|UNITED
      STATES                                                            
|-------------------------------------------------------------------------------
|SECURITIES
      AND EXCHANGE COMMISSION                                       
|Washington, D.C. 20549                                                         
|                                                                               
|FORM
      10-KSB                                                              
|[X]                                                                            
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|[ ]                                                                            
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|                                                                               
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|(Name of small
      business issuer in its charter)                           
|                                                                               
|(State or other jurisdiction of
      incorporation or organization)           
|2094 Jordan Avenue, Juneau,
      Alaska 99801                                 
|(Address of principal executive
      offices)                                 
|Issuers telephone number (907)
      789-4844                                 
|Securities registered pursuant to
      Section 12(b) of the Exchange Act: None
|Securities registered pursuant to
      Section 12(g) of the Exchange Act:     
|                                                                               

Check whether the issuer is not required
to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [
]

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

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this
form, and no disclosure will be contained, to the best of the registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB.
[ ]

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X] The issuers revenues for the fiscal year were $13.2
million.

As of March 15, 2007, there were issued
and outstanding 639,809 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 March 15, 2007, the aggregate value of the Common Stock outstanding held by
nonaffiliates of the registrant was $16.3 million (639,809 shares at $25.40 per
share). For purposes of this calculation, officers and directors of the
registrant are considered nonaffiliates.



|DOCUMENTS INCORPORATED
      BY REFERENCE
|-----------------------------------------

|1. | Portions of the Annual Report to
      Stockholders for the Fiscal Year Ended December 31, 2006 (Parts I and
      II)
|-- | ----------------------------------------------------------------------------------------------------------------------
|  
|2. | Portions of the Proxy Statement
      for the 2007 Annual Meeting of Stockholders (Part III)                          
|  

Transitional Small Business Disclosure
Format (check one) Yes [ ] No [X]

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|PART I
|------



|Item 1. Description of Business
|-------------------------------



|General
|-------

Alaska Pacific Bancshares, Inc. (Corporation), 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, 2006, the Corporation
had total assets of $178.9 million, total deposits of $145.2 million and stockholders equity of $17.7 million. The Corporation 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 is regulated by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance
Corporation (FDIC). The FDIC currently insures the Banks deposits, which have been federally insured since 1937. 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 real estate loans.



|Market Area
|-----------

Alaska Pacifics primary market area includes the communities of Juneau, Ketchikan, Sitka, Hoonah, and Yakutat. Alaska Pacifics market area covers 500 miles along the Pacific Ocean
coastline from Yakutat in the north to Prince of Wales Island in the south, and encompasses approximately 35,000 square miles of land. The region is home to approximately 74,000 residents who reside in 14 communities. This area has similar economic
characteristics; however, there is diversity in some unique industries. With its breathtaking scenery, abundant fishing and wildlife, and numerous recreational activities, Southeast Alaska is a popular tourist destination, and offers several ports
of call for cruise ship passengers.

Alaska Pacifics main office and one other full service branch office are located in Juneau (population approximately 31,187), which is the capital of Alaska. The primary economic sources
in Juneau are government, tourism, support services for logging and fish processing, mining and fishing. Juneaus historically active mining industry (primarily gold and silver) is again gaining importance after decades of decline. According to
information provided by the Alaska Department of Labor, the largest employers in Juneau are the state, local and federal governments, Bartlett Regional Hospital and the University of Alaska.

Two full service offices of Alaska Pacific are located in Ketchikan (population approximately 13,320). Ketchikan is an industrial center and a major port of entry in Southeast Alaska with a
diverse economy. A large fishing fleet, fish processing facilities, timber and wood products manufacturing, and tourism are Ketchikans main economic support. The largest employers in the Ketchikan Gateway Borough include the city and state
government, Ketchikan General Hospital, the Ketchikan Gateway School District, the Ketchikan Pulp Mill and the federal government.

One full service office of Alaska Pacific is located in Sitka (population approximately 8,876) located on the west coast of Baranof Island fronting the Pacific Ocean, on Sitka Sound. The
primary economic sources in Sitka are fishing, fish processing, tourism, government, transportation, 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



|- 2 -
|-----

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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.

In January
2006, Alaska Pacifics smallest offices, located in Hoonah (population
approximately 860) and Yakutat (population approximately 808), were closed to
reduce operating expenses, but Alaska Pacific continues to serve these
communities through online banking and other remote services



|Selected Financial
      Data
|-----------------------------

This
information contained under the section captioned Selected Consolidated
Financial Information is incorporated by reference from the 2006 Annual Report
to Shareholders (Annual Report) which is included as Exhibit 13 to this Form
10-KSB.



|Market Risk
    Analysis
|------------------------

The
information contained under the section captioned Managements Discussion and
Analysis of Financial Condition and Results of Operations - Asset and Liability
Management and Market Risk in the Corporations Annual Report is incorporated
herein by reference.



|Average Balance
    Sheet
|-------------------------

The
information contained under the section captioned Managements Discussion and
Analysis of Financial Condition and Results of Operations - Average Balances,
Interest and Average Yields/Cost in the Annual Report is incorporated herein by
reference.



|Rate/Volume
    Analysis
|------------------------

The information contained under the
section captioned Managements Discussion and Analysis of
FinancialCondition and Results of
Operations - Rate/Volume Analysis in the Annual Report is incorporated herein
by reference.



|Yields Earned and Rates
      Paid
|----------------------------------

The information contained under the
section captioned Managements Discussion and Analysis of
FinancialCondition and Results of
Operations - Rate/Volume Analysis in the Annual Report is incorporated herein
by reference.



|Lending
  Activities
|--------------------

General.At December 31, 2006, Alaska Pacifics loan
portfolio (excluding loans held for sale) amounted to $158.6 million, or 89% of
total assets at that date. Alaska Pacific originates conventional mortgage
loans, construction loans, commercial 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.

- 3 -

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Loan
Portfolio Analysis. The following table sets
forth the composition of Alaska Pacifics loan portfolio as of the dates
indicated.

|(dollars in thousands)December
      31, |  |   |  | 2006    |  |         |   |  |   |  |         |  | 2005    |  
|---------------------------------------- |  | - |  | ------- |  | ------- | - |  | - |  | ------- |  | ------- | -
|                                        
|                                         |  |   |  | Amount  |  | Percent |   |  |   |  | Amount  |  | Percent |  
|                                         |  |  
|Real estate:                             |  |   |  |         |  |         |   |  |   |  |         |  |         |  
|Permanent:                               |  |   |  |         |  |         |   |  |   |  |         |  |         |  
|One-to-four-family                       |  | $ |  | 44,072  |  | 27.79   | % |  | $ |  | 49,425  |  | 32.36   | %
|Multifamily                              |  |   |  | 1,304   |  | 0.82    |   |  |   |  | 1,261   |  | 0.83    |  
|Commercial
      nonresidential          |  |   |  | 45,212  |  | 28.51   |   |  |   |  | 45,874  |  | 30.04   |  
|                                        
|Total
      permanent                    |  |   |  | 90,588  |  | 57.12   |   |  |   |  | 96,560  |  | 63.23   |  
|Land                                     |  |   |  | 6,359   |  | 4.01    |   |  |   |  | 3,952   |  | 2.59    |  
|Construction:                            |  |   |  |         |  |         |   |  |   |  |         |  |         |  
|One-to-four-family                       |  |   |  | 12,892  |  | 8.13    |   |  |   |  | 9,174   |  | 6.01    |  
|Multifamily                              |  |   |  | 731     |  | 0.46    |   |  |   |  | 1,415   |  | 0.93    |  
|Commercial
      nonresidential          |  |   |  | 6,567   |  | 4.14    |   |  |   |  | 3,284   |  | 2.15    |  
|                                        
|Total
      construction                 |  |   |  | 20,190  |  | 12.73   |   |  |   |  | 13,873  |  | 9.09    |  
|Commercial business                      |  |   |  | 18,268  |  | 11.52   |   |  |   |  | 19,134  |  | 12.53   |  
|Consumer:                                |  |   |  |         |  |         |   |  |   |  |         |  |         |  
|Home
      equity                        |  |   |  | 16,836  |  | 10.62   |   |  |   |  | 13,454  |  | 8.81    |  
|Boat                                     |  |   |  | 4,663   |  | 2.94    |   |  |   |  | 3,914   |  | 2.56    |  
|Automobile                               |  |   |  | 738     |  | 0.46    |   |  |   |  | 696     |  | 0.46    |  
|Other                                    |  |   |  | 955     |  | 0.60    |   |  |   |  | 1,139   |  | 0.75    |  
|                                        
|Total
      consumer                     |  |   |  | 23,192  |  | 14.62   |   |  |   |  | 19,203  |  | 12.56   |  
|                                        
|Total loans                              |  |   |  | 158,597 |  | 100.00  | % |  |   |  | 152,722 |  | 100.00  | %
|Less:                                    |  |   |  |         |  |         |   |  |   |  |         |  |         |  
|Allowance for loan
      losses          |  |   |  | 1,666   |  |         |   |  |   |  | 1,448   |  |         |  
|                                        
|Loans,
      net                         |  | $ |  | 156,931 |  |         |   |  | $ |  | 151,274 |  |         |  
|                                         |  |  

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, 2006, $44.1 million, or 27.8%, of Alaska Pacifics total loan portfolio
consisted of these loans. Alaska Pacific originated $25.0 million and $20.6
million of one-to-four-family residential mortgage loans during the years ended
December 31, 2006 and 2005, 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 permit them to be sold to U.S. Government sponsored agencies
such as the Federal Home Loan Mortgage Corporation (Freddie Mac) 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, 2006, $2.2 million, or 5.0%, 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 recently 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.

Alaska
Pacific also originates one-to-four-family mortgage loans under Freddie Mac, the
Federal Housing Administration, the Veterans Administration, and AHFC programs.
Alaska Pacific generally sells these loans in the



|- 4
-
|-----

---

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 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.

To a lesser extent, Alaska Pacific originates loans secured by non-owner occupied residential properties that are sold to Freddie Mac.

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 five years and are fixed-rate, fully amortizing loans. Alaska Pacific also originates commercial land loans, which have floating rates that adjust annually. At December 31, 2006 and 2005,
land loans amounted to $6.4 million and $4.0 million, respectively.

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 the value of which is insufficient to assure full repayment.

Construction Lending.At December 31, 2006, construction loans amounted to $20.2 million, or 12.7% of total loans, most of which were secured by
properties located in Alaska Pacifics primary market area. This compares with $13.9 million, or 9.1% of the total loan portfolio at December 31, 2005. The increase is attributable to a steady demand for construction loans, both residential
and commercial.

Construction loans are made for a term of up to nine to 18 months. Construction loans 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-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 disbursement of funds during the term of the construction loan. Loan proceeds are generally disbursed after inspection of the project.



|- 5 -
|-----

---

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. It is more difficult to evaluate construction loans than permanent loans. 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). 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 nonresidential and multifamily construction loans have generally ranged from $500,000 to $2.5 million. At December
31, 2006, all construction loans were performing according to the loan terms; the largest, for approximately $1.8 million, was for a residential development project.

Multifamily and Commercial Real Estate Lending. The multifamily residential loan portfolio consists primarily of loans secured by small apartment
buildings and the commercial 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, 2006 the largest loan totaled $2.7 million and was performing in accordance with its terms. At December 31, 2006, Alaska Pacific had $1.3 million of multifamily residential and $45.2 million of
commercial real estate loans, or 0.8% and 28.5%, respectively, of the total loan portfolio at this date. Multifamily and commercial 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 they adjust at a rate equal to the prime rate plus
a negotiated margin of 1% to 3%. 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, Oregon, and Utah.

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

From time to time, Alaska Pacific purchases participations in multifamily and commercial 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 subject to the same underwriting standards as loans originated by Alaska Pacific.

Multifamily residential and commercial real estate lending entails significant additional risks as compared with single-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 on the successful operation of the real estate project. Supply and
demand conditions in the market for office, retail and residential space can significantly affect these risks, and, as such, may be subject to a greater extent to adverse conditions in the economy generally. Alaska Pacific reviews all commercial
real estate loans in excess of $500,000 on an annual basis to ensure that the loan meets current underwriting standards.

- 6 -

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Future
growth of commercial real estate loans is restricted by regulation which
generally limits such loans, under Alaska Pacifics federal thrift charter, to
400% of total capital for regulatory purposes, or approximately $74 million at
December 31, 2006.

Commercial Business Lending.At
December 31, 2006, commercial business loans amounted to $18.3 million, or 11.5%
of total loans. Future growth of commercial business loans is restricted by
regulation which generally limits such loans, under Alaska Pacifics federal
thrift charter, to 20% of total assets, or approximately $36 million at December
31, 2006.

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 loans to finance operating lines made for one year or less
renewed annually at an interest rate based on the prime rate plus a margin of
between one half and three percentage points. Such loans generally are
originated in principal amounts between $100,000 and $1 million. At December 31,
2006, the largest commercial business loan was for $1.1 million and was secured
by equipment and inventory. This loan was restructured in 2005 after the
borrower encountered financial difficulties, but was performing according to the
restructured terms at December 31, 2006.

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, Alaska Pacific receives guarantees of between 75% and 90% of
the loan amount. In addition, Alaska Pacific has retained portions of commercial
loans originated through participation programs with economic development
agencies such as Alaska Industrial Development and Export Authority.

Alaska
Pacific also makes commercial loans secured by commercial charter boats and
commercial fishing boats. These loans have ten- 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.

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
things. 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, 2006, consumer loans
totaled $23.2 million, or 14.6% 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 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, 2006, home equity loans
totaled $16.8 million, or 10.6% of the total loan portfolio, compared to $13.5
million, or 8.8% of the total loan portfolio at December 31, 2005. Home equity
loans generally do not exceed 95% of the appraised value of the residence or
100% of the tax assessment, less the outstanding

- 7 -

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principal of the first mortgage. Closed-end loans are generally fixed-rate and have terms of up to 15 years requiring monthly payments of principal and interest. Home equity lines of credit generally have adjustable
interest rates.

At December 31, 2006, consumer boat loans amounted to $4.7 million, or 2.9%, of the total loan portfolio compared to $3.9 million, or 2.6% of the total loan portfolio at December 31,
2005. Alaska Pacific offers boat loans with maturities of between five and 15 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
$50,000 at fixed rates of interest and loans over $50,000 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 85% of the value and 75% on used
boats, but in certain instances it will loan up to 100% of the value.

At December 31, 2006, automobile loans amounted to $738,000, or 0.5%, of the total loan portfolio compared to $696,000, or 0.5% of the total loan portfolio at December 31, 2005. Alaska
Pacific offers automobile loans with maturities of up to six years with fixed rates of interest. The origination of auto loans has declined in recent years as a result of dealer financing offered at below-market rates.

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 $1.0 million,
or 0.6%, of total loans at December 31, 2006, compared to $1.1 million, or 0.7% of total loans at December 31, 2005.

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 which are unsecured or secured by rapidly depreciating assets such as
automobiles or boats and particularly used automobiles. 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. 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.

- 8 -

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Loan
Maturity and Repricing.The following table
sets forth certain information at December 31, 2006 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. Demand loans, 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 and unearned discounts, and do not
include loans held for sale.

|                     |  |   |  |        |  |   |  |             |  |   |  |              |  |   |  |              |  |   |  |          |  |   |  |         |  |   |  | After 1 Year
|-------------------- |  | - |  | ------ |  | - |  | ----------- |  | - |  | ------------ |  | - |  | ------------ |  | - |  | -------- |  | - |  | ------- |  | - |  | ------------
|                     |  |  
|                     |  |   |  |        |  |   |  | After1 Year |  |   |  | After3 Years |  |   |  | After5 Years |  |   |  |          |  |   |  |         |  |   |  |             
|(in
      thousands) |  |   |  | Within |  |   |  | Through     |  |   |  | Through      |  |   |  | Through      |  |   |  | Beyond   |  |   |  |         |  |   |  | Fixed       
|December 31, 2006    |  |   |  | 1 Year |  |   |  | 3 Years     |  |   |  | 5 Years      |  |   |  | 10 Years     |  |   |  | 10 Years |  |   |  | Total   |  |   |  | Rates       
|                    
|Real estate:         |  |   |  |        |  |   |  |             |  |   |  |              |  |   |  |              |  |   |  |          |  |   |  |         |  |   |  |             
|Permanent:           |  |   |  |        |  |   |  |             |  |   |  |              |  |   |  |              |  |   |  |          |  |   |  |         |  |   |  |             
|One-to-four-         |  |   |  |        |  |   |  |             |  |   |  |              |  |   |  |              |  |   |  |          |  |   |  |         |  |   |  |             
|family               |  | $ |  | 3,059  |  | $ |  | 265         |  | $ |  | 1,467        |  | $ |  | 1,101        |  | $ |  | 38,180   |  | $ |  | 44,072  |  | $ |  | 38,788      
|Multifamily          |  |   |  | -      |  |   |  | 565         |  |   |  | 227          |  |   |  | -            |  |   |  | 512      |  |   |  | 1,304   |  |   |  | 536         
|Commercial           |  |   |  |        |  |   |  |             |  |   |  |              |  |   |  |              |  |   |  |          |  |   |  |         |  |   |  |             
|nonresidential       |  |   |  | 895    |  |   |  | 2,817       |  |   |  | 1,372        |  |   |  | 6,404        |  |   |  | 33,724   |  |   |  | 45,212  |  |   |  | 1,923       
|Land                 |  |   |  | 633    |  |   |  | 1,945       |  |   |  | 2,868        |  |   |  | 616          |  |   |  | 297      |  |   |  | 6,359   |  |   |  | 3,020       
|Construction:        |  |   |  |        |  |   |  |             |  |   |  |              |  |   |  |              |  |   |  |          |  |   |  |         |  |   |  |             
|One-to-four-         |  |   |  |        |  |   |  |             |  |   |  |              |  |   |  |              |  |   |  |          |  |   |  |         |  |   |  |             
|family               |  |   |  | 9,222  |  |   |  | 3,670       |  |   |  | -            |  |   |  | -            |  |   |  | -        |  |   |  | 12,892  |  |   |  | -           
|Multifamily          |  |   |  | -      |  |   |  | -           |  |   |  | -            |  |   |  | 731          |  |   |  | -        |  |   |  | 731     |  |   |  | 731         
|Commercial           |  |   |  |        |  |   |  |             |  |   |  |              |  |   |  |              |  |   |  |          |  |   |  |         |  |   |  |             
|nonresidential       |  |   |  | 2,690  |  |   |  | 1,160       |  |   |  | 1,489        |  |   |  | -            |  |   |  | 1,228    |  |   |  | 6,567   |  |   |  | -           
|Commercial           |  |   |  |        |  |   |  |             |  |   |  |              |  |   |  |              |  |   |  |          |  |   |  |         |  |   |  |             
|business             |  |   |  | 1,833  |  |   |  | 2,255       |  |   |  | 2,846        |  |   |  | 5,451        |  |   |  | 5,883    |  |   |  | 18,268  |  |   |  | 2,220       
|Consumer:            |  |   |  |        |  |   |  |             |  |   |  |              |  |   |  |              |  |   |  |          |  |   |  |         |  |   |  |             
|Home
      equity    |  |   |  | 405    |  |   |  | 130         |  |   |  | 765          |  |   |  | 5,067        |  |   |  | 10,469   |  |   |  | 16,836  |  |   |  | 13,682      
|Boat                 |  |   |  | 473    |  |   |  | 62          |  |   |  | 240          |  |   |  | 1,493        |  |   |  | 2,395    |  |   |  | 4,663   |  |   |  | 3,053       
|Automobile           |  |   |  | 6      |  |   |  | 230         |  |   |  | 390          |  |   |  | 112          |  |   |  | -        |  |   |  | 738     |  |   |  | 732         
|Other                |  |   |  | 106    |  |   |  | 108         |  |   |  | 157          |  |   |  | 122          |  |   |  | 462      |  |   |  | 955     |  |   |  | 618         
|                    
|Total                |  | $ |  | 19,322 |  | $ |  | 13,207      |  | $ |  | 11,821       |  | $ |  | 21,097       |  | $ |  | 93,150   |  | $ |  | 158,597 |  | $ |  | 65,303      
|                     |  |  

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 the Chief Lending Officer each have 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 agency limit if the loan
is to be sold in the secondary market, multifamily and commercial 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,
Chief Lending Officer and a senior lending officer, 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.

- 9 -

---

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 also has a system for online loan applications for mortgage loans.

Pursuant to OTS regulations, loans to one borrower cannot exceed 15% of Alaska Pacifics unimpaired capital and surplus. At December 31, 2006, the loans-to-one-borrower limitation for
Alaska Pacific was $2.8 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, and consumer loans.

Alaska Pacific generally sells loans without recourse and with servicing retained. 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, 2006, Alaska Pacifics servicing portfolio was $102.6
million. For the year ended December 31, 2006, loan servicing fees totaled $260,000 before amortization of servicing rights.

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, 2006, these escrow balances totaled $740,000.

- 10 -

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

|(in thousands)Year
      ended December 31,         |  |   |  | 2006    |   |  |   |  | 2005    |  
|--------------------------------------------------- |  | - |  | ------- | - |  | - |  | ------- | -
|                                                   
|Loans originated:                                   |  |   |  |         |   |  |   |  |         |  
|Real estate:                                        |  |   |  |         |   |  |   |  |         |  
|Permanent:                                          |  |   |  |         |   |  |   |  |         |  
|One-to-four-family                                  |  | $ |  | 24,950  |   |  | $ |  | 20,603  |  
|Multifamily                                         |  |   |  | 560     |   |  |   |  | -       |  
|Commercial
      nonresidential                     |  |   |  | 8,017   |   |  |   |  | 22,206  |  
|Land                                                |  |   |  | 4,313   |   |  |   |  | 2,986   |  
|Construction:                                       |  |   |  |         |   |  |   |  |         |  
|One-to-four-family                                  |  |   |  | 12,628  |   |  |   |  | 13,792  |  
|Multifamily                                         |  |   |  | 273     |   |  |   |  | 2,894   |  
|Commercial
      nonresidential                     |  |   |  | 5,333   |   |  |   |  | 597     |  
|Commercial
      business                           |  |   |  | 14,258  |   |  |   |  | 17,604  |  
|Consumer:                                           |  |   |  |         |   |  |   |  |         |  
|Home
      equity                                   |  |   |  | 7,443   |   |  |   |  | 4,377   |  
|Boat                                                |  |   |  | 1,204   |   |  |   |  | 673     |  
|Automobile                                          |  |   |  | 381     |   |  |   |  | 570     |  
|Other                                               |  |   |  | 3,302   |   |  |   |  | 3,347   |  
|                                                   
|Total loans originated                              |  |   |  | 82,662  |   |  |   |  | 89,649  |  
|Loans purchased                                     |  |   |  | 7,055   |   |  |   |  | 3,205   |  
|Loans sold                                          |  |   |  | (18,534 | ) |  |   |  | (10,648 | )
|Foreclosed loans                                    |  |   |  | (25     | ) |  |   |  | (101    | )
|Principal repayments and other
      changes        |  |   |  | (67,295 | ) |  |   |  | (66,422 | )
|                                                   
|Net increase in loans and loans held for
      sale |  | $ |  | 3,863   |   |  | $ |  | 15,683  |  
|                                                    |  |  

A portion of
Alaska Pacifics originations in 2006 and 2005 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;
letters of credit are not offered. At December 31, 2006, Alaska Pacific had
$19.5 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 13 of Notes to the
Consolidated Financial Statements included in the Annual Report.

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 $935,000 of net deferred loan fees at December 31, 2006.

Nonperforming Assets and Delinquencies.Alaska Pacific utilizes one loan collector to monitor the loan portfolio
and communicate with customers concerning past due payments. The size of the
portfolio and historically low delinquency rates 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



|- 11
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|------

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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.

Customers
who miss a payment are mailed a computer-generated notice 15 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 30 days, the
collector sends a letter, which begins the demand process. Follow-up contacts
are made between the 30thand 60thday, 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. 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.

The
following table sets forth information with respect to Alaska Pacifics
nonperforming assets at the dates indicated. It is the policy of Alaska Pacific
to cease accruing interest on loans 90 days or more past due.

|(dollars in thousands)December
      31,                   |   | 2006 |  |   | 2005  |  
|---------------------------------------------------------- | - | ---- |  | - | ----- | -
|                                                          
|Loans accounted for on a nonaccrual
      basis:           |   |      |  |   |       |  
|Commercial
      business                                  | $ | -    |  | $ | 1,288 |  
|Consumer                                                   |   | -    |  |   | 11    |  
|                                                          
|Total                                                      |   | -    |  |   | 1,299 |  
|Accruing loans which are contractually past
      due 90   |   |      |  |   |       |  
|days or
      more                                         |   | -    |  |   | -     |  
|                                                          
|Total of
      nonaccrual and 90 days past due loans       |   | -    |  |   | 1,299 |  
|                                                          
|Repossessed assets                                         |   | -    |  |   | 101   |  
|                                                          
|Total nonperforming
      assets                           | $ | -    |  | $ | 1,400 |  
|                                                           |  
|                                                          
|Nonaccrual and 90 days or more past due
      loans as a   |   |      |  |   |       |  
|percentage of
      loans                                  |   | -    |  |   | 0.85  | %
|                                                          
|Nonaccrual and 90 days or more past due
      loans as a   |   |      |  |   |       |  
|percentage of total
      assets                           |   | -    |  |   | 0.73  | %
|                                                          
|Nonperforming assets as a percentage of
      total assets |   | -    |  |   | 0.79  | %
|                                                           |  

Gross
interest income that would have been recorded for the year ended December 31,
2006 if nonaccrual loans had been current according to their original terms and
had been outstanding throughout the year was approximately $78,000, and the
amount of interest income on these loans that was included in net income for the
year was $76,000.

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,



|- 12
-
|------

---

which is the unpaid principal balance of
the related loan plus acquisition costs, or fair value. Subsequent to
acquisition, the property is carried at the lower of the acquisition amount or
fair value. At December 31, 2006, Alaska Pacific had no repossessed
assets.

Asset
Classification.The OTS 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, OTS 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. The regulations have also created a
special mention category, described as assets which do not currently expose an
insured institution to a sufficient degree of risk to warrant classification but
do possess credit deficiencies or potential weaknesses deserving managements
close attention. 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 quarterly 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.

At December
31, 2006 and 2005, the aggregate amounts of Alaska Pacifics classified and
special mention assets (as determined by Alaska Pacific), were as
follows:

|(in thousands)December
      31, |  |   |  | 2006  |  |   |  | 2005 
|-------------------------------- |  | - |  | ----- |  | - |  | -----
|                                
|Loss                             |  | $ |  | -     |  | $ |  | -    
|Doubtful                         |  |   |  | 450   |  |   |  | 365  
|Substandard assets               |  |   |  | 2,770 |  |   |  | 3,040
|Special mention                  |  |   |  | 1,282 |  |   |  | 774  
|                                

At December
31, 2006 assets classified as substandard, doubtful or loss totaled $3.2 million
compared to $3.4 million at December 31, 2005. Substandard and doubtful assets
as of December 31, 2006 consisted of two commercial business loans totaling $1.3
million and three commercial real estate loans for $1.9 million. Management has
estimated potential impairment of $450,000 for these loans in its assessment of
the adequacy of the allowance for loan losses at December 31, 2006. The largest
loan in the substandard classification at December 31, 2006 was a $1.1 million
commercial business loan that was restructured in 2005 after the borrower
encountered financial difficulties, but was performing according to the
restructured terms at December 31, 2006. Also in the substandard classification
at December 31, 2006 was a $1.1 million commercial real estate loan to the same
borrower; this loan is well collateralized and paying as agreed. The largest
component of classified assets at December 31, 2005 was $1.9 million in
commercial real estate loans.

Special
mention loans of $1.3 million at December 31, 2006 consisted primarily of two
commercial business loans totaling $1.1 million and four other loans totaling
$228,000. Alaska Pacific believes these loans are adequately secured, but are
being monitored carefully.

Allowance
for Loan Losses.Alaska Pacific maintains an
allowance for loan losses sufficient to absorb losses inherent in the loan
portfolio. Alaska Pacific has established a systematic methodology to ensure
that the allowance is adequate. TheAsset
Classification Policyrequires an ongoing
quarterly assessment of the probable estimated losses in the portfolios. The
Asset Classification Committee reviews the following information:

- 13 -

---

· All loans classified during the previous
analysis. Current information as to payment
history, or actions taken to correct the deficiency are reviewed, and if
justified, the loan is no longer classified. If conditions have not improved,
the loan classification is reviewed to ensure that the appropriate action is
being taken to mitigate loss.

· Past due loans. The
committee reviews loans that are past due 30 days or more, taking into
consideration the borrower, nature of the collateral and its value, the
circumstances that have caused the delinquency, and the likelihood of the
borrower correcting the conditions that have resulted in the delinquent status.
The committee may recommend more aggressive collection activity, inspection of
the collateral, or no change in its classification.

· Reports from Alaska Pacifics managers. Lending managers may be aware of a borrowers circumstances
that have not yet resulted in any past due payments but has the potential for
problems in the future. Each lending manager reviews their respective lending
units loans and identifies any that may have developing
weaknesses.This self identification
process is an important component of maintaining credit quality, as each lender
is accountable for monitoring as well as originating loans.

· Current economic conditions. Alaska Pacific takes into consideration economic conditions in its market
area, the states economy, and national economic factors that could influence
the quality of the loan portfolio in general. The unique, isolated geography of
Alaska Pacifics market area of Southeast Alaska requires that each communitys
economic activity be reviewed.

· Trends in Alaska Pacifics delinquencies. Alaska Pacifics market area has seasonal trends and as a
result, the portfolio tends to have similar fluctuations. Prior period
statistics are reviewed and evaluated to determine if the current conditions
exceed expected trends.

The amount
that is to be added to allowance for loan losses is based upon a variety of
factors. An important component is a loss percentage set for each major category
of loan that is based upon Alaska Pacifics past loss experience. In certain
instances, Alaska Pacifics own loss experience has been minimal, and the
related loss factor is modified based on consideration of published national
loan loss data. The loss percentages are also influenced by economic factors as
well as management experience.

Each
individual loan, previously classified by management or newly classified during
the quarterly review, is evaluated for loss potential, and any specific
estimates of impairment are added to the overall required reserve amount. As a
result of the size of the institution, the size of the portfolio, and the
relatively small number of classified loans, most members of the asset
classification committee are often directly familiar with the borrower, the
collateral or the circumstances giving rise to the concerns. For the remaining
portion of the portfolio, comprised of pass loans, the loss percentages
discussed above are applied to each loan category.

The
calculated amount is compared to the actual amount recorded in the allowance at
the end of each quarter and a determination is made as to whether the allowance
is adequate or needs to be increased. Management increases the amount of the
allowance for loan losses by charges to income and decreases it by loans charged
off (net of recoveries).

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.

- 14 -

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·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 Real Estate -As with
multifamily loans, the classification of commercial real estate loans closely
corresponds to economic conditions which will limit the 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,
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.

Management
believes that the allowance for loan losses at December 31, 2006 was adequate at
that date. 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.

While Alaska
Pacific believes it has established its existing allowance for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing Alaska Pacifics loan portfolio, will
not request Alaska Pacific to increase significantly its allowance for loan
losses. In addition, because 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. Any material increase in the allowance for loan losses
may adversely affect Alaska Pacifics financial condition and results of
operations.

- 15 -

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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,            |  |   |  | 2006  |   |  |   |  | 2005   |  
|-------------------------------------------------------- |  | - |  | ----- | - |  | - |  | ------ | -
|                                                        
|Allowance at beginning of period                         |  | $ |  | 1,448 |   |  | $ |  | 1,380  |  
|Provision for loan losses                                |  |   |  | 250   |   |  |   |  | 120    |  
|Charge-offs:                                             |  |   |  |       |   |  |   |  |        |  
|One- to- four family
      residential                   |  |   |  | -     |   |  |   |  | -      |  
|Commercial business                                      |  |   |  | -     |   |  |   |  | (21    | )
|Consumer:                                                |  |   |  |       |   |  |   |  |        |  
|Home
      equity                                        |  |   |  | (11   | ) |  |   |  | -      |  
|Boat                                                     |  |   |  | (24   | ) |  |   |  | (43    | )
|                                                        
|Total charge-offs                                        |  |   |  | (35   | ) |  |   |  | (64    | )
|Recoveries:                                              |  |   |  |       |   |  |   |  |        |  
|Commercial business                                      |  |   |  | 1     |   |  |   |  | -      |  
|Consumer:                                                |  |   |  |       |   |  |   |  |        |  
|Boat                                                     |  |   |  | 2     |   |  |   |  | 10     |  
|Automobile                                               |  |   |  | -     |   |  |   |  | 2      |  
|                                                        
|Total recoveries                                         |  |   |  | 3     |   |  |   |  | 12     |  
|                                                        
|Net
      charge-offs                                    |  |   |  | (32   | ) |  |   |  | (52    | )
|                                                        
|Balance at end of period                                 |  | $ |  | 1,666 |   |  | $ |  | 1,448  |  
|                                                         |  |  
|                                                        
|Allowance for loan losses as a percentage of
      loans |  |   |  |       |   |  |   |  |        |  
|outstanding at the end of the
      period               |  |   |  | 1.05  | % |  |   |  | 0.95   | %
|Net
      charge-offs as a percentage of average loans   |  |   |  |       |   |  |   |  |        |  
|outstanding during the
      period                      |  |   |  | 0.02  |   |  |   |  | 0.04   |  
|Allowance for loan losses as a percentage of             |  |   |  |       |   |  |   |  |        |  
|nonperforming loans at end of
      period               |  |   |  | NA    |   |  |   |  | 111.47 |  
|                                                         |  |  

- 16 -

---

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

|December 31,                    |  |   |  |        |  | 2006        |   |  |            |   |  |   |  |        |  | 2005        |   |  |          |  
|------------------------------- |  | - |  | ------ |  | ----------- | - |  | ---------- | - |  | - |  | ------ |  | ----------- | - |  | -------- | -
|                               
|                                |  |   |  |        |  |             |   |  | % of Loans |   |  |   |  |        |  |             |   |  | % of     |  
|                                |  |   |  |        |  | As a % of   |   |  | in         |   |  |   |  |        |  | As a % of   |   |  | Loans in |  
|                                |  |   |  |        |  | Outstanding |   |  | Category   |   |  |   |  |        |  | Outstanding |   |  | Category |  
|                                |  |   |  |        |  | Loans in    |   |  | to Total   |   |  |   |  |        |  | Loans in    |   |  | to Total |  
|(dollars in
      thousands)    |  |   |  | Amount |  | Category    |   |  | Loans      |   |  |   |  | Amount |  | Category    |   |  | Loans    |  
|                               
|Real estate:                    |  |   |  |        |  |             |   |  |            |   |  |   |  |        |  |             |   |  |          |  
|Permanent:                      |  |   |  |        |  |             |   |  |            |   |  |   |  |        |  |             |   |  |          |  
|One-to-four-family              |  | $ |  | 57     |  | 0.13        | % |  | 27.79      | % |  | $ |  | 57     |  | 0.12        | % |  | 32.36    | %
|Multifamily                     |  |   |  | 3      |  | 0.26        |   |  | 0.82       |   |  |   |  | 5      |  | 0.40        |   |  | 0.83     |  
|Commercial
      nonresidential |  |   |  | 328    |  | 0.73        |   |  | 28.51      |   |  |   |  | 267    |  | 0.58        |   |  | 30.04    |  
|Land                            |  |   |  | 23     |  | 0.36        |   |  | 4.01       |   |  |   |  | 9      |  | 0.23        |   |  | 2.59     |  
|Construction:                   |  |   |  |        |  |             |   |  |            |   |  |   |  |        |  |             |   |  |          |  
|One-to-four-family              |  |   |  | 7      |  | 0.05        |   |  | 8.13       |   |  |   |  | 6      |  | 0.07        |   |  | 6.01     |  
|Multifamily                     |  |   |  | 1      |  | 0.05        |   |  | 0.46       |   |  |   |  | 1      |  | 0.07        |   |  | 0.93     |  
|Commercial
      nonresidential |  |   |  | 3      |  | 0.05        |   |  | 4.14       |   |  |   |  | 2      |  | 0.06        |   |  | 2.15     |  
|Commercial                      |  |   |  | 990    |  | 5.42        |   |  | 11.52      |   |  |   |  | 900    |  | 4.70        |   |  | 12.53    |  
|Consumer:                       |  |   |  |        |  |             |   |  |            |   |  |   |  |        |  |             |   |  |          |  
|Home
      equity               |  |   |  | 106    |  | 0.63        |   |  | 10.62      |   |  |   |  | 98     |  | 0.73        |   |  | 8.81     |  
|Boat                            |  |   |  | 145    |  | 3.10        |   |  | 2.94       |   |  |   |  | 94     |  | 2.40        |   |  | 2.56     |  
|Automobile                      |  |   |  | 1      |  | 0.10        |   |  | 0.46       |   |  |   |  | 3      |  | 0.43        |   |  | 0.45     |  
|Other                           |  |   |  | 2      |  | 0.22        |   |  | 0.60       |   |  |   |  | 6      |  | 0.53        |   |  | 0.74     |  
|                                |  |   |  |        |  |             |   |  |            |   |  |   |  |        |  |             |   |  |          |  
|Total allowance for loan losses |  | $ |  | 1,666  |  | 1.05        | % |  | 100.00     | % |  | $ |  | 1,448  |  | 0.95        | % |  | 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 Managements Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources in the Annual Report and
Regulation herein.

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.



|- 17
-
|------

---

The
following table sets forth the composition of Alaska Pacifics investment and
mortgage-backed securities portfolios at the dates indicated.

|December 31,                        |  |   |  |       |  |   |  | 2006      |  |           |   |  |   |  |       |  |   |  | 2005      |  |           |  
|----------------------------------- |  | - |  | ----- |  | - |  | --------- |  | --------- | - |  | - |  | ----- |  | - |  | --------- |  | --------- | -
|                                   
|                                    |  |   |  |       |  |   |  |           |  | Percent   |   |  |   |  |       |  |   |  |           |  | Percent   |  
|                                    |  |   |  | Fair  |  |   |  | Amortized |  | of        |   |  |   |  | Fair  |  |   |  | Amortized |  | of        |  
|(dollars in
      thousands)        |  |   |  | Value |  |   |  | Cost      |  | Portfolio |   |  |   |  | Value |  |   |  | Cost      |  | Portfolio |  
|                                   
|Mortgage-backed securities:         |  |   |  |       |  |   |  |           |  |           |   |  |   |  |       |  |   |  |           |  |           |  
|Fannie
      Mae                    |  | $ |  | 4,141 |  | $ |  | 4,224     |  | 79.3      | % |  | $ |  | 5,980 |  | $ |  | 6,079     |  | 80.1      | %
|Freddie
      Mac                   |  |   |  | 454   |  |   |  | 471       |  | 8.8       |   |  |   |  | 613   |  |   |  | 641       |  | 8.2       |  
|Ginnie
      Mae                    |  |   |  | 558   |  |   |  | 500       |  | 9.4       |   |  |   |  | 731   |  |   |  | 639       |  | 9.8       |  
|U.S. agencies and corporations:     |  |   |  |       |  |   |  |           |  |           |   |  |   |  |       |  |   |  |           |  |           |  
|Small Business
      Administration |  |   |  |       |  |   |  |           |  |           |   |  |   |  |       |  |   |  |           |  |           |  
|pools                               |  |   |  | 135   |  |   |  | 134       |  | 2.5       |   |  |   |  | 140   |  |   |  | 141       |  | 1.9       |  
|                                   
|Total
      investment securities   |  |   |  |       |  |   |  |           |  |           |   |  |   |  |       |  |   |  |           |  |           |  
|available
      for sale            |  | $ |  | 5,288 |  | $ |  | 5,329     |  | 100.0     | % |  | $ |  | 7,464 |  | $ |  | 7,500     |  | 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, 2006 and 2005, to allow
flexibility in managing the portfolio.

At December
31, 2006, the portfolio of U.S. Government and agency securities had an
aggregate estimated fair value of $135,000 and the portfolio of mortgage-backed
securities had an estimated fair value of $5.2 million.

At December
31, 2006, mortgage-backed securities consisted of Freddie Mac, Fannie Mae and
Ginnie Mae issues with an amortized cost of $5.2 million. The mortgage-backed
securities portfolio had coupon rates ranging from 4.4% to 9.0% and had a
weighted average yield of 5.2% at December 31, 2006.

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.



|- 18
-
|------

---

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 and mortgage-backed securities at December 31, 2006.

|Final Maturity or
      Repricing within:
|-----------------------------------------
|                                         
|                                         
|                                         
|                                         
|                                         
|(dollars in                              
|thousands)                               
|                                         
|Mortgage-backed                          
|securities:                              
|Fannie
      Mae                         
|Freddie
      Mac                        
|Ginnie
      Mae                         
|U.S. agencies and                        
|corporations:                            
|Small
      Business                     
|Administration                           
|pools                                    
|                                         
|                                         
|Total investment                         
|securities
      available               
|for
      sale                           
|                                         

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 $1.8 million at December 31, 2006. 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. The yield on the FHLB of Seattle
stock is normally paid through stock dividends that are subject to the
discretion of the board of directors of the FHLB of Seattle. However, the FHLB
of Seattle suspended the payment of dividends during the fourth quarter of 2004,
and no dividends were paid during the years ended December 31, 2006 and 2005.
Dividend payments have resumed, however, during the first quarter of 2007. Stock
ownership in the FHLB of Seattle is expected to remain stable or increase in
response to the Banks borrowing needs.

At December
31, 2006, Alaska Pacifics investment in the common stock of the FHLB of Seattle
(carrying and fair values of $1.8 million) had an aggregate book value in excess
of 10% of Alaska Pacifics total equity.

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,
2006.

- 19 -

---



|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 Alaska Pacifics 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. Deposits from municipalities and other public
entities were approximately $5 million at December 31, 2006.

Alaska
Pacific had approximately $6.0 million of brokered deposits at December 31, 2006
issued through the Certificate of Deposit Account Registry Service (CDARS).
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
such, Alaska Pacific utilizes such deposits as an alternative supplemental
funding source in addition to advances from the FHLB of Seattle.

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
Corporation, as the sole stockholder of the Bank. Substantially all of the
Banks depositors are residents of the State of Alaska.

- 20 -

---

The
following table sets forth information concerning Alaska Pacifics time deposits
and other interest-bearing deposits at December 31, 2006.

|Weighted |   |  |                  |  |                               |  |   |  |           |  |   |  |         |  |            |  
|-------- | - |  | ---------------- |  | ----------------------------- |  | - |  | --------- |  | - |  | ------- |  | ---------- | -
|Average  |   |  |                  |  |                               |  |   |  | Amount    |  |   |  |         |  | Percentage |  
|Interest |   |  | Original         |  |                               |  |   |  | (in thou- |  |   |  | Minimum |  | of Total   |  
|Rate     |   |  | Term             |  | Category                      |  |   |  | sands)    |  |   |  | Balance |  | Deposits   |  
|        
|0.00     | % |  | N/A              |  | Noninterest-bearing           |  | $ |  | 25,010    |  | $ |  | 100     |  | 17.22      | %
|         |   | 
|0.35     |   |  | N/A              |  | Interest-bearing demand       |  |   |  | 30,629    |  |   |  | 100     |  | 21.09      |  
|         |   | 
|3.09     |   |  | N/A              |  | Money market deposit accounts |  |   |  | 23,738    |  |   |  | 100     |  | 16.35      |  
|         |   | 
|0.75     |   |  | N/A              |  | Savings accounts              |  |   |  | 18,387    |  |   |  | 100     |  | 12.66      |  
|        
|         |   |  |                  |  | Certificates of
      Deposit |  |   |  |           |  |   |  |         |  |            |  
|1.66     |   |  | Seven days       |  | Fixed-rate                    |  |   |  | 125       |  |   |  | 2,000   |  | 0.09       |  
|         |   | 
|1.64     |   |  | One month        |  | Fixed-rate                    |  |   |  | 13        |  |   |  | 2,000   |  | 0.01       |  
|         |   | 
|1.98     |   |  | Two months       |  | Fixed-rate                    |  |   |  | 1         |  |   |  | 2,000   |  | 0.01       |  
|4.15     |   |  | Three months     |  | Fixed-rate                    |  |   |  | 2,974     |  |   |  | 2,000   |  | 2.05       |  
|3.78     |   |  | Six months       |  | Fixed-rate                    |  |   |  | 3,591     |  |   |  | 2,000   |  | 2.47       |  
|3.67     |   |  | Nine months      |  | Fixed-rate                    |  |   |  | 87        |  |   |  | 2,000   |  | 0.06       |  
|4.35     |   |  | One year         |  | Fixed-rate                    |  |   |  | 13,554    |  |   |  | 2,000   |  | 9.33       |  
|3.99     |   |  | 18 months        |  | Fixed-rate                    |  |   |  | 875       |  |   |  | 2,000   |  | 0.60       |  
|4.05     |   |  | Two years        |  | Fixed-rate                    |  |   |  | 4,457     |  |   |  | 2,000   |  | 3.07       |  
|4.57     |   |  | Three years      |  | Fixed-rate                    |  |   |  | 1,833     |  |   |  | 2,000   |  | 1.26       |  
|3.10     |   |  | Four years       |  | Fixed-rate                    |  |   |  | 242       |  |   |  | 2,000   |  | 0.17       |  
|4.02     |   |  | Five years       |  | Fixed-rate                    |  |   |  | 4,498     |  |   |  | 2,000   |  | 3.10       |  
|5.19     |   |  | Various specials |  | Fixed-rate                    |  |   |  | 8,494     |  |   |  | 5,000   |  | 5.85       |  
|4.18     |   |  | Gold minor one   |  |                               |  |   |  |           |  |   |  |         |  |            |  
|         |   |  | year             |  | Fixed-rate                    |  |   |  | 2,046     |  |   |  | 500     |  | 1.41       |  
|8.00     |   |  | Deferred Comp    |  |                               |  |   |  |           |  |   |  |         |  |            |  
|         |   |  | one
      year   |  | Fixed-rate                    |  |   |  | 1,090     |  |   |  | 2,000   |  | 0.75       |  
|3.96     |   |  | One year         |  | Variable-rate                 |  |   |  | 938       |  |   |  | 2,000   |  | 0.65       |  
|3.97     |   |  | 2-1/2 years      |  | Variable-rate                 |  |   |  | 2,619     |  |   |  | 2,000   |  | 1.80       |  
|        
|2.13     | % |  |                  |  | TOTAL                         |  | $ |  | 145,201   |  |   |  |         |  | 100.00     | %
|         |   | 

The
following table indicates the amount of Alaska Pacifics jumbo certificates of
deposit by time remaining until maturity as of December 31, 2006. Jumbo
certificates of deposit are certificates in amounts of $100,000 or
more.

|                               |  |   |  | Certificates of     
|------------------------------ |  | - |  | --------------------
|                               |  |   |  | Deposit             
|Maturity Period                |  |   |  | (in
      thousands)
|                              
|Three months or less           |  | $ |  | 4,629               
|Over three through six months  |  |   |  | 2,126               
|Over six through twelve months |  |   |  | 2,694               
|Over twelve months             |  |   |  | 2,632               
|                              
|Total                          |  | $ |  | 12,081              
|                               |  |  

- 21 -

---

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,     |  |   |  |         |  | 2006       |   |  |   |  |            |   |  |   |  | 2005    | 
|-------------------------------------------- |  | - |  | ------- |  | ---------- | - |  | - |  | ---------- | - |  | - |  | ------- | 
|                                            
|                                             |  |   |  |         |  | Percent of |   |  |   |  | Increase   |   |  |   |  |         | 
|                                             |  |   |  | Amount  |  | Total      |   |  |   |  | (Decrease) |   |  |   |  | Amount  | 
|                                             |  |  
|Noninterest-bearing demand
      accounts    |  | $ |  | 25,010  |  | 17.22      | % |  | $ |  | (806       | ) |  | $ |  | 25,816  | 
|Interest-bearing demand
      accounts       |  |   |  | 30,629  |  | 21.09      |   |  |   |  | 482        |   |  |   |  | 30,147  | 
|Money market deposit accounts                |  |   |  | 23,738  |  | 16.35      |   |  |   |  | (3,710     | ) |  |   |  | 27,448  | 
|Savings accounts                             |  |   |  | 18,387  |  | 12.66      |   |  |   |  | (2,199     | ) |  |   |  | 20,586  | 
|Fixed-rate certificates which mature
      : |  |   |  |         |  |            |   |  |   |  |            |   |  |   |  |         | 
|Within 1
      year                          |  |   |  | 32,863  |  | 22.63      |   |  |   |  | 3,201      |   |  |   |  | 29,662  | 
|After 1 year, but
      within 2 years       |  |   |  | 5,295   |  | 3.65       |   |  |   |  | 867        |   |  |   |  | 4,428   | 
|After 2 years, but
      within 5 years      |  |   |  | 4,632   |  | 3.19       |   |  |   |  | (304       | ) |  |   |  | 4,936   | 
|Variable-rate certificates
      which       |  |   |  |         |  |            |   |  |   |  |            |   |  |   |  |         | 
|mature:                                      |  |   |  |         |  |            |   |  |   |  |            |   |  |   |  |         | 
|Within 1
      year                          |  |   |  | 2,267   |  | 1.56       |   |  |   |  | 324        |   |  |   |  | 1,943   | 
|After 1 year, but
      within 2 years       |  |   |  | 1,043   |  | 0.72       |   |  |   |  | (261       | ) |  |   |  | 1,304   | 
|After 2 years, but
      within 5 years      |  |   |  | 1,337   |  | 0.93       |   |  |   |  | 957        |   |  |   |  | 380     | 
|                                            
|Total                                        |  | $ |  | 145,201 |  | 100.00     | % |  | $ |  | (1,449     | ) |  | $ |  | 146,650 | 
|                                             |  |  



|Time Deposits by
    Rates
|--------------------------

The
following table sets forth the time deposits in Alaska Pacific classified by
rates at the dates indicated.

|(In thousands)December
      31, |   |  | 2006   |   |  | 2005  
|-------------------------------- | - |  | ------ | - |  | ------
|                                
|1.00 - 1.99%                     | $ |  | 150    | $ |  | 3,837 
|2.00 - 2.99%                     |   |  | 1,291  |   |  | 11,510
|3.00 - 3.99%                     |   |  | 16,313 |   |  | 14,981
|4.00 - 4.99%                     |   |  | 14,918 |   |  | 10,688
|5.00 - 5.99%                     |   |  | 13,550 |   |  | 517   
|6.00 - 6.99%                     |   |  | 125    |   |  | 76    
|7.00% and over                   |   |  | 1,090  |   |  | 1,044 
|                                
|Total                            | $ |  | 47,437 | $ |  | 42,653
|                                



|Time Deposits by
      Maturities
|---------------------------------

The
following table sets forth the amount and maturities of time deposits at
December 31, 2006.

|                             |   |  |           |  |   |  |            |  |   |  | Amount Due |   |   |  |            |  |   |  |         |  |   |  |       
|---------------------------- | - |  | --------- |  | - |  | ---------- |  | - |  | ---------- | - | - |  | ---------- |  | - |  | ------- |  | - |  | ------
|                             |   |  |          
|                             |   |  |           |  |   |  | Over 1 And |  |   |  | Over 2 And |   |   |  | Over 3 And |  |   |  |         |  |   |  |       
|                             |   |  | Less Than |  |   |  | Less Than  |  |   |  | Less Than  |   |   |  | Less Than  |  |   |  | Over    |  |   |  |       
|(dollars in
      thousands) |   |  | 1 Year    |  |   |  | 2 Years    |  |   |  | 3 Years    |   |   |  | 4 Years    |  |   |  | 4 Years |  |   |  | Total 
|                            
|1.00 - 1.99%                 | $ |  | 150       |  | $ |  | -          |  | $ |  | -          |   | $ |  | -          |  | $ |  | -       |  | $ |  | 150   
|2.00 - 2.99%                 |   |  | 1,129     |  |   |  | 162        |  |   |  | -          |   |   |  | -          |  |   |  | -       |  |   |  | 1,291 
|3.00 - 3.99%                 |   |  | 13,063    |  |   |  | 2,303      |  |   |  | 947        |   |   |  | -          |  |   |  | -       |  |   |  | 16,313
|4.00 - 4.99%                 |   |  | 10,309    |  |   |  | 2,032      |  |   |  | 1,158      |   |   |  | 1,171      |  |   |  | 248     |  |   |  | 14,918
|5.00 - 5.99%                 |   |  | 10,354    |  |   |  | 1,841      |  |   |  | 806        |   |   |  | -          |  |   |  | 549     |  |   |  | 13,550
|6.00 - 6.99%                 |   |  | 125       |  |   |  | -          |  |   |  | -          |   |   |  | -          |  |   |  | -       |  |   |  | 125   
|7.00% and over               |   |  | -         |  |   |  | -          |  |   |  | -          |   |   |  | -          |  |   |  | 1,090   |  |   |  | 1,090 
|                            
|Total                        | $ |  | 35,130    |  | $ |  | 6,338      |  | $ |  | 2,911      |   | $ |  | 1,171      |  | $ |  | 1,887   |  | $ |  | 47,437
|                            
|                            
|                             |   |  |           |  |   |  |            |  |   |  | - 22       | - |   |  |            |  |   |  |         |  |   |  |       

---



|Deposit Activities and Other Sources
      of Funds
|---------------------------------------------------

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

|(in thousands)Year
      ended December 31,      |   |  | 2006    |   |  |   |  | 2005   
|------------------------------------------------ | - |  | ------- | - |  | - |  | -------
|                                                
|Beginning balance                                | $ |  | 146,650 |   |  | $ |  | 137,784
|                                                
|Net deposits (withdrawals) before
      interest |   |  |         |   |  |   |  |        
|credited                                         |   |  | (4,107  | ) |  |   |  | 7,260  
|Interest credited                                |   |  | 2,658   |   |  |   |  | 1,606  
|                                                
|Net increase (decrease) in
      deposits        |   |  | (1,449  | ) |  |   |  | 8,866  
|                                                
|                                                
|Ending balance                                   | $ |  | 145,201 |   |  | $ |  | 146,650
|                                                 |  

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, 2006, Alaska Pacific had a borrowing capacity of
approximately $44.7 million with the FHLB of Seattle, of which $30.7 million was
unused compared with $44.3 million and $32.3 million, respectively, at December
31, 2005.

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, |   |  | 2006   |   |  |   |  | 2005   |  
|--------------------------------------------------- | - |  | ------ | - |  | - |  | ------ | -
|                                                   
|Advances:                                           |   |  |        |   |  |   |  |        |  
|Maximum amount of borrowings
      outstanding      |   |  |        |   |  |   |  |        |  
|during the year at
      any month end              | $ |  | 18,952 |   |  | $ |  | 14,095 |  
|Average outstanding during the
      year           |   |  | 13,729 |   |  |   |  | 10,393 |  
|Balance outstanding at end of
      year            |   |  | 14,062 |   |  |   |  | 12,048 |  
|                                                   
|Approximate weighted average rate
      paid:       |   |  |        |   |  |   |  |        |  
|Average during the
      year                       |   |  | 5.27   | % |  |   |  | 4.84   | %
|At end of
      year                                |   |  | 5.43   |   |  |   |  | 4.87   |  

REGULATION

General

The Bank, as
a federally-chartered savings institution, is subject to federal regulation and
oversight by the OTS extending to all aspects of its operations. The Bank also
is subject to regulation and examination by the FDIC, which insures the deposits
of The Bank to the maximum extent permitted by law, and requirements established
by the Federal Reserve Board. Federally chartered savings institutions are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS and the FDIC. The investment and lending authority of
savings institutions are prescribed by federal laws and regulations, and these
institutions are prohibited from engaging in any activities not permitted by the
laws and regulations. This regulation and supervision primarily is intended for
the protection of depositors and not for the purpose of protecting
stockholders.

- 23 -

---

The OTS
regularly examines the Bank and prepares reports for the consideration of the
Banks Board of Directors on any deficiencies that it may find in the Banks
operations. The FDIC also has the authority to examine the Bank in its roles as
the administrator of the Deposit Insurance Fund. The Banks relationship with
its depositors and borrowers also is regulated to a great extent by both federal
and state laws, especially in matters such as the ownership of savings accounts
and the form and content of the Banks mortgage requirements. Any change in
these regulations, whether by the FDIC, the OTS or Congress, could have a
material adverse impact on the Bank and its operations



|Regulation and Supervision of
      Savings Institutions
|--------------------------------------------------------

Office of
Thrift Supervision. The OTS has extensive
authority over the operations of savings institutions. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. All savings
institutions are subject to a semi-annual assessment, based upon the
institutions total assets, to fund the operations of the OTS. The OTS also has
extensive enforcement authority over all savings institutions and their holding
companies, including the Bank and the Corporation. 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 OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.

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 OTS.
Federal savings institutions are also generally authorized to branch nationwide.
The Bank is in compliance with the noted restrictions.

The Bank's
general permissible lending limit for loans-to-one-borrower is equal to the
greater of $500,000 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, 2006,
the Bank's lending limit under this restriction was $2.8 million and, at that
date, the Bank had no loans to one borrower exceeding this amount.

The OTS, 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 OTS 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 OTS assessment for the year ended December 31, 2006 was
$59,000.

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.

- 24 -

---

As a member,
the Bank is required to purchase and maintain stock in the FHLB of Seattle. At
December 31, 2006, the Bank had $1.8 million in FHLB stock, which was in
compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock until such dividends were suspended late
in 2004. For the years ended December 31, 2006 and 2005, Alaska Pacific received
no dividends, although dividend payments have resumed in the first quarter of
2007.

Under
federal law, the Federal Home Loan Banks are 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 the Banks capital.

Federal
Deposit Insurance Corporation. The Bank is a
member of the Deposit Insurance Fund, which is administered by the FDIC.
Deposits are insured up to the applicable limits by the FDIC and this insurance
is backed by the full faith and credit of the United States
government.

As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the SAIF. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after giving the OTS an 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.

The Federal
Deposit Insurance Reform Act of 2005 (the Reform Act"), which was enacted in
2006, revised the laws governing the federal deposit insurance system. The
Reform Act merged the Bank Insurance Fund and the Savings Association Insurance
Fund to form the Deposit Insurance Fund, eliminated any disparities in bank and
thrift risk-based premium assessments, reduced the administrative burden of
maintaining and operating two separate funds and established certain new
insurance coverage limits and a mechanism for possible periodic increases. The
legislation also gave the FDIC greater discretion to identify the relative risks
all institutions present to the Deposit Insurance Fund and set risk-based
premiums.

Major
provisions in the legislation include:

·merging
the Savings Association Insurance Fund and Bank Insurance Fund, which became
effective March 31, 2006;

·maintaining basic deposit and municipal account insurance coverage at
$100,000 but providing for a new basic insurance coverage for retirement
accounts of $250,000. Insurance coverage for basic deposit and retirement
accounts could be increased for inflation every five years in $10,000 increments
beginning in 2011;

·providing
the FDIC with the ability to set the designated reserve ratio within a range of
between 1.15% and 1.50%, rather than maintaining 1.25% at all times regardless
of prevailing economic conditions;

·providing
a one-time assessment credit of $4.7 billion to banks and savings associations
in existence on December 31, 1996, which may be used to offset future premiums
with certain limitations;

·requiring
the payment of dividends of 100% of the amount that the insurance fund exceeds
1.5% of the estimated insured deposits and the payment of 50% of the amount that
the insurance fund exceeds 1.35% of the estimated insured deposits (when the
reserve is greater than 1.35% but no more than 1.5%); and

·Provides
for a new risk-based assessment system and allows the FDIC to establish separate
risk-based assessment systems for large and small members of the Deposit
Insurance Fund.



|- 25
-
|------

---

On November
2, 2006, the FDIC set the designated reserve ratio for the deposit insurance
fund at 1.25% of estimated insured deposits, and adopted final regulations to
implement the risk-based deposit insurance assessment system mandated by the
Reform Act, which is intended to more closely tie each bank's deposit insurance
assessments to the risk it poses to the deposit insurance fund. Under the new
risk-based assessment system, the FDIC will evaluate each institution's risk
based on three primary factors  supervisory ratings for all insured
institutions, financial ratios for most institutions, and long-term debt issuer
ratings for large institutions that have them. An institutions assessment rate
will depend upon the level of risk it poses to the deposit insurance system as
measured by these factors. The new rates for most institutions will vary between
5 and 7 cents for every $100 of domestic insurable deposits. Applying this range
of assessments to the Banks deposits at December 31, 2006 results in an annual
assessment of approximately $73,000 to $102,000.

The new
assessment rates were effective at the beginning of 2007. However, the Reform
Act provides credits to institutions that paid high premiums in the past to
bolster the FDIC's insurance reserves, as a result of which the FDIC has
announced that a majority of banks will have assessment credits to initially
offset all of their premiums in 2007. Management does not believe it is possible
at this time to reliably estimate the net assessment cost, if any, that may be
imposed on the Bank. There are a number of uncertain factors that could affect
the assessment rate that the FDIC will decide to apply to the Bank and the
actual assessment credit that will be available to the Bank in 2007.

Capital
Requirements. Federally insured savings
institutions, such as Alaska Pacific, are required to maintain a minimum level
of regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings institutions. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual institutions on a
case-by-case basis.

The capital
regulations require tangible capital of at least 1.5% of adjusted total assets
(as defined by regulation). Tangible capital generally includes common
stockholders equity and retained income, and certain noncumulative perpetual
preferred stock and related income. In addition, all intangible assets must be
deducted from tangible capital for calculating compliance with the requirement.
At December 31, 2006, the Bank had tangible capital of $17.2 million, or 9.66%
of adjusted total assets, which is approximately $14.5 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.

The capital
standards also require core 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. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. At December 31, 2006, the Bank had core capital equal to $17.2
million, or 9.66% of adjusted total assets, which is $10.1 million above the
minimum requirement of 4% in effect on that date.

The OTS also
requires savings institutions to have core capital equal to 4% of risk-weighted
assets ("Tier 1 risk-based"). At December 31, 2006, the Bank had Tier 1
risk-based capital of $17.2 million, or 12.44% of risk-weighted assets, which is
approximately $11.7 million above the minimum on that date. The OTS risk-based
requirement requires savings institutions to have total capital of at least 8%
of risk-weighted assets. Total capital consists of core capital, as defined
above, and supplementary capital. Supplementary capital consists of certain
permanent and maturing capital instruments that do not qualify as core capital
and general valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only to the extent of core capital. The OTS is also
authorized to require a savings institution to maintain an additional amount of
total capital to account for concentration of credit risk and the risk of
non-traditional activities.

In
determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, are multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of asset. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one- to- four
family first lien mortgage loans not more than 90 days delinquent and
having a loan-to-value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by Fannie Mae or Freddie Mac.



|- 26
-
|------

---

On December
31, 2006, the Bank had total risk-based capital of $18.4 million and
risk-weighted assets of $138.4 million, or total capital of 13.32% of
risk-weighted assets. This amount was $7.4 million above the 8% requirement in
effect on that date.

The OTS and
the FDIC are authorized and, under certain circumstances, required to take
certain actions against savings institutions that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an undercapitalized institution, which is an institution with
less than either a 4.0% core capital ratio, a 4.0% Tier 1 risk-based capital
ratio, or an 8.0% risk-based capital ratio. Any such institution must submit a
capital restoration plan and until the plan is approved by the OTS, may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized institutions. As a condition to the approval of
the capital restoration plan, any company controlling an undercapitalized
institution must agree that it will enter into a limited capital maintenance
guarantee with respect to the institutions achievement of its capital
requirements.

Any savings
institution that fails to comply with its capital plan or has Tier 1 risk-based
or core capital ratios of less than 3.0% or a risk-based capital ratio of less
than 6.0% and is considered significantly undercapitalized will be made
subject to one or more additional specified actions and operating restrictions
which may cover all aspects of its operations and may include a forced merger or
acquisition of the institution. An institution that becomes critically
undercapitalized because it has a tangible capital ratio of 2.0% or less is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized institutions. In addition, the OTS
must appoint a receiver, or conservator with the concurrence of the FDIC, for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.

The OTS is
also generally authorized to reclassify an institution into a lower capital
category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition. The imposition by the OTS or the FDIC of any of these
measures on the Bank may have a substantial adverse effect on its operations and
profitability.

Standards
for Safety and Soundness.The federal banking
regulatory agencies have prescribed, by regulation, standards for all insured
depository institutions relating to: (i) internal controls, information systems
and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits (Guidelines). 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. If the OTS determines that the Bank fails to
meet any standard prescribed by the Guidelines, the OTS may require the Bank to
submit an acceptable plan to achieve compliance with the standard. OTS
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, 2006, the Bank met the test, with a ratio of 80.53% .



- 27 -

---

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 orconverted 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.
OTS 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 OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends to the Corporation in accordance with this general
authority.

Savings
institutions proposing to make any capital distribution need not submit written
notice to the OTS 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 OTS approval prior to making
such distribution. The OTS 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.

Activities of 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 OTS
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 OTS 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 FDIA. Based upon that
determination, the FDIC or the OTS 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 OTS 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 Corporation 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.





|- 28
  -
|--------

---

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
incompliance 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, 2006, the
Banks deposit with the Federal Reserve Bank and vault cash exceeded its reserve
requirements.

Community
Reinvestment Act. 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 OTS, 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 OTS. 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 2004 for Community Reinvestment
Act compliance and received a rating of satisfactory in its latest
examination.

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
OTS 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.

Anti-Money Laundering and Customer Identification.Congress enacted the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (the "USA Patriot Act") on October 26, 2001 in response to the terrorist
events of September 11, 2001. The USA Patriot Act gives the federal government
new powers to address terrorist threats through enhanced domestic security
measures, expanded surveillance powers, increased information sharing, and
broadened anti-money laundering requirements. In 2006, Congress re-enacted
certain expiring provisions of the USA Patriot Act.

- 29 -

---



|Regulation and Supervision of the
      Corporation
|---------------------------------------------------

General. The Corporation is a unitary
savings and loan holding company subject to regulatory oversight of the OTS.
Accordingly, the Corporation is required to register and file reports with the
OTS and is subject to regulation and examination by the OTS. In addition, the
OTS has enforcement authority over the Corporation and its non-savings
institution subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to present a serious risk to the subsidiary
savings institution.

Activities Restrictions. The
Corporation 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 Corporation 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."

Mergers
and Acquisitions.The Corporation must obtain
approval from the OTS 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 Corporation to acquire control
of a savings institution, the OTS would consider the financial and managerial
resources and future prospects of the Corporation 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.

Sarbanes-Oxley Act of 2002.The
Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) was signed into law on July
30, 2002 in response to public concerns regarding corporate accountability in
connection with the recent accounting scandals. The stated goals of the
Sarbanes-Oxley Act are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act
generally applies to all companies that file or are required to file periodic
reports with the Securities and Exchange Commission (SEC), under the
Securities Exchange Act of 1934 (Exchange Act), including the
Corporation.

The
Sarbanes-Oxley Act includes very specific additional disclosure requirements and
new corporate governance rules. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate law,
such as the relationship between a board of directors and management and between
a board of directors and its committees.



|TAXATION
|--------



|Federal
  Taxation
|------------------

General. The Corporation 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 corporations with some exceptions, including particularly the Banks
reserve for bad debts discussed below. 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 Bank or the
Corporation.

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.

- 30 -

---

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 the extent that the
Bank makes nondividend distributions to the Corporation, 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, after the Conversion, 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 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 the Banks
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 corporations, including the Bank, whether or not an Alternative
Minimum Tax is paid.

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



|State
  Taxation
|----------------

The Alaska
state income tax rate applicable to the Bank 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 the Banks state tax returns during the past five
years.

- 31 -

---



|Audits
|------

The Corporations 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 12 of the
Notes to Consolidated Financial Statements contained in the Annual Report.



|Subsidiary Activities
|---------------------

As of December 31, 2006, Alaska Pacific did not own any active subsidiaries.



|Executive Officers
|------------------

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

|                       |  | Age at       |  |                                 |  |                         |  |                            
|---------------------- |  | ------------ |  | ------------------------------- |  | ----------------------- |  | ---------------------------
|                       |  | December 31, |  |                                 |  | Position               
|                       |  |             
|Name                   |  | 2006         |  | Corporation                     |  |                         |  | Bank                       
|                      
|Craig E. Dahl          |  | 57           |  | Director, President             |  |                         |  | Director, President        
|                       |  |              |  | and Chief Executive Officer     |  |                         |  | and Chief Executive Officer
|                      
|Roger K. White         |  | 56           |  | Senior Vice President, Chief    |  |                         |  | Senior Vice President and  
|                       |  |              |  | Financial Officer and Secretary |  | Chief Financial Officer
|                      
|John E. Robertson      |  | 59           |  | --                              |  |                         |  | Senior Vice President and  
|                       |  |              |  |                                 |  |                         |  | Chief Credit Officer       
|                      
|Christopher P. Bourque |  | 55           |  | --                              |  |                         |  | Senior Vice President and  
|                       |  |              |  |                                 |  |                         |  | Chief Operating Officer    
|                      
|Leslie Dahl            |  | 47           |  | --                              |  |                         |  | Senior Vice President and  
|                       |  |              |  |                                 |  |                         |  | Chief Lending Officer      

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

Craig E. Dahljoined 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 Corporation since its formation in 1999. Prior to joining the Bank, he was President of the B.M. Behrends Bank in Juneau, Alaska. Mr. Dahl and Leslie Dahl, the Banks Senior Vice President and Chief Lending Officer, are married
to each other.

Roger K. Whitejoined the Bank in 1995 and has served in his current position at the Bank since that time and as Senior Vice President, Chief Financial
Officer and Secretary of the Corporation since its formation in 1999.

John E. Robertsonjoined the Bank in December 2002. Mr. Robertson previously held the position of Senior Relationship Manager at ABN Amro Bank from 1995
until 2002.

Christopher P. Bourquejoined 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 2003.

Leslie Dahljoined the Bank in February 2000 and has served as Senior Vice President and Chief Lending Officer since April 2006. Ms. Dahl and Craig E.
Dahl, the Corporations and the Banks President and Chief Executive Officer, are married to each other.



|- 32 -
|------

---



|Personnel
|---------

As of
December 31, 2006, the Bank had 64 full-time and seven part-time employees, none
of whom are represented by a collective bargaining unit. The Bank 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 giant super-regional 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 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 13% of deposits in Southeast Alaska, but
the total market in this calculation includes credit unions only for those based
in Southeast Alaska. If one were to include state-wide credit unions 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 46%. Wells
acquired the former National Bank of Alaska in 2000, and Alaska Pacific has
achieved some success in drawing customers away from Wells, especially small
businesses, through a targeted calling effort and a marketing emphasis on the
advantages of banking locally.

- 33 -

---



|Item 2. Description of
      Property
|-------------------------------------

The
following table sets forth certain information regarding Alaska Pacifics
offices at December 31, 2006.

|                        |  | Year   |  | Square  |  |   | Deposits            
|----------------------- |  | ------ |  | ------- |  | - | --------------------
|Location                |  | Opened |  | Footage |  |   | (in
      thousands)
|                       
|Main Office:            |  |        |  |         |  |   |                     
|Nugget Mall Office (1)  |  | 1984   |  | 16,000  |  | $ | 74,418              
|2094 Jordan Avenue      |  |        |  |         |  |   |                     
|Juneau, Alaska 99801    |  |        |  |         |  |   |                     
|Branch Offices:         |  |        |  |         |  |   |                     
|301 N. Franklin Street  |  | 1960   |  | 6,268   |  |   | 30,393              
|Juneau, Alaska 99801    |  |        |  |         |  |   |                     
|410 Mission Street (2)  |  | 1974   |  | 2,300   |  |   | 12,853              
|Ketchikan, Alaska 99901 |  |        |  |         |  |   |                     
|2442 Tongass Avenue (3) |  | 1997   |  | 1,550   |  |   | 7,217               
|Ketchikan, Alaska 99901 |  |        |  |         |  |   |                     
|315 Lincoln Street (4)  |  | 1978   |  | 2,032   |  |   | 20,320              
|Sitka, Alaska 99835     |  |        |  |         |  |   |                     
|                        |  |       

|(1) | Lease expires in January 2019,
      with one 10-year option to renew.                         
|--- | -----------------------------------------------------------------------------------------------
|(2) | Lease expires in February 2008,
      with option to renew for two consecutive five-year terms.
|(3) | Lease expires in November 2007,
      with two six-month options to renew.                     
|(4) | Lease expires in December 2013,
      with option to renew for two consecutive five-year terms.
|   

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, 2006, the net book value of Alaska Pacifics properties and its fixtures,
furniture and equipment was $3.5 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. Submission of Matters to a
Vote of Security Holders

No matters were submitted to a vote of
security holders during the fourth quarter of the year ended December 31,
2006.



- 34 -

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|PART
    II
|-----------

Item 5. Market for Common Equity and
Related Stockholder Matters

The
information contained in the section captioned Common Stock Information in the
Annual Report is incorporated herein by reference.



|Equity Compensation Plan
      Information
|------------------------------------------

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



|Issuer Purchases of Equity
      Securities
|-------------------------------------------

During the fourth quarter of the
year ended December 31, 2006, the Corporation had no purchases of its Common
Stock.

Item 6. Managements Discussion and
Analysis or Plan of Operation

The
information contained in the section captioned Managements Discussion and
Analysis of Financial Condition and Results of Operations in the Annual Report
is incorporated herein by reference.



|Item 7. Financial
      Statements
|----------------------------------

Independent
Auditors Report on Consolidated Financial Statements for the years ended
December 31, 2006 and 2005*

| | (a) | Consolidated Statements of Financial Condition as of
      December 31, 2006 and 2005*               
| | --- | -----------------------------------------------------------------------------------------------------
| | (b) | Consolidated Statements of Income for the Years Ended
      December 31, 2006 and 2005*              
| | (c) | Consolidated Statements of Stockholders Equity For the
      Years Ended December 31, 2006 and 2005*
| | (d) | Consolidated Statements of Cash Flows For the Years
      Ended December 31, 2006 and 2005*          
| | (e) | Notes to Consolidated Financial Statements*                                                          
| |    

| | * | Contained in the Annual Report
      included as Exhibit 13 hereto and incorporated herein by reference. All
      schedules have been omitted as the required information is either
      inapplicable or contained in the Consolidated Financial Statements or
      related Notes contained in the Annual Report.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  

Item 8. Changes In and Disagreements
With Accountants on Accounting and Financial Disclosure

No
disagreement with the Corporations independent accountants on accounting and
financial disclosure has occurred during the two most recent fiscal
years.



|Item 8A. Controls and
      Procedures
|--------------------------------------

(a)Evaluation of Disclosure Controls and
Procedures: An evaluation of the
Corporations disclosure controls and procedures (as defined in Section
13(a)-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) was
carried out under the supervision and with the participation of the
Corporations Chief Executive Officer, Chief Financial Officer and several other
members of the Corporations senior management within the 90-day period
preceding the filing date of this annual report. The Corporations Chief
Executive Officer and Chief Financial Officer concluded that the Corporations
disclosure controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by the Corporation in the
reports it files or submits under the Exchange Act is (i) accumulated and
communicated to the Corporations management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms.



|- 35
  -
|--------

---

(b)Changes in Internal Controls: In the year ended December 31, 2006, the Corporation did not
make any significant changes in, nor take any corrective actions regarding, its
internal controls or other factors that could significantly affect these
controls.



|Item 8B. Other
      Information
|--------------------------------

There was no
information to be disclosed by the Corporation in a report on Form 8-K during
the fourth quarter of fiscal 2006 that was not so disclosed.



|PART
    III
|------------

Item 9.Directors, Executive Officers, Promoters, Control Persons and
Corporate Governance; Compliance with Section 16(a) of the Exchange
Act

The
information contained under the section captioned Proposal I -- Election of
Directors in the Corporations Definitive Proxy Statement for the 2007 Annual
Meeting of Shareholders (Proxy Statement) is incorporated herein by reference.
For information regarding the executive officers of the Corporation, see Item
1. Business - Executive Officers.



|Audit Committee Financial
      Expert
|--------------------------------------

The Audit
Committee consisting of Directors Milner (Chairman), Grant, Grummett and
McDowell is responsible for reviewing the internal auditors report and results
of their examination prior to review by and with the entire Board of Directors
and retains and establishes the scope of the engagement of the Corporations
independent auditors. The Board of Directors has designated Director Milner as
the Audit Committee financial expert, as defined in the SECs Regulation S-B, by
the Banks Board of Directors. Although the Corporation is not listed on Nasdaq,
its Board of Directors has chosen to apply the definition of independent under
the Nasdaq rules, as permitted by the SECs Regulation S-B. Using this
definition, the Board has determined that Director Milner is
independent.



|Compliance with Section
      16(a)
|-----------------------------------

Section
16(a) of the Exchange Act requires Corporation directors and executive officers,
and persons who own more than 10% of a registered class of its equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the
Corporation. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.

Reference is
made to the cover page of this Annual Report on Form 10-KSB, and the information
under the section captioned Compliance with Section 16(a) of the Exchange Act
in the Proxy Statement is incorporated herein by reference, with regard to
compliance with Section 16(a) of the Exchange Act.



|Code of
  Ethics
|----------------

The Board of
Directors adopted a Code of Ethics for the Corporations officers (including its
senior financial officers), directors, and employees, which is included as
Exhibit 14 hereto. The Code of Ethics requires the Corporations officers,
directors, and employees to maintain the highest standards of professional
conduct. The Corporation has elected to provide a copy of its Code of Ethics
without charge to anyone who requests it.

Shareholder Recommendations for Board
Nominations

No material
changes have been made to the procedures by which security holders may recommend
nominees to the Corporations Board of Directors. See the sections captioned
"Meetings and Committees of the Board of Directors and Corporate Governance
Matters -- Committees and Committee Charters" and "Stockholder Proposals" in the
Proxy Statement, which are incorporated herein by reference.



|- 36
-
|------

---

Item 10. Executive
Compensation

The
information contained under the sections captioned Executive Compensation and
Directors Compensation in the Proxy Statement is incorporated herein by
reference.

Item 11. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters

(a)Security Ownership of Certain Beneficial Owners

Information required by this item is
incorporated herein by reference to the section captioned Security Ownership of
Certain Beneficial Owners and Management of the Proxy Statement.

(b)Security Ownership of Management

Information required by this item is
incorporated herein by reference to the sections captioned and Security
Ownership of Certain Beneficial Owners and Management and Proposal I -
Election of Directors of the Proxy Statement.

(c)Changes in Control

The Corporation is not aware of any
arrangements, including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date result in a change
in control of the Corporation.

(d)Equity Compensation Plan Information.The following table summarizes share and exercise price information about
the Corporations equity compensation plans as of December 31, 2006.

|                               |  |                            |  |  |   |                      |  | (c)                      
|------------------------------ |  | -------------------------- |  |  | - | -------------------- |  | -------------------------
|                               |  |                            |  |  |   |                      |  | Number of securities     
|                               |  | (a)                        |  |  |   | (b)                  |  | remaining available for  
|                               |  | Number of securities to be |  |  |   | Weighted-average     |  | future issuance under    
|                               |  | issued upon exercise of    |  |  |   | exercise price of    |  | equity compensation plans
|                               |  | outstanding options,       |  |  |   | outstanding options, |  | (excluding securities    
|Plan category                  |  | warrants and rights        |  |  |   | warrants, and rights |  | reflected in column (a)) 
|                              
|Equity compensation plans      |  |                            |  |  |   |                      |  |                          
|approved by security           |  |                            |  |  |   |                      |  |                          
|holders                        |  |                            |  |  |   |                      |  |                          
|Option
      plan              |  | 46,905                     |  |  | $ | 10.14                |  | -                        
|                              
|Equity compensation plans      |  |                            |  |  |   |                      |  |                          
|not approved by
      security |  |                            |  |  |   |                      |  |                          
|holders                        |  | -                          |  |  |   |                      |  | -                        
|                              
|Total                          |  | 46,905                     |  |  |   |                      |  | -                        
|                               |  |                           

Item 12. Certain Relationships and
Related Transactions, and Director Independence

The
information required by this item is incorporated herein by reference to the
section captioned Meetings and Committees of the Board of Directors and
Corporate Governance Matters  Corporate Governance  Related Party
Transactions" and Meetings and Committees of the Board of Directors and
Corporate Governance Matters  Corporate Governance Director Independence" in
the Proxy Statement.

- 37 -

---



|Item 13.
      Exhibits
|-----------------------

|(a) | Exhibits
|--- | --------
|   
|    | 3.1     
|   
|    | 3.2     
|   
|    | 10.1    
|   
|    | 10.2    
|   
|    | 10.3    
|   
|    | 10.4    
|   
|    | 10.5    
|   
|    | 10.6    
|   
|    | 10.7    
|   
|    | 10.8    
|   
|    | 10.9    
|   
|    | 10.10   
|   
|    | 10.11   
|   
|    | 10.12   
|   
|    | 10.13   
|   
|    | 13      
|   
|    | 14      
|   
|    | 21      
|   
|    | 23      
|   
|    | 31.1    
|   
|    | 31.2    
|   
|    | 32.1    
|   
|    | 32.2    
|   



| | 
| | 

|(1) | Incorporated by reference to the
      registrants Registration Statement on Form SB-2 (333-74827).                                                                                                                                                                                                    
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Incorporated by reference to the
      registrants Registration Statement on Form SB-2 (333-74827), except for
      amended Article III, Section 2, which was incorporated by reference to the
      registrants quarterly report on Form 10-QSB for the quarterly period
      ended March 31, 2004.
|   
|(3) | Incorporated by reference to the
      registrants Annual Report on Form 10-KSB for the year ended December 31,
      1999.                                                                                                                                                                            
|   
|(4) | Incorporated by reference to the
      registrants annual meeting proxy statement dated May 5, 2000.                                                                                                                                                                                                   
|   
|(5) | Incorporated by reference to the
      registrants quarterly report on Form 10-QSB for the quarterly period
      ended March 31, 2004.                                                                                                                                                                
|   
|(6) | Incorporated by reference to the
      registrants annual meeting proxy statement dated April 10, 2004.                                                                                                                                                                                                
|   
|(7) | Incorporated by reference to the
      registrants Annual Report on Form 10-KSB for the year ended December 31,
      2005                                                                                                                                                                             
|   



|Item 14. Principal Accountant
      Fees and Services
|-----------------------------------------------------

The
information set forth under the section captioned Proposal II -- Approval of
Appointment of Independent Auditors in the Proxy Statement is incorporated
herein by reference.

- 38 -

---



|SIGNATURES
|----------

Pursuant to
the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on March 28, 2007, on
its behalf by the undersigned, thereunto duly authorized.



|ALASKA
      PACIFIC BANCSHARES, INC.
|-------------------------------------



| | /s/ Craig E.
      DahlCraig E. DahlPresident and Chief Executive Officer(Duly Authorized
Representative)
| | ---------------------------------------------------------------------------------------------------------

Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below on March 28, 2007 by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.

/s/ Craig E.
Dahl                                                             /s/
Roger K. WhiteCraig E.
Dahl                                                                   Roger
K. WhitePresident and Chief Executive
Officer                               Senior
Vice President, Chief Financial Officer(Principal Executive
Officer)                                                  and
Secretary                                                                                       (Principal
Financial and Accounting Officer)

|/s/ Roger Grummett                     |  | /s/ BethAnn
Chapman        
|-------------------------------------- |  | ---------------------------
|                                      
|Roger Grummett                         |  | BethAnn Chapman            
|Chairman of the Board and
    Director |  | Director                   
|                                      
|                                      
|                                      
|/s/ Hugh N. Grant                      |  | /s/ Deborah R.
    Marshall
|                                      
|Hugh N. Grant                          |  | Deborah R. Marshall        
|Director                               |  | Director                   
|                                      
|                                      
|                                      
|/s/ Eric McDowell                      |  | /s/ Scott C.
Milner        
|                                      
|Eric McDowell                          |  | Scott C. Milner            
|Director                               |  | Director                   
|                                      
|                                      
|                                      
|/s/ Marta Ryman                        |  | /s/ William J.
  Schmitz   
|                                      
|Marta Ryman                            |  | William J. Schmitz         
|Director                               |  | Director                   

39

---



|Exhibit
  Index
|---------------





|Exhibit No. |  | Description                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------
|            |  |                                                                                                         
|13          |  | Annual Report to Stockholders                                                                           
|           
|21          |  | Subsidiaries of the Registrant                                                                          
|           
|23          |  | Consent of Independent Registered Public Accounting
      Firm                                          
|           
|31.1        |  | Certification of Chief Executive Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
|           
|31.2        |  | Certification of Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
|           
|32.1        |  | Certification of Chief Executive Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002
|           
|32.2        |  | Certification of Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002
|           

---



|Exhibit
      13
|----------------

Annual Report to
Stockholders

---



|Exhibit
      21Subsidiaries of the
      Registrant
|----------------------------------------------------

|Parent                  |  |              |  |  |                       
|----------------------- |  | ------------ |  |  | ----------------------
|Alaska Bancshares, Inc. |  |              |  |  |                       
|                        |  | Percentage   |  |  | Jurisdiction or       
|Subsidiaries (a)        |  | of Ownership |  |  | State of Incorporation
|Alaska Pacific Bank     |  | 100%         |  |  | United States         

|(a) | The operation of the Corporations
      wholly owned subsidiary is included in the Corporations Consolidated
      Financial Statements contained in the Annual Report attached hereto as
      Exhibit 13.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   

---



|Exhibit
  23
|------------

CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Board of DirectorsAlaska Pacific Bancshares, Inc.

We consent to the incorporation by reference in
Registration Statement No. 333-58798 on Form S-8 of Alaska Pacific Bancshares,
Inc. of our report dated March 27, 2007, with respect to the consolidated
balance sheets of Alaska Pacific Bancshares, Inc. and subsidiary as of December
31, 2006 and 2005, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the years then ended, which appear in
the December 31, 2006, annual report on Form 10-KSB of Alaska Pacific
Bancshares, Inc.



|/s/ Moss Adams LLPSpokane, WashingtonMarch 27,
      2007
|---------------------------------------------------------

---

Exhibit 31.1

Certification RequiredBy Rules 13a-14 and 15d-14 under the Securities Exchange Act
of 1934

I, Craig E. Dahl, President and Chief
Executive Officer, certify that:

|1. | I have reviewed this
      Annual Report on Form 10-KSB of Alaska Pacific Bancshares,
  Inc.;                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. | Based on my knowledge,
      this report does not contain any untrue statement of a material fact or
      omit to state a material fact necessary to make the statements made, in
      light of the circumstances under which such statements were made, not
      misleading with respect to the period covered by this report;                                                                                             
|  
|3. | Based on my knowledge,
      the financial statements, and other financial information included in this
      report, fairly present in all material respects the financial condition,
      results of operations and cash flows of the registrant as of, and for, the
      periods presented in this report;                                                                                                                
|  
|4. | The registrants other
      certifying officer(s) and I are responsible for establishing and
      maintaining disclosure controls and procedures (as defined in Exchange Act
      Rules 13a-15(e) and 15d-15(e)) for the registrant and have:                                                                                                                                                                               
|  
|   | (a) Designed such
      disclosure controls and procedures, or caused such disclosure controls and
      procedures to be designed under our supervision, to ensure that material
      information relating to the registrant, including its consolidated
      subsidiaries, is made known to us by others within those entities,
      particularly during the period in which this report is being
      prepared;         
|  
|   | (b) Evaluated the
      effectiveness of the registrants disclosure controls and procedures and
      presented in this report our conclusions about the effectiveness of the
      disclosure controls and procedures, as of the end of the period covered by
      this report based on such evaluation; and                                                                                                                
|  
|   | (c) Disclosed in this
      report any change in the registrants internal control over financial
      reporting that occurred during the registrants most recent fiscal quarter
      (the registrants fourth fiscal quarter in the case of an annual report)
      that has materially affected, or is reasonably likely to materially
      affect, the registrants internal control over financial reporting;
      and
|  
|5. | The registrants other
      certifying officer(s) and I have disclosed, based on our most recent
      evaluation of internal control over financial reporting, to the
      registrants auditors and the audit committee of the registrants board of
      directors (or persons performing the equivalent functions):                                                                                                     
|  
|   | (a) All significant
      deficiencies and material weaknesses in the design or operation of
      internal control over financial reporting which are reasonably likely to
      adversely affect the registrants ability to record, process, summarize
      and report financial information; and                                                                                                                          
|  
|   | (b) Any fraud, whether
      or not material, that involves management or other employees who have a
      significant role in the registrants internal control over financial
      reporting.                                                                                                                                                                                                                               
|  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                

Date:      March 28,
2007                                                /s/Craig
E.
Dahl                                                                                        Craig
E.
DahlPresident and Chief Executive Officer

---



|Exhibit
      31.2
|------------------

Certification RequiredBy Rules 13a-14 and 15d-14 under the Securities Exchange Act
of 1934

I, Roger K. White, Senior Vice President
and Chief Financial Officer, certify that:

|1. | I have reviewed this
      Annual Report on Form 10-KSB of Alaska Pacific Bancshares,
  Inc.;                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. | Based on my knowledge,
      this report does not contain any untrue statement of a material fact or
      omit to state a material fact necessary to make the statements made, in
      light of the circumstances under which such statements were made, not
      misleading with respect to the period covered by this report;                                                                                             
|  
|3. | Based on my knowledge,
      the financial statements, and other financial information included in this
      report, fairly present in all material respects the financial condition,
      results of operations and cash flows of the registrant as of, and for, the
      periods presented in this report;                                                                                                                
|  
|4. | The registrants other
      certifying officer(s) and I are responsible for establishing and
      maintaining disclosure controls and procedures (as defined in Exchange Act
      Rules 13a-15(e) and 15d-15(e)) for the registrant and have:                                                                                                                                                                               
|  
|   | (a) Designed such
      disclosure controls and procedures, or caused such disclosure controls and
      procedures to be designed under our supervision, to ensure that material
      information relating to the registrant, including its consolidated
      subsidiaries, is made known to us by others within those entities,
      particularly during the period in which this report is being
      prepared;         
|  
|   | (b) Evaluated the
      effectiveness of the registrants disclosure controls and procedures and
      presented in this report our conclusions about the effectiveness of the
      disclosure controls and procedures, as of the end of the period covered by
      this report based on such evaluation; and                                                                                                                
|  
|   | (c) Disclosed in this
      report any change in the registrants internal control over financial
      reporting that occurred during the registrants most recent fiscal quarter
      (the registrants fourth fiscal quarter in the case of an annual report)
      that has materially affected, or is reasonably likely to materially
      affect, the registrants internal control over financial reporting;
      and
|  
|5. | The registrants other
      certifying officer(s) and I have disclosed, based on our most recent
      evaluation of internal control over financial reporting, to the
      registrants auditors and the audit committee of the registrants board of
      directors (or persons performing the equivalent functions):                                                                                                     
|  
|   | (a) All significant
      deficiencies and material weaknesses in the design or operation of
      internal control over financial reporting which are reasonably likely to
      adversely affect the registrants ability to record, process, summarize
      and report financial information; and                                                                                                                          
|  
|   | (b) Any fraud, whether
      or not material, that involves management or other employees who have a
      significant role in the registrants internal control over financial
      reporting.                                                                                                                                                                                                                               
|  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                

Date:    March 28,
2007                                                 /s/Roger
K.
White                                                                                       Roger
K. WhiteSenior
Vice President and Chief Financial Officer

---



|Exhibit
      32.1
|------------------

CERTIFICATION OF CHIEF EXECUTIVE
OFFICER OF ALASKA PACIFIC BANCSHARES, INC.PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002

Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, and in connection with the
Corporations Annual Report on Form 10-KSB, I hereby certify that:

·
The report fully complies with the requirements of
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended,
and

·
The information contained in the report fairly presents,
in all material respects, the Corporations financial condition and results of
operations.

|March 28, 2007 |  | /s/Craig E. Dahl             
|-------------- |  | -----------------------------
|Date           |  | Craig E. Dahl                
|               |  | President and                
|               |  | Chief Executive
      Officer

---



|Exhibit
      32.2
|------------------

CERTIFICATION OF CHIEF FINANCIAL
OFFICER OF ALASKA PACIFIC BANCSHARES, INC.PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002

Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, and in connection with the
Corporations Annual Report on Form 10-KSB, I hereby certify that:

·
The report fully complies with the requirements of
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended,
and

·
The information contained in the report fairly presents,
in all material respects, the Corporations financial condition and results of
operations.

|March 28, 2007 |  | /s/ Roger K. White       
|-------------- |  | -------------------------
|Date           |  | Roger K. White           
|               |  | Senior Vice President and
|               |  | Chief Financial Officer  

---