UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-K
 
 x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For
the Fiscal Year Ended December 31, 2008
 OR
 o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the
transition period from  
to
 
 Commission
File Number: 000-51385
 
 Colonial
Bankshares,
Inc.
 (Exact
Name of Registrant as Specified in its Charter)
 
 Federal
                90-0183739(State
      or Other Jurisdiction of Incorporation or Organization)
                (I.R.S.
      Employer Identification Number)2745 S. Delsea Drive, Vineland, New
      Jersey
                08360(Address
      of Principal Executive Offices)
                (Zip
      Code)
 
 (856)
205-0058
 (Registrant’s
Telephone Number Including Area Code)
 
 Securities
Registered Pursuant to Section 12(b) of the Act:
 
 Title of Each Class
                Name of Each Exchange on Which
      RegisteredCommon
      Stock, par value $0.10 per share
                The
      NASDAQ Stock Market, LLC
 
 Securities
Registered Pursuant to Section 12(g) of the Act:  None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes o   No
x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
 Yes o   No
x
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file reports), and (2) has been subject to such requirements for the past 90
days.
 (1)
                  Yes x   No
      o
                  (2)
                  Yes x   No
      o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer   o
                Accelerated
      filer   o
                Non-accelerated
      filer   o
                Smaller
      reporting company   x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes o   No
x
 
 As of
March 27, 2009 there were 4,428,021 shares outstanding of the registrant’s
common stock, including 2,441,716 shares owned by Colonial Bankshares,
MHC.  The aggregate value of the voting and non-voting common stock
held by non-affiliates of the registrant, computed by reference to the closing
price of the common stock as of June 30, 2008 was $19.4 million.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 1.
                Portions
      of Annual Report to Stockholders. (Parts II and IV)2.
                Portions
      of the Proxy Statement for the 2009 Annual Meeting of Stockholders. (Part
      III)
  
  PART
I
 
 ITEM 1.Business
   Forward
Looking Statements
   This
Annual Report contains certain “forward-looking statements” which may be
identified by the use of words such as “believe,” “expect,” “anticipate,”
“should,” “planned,” “estimated” and “potential.”  Examples of
forward-looking statements include, but are not limited to, estimates with
respect to our financial condition, results of operations and business that are
subject to various factors which could cause actual results to differ materially
from these estimates and most other statements that are not historical in
nature.  These factors include, but are not limited to, general and
local economic conditions, changes in interest rates, deposit flows, demand for
mortgage, and other loans, real estate values, competition, changes in
accounting principles, policies, or guidelines, changes in legislation or
regulation, 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 institution 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.
  Colonial
Bankshares, MHC
  Colonial
Bankshares, MHC is the federally chartered mutual holding company parent of
Colonial Bankshares, Inc.  Colonial Bankshares, MHC has not engaged in
any significant business activity other than owning a majority of the
outstanding shares of common stock of Colonial Bankshares, Inc.  As
long as Colonial Bankshares, MHC exists, it will own a majority of the
outstanding shares of common stock of Colonial Bankshares, Inc.  The
executive offices of Colonial Bankshares, MHC are located at 2745 S. Delsea
Drive, Vineland, New Jersey 08360, and its telephone number is (856)
205-0058.  Colonial Bankshares, MHC is subject to comprehensive
regulation and examination by the Office of Thrift Supervision.
  Colonial
Bankshares, Inc.
  Colonial
Bankshares, Inc. is the mid-tier stock holding company of Colonial Bank,
FSB.  Colonial Bankshares, Inc. is a federally chartered corporation
and owns 100% of the outstanding shares of common stock of Colonial Bank,
FSB.  Colonial Bankshares, Inc. has not engaged in any significant
business activity other than owning all of the shares of common stock of
Colonial Bank, FSB.  At December 31, 2008, Colonial Bankshares, Inc.
had consolidated assets of $530.6 million, total deposits of $457.2 million
and equity of $40.6 million.  Colonial Bankshares, Inc.’s net income
for the year ended December 31, 2008 was $1.3 million.  The executive
offices of Colonial Bankshares, Inc. are located at 2745 S. Delsea Drive,
Vineland, New Jersey 08360, and its telephone number is (856) 205-0058. Colonial
Bankshares, Inc. is subject to comprehensive regulation and examination by the
Office of Thrift Supervision.
  Colonial
Bank, FSB
  Colonial
Bank, FSB is a federally chartered savings bank headquartered in Vineland, New
Jersey.  Colonial Bank, FSB was originally founded in 1913. Colonial
Bank, FSB conducts business from its main office located at 2745 S. Delsea Drive
in Vineland, New Jersey, its eight branch offices located in Cumberland and
Gloucester Counties, New Jersey and through its Delaware operating subsidiary,
CB Delaware Investments, Inc., which was formed in September
2006.  The telephone number at its main office is (856)
205-0058.
  Our
principal business activity is the origination of one- to four-family
residential real estate loans.  We also offer home equity loans and
lines of credit, commercial real estate loans, commercial business loans and, to
a lesser extent, construction and consumer loans.  We also invest in
mortgage-backed securities and other investment securities.  We offer
a variety of deposit accounts, including demand accounts, NOW accounts, money
market deposit accounts, savings accounts and certificates of
deposit.  Deposits are our primary source of funds for our lending and
investing activities.  We have also used borrowed funds as a source of
funds, and we borrow principally from the Federal Home Loan Bank of New
York.  We emphasize exceptional personal service for our
customers.  Colonial Bank, FSB is subject to comprehensive regulation
and examination by the Office of Thrift Supervision. Colonial Bank, FSB is a
member of the Federal Home Loan Bank system.
  2
  CB
Delaware Investments, Inc.
  CB Delaware Investments, Inc. is a
wholly owned subsidiary of Colonial Bank, FSB.  It is a Delaware
corporation that was formed in 2006 to invest in and manage investment
securities that Colonial Bank, FSB is authorized to hold.
  General
  Our
principal business consists of attracting retail deposits from the general
public in the areas surrounding our main office in Vineland, New Jersey and
eight branch offices in Cumberland and Gloucester Counties, New Jersey and
investing those deposits, together with funds generated from operations,
primarily in one- to four-family residential mortgage loans, home equity loans
and lines of credit and commercial real estate loans and, to a lesser extent,
construction loans, commercial business loans, consumer loans, and investment
securities.  Our revenues are derived principally from interest on
loans and securities.  We also generate revenues from fees and service
charges and other income.  Our primary sources of funds are deposits,
borrowings and principal and interest payments on loans and
securities.
  Market
Area
  We
primarily serve communities located in Cumberland and Gloucester Counties, New
Jersey.  Our primary market for loans and deposits is concentrated in
these counties.
  There are
many manufacturing and service industry companies in Cumberland County, while
Gloucester County is a community for people who work in the greater
Philadelphia, Pennsylvania area.  As of December 2008, unemployment
rates in Cumberland and Gloucester Counties were 10.4% and 6.8%, respectively,
compared to 7.1% for the State of New Jersey and the national average of
7.2%.  The population of Cumberland and Gloucester Counties increased
at annual growth rates of approximately 0.9% and 1.7%, respectively, between
2000 and July 2006, compared to an annual growth rate of 1.0% for the United
States as a whole during the same period.
  Competition
  We face
significant competition in both originating loans and attracting
deposits.  Cumberland and Gloucester Counties, New Jersey, which
comprise our primary market area, have a high concentration of financial
institutions, many of which are significantly larger and have greater financial
resources than we, and many of which are our competitors to varying
degrees.  As of June 30, 2008 (the latest date for which information
is available), our market share of deposits represented 16.01% of deposits in
Cumberland County, making us the second largest financial institution out of
12financial
institutions in Cumberland County based upon deposit share as of that
date.  As of June 30, 2008, our market share of deposits represented
1.68% of deposits in Gloucester County, making us the 12th largest financial
institution out of 22financial institutions
based on deposit share as of that date.  Some of our competitors offer
products and services that we currently do not offer, such as trust services and
private banking.  Our competition for loans comes principally from
commercial banks, savings banks, mortgage banking companies and credit
unions.  Our most direct competition for deposits has historically
come from commercial banks, savings banks and credit unions.  We face
additional competition for deposits from nondepository competitors such as the
mutual fund industry, securities and brokerage firms and insurance
companies.
  We seek
to meet this competition by emphasizing personalized banking, competitive
pricing strategies and the advantage of local decision-making in our banking
business. Specifically, we promote and maintain relationships and build customer
loyalty within our market area by emphasizing decentralized regional management
and by focusing our marketing and community involvement on the specific needs of
local communities. In addition, we seek to meet competition for loans by
offering our current and prospective borrowers preferred rates and terms on
deposit products for new lending business.  We do not rely on any
individual, group, or entity for a material portion of our
deposits.
  Lending
Activities
  General.We
originate one- to four-family residential real estate loans, home equity loans
and lines of credit, commercial real estate loans, commercial business loans,
construction loans, consumer loans and multi-family mortgage
loans.  At December 31, 2008, our gross loan portfolio totaled
$305.6 million compared to $242.7 million at December 31,
2007.
  3
  One- to
Four-Family Residential Real Estate Loans.We offer conforming
and non-conforming, fixed-rate and adjustable-rate residential real estate loans
with maturities of up to 30 years.  This portfolio totaled
$145.3 million, or 47.6% of our total loan portfolio at December 31,
2008.
  We
currently offer fixed-rate conventional mortgage loans with terms of 10 to 30
years that are fully amortizing with monthly loan payments, and adjustable-rate
conventional residential real estate loans with initial fixed-rate terms of one,
three, five or seven years that amortize up to 30 years.  One- to
four-family residential real estate loans are generally underwritten according
to Fannie Mae guidelines, and loans that conform to such guidelines are referred
to as “conforming loans.” We generally originate both fixed- and adjustable-rate
loans in amounts up to the maximum conforming loan limits as established by
Fannie Mae, which for 2009 is currently $417,000 for single-family
homes.  Private mortgage insurance is required for first mortgage
loans with loan-to-value ratios in excess of 80%.  We also originate
loans above conforming limits, referred to as “jumbo loans,” although the
significant majority of the loans we have originated have been within conforming
loan limits.
  We
currently offer several adjustable-rate loan products secured by residential
properties with rates that are fixed for an initial period ranging from one year
to seven years. After the initial fixed-rate period, the interest rate on these
loans resets based upon a contractual spread or margin above the average yield
on U.S. Treasury securities, adjusted to a constant maturity of one, three or
five years, as published weekly by the Federal Reserve Board, subject to certain
periodic and lifetime limitations on interest rate
changes.  Adjustable-rate residential real estate loans generally pose
different credit risks than fixed-rate loans primarily because the underlying
debt service payments of the borrowers rise as interest rates rise, thereby
increasing the potential for default. At December 31, 2008, our adjustable-rate,
one- to four-family residential real estate loan portfolio totaled $10.7
million.
  We
require title insurance on all of our one- to four-family residential real
estate loans, and we also require that borrowers maintain fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) in an amount
at least equal to the lesser of the loan balance or the replacement cost of the
improvements.  Nearly all residential real estate loans must have a
mortgage escrow account from which disbursements are made for real estate
taxes.  We do not conduct environmental testing on residential real
estate loans unless specific concerns for hazards are determined by the
appraiser utilized in connection with the loan.
  Home Equity Loans
and Lines of Credit.In addition to traditional one- to
four-family residential real estate loans, we offer home equity loans and home
equity lines of credit that are secured by the borrower’s primary
residence.  At December 31, 2008, the outstanding balances of home
equity loans totaled $36.7 million, or 12.0% of our total loan portfolio,
and the outstanding balance of home equity lines of credit totaled
$4.6 million, or 1.5% of our total loan portfolio.  The borrower
is permitted to draw on a home equity line of credit at any time after it is
originated and may repay the outstanding balance over a term not to exceed 15
years from the date of the borrower’s last draw on the home equity line of
credit.  We review each performing line of credit every six years to
determine whether to continue to offer the unused portion of the line of credit
to the borrower.  Our home equity loans are generally originated as
mortgages with fixed terms of five to 15 years or with balloon maturities of
three or five years.  Home equity loans and lines of credit are
generally underwritten with the same criteria that we use to underwrite
fixed-rate, one- to four-family residential mortgage loans.  We
underwrite home equity loans and lines of credit with a loan-to-value ratio of
up to 90% when combined with the principal balance of the existing mortgage
loan.  We appraise the property securing the loan at the time of the
loan application in order to determine the value of the property securing the
home equity loan or line of credit.  At the time we close a home
equity loan or line of credit, we file a mortgage to perfect our security
interest in the underlying collateral.
  Commercial Real
Estate Lending.We also originate real estate loans secured by
first liens on commercial real estate.  The commercial real estate
properties are predominantly professional offices, manufacturing and retail
facilities and shopping centers and, to a lesser extent, more specialized
properties such as nursing homes and other healthcare facilities.We have purchased
commercial real estate loan participations through the Thrift Institution
Community Investment Council, which originates loans for Community Reinvestment
Act purposes.  We have also originated commercial real estate loans as
a participant with other lenders.  We emphasize commercial real estate
loans with initial principal balances between $100 thousand and $2.0
million.  Loans secured by commercial real estate totaled
$82.0 million, or 26.8% of our total loan portfolio, at December 31,
2008, and consisted of 218 loans outstanding with an average loan balance of
approximately $376 thousand, although we have originated loans with balances
substantially greater than this average.  Substantially all of our
commercial real estate loans are secured by properties located in our primary
market area.
  4
  Our
commercial real estate loans are generally written as mortgages with balloon
maturities of five years.  Amortization of these loans is typically
based on 10- to 20-year payout schedules.  We also originate some 10
and 15-year, fixed-rate, fully amortizing loans.  We establish margins
for commercial real estate loans based upon our cost of funds, but we also
consider rates offered by our competitors in our market area.
  In the
underwriting of commercial real estate loans, we generally lend up to 80% of the
property’s appraised value.  We base our decisions to lend on the
economic viability of the property and the creditworthiness of the borrower. In
evaluating a proposed commercial real estate loan, we emphasize the ratio of the
property’s projected net cash flow to the loan’s debt service requirement
(generally requiring a minimum ratio of 120%), computed after deduction for a
vacancy factor and property expenses we deem appropriate.  Personal
guarantees are usually obtained from commercial real estate
borrowers.  We require title insurance insuring the priority of our
lien, fire and extended coverage casualty insurance, and, if appropriate, flood
insurance, in order to protect our security interest in the underlying
property.
  Commercial
real estate loans generally have higher interest rates and shorter terms than
those on one- to four-family residential mortgage loans.  Commercial
real estate loans, however, entail significant additional credit risks compared
to one- to four-family residential mortgage loans, as they typically involve
larger loan balances concentrated with single borrowers or groups of related
borrowers.  In addition, the repayment of loans secured by
income-producing properties typically depends on the successful operation of the
related real estate project and thus may be subject to a greater extent to
adverse conditions in the real estate market and in the general
economy.
  Commercial Loans.We make various types of secured and unsecured commercial loans to
customers in our market area for the purpose of expansion, working capital and
other general business purposes.  The terms of these loans generally
range from less than one year to five years.  The loans are either
negotiated on a fixed-rate basis or carry adjustable interest rates indexed to a
lending rate that is determined internally, or a short-term market rate index,
although the significant majority of our commercial loans are fixed-rate
loans.  At December 31, 2008, we had 199 commercial loans
outstanding with an aggregate balance of $17.2 million, or 5.6% of the
total loan portfolio.  These totals include 34 unsecured commercial
loans with an aggregate outstanding balance of $1.5 million.  As of
December 31, 2008, the average commercial loan balance (secured and unsecured
loans) was approximately $86 thousand, although we have originated loans with
balances substantially greater than this average.
  Commercial
credit decisions are based upon our credit assessment of the loan applicant. We
determine the applicant’s ability to repay in accordance with the proposed terms
of the loans and we assess the risks involved. We also evaluate the applicant’s
credit and business history and ability to manage the loan and its
business.  We usually obtain personal guarantees of the
principals.  In addition to evaluating the loan applicant’s financial
statements, we consider the adequacy of the primary and secondary sources of
repayment for the loan.  We supplement our analysis of the applicant’s
creditworthiness with credit agency reports of the applicant’s credit
history.  We may also check with other banks and conduct trade
investigations.  Collateral supporting a secured transaction also is
analyzed to determine its marketability.  Commercial business loans
generally have higher interest rates than residential loans of like duration
because they have a higher risk of default since their repayment generally
depends on the successful operation of the borrower’s business and the
sufficiency of any collateral.  Our pricing of commercial business
loans is based primarily on the credit risk of the borrower, with due
consideration given to borrowers with appropriate deposit relationships and
competition.
  Construction
Loans.We originate construction loans to individuals and
builders in our market area.  These loans totaled $12.2 million, or
4.0% of our total loan portfolio at December 31, 2008.  These
loans are often originated in conjunction with development loans.  In
the case of residential subdivisions, these loans finance the cost of completing
homes on the improved property.  Advances on construction loans are
made in accordance with a schedule reflecting the cost of construction, but are
generally limited to 80% of actual construction costs and, as required by
applicable regulations, an 80% loan to completed appraised value
ratio.  Repayment of construction loans on residential subdivisions is
normally expected from the sale of units to individual purchasers.
  Construction
lending exposes us to greater credit risk than permanent mortgage
financing.  The repayment of construction loans may depend upon the
sale of the property to third parties or the availability of permanent financing
upon completion of all improvements.  Construction loans also expose
us to the risk that improvements will not be completed on time in accordance
with specifications and projected costs.  In addition, the ultimate
sale or rental of the property may not occur as anticipated.
  5
  Loan Portfolio
Composition.The following table sets forth the composition of
our loan portfolio, by type of loan at the dates indicated.
  At
      December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent(Dollars
      in thousands)Real
      estate loans:One-
      to four-family residential
                
                $
                145,329
                
                
                
                47.6
                %
                
                $
                114,745
                
                
                
                47.3
                %
                
                $
                102,328
                
                
                
                51.1
                %
                
                $
                77,738
                
                
                
                48.8
                %
                
                $
                56,478
                
                
                
                44.4
                %Home
      equity loans and lines of credit
                
                
                41,293
                
                
                
                13.5
                
                
                
                40,264
                
                
                
                16.6
                
                
                
                38,074
                
                
                
                19.0
                
                
                
                33,067
                
                
                
                20.8
                
                
                
                31,883
                
                
                
                25.1Multi-family
                
                
                4,942
                
                
                
                1.6
                
                
                
                5,609
                
                
                
                2.3
                
                
                
                2,492
                
                
                
                1.2
                
                
                
                1,676
                
                
                
                1.1
                
                
                
                1,825
                
                
                
                1.4Commercial
                
                
                81,983
                
                
                
                26.8
                
                
                
                55,606
                
                
                
                22.9
                
                
                
                39,186
                
                
                
                19.6
                
                
                
                31,392
                
                
                
                19.7
                
                
                
                25,786
                
                
                
                20.3Construction
                
                
                12,223
                
                
                
                4.0
                
                
                
                10,137
                
                
                
                4.2
                
                
                
                8,371
                
                
                
                4.2
                
                
                
                6,267
                
                
                
                3.9
                
                
                
                2,265
                
                
                
                1.8Commercial
                
                
                17,177
                
                
                
                5.6
                
                
                
                12,600
                
                
                
                5.2
                
                
                
                7,337
                
                
                
                3.7
                
                
                
                6,880
                
                
                
                4.3
                
                
                
                6,055
                
                
                
                4.8Consumer
      and other
                
                
                2,616
                
                
                
                0.9
                
                
                
                3,752
                
                
                
                1.5
                
                
                
                2,427
                
                
                
                1.2
                
                
                
                2,258
                
                
                
                1.4
                
                
                
                2,824
                
                
                
                2.2Total
      loans receivable
                
                
                305,563
                
                
                
                100.0
                %
                
                
                242,713
                
                
                
                100.0
                %
                
                
                200,215
                
                
                
                100.0
                %
                
                
                159,278
                
                
                
                100.0
                %
                
                
                127,116
                
                
                
                100.0
                %Deferred
      loan fees
                
                
                (307
                )
                
                
                
                
                
                
                (281
                )
                
                
                
                
                
                
                (323
                )
                
                
                
                
                
                
                (336
                )
                
                
                
                
                
                
                (326
                )Allowance
      for loan losses
                
                
                (2,105
                )
                
                
                
                
                
                
                (1,392
                )
                
                
                
                
                
                
                (1,373
                )
                
                
                
                
                
                
                (1,168
                )
                
                
                
                
                
                
                (990
                )Total
      loans receivable, net
                
                $
                303,151
                
                
                
                
                
                
                $
                241,040
                
                
                
                
                
                
                $
                198,519
                
                
                
                
                
                
                $
                157,774
                
                
                
                
                
                
                $
                125,800
  6
 Loan Portfolio
Maturities and Yields.The following table summarizes the
scheduled repayments of our loan portfolio at December 31,
2008.  Demand loans, loans having no stated repayment schedule or
maturity, and overdraft loans are reported as being due in one year or
less.
  One-
      to Four-Family
                    Residential
                
                
                Home
      Equity Loans and
                    Lines
      of Credit
                
                
                Multi-Family
                
                
                Commercial
      Real EstateAmount
                
                
                Weighted
      Average
                    Rate
                
                
                Amount
                
                
                Weighted
      Average
                    Rate
                
                
                Amount
                
                
                Weighted
      Average
                    Rate
                
                
                Amount
                
                
                Weighted
      Average
                    Rate(Dollars
      in thousands)Due
      During the Years
                  Ending December 31,2009
                
                $
                1,658
                
                
                
                5.34
                %
                
                $
                6,412
                
                
                
                4.42
                %
                
                $
                1,227
                
                
                
                5.88
                %
                
                $
                13,404
                
                
                
                5.47
                %2010
                
                
                594
                
                
                
                7.26
                %
                
                
                1,860
                
                
                
                5.55
                %
                
                
                2,673
                
                
                
                7.00
                %
                
                
                3,975
                
                
                
                5.98
                %2011
                
                
                743
                
                
                
                7.15
                %
                
                
                2,459
                
                
                
                6.16
                %
                
                
                291
                
                
                
                8.00
                %
                
                
                2,269
                
                
                
                7.86
                %2012
      to 2013
                
                
                11,577
                
                
                
                6.74
                %
                
                
                10,596
                
                
                
                5.62
                %
                
                
                31
                
                
                
                8.00
                %
                
                
                36,379
                
                
                
                6.28
                %2014
      to 2018
                
                
                9,515
                
                
                
                5.42
                %
                
                
                5,319
                
                
                
                6.82
                %
                
                
                244
                
                
                
                6.99
                %
                
                
                18,244
                
                
                
                6.36
                %2019
      to 2023
                
                
                13,985
                
                
                
                5.39
                %
                
                
                13,167
                
                
                
                6.80
                %
                
                
                -
                
                
                
                -
                %
                
                
                5,320
                
                
                
                6.26
                %2023
      and beyond
                
                
                107,257
                
                
                
                6.02
                %
                
                
                1,480
                
                
                
                5.37
                %
                
                
                476
                
                
                
                5.61
                %
                
                
                2,392
                
                
                
                6.27
                %Total
                
                $
                145,329
                
                
                
                5.98
                %
                
                $
                41,293
                
                
                
                5.87
                %
                
                $
                4,942
                
                
                
                6.65
                %
                
                $
                81,983
                
                
                
                6.19
                %
 
 Construction
                
                
                Commercial
                
                
                Consumer
      and Other
                
                
                TotalAmount
                
                
                Weighted
      Average
                    Rate
                
                
                Amount
                
                
                Weighted
      Average
                    Rate
                
                
                Amount
                
                
                Weighted
      Average
                    Rate
                
                
                Amount
                
                
                Weighted
      Average
                    Rate(Dollars
      in thousands)Due
      During the Years
                  Ending December 31,2009
                
                $
                12,223
                
                
                
                5.82
                %
                
                $
                5,408
                
                
                
                4.49
                %
                
                $
                495
                
                
                
                8.32
                %
                
                $
                40,827
                
                
                
                5.32
                %2010
                
                
                -
                
                
                
                -
                %
                
                
                1,104
                
                
                
                6.64
                %
                
                
                386
                
                
                
                11.09
                %
                
                
                10,592
                
                
                
                6.49
                %2011
                
                
                -
                
                
                
                -
                %
                
                
                2,010
                
                
                
                6.30
                %
                
                
                632
                
                
                
                10.30
                %
                
                
                8,404
                
                
                
                7.12
                %2012
      to 2013
                
                
                -
                
                
                
                -
                %
                
                
                4,833
                
                
                
                6.28
                %
                
                
                920
                
                
                
                7.50
                %
                
                
                64,336
                
                
                
                6.27
                %2014
      to 2018
                
                
                -
                
                
                
                -
                %
                
                
                3,822
                
                
                
                6.58
                %
                
                
                183
                
                
                
                7.49
                %
                
                
                37,327
                
                
                
                6.22
                %2019
      to 2023
                
                
                -
                
                
                
                -
                %
                
                
                -
                
                
                
                -
                %
                
                
                -
                
                
                
                -
                %
                
                
                32,472
                
                
                
                6.11
                %2023
      and beyond
                
                
                -
                
                
                
                -
                %
                
                
                -
                
                
                
                -
                %
                
                
                -
                
                
                
                -
                %
                
                
                111,605
                
                
                
                6.01
                %Total
                
                $
                12,223
                
                
                
                5.82
                %
                
                $
                17,177
                
                
                
                5.81
                %
                
                $
                2,616
                
                
                
                8.86
                %
                
                $
                305,563
                
                
                
                6.06
                %
 
 The
following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at December 31, 2008 that are contractually due after
December 31, 2009.
  Due
      After December 31, 2009Fixed
                  
                  
                  Adjustable
                  
                  
                  Total(In
      thousands)Real
      estate loans:One-
      to four-family residential
                  
                  $
                  132,921
                  
                  
                  $
                  10,750
                  
                  
                  $
                  143,671Home
      equity loans and lines of credit
                  
                  
                  34,881
                  
                  
                  
                  -
                  
                  
                  
                  34,881Multi-family
                  
                  
                  3,715
                  
                  
                  
                  -
                  
                  
                  
                  3,715Commercial
                  
                  
                  68,579
                  
                  
                  
                  -
                  
                  
                  
                  68,579Commercial
                  
                  
                  11,769
                  
                  
                  
                  -
                  
                  
                  
                  11,769Consumer
      and other
                  
                  
                  2,121
                  
                  
                  
                  -
                  
                  
                  
                  2,121Total
      loans
                  
                  $
                  253,986
                  
                  
                  $
                  10,750
                  
                  
                  $
                  264,736
  Loan
Originations, Purchases, Sales and Servicing.While we
originate both fixed-rate and adjustable-rate loans, our ability to generate
each type of loan depends upon borrower demand, market interest rates, borrower
preference for fixed- versus adjustable-rate loans, and the interest rates
offered on each type of loan by other lenders competing in our market
area.  Loan originations are derived from a number of sources,
including branch office personnel, existing customers, borrowers, builders,
attorneys, accountants and other professionals, real estate broker referrals and
walk-in customers.
  7
  Our loan
origination activity may be adversely affected by a rising interest rate
environment that typically results in decreased loan demand, while declining
interest rates may stimulate increased loan demand. Accordingly, the volume of
loan originations, the mix of fixed and adjustable-rate loans, and the
profitability of this activity can vary from period to period.  One-
to four-family residential mortgage loans are generally underwritten to current
Fannie Mae seller/servicer guidelines, and are closed on documents that conform
to Fannie Mae guidelines.
  During
2008, we sold approximately $338 thousand in loans.  We have not
purchased any loans in recent periods.  We are an approved loan seller
and seller/servicer for Fannie Mae.  We may sell conforming loans in
the future, and we may retain the servicing rights for the conforming loans we
sell, and to continue to collect payments on the loans, maintain tax escrows and
applicable fire and flood insurance coverage, and supervise foreclosure
proceedings if necessary.  We would retain a portion of the interest
paid by the borrower on the loans as consideration for our servicing
activities.
  Loan Approval
Authority and Underwriting.Our Board of Directors grants
lending authority to our Management Loan Committee and individual executive
officers and loan officers.  Our lending activities are subject to
written policies established by the Board.  These policies are
reviewed periodically.
  The
Management Loan Committee may approve loans in accordance with applicable loan
policies, including our policy governing loans to one borrower.  This
policy places limits on the aggregate dollar amount of credit that may be
extended to any one borrower and related entities.  The Management
Loan Committee may approve real estate loans in amounts up to $300 thousand, and
other loans in amounts up to $100 thousand.
  In
connection with our residential and commercial real estate loans, we generally
require property appraisals to be performed by independent appraisers who are
approved by the Board.  Appraisals are then reviewed by the
appropriate loan underwriting areas.  Under certain conditions, we may
not require appraisals for loans under $250 thousand, but we obtain appraisals
in many of these cases.  We also require title insurance, hazard
insurance and, if necessary, flood insurance on property securing mortgage
loans.
  Loan Origination
Fees and Costs.In addition to interest earned on loans, we
also receive loan origination fees.  Such fees vary with the volume
and type of loans and commitments made, and competitive conditions in the
mortgage markets, which in turn respond to the demand and availability of
money.  We defer loan origination fees and costs and amortize such
amounts as an adjustment to yield over the term of the loan by use of the
level-yield method. Deferred loan origination fees (net of deferred costs) were
$307 thousand and $281 thousand at December 31, 2008 and 2007,
respectively.
  Loans to One
Borrower.At December 31, 2008, our five largest aggregate
amounts loaned to any borrower and related interests totaled $5.7 million,
$5.4 million, $4.8 million, $4.8 million and $4.5 million.These loans are all
secured loans and are performing according to their terms.  Under
federal banking regulations, at December 31, 2008 our maximum loan-to-one
borrower limit was $5.8million.  See
“Supervision and Regulation—Federal Banking Regulation—Loans to One Borrower”
for a discussion of applicable regulatory limitations.
  Delinquent
Loans, Other Real Estate Owned and Classified Assets
  Collection
Procedures.We send a computer-generated late notice on the
tenth day after the payment due date on a loan, which requests the payment due
plus any late charge that is assessed.  When a loan is more than 15
days delinquent, we contact the borrower by telephone to determine the reason
for delinquency and arrange for payment, and accounts are monitored
electronically for receipt of payments.  If payments are not received
within 30 days of the original due date, a letter demanding payment of all
arrearages is sent and contact efforts are continued.  If payment is
not received within 60 days of the due date, we generally accelerate loans and
demand payment in full.  Failure to pay within 90 days of the original
due date may result in legal action, notwithstanding ongoing collection efforts.
Unsecured consumer loans are generally charged-off after 120
days.  For commercial loans, procedures with respect to demand letters
and legal action may vary depending upon individual circumstances.
  Loans Past Due
and Nonperforming Assets.Loans are reviewed on a regular
basis, and generally are placed on nonaccrual status when either principal or
interest is 90 days or more past due.  In addition, we place loans on
nonaccrual status when we believe that there is sufficient reason to question
the borrower’s ability to continue to meet contractual principal or interest
payment obligations.  Interest accrued and unpaid at the time a loan
is placed on nonaccrual status is reversed from interest
income.  Interest payments received on nonaccrual loans are not
recognized as income unless warranted based on the borrower’s financial
condition and payment record.
  8
  Real
estate acquired as a result of foreclosure or by deed in lieu of foreclosure is
classified as real estate owned until such time as it is sold.  When
real estate is acquired through foreclosure or by deed in lieu of foreclosure,
it is recorded at its fair value, less estimated costs of
disposal.  If the fair value of the property is less than the loan
balance, the difference is charged against the allowance for loan
losses.
  The
following table sets forth certain information with respect to our loan
portfolio delinquencies at the dates indicated.  Loans delinquent for
90 days or more are generally classified as nonaccrual loans.
  Loans
      Delinquent For60-89
      Days
                
                
                90
      Days and Over
                
                
                TotalNumber
                
                
                Amount
                
                
                Number
                
                
                Amount
                
                
                Number
                
                
                Amount(Dollars
      in thousands)At December 31, 2008Real
      estate loans:One-
      to four-family residential
                
                
                10
                
                
                $
                1,574
                
                
                
                1
                
                
                $
                382
                
                
                
                11
                
                
                $
                1,956Home
      equity loans and lines of credit
                
                
                5
                
                
                
                117
                
                
                
                4
                
                
                
                290
                
                
                
                9
                
                
                
                407Multi-family
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                3
                
                
                
                753
                
                
                
                4
                
                
                
                511
                
                
                
                7
                
                
                
                1,264Construction
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                -
                
                
                
                2
                
                
                
                13
                
                
                
                2
                
                
                
                13Consumer
      and other
                
                
                15
                
                
                
                80
                
                
                
                2
                
                
                
                73
                
                
                
                17
                
                
                
                153Total
                
                
                33
                
                
                $
                2,524
                
                
                
                13
                
                
                $
                1,269
                
                
                
                46
                
                
                $
                3,793At December 31, 2007Real
      estate loans:One-
      to four-family residential
                
                
                1
                
                
                $
                82
                
                
                
                4
                
                
                $
                682
                
                
                
                5
                
                
                $
                764Home
      equity loans and lines of credit
                
                
                4
                
                
                
                78
                
                
                
                1
                
                
                
                10
                
                
                
                5
                
                
                
                88Multi-family
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                252
                
                
                
                1
                
                
                
                252Construction
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                2
                
                
                
                197
                
                
                
                3
                
                
                
                118
                
                
                
                5
                
                
                
                315Consumer
      and other
                
                
                7
                
                
                
                18
                
                
                
                2
                
                
                
                22
                
                
                
                9
                
                
                
                40Total
                
                
                14
                
                
                $
                375
                
                
                
                11
                
                
                $
                1,084
                
                
                
                25
                
                
                $
                1,459At December 31, 2006Real
      estate loans:One-
      to four-family residential
                
                
                1
                
                
                $
                52
                
                
                
                2
                
                
                $
                167
                
                
                
                3
                
                
                $
                219Home
      equity loans and lines of credit
                
                
                5
                
                
                
                253
                
                
                
                2
                
                
                
                22
                
                
                
                7
                
                
                
                275Multi-family
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Construction
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                44
                
                
                
                1
                
                
                
                44Commercial
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
      and other
                
                
                7
                
                
                
                115
                
                
                
                -
                
                
                
                -
                
                
                
                7
                
                
                
                115Total
                
                
                13
                
                
                $
                420
                
                
                
                5
                
                
                $
                233
                
                
                
                18
                
                
                $
                653At December 31, 2005Real
      estate loans:One-
      to four-family residential
                
                
                1
                
                
                $
                41
                
                
                
                2
                
                
                $
                37
                
                
                
                3
                
                
                $
                78Home
      equity loans and lines of credit
                
                
                4
                
                
                
                147
                
                
                
                1
                
                
                
                39
                
                
                
                5
                
                
                
                186Multi-family
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Construction
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
      and other
                
                
                11
                
                
                
                209
                
                
                
                1
                
                
                
                4
                
                
                
                12
                
                
                
                213Total
                
                
                16
                
                
                $
                397
                
                
                
                4
                
                
                $
                80
                
                
                
                20
                
                
                $
                477
 
 9
 
 Loans
      Delinquent For60-89
      Days
                
                
                90
      Days and Over
                
                
                TotalNumber
                
                
                Amount
                
                
                Number
                
                
                Amount
                
                
                Number
                
                
                Amount(Dollars
      in thousands)At December 31, 2004Real
      estate loans:One-
      to four-family residential
                
                
                2
                
                
                $
                25
                
                
                
                1
                
                
                $
                22
                
                
                
                3
                
                
                $
                47Home
      equity loans and lines of credit
                
                
                5
                
                
                
                129
                
                
                
                2
                
                
                
                60
                
                
                
                7
                
                
                
                189Multi-family
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Construction
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
      and other
                
                
                9
                
                
                
                32
                
                
                
                2
                
                
                
                25
                
                
                
                11
                
                
                
                57Total
                
                
                16
                
                
                $
                186
                
                
                
                5
                
                
                $
                107
                
                
                
                21
                
                
                $
                293
 
 Nonperforming
Assets.The table below sets forth the amounts and categories
of our nonperforming assets at the dates indicated.  At each date
presented, we had no troubled debt restructurings (loans for which a portion of
interest or principal has been forgiven and loans modified at interest rates
materially less than current market rates).
  At
      December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      in thousands)Non-accrual
      loans:Real
      estate loans:One-
      to four-family residential
                
                $
                1,015
                
                
                $
                764
                
                
                $
                167
                
                
                $
                37
                
                
                $
                -Home
      equity loans and lines of credit
                
                
                290
                
                
                
                10
                
                
                
                22
                
                
                
                39
                
                
                
                -Multi-family
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                511
                
                
                
                252
                
                
                
                -
                
                
                
                -
                
                
                
                -Construction
                
                
                -
                
                
                
                -
                
                
                
                44
                
                
                
                -
                
                
                
                -Commercial
                
                
                13
                
                
                
                118
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
      and other
                
                
                73
                
                
                
                22
                
                
                
                -
                
                
                
                4
                
                
                
                -Total
                
                
                1,902
                
                
                
                1,166
                
                
                
                233
                
                
                
                80
                
                
                
                -Accruing
      loans 90 days or more past due:Real
      estate loans:One-
      to four-family residential
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                22Home
      equity loans and lines of credit
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                60Multi-family
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Construction
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
      and other
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25Total
      loans 90 days or more past due
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                107Total
      non-performing loans
                
                
                1,902
                
                
                
                1,166
                
                
                
                233
                
                
                
                80
                
                
                
                107Foreclosed
      real estate
                
                
                113
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      non-performing assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      non-performing assets
                
                $
                2,015
                
                
                $
                1,166
                
                
                $
                233
                
                
                $
                80
                
                
                $
                107Ratios:Total
      non-performing loans to total loans
                
                
                0.62
                %
                
                
                0.48
                %
                
                
                0.12
                %
                
                
                0.05
                %
                
                
                0.08
                %Total
      non-performing loans to total assets
                
                
                0.36
                %
                
                
                0.25
                %
                
                
                0.06
                %
                
                
                0.02
                %
                
                
                0.03
                %Total
      non-performing assets to total assets
                
                
                0.38
                %
                
                
                0.25
                %
                
                
                0.06
                %
                
                
                0.02
                %
                
                
                0.03
                %
 
 The
amount of the allowance for loan losses allocated to the $1.9 million of
non-performing loans at December 31, 2008, noted above, was $206
thousand.  We have calculated this amount by determining the specific
valuation allowance against each loan.
  10
  Classification of
Assets.Our policies, consistent with regulatory guidelines,
provide for the classification of loans and other assets that are considered to
be of lesser quality as substandard, doubtful, or loss assets. An asset is
considered substandard if it is inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if
any.  Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not
corrected.  Assets classified as doubtful have all of the weaknesses
inherent in those classified substandard with the added characteristic that the
weaknesses present make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly questionable and
improbable.  Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets is not
warranted.  Assets that do not expose us to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess
potential weaknesses that deserve our close attention, are required to be
designated as special mention.  As of December 31, 2008, we had $8.5
million of assets designated as special mention.
  When we
classify assets as either substandard or doubtful, we allocate a portion of the
related general loss allowances to such assets as we deem
prudent.  The allowance for loan losses represents amounts that have
been established to recognize losses inherent in the loan portfolio that are
both probable and reasonably estimable at the date of the financial
statements.  When we classify problem assets as loss, we charge-off
such amounts.  Our determination as to the classification of our
assets and the amount of our loss allowances are subject to review by our
regulatory agencies, which can require that we establish additional loss
allowances.  We regularly review our asset portfolio to determine
whether any assets require classification in accordance with applicable
regulations.  On the basis of our review of our assets at December 31,
2008, classified assets consisted of substandard assets of $2.0 million and no
loans classified as doubtful or loss assets.  The classified assets
total includes $1.9 million of nonperforming loans.
  Allowance for
Loan Losses.We provide for loan losses based on the allowance
method.  Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it.  Additions to the
allowance for loan losses are provided by charges to income based on various
factors which, in our judgment, deserve current recognition in estimating
probable losses.  We regularly review the loan portfolio and make
provisions for loan losses in order to maintain the allowance for loan losses in
accordance with accounting principles generally accepted in the United States of
America.  The allowance for loan losses consists of three
components:
  (1)
                    specific
      allowances established for any impaired commercial real estate,
      commercial, construction and multi-family mortgage loans for which the
      recorded investment in the loan exceeds the measured value of the
      loan;(2)
                    allowances
      for loan losses for each loan type based on historical loan loss
      experience; and(3)
                    adjustments
      to historical loss experience (general allowances), maintained to cover
      uncertainties that affect our estimate of probable losses for each loan
      type.
  The
adjustments to historical loss experience are based on our evaluation of several
factors, including:
  ●
                      levels
      of, and trends in, charge-offs and recoveries;●
                      national
      and local economic trends and conditions;●
                      trends
      in volume and terms of loans, including any credit concentrations in the
      loan portfolio; and●
                      experience,
      ability, and depth of lending management and other relevant
      staff.
  We
evaluate the allowance for loan losses based upon the combined total of the
specific, historical loss and general components.  Generally when the
loan portfolio increases, absent other factors, the allowance for loan loss
methodology results in a higher dollar amount of estimated probable losses than
would be the case without the increase.  Generally when the loan
portfolio decreases, absent other factors, the allowance for loan loss
methodology results in a lower dollar amount of estimated probable losses than
would be the case without the decrease.
  11
  We
consider commercial loans, commercial real estate loans and construction loans
to be riskier than one- to four-family residential mortgage
loans.  Commercial loans involve a higher risk of default than
residential loans of like duration since their repayment generally depends on
the successful operation of the borrower’s business and the sufficiency of
collateral, if any.  Commercial real estate loans also have greater
credit risks compared to one- to four-family residential mortgage loans, as they
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers.  In addition, the payment experience on
loans secured by income-producing properties typically depends on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
general economy.  Construction loans have greater credit risk than
permanent mortgage financing.  The repayment of these loans depends
upon the sale of the property to third parties or the availability of permanent
financing upon completion of all improvements.  In the event we make
an acquisition loan on property that is not yet approved for the planned
development, there is the risk that approvals will not be granted or will be
delayed.  These events may adversely affect the borrower and the
collateral value of the property.  Construction loans also expose us
to the risk that improvements will not be completed on time in accordance with
specifications and projected costs.  In addition, the ultimate sale or
rental of the property may not occur as anticipated.
  We
periodically evaluate the carrying value of loans and the allowance is adjusted
accordingly.  While we use the best information available to make
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the information used in making the
evaluations.  In addition, as an integral part of their examination
process, our regulatory agencies periodically review the allowance for loan
losses.  Such agencies may require us to recognize additions to the
allowance based on their evaluation of information available to them at the time
of their examination.
  12
  The
following table sets forth activity in our allowance for loan losses for the
years indicated.
  At
      or For the Years Ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      in thousands)Balance
      at beginning of year
                
                $
                1,392
                
                
                $
                1,373
                
                
                $
                1,168
                
                
                $
                990
                
                
                $
                667Charge-offs:Real
      estate loans:One-
      to four-family residential
                
                
                (11
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (4
                )Home
      equity loans and lines of credit
                
                
                (2
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Multi-family
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Commercial
                
                
                (5
                )
                
                
                (62
                )
                
                
                —
                
                
                
                —
                
                
                
                —Construction
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Commercial
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Consumer
      and other
                
                
                (32
                )
                
                
                (6
                )
                
                
                (10
                )
                
                
                (31
                )
                
                
                (38
                )Total
      charge-offs
                
                
                (50
                )
                
                
                (68
                )
                
                
                (10
                )
                
                
                (31
                )
                
                
                (42
                )Recoveries:Real
      estate loans:One-
      to four-family residential
                
                
                3
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Home
      equity loans and lines of credit
                
                
                —
                
                
                
                —
                
                
                
                15
                
                
                
                —
                
                
                
                —Multi-family
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Commercial
                
                
                4
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Construction
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Commercial
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Consumer
      and other
                
                
                —
                
                
                
                3
                
                
                
                21
                
                
                
                5
                
                
                
                11Total
      recoveries
                
                
                7
                
                
                
                3
                
                
                
                36
                
                
                
                5
                
                
                
                11Net
      recoveries (charge-offs)
                
                
                (43
                )
                
                
                (65
                )
                
                
                26
                
                
                
                (26
                )
                
                
                (31
                )Provision
      for loan losses
                
                
                756
                
                
                
                84
                
                
                
                179
                
                
                
                204
                
                
                
                354Balance
      at end of year
                
                $
                2,105
                
                
                $
                1,392
                
                
                $
                1,373
                
                
                $
                1,168
                
                
                $
                990Ratios:Net
      recoveries (charge-offs) to average loans outstanding
                
                
                (0.02
                )%
                
                
                (0.03
                )%
                
                
                0.01
                %
                
                
                (0.03
                )%
                
                
                (0.05
                )%Allowance
      for loan losses to non-performing loans at end of year
                
                
                110.67
                %
                
                
                119.38
                %
                
                
                589.27
                %
                
                
                1,460.00
                %
                
                
                925.23
                %Allowance
      for loan losses to total loans at end of year
                
                
                0.69
                %
                
                
                0.57
                %
                
                
                0.69
                %
                
                
                0.73
                %
                
                
                0.77
                %
 
 13
 
 Allocation of
Allowance for Loan Losses.The following tables set forth the
allowance for loan losses allocated by loan category, the percent of the
allowance to the total allowance and the percent of loans in each category to
total loans at the dates indicated.  The allowance for loan losses
allocated to each category is not necessarily indicative of future losses in any
particular category and does not restrict the use of the allowance to absorb
losses in other categories.
  At
      December 31,2008
                  
                  
                  2007
                  
                  
                  2006Amount
                  
                  
                  Percent
      of Allowance to Total Allowance
                  
                  
                  Percent
      of Loans in Category to Total Loans
                  
                  
                  Amount
                  
                  
                  Percent
      of Allowance to Total Allowance
                  
                  
                  Percent
      of Loans in Category to Total Loans
                  
                  
                  Amount
                  
                  
                  Percent
      of Allowance to Total Allowance
                  
                  
                  Percent
      of Loans in Category to Total Loans(Dollars
      in thousands)Real
      estate loans:One-
      to four-family residential
                  
                  $
                  273
                  
                  
                  
                  13.0
                  %
                  
                  
                  47.6
                  %
                  
                  $
                  115
                  
                  
                  
                  8.3
                  %
                  
                  
                  47.3
                  %
                  
                  $
                  265
                  
                  
                  
                  19.3
                  %
                  
                  
                  51.1
                  %Home
      equity loans and lines of credit
                  
                  
                  57
                  
                  
                  
                  2.7
                  
                  
                  
                  13.5
                  
                  
                  
                  40
                  
                  
                  
                  2.9
                  
                  
                  
                  16.6
                  
                  
                  
                  95
                  
                  
                  
                  6.9
                  
                  
                  
                  19.0Multi-family
                  
                  
                  16
                  
                  
                  
                  0.7
                  
                  
                  
                  1.6
                  
                  
                  
                  70
                  
                  
                  
                  5.0
                  
                  
                  
                  2.3
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1.2Commercial
                  
                  
                  863
                  
                  
                  
                  41.0
                  
                  
                  
                  26.8
                  
                  
                  
                  825
                  
                  
                  
                  59.3
                  
                  
                  
                  22.9
                  
                  
                  
                  695
                  
                  
                  
                  50.6
                  
                  
                  
                  19.6Construction
                  
                  
                  63
                  
                  
                  
                  3.0
                  
                  
                  
                  4.0
                  
                  
                  
                  71
                  
                  
                  
                  5.1
                  
                  
                  
                  4.2
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4.2Commercial
                  
                  
                  271
                  
                  
                  
                  12.9
                  
                  
                  
                  5.6
                  
                  
                  
                  158
                  
                  
                  
                  11.3
                  
                  
                  
                  5.2
                  
                  
                  
                  220
                  
                  
                  
                  16.0
                  
                  
                  
                  3.7Consumer
      and other
                  
                  
                  212
                  
                  
                  
                  10.1
                  
                  
                  
                  0.9
                  
                  
                  
                  113
                  
                  
                  
                  8.1
                  
                  
                  
                  1.5
                  
                  
                  
                  98
                  
                  
                  
                  7.2
                  
                  
                  
                  1.2Unallocated
                  
                  
                  350
                  
                  
                  
                  16.6
                  
                  
                  
                  0.0
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      allowance for loan losses
                  
                  $
                  2,105
                  
                  
                  
                  100.0
                  %
                  
                  
                  100.00
                  %
                  
                  $
                  1,392
                  
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  $
                  1,373
                  
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
 
 
 At
      December 31,2005
                  
                  
                  2004Amount
                  
                  
                  Percent
      of Allowance to Total Allowance
                  
                  
                  Percent
      of Loans in Category to Total Loans
                  
                  
                  Amount
                  
                  
                  Percent
      of Allowance to Total Allowance
                  
                  
                  Percent
      of Loans in Category to Total Loans(Dollars
      in thousands)Real
      estate loans:One-
      to four-family residential
                  
                  $
                  205
                  
                  
                  
                  17.5
                  %
                  
                  
                  48.8
                  %
                  
                  $
                  146
                  
                  
                  
                  14.8
                  %
                  
                  
                  44.4
                  %Home
      equity loans and lines of credit
                  
                  
                  83
                  
                  
                  
                  7.1
                  
                  
                  
                  20.8
                  
                  
                  
                  80
                  
                  
                  
                  8.1
                  
                  
                  
                  25.1Multi-family
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1.1
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1.4Commercial
                  
                  
                  640
                  
                  
                  
                  54.8
                  
                  
                  
                  19.7
                  
                  
                  
                  518
                  
                  
                  
                  52.3
                  
                  
                  
                  20.3Construction
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3.9
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1.8Commercial
                  
                  
                  155
                  
                  
                  
                  13.3
                  
                  
                  
                  4.3
                  
                  
                  
                  156
                  
                  
                  
                  15.8
                  
                  
                  
                  4.8Consumer
      and other
                  
                  
                  85
                  
                  
                  
                  7.3
                  
                  
                  
                  1.4
                  
                  
                  
                  90
                  
                  
                  
                  9.0
                  
                  
                  
                  2.2Total
      allowance for loan losses
                  
                  $
                  1,168
                  
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  $
                  990
                  
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
 
 14
 
 Securities
Activities
  Our
securities investment policy is established by our Board of Directors. This
policy dictates that investment decisions be made based on the safety of the
investment, liquidity requirements, potential returns, cash flow targets, and
consistency with our interest rate risk management strategy.  Our
Asset/Liability Management Committee, which consists of senior management,
oversees our investing strategies.  The Board of Directors reviews the
Asset/Liability Management Committee’s activities and strategies, and evaluates
on an ongoing basis our investment policy and objectives. Our chief executive
officer and our chief financial officer are responsible for making securities
portfolio decisions in accordance with established policies.  Our
chief executive officer and our chief financial officer have the authority to
purchase and sell securities within specific guidelines established by the
investment policy. In addition, all transactions are reviewed by the
Asset/Liability Management Committee at least monthly.
  Our
current investment policy generally permits securities investments in debt
securities issued by the U.S. Government and U.S. Government agencies, municipal
bonds, and corporate debt obligations, as well as investments in preferred and
common stock of U.S. Government agencies and U.S. Government sponsored
enterprises such as Fannie Mae, Freddie Mac and the Federal Home Loan
Bank.  Securities in these categories are classified as “investment
securities” for financial reporting purposes.  The policy also permits
investments in mortgage-backed securities, including pass-through securities
issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as
collateralized mortgage obligations (“CMOs”) issued or backed by securities
issued by these government agencies or government-sponsored enterprises. Also
permitted are investments in securities issued or backed by the Small Business
Administration.  As of December 31, 2008, we held no asset-backed
securities (securities collateralized by automobile loans, credit card
receivables and home equity loans), and we held no preferred securities issued
by either Fannie Mae or Freddie Mac.  Our current investment strategy
uses a risk management approach of diversified investing in fixed-rate
securities with short- to intermediate-term maturities, as well as
adjustable-rate securities, which may have a longer term to maturity. The
emphasis of this approach is to increase overall investment securities yields
while managing interest rate risk.
  Statement
of Financial Accounting Standards No. 115, “Accounting for Certain Investments
in Debt and Equity Securities,” requires that, at the time of purchase, we
designate a security as held to maturity, available-for-sale, or trading,
depending on our ability and intent.  Securities available-for-sale
are reported at fair value, while securities held to maturity are reported at
amortized cost. We do not have a trading portfolio.
  Mortgage-Backed
Securities.We invest in mortgage-backed securities in order
to generate positive interest rate spreads with minimal administrative expense,
lower credit risk as a result of the guarantees provided by Freddie Mac, Fannie
Mae and Ginnie Mae, and increased liquidity.  We invest primarily in
mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac, and
Ginnie Mae.  At December 31, 2008, our mortgage-backed securities
portfolio had a fair value of $120.3 million, consisting of pass-through
securities.
  Mortgage-backed
securities are created by pooling mortgages and issuing a security
collateralized by the pool of mortgages with an interest rate that is less than
the interest rate on the underlying mortgages.  Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although most of our mortgage-backed
securities are collateralized by single-family mortgages. The issuers of such
securities (government sponsored enterprises, such as Fannie Mae, Freddie Mac
and Ginnie Mae) pool and resell the participation interests in the form of
securities to investors, such as Colonial Bank, FSB, and guarantee the payment
of principal and interest to these investors.  Investments in
mortgage-backed securities involve a risk that actual prepayments will be
greater or lesser than the prepayment rate estimated at the time of purchase,
which may require adjustments to the amortization of any premium or accretion of
any discount relating to such instruments, thereby affecting the net yield on
such securities.  We review prepayment estimates for our
mortgage-backed securities at the time of purchase to ensure that prepayment
assumptions are reasonable considering the underlying collateral for the
securities at issue and current interest rates, and to determine the yield and
estimated maturity of the mortgage-backed securities portfolio.
  15
  CMOs are
types of debt securities issued by a special-purpose entity that aggregates
pools of mortgages and mortgage-backed securities and creates different classes
of securities with varying maturities and amortization schedules, as well as a
residual interest, with each class possessing different risk
characteristics.  The cash flows from the underlying collateral are
generally divided into “tranches” or classes that have descending priorities
with respect to the distribution of principal and interest cash flows, while
cash flows on pass-through mortgage-backed securities are distributed pro rata
to all security holders. Our practice is to limit fixed-rate CMO investments
primarily to the early-to-intermediate tranches, which have the greatest cash
flow stability.  Floating rate CMOs are purchased with emphasis on the
relative trade-offs between lifetime interest rate caps, prepayment risk and
interest rates.
  Corporate Debt
Securities and Municipal Bonds.At December 31, 2008, we held
$16.8 million in corporate debt securities, at fair value, $13.5 million of
which were classified as available for sale and $3.3 million of which were
classified as held to maturity.  At December 31, 2008, we held $12.5
million in bonds issued by states and political subdivisions, $8.9 million of
which were classified as held to maturity at amortized cost and $3.6 million of
which were classified as available for sale at fair value.  Although
corporate debt securities and municipal bonds may offer a higher yield than a
U.S. Treasury or agency security of comparable duration, these securities also
have a higher risk of default due to adverse changes in the creditworthiness of
the issuer.  In recognition of this potential risk, we generally limit
investments in corporate bonds to securities rated in one of the four highest
categories by at least one nationally recognized rating agency, and to a total
investment of no more than $1.0 million per issuer.  We also generally
limit investments in municipal bonds to issues that are insured unless the
issuer is a local government entity within our service area.  Such
local entity obligations generally are not rated, and are subject to internal
credit reviews.  In, addition our investment policy imposes an
investment limitation of $1.5 million per municipal bond.
  Equity
Securities.  At December 31, 2008, our equity securities
consisted of Federal Home Loan Bank of New York common stock and mutual
funds.  We hold the Federal Home Loan Bank of New York common stock to
qualify for membership in the Federal Home Loan Bank System and to be eligible
to borrow funds under the Federal Home Loan Bank of New York’s advance
program.  There is no market for the common stock, but it is the
current practice of the Federal Home Loan Bank of New York to redeem shares at
par value.  The aggregate fair value of our Federal Home Loan Bank of
New York common stock as of December 31, 2008 was $2.0 million based on its
par value.  No unrealized gains or losses have been recorded because
the par value of the common stock represents its fair value.  Our
mutual funds consist solely of Shay Asset Management Funds.  At
December 31, 2008 and 2007, the Company made a determination to write down this
mutual fund for “other than temporary impairment”.  The Company took
an impairment charge (pre-tax) of $1.2 million and $284 thousand, respectively,
based on the length of time the mutual fund was in a loss position and based on
the fact that the mutual fund had not made any recovery during the recent
reduction in interest rates.  The Company does not believe this
impairment is related to credit quality but rather to the widening of spreads in
the bond market for mortgage related securities.
  U.S. Government
Agency Securities.At December 31, 2008, we held U.S.
Government agency securities available for sale with a fair value of $22.2
million and U.S. Government agency securities held to maturity of $970 thousand.
Generally, these securities have short- to medium-term maturities (one to five
years) and may have call or step-up features.  While these securities
generally provide lower yields than other investments such as mortgage-backed
securities, our current investment strategy is to maintain investments in such
instruments to the extent appropriate for liquidity purposes, as collateral for
borrowings, and for prepayment protection.
  16
  The
following table sets forth the composition of our securities portfolio
(excluding Federal Home Loan Bank of New York common stock) at the dates
indicated.
  At
      December 31,2008
                
                
                2007
                
                
                2006Amortized
                  Cost
                
                
                Fair
      Value
                
                
                Amortized
                  Cost
                
                
                Fair
      Value
                
                
                Amortized
                    Cost
                
                
                Fair
      Value(In
      thousands)Securities
      available-for-sale:Mortgage-backed
                
                $
                115,245
                
                
                $
                117,010
                
                
                $
                79,085
                
                
                $
                79,454
                
                
                $
                53,646
                
                
                $
                53,229U.S.
      Government agency
                
                
                21,963
                
                
                
                22,245
                
                
                
                44,052
                
                
                
                44,275
                
                
                
                29,534
                
                
                
                29,128Corporate
                
                
                15,249
                
                
                
                13,483
                
                
                
                12,880
                
                
                
                12,267
                
                
                
                8,956
                
                
                
                8,660Mutual
      funds (1)
                
                
                2,643
                
                
                
                2,643
                
                
                
                14,385
                
                
                
                14,385
                
                
                
                13,942
                
                
                
                13,716Municipal
                
                
                3,659
                
                
                
                3,632
                
                
                
                5,402
                
                
                
                5,504
                
                
                
                23,927
                
                
                
                24,259SBA
      pools
                
                
                6,453
                
                
                
                6,449
                
                
                
                7,614
                
                
                
                7,664
                
                
                
                7,759
                
                
                
                7,933Total
      securities available-for-sale
                
                $
                165,212
                
                
                $
                165,462
                
                
                $
                163,418
                
                
                $
                163,549
                
                
                $
                137,764
                
                
                $
                136,925Securities
      held-to-maturity:Mortgage-backed
                
                $
                3,143
                
                
                $
                3,256
                
                
                $
                3,766
                
                
                $
                3,863
                
                
                $
                3,972
                
                
                $
                4,064U.S.
      Government agency
                
                
                932
                
                
                
                970
                
                
                
                1,420
                
                
                
                1,442
                
                
                
                1,412
                
                
                
                1,369Corporate
                
                
                3,969
                
                
                
                3,259
                
                
                
                2,173
                
                
                
                2,317
                
                
                
                1,698
                
                
                
                1,828Municipal
                
                
                8,853
                
                
                
                8,847
                
                
                
                9,854
                
                
                
                10,354
                
                
                
                11,640
                
                
                
                12,239Total
      securities held-to-maturity
                
                $
                16,897
                
                
                $
                16,332
                
                
                $
                17,213
                
                
                $
                17,976
                
                
                $
                18,722
                
                
                $
                19,500
 
 (1)  The
cost and fair value for 2008 and 2007 reflect an impairment charge of
approximately $1.2 million and $284 thousand before income tax
benefit.
  17
  Portfolio
Maturities and Yields.The composition and maturities of the
investment debt securities portfolio and the mortgage-backed securities
portfolio at December 31, 2008 are summarized in the following
table.  Maturities are based on the final contractual payment dates,
and do not reflect the impact of prepayments or early redemptions that may
occur.  State and municipal securities yields have been adjusted to a
tax-equivalent basis.
  One
      Year or Less
                  
                  
                  More
      than One Year through Five Years
                  
                  
                  More
      than Five Years through Ten Years
                  
                  
                  More
      than Ten Years
                  
                  
                  Total
      SecuritiesAmortized
      Cost
                  
                  
                  Weighted
      Average Yield
                  
                  
                  Amortized
      Cost
                  
                  
                  Weighted
      Average Yield
                  
                  
                  Amortized
      Cost
                  
                  
                  Weighted
      Average Yield
                  
                  
                  Amortized
      Cost
                  
                  
                  Weighted
      Average Yield
                  
                  
                  Amortized
      Cost
                  
                  
                  Fair
      Value
                  
                  
                  Weighted
      Average Yield(Dollars
      in thousands)Securities
      available-for-sale:Mortgage-backed
                  
                  $
                  446
                  
                  
                  
                  4.56
                  %
                  
                  $
                  937
                  
                  
                  
                  6.20
                  %
                  
                  $
                  2,404
                  
                  
                  
                  5.48
                  %
                  
                  $
                  111,458
                  
                  
                  
                  5.05
                  %
                  
                  $
                  115,245
                  
                  
                  $
                  117,010
                  
                  
                  
                  5.07
                  %U.S.
      Government agency
                  
                  
                  3,010
                  
                  
                  
                  4.08
                  
                  
                  
                  5,998
                  
                  
                  
                  4.88
                  
                  
                  
                  9,003
                  
                  
                  
                  5.45
                  
                  
                  
                  3,952
                  
                  
                  
                  5.06
                  
                  
                  
                  21,963
                  
                  
                  
                  22,245
                  
                  
                  
                  5.04Corporate
                  
                  
                  2,628
                  
                  
                  
                  4.35
                  
                  
                  
                  7,181
                  
                  
                  
                  5.53
                  
                  
                  
                  4,940
                  
                  
                  
                  5.24
                  
                  
                  
                  500
                  
                  
                  
                  4.00
                  
                  
                  
                  15,249
                  
                  
                  
                  13,483
                  
                  
                  
                  5.18Mutual
      funds
                  
                  
                  2,643
                  
                  
                  
                  4.78
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,643
                  
                  
                  
                  2,643
                  
                  
                  
                  4.78Municipal
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  366
                  
                  
                  
                  6.92
                  
                  
                  
                  1,845
                  
                  
                  
                  7.00
                  
                  
                  
                  1,448
                  
                  
                  
                  6.52
                  
                  
                  
                  3,659
                  
                  
                  
                  3,632
                  
                  
                  
                  6.80SBA
      pools
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  893
                  
                  
                  
                  4.85
                  
                  
                  
                  2,845
                  
                  
                  
                  5.41
                  
                  
                  
                  2,715
                  
                  
                  
                  2.28
                  
                  
                  
                  6,453
                  
                  
                  
                  6,449
                  
                  
                  
                  4.02Total
      securities available-for-sale
                  
                  $
                  8,727
                  
                  
                  
                  4.40
                  %
                  
                  $
                  15,375
                  
                  
                  
                  5.31
                  %
                  
                  $
                  21,037
                  
                  
                  
                  5.54
                  %
                  
                  $
                  120,073
                  
                  
                  
                  5.00
                  %
                  
                  $
                  165,212
                  
                  
                  $
                  165,462
                  
                  
                  
                  5.07
                  %Securities
      held-to-maturity:Mortgage-backed
                  
                  $
                  -
                  
                  
                  
                  -
                  %
                  
                  $
                  61
                  
                  
                  
                  6.28
                  %
                  
                  $
                  1,077
                  
                  
                  
                  6.25
                  %
                  
                  $
                  2,005
                  
                  
                  
                  5.95
                  %
                  
                  $
                  3,143
                  
                  
                  $
                  3,256
                  
                  
                  
                  6.06
                  %U.S.
      Government agency
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  932
                  
                  
                  
                  7.13
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  932
                  
                  
                  
                  970
                  
                  
                  
                  7.13Corporate
                  
                  
                  968
                  
                  
                  
                  4.11
                  
                  
                  
                  986
                  
                  
                  
                  9.38
                  
                  
                  
                  1,819
                  
                  
                  
                  6.00
                  
                  
                  
                  196
                  
                  
                  
                  6.44
                  
                  
                  
                  3,969
                  
                  
                  
                  3,259
                  
                  
                  
                  6.40Municipal
                  
                  
                  1,429
                  
                  
                  
                  6.48
                  
                  
                  
                  1,051
                  
                  
                  
                  6.87
                  
                  
                  
                  1,308
                  
                  
                  
                  8.24
                  
                  
                  
                  5,065
                  
                  
                  
                  8.65
                  
                  
                  
                  8,853
                  
                  
                  
                  8,847
                  
                  
                  
                  8.03Total
      securities held-to-maturity
                  
                  $
                  2,397
                  
                  
                  
                  5.52
                  %
                  
                  $
                  2,098
                  
                  
                  
                  8.03
                  %
                  
                  $
                  5,136
                  
                  
                  
                  6.83
                  %
                  
                  $
                  7,266
                  
                  
                  
                  7.84
                  %
                  
                  $
                  16,897
                  
                  
                  $
                  16,332
                  
                  
                  
                  7.23
                  %
 
 18
 
 Sources
of Funds
  General.Deposits,
borrowings, repayments and prepayments of loans and securities, proceeds from
sales of securities, proceeds from maturing securities and cash flows from
operations are the primary sources of our funds for use in lending, investing
and for other general purposes.
  Deposits.We
offer a variety of deposit accounts with a range of interest rates and
terms.  Our deposit accounts consist of certificates of deposit,
savings accounts, NOW accounts, checking accounts, money market deposit
accounts, club accounts andindividual retirement
accounts.We
provide commercial checking accounts for businesses.  In addition, we
provide low-cost checking account services for low-income
customers.
  Our
deposits are obtained predominantly from the areas in which our branch offices
are located.  We rely on our customer service and competitive pricing
to attract and retain these deposits.  We accept certificates of
deposit in excess of $100,000 for which we may provide preferential
rates.  At December 31, 2008, we had $43.6 million in brokered
certificates of deposits.
  The
following tables set forth the distribution of total deposit accounts, by
account type, at the dates indicated.
  At
      December 31,2008
                  
                  
                  2007
                  
                  
                  2006Balance
                  
                  
                  Percent
                  
                  
                  Weighted
      Average
                      Rate
                  
                  
                  Balance
                  
                  
                  Percent
                  
                  
                  Weighted
      Average
                      Rate
                  
                  
                  Balance
                  
                  
                  Percent
                  
                  
                  Weighted
      Average
                      Rate(Dollars
      in thousands)Deposit
      type:Non-interest
      bearing demand
                  
                  $
                  18,146
                  
                  
                  
                  3.97
                  %
                  
                  
                  0.0
                  %
                  
                  $
                  15,141
                  
                  
                  
                  4.08
                  %
                  
                  
                  —
                  %
                  
                  $
                  18,055
                  
                  
                  
                  5.35
                  %
                  
                  
                  —
                  %Savings
                  
                  
                  81,050
                  
                  
                  
                  17.73
                  
                  
                  
                  2.76
                  
                  
                  
                  55,716
                  
                  
                  
                  15.00
                  
                  
                  
                  2.18
                  
                  
                  
                  57,260
                  
                  
                  
                  16.98
                  
                  
                  
                  1.72NOW
      accounts
                  
                  
                  55,439
                  
                  
                  
                  12.12
                  
                  
                  
                  0.72
                  
                  
                  
                  45,255
                  
                  
                  
                  12.19
                  
                  
                  
                  2.12
                  
                  
                  
                  36,740
                  
                  
                  
                  10.89
                  
                  
                  
                  1.89Super
      NOW accounts
                  
                  
                  15,532
                  
                  
                  
                  3.40
                  
                  
                  
                  1.75
                  
                  
                  
                  16,520
                  
                  
                  
                  4.45
                  
                  
                  
                  1.77
                  
                  
                  
                  14,200
                  
                  
                  
                  4.21
                  
                  
                  
                  1.71Money
      market deposit
                  
                  
                  45,404
                  
                  
                  
                  9.93
                  
                  
                  
                  3.26
                  
                  
                  
                  20,670
                  
                  
                  
                  5.56
                  
                  
                  
                  3.72
                  
                  
                  
                  20,553
                  
                  
                  
                  6.10
                  
                  
                  
                  3.54Total
      transaction accounts
                  
                  
                  215,571
                  
                  
                  
                  47.15
                  
                  
                  
                  2.03
                  
                  
                  
                  153,302
                  
                  
                  
                  41.28
                  
                  
                  
                  2.11
                  
                  
                  
                  146,808
                  
                  
                  
                  43.53
                  
                  
                  
                  1.81Certificates
      of deposit
                  
                  
                  241,660
                  
                  
                  
                  52.85
                  
                  
                  
                  3.97
                  
                  
                  
                  218,080
                  
                  
                  
                  58.72
                  
                  
                  
                  4.86
                  
                  
                  
                  190,446
                  
                  
                  
                  56.47
                  
                  
                  
                  4.74Total
      deposits
                  
                  $
                  457,231
                  
                  
                  
                  100.0
                  %
                  
                  
                  3.06
                  %
                  
                  $
                  371,382
                  
                  
                  
                  100.00
                  %
                  
                  
                  3.72
                  %
                  
                  $
                  337,254
                  
                  
                  
                  100.00
                  %
                  
                  
                  3.46
                  %
 
 As of
December 31, 2008, the aggregate amount of outstanding certificates of deposit
in amounts greater than or equal to $100,000 was approximately $125.5
million.  The following table sets forth the maturity of those
certificates as of December 31, 2008.
  At
                        December
      31, 2008(In
      thousands)Three
      months or less
                    
                    $
                    14,859Over
      three months through six months
                    
                    
                    16,896Over
      six months through one year
                    
                    
                    48,013Over
      one year to three years
                    
                    
                    41,169Over
      three years
                    
                    
                    4,547Total
                    
                    $
                    125,484
  At
December 31, 2008, $152.6 million of our certificates of deposit had maturities
of one year or less.  We monitor activity on these accounts and, based
on historical experience and our current pricing strategy, we believe we will
retain a large portion of these accounts upon maturity.
  19
 The
following table sets forth the interest-bearing deposit activities for the years
indicated.
  Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(In
      thousands)Beginning
      balance
                  
                  $
                  356,241
                  
                  
                  $
                  319,199
                  
                  
                  $
                  271,087Net
      deposits (withdrawals) before interest credited
                  
                  
                  68,789
                  
                  
                  
                  23,410
                  
                  
                  
                  38,655Interest
      credited
                  
                  
                  14,055
                  
                  
                  
                  13,632
                  
                  
                  
                  9,457Ending
      balance
                  
                  $
                  439,085
                  
                  
                  $
                  356,241
                  
                  
                  $
                  319,199
 
 Borrowings.Our
borrowings consist of short-term and long-term Federal Home Loan Bank
advances.  The following table sets forth information concerning the
borrowing balances and interest rates at the dates and for the years
indicated.
  At
      or For the Year Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars
      in thousands)Balance
      at end of year
                  
                  $
                  31,227
                  
                  
                  $
                  45,939
                  
                  
                  $
                  8,324Average
      balance during year
                  
                  $
                  41,140
                  
                  
                  $
                  17,605
                  
                  
                  $
                  15,504Maximum
      outstanding at any month end
                  
                  $
                  58,998
                  
                  
                  $
                  45,939
                  
                  
                  $
                  23,975Weighted
      average interest rate at end of year
                  
                  
                  4.46
                  %
                  
                  
                  4.33
                  %
                  
                  
                  5.54
                  %Average
      interest rate during year
                  
                  
                  3.99
                  %
                  
                  
                  4.54
                  %
                  
                  
                  4.84
                  %
  At
December 31, 2008 the maturities of the borrowings are as
follows:  $3.0 million due in June 2009, $4.0 million due in October
2009, $4.0 million due in November 2009, $4.0 million due in December 2009, $3.0
million due in June 2010, $4.0 million due in October 2010, $3.0 million due in
June 2011 and $6.2 million is an monthly amortizing loan with a final maturity
due in June 2021.
  At
December 31, 2008, we had the ability to borrow approximately $127.5 million
under our credit facilities with the Federal Home Loan Bank of New York of which
$31.2 million was outstanding.
  Employees
  As of
December 31, 2008, we had 88 full-time employees and 16 part-time
employees.  The employees are not represented by a collective
bargaining unit and we consider our relationship with our employees to be
good.
  Legal
Proceedings
  We are
not involved in any pending legal proceedings other than routine legal
proceedings occurring in the ordinary course of business, which, in the
aggregate, involve amounts that we believe are immaterial to our consolidated
financial condition, results of operations and cash flows.
  FEDERAL
AND STATE TAXATION
  Tax
Allocation
  Colonial
Bank, FSB, Colonial Bankshares, Inc. and CB Delaware Investments, Inc. have
established a method for allocating and for reimbursing the payment of their
consolidated tax liability.
  Federal
Taxation
  General.Colonial
Bankshares, Inc., Colonial Bank, MHC, Colonial Bank, FSB and CB Delaware
Investments, Inc. are subject to federal income taxation in the same general
manner as other corporations, with some exceptions discussed
below.  Colonial Bankshares, MHC’s and Colonial Bank, FSB’s federal
tax returns are not currently under audit, and have not been audited during the
past five years.  The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the applicable tax rules.
  20
  Method of
Accounting.For federal
income tax purposes, Colonial Bankshares, Inc. reports income and expenses on
the accrual method of accounting and uses a tax year ending December 31 for
filing its federal and state income tax returns.
  Bad Debt
Reserves.Colonial Bank,
FSB is permitted to establish a reserve for bad debts and to make annual
additions to the reserve.  These additions can, within specified
formula limits, be deducted in arriving at our taxable
income.  Pursuant to the Small Business Protection Act of 1996 (the
“1996 Act”), savings institutions were required to recapture any excess reserves
over those established as of December 31, 1988 (base year
reserve).  Colonial Bank, FSB recaptured approximately $50,000 of
reserves over the six-year period ended December 31, 2002.
  Taxable
Distributions and Recapture.Prior to the
1996 Act, bad debt reserves created prior to December 31, 1988 were subject to
recapture into taxable income should Colonial Bank, FSB fail to meet certain
thrift asset and definitional tests.  Federal legislation has
eliminated these thrift related recapture rules.
  At
December 31, 2008, our total federal pre-1988 base year reserve was
approximately $1.5 million.  However, under current law, pre-1988 base
year reserves remain subject to recapture should Colonial Bank, FSB make certain
non-dividend distributions, repurchase any of its stock, pay dividends in excess
of tax earnings and profits, or cease to maintain a financial institution
charter.
  Alternative
Minimum Tax.The Internal
Revenue Code of 1986, as amended (the “Code”) imposes an alternative minimum tax
(“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax
preferences (“alternative minimum taxable income”).  The AMT is
payable to the extent such alternative minimum taxable income is in excess of an
exemption amount and the AMT exceeds the regular income tax.  Net
operating losses can offset no more than 90% of alternative minimum taxable
income.  Certain payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years.  Colonial
Bank, FSB has no such amounts available as credits for carryover.
  Net Operating
Loss Carryovers.A financial
institution may carry back net operating losses to the preceding two taxable
years and forward to the succeeding 20 taxable years.  At December 31,
2008, Colonial Bank, FSB had no net operating loss carryforwards for federal
income tax purposes.
  Corporate
Dividends-Received Deduction.Colonial
Bankshares, Inc. may exclude from its income 100% of dividends received from
Colonial Bank, FSB as a member of the same affiliated group of
corporations.  The corporate dividends-received deduction is 80% in
the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
  State
Taxation
  New Jersey State
Taxation.Colonial Bankshares,
MHC, Colonial Bankshares, Inc. and Colonial Bank, FSB file New Jersey
Corporation Business tax returns for banking and financial
corporations.  Generally, the income of savings institutions in New
Jersey is subject to the New Jersey Corporation Business tax at the rate of 9%
on its taxable income, before net operating loss deductions and special
deductions for federal income tax purposes. For this purpose, “taxable income”
generally means federal taxable income subject to certain adjustments (including
addition of interest income on state and municipal obligations).  With
the formation of CB Delaware Investments, Inc. and the transfer of investment
securities to it, the taxable state income of Colonial Bank, FSB has been
substantially reduced.  With the reduction, the Bank is in a net
operating loss position for state tax purposes and may utilize state net
operating loss carryforwards to reduce future state income taxes though there is
no guarantee that these carryforwards will be realized.
  Colonial
Bankshares, MHC, Colonial Bankshares, Inc. and Colonial Bank, FSB are not
currently under audit with respect to their New Jersey income tax returns and
their state tax returns have not been audited for the past five
years.
  21
  SUPERVISION
AND REGULATION
  General
  Colonial
Bank, FSB is examined and supervised by the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation.  This regulation and
supervision establishes a comprehensive framework of activities in which an
institution may engage and is intended primarily for the protection of the
Federal Deposit Insurance Corporation’s deposit insurance funds and
depositors.  Under this system of federal regulation, financial
institutions are periodically examined to ensure that they satisfy applicable
standards with respect to their capital adequacy, assets, management, earnings,
liquidity and sensitivity to market interest rates.  Following
completion of its examination, the federal agency critiques the institution’s
operations and assigns its rating (known as an institution’s CAMELS
rating).  Under federal law, an institution may not disclose its
CAMELS rating to the public.  Colonial Bank, FSB also is a member of
and owns stock in the Federal Home Loan Bank of New York, which is one of the
twelve regional banks in the Federal Home Loan Bank System.  Colonial
Bank, FSB is also regulated to a lesser extent by the Board of Governors of the
Federal Reserve System, governing reserves to be maintained against deposits and
other matters.  The Office of Thrift Supervision examines Colonial
Bank, FSB and prepares reports for the consideration of its Board of Directors
on any operating deficiencies.  Colonial Bank, FSB’s relationship with
its depositors and borrowers also is regulated to a great extent by both federal
and state laws, especially in matters concerning the ownership of deposit
accounts and the form and content of Colonial Bank, FSB’s mortgage
documents.
  Any
change in these laws or regulations, whether by the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision or Congress, could have a material
adverse impact on Colonial Bankshares, Inc. and Colonial Bank, FSB and their
operations.
  Federal
Banking Regulation
  Business
Activities.A federal savings bank derives its lending and
investment powers from the Home Owners’ Loan Act, as amended, and the
regulations of the Office of Thrift Supervision.  Under these laws and
regulations, Colonial Bank, FSB may invest in mortgage loans secured by
residential real estate without limitations as a percentage of assets and
non-residential real estate loans which may not in the aggregate exceed 400% of
capital, commercial business loans up to 20% of assets in the aggregate and
consumer loans up to 35% of assets in the aggregate, certain types of debt
securities and certain other assets.  Colonial Bank, FSB also may
establish subsidiaries that may engage in activities not otherwise permissible
for Colonial Bank, FSB directly including real estate investment, and securities
and insurance brokerage.
  Capital
Requirements.  Office of Thrift Supervision regulations require
savings banks to meet three minimum capital standards:  a 1.5%
tangible capital ratio, a 4% leverage ratio (3% for savings banks receiving the
highest rating on the CAMELS rating system), and an 8% risk-based capital
ratio.  The prompt corrective action standards discussed below, in
effect, establish a minimum 2% tangible capital standard.
  The
risk-based capital standard for savings banks requires the maintenance of
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively.  In determining the amount of risk-weighted assets, all
assets, including certain off-balance sheet assets, are multiplied by a
risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision,
based on the risks believed inherent in the type of asset.  Core
capital is defined as common stockholders’ equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card
relationships.  The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock, the allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 46% of net unrealized gains on available-for-sale
equity securities with readily determinable fair market
values.  Overall, the amount of supplementary capital included as part
of total capital cannot exceed 100% of core capital.  Additionally, a
savings bank that retains credit risk in connection with an asset sale may be
required to maintain additional regulatory capital because of the recourse back
to the savings bank.  Colonial Bank, FSB does not typically engage in
asset sales.
  At
December 31, 2008, Colonial Bank, FSB’s capital exceeded all applicable
requirements.
  22
  Loans to One
Borrower. A
federal savings bank generally may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of unimpaired capital and
surplus.  An additional amount may be loaned, equal to 10% of
unimpaired capital and surplus, if the loan is secured by readily marketable
collateral, which generally does not include real estate.  As of
December 31, 2008, Colonial Bank, FSB was in compliance with the
loans-to-one-borrower limitations.
  Qualified Thrift
Lender Test.As a federal savings
bank, Colonial Bank, FSB must satisfy the qualified thrift lender, or “QTL,”
test.  Under the QTL test, Colonial Bank, FSB must maintain at least
65% of its “portfolio assets” in “qualified thrift investments” (primarily
residential mortgages and related investments including mortgage-backed
securities) in at least nine of the most recent 12-month
period.  “Portfolio assets” generally means total assets of a savings
institution, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the
conduct of the savings bank’s business.
  Colonial
Bank, FSB also may satisfy the QTL test by qualifying as a “domestic building
and loan association” as defined in the Internal Revenue Code.
  A savings
bank that fails the qualified thrift lender test must either convert to a bank
charter or operate under specified restrictions.  At December 31,
2008, Colonial Bank, FSB held 87.9% of its “portfolio assets” in “qualified
thrift investments,” and satisfied this test.
  Assessments.The
Office of Thrift Supervision charges assessments to recover the costs of
examining savings banks and their affiliates.  These assessments are
based on three components: the size of the savings bank on which the basic
assessment is based; the savings bank’s supervisory condition, which results in
an additional assessment based on a percentage of the basic assessment for any
savings bank with a composite rating of 3, 4, or 5 in its most recent safety and
soundness examination; and the complexity of the bank’s
operations.  For 2008, our combined assessment was $123
thousand.
  Capital
Distributions.Office of Thrift
Supervision regulations govern capital distributions by a federal savings bank,
which include cash dividends, stock repurchases and other transactions charged
to the capital account.  A savings bank must file an application for
approval of a capital distribution if:
  ●
                      the
      total capital distributions for the applicable calendar year exceed the
      sum of the association’s net income for that year to date plus the savings
      bank’s retained net income for the preceding two years;●
                      the
      savings bank would not be at least adequately capitalized following the
      distribution;●
                      the
      distribution would violate any applicable statute, regulation, agreement
      or Office of Thrift Supervision-imposed condition; or●
                      the
      savings bank is not eligible for expedited treatment of its
      filings.
  Even if
an application is not otherwise required, every savings bank that is a
subsidiary of a holding company must still file a notice with the Office of
Thrift Supervision at least 30 days before the Board of Directors declares a
dividend or approves a capital distribution.
  The
Office of Thrift Supervision may disapprove a notice or application
if:
  ●
                    the
      savings bank would be undercapitalized following the
      distribution;●
                    the
      proposed capital distribution raises safety and soundness concerns;
      or●
                    the
      capital distribution would violate a prohibition contained in any statute,
      regulation or
agreement.
  In
addition, the Federal Deposit Insurance Act provides that an insured depository
institution shall not make any capital distribution, if after making such
distribution the institution would be undercapitalized.
  Liquidity.  A
federal savings bank is required to maintain a sufficient amount of liquid
assets to ensure its safe and sound operation.
  23
  Community
Reinvestment Act and Fair Lending Laws.  All savings banks have
a responsibility under the Community Reinvestment Act and related regulations of
the Office of Thrift Supervision to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods.  In
connection with its examination of a federal savings bank, the Office of Thrift
Supervision is required to assess the association’s record of compliance with
the Community Reinvestment Act.  In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes.  A savings bank’s failure to comply with the provisions of
the Community Reinvestment Act could, at a minimum, result in denial of certain
corporate applications such as branches or mergers, or in restrictions on its
activities.  The failure to comply with the Equal Credit Opportunity
Act and the Fair Housing Act could result in enforcement actions by the Office
of Thrift Supervision, as well as other federal regulatory agencies and the
Department of Justice.  Colonial Bank, FSB received a “satisfactory”
Community Reinvestment Act rating in its most recent federal
examination.
  Privacy
Standards.  Financial institutions, including Colonial Bank,
FSB, are subject to Federal Deposit Insurance Corporation regulations
implementing the privacy protection provisions of the Gramm-Leach-Bliley
Act.  These regulations require Colonial Bank, FSB to disclose its
privacy policy, including identifying with whom it shares “non-public personnel
information” to customers at the time of establishing the customer relationship
and annually thereafter.
  The
regulations also require Colonial Bank, FSB to provide its customers with
initial and annual notices that accurately reflect its privacy policies and
practices.  In addition, Colonial Bank, FSB is required to provide its
customers with the ability to “opt-out” of having Colonial Bank, FSB share their
non-public personal information with unaffiliated third parties before it can
disclose such information, subject to certain exceptions.  The
implementation of these regulations did not have a material adverse effect on
Colonial Bank, FSB.  The Gramm-Leach-Bliley Act also provides for the
ability of each state to enact legislation that is more protective of consumers’
personal information. We cannot predict whether New Jersey may enact such
legislation or what impact, if any, it would have if enacted.
  The
Federal Deposit Insurance Corporation and other federal banking agencies have
adopted guidelines establishing standards for safeguarding customer information
to implement certain provisions of the Gramm-Leach-Bliley Act.  The
guidelines describe the agencies’ expectations for the creation, implementation
and maintenance of an information security program, which would include
administrative, technical and physical safeguards appropriate to the size and
complexity of the institution and the nature and scope of its activities. The
standards set forth in the guidelines are intended to insure the security and
confidentiality of customer records and information, protect against any
anticipated threats or hazards to the security or integrity of such records and
protect against unauthorized access to or use of such records or information
that could result in substantial harm or inconvenience to any
customer.  Colonial Bank, FSB has implemented these guidelines and
such implementation did not have a material adverse effect on our
operations.
  Transactions with
Related Parties.  A federal savings bank’s authority to engage
in transactions with its affiliates is limited by Office of Thrift Supervision
regulations and by Sections 23A and 23B of the Federal Reserve Act and its
implementing Regulation W. An affiliate is a company that controls, is
controlled by, or is under common control with an insured depository institution
such as Colonial Bank, FSB.  Colonial Bankshares, Inc. is an affiliate
of Colonial Bank, FSB.  In general, loan transactions between an
insured depository institution and its affiliate are subject to certain
quantitative and collateral requirements.  In this regard,
transactions between an insured depository institution and its affiliate are
limited to 10% of the institution’s unimpaired capital and unimpaired surplus
for transactions with any one affiliate and 20% of unimpaired capital and
unimpaired surplus for transactions in the aggregate with all
affiliates.  Collateral in specified amounts ranging from 100% to 130%
of the amount of the transaction must usually be provided by affiliates in order
to receive loans from the savings bank.  In addition, Office of Thrift
Supervision regulations prohibit a savings bank from lending to any of its
affiliates that are engaged in activities that are not permissible for bank
holding companies and from purchasing the securities of any affiliate, other
than a subsidiary.  Finally, transactions with affiliates must be
consistent with safe and sound banking practices, not involve low-quality assets
and be on terms that are as favorable to the institution as comparable
transactions with non-affiliates.  The Office of Thrift Supervision
requires savings banks to maintain detailed records of all transactions with
affiliates.
  24
  Colonial
Bank, FSB’s authority to extend credit to its directors, executive officers and
10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the
FRA and Regulation O of the Federal Reserve Board.  Among other
things, these provisions require that extensions of credit to insiders (i) be
made on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features, and (ii) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of Colonial Bank, FSB’s capital.  In addition, extensions of
credit in excess of certain limits must be approved by Colonial Bank, FSB’s
Board of Directors.
  Enforcement.  The
Office of Thrift Supervision has primary enforcement responsibility over federal
savings institutions and has the authority to bring enforcement action against
all “institution-affiliated parties,” including stockholders, and attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured
institution.  Formal enforcement action by the Office of Thrift
Supervision may range from the issuance of a capital directive or cease and
desist order, to removal of officers and/or directors of the institution and the
appointment of a receiver or conservator.  Civil penalties cover a
wide range of violations and actions, and range up to $25,000 per day, unless a
finding of reckless disregard is made, in which case penalties may be as high as
$1 million per day.  The Federal Deposit Insurance Corporation also
has the authority to terminate deposit insurance or to recommend to the Director
of the Office of Thrift Supervision that enforcement action be taken with
respect to a particular savings institution.  If action is not taken
by the Director, the Federal Deposit Insurance Corporation has authority to take
action under specified circumstances.
  Standards for
Safety and Soundness.  Federal law requires each federal
banking agency to prescribe certain standards for all insured depository
institutions.  These standards relate to, among other things, internal
controls, information systems and audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, compensation, and other
operational and managerial standards as the agency deems
appropriate.  The federal banking agencies adopted Interagency
Guidelines Prescribing Standards for Safety and Soundness to implement the
safety and soundness standards required under federal law.  The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired.  The guidelines address internal
controls and information systems, internal audit systems, credit underwriting,
loan documentation, interest rate risk exposure, asset growth, compensation,
fees and benefits.  If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard.  If an
institution fails to meet these standards, the appropriate federal banking
agency may require the institution to submit a compliance plan.
  Prompt Corrective
Action Regulations.  Under the prompt
corrective action regulations, the Office of Thrift Supervision is required and
authorized to take supervisory actions against undercapitalized savings
banks.  For this purpose, a savings bank is placed in one of the
following five categories based on the association’s capital:
  ●
                        well-capitalized
      (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10%
      total risk-based capital);●
                        adequately
      capitalized (at least 4% leverage capital, 4% Tier 1 risk-based
      capital and 8% total risk-based capital);●
                        undercapitalized
      (less than 8% total risk-based capital, 4% Tier 1 risk-based capital
      or 3% leverage capital);●
                        significantly
      undercapitalized (less than 6% total risk-based capital, 3% Tier 1
      risk-based capital or 3% leverage capital); and●
                        critically
      undercapitalized (less than 2% tangible
  capital).
  25
  Generally,
a banking regulator is required to appoint a receiver or conservator for an
association that is “critically undercapitalized” within specific time
frames.  The regulations also provide that a capital restoration plan
must be filed with the Office of Thrift Supervision within 45 days of the date
an association receives notice that it is “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.”  The criteria for
an acceptable capital restoration plan include, among other things, the
establishment of the methodology and assumptions for attaining adequately
capitalized status on an annual basis, procedures for ensuring compliance with
restrictions imposed by applicable federal regulations, the identification of
the types and levels of activities the savings bank will engage in while the
capital restoration plan is in effect, and assurances that the capital
restoration plan will not appreciably increase the current risk profile of the
savings bank.  Any holding company for the savings bank required to
submit a capital restoration plan must guarantee the lesser of: an amount equal
to 5% of the savings bank’s assets at the time it was notified or deemed to be
undercapitalized by the Office of Thrift Supervision, or the amount necessary to
restore the savings bank to adequately capitalized status.  This
guarantee remains in place until the Office of Thrift Supervision notifies the
savings bank that it has maintained adequately capitalized status for each of
four consecutive calendar quarters, and the Office of Thrift Supervision has the
authority to require payment and collect payment under the
guarantee.  Failure by a holding company to provide the required
guarantee will result in certain operating restrictions on the savings bank,
such as restrictions on the ability to declare and pay dividends, pay executive
compensation and management fees, and increase assets or expand operations.
The Office of
Thrift Supervision may also take any one of a number of discretionary
supervisory actions against undercapitalized associations, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
  At
December 31, 2008, Colonial Bank, FSB met the criteria for being considered
“well-capitalized.”
  Insurance of
Deposit Accounts.The FDIC insures
deposit accounts in Colonial Bank, FSB generally up to a maximum of $100,000 per
separately-insured depositor, and up to a maximum of $250,000 per
separately-insured depositor for certain retirement accounts.  As an
FDIC-insured depository institutions, Colonial Bank, FSB is required to pay
deposit insurance premiums based on the risk each institution poses to the
Deposit Insurance Fund.  As of December 31, 2008, the annual FDIC
assessment rate ranged from $0.05 to $0.43 per $100 of insured deposits, based
on the institution’s relative risk to the Deposit Insurance Fund, as measured by
the institution’s regulatory capital position and other supervisory
factors.  The FDIC also has the authority to raise or lower assessment
rates on insured deposits, subject to limits, and to impose special additional
assessments.
  As a
result of the Emergency Economic Stabilization Act of 2008 (“EESA”) signed into
law on October 3, 2008, the $100,000 limit on insured deposits has been
increased to $250,000, matching the limit on qualified retirement accounts,
through December 31, 2009.  In addition, Colonial Bank, FSB has
elected to participate in the Transaction Account Guarantee Program under the
FDIC’s Temporary Liquidity Guaranty Program (“TLGP”).  Under the
Transaction Account Guarantee Program, non-interest bearing transaction deposit
accounts and interest –bearing transaction accounts paying 50 basis points or
less will be fully insured above and beyond the $250,000 limit through the same
date.  While this unlimited insurance coverage is in effect, covered
deposits in excess of the $250,000 limit are subject to a surcharge of $0.10 per
$100 of deposits insured by the FDIC.
  In
addition, the FDIC collects funds from insured institutions sufficient to pay
interest on debt obligations of the Financing Corporation
(FICO).  FICO is a government-sponsored entity that was formed to
borrow the money necessary to carry out the closing and ultimate disposition of
failed thrift institutions by the Resolution Trust Corporation. For the quarter ended
December 31, 2008, the annualized FICO assessment was equal to $0.012 for each
$100 of insured domestic deposits maintained at an institution.
  In 2008,
we were assessed total FDIC premiums of $252 thousand, consisting of $207
thousand in deposit insurance premiums and $45 thousand in FICO
assessments.  Colonial Bank, FSB was permitted to reduce its 2007 and
2008 deposit insurance premium payments by $147 thousand and $14 thousand,
respectively, in FDIC “credits,” previously earned by Colonial Bank, FSB for its
participation in the Deposit Insurance Fund.  Colonial Bank, FSB has
no remaining deposit insurance credits at December 31, 2008.
  26
  Due to
losses incurred by the DIF in 2008, and in anticipation of future losses, the
FDIC adopted an across-the-board seven basis point increase in the assessment
range, effective January 2009.  In addition to this increase, Banks
will be assessed up to an additional nine basis points, beginning in the second
quarter of 2009 assessment period, as a result of subsequent refinements made by
the FDIC to the risk-based assessment system.  Furthermore, on
February 27, 2009, the FDIC adopted the interim rule imposing a 20-basis point
emergency special assessment on the industry June 30, 2009, which is to be
collected on September 30, 2009.  The interim rule also permits the
FDIC to impose an emergency special assessment of up to ten basis points after
June 30, 2009, if necessary, to maintain public confidence in federal deposit
insurance.  Comments on the interim rule on special assessments are
due no later than 30 days after publication in the Federal
Register.
  Emergency
Economic Stabilization Act of 2008
  The U.S.
Department of the Treasury has purchased equity positions in a wide variety of
financial services companies under a program, known as the Troubled Asset Relief
Program- Capital Purchase Program (the “TARP Capital Purchase
Program”).
  The
Treasury has made capital available to U.S. financial services companies in the
form of preferred stock.  In conjunction with the purchase of
preferred stock, which will yield 5% for the first five years that it is
outstanding, and 9% thereafter, until it is redeemed, the Treasury will receive
warrants to purchase common stock with an aggregate market value equal to 15% of
the preferred investment.  The TARP Capital Purchase Program also has
other terms and conditions, including limitations of cash dividends,
restrictions on treasury stock repurchases and executive compensation
limitations.
  Colonial
Bank, FSB has a strong capital position, with total capital to risk-weighted
assets in excess of 13% and has decided, after careful consideration, not to
apply to participate in the TARP Capital Purchase Program.
  Temporary
Liquidity Guarantee Program
  The
Federal Deposit Insurance Corporation has implemented a Temporary Liquidity
Guarantee Program. The Temporary Liquidity Guarantee Program has two primary
components: the Debt Guarantee Program, by which the Federal Deposit Insurance
Corporation will guarantee the payment of certain newly-issued senior unsecured
debt, and the Transaction Account Guarantee Program, by which the Federal
Deposit Insurance Corporation will guarantee certain noninterest-bearing
transaction accounts.  The Company and the Bank, by regulation, were
automatically participating in the Temporary Liquidity Guarantee Program through
December 5, 2008.
  The
Company has carefully evaluated each of these two programs and decided to
“opt-out” of continued participation in the Debt Guarantee
Program.  The Bank did not “opt-out” of the Transaction Account
Guarantee Program and therefore will continue to participate in that program
providing unlimited Federal Deposit Insurance, through December 31, 2009, to
certain noninterest-bearing transaction accounts held at Colonial Bank,
FSB.  The cost of participate in the Transaction Account Guarantee
Program is not expected to have a significant impact on the operations of the
Company.
  On
January 16, 2009, in an effort to further strengthen the financial system and
U.S. economy, the FDIC announced that it will soon propose rule changes to the
Temporary Liquidity Guarantee Program to extend the maturity of the guarantee
from three to up to 10 years where the debt is supported by collateral and the
issuance supports new consumer lending.  Until the details of this
extended program are finalized and published, we cannot determine to what extent
, if any, we would participate in this program.
  Prohibitions
Against Tying Arrangements.  Federal savings
banks are prohibited, subject to some exceptions, from extending credit to or
offering any other service, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or its affiliates or not obtain services
of a competitor of the institution.
  27
  Federal Home Loan
Bank System.  Colonial Bank, FSB is a member of the Federal
Home Loan Bank System, which consists of 12 regional Federal Home Loan
Banks.  The Federal Home Loan Bank System provides a central credit
facility primarily for member institutions.  As a member of the
Federal Home Loan Bank of New York, Colonial Bank, FSB is required to acquire
and hold shares of capital stock in the Federal Home Loan
Bank.  Currently, the capital stock requirement is comprised of: 1)
Membership Stock, which equals 0.20% of Colonial Bank, FSB’s mortgage-related
assets as of December 31, 2007 and 2) Activity-Based Stock, which equals 4.5% of
outstanding borrowings from the Federal Home Loan Bank.  As of
December 31, 2008, Colonial Bank, FSB was in compliance with this
requirement.
  Federal
Reserve System
  The
Federal Reserve Board regulations require savings banks to maintain
noninterest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts.  At
December 31, 2008, Colonial Bank, FSB was in compliance with these reserve
requirements.
  The
USA PATRIOT Act
  The USA
Patriot Act gives the federal government powers to address terrorist threats
through enhanced domestic security measures, expanded surveillance powers,
increased information sharing and broadened anti-money laundering
requirements.  The USA Patriot Act also requires the federal banking
agencies to take into consideration the effectiveness of controls designed to
combat money laundering activities in determining whether to approve a merger or
other acquisition application of a member institution.  Accordingly,
if we engage in a merger or other acquisition, our controls designed to combat
money laundering would be considered as part of the application
process.  We have established policies, procedures and systems
designed to comply with these regulations.
  Sarbanes-Oxley
Act of 2002
  The
Sarbanes-Oxley Act of 2002 was enacted to address, among other issues, corporate
governance, auditing and accounting, executive compensation, and enhanced and
timely disclosure of corporate information.  Under Section 302(a) of
the Sarbanes-Oxley Act, the Chief Executive Officer and Chief Financial Officer
of Colonial Bankshares, Inc. are required to certify that its quarterly and
annual reports filed with the Securities and Exchange Commission do not contain
any untrue statement of a material fact.  Rules promulgated under the
Sarbanes-Oxley Act require that these officers certify that: they are
responsible for establishing, maintaining and regularly evaluating the
effectiveness of our internal controls; they have made certain disclosures to
our auditors and the audit committee of the Board of Directors about our
internal controls; and they have included information in our quarterly and
annual reports about their evaluation and whether there have been significant
changes in our internal controls or in other factors that could significantly
affect internal controls.  Colonial Bankshares, Inc. has existing
policies, procedures and systems designed to comply with these regulations, and
is further enhancing and documenting such policies, procedures and systems to
ensure continued compliance with these regulations.
  Holding
Company Regulation
  General.  Colonial
Bankshares, MHC and Colonial Bankshares, Inc. are non-diversified savings and
loan holding companies within the meaning of the Home Owners’ Loan
Act.  As such, Colonial Bankshares, MHC and Colonial Bankshares, Inc.
are registered with the Office of Thrift Supervision and are subject to Office
of Thrift Supervision regulations, examinations, supervision and reporting
requirements.  In addition, the Office of Thrift Supervision has
enforcement authority over Colonial Bankshares, Inc. and Colonial Bankshares,
MHC, and their subsidiaries.  Among other things, this authority
permits the Office of Thrift Supervision to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings
institution.  As federal corporations, Colonial Bankshares, Inc. and
Colonial Bankshares, MHC are generally not subject to state business
organization laws.
  Permitted
Activities.  Pursuant to Section 10(o) of the Home Owners’ Loan
Act and Office of Thrift Supervision regulations and policy, a mutual holding
company and a federally chartered mid-tier holding company such as Colonial
Bankshares, Inc. may engage in the following activities:
  28
  (i)
                                        investing
      in the stock of a savings bank;(ii)
                                        acquiring
      a mutual association through the merger of such association into a savings
      bank subsidiary of such holding company or an interim savings bank
      subsidiary of such holding company;(iii)
                                        merging
      with or acquiring another holding company, one of whose subsidiaries is a
      savings bank;(iv)
                                        investing
      in a corporation, the capital stock of which is available for purchase by
      a savings bank under federal law or under the law of any state where the
      subsidiary savings bank or associations share their home
      offices;(v)
                                        furnishing
      or performing management services for a savings bank subsidiary of such
      company;(vi)
                                        holding,
      managing or liquidating assets owned or acquired from a savings subsidiary
      of such company;(vii)
                                        holding
      or managing properties used or occupied by a savings bank subsidiary of
      such company;(viii)
                                        acting
      as trustee under deeds of trust;(ix)
                                        any
      other activity:(A)
                                        that
      the Federal Reserve Board, by regulation, has determined to be permissible
      for bank holding companies under Section 4(c) of the Bank Holding Company
      Act of 1956, unless the Director, by regulation, prohibits or limits any
      such activity for savings and loan holding companies;
or(B)
                                        in
      which multiple savings and loan holding companies were authorized (by
      regulation) to directly engage on March 5, 1987;(x)
                                        any
      activity permissible for financial holding companies under Section 4(k) of
      the Bank Holding Company Act, including securities and insurance
      underwriting; and(xi)
                                        purchasing,
      holding, or disposing of stock acquired in connection with a qualified
      stock issuance if the purchase of such stock by such savings and loan
      holding company is approved by the Director.  If a mutual
      holding company acquires or merges with another holding company, the
      holding company acquired or the holding company resulting from such merger
      or acquisition may only invest in assets and engage in activities listed
      in (i) through (x) above, and has a period of two years to cease any
      nonconforming activities and divest any nonconforming
      investments.
  The Home
Owners’ Loan Act prohibits a savings and loan holding company, including
Colonial Bankshares, Inc. and Colonial Bankshares, MHC, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of another
savings institution or holding company thereof, without prior written approval
of the Office of Thrift Supervision.  It also prohibits the
acquisition or retention of, with certain exceptions, more than 5% of a
nonsubsidiary company engaged in activities other than those permitted by the
Home Owners’ Loan Act, or acquiring or retaining control of an institution that
is not federally insured.  In evaluating applications by holding
companies to acquire savings institutions, the Office of Thrift Supervision must
consider the financial and managerial resources, future prospects of the company
and institution involved, the effect of the acquisition on the risk to the
federal deposit insurance fund, the convenience and needs of the community and
competitive factors.
  The
Office of Thrift Supervision is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions:
  (i)
                  the
      approval of interstate supervisory acquisitions by savings and loan
      holding companies; and(ii)
                  the
      acquisition of a savings institution in another state if the laws of the
      state of the target savings institution specifically permit such
      acquisitions.  The states vary in the extent to which they
      permit interstate savings and loan holding company
      acquisitions.
  29
  Waivers of
Dividends byColonial
Bankshares, MHC.  Office of Thrift Supervision regulations
require Colonial Bankshares, MHC to notify the Office of Thrift Supervision of
any proposed waiver of its receipt of dividends from Colonial Bankshares,
Inc.  The Office of Thrift Supervision reviews dividend waiver notices
on a case-by-case basis, and, in general, does not object to any such waiver
if:
  (i)
                  the
      waiver would not be detrimental to the safe and sound operation of the
      subsidiary  savings association; and(ii)
                  the
      mutual holding company’s Board of Directors determines that such waiver is
      consistent with such directors’ fiduciary duties to the mutual holding
      company’s members.
  We
anticipate that Colonial Bankshares, MHC will waive any dividends paid by
Colonial Bankshares, Inc.  Under Office of Thrift Supervision
regulations, our public stockholders would not be diluted because of any
dividends waived by Colonial Bankshares, MHC (and waived dividends would not be
considered in determining an appropriate exchange ratio) in the event Colonial
Bankshares, MHC converts to stock form.
  Conversion ofColonial
Bankshares, MHCto Stock
Form.  Office of Thrift Supervision regulations permit Colonial
Bankshares, MHC to convert from the mutual form of organization to the capital
stock form of organization (a “Conversion Transaction”).  There can be
no assurance when, if ever, a Conversion Transaction will occur, and the Board
of Directors has no current intention or plan to undertake a Conversion
Transaction.  In a Conversion Transaction a new stock holding company
would be formed as the successor to Colonial Bankshares, Inc. (the “New Holding
Company”), Colonial Bankshares, MHC’s corporate existence would end, and certain
depositors and borrowers of Colonial Bank, FSB would receive the right to
subscribe for additional shares of the New Holding Company.  In a
Conversion Transaction, each share of common stock held by stockholders other
than Colonial Bankshares, MHC (“Minority Stockholders”) would be automatically
converted into a number of shares of common stock of the New Holding Company
determined pursuant an exchange ratio that ensures that Minority Stockholders
own the same percentage of common stock in the New Holding Company as they owned
in Colonial Bankshares, Inc. immediately prior to the Conversion
Transaction.  Under Office of Thrift Supervision regulations, Minority
Stockholders would not be diluted because of any dividends waived by Colonial
Bankshares, MHC (and waived dividends would not be considered in determining an
appropriate exchange ratio), in the event Colonial Bankshares, MHC converts to
stock form.  The total number of shares held by Minority Stockholders
after a Conversion Transaction also would be increased by any purchases by
Minority Stockholders in the offering conducted as part of the Conversion
Transaction.
  Any
Conversion Transaction would require the approval of a majority of the
outstanding shares of common stock of Colonial Bankshares, Inc. held by Minority
Stockholders and by two thirds of the total outstanding shares of common stock
of Colonial Bankshares, Inc.  Any second-step conversion transaction
also would require the approval of a majority of the eligible votes of members
of Colonial Bankshares, MHC.
  Federal
Securities Laws
  Colonial
Bankshares, Inc. common stock is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934.  Colonial
Bankshares, Inc. is subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Securities Exchange Act of
1934.
  The
registration under the Securities Act of 1933 of shares of common stock issued
in the offering does not cover the resale of those shares.  Shares of
common stock purchased by persons who are not affiliates of Colonial Bankshares,
Inc. may be resold without registration.  Shares purchased by an
affiliate of Colonial Bankshares, Inc. are subject to the resale restrictions of
Rule 144 under the Securities Act of 1933.  If we meet the current
public information requirements of Rule 144 under the Securities Act of 1933,
each affiliate of Colonial Bankshares, Inc. that complies with the other
conditions of Rule 144, including those that require the affiliate’s sale to be
aggregated with those of other persons, would be able to sell in the public
market, without registration, a number of shares not to exceed, in any
three-month period, the greater of 1% of our outstanding shares, or the average
weekly volume of trading in the shares during the preceding four calendar
weeks.  In the future, we may permit affiliates to have their shares
registered for sale under the Securities Act of 1933.
  30
  ITEM 1ARisk
Factors
  The risks
set forth below, in addition to the other risks described in this Annual Report
on Form 10-K, may adversely affect our business, financial condition and
operating results.  In addition to the risks set forth below and the
other risks described in this annual report, there may also be additional risks
and uncertainties that are not currently known to us or that we currently deem
to be immaterial that could materially and adversely affect our business,
financial condition or operating results.  As a result, past financial
performance may not be a reliable indicator of future performance, and
historical trends should not be used to anticipate results or trends in future
periods. Further, to the extent that any of the information contained in this
Annual Report on Form 10-K constitutes forward-looking statements, the risk
factors set forth below also are cautionary statements identifying important
factors that could cause our actual results to differ materially from those
expressed in any forward-looking statements made by or on behalf of
us.
  Current
Market and Economic Conditions and Related Government Responses May
Significantly Affect Our Operations, Financial Condition, and
Earnings
  Recent
negative developments in the national and global credit markets have resulted in
uncertainty in the financial markets with the expectation of a continued
downturn in general economic conditions, including increased levels of
unemployment, continuing into 2009 and beyond.  The resulting economic
pressure on consumers and businesses may adversely affect our business,
financial condition, and results of operations.  A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
conditions on us and others in the financial services industry.
  In
general, loan and investment securities credit quality has deteriorated at many
institutions and the values of real estate collateral supporting many commercial
loans and home mortgages have declined and may continue to decline. Financial
companies’ stock prices have been negatively affected, as has the ability of
banks and bank holding companies to raise capital or borrow in the debt
markets.  As a result, the potential exists for new federal or state
laws and regulations regarding revisions to the overall regulatory framework, as
well as lending and funding practices and liquidity standards.  Bank
regulatory agencies are expected to be active in responding to concerns and
trends identified in examinations.  Negative developments in the
financial industry and the domestic and international credit markets, and the
impact of new legislation in response to those developments, may negatively
impact our operations by restricting our business operations, including our
ability to originate or sell loans, modify loan terms, or foreclose on property
securing a loan.  These events may have a significant adverse impact
our financial performance.  In addition, these risks could affect the
performance and value of our loan portfolio as well as the performance and value
of our investment securities portfolio, which would also negatively affect our
financial performance.
  In
addition, deflation pressures while possibly could lower our operating costs,
could have a significant negative affect on our borrowers, especially our
business borrowers, and the values of underlying collateral loans, which could
negatively affect our financial performance.
  Lack
of Consumer Confidence in Financial Institutions May Decrease Our Level of
Deposits
  Our level
of deposits may be affected by lack of consumer confidence in financial
institutions, which have caused fewer depositors to be willing to maintain
deposits that are not FDIC-insured accounts. That may cause depositors to
withdraw deposits and place them in other institutions or to invest uninsured
funds in investments perceived as being more secure, such as securities issued
by the United States Treasury.  These consumer preferences may cause
us to be forced to pay higher interest rates to retain deposits and may
constrain liquidity as we seek to meet funding needs caused by reduced deposit
levels.
  Legislative
or Regulatory Responses to Perceived Financial and Market Problems Could Impair
Our Rights Against Borrowers.
  Current
and future proposals made by members of Congress and others that would reduce
the amount distressed borrowers are otherwise contractually obligated to pay
under their mortgage loans and may limit an institution’s ability to foreclose
on mortgage collateral.  If proposals such as these, or other
proposals limiting our rights as a creditor, were to be implemented, we could
experience increased credit losses on our loans or mortgage-backed securities
portfolio, or increased expense in pursuing our remedies as a
creditor.
  31
  Our Expenses Will Increase as a
Result of Increases in FDIC Insurance Premiums
  The FDIC
imposes an assessment against institutions for deposit
insurance.  This assessment is based on the risk category of the
institution and currently ranges from five to 43 basis points of the
institution’s deposits.  In February 2009, the FDIC published the
final rule that would raise the current deposit insurance assessment rates (to a
range from 8 to 77.5 basis points) in 2009 and also published an interim final
rule related to a one-time assessment of 20 basis points as of the June 30,
2009, payable September 30, 2009.
  Based
upon our initial review of the FDIC’s final rule, our annual expense for FDIC
insurance based on deposits as of December 31, 2008, would increase by
approximately $61 thousand.  Additionally our expense would increase
an additional $920 thousand based on the interim final rule related to the
one-time assessment of 20 basis points.
  A
Significant Portion of Our Loan Portfolio is Unseasoned
  Our loan portfolio has grown to $303.2
million at December 31, 2008 from $125.8 million at December 31,
2004.  It is difficult to assess the future performance of these
recently originated loans.  We cannot assure you that these loans will
not have delinquency or charge-off levels above our historical experience, which
could adversely affect our future performance.
  If
Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our
Earnings Could Decrease
  We make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans.  In determining the amount of the allowance for loan
losses, we review our loans and our loss and delinquency experience, and we
evaluate other factors including, among other things, current economic
conditions. If our assumptions are incorrect, our allowance for loan losses may
not be sufficient to cover losses inherent in our loan portfolio, resulting in
additions to our allowance.  Material additions to our allowance could
materially decrease our net income.
  In
addition, bank regulators periodically review our allowance for loan losses and
may, based upon information available to them at the time of their review,
require us to increase our allowance for loan losses or recognize further loan
charge-offs. An increase in our allowance for loan losses or loan charge-offs as
required by these regulatory authorities may have a material adverse effect on
our financial condition and results of operations.
  Changes
in Market Interest Rates Could Adversely Affect Our Financial Condition and
Results of Operations
  Our financial condition and results of
operations are significantly affected by changes in market interest
rates.  Our results of operations substantially depend on our net
interest income, which is the difference between the interest income we earn on
our interest-earning assets and the interest expense we pay on our
interest-bearing liabilities.  Our interest-bearing liabilities
generally reprice or mature more quickly than our interest-earning
assets.  If rates increase rapidly as a result of perceived
inflationary pressures, we may have to increase the rates paid on our deposits
and borrowed funds more quickly than loans and investments reprice, resulting in
a negative effect on interest spreads and net interest income. In addition, the
effect of rising rates could be compounded if deposit customers move funds from
savings accounts to higher rate certificate of deposit accounts. Conversely,
should market interest rates continue to fall below current levels, our net
interest margin could also be negatively affected, as competitive pressures
could keep us from further reducing rates on our deposits, and prepayments and
curtailments on assets may continue.
  We also
are subject to reinvestment risk associated with changes in interest
rates.  Changes in interest rates may affect the average life of loans
and mortgage-related securities. Decreases in interest rates often result in
increased prepayments of loans and mortgage-related securities, as borrowers
refinance their loans to reduce borrowings costs.  Under these
circumstances, we are subject to reinvestment risk to the extent that we are
unable to reinvest the cash received from such prepayments in loans or other
investments that have interest rates that are comparable to the interest rates
on existing loans and securities. Additionally, increases in interest rates may
decrease loan demand and/or may make it more difficult for borrowers to repay
adjustable rate loans.
  32
  Changes
in interest rates also affect the value of our interest earning assets and in
particular our securities portfolio. Generally, the value of securities
fluctuates inversely with changes in interest rates.
  Strong
Competition Within Our Market Areas May Limit Our Growth and
Profitability
  Competition in the banking and
financial services industry is intense.  In our market areas, we
compete with commercial banks, savings institutions, mortgage brokerage firms,
credit unions, finance companies, mutual funds, money market funds, insurance
companies, and brokerage and investment banking firms operating locally and
elsewhere. Some of our competitors have greater name recognition and market
presence that benefit them in attracting business, and offer certain services
that we do not or cannot provide. In addition, larger competitors may be able to
price loans and deposits more aggressively than we do.
  In
addition, recent turmoil in the United States and world economies, and more
specifically in the financial services industry, has resulted in financial
services companies such as investment banking institutions, and automobile and
real estate finance companies, electing to become bank holding
companies.  These financial services companies have traditionally
received their funding from sources other than insured bank
deposits.  Many of the alternative funding sources traditionally
utilized by these companies is no longer available and has resulted in these
companies relying more on insured bank deposits to fund their operations,
increasing competition for deposits and related costs of such
deposits.
  The
Need to Account for Certain Assets at Estimated Fair Value May Adversely Affect
Our Results of Operations
  We report
certain assets, including securities, at fair value. Generally, for assets that
are reported at fair value we use quoted market prices or valuation models that
utilize market data inputs to estimate fair value.  Because we carry
these assets on our books at their estimated fair value, we may incur losses
even if the asset in question presents minimal credit risk.  Given the
continued disruption in the capital markets, we may be required to recognize
other-than-temporary impairments in future periods with respect to our
securities portfolio.  The amount and timing of any impairment
recognized will depend on the severity and duration of the decline in the
estimated fair value of the securities and our estimation of the anticipated
recovery period.
  If
Our Investment in the Common Stock of the Federal Home Loan Bank of New York is
Classified as Other-Than-Temporarily Impaired or as Permanently Impaired,
Earnings and Stockholders’ Equity Could Decrease
  We own
common stock of the Federal Home Loan Bank of New York. The common stock is held
to qualify for membership in the Federal Home Loan Bank system and to be
eligible to borrow funds under the FHLB’s advance programs.  The
aggregate cost of our FHLB common stock as of December 31, 2008, was $2.0
million based on its par value.  There is no market for FHLB common
stock.
  Recent
published reports indicates that certain member banks of the Federal Home Loan
Bank system may be subject to accounting rules and asset quality risks that
could result in materially lower regulatory capital levels. In an extreme
situation, it is possible that the capital of a Federal Home Loan Bank system,
including the FHLB of New York, could be substantially diminished or reduced to
zero.  Consequently, there is a risk that the Company’s investment in
FHLB common stock could be deemed other-than-temporarily impaired at some time
in the future, and if this occurs, it would cause earnings and stockholders’
equity to decrease by the impairment charge.
  Risks
Associated with System Failures, Interruptions, or Breaches of Security Could
Negatively Affect Our Earnings
  Information
technology systems are critical to our business.  We use various
technology systems to manage our customer relationships, general ledger,
securities, deposits, and loans.  We have established policies and
procedures to prevent or limit the impact of system failures, interruptions, and
security breaches, but there can be no assurance that such events will not occur
or that they will be adequately addressed if they do.  In addition any
compromise of our systems could deter customers from using our products and
services.  Although we rely on security systems to provide security
and authentication necessary to effect the secure transmission of data, these
precautions may not protect our systems from compromises or breaches of
security.
  33
   In
addition, we outsource a majority of our data processing to certain third-party
providers.  If these third-party providers encounter difficulties, or
if we have difficulty in communicating with them, our ability to adequately
process and account for transactions could be affected, and our business
operations could be adversely impacted.  Threats to information
security also exist in the processing of customer information through various
other vendors and their personnel.
  The
occurrence of any system failures, interruption, or breach of security could
damage our reputation and result in a loss of customers and business subjecting
us to additional regulatory scrutiny, or could expose us to litigation and
possible financial liability.  Any of these events could have a
material adverse effect on our financial condition and results of
operations.
  We
Are Subject to Extensive Regulatory Oversight
  We and
our subsidiaries are subject to extensive regulation and
supervision.  Regulators have intensified their focus on bank lending
criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and
Bank Secrecy Act compliance requirements.  There is also increased
scrutiny of our compliance with the rules enforced by the Office of Foreign
Assets Control.  In order to comply with regulations, guidelines and
examination procedures in the anti-money laundering area, we have been required
to adopt policies and procedures and to install systems.  We cannot be
certain that the policies, procedures and systems we have in place are flawless.
Therefore, there is no assurance that in every instance we are in full
compliance with these requirements.  Our failure to comply with these
and other regulatory requirements can lead to, among other remedies,
administrative enforcement actions, and legal proceedings.  In
addition, recently enacted, proposed and future legislation and regulations have
had, will continue to have or may have significant impact on the financial
services industry.  Regulatory or legislative changes could make
regulatory compliance more difficult or expensive for us, and could cause us to
change or limit some of our products and services, or the way we operate our
business.
  The
Price and Trading of Our Common Stock is Subject to Various Factors Many That
Are Out of our Control
  The price
of our common stock can fluctuate significantly in response to various factors,
including, but not limited to: actual or anticipated variations in our results
of operations; news reports regarding trends and issues in the financial
services industry; the real estate market; interest rates;  earnings
estimates and recommendations of securities analyst; the performance and stock
price of other companies that investors or analyst deem comparable to us; actual
or anticipated changes in the economy; capital market activities; mergers and
acquisitions involving our peers and speculation regarding our merger and
acquisition activities; speculation about, or an actual change, dividend
payments; changes in legislation or regulation impacting financial services
industry in particular, or publicly traded companies in general; regulatory
enforcement or other actions against the Company or the Bank or its affiliates;
threats of terrorism or military conflicts; and in general market fluctuations.
Fluctuations in our stock price may make it more difficult for you to sell your
common stock at an attractive price.
  34
  ITEM 2.Properties
  The
following table provides certain information with respect to our eight banking
offices as of December 31, 2008:
  Location
                  
                  Owned
      or Leased
                  
                  Net
      Book Value of Real Property(In
      thousands)Main
      Office:2745
      S. Delsea Drive
                    Vineland,
      New Jersey 08360
                  
                  Owned
                  
                  $
                  6,036Branch
      Offices:85
      West Broad Street
                    Bridgeton,
      New Jersey 08302
                  
                  Owned
                  
                  $
                  4361107
      North High Street
                    Millville,
      New Jersey 08332
                  
                  Owned
                  
                  $
                  303227
      Bridgeton Pike
                    Mantua,
      New Jersey 08051
                  
                  Owned
                  
                  $
                  495Route
      77 and Big Oak Road
                    Upper
      Deerfield Township, New Jersey 08302
                  
                  Owned
                  
                  $
                  3891771
      South Lincoln Avenue
                    Vineland,
      New Jersey 08361
                  
                  Owned
                  
                  $
                  330271
      Lambs Road
                    Sewell,
      New Jersey 08080
                  
                  Owned
                  
                  $
                  315125
      West Landis Avenue
                    Vineland,
      New Jersey 08360
                  
                  Owned
                  
                  $
                  557
 
 In
addition to the above properties, the Company has purchased land in the Borough
of Buena in Atlantic County, New Jersey as a possible branch location and the
total amount invested in this site to date is $341 thousand.  The
Company has purchased land in Millville, Cumberland County, New Jersey as a
possible branch location and the total amount invested in this site to date is
$788 thousand.  The Company purchased land in Harrison Township, New
Jersey as a possible branch location and the total amount invested in this site
to date is $1.3 million.  As we are in the early stages of planning,
we cannot determine completion dates or estimated costs to
complete.
  In July
2008, the Company opened a branch office on Landis Avenue in Vineland, New
Jersey.  Total costs including land, building and furniture, fixtures
and equipment totaled approximately $585 thousand.
  In
November 2008, the Company 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.
  The net
book value of our premises, land and equipment was approximately $11.6 million
at December 31, 2008.
  For
information regarding the Company’s investment in mortgages and mortgage-related
securities, see “Item 1. Business” herein.
  ITEM 3.Legal
Proceedings
  From time
to time, we are involved as plaintiff or defendant in various legal proceedings
arising in the ordinary course of business.  At December 31, 2008, we
were not involved in any legal proceedings, the outcome of which would be
material to our financial condition or results of operations.
  35
  ITEM 4.Submission of Matters to a
Vote of Security Holders
  No
matters were submitted to a vote of stockholders during the fourth quarter of
the year under report.
  PART
II
  ITEM 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
  (a)
                              Reference
      is made to the “Market for Common Stock” section of Colonial Bankshares’
      2008 Annual Report to Stockholders, which is incorporated herein by
      reference.(b)
                              Not
      applicable.(c)
                              Purchases
      of Equity SecuritiesThe
      Company’s repurchases of its common stock made during the fourth quarter
      of 2008 are set forth in the following
table:
 Total
                          Number
      of
                          Shares
                          Purchased
                        
                        
                        Average
                          Price
      Paid
                          Per
      Share
                        
                        
                        Total
                          Number
      of
                          Shares
                          Purchased
      as
                          Part
      of
                          Publicly
                          Announced
                          Plan
                        
                        
                        Maximum
                          Number
      of
                          Shares
      That
                          May
      Yet be
                          Purchased
                          Under
                          Publicly
                          Announced
                          PlanOctober
      1 – October 31, 2008
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        79,954November
      1 – November 30, 2008
                        
                        
                        10,000
                        
                        
                        
                        7.55
                        
                        
                        
                        10,000
                        
                        
                        
                        69,954December
      1 – December 31, 2008
                        
                        
                        10,000
                        
                        
                        
                        7.80
                        
                        
                        
                        10,000
                        
                        
                        
                        59,954Total
                        
                        
                        20,000
                        
                        
                        
                        7.68
                        
                        
                        
                        20,000
                        
                        
                        
                        -
  ITEM 6. Selected Financial
Data
  The
selected financial data included in Colonial Bankshares’ 2008 Annual Report to
Stockholders are incorporated herein by reference.
  ITEM 7. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
  The
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section of Colonial Bankshares’ 2008 Annual Report to Stockholders
is incorporated herein by reference.
  ITEM
7A.Quantitative and Qualitative
Disclosures About Market Risk
  For
information regarding market risk, see “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations”.
  ITEM 8. Financial Statements and
Supplementary Data
  The
consolidated financial statements included in Colonial Bankshares’ 2008 Annual
Report to Stockholders are incorporated herein by reference.
  ITEM 9. Changes In and Disagreements
With Accountants on Accounting and Financial
Disclosure
  None.
  36
  ITEM
9A.Controls and
Procedures
  None
 
 ITEM
9A(T)Controls and
Procedures
 
 (a)
                  Under
      the supervision and with the participation of our management, including
      our Principal Executive Officer and Principal Financial Officer, we
      evaluated the effectiveness of the design and operation of our disclosure
      controls and procedures (as defined in Rule 13a-15(e) under the Securities
      Exchange Act of 1934) as of the end of the period covered by this report.
      Based upon that evaluation, the Principal Executive Officer and Principal
      Financial Officer concluded that, as of the end of the period covered by
      this report, our disclosure controls and procedures were effective to
      ensure that information required to be disclosed in the reports that the
      Company files or submits under the Securities Exchange Act of 1934, is
      recorded, processed, summarized and reported, within the time periods
      specified in the SEC’s rules and forms.  There has been no
      change in the Company’s internal control over financial reporting during
      the Company’s fourth quarter of fiscal year 2008 that has materially
      affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.(b)
                  Management’s
      annual report on internal control over financial
  reporting.
  Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting.
  The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 Management,
including the principal executive officer and principal financial officer,
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, based on the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
“Internal Control-Integrated Framework.”  Based on such assessment,
management believes that, as of December 31, 2008, the Company’s internal
control over financial reporting is effective, based on those
criteria.
  This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only the
management’s report in this annual report.
  ITEM
9B. Other
Information
  None.
  37
  PART
III
  ITEM
10. Directors, Executive
Officers and Corporate Governance
  Colonial
Bankshares has adopted a Code of Ethics that applies to Colonial Bankshares’
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions.  The
Code of Ethics is incorporated by reference to Exhibit 14 to the Annual Report
on Form 10-KSB for the year ended December 31, 2005, as originally filed with
the Securities and Exchange Commission on March 30, 2006.  A copy of
the Code will be furnished without charge upon written request to the Secretary,
Colonial Bankshares, Inc., 2745 S. Delsea Drive, Vineland, NJ
08360.
  The
information contained under the sections captioned “Proposal I – Election of
Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the
Company’s definitive Proxy Statement for the 2009 Annual Meeting of Stockholders
is incorporated herein by reference.
  ITEM
11. Executive
Compensation
  The
information contained under the section captioned “Executive Compensation” in
the definitive Proxy Statement is incorporated herein by reference.
  ITEM
12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
  (a)
                Securities
      Authorized for issuance Under Stock-Based Compensation
    PlansSet
      forth below is information as of December 31, 2008 with respect to
      compensation plans under which equity securities of the Registrant are
      authorized for issuance.
 
 
 EQUITY
      COMPENSATION PLAN INFORMATIONNumber
      of securities
                          to
      be issued upon
                          exercise
      of
                          outstanding
      options,
                          warrants
      and rights
                        
                        
                        Weighted-average
      exercise price of outstanding options, warrants and rights
                        
                        
                        Number
      of securities
                          remaining
      available
                          for
      future issuance
                          under
      stock-based
                          compensation
      plans
                          (excluding
      securities
                          reflected
      in first
                          column)Equity
      compensation plans approved by security holders
                        
                        
                        285,093
                        
                        
                        $
                        12.47
                        
                        
                        
                        25,095Equity
      compensation plans not approved by security holders
                        
                        
                        N/A
                        
                        
                        
                        N/A
                        
                        
                        
                        N/ATotal
                        
                        
                        285,093
                        
                        
                        $
                        12.47
                        
                        
                        
                        25,095
 
 (b)
                Security
      Ownership of Certain Beneficial OwnersThe
      information required by this item is incorporated herein by reference to
      the section captioned “Voting Securities and Principal Holders” in the
      Proxy Statement.(c)
                Security
      Ownership of ManagementThe
      information required by this item is incorporated herein by reference to
      the section captioned “Proposal I – Election of Directors” in the Proxy
      Statement.(d)
                Changes
      in ControlManagement
      of the Company know of no arrangements, including any pledge by any person
      of securities of the Company, the operation of which may at a subsequent
      date result in a change in control of the
  registrant.
  38
 ITEM
13. Certain Relationships and
Related Transactions, and Director Independence
  The
information required by this item is incorporated herein by reference to the
section captioned “Proposal I – Election of Directors – Certain Relationships
and Related Transactions” of the Proxy Statement.
  ITEM
14.Principal Accountant Fees
and Services
 
 The
information required by this item is incorporated herein by reference to the
section captioned “Proposal II – Ratification of Appointment of Independent
Registered Public Accounting Firm” in the Proxy Statement.
  ITEM
15. Exhibits and Financial
Statement Schedules
  3.1
                  Charter
      of Colonial Bankshares, Inc. (1)3.2
                  Bylaws
      of Colonial Bankshares, Inc. (1)4
                  Form
      of Common Stock Certificate of Colonial Bankshares, Inc.
    (1)10.1
                  Form
      of Employee Stock Ownership Plan (1)10.2
                  Colonial
      Bankshares, Inc. 2006 Stock-Based Incentive Plan (2)10.3
                  Form
      of Colonial Bankshares, Inc. 2006 Stock-Based Incentive Plan Stock Option
      Agreement (Outside Directors) (3)10.4
                  Form
      of Colonial Bankshares, Inc. 2006 stock-Based Incentive Plan Stock Option
      Agreement (Employees) (3)10.5
                  Form
      of Colonial Bankshares, Inc. 2006 Stock-Based Incentive Plan Restricted
      Stock Award Notice (Outside Directors) (3)10.6
                  Form
      of Colonial Bankshares, Inc. 2006 Stock-Based Incentive Plan Restricted
      Stock Award Notice (Employees) (3)10.7
                  Employment
      Agreement By and Between Colonial Bank, FSB and Edward J. Geletka
      (4)10.8
                  Employment
      Agreement By and Between Colonial Bank, FSB and L. Joseph Stella, III
      (5)10.9
                  Employment
      Agreement By and Between Colonial Bank, FSB and William F. Whelan
      (6)10.10
                  Amended
      and Restated Employment Agreement with Edward J.
Geletka10.11
                  Amended
      and Restated Employment Agreement with L. Joseph Stella,
    III10.12
                  Amended
      and Restated Employment Agreement with William F.
Whelan10.13
                  Bonus
      Plan, including amendments13
                  Portions
      of Annual Report to Stockholders14
                  Code
      of Ethics (7)21
                  Subsidiaries
      of Registrant23
                  Consent
      of Independent Registered Public Accounting Firm31.1
                  Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
      Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200231.2
                  Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
      Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232
                  Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002
 ______________________________
 (1)
                Incorporated
      by reference to the Registration Statement on Form SB-2 of Colonial
      Bankshares (File no. 333-123583), originally filed with the Securities and
      Exchange Commission on March 25, 2005.(2)
                Incorporated
      by reference to the Definitive Proxy Statement for the Annual Meeting of
      Stockholders of Colonial Bankshares held July 20, 2006 (File no.
      000-51385), filed with the Securities and Exchange Commission on June 15,
      2006.(3)
                Incorporated
      by reference to the Current Report on Form 8-K of Colonial Bankshares,
      Inc. (File no. 000-51385), filed with the Securities and Exchange
      Commission on October 23, 2006.(4)
                Incorporated
      by reference to Exhibit 10.5 to the Quarterly Report on Form 10-QSB for
      the quarter ended September 30, 2006 of Colonial Bankshares (File no.
      000-51385), filed with the Securities and Exchange Commission on November
      14, 2006.          39
  (5)
                Incorporated
      by reference to Exhibit 10.6 to the Quarterly Report on Form 10-QSB for
      the quarter ended September 30, 2006 of Colonial Bankshares (File no.
      000-51385), filed with the Securities and Exchange Commission on November
      14, 2006.(6)
                Incorporated
      by reference to Exhibit 10.7 to the Quarterly Report on Form 10-QSB for
      the quarter ended September 30, 2006 of Colonial Bankshares (File no.
      000-51385), filed with the Securities and Exchange Commission on November
      14, 2006.(7)
                Incorporated
      by reference to Exhibit 14 to the Annual Report on Form 10-KSB for the
      year ended December 31, 2005 of Colonial Bankshares (File no. 000-51385),
      originally filed with the Securities and Exchange Commission on March 30,
      2006.
 
       40
  SIGNATURES
 
 Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 COLONIAL
      BANKSHARES, INC.Date:
      March 30, 2009
                                By:
                                /s/ Edward J. GeletkaEdward
      J. GeletkaPresident,
      Chief Executive Officer and Director(Duly
      Authorized Representative)
 
 Pursuant to the requirements of the
Securities Exchange of 1934, this report has been signed by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
 
 Signatures
                        
                        Title
                        
                        Date/s/
      Edward J. Geletka
                        
                        President,
      Chief Executive
                        
                        March
      30, 2009Edward
      J. Geletka
                        
                        Officer
      and Director (PrincipalExecutive
      Officer)/s/ L. Joseph Stella, III
                        
                        Executive
      Vice President and
                        
                        March
      30, 2009L.
      Joseph Stella, III
                        
                        Chief
      Financial Officer(Principal
      Financial andAccounting
      Officer)/s/ Albert A. Fralinger,
Jr.
                        
                        Chairman
      of the Board
                        
                        March
      30, 2009Albert
      A. Fralinger, Jr./s/ Gregory J. Facemyer
                        
                        Vice
      Chairman of the Board
                        
                        March
      30, 2009Gregory
      J. Facemyer/s/ Richard S. Allen
                        
                        Director
                        
                        March
      30, 2009Richard
      S. Allen/s/ John Fitzpatrick
                        
                        Director
                        
                        March
      30, 2009John
      Fitzpatrick/s/ Frank M. Hankins, Jr.
                        
                        Director
                        
                        March
      30, 2009Frank
      M. Hankins, Jr./s/ James Quinn
                        
                        Director
                        
                        March
      30, 2009James
      Quinn