UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 
 FORM
10-Q
 
 x
              QUARTERLY
      REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended  March 31,
      2008o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from __________________ to
      __________________Commission
      file number 0-51385
 
 COLONIAL
BANKSHARES, INC.
 (Exact
name of registrant as specified in its charter)
 
 United
      States of America
              90-0183739(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)2745
      S. Delsea DriveVineland,
      New Jersey
              08360(Address
      of principal executive offices)
              (Zip
      code)
 
 
 (856)
205-0058
 (Registrant’s
telephone number including area code)
 
 N/A
 (Former
name, former address, and former fiscal year, if changed since last
report)
 
 Indicate
by check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
 (1)    x    Yes    o    No
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
 Large
      accelerated filer    o
              Accelerated
      filer
              oNon-accelerated
      filer      o
              Smaller
      reporting company
              x
  Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  o   Yes
x   No
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date:
 As of May
12, 2008, 4,450,796 shares of common stock, par value $0.10 per
share
 
 
 
 TABLE
OF CONTENTS
 
 
 PART
      I
              FINANCIAL
      INFORMATION
              PAGEItem
      1
              Consolidated
      Statements of Financial Condition
              2Consolidated
      Statements of Income
              3Consolidated
      Statements of Stockholders’ Equity
              4Consolidated
      Statements of Cash Flows
              5Notes
      to Consolidated Financial Statements
              6Item
      2
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              17Item
      3
              Quantitative
      and Qualitative Disclosures About Market Risk
              24Item
      4
              Controls
      and Procedures
              24Item
      4T.
              Controls
      and Procedures
              24PART
      II
              OTHER
      INFORMATIONItem
      1
              Legal
      Proceedings
              24Item
      1A.
              Risk
      Factors
              24Item
      2
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              24Item
      3
              Defaults
      Upon Senior Securities
              25Item
      4
              Submission
      of Matters to Vote of Security Holders
              25Item
      5
              Other
      Information
              25Item
      6
              Exhibits
              25Signatures
              26
 
 
 1
 
 PART IFINANCIAL
INFORMATION
 Item 1.Financial
Statements
 
 Colonial
Bankshares, Inc.
 Consolidated
Statements of Financial Condition
 At March
31, 2008 and December 31, 2007
  March
      31,
                2008
              
              
              December
      31,
                2007(unaudited)(Dollars
      In thousands, except per
                share
      data)AssetsCash
      and amounts due from banks
              
              $
              18,106
              
              
              $
              15,978Interest-bearing
      time deposits in banks
              
              
              -
              
              
              
              208Investment
      securities available for sale
              
              
              168,104
              
              
              
              163,549Investment
      securities held to maturity (fair value at March 31, 2008 -
      $17,410;
                at
      December 31, 2007 - $17,796)
              
              
              16,870
              
              
              
              17,213Loans
      receivable, net of allowance for loan losses of $1,390 at March 31, 2008
      and $1,392 at December 31, 2007
              
              
              259,693
              
              
              
              241,040Federal
      Home Loan Bank stock, at cost
              
              
              2,163
              
              
              
              2,545Office
      properties and equipment, net
              
              
              10,203
              
              
              
              10,273Bank-owned
      life insurance
              
              
              2,602
              
              
              
              2,578Accrued
      interest receivable
              
              
              2,242
              
              
              
              2,185Other
      assets
              
              
              2,085
              
              
              
              2,291Total
      Assets
              
              $
              482,068
              
              
              $
              457,860Liabilities
      and Stockholders’ EquityLiabilitiesDeposits:Noninterest-bearing
              
              $
              18,538
              
              
              $
              15,141Interest-bearing
              
              
              384,329
              
              
              
              356,241Total
      deposits
              
              
              402,867
              
              
              
              371,382Federal
      Home Loan Bank short-term borrowings
              
              
              14,970
              
              
              
              23,380Federal
      Home Loan Bank long-term borrowings
              
              
              22,478
              
              
              
              22,559Advances
      from borrowers for taxes and insurance
              
              
              673
              
              
              
              581Accrued
      interest payable and other liabilities
              
              
              907
              
              
              
              930Total
      Liabilities
              
              
              441,895
              
              
              
              418,832Stockholders’
      EquityPreferred
      stock, 1,000,000 shares authorized and unissued
              
              
              -
              
              
              
              -Common
      stock, par value $0.10 per share; authorized 10,000,000
      shares;
                issued
      4,521,696 shares;  outstanding 4,450,796 shares in 2008 and
      2007
              
              
              452
              
              
              
              452Additional
      paid-in capital
              
              
              20,014
              
              
              
              19,922Unearned
      shares held by Employee Stock Ownership Plan (“ESOP”)
              
              
              (1,316
              )
              
              
              (1,316
              )Treasury
      stock, at cost, 88,625 shares
              
              
              (1,189
              )
              
              
              (1,189
              )Retained
      earnings
              
              
              21,398
              
              
              
              21,094Accumulated
      other comprehensive gain
              
              
              814
              
              
              
              65Total
      Stockholders’ Equity
              
              
              40,173
              
              
              
              39,028Total
      Liabilities and Stockholders’ Equity
              
              $
              482,068
              
              
              $
              457,860
   See
notes to consolidated financial statements.
 2
 Colonial
Bankshares, Inc.
 Consolidated
Statements of Income
 Three
Months Ended March 31, 2008 and 2007
  Three
      Months Ended
                March
      31,2008
              
              
              2007(unaudited)(Dollars
      in thousands, except per share data)Interest
      IncomeLoans,
      including fees
              
              $
              3,925
              
              
              $
              3,178Mortgage-backed
      securities
              
              
              1,089
              
              
              
              740Securities:Taxable
              
              
              1.297
              
              
              
              952Tax-exempt
              
              
              159
              
              
              
              358Total
      Interest Income
              
              
              6.470
              
              
              
              5,228Interest
      ExpenseDeposits
              
              
              3,574
              
              
              
              3,084Borrowings
              
              
              364
              
              
              
              75Total
      Interest Expense
              
              
              3,938
              
              
              
              3,159Net
      Interest Income
              
              
              2,532
              
              
              
              2,069Provision
      for Loan Losses
              
              
              -
              
              
              
              69Net
      Interest Income after Provision for Loan Losses
              
              
              2,532
              
              
              
              2,000Non-Interest
      IncomeFees
      and service charges
              
              
              258
              
              
              
              244Gain
      on sale of loans
              
              
              7
              
              
              
              11Net
      (loss) on calls and sales of securities
              
              
              (22
              )
              
              
              -Impairment
      charge on investment security
              
              
              (150
              )
              
              
              -Earnings
      on life insurance
              
              
              24
              
              
              
              23Other
              
              
              5
              
              
              
              10Total
      Non-Interest Income
              
              
              122
              
              
              
              288Non-Interest
      ExpensesCompensation
      and benefits
              
              
              1,340
              
              
              
              1,167Occupancy
      and equipment
              
              
              315
              
              
              
              247Data
      processing
              
              
              182
              
              
              
              174Office
      supplies
              
              
              35
              
              
              
              33Professional
      fees
              
              
              93
              
              
              
              75Other
              
              
              316
              
              
              
              278Total
      Non-Interest Expenses
              
              
              2,281
              
              
              
              1,974Income
      before Income Taxes
              
              
              373
              
              
              
              314Income
      Tax EXPENSE (BENEFIT)
              
              
              69
              
              
              
              (98
              )Net
      Income
              
              $
              304
              
              
              $
              412Per
      Share Data (See Note 3):Earnings
      per share – basic
              
              $
              0.07
              
              
              $
              0.10Earnings
      per share – diluted
              
              $
              0.07
              
              
              $
              0.09
  See
notes to consolidated financial statements.
 3
  Colonial
Bankshares, Inc.
 Consolidated
Statements of Stockholders’ Equity
 Three
Months Ended March 31, 2008 and 2007 (unaudited)
  
 Common
                Stock
              
              
              Additional
                Paid-in
                Capital
              
              
              Unearned
                Shares
                Held
      by
                ESOP
              
              
              Retained
                Earnings
              
              
              Treasury
                Stock
              
              
              Accumu-
                lated
                Other
                Compre-
                hensive
                Income
                (Loss)
              
              
              Total
                Stock-
                holders’
                Equity(Dollars
      in thousands)Balance,
      January 1, 2008
              
              $
              452
              
              
              $
              19,922
              
              
              $
              (1,316
              )
              
              $
              21,094
              
              
              $
              (1,189
              )
              
              $
              65
              
              
              $
              39,028Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              304
              
              
              
              -
              
              
              
              -
              
              
              
              304Net
      change in unrealized gain on securities available for sale, net of tax
      expense of $384
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              749
              
              
              
              749Total
      Comprehensive Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,053Stock-based
      compensation expense (restricted stock awards)
              
              
              -
              
              
              
              55
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              55Stock-based
      compensation expense (stock options)
              
              
              -
              
              
              
              37
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              37Balance,
      March 31, 2008
              
              $
              452
              
              
              $
              20,014
              
              
              $
              (1,316
              )
              
              $
              21,398
              
              
              $
              (1,189
              )
              
              $
              814
              
              
              $
              40,173Balance,
      January 1, 2007
              
              $
              452
              
              
              $
              19,519
              
              
              $
              (1,432
              )
              
              $
              19,863
              
              
              $
              (1,189
              )
              
              $
              (550
              )
              
              $
              36,663Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              412
              
              
              
              -
              
              
              
              -
              
              
              
              412Net
      change in unrealized loss on securities available for sale, net of tax
      expense of $32
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              66
              
              
              
              66Total
      Comprehensive Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              478Stock-based
      compensation expense (restricted stock awards)
              
              
              -
              
              
              
              55
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              55Stock-based
      compensation expense (stock options)
              
              
              -
              
              
              
              37
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              37Balance,
      March 31, 2007
              
              $
              452
              
              
              $
              19,611
              
              
              $
              (1,432
              )
              
              $
              20,275
              
              
              $
              (1,189
              )
              
              $
              (484
              )
              
              $
              37,233
  See notes to consolidated financial
statements.
 
 4
  Colonial
Bankshares, Inc.
 Consolidated
Statements of Cash Flows
 Three
Months Ended March 31, 2008 and 2007
  Three
      Months Ended March 31,2008
              
              
              2007(unaudited)Cash
      Flows from Operating Activities:
              
              (In
      thousands)Net
      income
              
              $
              304
              
              
              $
              412Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
              
              
              -
              
              
              
              69Depreciation
      expense
              
              
              143
              
              
              
              98Stock-based
      compensation expense
              
              
              92
              
              
              
              92Impairment
      charge on investment security
              
              
              150
              
              
              
              -Deferred
      income taxes
              
              
              (27
              )
              
              
              (11
              )Net
      earnings on bank-owned life insurance
              
              
              (24
              )
              
              
              (23
              )Loans
      originated for sale
              
              
              (331
              )
              
              
              (796
              )Proceeds
      from sale of loans
              
              
              338
              
              
              
              577Gain
      on sale of loans
              
              
              (7
              )
              
              
              (11
              )Net
      amortization of loan fees (costs)
              
              
              (9
              )
              
              
              5Net
      loss on sales and calls of securities
              
              
              22
              
              
              
              -Accretion
      of premium and discount on investment securities, net
              
              
              (110
              )
              
              
              (129
              )Increase
      in accrued interest receivable
              
              
              (57
              )
              
              
              (87
              )(Increase)
      decrease in other assets
              
              
              (151
              )
              
              
              311(Decrease)
      increase in accrued interest payable and other liabilities
              
              
              (22
              )
              
              
              682Net
      cash provided by operating activities
              
              
              311
              
              
              
              1,189Cash
      Flows from Investing Activities:Proceeds
      from salesInvestment
      securities available for sale
              
              
              1,000
              
              
              
              -Proceeds
      from calls and maturities of:Investment
      securities available for sale
              
              
              14,472
              
              
              
              -Investment
      securities held to maturity
              
              
              2,000
              
              
              
              180Purchase
      of:Investment
      securities available for sale
              
              
              (9,016
              )
              
              
              (3,425
              )Investment
      securities held to maturity
              
              
              (1,802
              )
              
              
              -Mortgage-backed
      securities available for sale
              
              
              (13,434
              )
              
              
              (4.770
              )Mortgage-backed
      securities held to maturity
              
              
              -
              
              
              
              (719
              )Office
      properties and equipment
              
              
              (73
              )
              
              
              (1.952
              )Principal
      repayments from:Investment
      securities
              
              
              267
              
              
              
              601Mortgage-backed
      securities
              
              
              3,372
              
              
              
              3,323Net
      decrease in Federal Home Loan Bank stock
              
              
              382
              
              
              
              69Purchase
      of interest-bearing time deposits in banks
              
              
              -
              
              
              
              (208
              )Maturity
      of interest-bearing time deposits in banks
              
              
              208
              
              
              
              200Net
      increase in loans receivable
              
              
              (18,644
              )
              
              
              (11,072
              )Net
      cash used for investing activities
              
              
              (21,268
              )
              
              
              (17,773
              )Cash
      Flows from Financing Activities:Net
      increase in deposits
              
              
              31,485
              
              
              
              29,191Decrease
      in Federal Home Loan Bank short-term borrowings
              
              
              (8,410
              )
              
              
              (1,450
              )Repayment
      of Federal Home Loan Bank long-term borrowings
              
              
              (81
              )
              
              
              (77
              )Increase
      (decrease) in advances from borrowers for taxes and
    insurance
              
              
              91
              
              
              
              (148
              )Net
      cash provided by financing activities
              
              
              23,085
              
              
              
              27,516Increase
      (decrease) in cash and cash equivalents
              
              
              2,128
              
              
              
              10,932CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              15,978
              
              
              
              13,257CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              18,106
              
              
              $
              24,189Supplemental
      Cash Flow Disclosures:Cash
      paid:Interest
              
              $
              3,934
              
              
              $
              2,715Income
      taxes
              
              $
              230
              
              
              $
              -
  See notes to consolidated financial
statements.
 5
 
 COLONIAL
BANKSHARES, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 1.
              Organization
      and Basis of Presentation
 
 Colonial
Bankshares, Inc. (the “Company”) was organized in January 2003 to serve as the
mid-tier stock holding company of Colonial Bank, FSB.  Colonial
Bankshares, Inc. is a federally chartered corporation and owns 100% of the
outstanding common stock of Colonial Bank, FSB (the “Bank”).  Colonial
Bank, FSB is a federally chartered capital stock savings
bank.  Colonial Bankshares, MHC, a federally chartered mutual holding
company, is the parent of the Company and owns approximately 54% of the
Company’s outstanding common stock.  The Bank is a wholly owned
subsidiary of the Company.  In September 2006, after receiving
regulatory approval, 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 investment securities with an approximate value of $134.0 million
in exchange for all the outstanding common stock of the Operating
Subsidiary.
 
 The
consolidated financial statements include the accounts of Colonial Bankshares,
Inc. Colonial Bank, FSB and CB Delaware Investments, Inc.  All
material intercompany transactions and balances have been
eliminated.  The Company prepares its financial statements on the
accrual basis and in conformity with accounting principles generally accepted in
the United States of America (“US GAAP”).  The unaudited information
furnished herein reflects all adjustments (consisting of normal recurring
accruals) that are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented.  They do not include
all of the information and footnotes required by US GAAP for complete financial
statements.  Operating results for the three months ended March 31,
2008 (unaudited) are not necessarily indicative of the results that may be
expected for the year ending December 31, 2008.
 
 The
balance sheet at December 31, 2007 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by US GAAP for complete financial
statements.
 
 The
preparation of financial statements in conformity with US GAAP 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, evaluation of other-than-temporary impairment
of investment securities and our ability to realize deferred tax
assets.
 
 The Bank
maintains its executive office and main branch in Vineland, New Jersey with
branches in Bridgeton, Mantua, Millville, Upper Deerfield, Vineland and Sewell,
New Jersey.  The Bank’s principal business consists of attracting
customer deposits and investing these deposits primarily in investments and
single-family residential, commercial and consumer loans.
  6
  2.
              Recent
      Accounting Pronouncements
 
 In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(Statement 161).  FASB Statement 161 requires entities that utilize
derivative instruments to provide qualitative disclosures about their objectives
and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives.  FASB Statement 161 also requires entities to disclose
additional information about the amounts and location of derivatives located
within the financial statements, how the provisions of SFAS 133 has been
applied, and the impact that hedges have on an entity’s financial position,
financial performance, and cash flows.  FASB Statement 161 is
effective for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged.  The Company is currently
evaluating the potential impact the new pronouncement will have on its
consolidated financial statements.
 
 In
February 2008, the FASB issued a FASB Staff Position (“FSP”) FAS 140-3,
“Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions.” This FSP addresses the issue of whether or not these transactions
should be viewed as two separate transactions or as one "linked" transaction.
The FSP includes a "rebuttable presumption" that presumes linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria.
The FSP will be effective for fiscal years beginning after November 15, 2008 and
will apply only to original transfers made after that date; early adoption will
not be allowed. The Company is currently evaluating the potential impact the new
pronouncement will have on its consolidated financial statements.
 
 Statement
of Financial Accounting Standards Board (“SFAS”) No. 141 (R) “Business
Combinations” was issued in December of 2007. This Statement establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The
Statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. The guidance will become effective as of
the beginning of a company’s fiscal year beginning after December 15, 2008. This
new pronouncement will impact the Company’s accounting for business combinations
completed beginning January 1, 2009.
 
 SFAS
Statement No. 160 “Noncontrolling Interests in Consolidated Financial
Statements—an amendment of ARB No. 51” was issued in December of 2007. This
Statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective as of the beginning of a company’s fiscal year
beginning after December 15, 2008. The Company is currently evaluating the
potential impact the new pronouncement will have on its consolidated financial
statements.
 
 7
 
 Staff
Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of
Section D.2 of Topic 14,“Share-Based Payment,” of the Staff Accounting Bulletin series. Question
6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use
of the “simplified” method in developing an estimate of expected term of “plain
vanilla” share options and allows usage of the “simplified” method for share
option grants prior to December 31, 2007. SAB 110 allows public companies
which do not have historically sufficient experience to provide a reasonable
estimate to continue use of the “simplified” method for estimating the expected
term of “plain vanilla” share option grants after December 31,
2007.  SAB 110 is effective January 1, 2008.
 
 Staff
Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded at
Fair Value Through Earnings" expresses the views of the staff regarding written
loan commitments that are accounted for at fair value through earnings under
generally accepted accounting principles. To make the staff's views consistent
with current authoritative accounting guidance, the SAB revises and rescinds
portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments."  Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect SAB 109 to have a material impact on its consolidated
financial statements.
 
 In June
2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should
recognize a realized tax benefit associated with dividends on nonvested equity
shares, nonvested equity share units and outstanding equity share options
charged to retained earnings as an increase in additional paid in
capital. The amount recognized in additional paid in capital should be
included in the pool of excess tax benefits available to absorb potential future
tax deficiencies on share-based payment awards. EITF 06-11 should be
applied prospectively to income tax benefits of dividends on equity-classified
share-based payment awards that are declared in fiscal years beginning after
December 15, 2007. The Company expects that EITF 06-11 will not have
an impact on its consolidated financial statements.
 
 In March
2007, the FASB ratified EITF Issue No. 06-10, “Accounting for Collateral
Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10).  EITF
06-10 provides guidance for determining a liability for the postretirement
benefit obligation as well as recognition and measurement of the associated
asset on the basis of the terms of the collateral assignment
agreement.  EITF 06-10 is effective for fiscal years beginning after
December 15, 2007.  The Company is currently assessing the impact of
EITF 06-10 on its consolidated financial statements.
  8
  In
February 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement No.
115.   SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date.  SFAS No. 159 is effective for the Company on January
1, 2008.  The Company does not expect the implementation of SFAS No.
159 will have an impact on our consolidated financial statements.
 
 In
September 2006, FASB ratified the consensus reached by the EITF in Issue 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements.”  EITF 06-4
applies to life insurance arrangements that provide an employee with a specified
benefit that is not limited to the employee’s active service period, including
certain bank-owned life insurance (“BOLI”) policies.  EITF 06-4
requires an employer to recognize a liability and related compensation costs for
future benefits that extend to postretirement periods.   EITF
06-4 is effective for fiscal years beginning after December 31, 2007, with
earlier application permitted.  The Company is continuing to evaluate
the impact of this consensus, which may require it to recognize an additional
liability and compensation expense related to its BOLI policies.
  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, for these
calculations, the net income for the three months ended March 31, 2008 is $304
thousand and the net income for the three months ended March 31, 2007 is $412
thousand.  Basic and diluted earnings per share data are based on the
weighted-average number of common shares outstanding during each
period.  Diluted earnings per share are further adjusted for potential
common shares that were dilutive and outstanding during the
period.  Potential common shares consist of stock options outstanding
and non-vested stock grants under the stock-based incentive
plans.  The dilutive effect of potential common shares is computed
using the treasury stock method.  The following table sets forth the
composition of the weighted average common shares (denominator) used in the
basic and diluted earnings per share computation.
  For
      the Three Months Ended
                March
      31,2008
              
              
              2007Net
      Income
              
              $
              304,000
              
              
              $
              412,000Weighted
      average common shares issued
              
              
              4,521,696
              
              
              
              4,521,696Average
      unearned ESOP shares
              
              
              (131,589
              )
              
              
              (143,192
              )Average
      treasury stock shares
              
              
              (88,625
              )
              
              
              (88,625
              )Weighted
      average common shares outstanding - basic
              
              
              4,301,482
              
              
              
              4,289,879Effect
      of dilutive non-vested shares and stock options
outstanding
              
              
              -
              
              
              
              108,506Weighted
      average common shares outstanding – diluted
              
              
              4,301,482
              
              
              
              4,398,385Basic
      earnings per share
              
              $
              0.07
              
              
              $
              0.10Diluted
      earnings per share
              
              $
              0.07
              
              
              $
              0.09
 
 9
 
 4.            
Stock Based Compensation
 
 The
Company’s Board of Directors and stockholders have adopted the 2006 Colonial
Bankshares, Inc. Stock-Based Incentive Plan (the “2006 Plan”).  The
Stock-Based Incentive Plan provides for the grant of shares of common stock and
the grant of stock options to officers, employees and directors of the
Company.  Under the 2006 Plan, the Company may grant options to
purchase 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 Plan, 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 March 31, 2008, there are 25,095 shares
available for option grants under the 2006 Plan.
  On
October 19, 2006, 88,625 shares of restricted stock were awarded.  The
restricted shares awarded had a grant date fair value of $12.47 per
share.  The restricted stock awarded will vest 20% annually beginning
October 19, 2007.  For the three months ended March 31, 2008, $55
thousand in compensation expense was recognized in regard to these restricted
stock awards with a related tax benefit of $18 thousand.  As of March
31, 2008, there was $783 thousand of unrecognized compensation expense related
to the restricted stock awards which is expected to be recognized over a period
of 3.5 years.  At March 31, 2007, there was $1.0 million of
unrecognized compensation expense related to the restricted stock awards which
is expected to be recognized over a period of 4.5 years.
 
 Activity
in issued but unvested award shares during the three months ended March 31,
2008, was as follows:
 
 Award
      Shares
              
              Number
      of Shares
              
              
              Weighted
      Average
                Grant
      Date
                Fair
      ValueRestricted,
      beginning of period
              
              
              70,900
              
              
              $
              12.47Granted
              
              
              -
              
              
              
              -Forfeitures
              
              
              -
              
              
              
              -Vested
              
              
              -
              
              
              
              -Restricted
      stock, end of period
              
              
              70,900
              
              
              $
              12.47
 
 10
  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 three months ended March 31,
2008:
 
 Shares
              
              
              Weighted
      Average
                Exercise
                PriceOptions
      outstanding, beginning of period
              
              
              196,468
              
              
              $
              12.47Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Forfeitures
              
              
              -
              
              
              
              -Options
      outstanding, end of period
              
              
              196,468
              
              
              $
              12.47Exercisable
      at end of period
              
              
              39,294
              
              
              $
              12.47
  The fair
value of each option grant is estimated on the date of grant using the
Black-Sholes option-pricing model with the following weighted average
assumptions for options granted 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 calculated fair value of options granted in
2006 was $3.79 per option.  The weighted average contractual term of
options outstanding and exercisable were 8.5 years at March 31, 2008 and 9.5
years at March 31, 2007.  The aggregate intrinsic value of options
outstanding was $0 and $301 thousand at March 31, 2008 and 2007,
respectively.
  Stock-based
compensation expense related to stock options for the three months ended March
31, 2008 was $37 thousand with a related tax benefit of $13
thousand.  As of March 31, 2008, there was approximately $527 thousand
of unrecognized compensation cost related to unvested stock options granted in
2006.  The cost will be recognized on a graded vesting method over a
period of 3.5 years.  At March 31, 2007, there was approximately $676
thousand of unrecognized compensation cost related to unvested stock options
granted in 2006.
 
 The
Company 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 purchased 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.
 
 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 shares are released from collateral, the Company
reports compensation expense equal to the current market price of the shares,
and the shares become outstanding for earnings per share
computations.  The compensation expense is recorded on a monthly
basis.  The Company’s contribution expense for the ESOP was $30
thousand and $41 thousand for the three months ended March 31, 2008 and 2007,
respectively.
  11
 The
following table presents the components of the ESOP shares:
 
 March
      31, 2008
              
              
              March
      31, 2007Shares
      released for allocation
              
              
              34,809
              
              
              
              23,206Unreleased
      shares
              
              
              131,589
              
              
              
              143,192Total
      ESOP shares
              
              
              166,398
              
              
              
              166,398
 
 5.           
Comprehensive Income
 
 Comprehensive
income for the Company consists of net income and unrealized gains and losses on
available for sale securities.  Other comprehensive income for the
three months ended March 31, 2008 and 2007 was as follows:
 
 Three
      Months Ended
                March
      31,2008
              
              
              2007(In
      thousands)Other
      comprehensive income:Unrealized
      holding gains on available for sale securities
              
              $
              1,111
              
              
              $
              98Reclassification
      adjustment for net losses realized in net income
              
              
              22
              
              
              
              -Net
      unrealized gains
              
              
              1,133
              
              
              
              98Income
      tax expense
              
              
              384
              
              
              
              32Net
      of tax amount
              
              $
              749
              
              
              $
              66
 
 
 6.           
 Contingent Liabilities and Guarantees
 
 In the
normal course of business, there are various outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit that are not reflected in the accompanying financial
statements.  No material losses are anticipated as a result of those
transactions on either a completed or uncompleted basis.
 
 The
Company does not issue any guarantees that would require liability recognition
or disclosure, other than its standby letters of credit.  Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party.  Generally, all
letters of credit, when issued, have expiration dates within one
year.  The credit risk involved in issuing letters of credit is
essentially the same as those that are involved in extending loan facilities to
customers.  The Company generally holds collateral and/or personal
guarantees supporting those commitments.  The Company had $2.1 million
of standby letters of credit outstanding as of March 31,
2008.  Management believes that the proceeds obtained through a
liquidation of collateral and the enforcement of guarantees would be sufficient
to cover the potential amount of future payment required under the corresponding
guarantees.  The current amount of the liability as of March 31, 2008
for guarantees under standby letters of credit is not material.
 
 
 12
  7.            
Investment Securities
 
 The
following table sets forth the composition of our securities portfolio at the
dates indicated.
 
 At
      March 31, 2008
              
              
              At
      December 31, 2007Amortized
                Cost
              
              
              Fair
                Value
              
              
              Amortized
                Cost
              
              
              Fair
                Value(Dollars
      in thousands)Securities
      available-for-sale:Mortgage-backed
              
              $
              89,373
              
              
              $
              90,599
              
              
              $
              79,085
              
              
              $
              79,454U.
      S. Government agency
              
              
              37,546
              
              
              
              37,952
              
              
              
              44,052
              
              
              
              44,275Corporate
              
              
              12,800
              
              
              
              12,234
              
              
              
              12,880
              
              
              
              12,267Mutual
      funds
              
              
              14,403
              
              
              
              14,403
              
              
              
              14,385
              
              
              
              14,385Municipal
              
              
              5,398
              
              
              
              5,528
              
              
              
              5,402
              
              
              
              5,504SBA
      pools
              
              
              7,321
              
              
              
              7,388
              
              
              
              7,614
              
              
              
              7,664Total
      securities available-for-sale
              
              $
              166,841
              
              
              $
              168,104
              
              
              $
              163,418
              
              
              $
              163,549Securities
      held-to-maturity:Mortgage-backed
              
              $
              3,556
              
              
              $
              3,687
              
              
              $
              3,766
              
              
              $
              3,863U.
      S. Government agency
              
              
              927
              
              
              
              964
              
              
              
              1,420
              
              
              
              1,442Corporate
              
              
              2,989
              
              
              
              2,920
              
              
              
              2,173
              
              
              
              2,317Municipal
              
              
              9,398
              
              
              
              9,839
              
              
              
              9,854
              
              
              
              10,354Total
      securities held-to-maturity
              
              $
              16,870
              
              
              $
              17,410
              
              
              $
              17,213
              
              
              $
              17,976
  Following
a decision made in the fourth quarter of 2007, the Company continued the write
down of a mutual fund held in its available-for-sale investment portfolio for
“other than temporary impairment.”  For the three months ended March
31, 2008, the Company took an impairment charge of $150 thousand (pre-tax) or an
after-tax charge of $100 thousand.  The Company’s decision was based
on the length of time the mutual fund was in a loss position and based on the
fact that the mutual fund had not made any recovery during the recent reduction
in interest rates.
 
 The
Company expects to and has already begun to reduce its holdings in this mutual
fund.  In April and May 2008, the Company has redeemed $10 million of
the mutual fund for a realized loss of approximately $72 thousand before taxes,
which will be recognized in the quarter ending June 30, 2008.
 
 
 13
  8.           Loans
 
 The
components of loans at March 31, 2008 and December 31, 2007 are as
follows:
 
 At
      March 31, 2008
              
              
              At
      December 31, 2007Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent(Dollars
      in thousands)Real
      estate loans:One-
      to four-family residential
              
              $
              119,111
              
              
              
              45.6
              %
              
              $
              114,745
              
              
              
              47.3
              %Home
      equity loans and lines of credit
              
              
              41,601
              
              
              
              15.9
              
              
              
              40,264
              
              
              
              16.6Multi-family
              
              
              5,666
              
              
              
              2.2
              
              
              
              5,609
              
              
              
              2.3Commercial
              
              
              67,081
              
              
              
              25.7
              
              
              
              55,606
              
              
              
              22.9Construction
              
              
              10,201
              
              
              
              3.9
              
              
              
              10,137
              
              
              
              4.2Commercial
              
              
              14,462
              
              
              
              5.5
              
              
              
              12,600
              
              
              
              5.2Consumer
      and other
              
              
              3,233
              
              
              
              1.2
              
              
              
              3,752
              
              
              
              1.5Total
      loans receivable
              
              $
              261,355
              
              
              
              100.0
              %
              
              $
              242,713
              
              
              
              100.0
              %Deferred
      loan fees
              
              
              (272
              )
              
              
              
              
              
              
              (281
              )Allowance
      for loan losses
              
              
              (1,390
              )
              
              
              
              
              
              
              (1,392
              )Total
      loans receivable, net
              
              $
              259,693
              
              
              
              
              
              
              $
              241,040
 
 Nonaccrual
loans amounted to approximately $1.0 million and $1.2 million at March 31, 2008
and December 31, 2007, respectively.
  9.            
Deposits
 
 Deposit
accounts, by type, at March 31, 2008 and December 31, 2007 are summarized as
follows:
  At
      March 31, 2008
              
              
              At
      December 31, 2007Balance
              
              
              Percent
              
              
              Wtd.
                Avg.
                Rate
              
              
              Balance
              
              
              Percent
              
              
              Wtd.
                Avg.
                Rate(Dollars
      in thousands)Deposit
      type:Non-interest
      bearing demand.
              
              $
              18,538
              
              
              
              4.60
              %
              
              
              -
              %
              
              $
              15,141
              
              
              
              4.08
              %
              
              
              -
              %Savings
              
              
              81,661
              
              
              
              20.27
              
              
              
              2.73
              
              
              
              55,716
              
              
              
              15.00
              
              
              
              2.18NOW
      accounts
              
              
              45,378
              
              
              
              11.26
              
              
              
              1.20
              
              
              
              45,255
              
              
              
              12.18
              
              
              
              2.12Super
      NOW accounts
              
              
              15,914
              
              
              
              3.95
              
              
              
              1.75
              
              
              
              16,520
              
              
              
              4.45
              
              
              
              1.77Money
      market accounts
              
              
              23,871
              
              
              
              5.93
              
              
              
              3.53
              
              
              
              20,670
              
              
              
              5.57
              
              
              
              3.72Total
      transaction accounts
              
              
              185,362
              
              
              
              46.01
              
              
              
              2.10
              
              
              
              153,302
              
              
              
              41.28
              
              
              
              1.81Certificates
      of deposit
              
              
              217,505
              
              
              
              53.99
              
              
              
              4.64
              
              
              
              218,080
              
              
              
              58.72
              
              
              
              4.86Total
      deposits
              
              $
              402,867
              
              
              
              100.00
              %
              
              
              3.47
              %
              
              $
              371,382
              
              
              
              100.00
              %
              
              
              3.72
              %
 
 14
  10.
              Federal
      Home Loan Bank Borrowings
 
 The
following table sets forth information concerning advances from the Federal Home
Loan Bank (“FHLB”) of New York, at March 31, 2008 and December 31,
2007:
  Maturity
              
              Interest
                Rate
              
              
              March
      31,
                2008
              
              
              December
      31, 2007(Dollars
      in thousands)January
      2, 2008
              
              
              3.61
              %
              
              $
              -
              
              
              $
              15,000January
      2, 2008
              
              
              4.11
              
              
              
              -
              
              
              
              380March
      24, 2008
              
              
              4.79
              
              
              
              -
              
              
              
              4,000April
      1, 2008
              
              
              2.86
              
              
              
              970
              
              
              
              -April
      7, 2008
              
              
              2.18
              
              
              
              10,000
              
              
              
              -November
      20, 2008
              
              
              4.42
              
              
              
              4,000
              
              
              
              4,000October
      19, 2009
              
              
              4.65
              
              
              
              4,000
              
              
              
              4,000November
      20, 2009
              
              
              4.23
              
              
              
              4,000
              
              
              
              4,000December
      03, 2009
              
              
              3.89
              
              
              
              4,000
              
              
              
              4,000October
      18, 2010
              
              
              4.70
              
              
              
              4,000
              
              
              
              4,000June
      30, 2021
              
              
              5.57
              
              
              
              6,478
              
              
              
              6,559$
              37,448
              
              
              $
              45,939
 
 At March
31, 2008, the Bank had a borrowing capacity of $118.9 million available from the
FHLB of New York, which is based on the amount of FHLB stock held or levels of
other assets, including investment securities, which are available for
collateral.  At March 31, 2008, the Bank had $37.4 million in
outstanding borrowings from the FHLB of New York.
  11.
              Fair
      Value Measurements
 
 SFAS No.
157 establishes a fair value hierarchy that prioritizes the input to valuation
techniques used to measure fair value.  The hierarchy gives the
highest priority to unadjusted prices in active markets for identical assets or
liabilities (level 1 measurements) and the lowest priority to unobservable
inputs (level 3 measurements).  The three levels of the fair value
hierarchy under SFAS No. 157 are described below:
 
 Level
      1 – Unadjusted quoted prices in active markets that are accessible at the
      measurement date for identical, unrestricted assets or
      liabilities;
 Level
      2 – Quoted prices in markets that are not active, or inputs that are
      observable, either directly or indirectly, for substantially the full term
      of the asset or liability;
 Level
      3 – Prices or valuation techniques that require inputs that are both
      significant to the fair value measurement and observable (1.e., supported
      by little or no market activity).
 
 A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
 
 15
 
 The
Company’s cash instruments are generally classified within level 1 or level 2 of
the fair value hierarchy because they are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency.
 
 The types
of instruments valued based on quoted market prices in active markets include
most U. S. government and agency securities, many other sovereign government
securities, liquid mortgage products, active listed equities and most money
market securities  Such instruments are generally classified within
level 1 or level 2 of the fair value hierarchy.  As required by SFAS
No. 157, the Company does not adjust the quoted price for such
instruments.
 
 The types
of instruments valued based on quoted prices in markets that are not active,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency include most investment-grade and high-yield
corporate bonds, less liquid mortgage products, less liquid listed equities,
state, municipal or provincial obligations and certain physical
commodities.  Such instruments are generally classified within level 2
of the fair value hierarchy.
 
 Level 3
is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence.  In the absence of such evidence, management’s best
estimate is used.  Subsequent to inception, management only changes
level 3 inputs and assumptions when corroborated by evidence such as
transactions in similar instruments, completed or pending third-party
transactions in the underlying investment or comparable entities, subsequent
rounds of financing, recapitalization and other transactions across the capital
structure, offerings in the equity or debt markets, and changes in financial
ratios or cash flows.
 
 
 16
  Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
  Forward-Looking
Statements
 
 This report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, including statements about anticipated operating and financial
performance, such as loan originations, operating efficiencies, loan sales,
charge-offs and loan loss provision, growth opportunities, interest rates and
deposit growth.  Words such as “may,” “could,” “should,” “would,”
“will,” ”will likely result,” ”believe,” ”expect,” ”plan,” ”will continue,” ”is
anticipated,” ”estimate,” ”intend,” ”project,” and similar expressions are
intended to identify these forward-looking statements.  We wish to
caution readers not to place undue reliance on any such forward-looking
statements, each of which speaks only as of the date made.  Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings than those
presently anticipated or projected.
 
 Critical
Accounting Policies
 
 Critical
accounting policies are those that involve significant judgments and assumptions
by management and that have, or could have, a material impact on our income or
the carrying value of our assets. Our critical accounting policies are those
related to our allowance for loan losses, the evaluation of other than temporary
impairment of investments securities and the valuation of and our ability to
realize deferred tax assets.
 
 Allowance for Loan
Losses.  The allowance for loan losses is calculated with the
objective of maintaining an allowance 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 the 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.  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, additional provisions to
the allowance for loan losses may be required that would adversely impact
earnings for future periods.
  17
  The
allowance for loan losses consists of specific, general and unallocated
components. 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.  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 March 31, 2008 and December 31, 2007, the allowance did
not include an unallocated component.
 
 Other-Than-Temporary
Impairment.  In estimating other-than-temporary impairment of
investment securities, securities are evaluated on at least a quarterly basis,
to determine whether a decline in their value is
other-than-temporary.  To determine whether a loss in value is
other-than-temporary, management reviews criteria such as the reasons underlying
the decline, the magnitude and duration of the decline and the intent and
ability of the Company to retain its investment in the security for a period of
time sufficient to allow for an anticipated recovery in the fair value or until
maturity.  Once a decline in value is determined to be
other-than-temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized.
 
 Valuation of Deferred Tax
Assets.  In evaluating our ability to realize deferred tax
assets, management considers all positive and negative information, including
our past operating results and our forecast of future taxable
income.  In determining future taxable income, management utilizes a
budget process that makes business assumptions and the implementation of
feasible and prudent tax planning strategies.  These assumptions
require us to make judgments about our future taxable income and are consistent
with the plans and estimates we use to manage our business.  Any
reduction in estimated future taxable income may require us to record a
valuation allowance against our deferred tax assets which would result in
additional income tax expense in the period.
  Comparison
of Financial Condition at March 31, 2008 and December 31, 2007
  Total
assets increased $24.2 million, or 5.3%, to $482.1 million at March 31, 2008,
from $457.9 million at December 31, 2007.  The increase was the result
of increases in all asset categories except Federal Home Loan Bank stock and
other assets.
  Net loans
receivable increased by $18.7 million, or 7.8%, to $259.7 million at March 31,
2008 from $241.0 million at December 31, 2007.  One- to four-family
residential real estate loans increased $4.4 million, or 3.8%, to $119.1 million
at March 31, 2008 from $114.7 million at December 31,
2007.  Commercial real estate loans increased $11.5 million, or 20.7%,
to $67.1 million at March 31, 2008 from $55.6 million at December 31,
2006.
  18
  Securities
available for sale increased $4.6 million, or 2.8%, to $168.1 million at March
31, 2008 from $163.5 million at December 31, 2007.  The increase was
the result of purchases in the amount of $22.5 million and increases in fair
value of $1.0 million offset by $3.4 million in principal amortization and $15.5
million in sales, calls and maturities.  Management considers the
change in the fair value of the portfolio to be temporary and primarily
resulting from changes in the interest rate environment except as previously
noted in regards to the mutual fund.  In addition, securities held to
maturity decreased by $343 thousand, to $16.9 million at March 31, 2008 from
$17.2 million at December 31, 2007.  This increase was the result of
purchases of $1.8 million offset by principal amortization of $212 thousand and
maturities of $2.0 million.
  Deposits
increased $31.5 million, or 8.5%, to $402.9 million at March 31, 2008 from
$371.4 million at December 31, 2007.  The largest increase was in
savings accounts, which increased $26.0 million, or 46.7%, to $81.7 million at
March 31, 2008 from $55.7 million at December 31, 2007.  Non-interest
bearing demand accounts increased $3.4 million, or 22.5%, to $18.5 million at
March 31, 2008 from $15.1 million at December 31, 2007.  Money-market
deposit accounts increased by $3.2 million, or 15.5%, to $23.9 million at March
31, 2008 from $20.7 million at December 31, 2007.  NOW accounts
increased by $123 thousand to $45.4 million at March 31, 2008 from $45.3 million
at December 31, 2007.  Super-NOW accounts decreased by $606 thousand
to $15.9 million at March 31, 2008 from $16.5 million at December 31, 2007 and
certificates of deposit decreased by $575 thousand to $217.5 million at March
31, 2008 from $218.1 million at December 31, 2007.
  Federal
Home Loan Bank borrowings decreased $8.5 million, or 18.5%, to $37.4 million at
March 31, 2008 from $45.9 million at December 31, 2007.  We decreased
our outstanding borrowings because our net increase in deposits and the proceeds
received from the maturities and pay downs of securities, discussed above,
provided sufficient cash to fund loan originations and the purchase of
investment securities and fixed assets.
  Total
stockholders’ equity increased $1.2 million to $40.2 million at March 31, 2008
from $39.0 million at December 31, 2007.  This increase was mainly
attributable to net income of $304 thousand.  Accumulated other
comprehensive gain increased by $749 thousand as a result of changes in the net
unrealized gains on investment securities available for sale.  Because
of interest rate volatility, accumulated other comprehensive income (loss) could
materially fluctuate for future interim periods and years depending on economic
and interest rate conditions.
  Comparison
of Operating Results for the Three Months Ended March 31, 2008 and March 31,
2007
 
 General.  Net
income decreased $108 thousand to $304 thousand for the three months ended March
31, 2008 from $412 thousand for the three months ended March 31,
2007.  The principal reason for the decrease was a $532 thousand
increase in net interest income after provision for loan losses, a $16 thousand
decrease in non-interest income, an impairment charge on an investment security
of $150 thousand, a $167 thousand increase in income tax expense and a $307
thousand increase in non-interest expense.
  Interest
Income.Interest income
increased $1.2 million, or 25.0%, to $6.5 million for the three months
ended March 31, 2008 from $5.2 million for the three months ended March 31,
2007.  The increase in interest income resulted from a $747 thousand
increase in interest income on loans and a $495 thousand increase in interest
income on securities.
  19
  Interest
income on loans increased $747 thousand, or 23.5%, to $3.9 million for the
three months ended March 31, 2008 from $3.2 million for the three months
ended March 31, 2007.  The average balance of loans increased $44.7
million, or 21.9%, to $248.4 million for the three months ended March 31, 2008
from $203.7 million for the three months ended March 31, 2007.  In
addition, the average yield increased to 6.32% for the three months ended March
31, 2008 from 6.24% for the three months ended March 31, 2007.  The
increase in the average balance of loans resulted primarily from increases
across all loan categories: mortgage, commercial and consumer
loans.
  Interest
income on securities increased $495 thousand, or 23.6% to $2.5 million for the
three months ended March 31, 2008 from $2.1 million for the three months ended
March 31, 2007.  This increase was due to an increase in the average
balance of investment securities to $182.1 million for the three months ended
March 31, 2008 from $159.2 million for the three months ended March 31, 2007 in
addition to an increase in the average yield on the securities portfolio to
5.59% for the three months ended March 31, 2008 from 5.15% for the three months
ended March 31, 2007.
  Interest
Expense.Interest expense
increased $779 thousand, or 24.3%, to $3.9 million for the three months
ended March 31, 2008 from $3.2 million for the three months ended March 31,
2007.
  Interest
expense on interest-bearing deposits increased by $490 thousand, or 15.8%, to
$3.6 million for the three months ended March 31, 2008 from
$3.1 million for the three months ended March 31, 2007.  The
increase in interest expense on interest-bearing deposits was due to a $36.2
million, or 11.0%, increase in the average balance of interest-bearing deposits
to $365.5 million for the three months ended March 31, 2008 from $329.3
million for the three months ended March 31, 2007.  In addition, the
average rate paid on interest-bearing deposits increased 16 basis points to
3.91% for the three months ended March 31, 2008 from 3.75% for the three months
ended March 31, 2007.  We experienced increases in the average
balances of certificates of deposits, savings accounts and the money market
accounts and decreases in the NOW and Super-NOW account categories.
  Interest
expense on borrowings increased $289 thousand to $364 thousand for the three
months ended March 31, 2008 from $75 thousand for the three months ended March
31, 2007.  This increase was primarily due to a $22.9 million increase
in the average balance of borrowings to $31.9 million for the three months ended
March 31, 2008 from $9.0 million for the three months ended March 31,
2007.
  Provision for
Loan Losses.We establish provisions for loan losses, which
are charged to operations in order to maintain the allowance for loan losses at
a level we consider sufficient to absorb estimated 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.  We did not record a provision for loan losses for the
three months ended March 31, 2008 and recorded a provision for loan losses of
$69 thousand for the three months ended March 31, 2007.  For the three
months ended March 31, 2008, there was a net charge-off of $2 thousand. For the
three months ended March 31, 2007, there was a net recovery of $2
thousand.  The allowance for loan losses as a percentage of total
loans was 0.53% and 0.57% at March 31, 2008 and December 31, 2007,
respectively.  We used the same methodology in calculating the
provision for loan losses during each of the three months ended March 31, 2008
and March 31, 2007.
  20
  Non-interest
Income.Non-interest
income was $122 thousand for the three months ended March 31, 2008 and $288
thousand for the three months ended March 31, 2007.  Fees and service
charges on deposit accounts increased by $14 thousand to $258 thousand for the
three months ended March 31, 2008 from $244 thousand for the three months ended
March 31, 2007.  The increase in fees and service charges was
attributed to increases in volume of overdraft fees and ATM fees and the
implementation of new service charges on deposit accounts.  Gains on
sales of loans totaled $7 thousand for the three months ended March 31, 2008
compared to $11 thousand for the three months ended March 31,
2007.  There was a net loss on the sale and call of securities of $22
thousand for the three months ended March 31, 2008, compared to no such loss or
gain during the same quarter in 2007.  Non-interest income for the
three months ended March 31, 2008 was reduced by an other-than-temporary
impairment of a mutual fund in our available-for-sale investment security
portfolio.  This charge totaled $150 thousand (pre-tax) and resulted
from a further decline in the fair value of the underlying mortgage-related
securities held by this mutual fund.
  Non-interest
Expense.  Non-interest
expense increased $307 thousand, or 15.4%, to $2.3 million for the three months
ended March 31, 2008 from $2.0 million for the three months ended March 31,
2007.  Compensation and benefits expense increased $173 thousand to
$1.3 million for the three months ended March 31, 2008 from $1.2 million for the
three months ended March 31, 2007.  Normal salary increases, increases
in staff, increases in medical benefit costs, and increases in payroll taxes
account for the increase in compensation and benefit
expense.  Occupancy and equipment expense increased $68 thousand
mainly due to increases in heat light and utilities, real estate tax expense,
depreciation expense and maintenance expense.  Data processing expense
increased $8 thousand due to the growth of loan and deposit
accounts.  Professional fees increased $18 thousand mainly due to
increases in audit fees to comply with the Sarbanes-Oxley Act of
2002.  The Company expects professional fees to increase in the future
due to increased accounting, audit, and legal expenses associated in complying
with Sarbanes-Oxley.  Other miscellaneous non-interest expense
increased $38 thousand.  This was mainly due to increases in FDIC
insurance expense, advertising expense, telephone expense, postage expense and
correspondent bank expense.
  Income Tax
Expense (Benefit).We
recorded an expense for income taxes of $69 thousand for the three months ended
March 31, 2008, compared to a benefit of $98 thousand for the three months ended
March 31, 2007, reflecting effective tax rates of 18.5% and (31.2) %,
respectively.  Our effective tax rate for the three months ended March
31, 2008 and 2007 was below the combined state and federal statutory rate and
was attributable to the formation of the Delaware operating subsidiary in
September 2006, which has resulted in the Bank being in a net operating loss
position for state tax purposes.  During the three months ended March
31, 2008 and 2007, the Bank incurred a net operating loss of approximately $1.3
million and $1.2 million, respectively, for state tax purposes but has not
recorded a deferred tax benefit for the three months ended March 31, 2008
compared to a deferred tax benefit of $152 thousand for the three months ended
March 31, 2007.
 
 21
 
 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 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 March 31, 2008, cash and cash equivalents totaled $18.1
million.  Securities classified as available-for-sale, which provide
additional sources of liquidity, totaled $168.1 million at March 31,
2008.  In addition, at March 31, 2008, we had the ability to borrow a
total of approximately $118.9 million from the Federal Home Loan Bank of
New York.  On that date, we had $37.4 million in advances
outstanding.
  At March
31, 2008, loan commitments outstanding totaled $13.7 million and commitments to
purchase securities totaled $500 thousand. In addition to commitments to
originate loans, we had $21.7 million in unadvanced funds to borrowers. Retail
certificates of deposit due within one year of March 31, 2008 totaled $148.6
million.  Total certificates of deposit within one year of March 31,
2007 represent 36.9% 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 March 31, 2009.  We believe 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 above. 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. For the three months ended March 31, 2008, we originated
$33.2 million of loans and purchased $24.3 million of securities. For the
three months ended March 31, 2007, we originated $24.2 million of loans and
purchased $8.9 million of securities.
 
 Financing
activities consist primarily of activity in deposit accounts and Federal Home
Loan Bank advances.  We experienced a net increase in total deposits
of $31.5 million and $29.1 million for the three months ended March 31, 2008 and
2007, respectively.  Deposit flows are affected by the overall level
of interest rates, the interest rates and products offered by us and our local
competitors and other factors.  We generally manage the pricing of our
deposits to be competitive.
  22
  Total
borrowings, which include Federal Home Loan Bank advances,
decreased $8.5 million net for the three months ended March 31, 2008
and decreased $1.5 million, net for the three months ended March 31,
2007.  Federal Home Loan Bank advances have primarily been used to
fund loan demand and purchase securities.
 
 We
completed construction on our new administrative headquarters/full-service
office in Vineland, New Jersey in May 2007. Total construction costs including
land was approximately $6.4 million.  We have spent $283 thousand for
the acquisition and development of land in Buena Township, New Jersey, $1.1
million for the acquisition and development of land in Harrison Township, New
Jersey and $161 thousand for the acquisition and development of land in
Millville, New Jersey.  As of March 31, 2008, we have commitments to
purchase two other properties: a building in Vineland, New Jersey for $325
thousand and a parcel of land in Millville, New Jersey for $525 thousand as
possible branch locations.  We expect to make settlement in April 2008
for both purchases.  However, because building these offices is
subject to state and local government approval, we cannot assure you that we
will be able to open these facilities, or that we will be able to complete
construction even if we expend significant funds on the construction
projects.
  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 March 31,
2008, Colonial Bank, FSB exceeded all of the Office of Thrift Supervision
regulatory capital requirements. Colonial Bank, FSB is considered “well
capitalized” under regulatory guidelines.
 
 The
capital from the offering has significantly increased our liquidity and capital
resources.  The net proceeds from the initial public offering have
been utilized for general corporate purposes, including the funding of lending
activities and the purchase of investment securities.  Our financial
condition and results of operations have been enhanced by the capital from the
offering, resulting in increased net interest-earning assets and net income.
However, due to the increase in equity resulting from the capital raised in the
offering, our return on equity has been adversely affected.
 
 23
  Item
      3.
              Quantitative
      and Qualitative Disclosures About Market RiskNot
      applicable, as the Company is a Smaller Reporting
  Company.Item
      4.
              Controls
      and ProceduresNot
      applicable.Item
      4T.
              Controls
      and Procedures(a)
              Evaluation
      of disclosure controls and procedures.Under
      the supervision and with the participation of our management, including
      our Principal Executive Officer and Principal Financial Officer, we
      evaluated the effectiveness of the design and operation of our disclosure
      controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under
      the Exchange Act) as of the end of the period covered by this quarterly
      report.   Based upon that evaluation, the Principal
      Executive Officer and Principal Financial Officer concluded that, as of
      the end of the period covered by this quarterly report, our disclosure
      controls and procedures were effective to ensure that information required
      to be disclosed in the reports that the Company files or submits under the
      Exchange Act is recorded, processed, summarized and reported within the
      time periods specified in the Securities and Exchange Commission’s rules
      and forms.(b)
              Changes
      in internal control over financial reporting.There
      were no changes made in our internal control over financial reporting
      during the period covered by this report that have materially affected, or
      are reasonably likely to materially affect, our internal control over
      financial reporting.
 PART
      II – OTHER INFORMATIONItem
      1.
              Legal
      ProceedingsThe
      Company or the Bank is periodically involved in various claims and
      lawsuits in the ordinary course of business.  Management of the
      Company believes that such proceedings will not have a material adverse
      effect on the Company’s financial condition, results of operations or cash
      flows.Item
      1A.
              Risk
      FactorsNot
      applicable, as the Company is a Smaller Reporting
  Company.Item
      2.
              Unregistered
      Sales of Equity Securities and Use of ProceedsNone
  24
  Item
      3.
              Defaults Upon Senior
      SecuritiesNoneItem
      4.
              Submission
      of Matters to Vote of Security HoldersNoneItem
      5.
              Other
      InformationNoneItem
      6.
              ExhibitsExhibit
      31.1
              Certification
      of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
      of 2002Exhibit
      31.2
              Certification
      of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
      of 2002Exhibit
      32
              Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to Section
      906 of Sarbanes-Oxley Act of 2002
  25
  SIGNATURES
 
 In
accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
 COLONIAL
      BANKSHARES, INC.RegistrantDate:  May
      13, 2008
              
              By:  /s/ Edward J.
      GeletkaEdward
      J. GeletkaPresident
      and Chief Executive Officer(Principal
      Executive Officer)Date:  May
      13, 2008
              
              By:  /s/ L. Joseph Stella, III,
      CPAL.
      Joseph Stella, III, CPAExecutive
      Vice President and Chief Financial Officer(Principal
      Accounting and FinancialOfficer)






26