  
                  
                  
                  125,800Deposits
                  
                  
                  457,231
                  
                  
                  
                  371,382
                  
                  
                  
                  337,254
                  
                  
                  
                  284,725
                  
                  
                  
                  259,407Borrowings
                  
                  
                  31,227
                  
                  
                  
                  45,939
                  
                  
                  
                  8,324
                  
                  
                  
                  15,415
                  
                  
                  
                  13,890Stockholders’
      equity
                  
                  
                  40,630
                  
                  
                  
                  39,028
                  
                  
                  
                  36,663
                  
                  
                  
                  35,861
                  
                  
                  
                  16,848





For
      the Years Ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(In
      thousands)Selected
      Operating Data:Interest
      income
                
                $
                27,151
                
                
                $
                23,045
                
                
                $
                18,509
                
                
                $
                14,706
                
                
                $
                12,351Interest
      expense
                
                
                15,696
                
                
                
                14,432
                
                
                
                10,208
                
                
                
                6,623
                
                
                
                4,662Net
      interest income
                
                
                11,455
                
                
                
                8,613
                
                
                
                8,301
                
                
                
                8,083
                
                
                
                7,689Provision
      for loan
      losses
                
                
                756
                
                
                
                84
                
                
                
                179
                
                
                
                204
                
                
                
                354Net
      interest income afterprovision
      for loan losses
                
                
                10,699
                
                
                
                8,529
                
                
                
                8,122
                
                
                
                7,879
                
                
                
                7,335Non-interest
      income
                
                
                628
                
                
                
                1,114
                
                
                
                1,043
                
                
                
                956
                
                
                
                902Non-interest
      expense
                
                
                9,629
                
                
                
                8,866
                
                
                
                7,430
                
                
                
                6,567
                
                
                
                5,824Income
      before income
      taxes
                
                
                1,698
                
                
                
                777
                
                
                
                1,735
                
                
                
                2,268
                
                
                
                2,413Income
      tax expense (benefit)
                
                
                353
                
                
                
                (454
                )
                
                
                124
                
                
                
                499
                
                
                
                566Net
      income
                
                $
                1,345
                
                
                $
                1,231
                
                
                $
                1,611
                
                
                $
                1,769
                
                
                $
                1,847





1




At
      or For the Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Selected
      Financial Ratios and Other Data:Performance
      Ratios:Return
      on average assets
                  
                  
                  0.27
                  %
                  
                  
                  0.29
                  %
                  
                  
                  0.45
                  %
                  
                  
                  0.57
                  %
                  
                  
                  0.67
                  %Return
      on average equity
                  
                  
                  3.44
                  %
                  
                  
                  3.33
                  %
                  
                  
                  4.49
                  %
                  
                  
                  6.69
                  %
                  
                  
                  11.96
                  %Interest
      rate spread (1)
                  
                  
                  2.27
                  %
                  
                  
                  1.95
                  %
                  
                  
                  2.17
                  %
                  
                  
                  2.65
                  %
                  
                  
                  2.84
                  %Net
      interest margin (2)
                  
                  
                  2.50
                  %
                  
                  
                  2.20
                  %
                  
                  
                  2.47
                  %
                  
                  
                  2.80
                  %
                  
                  
                  2.95
                  %Efficiency
      ratio (3)
                  
                  
                  79.69
                  %
                  
                  
                  91.15
                  %
                  
                  
                  79.52
                  %
                  
                  
                  72.65
                  %
                  
                  
                  67.79
                  %Noninterest
      expense to average total assets
                  
                  
                  1.92
                  %
                  
                  
                  2.09
                  %
                  
                  
                  2.07
                  %
                  
                  
                  2.10
                  %
                  
                  
                  2.12
                  %Average
      interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  106.49
                  %
                  
                  
                  106.73
                  %
                  
                  
                  109.99
                  %
                  
                  
                  106.70
                  %
                  
                  
                  106.15
                  %Asset
      Quality Ratios:Non-performing
      assets as a percent of total assets
                  
                  
                  0.38
                  %
                  
                  
                  0.25
                  %
                  
                  
                  0.06
                  %
                  
                  
                  0.02
                  %
                  
                  
                  0.03
                  %Non-performing
      loans as a percent of total loans
                  
                  
                  0.62
                  %
                  
                  
                  0.48
                  %
                  
                  
                  0.12
                  %
                  
                  
                  0.05
                  %
                  
                  
                  0.08
                  %Allowance
      for loan losses as a percent of non-performing loans
                  
                  
                  110.67
                  %
                  
                  
                  119.38
                  %
                  
                  
                  589.27
                  %
                  
                  
                  1460.00
                  %
                  
                  
                  925.23
                  %Allowance
      for loan losses as a percent of total loans
                  
                  
                  0.69
                  %
                  
                  
                  0.57
                  %
                  
                  
                  0.69
                  %
                  
                  
                  0.73
                  %
                  
                  
                  0.77
                  %Capital
      Ratios:Total
      risk-based capital (to risk weighted assets)
                  
                  
                  13.06
                  %
                  
                  
                  14.96
                  %
                  
                  
                  18.26
                  %
                  
                  
                  20.20
                  %
                  
                  
                  12.22
                  %Tier
      1 risk-based capital (to risk weighted assets)
                  
                  
                  12.42
                  %
                  
                  
                  14.42
                  %
                  
                  
                  17.57
                  %
                  
                  
                  19.53
                  %
                  
                  
                  11.53
                  %Tangible
      capital (to tangible assets)
                  
                  
                  7.27
                  %
                  
                  
                  8.03
                  %
                  
                  
                  9.09
                  %
                  
                  
                  9.85
                  %
                  
                  
                  5.67
                  %Tier
      1 leverage (core) capital (to adjusted tangible assets)
                  
                  
                  7.27
                  %
                  
                  
                  8.03
                  %
                  
                  
                  9.09
                  %
                  
                  
                  9.85
                  %
                  
                  
                  5.67
                  %Equity
      to total assets
                  
                  
                  7.66
                  %
                  
                  
                  8.52
                  %
                  
                  
                  9.56
                  %
                  
                  
                  10.65
                  %
                  
                  
                  5.79
                  %Other
      Data:Number
      of full service offices
                  
                  
                  8
                  
                  
                  
                  7
                  
                  
                  
                  6
                  
                  
                  
                  6
                  
                  
                  
                  6Dividends
      declared per share
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Earnings per share(4):Basic
      and diluted
                  
                  $
                  0.31
                  
                  
                  $
                  0.29
                  
                  
                  $
                  0.37
                  
                  
                  $
                  0.20
                  
                  
                  $
                  NA


___________________________


(1)
              Represents
      the difference between the weighted-average yield on interest-earning
      assets and the weighted-average cost of interest-bearing liabilities for
      the period.(2)
              The
      net interest margin represents net interest income as a percent of average
      interest-earning assets for the period.(3)
              The
      efficiency ratio represents non-interest expense divided by the sum of net
      interest income and non-interest income.(4)
              For
      2005, represents earnings per share for the six-month period from June 30,
      2005 (date of public offering) to December 31,
  2005.





2













To our
Stockholders and Customers:





On behalf
of our Board of Directors, Management and Employees of Colonial Bankshares, Inc.
we are pleased to present our 2008 Annual Report to Stockholders.





Colonial
Bankshares, Inc. experienced another year of superior growth in 2008 with total
assets increasing $72.7 million, or 15.9%, to $530.6 million.  During
2008, loan production totaled over $132 million, bringing our total loans to
$303.2 million, an increase of $62.2 million, or 25.8%.  Though
focused on growth, we are committed to maintaining credit quality in our loan
portfolio.  We did not originate any sub-prime loans.





Deposits
increased by $85.8 million, or 23.1%, to $457.2 million.  This deposit
growth included core deposit growth of $62.3 million.





Net
income increased $114 thousand, to $1.3 million for the year ended December 31,
2008 from $1.2 million for the year ended December 31, 2007.  For
2008, our net interest income increased to $11.5 million.  Due to the
uncertainty in the economy, we increased our allocation to the provision for
loan losses and continued the other-than-temporary impairment charge on a mutual
fund in our investment portfolio.  Our operating expenses increased by
$763 thousand in 2008 with a substantial increase coming in our federal deposit
insurance premiums.  Looking to 2009 with the continuing economic and
market uncertainty, we anticipate increasing the allocation to our provision for
loan losses.  Also, based on information reported from the FDIC, we
may see substantial increases in our federal deposit insurance premiums through
a special assessment on all banks.





At
December 31, 2008, our equity to assets ratio was 7.66% and our risk-based
capital ratio was 13.06%.  With both ratios we are considered “Well
Capitalized” as defined by the Office of Thrift Supervision.  We
believe our capital level, current liquidity position and strong asset quality
provide us with the flexibility to continue to grow, and our Board of Directors
and management team made a decision not to accept TARP funds.





To
continue our growth plan, we opened one new branch location in the downtown
shopping district of Vineland, New Jersey to complement the presence of our
existing two locations in Vineland.  We also completed the purchase of
a branch location from a competing regional bank in Cedarville, Lawrence
Township, New Jersey in the fourth quarter of 2008, and opened this location in
January 2009.  This acquisition did not include deposits.





We hope
to continue our growth in 2009 with a continued emphasis on prudent lending,
especially commercial real estate lending, as well as a continued focus on
exceptional customer service, up-to-date technology and convenient
access.





3





We wish
to thank our employees for their unwavering dedication to our
company.  We realize that without the hard work of every team member,
we would not be as successful as we have been in the past.





Thank you
for your continued support.







/s/ Edward J. Geletka
                
                /s/ Albert A. Fralinger,
Jr.Edward
      J. Geletka
                
                Albert
      A. Fralinger, Jr.President
      and Chief Executive Officer
                
                Chairman
      of the Board




4




MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS




Forward
Looking Statements




This
document contains certain “forward-looking statements,” which may be identified
by the use of words such as “believe,” “expect,” “anticipate,” “should,”
“planned,” “estimated” and “potential.”  Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors that could cause actual results to differ materially from these
estimates and most other statements that are not historical in
nature.  These factors include, but are not limited to, general and
local economic conditions, changes in interest rates, deposit flows, demand for
mortgage and other loans, real estate values, and competition; changes in
accounting principles, policies, or guidelines; changes in legislation or
regulation; monetary and fiscal policies of the U. S. Government, including
policies of the U. S. Treasury and the Federal Reserve Board, the effect of a
dramatically slowing economy on our lending portfolio and investments, the
impact of the U. S. Government’s economic stimulus program and its various
financial institutions rescue plans; demand for financial services in the
Company’s market area, changes in real estate values in the Company’s market
area; and other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing products and
services.




Overview




Our
results of operations depend primarily on our net interest
income.  Net interest income is the difference between the interest
income we earn on our interest-earning assets, consisting primarily of loans,
investment securities, mortgage-backed securities and other interest-earning
assets (primarily cash equivalents), and the interest we pay on our
interest-bearing liabilities, consisting primarily of savings accounts, NOW
accounts, money market accounts, time deposits and borrowings.  Our
results of operations also are affected by our provisions for loan losses,
non-interest income and non-interest expense.  Non-interest income
consists primarily of fees and service charges, income from bank-owned life
insurance and miscellaneous other income.  Non-interest expense
consists primarily of salaries and employee benefits, occupancy and equipment,
data processing, professional fees, advertising and other administrative
expenses.  Our results of operations also may be affected
significantly by general and local economic and competitive conditions, changes
in market interest rates, governmental policies and actions of regulatory
authorities.




Management
of Market Risk




General.  The
majority of our assets and liabilities are monetary in
nature.  Consequently, our most significant form of market risk is
interest rate risk.  Our assets, consisting primarily of mortgage
loans, have longer maturities than our liabilities, consisting primarily of
deposits.  As a result, a principal part of our business strategy is
to manage interest rate risk and reduce the exposure of our net interest income
to changes in market interest rates.  Accordingly, our Board of
Directors has established an Asset/Liability Management Committee, consisting of
senior management, which is responsible for evaluating the interest rate risk
inherent in our assets and liabilities, for determining the level of risk that
is appropriate given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with
the guidelines approved by the Board of Directors.  The
Asset/Liability Committee monitors the level of interest rate risk and our Board
of Directors reviews our asset/liability policies and interest rate risk
position.




We have
sought to manage our interest rate risk in order to minimize the exposure of our
earnings and capital to changes in interest rates.  During the low
interest rate environment that has existed in recent years, we have implemented
the following strategies to manage our interest rate risk:




●
                  increasing
      our origination of shorter-term loans, including commercial real estate
      loans and home equity loans;●
                  maintaining
      adjustable-rate and shorter-term investments; and●
                  maintaining
      pricing strategies that encourage deposits in longer-term, certificates of
      deposit.
  5


In
addition, we are an approved qualified loan seller/servicer for Fannie Mae,
which will facilitate our sale of long-term, fixed-rate residential mortgage
loans in the future.  By following these strategies, we believe that
we are better positioned to react to increases in market interest
rates.  However, investments in shorter-term assets generally bear
lower yields than longer-term investments.




Net Portfolio
Value.  The Office of
Thrift Supervision requires the computation of amounts by which the net present
value of an institution’s cash flow from assets, liabilities and off balance
sheet items (the institution’s net portfolio value or “NPV”) would change in the
event of a range of assumed changes in market interest rates.  The
Office of Thrift Supervision provides all institutions that file a Consolidated
Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with
an interest rate sensitivity report of net portfolio value.  The
Office of Thrift Supervision simulation model uses a discounted cash flow
analysis and an option-based pricing approach to measuring the interest rate
sensitivity of net portfolio value.  Historically, the Office of
Thrift Supervision model estimated the economic value of each type of asset,
liability and off-balance sheet contract under the assumption that the United
States Treasury yield curve increases or decreases instantaneously by 100 to 300
basis points in 100 basis point increments.  However, given the
current low level of market interest rates, we did not prepare a NPV calculation
for an interest rate decrease of greater than 100 basis points.  A
basis point equals one-hundredth of one percent, and 100 basis points equals one
percent.  An increase in interest rates from 3% to 4% would mean, for
example, a 100 basis point increase in the “Change in Interest Rates” column
below.




The table
below sets forth, as of December 31, 2008, the estimated changes in our net
portfolio value that would result from the designated instantaneous changes in
the United States Treasury yield curve.  Computations of prospective
effects of hypothetical interest rate changes are based on numerous assumptions
including relative levels of market interest rates, loan prepayments and deposit
decay, and should not be relied upon as indicative of actual
results.




NPV
      as a Percentage of
                                                                        Present
      Value of Assets (3)Change
in
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      Estimated
      Increase
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      IncreaseInterest
      Rates
                                                                      
                                                                      
                                                                      Estimated
                                                                      
                                                                      
                                                                      (Decrease)
      in NPV
                                                                      
                                                                      
                                                                      NPV
                                                                      
                                                                      
                                                                      (Decrease)(basis
      points) (1)
                                                                      
                                                                      
                                                                      NPV
      (2)
                                                                      
                                                                      
                                                                      Amount
                                                                      
                                                                      
                                                                      Percent
                                                                      
                                                                      
                                                                      Ratio
      (4)
                                                                      
                                                                      
                                                                      (basis
      points)(Dollars
      in thousands)+300
                                                                      
                                                                      
                                                                      $
                                                                      28,764
                                                                      
                                                                      
                                                                      $
                                                                      (18,645
                                                                      )
                                                                      
                                                                      
                                                                      (39
                                                                      %)
                                                                      
                                                                      
                                                                      5.50
                                                                      %
                                                                      
                                                                      
                                                                      (309
                                                                      )+200
                                                                      
                                                                      
                                                                      
                                                                      37,944
                                                                      
                                                                      
                                                                      
                                                                      (9,465
                                                                      )
                                                                      
                                                                      
                                                                      (20
                                                                      %)
                                                                      
                                                                      
                                                                      7.08
                                                                      %
                                                                      
                                                                      
                                                                      (151
                                                                      )+100
                                                                      
                                                                      
                                                                      
                                                                      44,226
                                                                      
                                                                      
                                                                      
                                                                      (3,183
                                                                      )
                                                                      
                                                                      
                                                                      (7
                                                                      %)
                                                                      
                                                                      
                                                                      8.11
                                                                      %
                                                                      
                                                                      
                                                                      (48
                                                                      )+50
                                                                      
                                                                      
                                                                      
                                                                      45,881
                                                                      
                                                                      
                                                                      
                                                                      (1,528
                                                                      )
                                                                      
                                                                      
                                                                      (3
                                                                      %)
                                                                      
                                                                      
                                                                      8.36
                                                                      %
                                                                      
                                                                      
                                                                      (23
                                                                      )—
                                                                      
                                                                      
                                                                      
                                                                      47,409
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      8.59
                                                                      %
                                                                      
                                                                      
                                                                      —-50
                                                                      
                                                                      
                                                                      
                                                                      47,995
                                                                      
                                                                      
                                                                      
                                                                      586
                                                                      
                                                                      
                                                                      
                                                                      1
                                                                      %
                                                                      
                                                                      
                                                                      8.66
                                                                      %
                                                                      
                                                                      
                                                                      7-100
                                                                      
                                                                      
                                                                      
                                                                      48,241
                                                                      
                                                                      
                                                                      
                                                                      832
                                                                      
                                                                      
                                                                      
                                                                      2
                                                                      %
                                                                      
                                                                      
                                                                      8.68
                                                                      %
                                                                      
                                                                      
                                                                      9








(1)
              Assumes
      an instantaneous uniform change in interest rates at all
      maturities.(2)
              NPV
      is the discounted present value of expected cash flows from assets,
      liabilities and off-balance sheet contracts.(3)
              Present
      value of assets represents the discounted present value of incoming cash
      flows on interest-earning assets.(4)
              NPV
      Ratio represents NPV divided by the present value of
    assets.







The table
above indicates that at December 31, 2008, in the event of a 100 basis point
decrease in interest rates, we would experience a 2% increase in net portfolio
value.  In the event of a 200 basis point increase in interest rates,
we would experience a 20% decrease in net portfolio value.  Both of
these calculations are based against the calculated net portfolio value of $47.4
million.




Certain
shortcomings are inherent in the methodology used in the above interest rate
risk measurement.  Modeling changes in net portfolio value require
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest
rates.  In this regard, the net portfolio value table presented
assumes that the composition of our interest-sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and assumes that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration or repricing of
specific assets and liabilities.  Accordingly, although the net
portfolio value table provides an indication of our interest rate risk exposure
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
our net interest income and will differ from actual results.




6




Average
Balance Sheet




The
following table sets forth average balances, average yields and costs, and
certain other information for the periods indicated.  Tax-equivalent
yield adjustments have not been made for tax-exempt securities.  All
average balances are daily average balances.  Non-accrual loans were
included in the computation of average balances, but have been reflected in the
table as loans carrying a zero yield.  The yields set forth below
include the effect of deferred fees, discounts and premiums that are amortized
or accreted to interest income or expense.




For
      the Years Ended December 31,2008
              
              
              2007
              
              
              2006Average
                  Balance
              
              
              Interest
      Income/
                  Expense
              
              
              Yield/
                  Cost
              
              
              Average
                  Balance
              
              
              Interest
      Income/
                  Expense
              
              
              Yield/
                  Cost
              
              
              Average
                  Balance
              
              
              Interest
      Income/
                  Expense
              
              
              Yield/
                  Cost(Dollars
      in thousands)Interest-earning
      assets:Loans
              
              $
              273,905
              
              
              $
              16,946
              
              
              
              6.19
              %
              
              $
              221,179
              
              
              $
              14,034
              
              
              
              6.35
              %
              
              $
              180,469
              
              
              $
              11,088
              
              
              
              6.14
              %SecuritiesTaxable
              
              
              172,209
              
              
              
              9,630
              
              
              
              5.59
              %
              
              
              139,533
              
              
              
              7,689
              
              
              
              5.51
              %
              
              
              123,701
              
              
              
              6,046
              
              
              
              4.89
              %Tax-exempt
              
              
              12,283
              
              
              
              575
              
              
              
              4.68
              %
              
              
              30,460
              
              
              
              1,322
              
              
              
              4.34
              %
              
              
              31,902
              
              
              
              1,375
              
              
              
              4.31
              %Total
      interest-earning assets
              
              
              458,397
              
              
              
              27,151
              
              
              
              5.92
              %
              
              
              391,172
              
              
              
              23,045
              
              
              
              5.89
              %
              
              
              336,072
              
              
              
              18,509
              
              
              
              5.51
              %Noninterest-earning
      assets
              
              
              42,530
              
              
              
              
              
              
              
              
              
              
              
              32,395
              
              
              
              
              
              
              
              
              
              
              
              22,703Total
      assets
              
              $
              500,927
              
              
              
              
              
              
              
              
              
              
              $
              423,567
              
              
              
              
              
              
              
              
              
              
              $
              358,775Interest-bearing
      liabilities:Savings
      accounts
              
              $
              80,384
              
              
              
              2,232
              
              
              
              2.78
              %
              
              $
              56,576
              
              
              
              1,188
              
              
              
              2.10
              %
              
              $
              59,781
              
              
              
              992
              
              
              
              1.66
              %NOW
      accounts
              
              
              52,940
              
              
              
              861
              
              
              
              1.63
              %
              
              
              57,521
              
              
              
              1,299
              
              
              
              2.26
              %
              
              
              49,201
              
              
              
              805
              
              
              
              1.64
              %Money
      market deposit
              
              
              31,109
              
              
              
              1,029
              
              
              
              3.31
              %
              
              
              19,316
              
              
              
              678
              
              
              
              3.51
              %
              
              
              19,806
              
              
              
              587
              
              
              
              2.96
              %Certificates
      of deposit
              
              
              224,900
              
              
              
              9,933
              
              
              
              4.42
              %
              
              
              215,480
              
              
              
              10,467
              
              
              
              4.86
              %
              
              
              161,264
              
              
              
              7,073
              
              
              
              4.39
              %Total
      interest-bearing deposits
              
              
              389,333
              
              
              
              14,055
              
              
              
              3.61
              %
              
              
              348,893
              
              
              
              13,632
              
              
              
              3.91
              %
              
              
              290,052
              
              
              
              9,457
              
              
              
              3.26
              %Borrowings
              
              
              41,140
              
              
              
              1,641
              
              
              
              3.99
              %
              
              
              17,605
              
              
              
              800
              
              
              
              4.54
              %
              
              
              15,505
              
              
              
              751
              
              
              
              4.84
              %Total
      interest-bearingliabilities
              
              
              430,473
              
              
              
              15,696
              
              
              
              3.65
              %
              
              
              366,498
              
              
              
              14,432
              
              
              
              3.94
              %
              
              
              305,557
              
              
              
              10,208
              
              
              
              3.34
              %Noninterest-bearing
      liabilities
              
              
              31,308
              
              
              
              
              
              
              
              
              
              
              
              20,110
              
              
              
              
              
              
              
              
              
              
              
              17,358Total
      liabilities
              
              
              461,781
              
              
              
              
              
              
              
              
              
              
              
              386,608
              
              
              
              
              
              
              
              
              
              
              
              322,915Equity
              
              
              39,146
              
              
              
              
              
              
              
              
              
              
              
              36,959
              
              
              
              
              
              
              
              
              
              
              
              35,860Total
      liabilities and equity
              
              $
              500,927
              
              
              
              
              
              
              
              
              
              
              $
              423,567
              
              
              
              
              
              
              
              
              
              
              $
              358,775Net
      interest income
              
              
              
              
              
              $
              11,455
              
              
              
              
              
              
              
              
              
              
              $
              8,613
              
              
              
              
              
              
              
              
              
              
              $
              8,301Interest
      rate spread
              
              
              
              
              
              
              
              
              
              
              2.27
              %
              
              
              
              
              
              
              
              
              
              
              1.95
              %
              
              
              
              
              
              
              
              
              
              
              2.17
              %Net
      interest-earning assets
              
              $
              27,924
              
              
              
              
              
              
              
              
              
              
              $
              24,674
              
              
              
              
              
              
              
              
              
              
              $
              30,515Net
      interest margin
              
              
              
              
              
              
              
              
              
              
              2.50
              %
              
              
              
              
              
              
              
              
              
              
              2.20
              %
              
              
              
              
              
              
              
              
              
              
              2.47
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              106.49
              %
              
              
              
              
              
              
              
              
              
              
              106.73
              %
              
              
              
              
              
              
              
              
              
              
              109.99
              %





7




Rate/Volume
Analysis




The
following table presents the effects of changing rates and volumes on our net
interest income for the periods indicated.  The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior
volume).  The volume column shows the effects attributable to changes
in volume (changes in volume multiplied by prior rate).  The net
column represents the sum of the prior columns.  For purposes of this
table, changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionately based on the changes due to rate and the
changes due to volume.




Years
      Ended December 31,
                    2008
      vs. 2007
                
                
                Years
      Ended December 31,
                    2007
      vs. 2006Increase
      (Decrease) Due to
                
                
                Net
                
                
                Increase
      (Decrease) Due to
                
                
                NetVolume
                
                
                Rate
                
                
                Volume
                
                
                Rate(In
      thousands)Interest-earning
      assets:Loans
                
                $
                3,252
                
                
                $
                (340
                )
                
                $
                2,912
                
                
                $
                2,573
                
                
                $
                373
                
                
                $
                2,946SecuritiesTaxable
                
                
                1,827
                
                
                
                114
                
                
                
                1,941
                
                
                
                826
                
                
                
                817
                
                
                
                1,643Tax-exempt
                
                
                (860
                )
                
                
                113
                
                
                
                (747
                )
                
                
                (64
                )
                
                
                11
                
                
                
                (53
                )Total
      interest-earningassets
                
                
                4,219
                
                
                
                (113
                )
                
                
                4,106
                
                
                
                3,335
                
                
                
                1,201
                
                
                
                4,536Interest-bearing
      liabilities:Savings
      accounts
                
                
                590
                
                
                
                454
                
                
                
                1,044
                
                
                
                (49
                )
                
                
                245
                
                
                
                196NOW
      accounts
                
                
                (98
                )
                
                
                (340
                )
                
                
                (438
                )
                
                
                152
                
                
                
                342
                
                
                
                494Money
      market deposit
                
                
                388
                
                
                
                (37
                )
                
                
                351
                
                
                
                (15
                )
                
                
                106
                
                
                
                91Certificates
      of deposit
                
                
                499
                
                
                
                (1,033
                )
                
                
                (534
                )
                
                
                2,574
                
                
                
                820
                
                
                
                3,394Total
      interest-bearing deposits
                
                
                1,379
                
                
                
                (956
                )
                
                
                423
                
                
                
                2,662
                
                
                
                1,513
                
                
                
                4,175Borrowings
                
                
                925
                
                
                
                (84
                )
                
                
                841
                
                
                
                91
                
                
                
                (42
                )
                
                
                49Total
      interest-bearing liabilities
                
                
                2,304
                
                
                
                (1,040
                )
                
                
                1,264
                
                
                
                2,753
                
                
                
                1,471
                
                
                
                4,224Net
      change in interest income
                
                $
                1,915
                
                
                $
                927
                
                
                $
                2,842
                
                
                $
                582
                
                
                $
                (270
                )
                
                $
                312




Critical
Accounting Policies




Critical
accounting policies are those that involve significant judgments and assumptions
by management and that have, or could have, a material impact on our income or
the carrying value of our assets.  Our critical accounting policies
are those related to our allowance for loan losses, the evaluation of
other-than-temporary impairment of investment securities and the valuation of
and our ability to realize deferred tax assets.




Allowance for
Loan Losses.The allowance for loan losses is calculated with
the objective of maintaining an allowance necessary to absorb estimated probable
loan losses inherent in the loan portfolio.  Management’s
determination of the adequacy of the allowance is based on periodic evaluations
of the loan portfolio and other relevant factors.  However, this
evaluation is inherently subjective, as it requires an estimate of the loss
content for each risk rating and for each impaired loan, an estimate of the
amounts and timing of expected future cash flows, and an estimate of the value
of collateral.




We have
established a systematic method of periodically reviewing the credit quality of
the loan portfolio in order to establish an allowance for losses on
loans.  The allowance for losses on loans is based on our current
judgments about the credit quality of individual loans and segments of the loan
portfolio.  The allowance for losses on loans is established through a
provision for loan losses based on our evaluation of the probable losses
inherent in the loan portfolio, and considers all known internal and external
factors that affect loan collectibility as of the reporting date.  Our
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, our knowledge of inherent losses in
the portfolio that are probable and reasonably estimable and other factors that
warrant recognition in providing an appropriate loan loss
allowance.  Management believes this is a critical accounting policy
because this evaluation involves a high degree of complexity and requires us to
make subjective judgments that often require assumptions or estimates about
various matters.  Historically, we believe our estimates and
assumptions have proven to be relatively accurate.  For example, over
the past three years, our allowance for loan losses as a percentage of average
loans outstanding has ranged from 0.63% to 0.77%, while our net recoveries
(charge-offs) as a percentage of average loans outstanding has ranged from
(0.03)% to 0.01%.  Nevertheless, because a small number of
non-performing loans could result in net charge-offs significantly in excess of
the estimated losses inherent in our loan portfolio, you should not place undue
reliance on the accuracy of past estimates.




8




The
analysis of the allowance for loan losses has three components: specific
allocations, general allocations and an unallocated
component.  Specific allocations are made for loans that are
determined to be impaired.  Impairment is measured by determining the
present value of expected future cash flows or, for collateral-dependent loans,
the fair value of the collateral adjusted for market conditions and selling
expenses.  The general allocation is determined by segregating the
remaining loans by type of loan, risk weighting (if applicable) and payment
history.  We also analyze delinquency trends, general economic
conditions and geographic and industry concentrations.  This analysis
establishes factors that are applied to the loan groups to determine the amount
of the general allowance.  The principal assumption used in deriving
the allowance for loan losses is the estimate of loss content for each risk
rating.  To illustrate, if recent loss experience dictated that the
projected loss ratios changed by 10% (of the estimate) across all risk ratings,
the allocated allowance as of December 31, 2008 would have changed by
approximately $179 thousand.  Actual loan losses may be significantly
more than the allowances we have established, which could have a material
negative effect on our financial results.




Other-Than-Temporary
Impairment.  In estimating
other-than-temporary impairment of investment securities, securities are
evaluated on at least a quarterly basis, to determine whether a decline in their
value is other-than-temporary.  To determine whether a loss in value
is other-than-temporary, management reviews criteria such as the reasons
underlying the decline, the magnitude and duration of the decline and the intent
and ability of the Company to retain its investment in the security for a period
of time sufficient to allow for an anticipated recovery in the fair value or
until maturity.  The term “other-than-temporary” is not intended to
indicate that the decline is permanent, but indicates that the prospects for a
near-term recovery of value are not necessarily favorable, or that there is a
lack of evidence to support a realizable value equal to or greater than the
carrying value of the investment.  Once a decline in value is
determined to be other-than-temporary, the value of the security is reduced and
a corresponding charge to earnings is recognized.





Valuation of
Deferred Tax Assets.  In evaluating our ability to realize
deferred tax assets, management considers all positive and negative information,
including our past operating results and our forecast of future taxable
income.  In determining future taxable income, management utilizes a
budget process that makes business assumptions and the implementation of
feasible and prudent tax planning strategies.  These assumptions
require us to make judgments about our future taxable income and are consistent
with the plans and estimates we use to manage our business.  Any
reduction in estimated future taxable income may require us to record a
valuation allowance against our deferred tax assets which would result in
additional income tax expense in the period.




Comparison
of Financial Condition at December 31, 2008 and 2007





Total
assets increased $72.7 million, or 15.9%, to $530.6 million at December 31,
2008, from $457.9 million at December 31, 2007.  The increase was the
result of increases in nearly all asset categories, and primarily the result of
an increase in loans receivable which was partially offset by decreases in
investment securities held to maturity, Federal Home Loan Bank stock and
interest-bearing time deposits.





Net loans
receivable increased by $62.2 million, or 25.8%, to $303.2 million at December
31, 2008 from $241.0 million at December 31, 2007.  One- to
four-family residential real estate loans increased $30.6 million, or 26.7%, to
$145.3 million at December 31, 2008 from $114.7 million at December 31,
2007.  Commercial real estate loans increased $26.4 million, or 47.5%,
to $82.0 million at December 31, 2008 from $55.6 million at December 31, 2007.
The increased
commercial real estate loan balances reflected our continued emphasis on
originating this type of loan, resulting in part from the expansion of our
commercial lending staff in recent years.  Home equity loans and lines
of credit increased $1.0 million, or 2.5%, to $41.3 million at December 31, 2008
from $40.3 million at December 31, 2007.  Construction loans increased
$2.1 million, or 20.8%, to $12.2 million at December 31, 2008 from $10.1 million
at December 31, 2007.  Commercial loans increased $4.6 million, or
36.5%, to $17.2 million at December 31, 2008 from $12.6 million at December 31,
2007.




9




Investment
securities available for sale increased $2.0 million, or 1.2%, to $165.5 million
at December 31, 2008 from $163.5 million at December 31, 2007.  The
increase was the result of purchases of $89.4 million of mortgage-backed and
investment securities and a $119 thousand increase in the market value of
investment securities available for sale, offset by $16.6 million in principal
amortization, $36.1 million in sales of investments securities available for
sale, $35.2 million in calls and maturities of investment securities available
for sale and an other-than-temporary investment writedown of $1.2
million.   In addition, securities held to maturity decreased
$316 thousand, or 1.8%, to $16.9 million at December 31, 2008 from $17.2 million
at December 31, 2007.  The decrease was the result of principal
amortization of $630 thousand and $3.7 million in calls and maturities of
investment securities held to maturity offset by $3.7 million of purchases of
mortgage-backed and investment securities held to maturity.





Deposits
increased $85.8 million, or 23.1%, to $457.2 million at December 31, 2008 from
$371.4 million at December 31, 2007.  The largest increase was in
savings accounts, which increased $25.4 million, or 45.6%, to $81.1 million at
December 31, 2008 from $55.7 million at December 31, 2007.  The
increase in savings accounts was due to an increase in county surrogate
accounts.  Money market deposit accounts increased $24.7 million, or
119.3%, to $45.4 million at December 31, 2008 from $20.7 million at December 31,
2007.  The increase in money market deposit accounts was due to
offering competitive rates to high balance accounts.  Certificates of
deposit increased $23.6 million, or 10.8%, to $241.7 million at December 31,
2008 from $218.1 million at December 31, 2007.  Included in the
increase in certificates of deposits, were brokered deposits in the amount of
$43.6 million at December 31, 2008.  Non-interest bearing demand
accounts increased $3.0 million, or 19.9%.  NOW accounts increased
$10.1 million, or 22.3%, to $55.4 million at December 31, 2008 from $45.3
million at December 31, 2007.  Super NOW accounts decreased $1.0
million, or 6.1%, to $15.5 million at December 31, 2008 from $16.5 million at
December 31, 2007.  Also, in 2008 we opened our branch on Landis
Avenue in Vineland, NJ and that branch ended the year at $13.3 million in
deposits and our branch on Delsea Avenue in Vineland, NJ increased to $26.5
million at December 31, 2008 from $6.9 million  at December 31,
2007.





Borrowings
decreased to $31.2 million at December 31, 2008 from $45.9 million at December
31, 2007.  We decreased our outstanding borrowings because our net
increase in deposits and the proceeds received from the calls, maturities and
pay-downs of securities, discussed above, exceeded our cash needs to fund loan
originations and investment securities purchases.





Total
stockholders’ equity increased $1.6 million to $40.6 million at December 31,
2008 from $39.0 million at December 31, 2007.  This increase was
attributable to net income of $1.3 million and an increase in accumulated other
comprehensive income of $143 thousand.  Accumulated other
comprehensive income increased as a result of an increase in the net unrealized
gains on investment securities available for sale.  Because of
interest rate volatility, accumulated other comprehensive income (loss) could
materially fluctuate for future interim periods and years depending on economic
and interest rate conditions.




Comparison
of Operating Results for the Years Ended December 31, 2008 and December 31,
2007





General.  Net
income increased $114 thousand, or 9.3%, to $1.3 million for the year ended
December 31, 2008 from $1.2 million for the year ended December 31,
2007.  The principal reason for the increase was a $2.8 million
increase in net interest income offset by an increase in the provision of loan
losses of $672 thousand, an increase in non-interest expense of $763 thousand, a
reduction in non-interest income of $486 thousand and an $807 thousand increase
in income tax expense.





Interest
Income.Interest income
increased $4.1 million, or 17.8%, to $27.2 million for the year ended
December 31, 2008 from $23.0 million for the year ended December 31,
2007.  The increase in interest income resulted from a $2.9 million
increase in interest income on loans and a $1.2 million increase in income on
investment securities and mortgage-backed securities.





Interest
income on loans increased $2.9 million, or 20.7%, to $16.9 million for the
year ended December 31, 2008 from $14.0 million for the year ended December
31, 2007.  This increase resulted from an increase in the average
balance of loans by $52.7 million, or 23.8%, to $273.9 million for the year
ended December 31, 2008 from $221.2 million for the year ended December 31,
2007, which was offset by a 16 basis point decrease in the average yield to
6.19% for the year ended December 31, 2008 from 6.35% for the year ended
December 31, 2007.  The increase in average balance of loans resulted
primarily from increases in the average balances of one- to four-family
residential real estate loans, commercial real estate loans and consumer
loans.




10




Interest
income on securities increased by $1.2 million to $10.2 million for the year
ended December 31, 2008 from $9.0 million for the year ended December 31,
2007.  The increase in interest income on securities was due to an
increase in the average balance of taxable and tax-exempt securities to $184.5
million for the year ended December 31, 2008 from $170.0 million for the year
ended December 31, 2007.  Also, the average yield on taxable and
tax-exempt securities increased to 5.53% for the year ended December 31, 2008
from 5.30% for the year ended December 31, 2007.  The yields on
tax-exempt securities are not tax-affected.





Interest
Expense.Interest expense
increased $1.3 million, or 9.0%, to $15.7 million for the year ended
December 31, 2008 from $14.4 million for the year ended December 31,
2007.





Interest expense on interest-bearing
deposits increased by $423 thousand, or 3.1%, to $14.1 million for the year
ended December 31, 2008 from $13.6 million for the year ended December 31,
2007.  The increase in interest expense on interest-bearing deposits
was due to a $40.4 million, or 11.6%, increase in the average balance of
interest-bearing deposits to $389.3 million for the year ended December 31,
2008 from $348.9 million for the year ended December 31, 2007, which was only
partially offset by a 30 basis point decrease in the average rate paid on
interest-bearing deposits to 3.61% for the year ended December 31, 2008 from
3.91% for the year ended December 31, 2007.  We experienced increases
in the average balances of certificates of deposits, savings accounts and money
market deposit accounts while we experienced decreases in the average balance of
NOW and Super-NOW accounts.  The average cost of all deposit account
categories except savings accounts decreased for the year ended December 31,
2008.





Interest
expense on borrowings increased $841 thousand to $1.6 million for the year ended
December 31, 2008 from $800 thousand for the year ended December 31,
2007.  This increase was due to a $23.5 million increase in the
average balance of borrowings to $41.1 million for the year ended December 31,
2008 from $17.6 million for the year ended December 31, 2007, offset by a
55 basis point decrease in the average cost of such borrowings to 3.99% for
the year ended December 31, 2008 from 4.54% for the year ended December 31,
2007.





Net Interest
Income.Because the
increase in our interest income was greater than the increase in our interest
expense, net interest income increased by $2.8 million, or 32.6%, to
$11.5 million for the year ended December 31, 2008 from $8.6 million
for the year ended December 31, 2007.  Our net interest margin
increased 30 basis points to 2.50% for the year ended December 31, 2008 from
2.20% for the year ended December 31, 2007, and our net interest rate spread
increased 32 basis points to 2.27% for the year ended December 31, 2008 from
1.95% for the year ended December 31, 2007.





Provision for
Loan Losses.We establish provisions for loan losses, which are charged
to operations in order to maintain the allowance for loan losses at a level we
consider necessary to absorb probable credit losses inherent in the loan
portfolio.  In determining the level of the allowance for loan losses,
we consider past and current loss experience, evaluation of real estate
collateral, current economic conditions, volume and type of lending, adverse
situations that may affect a borrower’s ability to repay a loan and the levels
of nonperforming and other classified loans.  The amount of the
allowance is based on estimates and the ultimate losses may vary from such
estimates as more information becomes available or later events
change.  We assess the allowance for loan losses on a quarterly basis
and make provisions for loan losses in order to maintain the
allowance.  Based on our evaluation of the above factors, we recorded
a provision for loan losses of $756 thousand for the year ended December 31,
2008 and a provision for loan losses of $84 thousand for the year ended December
31, 2007.  The provisions recorded reflected net charge-offs of
approximately $43 thousand for the year ended December 31, 2008 and net
charge-offs of approximately $65 thousand for the year ended December 31,
2007.  The allowance for loan losses was $2.1 million, or 0.69% of
total loans, at December 31, 2008, compared to $1.4 million, or 0.57%, of total
loans at, December 31, 2007.  The allowance for loan losses
represented 110.67% of nonperforming loans at December 31, 2008 and 119.38% of
nonperforming loans at December 31, 2007.  To the best of our
knowledge, we have recorded all losses that are both probable and reasonable to
estimate at December 31, 2008 and 2007.




11


Non-interest
Income.Non-interest
income was $628 thousand for the year ended December 31, 2008 and $1.1 million
for the year ended December 31, 2007.  Fees and service charges on
deposit accounts increased by $115 thousand, and gains on the sales of
investment securities increased $332 thousand.  The increase in fees
and services charges on deposit accounts was attributable to the implementation
of new fees charged on deposit accounts and a slight increase in the volume of
several service charges.  Non-interest income for the year ended
December 31, 2008 was reduced by an other-than-temporary writedown of an
investment security of $1.2 million.  This impairment was determined
after a review of the mutual fund and its net asset value.  We do not
believe that this impairment is related to credit quality but rather to the
widening of the spreads in the bond market for mortgage-related
securities.





Non-interest
Expense.  Non-interest
expense increased $763 thousand, or 8.6%, to $9.6 million for the year ended
December 31, 2008 from $8.9 million for the year ended December 31,
2007.  Compensation and benefits expense increased $371 thousand, or
7.3%, to $5.4 million for the year ended December 31, 2008 from $5.1 million for
the year ended December 31, 2007.  Normal salary increases, increases
in benefits costs and increases in payroll taxes accounted for the increase in
compensation and benefits expense.  Occupancy and equipment expense
increased $124 thousand, or 10.0%, to $1.4 million for the year ended December
31, 2008 from $1.2 million for the year ended December 31, 2007.  This
increase was mainly due to increased depreciation expense and utility expense
due to the opening of our new main office in May 2007.  Data
processing expense increased $56 thousand.  This increase was mainly
due to data processing costs associated with the growth of savings accounts and
loans outstanding and price increases.  Other expenses increased $188
thousand.  This increase was attributable to increases in FDIC
insurance premium, advertising, supervisory examination, organizational dues and
subscription, contribution, telephone and postage expenses, offset by decreases
in employee related, loan acquisition and insurance and surety bond
expenses.





Income Tax
Expense.We
recorded an expense of $353 thousand for income taxes for the year ended
December 31, 2008, compared to a benefit of $454 thousand for the year ended
December 31, 2007, reflecting effective tax rates of 20.8% and (58.4)%,
respectively.  The income tax benefit is primarily attributable to the
formation of the Delaware operating subsidiary in September 2006 which resulted
in the Bank being in a net operating loss position for state tax
purposes.  For the year ended December 31, 2008, the Bank incurred a
net operating loss of approximately $6.3 million for state tax
purposes.  The related deferred tax benefit was fully offset by a
valuation allowance.





Liquidity
and Capital Resources





Liquidity
is the ability to meet current and future financial obligations of a short-term
nature.  Our primary sources of funds consist of deposit inflows, loan
repayments and maturities and sales of securities. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.





We
regularly adjust our investments in liquid assets based upon our assessment of
expected loan demand, expected deposit flows, yields available on
interest-earning deposits and securities, and the objectives of our
asset/liability management program.  Excess liquid assets are invested
generally in interest-earning deposits with other banks and short- and
intermediate-term securities.





Our most
liquid assets are cash and cash equivalents. The levels of these assets are
dependent on our operating, financing, lending and investing activities during
any given period. At December 31, 2008, cash and cash equivalents totaled $23.4
million.  Securities classified as available-for-sale, which provide
additional sources of liquidity, totaled $165.5 million at December 31, 2008. In
addition, at December 31, 2008, we had the ability to borrow approximately
$127.5 million from the Federal Home Loan Bank of New York.  On that
date, we had $31.2 million in advances outstanding.





At
December 31, 2008, we had $9.4 million in loan commitments
outstanding.  In addition to commitments to originate loans, we had
$22.0 million in unadvanced funds to borrowers and $3.4 million of commitments
issued under standby letters of credit. Certificates of deposit due within one
year of December 31, 2008 totaled $152.6 million, or 33.4% of total deposits. If
these deposits do not remain with us, we will be required to seek other sources
of funds, including other certificates of deposit and Federal Home Loan Bank
advances. Depending on market conditions, we may be required to pay higher rates
on such deposits or other borrowings than we currently pay on the certificates
of deposit due on or before December 31, 2009. We believe, however, based on
past experience, that a significant portion of our certificates of deposit will
remain with us. We have the ability to attract and retain deposits by adjusting
the interest rates offered.




12




We have
no material commitments or demands that are likely to affect our liquidity other
than set forth below. In the event loan demand were to increase at a pace
greater than expected, or any unforeseen demand or commitment were to occur, we
would access our borrowing capacity with the Federal Home Loan Bank of New
York.





Our
primary investing activities are the origination of loans and the purchase of
securities. In 2008, we originated $132.6 million of loans and purchased $93.2
million of securities. In 2007, we originated $90.3 million of loans and
purchased $68.2 million of securities. We have not purchased any loans in recent
periods.





Financing
activities consist primarily of activity in deposit accounts and Federal Home
Loan Bank advances.  We experienced a net increase in total deposits
of $85.8 million and $34.1 million for the years ended December 31, 2008 and
2007, respectively.  Deposit flows are affected by the overall level
of interest rates, the interest rates and products offered by us and our local
competitors and other factors.  We generally manage the pricing of our
deposits so that we are competitive in our market area.





Federal
Home Loan Bank advances decreased by $14.7 million during the year ended
December 31, 2008 and increased by $37.6 million during the year ended
December 31, 2007.  Federal Home Loan Bank advances have primarily
been used to fund new loans and purchase securities.





Colonial
Bank, FSB is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision, including a risk-based capital measure. The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories.  At December 31,
2008, Colonial Bank, FSB exceeded all Office of Thrift Supervision regulatory
capital requirements. Colonial Bank, FSB is considered “well capitalized” under
regulatory guidelines.





The
capital from the initial public offering significantly increased our liquidity
and capital resources.  Our financial condition was enhanced by the
capital from the offering, resulting in increased net interest-earning assets.
However, due to the increase in equity resulting from the capital raised in the
offering, our return on equity is lower than it was prior to the
offering.





Impact
of Inflation and Changing Prices





The
consolidated financial statements and related notes of Colonial Bankshares, Inc.
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”).  GAAP generally requires the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation.  The impact of inflation is
reflected in the increased cost of our operations.  Unlike industrial
companies, our assets and liabilities are primarily monetary in
nature.  As a result, changes in market interest rates have a greater
impact on performance than the effects of inflation.





13




Market
for Common Stock




Our
shares of common stock are traded on the NASDAQ Global Market under the symbol
“COBK”.  Colonial Bankshares, MHC owns 2,441,716 shares, or 54.0% of
our outstanding shares of common stock.  The approximate number of
holders of record of Colonial Bankshares’ common stock as of March 15, 2009 was
380. Certain shares of Colonial Bankshares are held in “nominee” or “street”
name and accordingly, the number of beneficial owners of such shares is not
known or included in the foregoing number.  The following table
presents quarterly market information for Colonial Bankshares’ common stock for
the years ended December 31, 2008 and 2007.  The following information
was provided by the NASDAQ Global Market.




High
                
                
                Low
                
                
                DividendsQuarter
      ended March 31, 2007
                
                
                14.90
                
                
                
                13.28
                
                
                
                -Quarter
      ended June 30, 2007
                
                
                16.05
                
                
                
                13.40
                
                
                
                -Quarter
      ended September 30, 2007
                
                
                14.75
                
                
                
                10.05
                
                
                
                -Quarter
      ended December 31, 2007
                
                
                12.00
                
                
                
                9.75
                
                
                
                -Quarter
      ended March 31, 2008
                
                
                11.75
                
                
                
                9.05
                
                
                
                -Quarter
      ended June 30, 2008
                
                
                11.75
                
                
                
                9.50
                
                
                
                -Quarter
      ended September 30, 2008
                
                
                11.04
                
                
                
                8.42
                
                
                
                -Quarter
      ended December 31, 2008
                
                
                11.48
                
                
                
                6.50
                
                
                
                -




Dividend
payments by Colonial Bankshares are dependent primarily on dividends it receives
from Colonial Bank, FSB, because Colonial Bankshares has no source of income
other than dividends from Colonial Bank, FSB, earnings from the investment of
proceeds from the sale of shares of common stock retained by Colonial
Bankshares, and interest payments with respect to Colonial Bankshares’ loan to
the Employee Stock Ownership Plan.




Under the
rules of the Office of Thrift Supervision, Colonial Bank, FSB is not permitted
to pay dividends on its capital stock to Colonial Bankshares, Inc., its sole
stockholder, if, after making such distribution, it would be
undercapitalized.




In
addition to the foregoing, earnings of Colonial Bank, FSB previously
appropriated to bad debt reserves and deducted for federal income tax purposes
are not available for payment of cash dividends or other distributions to
stockholders without payment of taxes at the then-current tax rate by Colonial
Bank, FSB on the amount of earnings removed from the reserves for such
distributions.  Colonial Bank, FSB does not contemplate any
distribution in a manner that would create a federal tax liability.




14




COLONIAL
BANKSHARES, INC.





TABLE
OF CONTENTS







Page
No.





REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              F-2CONSOLIDATED
      FINANCIAL STATEMENTS:Consolidated
      Statements of Financial Condition
              F-3Consolidated
      Statements of Income
              F-4Consolidated
      Statements of Stockholders’ Equity
              F-5Consolidated
      Statements of Cash Flows
              F-6Notes
      to Consolidated Financial Statements
              F-7





F-1







Report
of Independent Registered Public Accounting Firm
  To the
Board of Directors and
 Stockholders
of Colonial Bankshares, Inc.
 
  We have
audited the accompanying consolidated balance sheets of Colonial Bankshares,
Inc. and subsidiaries as of December 31, 2008 and2007, and the
related statements of income, stockholders’ equity and cash flows for the years
then ended.  Colonial Bankshares, Inc.’s management is responsible for
these financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting.  Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Colonial Bankshares, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
  
 
  
 Beard
Miller Company LLP
 Malvern,
Pennsylvania
 March 26,
2009


F-2




COLONIAL
BANKSHARES, INC.





CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION








December
      31,2008
                              
                              
                              2007(Dollars
      In Thousands, Except
                                Per
      Share Data)AssetsCash
      and amounts due from banks
                              
                              $
                              23,407
                              
                              
                              $
                              15,978Interest-bearing
      time deposits in banks
                              
                              
                              —
                              
                              
                              
                              208Investment
      securities available for sale
                              
                              
                              165,462
                              
                              
                              
                              163,549Investment
      securities held to maturity (fair value 2008 - $16,332; 2007 -
      $17,976)
                              
                              
                              16,897
                              
                              
                              
                              17,213Loans
      receivable (net of allowance for loan losses 2008 - $2,105; 2007 -
      $1,392)
                              
                              
                              303,151
                              
                              
                              
                              241,040Real
      estate owned
                              
                              
                              113
                              
                              
                              
                              —Federal
      Home Loan Bank stock, at cost
                              
                              
                              1,991
                              
                              
                              
                              2,545Office
      properties and equipment, net
                              
                              
                              11,563
                              
                              
                              
                              10,273Bank-owned
      life insurance
                              
                              
                              2,674
                              
                              
                              
                              2,578Accrued
      interest receivable
                              
                              
                              2,298
                              
                              
                              
                              2,185Other
      assets
                              
                              
                              3,020
                              
                              
                              
                              2,291Total
      Assets
                              
                              $
                              530,576
                              
                              
                              $
                              457,860Liabilities
      and Stockholders’ EquityLiabilitiesDeposits:Non-interest-bearing
                              
                              $
                              18,146
                              
                              
                              $
                              15,141Interest-bearing
                              
                              
                              439,085
                              
                              
                              
                              356,241Total
      deposits
                              
                              
                              457,231
                              
                              
                              
                              371,382Federal
      Home Loan Bank short-term borrowings
                              
                              
                              3,000
                              
                              
                              
                              23,380Federal
      Home Loan Bank long-term borrowings
                              
                              
                              28,227
                              
                              
                              
                              22,559Advances
      from borrowers for taxes and insurance
                              
                              
                              620
                              
                              
                              
                              581Other
      liabilities
                              
                              
                              868
                              
                              
                              
                              930Total
      Liabilities
                              
                              
                              489,946
                              
                              
                              
                              418,832Stockholders’
      EquityPreferred
      stock, 1,000,000 shares authorized and unissued
                              
                              
                              —
                              
                              
                              
                              —Common
      stock, par value $0.10 per share; authorized 10,000,000
      shares;
                                issued
      4,521,696 shares; outstanding: 4,428,021 in 2008 and 4,450,796 in
      2007
                              
                              
                              452
                              
                              
                              
                              452Additional
      paid-in capital
                              
                              
                              20,290
                              
                              
                              
                              19,922Unearned
      shares held by Employee Stock Ownership Plan (ESOP)
                              
                              
                              (1,200
                              )
                              
                              
                              (1,316
                              )Treasury
      stock, at cost, (2008 - 129,125 shares; 2007 – 88,625
    shares)
                              
                              
                              (1,559
                              )
                              
                              
                              (1,189
                              )Retained
      earnings
                              
                              
                              22,439
                              
                              
                              
                              21,094Accumulated
      other comprehensive income
                              
                              
                              208
                              
                              
                              
                              65Total
      Stockholders’ Equity
                              
                              
                              40,630
                              
                              
                              
                              39,028Total
      Liabilities and Stockholders’ Equity
                              
                              $
                              530,576
                              
                              
                              $
                              457,860





See
notes to consolidated financial statements


F-3




COLONIAL
BANKSHARES, INC.





CONSOLIDATED
STATEMENTS OF INCOME





Years
      Ended December 31,2008
                                
                                
                                2007(Dollars
      in Thousands, Except
                                  Per
      Share Data)Interest
      IncomeLoans,
      including fees
                                
                                $
                                16,946
                                
                                
                                $
                                14,034Mortgage-backed
      securities
                                
                                
                                5,513
                                
                                
                                
                                3,320Securities:Taxable
                                
                                
                                4,117
                                
                                
                                
                                4,369Tax-exempt
                                
                                
                                575
                                
                                
                                
                                1,322Total
      Interest Income
                                
                                
                                27,151
                                
                                
                                
                                23,045Interest
      ExpenseDeposits
                                
                                
                                14,055
                                
                                
                                
                                13,632Borrowings
                                
                                
                                1,641
                                
                                
                                
                                800Total
      Interest Expense
                                
                                
                                15,696
                                
                                
                                
                                14,432Net
      Interest Income
                                
                                
                                11,455
                                
                                
                                
                                8,613Provision
      for Loan Losses
                                
                                
                                756
                                
                                
                                
                                84Net
      Interest Income after Provision for Loan Losses
                                
                                
                                10,699
                                
                                
                                
                                8,529Non-Interest
      IncomeFees
      and service charges
                                
                                
                                1,105
                                
                                
                                
                                990Gain
      on sale of loans
                                
                                
                                7
                                
                                
                                
                                56Net
      gain on sales and calls of securities
                                
                                
                                561
                                
                                
                                
                                229Impairment
      charge on investment security
                                
                                
                                (1,161
                                )
                                
                                
                                (284
                                )Earnings
      on bank-owned life insurance
                                
                                
                                96
                                
                                
                                
                                93Other
                                
                                
                                20
                                
                                
                                
                                30Total
      Non-Interest Income
                                
                                
                                628
                                
                                
                                
                                1,114Non-Interest
      ExpensesCompensation
      and benefits
                                
                                
                                5,434
                                
                                
                                
                                5,063Occupancy
      and equipment
                                
                                
                                1,364
                                
                                
                                
                                1,240Data
      processing
                                
                                
                                799
                                
                                
                                
                                743FDIC
      insurance premiums
                                
                                
                                322
                                
                                
                                
                                63Office
      supplies
                                
                                
                                165
                                
                                
                                
                                170Professional
      fees
                                
                                
                                378
                                
                                
                                
                                349Other
                                
                                
                                1,167
                                
                                
                                
                                1,238Total
      Non-Interest Expenses
                                
                                
                                9,629
                                
                                
                                
                                8,866Income
      before Income Tax Expense (Benefit)
                                
                                
                                1,698
                                
                                
                                
                                777Income
      Tax expense (benefit)
                                
                                
                                353
                                
                                
                                
                                (454
                                )Net
      Income
                                
                                $
                                1,345
                                
                                
                                $
                                1,231Per
      Share Data (Note 3):Earnings
      per share - basic
                                
                                $
                                0.31
                                
                                
                                $
                                0.29Earnings
      per share – diluted
                                
                                $
                                0.31
                                
                                
                                $
                                0.29See
      notes to consolidated financial statements


F-4




COLONIAL
BANKSHARES, INC.





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY








Common
                                    Stock
                                  
                                  
                                  Additional
                                    Paid-in
                                    Capital
                                  
                                  
                                  Unearned
                                    Shares
                                    Held
      by
                                    ESOP
                                  
                                  
                                  Retained
                                    Earnings
                                  
                                  
                                  Treasury
                                    Stock
                                  
                                  
                                  Accumu-
                                    lated
                                    Other
                                    Compre-
                                    hensive
                                    Income
                                    (Loss)
                                  
                                  
                                  Total
                                    Stock-
                                    holders’
                                    Equity(Dollars
      in thousands)Balance,
      January 1, 2007
                                  
                                  $
                                  452
                                  
                                  
                                  $
                                  19,519
                                  
                                  
                                  $
                                  (1,432
                                  )
                                  
                                  $
                                  19,863
                                  
                                  
                                  $
                                  (1,189
                                  )
                                  
                                  $
                                  (550
                                  )
                                  
                                  $
                                  36,663Comprehensive
      income:Net
      income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,231
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,231Net
      change in unrealized loss on securities available for sale, net of tax
      expense of $354
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  615
                                  
                                  
                                  
                                  615Total
      Comprehensive Income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  1,846ESOP
      shares committed to be released
                                  
                                  
                                  -
                                  
                                  
                                  
                                  33
                                  
                                  
                                  
                                  116
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  149Stock-based
      compensation expense (restricted stock awards)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  222
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  222Stock-based
      compensation expense (stock options)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  148
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  148Balance,
      December 31, 2007
                                  
                                  
                                  452
                                  
                                  
                                  
                                  19,922
                                  
                                  
                                  
                                  (1,316
                                  )
                                  
                                  
                                  21,094
                                  
                                  
                                  
                                  (1,189
                                  )
                                  
                                  
                                  65
                                  
                                  
                                  
                                  39,028Comprehensive
      income:Net
      income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,345
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,345Net
      change in unrealized loss on securities available for sale, net of tax
      benefit of $24
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  143
                                  
                                  
                                  
                                  143Total
      Comprehensive Income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  1,488ESOP
      shares committed to be released
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2
                                  )
                                  
                                  
                                  116
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  114Purchase
      of treasury stock – 40,500 shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (370
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (370
                                  )Stock-based
      compensation expense (restricted stock awards)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  222
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  222Stock-based
      compensation expense (stock options)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  148
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  148Balance,
      December 31, 2008
                                  
                                  $
                                  452
                                  
                                  
                                  $
                                  20,290
                                  
                                  
                                  $
                                  (1,200
                                  )
                                  
                                  $
                                  22,439
                                  
                                  
                                  $
                                  (1,559
                                  )
                                  
                                  $
                                  208
                                  
                                  
                                  $
                                  40,630







See
notes to consolidated financial statements


F-5




COLONIAL
BANKSHARES, INC.





CONSOLIDATED
STATEMENTS OF CASH FLOWS


Years
      Ended December 31,2008
                
                
                2007Cash
      Flows from Operating Activities:
                
                (In
      thousands)Net
      income
                
                $
                1,345
                
                
                $
                1,231Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
                
                
                756
                
                
                
                84Depreciation
      expense
                
                
                593
                
                
                
                536ESOP
      expense
                
                
                114
                
                
                
                149Stock-based
      compensation expense
                
                
                370
                
                
                
                370Impairment
      charge on investment security
                
                
                1,161
                
                
                
                284Deferred
      income taxes
                
                
                (670
                )
                
                
                (315
                )Net
      earnings on bank-owned life insurance
                
                
                (96
                )
                
                
                (93
                )Net
      gain on sales and calls of investment securities
                
                
                (561
                )
                
                
                (229
                )Loans
      originated for sale
                
                
                (331
                )
                
                
                (2,802
                )Proceeds
      from sale of loans
                
                
                338
                
                
                
                2,858Gain
      on sale of loans
                
                
                (7
                )
                
                
                (56
                )Net
      amortization of loan fees
                
                
                25
                
                
                
                (42
                )Accretion
      of premium and discount on investment securities, net
                
                
                (504
                )
                
                
                (521
                )Increase
      in accrued interest receivable
                
                
                (113
                )
                
                
                (404
                )(Increase)
      decrease in other assets
                
                
                (35
                )
                
                
                748(Decrease)
      increase in other liabilities
                
                
                (62
                )
                
                
                367Net
      cash provided by operating activities
                
                
                2,323
                
                
                
                2,165Cash
      Flows from Investing Activities:Proceeds
      from sales of:Investment
      securities available for sale
                
                
                22,120
                
                
                
                19,174Mortgage-backed
      securities available for sale
                
                
                13,937
                
                
                
                -Proceeds
      from calls and maturities of:Investment
      securities available for sale
                
                
                35,190
                
                
                
                6,335Investment
      securities held to maturity
                
                
                3,680
                
                
                
                3,162Purchase
      of:Investment
      securities available for sale
                
                
                (23,972
                )
                
                
                (27,858
                )Investment
      securities held to maturity
                
                
                (3,712
                )
                
                
                (1,666
                )Mortgage-backed
      securities available for sale
                
                
                (65,488
                )
                
                
                (37,955
                )Mortgage-backed
      securities held to maturity
                
                
                -
                
                
                
                (719
                )Office
      properties and equipment
                
                
                (1,883
                )
                
                
                (3,473
                )Principal
      repayments from:Investment
      securities
                
                
                547
                
                
                
                2,334Mortgage-backed
      securities
                
                
                16,124
                
                
                
                13,515Net
      (increase) decrease in Federal Home Loan Bank stock
                
                
                554
                
                
                
                (1,770
                )Maturity
      of interest-bearing time deposits
                
                
                208
                
                
                
                509Net
      increase in loans receivable
                
                
                (63,005
                )
                
                
                (42,563
                )Net
      cash used for investing activities
                
                
                (65,700
                )
                
                
                (70,975
                )Cash
      Flows from Financing Activities:Net
      increase in deposits
                
                
                85,849
                
                
                
                34,128(Decrease)
      increase in Federal Home Loan Bank short-term borrowings
                
                
                (20,380
                )
                
                
                21,930Proceeds
      from Federal Home Loan Bank long-term borrowings
                
                
                6,000
                
                
                
                16,000Repayment
      of Federal Home Loan Bank long-term borrowings
                
                
                (332
                )
                
                
                (315
                )Increase
      (decrease) increase in advances from borrowers for taxes and
      insurance
                
                
                39
                
                
                
                (212
                )Acquisition
      of treasury stock
                
                
                (370
                )
                
                
                -Net
      cash provided by financing activities
                
                
                70,806
                
                
                
                71,531Increase
      in cash and cash equivalents
                
                
                7,429
                
                
                
                2,721CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                15,978
                
                
                
                13,257CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                23,407
                
                
                $
                15,978Supplemental
      Cash Flow Disclosures:Cash
      paid:Interest
                
                $
                15,909
                
                
                $
                14,243Income
      taxes
                
                $
                1,017
                
                
                $
                5Supplemental
      Schedule of Noncash Investing and Financing Activities:Other
      real estate acquired in settlement of loans
                
                $
                113
                
                
                $
                0





See
notes to consolidated financial statements


F-6




COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
1 – ORGANIZATION AND NATURE OF OPERATIONS





In 2003,
Colonial Bank, FSB (the “Bank”) reorganized into the two-tier mutual holding
company structure.  As part of the reorganization, the Bank formed
Colonial Bankshares, Inc. (the “Company”) and Colonial Bankshares, MHC (the
“Mutual Holding Company”), a federally-chartered, mid-tier, stock holding
company and mutual holding company, respectively.  Colonial Bank, FSB
became a federally-chartered capital stock savings bank, and a wholly-owned
subsidiary of Colonial Bankshares, Inc.  Colonial Bankshares, Inc.
became the wholly-owned subsidiary of Colonial Bankshares, MHC, whose activity
is not included in the accompanying consolidated financial
statements.  The same directors and officers who manage Colonial Bank,
FSB manage Colonial Bankshares, Inc. and Colonial Bankshares,
MHC.  The MHC, the Company and the Bank are subject to regulation and
supervision by the Office of Thrift Supervision.





In 2005,
the Company filed a Registration Statement on Form SB-2 with the Securities and
Exchange Commission in connection with the Company’s offer and sale of shares of
its common stock in a public offering.  The offering was completed on
June 30, 2005.





In 2006,
the Bank established a Delaware corporation, CB Delaware Investments, Inc. (the
“Operating Subsidiary”), whose purpose is to invest in and manage
securities.





In 2007,
the Bank opened its new administrative headquarters/full-service office in
Vineland, New Jersey.  The Bank also   maintains branch
offices in Bridgeton, Mantua, Millville, Upper Deerfield, Vineland and Sewell,
New Jersey.  The Bank’s principal business consists of attracting
customer deposits and investing these deposits primarily in single-family
residential, commercial, and consumer loans and investments.





NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES





Principles
of Consolidation





The
consolidated financial statements include the accounts of Colonial Bankshares,
Inc., its wholly-owned subsidiary, Colonial Bank, FSB and the Bank’s
wholly-owned subsidiary, CB Delaware Investments, Inc.  All material
intercompany transactions and balances have been eliminated in the consolidated
financial statements.





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period.  Actual results could differ from those
estimates.  Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses,  the potential impairment of Federal Home Loan Bank
stock, the evaluation of other than temporary impairment of investment
securities and the valuation of deferred tax assets.





F-7





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Significant
Group Concentrations of Credit Risk





Most of
the Bank’s activities are with customers located within Southern New
Jersey.  Note 4 discusses the types of investment securities that the
Bank invests in.  Note 5 discusses the types of lending that the Bank
engages in.  The Bank does not have any significant concentrations to
any one industry or customer.  Although the Bank has a diversified
portfolio, its debtors’ ability to honor their contracts is influenced by the
region’s economy.





Cash
and Cash Equivalents





For
purposes of reporting cash flows, cash and cash equivalents include cash on hand
and amounts due from banks.





The
Company and the Bank maintain cash deposits in other depository institutions
that occasionally exceed the amount of deposit insurance
available.  Management periodically assesses the financial condition
of these institutions and believes that the risk of any possible credit loss is
minimal.





The Bank
is required to maintain average reserve balances in vault cash, with the Federal
Reserve Bank or with the Federal Home Loan Bank based upon outstanding balances
of deposit transaction accounts.  Based upon the Bank’s outstanding
transaction deposit balances, the Bank maintained a deposit account at the
Federal Home Loan Bank of New York in the amount of $2.4 million at December 31,
2007.  No reserve balance was required at December 31,
2008.





Interest-Bearing
Time Deposits in Banks





Interest-bearing
time deposits in banks matured in 2008 and were carried at
cost.





Investment
Securities





Debt
securities that management has the positive intent and ability to hold until
maturity are classified as held to maturity and are carried at their remaining
unpaid principal balance, net of unamortized premiums, or unaccreted
discounts.  Premiums are amortized and discounts are accreted using a
method which produces results which approximate the interest method over the
estimated remaining term of the underlying security.





Securities
that will be held for indefinite periods of time, including securities that may
be sold in response to changes in market interest or prepayment rates, needs for
liquidity and changes in the availability of and the yield of alternative
investments are classified as available for sale.  These securities
are carried at estimated fair value, which is determined using published quotes
where available.  If published quotes are not available, fair values
are based on quoted market prices of comparable
instruments.  Unrealized gains and losses are excluded from earnings
and are reported net of tax in other comprehensive income.  Realized
gains and losses are included in the statements of income and are determined
based on the adjusted cost of the specific security sold.





Management
determines the appropriate classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet
date.





Declines
in the fair value of held to maturity and available for sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses.  In estimating other-than-temporary impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Bank to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.





F-8




COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Loans
Held for Sale





At
December 31, 2008 and 2007, the Bank had no loans held for sale.





Loans
Receivable





The Bank
grants mortgage, commercial and consumer loans to customers.  A
substantial portion of the loan portfolio is represented by mortgage loans
throughout the counties of Cumberland and Gloucester of New
Jersey.  The ability of the Bank’s debtors to honor their contracts is
dependent upon the real estate and general economic conditions in this
area.





Loans
receivable that management has the intent and ability to hold until maturity or
payoff are stated at their outstanding unpaid principal balances, net of an
allowance for loan losses and any deferred fees and costs.  Interest
income is accrued on the unpaid principal balance.  Loan origination
fees and costs are deferred and recognized as an adjustment of the yield
(interest income) of the related loans.  The Bank is amortizing these
amounts over the contractual life of the loan.





The
accrual of interest is generally discontinued when the contractual payment of
principal or interest have become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing.  A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well
secured.  When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest accrued
in prior years is charged against the allowance for loan
losses.  Interest received on nonaccrual loans generally is either
applied against principal or reported as interest income, according to
management’s judgment as to the collectibility of
principal.  Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time, and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.





Allowance
for Loan Losses





The
allowance for loan losses is established through provisions for loan losses
charged against income.  Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance.





The
allowance for loan losses is maintained at a level considered necessary to
provide for estimated probable loan losses.  Management’s periodic
evaluation of the adequacy of the allowance is based on the Bank’s past loan
loss experience, adverse situations that may affect the borrower’s ability to
repay, the estimated value of any underlying collateral, composition of the loan
portfolio, current economic conditions, and other relevant
factors.  This evaluation is inherently subjective as it requires
material estimates that may be susceptible to significant revision as more
information becomes available.





A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payments status, collateral value, and the probability of collecting
scheduled principal and interest payments when due.  Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired.  Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.  Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.





F-9




COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly, the Bank does not separately identify
individual consumer and mortgage loans for impairment disclosures, unless they
are subject to a restructuring agreement.





The
allowance consists of specific, general and unallocated
components.  The specific component relates to loans that are
classified as doubtful, substandard or special mention.  For such
loans that are also classified as impaired, an allowance is established when the
discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value for that loan.  The
general component covers non-classified loans and is based on historical loss
experience adjusted for qualitative estimate of probable losses.  The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.





Federal
Home Loan Bank Stock




Federal
Home Loan Bank (“FHLB”) Stock, which represents required investment in the
common stock of a correspondent bank, is carried at cost.




Management
evaluates the FHLB stock for impairment in accordance with Statement of Position
(“SOP”) 0 1-6, Accounting by Certain Entities (Including Entities With Trade
Receivables) That Lend to or Finance the Activities of Others. Management’s
determination of whether these investments are impaired is based on their
assessment of the ultimate recoverability of their cost rather than by
recognizing temporary declines in value. The determination of whether a decline
affects the ultimate recoverability of their cost is influenced by criteria such
as (1) the significance of the decline in net assets of the FHLB as compared to
the capital stock amount for the FHLB and the length of time this situation has
persisted, (2) commitments by the FHLB to make payments required by law or
regulation and the level of such payments in relation to the operating
performance of the FHLB, and (3) the impact of legislative and regulatory
changes on institutions and, accordingly, on the customer base of the
FHLB.





Management
believes no impairment charge is necessary related to the FHLB stock as of
December 31, 2008.





Office
Properties and Equipment





Office
properties and equipment are recorded at cost.  Depreciation is
computed using the straight-line method over the expected useful lives of the
related assets.





Transfers
of Financial Assets





Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered.  Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.





Bank-Owned
Life Insurance





The Bank
invests in bank owned life insurance (“BOLI”) as a source of funding for
employee benefit expenses.  BOLI involves the purchasing of life
insurance by the Bank on a chosen group of employees.  The Bank is the
owner and beneficiary of the policies.  This life insurance investment
is carried at the cash surrender value of the underlying
policies.  Income from the increase in cash surrender value of the
policies is included in non-interest income on the statements of
income.





F-10




COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Advertising
Costs





The Bank
follows the policy of charging the costs of advertising to expense as
incurred.  Advertising expense was $153 thousand and $141 thousand for
the years ended December 31, 2008 and 2007, respectively.





Stock
Compensation Plans





In 2006,
Board of Directors of the Company approved the Colonial Bankshares, Inc. 2006
Stock-based Incentive Plan (the “Stock Plan”).  Prior to 2006, the
Company had no stock option plans or stock-based compensation other than the
ESOP.  The Company accounts for stock-based compensation under the
fair value recognition provisions of the Financial Accounting Standards Board
(“FASB”) Statement No. 123(R), “Share-Based Payment.”  Statement No.
123(R) replaces Statement No. 123, and requires compensation costs related
to share-based payment transactions to be recognized in the financial statements
over the period that an employee provides service in exchange for the
award.  For the years ended December 31, 2008 and 2007, there
were stock options outstanding and the related compensation expense of
approximately $148 thousand and $148 thousand, respectively, and is included in
the accompanying statements of income.  For the years ended
December 31, 2008 and 2007, there was a tax benefit recognized related to
this stock-based compensation of approximately $51 thousand and $51 thousand,
respectively.





Income
Taxes





Deferred
taxes are provided on the liability method whereby deferred tax assets are
recognized for deductible temporary differences and deferred tax liabilities are
recognized for taxable temporary differences.  Temporary differences
are the differences between the reported amounts of assets and liabilities and
their tax basis.  Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion of the deferred tax assets will not be
realized.  Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of
enactment.  Colonial Bankshares, Inc. and its subsidiary file a
consolidated federal income tax return.





Earnings
Per Share





Basic
earnings per share (“EPS”) is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period.  Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock, such as unvested
restricted stock awards and outstanding stock options, were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. Diluted EPS is calculated by
adjusting the weighted average number of shares on common stock outstanding to
include the effect of contracts or securities exercisable or which could be
converted into common stock, if dilutive, using the treasury stock
method.





Off-Balance
Sheet Financial Instruments





In the
ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and letters of
credit.  Such financial instruments are recorded in the statements of
financial condition when they are funded.





F-11




COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Comprehensive
Income





Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income.  Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
investment securities, are reported as a separate component of the stockholders’
equity section of the statement of financial condition, such items, along with
net income, are components of comprehensive income.





The
components of other comprehensive income (loss) and related tax effects are as
follows:





Years
      Ended December 31,2008
                
                
                2007(In
      Thousands)Unrealized
      holding gains (losses) on available for sale securities
                
                $
                (481
                )
                
                $
                914Reclassification
      adjustment for net (gains) on sales and calls of
securities
                
                
                (561
                )
                
                
                (229
                )Impairment
      charge on investment security
                
                
                1,161
                
                
                
                284Net
      unrealized gains
                
                
                119
                
                
                
                969Income
      tax effect (benefit)
                
                
                (24
                )
                
                
                354Net
      of tax amount
                
                $
                143
                
                
                $
                615





Recent
Accounting Pronouncements





In
December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) Statement of Financial Accounting Standards (“SFAS”)
No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan
Assets”.  This FSP amends SFAS 132(R), “Employers’ Disclosures about
Pensions and Other Postretirement Benefits”, to provide guidance on an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan.  The disclosures about plan assets required by
this FSP shall be provided for fiscal years ending after December 15,
2009.  The Company is currently reviewing the effect this new
pronouncement will have on its consolidated financial statements.





SFAS No.
141 (R), “Business Combinations,” was issued in December of 2007. This Statement
establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree.  The Statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.  The guidance
will become effective as of the beginning of a company’s fiscal year beginning
after December 15, 2008.  This new pronouncement will impact the Company’s
accounting for business combinations completed after January 1,
2009.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of SFAS No.
115”.  SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date.  SFAS No. 159 is effective for the Company on January
1, 2009.  The implementation of this standard is not expected to have
an impact on the Company’s consolidated financial position or results of
operations.





F-12




COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
3 – EARNINGS PER SHARE





There are
no convertible securities which would affect the net income (numerator) in
calculating basic and diluted earnings per share; therefore the net income for
each calculation in 2008 is $1.3 million and the net income for 2007 is $1.2
million.  Basic and diluted earnings per share data are based on the
weighted-average number of common shares outstanding during each
period.  Diluted earnings per share are further adjusted for potential
common shares that were dilutive and outstanding during the
period.  Potential common shares consist of stock options outstanding
and non-vested stock grants under the stock-based incentive
plans.  The dilutive effect of potential common shares is computed
using the treasury stock method.  The following table sets forth the
composition of the weighted average common shares (denominator) used in the
basic and diluted earnings per share computation.  At December 31,
2008 and 2007, respectively, there were 249,643 and 244,804 anti-dilutive
non-vested awards and options excluded from the computation of earnings per
share because the option price was greater than the average market price,
respectively.





December
      31,2008
                    
                    
                    2007Net
      Income
                    
                    $
                    1,345,000
                    
                    
                    $
                    1,231,000Weighted
      average common shares outstanding
                    
                    
                    4,521,696
                    
                    
                    
                    4,521,696Average
      unearned ESOP shares
                    
                    
                    (131,557
                    )
                    
                    
                    (143,160
                    )Average
      treasury stock shares
                    
                    
                    (100,778
                    )
                    
                    
                    (88,625
                    )Weighted
      average common shares outstanding - basic
                    
                    
                    4,289,361
                    
                    
                    
                    4,289,911Effect
      of dilutive non-vested shares and stock options
outstanding
                    
                    
                    -
                    
                    
                    
                    22,564Weighted
      average common shares outstanding - diluted
                    
                    
                    4,289,361
                    
                    
                    
                    4,312,475Earnings
      per share-basic
                    
                    $
                    0.31
                    
                    
                    $
                    0.29Earnings
      per share-diluted
                    
                    $
                    0.31
                    
                    
                    $
                    0.29




F-13




COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
4 – INVESTMENT SECURITIES





Investment
securities are summarized as follows:





Amortized
                Cost
              
              
              Gross
                Unrealized
                Gains
              
              
              Gross
                Unrealized
                Losses
              
              
              Fair
                Value(In
      thousands)AVAILABLE
      FOR SALE:DECEMBER
      31, 2008U.
      S. Government obligations
              
              $
              21,963
              
              
              $
              331
              
              
              $
              (49
              )
              
              $
              22,245Corporate
              
              
              15,249
              
              
              
              67
              
              
              
              (1,833
              )
              
              
              13,483Mutual
      funds
              
              
              2,643
              
              
              
              -
              
              
              
              -
              
              
              
              2,643Municipal
      securities
              
              
              3,659
              
              
              
              49
              
              
              
              (76
              )
              
              
              3,632SBA
      pools
              
              
              6,453
              
              
              
              58
              
              
              
              (62
              )
              
              
              6,449Mortgage-backed
      securities
              
              
              115,245
              
              
              
              2,172
              
              
              
              (407
              )
              
              
              117,010$
              165,212
              
              
              $
              2,677
              
              
              $
              (2,427
              )
              
              $
              165,462





DECEMBER
      31, 2007U.
      S. Government obligations
              
              $
              44,052
              
              
              $
              350
              
              
              $
              (127
              )
              
              $
              44,275Corporate
              
              
              12,880
              
              
              
              56
              
              
              
              (669
              )
              
              
              12,267Mutual
      funds
              
              
              14,385
              
              
              
              -
              
              
              
              -
              
              
              
              14,385Municipal
      securities
              
              
              5,402
              
              
              
              113
              
              
              
              (11
              )
              
              
              5,504SBA
      pools
              
              
              7,614
              
              
              
              119
              
              
              
              (69
              )
              
              
              7,664Mortgage-backed
      securities
              
              
              79,085
              
              
              
              669
              
              
              
              (300
              )
              
              
              79,454$
              163,418
              
              
              $
              1,307
              
              
              $
              (1,176
              )
              
              $
              163,549HELD
      TO MATURITY:DECEMBER
      31, 2008U.
      S. Government obligations
              
              $
              932
              
              
              $
              38
              
              
              $
              -
              
              
              $
              970Corporate
              
              
              3,969
              
              
              
              19
              
              
              
              (729
              )
              
              
              3,259Municipal
      securities
              
              
              8,853
              
              
              
              217
              
              
              
              (223
              )
              
              
              8,847Mortgage-backed
      securities
              
              
              3,143
              
              
              
              113
              
              
              
              -
              
              
              
              3,256$
              16,897
              
              
              $
              387
              
              
              $
              (952
              )
              
              $
              16,332DECEMBER
      31, 2007U.
      S. Government obligations
              
              $
              1,420
              
              
              $
              22
              
              
              $
              -
              
              
              $
              1,442Corporate
              
              
              2,173
              
              
              
              145
              
              
              
              (1
              )
              
              
              2,317Municipal
      securities
              
              
              9,854
              
              
              
              500
              
              
              
              -
              
              
              
              10,354Mortgage-backed
      securities
              
              
              3,766
              
              
              
              97
              
              
              
              -
              
              
              
              3,863$
              17,213
              
              
              $
              764
              
              
              $
              (1
              )
              
              $
              17,976





All of
the Company’s mortgage-backed securities at December 31, 2008 and 2007 have been
issued by government agencies or government sponsored enterprises.




F-14




COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
4 – INVESTMENT SECURITIES (CONTINUED)





The
amortized cost and estimated fair value of investment securities at December 31,
2008, by contractual maturity, are shown below.  Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.








Held
      to Maturity
                
                
                Available
      for SaleAmortized
                  Cost
                
                
                Fair
      Value
                
                
                Amortized
                  Cost
                
                
                Fair
      Value(In
      thousands)Due
      in one year or less
                
                $
                2,397
                
                
                $
                2,415
                
                
                $
                8,727
                
                
                $
                8,659Due
      after one year through five years
                
                
                2,098
                
                
                
                1,756
                
                
                
                15,375
                
                
                
                14,964Due
      after five year through ten years
                
                
                5,136
                
                
                
                4,855
                
                
                
                21,037
                
                
                
                20,115Due
      thereafter
                
                
                7,266
                
                
                
                7,306
                
                
                
                120,073
                
                
                
                121,724$
                16,897
                
                
                $
                16,332
                
                
                $
                165,212
                
                
                $
                165,462





At
December 31, 2008 and 2007, $74.2 million and $64.9 million, respectively, of
securities were pledged as collateral to secure certain deposits and FHLB
advances.





Gross
gains and losses of $713 thousand and $152, respectively, for the year ended
December 31, 2008, and $312 thousand and $83 thousand, respectively, for the
year ended December 31, 2007, were realized on sales and calls of investment
securities.





The
following table shows the Company’s available for sale investments’ gross
unrealized losses and fair value, and length of time that individual securities
have been in a continuous unrealized loss position:





At
      December 31, 2008
              
              Less
      than 12 months
              
              
              12
      months or more
              
              
              TotalFairValue
              
              
              Unrealized
                Losses
              
              
              FairValue
              
              
              Unrealized
                Losses
              
              
              FairValue
              
              
              Unrealized
                Losses(In
      thousands)U.
      S. Government obligations
              
              $
              451
              
              
              $
              13
              
              
              $
              1,931
              
              
              $
              36
              
              
              $
              2,382
              
              
              $
              49Corporate
              
              
              8,889
              
              
              
              1,157
              
              
              
              2,748
              
              
              
              676
              
              
              
              11,637
              
              
              
              1,833Municipal
      securities
              
              
              1,373
              
              
              
              76
              
              
              
              -
              
              
              
              -
              
              
              
              1,373
              
              
              
              76SBA
      pools
              
              
              1,609
              
              
              
              38
              
              
              
              1,316
              
              
              
              24
              
              
              
              2,925
              
              
              
              62Mortgage-backed
      securities
              
              
              31,136
              
              
              
              357
              
              
              
              2,046
              
              
              
              50
              
              
              
              33,182
              
              
              
              407Total
              
              $
              43,458
              
              
              $
              1,641
              
              
              $
              8,041
              
              
              $
              786
              
              
              $
              51,499
              
              
              $
              2,427





F-15





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
4 – INVESTMENT SECURITIES (CONTINUED)





At
      December 31, 2007
              
              Less
      than 12 months
              
              
              12
      months or more
              
              
              TotalFair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses(In
      thousands)U.
      S. Government obligations
              
              $
              4,091
              
              
              $
              48
              
              
              $
              10,414
              
              
              $
              79
              
              
              $
              14,505
              
              
              $
              127Corporate
              
              
              5,295
              
              
              
              137
              
              
              
              2,945
              
              
              
              532
              
              
              
              8,240
              
              
              
              669Municipal
      securities
              
              
              -
              
              
              
              -
              
              
              
              303
              
              
              
              11
              
              
              
              303
              
              
              
              11SBA
      pools
              
              
              2,888
              
              
              
              16
              
              
              
              1,613
              
              
              
              53
              
              
              
              4,501
              
              
              
              69Mortgage-backed
      securities
              
              
              10,144
              
              
              
              14
              
              
              
              13,864
              
              
              
              286
              
              
              
              24,008
              
              
              
              300Total
              
              $
              22,418
              
              
              $
              215
              
              
              $
              29,139
              
              
              $
              961
              
              
              $
              51,557
              
              
              $
              1,176





The
following table shows the Company’s held to maturity investments’ gross
unrealized losses and fair value, and length of time that individual securities
have been in a continuous unrealized loss position:




At
      December 31, 2008
                
                Less
      than 12 months
                
                
                12
      months or more
                
                
                TotalFair
      Value
                
                
                Unrealized
                  Losses
                
                
                Fair
      Value
                
                
                Unrealized
                  Losses
                
                
                Fair
      Value
                
                
                Unrealized
                  Losses(In
      thousands)Corporate
                
                $
                1,474
                
                
                $
                351
                
                
                $
                605
                
                
                $
                378
                
                
                $
                2,079
                
                
                $
                729Municipal
      securities
                
                
                2,367
                
                
                
                223
                
                
                
                -
                
                
                
                -
                
                
                
                2,367
                
                
                
                223Total
                
                $
                3,841
                
                
                $
                574
                
                
                $
                605
                
                
                $
                378
                
                
                $
                4,446
                
                
                $
                952




At
      December 31, 2007
              
              Less
      than 12 months
              
              
              12
      months or more
              
              
              TotalFair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses
              
              
              Fair
      Value
              
              
              Unrealized
                Losses(In
      thousands)Corporate
              
              
              986
              
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              986
              
              
              
              1Total
              
              $
              986
              
              
              $
              1
              
              
              $
              -
              
              
              $
              -
              
              
              $
              986
              
              
              $
              1




Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability
of the Bank to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.  In
management’s opinion, the unrealized losses reflect changes in interest rates or
changes in spreads subsequent to the acquisition of specific
securities.





For the
year ended December 31, 2008, the Company took a pre-tax investment write down
of $1.2 million for other-than-temporary impairment on a mutual
fund.  For the year ended December 31, 2007, the Company took a
pre-tax investment write down of $284 thousand for other-than-temporary
impairment” on a mutual fund.  The Company’s decision was based on the
length of time the mutual fund was in a loss position and based on the fact that
the mutual fund had not made any recovery during recent changes in interest
rates.  The Company does not believe this impairment is related to
credit quality but rather to the widening of spreads in the bond market for
mortgage related securities.  At December 31, 2008 and 2007, mutual
funds are carried at their estimated fair value.





F-16







COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
4 – INVESTMENT SECURITIES (CONTINUED)





At
December 31, 2008, there were 76 securities in the less-than-twelve-months
category and 26 securities in the twelve-months-or-more category for the
available for sale portfolio.  At December 31, 2008, there were nine
securities in the less-than-twelve-months category and one security in the
twelve-months-or-more category for the held to maturity portfolio.





As of
December, 31, 2008 management believes that the estimated fair value of the
securities noted above are primarily dependent on the movement in market
interest rates.  These investment securities are comprised of
securities that are rated investment grade by at least one bond credit rating
service.  Management believes that these fair values will recover as
the underlying portfolios mature.  The Company has the ability and
intent to hold these securities until such time as the value recovers or the
securities mature.  Management does not believe any individual
unrealized loss as of December 31, 2008, represents an other-than-temporary
impairment.





NOTE
5 - LOANS RECEIVABLE





Loans
receivable at December 31, 2008 and 2007 consist of the following:





2008
                
                
                2007(In
      Thousands)Mortgage
      loans:One-to-four
      family
                
                $
                145,329
                
                
                $
                114,745Multi-family
                
                
                4,942
                
                
                
                5,609Commercial
                
                
                81,983
                
                
                
                55,606Construction
                
                
                12,223
                
                
                
                10,137Home
      equity loans and credit lines
                
                
                41,293
                
                
                
                40,264Commercial
      loans
                
                
                17,177
                
                
                
                12,600Consumer
      and other loans
                
                
                2,616
                
                
                
                3,752305,563
                
                
                
                242,713Deferred
      loan fees
                
                
                (307
                )
                
                
                (281
                )Allowance
      for loan losses
                
                
                (2,105
                )
                
                
                (1,392
                )$
                303,151
                
                
                $
                241,040




In the
normal course of business, the Bank has extended loans to executive officers,
directors and principal stockholders, their immediate families and affiliated
companies (commonly referred to as related parties) on the same terms including
interest rates and collateral as those prevailing at the time for comparable
transactions with others.  A summary of loan activity to related
parties is as follows (in thousands):





Balance
                    January
      1,
                  
                  
                  Additions
                  
                  
                  Amounts
                    Collected
                  
                  
                  Balance
                    December
      31,2008
                  
                  $
                  6,577
                  
                  
                  $
                  404
                  
                  
                  $
                  576
                  
                  
                  $
                  6,405





F-17





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
5 - LOANS RECEIVABLE (CONTINUED)





At
December 31, 2008, the Bank had $524 thousand of impaired loans and at December
31, 2007, the Bank had $370 thousand of impaired loans.  The amounts
of related valuation allowances were $113 thousand and $25 thousand,
respectively, at those dates.  There was $154 thousand of impaired
loans at December 31, 2008, for which no specific reserve was
recorded.  There were no impaired loans at December 31, 2007, for
which no specific reserve was recorded.  For 2008 and 2007, the
average daily balance of impaired loans totaled $417 thousand and $623 thousand,
respectively.  The total amount of interest not recognized into income
on the impaired loans totaled $28 thousand and $17 thousand in 2008 and 2007,
respectively.  Loans on which the accrual of interest has been
discontinued amounted to $1.9 million and $1.2 million at December 31, 2008 and
2007, respectively.  The Bank had no loan balances past due 90 days or
more and still accruing interest at December 31, 2008 and 2007,
respectively.





The
following is a summary of changes in the allowance for loan losses:





2008
                
                
                2007(In
      thousands)Balance,
      beginning of year
                
                $
                1,392
                
                
                $
                1,373Provision
      charged to operations
                
                
                756
                
                
                
                84Charge-offs
                
                
                (50
                )
                
                
                (68
                )Recoveries
                
                
                7
                
                
                
                3Balance,
      end of year
                
                $
                2,105
                
                
                $
                1,392








NOTE
6 – OFFICE PROPERTIES AND EQUIPMENT





Office
properties and equipment at December 31, 2008 and 2007 are summarized by major
classification as follows:





Estimated
      Useful Life in Years
                    
                    
                    2008
                    
                    
                    2007(In
      thousands)Land
                    
                    Indefinite
                    
                    
                    $
                    4,017
                    
                    
                    $
                    2,929Buildings
                    
                    25
                    
                    
                    
                    8,190
                    
                    
                    
                    7,596Furniture,
      Fixtures and equipment
                    
                    3 –
      7
                    
                    
                    
                    2,927
                    
                    
                    
                    2,843Construction
      in progress
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    9115,134
                    
                    
                    
                    13,459Accumulated
      depreciation
                    
                    
                    
                    
                    
                    (3,571
                    )
                    
                    
                    (3,186
                    )$
                    11,563
                    
                    
                    $
                    10,273





The
Company completed construction and opened our new administrative
headquarters/full-service office in Vineland, New Jersey in May
2007.  Total construction costs including land was $6.4
million.





The
Company has spent $341 thousand for the acquisition of land in the Borough of
Buena in Atlantic County, New Jersey, $788 thousand for the acquisition of land
in Millville, Cumberland County, New Jersey and $1.3 million for the acquisition
of land in Harrison Township, Gloucester County, New Jersey as possible branch
locations.  The cost of the land for all of the above properties is
included in the Land total.  As the Company is in the early stages of
planning, we cannot determine completion dates or estimated costs to complete
cannot be determined.  In July 2008, the Bank opened a branch office
on Landis Avenue in Vineland, New Jersey.  Total costs including land,
building and furniture, fixtures and equipment total approximately $585
thousand.





In
November 2008, the Bank purchased a building in Cedarville, New Jersey (Township
of Lawrence) for $275 thousand as a branch location.  After
renovations, the branch opened in January 2009.





F-18





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
7 - DEPOSITS





Deposits
at December 31, 2008 and 2007 consist of the following major classifications
(dollars in thousands):





2008
                        
                        
                        2007Amount
                        
                        
                        Average
                          Rate
                        
                        
                        Amount
                        
                        
                        Average
                          RateCertificates
      of deposit:2.01%
      - 4.00%
                        
                        
                        $
                        178,445
                        
                        
                        
                        3.58
                        %
                        
                        $
                        13,155
                        
                        
                        
                        3.80
                        %4.01%
      - 6.00%
                        
                        
                        
                        63,215
                        
                        
                        
                        5.06
                        
                        
                        
                        204,761
                        
                        
                        
                        4.926.01%
      - 8.00%
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        141
                        
                        
                        
                        7.77More
      than 8.00%
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        23
                        
                        
                        
                        9.65Total
      certificates of deposit
                        
                        
                        
                        241,660
                        
                        
                        
                        3.97
                        
                        
                        
                        218,080
                        
                        
                        
                        4.86Non-interest
      bearing demand
                        
                        
                        
                        18,146
                        
                        
                        
                        -
                        
                        
                        
                        15,141
                        
                        
                        
                        -NOW
                        
                        
                        
                        55,439
                        
                        
                        
                        .72
                        
                        
                        
                        45,255
                        
                        
                        
                        2.12Super
      NOW
                        
                        
                        
                        15,532
                        
                        
                        
                        1.75
                        
                        
                        
                        16,520
                        
                        
                        
                        1.77Savings
                        
                        
                        
                        81,050
                        
                        
                        
                        2.76
                        
                        
                        
                        55,716
                        
                        
                        
                        2.18Money
      market deposit
                        
                        
                        
                        45,404
                        
                        
                        
                        3.26
                        
                        
                        
                        20,670
                        
                        
                        
                        3.72$
                        457,231
                        
                        
                        
                        3.06
                        %
                        
                        $
                        371,382
                        
                        
                        
                        3.72
                        %





A summary
of certificates of deposit by maturity at December 31, 2008 is as follows (in
thousands):





2009
                
                $
                152,5872010
                
                
                60,4112011
                
                
                18,3022012
                
                
                5,6452013
                
                
                2,660Thereafter
                
                
                2,055$
                241,660




The
aggregate amount of certificates of deposit with a minimum denomination of $100
thousand was $125.5 million and $119.7 million at December 31, 2008 and 2007,
respectively.  Currently, amounts above $250 thousand are not insured
by the Federal Deposit Insurance Corporation (“FDIC”).  Included in
the certificate of deposit balances at December 31, 2008 are brokered
certificates of deposit in the amount of $43.6 million at a weighted average
rate of 4.14% with maturities as follows, $24.4 million in 2009, $13.3 million
in 2010, and $5.9 million in 2011.  The Bank had $28.0 million at a
weighted average rate of 5.30% in brokered deposits at December 31,
2007.





A summary
of interest expense on deposits for the years ended December 31, 2008 and 2007
are as follows:





2008
                
                
                2007(In
      thousands)NOW
      and Super NOW
                
                $
                862
                
                
                $
                1,299Savings
                
                
                2,232
                
                
                
                1,188Money
      market demand
                
                
                1,029
                
                
                
                678Certificates
      of deposit
                
                
                9,932
                
                
                
                10,467$
                14,055
                
                
                $
                13,632





F-19





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
8 – FEDERAL HOME LOAN BANK BORROWINGS





Federal
Home Loan Bank (FHLB) borrowings at December 31 are as follows:





Maturity
                  
                  Interest
      Rate
                  
                  
                  2008
                  
                  
                  2007(In
      thousands)January
      2, 2008
                  
                  3.61%
                  
                  
                  
                  -
                  
                  
                  $
                  15,000January
      2, 2008
                  
                  4.11%
                  
                  
                  
                  -
                  
                  
                  
                  380March
      24, 2008
                  
                  4.79%
                  
                  
                  
                  -
                  
                  
                  
                  4,000November
      20, 2008
                  
                  4.42%
                  
                  
                  
                  -
                  
                  
                  
                  4,000June
      23, 2009
                  
                  3.35%
                  
                  
                  
                  3,000
                  
                  
                  
                  -October
      19, 2009
                  
                  4.65%
                  
                  
                  
                  4,000
                  
                  
                  
                  4,000November
      20, 2009
                  
                  4.23%
                  
                  
                  
                  4,000
                  
                  
                  
                  4,000December
      03, 2009
                  
                  3.89%
                  
                  
                  
                  4,000
                  
                  
                  
                  4,000June
      23, 2010
                  
                  3.88%
                  
                  
                  
                  3,000October
      18, 2010
                  
                  4.70%
                  
                  
                  
                  4,000
                  
                  
                  
                  4,000June
      23, 2011
                  
                  4.31%
                  
                  
                  
                  3,000
                  
                  
                  
                  -June
      30, 2021
                  
                  5.57%
                  
                  
                  
                  6,227
                  
                  
                  
                  6,559$
                  31,227
                  
                  
                  $
                  45,939




At
December 31, 2008, the Bank had a borrowing capacity of $127.5 million available
from the FHLB of New York, of which $31.2 million was outstanding, which is
based on the amount of FHLB stock held or levels of other assets, including
United States Government obligations, which are available for
collateral.




NOTE
9 – INCOME TAXES





Retained
earnings include $1.5 million at December 31, 2008 and 2007, for which no
provision for federal income tax has been made.  These amounts
represent deductions for bad debt reserves for tax purposes which were only
allowed to savings institutions which met certain definitional tests prescribed
by the Internal Revenue Code of 1986, as amended.  The Small Business
Job Protection Act of 1996 eliminated the special bad debt deduction granted
solely to thrifts.  Under the terms of the Act, there would be no
recapture of the pre-1988 (base year) reserves.  However, these
pre-1988 reserves would be subject to recapture under the rules of the Internal
Revenue Code if the Bank itself pays a cash dividend in excess of earnings and
profits, or liquidates.  The Act also provides for the recapture of
deductions arising from “applicable excess reserve” defined as the total amount
of reserve over the base year reserve.  The Bank’s total reserve
exceeds the base year reserve and deferred taxes have been provided for this
excess.





The
income tax provision consists of the following for the years ended December
31:





2008
                          
                          
                          2007(In
      thousands)Current:Federal
                          
                          $
                          1,023
                          
                          
                          $
                          (139
                          )State
                          
                          
                          -
                          
                          
                          
                          -Total
      current
                          
                          
                          1,023
                          
                          
                          
                          (139
                          )Deferred
                          
                          
                          (670
                          )
                          
                          
                          (315
                          )Total
                          
                          $
                          353
                          
                          
                          $
                          (454
                          )





F-20




COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
9 – INCOME TAXES (CONTINUED)





A
reconciliation of the statutory federal income tax at a rate of 34% to the
income tax expense included in the statements of income for the years ended
December 31 is as follows (dollars in thousands):





2008
                
                
                2007Amount
                
                
                %
      of Pretax
                  Income
                
                
                Amount
                
                
                %
      of Pretax
                  IncomeFederal
      income tax at statutory rate
                
                $
                578
                
                
                
                34.0
                %
                
                $
                264
                
                
                
                34.0
                %State
      tax, net of federal benefit
                
                
                (85
                )
                
                
                (5.0
                )
      %
                
                
                (243
                )
                
                
                (31.3
                )
      %Tax
      exempt income
                
                
                (196
                )
                
                
                (11.5
                )
      %
                
                
                (392
                )
                
                
                (50.5
                )
      %Life
      insurance income
                
                
                (33
                )
                
                
                (1.9
                )
      %
                
                
                (32
                )
                
                
                (4.1
                )
      %Other
                
                
                89
                
                
                
                5.2
                %
                
                
                (51
                )
                
                
                (6.6
                )  %Total
                
                $
                353
                
                
                
                20.8
                %
                
                $
                (454
                )
                
                
                (58.4
                )
      %





The
components of the net deferred tax asset, included in other assets, are as
follows:





December
      31,2008
                    
                    
                    2007(In
      thousands)Deferred
      tax assets:Deferred
      loan fees
                    
                    $
                    122
                    
                    
                    $
                    112Allowance
      for loan losses
                    
                    
                    841
                    
                    
                    
                    556Securities
      impairment
                    
                    
                    351
                    
                    
                    
                    113Net
      operating loss carryforwards
                    
                    
                    682
                    
                    
                    
                    243Stock-based
      compensation
                    
                    
                    204
                    
                    
                    
                    112AMT
      credit carryforward
                    
                    
                    88
                    
                    
                    
                    88Prepaid
      expenses
                    
                    
                    4
                    
                    
                    
                    29Depreciation
                    
                    
                    44
                    
                    
                    
                    -Total
      deferred tax assets
                    
                    
                    2,336
                    
                    
                    
                    1,253Valuation  allowance
                    
                    
                    (542
                    )
                    
                    
                    (103
                    )Deferred
      tax liabilities:Depreciation
                    
                    
                    -
                    
                    
                    
                    (23
                    )Net
      unrealized loss on securities available for sale
                    
                    
                    (42
                    )
                    
                    
                    (66
                    )Other
                    
                    
                    -
                    
                    
                    
                    (3
                    )Total
      deferred tax liabilities
                    
                    
                    (42
                    )
                    
                    
                    (92
                    )Net
      Deferred Tax Asset
                    
                    $
                    1,752
                    
                    
                    $
                    1,058





The
Company has state net operating loss carryforwards of approximately $11.5
million beginning to expire in 2014.





NOTE
10 – BENEFIT PLANS





The Bank
has a 401(k) Savings Plan (the “Plan”).  All employees are eligible to
participate after completing one year of eligible service.  The
employees may contribute up to fifteen percent of their compensation to the Plan
with the Bank matching fifty percent of the first six percent or a maximum of
three percent of total salary.  Full vesting in the Plan is prorated
equally over a five-year period.  The Bank’s contributions to the Plan
for the years ended December 31, 2008 and 2007 were $68 thousand and $64
thousand, respectively.





The Bank
has an Employee Stock Ownership Plan (“ESOP”) for the benefit of employees who
meet the eligibility requirements as defined in the plan.  The ESOP
trust acquired 166,398 shares of common stock in the initial public offering
using proceeds of a loan from the Company.  The Bank will make cash
contributions to the ESOP on an annual basis sufficient to enable the ESOP to
make the required loan payments to the Company.  The loan bears an
interest rate of 6.00% with principal and interest payable annually in equal
installments over fifteen years.  The loan is secured by the shares of
the stock purchased.





F-21





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
10 – BENEFIT PLANS (CONTINUED)





As the
debt is repaid, shares are released from the collateral and allocated to
qualified employees.  Accordingly, the shares pledged as collateral
are reported as unearned ESOP shares in the Consolidated Statements of Financial
Condition.  As the shares are released from collateral, the Company
reports compensation expense equal to the average market price of the shares,
and the shares become outstanding for earnings per share
computations.  The Company’s compensation expense for the ESOP was
$114 thousand and $149 thousand for the years ended December 31, 2008 and 2007,
respectively.  The following table presents the components of the ESOP
shares:





December
      31,2008
                
                
                2007Shares
      released for allocation
                
                
                46,412
                
                
                
                34,809Unreleased
      shares
                
                
                119,986
                
                
                
                131,589Total
      ESOP shares
                
                
                166,398
                
                
                
                166,398Fair
      value of unreleased shares
                
                $
                941,890
                
                
                $
                1,335,628




NOTE
11 – STOCK-BASED COMPENSATION





Under the
2006 Stock-Based Incentive Plan (the “2006 Plan”), the Company may grant options
to purchase up to 221,563 shares of Company stock and may grant up to 88,625
shares of common stock as restricted stock awards.





The 2006
Plan enables the Board of Directors to grant stock options to executives, other
key employees and nonemployee directors.  The options granted under
the Plan may be either non-qualified stock options (NQOs) or incentive stock
options (ISOs).  Only NQOs may be granted to nonemployee directors
under this plan and ISOs may be granted to employees.  The Company has
reserved 221,563 shares of common stock for issuance upon the exercise of
options granted under the 2006 Plan.  No grants may be made more than
ten years after adoption of the plan.  Options may not be granted with
an exercise price that is less than 100% of the fair market value of the
Company’s common stock on the date of grant.  Options may not be
granted with a term longer than 10 years.  Stock options granted under
the Incentive Plan are subject to limitations under Section 422 of the
Internal Revenue Code.  The number of shares available under the 2006
Plans, the number of shares subject to outstanding options and the exercise
price of outstanding options will be adjusted to reflect any stock dividend,
stock split, merger, reorganization or other event generally affecting the
number of the Company’s outstanding shares.  At December 31,
2008, there are 25,095 shares available for option grants under the 2006
Plan.





On
October 19, 2006, 88,625 shares of restricted stock were awarded.  The
restricted shares awarded had a grant date fair value of $12.47 per
share.  The restricted stock awarded vest 20% annually beginning
October 19, 2007.  During the years ended December 31, 2008 and 2007,
$222 thousand and $222 thousand in compensation expense was recognized in regard
to these restricted stock awards, respectively.  The tax benefits
recognized related to such stock-based compensation was $75 thousand and $75
thousand for the years ended December 31, 2008 and 2007.  At December
31, 2008, there was $617 thousand of unrecognized compensation expense related
to the restricted stock awards which is expected to be recognized over a period
of 2.75 years.





Number
      of
                  shares
                
                
                Weighted
      Average
                  Grant
      Date
                  Fair
      ValueRestricted
      stock, beginning of year
                
                
                70,900
                
                
                $
                12.47Granted
                
                
                -
                
                
                
                -Forfeited
                
                
                -
                
                
                
                -Vested
                
                
                17,725
                
                
                
                12.47Restricted
      stock, end of year
                
                
                53,175
                
                
                $
                12.47





F-22





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
11 – STOCK-BASED COMPENSATION (CONTINUED)





On
October 19, 2006, options to purchase 196,468 shares of common stock at $12.47
per share were awarded.  The options awarded vest 20% annually
beginning October 19, 2007.  The following is a summary of the
Company’s stock option activity for the years ended December 31, 2008 and
2007:





Options
                
                
                Weighted
                  Average
                  Exercise
                  PriceOutstanding
      at January 1, 2008 and 2007
                
                
                196,468
                
                
                $
                12.47Granted
      during 2008 and 2007
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeitures
                
                
                -
                
                
                
                -Outstanding
      at December 31, 2008 and 2007
                
                
                196,468
                
                
                $
                12.47Exercisable
      at December 31, 2008
                
                
                78,588
                
                
                $
                12.47





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 2006:  dividend yield of 0%, risk-free
interest rate of 4.79%, expected life of 6.5 years, and expected volatility of
15.00%.  The weighted average fair value of options granted in 2006
was $3.79 per share.  Weighted average contractual term of options
outstanding and exercisable were 7.75 years at December 31, 2008, and 8.75 years
at December 31, 2007.  The aggregate intrinsic value of options
outstanding was $0 and $0 at December 31, 2008 and 2007,
respectively.





Stock-based
compensation expense related to stock options granted for the years ended
December 31, 2008 and 2007 was $148 thousand and $148 thousand, respectively,
with a related tax benefit of $51 thousand and $51 thousand,
respectively.  No options were granted in 2008 or 2007.  As
of December 31, 2008, there was approximately $416 thousand of unrecognized
compensation cost.    The cost will be recognized on a
graded vesting method over a period of 2.75 years.





NOTE
12 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK





The Bank
is a party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit and letters of credit.  Such commitments involve, to varying
degrees, elements of credit, and interest rate risk in excess of the amount
recognized in the statements of financial condition.





The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and letters of
credit is represented by the contractual amount of those
instruments.  The Bank uses the same credit policies in making
commitments and conditional obligations as its does for on-balance sheet
instruments.





At
December 31, 2008 and 2007, the following financial instruments were outstanding
whose contract amounts represent credit risk:





2008
                
                
                2007(In
      thousands)Commitments
      to grant loans
                
                $
                9,361
                
                
                $
                10,210Unfunded
      commitments under lines of credit
                
                
                21,986
                
                
                
                24,080Standby
      letters of credit
                
                
                3,424
                
                
                
                1,863$
                34,771
                
                
                $
                36,153





F-23





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
12 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  The Bank evaluates each customer’s credit
worthiness on a case-by-case basis.  The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management’s credit evaluation.  Collateral held varies but generally
includes personal or commercial real estate.





Unfunded
commitments under lines of credit are collateralized except for the overdraft
protection lines of credit and commercial unsecured lines of
credit.  The amount of collateral obtained is based on management’s
credit evaluation, and generally includes personal or commercial real
estate.  The overdraft protection lines and the commercial unsecured
lines of credit total approximately $4.4 million and usually do not contain
specified maturity dates and may not be drawn upon to the extent to which the
Bank is committed.





Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party.  The majority of these
standby letters of credit expire within the next twelve months.  The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending other loan commitments.  The Bank requires
collateral supporting these letters of credit when deemed
necessary.  Management believes that the proceeds obtained through
liquidation of such collateral would be sufficient to cover the maximum
potential amount of future payments required under the corresponding
guarantees.  The amount of the liability as of December 31, 2008 and
2007 for guarantees under standby letters of credit issued is not
material.





NOTE
13 – REGULATORY CAPITAL REQUIREMENTS





The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies.  Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements.  Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank’s assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices.  The Bank’s
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk-weightings and other factors.





Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of
tangible and core capital (as defined in the regulations) to total adjusted
assets (as defined) and of risk-based capital (as defined) to risk-weighted
assets (as defined).  Management believes, as of December 31, 2008,
that the Bank meets all capital adequacy requirements to which it is
subject.





As of
December 31, 2008, the most recent notification from the regulators categorized
the Bank as well-capitalized under the regulatory framework for prompt
corrective action.  To be categorized as well-capitalized, the Bank
must maintain minimum tangible, core and risk-based ratios as set forth in the
table.  There are no conditions or events since that notification that
management believes have changed the Bank’s category.





F-24





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
13 – REGULATORY CAPITAL REQUIREMENTS (CONTINUED)





The
Bank’s actual capital amounts and ratios are presented in the
table.





Actual
                                                                                    
                                                                                    
                                                                                    For
      Capital Adequacy
                                                                                      Purposes
                                                                                    
                                                                                    
                                                                                    To
      be Well Capitalized
                                                                                      under
      Prompt Corrective
                                                                                      Action
      ProvisionsAmount
                                                                                    
                                                                                    
                                                                                    Ratio
                                                                                    
                                                                                    
                                                                                    Amount
                                                                                    
                                                                                    
                                                                                    Ratio
                                                                                    
                                                                                    
                                                                                    Amount
                                                                                    
                                                                                    
                                                                                    Ratio(In
      Thousands)As
      of December 31, 2008:Tangible
      Capital (to Adjusted Total Assets)
                                                                                    
                                                                                    $
                                                                                    38,524
                                                                                    
                                                                                    
                                                                                    
                                                                                    7.27
                                                                                    %
                                                                                    
                                                                                    $
                                                                                    >7,951
                                                                                    
                                                                                    
                                                                                    
                                                                                    >1.50%
                                                                                    
                                                                                    
                                                                                    
                                                                                    N/A
                                                                                    
                                                                                    
                                                                                    
                                                                                    N/ACore
      Capital (to Adjusted Total Assets)
                                                                                    
                                                                                    
                                                                                    38,524
                                                                                    
                                                                                    
                                                                                    
                                                                                    7.27
                                                                                    %
                                                                                    
                                                                                    
                                                                                    >21,203
                                                                                    
                                                                                    
                                                                                    
                                                                                    >4.00%
                                                                                    
                                                                                    
                                                                                    $
                                                                                    >26,503
                                                                                    
                                                                                    
                                                                                    
                                                                                    >5.00%Tier
      1 Capital (to Risk-Weighted Assets)
                                                                                    
                                                                                    
                                                                                    38,524
                                                                                    
                                                                                    
                                                                                    
                                                                                    12.42
                                                                                    %
                                                                                    
                                                                                    
                                                                                    N/A
                                                                                    
                                                                                    
                                                                                    
                                                                                    N/A
                                                                                    
                                                                                    
                                                                                    
                                                                                    >18,616
                                                                                    
                                                                                    
                                                                                    
                                                                                    >6.00%Total
      Capital (to Risk-Weighted Assets)
                                                                                    
                                                                                    
                                                                                    40,528
                                                                                    
                                                                                    
                                                                                    
                                                                                    13.06
                                                                                    %
                                                                                    
                                                                                    
                                                                                    >24,822
                                                                                    
                                                                                    
                                                                                    
                                                                                    >8.00%
                                                                                    
                                                                                    
                                                                                    
                                                                                    >31,027
                                                                                    
                                                                                    
                                                                                    
                                                                                    >10.00%As
      of December 31, 2007:Tangible
      Capital (to Adjusted Total Assets)
                                                                                    
                                                                                    $
                                                                                    36,725
                                                                                    
                                                                                    
                                                                                    
                                                                                    8.03
                                                                                    %
                                                                                    
                                                                                    $
                                                                                    >6,859
                                                                                    
                                                                                    
                                                                                    
                                                                                    >1.50%
                                                                                    
                                                                                    
                                                                                    
                                                                                    N/A
                                                                                    
                                                                                    
                                                                                    
                                                                                    N/ACore
      Capital (to Adjusted Total Assets)
                                                                                    
                                                                                    
                                                                                    36,725
                                                                                    
                                                                                    
                                                                                    
                                                                                    8.03
                                                                                    %
                                                                                    
                                                                                    
                                                                                    >18,291
                                                                                    
                                                                                    
                                                                                    
                                                                                    >4.00%
                                                                                    
                                                                                    
                                                                                    $
                                                                                    >22,863
                                                                                    
                                                                                    
                                                                                    
                                                                                    >5.00%Tier
      1 Capital (to Risk-Weighted Assets)
                                                                                    
                                                                                    
                                                                                    36,262
                                                                                    
                                                                                    
                                                                                    
                                                                                    14.42
                                                                                    %
                                                                                    
                                                                                    
                                                                                    N/A
                                                                                    
                                                                                    
                                                                                    
                                                                                    N/A
                                                                                    
                                                                                    
                                                                                    
                                                                                    >15,088
                                                                                    
                                                                                    
                                                                                    
                                                                                    >6.00%Total
      Capital (to Risk-Weighted Assets)
                                                                                    
                                                                                    
                                                                                    37,617
                                                                                    
                                                                                    
                                                                                    
                                                                                    14.96
                                                                                    %
                                                                                    
                                                                                    
                                                                                    >20,118
                                                                                    
                                                                                    
                                                                                    
                                                                                    >8.00%
                                                                                    
                                                                                    
                                                                                    
                                                                                    >25,147
                                                                                    
                                                                                    
                                                                                    
                                                                                    >10.00%





Office of
Thrift Supervision regulations imposes limitations upon all capital
distributions by savings institutions, like the Bank, such as dividends and
payments to repurchase or otherwise acquire shares.  The Company may
not declare or pay cash dividends on or repurchase any of its shares of common
stock if the effect thereof would cause stockholders’ equity to be reduced below
applicable regulatory capital maintenance requirements, or if such declaration
and payments would otherwise violate regulatory requirements.





NOTE
14 – FAIR VALUE OF FINANCIAL INSTRUMENTS





Management uses its best
judgment in estimating the fair value of the Company’s financial instruments;
however, there are inherent weaknesses in any estimation
technique.  Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sale transaction on the dates
indicated.  The estimated fair value amounts have been measured as of
their respective year-ends and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective
dates.  As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year-end.




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 157, Fair
Value Measurements (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value under GAAP, and expands disclosures about
fair value measurements.  SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements.  The
Company adopted SFAS 157 effective for its fiscal year beginning January 1,
2008.





F-25





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
14 – FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)





In
December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS
157 for all non-financial assets and liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years.  As such, the Company only partially
adopted the provisions of SFAS 157, and will begin to account and report for
non-financial assets and liabilities in 2009.  In October 2008, the
FASB issued FASB Staff Position 157-3,Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active
(“FSP 157-3”), to clarify the application of the provisions of
SFAS 157 in an inactive market and how an entity would determine fair value
in an inactive market.  FSP 157-3 is effective immediately and
applies to the Company’s December 31, 2008 consolidated financial
statements.  The adoption of SFAS 157 and FSP 157-3 had no
impact on the amounts reported in the financial statements.




SFAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value.  The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements).  The three levels of the fair value
hierarchy under SFAS 157 are as follows:




Level
1:
            Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or
  liabilities.





Level
2:
            Quoted
      prices in markets that are not active, or inputs that are observable
      either directly or indirectly, for substantially the full term of the
      asset or liability.





Level
3:
            Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (i.e., supported with little
      or no market activity).




An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.




For
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
are as follows:




December
                  31,
      2008
                
                
                (Level
      1) Quoted
                  Prices
      in Active
                  Markets
      for
                  Identical
      Assets
                
                
                (Level
      2)
                  Significant
                  Observable
                  Other Inputs
                
                
                (Level
      3)
                  Significant
                  Unobservable
                  InputsSecurities
      available-for-sale
                
                $
                165,462
                
                
                $
                -
                
                
                $
                165,462
                
                
                $
                -





For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
are as follows:





December
                  31,
      2008
                
                
                (Level
      1) Quoted
                  Prices
      in Active
                  Markets
      for
                  Identical
      Assets
                
                
                (Level
      2)
                  Significant
                  Observable
                  Other Inputs
                
                
                (Level
      3)
                  Significant
                  Unobservable
                  InputsImpaired
      loans
                
                $
                257
                
                
                $
                -
                
                
                $
                -
                
                
                $
                257





As
discussed above, the Company has delayed its disclosure requirements of
non-financial assets and liabilities.  Certain real estate owned with
write-downs subsequent to foreclosure are carried at fair value at the balance
sheet date for which the Company has not yet adopted the provisions of SFAS
157.





F-26





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
14 – FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)





The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities.  Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful.  The following methods and
assumptions were used to estimate the fair values of the Company’s financial
instruments at December 31, 2008 and 2007:




Cash
and Amounts Due From Banks (Carried at Cost)




The
carrying amounts reported in the balance sheet for cash and amounts due from
bank’s approximate those assets’ fair values.




Interest-bearing
Time Deposits (Carried at Cost)




Fair
values for fixed-rate time certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered in the market on certificates to a schedule of aggregated expected
monthly maturities on time deposits.  The Company generally purchases
amounts below the insured limit, limiting the amount of credit risk on these
time deposits.




Investment
Securities




The fair
value of securities available for sale (carried at fair value) and held to
maturity (carried at amortized cost) are determined by obtaining quoted market
prices on nationally recognized securities exchanges (Level 1), or matrix
pricing (Level 2), which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities’ relationship to
other benchmark quoted prices.




Loans
Receivable (Carried at Cost)




The fair
values of loans are estimated using discounted cash flow analyses, using market
rates at the balance sheet date that reflect the credit and interest rate-risk
inherent in the loans.  Projected future cash flows are calculated
based upon contractual maturity or call dates, projected repayments and
prepayments of principal.  Generally, for variable rate loans that
reprice frequently and with no significant change in credit risk, fair values
are based on carrying values.




Impaired
Loans (Generally Carried at Fair Value)




Impaired
loans are those that are accounted for under FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loan (“SFAS 114”), in which the Company has measured
impairment generally based on the fair value of the loan’s
collateral.  Fair value is generally determined based upon independent
third-party appraisals of the properties, or discounted cash flows based upon
the expected proceeds.  These assets are included as Level 3 fair
values, based upon the lowest level of input that is significant to the fair
value measurements.  The fair value consists of the loan balances of
$370 thousand, net of a valuation allowance of $113 thousand.




Federal
Home Loan Bank Stock (Carried at Cost)




The
carrying amount of restricted investment in Company stock approximates fair
value, and considers the limited marketability of such securities.




Accrued
Interest Receivable and Payable (Carried at Cost)




The
carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.





F-27





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
14 – FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)





Deposit
Liabilities (Carried at Cost)




The fair
values disclosed for demand deposits (e.g., interest and noninterest checking,
passbook savings and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts).  Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on certificates to a schedule of
aggregated expected monthly maturities on time deposits.





Short-Term
Borrowings (Carried at Cost)




The
carrying amounts of short-term borrowings approximate their fair
values.




Long-Term
Borrowings (Carried at Cost)




Fair
values of FHLB advances are estimated using discounted cash flow analysis, based
on quoted prices for new FHLB advances with similar credit risk characteristics,
terms and remaining maturity.  These prices obtained from this active
market represent a market value that is deemed to represent the transfer price
if the liability were assumed by a third party.




Off-Balance
Sheet Financial Instruments (Disclosed at Cost)




Fair
values for the Company’s off-balance sheet financial instruments (lending
commitments and letters of credit) are based on fees currently charged in the
market to enter into similar agreements, taking into account, the remaining
terms of the agreements and the counterparties’ credit standing.




The
estimated fair value of the Company’s financial instruments at December 31, 2008
and 2007 are as follows:





2008
                  
                  
                  2007Carrying
                    Amount
                  
                  
                  Fair
      Value
                  
                  
                  Carrying
                    Amount
                  
                  
                  Fair
      Value(In
      thousands)Assets:Cash
      and amounts due from banks
                  
                  $
                  23,407
                  
                  
                  $
                  23,407
                  
                  
                  $
                  15,978
                  
                  
                  $
                  15,978Interest-bearing
      time deposits
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  208
                  
                  
                  
                  208Investment
      securities available-for-sale
                  
                  
                  165,462
                  
                  
                  
                  165,462
                  
                  
                  
                  163,549
                  
                  
                  
                  163,549Investment
      securities held-to-maturity
                  
                  
                  16,897
                  
                  
                  
                  16,332
                  
                  
                  
                  17,213
                  
                  
                  
                  17,976Federal
      Home Loan Bank stock
                  
                  
                  1,991
                  
                  
                  
                  1,991
                  
                  
                  
                  2,545
                  
                  
                  
                  2,545Loans
      receivable, net
                  
                  
                  303,151
                  
                  
                  
                  311,796
                  
                  
                  
                  241,040
                  
                  
                  
                  242,052Accrued
      interest receivable
                  
                  
                  2,298
                  
                  
                  
                  2,298
                  
                  
                  
                  2,185
                  
                  
                  
                  2,185Liabilities:Deposits
                  
                  
                  457,231
                  
                  
                  
                  467,070
                  
                  
                  
                  371,382
                  
                  
                  
                  374,990Federal
      Home Loan Bank short-term borrowings
                  
                  
                  3,000
                  
                  
                  
                  3,000
                  
                  
                  
                  23,380
                  
                  
                  
                  23,380Federal
      Home Loan Bank long-term borrowings
                  
                  
                  28,227
                  
                  
                  
                  30,896
                  
                  
                  
                  22,559
                  
                  
                  
                  22,987Accrued
      interest payable
                  
                  
                  433
                  
                  
                  
                  433
                  
                  
                  
                  646
                  
                  
                  
                  646Off-balance
      sheet financial instruments:Commitments
      to extend credit and letters of credit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -





F-28





COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
15 – PARENT COMPANY ONLY FINANCIAL INFORMATION








CONDENSED
STATEMENTS OF FINANCIAL CONDITION





December
      31,2008
                  
                  
                  2007ASSETS
                  
                  (In
      thousands)Cash
      and cash equivalents
                  
                  $
                  361
                  
                  
                  $
                  843Equity
      investment in Colonial Bank, FSB
                  
                  
                  38,737
                  
                  
                  
                  36,796Loan
      receivable – ESOP
                  
                  
                  1,292
                  
                  
                  
                  1,380Other
      assets
                  
                  
                  240
                  
                  
                  
                  9Total
      Assets
                  
                  $
                  40,630
                  
                  
                  $
                  39,028LIABILITIES
      AND STOCKHOLDERS’ EQUITYSTOCKHOLDERS’
      EQUITYTotal
      Stockholders’ Equity
                  
                  $
                  40,630
                  
                  
                  $
                  39,028Total
      Liabilities and Stockholders’ Equity
                  
                  $
                  40,630
                  
                  
                  $
                  39,028





F-29




COLONIAL
BANKSHARES, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
15 – PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)





CONDENSED
STATEMENTS OF INCOME





Years
      Ended December 31,2008
                
                
                2007(In
      thousands)Interest
      income
                
                $
                89
                
                
                $
                107Equity
      in earnings of Colonial Bank, FSB
                
                
                1,684
                
                
                
                1,556Total
      income
                
                
                1,773
                
                
                
                1,663General,
      administrative and other expenses
                
                
                428
                
                
                
                432Net
      income
                
                $
                1,345
                
                
                $
                1,231




CONDENSED
STATEMENTS OF CASH FLOWS





Years
      Ended December 31,2008
                    
                    
                    2007(In
      thousands)Cash
      flows from operating activities:Net
      income
                    
                    $
                    1,345
                    
                    
                    $
                    1,231Share-based
      compensation expense
                    
                    
                    370
                    
                    
                    
                    370Equity
      in undistributed earnings Colonial Bank, FSB
                    
                    
                    (1,684
                    )
                    
                    
                    (1,556
                    )Increase
      in cash from ESOP loan repayment
                    
                    
                    88
                    
                    
                    
                    84Increase
      in other assets
                    
                    
                    (231
                    )
                    
                    
                    (3
                    )Net
      cash from operating activities
                    
                    
                    (112
                    )
                    
                    
                    126Cash
      flows from financing activities:Acquisition
      of treasury stock
                    
                    
                    (370
                    )
                    
                    
                    -Net
      cash (used in) provided by financing activities
                    
                    
                    (370
                    )
                    
                    
                    -Net
      (decrease) increase in cash and cash equivalents
                    
                    
                    (482
                    )
                    
                    
                    126Cash
      and cash equivalents at beginning of period
                    
                    
                    843
                    
                    
                    
                    717Cash
      and cash equivalents at end of period
                    
                    $
                    361
                    
                    
                    $
                    843




F-30




STOCK
HOLDER INFORMATION








Annual Meeting
                                                                                                                  
                                                                                                                  Transfer
      AgentThe
      Annual Meeting of Stockholders will be held at 3:00
      p.m. on May 21, 2009 at the main office, 2745
      S. Delsea Drive, Vineland, New Jersey 08360.
                                                                                                                    
                                                                                                                    Stock
      Listing
                                                                                                                    
                                                                                                                    The
      Company’s Common Stock trades on the Nasdaq Global Market System under the
      symbol “COBK”
                                                                                                                    
                                                                                                                    Special
      Counsel
                                                                                                                    
                                                                                                                    Luse
      Gorman Pomerenk & Schick, P.C.
                                                                                                                    5335
      Wisconsin Avenue, N.W., Suite 400
                                                                                                                    Washington,
      D.C.  20015
                                                                                                                    
                                                                                                                    Independent Registered Public
      Accounting Firm
                                                                                                                    
                                                                                                                    Beard
      Miller Company LLP
                                                                                                                    1200
      Atwater Drive Suite
      225
                                                                                                                    Malvern,
      Pennsylvania 19355
                                                                                                                  
                                                                                                                  Registrar
      and Transfer Company
                                                                                                                    10
      Commerce Drive
                                                                                                                    Cranford,
      New Jersey 07016If you have any
      questions concerning your stockholder account, please call our transfer
      agent, noted above, at (800) 368-5948.  This is the number to
      call if you require a change of address, records or information about lost
      certificates.Annual
      Report on Form 10-KSBA copy of the
      Company’s Form 10-K for the fiscal year ended December 31, 2008, will be
      furnished without charge to stockholders upon written request to the
      Secretary, Colonial Bankshares, Inc., 2745 S. Delsea Drive, Vineland, New
      Jersey 08360.





DIRECTORS
AND OFFICERS





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