**EXHIBIT
      13**


**PORTIONS
        OF ANNUAL REPORT TO STOCKHOLDERS**
 
 **SELECTED
        CONSOLIDATED FINANCIAL AND OTHER DATA**
  The
        following information is derived from the audited consolidated financial
        statements of Colonial Bankshares, Inc. For additional information, reference
        is
        made to “Management’s Discussion and Analysis of Financial Condition and Results
        of Operations” and the Consolidated Financial Statements of Colonial Bankshares,
        Inc. and related notes included elsewhere in this Annual Report.
 
 **At
                  December 31,****2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002****(In
                  thousands)****Selected
                  Financial Condition Data:**Total
                  assets
              
              $
              383,597
              
              $
              336,852
              
              $
              291,050
              
              $
              243,535
              
              $
              235,495Cash
                  and amounts due from banks
              
              
              13,257
              
              
              10,669
              
              
              5,282
              
              
              5,264
              
              
              4,984Investment
                  securities held to maturity
              
              
              18,722
              
              
              17,474
              
              
              18,584
              
              
              24,598
              
              
              40,118Investment
                  securities available for sale
              
              
              136,925
              
              
              139,256
              
              
              131,159
              
              
              118,233
              
              
              123,827Loans
                  receivable, net
              
              
              198,519
              
              
              157,774
              
              
              125,800
              
              
              86,841
              
              
              59,523Deposits
              
              
              337,254
              
              
              284,725
              
              
              259,407
              
              
              223,569
              
              
              217,786Borrowings
              
              
              8,324
              
              
              15,415
              
              
              13,890
              
              
              4,070
              
              
              3,165Stockholders’
                  equity
              
              
              36,663
              
              
              35,861
              
              
              16,848
              
              
              15,154
              
              
              13,617
 
 **For
                  the Years Ended December
                  31,****2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002****(In
                  thousands)****Selected
                  Operating Data:**Interest
                  income
              
              $
              18,509
              
              $
              14,706
              
              $
              12,351
              
              $
              10,734
              
              $
              11,316Interest
                  expense
              
              
              10,208
              
              
              6,623
              
              
              4,662
              
              
              4,275
              
              
              6,143Net
                  interest income
              
              
              8,301
              
              
              8,083
              
              
              7,689
              
              
              6,459
              
              
              5,173Provision
                  for loan losses
              
              
              179
              
              
              204
              
              
              354
              
              
              283
              
              
              218Net
                  interest income after
                provision
                  for loan losses
              
              
              8,122
              
              
              7,879
              
              
              7,335
              
              
              6,176
              
              
              4,955Non-interest
                  income
              
              
              1,043
              
              
              956
              
              
              902
              
              
              929
              
              
              853Non-interest
                  expense
              
              
              7,430
              
              
              6,567
              
              
              5,824
              
              
              4,955
              
              
              4,476Income
                  before income taxes
              
              
              1,735
              
              
              2,268
              
              
              2,413
              
              
              2,150
              
              
              1,332Income
                  taxes
              
              
              124
              
              
              499
              
              
              566
              
              
              483
              
              
              293Net
                  income
              
              $
              1,611
              
              $
              1,769
              
              $
              1,847
              
              $
              1,667
              
              $
              1,039
  
 
 1
  **At
                  or For the Years Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****Selected
                  Financial Ratios and Other Data:****Performance
                  Ratios:**Return
                  on average assets
              
              
              0.45
              %
              
              0.57
              %
              
              0.67
              %
              
              0.71
              %
              
              0.47
              %Return
                  on average equity
              
              
              4.49
              %
              
              6.69
              %
              
              11.96
              %
              
              11.75
              %
              
              8.13
              %Interest
                  rate spread (1)
              
              
              2.17
              %
              
              2.65
              %
              
              2.84
              %
              
              2.79
              %
              
              2.35
              %Net
                  interest margin (2)
              
              
              2.47
              %
              
              2.80
              %
              
              2.95
              %
              
              2.89
              %
              
              2.48
              %Efficiency
                  ratio (3)
              
              
              79.52
              %
              
              72.65
              %
              
              67.79
              %
              
              67.07
              %
              
              74.25
              %Noninterest
                  expense to average total assets
              
              
              2.07
              %
              
              2.10
              %
              
              2.12
              %
              
              2.10
              %
              
              2.03
              %Average
                  interest-earning assets to average interest-bearing
                  liabilities
              
              
              109.99
              %
              
              106.70
              %
              
              106.15
              %
              
              105.47
              %
              
              104.40
              %**Asset
                  Quality Ratios:**Non-performing
                  assets as a percent of total assets
              
              
              0.06
              %
              
              0.02
              %
              
              0.03
              %
              
              0.04
              %
              
              0.03
              %Non-performing
                  loans as a percent of total loans
              
              
              0.12
              %
              
              0.05
              %
              
              0.08
              %
              
              0.12
              %
              
              0.14
              %Allowance
                  for loan losses as a percent of non-performing loans
              
              
              589.27
              %
              
              1460.00
              %
              
              925.23
              %
              
              595.54
              %
              
              501.19
              %Allowance
                  for loan losses as a percent of total loans
              
              
              0.69
              %
              
              0.73
              %
              
              0.77
              %
              
              0.76
              %
              
              0.71
              %**Capital
                  Ratios:**Total
                  risk-based capital (to risk weighted assets)
              
              
              18.36
              %
              
              20.20
              %
              
              12.22
              %
              
              13.11
              %
              
              14.43
              %Tier
                  1 risk-based capital (to risk weighted assets)
              
              
              17.57
              %
              
              19.53
              %
              
              11.53
              %
              
              12.54
              %
              
              13.97
              %Tangible
                  capital (to tangible assets)
              
              
              9.09
              %
              
              9.85
              %
              
              5.67
              %
              
              6.02
              %
              
              5.53
              %Tier
                  1 leverage (core) capital (to adjusted tangible assets)
              
              
              9.09
              %
              
              9.85
              %
              
              5.67
              %
              
              6.02
              %
              
              5.53
              %Equity
                  to total assets
              
              
              9.56
              %
              
              10.65
              %
              
              5.79
              %
              
              6.21
              %
              
              5.79
              %**Other
                  Data:**Number
                  of full service offices
              
              
              6
              
              
              6
              
              
              6
              
              
              6
              
              
              7**Earnings
                  per share** (4):Basic
                  and diluted
              
              $
              0.37
              
              $
              0.20
              
              $
              NA
              
              $
              NA
              
              $
              NADividends
                  declared per share
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
 ___________________________
 (1)
              Represents
                  the difference between the weighted-average yield on interest-earning
                  assets and the weighted-average cost of interest-bearing liabilities
                  for
                  the period.
 (2)
              The
                  net interest margin represents net interest income as a percent
                  of average
                  interest-earning assets for the
                  period.
 (3)
                The
                    efficiency ratio represents non-interest expense divided by the
                    sum of net
                    interest income and non-interest
                    income.
 (4)
                For
                    2005, represents earnings per share for the six-month period
                    from June 30,
                    2005 (date of public offering) to December 31,
                    2005.
   2
  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
  **Forward
        Looking Statements**
  This
        document contains certain “forward-looking statements,” which may be identified
        by the use of words such as “believe,” “expect,” “anticipate,” “should,”
“planned,” “estimated” and “potential.” Examples of forward-looking statements
        include, but are not limited to, estimates with respect to our financial
        condition, results of operations and business that are subject to various
        factors which could cause actual results to differ materially from these
        estimates and most other statements that are not historical in nature. These
        factors include, but are not limited to, general and local economic conditions,
        changes in interest rates, deposit flows, demand for mortgage and other loans,
        real estate values, and competition; changes in accounting principles, policies,
        or guidelines; changes in legislation or regulation; and other economic,
        competitive, governmental, regulatory, and technological factors affecting
        our
        operations, pricing products and services.
  **Overview**
  Our
        results of operations depend primarily on our net interest income. Net interest
        income is the difference between the interest income we earn on our
        interest-earning assets, consisting primarily of loans, investment securities,
        mortgage-backed securities and other interest-earning assets (primarily cash
        equivalents), and the interest we pay on our interest-bearing liabilities,
        consisting primarily of savings accounts, NOW accounts, money market accounts,
        time deposits and borrowings. Our results of operations also are affected
        by our
        provisions for loan losses, non-interest income and non-interest expense.
        Non-interest income consists primarily of fees and service charges, income
        from
        bank-owned life insurance and miscellaneous other income. Non-interest expense
        consists primarily of salaries and employee benefits, occupancy and equipment,
        data processing, professional fees, advertising and other administrative
        expenses. Our results of operations also may be affected significantly by
        general and local economic and competitive conditions, changes in market
        interest rates, governmental policies and actions of regulatory
        authorities.
  **Management
        of Market Risk**
  ***General*** .
        The
        majority of our assets and liabilities are monetary in nature. Consequently,
        our
        most significant form of market risk is interest rate risk. Our assets,
        consisting primarily of mortgage loans, have longer maturities than our
        liabilities, consisting primarily of deposits. As a result, a principal part
        of
        our business strategy is to manage interest rate risk and reduce the exposure
        of
        our net interest income to changes in market interest rates. Accordingly,
        our
        Board of Directors has established an Asset/Liability Management Committee,
        consisting of senior management, which is responsible for evaluating the
        interest rate risk inherent in our assets and liabilities, for determining
        the
        level of risk that is appropriate given our business strategy, operating
        environment, capital, liquidity and performance objectives, and for managing
        this risk consistent with the guidelines approved by the Board of Directors.
        The
        Asset/Liability Committee monitors the level of interest rate risk and our
        Board
        of Directors reviews our asset/liability policies and interest rate risk
        position.
  We
        have
        sought to manage our interest rate risk in order to minimize the exposure
        of our
        earnings and capital to changes in interest rates. During the low interest
        rate
        environment that has existed in recent years, we have implemented the following
        strategies to manage our interest rate risk:
  ·
            increasing
                our origination of shorter-term loans, including commercial real
                estate
                loans and home equity loans;  ·
            maintaining
                adjustable-rate and shorter-term investments;
                and  ·
            maintaining
                pricing strategies that encourage deposits in longer-term, certificates
                of
                deposit.  3
  In
        addition, we have recently been approved as a qualified loan seller/servicer
        for
        Fannie Mae, which will facilitate our sale of long-term, fixed-rate residential
        mortgage loans in the future. By following these strategies, we believe that
        we
        are better positioned to react to increases in market interest rates. However,
        investments in shorter-term assets generally bear lower yields than longer-term
        investments.
  ***Net
        Portfolio Value*** **.** The
        Office of Thrift Supervision requires the computation of amounts by which
        the
        net present value of an institution’s cash flow from assets, liabilities and off
        balance sheet items (the institution’s net portfolio value or “NPV”) would
        change in the event of a range of assumed changes in market interest rates.
        The
        Office of Thrift Supervision provides all institutions that file a Consolidated
        Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report
        with
        an interest rate sensitivity report of net portfolio value. The Office of
        Thrift
        Supervision simulation model uses a discounted cash flow analysis and an
        option-based pricing approach to measuring the interest rate sensitivity
        of net
        portfolio value. Historically, the Office of Thrift Supervision model estimated
        the economic value of each type of asset, liability and off-balance sheet
        contract under the assumption that the United States Treasury yield curve
        increases or decreases instantaneously by 100 to 300 basis points in 100
        basis
        point increments. However, given the current low level of market interest
        rates,
        we did not prepare a NPV calculation for an interest rate decrease of greater
        than 200 basis points. A basis point equals one-hundredth of one percent,
        and
        100 basis points equals one percent. An increase in interest rates from 3%
        to 4%
        would mean, for example, a 100 basis point increase in the “Change in Interest
        Rates” column below.
  The
        table
        below sets forth, as of December 31, 2006, the estimated changes in our net
        portfolio value that would result from the designated instantaneous changes
        in
        the United States Treasury yield curve. Computations of prospective effects
        of
        hypothetical interest rate changes are based on numerous assumptions including
        relative levels of market interest rates, loan prepayments and deposit decay,
        and should not be relied upon as indicative of actual results.
  **NPV
                  as a Percentage
                  of****Present
                  Value of Assets
                  (3)****Estimated
                  Increase****Change
                  in**
              
              
              
              **(Decrease)
                  in
                  NPV**
              
              
              
              
              
              **Increase****Interest
                  Rates**
              
              **Estimated**
              
              
              
              
              
              
              **NPV**
              
              
              **(Decrease)****(basis
                    points) (1)**
              
              **NPV
                    (2)**
              
              **Amount**
              
              **Percent**
              
              
              **Ratio
                    (4)**
              
              
              **(basis
                    points)****(Dollars
                  in thousands)**+300
              
              $
              27,648
              
              $
              (21,011
              )
              
              (43
              %)
              
              7.48
              %
              
              (477
              )+200
              
              
              35,104
              
              
              (13,555
              )
              
              (28
              %)
              
              9.26
              %
              
              (299
              )+100
              
              
              42,155
              
              
              (6,504
              )
              
              (13
              %)
              
              10.85
              %
              
              (140
              )—
              
              
              48,659
              
              
              —
              
              
              —
              
              
              12.25
              %
              
              —-100
              
              
              53,535
              
              
              4,876
              
              
              10
              %
              
              13.22
              %
              
              97-200
              
              
              55,846
              
              
              7,187
              
              
              15
              %
              
              13.61
              %
              
              136
 
 (1)
            Assumes
                an instantaneous uniform change in interest rates at all
                maturities. (2)
            NPV
                is the discounted present value of expected cash flows from assets,
                liabilities and off-balance sheet
                contracts. (3)
            Present
                value of assets represents the discounted present value of incoming
                cash
                flows on interest-earning assets. (4)
            NPV
                Ratio represents NPV divided by the present value of
                assets. 
 The
        table
        above indicates that at December 31, 2006, in the event of a 200 basis point
        decrease in interest rates, we would experience a 15% increase in net portfolio
        value. In the event of a 200 basis point increase in interest rates, we would
        experience a 28% decrease in net portfolio value. Both of these calculations
        are
        based against the calculated net portfolio value of $48.7 million.
  Certain
        shortcomings are inherent in the methodology used in the above interest rate
        risk measurement. Modeling changes in net portfolio value require making
        certain
        assumptions that may or may not reflect the manner in which actual yields
        and
        costs respond to changes in market interest rates. In this regard, the net
        portfolio value table presented assumes that the composition of our
        interest-sensitive assets and liabilities existing at the beginning of a
        period
        remains constant over the period being measured and assumes that a particular
        change in interest rates is reflected uniformly across the yield curve
        regardless of the duration or repricing of specific assets and liabilities.
        Accordingly, although the net portfolio value table provides an indication
        of
        our interest rate risk exposure at a particular point in time, such measurements
        are not intended to and do not provide a precise forecast of the effect of
        changes in market interest rates on our net interest income and will differ
        from
        actual results.
   4
  **Average
        Balance Sheet**
  The
        following table sets forth average balances, average yields and costs, and
        certain other information for the periods indicated. Tax-equivalent yield
        adjustments have not been made for tax-exempt securities. All average balances
        are daily average balances. Non-accrual loans were included in the computation
        of average balances, but have been reflected in the table as loans carrying
        a
        zero yield. The yields set forth below include the effect of deferred fees,
        discounts and premiums that are amortized or accreted to interest income
        or
        expense.
  **For
                  the Years Ended December 31,****2006**
              
              **2005**
              
              **2004****Average
                  Balance**
              
              **Interest
                  Income/**
                **Expense**
              
              **Yield/
                  Cost**
              
              **Average
                  Balance**
              
              **Interest
                  Income/**
                **Expense**
              
              **Yield/
                  Cost**
              
              **Average
                  Balance**
              
              **Interest
                  Income/**
                **Expense**
              
              **Yield/
                  Cost****(Dollars
                  in thousands)****Interest-earning
                  assets:**Loans
              
              $
              180,469
              
              $
              11,088
              
              
              6.14
              %
              $
              140,069
              
              $
              8,268
              
              
              5.90
              %
              $
              105,074
              
              $
              6,030
              
              
              5.74
              %SecuritiesTaxable
              
              
              123,701
              
              
              6,046
              
              
              4.89
              %
              
              116,843
              
              
              5,150
              
              
              4.41
              %
              
              125,262
              
              
              5,054
              
              
              4.03
              %Tax-exempt
              
              
              31,902
              
              
              1,375
              
              
              4.31
              %
              
              31,382
              
              
              1,288
              
              
              4.10
              %
              
              30,732
              
              
              1,267
              
              
              4.12
              %Total
                  interest-earning assets
              
              
              336,072
              
              
              18,509
              
              
              5.51
              %
              
              288,294
              
              
              14,706
              
              
              5.10
              %
              
              261,068
              
              
              12,351
              
              
              4.73
              %Noninterest-earning
                  assets
              
              
              22,703
              
              
              
              
              
              
              
              
              24,058
              
              
              
              
              
              
              
              
              14,099Total
                  assets
              
              $
              358,775
              
              
              
              
              
              
              
              $
              312,352
              
              
              
              
              
              
              
              $
              275,167**Interest-bearing
                  liabilities:**Savings
                  accounts
              
              $
              59,781
              
              
              992
              
              
              1.66
              %
              $
              66,200
              
              
              979
              
              
              1.48
              %
              $
              63,994
              
              
              853
              
              
              1.33
              %NOW
                  accounts
              
              
              49,201
              
              
              805
              
              
              1.64
              %
              
              50,177
              
              
              507
              
              
              1.01
              %
              
              37,316
              
              
              171
              
              
              0.46
              %Money
                  market demand
              
              
              19,806
              
              
              587
              
              
              2.96
              %
              
              19,184
              
              
              385
              
              
              2.01
              %
              
              20,985
              
              
              421
              
              
              2.01
              %Certificates
                  of deposit
              
              
              161,264
              
              
              7,073
              
              
              4.39
              %
              
              128,714
              
              
              4,557
              
              
              3.54
              %
              
              108,609
              
              
              2,973
              
              
              2.74
              %Total
                  interest-bearing deposits
              
              
              290,052
              
              
              9,457
              
              
              3.26
              %
              
              264,275
              
              
              6,428
              
              
              2.43
              %
              
              230,904
              
              
              4,418
              
              
              1.91
              %Borrowings
              
              
              15,505
              
              
              751
              
              
              4.84
              %
              
              5,912
              
              
              195
              
              
              3.30
              %
              
              15,024
              
              
              244
              
              
              1.62
              %Total
                  interest-bearing
                liabilities
              
              
              305,557
              
              
              10,208
              
              
              3.34
              %
              
              270,187
              
              
              6,623
              
              
              2.45
              %
              
              245,928
              
              
              4,662
              
              
              1.90
              %Noninterest-bearing
                  liabilities
              
              
              17,358
              
              
              
              
              
              
              
              
              15,729
              
              
              
              
              
              
              
              
              13,803Total
                  liabilities
              
              
              322,915
              
              
              
              
              
              
              
              
              285,916
              
              
              
              
              
              
              
              
              259,731Equity
              
              
              35,860
              
              
              
              
              
              
              
              
              26,436
              
              
              
              
              
              
              
              
              15,436Total
                  liabilities and equity
              
              $
              358,775
              
              
              
              
              
              
              
              $
              312,352
              
              
              
              
              
              
              
              $
              275,167Net
                  interest income
              
              
              
              
              $
              8,301
              
              
              
              
              
              
              
              $
              8,083
              
              
              
              
              
              
              
              $
              7,689Interest
                  rate spread
              
              
              
              
              
              
              
              
              2.17
              %
              
              
              
              
              
              
              
              2.65
              %
              
              
              
              
              
              
              
              2.84
              %Net
                  interest-earning assets
              
              $
              30,515
              
              
              
              
              
              
              
              $
              18,107
              
              
              
              
              
              
              
              $
              15,140Net
                  interest margin
              
              
              
              
              
              
              
              
              2.47
              %
              
              
              
              
              
              
              
              2.80
              %
              
              
              
              
              
              
              
              2.95
              %Average
                  interest-earning assets to average interest-bearing
                  liabilities
              
              
              109.99
              %
              
              
              
              
              
              
              
              106.70
              %
              
              
              
              
              
              
              
              106.15
              %
 
  5
   **Rate/Volume
        Analysis**
  The
        following table presents the effects of changing rates and volumes on our
        net
        interest income for the periods indicated. The rate column shows the effects
        attributable to changes in rate (changes in rate multiplied by prior volume).
        The volume column shows the effects attributable to changes in volume (changes
        in volume multiplied by prior rate). The net column represents the sum of
        the
        prior columns. For purposes of this table, changes attributable to both rate
        and
        volume, which cannot be segregated, have been allocated proportionately based
        on
        the changes due to rate and the changes due to volume.
  **Years
                  Ended December 31,**
                **2006
                  vs. 2005**
              
              **Years
                  Ended December 31,**
                **2005
                  vs. 2004****Increase
                  (Decrease) Due to**
              
              
              
              **Increase
                  (Decrease) Due to****Volume**
              
              **Rate**
              
              **Net**
              
              **Volume**
              
              **Rate**
              
              **Net****(In
                  thousands)****Interest-earning
                  assets:**Loans
              
              $
              2,470
              
              $
              350
              
              $
              2,820
              
              $
              2,061
              
              $
              177
              
              $
              2,238SecuritiesTaxable
              
              
              314
              
              
              582
              
              
              896
              
              
              (238
              )
              
              334
              
              
              96Tax-exempt
              
              
              21
              
              
              66
              
              
              87
              
              
              27
              
              
              (6
              )
              
              21Total
                  interest-earning
                assets
              
              
              2,805
              
              
              998
              
              
              3,803
              
              
              1,850
              
              
              505
              
              
              2,355**Interest-bearing
                  liabilities:**Savings
                  accounts
              
              
              (51
              )
              
              64
              
              
              13
              
              
              29
              
              
              97
              
              
              126NOW
                  accounts
              
              
              (10
              )
              
              308
              
              
              298
              
              
              75
              
              
              261
              
              
              336Money
                  market demand
              
              
              13
              
              
              189
              
              
              202
              
              
              (36
              )
              
              0
              
              
              (36
              )Certificates
                  of deposit
              
              
              1,290
              
              
              1,226
              
              
              2,516
              
              
              615
              
              
              969
              
              
              1,584Total
                  interest-bearing deposits
              
              
              1,242
              
              
              1,787
              
              
              3,029
              
              
              683
              
              
              1,327
              
              
              2,010Borrowings
              
              
              432
              
              
              124
              
              
              556
              
              
              (119
              )
              
              70
              
              
              (49
              )Total
                  interest-bearing liabilities
              
              
              1,674
              
              
              1,911
              
              
              3,585
              
              
              564
              
              
              1,397
              
              
              1,961Net
                  change in interest income
              
              $
              1,131
              
              $
              (913
              )
              $
              218
              
              $
              1,286
              
              $
              (892
              )
              $
              394
  **Critical
        Accounting Policies**
  Critical
        accounting policies are those that involve significant judgments and assumptions
        by management and that have, or could have, a material impact on our income
        or
        the carrying value of our assets. Our critical accounting policies are those
        related to our allowance for loan losses.
  ***Allowance
        for Loan Losses.*** The
        allowance for loan losses is calculated with the objective of maintaining
        an
        allowance sufficient to absorb estimated probable loan losses inherent in
        the
        loan portfolio. Management’s determination of the adequacy of the allowance is
        based on periodic evaluations of the loan portfolio and other relevant factors.
        However, this evaluation is inherently subjective, as it requires an estimate
        of
        the loss content for each risk rating and for each impaired loan, an estimate
        of
        the amounts and timing of expected future cash flows, and an estimate of
        the
        value of collateral.
  We
        have
        established a systematic method of periodically reviewing the credit quality
        of
        the loan portfolio in order to establish an allowance for losses on loans.
        The
        allowance for losses on loans is based on our current judgments about the
        credit
        quality of individual loans and segments of the loan portfolio. The allowance
        for losses on loans is established through a provision for loan losses based
        on
        our evaluation of the losses inherent in the loan portfolio, and considers
        all
        known internal and external factors that affect loan collectibility as of
        the
        reporting date. Our evaluation, which includes a review of all loans on which
        full collectibility may not be reasonably assured, considers among other
        matters, the estimated net realizable value or the fair value of the underlying
        collateral, economic conditions, historical loan loss experience, our knowledge
        of inherent losses in the portfolio that are probable and reasonably estimable
        and other factors that warrant recognition in providing an appropriate loan
        loss
        allowance. Management believes this is a critical accounting policy because
        this
        evaluation involves a high degree of complexity and requires us to make
        subjective judgments that often require assumptions or estimates about various
        matters. Historically, we believe our estimates and assumptions have proven
        to
        be relatively accurate. For example, over the past three years, our allowance
        for loan losses as a percentage of average loans outstanding has ranged from
        0.77% to 0.94%, while our net charge-offs as a percentage of average loans
        outstanding has ranged from 0.02% to 0.03%. Nevertheless, because a small
        number
        of non-performing loans could result in net charge-offs significantly in
        excess
        of the estimated losses inherent in our loan portfolio, you should not place
        undue reliance on the accuracy of past estimates.
  6
  The
        analysis of the allowance for loan losses has three components: specific,
        general allocations and unallocated. Specific allocations are made for loans
        that are determined to be impaired. Impairment is measured by determining
        the
        present value of expected future cash flows or, for collateral-dependent
        loans,
        the fair value of the collateral adjusted for market conditions and selling
        expenses. The general allocation is determined by segregating the remaining
        loans by type of loan, risk weighting (if applicable) and payment history.
        We
        also analyze delinquency trends, general economic conditions and geographic
        and
        industry concentrations. This analysis establishes factors that are applied
        to
        the loan groups to determine the amount of the general allowance. The principal
        assumption used in deriving the allowance for loan losses is the estimate
        of
        loss content for each risk rating. To illustrate, if recent loss experience
        dictated that the projected loss ratios changed by 10% (of the estimate)
        across
        all risk ratings, the allocated allowance as of December 31, 2006 would have
        changed by approximately $137 thousand. Actual loan losses may be significantly
        more than the allowances we have established, which could have a material
        negative effect on our financial results.
  **Comparison
        of Financial Condition at December 31, 2006 and 2005**
  Total
        assets increased $46.7 million, or 13.9%, to $383.6 million at December 31,
        2006, from $336.9 million at December 31, 2005. The increase was the result
        of
        increases in loans receivable, office properties and equipment, interest-bearing
        time deposits, investment securities held to maturity and cash and amounts
        due
        from banks partially offset by decreases in investment securities available
        for
        sale and Federal Home Loan Bank stock.
  Net
        loans
        receivable increased by $40.7 million, or 25.8%, to $198.5 million at December
        31, 2006 from $157.8 million at December 31, 2005. One- to four-family
        residential real estate loans, which comprise over half of our loan portfolio,
        increased $24.6 million, or 31.7%, to $102.3 million at December 31, 2006
        from
        $77.7 million at December 31, 2005, reflecting a continued increase in our
        marketing efforts. Commercial real estate loans increased $7.8 million, or
        24.8%, to $39.2 million at December 31, 2006 from $31.4 million at December
        31,
        2005. **** The
        increased commercial real estate loan balances reflected our continued emphasis
        on originating this type of loan, resulting, in part, from the expansion
        of our
        commercial lending staff in recent years.
  Investment
        securities available for sale decreased $2.4 million, or 1.7%, to $136.9
        million
        at December 31, 2006 from $139.3 million at December 31, 2005. The decrease
        was
        the result of $16.6 million in principal amortization and $6.2 million in
        calls
        and maturities of investment securities available for sale offset by purchases
        of $20.1 million of mortgaged-backed and investment securities and a $342
        thousand increase in the market value of investment securities available
        for
        sale. Management considers the change in the fair value of the portfolio
        to be
        temporary and primarily resulting from changes in the interest rate environment.
        In addition, securities held to maturity increased $1.2 million, or 6.9%,
        to
        $18.7 million at December 31, 2006 from $17.5 million at December 31, 2005.
        The
        increase was the result of purchases in the amount of $7.4 million offset
        by
        principal amortization of $1.4 million and $5.0 million in calls and maturities
        of investment securities held to maturity.
  Deposits
        increased $52.6 million, or 18.5%, to $337.3 million at December 31, 2006
        from
        $284.7 million at December 31, 2005. The largest increase was in certificates
        of
        deposit, which increased $51.1 million, or 36.7%, to $190.4 million at December
        31, 2006 from $139.3 million at December 31, 2005. Included in the increase
        in
        certificates of deposits were brokered deposits in the amount of $11.4 million.
        Non-interest bearing demand accounts increased $4.5 million, or 33.1%. The
        increase in non-interest bearing demand accounts was due to increases in
        commercial accounts. NOW accounts and money market deposit accounts increased
        by
        $2.9 and $1.8 million, respectively, while Super NOW and savings accounts
        decreased by $3.3 and $4.3 million, respectively **.**
  Borrowings
        decreased to $8.3 million at December 31, 2006 from $15.4 million at December
        31, 2005. We decreased our outstanding borrowings because our net increase
        in
        deposits and the proceeds received from the calls, maturities and pay downs
        of
        securities, discussed above, exceeded our cash needs to fund loan
        originations.
  7
 Total
        stockholders’ equity increased $802 thousand to $36.7 million at December 31,
        2006 from $35.9 million at December 31, 2005. This increase was attributable
        to
        net income of $1.6 million and a decrease in accumulated other comprehensive
        loss of $159 thousand offset by repurchases of common stock in the amount
        of
        $1.2 million. Accumulated other comprehensive loss decreased as a result
        of a
        reduction in the net unrealized losses on investment securities available
        for
        sale. Because of interest rate volatility, accumulated other comprehensive
        income (loss) could materially fluctuate for future interim periods and years
        depending on economic and interest rate conditions.
  **Comparison
        of Operating Results for the Years Ended December 31, 2006 and December 31,
        2005**
  ***General.*** Net
        income decreased $158 thousand, or 8.9%, to $1.6 million for the year ended
        December 31, 2006 from $1.8 million for the year ended December 31, 2005.
        The
        principal reason for the decrease was an $863 thousand increase in non-interest
        expense partially offset by a $218 thousand increase in net interest income,
        a
        $25 thousand reduction in the provision for loan losses, an $87 thousand
        increase in non-interest income and a $375 thousand reduction in income tax
        expense.
  ***Interest
        Income*** *.* Interest
        income increased $3.8 million, or 25.9%, to $18.5 million for the year
        ended December 31, 2006 from $14.7 million for the year ended December 31,
        2005. The increase in interest income resulted from a $2.8 million increase
        in
        interest income on loans and a $1.0 million increase in income on investment
        securities.
  Interest
        income on loans increased $2.8 million, or 33.7%, to $11.1 million for the
        year ended December 31, 2006 from $8.3 million for the year ended December
        31, 2005. The average balance of loans increased $40.4 million, or 28.8%,
        to
        $180.5 million for the year ended December 31, 2006 from $140.1 million for
        the
        year ended December 31, 2005. The increase in average balance of loans accounted
        for the increase in interest income along with an increase in the average
        yield
        to 6.14% for the year ended December 31, 2006 from 5.90% for the year ended
        December 31, 2005. The increase in average balance of loans resulted primarily
        from increases in the average balances of one- to four-family residential
        real
        estate loans and commercial real estate loans. The increase in average balance
        of one- to four-family residential estate loans reflected, in part, our
        increased marketing efforts. The increase in average balance of commercial
        real
        estate loans reflected our continued emphasis on originating this type of
        loan,
        resulting, in part, from expanding our commercial lending staff in recent
        years.
  Interest
        income on securities increased by $1.0 million to $7.4 million for the year
        ended December 31, 2006 from $6.4 million for the year ended December 31,
        2005.
        An increase in the average yield on securities was augmented by an increase
        in
        the average balance of securities.
  ***Interest
        Expense.*** ** Interest
        expense increased $3.6 million, or 54.5%, to $10.2 million for the year
        ended December 31, 2006 from $6.6 million for the year ended December 31,
        2005.
  Interest
        expense on interest-bearing deposits increased by $3.1 million, or 48.4%,
        to
        $9.5 million for the year ended December 31, 2006 from $6.4 million
        for the year ended December 31, 2005. The increase in interest expense on
        interest-bearing deposits was due to a $25.8 million, or 9.8%, increase in
        the
        average balance of interest-bearing deposits to $290.1 million for the year
        ended December 31, 2006 from $264.3 million for the year ended December 31,
        2005. In addition, the average rate paid on interest-bearing deposits increased
        83 basis points to 3.26% for the year ended December 31, 2006 from 2.43%
        for the
        year ended December 31, 2005. We experienced increases in the average balances
        of money market deposit accounts and certificates of deposits while we
        experienced decreases in the average balance of savings accounts and NOW
        and
        Super-NOW accounts. The average cost of all deposit account categories increased
        for the year ended December 31, 2006.
  Interest
        expense on borrowings increased $556 thousand to $751 thousand for the year
        ended December 31, 2006 from $195 thousand for the year ended December 31,
        2005.
        This increase was due to a $9.6 million increase in the average balance of
        borrowings to $15.5 million for the year ended December 31, 2006 from $5.9
        million for the year ended December 31, 2005 and by a 154 basis point
        increase in the average cost of such borrowings to 4.84% for the year ended
        December 31, 2006 from 3.30% for the year ended December 31, 2005.
  8
  ***Net
        Interest Income*** *.* Because
        the increase in our interest income was greater than our increase in interest
        expense, net interest income increased by $218 thousand, or 2.7%, to
        $8.3 million for the year ended December 31, 2006 from $8.1 million
        for the year ended December 31, 2005. Our net interest margin decreased 33
        basis
        points to 2.47% for the year ended December 31, 2006 from 2.80% for the year
        ended December 31, 2005, and our net interest rate spread decreased 48 basis
        points to 2.17% for the year ended December 31, 2006 from 2.65% for the year
        ended December 31, 2005.
  ***Provision
        for Loan Losses.*** We
        establish provisions for loan losses, which are charged to operations in
        order
        to maintain the allowance for loan losses at a level we consider necessary
        to
        absorb probable credit losses inherent in the loan portfolio. In determining
        the
        level of the allowance for loan losses, we consider past and current loss
        experience, evaluation of real estate collateral, current economic conditions,
        volume and type of lending, adverse situations that may affect a borrower’s
        ability to repay a loan and the levels of nonperforming and other classified
        loans. The amount of the allowance is based on estimates and the ultimate
        losses
        may vary from such estimates as more information becomes available or later
        events change. We assess the allowance for loan losses on a quarterly basis
        and
        make provisions for loan losses in order to maintain the allowance. Based
        on our
        evaluation of the above factors, we recorded a provision for loan losses
        of $179
        thousand for the year ended December 31, 2006 and a provision for loan losses
        of
        $204 thousand for the year ended December 31, 2005. The provisions recorded
        reflected net recoveries of approximately $26 thousand for the year ended
        December 31, 2006 and net charge-offs of $26 thousand for the year ended
        December 31, 2005. The allowance for loan losses was $1.4 million, or 0.69%
        of
        total loans at December 31, 2006 compared to $1.2 million, or 0.73%, of total
        loans at December 31, 2005. The allowance for loan losses represented 589.3%
        of
        nonperforming loans at December 31, 2006 and 1,460.0% of nonperforming loans
        at
        December 31, 2005. To the best of our knowledge, we have recorded all losses
        that are both probable and reasonable to estimate for the years ended December
        31, 2006 and 2005.
  ***Non-interest
        Income*** *.* Non-interest
        income was $1.0 million for the year ended December 31, 2006 and $956 thousand
        for the year ended December 31, 2005. Fees and service charges on deposit
        accounts, gains on the sales of loans, earnings on life insurance and other
        non-interest income increased while net gains on sales and calls of investment
        securities decreased. The increase in fees and services charges on deposit
        accounts was attributable to the implementation of new fees charged on deposit
        accounts and a slight increase in the volume of several service charges.
  ***Non-interest
        Expense*** *.* Non-interest expense increased $863 thousand, or 13.3%, to $7.4 million for
        the
        year ended December 31, 2006 from $6.6 million for the year ended December
        31,
        2005. Compensation and benefits expense increased $611 thousand, or 16.5%,
        to
        $4.3 million for the year ended December 31, 2006 from $3.7 million for the
        year
        ended December 31, 2005. Normal salary increases, the addition of
        management-level employees, increases in benefit costs and the implementation
        of
        an Employee Stock Ownership Plan (“ESOP”) and stock-based incentive plans were
        offset by a reduction in incentive plan costs with the termination of the
        Phantom Stock Appreciation Rights Incentive Plan. The termination of the
        incentive plan, in May 2005, resulted in an expense reversal of $201 thousand,
        which represented an excess accrual after distribution of amounts due to
        participants. Occupancy and equipment expense increased $23 thousand, or
        2.5%.
        This increase was mainly due to increased depreciation expense, utility expense
        and real estate taxes offset by reductions in repair and maintenance expense.
        Data processing expense increased $23 thousand. This increase was mainly
        due to
        data processing costs associated with the growth of savings and loans.
        Professional fees increased $156 thousand. This increase was attributed to
        increases in legal and accounting and auditing expense as we completed our
        first
        full year of being a public company with the costs associated with our first
        public annual meeting. We expect professional fees to increase in the future
        due
        to increased accounting, audit and legal expenses associated with being a
        public
        company and fees associated with complying with the Sarbanes-Oxley Act of
        2002.
        Other expenses increased $48 thousand. This increase was attributable to
        increases in supervisory examination, insurance and surety bond, organizational
        dues and subscription, loan acquisition, telephone and postage expenses offset
        by decreases in employee related, advertising and promotion, contribution,
        differences and write-off expenses.
  ***Income
        Tax Expense*** *.* ****** The
        provision for income taxes was $124 thousand for the year ended December
        31,
        2006, compared to $499 thousand for the year ended December 31, 2005, reflecting
        effective tax rates of 7.2% and 22.0%, respectively. Our effective tax rate
        is
        below the combined state and federal statutory rate because of our investment
        in
        tax-exempt securities and bank-owned life insurance. The effective tax rate
        decreased in 2006 over 2005 due to the increased tax-exempt income with lower
        pre-tax income. Also, the formation of the Delaware subsidiary helped decrease
        the effective tax rate because the income from the Delaware subsidiary is
        subject to lower state income tax rates.
  9
  **Liquidity
        and Capital Resources**
  Liquidity
        is the ability to meet current and future financial obligations of a short-term
        nature. Our primary sources of funds consist of deposit inflows, loan repayments
        and maturities and sales of securities. While maturities and scheduled
        amortization of loans and securities are predictable sources of funds, deposit
        flows and mortgage prepayments are greatly influenced by general interest
        rates,
        economic conditions and competition.
  We
        regularly adjust our investments in liquid assets based upon our assessment
        of
        expected loan demand, expected deposit flows, yields available on
        interest-earning deposits and securities, and the objectives of our
        asset/liability management program. Excess liquid assets are invested generally
        in interest-earning deposits with other banks and short- and intermediate-term
        securities.
  Our
        most
        liquid assets are cash and cash equivalents. The levels of these assets are
        dependent on our operating, financing, lending and investing activities during
        any given period. At December 31, 2006, cash and cash equivalents totaled
        $13.3
        million. Securities classified as available-for-sale, which provide additional
        sources of liquidity, totaled $136.9 million at December 31, 2006. In addition,
        at December 31, 2006, we had the ability to borrow approximately $75.3 million
        from the Federal Home Loan Bank of New York. On that date, we had $8.3 million
        in advances outstanding.
  At
        December 31, 2006, we had $10.0 million in loan commitments outstanding.
        In
        addition to commitments to originate loans, we had $20.0 million in unadvanced
        funds to borrowers and $2.4 million of commitments issued under standby letters
        of credit. Certificates of deposit due within one year of December 31, 2006
        totaled $128.2 million, or 38.0% of total deposits. If these deposits do
        not
        remain with us, we will be required to seek other sources of funds, including
        other certificates of deposit and Federal Home Loan Bank advances. Depending
        on
        market conditions, we may be required to pay higher rates on such deposits
        or
        other borrowings than we currently pay on the certificates of deposit due
        on or
        before December 31, 2007. We believe, however, based on past experience,
        that a
        significant portion of our certificates of deposit will remain with us. We
        have
        the ability to attract and retain deposits by adjusting the interest rates
        offered.
  We
        have
        no material commitments or demands that are likely to affect our liquidity
        other
        than set forth below. In the event loan demand were to increase at a pace
        greater than expected, or any unforeseen demand or commitment were to occur,
        we
        would access our borrowing capacity with the Federal Home Loan Bank of New
        York.
  Our
        primary investing activities are the origination of loans and the purchase
        of
        securities. In 2006, we originated $87.6 million of loans and purchased $27.5
        million of securities. In 2005, we originated $75.1 million of loans and
        purchased $36.7 million of securities. We have not purchased any loans in
        recent
        periods.
  Financing
        activities consist primarily of activity in deposit accounts and Federal
        Home
        Loan Bank advances. We experienced a net increase in total deposits of $52.6
        million and $25.3 million for the years ended December 31, 2006 and 2005,
        respectively. Deposit flows are affected by the overall level of interest
        rates,
        the interest rates and products offered by us and our local competitors and
        other factors. We generally manage the pricing of our deposits so that we
        are
        competitive in our market area.
  Federal
        Home Loan Bank advances decreased by $7.1 million during the year ended December
        31, 2006 and increased by $1.5 million during the years ended December 31,
        2005. Federal Home Loan Bank advances have primarily been used to fund new
        loans
        and purchase securities.
  We
        have
        begun construction on our new administrative headquarters/full-service office
        in
        Vineland, New Jersey. We have budgeted approximately $6.3 million for the
        construction of these new banking facilities, for which we have already spent
        $4.3 million, including the cost of land, as of December 31, 2006. We cannot
        assure you that construction and other costs will not exceed this budget
        estimate. We anticipate opening the administrative headquarters in the first
        half of 2007. We have spent $269 thousand for the acquisition of land in
        Buena
        Township as a possible branch location. In January 2007, we purchased land
        in
        Harrison Township, New Jersey as a possible branch location. We purchased
        the
        land for $984 thousand.
  10
 Colonial
        Bank, FSB is subject to various regulatory capital requirements administered
        by
        the Office of Thrift Supervision, including a risk-based capital measure.
        The
        risk-based capital guidelines include both a definition of capital and a
        framework for calculating risk-weighted assets by assigning balance sheet
        assets
        and off-balance sheet items to broad risk categories. At December 31, 2006,
        Colonial Bank, FSB exceeded all Office of Thrift Supervision regulatory capital
        requirements. Colonial Bank, FSB is considered “well capitalized” under
        regulatory guidelines.
  The
        capital from the initial public offering significantly increased our liquidity
        and capital resources. Our financial condition was enhanced by the capital
        from
        the offering, resulting in increased net interest-earning assets. However,
        due
        to the increase in equity resulting from the capital raised in the offering,
        our
        return on equity is lower than it was prior to the offering.
  **Impact
        of Inflation and Changing Prices**
  The
        consolidated financial statements and related notes of Colonial Bankshares,
        Inc.
        have been prepared in accordance with accounting principles generally accepted
        in the United States of America (“GAAP”). GAAP generally requires the
        measurement of financial position and operating results in terms of historical
        dollars without consideration for changes in the relative purchasing power
        of
        money over time due to inflation. The impact of inflation is reflected in
        the
        increased cost of our operations. Unlike industrial companies, our assets
        and
        liabilities are primarily monetary in nature. As a result, changes in market
        interest rates have a greater impact on performance than the effects of
        inflation.
  **Market
        for Common Stock**
  Our
        shares of common stock are traded on the NASDAQ Global Market under the symbol
        “COBK”. Colonial Bankshares, MHC owns 2,441,716 shares, or 54.0% of our
        outstanding shares of common stock. The approximate number of holders of
        record
        of Colonial Bankshares’ common stock as of March 15, 2007 was 380. Certain
        shares of Colonial Bankshares are held in “nominee” or “street” name and
        accordingly, the number of beneficial owners of such shares is not known
        or
        included in the foregoing number. The following table presents quarterly
        market
        information for Colonial Bankshares’ common stock since the initial public
        offering date of June 30, 2005. Colonial Bankshares began trading on the
        NASDAQ
        National Market on June 30, 2005. Accordingly, no information prior to this
        date
        is available. The following information was provided by the NASDAQ Global
        Market.
  **High**
              
              **Low**
              
              **Dividends**Quarter
                  ended June 30, 2005
              
              $
              10.65
              
              $
              9.95
              
              $
              -Quarter
                  ended September 30, 2005
              
              
              11.35
              
              
              10.25
              
              
              -Quarter
                  ended December 31, 2005
              
              
              11.00
              
              
              9.31
              
              
              -Quarter
                  ended March 31, 2006
              
              
              12.86
              
              
              10.25
              
              
              -Quarter
                  ended June 30, 2006
              
              
              12.99
              
              
              11.14
              
              
              -Quarter
                  ended September 30, 2006
              
              
              13.14
              
              
              12.15
              
              
              -Quarter
                  ended December 31, 2006
              
              
              14.77
              
              
              12.41
              
              
              -
 
 Dividend
        payments by Colonial Bankshares are dependent primarily on dividends it receives
        from Colonial Bank, FSB, because Colonial Bankshares will have no source
        of
        income other than dividends from Colonial Bank, FSB, earnings from the
        investment of proceeds from the sale of shares of common stock retained by
        Colonial Bankshares, and interest payments with respect to Colonial Bankshares’
loan to the Employee Stock Ownership Plan.
   Under
        the
        rules of the Office of Thrift Supervision, Colonial Bank, FSB is not permitted
        to pay dividends on its capital stock to Colonial Bankshares, Inc., its sole
        stockholder, if Colonial Bank, FSB’s stockholder’s equity would be reduced below
        the amount of the liquidation account established in connection with the
        conversion. In addition, Colonial Bank, FSB is not permitted to make a capital
        distribution if, after making such distribution, it would be undercapitalized.
  In
        addition to the foregoing, earnings of Colonial Bank, FSB appropriated to
        bad
        debt reserves and deducted for federal income tax purposes are not available
        for
        payment of cash dividends or other distributions to stockholders without
        payment
        of taxes at the then-current tax rate by Colonial Bank, FSB on the amount
        of
        earnings removed from the reserves for such distributions. Colonial Bankshares,
        Inc. intends to make full use of this favorable tax treatment and does not
        contemplate any distribution by Colonial Bank, FSB in a manner that would
        create
        a federal tax liability.
 
 11
  **STOCKHOLDER
        INFORMATION**
 
 **Annual
                    Meeting**
                **Transfer
                    Agent**The
                    Annual Meeting of Stockholders will be held at
                Registrar
                    and Transfer Company3:00
                    p.m. on May 17, 2007 at the Ramada Inn,
                10
                    Commerce Drive2216 W.
                  Landis Avenue
                  and Route 55 Exit 32A,
                Cranford,
                    New Jersey 07016Vineland,
                  New Jersey
                  08360.If you
                  have any
                  questions concerning your stockholder**Stock
                    Listing**
                account,
                  please call
                  our transfer agent, noted above, at(800)
                  368-5948. This is
                  the number to call if youThe
                    Company’s Common Stock trades on the Nasdaq
                require
                    a change of address, records or informationGlobal
                    Market System under the symbol “COBK”
                about
                  lost
                  certificates.**Special
                    Counsel**
                **Annual
                    Report on Form 10**-**KSB**Luse
                    Gorman Pomerenk & Schick, P.C.
                A
                    copy of the Company’s Form 10-KSB for the fiscal5335
                    Wisconsin Avenue, N.W., Suite 400
                year ended
                  December 31,
                  2006, will be furnishedWashington,
                    D.C. 20015
                without
                  charge to
                  stockholders upon written request tothe Secretary,
                  Colonial
                  Bankshares, Inc., 85 West**Independent
                    Auditors**
                Broad
                  Street,
                  Bridgeton, New Jersey 08302.Beard
                    Miller Company LLP37
                    N. Valley RoadStation
                    Square Three, Suite 100Paoli,
                    Pennsylvania 19301
 **DIRECTORS
        AND OFFICERS**
   **Directors**
              
              **Officers**Frank M. Hankins, Jr.
              
              John Fitzpatrick, CPA
              
              Edward J. Geletka*Chairman of the Board*
              
              *President,
                  Fitzpatrick &*
              
              *President and**Retired
                  Chairman, H. H. Hankins &*
              
              *McIlvaine, CPAs PC*
              
              *Chief
                  Executive Officer**Brothers Lumber*Albert A. Fralinger, Jr.
              
              Edward J. Geletka
              
              L. Joseph Stella, III, CPA*Vice Chairman of the Board*
              
              *President and Chief Executive
                Officer,*
              
              *Executive Vice President
                and**Chairman and Chief Financial
                Officer,*
              
              *Colonial Bank, FSB*
              
              *Chief
                  Financial Officer**Fralinger Engineering*Richard S. Allen
              
              James Quinn
              
              William F. Whelan*President,
                  Allen Associates,*
              
              *Owner, Quinn Broadcasting,
                Inc.*
              
              *Executive
                  Vice President and**Insurance Services*
              
              *Mayor,
                  Millville, NJ*
              
              *Chief Operating
                Officer*Gregory J. Facemyer, CPA
              
              
              
              Richard W. Dapp*Self-Employed
                  Certified Public*
              
              
              
              *Senior Vice President
                and**Accountant*
              
              
              
              *Chief
                  Credit Officer*


12





***COLONIAL
        BANKSHARES, INC.***
 
  **TABLE
        OF CONTENTS**
  **Page
                    No.****CONSOLIDATED
                    FINANCIAL STATEMENTS:**Report
                    of Independent Registered Public Accounting Firm
                F-2Consolidated
                    Statements of Financial Condition
                F-3Consolidated
                    Statements of Income
                F-4Consolidated
                    Statements of Stockholders’ Equity
                F-5Consolidated
                    Statements of Cash Flows
                F-6Notes
                    to Consolidated Financial Statements
                F-7
 
 F-1
  **Report
        of Independent Registered Public Accounting Firm**
  To
        the
        Board of Directors and Stockholders
 Colonial
        Bankshares, Inc.
 Bridgeton,
        New Jersey
 
 We
        have
        audited the accompanying consolidated statements of financial condition of
        Colonial Bankshares, Inc. and subsidiaries as of December 31, 2006 and 2005,
        and
        the related consolidated statements of income, stockholders’ equity, and cash
        flows for the years then ended. These consolidated financial statements are
        the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these consolidated financial statements based on our
        audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audits included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Colonial Bankshares,
        Inc.
        and subsidiaries as of December 31, 2006 and 2005, and the results of their
        operations and their cash flows for the years then ended in conformity with
        accounting principles generally accepted in the United States of
        America.
  /s/
        Beard
        Miller Company LLP
  Beard
        Miller Company LLP
 Paoli,
        Pennsylvania
 March
        16,
        2007
  F-2
 
  ***COLONIAL
          BANKSHARES, INC.***
 
  **CONSOLIDATED
        STATEMENTS OF FINANCIAL CONDITION**
  December
                  31,**2006**
              
              **2005****(Dollars
                  In Thousands, Except Per Share Data)****ASSETS**Cash
                  and amounts due from banks
              
              $
              13,257
              
              $
              10,669Interest-bearing
                  time deposits in banks
              
              
              717
              
              
              —Investment
                  securities available for sale
              
              
              136,925
              
              
              139,256Investment
                  securities held to maturity (fair value 2006 - $19,500; 2005 -
                  $18,231)
              
              
              18,722
              
              
              17,474Loans
                  receivable (net of allowance for loan losses 2006 - $1,373; 2005
                  -
                  $1,168)
              
              
              198,519
              
              
              157,774Federal
                  Home Loan Bank stock, at cost
              
              
              775
              
              
              1,021Office
                  properties and equipment, net
              
              
              7,337
              
              
              4,535Bank-owned
                  life insurance
              
              
              2,485
              
              
              2,397Other
                  assets
              
              
              4,860
              
              
              3,726Total
                  Assets
              
              $
              383,597
              
              $
              336,852**LIABILITIES
                    AND STOCKHOLDERS’
                    EQUITY****LIABILITIES**Deposits:Non-interest-bearing
              
              $
              18,055
              
              $
              13,638Interest-bearing
              
              
              319,199
              
              
              271,087Total
                  deposits
              
              
              337,254
              
              
              284,725Federal
                  Home Loan Bank short-term borrowings
              
              
              1,450
              
              
              15,415Federal
                  Home Loan Bank long-term borrowings
              
              
              6,874
              
              
              —Advances
                  from borrowers for taxes and insurance
              
              
              793
              
              
              505Other
                  liabilities
              
              
              563
              
              
              346Total
                  Liabilities
              
              
              346,934
              
              
              300,991**STOCKHOLDERS’
                  EQUITY**Preferred
                  stock, 1,000,000 shares authorized and unissued
              
              
              —
              
              
              —Common
                  stock, par value $0.10 per share; authorized 10,000,000
                  shares;
                issued
                  4,521,696 shares; outstanding: 4,433,071 in 2006 and 4,521,696
                  in
                  2005
              
              
              452
              
              
              452Additional
                  paid-in capital
              
              
              19,519
              
              
              19,414Unearned
                  shares held by Employee Stock Ownership Plan (ESOP)
              
              
              (1,432
              )
              
              (1,548
              )Treasury
                  stock, at cost, 88,625 shares
              
              
              (1,189
              )
              
              —Retained
                  earnings
              
              
              19,863
              
              
              18,252Accumulated
                  other comprehensive loss
              
              
              (550
              )
              
              (709
              )Total
                  Stockholders’ Equity
              
              
              36,663
              
              
              35,861Total
                  Liabilities and Stockholders’ Equity
              
              $
              383,597
              
              $
              336,852
 
 *See
        notes to consolidated financial statements*
 
 F-3
  ***COLONIAL
        BANKSHARES, INC.***
 
  **CONSOLIDATED
        STATEMENTS OF INCOME**
  Years
                    Ended December 31,2006
                
                2005(Dollars
                    in Thousands, Except Per Share Data)INTEREST
                  INCOMELoans,
                    including fees
                
                $
                11,088
                
                $
                8,268Mortgage-backed
                    securities
                
                
                2,528
                
                
                2,014Securities:Taxable
                
                
                3,518
                
                
                3,136Tax-exempt
                
                
                1,375
                
                
                1,288Total
                    Interest Income
                
                
                18,509
                
                
                14,706INTEREST
                      EXPENSEDeposits
                
                
                9,457
                
                
                6,428Borrowings
                
                
                751
                
                
                195Total
                    Interest Expense
                
                
                10,208
                
                
                6,623Net
                    Interest Income
                
                
                8,301
                
                
                8,083PROVISION
                      FOR LOAN
                      LOSSES
                
                
                179
                
                
                204Net
                    Interest Income after Provision for Loan Losses
                
                
                8,122
                
                
                7,879NON-INTEREST
                    INCOMEFees
                    and service charges
                
                
                873
                
                
                807Gain
                    on sale of loans
                
                
                45
                
                
                15Net
                    gain on sales and calls of securities
                
                
                5
                
                
                29Earnings
                    on bank-owned life insurance
                
                
                88
                
                
                83Other
                
                
                32
                
                
                22Total
                    Non-Interest Income
                
                
                1,043
                
                
                956NON-INTEREST
                    EXPENSESCompensation
                    and benefits
                
                
                4,309
                
                
                3,698Occupancy
                    and equipment
                
                
                927
                
                
                904Data
                    processing
                
                
                617
                
                
                594Office
                    supplies
                
                
                129
                
                
                127Professional
                    fees
                
                
                351
                
                
                195Other
                
                
                1,097
                
                
                1,049Total
                    Non-Interest Expenses
                
                
                7,430
                
                
                6,567Income
                    before Income Taxes
                
                
                1,735
                
                
                2,268INCOME
                      TAXES
                
                
                124
                
                
                499Net
                    Income
                
                $
                1,611
                
                $
                1,769Per
                    Share Data (Note 3):Earnings
                    per share - basic
                
                $
                0.37
                
                $
                0.20Earnings
                    per share - diluted
                
                $
                0.37
                
                $
                0.20
  *See
        notes to consolidated financial statements*
 
 F-4
  ***COLONIAL
        BANKSHARES, INC.***
  **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY**
  ****
                **Common
                    Stock**
                ****
                **Additional
                    Paid-in Capital**
                ****
                **Unearned
                    Shares Held by ESOP**
                ****
                **Retained
                    Earnings**
                ****
                **Treasury
                    Stock**
                ****
                **Accumu-lated
                    Other Compre-hensive Income (Loss)**
                ****
                **Total
                    Stock-holders’ Equity**
                ****Balance,
                    January 1, 2004
                
                $
                —
                
                $
                5
                
                $
                —
                
                $
                16,483
                
                $
                —
                
                $
                360
                
                $
                16,848Comprehensive
                    income:Net
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                1,769
                
                
                —
                
                
                —
                
                
                1,769Net
                    change in unrealized loss on securities available for sale, net
                    of tax
                    benefit of $708
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,069
                )
                
                (1,069
                )Total
                    Comprehensive Income
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                700Net
                    proceeds of initial public stock offering (4,521,696
                    shares)
                
                
                452
                
                
                19,403
                
                
                (1,664
                )
                
                —
                
                
                —
                
                
                —
                
                
                18,191ESOP
                    shares committed to be released
                
                
                —
                
                
                6
                
                
                116
                
                
                —
                
                
                —
                
                
                —
                
                
                122Balance,
                    December 31, 2005
                
                
                452
                
                
                19,414
                
                
                (1,548
                )
                
                18,252
                
                
                —
                
                
                (709
                )
                
                35,861Comprehensive
                    income:Net
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                1,611
                
                
                —
                
                
                —
                
                
                1,611Net
                    change in unrealized loss on securities available for sale, net
                    of tax
                    expense of $180
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                159
                
                
                159Total
                    Comprehensive Income
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,770ESOP
                    shares committed to be released
                
                
                —
                
                
                27
                
                
                116
                
                
                —
                
                
                —
                
                
                —
                
                
                143Purchase
                    of treasury stock - 88,625 shares
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,189
                )
                
                —
                
                
                (1,189
                )Stock-based
                    compensation expense (restricted stock awards)
                
                
                —
                
                
                46
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                46Stock-based
                    compensation expense (stock options)
                
                
                —
                
                
                32
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                32Balance,
                    December 31, 2006
                
                $
                452
                
                $
                19,519
                
                $
                (1,432
                )
                $
                19,863
                
                $
                (1,189
                )
                $
                (550
                )
                $
                36,663
 
 *See
        notes to consolidated financial statements*
 
 F-5
  ***COLONIAL
        BANKSHARES, INC.***
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 Years
                  Ended December 31,2006
              
              2005Cash
                  Flows from Operating Activities:
              
              **(In
                  Thousands)**Net
                  income
              
              $
              1,611
              
              $
              1,769Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Provision
                  for loan losses
              
              
              179
              
              
              204Depreciation
                  expense
              
              
              390
              
              
              350ESOP
                  expense
              
              
              143
              
              
              122Stock-based
                  compensation expense
              
              
              78
              
              
              —Deferred
                  income taxes
              
              
              (185
              )
              
              (83
              )Net
                  earnings on bank-owned life insurance
              
              
              (88
              )
              
              (83
              )Net
                  gain on sales and calls of investment securities
              
              
              (5
              )
              
              (29
              )Loans
                  originated for sale
              
              
              (2,746
              )
              
              (990
              )Proceeds
                  from sale of loans
              
              
              2,647
              
              
              1,005Gain
                  on sale of loans
              
              
              (45
              )
              
              (15
              )Net
                  amortization of loan fees
              
              
              (13
              )
              
              10Amortization
                  (accretion) of premium and discount on investment securities,
                  net
              
              
              (287
              )
              
              13(Increase)
                  decrease in other assets
              
              
              (1,129
              )
              
              6Increase
                  (decrease) in other liabilities
              
              
              217
              
              
              (132
              )Net
                  cash provided by operating activities
              
              
              767
              
              
              2,147Cash
                  Flows from Investing Activities:Proceeds
                  from sales of:Investment
                  securities available for sale
              
              
              —
              
              
              1,000Proceeds
                  from calls and maturities of:Investment
                  securities available for sale
              
              
              6,241
              
              
              6,146Investment
                  securities held to maturity
              
              
              4,971
              
              
              2,000Purchase
                  of:Investment
                  securities available for sale
              
              
              (6,228
              )
              
              (10,779
              )Investment
                  securities held to maturity
              
              
              (5,545
              )
              
              (2,171
              )Mortgage-backed
                  securities available for sale
              
              
              (13,849
              )
              
              (23,782
              )Mortgage-backed
                  securities held to maturity
              
              
              (1,860
              )Office
                  properties and equipment
              
              
              (3,192
              )
              
              (939
              )Principal
                  repayments from:Investment
                  securities
              
              
              2,693
              
              
              3,887Mortgage-backed
                  securities
              
              
              15,291
              
              
              14,951Net
                  decrease in Federal Home Loan Bank stock
              
              
              246
              
              
              3Purchase
                  of interest-bearing time deposits
              
              
              (717
              )
              
              —Net
                  increase in loans receivable
              
              
              (40,767
              )
              
              (32,188
              )Net
                  cash used for investing activities
              
              
              (42,716
              )
              
              (41,872
              )Cash
                  Flows from Financing Activities:Net
                  increase in deposits
              
              
              52,529
              
              
              25,318Decrease
                  in Federal Home Loan Bank short-term borrowings
              
              
              (13,965
              )
              
              1,525Proceeds
                  from Federal Home Loan Bank long-term borrowings
              
              
              7,000
              
              
              —Repayment
                  of Federal Home Loan Bank long-term borrowings
              
              
              (126
              )
              
              —Increase
                  in advances from borrowers for taxes and insurance
              
              
              288
              
              
              78Acquisition
                  of treasury stock
              
              
              (1,189
              )
              
              —Net
                  proceeds from issuance of common stock
              
              
              —
              
              
              18,191Net
                  cash provided by financing activities
              
              
              44,537
              
              
              45,112Increase
                  in cash and cash equivalents
              
              
              2,588
              
              
              5,387CASH
                  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              10,669
              
              
              5,282CASH
                  AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              13,257
              
              $
              10,669Supplemental
                  Cash Flow Disclosures:Cash
                  paid:Interest
              
              $
              9,834
              
              $
              6,586Income
                  taxes
              
              $
              463
              
              $
              664




*See
        notes to consolidated financial statements*





F-6




***COLONIAL
      BANKSHARES, INC.***





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      1 –
      ORGANIZATION AND NATURE OF OPERATIONS**





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





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





In
      September 2006, the Bank established a Delaware corporation, CB Delaware
      Investments, Inc. (the “Operating Subsidiary”) whose purpose is to invest in and
      manage securities. The Operating Subsidiary was funded by the Bank with cash
      and
      investments with an approximate value of $134.0 million in exchange for all
      the
      outstanding stock of the Operating Subsidiary.





The
      Bank
      maintains its executive offices and main branch in Bridgeton, New Jersey with
      branches in Mantua, Millville, Upper Deerfield, Vineland and Sewell, New Jersey.
      The Bank’s principal business consists of attracting customer deposits and
      investing these deposits primarily in single-family residential, commercial,
      and
      consumer loans and investments.




**NOTE
      2 – SIGNIFICANT ACCOUNTING POLICIES**





**Principles
      of Consolidation**





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





**Use
      of Estimates**





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





F-7




***COLONIAL
        BANKSHARES, INC.***
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Significant
      Group Concentrations of Credit Risk**





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





**Cash
      and Cash Equivalents**





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





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





The
      Bank
      is required to maintain average reserve balances in vault cash, with the Federal
      Reserve Bank or with the Federal Home Loan Bank based upon outstanding balances
      of deposit transaction accounts. Based upon the Bank’s outstanding transaction
      deposit balances, the Bank maintained a deposit account at the Federal Home
      Loan
      Bank of New York in the amount of $1.2 million and $1.1 million at December
      31,
      2006 and 2005, respectively.





**Interest-Bearing
      Time Deposits in Banks**





Interest-bearing
      time deposits in banks mature within two years and are carried at
      cost.





**Investment
      Securities**





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





Securities
      that will be held for indefinite periods of time, including securities that
      may
      be sold in response to changes in market interest or prepayment rates, needs
      for
      liquidity and changes in the availability of and the yield of alternative
      investments are classified as available for sale. These securities are carried
      at estimated fair value, which is determined using published quotes. Unrealized
      gains and losses are excluded from earnings and are reported net of tax in
      other
      comprehensive income. Realized gains and losses are included in the statements
      of income and are determined based on the adjusted cost of the specific security
      sold.





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





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




F-8


***COLONIAL
          BANKSHARES, INC.***
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Loans
      Held for Sale**





At
      December 31, 2006, the Bank held $144 thousand in loans held for sale. These
      loans are carried at the lower of cost or estimated fair value. Net unrealized
      losses, if any, are recognized through a valuation allowance by charges to
      income. The loans held for sale balance is included in total loans receivable
      on
      the balance sheet. There were no loans held for sale at December 31,
      2005.





**Loans
      Receivable**





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





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





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





**Allowance
      for Loan Losses**





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





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





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





F-9


***COLONIAL
        BANKSHARES, INC.***
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





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





The
      allowance consists of specific, general and unallocated components. The specific
      component relates to loans that are classified as doubtful, substandard or
      special mention. For such loans that are also classified as impaired, an
      allowance is established when the discounted cash flows (or collateral value
      or
      observable market price) of the impaired loan is lower than the carrying value
      for that loan. The general component covers non-classified loans and is based
      on
      historical loss experience adjusted for qualitative estimate of probable losses.
      The unallocated component of the allowance reflects the margin of imprecision
      inherent in the underlying assumptions used in the methodologies for estimating
      specific and general losses in the portfolio. At December 31, 2006 and 2005,
      the
      allowance did not include an unallocated component.





**Federal
      Home Loan Bank Stock**





Federal
      law requires a member institution of the Federal Home Loan Bank system to hold
      restricted stock of its district Federal Home Loan Bank according to a
      predetermined formula. The restricted stock is carried at cost.





**Office
      Properties and Equipment**





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





**Transfers
      of Financial Assets**





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





**Bank-Owned
      Life Insurance**





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





**Advertising
      Costs**





The
      Bank
      follows the policy of charging the costs of advertising to expense as incurred.
      Advertising expense was $82 thousand and $115 thousand for the years ended
      December 31, 2006 and 2005, respectively.





F-10


***COLONIAL
        BANKSHARES, INC.***
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Stock
      Compensation Plans**





In
      2006,
      Board of Directors of the Company approved the Colonial Bankshares, Inc. 2006
      Stock-based Incentive Plan (the “Stock Plan”). Prior to 2006, the Company had no
      stock option plans or stock-based compensation other than the ESOP. The Company
      accounts for stock-based compensation under the fair value recognition
      provisions of FASB Statement No. 123(R), “Share-Based Payment.” Statement No.
      123(R) replaces Statement No. 123, supersedes APB Opinion No. 25 and
      requires compensation costs related to share-based payment transactions to
      be
      recognized in the financial statements over the period that an employee provides
      service in exchange for the award. Statement No. 123(R) was effective for all
      companies on January 1, 2006. For the year ended December 31, 2006,
      there were stock options granted and the related compensation expense of
      approximately $32 thousand is included in the accompanying statement of income
      for the year ended December 31, 2006. For the year ended December 31,
      2006, there was a tax benefit recognized related to this share-based
      compensation of approximately $11 thousand.





**Income
      Taxes**





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





**Earnings
      Per Share**





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





**Off-Balance
      Sheet Financial Instruments**





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





F-11
  ***COLONIAL
        BANKSHARES, INC.***
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Comprehensive
      Income**





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





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





Years
                Ended December 31,2006
            
            2005**(In
                Thousands)**Unrealized
                holding gains (losses) on available for sale securities
            
            $
            344
            
            $
            (1,748
            )Reclassification
                adjustment for gains included in net income
            
            
            (5
            )
            
            (29
            )Net
                unrealized gains (losses)
            
            
            339
            
            
            (1,777
            )Income
                tax effect
            
            
            (180
            )
            
            708Net
                of tax amount
            
            $
            159
            
            $
            (1,069
            )




**Recent
      Accounting Pronouncements**





In
      February 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for
      Certain Hybrid Financial Instruments”. SFAS No. 155 amends FASB Statement No.
      133 and FASB Statement No. 140, and improves the financial reporting of certain
      hybrid financial instruments by requiring more consistent accounting that
      eliminates exemptions and provides a means to simplify the accounting for these
      instruments. Specifically, SFAS No. 155 allows financial instruments that have
      embedded derivatives to be accounted for as a whole (eliminating the need to
      bifurcate the derivative from its host) if the holder elects to account for
      the
      whole instrument on a fair value basis. SFAS No. 155 is effective for all
      financial instruments acquired or issued after the beginning of an entity’s
      first fiscal year that begins after September 15, 2006. The Company is required
      to adopt the provisions of SFAS No. 155, as applicable, beginning in fiscal
      year
      2007. The Company does not believe the adoption of SFAS No. 155 will have a
      material impact on the Company’s financial position and results of
      operations.





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets - An Amendment of FASB Statement No. 140”. SFAS 156 requires that all
      separately recognized servicing assets and servicing liabilities be initially
      measured at fair value, if practicable. The statement permits, but does not
      require, the subsequent measurement of servicing assets and servicing
      liabilities at fair value. SFAS 156 is effective as of the beginning of an
      entity’s fiscal year that begins after September 15, 2006, which for the Company
      will be as of the beginning of fiscal 2007. The Company does not believe that
      the adoption of SFAS 156 will have a significant effect on its financial
      statements.





In
      February 2006, the FASB issued FASB Staff Position No. FAS 123(R)-4,
“Classification of Options and Similar Instruments Issued as Employer
      Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
      Event”. The position amends SFAS 123(R) to incorporate that a cash settlement
      feature that can be exercised only upon the occurrence of a contingent event
      that is outside the employee’s control does not meet certain conditions in SFAS
      123R until it becomes probable that the event will occur. The Company has
      adopted SFAS 123(R) effective January 1, 2006 and this FASB Staff Position
      did
      not have an impact on the Company’s consolidated financial statements.




F-12


***COLONIAL
        BANKSHARES, INC.***
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





In
      October 2006, the FASB issued FASB Staff Position No. 123(R)-5, "Amendment
      of
      FASB Staff Position FAS 123(R)-1" ("FSP 123(R)-5"). FSP 123(R)-5 amends FSP
      123(R)-1 for equity instruments that were originally issued as employee
      compensation and then modified, with such modification made solely to reflect
      an
      equity restructuring that occurs when the holders are no longer employees.
      The
      Company has adopted SFAS 123(R) effective January 1, 2006 and this FASB Staff
      Position did not have an impact on the Company’s consolidated financial
      statements.





In
      October 2006, the Financial Accounting Standards Board ("FASB") issued FASB
      Staff Position No. 123R-6, "Technical Corrections of FASB Statement No. 123(R)"
      ("FSP 123(R)-6"). FSP 123(R)-6 amends FSP 123(R) to exempt nonpublic entities
      from disclosing the aggregate intrinsic value of outstanding fully vested share
      options (or share units) and share options expected to vest, to revise the
      computation of minimum compensation cost that must be recognized, to indicate
      that at the date that the illustrative awards were no longer probable of
      vesting, any previously recognized compensation cost should have been reversed,
      and to amend the definition of short-term inducement to exclude an offer to
      settle an award. The Company has adopted SFAS 123(R) effective January 1, 2006
      and this FASB Staff Position did not have an impact on the Company’s
      consolidated financial statements.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48), which
      clarifies the accounting for uncertainty in tax positions. This interpretation
      requires that companies recognize in their financial statements the impact
      of a
      tax position, if that position is more likely than not of being sustained on
      audit, based on the technical merits of the position. The provisions of FIN
      48
      are effective for fiscal years beginning after December 15, 2006, with the
      cumulative effect of the change in accounting principle recorded as an
      adjustment to opening retained earnings. The company does not anticipate a
      significant impact of these new pronouncements on its consolidated financial
      statements.





On
      September 13, 2006, the Securities and Exchange Commission (“SEC”) issued
      Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides
      interpretive guidance on how the effects of the carryover or reversal of prior
      year misstatements should be considered in quantifying a potential current
      year
      misstatement. Prior to SAB 108, companies could evaluate the materiality of
      financial-statement misstatements using either the income statement or balance
      sheet approach, with the income statement approach  focusing on new
      misstatements added in the current year, and the balance sheet approach focusing
      on the cumulative amount of misstatement present in a company’s balance sheet.
      Misstatements that would be material under one approach could be viewed as
      immaterial under another approach, and not be corrected. SAB 108 now requires
      that companies view financial statement misstatements as material if they are
      material according to either the income statement or balance sheet approach.
      The
      Company has analyzed SAB 108 and determined that the adoption did not have
      a
      material effect on the reported results of operations or financial
      conditions.





In
      September 2006, the FASB issued FASB Staff Position AUG AIR-1, “Accounting for
      Planned Major Maintenance Activities” which is effective for fiscal years
      beginning after December 15, 2006. This position statement eliminates the
      accrue-in-advance method of accounting for planned major maintenance activities.
      Adoption of this pronouncement did not have an impact on the determination
      or
      reporting of our financial results.





In
      September 2006, the FASB ratified the consensus reached by the Emerging Issues
      Task Force (“EITF”) in Issue 06-4, Accounting for Deferred Compensation and
      Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
      Arrangements. EITF 06-4 applies to life insurance arrangements that provide
      an
      employee with a specified benefit that is not limited to the employee’s active
      service period, including certain bank-owned life insurance (“BOLI”) policies.
      EITF 06-4 requires an employer to recognize a liability and related compensation
      costs for future benefits that extend to postretirement periods. EITF 06-4
      is
      effective for fiscal years beginning after December 15, 2007, with earlier
      application permitted. The Company is continuing to evaluate the impact of
      this
      consensus, which may require it to recognize an additional liability and
      compensation expense related to its BOLI policies.




F-13


***COLONIAL
        BANKSHARES, INC.***
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
      2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





In
      September 2006, the FASB ratified the consensus reached by the EITF in Issue
      06-5, Accounting for Purchases of Life Insurance - Determining the Amount That
      Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
      Accounting for Purchases of Life Insurance. Technical Bulletin No. 85-4 states
      that an entity should report as an asset in the statement of financial position
      the amount that could be realized under the insurance contract. EITF 06-5
      clarifies certain factors that should be considered in the determination of
      the
      amount that could be realized. EITF 06-5 is effective for fiscal years beginning
      after December 15, 2006, with earlier application permitted under certain
      circumstances. The adoption of this consensus did not have a material effect
      on
      its consolidated financial position or results of operation.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities-Including an amendment of FASB
      Statement No. 115. SFAS No. 159 permits entities to choose to measure many
      financial instruments and certain other items at fair value. Unrealized gains
      and losses on items for which the fair value option has been elected will be
      recognized in earnings at each subsequent reporting date. SFAS No. 159 if
      effective for our Company January 1, 2008. The Company is evaluating the impact
      that the adoption of SFAS No. 159 will have on our consolidated financial
      statements.




F-14


***COLONIAL
        BANKSHARES, INC.***
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**NOTE
        3 – EARNINGS
        PER SHARE**
 
 There
        are
        no convertible securities which would affect the net income (numerator) in
        calculating basic and diluted earnings per share; therefore the net income
        for
        2006 is $1.6 million and the net income for 2005 is $859 thousand which is
        the
        net income from June 30, 2005 (the date of the initial public offering) to
        December 31, 2005. Basic and diluted earnings per share data are based on
        the
        weighted-average number of common shares outstanding during each period.
        Diluted
        earnings per share are further adjusted for potential common shares that
        were
        dilutive and outstanding during the period. Potential common shares consist
        of
        stock options outstanding and non-vested stock grants under the stock-based
        incentive plans. The dilutive effect of potential common shares is computed
        using the treasury stock method. All stock options and non-vested stock grants
        are assumed to be 100% vested for purposes of the earnings per share
        computations. The following table sets forth the composition of the weighted
        average common shares (denominator) used in the basic and diluted earnings
        per
        share computation.
  **For
                    the year ended December 31,****2006**
              ****
              **For
                    the period ended December 31,****2005**Net
                  Income
              
              $
              1,611,000
              
              $
              859,000Weighted
                  average common shares outstanding
              
              
              4,521,696
              
              
              4,521,696Average
                  unearned ESOP shares
              
              
              (154,763
              )
              
              (166,335
              )Average
                  treasury stock shares
              
              
              (11,718
              )
              
              —Weighted
                  average common shares outstanding - basic
              
              
              4,355,215
              
              
              4,355,361Effect
                  of dilutive non-vested shares and stock options
                  outstanding
              
              
              33,561
              
              
              —Weighted
                  average common shares outstanding - diluted
              
              
              4,388,776
              
              
              4,355,361Basic
                  earnings per share
              
              $
              0.37
              
              $
              0.20Diluted
                  earnings per share
              
              $
              0.37
              
              $
              0.20
 
 F-15
 ***COLONIAL
          BANKSHARES, INC.***
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        4 – INVESTMENT SECURITIES**
 
 Investment
        securities are summarized as follows:
 
 **Amortized
                  Cost**
              
              **Gross
                  Unrealized Gains**
              
              **Gross
                  Unrealized Losses**
              
              **Fair
                  Value****(In
                  Thousands)**AVAILABLE
                  FOR SALE:DECEMBER
                  31, 2006U.
                  S. Government agency
              
              $
              29,534
              
              $
              43
              
              $
              (449
              )
              $
              29,128Corporate
              
              
              8,956
              
              
              37
              
              
              (333
              )
              
              8,660Mutual
                  funds
              
              
              13,942
              
              
              —
              
              
              (226
              )
              
              13,716Municipal
                  securities
              
              
              23,927
              
              
              403
              
              
              (71
              )
              
              24,259SBA
                  pools
              
              
              7,759
              
              
              220
              
              
              (46
              )
              
              7,933Mortgage-backed
                  securities
              
              
              53,646
              
              
              168
              
              
              (585
              )
              
              53,229$
              137,764
              
              $
              871
              
              $
              (1,710
              )
              $
              136,925
 
 DECEMBER
                  31, 2005U.
                  S. Government agency
              
              $
              29,509
              
              $
              41
              
              $
              (499
              )
              $
              29,051Corporate
              
              
              9,341
              
              
              56
              
              
              (134
              )
              
              9,263Mutual
                  funds
              
              
              13,314
              
              
              —
              
              
              (198
              )
              
              13,116Municipal
                  securities
              
              
              23,902
              
              
              316
              
              
              (157
              )
              
              24,061SBA
                  pools
              
              
              10,597
              
              
              201
              
              
              (63
              )
              
              10,735Mortgage-backed
                  securities
              
              
              53,771
              
              
              170
              
              
              (911
              )
              
              53,030$
              140,434
              
              $
              784
              
              $
              (1,962
              )
              $
              139,256HELD
                  TO MATURITY:DECEMBER
                  31, 2006U.
                  S. Government agency
              
              $
              1,412
              
              $
              —
              
              $
              (43
              )
              $
              1,369Corporate
              
              
              1,698
              
              
              131
              
              
              (1
              )
              
              1,828Municipal
                  securities
              
              
              11,640
              
              
              599
              
              
              —
              
              
              12,239Mortgage-backed
                  securities
              
              
              3,972
              
              
              92
              
              
              —
              
              
              4,064$
              18,722
              
              $
              822
              
              $
              (44
              )
              $
              19,500DECEMBER
                  31, 2005U.
                  S. Government agency
              
              $
              1,000
              
              $
              —
              
              $
              (2
              )
              $
              998Corporate
              
              
              2,964
              
              
              167
              
              
              (1
              )
              
              3,130Municipal
                  securities
              
              
              10,011
              
              
              500
              
              
              —
              
              
              10,511Mortgage-backed
                  securities
              
              
              3,499
              
              
              93
              
              
              —
              
              
              3,592$
              17,474
              
              $
              760
              
              $
              (3
              )
              $
              18,231
  All
        of
        the Company’s mortgage-backed securities at December 31, 2006 and 2005 have been
        issued by government agencies.
 F-16


***COLONIAL
          BANKSHARES, INC.***
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
          4 –
          INVESTMENT SECURITIES (CONTINUED)**
 
 The
          amortized cost and estimated fair value of investment securities at December
          31,
          2006, by contractual maturity, are shown below. Expected maturities will
          differ
          from contractual maturities because borrowers may have the right to call
          or
          prepay obligations with or without call or prepayment penalties.
  ****
                **Held
                    to Maturity**
                ****
                **Available
                    for Sale**
                ********
                ****
                **AmortizedCost**
                ****
                **Fair
                    Value**
                ****
                **AmortizedCost**
                ****
                **Fair
                    Value****(In
                    Thousands)**Due
                    in one year or less
                
                $
                2,643
                
                $
                2,936
                
                $
                14,942
                
                $
                14,713Due
                    after one year through five years
                
                
                2,684
                
                
                2,617
                
                
                19,633
                
                
                19,534Due
                    after five year through ten years
                
                
                3,462
                
                
                3,361
                
                
                36,596
                
                
                36,763Due
                    thereafter
                
                
                9,933
                
                
                10,586
                
                
                66,593
                
                
                65,915$
                18,722
                
                $
                19,500
                
                $
                137,764
                
                $
                136,925
 
 At
          December 31, 2006 and 2005, $35.7 million and $37.2 million, respectively,
          of
          securities were pledged as collateral to secure certain deposits and FHLB
          advances.
 
 Gross
          gains and losses of $5 thousand and $0, respectively, for the year ended
          December 31, 2006, and $29 thousand and $0 thousand, respectively, for
          the year
          ended December 31, 2005, were realized on sales and calls of investment
          securities.
 
 The
          following table shows the Company’s available for sale investments’ gross
          unrealized losses and fair value, and length of time that individual securities
          have been in a continuous unrealized loss position:
  **At
                    December 31, 2006**
                ****
                **Less
                    than 12 months**
                ****
                **12
                    months or more**
                ****
                **Total**
                ********
                ****
                **Fair
                    Value**
                ****
                **Unrealized
                    Losses**
                ****
                **Fair
                    Value**
                ****
                **Unrealized
                    Losses**
                ****
                **Fair
                    Value**
                ****
                **Unrealized
                    Losses****(In
                    Thousands)**U.
                    S. Government agency
                
                $
                1,983
                
                $
                1
                
                $
                23,708
                
                $
                448
                
                $
                25,691
                
                $
                449Corporate
                
                
                —
                
                
                —
                
                
                4,809
                
                
                333
                
                
                4,809
                
                
                333Mutual
                    funds
                
                
                444
                
                
                1
                
                
                12,960
                
                
                225
                
                
                13,404
                
                
                226Municipal
                    securities
                
                
                769
                
                
                3
                
                
                6,591
                
                
                68
                
                
                7,360
                
                
                71SBA
                    pools
                
                
                544
                
                
                1
                
                
                1,789
                
                
                45
                
                
                2,333
                
                
                46Mortgage-backed
                    securities
                
                
                14,280
                
                
                154
                
                
                19,998
                
                
                431
                
                
                34,278
                
                
                585Total
                
                $
                18,020
                
                $
                160
                
                $
                69,855
                
                $
                1,550
                
                $
                87,875
                
                $
                1,710
 
 F-17
  ***COLONIAL
          BANKSHARES, INC.***
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
          4 –
          INVESTMENT SECURITIES (CONTINUED)**
 
 **At
                    December 31, 2005**
                
                **Less
                    than 12 months**
                
                **12
                    months or more**
                
                **Total******
                
                **Fair
                    Value**
                
                **UnrealizedLosses**
                
                **Fair
                    Value**
                
                **UnrealizedLosses**
                
                **Fair
                    Value**
                
                **UnrealizedLosses****(In
                    Thousands)**U.
                    S. Government agency
                
                $
                15,097
                
                $
                206
                
                $
                12,160
                
                $
                293
                
                $
                27,257
                
                $
                499Corporate
                
                
                3,577
                
                
                89
                
                
                1,329
                
                
                45
                
                
                4,906
                
                
                134Mutual
                    funds
                
                
                374
                
                
                3
                
                
                12,613
                
                
                195
                
                
                12,987
                
                
                198Municipal
                    securities
                
                
                7,450
                
                
                67
                
                
                3,892
                
                
                90
                
                
                11,342
                
                
                157SBA
                    pools
                
                
                1,306
                
                
                3
                
                
                3,806
                
                
                60
                
                
                5,112
                
                
                63Mortgage-backed
                    securities
                
                
                26,402
                
                
                337
                
                
                16,825
                
                
                574
                
                
                43,227
                
                
                911Total
                
                $
                54,206
                
                $
                705
                
                $
                50,625
                
                $
                1,257
                
                $
                104,831
                
                $
                1,962
 
 The
          following table shows the Company’s held to maturity investments’ gross
          unrealized losses and fair value, and length of time that individual securities
          have been in a continuous unrealized loss position:
  **At
                    December 31, 2006**
                ****
                **Less
                    than 12 months**
                ****
                **12
                    months or more**
                ****
                **Total**
                ********
                ****
                **Fair
                    Value**
                ****
                **Unrealized
                    Losses**
                ****
                **Fair
                    Value**
                ****
                **Unrealized
                    Losses**
                ****
                **Fair
                    Value**
                ****
                **Unrealized
                    Losses****(In
                    Thousands)**U.
                    S. Government agency
                
                $
                875
                
                $
                43
                
                $
                —
                
                $
                —
                
                $
                875
                
                $
                43Corporate
                
                
                429
                
                
                1
                
                
                —
                
                
                —
                
                
                429
                
                
                1Total
                
                $
                1,304
                
                $
                44
                
                $
                —
                
                $
                —
                
                $
                1,304
                
                $
                44
  **At
                      December 31, 2005**
                  
                  **Less
                      than 12 months**
                  
                  **12
                      months or more**
                  
                  **Total****Fair
                      Value**
                  
                  **Unrealized**
                    **Losses**
                  
                  **Fair
                      Value**
                  
                  **Unrealized**
                    **Losses**
                  
                  **Fair
                      Value**
                  
                  **Unrealized**
                    **Losses****(In
                      Thousands)**U.
                      S. Government agency
                  
                  $
                  998
                  
                  $
                  2
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  998
                  
                  $
                  2Corporate
                  
                  
                  400
                  
                  
                  1
                  
                  
                  —
                  
                  
                  —
                  
                  
                  400
                  
                  
                  1Total
                  
                  $
                  1,398
                  
                  $
                  3
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  1,398
                  
                  $
                  3
 Management
          evaluates securities for other than temporary impairment at least on a
          quarterly
          basis, and more frequently when economic or market concerns warrant such
          evaluation. Consideration is given to (1) the length of time and the extent
          to
          which the fair value has been less than cost, (2) the financial condition
          and
          near-term prospects of the issuer, and (3) the intent and ability of the
          Bank to
          retain its investment in the issuer for a period of time sufficient to
          allow for
          any anticipated recovery in fair value. In management’s opinion, the unrealized
          losses reflect changes in interest rates subsequent to the acquisition
          of
          specific securities.
 
 At
          December 31, 2006, there were 38 securities in the less than twelve months
          category and 112 securities in the twelve months or more category for the
          available for sale portfolio. At December 31, 2006, there were two securities
          in
          the less than twelve months category and no securities in the twelve months
          or
          more category for the held to maturity portfolio.
  
 F-18
 
 *COLONIAL BANKSHARES, INC.*
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
          4 –
          INVESTMENT SECURITIES (CONTINUED)**
 
 The
          Company believes the unrealized losses on the investment in U. S. Government
          agency securities are caused by interest rate increases. The contractual
          terms
          of those investments do not permit the issuer to settle the securities
          at a
          price less than the amortized cost of the investment. Because the Company
          has
          the ability and intent to hold these investments until a recovery of fair
          value,
          which may be maturity, the Company does not consider the investments to
          be
          other-than temporarily impaired at December 31, 2006.
 
 The
          Company believes the unrealized losses on the investment in corporate securities
          are caused by interest rate increases. The contractual terms of those
          investments do not permit the individual corporations to settle the security
          at
          a price less than par. Because the decline in market value is attributable
          to
          changes in interest rates and not credit quality, and because the Company
          has
          the ability and intent to hold these investments until a recovery of fair
          value,
          which may be maturity, the Company does not consider the investments to
          be
          other-than temporarily impaired at December 31, 2006.
 
 The
          Company believes the unrealized loss on the investment in mutual fund is
          caused
          by interest rate increases. The mutual fund invests in adjustable-rate
          mortgage-backed securities. Because the decline in market value is attributable
          to changes in interest rates and not credit quality, and because the Company
          has
          the ability and intent to hold these investments until a recovery of fair
          value,
          which may be maturity, the Company does not consider the investments to
          be
          other-than temporarily impaired at December 31, 2006.
 
 The
          Company believes the unrealized losses on the investment in municipal securities
          are caused by interest rate increases. The contractual terms of those
          investments do not permit the municipality to settle the security at a
          price
          less than par. Because the decline in market value is attributable to changes
          in
          interest rates and not credit quality, and because the Company has the
          ability
          and intent to hold these investments until a recovery of fair value, which
          may
          be maturity, the Company does not consider the investments to be other-than
          temporarily impaired at December 31, 2006.
 
 The
          Company believes the unrealized losses on the investment in SBA loan pools
          and
          the U. S. Government agency mortgage-backed securities are caused by interest
          rate increases. The contractual cash flows of those investments are guaranteed
          by an agency of the United States government. Because the decline in market
          value is attributable to changes in interest rates and not credit quality,
          and
          because the Company has the ability and intent to hold these investments
          until a
          recovery of fair value, which may be maturity, the Company does not consider
          the
          investments to be other-than temporarily impaired at December 31,
          2006.
  **NOTE
          5 -
          LOANS RECEIVABLE**
 
 Loans
          receivable at December 31, 2006 and 2005 consist of the following:
 
 **2006**
                ****
                **2005**
                ********
                ****
                **(In
                    Thousands)**Mortgage
                    loans:One-to-four
                    family
                
                $
                102,328
                
                $
                77,738Multi-family
                
                
                2,492
                
                
                1,676Commercial
                
                
                39,186
                
                
                31,392Construction
                
                
                8,371
                
                
                6,267Home
                    equity loans and credit lines
                
                
                38,074
                
                
                33,067Commercial
                    loans
                
                
                7,337
                
                
                6,880Consumer
                    and other loans
                
                
                2,427
                
                
                2,258200,215
                
                
                159,278Deferred
                    loan fees
                
                
                (323
                )
                
                (336
                )Allowance
                    for loan losses
                
                
                (1,373
                )
                
                (1,168
                )$
                198,519
                
                $
                157,774
 
 F-19
  *COLONIAL BANKSHARES, INC.*
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
          5 - LOANS RECEIVABLE (CONTINUED)**
 
 In
          the
          normal course of business, the Bank has extended loans to executive officers,
          directors and principal stockholders, their immediate families and affiliated
          companies (commonly referred to as related parties) on the same terms including
          interest rates and collateral as those prevailing at the time for comparable
          transactions with others. A summary of loan activity to related parties
          is as
          follows (in thousands):
 
 **Balance**
                  **January
                    1,**
                ****
                **Additions**
                ****
                **AmountsCollected**
                ****
                **Balance**
                  **December
                    31,**2006
                
                $
                2,601
                
                $
                2,019
                
                $
                2,019
                
                $
                2,601
 
 At
          December 31, 2006 and 2005, the Bank had no impaired loans. Loans on which
          the
          accrual of interest has been discontinued amounted to $233 thousand and
          $80
          thousand at December 31, 2006 and 2005, respectively. The Bank had no loan
          balances past due 90 days or more and still accruing interest at December
          31,
          2006 and 2005, respectively.
 
 The
          following is a summary of changes in the allowance for loan losses:
 
 **2006**
                ****
                **2005**
                ********
                ****
                **(In
                    Thousands)**Balance,
                    beginning of year
                
                $
                1,168
                
                $
                990Provision
                    charged to operations
                
                
                179
                
                
                204Charge-offs
                
                
                (10
                )
                
                (31
                )Recoveries
                
                
                36
                
                
                5Balance,
                    end of year
                
                $
                1,373
                
                $
                1,168
 
 
 **NOTE
          6 – OFFICE
          PROPERTIES AND EQUIPMENT**
 
 Office
          properties and equipment at December 31, 2006 and 2005 are summarized by
          major
          classification as follows:
 
 ****
                ****
                **EstimatedUseful
                    Lifein Years**
                ****
                **2006**
                ****
                **2005**
                ********
                ****
                **(In
                    Thousands)**Land
                
                
                Indefinite
                
                $
                1,804
                
                $
                1,732Buildings
                
                
                25
                
                
                2,987
                
                
                2,670Furniture,
                    Fixtures and equipment
                
                
                3
                    –
                    7
                
                
                1,946
                
                
                1,819Construction
                    in progress
                
                
                
                
                
                3,253
                
                
                6219,990
                
                
                6,842Accumulated
                    depreciation
                
                
                
                
                
                (2,653
                )
                
                (2,307
                )$
                7,337
                
                $
                4,535
 
 The
          Company has received approvals and has begun construction on our new
          administrative headquarters/full-service office in Vineland, New Jersey.
          We have
          budgeted approximately $6.3 million for the acquisition and construction
          for
          this new banking facility, for which we have already spent $4.3 million
          as of
          December 31, 2006, including $1.1 million in land costs. We anticipate
          opening
          the administrative headquarters in the first half of 2007. We have spent
          $269
          thousand for the acquisition of land in Buena Township as a possible branch
          location. In January 2007, the Company purchased land in Harrison Township,
          New
          Jersey as a possible branch location. The cost of the land was $984
          thousand.
 
 F-20
  ***COLONIAL
          BANKSHARES, INC.***
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
          7 - DEPOSITS**
 
 Deposits
          at December 31, 2006 and 2005 consist of the following major classifications
          (dollars in thousands):
 
 **2006**
                ****
                **2005**
                ********
                ****
                **Amount**
                ****
                **Average
                    Rate**
                ****
                **Amount**
                ****
                **Average
                    Rate**Certificates
                    of deposit:Less
                    than 2.00%
                
                $
                —
                
                
                —
                %
                $
                253
                
                
                0.46
                %2.01%
                    - 4.00%
                
                
                27,034
                
                
                3.62
                
                
                63,842
                
                
                3.184.01%
                    - 6.00%
                
                
                163,412
                
                
                4.93
                
                
                75,158
                
                
                4.636.01%
                    - 8.00%
                
                
                —
                
                
                —
                
                
                85
                
                
                6.10Total
                    certificates of deposit
                
                
                190,446
                
                
                4.74
                
                
                139,338
                
                
                3.96Non-interest
                    bearing demand
                
                
                18,055
                
                
                —
                
                
                13,638
                
                
                —NOW
                
                
                36,740
                
                
                1.89
                
                
                33,844
                
                
                1.43Super
                    NOW
                
                
                14,200
                
                
                1.71
                
                
                17,492
                
                
                1.00Savings
                
                
                57,260
                
                
                1.72
                
                
                61,635
                
                
                1.50Money
                    market demand
                
                
                20,553
                
                
                3.54
                
                
                18,778
                
                
                2.39$
                337,254
                
                
                3.46
                %
                $
                284,725
                
                
                2.65
                %
 
 A
          summary
          of certificates of deposit by maturity at December 31, 2006 is as follows
          (in
          thousands):
 
 2007
                
                $
                128,1642008
                
                
                24,8252009
                
                
                18,6392010
                
                
                13,0622011
                
                
                2,714Thereafter
                
                
                3,042$
                190,446
  The
          aggregate amount of certificates of deposit with a minimum denomination
          of $100
          thousand was $94.4 million and $52.7 million at December 31, 2006 and 2005,
          respectively. Amounts above $100 thousand are not insured by the Federal
          Deposit
          Insurance Corporation (“FDIC”). Included in the certificate of deposit balances
          at December 31, 2006 are brokered certificates of deposit in the amount
          of $11.5
          million at a weighted average rate of 5.24% with maturities as follows,
          $5.0
          million in October 2008, $5.0 million in November 2008 and $1.5 million
          in
          December 2009. The Bank had no brokered deposits at December 31,
          2005.
 
 A
          summary
          of interest expense on deposits for the years ended December 31, 2006 and
          2005
          are as follows:
  **2006**
                ****
                **2005**
                ********
                ****
                **(In
                    Thousands)**NOW
                    and Super NOW
                
                $
                805
                
                $
                507Savings
                
                
                992
                
                
                979Money
                    market demand
                
                
                587
                
                
                385Certificates
                    of deposit
                
                
                7,073
                
                
                4,557$
                9,457
                
                $
                6,428
 
 F-21
  ***COLONIAL
          BANKSHARES, INC.***
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
          8 - FEDERAL HOME LOAN BANK BORROWINGS**
 
 Federal
          Home Loan Bank (FHLB) borrowings at December 31 are as follows:
 
 Maturity
                
                Interest
                    Rate
                
                2006
                
                2005(In
                    Thousands)January
                    3, 2006
                
                
                4.17%
                
                $
                —
                
                $
                15,415January
                    2, 2007
                
                
                5.39%
                
                
                1,450
                
                
                —June
                    30, 2021
                
                
                5.57%
                
                
                6,874
                
                
                —$
                8,324
                
                $
                15,415
 
 
 At
                    or For the Year Ended December 31,2006
                
                2005Long-term
                    borrowings at end of year
                
                $
                6,874
                
                $
                —Maximum
                    outstanding at any month end
                
                $
                7,000
                
                $
                —
 
 At
          December 31, 2006, the Bank had a borrowing capacity of $75.3 million available
          from the FHLB of New York, of which $8.3 million was outstanding, which
          is based
          on the amount of FHLB stock held or levels of other assets, including U.
          S.
          Government agency securities, which are available for collateral.
  **NOTE
          9 - INCOME TAXES**
 
 Retained
          earnings include $1.5 million at December 31, 2006 and 2005, for which
          no
          provision for federal income tax has been made. These amounts represent
          deductions for bad debt reserves for tax purposes which were only allowed
          to
          savings institutions which met certain definitional test prescribed by
          the
          Internal Revenue Code of 1986, as amended. The Small Business Job Protection
          Act
          of 1996 eliminated the special bad debt deduction granted solely to thrifts.
          Under the terms of the Act, there would be no recapture of the pre-1988
          (base
          year) reserves. However, these pre-1988 reserves would be subject to recapture
          under the rules of the Internal Revenue Code if the Bank itself pays a
          cash
          dividend in excess of earnings and profits, or liquidates. The Act also
          provides
          for the recapture of deductions arising from “applicable excess reserve” defined
          as the total amount of reserve over the base year reserve. The Bank’s total
          reserve exceeds the base year reserve and deferred taxes have been provided
          for
          this excess.
 
 The
          income tax provision consists of the following for the years ended December
          31:
 
 2006
                
                2005(In
                    Thousands)Current:Federal
                
                $
                351
                
                $
                387State
                
                
                (42
                )
                
                195Total
                    current
                
                
                309
                
                
                582Deferred
                
                
                (185
                )
                
                (83
                )Total
                
                $
                124
                
                $
                499
  
 F-22




***COLONIAL
        BANKSHARES, INC.***
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        9 - INCOME TAXES (CONTINUED)**
 
 A
        reconciliation of the statutory federal income tax at a rate of 34% to the
        income tax expense included in the statements of income for the years ended
        December 31 is as follows (dollars in thousands):
 
 2006
              
              2005Amount
              
              %
                  of Pretax Income
              
              Amount
              
              %
                  of Pretax IncomeFederal
                  income tax at statutory rate
              
              $
              590
              
              
              34.0
              %
              $
              771
              
              
              34.0
              %State
                  tax, net of federal benefit
              
              
              (53
              )
              
              (2.9
              )%
              
              129
              
              
              5.7
              %Tax
                  exempt income
              
              
              (402
              )
              
              (23.2
              )%
              
              (392
              )
              
              (17.3
              )%Life
                  insurance income
              
              
              (30
              )
              
              (1.7
              )%
              
              (28
              )
              
              (1.2
              )%Other
              
              
              19
              
              
              1.0
              %
              
              19
              
              
              .8
              %$
              124
              
              
              7.2
              %
              $
              499
              
              
              22.0
              %
 
 The
        components of the net deferred tax asset, included in other assets, are as
        follows:
 
 December
                  31,2006
              
              2005(In
                  Thousands)Deferred
                  tax assets:Deferred
                  loan fees
              
              $
              129
              
              $
              134Allowance
                  for loan losses
              
              
              548
              
              
              466Stock-based
                  compensation
              
              
              27
              
              
              —AMT
                  credit carryforward
              
              
              88
              
              
              82Prepaid
                  expenses
              
              
              28
              
              
              —Net
                  unrealized loss on securities available for sale
              
              
              289
              
              
              469Other
              
              
              12
              
              
              81,121
              
              
              1,159Deferred
                  tax liabilities:Depreciation
              
              
              (23
              )
              
              (23
              )Prepaid
                  expenses
              
              
              —
              
              
              (43
              )(23
              )
              
              (66
              )Net
                  Deferred Tax Asset
              
              $
              1,098
              
              $
              1,093
  **NOTE
        10 - BENEFIT PLANS**
 
 The
        Bank
        has a 401(k) Savings Plan (the “Plan”). All employees are eligible to
        participate after completing one year of eligible service. The employees
        may
        contribute up to fifteen percent of their compensation to the Plan with the
        Bank
        matching fifty percent of the first six percent or a maximum of three percent
        of
        total salary. Full vesting in the Plan is prorated equally over a five-year
        period. The Bank’s contributions to the Plan for the years ended December 31,
        2006 and 2005 were $55 thousand and $48 thousand, respectively.
 
 The
        Bank
        had a Phantom Stock Appreciation Rights Incentive Plan, a deferred compensation
        plan, for certain officers, directors and one former director of the Bank.
        The
        plan was terminated in May 2005. The termination of the agreements resulted
        in a
        reduction in compensation and benefits expense of approximately $201 thousand
        for the year ended December 31, 2005, which represented an excess accrual
        after
        distribution of amounts due to participants under the agreements.
 
 The
        Bank
        has an Employee Stock Ownership Plan (“ESOP”) for the benefit of employees who
        meet the eligibility requirements as defined in the plan. The ESOP trust
        acquired 166,398 shares of common stock in the initial public offering using
        proceeds of a loan from the Company. The Bank will make cash contributions
        to
        the ESOP on an annual basis sufficient to enable the ESOP to make the required
        loan payments to the Company. The loan bears an interest rate of 6.00% with
        principal and interest payable annually in equal installments over fifteen
        years. The loan is secured by the shares of the stock purchased.
  
 F-23




***COLONIAL
        BANKSHARES, INC.***
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        10 - BENEFIT PLANS (CONTINUED)**
 
 As
        the
        debt is repaid, shares are released from the collateral and allocated to
        qualified employees. Accordingly, the shares pledged as collateral are reported
        as unearned ESOP shares in the Consolidated Statements of Financial Condition.
        As the shares are released from collateral, the Company reports compensation
        expense equal to the average market price of the shares, and the shares become
        outstanding for earnings per share computations. The Company’s compensation
        expense for the ESOP was $144 thousand and $122 thousand for the years ended
        December 31, 2006 and 2005, respectively. The following table presents the
        components of the ESOP shares:
 
 ****
              **December
                  31,**
              ********
              ****
              **2006**
              ****
              **2005**Shares
                  released for allocation
              
              
              23,206
              
              
              11,603Unreleased
                  shares
              
              
              143,192
              
              
              154,795Total
                  ESOP shares
              
              
              166,398
              
              
              166,398Fair
                  value of unreleased shares
              
              $
              2,013,280
              
              $
              1,633,087
 
 **NOTE
        11 - STOCK-BASED COMPENSATION**
 
 At
        the
        Company’s annual stockholders’ meeting held on July 20, 2006, stockholders of
        the Company approved the Colonial Bankshares, Inc. 2006 Stock-Based Incentive
        Plan (the “2006 Plan”). Under this plan, the Company may grant options to
        purchase up to 221,563 shares of Company stock and may grant up to 88,625
        shares
        of common stock as restricted stock awards.
 
 The
        2006
        Plan enables the Board of Directors to grant stock options to executives,
        other
        key employees and nonemployee directors. The options granted under the Plan
        may
        be either non-qualified stock options (NQOs) or incentive stock options (ISOs).
        Only NQOs may be granted to nonemployee directors under this plan and ISOs
        may
        be granted to employees. The Company has reserved 221,563 shares of common
        stock
        for issuance upon the exercise of options granted under the 2006 Plan. The
        2006
        Plan will terminate ten years from the grant date. Options may not be granted
        with an exercise price that is less than 100% of the fair market value of
        the
        Company’s common stock on the date of grant. Options may not be granted with a
        term longer than 10 years. Stock options granted under the Incentive Plan
        are
        subject to limitations under Section 422 of the Internal Revenue Code. The
        number of shares available under the 2006 Plans, the number of shares subject
        to
        outstanding options and the exercise price of outstanding options will be
        adjusted to reflect any stock dividend, stock split, merger, reorganization
        or
        other event generally affecting the number of the Company’s outstanding shares.
        At December 31, 2006, there are 25,095 shares available for option grants
        under the 2006 Plan.
 
 On
        October 19, 2006, 88,625 shares of restricted stock were awarded. The restricted
        shares awarded had a grant date fair value of $12.47 per share. The restricted
        stock awarded will vest 20% annually beginning October 19, 2007. During the
        year
        ended December 31, 2006, $46 thousand in compensation expense was recognized
        in
        regard to these restricted stock awards. The tax benefits recognized related
        to
        such stock-based compensation was $16 thousand. At December 31, 2006, there
        was
        $ 1.1 million of unrecognized compensation expense related to restricted
        stock
        awards which is expected to be recognized over a period of 4.75
        years.
  
 F-24
 ***COLONIAL
          BANKSHARES, INC.***
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
          11 - STOCK-BASED COMPENSATION (CONTINUED)**
 
 On
          October 19, 2006, options to purchase 196,468 shares of common stock at
          $12.47
          per share were awarded. The options awarded will vest 20% annually beginning
          October 19, 2007. The following is a summary of the Company’s stock option
          activity for the year ended December 31, 2006:
 
 ****
                **Options**
                ****
                **Weighted
                    Average Exercise Price**
                ****
                **Weighted
                    Average Remaining Contractual Term**
                ****
                **Aggregate
                    Intrinsic Value**Outstanding
                    at January 1, 2006
                
                
                —
                
                $
                —Granted
                
                
                196,468
                
                
                12.47Exercised
                
                
                —
                
                
                —Forfeitures
                
                
                —
                
                
                —Outstanding
                    at December 31, 2006
                
                
                196,468
                
                $
                12.47
                
                
                9.8
                    years
                
                $
                312Exercisable
                    at December 31, 2006
                
                
                —
                
                $
                12.47
                
                
                9.8
                    years
                
                $
                —
 
 The
          fair
          value of each option grant is estimated on the date of grant using the
          Black-Scholes option-pricing model with the following weighted average
          assumptions for grants in 2006: dividend yield of 0%, risk-free interest
          rate of
          4.79%, expected life of 6.5 years, and expected volatility of 15.00%. The
          weighted average fair value of options granted in 2006 was $3.79 per
          share.
 
 Stock-based
          compensation expense related to stock options granted for the year ended
          December 31, 2006, was $32 thousand with a related tax benefit of $11 thousand.
          As of December 31, 2006, there was approximately $714 thousand of unrecognized
          compensation cost related to nonvested stock options granted in 2006. The
          cost
          will be recognized on a graded vesting method over a period of 5
          years.
  **NOTE
          12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK**
 
 The
          Bank
          is a party to financial instruments with off-balance sheet risk in the
          normal
          course of business to meet the financing needs of its customers. These
          financial
          instruments include commitments to extend credit and letters of credit.
          Such
          commitments involve, to varying degrees, elements of credit, and interest
          rate
          risk in excess of the amount recognized in the statements of financial
          condition.
 
 The
          Bank’s exposure to credit loss in the event of nonperformance by the other party
          to the financial instrument for commitments to extend credit and letters
          of
          credit is represented by the contractual amount of those instruments. The
          Bank
          uses the same credit policies in making commitments and conditional obligations
          as its does for on-balance sheet instruments.
 
 At
          December 31, 2006 and 2005, the following financial instruments were outstanding
          whose contract amounts represent credit risk:
 
 ****
                ****
                **2006**
                ****
                **2005**
                ********
                ****
                **(In
                    Thousands)**Commitments
                    to grant loans
                
                $
                9,962
                
                $
                6,526Unfunded
                    commitments under lines of credit
                
                
                20,046
                
                
                14,545Standby
                    letters of credit
                
                
                2,441
                
                
                860$
                32,449
                
                $
                21,931
  
 F-25




***COLONIAL
        BANKSHARES, INC.***
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
        (CONTINUED)**
 
 Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Commitments generally
        have fixed expiration dates or other termination clauses and may require
        payment
        of a fee. The Bank evaluates each customer’s credit worthiness on a case-by-case
        basis. The amount of collateral obtained, if deemed necessary by the Bank
        upon
        extension of credit, is based on management’s credit evaluation. Collateral held
        varies but generally includes personal or commercial real estate.
 
 Unfunded
        commitments under lines of credit are collateralized except for the overdraft
        protection lines of credit and commercial unsecured lines of credit. The
        amount
        of collateral obtained is based on management’s credit evaluation, and generally
        includes personal or commercial real estate. The overdraft protection lines
        and
        the commercial unsecured lines of credit total approximately $1.0 million
        and
        usually do not contain specified maturity dates and may not be drawn upon
        to the
        extent to which the Bank is committed.
 
 Standby
        letters of credit are conditional commitments issued by the Bank to guarantee
        the performance of a customer to a third party. The majority of these standby
        letters of credit expire within the next twelve months. The credit risk involved
        in issuing letters of credit is essentially the same as that involved in
        extending other loan commitments. The Bank requires collateral supporting
        these
        letters of credit when deemed necessary. Management believes that the proceeds
        obtained through liquidation of such collateral would be sufficient to cover
        the
        maximum potential amount of future payments required under the corresponding
        guarantees. The amount of the liability as of December 31, 2006 and 2005
        for
        guarantees under standby letters of credit issued is not material.
  **NOTE
        13 - REGULATORY CAPITAL REQUIREMENTS**
 
 The
        Bank
        is subject to various regulatory capital requirements administered by the
        federal banking agencies. Failure to meet minimum capital requirements can
        initiate certain mandatory and possibly additional discretionary, actions
        by
        regulators that, if undertaken, could have a direct material effect on the
        Company’s financial statements. Under capital adequacy guidelines and the
        regulatory framework for prompt corrective action, the Bank must meet specific
        capital guidelines that involve quantitative measures of the Bank’s assets,
        liabilities and certain off-balance sheet items as calculated under regulatory
        accounting practices. The Bank’s capital amounts and classifications are also
        subject to qualitative judgments by the regulators about components,
        risk-weightings and other factors.
 
 Quantitative
        measures established by regulation to ensure capital adequacy require the
        Bank
        to maintain minimum amounts and ratios (set forth in the table below) of
        tangible and core capital (as defined in the regulations) to total adjusted
        assets (as defined) and of risk-based capital (as defined) to risk-weighted
        assets (as defined). Management believes, as of December 31, 2006, that the
        Bank
        meets all capital adequacy requirements to which it is subject.
 
 As
        of
        December 31, 2006, the most recent notification from the regulators categorized
        the Bank as well-capitalized under the regulatory framework for prompt
        corrective action. To be categorized as well-capitalized, the Bank must maintain
        minimum tangible, core and risk-based ratios as set forth in the table. There
        are no conditions or events since that notification that management believes
        have changed the Bank’s category.
  
 F-26
  ***COLONIAL
          BANKSHARES, INC.***
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
          13 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)**
 
 The
          Bank’s actual capital amounts and ratios are presented in the
          table.
  Actual
                
                For
                    Capital Adequacy
                  Purposes
                
                To
                    be Well Capitalized
                  under
                    Prompt Corrective
                  Action
                    ProvisionsAmount
                
                Ratio
                
                Amount
                
                Ratio
                
                Amount
                
                Ratio**(In
                    Thousands)**As
                    of December 31, 2006:Tangible
                    Capital (to Adjusted Total Assets)
                
                $
                34,885
                
                
                9.09
                %
                $
                >5,757
                
                
                >1.50
                %
                
                N/A
                
                
                N/ACore
                    Capital (to Adjusted Total Assets)
                
                
                34,885
                
                
                9.09
                %
                
                >15,352
                
                
                >4.00
                %
                $
                >19,190
                
                
                >5.00
                %Tier
                    1 Capital (to Risk-Weighted Assets)
                
                
                34,885
                
                
                17.57
                %
                
                N/A
                
                
                N/A
                
                
                >11,913
                
                
                >6.00
                %Total
                    Capital (to Risk-Weighted Assets)
                
                
                36,244
                
                
                18.26
                %
                
                >15,883
                
                
                >8.00
                %
                
                >19,854
                
                
                >10.00
                %As
                    of December 31, 2005:Tangible
                    Capital (to Adjusted Total Assets)
                
                $
                33,129
                
                
                9.85
                %
                $
                >5,043
                
                
                >1.50
                %
                
                N/A
                
                
                N/ACore
                    Capital (to Adjusted Total Assets)
                
                
                33,129
                
                
                9.85
                %
                
                >13,449
                
                
                >4.00
                %
                $
                >16,811
                
                
                >5.00
                %Tier
                    1 Capital (to Risk-Weighted Assets)
                
                
                33,129
                
                
                19.53
                %
                
                N/A
                
                
                N/A
                
                
                >10,180
                
                
                >6.00
                %Total
                    Capital (to Risk-Weighted Assets)
                
                
                34,281
                
                
                20.20
                %
                
                >13,574
                
                
                >8.00
                %
                
                >16,967
                
                
                >10.00
                %
 
 Office
          of
          Thrift Supervision regulations imposes limitations upon all capital
          distributions by savings institutions, like the Bank, such as dividends
          and
          payments to repurchase or otherwise acquire shares. The Company may not
          declare
          or pay cash dividends on or repurchase any of its shares of common stock
          if the
          effect thereof would cause stockholders’ equity to be reduced below applicable
          regulatory capital maintenance requirements, or if such declaration and
          payments
          would otherwise violate regulatory requirements.
  **NOTE
          14 - FAIR VALUE OF FINANCIAL INSTRUMENTS**
 
 The
          fair
          value of a financial instrument is the current amount that would be exchanged
          between willing parties, other than in a forced liquidation.
 
 The
          following disclosure of the estimated fair value of financial instruments
          is
          made in accordance with the requirements of SFAS No. 107, “Disclosures About
          Fair Value of Financial Instruments.” The estimated fair value amounts have been
          determined by the Company using available market information and appropriate
          valuation methods. However, considerable judgment is necessarily required
          to
          interpret market data to develop the estimates of fair value. Accordingly,
          the
          estimates presented herein are not necessarily indicative of the amounts
          the
          Company would realize in a current market exchange. The use of different
          market
          assumptions and/or estimation methodologies may have a material effect
          on the
          estimated fair value amounts. SFAS No. 107 excludes certain financial
          instruments and all non-financial instruments from its disclosure requirements.
          Accordingly, the aggregate fair value amounts presented may not necessarily
          represent the underlying fair value of the Company.
  
 F-27




***COLONIAL
        BANKSHARES, INC.***
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)**
 
 The
        fair
        value estimates presented herein are based on pertinent information available
        to
        management as of December 31, 2006 and 2005. Although management is not aware
        of
        any factors that would significantly affect the estimated fair value amounts,
        such amounts have not been comprehensively revalued for purposes of these
        financial statements since December 31, 2006 and 2005 and, therefore, current
        estimates of fair value may differ significantly from the amounts prescribed
        herein.
 
 The
        following assumptions were used to estimate the fair value of the Company’s
        financial instruments:
 
 **Cash
        and Amounts Due From Banks**
 For
        cash
        and amounts due from banks, the carrying amount is a reasonable estimate
        of fair
        value.
 
 **Interest-bearing
        Time Deposits**
 The
        carrying values approximate the fair values for these assets.
 
 **Investment
        Securities**
 The
        fair
        value of investment securities is based on quoted market prices.
 
 **Loans
        Receivable**
 The
        fair
        value of loans is estimated based on the present value of cash flows using
        interest rates currently offered for loans with similar terms to borrowers
        of
        similar credit quality.
 
 **Federal
        Home Loan Bank Stock**
 The
        carrying amount of Federal Home Loan Bank stock approximates fair value based
        on
        the stock’s redemption provisions which are at par value.
 
 **Accrued
        Interest Receivable and Payable**
 The
        carrying amount of accrued interest receivable and payable approximates fair
        value.
 
 **Deposits**
 The
        fair
        value of non-interest bearing demand, NOW, Super NOW, passbook savings and
        money
        market demand accounts is the amount reported in the financial statements.
        The
        fair value of certificates of deposits is based on a present value of cash
        flows
        estimate using rates currently offered for deposits with similar remaining
        maturities.
 
 **Federal
        Home Loan Bank Borrowings**
 The
        fair
        value of advances from the Federal Home Loan Bank is estimated using discounted
        cash flow analyses, based on rates currently available to the Bank for advances
        from the Federal Home Loan Bank with similar terms and remaining
        maturities.
 
 **Off-Balance
        Sheet Financial Instruments**
 Fair
        values for the Bank’s off-balance sheet financial instruments (lending
        commitments and letters of credit) are based on fees currently charged to
        enter
        into similar agreements, taking into account, the remaining terms of the
        agreements and the counterparties’ credit standing.
  
 F-28
 ***COLONIAL
          BANKSHARES, INC.***
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
          14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)**
 
 The
          estimated fair value of the Company’s financial instruments at December 31, 2006
          and 2005 are as follows:
  ****
                ****
                **2006**
                ****
                **2005**
                ********
                ****
                **Carrying**
                  **Amount**
                ****
                **Fair
                    Value**
                ****
                **Carrying**
                  **Amount**
                ****
                **Fair
                    Value**
                ********
                ****
                **(In
                    Thousands)**Assets:Cash
                    and amounts due from banks
                
                $
                13,257
                
                $
                13,257
                
                $
                10,669
                
                $
                10,669Interest-bearing
                    time deposits
                
                
                717
                
                
                717
                
                
                —
                
                
                —Investment
                    securities
                
                
                155,647
                
                
                156,425
                
                
                156,730
                
                
                157,487Federal
                    Home Loan Bank stock
                
                
                775
                
                
                775
                
                
                1,021
                
                
                1,021Loans
                    receivable, net
                
                
                198,519
                
                
                195,917
                
                
                157,774
                
                
                155,675Accrued
                    interest receivable
                
                
                1,767
                
                
                1,767
                
                
                1,554
                
                
                1,554Liabilities:Deposits
                
                
                337,254
                
                
                336,919
                
                
                284,725
                
                
                284,044Federal
                    Home Loan Bank borrowings
                
                
                8,324
                
                
                8,539
                
                
                15,415
                
                
                15,415Accrued
                    interest payable
                
                
                457
                
                
                457
                
                
                83
                
                
                83Off-balance
                    sheet financial instruments:Commitments
                    to extend credit and letters of credit
                
                
                —
                
                
                —
                
                
                —
                
                
                —
 
 **NOTE
          15 - PARENT COMPANY ONLY FINANCIAL INFORMATION**
  **CONDENSED
          STATEMENTS OF FINANCIAL CONDITION**
 
 **December
                    31,**
                ********
                ****
                **2006**
                ****
                **2005**ASSETS
                
                **(In
                    Thousands)**Cash
                    and cash equivalents
                
                $
                717
                
                $
                1,775Equity
                    investment in Colonial Bank
                
                
                34,476
                
                
                32,538Loan
                    receivable - ESOP
                
                
                1,464
                
                
                1,548Other
                    assets
                
                
                6
                
                
                —Total
                    Assets
                
                $
                36,663
                
                $
                35,861LIABILITIES
                    AND STOCKHOLDERS’ EQUITYSTOCKHOLDERS’
                    EQUITYTotal
                    Stockholders’ Equity
                
                $
                36,663
                
                $
                35,861Total
                    Liabilities and Stockholders’ Equity
                
                $
                36,663
                
                $
                35,861
  
 F-29
  ***COLONIAL
            BANKSHARES, INC.***
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
            15 — PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)**
 
 **CONDENSED
            STATEMENTS OF INCOME**
 
 Years
                      Ended December 31,2006
                  
                  2005(In
                      Thousands)Interest
                      income
                  
                  $
                  160
                  
                  $
                  78Equity
                      in earnings of Colonial Bank
                  
                  
                  1,630
                  
                  
                  1,710Total
                      income
                  
                  
                  1,790
                  
                  
                  1,788General,
                      administrative and other expenses
                  
                  
                  179
                  
                  
                  19Net
                      income
                  
                  $
                  1,611
                  
                  $
                  1,769
  **CONDENSED
            STATEMENTS OF CASH FLOWS**
 
 Years
                      Ended December 31,2006
                  
                  2005(In
                      Thousands)Cash
                      flows from operating activities:Net
                      income
                  
                  $
                  1,611
                  
                  $
                  1,769Share-based
                      compensation expense
                  
                  
                  78
                  
                  
                  —Equity
                      in undistributed earnings Colonial Bank, FSB
                  
                  
                  (1,630
                  )
                  
                  (1,710
                  )Increase
                      in cash from ESOP loan repayment
                  
                  
                  78
                  
                  
                  116Increase
                      in other assets
                  
                  
                  (6
                  )
                  
                  —Net
                      cash from operating activities
                  
                  
                  131
                  
                  
                  175Cash
                      flows from investing activities:Investment
                      in Colonial Bank, FSB
                  
                  
                  —
                  
                  
                  (16,591
                  )Net
                      cash used in investing activities
                  
                  
                  —
                  
                  
                  (16,591
                  )Cash
                      flows from financing activities:Net
                      proceeds from issuance of common stock
                  
                  
                  —
                  
                  
                  18,191Acquisition
                      of treasury stock
                  
                  
                  (1,189
                  )
                  
                  —Net
                      cash (used in) provided by financing activities
                  
                  
                  (1,189
                  )
                  
                  18,191Net
                      (decrease) increase in cash and cash equivalents
                  
                  
                  (1,058
                  )
                  
                  1,775Cash
                      and cash equivalents at beginning of period
                  
                  
                  1,775
                  
                  
                  —Cash
                      and cash equivalents at end of period
                  
                  $
                  717
                  
                  $
                  1,775
  
 F-30