UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2012~~ 2013 or

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _________

Commission File Number: 0-26003

ALASKA PACIFIC BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Alaska	92-0167101
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2094 Jordan Avenue, Juneau, Alaska 99801

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (907) 789-4484

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:	Common Stock, par value $0.01 per share
	(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange

Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [ X ] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

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

As of March 15, ~~2013~~2014, there were 655,415 issued and 654,486 outstanding shares of the registrant’s common stock, which are traded on the over-the-counter market through the OTC “Electronic Bulletin Board” under the symbol “AKPB.” Based on the closing price

of the common stock on June 30, ~~2012~~2013, the aggregate value of the Common Stock outstanding held by nonaffiliates of the registrant was $46.41 million (533,223 shares at $811.2040 per share). For purposes of this calculation, shares of common stock held by each executive officer and director have been excluded.

~~DOCUMENTS INCORPORATED BY REFERENCE~~-2-

1. Portions of the Proxy Statement for the 2012 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

Alaska Pacific Bancshares, Inc. and Subsidiary

Juneau, Alaska

Table of Contents

PART I.		Page
Item 1. Business
General		7
Proposed Merger with Northrim Bancorp, Inc.		7
Participation in U.S. Treasury’s Capital Purchase Program		7
Regulatory Matters		7
Market Area		8
Lending Activities		9
Investment Activities		24
Deposit Activities and Other Sources of Funds		27
Regulation		30
Taxation		39
Subsidiary Activities		40
Executive Officers		41
Personnel		41
Competition		41
Item 1A. Risk Factors		42
Item 1B. Unresolved Staff Comments		5153
Item 2. Properties		5254
Item 3. Legal Proceedings		5254
Item 4. Mine Safety Disclosures		5254
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		5355
Item 6. Selected Financial Data		5456
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		5456
General		5456
Operating Strategy		5456
Financial Condition		5456
Results of Operations		5557
Provision and Allowance for Loan Losses		5658
Average Balances, Interest and Average Yields/Cost		5860
Rate/Volume Analysis		5961
Yields Earned and Rates Paid		6062
Liquidity and Capital Reserves		6062
Recent Accounting Pronouncements		6163

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		Page
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		6163
Item 8. Financial Statements and Supplementary Data		6466
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		~~106~~110
Item 9A. Controls and Procedures		~~106~~110
Item 9B. Other Information		~~107~~111
PART III.
Item 10. Directors, Executive Officers, and Corporate Governance		~~107~~111
Item 11. Executive Compensation		~~108~~113
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		~~108~~116
Item 13. Certain Relationships and Related Transactions, and Director Independence		~~108~~118
Item 14. Principal Accounting Fees and Services		~~108~~119
Item 15. Exhibits, Financial Statement Schedules		~~109~~119
Signatures		~~111~~122

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Forward-Looking Statements

“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: This Form 10-K contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding our strategies. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: the requisite shareholder or regulatory approval of the proposed merger with Northrim BanCorp, Inc. may not be received or other conditions to the completion of the merger might not be satisfied or waived, the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs that may be impacted by deterioration in the housing and commercial non-residential real estate markets and may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; deposit flows; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; adverse changes in the securities markets; results of examinations of us by the Board of Governors of the Federal Reserve System (“FRB” or “Federal Reserve”) and our bank subsidiary by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”), or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; computer systems on which we depend could fail or experience a security breach, or the implementation of new technologies may not be successful; our ability to retain key members of our senior management team; costs and effects of litigation, ~~including settlements and judgments;[Duplicate of prior two factors]~~ increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business including changes in regulatory ~~polices~~policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed in this Form 10-K and our other reports filed with the U.S. Securities and Exchange Commission (“SEC”). Any of the forward-looking statements that we make in this Form 10-K and in the other public statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward- looking statements made by or on our behalf. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any forward-looking statements.

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As used throughout this report, the terms “we”, “our” or “us” refer to Alaska Pacific Bancshares, Inc. and our consolidated subsidiary, Alaska Pacific Bank.

Available Information

Alaska Pacific Bancshares, Inc. posts its annual report to shareholders, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and press releases on its investor information page at www.alaskapacificbank.com. These reports are posted as soon as reasonably practicable after they are electronically filed with the SEC. All of Alaska Pacific Bancshares, Inc’s. SEC filings are also available free of charge at the SEC's website at www.sec.gov or by calling the SEC at 1-800-SEC-0330.

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PART I

Item 1. Business

General

Alaska Pacific Bancshares, Inc. (“Company”), an Alaska corporation, was organized on March 19, 1999 for the purpose of becoming the holding company for Alaska Pacific Bank (“Alaska Pacific” or the “Bank”) upon the Bank’s conversion from a federal mutual to a federal stock savings bank (“Conversion”). The Conversion was completed on July 1, 1999. At December 31, ~~2012~~2013, the Company had total assets of $~~182~~176.17 million, total deposits of $~~156~~154.5 million and stockholders’ equity of $20.8 million. The Company has not engaged in any significant activity other than holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank.

Alaska Pacific was founded as “Alaska Federal Savings and Loan Association of Juneau” in 1935 and changed its name to “Alaska Federal Savings Bank” in October 1993. In connection with the Conversion, Alaska Pacific changed its name from “Alaska Federal Savings Bank” to its current title. The Bank, as a federally-chartered savings institution, is regulated by the OCC, its primary federal regulator and successor to the Office of Thrift Supervision (“OTS”), and the FDIC, as its deposit insurer. The Company is regulated by the FRB, its primary federal regulator. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund administered by the FDIC. The Bank has been a member of the Federal Home Loan Bank (“FHLB”) System since 1937.

Alaska Pacific operates as a community oriented financial institution and is devoted to serving the needs of its customers. The Bank’s business consists primarily of attracting retail deposits from the general public and using those funds to originate one-to-four-family mortgage loans, commercial business loans, consumer loans, construction loans and commercial non-residential real estate loans.

Proposed Merger With Northrim BanCorp, Inc.

On October 21, 2013 Northrim BanCorp, Inc. (“Northrim BanCorp”) (NASDAQ: NRIM) and Alaska Pacific Bancshares, Inc. signed a definitive agreement for Northrim BanCorp to acquire Alaska Pacific in a stock and cash transaction. In connection with the transaction, Alaska Pacific will merge into a wholly-owned subsidiary of Northrim BanCorp, and Alaska Pacific Bank will merge with and into Northrim Bank.

The board directors of both companies unanimously approved the transaction, which was approved by Alaska Pacific’s shareholder’s on March 11, 2014, and is subject to approval of applicable bank regulators, as well as other closing conditions. Alaska Pacific will redeem its outstanding preferred stock in full prior to the closing of the transaction.

Northrim BanCorp, Inc. is the parent company of Northrim Bank, an Alaska-based community bank with ten branches in Anchorage, the Matanuska Valley, and Fairbanks serving 70% of Alaska’s population; and an asset based lending division in Washington. The Bank differentiates itself with its detailed knowledge of Alaska’s economy and its “Customer First Service” philosophy. Affiliated companies include Elliott Cove Insurance Agency, LLC; Elliott Cove Capital Management, LLC; Residential Mortgage, LLC; Northrim Benefits Group, LLC; and Pacific Wealth Advisors, LLC.

In connection with the proposed merger, Alaska Pacific Bancshares has mailed to its shareholders a document that is a Proxy Statement of Alaska Pacific Bancshares and a Prospectus of Northrim BanCorp and for additional information concerning the proposed merger shareholders are urged to read the Proxy Statement/Prospectus and the other related documents filed with the SEC.

Participation in the U.S. Treasury’s Capital Purchase Program.

On February 9, 2009, the Company received $4.8 million from the U.S. Treasury Department (“Treasury”) as part of the Treasury’s Troubled Asset Relief (“TARP”) Capital Purchase Program. The Company issued $4.8 million in Series A preferred stock, with a related warrant to purchase up to $717,150 in Company common stock, to the U.S. Treasury. The warrant provides the Treasury the option to purchase up to 175,772 shares of the Company’s common stock at a price of $4.08 per share at any time during the next ten years. The Series A preferred stock pays a 5% dividend for the first five years, after which the rate will increase to 9% if the preferred shares are not redeemed by the Company. The additional capital enhanced our capacity to support the communities we serve through expanded lending activities and economic development. This capital also added flexibility in considering strategic opportunities that may be available to us as the financial services industry continues to consolidate.

-7-

part of the Treasury’s Troubled Asset Relief (“TARP”) Capital Purchase Program. The Company issued $4.8 million in Series A preferred stock, with a related warrant to purchase up to $717,150 in Company common stock, to the U.S. Treasury. The warrant provides the Treasury the option to purchase up to 175,772 shares of the Company’s common stock at a price of $4.08 per share at any time during the next ten years. The Series A preferred stock pays a 5% dividend for the first five years, after which the rate will increase to 9% if the preferred shares are not redeemed by the Company. The additional capital enhanced our capacity to support the communities we serve through expanded lending activities and economic development. This capital also added flexibility in considering strategic opportunities that may be available to us as the financial services industry continues to consolidate.

On November 29, 2012, the Company's $4.8 million of Series A preferred stock issued to the Treasury was sold by the Treasury as part of its efforts to manage and recover its investments under TARP. While the sale of these preferred shares to new owners did not result in any proceeds to the Company and did not change the Company's capital position or accounting for these securities, it did eliminate restrictions put in place by the Treasury on TARP recipients. The Treasury retained its related warrants to purchase up to $717,150 in Company common stock.

~~Regulatory~~As ~~Matters~~a condition to the proposed merger with Northrim BanCorp, Alaska Pacific is required to redeem the Series A preferred stock.

On September 28, 2010, the Company and the Bank each entered into an Order to Cease and Desist with the OTS (individually an “Order” and collectively the “Orders”). As a result of the elimination of the OTS on July 21, 2011, the FRB, the Company’s new primary bank regulator, and the OCC, the Bank’s new primary bank regulator continued to administer the Company’s and Bank’s Order, respectively. On February 1, 2013 the Federal Reserve Bank of San Francisco terminated the Company’s Order. The Bank’s Order was previously terminated by the OCC on August 14, 2012.

- 7 -

Market Area

Alaska Pacific Bank‘s primary market areas are the communities of Juneau, Ketchikan and Sitka, located in the geographically unique region referred to as Southeast Alaska. The region consists of over 35,000 square miles (approximately the size of the state of Indiana), and spans nearly 500 miles from Yakutat in the north to Prince of Wales Island to the south. The narrow strip of coastline and islands next to British Columbia is often referred to as the Alaskan Panhandle. Deep fjords, islands, glaciers and mountains preclude any road system from connecting the various communities so travel throughout the region is either by air or water. Alaska Airlines serves the larger cities, with dozens of ~~private~~privately scheduled and charter float plane companies providing service for the smaller communities. The Alaska Marine Highway system provides scheduled vehicle and passenger service throughout the region, along with other smaller private vessels. Freight comes into the region either by shipping containers on a barge, orshipping vans by ferry, or air cargo by Alaska Airlines.

According to ~~the 2012 census~~ data obtained from the State of Alaska Department of Labor, Southeast Alaska’s economic region isreflects ~~home~~an toestimated population (as of July 2013) 74,~~423~~382 residents in 14 communities. The population of the region has remained very stable, with periods of decline during 2004-2007, with modest but consistent growth occurring through ~~2012~~present. The Bank’s three major markets of Juneau, Ketchikan and Sitka have a combined population of 55,~~854~~959 ~~(an increase of 893 people over 2011),~~ which is 75% of the region’s total population. While the region shares similar economic characteristics there are diverse and unique industries from community to community.

The Bank directly serves the communities of Juneau, Ketchikan and Sitka with ~~six~~five retail offices, but has consumer and business customers throughout the entire region. The Bank’s products and services are marketed by radio, newspaper and Internet, reaching all but the most remote locations. The Bank, through its correspondent banking relationships in Anchorage and Fairbanks, has some business in the northern regions of the state, but does not do any direct marketing in those regions.

~~Historically,~~ Southeast Alaska has a very stable and diversified economy which has been relatively immune from the ~~direct impact of~~ economic ~~problems~~swings in the “lower 48.” ~~The~~ State, ~~region~~federal ~~has~~and ~~demonstrated~~local ~~its~~governments, ~~stability~~tourism ~~over~~in ~~time~~the ~~missing~~form of the ~~“booms”~~cruise ship industry, world-class gold and ~~avoiding~~silver ~~the~~mines, ~~“busts”~~and ~~without~~fishing ~~significant~~and ~~swings~~fish inprocessing ~~either~~are ~~direction~~all major segments of the Southeast economy. ~~While~~The ~~not~~cruise ~~totally~~ship ~~immune~~industry, which has returned to pre-recession levels brings over one million ship-visitors into the region ~~remained~~each ~~relatively~~season. ~~insulated~~This ~~from~~has a major impact on the ~~recent~~many ~~deep~~local ~~recession~~businesses that serve the tourism market with various retail stores, excursions and ~~did~~charters ~~not~~that define the Alaskan experience. In Juneau, the ~~levels~~Kensington ofGold ~~unemployment~~Mine oris ~~drop~~entering inits ~~real~~third ~~estate~~year ~~values~~of ~~felt~~production inadding ~~many~~a ~~other~~significant ~~parts~~private ofsector employer to the ~~country~~local market. AsThe along ~~primary~~established ~~example,~~Greens ~~according~~Creek tosilver ~~the~~mine ~~State~~also ofcontinues ~~Alaska~~as ~~Department~~one of ~~Labor~~the largest private employers in the area. In Ketchikan, the ~~December~~Ketchikan ~~2012~~Ship ~~unemployment~~Yard ~~rate~~continues ~~for~~with ~~Juneau~~its expansion program, ~~the~~with ~~Bank’s~~mineral ~~largest~~exploration ~~market~~(gold and rare earth minerals) in and around the Ketchikan area, ~~was~~also ~~5.0%~~creating ~~compared~~economic growth that we believe will prove to ~~6.6%~~be ~~statewide~~a ~~and~~long-term ~~7.8%~~boost ~~nationwide~~to the region.

Relative to housing, Juneau saw its greatest drop in values during 2008, which was 9%, but over 2009 and midway through the 2010, values had recovered by 4% for each of the periods, offsetting the 2008 decline. According the Juneau Economic Council, during 2011, home values rose to their highest levels, surpassing the levels in place prior to the recession.-8-

~~Tourism,~~Using ~~and~~unemployment ~~more~~as ~~specifically~~a ~~the~~key ~~cruise ship industry~~indicator, ~~has returned to pre-recession levels with over one million ship-visitors visiting~~ the ~~region.~~State ~~This~~of ~~has~~Alaska aDepartment ~~major~~of ~~impact~~Labor onreports the ~~many~~December ~~local~~2013 ~~businesses~~unemployment ~~that~~rate ~~are~~for ~~dependent~~Juneau, on the ~~tourism~~Bank’s largest market ~~with various retail stores~~area, ~~excursions~~was ~~and~~4.6% ~~charters~~compared ~~that~~to ~~define~~6.5% ~~the~~statewide ~~Alaskan~~and ~~experience~~6. In5% ~~Juneau~~nationwide, ~~the~~even ~~Kensington~~though ~~Gold~~December ~~Mine~~ is ~~entering its second year of production adding a significant private sector employer to the local market. The long established Greens Creek silver mine also continues as~~ one of the ~~largest~~slowest private employers in the area. In Ketchikan, the Ketchikan Ship Yard continues with its expansion program, with mineral exploration (gold and rare earth minerals) in and around the Ketchikan area also creating economic ~~growth~~times ~~that~~of ~~we believe will prove to be a long-term boost to~~ the ~~region~~year.

~~Alaska~~While ~~Pacific~~the ~~Bank’s~~oil ~~branching~~industry ~~system~~is ~~starts~~not present in ~~Juneau where~~ the ~~Bank~~Southeast ~~has its administrative headquarters and largest banking office~~region, ~~one~~oil ~~other full service branch and a retail mortgage office (Alaska Pacific Mortgage). The City and Borough of Juneau encompasses 3,248 square miles, of which 704 square miles~~ is ~~water~~the ~~and 928 square miles are ice fields. While serving as a~~ major ~~transportation~~source ~~hub for all~~ of ~~Southeast~~revenue ~~Alaska,~~for ~~Juneau~~the ~~has~~State ~~fewer than 191 miles~~ of ~~road. Juneau had an estimated population of 32~~Alaska,~~290~~ asfunding ofvirtually ~~the~~all ~~end~~state ~~of 2012~~programs. ~~Juneau~~Currently is the ~~capital of~~ Alaska ~~with~~Permanent ~~its~~Fund ~~primary~~has ~~economic~~in ~~resources~~excess ~~being~~of ~~state~~$49 ~~and~~billion ~~federal~~in ~~government,~~investments ~~tourism,~~earning ~~fish~~a ~~processing,~~return ~~fishing~~in ~~and~~the ~~mining. Juneau’s~~second ~~historically~~quarter ~~active~~of ~~mining~~fiscal ~~industry~~year ~~(primarily~~2014 ~~gold and silver), which had seen decades~~ of ~~decline~~4.3%, ~~has~~as ~~gained~~reported ~~importance~~by in the ~~area’s economy. According to the~~ Alaska ~~Department~~Permanent ofFund ~~Labor, the top ten largest employers in Juneau at the end~~ Corporation.

-Alaska 8Pacific -Bank’s branching system starts in Juneau where the Bank has its administrative headquarters and largest banking office, and one other full service office. The City and Borough of Juneau encompasses 3,248 square miles, of which 704 square miles is water and 928 square miles are ice fields. While serving as a major transportation hub for all of Southeast Alaska, Juneau has fewer than 191 miles of road. Juneau had an estimated population of 32,290 as of the end of 2012. Juneau is the capital of Alaska with its primary economic resources being state and federal government, tourism, fish processing, fishing and mining. Juneau’s historically active mining industry (primarily gold and silver), which had seen decades of decline, has gained importance in the area’s economy. According to the Alaska Department of Labor, the top ten largest employers in Juneau at the end of 2010 were the State of Alaska, Juneau School District, Juneau City & Borough, Bartlett Regional Hospital, University of Alaska, REACH, Inc., Fred Meyer Inc., Southeast Alaska Regional Health Consortium (SEARHC), Hecla Greens Creek Mining Company, Coeur Alaska (Kensington gold mine), and the Central Council of Tlingit & Haida.

of 2010 were the State of Alaska, Juneau School District, Juneau City & Borough, Bartlett Regional Hospital, University of Alaska, REACH, Inc., Fred Meyer Inc., Southeast Alaska Regional Health Consortium (SEARHC), Hecla Greens Creek Mining Company, Coeur Alaska (Kensington gold mine), and the Central Council of Tlingit & Haida.

Two full service offices of Alaska Pacific are located in Ketchikan, which has an estimated population of approximately 13,938 according to the U.S. Census Bureau. Ketchikan is an industrial center and a major port of entry into Southeast Alaska. Ketchikan’s key economic industries are a large fishing fleet, fish processing facilities, timber and wood products manufacturing, and tourism. The largest employers in the Ketchikan Gateway Borough include the city and state government, Ketchikan General Hospital, the Ketchikan Gateway School District, the Ketchikan Ship Yard and the federal government.

One full service office of Alaska Pacific is located in Sitka, which has an estimated population of approximately 9,084 according to the U.S. Census Bureau. Sitka is located on the west coast of Baranof Island on Sitka Sound. The primary economic sources in Sitka are fishing, fish processing, tourism, government, transportation, and retail and health care services. The largest employers in Sitka include the Southeast Alaska Regional Health Corp., the Sitka Borough School District, city, state and federal governments and the Sitka Community Hospital. Other Sitka employers include the Alaska State Trooper Training Academy and numerous businesses involved in commercial and sport fishing and tourism.

Lending Activities

General. At December 31, ~~2012~~2013, Alaska Pacific’s loan portfolio (excluding loans held for sale) was $~~148~~146.45 million, or 8183% of total assets at that date. Alaska Pacific originates conventional mortgage loans, construction loans, commercial non-residential real estate loans, land loans, consumer loans and commercial business loans. ~~Over 75% of Alaska Pacific’s loan portfolio is secured by real estate, either as primary or secondary collateral, located in its primary market area.~~

Over 75% of Alaska Pacific’s loan portfolio is secured by real estate, either as primary or secondary collateral, located in its primary market area.

Loan Portfolio Analysis. The following table sets forth the composition of Alaska Pacific’s loan portfolio as of the dates indicated. Loan balances are net of undisbursed loan proceeds, deferred fees and unearned discounts, and do not include loans held for sale.

- 9 -

(dollars in thousands) December 31,

~~2012~~2013

~~2011~~2012

Amount

Percent

Amount

Percent

Real estate:

Permanent:

One-to-four-family

2118,~~433~~166

1412.4540

2421,~~554~~433

1614.6245

Multifamily

32,~~008~~727

21.0386

23,~~951~~008

2.0003

Commercial non-residential

7370,~~447~~775

4948.5032

7073,~~926~~447

4849.0050

Total permanent

9791,~~888~~668

6562.9858

9897,~~431~~888

6665.6198

Land

8,~~107~~257

5.4664

8,~~435~~107

5.7146

Construction:

One-to-four-family

25,~~410~~007

13.6242

12,~~103~~410

01.7562

Commercial non-residential

~~607~~1,747

01.4119

~~2,042~~607

10.3841

Total construction

36,~~017~~754

24.0361

3,~~145~~017

2.1303

Commercial business

2324,~~245~~958

1517.6704

1923,~~197~~245

1215.9967

Consumer:

Home equity

98,~~115~~713

65.1495

119,~~532~~115

76.8014

Boat

4,~~772~~439

3.2203

54,~~011~~772

3.3922

Automobile

~~773~~688

0.5247

~~913~~773

0.6252

Other

1,~~453~~000

0.9868

1,~~102~~453

0.7598

Total consumer

1614,~~113~~840

10.8613

1816,~~558~~113

1210.5686

Total loans

~~148~~146,~~370~~477

100.00

~~147~~148,~~766~~370

100.00

Less:

Allowance for loan losses

1,~~876~~910

1,~~865~~876

Loans, net

~~146~~144,~~494~~567

~~145~~146,~~901~~494

One-to-four-family Real Estate Lending. Historically, Alaska Pacific has concentrated its lending activities on the origination of loans secured by first mortgages on existing one-to-four-family residences located in its primary market area. At December 31, 2012, $21.4 million, or 14.5%, of Alaska Pacific’s total loan portfolio consisted of these loans. Alaska Pacific originated $37.2 million and $20.3 million of one-to-four-family residential mortgage loans of which $34.5 and $17.5 were originated for sale during the years ended December 31, 2012 and 2011, respectively.

In the fourth quarter of 2013, the Company decided to discontinue its mortgage loan origination operations and shut down the operation by the end of December 2013. No significant proceeds are expected from the sale of any related assets, since most of the assets will be absorbed into other operations of the Company. In the past, income derived from mortgage loan originations consisted of interest income from loans, gain on sale of loans and related loan fees.

At December 31, 2013, $18.2 million, or 12.4%, of Alaska Pacific’s total loan portfolio consisted of these loans. Alaska Pacific originated $33.6 million and $37.2 million of one-to-four-family residential mortgage loans of which $30.9 million and $34.5 million were originated for sale during the years ended December 31, 2013 and 2012, respectively.

Generally, Alaska Pacific’s fixed-rate one-to four-family mortgage loans have maturities of 15 and 30 years and are fully amortizing with monthly payments sufficient to repay the total amount of the loan with interest by the end of the loan term. Generally, Alaska Pacific originates these loans under terms, conditions and documentation which permits them to be sold to U.S. Government sponsored agencies such as the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Federal National Mortgage Association (“Fannie Mae”) and the Alaska Housing Finance Corporation (“AHFC”), a state agency that provides affordable housing programs. Alaska Pacific’s fixed-rate loans customarily include “due on sale” clauses, which gives the Bank the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not paid.

Alaska Pacific offers adjustable rate mortgage loans at rates and terms competitive with market conditions. At December 31, ~~2012~~2013, $32.2 million, or 1512.1%, of Alaska Pacific’s one-to-four-family residential loan portfolio consisted of adjustable rate mortgage loans. Demand for conventional adjustable rate mortgage loans has been very low in the Bank’s market area, but have increased with the advent of “hybrid mortgages,” which are adjustable rate loans with the interest rate fixed for an initial period of three to five years and typically adjust annually thereafter.

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Alaska Pacific originates one-to-four-family mortgage loans under Freddie Mac, Fannie Mae, the Federal Housing Administration, the Veterans Administration, and AHFC programs. Alaska Pacific generally sells most of these loans in the secondary market, with servicing retained. This means that Alaska Pacific retains the right to collect principal and interest payments on the loans and forward these payments to the purchaser of the loan, maintain escrow accounts for payment of taxes and insurance and perform other loan administration functions. See “Loan Originations, Sales and Purchases.” Alaska Pacific also uses a larger private mortgage investor as an additional source for funding mortgages.

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Some of the one- to four-family residential mortgage loans we retain in our portfolio consist of loans that are "non-conforming" because they do not satisfy acreage limits, income, credit or various other requirements imposed by government sponsored agencies or other secondary market purchasers. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy government sponsored agencies credit requirements because of personal and financial reasons (i.e., divorce, bankruptcy, length of time employed, etc.), and other aspects, which do not conform to government sponsored agencies guidelines. Such borrowers may have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans. We believe that these loans satisfy a need in our market area. As a result, subject to market conditions, we intend to continue to originate these types of loans.

Alaska Pacific requires title insurance insuring the status of its lien on all loans where real estate is the primary source of security. Alaska Pacific also requires that fire and casualty insurance, and flood insurance where appropriate, be maintained in an amount at least equal to the outstanding loan balance.

One-to-four-family residential mortgage loans may be made up to 80% of the appraised value of the security property without private mortgage insurance. Pursuant to underwriting guidelines adopted by the Board of Directors, Alaska Pacific can lend up to 97% of the appraised value of the property securing a one-to-four-family residential loan; however, Alaska Pacific generally obtains private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the security property.

Land Lending. Alaska Pacific also originates loans secured by first mortgages on residential building lots on which the borrower proposes to construct a primary residence. These loans generally have terms of up to 12 years and can be either fixed-rate or floating rate loans. Alaska Pacific also originates commercial land loans, which have floating rates that adjust annually. At December 31, ~~2012~~2013 and ~~2011~~2012, land loans amounted to $8.13 million and $8.41 million, respectively. The $~~300~~200,000 ~~decrease~~increase in land loans was primarily attributable to aan ~~decrease~~increase in ~~commercial~~consumer land loans.

Loans secured by undeveloped land or improved lots involve greater risks than one-to-four-family residential mortgage loans because these loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default and foreclosure, Alaska Pacific may be confronted with a property value that is insufficient to assure full repayment of the loan.

Construction Lending. At December 31, ~~2012~~2013, construction loans amounted to $36.08 million, or 24.06% of total loans, most of which were secured by properties located in Alaska Pacific’s primary market area. This compares with $3.10 million, or 2.10% of the total loan portfolio at December 31, ~~2011~~2012. The $~~100,000~~3.8 ~~decrease~~million increase was attributable to ~~a decrease in demand for commercial non-residential construction loans offset with~~ an increase in market demand for residential construction loans.

At December 31, ~~2012~~2013, $36.08 million of our construction loan portfolio consisted of loans requiring interest only payments of which $13.54 million or 50% of the total construction loans were relying on the interest reserve to make this payment. As a result, construction lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor themselves to repay principal and interest.

Construction loans are made for terms of nine to 18 months and are made at fixed or adjustable rates with interest payable monthly. Alaska Pacific originates construction loans to individuals who have a contract with a builder for the construction of their residence. Alaska Pacific typically requires that permanent financing with Alaska Pacific or some other lender be in place prior to closing any construction loan to an individual. Alaska Pacific generally underwrites these loans, which typically convert to a fully amortizing adjustable- or fixed-rate loan at the end of the construction term, according to the underwriting standards for a permanent loan.

~~Construction loans to builders, or speculative loans, are typically made with a maximum loan~~-to11-value ratio of the lesser of 80% of the cost of construction or 75% of the appraised value. Construction loans made to home builders are termed “speculative” because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either Alaska Pacific or another lender for the finished

some other lender be in place prior to closing any construction loan to an individual. Alaska Pacific generally underwrites these loans, which typically convert to a fully amortizing adjustable- 11or fixed-rate loan at the end of the construction term, according to the underwriting standards for a permanent loan.

Construction loans to builders, or speculative loans, are typically made with a maximum loan-to-value ratio of the lesser of 80% of the cost of construction or 75% of the appraised value. Construction loans made to home builders are termed “speculative” because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either Alaska Pacific or another lender for the finished home. The home buyer may be identified either during or after the construction period, with the risk that the builder will have to service the debt on the speculative construction loan and finance real estate taxes and other carrying costs of the completed home for a significant time after the completion of construction until the home buyer is identified.

Prior to making a commitment to fund a construction loan, Alaska Pacific requires an appraisal of the property by an independent state-licensed and qualified appraiser approved by the Board of Directors. Alaska Pacific’s staff also reviews and inspects projects prior to any disbursement of funds during the term of the construction loan. The review consists of examining the percentage of funds expended compared to the percentage of work completed and examining interest reserves compared to work left to finish the project.

Although construction lending affords Alaska Pacific the opportunity to achieve higher interest rates and fees with shorter terms to maturity than one-to-four-family mortgage lending, construction lending is generally considered to involve a higher degree of risk than one-to-four-family mortgage lending. Generally, these loans are considered to involve more risk than one-to-four-family loans because they are more difficult to evaluate. At the time the loan is made, the value of the collateral securing the loan must be estimated based on the projected selling price at the time the residence is completed, typically six to 12 months later, and on estimated building and other costs (including interest costs). However, appraisers will use both market and income valuation approaches in addition to cost to establish value. Changes in the demand for new housing in the area and higher-than-anticipated building costs may cause actual results to vary significantly from those estimated. Accordingly, Alaska Pacific may be confronted, at the time the residence is completed, with a loan balance exceeding the value of the collateral. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers’ borrowing costs, thereby reducing the overall demand for new housing. The fact that in-process homes are difficult to sell and typically must be completed in order to be successfully sold also complicates the process of working out problem construction loans. This may require Alaska Pacific to advance additional funds and/or contract with another builder to complete the residence. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished home.

Alaska Pacific has attempted to minimize the foregoing risks by, among other things, limiting its construction lending, and especially speculative loans, to a small number of well-known local builders. One-to-four-family construction loans generally range in size from $100,000 to $600,000, while commercial non-residential and multifamily construction loans have generally ranged from $500,000 to $2.5 million. At December 31, ~~2012~~2013, the largest commercial non-residential construction loan was $1.46 million for remodeling a non-residential building located in our market area, which was performing in accordance with its repayment terms.

Multifamily and Commercial Non-Residential Real Estate Lending. The multifamily residential loan portfolio consists primarily of loans secured by small apartment buildings and the commercial non-residential real estate loan portfolio consists primarily of loans secured by retail, office, warehouse, mini-storage facilities and other improved commercial properties. These loans generally range in size from $100,000 to $2.5 million and at December 31, ~~2012~~2013 the largest commercial non-residential real estate loan totaled $2.59 million and was performing in accordance with its repayment terms. At December 31, ~~2012~~2013, Alaska Pacific had $32.07 million of multifamily residential and $7370.48 million of commercial non-residential real estate loans, or 21.09% and 4948.53%, respectively, of the total loan portfolio at this date. Multifamily and commercial non-residential real estate loans are generally underwritten with loan-to-value ratios of up to 75% of the lesser of the appraised value or the purchase price of the property. These loans generally are made at interest rates based on the prime rate for 15 to 20 year terms, with adjustment periods of one, three or five years and an adjustment rate equal to the prime rate plus a negotiated margin of 1% to 3%. In addition, many of these loans have interest rate floors ranging from 5.00% to 6.00%. Alaska Pacific is increasingly using interest rate floors in the current low interest rate environment to protect or enhance yield. While a majority of Alaska Pacific’s multifamily and commercial real estate loans are secured by properties located within Alaska Pacific’s primary market area, others are secured by properties elsewhere in Alaska as well as Washington, Colorado, California, and Idaho.

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low interest rate environment to protect or enhance yield. While a majority of Alaska Pacific’s multifamily and commercial non-residential real estate loans are secured by properties located within Alaska Pacific’s primary market area, others are secured by properties elsewhere in Alaska as well as Washington, Colorado, California, and Idaho.

Alaska Pacific is also an approved lender under the AHFC Multifamily Participation Program, which was introduced in 1998. The AHFC Multifamily Participation Program provides financing for up to 80% of the loan amount, which allows Alaska Pacific to pursue larger lending opportunities while mitigating its risk.

- From 12time to time, Alaska Pacific purchases participations in multifamily and commercial non-residential real estate loans from other banks in Alaska and the Pacific Northwest, generally ranging from $500,000 to $2.5 million. Such loans are on similar terms and are underwritten by us utilizing the same underwriting standards as loans originated by Alaska Pacific. Alaska Pacific’s lending policy limits participation loans by geographic region, loan type and lead lender concentrations. Additionally, the Board of Directors must approve all participation loans. Alaska Pacific monitors participation loans by maintaining consistent communication with lead lenders, receipt of status updates on each credit and by review of annual financial statements of the borrowers.

~~From~~Multifamily ~~time~~residential toand ~~time,~~commercial ~~Alaska~~non-residential ~~Pacific~~real ~~purchases~~estate ~~participations~~lending inentails ~~multifamily~~significant additional risks as compared with single-family residential property lending. Multifamily residential and commercial non-residential real estate loans ~~from~~typically ~~other~~involve ~~banks~~large inloan ~~Alaska~~balances ~~and~~to ~~the~~single ~~Pacific~~borrowers ~~Northwest,~~or ~~generally~~groups ~~ranging~~of ~~from~~related ~~$500,000 to $2~~borrowers.~~5 million. Such~~ ~~loans~~The ~~are~~payment experience on ~~similar~~these ~~terms~~loans ~~and~~typically ~~are~~is ~~underwritten~~dependent byon usthe ~~utilizing~~successful operation of the ~~same~~real ~~underwriting~~estate ~~standards~~project. Supply asand ~~loans~~demand ~~originated~~conditions byin ~~Alaska~~the ~~Pacific. Alaska~~market ~~Pacific’s~~for ~~lending~~office, ~~policy~~retail ~~limits~~and ~~participation~~residential ~~loans~~space bycan ~~geographic~~significantly ~~region,~~affect ~~loan~~these ~~type~~risks, and, ~~lead~~as ~~lender concentrations. Additionally~~such, ~~the~~may ~~Board~~be ofsubject ~~Directors~~to ~~must~~a ~~approve~~greater ~~all~~extent ~~participation~~to ~~loans~~adverse conditions in the economy generally. Alaska Pacific ~~monitors~~reviews ~~participation~~all ~~loans~~commercial bynon-residential ~~maintaining~~real ~~consistent~~estate ~~communication~~loans ~~with~~in ~~lead~~excess ~~lenders, receipt~~ of ~~status~~$500,000 ~~updates~~ on ~~each~~an ~~credit~~annual ~~and~~basis byto ~~review~~ensure ofthat ~~annual~~the ~~financial~~loan ~~statements~~meets ofcurrent ~~the~~underwriting ~~borrowers~~standards.

~~Multifamily~~Future ~~residential~~growth ~~and~~of commercial ~~real estate lending entails significant additional risks as compared with single~~non-~~family~~ residential ~~property lending. Multifamily residential and commercial~~ real estate loans ~~typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on these loans typically~~ is ~~dependent~~restricted onby ~~the~~regulation ~~successful~~which ~~operation~~generally oflimits ~~the~~such ~~real estate project. Supply and demand conditions in the market for office~~loans, ~~retail~~under ~~and~~Alaska ~~residential~~Pacific’s ~~space~~federal ~~can~~thrift ~~significantly affect these risks~~charter, ~~and, as such, may be subject~~ to a400% ~~greater~~of ~~extent~~total tocapital ~~adverse~~for ~~conditions~~regulatory inpurposes, ~~the~~or ~~economy~~approximately ~~generally~~$83. ~~Alaska~~1 million ~~Pacific~~at ~~reviews all commercial real estate loans in excess of $500~~December 31,~~000~~ ~~on an annual basis to ensure that the loan meets current underwriting standards~~2013.

Commercial Business Lending. At December 31, 2013, commercial business loans amounted to $25.0 million, or 17.0% of total loans. Future growth of commercial ~~real~~business ~~estate~~ loans is restricted by regulation which generally limits such loans, under Alaska Pacific’s federal thrift charter, to ~~400~~20% of total ~~capital for regulatory purposes~~assets, or approximately $8335.2 3 million at December 31, ~~2012~~2013.

~~Commercial~~Alaska ~~Business~~Pacific ~~Lending. At~~originates ~~December~~commercial ~~31,~~business ~~2012,~~loans ~~commercial~~to small sized businesses in its primary market area. Commercial business loans ~~amounted~~are generally made to ~~$23.2 million~~finance the purchase of seasonal inventory needs, new or 15used equipment, and for short-term working capital.7% ofSecurity ~~total~~for these loans~~. Future~~ ~~growth~~generally ofincludes equipment, boats, accounts receivable and inventory, although commercial business loans isare ~~restricted~~sometimes bygranted ~~regulation~~on ~~which~~an ~~generally~~unsecured ~~limits~~basis. ~~such~~Commercial business loans, ~~under~~are ~~Alaska~~made ~~Pacific’s~~for ~~federal~~terms ~~thrift~~of ~~charter~~seven years or less, todepending ~~20%~~on the purpose of ~~total~~the ~~assets~~loan and the collateral, with operating lines of credit made for one year or ~~approximately~~less ~~$36.4~~renewed ~~million~~annually at ~~December~~an interest rate based on the prime rate, usually adding a margin of between one-half and three percentage points. Such loans generally are originated in principal amounts between $100,000 and $1.0 million. At December 31, ~~2012~~2013, the largest commercial business loan for $3.0 million was secured by equipment and inventory and was performing in accordance with its repayment terms.

Alaska Pacific originates commercial business loans to small sized businesses in its primary market area. Commercial business loans are generally made to finance the purchase of seasonal inventory needs, new or used equipment, and for short-term working capital. Security for these loans generally includes equipment, boats, accounts receivable and inventory, although commercial business loans are sometimes granted on an unsecured basis. Commercial business loans are made for terms of seven years or less, depending on the purpose of the loan and the collateral, with operating lines of credit made for one year or less renewed annually at an interest rate based on the prime rate, usually adding a margin of between one-half and three percentage points. Such loans generally are originated in principal amounts between $100,000 and $1.0 million. At December 31, 2012, the largest commercial business loan for $3.0 million was secured by equipment and inventory and was performing in accordance with its repayment terms.

Alaska Pacific originates guaranteed loans through the Small Business Administration, the U.S. Department of Agriculture and the Alaska Industrial Development and Export Authority. Alaska Pacific has also worked with local municipal agencies, such as the Juneau Economic Development Council and the Cities of Sitka and Ketchikan in exploring participation or guaranty programs in each of these cities. Generally in these programs, Alaska Pacific receives guarantees of between 75% and 90% of the loan amount. In addition, Alaska Pacific has retained portions of commercial business loans originated through participation programs with economic development agencies such as the Alaska Industrial Development and Export Authority, often retaining portions of as little as 10%.

Alaska Pacific also makes commercial business loans secured by commercial charter boats and commercial fishing vessels. These loans have 10 to 15 year terms with an interest rate that adjusts based on the prime interest rate. In connection with the loans on these boats, Alaska Pacific receives a ship’s preferred marine mortgage to protect its interest ~~in the collateral. Alaska Pacific has also granted a flooring line to one boat dealer for the purchase of boats and other related marine equipment.~~

-in 13the -collateral. Alaska Pacific has also granted a flooring line to one boat dealer for the purchase of boats and other related marine equipment.

Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential, commercial and multifamily real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan-to-collateral values, and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans often have equipment, inventory, accounts receivable or other business assets as collateral, the liquidation of collateral in the event of a borrower default is often not a sufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other conditions. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.

Consumer Lending. At December 31, ~~2012~~2013, consumer loans totaled $1614.18 million, or 10.91% of total loans. Consumer loans generally have shorter terms to maturity or repricing and higher interest rates than long-term, fixed-rate mortgage loans. In addition to home equity, boat loans and automobile loans, Alaska Pacific’s consumer loans consist of loans secured by land, airplanes, deposit accounts, and unsecured loans for personal or household purposes.

The largest category of Alaska Pacific’s consumer loan portfolio is home equity loans that are made on the security of residences. At December 31, ~~2012~~2013, home equity loans totaled $98.17 million, or 6.10% of the total loan portfolio, compared to $119.51 million, or 76.81% of the total loan portfolio at December 31, ~~2011~~2012. Home equity loans generally do not exceed 95% of the appraised value of the residence or 100% of the tax assessment including the outstanding principal of the first mortgage. Closed-end loans are generally fixed-rate and have terms of up to 25 years requiring monthly payments of principal and interest. Home equity lines of credit generally have adjustable interest rates. These rates are graduated based on credit scores. Recently, with the slowdown in price appreciation or actual declines in values, homeowner’s equity in some high loan to value (LTV) home equity loans may have declined. However, Alaska has not experienced the rapid declines in home prices experienced by many parts of the country where home prices rose much faster.

At December 31, ~~2012~~2013, consumer boat loans amounted to $4.84 million, or 3.20%, of the total loan portfolio compared to $54.08 million, or 3.42% of the total loan portfolio at December 31, ~~2011~~2012. Alaska Pacific offers consumer boat loans with maturities of between five and 20 years, which generally range in principal amounts from $15,000 to $350,000 and are secured by new and used boats. Alaska Pacific makes boat loans of less than $100,000 at fixed rates of interest and loans over $100,000 are made at an interest rate that is adjustable based on the prime lending rate. Alaska Pacific generally makes boat loans on new boats of up to 90% of the value and 85% on used boats, but in certain instances it will loan up to 100% of the value depending on the borrower’s credit score.

At December 31, ~~2012~~2013, automobile loans amounted to $~~773~~688,000, or 0.5%, of the total loan portfolio, relatively unchanged from $~~913~~773,000 or 0.65% of the total loan portfolio at December 31, ~~2011~~2012. Alaska Pacific offers automobile loans with maturities of up to seven years with fixed rates of interest.

Other consumer loans include loans collateralized by deposit accounts and other types of collateral, and by unsecured loans to qualified individuals. These loans amounted to $1.50 million or 1.0.7%, of total loans at December 31, ~~2012~~2013, compared to $1.15 million, or 01.80%, of total loans at December 31, ~~2011~~2012.

Alaska Pacific also requires title, fire and casualty insurance on secured consumer loans. The only title exception is for home equity loans under $50,000 where a property profile, obtained from a title company, indicates there are no liens or encumbrances not previously disclosed.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans secured by rapidly depreciating assets such as automobiles or boats. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. Home equity lines of credit have greater credit risk than one-to-four family residential mortgage loans because they are generally secured by mortgages subordinated to the existing first mortgage on the property, which we may or may not hold in our portfolio. We do not have private mortgage insurance coverage on these loans. Further adjustable-rate loans may experience a higher rate of default in a rising interest rate environment due to the increase in payment amounts caused by the increase in interest rates as loan rates reset. If current economic conditions deteriorate for our borrowers and their home prices fall, we may also experience higher credit losses from this loan portfolio. Since our home equity loans primarily consist of second mortgage loans, it is unlikely that we will be successful in recovering all, if any, portion of our loan principal amount outstanding in the event of a default. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

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default in a rising interest rate environment due to the increase in payment amounts caused by the increase in interest rates as loan rates reset. If current economic conditions deteriorate for our borrowers and their home prices fall, we may also experience higher credit losses from this loan portfolio. Since our home equity loans primarily consist of second mortgage loans, it is unlikely that we will be successful in recovering all, if any, portion of our loan principal amount outstanding in the event of a default. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans. These loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of these loans such as Alaska Pacific, and a borrower may be able to assert against this assignee claims and defenses that it has against the seller of the underlying collateral.

Loan Maturity and Repricing. The following table sets forth certain information at December 31, ~~2012~~2013 regarding the dollar amount of loans maturing in Alaska Pacific’s portfolio based on their contractual terms to final maturity, but does not include scheduled payments or potential prepayments. Loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. Loan balances are net of undisbursed loan proceeds, deferred fees and unearned discounts, and do not include loans held for sale.

			After		After		After						After 1 Year
(in thousands) December 31, 2012	Within 1 Year		1 Year Through 3 Years		3 Years Through 5 Years		5 Years Through 10 Years		Beyond 10 Years		Total		Fixed Rates		Adjust- able Rates
(in thousands) December 31, 2013	Within 1 Year		1 Year Through 3 Years		3 Years Through 5 Years		5 Years Through 10 Years		Beyond 10 Years		Total		Fixed Rates		Adjust- able Rates
Real estate:
Permanent:
One-to-four-family	$	1,330	$	2,765	$	2,762	$	4,396	$	10,180	$	21,433	$	18,163	$	1,940
One-to-four- family	$	1,179	$	2,492	$	2,537	$	3,084	$	8,874	$	18,166	$	15,143	$	1,844
Multifamily		~~376~~342		~~803~~731		~~877~~797		~~952~~857		-		32,~~008~~727		2,~~632~~385		-
Commercial non-residential		3,958		9,994		11,073		32,830		15,592		73,447		3,237		66,252
Commercial non- residential		5,336		12,120		13,318		39,902		99		70,775		7,457		57,982
Land		1,~~461~~391		23,~~977~~594		32,~~021~~640		~~558~~547		9085		8,~~107~~257		1,~~014~~423		5,~~632~~443
Construction:
One-to-four-family		2,410		-		-		-		-		2,410		-		-
One-to-four- family		4,506		501		-		-		-		5,007		-		501
Commercial non-residential		607		-		-		-		-		607		-		-
Commercial non- residential		260		1,487		-		-		-		1,747		-		1,487
Commercial business		23,~~388~~023		56,~~187~~553		57,~~788~~295		98,~~882~~087		-		2324,~~245~~958		23,~~676~~843		18,~~181~~092
Consumer:
Home equity		~~726~~893		1,~~723~~515		1,~~443~~462		3,~~458~~343		1,~~765~~500		98,~~115~~713		43,~~654~~786		34,~~735~~034
Boat		~~365~~341		~~761~~736		~~773~~786		1,~~746~~578		~~1,127~~998		4,~~772~~439		43,~~125~~890		~~282~~208
Automobile		~~243~~226		~~384~~380		~~131~~73		151		-8		~~773~~688		~~530~~462		-
Other		~~420~~184		~~295~~199		~~220~~172		~~252~~236		~~266~~209		1,~~453~~000		~~993~~804		4012
Total Loans	$	1417,~~284~~681	$	2430,~~889~~308	$	2629,~~088~~080	$	5457,~~089~~635	$	2911,~~020~~773	$	~~148~~146,~~370~~477	$	3839,~~024~~193	$	9689,~~062~~603

Loan Solicitation and Processing. Alaska Pacific obtains its loan applicants from walk-in traffic, which is generated through media advertising and referrals from existing customers, from on-line loan applications through its web site, and through officer business development calls and activities. Local real estate agents refer a portion of Alaska Pacific’s mortgage loan applicants, and dealers refer some consumer loans, such as boat loans. Alaska Pacific requires title insurance on all of its mortgage loans. All mortgage loans require fire and extended coverage on appurtenant structures and flood insurance, if applicable.

Loan approval authority varies based on loan type. The Chief Executive Officer, the Chief Credit Officer and Senior Commercial Loan Officer, each has authority to approve all residential mortgage loans up to and including $300,000 that are originated for Alaska Pacific’s portfolio, and up to the purchasing agency limit if the loan is to be sold in the secondary market; multifamily and commercial non-residential real estate loans up to and including $300,000; commercial business loans up to and including $300,000 ($100,000 if unsecured); and consumer loans up to and including $300,000 ($100,000 if unsecured). Alaska Pacific’s Senior Loan Committee, consisting of the Chief Executive Officer, Chief Credit Officer, and two senior lending officers, must approve loans in excess of these amounts up to and including $750,000. The Directors’ Loan Committee must approve all loans in excess of the Senior Loan Committee’s approval authority up to 75% of Alaska Pacific’s legal lending limit. The Board of Directors must approve all loans in excess of the Directors’ Loan Committee’s approval authority.

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commercial business loans up to and including $300,000 ($100,000 if unsecured); and consumer loans up to and including $300,000 ($100,000 if unsecured). Alaska Pacific’s Senior Loan Committee, consisting of the Chief Executive Officer, Chief Credit Officer, and two senior lending officers, must approve loans in excess of these amounts up to and including $750,000. The Directors’ Loan Committee must approve all loans in excess of the Senior Loan Committee’s approval authority up to 75% of Alaska Pacific’s legal lending limit. The Board of Directors must approve all loans in excess of the Directors’ Loan Committee’s approval authority.

Upon receipt of a loan application from a prospective borrower, a credit report and other data are obtained to verify specific information relating to the loan applicant’s employment, income and credit standing. An independent appraiser approved by Alaska Pacific and licensed or certified by the State of Alaska undertakes an appraisal of any real estate offered as collateral. Alaska Pacific promptly notifies applicants of the decision. Interest rates are subject to change if the approved loan is not closed within the time of the commitment.

Alaska Pacific has an automated underwriting system for consumer loans, enabling expedited approval of consumer loans at any branch location. This system also enables processing of online loan applications from customers. In addition, Alaska Pacific has a system for online loan applications for mortgage loans.

Pursuant to federal banking regulations, loans to one borrower cannot exceed 15% of Alaska Pacific’s unimpaired capital and surplus. At December 31, ~~2012~~2013, the loans-to-one-borrower limitation for Alaska Pacific was $3.34 million, and Alaska Pacific had no loans in excess of this limitation except where guaranteed by a government agency.

Loan Originations, Sales and Purchases. Alaska Pacific’s lending activities include the origination of one-to-four-family residential mortgage loans, construction and land loans, loans to businesses, commercial non-residential real estate, multifamily and consumer loans.

Alaska Pacific generally sells loans without recourse and with servicing retained except in its correspondent lending programs. Correspondent lending involves the sale of one-to-four-family mortgages to private (non-government sponsored enterprises or GSE) institutional investors, usually with servicing rights released. By retaining the servicing, Alaska Pacific receives fees for performing the traditional services of processing payments, accounting for loan funds, and collecting and paying real estate taxes, hazard insurance and other loan-related items, such as private mortgage insurance. At December 31, ~~2012~~2013, Alaska Pacific’s servicing portfolio was $~~138~~141.84 million. For the year ended December 31, ~~2012~~2013, related servicing income, net totaled $~~295~~616,000.

The value of the loans that are serviced for others is significantly affected by interest rates. In general, during periods of falling interest rates, mortgage loans prepay at faster rates and the value of the mortgage servicing declines. Conversely, during periods of rising interest rates, the value of the servicing rights generally increases as a result of slower rates of prepayment. Alaska Pacific may be required to recognize a decrease in value by taking a charge against earnings, which would cause its profits to decrease.

In addition, Alaska Pacific retains certain amounts in escrow for the benefit of investors. Alaska Pacific is able to invest these funds but is not required to pay interest on them. At December 31, ~~2012~~2013, these escrow balances totaled $~~491~~541,000.

- 16 -

The following table shows total loans originated, purchased, sold and repaid during the periods indicated.

(in thousands) Year ended December 31,	~~2012~~2013			~~2011~~2012
Loans originated:
Real estate:
Permanent:
One-to-four-family	$	3733,~~176~~592		$	2037,~~273~~176
Multifamily		~~350~~945			-350
Commercial non-residential		97,~~940~~402			189,~~950~~940
Land		~~367~~1,643			~~4,067~~367
Construction:
One-to-four-family		6,~~554~~829			26,~~414~~554
Multifamily		-			-
Commercial non-residential		31,~~223~~868			63,~~491~~223
Commercial business		1418,~~657~~449			1114,~~571~~657
Consumer:
Home equity		1,~~358~~740			~~930~~1,358
Boat		~~864~~814			~~1,420~~864
Automobile		~~386~~297			~~253~~386
Other		2,~~236~~167			2,~~379~~236
Total loans originated		7775,~~111~~746			6877,~~748~~111
Loans purchased		-			-
Loans sold		(3230,~~266~~932	)		(2132,~~697~~266	)
Foreclosed loans		(~~156~~1,433	)		(~~543~~156	)
Principal repayments and other changes		(4148,~~814~~521	)		(4041,~~154~~814	)
Net decrease in loans and loans held for sale	$	25,~~875~~140		$	62,~~354~~875

One-to-four-family loans sold reflect loans sold primarily to Freddie Mac without recourse. One-to-four-family mortgage loan originations ~~increased~~decreased in ~~2012~~2013 to $3733.26 million, ana 839.47% ~~increase~~decrease over the $2037.32 million of such loans originated in ~~2011~~2012. Commercial non-residential real estate loan originations increased in ~~2012~~2013 to $1418.74 million, a 2625.72% increase over the $1114.67 million of such loans originated in ~~2011~~2012. The ~~decrease~~increase in commercial non-residential real estate originations was primarily attributable to aan ~~decrease~~increase in ~~large~~market ~~balance loan originations in 2012 compared to four loans totaling $8~~demand.~~0 million that were originated in 2011 ranging in size from $1.6 million to $2.7 million and secured by commercial non-residential real estate.~~

A portion of Alaska Pacific’s originations in ~~2012~~2013 and ~~2011~~2012 represent refinancing of loans originally made by Alaska Pacific and other lenders.

Loan Commitments. Occasionally, Alaska Pacific issues, without charge, commitments for fixed- and adjustable-rate single-family residential mortgage loans conditioned upon the occurrence of certain events. These commitments are made in writing on specified terms and conditions and are honored for up to 60 days. Commercial commitments issued by Alaska Pacific include commitments for fixed-term loans as well as business lines of credit; generally, letters of credit are not offered. At December 31, ~~2012~~2013, Alaska Pacific had $1516.91 million of outstanding net loan commitments, including unused portions on commercial business lines of credit and undisbursed funds on construction loans. For additional information on loan commitments, see Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

Loan Origination and Other Fees. Alaska Pacific often receives loan origination fees and discount “points.” Loan fees and points are a percentage of the principal amount of the loan that are charged to the borrower for funding the loan. The amount of fees and points charged by Alaska Pacific varies, though the range generally is between one half and two points. Accounting standards require fees received (net of certain loan origination costs) for originating loans to be deferred and amortized into interest income over the contractual life of the loan. ~~Net deferred fees associated with loans that are prepaid are recognized as income at the time of prepayment.~~ Alaska Pacific had $~~529~~481,000 of net deferred loan fees at December 31, ~~2012~~2013.

- Nonperforming 17Assets -and Delinquencies. Alaska Pacific utilizes one loan collector that is a Bank employee to monitor the loan portfolio and communicate with customers concerning past due payments. The size of the portfolio and

Nonperforming Assets and Delinquencies. Alaska Pacific utilizes one loan collector that is a Bank employee to monitor the loan portfolio and communicate with customers concerning past due payments. The size of the portfolio and historically low number of delinquent borrowers allow one individual to manage consumer, commercial and residential loans, including those loans serviced for other investors. When a borrower fails to make a required payment, Alaska Pacific institutes collection procedures. The process for monitoring consumer, commercial and residential loans is the same for each type of loan until foreclosure or repossession of the collateral. Depending on the value or nature of the collateral, the loan servicing manager, senior lender or senior management directs any further action in consultation with the Bank’s legal counsel.-17-

historically low number of delinquent borrowers allow one individual to manage consumer, commercial and residential loans, including those loans serviced for other investors. When a borrower fails to make a required payment, Alaska Pacific institutes collection procedures. The process for monitoring consumer, commercial and residential loans is the same for each type of loan until foreclosure or repossession of the collateral. Depending on the value or nature of the collateral, the loan servicing manager, senior lender or senior management directs any further action in consultation with the Bank’s legal counsel.

Customers who miss a payment are mailed computer-generated notice 15 and 25 days after the payment due date. If the customer does not pay promptly, the collector telephones the customer 20 days after the payment due date. After 35 days, the collector sends a demand letter, which outlines the demand process. Follow-up contacts are made between the 30th and 60th day, after which the collector sends a demand letter that specifies the action Alaska Pacific will take and the deadline for resolving the delinquency. While most delinquencies are cured promptly, the collector initiates foreclosure or repossession, according to the terms of the security instrument and applicable law, if the deadline in the 60-day letter is not met.

Residential loans have a highly structured process for foreclosure. In addition to Alaska Pacific’s residential loan portfolio, Alaska Pacific services real estate loans for other investors who in turn have their own requirements that must be followed. Alaska Pacific evaluates consumer and commercial business loans individually depending on the nature and value of the collateral.

Alaska Pacific places all loans that are past due 90 days or more on nonaccrual status and all previously accrued interest income is reversed, unless the loan is well secured and in the process of collection. Alaska Pacific charges off consumer loans when it is determined they are no longer collectible.

Alaska Pacific’s Board of Directors is informed monthly as to the status of all mortgage, commercial and consumer loans that are delinquent 30 days or more, the status on all loans currently in foreclosure, and the status of all foreclosed and repossessed property owned by Alaska Pacific.

- 18 -

The following table sets forth information with respect to Alaska Pacific’s nonperforming assets and troubled debt restructurings at the dates indicated.

(dollars in thousands) December 31,	~~2012~~2013			~~2011~~2012
Loans accounted for on a nonaccrual basis:
Consumer	$	845		$	378
One-to-four-family		~~291~~271			-291
Commercial business		~~1,427~~94			1,~~449~~427
Commercial non-residential		35,~~953~~364			13,~~159~~953
Total		5,~~679~~774			25,~~645~~679
Accruing loans which are contractually past due 90 days or more		~~1,839~~-			-1,839
Total of nonaccrual and 90 days past due loans		75,~~518~~774			27,~~645~~518
Real estate owned and repossessed assets		~~344~~368			~~880~~344
Total nonperforming assets	$	76,~~862~~142		$	37,~~525~~862
Troubled debt restructurings	$	97,~~212~~230		$	9,~~641~~212
Nonaccrual and 90 days or more past due loans as a percentage of loans		53.0794	%		15.7907	%
Nonaccrual and 90 days or more past due loans as a percentage of total assets		43.1327	%		14.5413	%
Nonperforming assets as a percentage of total assets		43.3248	%		24.0532	%

During the years ended December 31, 2012 and 2011, $234,000 and $75,000, respectively, of interest would have been recorded if these loans had been current according to their original terms and had been outstanding throughout the year. Nonaccrual loans increased $2.8 million from $2.6 million at December 31, 2011 to $5.4 million at December 31, 2012. Most of the increase in non-~~performing loans related to two permanent commercial non~~18-~~residential loans to one borrower totaling $2.4 million secured by hotels not located in Idaho.~~

~~Real~~During ~~Estate~~the ~~Owned~~years ~~and~~ended ~~Repossessed~~December ~~Assets. Alaska~~31, ~~Pacific~~2013 ~~classifies~~and ~~real~~2012, ~~estate~~$168,000 ~~acquired as a result of foreclosure~~ and ~~other repossessed collateral as repossessed assets until sold. When Alaska Pacific acquires collateral~~$234,000, ~~it is recorded at the lower of its cost~~respectively, ~~which is the unpaid principal balance~~ of ~~the~~interest ~~related~~would ~~loan~~have ~~plus~~been ~~acquisition~~recorded ~~costs,~~if orthese ~~fair~~loans ~~value~~had ~~less~~been ~~cost~~current toaccording ~~sell. Subsequent~~ to ~~acquisition,~~their ~~the~~original ~~property~~terms isand ~~carried~~had atbeen ~~the~~outstanding ~~lower~~throughout of the ~~acquisition amount or fair value~~year. Nonaccrual Atloans ~~December~~increased ~~31, 2012, Alaska Pacific held real estate owned and repossessed assets of~~ $~~344~~100,000, ~~which~~from ~~consisted~~$5.7 ~~entirely~~million ofat ~~real~~December ~~estate~~31, ~~owned.~~2012 ~~This compares~~ to $~~880,000~~5.8 ~~held~~million ~~in real estate owned and repossessed assets~~ at December 31, ~~2011, which consisted entirely of real estate owned~~2013.

Real Estate Owned and Repossessed Assets. Alaska Pacific classifies real estate acquired as a result of foreclosure and other repossessed collateral as repossessed assets until sold. When Alaska Pacific acquires collateral, it is recorded at the lower of its cost, which is the unpaid principal balance of the related loan plus acquisition costs, or fair value less cost to sell. Subsequent to acquisition, the property is carried at the lower of the acquisition amount or fair value. At December 31, 2013, Alaska Pacific held real estate owned and repossessed assets of $368,000, which consisted of $18,000 of repossessed assets and $350,000 of real estate owned. This compares to $344,000 held in real estate owned and repossessed assets at December 31, 2012, which consisted entirely of real estate owned.

Asset Classification. The OCC has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OCC examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified loss, the loss amount is charged off.

Alaska Pacific monitors its asset quality through the use of an Asset Classification Committee, which is comprised of senior lenders and executive officers. The Committee meets monthly to review the loan portfolio, with specific attention given to assets with an identified weakness, as well as reviewing the local, state and national economic trends and the adequacy of the allowance for loan losses.

- 19 -

attention given to assets with an identified weakness, as well as reviewing the local, state and national economic trends and the adequacy of the allowance for loan losses.

When the Committee classifies problem assets as either substandard or doubtful, a specific allowance in an amount deemed prudent may be established. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to recognize the loss in the period in which they are deemed uncollectible. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the OCC and FDIC, which can order the establishment of additional loss allowances or the charge-off of specific loans against established loss reserves. Assets which do not currently expose us to sufficient risk to warrant classification as substandard, doubtful and loss but possess weaknesses are designated by us as special mention.

At December 31, ~~2012~~2013 and ~~2011~~2012, the aggregate amounts of Alaska Pacific’s classified, special mention and repossessed assets, net of loan balances guaranteed, (as determined by Alaska Pacific), were as follows:

(in thousands) December 31,	~~2012~~2013		~~2011~~2012
Doubtful	$	473	$	473
Substandard assets		6,~~714~~334		6,~~255~~714
Special mention		21,~~318~~361		2,~~282~~318
Other real estate owned and repossessed assets		~~344~~368		~~880~~344
Total classified loans, special mention loans and repossessed assets	$	98,~~849~~536	$	9,~~890~~849

At December 31, ~~2012~~2013 classified loans totaled $76.28 million compared to $6.7.2 million at December 31, ~~2011~~2012. Loans classified as substandard ~~increased~~decreased $400,000 to $6.73 million at December 31, ~~2012~~2013 from $6.37 million at December 31, ~~2011~~2012. The ~~due~~decrease towas ~~an increase in loans to borrowers where~~ the ~~primary~~result ~~source~~ of ~~repayment is lacking and~~ the ~~Bank~~receipt isof ~~relying~~principal ~~on a secondary source for~~ repayment~~. Total~~ ~~special~~of ~~mention~~ loans ~~were~~previously ~~$2.3~~classified ~~million~~as atsubstandard ~~both December 31, 2012 and December 31, 2011.~~

Impaired Loans. Loans are deemed to be impaired when management determines that it is probable that all amounts due under the contractual terms of the loan agreements will not be collectible in accordance with the original loan agreement. All loans considered to be impaired are evaluated for impairment. Impairment is measured by comparing the fair value of the collateral or present value of future cash flows to the recorded investment in the loan. Loans with balances totaling $11.6 million at December 31, 2012 and $12.0 million at December 31, 2011 were considered to be impaired. The $400,000 decrease in impaired loans was primarily due to an additional residential real estate loan offset by a multifamily real estate loan no longer classified as impaired. The total number of impaired loans was 21 and 22 as of December 31, 2012 and 2011, respectively. Total specific reserves of $473,000 were recognized on impaired loans in evaluating the adequacy of the allowance for loan losses at both December 31, 2012 and 2011. As of December 31, 2012 and 2011, the recorded investment in receivables that had been modified in a troubled debt restructuring and that were impaired was $9.2 million, and $9.6 million, respectively. Included in these amounts, were $6.5 million and $9.6 million of troubled debt restructurings as of December 31, 2012 and December 31, 2011, respectively, which were performing in accordance with their modified loan terms.-19-

-loans 20and -loans foreclosed and recorded as other real estate owned, offset with additional substandard loans to borrowers where the primary source of repayment is lacking and the Bank is relying on a secondary source for repayment. Total special mention loans decreased $900,000 to $1.4 million at December 31, 2013 compared to $2.3 million at December 31, 2012.

~~The~~Impaired ~~following~~Loans. Loans ~~table~~are ~~reflects~~deemed to be impaired when management determines that it is probable that all amounts due under the contractual terms of the loan ~~balances~~agreements will not be collectible in accordance with the original loan agreement. All loans considered to be impaired are evaluated for impairment. Impairment is measured by ~~asset~~comparing ~~type~~the fair value of the collateral or present value of future cash flows to the recorded investment in the loan. Loans with balances totaling $10.1 million at December 31, 2013 and $11.6 million at December 31, 2012 were considered to be impaired. The $1.5 million decrease in impaired loans was primarily due to the receipt of principal repayments offset with additional impaired loans. The total number of impaired loans was 24 and ~~2011~~21 as of December 31, 2013 and 2012, respectively. Total specific reserves of $473,000 were recognized on impaired loans in evaluating the adequacy of the allowance for loan losses at both December 31, 2013 and 2012. As of December 31, 2013 and 2012, the recorded investment in receivables that had been modified in a troubled debt restructuring and that were impaired was $7.2 million, and $9.2 million, respectively. Included in these amounts, were $6.5 million of troubled debt restructurings as of both December 31, 2013 and December 31, 2012, respectively, which were performing in accordance with their modified loan terms.

(in thousands) December 31,	2012		2011
One-to-four family	$	291	$	-
Multifamily real estate		-		659
Commercial non-residential		7,363		7,395
Land		2,021		2,224
Consumer		8		76
Commercial business		1,898		1,626
Total impaired loans	$	11,581	$	11,980

-20-

AtThe ~~December~~following ~~31,~~table ~~2012,~~reflects ~~89%~~loan ofbalances ~~impaired~~considered ~~loans totaling $10.3 million included loans~~ to ~~six~~be ~~borrowers. Additional~~impaired ~~information regarding these six borrowers,~~ by ~~market~~asset ~~area~~type asat of December 31, ~~2012~~2013 isand ~~provided in the following table:~~2012.

				Loan Balances December 31, 2012
(in thousands) December 31,		2013				2012
Loan Type	Description	Market Area		(in thousands)
One-to-four family		$	271			$	291
Land	Land	Alaska		$	2,021
Commercial non-residential			7,879				7,363
Commercial Business	Commercial Secured	Alaska			1,427
Land			1,421				2,021
Commercial Real Estate	Commercial Real Estate	Alaska			1,335
Consumer			45				8
Commercial Real Estate	Commercial Real Estate	Idaho			2,399
Commercial business			474				1,898
Commercial Real Estate	Commercial Real Estate	Alaska			2,295
Total impaired loans		$	10,090			$	11,581
Commercial Real Estate	Commercial Real Estate	Alaska			801
Total – Impaired loans of six largest credit relationships				$	10,278

~~Potential~~At ~~Problem~~December ~~Loans. Potential problem loans are classified and special mention loans that do not yet meet the criteria for placement on non-accrual status~~31, ~~but where known information about the possible credit problems of the borrowers causes management to have serious concerns as to the ability of the borrower to comply with present loan repayment terms~~2013, ~~and~~87.2% ~~may result in the future inclusion~~ of ~~such~~impaired loans intotaling ~~the non-accrual loan category~~$8. At8 ~~December~~million ~~31,~~included ~~2012,~~loans ~~Alaska~~to ~~Pacific~~six ~~had $2~~borrowers.0 Additional ~~million~~information ofregarding ~~loans,~~these ~~net~~six ~~of loan balances guaranteed~~borrowers, ~~that~~by ~~were~~market ~~identified~~area as ~~potential problems consisting primarily~~ of ~~permanent~~December ~~commercial~~31, ~~real~~2013 ~~estate~~is ~~loans~~provided ~~located~~ in ~~Alaska.~~the following table:

Allowance for Loan Losses. Alaska Pacific maintains an allowance for loan losses sufficient to absorb losses inherent in the loan portfolio. The allowance for loan losses increased $11,000, and is $1.9 million at both December 31, 2012 and December 31, 2011. Alaska Pacific has established a systematic methodology to ensure that the allowance is adequate. The Asset Classification Policy requires an ongoing quarterly assessment of the probable estimated losses in the portfolios. The Asset Classification Committee reviews the following information:

			Loan Balances December 31, 2013
Loan Type	Description	Market Area	(in thousands)
Land	Land	Alaska	$	1,421
Commercial non-residential real estate	Commercial non-residential real estate	Alaska		2,215
Commercial non-residential real estate	Commercial non-residential real estate	Alaska		1,151
Commercial non-residential real estate	Commercial non-residential real estate	Idaho		2,275
Commercial non-residential real estate	Commercial non-residential real estate	Alaska		757
Commercial non-residential real estate	Commercial non-residential real estate	Alaska		976
Total – Impaired loans of six largest credit relationships			$	8,795

Potential Problem Loans. Potential problem loans are classified and special mention loans that do not yet meet the criteria for placement on non-accrual status, but where known information about the possible credit problems of the borrowers causes management to have serious concerns as to the ability of the borrower to comply with present loan repayment terms, and may result in the future inclusion of such loans in the non-accrual loan category. At December 31, 2013, Alaska Pacific had $4.3 million of loans, net of loan balances guaranteed, that were identified as potential problems consisting primarily of permanent commercial non-residential real estate loans located in Alaska.

Allowance for Loan Losses. Alaska Pacific maintains an allowance for loan losses sufficient to absorb losses inherent in the loan portfolio. The allowance for loan losses increased $34,000, and is $1.9 million at both December 31, 2013 and December 31, 2012. Alaska Pacific has established a systematic methodology to ensure that the allowance is adequate. The Asset Classification Policy requires an ongoing quarterly assessment of the probable estimated losses in the portfolios. The Asset Classification Committee reviews the following information:

·	All loans classified during the previous analysis.

·	Growth and composition of the portfolio.

·	Historical loan losses.

·	Past due loans.

·	Reports from Alaska Pacific’s managers and analysis of potential problem loans.

·	Current economic conditions.

·	Trends in Alaska Pacific’s delinquencies.

-21-

For additional information regarding the information reviewed by the Asset Classification Committee to determine the allowance for loan losses, see Note 5 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

- 21 -

Alaska Pacific’s loan categories that it considers in evaluating risk may be broadly described as residential, commercial and consumer. The following comments represent management’s view of the risks inherent in several component portfolio categories.

One-to-four-family Residential - Alaska Pacific’s market area is comprised primarily of a population with above-average incomes and market conditions that have, over the long term, supported a stable or increasing market value of real estate. Absent an overall economic downturn in the economy, experience in this portfolio indicates that losses are minimal provided the property is reasonably maintained, and marketing time to resell the property is relatively short.

Multifamily Residential - There have been minimal losses taken in this segment of the portfolio, however, the rental market is very susceptible to the effects of an economic downturn. While Alaska Pacific monitors loan-to-value ratios, the conditions that would create a default and foreclosure would carry through to a new owner, which may require that Alaska Pacific discount the property or hold it until conditions improve.

· Commercial Non-Residential Real Estate - As with multifamily loans, the classification of commercial non-residential real estate loans closely corresponds to economic conditions which will limit the income potential and marketability of the property, resulting in higher risk than a loan secured by a single-family residence.

Construction Loans (Residential and Commercial) - There are a variety of risks in construction lending, increased in Alaska by a short building season, difficult building sites and construction delays attributable to delivery of materials. While Alaska Pacific has established construction loan policies and underwriting guidelines designed to mitigate the risk, there is still a higher risk of loss with these loans.

·	Commercial Business Loans - These types of loans carry the highest degree of risk, relying on the ongoing success of the business to repay the loan. Collateral for commercial credits is often difficult to secure, and even more difficult to liquidate in the event of a default.

Consumer Loans - The consumer loan portfolio has a wide range of factors, determined primarily by the nature of the collateral and the credit history and capacity of the borrower. These loans tend to be smaller in principal amount and secured by second deeds of trust on homes, automobiles, and pleasure boats. Loans for automobiles and pleasure boats generally experience higher than average wear in the Alaskan environment and hold a higher degree of risk of loss in the event of repossession.

The allowance for loan losses represents management's best estimate of incurred credit losses inherent in the Company's loan portfolio as of December 31, ~~2012~~2013. Although management believes that it uses the best information available to make these determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Since future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses will be adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. For additional information, see the discussion included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Provision and Allowance for Loan Losses.” In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional loss reserves or the charge-off of specific loans against established loss reserves based upon their judgment of information available to them at the time of their examination. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

- 22 -

The following table sets forth an analysis of the changes in the allowance for loan losses for the periods indicated.

(dollars in thousands) Year ended December 31,	~~2012~~2013			~~2011~~2012
Allowance at beginning of period	$	1,~~865~~876		$	1,~~583~~865
Provision for loan losses		~~300~~180			~~373~~300
Charge-offs:
Permanent:
One-to-four-family		-			~~(99~~-	)
Multifamily		-			-
Commercial non-residential		(~~189~~142	)		(85189	)
Land		~~(46~~-	)		(1846	)
Construction:
One-to-four-family		-			-
Commercial non-residential		-			-
Commercial business		(197	)		(419	)
Consumer:
Home Equity		(37	)		(137	)
Home equity		-			(37	)
Boat		-			(6-	)
Auto		-			-
Total charge-offs		(~~291~~149	)		(~~349~~291	)
Recoveries:
Commercial business		-3			-
Construction commercial		-			~~250~~-
Consumer:
Home equity		-			2-
Boat		2-			2
Automobile		-			6-
Total recoveries		23			~~258~~2
Net charge-offs		(~~289~~146	)		(91289	)
Balance at end of period	$	1,~~876~~910		$	1,~~865~~876
Allowance for loan losses as a percentage of loans outstanding at the end of the period		1.2630	%		1.26	%
Net charge-offs as a percentage of average loans outstanding during the period		0.1910	%		0.0619	%
Allowance for loan losses as a percentage of nonperforming loans at end of period		33.01	%		7033.510	%

- 23 -

The following table sets forth the breakdown of the allowance for loan losses by loan category for the dates indicated.

December 31,	~~2012~~2013								~~2011~~2012
(dollars in thousands)	Amount		As a % of Outstanding Loans in Category			% of Loans in Category to Total Loans			Amount		As a % of Outstanding Loans in Category			% of Loans in Category to Total Loans
Real estate:
Permanent:
One-to-four-family	$	9338		0.4321	%		1412.4540	%	$	~~102~~93		0.4243	%		1614.6245	%
Multifamily		1715		0.5755			21.0386			517		0.1757			2.0003
Commercial non-residential		~~1,117~~960		1.5236			4948.5032			1,~~223~~117		1.7252			4849.0050
Land		1520		0.1924			5.4664			1315		0.1519			5.7146
Construction:
One-to-four-family		413		0.1726			13.6242			24		0.1817			01.7562
Commercial non-residential		15		0.1629			01.4119			41		0.2016			10.3841
Commercial		~~107~~128		0.4651			1517.6704			~~216~~107		10.1346			1215.9967
Consumer:
Home equity		3546		0.3853			65.1495			2635		0.2338			76.8014
Boat		202		0.4205			3.2203			3420		0.6842			3.3922
Automobile		1-		~~0.13~~-			0.5247			21		0.2213			0.6252
Other		3		0.2130			0.9868			3		0.2721			0.7598
Unallocated		~~463~~680		-			-			~~235~~463		-			-
Total allowance for loan losses	$	1,~~876~~910		1.2630	%		100.00	%	$	1,~~865~~876		1.26	%		100.00	%

Investment Activities

Federal law permits Alaska Pacific to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the FHLB of Seattle, certificates of deposit of federally insured institutions, certain bankers’ acceptances and federal funds. Subject to various restrictions, Alaska Pacific may also invest a portion of its assets in commercial paper and corporate debt securities. Alaska Pacific must also maintain an investment in FHLB stock as a condition of membership in the FHLB of Seattle.

Investment securities provide liquidity for funding loan originations and deposit withdrawals and enable Alaska Pacific to improve the match between the maturities and repricing of its interest-rate sensitive assets and liabilities. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.”

Alaska Pacific’s Asset Liability Management Committee determines appropriate investments in accordance with the Board of Directors’ approved investment policies and procedures. Alaska Pacific’s policies generally limit investments to U.S. Government and agency securities and mortgage-backed securities issued and guaranteed by Freddie Mac, the Federal National Mortgage Association (“Fannie Mae”) and the Government National Mortgage Association (“Ginnie Mae”). Alaska Pacific’s policies provide that investment purchases be ratified at monthly Board of Directors’ meetings. Certain considerations, which include the interest rate, yield, settlement date and maturity of the investment, Alaska Pacific’s liquidity position, and anticipated cash needs and sources (which in turn include outstanding commitments, upcoming maturities, estimated deposits and anticipated loan amortization and repayments) affect the making of investments. The effect that the proposed investment would have on Alaska Pacific’s credit and interest rate risk, and risk-based capital is also considered. From time to time, investment levels may be increased or decreased depending upon the yields on investment alternatives and upon management’s judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management’s projections as to the short-term demand for funds to be used in Alaska Pacific’s loan origination and other activities.

- 24 -

The following table sets forth the composition of Alaska Pacific’s investment portfolios at the dates indicated.

December 31,	~~2012~~2013							~~2011~~2012
(dollars in thousands)	Fair Value		Amortized Cost		Percent of Portfolio			Fair Value		Amortized Cost		Percent of Portfolio
Mortgage-backed securities:
Fannie Mae	$	~~891~~655	$	~~847~~625		2011.8018	%	$	~~1,159~~891	$	~~1,112~~847		20.0580	%
Freddie Mac		~~670~~461		~~644~~445		157.8296	%		~~1,018~~670		~~992~~644		1715.8882	%
Ginnie Mae		~~207~~166		~~166~~135		42.0841	%		~~244~~207		~~199~~166		34.5908	%
Municipal securities		1,~~409~~346		1,~~350~~330		3323.1579	%		1,~~706~~409		1,~~668~~350		3033.0815	%
U.S. Government and agency:
Small Business Administration		12,~~076~~939		13,~~065~~056		2654.1566	%		1,~~587~~076		1,~~575~~065		2826.4015	%
Total investment securities available for sale	$	45,~~253~~567	$	45,~~072~~591		100.0	%	$	54,~~714~~253	$	54,~~546~~072		100.0	%

While management has no specific plans to sell any security, the entire portfolio has been designated as “available-for-sale” at December 31, ~~2012~~2013 and ~~2011~~2012, to allow flexibility in managing the portfolio.

At December 31, ~~2012~~2013, the portfolio of U.S. Government and agency securities had an aggregate estimated fair value of $12.19 million and the portfolio of mortgage-backed securities had an estimated fair value of $1.83 million.

At December 31, ~~2012~~2013, mortgage-backed securities consisted of Freddie Mac, Fannie Mae and Ginnie Mae issues with an amortized cost of $1.72 million. The mortgage-backed securities portfolio had coupon rates ranging from 1.86% to 9.0% and had a weighted average yield of 3.97% at December 31, ~~2012~~2013.

Mortgage-backed securities, which also are known as mortgage participation certificates or pass-through certificates, typically represent interests in pools of single-family or multifamily mortgages in which payments of both principal and interest on the securities are generally made monthly. The principal and interest payments on these mortgages are passed from the mortgage originators, through intermediaries, generally U.S. Government agencies and government sponsored enterprises, that pool and resell the participation interests in the form of securities, to investors such as Alaska Pacific. These U.S. Government agencies and government-sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include the Freddie Mac, Fannie Mae and the Ginnie Mae. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that fall within a specific range and have varying maturities. Mortgage-backed securities generally yield less than the loans that underlie these securities because of the cost of payment guarantees and credit enhancements. In addition, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize certain liabilities and obligations of Alaska Pacific. These types of securities also permit Alaska Pacific to optimize its regulatory capital because they have low risk weighting.

The actual maturity of a mortgage-backed security may be less than its stated maturity due to prepayments of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and may result in a loss of any premiums paid and thereby reduce the net yield on these securities. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of declining mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under these circumstances, Alaska Pacific may be subject to reinvestment risk because, to the extent that Alaska Pacific’s mortgage-backed securities amortize or prepay faster than anticipated, Alaska Pacific may not be able to reinvest the proceeds of these repayments and prepayments at a comparable rate.

- 25 -

The table below sets forth certain information regarding the carrying value, weighted average yields and maturities or periods to repricing of Alaska Pacific’s investment portfolios at December 31, ~~2012~~2013.

(dollars in thousands) as of December 31, 2012	Amortized Cost		Weighted Average Yield			Weighted Average Maturity (Yrs)
(dollars in thousands) as of December 31, 2013	Amortized Cost		Weighted Average Yield			Weighted Average Maturity (Yrs)
Mortgage backed securities	$	1,~~657~~205		3.8567	%		1312.2965
Municipal securities		1,~~350~~330		32.9616	%		76.2927
US government agencies		13,~~065~~056		21.1215	%		89.5774

Alaska Pacific’s investment policy permits investment in “off balance sheet” derivative instruments such as “forwards,” “futures,” “options” and “swaps” used as hedges; however, Alaska Pacific has not utilized such instruments.

As a member of the FHLB of Seattle, the Bank is required to own capital stock in the FHLB of Seattle. The minimum amount of stock held is based on percentages specified by the FHLB of Seattle outstanding advances. The carrying value of FHLB of Seattle stock totaled $1.87 million at December 31, ~~2012~~2013. The redemption of any excess stock held by the Bank is at the discretion of the FHLB of Seattle, and under present policies may take up to five years. During the year ended December 31, ~~2012~~2013, the Bank received a $3263,000 stock redemption. The Bank received a dividend of $900 during the year ended December 31, 2013. The Bank did not receive a dividend during the year ended December 31, 2012 ~~or 2011~~.

Management evaluates the FHLB of Seattle stock for impairment. The determination of whether this investment is impaired is based on Alaska Pacific’s assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB and (4) the liquidity position of the FHLB.

On October 25, 2010, the FHLB of Seattle agreed to the stipulation and issuance of a Consent Order by its primary regulator the Federal Housing Finance Agency (“FHFA”). The Consent Order sets forth requirements for capital management, asset composition and other operational and risk management improvements.

In September 2012, the Finance Agency reclassified the Seattle Bank as "adequately capitalized." Although this capital classification change means that FHLB will no longer be subject to the mandatory and discretionary restrictions imposed by the PCA regulations, including limitations on asset growth, FHLB remains subject to the requirements stipulated in the Consent Arrangement.

Based upon an analysis by Standard and Poor’s regarding the Federal Home Loan Banks, they stated that the FHLB System has a special public status (organized under the Federal Home Loan Bank Act of 1932) and because of the extraordinary support offered to it by the U.S. Treasury in a crisis, (though not used), it can be considered an extension of the government. Management believes the U.S. government would almost certainly support the credit obligations of the FHLB System. Alaska Pacific has determined there is not an other-than-temporary impairment on its FHLB of Seattle stock investment as of December 31, ~~2012~~2013. For additional information, see Item 1.A. “Risk Factors -- Further deterioration in the financial position of the Federal Home Loan Bank of Seattle may result in future impairment losses on our investment in Federal Home Loan Bank stock.”

Alaska Pacific had no securities (other than U.S. Government and agency securities and mutual funds which invest exclusively in such securities), which had an aggregate book value in excess of 10% of shareholders’ equity at December 31, ~~2012~~2013.

- 26 -

Deposit Activities and Other Sources of Funds

General. Deposits and loan repayments are the major sources of Alaska Pacific’s funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while general interest rates and money market conditions significantly influence deposit inflows and outflows and loan prepayments. Alaska Pacific may use borrowings on a short-term basis to compensate for reductions in the availability of funds from other sources. Alaska Pacific may also use borrowings on a longer-term basis for general business purposes.

Deposit Accounts. Alaska Pacific attracts deposits from within its primary market area through the offering of a broad selection of deposits as set forth in the following table. In determining the terms of its deposit accounts, Alaska Pacific considers current market interest rates, profitability to Alaska Pacific, matching deposit and loan products and its customer preferences and concerns. Alaska Pacific’s deposit mix and pricing is generally reviewed weekly by Chief Financial and Chief Operating Officer. Deposits from municipalities and other public entities were $65.78 million at December 31, ~~2012~~2013.

At December 31, ~~2012~~2013, Alaska Pacific ~~did~~had ~~not~~$1.0 ~~have~~million ~~any~~of brokered deposits issued through the Certificate of Deposit Account Registry Service (“CDARS”). Historically, CDARS deposits range in maturities from one month to three years, and carry interest rates that are generally higher than locally obtained time deposits. As a result, Alaska Pacific utilizes these deposits as an alternative supplemental funding source in addition to advances from the FHLB of Seattle, when necessary.

In the unlikely event Alaska Pacific is liquidated, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the Company, as the sole stockholder of the Bank. Substantially all of the Bank’s depositors are residents of the State of Alaska.

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The following table sets forth information concerning Alaska Pacific’s time deposits and other interest-bearing deposits at December 31, ~~2012~~2013.

Weighted Average Interest Rate			Original Term	Category	Amount (in thou- sands)		Minimum Balance		Percentage of Total Deposits
	0.00	%	N/A	Noninterest-bearing	$	3633,~~684~~308	$	100		2321.4456	%
	0.04		N/A	Interest-bearing demand		3436,~~357~~546		100		2123.9665
	0.23		N/A	Money market		32,932		100		21.05
	0.18		N/A	Money market		32,479		100		21.01
	0.10		N/A	Savings		23,738		100		15.17
	0.05		N/A	Savings		24,182		100		15.65
				Certificates of Deposit
	0.10		Seven days	Fixed-rate		33		2,000		0.02
	0.05		Seven days	Fixed-rate		26		2,000		0.02
	0.20		One month	Fixed-rate		143		2,000		0.09
	0.05		One month	Fixed-rate		43		2,000		0.03
	0.20		Two months	Fixed-rate		142		2,000		0.09
	0.05		Two months	Fixed-rate		150		2,000		0.10
	0.20		Three months	Fixed-rate		1,720		2,000		1.10
	0.10		Three months	Fixed-rate		1,003		2,000		0.65
	0.30		Six months	Fixed-rate		3,442		2,000		2.20
	0.16		Six months	Fixed-rate		3,704		2,000		2.40
	0.40		Nine months	Fixed-rate		~~660~~622		2,000		0.4240
	0.66		One year	Fixed-rate		7,527		2,000		4.81
	0.36		One year	Fixed-rate		6,882		2,000		4.45
	1.03		18 months	Fixed-rate		2,521		2,000		1.61
	0.43		18 months	Fixed-rate		2,649		2,000		1.71
	1.26		Two years	Fixed-rate		3,144		2,000		2.01
	0.67		Two years	Fixed-rate		2,480		2,000		1.61
	2.08		Three years	Fixed-rate		1,295		2,000		0.83
	1.65		Three years	Fixed-rate		1,187		2,000		0.77
	1.87		Four years	Fixed-rate		353		2,000		0.23
	1.48		Four years	Fixed-rate		349		2,000		0.23
	2.66		Five years	Fixed-rate		2,334		2,000		1.49
	1.84		Five years	Fixed-rate		2,624		2,000		1.70
	0.87		Gold minor one year	Fixed-rate		1,411		500		0.90
	0.59		Gold minor one year	Fixed-rate		1,325		500		0.86
	8.00		Deferred Comp ~~one~~five year	Fixed-rate		1,~~443~~540		2,000		01.9200
	0.40		1 - 2-1/2 years	Variable-rate		2,602		2,000		1.66
	.10		CDARS	Variable-rate		1,003				.65
	0.34	%		TOTAL	$	156,481				100.00	%
	0.40		1 - 2-1/2 years	Variable-rate		2,399		2,000		1.55
	0.23	%		TOTAL	$	154,501				100.00	%

- 28 -

The following table sets forth the balances and changes in dollar amounts of deposits in the various types of accounts offered by Alaska Pacific at the dates indicated.

(dollars in thousands) December 31,	~~2012~~2013								~~2011~~2012
	Amount		Percent of Total			Increase (Decrease)			Amount		Percent of Total
Noninterest-bearing demand accounts	$	3633,~~684~~308		2321.4456	%	$	4(3,~~936~~376	)	$	3136,~~748~~684		2123.5744	%
Interest-bearing demand accounts		3436,~~357~~546		2123.9665			12,~~324~~189			3334,~~033~~357		2221.4496
Money market deposit accounts		32,~~932~~479		21.0502			~~5,089~~(453	)		2732,~~843~~932		1821.9205
Savings accounts		2324,~~738~~182		15.1765			~~2,751~~444			2023,~~987~~738		1415.2617
Fixed-rate certificates which mature:
Within 1 year		1916,~~838~~557		1210.6772			(23,~~856~~281	)		2219,~~694~~838		1512.4167
After 1 year, but within 2 years		24,~~042~~541		12.3194			(12,~~780~~499	)		32,~~822~~042		21.5931
After 2 years, but within 5 years		43,~~287~~486		2.7426			~~186~~(801	)		4,~~101~~287		2.7974
Variable-rate certificates which mature:
Within 1 year		12,~~521~~372		01.9753			~~(401~~851	)		1,~~922~~521		10.3197
After 1 year, but within 2 years		~~655~~678		0.4244			~~(188~~23	)		~~843~~655		0.5742
After 2 years, but within 5 years		~~427~~352		0.2723			~~219~~(75	)		~~208~~427		0.1427
Total	$	~~156~~154,~~481~~501		100.00	%	$	9(1,~~280~~980	)	$	~~147~~156,~~201~~481		100.00	%

Time Deposits Maturities and Weighted Average Rates. The following table sets forth the amount, maturities and weighted average rates of time deposits at December 31, ~~2012~~2013.

(in thousands) Year ending December 31,		Weighted Average Interest Rate		~~Weighted Average Interest Rate~~
2013		$	21,359		0.55	%
2014	$18,929	0.39%
2014			2,697		0.96	%
2015	5,219	1.06%
2015			2,304		1.81	%
2016	2,909	4.71%
2016			2,065		6.10	%
2017	402	1.00%
2017 and thereafter			345		1.04	%
2018 and thereafter	527	0.92%
Total	$27,986	$	~~28,770~~

The scheduled maturities of certificates of deposit of $100,000 and greater as of December 31, ~~2012~~2013 are as follows:

(in thousands)
Three months or less	$	32,~~816~~853
Over three months through six months		21,~~050~~467
Six months through twelve months		2,~~211~~910
Over twelve months		35,~~092~~333
Total $100,000 and over	$	1112,~~169~~563

-29-

Deposit Activities. The following table sets forth the deposit activities of Alaska Pacific for the periods indicated.

(in thousands) Year ended December 31,	~~2012~~2013			~~2011~~2012
Beginning balance	$	~~147~~156,~~201~~481		$	147,~~548~~201
Net increase (decrease) before interest credited		8(2,~~826~~373	)		~~(901~~8,826	)
Interest credited		~~454~~393			~~554~~454
Net increase (decrease) in deposits		9(1,~~280~~980	)		~~(347~~9,280	)
Ending balance	$	~~156~~154,~~481~~501		$	~~147~~156,~~201~~481

Borrowings. Deposits and loan repayments are the primary source of funds for Alaska Pacific’s lending and investment activities. However, Alaska Pacific may rely upon advances from the FHLB of Seattle to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Seattle functions as a central reserve bank providing credit for thrift institutions and many other member financial institutions. The FHLB of Seattle requires Alaska Pacific, as a member, to own capital stock in the FHLB of Seattle and authorizes it to apply for advances on the security of this stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met. Advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. At December 31, ~~2012~~2013, Alaska Pacific had a borrowing capacity of approximately $4445.75 million with the FHLB of Seattle, of which $4143.75 million was unused compared with $4044.07 million and $3741.07 million, respectively, at December 31, ~~2011~~2012. There were no advances outstanding on the line at December 31, 2013. At December 31, 2012, there was $3.0 million outstanding on the line.

The following table sets forth certain information regarding Alaska Pacific’s advances from the FHLB of Seattle at the end of and during the periods indicated:

(dollars in thousands) Year ended December 31,	~~2012~~2013			~~2011~~2012
Advances:
Maximum amount of borrowings outstanding during the year at any month end	$	43,000		$	54,000
Average outstanding during the year		~~3,133~~686			3,~~466~~133
Balance outstanding at end of year		~~3,000~~-			3,000
Approximate weighted average rate paid:
Average during the year		3.6164	%		3.9261	%
At end of year		~~3.73~~-			3.73

REGULATION

General

The Bank, as a federally chartered savings bank, is subject to extensive regulation, examination and supervision by the OCC, as its primary federal regulator, and the FDIC as its deposit insurer. Additionally, the Company is subject to extensive regulation, examination and supervision by the Federal Reserve, as its primary federal regulator. Alaska Pacific is a member of the FHLB System, and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) administered by the FDIC. Alaska Pacific must file reports with the OCC and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the

- 30 -

OCC, the Federal Reserve, and, under certain circumstances, the FDIC to evaluate the Bank’s safety and soundness and compliance with various regulatory requirements. This regulatory structure establishes a comprehensive framework of activities in which a thrift can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OCC, the Federal Reserve, the FDIC or Congress, could have a material adverse impact on the Company and the Bank and their operations.

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd Frank Act"). The Dodd-Frank Act ~~implements~~made ~~far-reaching~~extensive changes ~~across~~to the ~~financial~~regulation ~~regulatory~~of the ~~landscape~~Bank. Under the Dodd-Frank Act, ~~including~~the ~~provisions~~Office ~~that~~of Thrift Supervision was eliminated and responsibility for the supervision and regulation of federal savings associations such as the Bank was transferred to the OCC on July 21, ~~among~~2011. ~~other~~The ~~things~~OCC is the agency that is primarily responsible for the regulation and supervision of national banks. Additionally, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has orauthority to impose new requirements. However, institutions of less than $10 billion in assets, such as the Bank, will: continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their prudential regulators.

•Many Onaspects ~~July~~of ~~21,~~the ~~2011,~~Dodd-Frank ~~the~~Act ~~responsibilities~~are ~~and~~subject ~~authority~~to ofrulemaking by the ~~OTS~~federal tobanking ~~supervise~~agencies, ~~and~~which ~~examine~~has ~~federal~~not ~~thrifts,~~been ~~including~~completed ~~the~~and ~~Bank,~~will ~~were~~not ~~transferred~~take toeffect ~~the~~for ~~OCC~~some time, and ~~the~~will ~~responsibilities~~take ~~and~~effect ~~authority~~over ofseveral ~~the~~years, ~~OTS~~making it difficult to ~~supervise~~anticipate ~~and~~the ~~examine~~overall ~~savings~~financial ~~and~~impact ~~loan~~of ~~holding~~the ~~companies,~~Dodd-Frank ~~including~~Act on the Company, ~~were~~the ~~transferred~~Bank toand the ~~Federal~~financial ~~Reserve~~services industry more generally.

• Centralize responsibility for consumer financial protection by creating a new agency within the Federal Reserve, the Bureau of Consumer Financial Protection, with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts. Smaller financial institutions, including the Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

• Require new capital rules and apply the same leverage and risk-based capital requirements that apply to insured depository institutions to savings and loan holding companies beginning July 21, 2015.

• Require the federal banking regulators to seek to make their capital requirements counter cyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.

• Provide for new disclosure and other requirements relating to executive compensation and corporate governance.

• Make permanent the $250,000 limit for federal deposit insurance

• Effective July 21, 2011, repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

• Require all depository institution holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company and the financial services industry more generally. The elimination of the prohibition on the payment of interest on demand deposits could materially increase our interest expense, depending on our competitors’ responses. Provisions in the legislation that require revisions to the capital requirements of the Company and the Bank could require the Company and the Bank to seek additional sources of capital in the future.

Regulation and Supervision of Savings Institutions

Office of the Comptroller of the Currency. The OCC has extensive authority over the operations of federally chartered savings institutions. As part of this authority, the Bank is required to file periodic reports with the OCC and is subject to periodic examinations by the OCC and the FDIC. The OCC also has extensive enforcement authority over all federally chartered savings institutions and their holding companies, including the Bank ~~and the Company~~. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OCC. Except under certain circumstances, public disclosure of final enforcement actions by the OCC is required.

If the OCC deems an institution to be in “troubled condition” (because it receives a composite CAMELS rating of 4 or 5, is subject to a cease-and-desist order, a capital or prompt corrective action directive, or a formal written agreement, or because of other reasons), the institution will become subject to various restrictions, such as growth limits, requirement for prior application of any new director or senior executive officer, restrictions on dividends, compensation and golden parachute and indemnification payments, and restrictions on transactions with affiliates and third parties. Higher assessment and application fees will also apply.

The investment, lending and branching authority of the Bank is prescribed by federal laws and it is prohibited from engaging in any activities not permitted by these laws. For example, no savings institution may invest in non-investment 31grade corporate debt securities. In addition, the permissible level of investment by federal institutions in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the OCC. Federal savings institutions are also generally authorized to branch nationwide. At December 31, 2013, the Bank was in compliance with the noted restrictions.

~~agreement,~~Federal orlaw ~~because~~provides ofthat ~~other~~federally ~~reasons),~~chartered ~~the~~savings ~~institution~~institutions ~~will~~are ~~become~~generally subject to ~~various~~the ~~restrictions,~~national ~~such~~bank aslimit ~~growth~~on ~~limits,~~loans ~~requirement~~to ~~for~~one ~~prior~~borrower. A ~~application~~federally ofchartered ~~any~~savings ~~new~~institution ~~director~~may ornot ~~senior~~make ~~executive~~a ~~officer,~~loan ~~restrictions~~or onextend ~~dividends,~~credit ~~compensation~~to ~~and~~a ~~golden~~single ~~parachute~~or ~~and~~related ~~indemnification~~group ~~payments,~~of ~~and~~borrowers ~~restrictions~~in onexcess ~~transactions~~of ~~with~~15% ~~affiliates~~of ~~and~~its ~~third~~unimpaired ~~parties~~capital and surplus. ~~Higher~~An ~~assessment~~additional amount may be lent, equal to 10% of unimpaired capital and ~~application~~surplus, ~~fees~~if ~~will~~secured ~~also~~by ~~apply~~specified readily marketable collateral. At December 31,

In addition, the investment, lending and branching authority of the Bank is prescribed by federal laws and it is prohibited from engaging in any activities not permitted by these laws. For example, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal institutions in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the OCC. Federal savings institutions are also generally authorized to branch nationwide. At December 31~~, 2012, the Bank was in compliance with the noted restrictions.~~-

~~The Bank's general permissible lending limit for loans-to-one-borrower is equal to the greater of $500~~2013,~~000~~ or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At December 31, 2012, the Bank's lending limit under this restriction was $3.34 million and, at that date, the Bank had no loans to one borrower exceeding this amount except where guaranteed by a government agency, in whole or in part, and the guarantee reduces our exposure below the limitation.

The OCC, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to comply with these standards must submit a compliance plan.

All savings institutions are required to pay assessments to the OCC to fund the agency’s operations. The general assessments, paid on a semi-annual basis, are determined based on the institution’s total assets, including consolidated subsidiaries. The Bank’s OCC assessment for the year ended December 31, ~~2012~~2013 was $9569,000.

FHLB System. The Bank is a member of the FHLB of Seattle, which is one of 12 regional FHLBs that administer the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing.

As a member, the Bank is required to purchase and maintain stock in the FHLB of Seattle. At December 31, ~~2012~~2013, the Bank had $1.87 million in FHLB stock, which was in compliance with this requirement. During the year ended December 31, ~~2012~~2013, the Bank received a $3263,000 stock redemption from the FHLB of Seattle.

Under federal law, the FHLB is required to provide funds for the resolution of troubled savings institutions and to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank's FHLB stock may result in a corresponding reduction in its capital.

Federal Deposit Insurance Corporation. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Dodd-Frank Act permanently ~~increases~~increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. ~~and~~As ~~non-interest-bearing~~insurer, ~~transaction~~the ~~accounts~~FDIC imposes deposit insurance premiums and ~~IOLTA~~is ~~accounts~~authorized ~~have~~to ~~unlimited~~conduct ~~deposit~~examinations ~~insurance~~of ~~through~~and ~~December~~to ~~31,~~require ~~2012~~reporting by FDIC-insured institutions. ~~NOW~~It ~~accounts,~~also ~~which~~may ~~were~~prohibit ~~previously~~any ~~fully~~ FDIC-insured ~~under~~institution ~~the~~from ~~Transaction~~engaging ~~Account~~in ~~Guarantee~~any ~~Program,~~activity ~~are~~the noFDIC ~~longer~~determines ~~eligible~~by ~~for~~regulation anor ~~unlimited~~order ~~guarantee~~to ~~due~~pose a serious risk to the ~~expiration~~insurance offund. The ~~this~~FDIC ~~program~~also onhas ~~December~~the ~~31,~~authority ~~2010. As~~to ~~insurer,~~initiate ~~the~~enforcement ~~FDIC~~actions ~~imposes~~against ~~deposit~~savings ~~insurance~~institutions, ~~premiums~~after ~~and~~giving isthe ~~authorized~~OCC opportunity to ~~conduct~~take ~~examinations~~such ofaction, and tomay ~~require~~terminate ~~reporting~~the bydeposit ~~FDIC-insured~~insurance ~~institutions. It~~if ~~also~~it ~~may~~determines ~~prohibit~~that ~~any~~the ~~FDIC-insured~~ institution ~~from~~has ~~engaging~~engaged in ~~any~~unsafe ~~activity~~or unsound practices or is in an unsafe or unsound condition. Management of the ~~FDIC~~Bank ~~determines~~is bynot ~~regulation~~aware of any practice, condition or ~~order~~violation that might lead to ~~pose~~termination aof the Bank’s deposit insurance.

-As 32a -result of a decline in the reserve ratio (the ratio of the DIF to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount was recorded as an asset with a zero risk weight and the institution continued to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at the institution’s assessment rate as of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011 and were based on the institution’s assessment base for the third quarter of 2009, with deposit growth assumed quarterly at an annual rate of 5%. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments in cash or receive a rebate of prepaid amounts not exhausted after collection of assessments due on June 13, 2013, as applicable. The Bank’s annual FDIC assessment for the fiscal year ended December 31 2013 was $145,000.

serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OCC opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.-32-

~~The~~As required by the Dodd-Frank Act, the FDIC ~~assesses~~has ~~deposit~~adopted ~~insurance~~rules ~~premiums~~effective onApril ~~all~~1, ~~FDIC-insured~~2011, ~~institutions~~under ~~quarterly~~which insurance premium assessments are based on ~~annualized~~an ~~rates~~institution's ~~for~~total ~~one~~assets ofminus ~~four~~its ~~risk~~tangible ~~categories~~equity ~~applied~~(defined toas ~~its~~Tier ~~deposit~~1 ~~subject~~capital) toinstead ~~certain~~of ~~adjustments~~its deposits. ~~Each~~Under ~~institution~~these isrules, ~~assigned~~an toinstitution ~~one~~with total assets of ~~four~~less ~~risk~~than ~~categories~~$10 ~~based~~billion onis ~~its~~assigned ~~capital,~~to ~~supervisory~~a ~~ratings~~Risk ~~and~~Category ~~other~~as ~~factors. Well~~described ~~capitalized~~above ~~institutions~~and ~~that~~a ~~are~~range ~~financially~~of ~~sound~~initial ~~with~~base ~~only~~assessment arates ~~few~~apply ~~minor~~to ~~weaknesses~~each ~~are~~category, ~~assigned~~subject to ~~Risk~~adjustment ~~Category~~downward ~~I. Risk~~based ~~Categories~~on ~~II,~~unsecured ~~III~~debt issued by the institution and, IVexcept ~~present~~for ~~progressively~~an ~~greater~~institution ~~risks~~in toRisk ~~the~~Category ~~DIF. Under~~I, adjustment upward if the ~~FDIC’~~institution's ~~risk-based~~brokered ~~assessment~~deposits ~~rules,~~exceed ~~effective~~10% ~~April~~of 1,its ~~2009~~domestic deposits, ~~the~~to ~~initial~~produce total base assessment rates. Total ~~prior~~base toassessment ~~adjustments~~rates range from 122.5 to 169 basis points for Risk Category I, ~~and~~9 ~~are~~to 2224 basis points for Risk Category II, 3218 to 33 basis points for Risk Category III, and 30 to 45 basis points for Risk Category IV~~. Initial~~, ~~base~~all ~~assessment rates are~~ subject to ~~adjustments~~further ~~based~~adjustment onupward anif the institution’s ~~unsecured~~holds ~~debt,~~more ~~secured~~than ~~liabilities~~a ~~and~~de ~~brokered~~minimis ~~deposits,~~amount ~~such~~of ~~that~~unsecured ~~the~~debt ~~total~~issued ~~base~~by ~~assessment~~another ~~rates~~FDIC-insured ~~after~~institution. ~~adjustments~~The ~~range~~FDIC ~~from~~may 7increase toor 24decrease ~~basis~~its ~~points~~rates ~~for~~by ~~Risk~~2.0 ~~Category I, 17 to 43~~ basis points ~~for~~without ~~Risk~~further ~~Category~~rulemaking. ~~II,~~In 27an ~~to 58 basis points for Risk Category III~~emergency, ~~and~~the 40FDIC tomay ~~77.5~~also ~~basis~~impose ~~points~~a ~~for~~special ~~Risk Category IV~~assessment.

In addition to the regular quarterly assessments, due to losses and projected losses attributed to failed institutions, the FDIC imposed a special assessment of five basis points on the amount of each depository institution’s assets reduced by the amount of its Tier 1 capital (not to exceed 10 basis points of its assessment base for regularly quarterly premiums) as of June 30, 2009, which was collected on September 30, 2009.

As a result of a decline in the reserve ratio (the ratio of the DIF to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at the institution’s assessment rate as of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011 and were based on the institution’s assessment base for the third quarter of 2009, with deposit growth assumed quarterly at an annual rate of 5%. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments in cash or receive a rebate of prepaid amounts not exhausted after collection of assessments due on June 13, 2013, as applicable. Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. The rule includes a process for exemption from the prepayment for institutions whose safety and soundness would be affected adversely.

As required by the Dodd-Frank Act, the FDIC has adopted rules effective April 1, 2011, under which insurance premium assessments are based on an institution's total assets minus its tangible equity (defined as Tier 1 capital) instead of its deposits. Under these rules, an institution with total assets of less than $10 billion will be assigned to a Risk Category as described above and a range of initial base assessment rates will apply to each category, subject to adjustment downward based on unsecured debt issued by the institution and, except for an institution in Risk Category I, adjustment upward if the institution's brokered deposits exceed 10% of its domestic deposits, to produce total base assessment rates. Total base assessment rates range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III and 30 to 45 basis points for Risk Category IV, all subject to further adjustment upward if the institution holds more than a de minimis amount of unsecured debt issued by another FDIC-insured institution. The FDIC may increase or decrease its rates by 2.0 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment.

The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum reserve ratio to 1.35% from the former statutory minimum of 1.15%. The FDIC has not yet announced how it will implement this offset. In addition to the statutory minimum ratio the FDIC must designate a reserve ratio, known as the designated reserve ratio (“DRR”), which may exceed the statutory minimum. The FDIC has established 2.0% as the DRR.

-In 33addition -to the assessment for deposit insurance, federally insured institutions are required to pay a Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. For the quarterly period ended December 31, 2013, the Financing Corporation assessment equaled 0.16 basis points for each $100 in domestic deposits. These assessments, which may be revised based upon the level of DIF deposits, will continue until the bonds mature in the years 2017 through 2019. For 2013, Alaska Pacific incurred $10,000 in FICO assessments.

~~Federally~~The ~~insured~~Dodd-Frank ~~institutions~~Act ~~are~~contains ~~required to pay~~ a ~~Financing~~number ~~Corporation~~of ~~assessment~~provisions inthat ~~order~~will toaffect ~~fund~~ the ~~interest~~capital onrequirements ~~bonds~~applicable ~~issued~~ to ~~resolve~~the ~~thrift~~Company ~~failures~~and in the ~~1980s~~Bank. ~~For~~ ~~the~~On ~~quarterly~~July ~~period ended December 31~~2, ~~2012~~2013, the ~~Financing~~Federal ~~Corporation~~Reserve ~~assessment~~approved ~~equaled~~a ~~1.02~~final ~~basis~~rule ~~points~~(“Final ~~for~~Rule”) ~~each~~to ~~$100~~establish ina ~~domestic~~new ~~deposits. These~~comprehensive ~~assessments,~~regulatory ~~which~~capital ~~may~~framework befor ~~revised~~all ~~based~~U.S. ~~upon~~financial ~~the~~institutions ~~level~~and oftheir ~~DIF~~holding ~~deposits,~~companies. The ~~will~~Final ~~continue~~Rule ~~until~~implements the ~~bonds~~“Basel ~~mature~~III” inregulatory ~~the~~capital ~~years~~reforms ~~2017~~and ~~through~~changes ~~2019. For~~required ~~2012~~by the Dodd-Frank Act, ~~Alaska~~which ~~Pacific~~is ~~incurred~~discussed ~~$9,900~~below in ~~FICO~~the ~~assessments~~section entitled “ – New Capital Rules.”

The Dodd-Frank Act contains a number of provisions that will affect the capital requirements applicable to the Company and the Bank. In addition, on September 12, 2010, the Basel Committee adopted the Basel III capital rules. These rules, which will be phased in over a period of years, set new standards for common equity, tier 1 and total capital, determined on a risk-weighted basis. The impact on the Company and the Bank of the Basel III rules cannot be determined at this time. For additional information, see “– Capital Requirements – Possible Changes to Capital Requirements Resulting from Basel III” set forth below.

A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what insurance assessment rates will be in the future. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the deposit insurance of Alaska Pacific.

Capital Requirements. The ~~Federally~~Bank ~~insured~~is ~~savings~~required ~~institutions,~~to ~~such~~maintain asspecified ~~Alaska~~levels ~~Pacific~~of ~~Bank,~~regulatory ~~are~~capital ~~required~~under toregulations ~~maintain~~of athe ~~minimum~~OCC. The ~~level~~OCC ofmay ~~regulatory~~impose capital requirements on individual institutions in excess of these requirements on a case-by-case basis. ~~The~~In addition, the OCC has established capital standards, ~~including~~for apurposes ~~Tier~~of 1establishing ~~leverage~~the ~~ratio~~thresholds ~~(or~~for ~~core~~taking prompt corrective action against capital) ~~requirement~~deficient ~~and~~institutions. These ~~risk-based~~capital standards include three capital ~~requirements~~ratios. The ~~applicable~~leverage ratio is a measurement of Tier 1 capital to ~~such~~adjusted ~~savings~~total ~~institutions~~assets. ~~These~~The ~~capital~~Tier ~~requirements~~1 ~~must~~capital beratio ~~generally~~is asa ~~stringent~~measurement asof ~~the~~Tier ~~comparable~~1 capital ~~requirements~~to ~~for~~risk-weighted ~~national banks~~assets. The ~~OCC~~total capital ratio is ~~also~~a ~~authorized~~measurement of total capital to ~~impose~~risk-weighted assets. At December 31, 2013, the Bank met each of these capital requirements inand ~~excess~~had a leverage of ~~these~~20.2 ~~standards~~million, onor ~~individual~~11.48% ~~institutions~~of onadjusted total assets; a ~~case~~Tier 1 risk-bybased capital of $20.2 million, or 14.64% of risk-~~case~~weighted ~~basis~~assets; and a total risk-based capital ratio of $21.9 million and risk-weighted assets of $138.1 million, or total capital of 15.89% of risk-weighted assets; all of which exceeded mandated levels and qualified the Bank as well-capitalized under the prompt corrective

The capital standards require Tier 1 Leverage capital equal to at least 4% of adjusted total assets unless an institution’s supervisory condition is such to allow it to maintain a 3.0% ratio (“Tier 1 Leverage Capital Ratio”). Tier 1 leverage capital generally includes common stockholders’ equity and retained income, and certain noncumulative perpetual preferred stock and related income, plus certain intangible assets, including a limited amount of purchased credit card relationships. At December 31, 2012, the Bank had Tier 1 leverage capital equal to $20.5 million, or 11.36% of adjusted total assets, which was $13.3 million above the minimum requirement of 4% in effect on that date.-33-

~~The~~action ~~OCC~~standards. ~~also~~For ~~requires~~additional ~~savings~~information ~~institutions~~regarding tothe ~~have Tier 1 leverage~~ capital ~~equal~~levels ~~to 4%~~ of ~~risk-weighted assets ("Tier 1 Risk-Based Capital Ratio"). At December 31, 2012,~~ the Bank, ~~had~~see ~~Tier~~Note 13 ~~risk-based capital~~ of ~~$20.5 million,~~the orNotes ~~14.92%~~to ofConsolidated ~~risk-weighted~~Financial ~~assets,~~Statements ~~which~~included ~~was~~in ~~$15.0 million~~Item ~~above~~8 ~~the~~of ~~minimum~~this onForm ~~that date~~10-K.

~~The~~Tier ~~OCC~~1 ~~risk-based~~capital ~~requirement~~generally ~~requires~~consists ~~savings~~of ~~institutions~~common toshareholders' ~~have~~equity ~~total~~and ~~risk~~retained ~~based~~earnings ~~capital~~and ofcertain atnoncumulative ~~least~~perpetual 8%preferred ofstock ~~risk-weighted~~and ~~assets~~related ~~(“Total~~earnings, ~~risk-based~~excluding ~~capital~~most ~~ratio”)~~intangible assets. ~~Total~~The ~~risk~~OCC ~~based~~regulations ~~capital~~require ~~consists~~that offederal savings associations deduct from Tier 1 ~~Leverage~~ capital, asinvestments ~~defined~~in ~~above~~ and ~~supplementary~~loans ~~capital. Supplementary~~to ~~capital~~subsidiaries ~~consists~~engaged ofin ~~certain~~activities ~~permanent~~as ~~and~~principal ~~maturing~~that are not permissible for a national bank. Total capital ~~instruments~~consists ~~that~~of dothe ~~not~~sum ~~qualify~~of asan ~~core~~institution's Tier 1 capital and ~~general~~the ~~valuation~~amount ~~loan~~of ~~and~~its ~~lease~~Tier ~~loss~~2 ~~allowances~~capital up to athe ~~maximum~~amount of ~~1.25%~~its ofTier ~~risk-weighted~~1 ~~assets~~capital. ~~Supplementary~~Tier 2 capital ~~may~~consists begenerally ~~used~~of tocertain ~~satisfy~~cumulative ~~the~~and ~~risk-based~~other ~~requirement~~perpetual ~~only~~preferred tostock, ~~the~~certain ~~extent~~subordinated ofdebt ~~core~~and ~~capital. The~~other ~~OCC~~maturing iscapital ~~also~~instruments, ~~authorized~~the toamount ~~require~~of athe ~~savings~~ institution's toallowance ~~maintain~~for anloan ~~additional~~and ~~amount~~lease oflosses ~~total~~up ~~capital~~ to ~~account~~1.25% ~~for concentration~~ of ~~credit~~ risk-weighted assets and ~~the~~certain ~~risk~~unrealized ofgains ~~non-traditional~~on ~~activities~~equity securities. InRisk-weighted ~~determining~~assets are determined under the ~~amount~~OCC ofcapital ~~risk-weighted~~regulations ~~assets,~~that ~~all~~assign ~~assets~~to every asset, including certain off-balance sheet items, ~~are multiplied by~~ a risk -weight, ranging from 0% to ~~100~~200%, based on the ~~risk~~ inherent inrisk ~~the type~~ of the asset. ~~For~~The ~~example, the~~ OCC ~~has~~is ~~assigned~~authorized ato ~~risk~~require ~~weight~~the ofBank ~~50% for prudently underwritten permanent one-~~ to- ~~four~~maintain ~~family~~an ~~first~~additional ~~lien~~amount ~~mortgage~~of ~~loans~~total ~~not~~capital ~~more~~to ~~than~~account 90for ~~days~~concentrations ~~delinquent~~of ~~and~~credit ~~having~~risk, alevels ~~loan-to-value ratio~~ of ~~not~~interest ~~more~~rate ~~than~~risk, ~~80%~~equity atinvestments ~~origination~~in ~~unless~~non-financial ~~insured~~companies toand ~~such ratio by an insurer approved by Fannie Mae or Freddie Mac. On December 31, 2012,~~ the ~~Bank~~risks ~~had~~of ~~total risk~~non-~~based~~traditional ~~capital~~activities ofor ~~$22.2~~other ~~million~~supervisory concerns.

OCC prompt corrective action regulations state that to be adequately capitalized, the Bank must have a leverage ratio of at least 4.0%, a Tier 1 capital ratio of at least 4.0% and a total capital ratio of at least 8.0%. To be well-capitalized, 34the Bank must have a leverage ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%. At December 31, 2013, the Bank was considered a well-capitalized institution under OCC regulations.

~~and~~Institutions ~~risk~~that are not well-~~weighted~~capitalized ~~assets~~are ofsubject ~~$137~~to certain restrictions on brokered deposits and interest rates on deposits.~~4 million~~ The OCC is authorized and, orunder ~~total~~certain ~~capital~~circumstances, ofrequired ~~16.17%~~to oftake ~~risk-weighted~~certain ~~assets~~actions against institutions that fail to meet the minimum ratios for an adequately capitalized institution. ~~This~~Any ~~amount~~such ~~was~~institution ~~$11.2~~must ~~million~~submit ~~above~~a capital restoration plan and, until such plan is approved by the 8%OCC, ~~requirement~~may not increase its assets, acquire another depository institution, establish a branch or engage in ~~effect~~any new activities, or make capital distributions. The OCC is authorized to impose the additional restrictions on institutions that ~~date~~are less than adequately capitalized.

~~The~~ OCC ~~and~~regulations ~~the~~state ~~FDIC~~that ~~are~~any ~~authorized~~institution ~~and,~~that ~~under~~fails ~~certain~~to ~~circumstances,~~comply ~~required~~with toits ~~take~~capital ~~certain~~plan ~~actions~~or ~~against~~has ~~savings~~Tier ~~institutions~~1 ~~that~~or ~~fail~~leverage toratio ~~meet~~of ~~their~~less ~~capital~~than ~~requirements~~3. ~~The~~0% ~~OCC~~or a total capital ratio of less than 6.0% is ~~generally~~considered ~~required~~significantly toundercapitalized ~~take~~and ~~action~~must be made subject to ~~restrict~~one ~~the~~or ~~activities~~more ofadditional anspecified ~~“undercapitalized~~actions ~~institution,”~~and ~~which~~operating isrestrictions anthat ~~institution~~may ~~with~~cover ~~less~~all ~~than~~aspects ~~either~~of its operations and may include a 4forced merger or acquisition of the institution.0% ~~Tier~~An 1institution ~~Leverage~~with ~~capital~~tangible ~~ratio,~~equity ato 4total assets of less than 2.0% ~~Tier~~is 1critically ~~risk-based~~undercapitalized ~~capital~~and ~~ratio,~~becomes orsubject anto ~~8.0%~~further ~~risk-based~~mandatory ~~capital~~restrictions ~~ratio~~on its operations. ~~Any~~The ~~such~~OCC ~~institution~~generally ~~must~~is ~~submit~~authorized to reclassify an institution into a lower capital ~~restoration~~category ~~plan~~ and ~~until~~impose the ~~plan~~restrictions isapplicable ~~approved~~to bysuch category if the ~~OCC,~~institution ~~may~~is ~~not~~engaged ~~increase~~in ~~its~~unsafe ~~assets,~~or ~~acquire~~unsound ~~another~~practices ~~institution,~~or ~~establish~~is ain ~~branch~~an unsafe or ~~engage~~unsound incondition. The imposition by the OCC of any ~~new~~of ~~activities,~~these ~~and~~measures ~~generally~~on the Bank may ~~not~~have ~~make~~a ~~capital~~substantial ~~distributions. The~~adverse ~~OCC~~effect ison ~~authorized~~our tooperations ~~impose~~and profitability. In general, the ~~additional~~FDIC ~~restrictions~~must ~~that~~be ~~are~~appointed ~~applicable~~receiver tofor ~~significantly~~a critically undercapitalized ~~institutions. As~~institution awhose ~~condition~~capital tois ~~the~~not ~~approval~~restored ofwithin the ~~capital~~time ~~restoration~~provided. When ~~plan,~~the ~~any~~FDIC ~~company~~as ~~controlling~~receiver liquidates an ~~undercapitalized~~ institution, ~~must~~the ~~agree~~claims ~~that~~of itdepositors ~~will~~and ~~enter~~the ~~into~~FDIC aas ~~limited~~their ~~capital~~successor ~~maintenance~~(for ~~guarantee~~deposits ~~with~~covered ~~respect~~by toFDIC ~~the~~insurance) ~~institution’s~~have ~~achievement~~priority ofover ~~its~~other ~~capital~~unsecured ~~requirements~~claims against the institution.

~~Any~~New ~~savings~~Capital ~~institution~~Rules. Effective ~~that~~in ~~fails~~2015 ~~to comply~~ (with ~~its~~some ~~capital~~changes ~~plan~~generally ortransitioned ~~has~~into ~~Tier~~full 1effectiveness ~~risk-based~~over ortwo ~~core~~to ~~capital~~four ~~ratios~~years), ofthe ~~less~~Bank ~~than~~will ~~3.0%~~be orsubject ato ~~risk-based~~new capital ~~ratio~~requirements ofadopted ~~less~~by ~~than~~the 6OCC.0% These ~~and~~new isrequirements ~~considered~~create ~~“significantly~~a ~~undercapitalized”~~new ~~will~~required beratio ~~made~~for ~~subject~~common toequity ~~one~~Tier or1 ~~more~~(“CET1”) ~~additional~~capital, ~~specified~~increases ~~actions~~the leverage and ~~operating~~Tier ~~restrictions~~1 ~~which~~capital ~~may~~ratios, ~~cover~~changes ~~all~~the ~~aspects~~risk-weights of ~~its~~certain ~~operations~~assets ~~and~~for ~~may~~purposes ~~include a forced merger or acquisition~~ of the ~~institution. An~~risk-based ~~institution~~capital ~~that~~ratios, ~~becomes~~creates ~~“critically~~an ~~undercapitalized”~~additional ~~because it has a tangible~~ capital ~~ratio~~conservation ofbuffer ~~2.0%~~over orthe ~~less~~required iscapital ~~subject~~ratios toand ~~further~~changes ~~mandatory~~what ~~restrictions~~qualifies onas ~~its~~capital ~~activities~~for inpurposes ~~addition~~of tomeeting ~~those~~these ~~applicable~~various tocapital ~~significantly undercapitalized institutions~~requirements. InBeginning ~~addition,~~in ~~the OCC must appoint a receiver~~2016, orfailure ~~conservator~~to ~~with~~maintain the ~~concurrence~~required ofcapital ~~the~~conservation ~~FDIC,~~buffer ~~for~~will alimit ~~savings institution, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized institution is also subject to~~ the ~~general~~ability ~~enforcement authority~~ of the ~~OCC~~Bank ~~and~~to ~~the~~pay ~~FDIC~~dividends, ~~including~~repurchase ~~the~~shares ~~appointment of a conservator~~ or apay ~~receiver~~discretionary bonuses.

~~The~~When ~~OCC~~these isnew ~~also~~requirements ~~generally~~become ~~authorized~~effective toin ~~reclassify~~2015, anthe ~~institution~~Bank’s ~~into~~leverage aratio ~~lower~~of ~~capital~~4% ~~category~~of adjusted total assets and ~~impose~~total ~~the~~capital ~~restrictions~~ratio ~~applicable~~of to8% ~~such~~of ~~category~~risk-weighted ifassets will remain the ~~institution~~same; ishowever, ~~engaged~~the inTier ~~unsafe~~1 orcapital ~~unsound~~ratio ~~practices~~requirement orwill isincrease infrom an4.0% ~~unsafe~~to or6.5% ~~unsound~~of ~~condition~~risk-weighted assets. ~~The~~In ~~imposition~~addition, by the ~~OCC~~Bank orwill have to meet the ~~FDIC~~new CET1 capital ratio of ~~any~~4.5% of ~~these~~risk-weighted ~~measures~~assets, onwith ~~the~~CET1 ~~Bank~~consisting ~~may~~of ~~have~~qualifying aTier ~~substantial~~1 ~~adverse~~capital ~~effect~~less onall ~~its~~capital ~~operations~~components ~~and~~that ~~profitability~~are not considered common equity.

Possible Changes to Capital Requirements Resulting from Basel III. In December 2010 and January 2011, the Basel Committee on Banking Supervision published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including the Bank.-34-

For ~~banks~~all of these capital requirements, there are a number of changes in ~~the~~what ~~United~~constitutes ~~States~~regulatory capital, ~~among~~some of which are subject to a two-year transition period. These changes include the ~~most~~phasing-out ~~significant~~of ~~provisions~~certain instruments as qualifying capital. The Bank does not have any of ~~Basel~~these ~~III~~instruments. Under ~~concerning~~the new requirements for total capital, ~~are~~Tier 2 capital is no longer limited to the ~~following:~~amount of Tier 1 capital included in total capital.

·Mortgage Aservicing ~~minimum~~rights, ~~ratio~~certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common ~~equity~~stock towill ~~risk-weighted~~be ~~assets~~deducted ~~reaching~~from ~~4.5%~~capital, ~~plus~~subject anto ~~additional~~a 2two-year transition period.5% asIn aaddition, Tier 1 capital ~~conservation~~will ~~buffer~~include accumulated other comprehensive income, bywhich ~~2019~~includes ~~after~~all unrealized gains and losses on available for sale debt and equity securities, subject to a ~~phase~~two-inyear transition period. Because of its asset size, the Bank has the one-time option of deciding in the first quarter of 2015 whether to permanently opt-out of the inclusion of accumulated other comprehensive income in its capital calculations. The Bank is considering whether to take advantage of this opt-out to reduce the impact of market volatility on its regulatory capital levels.

·The Anew ~~minimum~~requirements ~~ratio~~also ofinclude ~~Tier~~changes 1in ~~capital~~the to risk-~~weighted~~weights of assets ~~reaching~~to 6better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial non-residential real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) bycredit ~~2019~~conversion ~~after~~factor for the unused portion of a ~~phase~~commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-inweights ~~period~~(0% to 600%) for equity exposures.

·In Aaddition to the minimum ~~ratio~~CET1, ofTier 1 and total capital ratios, the Bank will have to maintain a capital conservation buffer consisting of additional CET1 capital equal to 2.5% of risk-weighted assets, ~~plus~~above the ~~additional~~required 2minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions.5% This new capital conservation buffer, ~~reaching~~requirement 10is be phased in beginning in January 2016 at 0.5625% byof ~~2019~~risk-weighted ~~after~~assets aand ~~phase-~~increasing each year until fully implemented at 2.5% in ~~period~~January 2019.

·The AnOCC’s ~~additional~~prompt ~~countercyclical~~corrective action standards will change when these new capital ~~buffer~~ratios become effective. Under the new standards, in order to be ~~imposed~~considered bywell-capitalized, ~~applicable~~the ~~national~~Bank ~~banking~~would ~~regulators~~have ~~periodically~~to athave ~~their~~a ~~discretion~~CET1 ratio of 6.5% (new), ~~with~~a ~~advance~~Tier ~~notice~~1 ratio of 8% (increased from 6%), a total capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged).

· Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone.

· Deduction from common equity of deferred tax assets that depend on future profitability to be realized.

· Increased capital requirements for counterparty credit risk relating to OTC derivatives, repos and securities financing activities.

· For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement such that the instrument must be written off or converted to common equity if a trigger event occurs, either pursuant to applicable law or at the direction of the banking regulator. A

- 35 -

trigger event is an event under which the banking entity would become nonviable without the write-off or conversion, or without an injection of capital from the public sector. The issuer must maintain authorization to issue the requisite shares of common equity if conversion were required.

The Basel III provisions on liquidity include complex criteria establishing a liquidity coverage ratio (“LCR”) and net stable funding ratio (“NSFR”). The purpose of the LCR is to ensure that a bank maintains adequate unencumbered, high quality liquid assets to meet its liquidity needs for 30 days under a severe liquidity stress scenario. The purpose of the NSFR is to promote more medium and long-term funding of assets and activities, using a one-year horizon. Although Basel III is described as a “final text,” it is subject to the resolution of certain issues and to further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will apply to United States banks that are not large, internationally active banks.

Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to: internal controls, information systems and internal audit systems,) loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program also must be designed to ensure the security and confidentiality of customer information, protect against any unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer and ensure the proper disposal of customer and consumer information. Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems. If the OCC determines that the Bank fails to meet any standard prescribed by the Guidelines, the OCC may require the Bank to submit an acceptable plan to achieve compliance with the standard. OCC regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Management of the Bank is not aware of any conditions relating to these safety and soundness standards which would require submission of a plan of compliance.

Qualified Thrift Lender Test. All savings institutions, including Alaska Pacific, are required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on their operations. This test requires a savings institution to have at least 65% of its portfolio assets, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 month period on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code (“Code”). Under either test, such assets primarily consist of residential housing related loans and investments. At December 31, 2012, the Bank met the test, with a ratio of 91.3%.

-35-

in those assets specified in Section 7701(a)(19) of the Internal Revenue Code (“Code”). Under either test, such assets primarily consist of residential housing related loans and investments. At December 31, 2013, the Bank met the test, with a ratio of 86.8%.

Any savings institution that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL within one year of failure and thereafter remains a QTL. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings institution and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such an institution has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See “- Savings and Loan Holding Company Regulations.”

Limitations on Capital Distributions. OCC regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Generally, savings institutions, such as Alaska Pacific, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year equal to up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision by the OCC may have its dividend authority restricted by the OCC. If the Bank, however, proposes to make a capital distribution when it does not meet its capital requirements (or will not following the proposed capital distribution) or that will exceed these net income-based limitations, it must obtain the OCC’s approval prior to making such distribution. In addition, the Bank must file a prior written notice of a dividend with the Federal Reserve Board. The Federal Reserve Board or the OCC may object to a capital distribution based on safety and soundness concerns. Additional restrictions on Bank dividends may apply if the Bank fails the QTL test and the Bank may not make a capital distribution if, after making the distribution, it would be undercapitalized. In addition, as noted above, beginning in 2016, if the Bank does not have the required capital conservation buffer, its ability to pay dividends to the Company would be limited, which may limit the ability of the Company to pay dividends to its stockholders.

- 36 -

years. However, an institution deemed to be in need of more than normal supervision by the OCC may have its dividend authority restricted by the OCC.

Savings institutions proposing to make any capital distribution need not submit written notice to the OCC prior to such distribution unless they are a subsidiary of a holding company or would not remain well-capitalized following the distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution or propose to exceed these net income limitations, must obtain OCC approval prior to making such distribution. The OCC may object to the distribution during that 30-day period based on safety and soundness concerns. See “- Capital Requirements.”

Liquidity. All savings institutions, including the Bank, are required to maintain sufficient liquidity to ensure a safe and sound operation. The Bank’s primary sources of funds are deposits, proceeds from principal and interest payments on loans and mortgage-backed securities, and FHLB advances. The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities.

Activities of Savings Associations and Their Subsidiaries. When a savings institution establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings institution must notify the FDIC and the OCC 30 days in advance and provide the information each agency may, by regulation, require. Savings institutions also must conduct the activities of subsidiaries in accordance with existing regulations and orders.

The OCC may determine that the continuation by a savings institution of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIC. Based upon that determination, the FDIC or the OCC has the authority to order the savings institution to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF. If so, it may require that no SAIF member engage in that activity directly.

Transactions with Affiliates. The Bank's authority to engage in transactions with "affiliates" is limited by OCC regulations and by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board's Regulation W. The term "affiliates" for these purposes generally means any company that controls or is under common control with an institution. The Company and its non-savings institution subsidiaries are affiliates of the Bank. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, certain types of transactions are restricted to an aggregate percentage of the institution's capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from an institution. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

~~The Sarbanes~~-Oxley Act of 2002 generally prohibits a company from making loans to its executive officers and directors. However, there is a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, the Bank's authority to extend credit to executive officers, directors and 10% stockholders ("insiders"), as well as entities that such person’s control is limited. The law restricts both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank's capital position and requires certain Board approval procedures to be followed. Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. There are additional restrictions applicable to loans to executive officers.36-

~~Federal~~In ~~Reserve~~general, ~~System. The~~transactions ~~Federal~~with ~~Reserve~~affiliates ~~Board~~must ~~requires~~be on terms that ~~all~~are ~~depository~~as ~~institutions~~favorable ~~maintain~~to ~~reserves~~the oninstitution ~~transaction~~as ~~accounts~~comparable ortransactions with non-~~personal~~affiliates. ~~time~~In ~~deposits~~addition, certain types of transactions are restricted to an aggregate percentage of the institution's capital. ~~These~~ ~~reserves~~Collateral ~~may~~in specified amounts must usually be provided by affiliates in ~~the~~order ~~form~~to ofreceive ~~cash~~loans orfrom ~~non-interest-bearing~~an ~~deposits~~institution. ~~with~~In ~~the~~addition, ~~regional~~savings ~~Federal~~institutions ~~Reserve~~are ~~Bank. Negotiable~~prohibited ~~order~~from oflending ~~withdrawal~~to ~~(NOW)~~any ~~accounts~~affiliate ~~and~~that ~~other~~is ~~types~~engaged ofin ~~accounts~~activities that ~~permit~~are ~~payments~~not orpermissible ~~transfers~~for tobank ~~third~~holding ~~parties~~companies ~~fall~~and ~~within~~no savings institution may purchase the ~~definition~~securities of ~~transaction~~any ~~accounts~~affiliate ~~and~~other ~~are~~than ~~subject~~a subsidiary.

The Sarbanes-Oxley 37Act -of 2002 generally prohibits a company that makes filings with the SEC from making loans to its executive officers and directors. However, there is a specific exception for loans by a depository institution to its executive officers and directors, if the lending is in compliance with federal banking laws. Under such laws, the Bank's authority to extend credit to executive officers, directors and 10% stockholders ("insiders"), as well as entities that such person’s control is limited. The law restricts both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank's capital position and requires certain Board approval procedures to be followed. Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. There are additional restrictions applicable to loans to executive officers.

Federal Reserve System. The Federal Reserve Board requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. Negotiable order of withdrawal (NOW) accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a savings bank. As of December 31, 2012, the Bank’s deposit with the Federal Reserve Bank and vault cash exceeded its reserve requirements.

Community Reinvestment Act and Consumer Protection Laws. Under the Community Reinvestment Act, every FDIC-insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the OCC, in connection with the examination of the Bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the OCC. Due to the heightened attention being given to the Community Reinvestment Act in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community. The Bank was examined in 2012 for Community Reinvestment Act compliance and received a rating of satisfactory in its latest examination.

In connection with its deposit-taking, lending and other activities, the Bank is subject to a number of federal laws designed to protect consumers and promote lending to various sectors of the economy and population. The CFPB issues regulations and standards under these federal consumer protection laws, which include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act. Through its rulemaking authority, the CFPB has promulgated several proposed and final regulations under these laws that will affect our consumer businesses. Among these regulatory initiatives, are final regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and establishing new mortgage loan servicing and loan originator compensation standards. The Bank is evaluating these recent CFPB regulations and proposals and devotes substantial compliance, legal and operational business resources to ensure compliance with these consumer protection standards. In addition, the OCC has enacted customer privacy regulations that limit the ability of the Bank to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties.

Bank Secrecy Act/Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. These laws and regulations

-37-

require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

Environmental Issues Associated With Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), a federal statute, generally imposes strict liability on all prior and present “owners and operators” of sites containing hazardous waste. However, Congress asked to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan.

To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.

Privacy Standards. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLBA"), which was enacted in 1999, modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. The Bank is subject to OCC regulations implementing the privacy protection provisions of the GLBA.

These regulations require the Bank to disclose its privacy policy, including identifying with whom it shares "non-public personal information," to customers at the time of establishing the customer relationship and annually thereafter.

Regulation and Supervision of the Company

General. The Company is a unitary savings and loan holding company subject to regulatory oversight of the Federal Reserve. Accordingly, the Company is required to register and file reports with the OCC and is subject to regulation and examination by the Federal Reserve. In addition, the Federal Reserve has enforcement authority over the Company and its non-savings institution subsidiaries which also permit the OCC to restrict or prohibit activities that are determined to present a serious risk to the subsidiary savings institution. In accordance with the Dodd-Frank Act, the federal banking regulators must require any company that controls an FDIC-insured depository institution to serve as a source of strength for the institution, with the ability to provide financial assistance if the institution suffers financial distress. These and other Federal Reserve Board policies may restrict the Company’s ability to pay dividends.

Activities Restrictions. The Company and its non-savings institution subsidiaries are subject to statutory and regulatory restrictions on their business activities specified by federal regulations, which include performing services and holding properties used by a savings institution subsidiary, activities authorized for savings and loan holding companies as of March 5, 1987, and non-banking activities permissible for bank holding companies pursuant to the Bank Holding Company Act of 1956 or authorized for financial holding companies pursuant to the GLBA.

If the Bank fails the qualified thrift lender test, the Company must, within one year of that failure, register as, and will become subject to, the restrictions applicable to bank holding companies. See "- Regulation and Supervision of Savings Institutions - Qualified Thrift Lender Test."

-Dividend 38Payments -and Common Stock Repurchases. As an Alaska corporation, the Company is subject to restrictions on the payment of dividends under Alaska law. In addition, as a savings and loan holding company, the Company’s ability to declare and pay dividends is dependent on certain federal regulatory considerations. The Company is an entity separate and distinct from its principal subsidiary, Alaska Pacific Bank, and derives substantially all of its revenue in the form of dividends from this subsidiary. Accordingly, the Company is, and will be, dependent upon dividends from the Bank to pay the principal of and interest on its indebtedness, to satisfy its other cash needs and to pay

Dividend Payments and Common Stock Repurchases. As an Alaska corporation, the Company is subject to restrictions on the payment of dividends under Alaska law. In addition, as a savings and loan holding company, the Company’s ability to declare and pay dividends is dependent on certain federal regulatory considerations. The Company is an entity separate and distinct from its principal subsidiary, Alaska Pacific Bank, and derives substantially all of its revenue in the form of dividends from this subsidiary. Accordingly, the Company is, and will be, dependent upon dividends from the Bank to pay the principal of and interest on its indebtedness, to satisfy its other cash needs and to pay dividends on its common stock. The Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. See “—Regulation and Supervision of Savings Institutions - ~~Limitations on Capital Distributions” and Item 1A, “Risk Factors~~ 38-~~- There are regulatory and contractual limitations that may limit or prevent us from paying dividends on the common stock and we may limit or eliminate our dividends to shareholders.”~~

dividends on its common stock. The Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. See “—Regulation and Supervision of Savings Institutions - Limitations on Capital Distributions” and Item 1A, “Risk Factors -- There are regulatory and contractual limitations that may limit or prevent us from paying dividends on the common stock and we may limit or eliminate our dividends to shareholders.”

Mergers and Acquisitions. The Company must obtain approval from the OCC before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its assets. In evaluating an application for the Company to acquire control of a savings institution, the OCC would consider the financial and managerial resources and future prospects of the Company and the target institution, the effect of the acquisition on the risk to the insurance funds, the convenience and the needs of the community and competitive factors.

Capital Requirements. ~~Under~~The ~~the~~Company ~~Dodd-Frank~~is ~~Act, savings and loan holding companies will~~ not be subject to any minimum regulatory capital requirements. However, ~~for~~beginning ~~five~~in ~~years~~2015, orit ~~until~~will ~~July~~be ~~21,~~subject ~~2015.~~to ~~The~~regulatory ~~OCC,~~capital ~~however,~~requirements ~~expects~~adopted by the ~~Company~~Federal toReserve ~~support the Bank~~Board, ~~including~~which ~~providing~~generally ~~additional~~are ~~capital~~the tosame as the ~~Bank~~new ~~when~~capital itrequirements ~~does~~for ~~not~~the ~~meet~~Bank. These ~~its~~new capital requirements. ~~Under~~include ~~the~~provisions ~~Dodd-Frank~~that ~~Act,~~might limit the ~~federal~~ability ~~banking~~of ~~regulators~~the ~~must~~Company ~~require~~to ~~any~~pay ~~company~~dividends ~~that~~to ~~controls~~its anstockholders ~~FDIC-insured~~or ~~depository~~repurchase ~~institution~~its toshares. ~~serve~~For as a ~~source~~description of ~~strength~~these ~~for~~new ~~the~~capital ~~institution~~regulations, ~~with~~see ~~the~~“Regulation ~~ability~~and toSupervision ~~provide~~of ~~financial~~Savings ~~assistance~~Institutions if- ~~the~~New ~~institution~~Proposed ~~suffers~~Capital ~~financial~~Rules” ~~distress~~above in this Form 10-K.

TAXATION

Federal Taxation

General. The Company and the Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other companies with some exceptions, including particularly the Bank’s reserve for bad debts discussed below. The Company files a consolidated federal income tax return with the Bank. Accordingly, any cash distributions made by the Company to its shareholders are considered to be taxable dividends and not as a non-taxable return of capital to shareholders for federal and state tax purposes. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company or the Bank.

Bad Debt Reserve. Historically, savings institutions such as the Bank which met certain definitional tests primarily related to their assets and the nature of their business (“qualifying thrift”) were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Bank’s deductions with respect to “qualifying real property loans,” which are generally loans secured by certain interest in real property, were computed using an amount based on the Bank’s actual loss experience, or a percentage equal to 8% of the Bank’s taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the non-qualifying reserve. Due to the Bank’s loss experience, the Bank generally recognized a bad debt deduction equal to 8% of taxable income.

The thrift bad debt rules were revised by Congress in 1996. The new rules eliminated the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also required that all institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). The Bank has no post-1987 reserves subject to recapture. For taxable years beginning after December 31, 1995, the Bank’s bad debt deduction will be determined under the experience method using a formula based on actual bad debt experience over a period of years. The unrecaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continue to be subject to provisions of present law referred to below that require recapture in the case of certain excess distributions to shareholders.

- Distributions. To 39the -extent that the Bank makes “nondividend distributions” to the Company, such distributions will be considered to result in distributions from the balance of its bad debt reserve as of December 31, 1987 (or a lesser amount if the Bank’s loan portfolio decreased since December 31, 1987) and then from the supplemental reserve for losses on loans (“Excess Distributions”), and an amount based on the Excess Distributions will be included in the Bank’s

~~addition, the balance of the pre~~-~~1988 bad debt reserves continue to be subject to provisions of present law referred to below that require recapture in the case of certain excess distributions to shareholders.~~39-

Distributions. To the extent that the Bank makes “nondividend distributions” to the Company, such distributions will be considered to result in distributions from the balance of its bad debt reserve as of December 31, 1987 (or a lesser amount if the Bank’s loan portfolio decreased since December 31, 1987) and then from the supplemental reserve for losses on loans (“Excess Distributions”), and an amount based on the Excess Distributions will be included in the Bank’s taxable income. Nondividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank’s current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank’s bad debt reserve. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Bank makes a “nondividend distribution,” then approximately one and one-half times the Excess Distribution would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). See “Regulation – Regulation and Supervision of Savings Institutions -- Limitations on Capital Distributions” for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve.

Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income (“AMTI”) at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which our adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on companies, including us, whether or not an Alternative Minimum Tax is paid.

Dividends-Received Deduction. We may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of companies. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated companies with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20% of the stock of a company distributing a dividend, then 80% of any dividends received may be deducted.

State Taxation

The Alaska state income tax rate applicable to us is based on a graduated tax rate schedule, with a maximum rate of 9.4% on income over $90,000. There have not been any audits of our state tax returns during the past five years.

Audits

Our income tax returns have not been audited by federal or state authorities within the last five years. For additional information regarding income taxes, see Note 13 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.

Subsidiary Activities

As of December 31, ~~2012~~2013, the Company’s only subsidiary was the Bank. Alaska Pacific did not have any active subsidiaries.

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Executive Officers

The following table sets forth certain information with respect to the executive officers of the Company and the Bank are as follows:

	Age at December 31,	Position
Name	~~2012~~2013	Company	Bank
Craig E. Dahl	6364	Director, President	Director, President
		and Chief Executive Officer	and Chief Executive Officer
Julie M. Pierce	4142	Senior Vice President, Chief	Senior Vice President and
		Financial Officer and Secretary	Chief Financial Officer
Christopher P. Bourque	6162	--	Senior Vice President and
			Chief Operating Officer
Jay M. Halverson	5253	--	Senior Vice President and
			Chief Credit Officer

The following is a description of the principal occupation and employment of the executive officers of the Company and the Bank during at least the past five years:

Craig E. Dahl joined the Bank in 1992 and has served as President and Chief Executive Officer of the Bank since 1996 and as President and Chief Executive Officer of the Company since its formation in 1999. Prior to joining the Bank, he was President of the B.M. Behrends Bank in Juneau, Alaska.

Julie M. Pierce joined the Bank in September 2007. Ms. Pierce previously held the positions of Assistant State and State Comptroller for the State of Alaska from 2005 until 2007, Director of Finance for Sealaska Heritage Institute from 2004 until 2005, and Chief Financial Officer for True North Federal Credit Union from 1999 until 2004.

Christopher P. Bourque joined the Bank in June 2003 and has served as Senior Vice President and Chief Operating Officer since April 2006. Mr. Bourque previously held the position of Senior Vice President of Operations at Mount McKinley Bank in Fairbanks, Alaska from 1992 until 2000.

Jay M. Halverson joined the Bank in April 2012. Mr. Halverson previously held the positions of Senior Vice President and Chief Credit Officer for Park State Bank in Woodland Park, Colorado from 2009 until 2012 and Senior Vice President and Special Assets Officer for Pueblo Bank and Trust in Colorado Springs, Colorado from 2007 - 2009.

Personnel

As of December 31, ~~2012~~2013, the Bank had ~~sixty~~fifty ~~eight~~three full-time and ~~two~~four part-time employees, none of whom are represented by a collective bargaining unit. The Company believes its relationship with its employees is good.

Competition

Alaska Pacific faces strong competition in its primary market area for the attraction of deposits (its primary source of lendable funds) and in the origination of loans. Its most direct competition for deposits has historically come from commercial banks and credit unions operating in its primary market area. The Bank competes with four commercial banks (including one Southeast Alaska based community bank, two large national banks and one statewide regional bank) and six credit unions in its primary market area. Particularly in times of high interest rates, Alaska Pacific has faced additional significant competition for investors’ funds from short-term money market securities, other corporate and government securities and credit unions. The Bank’s competition for loans also comes from mortgage bankers and

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Internet-based marketers. This competition for deposits and the origination of loans may limit Alaska Pacific’s future growth.

Alaska Pacific’s market share is approximately 1012.318% of deposits in Southeast Alaska, according to the FDIC Deposit Market Share Report; however, this calculation does not include deposits held by credit unions. If state-wide credit unions were included in this calculation as well as “non-bank” competitors such as brokerage firms and money market mutual funds, Alaska Pacific’s share would be somewhat less. Alaska Pacific’s largest competitor is Wells Fargo, with a market share of approximately 5447.74% of deposits. Wells Fargo acquired the former National Bank of Alaska in 2000, and Alaska Pacific has achieved some success in drawing customers away from Wells Fargo, especially small businesses, through a targeted calling effort and a marketing emphasis on the advantages of banking locally.

Item 1A – Risk Factors

An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. This report is qualified in its entirety by these risk factors.

Termination of the merger agreement could negatively impact Alaska Pacific.

If the merger agreement is terminated, there may be various consequences. For example, Alaska Pacific’s business may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of its management on the merger, without realizing any of the anticipated benefits of completing the merger, or the market price of Alaska Pacific common stock could decline to the extent that the current market price reflects a market assumption that the merger will be completed. If the merger agreement is terminated and Alaska Pacific’s board of directors seeks another merger or business combination, Alaska Pacific shareholders cannot be certain that Alaska Pacific will be able to find a party willing to pay the equivalent consideration than that which Northrim BanCorp has agreed to pay in the merger. In addition, if the merger agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by Alaska Pacific’s board of directors, Alaska Pacific may be required to pay Northrim BanCorp a termination fee of $600,000.

Our business may continue to be adversely affected by downturns in the national and local economy and the states where our out of market area loans are located.

Since the latter half of 2007, depressed economic conditions have prevailed in portions of the United States. Although our primary market of Southeast Alaska has up to this point in time and based upon its geographic location and diverse resource-based economy not experienced the serious problems as those of markets in the lower-48 states, those states where the Bank has participation loans, specifically in the States of Washington, Oregon, Idaho, California, Minnesota and Colorado were adversely affected. If there were to be a further decline of the economic conditions in our primary market area or these states, this could have an adverse effect on our business, financial condition, results of operations and prospects.

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Deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:

·	loan delinquencies, problem assets and foreclosures may increase;

·	we may increase our allowance for loan losses;

·	demand for our products and services may decline possibly resulting in a decrease in our total loans or assets;

·	collateral for loans, especially real estate, may decline further in value, exposing us to increased risk of loss on existing loans, reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans;

·	the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

·	the amount of our low-cost or non-interest-bearing deposits may decrease; and

·	the price of our common stock may decrease.

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As a result, local or regional economic downturns, or downturns that disproportionately affect one or more of the key industries in regions served by the Company, may have a more pronounced effect upon our business than they might on an institution that is less geographically concentrated. The extent of the future impact of these events on economic and business conditions cannot be predicted; however, prolonged or acute fluctuations could have a material and adverse impact upon our results of operation and financial condition.

Our emphasis on commercial non-residential real estate lending may expose us to increased lending risks.

Our current business strategy includes the expansion of small business lending in the region, with a focus on owner-occupied commercial non-residential real estate lending. This type of lending activity, while potentially more profitable than single-family residential lending, is generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. Collateral evaluation and financial statement analysis in these types of loans requires a more detailed analysis at the time of loan underwriting and on an ongoing basis. A further downturn in housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure.

At December 31, ~~2012~~2013, we had $32.07 million of multifamily residential and $7370.48 million of commercial non-residential real estate loans, representing 21.09% and 5048.03%, respectively, of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans, and repayment is dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. For example, if the cash flow from the borrower’s project is reduced as a result of leases not being obtained or renewed, the borrower’s ability to repay the loan may be impaired. Commercial and multifamily mortgage loans also expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate.

A secondary market for most types of commercial non-residential real estate loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans. As a result of these characteristics, if we foreclose on a commercial or multifamily real estate loan, our holding period for the collateral typically is longer than for one-to-four family residential mortgage loans because there are fewer potential purchasers of the collateral. Accordingly, charge-offs on commercial and multifamily real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.

The level of our commercial non-residential real estate loan portfolio may subject us to additional regulatory scrutiny.

The FDIC, the Federal Reserve and the OCC have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multifamily and non-farm residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. We have concluded that we have a concentration in commercial real estate lending under the foregoing standards because our $73.4 million balance in commercial real estate loans at December 31, 2012 represented 353% or more of total capital. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may

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total reported loans secured by multifamily and non-farm residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The particular focus of the guidance is on exposure to commercial non-residential real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. We have concluded that we have a concentration in commercial real estate lending under the foregoing standards because our $70.8 million balance in commercial non-residential real estate loans at December 31, 2013 represented 340% or more of total capital. While we believe we have implemented policies and procedures with respect to our commercial non-residential real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.

Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

At December 31, ~~2012~~2013, we had $2325.20 million or 1517.70% of total loans in commercial business loans. Commercial lending involves risks that are different from those associated with residential and commercial non-residential real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. Our commercial loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use, among other things. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral provided by the borrower.

Our business may be adversely affected by credit risk associated with residential property.

At December 31, ~~2012~~2013, $2118.42 million, or 1412.54% of our total loan portfolio, was comprised of one-to-four family residential mortgage loans and $98.17 million or 6.140% of our total loan portfolio consisted of home equity loans secured by residential property. This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in the housing markets has reduced the value of the real estate collateral securing these types of loans and increased the risk that we would incur losses if borrowers default on their loans. Continued declines in the housing market and the economy and the associated increases in unemployment may result in higher than expected residential loan delinquencies or problem assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity, and damage our financial condition and business operations. These declines may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose loan portfolios are more diversified.

High loan-to-value ratios on a portion of our residential mortgage loan portfolio exposes us to greater risk of loss.

Many of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because either we originated upon purchase a first mortgage with an 80% loan-to-value ratio, have originated a home equity loan with a combined loan-to-value ratio of up to 90% or because of the decline in home values in our market areas. Residential loans with high loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and, therefore, may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full ~~from the sale. As a result, these loans may experience higher rates of delinquencies, defaults and losses.~~

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from the sale. As a result, these loans may experience higher rates of delinquencies, defaults and losses.

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

Lending money is a substantial part of our business, and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things.

·	the cash flow of the borrower and/or the project being financed;

·	changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

·	the duration of the loan;

·	the credit history of a particular borrower; and

·	changes in economic and industry conditions.

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We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by our management through periodic reviews and consideration of several factors, including, but not limited to:

·	our general reserve, based on our historical default and loss experience and certain macroeconomic factors based on management’s expectations of future events; and

·	our specific reserve, based on our evaluation of nonperforming loans and their underlying collateral.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. Our allowance for loan losses was 1.2630% of total loans held for investment and 33.01% of nonperforming loans at December 31, ~~2012~~2013. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations and our capital.

If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as real estate owned (“REO”), and at certain other times during the assets holding period. Our net book value in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s net book value over its fair value less cost to sell. If our valuation process is incorrect, the fair value of our investments in real estate may not be sufficient to recover our net book value in such assets, resulting in the need for additional charge-offs. Additional material charge-offs to our investments in real estate could have a material adverse effect on our financial condition and results of operations.

In addition, bank regulators periodically review our REO and may require us to recognize further charge-offs. Any increase in our charge-offs, as required by such regulators, may have a material adverse effect on our financial condition and results of operations.

We may suffer losses in our loan portfolio despite our underwriting practices.

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We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan losses.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and advances from the FHLB of Seattle (“FHLB”), the Federal Reserve Bank of San Francisco ("SFRB") and other borrowings to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB or SFRB, or market conditions change. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general - such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in our primary market area of Southeast Alaska where our loans are concentrated or adverse regulatory action against us.

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industry or economy in general - such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in our primary market area of Southeast Alaska where our loans are concentrated or adverse regulatory action against us.

Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Although we consider our sources of funds adequate for our liquidity needs, we may seek additional debt in the future to achieve our long-term business objectives. Additional borrowings, if sought, may not be available to us or, if available, may not be available on reasonable terms. If additional financing sources are unavailable, or are not available on reasonable terms, our financial condition, results of operations, growth and future prospects could be materially adversely affected. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our capital resources will satisfy our capital requirements for the foreseeable future. Nonetheless, we may at some point need to raise additional capital to support growth.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition and liquidity, results of operations and prospects.

There are regulatory and contractual limitations that may limit or prevent us from paying dividends on our common stock and we may limit or eliminate our dividends to shareholders.

As an Alaska corporation, under Alaska law we are subject to restrictions on the payment of dividends. In addition, as a savings and loan holding company, the Company’s ability to declare and pay dividends is dependent on certain federal regulatory considerations. Alaska Pacific Bancshares is an entity separate and distinct from its principal subsidiary, Alaska Pacific Bank, and derives substantially all of its revenue in the form of dividends from this subsidiary. Accordingly, the Company is and will be dependent upon dividends from Alaska Pacific Bank to pay the principal of and interest on its indebtedness, to satisfy its other cash needs and to pay dividends on its common stock. Alaska Pacific Bank’s ability to pay dividends is subject to their ability to earn net income and to meet certain regulatory requirements. In the event the Bank is unable to pay dividends to Alaska Pacific Bancshares, the Company may not be able to pay its obligations or pay dividends on its common stock. Also, Alaska Pacific Bancshares’s right to participate in a distribution ~~of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.~~

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of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

Alaska Pacific Bancshares is also subject to certain regulatory restrictions that could prohibit it from declaring or paying dividends or making liquidation payments on its common stock. See “Regulation - Regulation and Supervision of the Company - Dividend Payments and Common Stock Repurchases” above. In addition, we are unable to pay any dividends on our common stock unless we are current in our dividend payments on the Series A Preferred Stock.

Our board of directors regularly reviews our dividend policy in light of current economic conditions for financial institutions as well as our capital needs and any applicable contractual restrictions. On a quarterly basis, the board of directors determines whether a dividend will be paid and in what amount, if any.

New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.

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The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company's stockholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect us are described in this report under the heading “Item 1. Business -- Regulation.” These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time.

~~Our~~If our investment in the Federal Home Loan Bank of Seattle ~~stock~~becomes ~~may~~impaired, ~~become~~our ~~impaired~~earnings and shareholders' equity could decrease.

At December 31, ~~2012~~2013, wethe ~~owned~~Company had recorded $1.87 million ofin FHLB stock, ofcompared ~~the~~to ~~Federal~~$1.8 ~~Home~~million ~~Loan~~at ~~Bank~~December ~~of Seattle~~31, ~~or FHLB~~2012. As aThe ~~condition~~Bank’s ofinvestments ~~membership~~in ~~at the~~ FHLB, westock are ~~required~~generally toviewed ~~purchase~~as ~~and hold~~ a ~~certain~~long-term ~~amount~~investment ~~of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB~~ and isare ~~calculated~~carried inat ~~accordance with the Capital Plan of the FHLB. Our FHLB stock has a~~ par value of ($100, ~~is carried at cost, and is subject to recoverability testing~~ per ~~accounting guidance for the impairment of long lived assets. The FHLB announced that it had a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency (the "FHFA"~~share), ~~its~~which ~~primary~~reasonably ~~regulator,~~approximates asits offair ~~December 31, 2008, and that it would suspend future dividends and the repurchase and redemption of outstanding common stock~~value. AsIt adoes ~~result, the FHLB has~~ not ~~paid~~have a ~~dividend~~readily ~~since~~determinable ~~the~~fair ~~fourth~~value. Ownership ~~quarter~~ of ~~2008. The~~ FHLB ~~has~~stock ~~communicated~~is ~~that~~restricted itto ~~believes~~ the ~~calculation of risk-based capital under the current rules of the FHFA significantly overstates the market risk of the~~ FHLB's ~~private-label~~and ~~mortgage-backed~~member ~~securities~~institutions inand ~~the~~can ~~current~~only ~~market~~be ~~environment~~purchased and ~~that~~redeemed itat ~~has enough capital to cover the risks reflected in its balance sheet~~par. As amembers ~~result,~~of ~~we have not recorded an OTTI on our investment in FHLB stock. However, further deterioration in~~ the FHLB's ~~financial position may result in impairment in the value of those securities. In addition~~system, ~~on October 25, 2010,~~ the ~~FHLB~~Banks ~~entered~~are ~~into a Consent Order with the FHFA. The Consent Order~~ required, ~~among~~to ~~other matters, the FHLB meet and~~ maintain ~~certain~~a minimum ~~financial~~level ~~requirements. The FHLB reported, in its Form 10-Q for the quarter ended September 30, 2012, that it continues to address the requirements~~ of ~~the~~investment ~~Consent Order and that, as of September 30, 2012, it met all minimum financial metrics required under the Consent Order. Further, the FHLB reported that~~ in ~~September 2012 the FHFA reclassified the~~ FHLB tostock bebased ~~adequately capitalized. [10-K for the year not yet filed] Any dividends~~ on, orspecific ~~repurchases~~percentages of, ~~the~~their ~~FHLB~~outstanding ~~stock continue to require consent of the FHFA. The FHFA recently approved the~~ FHLB ~~to repurchase a portion of its stock and $32,000 of FHLB stock was purchased from the Bank during 2012~~advances. The FHLB has not indicated when dividend payments may resume. We will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of our investment.

The Seattle FHLB announced that it had a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency (the FHFA), its primary regulator, as of December 31, 2008, and that it would suspend future dividends and the repurchase and redemption of outstanding common stock. The FHLB of Seattle announced September 7, 2012 that the FHFA now considers the FHLB of Seattle to be adequately capitalized. Dividends on, or repurchases of, the FHLB of Seattle stock continue to require consent of the FHFA. The FHFA subsequently approved the repurchase of portions of FHLB of Seattle stock, and as of December 31, 2013, the FHLB had repurchased $63,200 of the Bank’s stock. During the years ended December 31, 2012 and 2011, the Bank did not receive any dividend income on FHLB stock. The FHLB announced in July 2013 that, based on its second quarter 2013 financial results, their Board of Directors had declared a $0.025 per share cash dividend. For the year ended December 31, 2013, the Bank received $900 in dividends on FHLB stock. Based on the above, the Company has determined there is not any impairment on the FHLB stock investment as of December 31, 2013. Deterioration in the FHLB’s financial position may, however, result in future impairment in the value of those securities. The Company will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of the Bank's investment

Our results of operations, liquidity and cash flows are subject to interest rate risk.

Our earnings and cash flows are largely dependent upon net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities and (iii) the average duration of our mortgage-backed securities portfolio and other interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

-47-

and other interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market Risk and Asset/Liability Management” for additional information concerning interest rate risk.

If external funds were not available, this could adversely impact our growth and prospects.

We rely on deposits and advances from the FHLB of Seattle and other borrowings to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, we might not be able to replace such funds in the future if our financial condition or the financial condition of the FHLB of Seattle or market conditions were to change. While we consider such sources of funds adequate for our liquidity needs, we may be compelled or elect to seek additional sources of financing in the future. Likewise, we may seek additional debt in the future to achieve our long-term business objectives, in connection with future acquisitions or for other reasons. Additional borrowings, if sought, may not be available to us or, if available, may not be on reasonable terms. If additional financing sources are unavailable or not available on reasonable terms, our financial condition, results of operations and future prospects could be materially adversely affected.

-Changes 47in -laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations, increase our costs of operations and decrease our efficiency.

~~conditions~~The ~~were~~financial toservices ~~change~~industry is extensively regulated. ~~While~~Federal weand ~~consider~~state ~~such~~banking ~~sources~~regulations ofare designed primarily to protect the deposit insurance funds ~~adequate~~and ~~for~~consumers, not to benefit our ~~liquidity~~shareholders. Regulatory ~~needs~~authorities have extensive discretion in connection with their supervisory and enforcement activities, weincluding ~~may~~the beimposition ~~compelled~~of orrestrictions ~~elect~~on tothe ~~seek~~operation ~~additional~~of ~~sources~~an institution, the classification of ~~financing~~assets by the institution and the adequacy of an institution's allowance for loan losses. The significant federal and state banking regulations that affect us are described in this report under the ~~future~~heading “Item 1. Business-Regulation.” ~~Likewise~~These regulations, wealong ~~may~~with ~~seek~~the ~~additional~~currently ~~debt~~existing intax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the ~~future~~methods toby ~~achieve~~which ~~our~~financial ~~long-term~~institutions ~~business~~conduct ~~objectives~~business, inimplement ~~connection~~strategic ~~with~~initiatives ~~future~~and ~~acquisitions~~tax orcompliance, ~~for~~and ~~other~~govern ~~reasons~~financial reporting and disclosures. ~~Additional~~These ~~borrowings~~laws, ifregulations, ~~sought~~rules, standards, policies, and interpretations are constantly evolving and may ~~not~~change besignificantly ~~available~~over totime. Such changes could subject us ~~or,~~to ifadditional ~~available~~costs, limit the types of financial services and products we may ~~not~~offer, berestrict onmergers ~~reasonable~~and ~~terms~~acquisitions, investments, access to capital, the location of banking offices, and/or increase the ability of non-banks to offer competing financial services and products, among other things. IfFurther, ~~additional~~changes ~~financing~~in ~~sources~~accounting ~~are~~standards ~~unavailable~~can orbe ~~not~~both ~~available~~difficult onto ~~reasonable~~predict ~~terms~~and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition, and results of our operations as could our interpretation of those changes. The Dodd-Frank Act created a new Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and ~~future~~enforce ~~prospects~~consumer ~~could~~protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be ~~materially~~examined ~~adversely~~for ~~affected~~compliance with the consumer laws and regulations of the CFPB by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws. The Company does not currently have assets in excess of $10 billion.

~~The~~In ~~Dodd-Frank~~January 2013, ~~Wall~~the ~~Street~~CFPB ~~Reform~~issued several final regulations and ~~Consumer~~changes ~~Protection~~to ~~Act~~certain ~~will,~~consumer ~~among~~protections ~~other~~under ~~things~~existing laws. These final rules, ~~tighten~~most ~~capital~~of ~~standards~~the provisions of which (including the qualified mortgage rule) become effective January 10, ~~create~~2014, agenerally ~~new~~prohibit ~~Consumer~~creditors ~~Financial~~from ~~Protection~~extending ~~Bureau~~mortgage loans without regard for the consumer’s ability to repay and ~~result~~add inrestrictions ~~new~~and ~~laws~~requirements to mortgage origination and ~~regulations~~servicing ~~that~~practices. In ~~are~~addition, ~~expected~~these rules limit prepayment penalties and require the creditor to retain evidence of compliance with the ability-to-repay requirement for three years. Compliance with these rules will likely increase our overall regulatory compliance costs ofand ~~operations~~may require changes to our underwriting practices with respect to mortgage loans. Moreover, these rules may adversely affect the

~~The Dodd~~-Frank Act has significantly impacted the bank regulatory structure for financial institutions, as well as the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd48-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting and implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

~~Among~~volume ~~the many requirements in the Dodd-Frank Act for new banking regulations is a requirement for new capital regulations to be adopted within 18 months after the date~~ of ~~enactment~~mortgage ofloans ~~the~~that ~~Dodd-Frank~~we ~~Act.~~underwrite ~~These regulations must be at least as stringent as,~~ and may ~~call~~subject ~~for~~us ~~higher levels of capital than, current regulations. Generally, trust preferred securities will no longer be eligible as Tier 1 capital and outstanding TARP preferred securities will continue~~ to ~~qualify~~increased aspotential ~~Tier~~liabilities 1related ~~capital. In addition, the banking regulators are required~~ to ~~seek~~such toresidential ~~make~~loan ~~capital~~origination ~~requirements for banks and bank holding companies, countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction~~activities. ~~For more information, see “-The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules is uncertain.”~~

~~Certain~~The ~~provisions of the~~ Dodd-Frank Act ~~are~~requires ~~expected~~minimum toleverage ~~have~~(Tier a1) ~~near~~and ~~term~~risk-based ~~impact~~capital onrequirements ~~us.~~for ~~For~~savings ~~example,~~and aloan ~~provision~~holding ofcompanies ~~the~~and ~~Dodd-Frank~~bank ~~Act~~holding ~~eliminates~~companies ~~the~~that ~~federal~~are ~~prohibitions~~no onless ~~paying~~stringent ~~interest~~than onthose ~~demand~~applicable ~~deposits~~to banks, ~~thus~~which ~~allowing~~will ~~businesses~~limit our ability to ~~have~~borrow ~~interest~~at ~~bearing~~the ~~checking~~holding ~~accounts.~~company ~~Depending~~level onand ~~competitive~~invest ~~responses~~the proceeds from such borrowings as capital in the Bank, ~~this~~and ~~significant~~will ~~change~~exclude tocertain ~~existing~~instruments ~~law~~that ~~could~~previously have anbeen ~~adverse~~eligible ~~impact~~for oninclusion ~~our~~by ~~interest~~bank ~~expense~~holding companies as Tier 1 capital.

The Dodd-Frank Act also broadens the base for FDIC deposit insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution., rather than deposits. The Dodd-Frank Act also permanently ~~increased~~increases the maximum amount of deposit insurance for banks, savings institutions, and credit unions to $250,000 per depositor, retroactive to January 1, 2008. The legislation also increases the required minimum reserve ratio for the DIF, from 1.15% to 1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets.

~~The~~Effective December 10, 2013, pursuant to the Dodd-Frank Act, ~~requires~~federal ~~publicly~~banking ~~traded~~and ~~companies~~securities regulators issued final rules to ~~give~~implement ~~stockholders~~Section a619 ~~non~~of the Dodd-~~binding~~Frank ~~vote~~Act on(the ~~executive~~Volcker ~~compensation~~Rule). Generally, subject to a transition period and socertain exceptions, the Volcker Rule restricts insured depository institutions and their affiliated companies from engaging in short-~~called~~term ~~“golden~~proprietary ~~parachute~~trading of certain securities, investing in funds with collateral comprised of less than 100% loans that are not registered with the Securities and Exchange Commission (“SEC”) ~~payments.~~and ~~The~~from ~~legislation~~engaging ~~also~~in ~~directs~~hedging activities that do not hedge a specific identified risk. After the ~~Federal~~transition ~~Reserve~~period, tothe ~~promulgate~~Volcker ~~rules~~Rule ~~prohibiting~~prohibitions ~~excessive~~and ~~compensation~~restrictions ~~paid~~will apply to ~~executives~~banking entities unless an exception applies. We are analyzing the impact of ~~bank~~the ~~holding~~Volcker ~~company~~Rule ~~and~~on ~~savings~~our investment portfolio and ~~loan~~we ~~holding~~anticipate ~~company,~~changes ~~regardless~~to ofour ~~whether~~investment ~~the~~strategies, ~~company~~which iscould ~~publicly~~negatively ~~traded~~affect our earnings.

InThe ~~addition,~~full impact of the Dodd-Frank Act ~~created~~on aour ~~new~~business ~~Consumer~~will ~~Financial~~not ~~Protection~~be ~~Bureau,~~known oruntil ~~CFPB,~~all ~~with~~of ~~broad~~the ~~powers~~regulations toimplementing ~~supervise~~the ~~and~~statute ~~enforce~~are ~~consumer~~adopted ~~protection~~and ~~laws~~implemented. As ~~The~~a ~~CFPB~~result, ~~has~~we ~~broad~~cannot ~~rule-making~~at ~~authority~~this ~~for~~time apredict ~~wide~~the ~~range~~extent ofto ~~consumer~~which ~~protection~~the ~~laws~~Dodd-Frank ~~that~~Act ~~apply~~will toimpact ~~all~~our ~~banks and savings institutions~~business, ~~including~~operations ~~the~~or ~~authority~~financial ~~to prohibit “unfair~~condition. However, ~~deceptive~~compliance orwith ~~abusive”~~these ~~acts~~new laws and ~~practices.~~regulations ~~The~~may ~~CFPB~~require ~~has~~us ~~examination~~to ~~and~~make ~~enforcement~~changes ~~authority~~to ~~over~~our ~~all~~business ~~banks~~ and ~~savings~~operations ~~institutions~~and ~~with~~will ~~more~~likely ~~than~~result ~~$10 billion~~ in ~~assets.~~additional ~~Financial~~costs ~~institutions~~and ~~with~~divert ~~$10~~management’s ~~billion~~time orfrom ~~less~~other inbusiness ~~assets~~activities, ~~such~~any asof ~~the~~which ~~Bank,~~may ~~will~~adversely ~~continue~~impact toour beresults ~~examined~~of ~~for~~operations, ~~compliance~~liquidity ~~with~~or ~~the~~financial ~~consumer laws by their primary bank regulators~~condition.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on us. It is expected, however, that at a minimum, compliance with this law and implementing its regulations will increase our operating and compliance costs and could increase our interest expense. Any other additional changes in our regulation and oversight, whether in the form of new laws, rules or regulations, could likewise make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition or prospects.

- 48 -

financial condition or prospects. For additional information, see Item 1, “Business – Regulation – General.”

The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules is uncertain.

InOn ~~June~~July ~~2012~~9, ~~the Federal Reserve~~2013, the FDIC and the ~~OCC~~other ~~proposed~~federal ~~rules~~bank ~~that~~regulatory ~~would~~agencies ~~substantially~~issued ~~amend~~a ~~the~~final ~~regulatory~~rule that will revise their risk-based capital ~~rules~~requirements ~~applicable~~and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the ~~Company~~Basel Committee on Banking Supervision and certain provisions of the ~~Bank.~~Dodd-Frank Act. The ~~proposed~~final ~~rules~~rule ~~were~~applies ~~subject~~to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a ~~public~~higher ~~comment~~risk ~~period~~weight (150%) to exposures that ~~has~~are ~~expired~~more than 90 days past due or are on nonaccrual status and ~~there~~to iscertain nocommercial ~~date~~real ~~set~~estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the ~~adoption~~banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final ~~rules~~rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019,

~~Various provisions of the Dodd~~-~~Frank Act will increase the capital requirements of savings and loan holding companies, and bank holding companies. The leverage and risk~~49-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The proposed rules include new minimum risk-based capital and leverage ratios, which would be phased in during 2013 and 2014, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to First Financial Northwest and the Bank under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions. While the proposed Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict when or how any new standards will ultimately be applied to us.

Inwhen ~~addition, in~~ the ~~current~~full ~~economic and regulatory environment, regulators of financial institutions and their holding companies have become more likely to impose~~ capital ~~requirements~~conservation ~~that~~buffer ~~are~~requirement ~~more~~will ~~stringent~~be ~~than those required by applicable existing regulations~~effective.

~~The~~Under ~~application of more stringent capital requirements for~~ the ~~Company~~new ~~and the Bank could, among other things, result in lower returns on invested~~ capital, ~~require the raising of additional capital~~standards, ~~and result~~ in ~~regulatory~~order ~~actions if we were~~ to be ~~unable to comply with such requirements. Furthermore~~well-capitalized, the ~~imposition~~Bank ofwould ~~liquidity~~be ~~requirements~~required into ~~connection~~have ~~with~~a ~~the~~common ~~implementation~~equity ofTier ~~Basel~~1 ~~III~~risk-based ~~could~~capital ~~result~~ratio ~~in our having to lengthen the term~~ of ~~our funding~~6.5%, ~~restructure~~a ~~our~~Tier ~~business~~1 ~~models,~~leverage ~~and/or~~ratio ~~increase our holdings~~ of ~~liquid assets~~5.0%, ~~Implementation~~a ofTier ~~changes~~1 ~~to asset~~ risk ~~weightings for risk~~ -based capital ~~calculations,~~ratio ~~items~~of ~~included~~8.0% orand ~~deducted~~a intotal ~~calculating~~risk-based ~~regulatory~~ capital ~~and/or~~ratio ~~additional~~of ~~capital conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions, including paying out dividends or buying back shares~~10.0%.

The application of these more stringent capital requirements could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, including paying out dividends or buying back shares. Specifically, beginning in 2016, the Bank’s ability to pay dividends will be limited if does not have the capital conservation buffer required by the new capital rules, which may limit our ability to pay dividends to stockholders. See “Regulation and Supervision—Federal Banking Regulation—New Capital Rule.”

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.

Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.

Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

Managing reputational risk is important to attracting and maintaining customers, investors and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

We are subject to certain risks in connection with our use of technology.

Our security measures may not be sufficient to mitigate the risk of a cyber attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure

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processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.

Security breaches in our Internet banking activities could further expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our Internet banking services that involve the transmission of confidential information. We rely on standard Internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures, which could result in significant legal liability and significant damage to our reputation and our business.

Our security measures may not protect us from systems failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any failures or interruptions may require us to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

Increases in deposit insurance premiums and special FDIC assessments will negatively impact our earnings.

The Dodd-Frank Act established 1.35% of total insured deposits as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio by the statutory deadline of September 30, 2020. For institutions with assets less than $10 billion, the Dodd-Frank Act requires the FDIC to offset the effect of the increase in the minimum reserve ratio to 1.35% from the former minimum of 1.15%. The FDIC has not announced how it will implement this offset. In addition to the statutory minimum ratio, the FDIC must set a designated reserve ratio, which may exceed the statutory minimum. The FDIC has set 2.0% as the designated reserve ratio.

As required by the Dodd-Frank Act, the FDIC has adopted final regulations under which insurance premiums are based on an institution’s total assets minus its tangible equity instead of its deposits. While our FDIC premiums initially were reduced, it is possible that our insurance premiums will increase under these final regulations in future periods.

The loss of key members of our senior management team could adversely affect our business.

- 49 -

We believe that our success depends largely on the efforts and abilities of our senior management. Their experience and industry contacts significantly benefit us. The competition for qualified personnel in the financial services industry is intense, and the loss of any of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business.

-51-

Our real estate lending also exposes us to the risk of environmental liabilities.

In the course of our business, we may foreclose and take title to real estate, and we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.

Our information systems may experience an interruption or breach in security.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

We rely on third-party service providers for much of our communications, information, operating and financial control systems technology. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality, as found in our existing systems, without the need to expend substantial resources, if at all. Any of these circumstances could have an adverse effect on our business.

The operations of our business, including our interaction with customers, are increasingly done via electronic means, and this has increased our risks related to cybersecurity.

We are exposed to the risk of cyber-attacks in the normal course of business. In general, cyber incidents can result from deliberate attacks or unintentional events. We have observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as by causing denial-of-service attacks on websites. Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining information necessary to gain access. The objectives of cyber-attacks vary widely and can include theft of financial assets, intellectual property, or other sensitive information, including the information belonging to our banking customers. Cyber-attacks may also be directed at disrupting our operations.

While we have not incurred any material losses related to cyber-attacks, nor are we aware of any specific or threatened cyber-incidents as of the date of this report, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks. Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused;

- 50 -

increased cybersecurity protection costs that may include organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence.

We rely on dividends from Alaska Pacific Bank for most of our revenue.

Alaska Pacific Bancshares is a separate and distinct legal entity from Alaska Pacific Bank. We receive substantially all of our revenue from dividends from Alaska Pacific Bank. These dividends are the principal source of funds to pay dividends on our common stock. Various federal laws and regulations limit the amount of dividends that Alaska Pacific Bank may pay to Alaska Pacific Bancshares. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event the Bank is unable to pay dividends to the Company, we may not be able to pay obligations or pay dividends on Alaska Pacific’s common stock. The inability to receive dividends from the Bank could have a material adverse effect on our business, financial condition and results of operations. See Item 1, “Business - Regulation – Limitations on Capital Distributions.”

Our concentration of operations in Alaska and specifically the Southeast areas of Alaska make us more exposed to downturns in the State of Alaska and those areas.

Substantially all of our business is derived from operations in Alaska and specifically the Southeast areas of Alaska. The majority of our lending has been with Alaska businesses and individuals. Substantially all of these loans are collateralized and repayment is expected from the borrowers’ cash flow or, secondarily, the collateral. Our exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is proved to be of no value. The State of Alaska and Southeast areas rely primarily upon the natural resources industries, particularly mining and oil production, as well as tourism, government and U.S. military spending for their economic success. Our business is and will remain sensitive to economic factors that relate to these industries and local and regional business conditions. As a result, local or regional economic downturns, or downturns that disproportionately affect one or more of the key industries in regions served by the Company, may have a more pronounced effect upon its business than they might on an institution that is less geographically concentrated. The extent of the future impact of these events on economic and business conditions cannot be predicted; however, prolonged or acute fluctuations could have a material and adverse impact upon our results of operation and financial condition.

-52-

geographically concentrated. The extent of the future impact of these events on economic and business conditions cannot be predicted; however, prolonged or acute fluctuations could have a material and adverse impact upon our results of operation and financial condition.

Our estimated allowance for off-balance sheet liabilities may be inadequate.

In the normal course of business, the Bank incurs various off-balance sheet liabilities and contingent liabilities that are not presented in its financial statements. These off-balance sheet commitments and contingent liabilities include various guarantees and commitments to extend credit. In addition, the Bank originates, and subsequently sells, nearly all residential real estate loans into the secondary market. The Bank may be required to repurchase sold loans under certain circumstances. A separate reserve for probable off-balance sheet liabilities has not been established for potential losses and there can be no assurance that a reserve to cover off-balance sheet liability losses would be sufficient.

Item 1B. Unresolved Staff Comments.

Not applicable.

- 51 53-

Item 2. Properties

The following table sets forth certain information regarding Alaska Pacific’s offices at December 31, ~~2012~~2013.

Location	Year Opened	Square Footage		Deposits (in thousands)
Main Office:
Nugget Mall Office (1)	1984		16,000	$	8072,~~169~~381
2094 Jordan Avenue
Juneau, Alaska 99801
Branch Offices:
301 N. Franklin Street	1960		6,268		3032,~~714~~875
Juneau, Alaska 99801
410 Mission Street (2)	1974		2,300		1415,~~610~~123
Ketchikan, Alaska 99901
2442 Tongass Avenue (3)	1997		1,550		6,~~914~~808
Ketchikan, Alaska 99901
315 Lincoln Street (4)	1978		2,032		2427,~~074~~314
Sitka, Alaska 99835
Alaska Pacific Mortgage (5)
2092 Jordan Avenue, Suite 595	2003		2,500	Non-depository
Juneau, Alaska 99801

_____________

(1)	Lease expires in January 2019, with one 10-year option to renew.

(2) Lease expires in ~~February~~December 2014~~, with option to renew for one-year term~~.

(3) Lease ~~extension~~ expires in ~~February~~August 2014, with ~~two~~one 6-month ~~options~~option to renew.

(4) Lease expires in ~~December~~November ~~2013, with option to renew for five-year term~~2018.

~~(5)~~ Alaska ~~Lease~~Pacific ~~expires~~maintains 11 automated teller machines including six in ~~October~~the Juneau area, two in the Sitka area, two in the Ketchikan area, and one in Hoonah. At December 31, 2013, the net book value of Alaska Pacific’s properties and its fixtures, furniture and equipment was $3.0 million.

Alaska Pacific maintains 11 automated teller machines including six in the Juneau area, two in the Sitka area, two in the Ketchikan area, and one in Hoonah. At December 31, 2012, the net book value of Alaska Pacific’s properties and its fixtures, furniture and equipment was $3.2 million.

Item 3. Legal Proceedings

Periodically, there have been various claims and lawsuits involving the Bank, mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Bank.

Item 4. Mine Safety Disclosures

Not applicable.

- 52 54-

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is traded on the over-the-counter market through the OTC “Electronic Bulletin Board” under the symbol “AKPB.” As of December 31, ~~2012~~2013, there were approximately ~~343~~335 stockholders of record and 654,486 shares outstanding. The following table sets forth market price information of the Company’s stock for ~~2012~~2013 and ~~2011~~2012. In 2008 the Board of Directors determined to suspend the payment of dividends until the Company’s earnings improved. As a result, no dividend payments have been made during the years ended December 31, ~~2012~~2013 and ~~2011~~2012.

	Market Price
Years Ended December 31,	High		Low
2013:
First Quarter	$	11.99	$	8.90
Second Quarter		12.10		10.93
Third Quarter		12.75		11.35
Fourth Quarter		16.83		11.65
2012:
First Quarter	$	7.30	$	6.00
Second Quarter		8.30		7.25
Third Quarter		8.95		7.9970
Fourth Quarter		8.9099		7.55
2011:
First Quarter	$	7.80	$	6.00
Second Quarter		8.00		7.20
Third Quarter		8.00		6.00
Fourth Quarter		6.60		5.80

Dividends

Generally, if the Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed in the OCC regulations. However, an institution that has converted to the stock form of ownership may not declare or pay a dividend on, or repurchase any of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the liquidation account which was established in connection with the institution’s mutual-to-stock conversion.

The Bank is restricted by the amount of dividends it may pay to the Company. It is generally limited to the net income of the current fiscal year and that of the two previous fiscal years, less dividends already paid during those periods. Based on this calculation, at December 31, ~~2012~~2013, none of the Bank’s retained earnings were available for the payment of dividends to the Company. However, payment of dividends may be further restricted by Banking Regulators if such payment would reduce the Bank’s capital ratios below required minimums or would otherwise be considered to adversely affect the safety and soundness of the institution.

For additional information regarding the Company’s and the Bank’s restrictions on the payment of dividends, see Item 1A, Risk Factors. “There are regulatory and contractual limitations that may limit or prevent us from paying dividends on our common stock and we may limit or eliminate our dividends to shareholders.”

Equity Compensation Plan Information

The equity compensation plan information is presented under subparagraph (d) in Part III, Item 11 of this Form 10-K ~~is incorporated herein by reference~~.

Issuer Purchases of Equity Securities

During the year ended December 31, ~~2012~~2013, the Company had no purchases of its common stock.

- 53 55-

Item 6. Selected Financial Data

Not Applicable

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The Company is not engaged in any significant business activity other than holding the stock of the Bank. Accordingly, the information in this discussion applies primarily to the Bank. The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes included in Item 8 of this annual report. In the following discussion, except as otherwise noted, references to “~~2012~~2013” or “~~2011~~2012” indicate the year ended December 31, ~~2012~~2013 or ~~2011~~2012, respectively.

Our results of operations depend primarily on its net interest income, which is the difference between the income earned on its interest-earning assets, consisting of loans and investments, and the cost of its interest-bearing liabilities, consisting of deposits and FHLB borrowings. Our profitability is also affected by our provision for loan losses, the level of noninterest income and expenses and income tax provisions. Noninterest income includes service charges and fees and gain on sale of loans and investments. Noninterest expenses primarily include compensation and benefits, occupancy and equipment expenses, deposit insurance premiums and data processing expenses. General economic and competitive conditions, particularly changes in market interest rates, government legislation and policies concerning monetary and fiscal affairs, housing and financial institutions and the attendant actions of the regulatory authorities also significantly affect our results of operations.

Operating Strategy

Our strategy is to operate a community-oriented financial institution devoted to serving the needs of its customers. Our business consists primarily of attracting retail deposits from the general public and using those funds to originate residential real estate loans, land, construction, commercial non-residential real estate loans, commercial business loans, and a variety of consumer loans.

Financial Condition

Total assets were $~~182~~176.17 million at December 31, ~~2012~~2013, compared with $~~172~~182.1 million at December 31, ~~2011~~2012. The $105.04 million, or 53.80%, ~~increase~~decrease was primarily the result of ana ~~increase~~decrease in ~~cash~~total ~~and~~deposits ~~cash~~of ~~equivalents~~$2.0 asmillion and a ~~result~~decrease ~~of an increase~~ in ~~total~~FHLB ~~deposits~~advances of $9.3.0 million.

~~Loans~~Net ~~increased~~loans decreased $~~600~~1.9 million,~~000,~~ or 01.43%, to $~~148~~144.46 million at December 31, ~~2012~~2013 from $~~147~~146.85 million at December 31, ~~2011~~2012. The ~~increase~~decrease was largely attributable to ana ~~increase~~decrease in ~~commercial~~one-to-four-family ~~business~~mortgage loans and commercial non-residential real estate loans partially offset by aan ~~decrease~~increase in ~~residential~~construction ~~one-to-four family~~ and ~~home~~commercial ~~equity~~business loans.

Total commercial non-residential real estate loans ~~increased~~decreased 3.56% to $7370.48 million, or 4948.53% of the portfolio at December 31, ~~2012~~2013, from $7073.94 million, or 4849.05% of the portfolio at December 31, ~~2011~~2012. Land loans ~~decreased~~increased 31.69% to $8.13 million, or 5.56% of the portfolio at December 31, ~~2012~~2013, from $8.41 million, or 5.75% of the portfolio at December 31, ~~2011~~2012. Total commercial business loans increased 207.84% to $2325.20 million, or 1517.70% of the portfolio at December 31, ~~2012~~2013, from $1923.2 million, or 1315.07% of the portfolio at December 31, ~~2011~~2012.

~~Production of one~~-to56-four-family mortgage loans increased in 2012. Originations totaled $37.2 million in 2012, an 83.4% increase over the $20.3 million originated in 2011. Most of these loans were sold in the secondary market and, as a result, total one-to-four-family mortgages declined to 14.5% of the loan portfolio at December 31, 2012, compared with 16.6% of the loan portfolio at December 31, 2011.

Production of one-to-four-family 54mortgage loans decreased in 2013. Originations totaled $33.6 million in 2013, a 9.7% decrease compared to the $37.2 million originated in 2012. Most of these loans were sold in the secondary market and, as a result, total one-to-four-family mortgages declined to 12.4% of the loan portfolio at December 31, 2013, compared with 14.5% of the loan portfolio at December 31, 2012.

Cash and cash equivalents ~~increased~~decreased $~~7.7~~200,000 ~~million~~ to $18.86 million at December 31, ~~2012~~2013, compared to $1118.18 million at December 31, ~~2011~~2012.

Available-for-sale securities ~~decreased~~increased $1.43 million to $45.36 million at December 31, ~~2012~~2013, compared to $54.73 million at December 31, ~~2011~~2012. The ~~decrease~~increase was the result of investments purchased net of normal principal reductions on mortgage-backed securities.

Premises and equipment ~~increased~~decreased $~~700~~200,000 to $3.20 million at December 31, ~~2012~~2013, from $23.52 million at December 31, ~~2011~~2012. The ~~increase~~decrease ~~was~~in ~~attributable~~net tobook ~~the~~value ~~purchase~~was ofattributable ~~a vacant building in Ketchikan, Alaska~~ to bedepreciation ~~used~~and ~~for a branch office~~amortization.

Total deposits ~~increased~~decreased $92.30 million to $~~156~~154.5 million at December 31, ~~2012~~2013 from $~~147~~156.25 million at December 31, ~~2011~~2012. Money market accounts ~~increased~~decreased a total of $~~5.1~~400,000 ~~million~~ to $32.95 million at December 31, ~~2012~~2013 compared to $2732.89 million a year ago. During the same period, interest bearing demand deposits increased $12.42 million to $3436.45 million and non-interest bearing demand deposits ~~increased~~decreased $53.04 million to $3633.73 million. Certificates of deposit decreased $~~4.8~~800,000 ~~million~~ to $28.80 million at December 31, ~~2012~~2013 from $3328.68 million at December 31, ~~2011~~2012 as we managed this reduction by competing less aggressively for these deposits to reduce our cost of funds.

At December 31, ~~2012~~2013, ~~there~~$1.0 ~~were~~million noof the certificates of deposit ~~that~~ were brokered certificates of deposit obtained through the Certificate of Deposit Account Registry Service (“CDARS”)~~. At~~ ~~December 31, 2011, $377,000 of the certificates of deposit were brokered certificates of deposit obtained through~~ CDARS. These deposits carry interest rates that are generally higher than locally obtained certificates of deposit, but which are generally lower than FHLB advances. There were no certificates of deposit that were brokered certificates of deposit obtained through CDARS at December 31, 2012.

There were no FHLB advances at December 31, 2013. FHLB advances were $3.0 million at ~~both~~ December 31, 2012 ~~and December 31, 2011~~.

Results of Operations

Net Income. For the year ended December 31, ~~2012~~2013, the Company reported net income available to common shareholders of $~~166~~13,000, or $0.2202 per diluted share, after recording $~~300~~180,000 provision for loan losses and $~~152~~552,000 provision for income tax. This compares to a net income available to common shareholders of $~~631~~166,000, or $0.8722 per diluted share at December 31, ~~2011~~2012, after recording $~~373~~300,000 provision for loan losses and no$152,000 provision ~~or benefit~~ for income tax ~~in 2011~~. The net income in ~~2012~~2013 was primarily attributable to an increase in ~~net~~noninterest ~~revenues~~income and decrease in noninterest expense offset by an increase in ~~noninterest~~provision ~~expense~~for income tax. For purposes of comparison, net income available to common shareholders may be separated into major components as follows:

							Income Increase
(in thousands) Year ended December 31,	2012			2011			(Decrease)
Net interest income	$	7,892		$	7,891		$	1
Gain on sale of loans		570			286			284
Other noninterest income		1,226			1,114			112
Net revenues		9,688			9,291			397
Noninterest expense		(8,757	)		(7,977	)		(780	)
Subtotal		931			1,314			(383	)
Provision for loan losses		(300	)		(373	)		73
Income before income tax		631			941			(310	)
Income tax provision		(152	)		-			(152	)
Net Income		479			941			(462	)
Preferred stock dividend and discount accretion		(313	)		(310	)		(3	)
Net income available to common shareholders	$	166		$	631		$	(465	)

-57-

Net Interest Income. Net interest income increased $1,000 and was $7.9 million in both 2012 and in 2011. The increase was due to a combination of factors, including a decrease in interest expense. See the tables in “--Average

							Income Increase
(in thousands) Year ended December 31,	2013			2012			(Decrease)
Net interest income	$	7,815		$	7,892		$	(77	)
Gain on sale of loans		570			570			-
Other noninterest income		1,487			1,226			261
Net revenues		9,872			9,688			184
Noninterest expense		(8,811	)		(8,757	)		(54	)
Subtotal		1,061			931			130
Provision for loan losses		(180	)		(300	)		120
Income before income tax		881			631			250
Income tax provision		(552	)		(152	)		(400	)
Net Income		329			479			(150	)
Preferred stock dividend and discount accretion		(316	)		(313	)		(3	)
Net income available to common shareholders	$	13		$	166		$	(153	)

Net Interest Income. Net interest income decreased $77,000 and was $7.8 million in 2013 compared to $7.9 million in 2012. The decrease was due to a combination of factors, including a decrease in interest income offset with a decrease in interest expense. See the tables in “--Average 55Balances, Interest and Average Yields/Cost” and in “--Rate/Volume Analysis” elsewhere in this discussion. The net interest margin on average earning assets was 4.59% for 2013 compared with 4.72% in 2012 reflecting a decrease in yield on interest earning assets partially offset with a decline in cost of funds. Nonaccrual loans were $5.8 million and $5.7 million at December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, approximately $168,000 and $234,000, respectively, of interest would have been recorded if these loans had been current according to their original terms.

~~Balances,~~Average ~~Interest~~loans ~~and~~(including ~~Average~~nonperforming ~~Yields/Cost”~~loans and inloans ~~“--Rate/Volume~~held ~~Analysis”~~for ~~elsewhere~~sale) indecreased ~~this discussion~~$1.7 million, ~~The~~or ~~net interest margin on average earning assets was 4~~1.721%, ~~for~~to ~~2012 compared with 4~~$149.~~80%~~2 million in ~~2011~~2013 ~~reflecting~~from ~~a decrease in yield on interest earning assets partially offset with a decline in cost of funds. Nonaccrual loans were~~ $5150.79 million ~~and~~in ~~$2.8 million at December 31,~~ 2012 ~~and 2011, respectively~~. ~~As of December 31, 2012 and 2011, approximately $234,000 and $75,000, respectively, of interest would have been recorded if these loans had been current according to their original terms.~~

~~Average~~Noninterest ~~loans~~Income. The ~~(including~~gain ~~nonperforming~~on ~~loans~~sale ~~and~~of loans ~~held~~was ~~for sale) increased~~ $~~5.3 million~~570,000 orin ~~3.6%,~~both to2013 ~~$150.9 million~~and in 2012 ~~from $145~~.~~6 million in 2011.~~

~~Noninterest~~Excluding ~~Income. The~~ gain on sale of loans, noninterest income increased $~~284~~261,000, or 21.3%, to $~~570,000~~1.5 million in ~~2012~~2013 ~~from~~compared with $~~286,000~~1.2 million in ~~2011~~2012. The asincrease awas ~~result~~primarily ofin anmortgage ~~increase~~servicing ~~one-~~income due to~~-four~~ ~~family~~the fair value adjustment to mortgage ~~loan~~servicing rights net of originations ~~due~~and todisposals ~~continued~~of ~~low~~$271,000 ~~interest~~in ~~rate~~2013 ~~environment~~compared ~~and~~with ~~mortgage~~$(35,000) ~~refinance~~in ~~activity~~2012.

~~Excluding~~Noninterest ~~gain~~Expense. Noninterest onexpense ~~sale~~was ~~of loans, noninterest income increased~~ $~~112,000, or 10~~8.~~1%,~~8 ~~to $1.2~~ million in ~~2012~~both ~~compared~~2013 ~~with~~and $12012.1 Professional ~~million~~and inconsulting ~~2011. The~~fees ~~increase~~were ~~was~~higher ~~primarily~~ in ~~mortgage~~2013 ~~servicing~~compared ~~income due~~ to ~~the~~2012, ~~fair~~offset ~~value~~with ~~adjustment~~lower toreal ~~mortgage~~estate ~~servicing~~owned ~~rights net of originations~~ and ~~disposals~~repossessed ofasset ~~$(35~~expense,~~000)~~ inFDIC ~~2012~~assessment ~~compared~~and ~~with~~other ~~$(144,000) in 2011~~expenses.

~~Noninterest~~Income ~~Expense~~Tax. ~~Noninterest~~During ~~expense~~the third quarter of 2013, the Company increased its provision for income taxes by $~~780~~208,000, orand ~~9.8%,~~deferred toincome ~~$8.8~~tax ~~million~~assets inwere ~~2012~~reduced ~~from~~for ~~$8.0~~amounts ~~million~~determined innot ~~2011. The~~to ~~net~~be ~~increase~~realizable in ~~expense~~future periods. There was ~~attributable~~no tovaluation ~~higher~~allowance ~~compensation~~for ~~and~~deferred ~~benefit~~tax ~~costs,~~assets ~~professional~~at ~~and~~December ~~consulting fees~~31, ~~higher real~~2013 ~~estate~~or ~~owned~~2012. Provision ~~and~~for ~~repossessed~~income ~~asset~~tax ~~expense~~was $552,000 ~~and~~in ~~other~~2013 ~~expenses~~compared with $152,000 in 2012.

Income Tax. During the fourth quarter of 2012, the Company reduced its net deferred tax asset and the valuation allowance in the amount of $94,000 primarily due to the utilization of net operating losses for federal and state purposes. There was no valuation allowance for deferred tax assets at December 31, 2012. Provision for income tax was $152,000 in 2012 compared with no provision or benefit for income tax in 2011.

Provision and Allowance for Loan Losses

Provisions for loan losses are charges to earnings to bring the total allowance for loan losses to a level considered by management to be adequate to provide for known and inherent risks in the loan portfolio, including management's continuing analysis of factors underlying the quality of the loan portfolio.

The provision for loan losses decreased $73120,000 to $~~300~~180,000 for ~~2012~~2013 from $~~373~~300,000 for ~~2011~~2012. The provision for both years was considered appropriate in order for the allowance for loan losses to reflect management's best estimate of losses inherent in the loan portfolio. The allowance for loan losses was $1.9 million at both December 31, ~~2012~~2013 and ~~December 31, 2011. The provision and the resulting allowance are reflective of numerous factors, including the following:~~

~~· Loan losses. Net loan charge offs were $289,000 (0.19% of total loans) in 2012 compared with $91,000 (0.06% of total loans) in 2011.~~-58-

~~· Growth and composition of the portfolio. Total loans increased $600,000 to $148.4 million at~~ December 31, 2012 ~~compared with $147~~.~~8 million at December 31, 2011.~~ The ~~increase~~provision ~~reflects~~and ~~gradual changes in~~ the ~~loan~~resulting ~~portfolio~~allowance ~~composition~~are ~~away~~reflective ~~from~~of ~~single-family~~numerous ~~mortgages and home equity loans~~factors, ~~moving~~including ~~to a greater proportion of commercial business and commercial real estate. Management considered~~ the ~~higher relative risk of these loans in assessing the adequacy of the allowance.~~following:

· ~~Management~~Loan ~~analysis of loans~~losses. AsNet ~~part~~loan ofcharge anoffs ~~assessment~~were ~~of the adequacy of the allowance~~$146,000 ~~management performed a detailed review of individual loans for which full collectability may not be assured. Loans judged to be impaired amounted to $11.6 million~~ (70.810% of total loans) atin ~~December~~2013 ~~31, 2012,~~ compared with $~~12.0~~289,000 ~~million~~ (80.119% of total loans) atin ~~December 31, 2011. An allowance for loan loss at both December 31,~~ 2012 ~~and 2011 for estimated impairments of $473,000 was established for these loans~~.

-· 56Growth and composition of the portfolio. Total loans decreased $1.9 million to $146.5 million at December 31, 2013 compared with $148.4 million at December 31, 2012. The decrease reflects gradual changes in the loan portfolio composition away from single-family mortgages and home equity loans, moving to a greater proportion of commercial business and construction loans. Management considered the higher relative risk of these loans in assessing the adequacy of the allowance.

· ~~Past-due~~Management analysis of loans. As part of an assessment of the adequacy of the allowance, management performed a detailed review of individual loans for which full collectability may not be assured. Loans judged to be impaired amounted to $10.1 Atmillion (6.9% of total loans) at December 31, ~~2012~~2013, compared with $511.06 million, ~~or 3~~(7.38% of total ~~loan~~loans) ~~balances~~at ~~were~~December ~~past~~31, ~~due~~2012. 30An ~~days~~allowance orfor ~~more~~loan loss at both December 31, ~~compared~~2013 ~~with~~and 2012 for estimated impairments of $~~329~~473,000, orwas ~~$0.2%~~established atfor ~~December~~these ~~31, 2011~~loans.

· ~~Nonperforming~~Past-due ~~and classified loans~~Loans. ~~Nonaccrual~~At ~~loans were $5.7 million (3.8% of total loans) at~~ December 31, ~~2012~~2013, ~~compared with~~ $21.69 million, (or 1.83% of total ~~loans)~~loan atbalances ~~December~~were ~~31,~~past ~~2011.~~due ~~Loans,~~30 ~~less~~days ~~guaranteed amounts, classified as “substandard”~~ or ~~“doubtful” were $7.2 million (4.8% of total loans) at December 31~~more, ~~2012~~ compared with $65.70 million, (4or 3.63% ~~of total loans)~~ at December 31, ~~2011~~2012.

Nonperforming and classified loans. Nonaccrual loans were $5.8 million (3.9% of total loans) at December 31, 2013, compared with $5.7 million (3.8% of total loans) at December 31, 2012. Loans, less guaranteed amounts, classified as “substandard” or “doubtful” were $6.8 million (4.7% of total loans) at December 31, 2013 compared with $7.2 million (4.8% of total loans) at December 31, 2012.

Economic conditions. Management considered known economic conditions in each of the geographic areas in which the Bank makes loans. For the last several years, Southeast Alaska’s economy has been relatively “flat” but stable, and management knows of no current economic conditions that warrant expectations of significant decline in the Bank’s markets. However, uncertainties in both the national and local economies have been considered in assessing the allowance.

Our evaluation of the adequacy of the allowance for loan losses is one of its most critical management processes and is also the most subjective. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions and other events might result in adjustment to the allowance if circumstances differ substantially from the assumptions used in making the final determination. One or more of these events could have a significant effect on net income, and the effect could be both material and adverse.

For further information on our accounting for the allowance for loan losses as well as how loan impairment is determined, see Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

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Average Balances, Interest and Average Yields/Cost

Our earnings depend largely on the spread between the yield on interest-earning assets, which consist primarily of loans and investments, and the cost of interest-bearing liabilities, which consist primarily of deposit accounts and borrowings, as well as the relative size of our interest-earning assets and interest-bearing liabilities.

The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities. Average balances are generally daily averages for the period.

(dollars in thousands) Year ended December 31,				~~2012~~2013								~~2011~~2012
	Average Balance			Interest		Average Yield/ Cost			Average Balance			Interest		Average Yield/ Cost
Interest-earning assets:
Loans (1)	$	~~150~~149,~~930~~219		$	8,~~309~~082		5.5142	%	$	~~145~~150,~~562~~930		$	8,~~420~~309		5.7851	%
Investment securities (1)		7,~~257~~352			~~131~~116		1.8158			7,~~004~~257			~~128~~131		1.8381
Interest-earning deposits in banks		813,~~868~~843			1935		0.2125			118,~~827~~868			3319		0.2821
Total interest-earning assets		~~167~~170,~~055~~414			8,~~459~~233		54.0683			~~164~~167,~~393~~055			8,~~581~~459		5.2206
Allowance for loan losses		(1,~~901~~947	)							(1,~~929~~901	)
Cash and due from banks		1,~~854~~682								1,~~940~~854
Other assets		6,~~790~~932								86,~~224~~790
Total assets	$	~~173~~177,~~798~~081							$	~~172~~173,~~628~~798
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	3234,~~508~~536		$	1314		0.04	%	$	32,~~746~~508		$	1413		0.04	%
Money market		3033,~~939~~404			7271		0.2321			2730,~~570~~939			6472		0.23
Savings		2123,~~613~~729			2116		0.1007			2021,~~214~~613			2021		0.10
Certificates of deposit		3027,~~863~~652			~~348~~292		1.1306			3430,~~616~~863			~~456~~348		1.3213
Total interest-bearing deposits		~~115~~119,~~923~~321			~~454~~393		0.3933			115,~~146~~923			~~554~~454		0.4839
Borrowings		~~3,133~~686			~~113~~25		3.6164			3,~~466~~133			~~136~~113		3.9261
Total interest-bearing liabilities		~~119~~120,~~056~~007			~~567~~418		0.4835			~~118~~119,~~612~~056			~~690~~567		0.5848
Noninterest-bearing demand deposits		3234,~~606~~146								3132,~~124~~606
Mortgage escrows		~~1,024~~985								1,~~071~~024
Other liabilities		~~504~~1,126								~~1,713~~504
Shareholders’ equity		20,~~608~~817								20,~~108~~608
Total liabilities and shareholders’ equity	$	~~173~~177,~~798~~081							$	~~172~~173,~~628~~798
Net interest income				$	7,~~892~~815							$	7,~~891~~892
Interest rate spread							4.5848	%							4.6458	%
Net interest margin:
On average interest-earning assets							4.7259	%							4.8072	%
On average total assets							4.5441								4.5754
Ratio of average interest-earning assets
Ratio of average interest-earning assets to average interest-bearing liabilities		142.00	%							140.32	%
to average interest-bearing liabilities		133.77	%							130.94	%

(1) Average loans include nonperforming loans and loans held for sale. Interest income does not include interest on nonaccrual loans. Average investment securities includes FHLB stock.

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Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to effects on interest income attributable to changes in volume, which are changes in volume multiplied by prior rate; effects on interest income attributable to changes in rate, which are changes in rate multiplied by prior volume; and changes in rate/volume, which is a change in rate multiplied by change in volume.

(in thousands) Year ended December 31, 2012 compared with year ended 2011	Rate			Volume			Rate/ Volume			Total
(in thousands) Year ended December 31, 2013 compared with year ended 2012	Rate			Volume			Rate/ Volume			Total
Interest-earning assets:
Loans	$	(~~407~~134	)	$	~~311~~(94	)	$	~~(15~~1	)	$	(~~111~~227	)
Investment securities		(216	)		52			-(1	)		3(15	)
Interest-earning deposits in banks		(83	)		(811	)		2			~~(14~~16	)
Total net change in interest income		(~~417~~147	)		~~308~~(81	)		~~(13~~2	)		(~~122~~226	)
Interest-bearing liabilities:
Interest-bearing demand accounts		(1-	)		-1			-			(1	)
Money market accounts		-(6	)		86			-(1	)		8(1	)
Savings accounts		-(6	)		12			-(1	)		1(5	)
Certificates of deposit		(6622	)		(4936	)		72			(~~108~~56	)
Borrowings		~~(11~~1	)		(1388	)		(1	)		(2388	)
Total net change in interest expense		(7833	)		(53115	)		8(1	)		(~~123~~149	)
Net change in net interest income	$	(~~339~~114	)	$	~~361~~34		$	~~(21~~3	)	$	1(77	)

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Yields Earned and Rates Paid

The following table sets forth, at the date and for the periods indicated, the weighted average yields earned on our assets and the weighted average interest rates paid on our liabilities, together with the net yield on interest-earning assets.

	At December 31,			For the Year Ended December 31,
	2012			2012			2011
	2013			2013			2012
Weighted average yield on:
Loans		5.8241	%		5.5142	%		5.7851	%
Investment securities		21.5144			1.8158			1.8381
Interest-earning deposits in banks		0.2721			0.2125			0.2821
Total interest-earning assets		54.1672			54.0683			5.2206
Weighted average rate paid on:
Interest-bearing demand accounts		0.0703			0.04			0.04
Money market accounts		0.2418			0.2321			0.23
Savings accounts		0.05			0.1007			0.10
Certificates of deposit		10.0593			1.1306			1.3213
Total interest-bearing deposits		0.3529			0.3933			0.4839
Borrowings		~~3.92~~-			3.6164			3.9261
Total interest-bearing liabilities		0.4423			0.4835			0.5848
Interest rate spread		4.7143			4.5848			4.6458
Net interest margin on:
Average interest-earning assets		--			4.7259			4.8072
Average total assets		--			4.5441			4.5754

Liquidity and Capital Resources

Our primary sources of funds are deposits, proceeds from principal and interest payments on loans and mortgage-backed securities, and FHLB advances. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank’s primary investing activity has been the origination of loans, including one-to-four-family mortgages, commercial non-residential real estate loans, commercial business loans, and consumer loans, deposits, FHLB borrowings, and principal repayments on loans and mortgage-backed securities were the primary means for funding these activities.

We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. As disclosed in our Consolidated Statements of Cash Flows in Item 8 of this Annual Report on Form 10-K, cash and cash equivalents ~~increased~~decreased $~~7.7~~200,000 ~~million~~ to $18.86 million at December 31, ~~2012~~2013, from $1118.18 million at December 31, ~~2011~~2012. Our sources of funds include deposits, principal and interest payments from loans and investments, and FHLB advances. During ~~2012~~2013 and ~~2011~~2012, we used our sources of funds primarily to fund new loans and to pay maturing certificates and other deposit withdrawals. At December 31, ~~2012~~2013, we had loan commitments including unused portions of lines of credit and undisbursed construction loans, of $1516.91 million.

At December 31, ~~2012~~2013, we had $~~181~~24,000 of net unrealized ~~gains~~losses on investment securities classified as available for sale, which represented 40.4% of the amortized cost ($45.16 million) of the securities. This represented ~~an increase of $13,000 compared with $168,000 of net unrealized gains at December 31, 2011, primarily as~~ a ~~result~~decrease of ~~changes in~~

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$205,000 compared with $181,000 of net unrealized gains at December 31, 2012, primarily as a result of changes in market demand~~. Movements~~ and movements in market interest rates will continue to affect the unrealized gains and losses in these securities. However, assuming that the securities are held to their individual dates of maturity, even in periods of increasing market interest rates, as the securities approach their dates of maturity, any unrealized gains or losses will begin to decrease and will eventually be eliminated.

At December 31, ~~2012~~2013, certificates of deposit amounted to $28.80 million, or 18.41% of our total deposits, including $2118.49 million scheduled to mature by December 31, ~~2012~~2014. Historically, we have been able to retain a significant amount of its deposits as they mature. Management believes it has adequate resources to fund all loan commitments with deposits and, as needed, FHLB advances and sale of mortgage loans and that it can adjust the offering rates of certificates of deposits to retain deposits in changing interest rate environments. In addition, the Bank has available a line of credit with the FHLB generally equal to the lower of 25% of the Bank’s total assets, or pledged collateral of approximately $4445.75 million at December 31, ~~2012~~2013, of which $41.7 million was unused. At December 31, ~~2012~~2013, there was $32.0 million outstanding on the line.

Given these sources of liquidity and our expectations for cash needs, we believe our sources of liquidity to be sufficient in the foreseeable future. However, continued deterioration in the FHLB of Seattle’s financial position may result in impairment in the value of our FHLB stock, the requirement that we contribute additional funds to recapitalize the FHLB of Seattle, or a reduction in the Bank’s ability to borrow funds from the FHLB of Seattle, impairing our ability to meet liquidity demands.

Recent Accounting Pronouncements

See “Item 8. Financial Statements and Supplementary Data -- Notes to Consolidated Financial Statements -- Note 1 Recent Accounting Pronouncements.”

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Qualitative Analysis - Risks When Interest Rates Change. Our profitability depends primarily on its net interest income, which is the difference between the income it receives on its loan and investment portfolios and its cost of funds, which consists of interest paid on deposits and borrowings. The relative amounts of interest-earning assets and interest-bearing liabilities also affect net interest income. When interest-earning assets equal or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. General economic and competitive conditions, particularly changes in market interest rates, government legislation and regulation, and monetary and fiscal policies also significantly affect the Bank’s results of operations.

Quantitative Analysis - How the Bank Measures Its Risk of Interest Rate Changes. The Bank does not maintain a trading account for any class of financial instrument nor does it engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Bank has no significant foreign currency exchange rate risk or commodity price risk.

The Bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. Principal elements in achieving this objective include increasing the interest-rate sensitivity of the Bank’s interest-earning assets by originating for its portfolio loans with interest rates that periodically adjust to market conditions, as well as continuing decisions to sell fixed-rate mortgage production versus keeping them in the portfolio.

The Bank relies on retail deposits as its primary source of funds. Historically, retail deposits, compared to brokered deposits and borrowed funds, tend to reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.

In order to encourage institutions to reduce interest rate risk, the federal banking regulators adopted a rule incorporating an interest rate risk component into its risk-based capital rules. The Bank compiles and measures interest rate risk utilizing an Asset and Liability Management software program. The program measures net portfolio value, which is the present value of expected cash flows from assets, liabilities and off-balance-sheet contracts. The calculation is intended to illustrate the change in net portfolio value that will occur upon an immediate change in interest rates of at ~~least 200 basis points with no effect given to any steps that management might take to counter the effect of that interest~~

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least 200 basis points with no effect given to any steps that management might take to counter the effect of that interest rate movement. Under OCC regulations, an institution with a greater than “normal” level of interest rate risk takes a deduction from total capital for purposes of calculating its risk-based capital. An institution with a “normal” level of interest rate risk is defined as one whose “measured interest rate risk” is less than 2.0%. Institutions with assets of less than $300 million and a risk-based capital ratio of more than 12.0% are exempt. The Bank is exempt because of its asset size and risk-based capital ratio. Based on the Bank’s regulatory capital levels at December 31, ~~2012~~2013, the Bank believes that, if the proposed regulation had been implemented at that date, the Bank’s level of interest rate risk would not have caused it to be treated as an institution with greater than “normal” interest rate risk.

The following table illustrates the change in net portfolio value at December 31, ~~2012~~2013, based assumptions that would occur in the event of an immediate change in interest rates, with no effect given to any steps which management might take to counter the effect of that interest rate movement.

(dollars in thousands)			Net Portfolio Value								Net Portfolio as % of Portfolio Value of Assets
Basis Point (“bp”) Change in Rates			Dollar Amount		Dollar Change (1)			Percent Change			Net Portfolio Value Ratio (2)			Change (3)
	300	bp	$	3036,~~240~~076	$	~~167~~3,165			09.6	%		1620.5938	%		94287	bp
	200			3135,~~188~~638		12,~~116~~726			38.73			1619.7871			~~113~~220
	100			3134,~~535~~744		1,~~463~~833			45.96			1618.6682			~~101~~131
	0			3032,~~072~~910		-			-			1517.6551			-
	(50	)		2933,~~838~~140		~~(234~~230	)		(0.87	)		1517.3233			(3318	)
	(100	)		3134,~~415~~983		12,~~343~~072			46.53			1517.9097			~~(25~~46	)

(1)	Represents the increase (decrease) of the estimated net portfolio value at the indicated change in interest rates compared to the net portfolio value assuming no change in interest rates.

(2)	Calculated as the estimated net portfolio value divided by the portfolio value of total assets.

(3)	Calculated as the increase (decrease) of the net portfolio value ratio assuming the indicated change in interest rates over the estimated net portfolio value ratio assuming no change in interest rates.

The above table illustrates, for example, that at December 31, ~~2012~~2013 an instantaneous 200 basis point increase in market interest rates would increase the Bank’s net portfolio value by $12.57 million, or 48.93%, and an instantaneous 100 basis point decrease in market interest rates would increase the Bank’s net portfolio value by $12.31 million.

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The following table summarizes key exposure measures for the dates indicated. They measure the change in net portfolio value ratio for an adverse change in interest rates of 200 basis points (“bp”) upward.

	December 31, 2012			September 30, 2012			December 31, 2011
	December 31, 2013			September 30, 2013			December 31, 2012
Pre-shock net portfolio value ratio		1517.6551	%		1517.2449	%		1315.7665	%
Post-shock net portfolio value ratio		1619.7870	%		1720.4910	%		1416.3278	%
Decline in net portfolio value ratio		0	bp		0	bp		0	bp

These measures indicate a relatively low level of interest-rate risk at the present time. Among other factors, this is attributable to management’s decisions in recent years to effect a relative decrease in fixed-rate mortgages and a gradual shift to earning assets that tend to reprice with greater frequency.

The asset liability management program uses certain assumptions in assessing interest rate risk. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the table.

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

	Page No.
Report of Independent Registered Public Accounting Firm	6567
Consolidated Balance Sheets as of December 31, 2012 and 2011	66
Consolidated Balance Sheets as of December 31, 2013 and 2012	68
Consolidated Statements of Income For the Years Ended
December 31, 2012 and 2011	67
December 31, 2013 and 2012	69
Consolidated Statements of Comprehensive Income For the Years Ended
Consolidated Statements of Comprehensive (Loss) Income For the Years Ended
December 31, 2012 and 2011	68
December 31, 2013 and 2012	70
Consolidated Statements of Changes in Shareholders’ Equity For the
Consolidated Statements of Changes in Shareholders’ Equity For the Years Ended December 31, 2013 and 2012	71
Years Ended December 31, 2012 and 2011	69
Consolidated Statements of Cash Flows For the Years Ended December 31, 2013 and 2012	72
Consolidated Statements of Cash Flows For the Years Ended
Notes to Consolidated Financial Statements	74
December 31, 2012 and 2011	70
Notes to Consolidated Financial Statements	72

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Alaska Pacific Bancshares, Inc. and Subsidiary

Juneau, Alaska

We have audited the accompanying consolidated balance sheets of Alaska Pacific Bancshares, Inc. and Subsidiary (the Company) as of December 31, ~~2012~~2013 and ~~2011~~2012, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alaska Pacific Bancshares, Inc. and Subsidiary as of December 31, ~~2012~~2013 and ~~2011~~2012, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Moss Adams LLP

Everett, Washington

March 2225, ~~2013~~2014

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Alaska Pacific Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

(in thousands) December 31,	2013			2012
Assets
Cash and due from banks	$	1,484		$	1,417
Interest-earning deposits in banks		17,068			17,334
Total cash and cash equivalents		18,552			18,751
Investment securities available for sale, at fair value (amortized cost: 2013 - $5,591; 2012 - $4,072)		5,567			4,253
Federal Home Loan Bank stock, at cost		1,689			1,752
Loans held for sale		-			3,247
Loans		146,477			148,370
Less allowance for loan losses		(1,910	)		(1,876	)
Loans, net		144,567			146,494
Accrued interest receivable		556			602
Premises and equipment, net		2,961			3,224
Real estate owned and repossessed assets		368			344
Mortgage servicing rights, at fair value		1,334			1,063
Other assets		1,079			2,347
Total Assets	$	176,673		$	182,077

(in thousands) December 31,	2012			2011
Liabilities and Shareholders’ Equity
Assets
Deposits:
Cash and due from banks	$	16,492		$	8,307
Noninterest-bearing demand	$	33,308		$	36,684
Interest-earning deposits in banks		2,259			2,751
Interest-bearing demand		36,546			34,357
Total cash and cash equivalents		18,751			11,058
Money market		32,479			32,932
Investment securities available for sale, at fair value (amortized cost: 2012 - $4,072; 2011 - $5,546)		4,253			5,714
Savings		24,182			23,738
Federal Home Loan Bank stock, at cost		1,752			1,784
Certificates of deposit		27,986			28,770
Loans held for sale		3,247			976
Total deposits		154,501			156,481
Loans		148,370			147,766
Federal Home Loan Bank advances		-			3,000
Less allowance for loan losses		(1,876	)		(1,865	)
Advance payments by borrowers for taxes and insurance		652			630
Loans, net		146,494			145,901
Accounts payable and accrued expenses		464			321
Accrued interest receivable		602			585
Accrued interest payable		56			88
Premises and equipment, net		3,224			2,451
Other liabilities		233			757
Real estate owned and repossessed assets		344			880
Total liabilities		155,906			161,277
Mortgage servicing rights, at fair value		1,063			1,098
Commitments and contingencies (Note 14)
Other assets		2,347			1,610
Shareholders’ Equity:
Total Assets	$	182,077		$	172,057
Preferred stock ($0.01 par value; 1,000,000 shares authorized; Series A – Liquidation preference $1,000 per share, 4,781 shares issued and outstanding at December 31, 2013 and 2012, respectively)		4,781			4,704
Common stock ($0.01 par value; 20,000,000 shares authorized; 655,415 shares issued; 654,486 shares outstanding at December 31, 2013 and 2012)		7			7
Additional paid-in capital		6,497			6,497
Treasury stock		(11	)		(11	)
Retained earnings		9,469			9,456
Accumulated other comprehensive income		24			147
Total shareholders’ equity		20,767			20,800
Total Liabilities and Shareholders’ Equity	$	176,673		$	182,077
See notes to consolidated financial statements.

Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	36,684		$	31,748
Interest-bearing demand		34,357			33,033
Money market		32,932			27,843
Savings		23,738			20,987
Certificates of deposit		28,770			33,590
Total deposits		156,481			147,201
Federal Home Loan Bank advances		3,000			3,000
Advance payments by borrowers for taxes and insurance		630			691
Accounts payable and accrued expenses		321			331
Accrued interest payable		88			131
Other liabilities		757			161
Total liabilities		161,277			151,515
Commitments and contingencies (Note 14)
Shareholders’ Equity:
Preferred stock ($0.01 par value; 1,000,000 shares authorized; Series A – Liquidation preference $1,000 per share, 4,781 shares issued and outstanding at December 31, 2012 and 2011, respectively)		4,704			4,631
Common stock ($0.01 par value; 20,000,000 shares authorized; 655,415 shares issued; 654,486 shares outstanding at December 31, 2012 and 2011)		7			7
Additional paid-in capital		6,497			6,486
Treasury stock		(11	)		(11	)
Retained earnings		9,456			9,290
Accumulated other comprehensive income		147			139
Total shareholders’ equity		20,800			20,542
Total Liabilities and Shareholders’ Equity	$	182,077		$	172,057
See notes to consolidated financial statements.

-68-

- 66 -

Alaska Pacific Bancshares, Inc. and Subsidiary

Consolidated Statements of Income

(in thousands, except per share) Year ended December 31,	2013		2012
Interest Income
Loans, including fees	$	8,082	$	8,309
Investment securities		116		131
Interest-earning deposits in banks		35		19
Total interest income		8,233		8,459
Interest Expense
Deposits		393		454
Federal Home Loan Bank advances		25		113
Total interest expense		418		567
Net Interest Income		7,815		7,892
Provision for loan losses		180		300
Net interest income after provision for loan losses		7,635		7,592
Noninterest Income
Mortgage servicing income, net		616		295
Service charges on deposit accounts		573		632
Other service charges and fees		298		284
Gain on sale of loans		570		570
Gain on sale of available for sale securities		-		15
Total noninterest income		2,057		1,796
Noninterest Expense
Compensation and benefits		4,571		4,537
Occupancy and equipment		1,470		1,435
Data processing		297		271
Professional and consulting fees		928		541
Marketing and public relations		263		244
Real estate owned and repossessed assets, net		75		285
Regulatory assessments		145		246
Other		1,062		1,198
Total noninterest expense		8,811		8,757
Income before provision for income taxes		881		631
Provision for income taxes		552		152
Net Income	$	329	$	479
Preferred stock dividend and discount accretion
Preferred stock dividend	$	239	$	240
Preferred stock discount accretion		77		73
Net income available to common shareholders	$	13	$	166

Net income per share:
Basic	$	0.02	$	0.25
Diluted		0.02		0.22

See notes to consolidated financial statements.

(in thousands, except per share) Year ended December 31,	2012		2011
Interest Income
Loans, including fees	$	8,309	$	8,420
Investment securities		131		128
Interest-earning deposits in banks		19		33
Total interest income		8,459		8,581
Interest Expense
Deposits		454		554
Federal Home Loan Bank advances		113		136
Total interest expense		567		690
Net Interest Income		7,892		7,891
Provision for loan losses		300		373
Net interest income after provision for loan losses		7,592		7,518
Noninterest Income
Mortgage servicing income, net		295		211
Service charges on deposit accounts		632		647
Other service charges and fees		284		255
Gain on sale of loans		570		286
Gain on sale of available for sale securities		15		-
Other noninterest income		-		1
Total noninterest income		1,796		1,400
Noninterest Expense
Compensation and benefits		4,537		4,321
Occupancy and equipment		1,435		1,326
Data processing		271		274
Professional and consulting fees		541		450
Marketing and public relations		244		235
Real estate owned and repossessed assets, net		285		140
Regulatory assessments		246		235
Other		1,198		996
Total noninterest expense		8,757		7,977
Income before provision for income taxes		631		941
Provision for income taxes		152		-
Net Income	$	479	$	941
Preferred stock dividend and discount accretion
Preferred stock dividend	$	240	$	241
Preferred stock discount accretion		73		69
Net income available to common shareholders	$	166	$	631
Net income per share:
Basic	$	0.25	$	0.96
Diluted		0.22		0.87
See notes to consolidated financial statements.

-69-

- 67 -

Alaska Pacific Bancshares, Inc. and Subsidiary

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Comprehensive Income

(in thousands), Year Ended December 31	2013			2012
Net income available to common shareholders	$	13		$	166
Other comprehensive income
Unrealized (loss) gains on investment securities available for sale, net of tax		(123	)		17
Reclassification adjustment for realized gains on sale of investment securities available for sale (net of tax expense of $6 for the year ended December 31, 2012)		-			(9	)
Comprehensive (loss) income	$	(110	)	$	174

(in thousands), Year Ended December 31	2012			2011
Net income available to common shareholders	$	166		$	631
Other comprehensive income
Unrealized gains on investment securities available for sale, net of tax		17			47
Reclassification adjustment for realized gains on sale of investment securities available for sale (net of tax expense of $6 for the year ended December 31, 2012)		(9	)		-
Comprehensive income	$	174		$	678

See notes to consolidated financial statements.

- 68 70-

Alaska Pacific Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

(in thousands)	Number of Shares Issued Preferred Stock		Number of Shares Issued Common Stock		Preferred Stock		Common Stock		Additional Paid-In Capital		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total Share- holders’ Equity
Balance, January 1, 2012		5		655	$	4,631	$	7	$	6,486	$	(11	)	$	9,290		$	139		$	20,542
Comprehensive income:
Net income															479						479
Change in net unrealized gains on securities available for sale, net of tax																		8			8
Comprehensive income																					487
Stock compensation expense										11											11
Accretion of preferred stock discount						73									(73	)					-
Cash dividends on preferred stock															(240	)					(240	)
Balance, December 31, 2012		5		655		4,704		7		6,497		(11	)		9,456			147			20,800
Comprehensive income:
Net income															329						329
Change in net unrealized loss on securities available for sale, net of tax																		(123	)		(123	)
Comprehensive income																					206
Accretion of preferred stock discount						77									(77	)					-
Cash dividends on preferred stock															(239	)					(239	)
Balance, December 31, 2013		5		655	$	4,781	$	7	$	6,497	$	(11	)	$	9,469		$	24		$	20,767

(in thousands)	Number of Shares Issued Preferred Stock		Number of Shares Issued Common Stock		Preferred Stock		Common Stock		Additional Paid-In Capital		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income		Total Share- holders’ Equity
Balance, January 1, 2011		5		655	$	4,562	$	7	$	6,470	$	(11	)	$	8,659		$	92	$	19,779
Comprehensive income:
Net income															941					941
Change in net unrealized gains on securities available for sale, net of tax																		47		47
Comprehensive income																				988
Stock compensation expense										16										16
Accretion of preferred stock discount						69									(69	)				-
Cash dividends on preferred stock															(241	)				(241	)
Balance, December 31, 2011		5		655		4,631		7		6,486		(11	)		9,290			139		20,542
Comprehensive income:
Net income															479					479
Change in net unrealized gains on securities available for sale, net of tax																		8		8
Comprehensive income																				487
Stock compensation expense										11										11
Accretion of preferred stock discount						73									(73	)				-
Cash dividends on preferred stock															(240	)				(240	)
Balance, December 31, 2012		5		655	$	4,704	$	7	$	6,497	$	(11	)	$	9,456		$	147	$	20,800

See notes to consolidated financial statements.

- 69 71-

Alaska Pacific Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(in thousands) Year ended December 31,	2013			2012
Operating Activities
Net income	$	329		$	479
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		180			300
Decrease in valuation allowance for deferred income tax assets		-			(94	)
Deferred income tax expense		392			108
Gain on sale of loans		(570	)		(570	)
Fair value adjustment on mortgage servicing rights, net		(271	)		35
Depreciation and amortization		310			301
Amortization of fees, discounts, and premiums, net		(226	)		(136	)
Stock compensation expense		-			11
Loans originated for sale		(27,685	)		(34,537	)
Proceeds from sale of loans originated for sale		31,502			32,836
Loss on sale and impairment of real estate owned and repossessed assets, net		8			240
Gain on sale of investment securities available for sale		-			(15	)
Cash provided by (used in) changes in operating assets and liabilities:
Accrued interest receivable		46			(17	)
Other assets		1,083			(540	)
Advance payments by borrowers for taxes and insurance		22			(61	)
Accrued interest payable		(32	)		(43	)
Accounts payable and accrued expenses		143			(10	)
Other liabilities		(524	)		596
Net cash provided by (used in) operating activities		4,707			(1,333	)
Investing Activities
Purchase of investment securities available for sale		(3,000	)		(258	)
Maturities and principal repayments of investment securities available for sale		1,459			1,149
Proceeds from sale of investment securities available for sale		-			569
Proceeds from FHLB stock redemption		63			32
Loan originations, net of principal repayments		563			(884	)
Purchase of premises and equipment		(47	)		(1,074	)
Proceeds from sale of real estate owned and repossessed assets		1,275			452
Net cash provided by (used in) investing activities		313			(14	)
Financing Activities
Cash dividends paid on preferred stock		(239	)		(240	)
Repayments on Federal Home Loan Bank advances		(3,000	)		-
Net (decrease) increase in demand and savings deposits		(1,196	)		14,100
Net decrease in certificates of deposit		(784	)		(4,820	)
Net cash provided by financing activities		(5,219	)		9,040
(Decrease) increase in cash and cash equivalents		(199	)		7,693
Cash and cash equivalents at beginning of year		18,751			11,058
Cash and cash equivalents at end of year	$	18,552		$	18,751

(in thousands) Year ended December 31,	2012			2011
Operating Activities
Net income	$	479		$	941
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		300			373
Decrease in valuation allowance for deferred income tax assets		(94	)		(377	)
Gain on sale of loans		(570	)		(286	)
Fair value adjustment on mortgage servicing rights, net		35			144
Depreciation and amortization		301			278
Amortization of fees, discounts, and premiums, net		(136	)		(167	)
Stock compensation expense		11			16
Loans originated for sale		(34,537	)		(17,496	)
Proceeds from sale of loans originated for sale		32,836			17,256
Loss on sale and impairment of real estate owned and repossessed assets, net		240			57
Gain on sale of investment securities available for sale		(15	)		-
Cash provided by (used in) changes in operating assets and liabilities:
Accrued interest receivable		(17	)		19
Other assets		(648	)		1,116
Advance payments by borrowers for taxes and insurance		(61	)		(4	)
Accrued interest payable		(43	)		(64	)
Accounts payable and accrued expenses		(10	)		(552	)
Other liabilities		596			11
Net cash provided by (used in) operating activities		(1,333	)		1,265
Investing Activities
Purchase of investment securities available for sale		(258	)		(6,173	)
Maturities and principal repayments of investment securities available for sale		1,149			2,669
Proceeds from sale of investment securities available for sale		569			-
Proceeds from FHLB stock redemption		32			-
Loan originations, net of principal repayments		(884	)		(6,272	)
Purchase of premises and equipment		(1,074	)		(144	)
Proceeds from sale of real estate owned and repossessed assets		452			1,397
Net cash used in investing activities		(14	)		(8,523	)
Financing Activities
Cash dividends paid on preferred stock		(240	)		(360	)
Repayments on Federal Home Loan Bank advances		-			(2,000	)
Net increase in demand and savings deposits		14,100			3,689
Net decrease in certificates of deposit		(4,820	)		(4,036	)
Net cash provided by (used in) financing activities		9,040			(2,707	)
Increase (decrease) in cash and cash equivalents		7,693			(9,965	)
Cash and cash equivalents at beginning of year		11,058			21,023
Cash and cash equivalents at end of year	$	18,751		$	11,058

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- 70 -

Alaska Pacific Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (continued)

Supplemental information:
Cash paid for interest	$	450		$	610
Cash paid for income taxes		352			222
Loans foreclosed and transferred to real estate owned and repossessed assets		1,307			156
Transfer of real estate owned and repossessed assets to receivables within other assets for guaranteed balances		126			-
Change in unrealized gains and losses on securities available for sale, net of tax		(123	)		13
Accrued preferred stock dividends		31			31
See notes to consolidated financial statements.

(in thousands) Year ended December 31,		2012		2011
Supplemental information:
Cash paid for interest	$	610	$	754
Cash paid for (received from) income taxes		222		(222	)
Loans foreclosed and transferred to real estate owned and repossessed assets		156		543
Change in unrealized gains and losses on securities available for sale		13		78
Accrued preferred stock dividends		31		31
See notes to consolidated financial statements.

-73-

- 71 -

Alaska Pacific Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

Note 1 – Summary of Significant Accounting Policies

Nature of Operations: The accompanying consolidated financial statements include the accounts of Alaska Pacific Bancshares, Inc. (the “Alaska Pacific”) and its wholly owned subsidiary, Alaska Pacific Bank (the “Bank”). Alaska Pacific and the Bank are collectively referred to as the “Company.” All significant intercompany transactions have been eliminated in consolidation.

Alaska Pacific was formed in 1999 when the Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank, issuing 655,415 shares in a subscription and community offering. Concurrent with the conversion, the Bank changed its name from Alaska Federal Savings Bank to Alaska Pacific Bank.

The Bank provides a range of financial services to individuals and small businesses primarily in Southeast Alaska. The Bank’s financial services include accepting deposits from the general public and making residential and commercial non-residential real estate loans, consumer loans, and commercial loans. The Bank also originates, sells, and services residential mortgage loans under several federal and state mortgage-lending programs.

Alaska Pacific is a savings and loan holding company and is subject to regulation by the Board of Governors of the Federal Reserve Bank of San Francisco (“Federal Reserve”) as the successor to the Office of Thrift Supervision (“OTS”). The Bank is regulated by the Office of the Comptroller of the Currency (“OCC”). Alaska Pacific and the Bank undergo periodic examination by these regulatory agencies.

Basis of Presentation and Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and impaired loans, mortgage servicing rights, fair value of financial instruments, and deferred tax assets. Actual results could differ from these estimates.

Subsequent Events: ~~The~~Proposed ~~Company~~Merger ~~has~~With ~~evaluated~~Northrim ~~events~~BanCorp, Inc. On October 21, 2013 Northrim BanCorp, Inc. (“Northrim BanCorp”) (NASDAQ: NRIM) and ~~transactions~~Alaska ~~subsequent~~Pacific Bancshares, Inc. signed a definitive agreement for Northrim BanCorp to ~~December~~acquire 31Alaska Pacific in a stock and cash transaction. In connection with the transaction, ~~2012~~Alaska ~~for~~Pacific ~~potential~~will ~~recognition~~merge into a wholly-owned subsidiary of Northrim BanCorp, and ~~disclosure~~Alaska Pacific Bank will merge with and into Northrim Bank.

~~Reclassifications: Certain~~The ~~amounts~~board indirectors ~~prior-period~~of ~~financial~~both ~~statements~~companies ~~have~~unanimously ~~been~~approved ~~reclassified~~the totransaction, ~~conform~~which was approved by Alaska Pacific’s shareholder’s on March 11, 2014, and is subject to ~~the~~approval ~~current-period~~applicable ~~presentation~~bank regulators, as well as other closing conditions. ~~These~~ ~~reclassifications~~Alaska ~~had~~Pacific nowill ~~effect~~redeem onits ~~net~~outstanding ~~income~~preferred orstock ~~shareholders~~in ~~equity~~full prior to the closing of the transaction.

-74-

information concerning the proposed merger shareholders are urged to read the Proxy Statement/Prospectus and the other related documents filed with the SEC.

The Company has evaluated events and transactions subsequent to December 31, 2013 for potential recognition and disclosure.

Preferred Stock Redemption On March 24, 2014, Alaska Pacific Bancshares (“Company”) redeemed the shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”) originally issued in February 2009 to the U.S. Treasury Department (“Treasury”) under the Treasury’s Capital Purchase Program. The 4,781 shares of Series A Preferred Stock were redeemed at the liquidation value of $1,000 per share. The redemption was a result of the requirements of the merger agreement that was filed on a Form 8-k and described in the merger proxy. After the redemption, the Company is still considered to be well capitalized under all regulatory guidelines.

Reclassifications: Certain amounts in prior-period consolidated financial statements have been reclassified to conform to the current-period presentation. These reclassifications had no effect on consolidated net income or shareholders equity.

Cash and Cash Equivalents: Cash equivalents are any highly liquid investment with a remaining maturity of three months or less at the date of purchase. The Company has cash and cash equivalents on deposit with other banks and financial institutions in amounts that periodically exceed the federal insurance limit. The Company evaluates the credit quality of these banks and financial institutions to mitigate its credit risk.

Statement of Cash Flows: The statement of cash flows has been prepared using the “indirect” method for presenting cash flows from operating activities. For purposes of this statement, cash and cash equivalents include cash and due from banks and interest-bearing deposits with banks all with maturities of three months or less.

Investment Securities: Investments are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale, or (3) trading. The Company had no held-to-maturity or trading securities at December 31, ~~2012~~2013 or ~~2011~~2012. Investments are categorized as held-to-maturity when we have the positive intent and ability to hold them to maturity. Investments available-for-sale are recorded at fair value. Unrealized gains and losses on investments available-for-sale are excluded from earnings and are reported in other comprehensive (loss) income, net of applicable taxes within the Consolidated Statement of Comprehensive (Loss) Income. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

- 72 -

Investments available-for-sale are recorded at fair value. Unrealized gains and losses on investments available-for-sale are excluded from earnings and are reported in other comprehensive income, net of applicable taxes within the Consolidated Statement of Comprehensive Income. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

The estimated fair value of investments is based on quoted market prices for investments traded in the public marketplace or dealer quotes. Mortgage-backed investments represent participation interest in pools of first mortgage loans originated and serviced by the issuers of the investments.

Amortization of purchase premiums and discounts are included in investment income using the level-yield method over the remaining period to contractual maturity.

Management makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. Management considers many factors including the severity and duration of the impairment, recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be an other-than-temporary impairment (“OTTI”) are written down to fair value. For equity securities, the write-down is recorded as a realized loss in noninterest income in the Consolidated Statements of Income. For debt securities, if management intends to sell the security or it is likely that management will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If management does not intend to sell the security and it is not likely that management will be required to sell the security but management does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI.

~~Loans: Loans are recorded at their outstanding principal balance adjusted for charge~~-offs, the ALLL and net deferred fees or costs. Interest on loans is calculated using the simple interest method based on the month end balance of the principal amount outstanding and is credited to income as earned.75-

effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI.

Loans: Loans are recorded at their outstanding principal balance adjusted for charge-offs, the ALLL and net deferred fees or costs. Interest on loans is calculated using the simple interest method based on the month end balance of the

principal amount outstanding and is credited to income as earned.

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in the process of collection. Consumer and other loans are typically managed in the same manner. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is doubtful.

All interest accrued but not collected on loans that are placed on nonaccrual is reversed against interest income. The interest on these loans is accounted for on the cash-basis until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. In order to return a nonaccrual loan to accrual status, each loan is evaluated on a case-by-case basis. We evaluate the borrower's financial condition to ensure that future loan payments are reasonably assured. The Company also takes into consideration the borrower's willingness and ability to make the loan payments and historical repayment performance. The Company requires the borrower to make the loan payments consistently for a period of at least six months as agreed to under the terms of the modified loan agreement before we will consider reclassifying the loan to accrual status.

Loans Held for Sale: Loans held for sale consist primarily of residential mortgage loans and are individually valued at the lower of cost or fair value less estimated selling costs. Loans are recorded as sold when the loan documents are sent to the investor. Gains or losses on sale of loans are recognized at settlement date based on the difference between the selling price and the carrying value of the related loans sold. Loan sales are made with and without recourse.

- 73 -

Allowance For Loan Losses: The Company accounts for the credit risk associated with lending activities through its allowance for loan losses and provision for loan and lease losses. The provision is the expense recognized in the consolidated statements of income to adjust the allowance to the levels deemed appropriate by management, as determined through application of the Company’s allowance methodology procedures. The provision for loan and lease losses reflects management’s judgment of the adequacy of the allowance for loan and lease losses. Loan and lease losses are charged against the allowance when management believes the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is maintained at a level believed to be sufficient to absorb losses probable and inherent in the loan portfolio.

The allowance consists of general, specific and unallocated components. The general component covers loans not specifically measured for impairment and is based on historical loss experience adjusted for qualitative factors. The specific component relates to loans that are impaired. For impaired loans an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The unallocated allowance provides for other credit losses inherent in the Company’s loan portfolio that may not have been contemplated in the general and specific components of the allowance. This unallocated amount generally comprises less than 10% of the allowance. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends.

Loans are deemed to be impaired when management determines that it is probable that all amounts due under the contractual terms of the loan agreements will not be collectible in accordance with the original loan agreement. All problem-graded loans are evaluated for impairment. Impairment is measured by comparing the fair value of the collateral or present value of future cash flows to the recorded investment in the loan. Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

-76-

problem-graded loans are evaluated for impairment. Impairment is measured by comparing the fair value of the collateral or present value of future cash flows to the recorded investment in the loan. Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Mortgage Servicing Rights: The Company measures all servicing assets at fair value at the time of sale. The Company uses a model derived valuation methodology to estimate the fair value of mortgage servicing rights, (“MSR”), obtained from an independent broker on an annual basis. The model pools loans into buckets of homogeneous characteristics and performs a present value analysis of the future cash flows. The buckets are created by individual loan characteristics such as note rate, product type, and the remittance schedule. Current market rates are utilized for discounting the future cash flows. Significant assumptions used in the valuation of MSR include discount rates, projected prepayment speeds, escrow calculations, ancillary income, delinquencies and option adjusted spreads.

Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on the straight-line method over the estimated useful lives of the assets: 20 to 50 years for buildings, five to ~~ten~~10 years for leasehold improvements depending on lease term, and three to 10 years for furniture and equipment. Expenditures for improvements and major renewals are capitalized and ordinary maintenance and repairs are charged to operations as incurred.

Long-lived assets are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, estimated future cash flows expected to result from the use of the asset and its eventual disposition are compared with the carrying value, and a direct writedown is recorded for the amount of impairment, if any.

Real Estate Owned And Repossessed Assets: Real estate or other collateral acquired in satisfaction of a loan is initially recorded in repossessed assets at the lower of cost or estimated fair value less estimated selling costs, with any difference from the loan balance charged to the allowance for loan losses. Subsequent changes in estimated fair value result in writing down the properties, directly or through valuation accounts. Such writedowns and gains and losses on disposal, as well as operating income and costs incurred during the period of ownership, are recognized currently in noninterest expense.

-Federal 74Home -Loan Bank Stock: The Bank’s investment in Federal Home Loan Bank of Seattle (“FHLB”) stock is carried at cost because there is no active market for the stock. As a member of the FHLB System, the Bank is required to maintain a minimum level of investment in FHLB stock based on specified percentages of its outstanding mortgages, total assets or FHLB advances. The Bank’s minimum investment requirement was approximately $191,400 and $209,000 at December 31, 2013 and 2012, respectively. The Bank may request redemption at par value on any stock in excess of the amount the Bank is required to hold. Stock redemptions are granted at the discretion of the FHLB. This security is reported at par value, which represents the Company’s cost. Management reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock.

~~difference~~Management ~~from~~periodically ~~the~~evaluates ~~loan~~FHLB ~~balance~~stock ~~charged~~for toother-than-temporary or permanent impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ~~allowance~~ultimate ~~for~~recoverability ~~loan~~of ~~losses~~cost rather than by recognizing temporary declines in value. ~~Subsequent~~The ~~changes~~determination inof ~~estimated~~whether ~~fair~~a ~~value~~decline ~~result~~affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in ~~writing~~net ~~down~~assets of the ~~properties~~FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, ~~directly~~(2) orcommitments ~~through~~by ~~valuation~~the ~~accounts. Such~~FHLB ~~writedowns~~to make payments required by law or regulation and ~~gains~~the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and ~~losses~~regulatory changes on ~~disposal~~institutions and, asaccordingly, ~~well~~the ascustomer ~~operating~~base ~~income~~of the FHLB, and ~~costs~~(4) ~~incurred~~the ~~during~~liquidity position of the ~~period~~FHLB. As of ~~ownership~~December 31, ~~are~~2013, ~~recognized~~management ~~currently~~has concluded that the Bank’s investment in ~~noninterest~~FHLB ~~expense~~stock is not impaired.

~~Federal~~Advertising ~~Home Loan Bank Stock~~Expense: ~~The~~Advertising ~~Bank’s~~costs ~~investment~~are inexpensed ~~Federal~~as ~~Home Loan Bank of Seattle (“FHLB”) stock is carried at cost because there is no active market for the stock~~incurred. AsAdvertising aexpense member of the FHLB System, the Bank is required to maintain a minimum level of investment in FHLB stock based on specified percentages of its outstanding mortgages, total assets or FHLB advances. The Bank’s minimum investment requirement was ~~approximately~~ $~~209~~178,000 and $~~216~~174,~~100~~000 atfor the years ended December 31, ~~2012~~2013 and ~~2011~~2012, respectively. The Bank may request redemption at par value on any stock in excess of the amount the Bank is required to hold. Stock redemptions are granted at the discretion of the FHLB. This security is reported at par value, which represents the Company’s cost. Management reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock.

~~Management periodically evaluates FHLB stock for other~~-~~than~~77-temporary or permanent impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB. As of December 31, 2012, management has concluded that the Bank’s investment in FHLB stock is not impaired.

Advertising Expense: Advertising costs are expensed as incurred. Advertising expense was $174,000 and $165,000 for the years ended December 31, 2012 and 2011, respectively.

Income Taxes: The Company accounts for income tax using the asset and liability method. The asset and liability method recognizes the amount of tax payable at the date of the financial statements as a result of all events that have been recognized in the financial statements, as measured by the provisions of current enacted tax laws and rates. Net deferred tax assets are evaluated and reduced through a valuation allowance to the extent that it is more likely than not that such assets will not be fully recovered in the future.

Treasury Stock: Treasury stock is accounted for on the basis of average cost at the time of buyback, or $12.375 per share at December 31, ~~2012~~2013 and ~~2011~~2012.

Employee Stock Ownership Plan: Compensation expense under the Company’s Employee Stock Ownership Plan (“ESOP”) includes expense for administering the plan. No shares held by the ESOP were unallocated at December 31, ~~2012~~2013 and ~~2011~~2012.

~~Earnings~~EARNINGS ~~Per~~PER ~~Share~~SHARE: Basic earnings per common share (“EPS”) is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Stock Option Plan: The Company accounts for its stock option plans in accordance with the provisions of ASC 718, Stock Compensation, which establishes accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans and requires that the compensation cost relating to share-based payment transactions such as stock options be recognized in the Company’s financial statements over the period the options are earned by employees. Recognized stock compensation expense was not reduced by estimated forfeitures because management believes the future effect to be minimal. Estimated forfeitures will be continually evaluated in subsequent periods and may change based on new facts and circumstances.

- 75 -

because management believes the future effect to be minimal. Estimated forfeitures will be continually evaluated in subsequent periods and may change based on new facts and circumstances.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.

Segment Reporting: The Company has identified a single segment at the entity-wide level used by senior management to make operating decisions.

Transfers of Financial Assets. Transfers of an entire financial asset and a group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Recent Accounting Pronouncements:

During the year ended December 31, ~~2012~~2013, the following Accounting Standards Updates (“ASU”) were issued or became effective:

In ~~February~~January 2013, the Financial Accounting Standards Board (“FASB”) issued ~~Auditing~~Accounting Standards Update (“ASU”) No. 2013-0201, ~~Reporting~~Clarifying ofthe ~~Amounts~~Scope ~~Reclassified~~of ~~Out~~Disclosures ofabout ~~Accumulated~~Offsetting ~~Other~~Assets ~~Comprehensive~~and ~~Income~~Liabilities. ~~This~~ ASU ~~requires~~No. an2013-01 ~~entity~~clarifies tothat ~~provide~~ASU ~~information~~No. ~~about~~2011-11 ~~the~~applies ~~amounts~~only ~~of reclassified out of accumulated other comprehensive income by component and~~ to ~~present either on the face of the statement where net income is presented~~derivatives, orincluding inbifurcated ~~the~~embedded ~~notes~~derivatives, ~~significant~~repurchase ~~amounts~~agreements ~~reclassified~~and ~~out~~reverse ofrepurchase ~~accumulated~~agreements, ~~other~~and ~~comprehensive~~securities ~~income~~borrowing byand ~~the~~securities ~~respective~~lending ~~line~~transactions ~~items~~that ofare ~~net~~either ~~income,~~offset ~~but~~or ~~only~~subject ~~if the amount reclassified is required~~ to bean ~~reclassified~~enforceable tomaster ~~net~~netting ~~income~~arrangement ~~in its entirety in the same reporting period. The ASU is effective for annual and interim reporting periods beginning on~~ or ~~after~~similar ~~December 15, 2012~~agreement. ~~The~~Entities ~~Company~~with isother ~~currently~~types ~~in the process~~ of ~~evaluating the ASU but does not expect it will have a material impact on the Company's consolidated~~ financial ~~statements.~~assets

~~In September 2012, the FASB issued ASU No. 2012~~-~~03, Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33~~78-9250, and Corrections Related to FASB Accounting Standards Update 2010-22. This ASU amends various SEC paragraphs: (a) pursuant to the issuance of Staff Accounting Bulletin No. 114; (b) pursuant to the issuance of the SEC’s Final Rule, “Technical Amendments to Commission Rules and Forms Related to the FASB’s Accounting Standards Codification,” Release Nos. 33-9250, 34-65052, and IC-29748 August 8, 2011; and (c) related to ASU 2010-22,Accounting for Various Topics. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

~~In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets~~ and ~~Liabilities~~financial ~~(Topic~~liabilities ~~210).~~subject ~~ASU 2011-11 requires an entity~~ to ~~disclose~~a ~~information~~master ~~about~~netting ~~offsetting~~arrangement ~~and~~or ~~related~~similar ~~arrangements~~agreement toare ~~enable~~no ~~users~~longer ofsubject ~~its financial statements~~ to ~~understand~~ the ~~effect~~disclosure ofrequirements ~~those~~in ~~arrangements~~ASU ~~on its financial position~~No. ~~ASU~~ 2011-11. ~~was~~The amendments were effective for ~~interim~~annual and ~~annual~~interim reporting periods beginning on or after January 1, 2013. ~~and~~The ~~should~~adoption beof ~~applied~~ASU ~~retrospectively for all comparative periods presented~~No. ~~The~~2013-01 ~~Company~~did isnot ~~evaluating~~have ~~the~~a material impact ~~this ASU will have~~ on ~~its~~the Company's consolidated financial statements.

~~FASB~~In ~~ASU~~February ~~2011-12~~2013, ~~Deferral of~~ the ~~Effective~~FASB ~~Date~~issued ~~for~~ASU ~~Amendments~~No. to2013-02, Reporting ~~the Presentation~~ of ~~Reclassifications~~Amounts ofReclassified ~~Items~~ Out of Accumulated Other Comprehensive Income. inASU ~~Accounting Standards Update~~ No. ~~2011~~ 2013-~~05,~~02 ~~was~~requires ~~issued~~an inentity ~~December~~to ~~2011~~provide ~~updating~~information ~~and~~about ~~superseding~~the ~~certain~~amounts ~~pending~~reclassified ~~paragraphs~~out ~~relating~~of accumulated other comprehensive income by component and to ~~the~~present ~~presentation~~either on the face of the ~~financial~~statement ~~statements~~where net income is presented, or in the ~~effects~~notes, ofsignificant ~~reclassifications~~amounts reclassified out of accumulated other comprehensive income onby the ~~components~~respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of ASU No. 2013-02 did not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-10, Inclusion 76of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. ASU No. 2013-10 permits the use of the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge account purposes. The amendment is effective prospectively for qualifying new or redesiginated hedging relationships entered into on or after July 17, 2013. The adoption of ASU No. 2013-10 did not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU No. 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and ~~other~~the ~~comprehensive~~entity ~~income~~does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ~~This~~ ~~ASU~~No ~~was~~new recurring disclosures are required. The amendments are effective for ~~interim~~annual and ~~annual~~interim reporting periods beginning on or after December 3115, ~~2011~~2013 and ~~was~~are to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of ~~this~~ ASU ~~did~~No. 2013-11 is not expected to have a material ~~effect~~impact on the Company’'s consolidated financial statements ~~at the date of adoption~~.

In ~~July~~January ~~2012~~2014, the FASB issued ASU No. ~~2012~~2014-0201, Accounting ~~Testing~~for ~~Indefinite-Lived~~Investments ~~Intangible~~in ~~Assets~~Qualified ~~for~~Affordable ~~Impairment.~~Housing ~~With this~~ Projects. ASU, ~~a company testing indefinite~~2014-~~lived~~04 ~~intangibles~~permit ~~for~~an ~~impairment~~entity ~~now~~to ~~has~~make ~~the~~an ~~option~~accounting topolicy ~~assess~~election ~~qualitative factors~~ to ~~determine~~account ~~whether~~for ~~the~~their ~~existence~~investments ofin ~~events~~qualified ~~and~~affordable ~~circumstances~~housing ~~indicates~~projects ~~that~~using itthe isproportional ~~more~~amortization ~~likely~~method ~~than~~if ~~not~~certain ~~that~~conditions ~~the~~are ~~indefinite-lived intangible asset is impaired~~met. ~~If,~~Under ~~after assessing~~ the ~~totality~~proportional ofamortization ~~events and circumstances~~method, an entity ~~concludes~~amortizes ~~that it is not more likely than not that~~ the ~~indefinite-lived~~initial ~~intangible~~cost ~~asset~~of ~~is impaired, then~~ the ~~entity~~investment isin ~~not~~proportion ~~required~~ to ~~take further action. However, if an entity concludes otherwise, then it is required to determine~~ the ~~fair~~tax ~~value~~credits ofand ~~the~~other ~~indefinite-lived~~tax ~~intangible~~benefits ~~asset~~received and ~~perform~~recognize the ~~quantitative~~net ~~impairment~~investment ~~test~~performance ~~by comparing the fair value with the carrying amount~~ in ~~accordance with current guidance. An entity also has~~ the ~~option~~income tostatement ~~bypass~~as ~~the~~a ~~qualitative~~component ~~assessment~~of ~~for~~income ~~any~~tax ~~indefinite-lived~~expense ~~intangible asset in any period and proceed directly to performing the quantitative impairment test~~(benefit). AnThe ~~entity~~amendments ~~will~~are ~~be able to resume performing the qualitative assessment in any subsequent period. This ASU is~~ effective for annual and interim ~~goodwill~~reporting ~~impairment~~periods ~~tests~~beginning ~~performed~~on ~~for~~or ~~fiscal~~after December ~~years~~15, ~~beginning~~2014 and ~~after~~should ~~September~~be ~~15,~~applied ~~2012~~prospectively. The adoption of ~~this~~ ASU No. 2014-01 is not expected ~~to have a material impact on the Company’s consolidated financial statements~~.

~~Financial~~In ~~Accounting~~January ~~Standards~~2014, ~~Board~~the (“FASB”) issued ASU ~~2011~~No. 2014-04, Reclassification ~~Amendments~~of toResidential ~~Achieve~~Real ~~Common~~Estate ~~Fair~~Collateralized ~~Value~~Consumer ~~Measurement~~Mortgage ~~and~~Loans ~~Disclosure~~upon ~~Requirements~~foreclosure. ASU 2014-04 clarifies that an in ~~U.S.~~substance ~~GAAP~~repossession ~~and~~or ~~IFRSs~~foreclosure occurs, ~~was~~and ~~issued~~a increditor ~~May~~is ~~2011~~considered asto ahave ~~result~~received physical possession of ~~the~~residential ~~FASB~~real ~~and~~estate ~~International~~property ~~Accounting~~collateralizing ~~Standards~~a ~~Board’s~~consumer mortgage loan, upon either (~~IASB~~1) ~~goal~~the creditor obtaining legal title to ~~develop~~the ~~common~~residential ~~requirements~~real ~~for~~estate ~~measuring~~property ~~fair~~upon ~~value~~completion ~~and~~of ~~for~~a ~~disclosing~~foreclosure ~~information~~or ~~about~~(2) ~~fair~~the ~~value~~borrower ~~measurements~~conveying all interest in ~~accordance~~the ~~with~~residential ~~U.S.~~real ~~GAAP~~estate ~~and~~property ~~International~~to ~~Financial~~the ~~Reporting~~creditor ~~Standards.~~to ~~The~~satisfy ~~provisions~~that ofloan ~~this~~through ~~Update~~completion ~~are~~of ~~effective~~a ~~during~~deed ~~the~~in ~~interim~~lieu of foreclosure or ~~annual~~through ~~periods~~a ~~beginning~~similar ~~after~~legal ~~December 15,~~agreement. ~~2011~~Additionally, ~~and~~the ~~are~~amendments torequire beinterim ~~applied~~and ~~prospectively. The~~annual ~~adoption~~disclosure of both (1) the ~~Update~~amount ~~did~~of ~~not~~foreclosed ~~have~~residential areal ~~material~~estate ~~effect~~property onheld by the ~~Company’s~~creditor ~~consolidated~~and ~~financial~~(2) ~~statements,~~the ~~but~~recorded ~~the~~investment ~~additional~~in ~~disclosures~~consumer ~~are~~mortgage ~~included~~loans collateralized by residential real estate property that are in ~~Note 17~~the process of foreclosure according to local requirements of the ~~Notes~~applicable tojurisdiction. The amendments are effective for annual and interim reporting periods beginning on or after ~~the~~December ~~Consolidated~~15, 2014 ~~Financial~~and ~~Statements.~~can be

~~FASB ASU 2011~~-~~05, Presentation of Comprehensive Income, was issued in June 2011 requiring that all non~~79-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This Update also requires that reclassification adjustments for items that are reclassified from other comprehensive income to net income be presented on the face of the financial statements. The provisions of this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and are to be applied retrospectively. Early adoption is permitted. The adoption of the Update did not have a material effect on the Company’s consolidated financial statements at the date of adoption. The Company has presented Consolidated Statements of Comprehensive Income for the years ended December 31, 2012 and 2011 as a separate statement immediately following the Consolidated Statements of Income for the years ended December 31, 2012 and 2011.

applied with a modified retrospective transition method or prospectively. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's consolidated financial statements.

Note 2 – Cash and Cash Equivalents

The Company is required to maintain prescribed reserves with the Federal Reserve Bank of San Francisco in the form of cash. Cash reserve requirements are computed by applying prescribed percentages to various types of deposits. The Company is also required to maintain cash balances or deposits with the Federal Reserve Bank sufficient to meet its statutory reserve requirements. The average reserve requirement for years ended, December 31, ~~2012~~2013 and ~~2011~~2012 was $~~204~~317,000 and $~~291~~204,000, respectively.

Note 3 – Regulatory Capital Requirements and Restrictions

The Bank is ~~restricted~~subject onto ~~the~~minimum ~~amount~~capital quantitative regulatory capital requirements imposed by regulation of ~~dividends~~the itOffice ~~may~~of ~~pay~~the toComptroller of the ~~Company~~Currency (“OCC”). ItTo isbe ~~generally~~categorized ~~limited~~as to"well capitalized," the ~~net~~Bank ~~income~~must ofmaintain ~~the~~minimum ~~current~~total ~~fiscal~~risk-based, ~~year~~Tier 1 risk-based, and ~~that~~Tier of1 ~~the~~leverage ~~two~~ratios ~~previous~~as ~~fiscal~~set ~~years,~~forth ~~less~~in ~~dividends~~the ~~already~~table ~~paid~~below, ~~during~~as ~~those~~of ~~periods. However,~~the ~~payment~~date of ~~dividends~~filing ~~may~~of beits ~~further~~quarterly ~~restricted~~report bywith the OCC. The Bank’s ~~regulatory~~was ~~agency~~considered if“well ~~such~~capitalized” ~~payment~~at ~~would~~both ~~reduce~~December 31, 2013 and 2012. There are no conditions or events since that notification that management believes have changed the Bank’s status.

- 77 80-

~~the~~The Bank’s capital ~~ratios~~amounts ~~below~~and ~~required~~ratios ~~minimums~~as orof ~~would~~December ~~otherwise~~31, be2013 ~~considered~~and toDecember ~~adversely~~31, ~~affect~~2012 ~~the~~are ~~safety~~presented ~~and~~in ~~soundness of~~ the ~~institution.~~following table:

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

						Minimum					Minimum
(in thousands)	Actual					For Capital Adequacy Purposes					To be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2013:
Tier 1 Leverage Capital(1)	$	20,216		11.48	%	$	7,047		4.00	%	$	8,809		5.00	%

Tier 1 Risk Based Capital(2)	$	20,216		14.64	%	$	5,523		4.00	%	$	8,285		6.00	%

Total Risk-Based Capital(2)	$	21,944		15.89	%	$	11,047		8.00	%	$	13,808		10.00	%

(1) Based on total adjusted assets of $182.4 million.
(2) Based on risk weighted assets of $142.6 million.

December 31, 2012:
Tier 1 Leverage Capital(1)	$	20,505		11.36	%	$	7,223		4.00	%	$	9,029		5.00	%

Tier 1 Risk Based Capital(2)	$	20,505		14.92	%	$	5,497		4.00	%	$	8,245		6.00	%

Total Risk-Based Capital(2)	$	22,225		16.17	%	$	10,994		8.00	%	$	13,742		10.00	%

(1) Based on total adjusted assets of $173.9 million.

Filing Compare · ALASKA PACIFIC BANCSHARES INC