SECURITIES
AND EXCHANGE COMMISSION
                                                                               Washington, D.C. 20549

FORM 10-KSB

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

|For the fiscal year ended December 31, 2002          OR
|-------------------------------------------------------

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

|Commission File Number:  0-26003                                                                            
|------------------------------------------------------------------------------------------------------------
|                                                                                                            
|ALASKA PACIFIC BANCSHARES, INC.                                                                             
|(Exact name of registrant as specified in its charter)                                                      
|Alaska                                                                                                      
|(State or other jurisdiction of incorporation 
or organization)                                             
|                                                                                                            
|2094 Jordan Avenue, Juneau, Alaska                                                                          
|(Address of principal executive offices)                                                                    
|                                                                                                            
|Registrant's telephone number, including area code:                                                         
|                                                                                                            
|Securities registered pursuant to Section 12(b) of the Act:                                                 
|                                                                                                            
|Securities registered pursuant to Section 12(g) of the Act:  
      
Common Stock, par value $0.01 per share
|(Title of Class)                                                                                            

|Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
   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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The registrant's revenues for
the fiscal year ended December 31, 2002 were $10.6 million.
|-----------------------------------------------------------------------------------------

|As of March 27, 2003, there were issued and outstanding 623,132 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 average of the bid and asked prices for the Common Stock on March 27, 2003, the aggregate value of the Common Stock outstanding held by nonaffiliates
of the registrant was $11.8 million (623,132 shares at $19.00 per share).  For purposes of this calculation, officers and directors of the registrant and the registrant's Employee Stock Ownership Plan are considered nonaffiliates.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

DOCUMENTS INCORPORATED BY REFERENCE

1.        Portions of Annual Report to Stockholders for the Fiscal Year Ended December 31, 2002 (Parts I and II)

2.        Portions of Proxy Statement for the 2002 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, 2002, the Corporation had total assets of $154.3 million, total deposits of $132.7 million and stockholders' equity of $15.0 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 from mutual to stock form, 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 under the Savings Association Insurance Fund ("SAIF") 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 11 communities. This area has similar economic characteristics, however, there is diversity in some unique industries. Southeast Alaska offers a number of recreational activities, which are popular tourist attractions.

Alaska Pacific's main office and one other full service branch office are located in Juneau (population approximately 30,711), 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. Historically, Juneau had an active mining industry (primarily gold and silver), however, mining employment has declined as a result of environmental pressures and a decline in the price of gold. 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 14,070).  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.



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Alaska Pacific's newest full service offices (opened in December 2000) are located in Hoonah (population approximately 860) and Yakutat (population approximately 808). The opening of these offices were the result of an agreement with KeyBank whereby KeyBank closed its existing offices and Alaska Pacific opened in the same locations. The economies of Hoonah and Yakutat are based on timber, commercial fishing, and related activities.

Alaska Pacific closed two branches in October 2001: the Wrangell Office in Wrangell, Alaska and the Auke Bay Office in Juneau, Alaska.  The decision to close was based on the branches' small size and resulting operating inefficiencies.

Selected Financial Data

This information is incorporated by reference from page 4 of the 2002 Annual Report to Stockholders  ("Annual Report").

Yields Earned and Rates Paid

This information is incorporated by reference from page 10 of the Annual Report.

Lending Activities



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|(dollars in thousands) December 31, | 2002     | 2001   
|----------------------------------- | -------- | -------
|                                    | Amount   | Percent
|Real estate:                        |          |        
|Permanent:                          |          |        
|One- to four-family                 | $41,419  | 38.60% 
|Multifamily                         | 2,209    | 2.06   
|Commercial nonresidential           | 26,075   | 24.31  
|Land                                | 5,120    | 4.77   
|Construction:                       |          |        
|One- to four-family                 | 3,643    | 3.40   
|Commercial nonresidential           | 52       | 0.05   
|Commercial business                 | 12,975   | 12.10  
|Consumer:                           |          |        
|Home equity                         | 8,912    | 8.31   
|Boat                                | 5,249    | 4.89   
|Automobile                          | 831      | 0.77   
|Other                               | 789      | 0.74   
|Total loans                         | 107,274  | 100.00%
|Less:                               |          |        
|Allowance for loan losses           | 1,152    |        
|Loans, net                          | $106,122 |    



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 ("FHLMC") 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.



Borrower demand for adjustable rate mortgage loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and adjustable rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. In general, there has been limited demand for adjustable rate mortgage loans in Alaska Pacific's primary market area for several years, but that demand has increased somewhat with the introduction of initial fixed-rate periods.

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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 be maintained in an amount at least equal to the outstanding loan balance and flood insurance where appropriate.

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 the FHLMC.



Loans secured by undeveloped land or improved lots involve greater risks than one- to four-family residential mortgage loans because such 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 loans are made for a term of up to 12 months. Construction loans are made at adjustable rates based on the prime lending rate 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.

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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.

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 $50,000 to $400,000, while commercial nonresidential and multifamily construction loans have generally ranged from $150,000 to $1 million.  At December 31, 2002, all construction loans were performing according to the loan terms; the largest, for approximately $1.2 million, was for a large single-family residence.



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 $1.5 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 $250,000 on an annual basis to ensure that the loan meets current underwriting standards.

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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 and three percentage points.  Such loans generally are originated in principal amounts between $50,000 and $750,000.  At December 31, 2002, the largest commercial business loan was to an Alaska Native corporation for $1.0 million, secured by a time deposit in Alaska Pacific.  The loan was performing according to its terms at December 31, 2002.

Beginning in 1998, Alaska Pacific increased its use of resources for loan guarantees 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 four commercial loans originated through participation programs with Alaska Industrial Development and Export Authority, Alaska Electrical Pension Trust, the City of Sitka and AHFC.

Alaska Pacific also makes commercial loans secured by commercial charter boats and commercial fishing boats.  These loans have ten-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 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, 2002, home equity loans totaled $8.9 million, or 8.3% of the total loan portfolio, compared to $9.9 million, or 8.9% of the total loan portfolio at December 31, 2001.  Home equity loans generally do not exceed 95% of the appraised value of the residence or 100% of the tax assessment, less the outstanding 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.

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At December 31, 2002, consumer boat loans amounted to $5.2 million, or 4.9%, of the total loan portfolio compared to $5.5 million, or 5.0% of the total loan portfolio at December 31, 2001. 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, 2002, automobile loans amounted to $831,000, or 0.8%, of the total loan portfolio compared to $1.3 million, or 1.2% of the total loan portfolio at December 31, 2001.  Alaska Pacific offers automobile loans with maturities of up to six years with fixed rates of interest.

Other consumer loans include loans collateralized by deposit accounts and other types of collateral, and by unsecured loans to qualified individuals.  These loans amounted to $789,000, or 0.7%, of total loans at December 31, 2002, compared to $1.0 million, or 0.9% of total loans at December 31, 2001.

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 for boats and airplanes also require a breach of warranty endorsement.

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. At December 31, 2002, one consumer loan, a boat loan for $33,000, was 90 days or more past due.

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|                                  |               | After                      | After                  | After                    |                 |          |       | After 1 Year
|--------------------------------- | ------------- | -------------------------- | ---------------------- | ------------------------ | --------------- | -------- | ----- | ------------
|(in thousands)                    | Within
1 Year | 1 Year     Through
3 Years | 3 Year
Through
5 Years | 5 Years
Through
10 Years | Beyond
10 Years | Total    |   | Fixed
Rates 
|Real estate:                      |               |                            |                        |                          |                 |          |       |             
|Permanent:                        |               |                            |                        |                          |                 |          |       |             
|One- to four-family               | $    587      | $   457                    | $   525                | $ 1,866                  | $37,984         | $41,419  |       | $37,796     
|Multifamily                       | 267           | 100                        | 57                     | 598                      | 1,187           | 2,209    |       | 651         
|Commercial       nonresidential   | 230           | 427                        | 198                    | 7,543                    | 17,677          | 26,075   |       | 1,762       
|Land                              | 2,253         | 1,110                      | 419                    | 930                      | 408             | 5,120    |       | 944         
|Construction:                     |               |                            |                        |                          |                 |          |       |             
|One- to four-family               | 3,643         | -                          | -                      | -                        | -               | 3,643    |       | -           
|Commercial         nonresidential | 52            | -                          | -                      | -                        | -               | 52       |       | -           
|Commercial business               | 2,867         | 1,125                      | 2,302                  | 3,848                    | 2,833           | 12,975   |       | 586         
|Consumer:                         |               |                            |                        |                          |                 |          |       |             
|Home equity                       | 152           | 259                        | 524                    | 3,291                    | 4,686           | 8,912    |       | 6,717       
|Boat                              | 10            | 150                        | 464                    | 2,124                    | 2,501           | 5,249    |       | 3,878       
|Automobile                        | 34            | 424                        | 319                    | 54                       | -               | 831      |       | 797         
|Other                             | 163           | 112                        | 183                    | 235                      | 96              | 789      |       | 295         
|Total                             | $10,258       | $4,164                     | $4,991                 | $20,489                  | $67,372         | $107,274 |   | $53,426     



Loan approval authority varies based on loan type. The President and Chief Executive Officer and the Senior Vice President and Chief Lending Officer each have authority to approve all residential mortgage loans up to and including $250,000 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 $250,000 ($100,000 if unsecured), and consumer loans up to and including $200,000 ($50,000 if unsecured).  Alaska Pacific's Senior Loan Committee, consisting of the Senior Vice President and Chief Loan Officer and two senior lending officers, must approve loans in excess of these amounts up to and including $500,000. The Directors' Loan Committee must approve all loans in excess of the Senior Loan Committee's approval authority up to and including $1,250,000. The Board of Directors must approve all loans in excess of the Directors Loan Committee's approval authority.

Upon receipt of a loan application from a prospective borrower, a credit report and other data are obtained to verify specific information relating to the loan applicant's employment, income and credit standing.  An independent fee appraiser approved by Alaska Pacific and licensed or certified by the State of Alaska undertakes an appraisal of the 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.

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In 2000, Alaska Pacific implemented 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, which is scheduled for implementation in 2003.

Pursuant to OTS regulations, loans-to-one borrower cannot exceed 15% of Alaska Pacific's unimpaired capital and surplus. At December 31, 2002, the loans-to-one borrower limitation for Alaska Pacific was $2.3 million and Alaska Pacific had no loans in excess of this limitation.



Alaska Pacific generally sells all loans without recourse.  Alaska Pacific generally sells conventional fixed-rate one- to four-family residential mortgage loans to the FHLMC or AHFC, 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, 2002, Alaska Pacific's servicing portfolio was $82.7 million. For the year ended December 31, 2002, loan servicing fees totaled $249,000 before amortization of servicing rights.  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, 2002, these escrow balances totaled $754,000.  Sales of mortgage loans amounted to $25.2 million in 2002, compared with $26.1 million in 2001.



|(in thousands) Year ended December 31,                   | 2002      | 2001      
|-------------------------------------------------------- | --------- | ----------
|Loans originated:                                        |           |           
|Real estate:                                             |           |           
|Permanent:                                               |           |           
|One- to four-family                                      | $39,513   | $35,715   
|Multifamily                                              | 543       | 69        
|Commercial nonresidential                                | 15,107    | 1,870     
|Land                                                     | 233       | 634       
|Construction:                                            |           |           
|One- to four-family                                      | 5,376     | 5,688     
|Multifamily                                              | -         | 750       
|Commercial nonresidential                                | 53        | 1,588     
|Commercial business                                      | 2,538     | 6,759     
|Consumer:                                                |           |           
|Home equity                                              | 2,923     | 4,208     
|Boat                                                     | 2,872     | 3,745     
|Automobile                                               | 455       | 871       
|Other                                                    | 432       | 685       
|Total loans originated                                   | 70,045    | 62,582    
|Loans purchased                                          | 1,074     | -         
|Loans sold                                               | (25,172)  | (26,133)  
|Principal repayments                                     | (46,124)  | (30,451)  
|Foreclosed loans                                         | (146)     | (170)     
|Net increase (decrease) in loans and loans held for sale | $   (323) | $    5,828



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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.

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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,                                           | 2002    | 2001  
|----------------------------------------------------------------------------- | ------- | ------
|Loans accounted for on a nonaccrual basis:                                    |         |       
|Commercial nonresidential real estate                                         | $   904 | $    -
|Land                                                                          | 508     | 145   
|Commercial business                                                           | 332     | 1,214 
|Consumer - boats                                                              | 33      |       
|Total                                                                         | 1,777   | 1,359 
|Accruing loans which are contractually past due 90 days or more               | -       | -     
|Total of nonaccrual and 90 days past due loans                                | 1,777   | 1,359 
|                                                                              |         |       
|Repossessed assets                                                            | 189     | 166   
|Total nonperforming assets                                                    | $1,966  | $1,525
|                                                                              |         |       
|Nonaccrual and 90 days or more past due loans as a percentage of loans, net   | 1.67%   | 1.23% 
|                                                                              |         |       
|Nonaccrual and 90 days or more past due loans as a percentage of total assets | 1.15%   | 0.88% 
|                                                                              |         |       
|Nonperforming assets as a percentage of total assets                          | 1.27%   | 0.99% 

Gross interest income that would have been recorded for the year ended December 31, 2002 if nonaccrual loans had been current according to their original terms and had been outstanding throughout the year was approximately $122,000, and the amount of interest income on these loans that was included in net income for the year was approximately $23,000.





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.

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At December 31, 2002 and 2001, the aggregate amounts of Alaska Pacific's classified and special mention assets (as determined by Alaska Pacific), were as follows:

|(in thousands) December 31, | 2002        | 2001       
|--------------------------- | ----------- | -----------
|Loss                        | $         - | $         -
|Doubtful                    | 329         | -          
|Substandard assets          | 1,638       | 1,161      
|Special mention             | 1,172       | 1,392      







- All loans classified during the previous analysis
- Past Due Loans
- Reports from Alaska Pacific's managers.
- Current economic conditions.
- Trends in Alaska Pacific's delinquencies



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.



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 -

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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) December 31,                                                           | 2002     | 2001 
|--------------------------------------------------------------------------------------------- | -------- | -----
|Allowance at beginning of period                                                              | $    939 | $788 
|Provision for loan losses                                                                     | 370      | 210  
|Charge-offs:                                                                                  |          |      
|One- to- four family residential                                                              | (4)      | (26) 
|Commercial business                                                                           | (139)    | -    
|Consumer:                                                                                     |          |      
|Home equity                                                                                   | (21)     | -    
|Boat                                                                                          | -        | (26) 
|Automobile                                                                                    | -        | (7)  
|Other                                                                                         | -        | (4)  
|Total charge-offs                                                                             | (164)    | (63) 
|Recoveries:                                                                                   |          |      
|Commercial business                                                                           | 7        | -    
|Consumer:                                                                                     |          |      
|Boat                                                                                          | -        | 2    
|Other                                                                                         | -        | 2    
|Total recoveries                                                                              | 7        | 4    
|Net charge-offs                                                                               | (157)    | (59) 
|Balance at end of period                                                                      | $1,152   | $939 
|                                                                                              |          |      
|Allowance for loan losses as a percentage of total loans outstanding at the end of the period | 1.07%    | 0.84%
|                                                                                              |          |      
|Net charge-offs as a percentage of average loans outstanding during the period                | 0.14     | 0.05 
|                                                                                              |          |      
|Allowance for loan losses as a percentage of nonperforming loans at end of period             | 64.83    | 69.09



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|December 31,                    | 2002    | 2001                                   
|------------------------------- | ------- | ---------------------------------------
|(dollars in thousands)          | Amount  | As a % of Outstanding Loans in Category
|Real estate:                    |         |                                        
|Permanent:                      |         |                                        
|One- to four-family             | $    45 | 0.11%                                  
|Multifamily                     | 6       | 0.27                                   
|Commercial nonresidential       | 151     | 0.58                                   
|Land                            | 7       | 0.14                                   
|Construction:                   |         |                                        
|One- to four-family             | 2       | 0.05                                   
|Commercial nonresidential       | -       | -                                      
|Commercial                      | 800     | 6.17                                   
|Consumer:                       |         |                                        
|Home equity                     | 58      | 0.65                                   
|Boat                            | 59      | 1.12                                   
|Automobile                      | 13      | 1.56                                   
|Other                           | 11      | 1.39                                   
|Total allowance for loan losses | $1,152  | 1.07%                                  

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 FHLMC, Federal National Mortgage Association ("FNMA") and Government National Mortgage Association ("GNMA"). 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.

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|December 31,                                               | 2002       |                | 2001                
|---------------------------------------------------------- | ---------- | -------------- | --------------------
|(dollars in thousands)                                     | Fair
Value | Amortized Cost | Percent of Portfolio
|Mortgage-backed securities:                                |            |                |                     
|Federal National Mortgage         Association              | $1,287     | $1,330         | 15.9%               
|Federal Home Loan Mortgage         Corporation             | 1,431      | 1,517          | 17.7                
|Government National Mortgage         Association           | 5,069      | 4,733          | 62.8                
|U.S. agencies and corporations:                            |            |                |                     
|Small Business Administration         pools                | 289        | 285            | 3.6                 
|Total investment securities             available for sale | $8,076     | $7,865         | 100.0%              











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, 2002.

|                                                           | Final Maturity or Repricing within: |                       
|---------------------------------------------------------- | ----------------------------------- | ----------------------
|                                                           | One Year or Less                    | Over Ten Years        
|(dollars in thousands)
December 31, 2002                   | Amortized
Cost                      | Weighted
Average
Yield
|Mortgage-backed securities:                                |                                     |                       
|Federal National Mortgage         Association              | $ 1,330                             | 3.3%                  
|Federal Home Loan Mortgage         Corporation             | 1,517                               | 2.9                   
|Government National Mortgage         Association           | 232                                 | 4.3                   
|U.S. agencies and corporations:                            |                                     |                       
|Small Business Administration         pools                | 285                                 | 3.4                   
|Total investment securities             available for sale | $3,364                              | 3.2%                  

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.





Deposit Activities and Other Sources of Funds







---

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 stockholder of the Bank.  Substantially all of the Bank's depositors are residents of the State of Alaska.





|Weighted Average Interest Rate | Term                   | Category                      | Amount
(in thousands) | Minimum Balance | Percentage of Total Deposits
|------------------------------ | ---------------------- | ----------------------------- | --------------------- | --------------- | ----------------------------
|0.00%                          | N/A                    | Non-interest-bearing          | $  18,094             | $     100       | 13.64%                      
|0.69                           | N/A                    | Interest-bearing demand       | 31,044                | 100             | 23.40                       
|1.26                           | N/A                    | Money market deposit accounts | 21,999                | 3,500           | 16.58                       
|1.01                           | N/A                    | Savings accounts              | 22,790                | 100             | 17.18                       
|                               |                        |                               |                       |                 |                             
|                               |                        | Certificates of Deposit       |                       |                 |                             
|0.89                           | Seven days             | Fixed-rate                    | 2,333                 | 500             | 1.76                        
|0.99                           | One month              | Fixed-rate                    | 164                   | 500             | 0.12                        
|1.19                           | Two months             | Fixed-rate                    | 980                   | 500             | 0.74                        
|1.27                           | Three months           | Fixed-rate                    | 3,435                 | 500             | 2.59                        
|1.72                           | Six months             | Fixed-rate                    | 4,974                 | 500             | 3.75                        
|2.01                           | Nine months            | Fixed-rate                    | 330                   | 500             | 0.25                        
|2.22                           | One year               | Fixed-rate                    | 10,726                | 500             | 8.08                        
|3.25                           | 18 months              | Fixed-rate                    | 622                   | 500             | 0.47                        
|4.27                           | Two years              | Fixed-rate                    | 2,884                 | 500             | 2.17                        
|4.65                           | Three years            | Fixed-rate                    | 608                   | 500             | 0.46                        
|5.81                           | Four years             | Fixed-rate                    | 226                   | 500             | 0.17                        
|5.45                           | Five years             | Fixed-rate                    | 2,846                 | 500             | 2.14                        
|2.35                           | Gold minor one year    | Fixed-rate                    | 2,635                 | 500             | 1.99                        
|8.00                           | Deferred Comp one year | Fixed-rate                    | 1,019                 | 500             | 0.77                        
|1.50                           | One year               | Variable-rate                 | 2,406                 | 500             | 1.81                        
|2.24                           | 2-1/2 years            | Variable-rate                 | 2,566                 | 500             | 1.93                        
|T                              | T                      | TOTAL                         | $132,681              | T               | T                           



|Maturity Period                | Certificates of Deposit(in thousands)
|------------------------------ | -------------------------------------
|Three months or less           | $  8,531                             
|Over three through six months  | 776                                  
|Over six through twelve months | 1,833                                
|Over twelve months             | 1,009                                
|Total                          | $12,149                              



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|(dollars in thousands) December 31,       | 2002     |                  | 2001               
|----------------------------------------- | -------- | ---------------- | -------------------
|                                      | Amount   | Percent of Total | Increase (Decrease)
|Non-interest bearing demand accounts      | $ 18,094 | 13.64%           | $5,162             
|Interest-bearing demand accounts          | 31,044   | 23.40            | 1,930              
|Money market deposit accounts             | 21,999   | 16.58            | 979                
|Savings accounts                          | 22,790   | 17.18            | 1,527              
|Variable-rate certificates which mature : |          |                  |                    
|Within 1 year                             | 3,631    | 2.74             | 131                
|After 1 year, but within 2 years          | 863      | 0.65             | (404)              
|After 2 years, but within 5 years         | 478      | 0.36             | 141                
|Fixed rate certificates which mature:     |          |                  |                    
|Within 1 year                             | 28,074   | 21.16            | (2,745)            
|After 1 year, but within 2 years          | 1,956    | 1.47             | (325)              
|After 2 years, but within 5 years         | 3,752    | 2.83             | (24)               
|Total                                     | $132,681 | 100.00%          | $6,372             

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, | 2002       | 2001        
|--------------------------- | ---------- | ------------
|0.00 - 0.99%                | $    2,400 | $          -
|1.00 - 1.99%                | 12,751     | 4,424       
|2.00 - 2.99%                | 16,061     | 9,609       
|3.00 - 3.99%                | 1,422      | 11,631      
|4.00 - 4.99%                | 1,477      | 4,306       
|5.00 - 5.99%                | 1,910      | 7,429       
|6.00 - 6.99%                | 1,713      | 3,445       
|7.00% and over              | 1,020      | 1,136       
|Total                       | $38,754    | $41,980     

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Time Deposits by Maturities

The following table sets forth the amount and maturities of time deposits at December 31, 2002.

|                       | Amount Due       |                             
|---------------------- | ---------------- | ----------------------------
|(dollars in thousands) | Less Than 1 Year | Over 1 And Less Than 2 Years
|0.00 - 0.99%           | $  2,400         | $      -                    
|1.00 - 1.99%           | 12,713           | -                           
|2.00 - 2.99%           | 14,191           | 1,339                       
|3.00 - 3.99%           | 350              | 709                         
|4.00 - 4.99%           | 368              | 356                         
|5.00 - 5.99%           | 984              | 335                         
|6.00 - 6.99%           | 700              | 79                          
|7.00% and over         | -                | -                           
|Total                  | $31,706          | $2,818                      

Deposit Activities and Other Sources of Funds



|(in thousands) Year ended December 31,               | 2002     | 2001    
|---------------------------------------------------- | -------- | --------
|Beginning balance                                    | $126,309 | $107,989
|                                                     |          |         
|Net deposits (withdrawals)  before interest credited | 4,257    | 14,640  
|Interest credited                                    | 2,115    | 3,680   
|Net increase in deposits                             | 6,372    | 18,320  
|                                                     |          |         
|Ending balance                                       | $132,681 | $126,309



---



|(dollars in thousands) Year ended December 31,                                   | 2002    | 2001   
|-------------------------------------------------------------------------------- | ------- | -------
|Advances:                                                                        |         |        
|Maximum amount of borrowings outstanding 
      during the year at any month end | $13,000 | $16,000
|Average outstanding during the year                                              | 5,485   | 13,155 
|Balance outstanding at end of year                                               | 5,000   | 13,000 
|                                                                                 |         |        
|Approximate weighted average rate paid:                                          |         |        
|Average during the year                                                          | 6.16%   | 5.78%  
|At end of year                                                                   | 6.13    | 5.67   



General

The Bank is subject to extensive regulation, examination and supervision by the OTS as its chartering agency, and the FDIC, as the insurer of its deposits.  The activities of federal savings institutions are governed by the Home Owners Loan Act, in certain respects, the Federal Deposit Insurance Act, and the regulations issued by the OTS and the FDIC to implement these statutes.  These laws and regulations delineate the nature and extent of the activities in which federal savings associations may engage. Lending activities and other investments must comply with various statutory and regulatory capital requirements.  In addition, the Bank's relationship with its depositors and borrowers is also regulated to a great extent, especially in such matters as the ownership of deposit accounts and the form and content of the Bank's mortgage documents.  The Bank is required to file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions.  There are periodic examinations by the OTS and the FDIC to review the Bank's compliance with various regulatory requirements.  The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.  Any change in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Corporation, the Bank and their operations.

Federal Regulation of Savings Associations



All savings associations 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 savings association's total assets, including consolidated subsidiaries. The Bank's OTS assessment for the year ended December 31, 2002 was $46,000.



---













Under the Federal Deposit Insurance Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. Management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

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---





















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---



Savings and Loan Holding Company Regulations









a.   repealed the historical restrictions and eliminates many federal and state law barriers to affiliations among banks,
                securities firms, insurance companies and other financial service providers;

b.   provided a uniform framework for the functional regulation of the activities of banks, savings institutions and their
                holding companies;

---

c.   broadened the activities that may be conducted by national banks, banking subsidiaries of bank holding companies
                and their financial subsidiaries;

d.   provided an enhanced framework for protecting the privacy of consumer information;

e.   adopted a number of provisions related to the capitalization, membership, corporate governance and other measures
                designed to modernize the FHLB system;

f.   modified the laws governing the implementation of the CRA; and

g.   addressed a variety of other legal and regulatory issues affecting day-to-day operations and long-term activities of
                financial institutions.

The GLBA also imposes certain obligations on financial institutions to develop privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer's request, and establish procedures and practices to protect and secure customer data. These privacy provisions were implemented by regulations that were effective on November 12, 2000. Compliance with the privacy provisions was required by July 1, 2001.

The USA Patriot Act.  In response to the terrorist events of September 11th, 2001, President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 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. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:

- Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program.
- Section 326 of the Act authorizes the Secretary of the Department of Treasury, in conjunction with other bank regulators, to issue regulations by October 26, 2002 that provide for minimum standards with respect to customer identification at the time new accounts are opened.
- Section 312 of the Act requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering.
- Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks.
- Bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

To date, it has not been possible to predict the impact the USA PATRIOT Act and its implementing regulations may have on the Corporation and the Bank.

---

Sarbanes-Oxley Act of 2002.  The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") was signed into law by President Bush on July 30, 2002 in response to public concerns regarding corporate accountability in connection with the recent accounting scandals at Enron and WorldCom. 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 is the most far-reaching U.S. securities legislation enacted in some time. The Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S., 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").

The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. 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.

The Sarbanes-Oxley Act addresses, among other matters:

- audit committees;
- certification of financial statements by the chief executive officer and the chief financial officer;
- the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;
- a prohibition on insider trading during pension plan black out periods;
- disclosure of off-balance sheet transactions;
- a prohibition on personal loans to directors and officers;
- expedited filing requirements for Form 4s;
- disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;
- "real time" filing of periodic reports;
- the formation of a public accounting oversight board;
- auditor independence; and
- various increased criminal penalties for violations of securities laws.





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TAXATION

Federal Taxation











---



State Taxation



Audits



Subsidiary Activities



Personnel



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 12% 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 42%.  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.

---

Item 2.    Description of Property



|Location                  | Year Opened | Square Footage | Deposits(in thousands)
|------------------------- | ----------- | -------------- | ----------------------
|                          |             |                |                       
|Main Office:              |             |                |                       
|                          |             |                |                       
|Nugget Mall Office (1)    | 1984        | 16,000         | $54,205               
|2094 Jordan Avenue        |             |                |                       
|Juneau, Alaska 99801      |             |                |                       
|                          |             |                |                       
|Branch Offices:           |             |                |                       
|                          |             |                |                       
|301 N. Franklin Street    | 1960        | 6,268          | 32,236                
|Juneau, Alaska  99801     |             |                |                       
|                          |             |                |                       
|410 Mission Street        | 1974        | 2,300          | 13,009                
|Ketchikan, Alaska  99901  |             |                |                       
|                          |             |                |                       
|2442 Tongass Avenue (2)   | 1997        | 1,550          | 4,066                 
|Ketchikan, Alaska 99901   |             |                |                       
|                          |             |                |                       
|101 Lake Street (3)       | 1978        | 3,326          | 14,993                
|Sitka, Alaska  99835      |             |                |                       
|                          |             |                |                       
|310 Hill Street           |             |                |                       
|Hoonah, Alaska 99829 (4)  | 2000        | 900            | 3,399                 
|                          |             |                |                       
|615 Mallott Avenue        |             |                |                       
|Yakutat, Alaska 99689 (4) | 2000        | 900            | 10,773                

_____________

(1)



Item 3.   Legal Proceedings



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Item 4.   Submission of Matters to a Vote of Security Holders



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.

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 year ended December 31, 2002*

(a)  Consolidated Statements of Financial Condition as of December 31, 2002 and 2001*(b)  Consolidated Statements of Income for the Years Ended December 31, 2002 and 2001*(c)  Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 2002 and 2001*(d)  Consolidated Statements of Cash Flows For the Years Ended December 31, 2002 and 2001*(e)  Notes to Consolidated Financial Statements*

*Contained in the Annual Report filed as an exhibit 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.

PART III

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



---





|                  | Age at
December 31, | Position                       
|----------------- | ------------------- | -------------------------------
|Name              | 2002                | Corporation                    
|Craig E. Dahl     | 53                  | Director, President            
|                  |                     | and Chief Executive Officer    
|                  |                     |                                
|Lisa C. Bell      | 43                  | Executive Vice President and   
|                  |                     | Chief Operating Officer        
|                  |                     |                                
|Roger K. White    | 52                  | Senior Vice President, Chief   
|                  |                     | Financial Officer and Secretary
|                  |                     |                                
|John E. Robertson | 55                  | -                              
|                  |                     |                                











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.

Item 10.   Executive Compensation



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Item 11.   Security Ownership of Certain Beneficial Owners and Management

Equity Compensation Plan Information.  The following table summarizes share
and exercise price information about the Bank's equity compensation plans as of December 31, 2002.

|Plan category                                                    | (a)
Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b)
Weighted-average exercise price of outstanding options, warrants, and rights | (c)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans    approved by security    holders     |                                                                                                 |                                                                                  |                                                                                                                                                
|Option plan                                                      | 62,142                                                                                          | $9.75                                                                            | 3,400                                                                                                                                          
|Restricted stock plan                                            | 26,217                                                                                          | N/A                                                                              | -                                                                                                                                              
|                                                                 |                                                                                                 |                                                                                  |                                                                                                                                                
|Equity compensation plans    not approved by security    holders | -                                                                                               | -                                                                                | -                                                                                                                                              
|Total                                                            | 88,359                                                                                          |                                                                              | 3,400                                                                                                                                          

(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.



Item 12.   Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the section captioned "Proposal I
- Election of Directors -- Transactions with Management" in the Proxy Statement.

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Item 13.   Exhibits, List and Reports on Form 8-K

(a)      Exhibits
                      3.1         Articles of Incorporation of Alaska Pacific Bancshares, Inc. (1)
                      3.2	        Bylaws of Alaska Pacific Bancshares, Inc. (1)
                      10.1       	Employment Agreement with Craig E. Dahl (2)
                      10.2	      Severance Agreement with Roger K. White (2)
                      10.3	      Severance Agreement with Lisa Corrigan Bell (2)
                      10.4       	Severance Agreement with Thomas C. Sullivan (2)
                      10.5	      Severance Agreement with Cheryl A. Crawford (2)
                      10.6	9;
      Severance Agreement with Tammi L. Knight (2)
                      10.7 	      Alaska Federal Savings Bank 401(k) Plan (1)
                      10.8 	      Alaska Pacific Bancshares, Inc. Employee Stock Ownership Plan (2)
                      10.9 	      Alaska Pacific Bancshares, Inc. Employee Severance Compensation Plan (2)
                      10.10 	    Alaska Pacific Bancshares, Inc. 2000 Stock Option Plan (3)
                      10.11 	    Alaska Pacific Bancshares, Inc. 2000 Management Recognition Plan (3)
                      13	         Annual Report to Stockholders
                      21          Subsidiaries of the Registrant
                      23
         Independent Auditors' Consent
                      99.1      Certifications
pursuant to Section 966 of the Sarbanes-Oxley Act of 2002

________________
(1)        Incorporated by reference to the registrant's Registration Statement on Form SB-2 (333-74827).
(2)        Incorporated by reference to the registrant's Annual Report on Form 10-KSB for the year ended

             December 31, 1999.
(3)        Incorporated by reference to the registrant's annual meeting proxy statement dated May 5, 2000.

(b)      Report on Form 8-K

No Current Reports on Form 8-K were
filed during the quarter ended December 31, 2002.

Item 14.   Controls and Procedures



(b) Changes in Internal Controls:  In the year ended December 31, 2002, the Registrant 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.

---

SIGNATURES







| |  | ALASKA PACIFIC BANCSHARES, INC.                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------
| |  | By: /s/Craig E. Dahl       Craig E. Dahl
       President and Chief Executive Officer
       (Duly Authorized Representative)



|                                                                    |  |                                                             
|------------------------------------------------------------------- |  | ------------------------------------------------------------
|/s/Craig E. Dahl                                                    |  | /s/Roger K. White                                           
|Craig E. Dahl                                                       |  | Roger K. White                                              
|President and Chief Executive Officer
(Principal Executive Officer) |  | Senior Vice President, Chief Financial Officer and Secretary
|                                                                    |  | (Principal Financial and Accounting Officer)                
|                                                                    |  |                                                             
|                                                                    |  |                                                             
|                                                                    |  |                                                             
|                                                                    |  |                                                             
|/s/Avrum M. Gross                                                   |  | /s/Hugh N. Grant                                            
|Avrum M. Gross                                                      |  | Hugh N. Grant                                               
|Chairman of the Board and Director                                  |  | Director                                                    
|                                                                    |  |                                                             
|                                                                    |  |                                                             
|                                                                    |  |                                                             
|/s/Roger Grummett                                                   |  | /s/Deborah R. Marshall                                      
|Roger Grummett                                                      |  | 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                                                    

---

CERTIFICATIONS

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

I, Craig E. Dahl, certify that:

1.

2.

3.     Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4.     The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)     designed such disclosure controls and procedures 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 annual report is being prepared;

b)     evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c)     presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.     The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  March 27, 2003

| | /s/Craig E. Dahl                     
| | -------------------------------------
| | Craig E. Dahl                        
| | President and Chief Executive Officer

---



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

I, Roger K. White, certify that:

1.     I have reviewed this annual report on Form 10-KSB of Alaska Pacific Bancshares, Inc.;

2.     Based on my knowledge, this annual 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 annual report;

3.     Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4.     The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)     designed such disclosure controls and procedures 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 annual report is being prepared;

b)     evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c)     presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.     The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  March 27, 2003

| | /s/ Roger K. White     
| | -----------------------
| | Roger K. White         
| | Chief Financial Officer

---

Exhibit 13

Annual Report to Stockholders

Alaska Pacific Bancshares, Inc.



Annual Report



2002

---

Contents

|Message to
    Shareholders                                                                 
|--------------------------------------------------------------------------------------------
|Business of the Company                                                                     
|Common Stock Information                                                                    
|Selected Consolidated
    Financial Information                                             
|Management's Discussion and
    Analysis ofFinancial Condition and Results
    of Operations
|Independent Auditors' Report                                                                
|Consolidated Financial
    Statements                                                       
|Notes to Consolidated
    Financial Statements                                              
|Corporate Information                                                                       



---

Message to Shareholders

It is a pleasure to report to shareholders another year of improved
performance as the company continues to follow its strategic plan, posting
record results for 2002. Our trend of improved earnings reflects the progress
made in developing our commercial product lines as well as the benefits of the
low interest rate environment that has dominated this past year.

At mid-year 2002, we paused for a moment to celebrate the third anniversary
of going public as Alaska Pacific Bancshares, Inc., operating Alaska
Pacific Bank as the sole business activity of the company. The utilization
of the capital created from the mutual-to-stock conversion provided the
opportunity to expand into commercial products and services to meet the needs of
our loyal customer base developed over our 67 year history. Our commitment
remains to bring new and competitive products and services to our customers
while serving the traditional expectations developed over a long period of time.

The most notable aspect of the bank's performance is our improvement in
earnings which, on a pre-tax basis, increased from $460,000 in 2001 to
$1,185,000 in 2002. The largest component of income, net interest income, was
$721,000 (11.7%) greater in 2002 than in 2001, due to increases in average loans
and in checking and savings accounts, as well as a generally favorable interest
rate environment. At the same time, other noninterest income experienced more
than a 12% increase, improving by $103,000, reflecting significant progress in
several of the bank's commercial retail products that are now making solid
contributions to the bottom line. The bank's ATM network, VISA Check Card
program, merchant services, and growth in commercial deposits have all had a
positive impact on noninterest income. At the same time, recurring noninterest
expense increased by only $31,000 (0.5%) between 2001 and 2002, due to
efficiencies gained in closing two unprofitable offices late in 2001.

I call your attention to the tax benefit of $592,000 that was
recognized in 2002, which has driven the bank's net income to nearly $1.8
million. This entry reflects a one time adjustment to book the value associated
with the tax credits created from net operating losses in prior years. These
losses occurred during the 1980's as the bank weathered the oil-driven recession
that brought the state's economy to its knees. This non-recurring component of
net income also signals the fact that the bank's performance has been strong
enough to support future utilization of the remaining tax benefit, but that
income will be treated as "fully taxable" for financial reporting purposes
beginning in the first quarter of 2003.

The bank's balance sheet did not show any growth from year-end 2001 to 2002,
and in fact reflected a small reduction. However, the dynamics of the balance
sheet were very important relative to the bank's strategic plan. The record low
interest rates continued to fuel a refinance boom in residential real estate
activity, as well as present opportunities to compete for new business on the
commercial side of the bank. Management made a conscious decision in this
interest rate market not to retain long-term fixed rate mortgage loans in the
bank's portfolio, choosing instead to hold more variable rate, shorter-term
commercial loans and higher yielding consumer loans. With the high volume of
residential lending that took place during the year, this strategy resulted in a
significant reduction in the bank's residential loan portfolio as loans
refinanced and were sold into the secondary mortgage market. Record loan volume
on the commercial/consumer side of the bank matched the runoff of mortgage loans
resulting in no material change in the level of loans from 2001 to 2002. So,
while there was no net growth, in fact the bank generated over $71 million in
new or purchased loans during 2002 - a record for both the commercial and
residential departments of the bank.

The bank continued to develop its electronic banking services during 2002
with improvements to both its consumer and commercial online banking products,
while introducing new commercial "sweep" products to allow business customers
more control over the management of their funds. This program will continue to
be improved into 2003.

While no new offices were added (or closed) during 2002, we did begin the
process of selling our large office building in downtown Ketchikan and the
construction of a smaller, more efficient office to replace the extremely
over-sized facility. The new Ketchikan Office opened in January of 2003, and the
building sale took place shortly thereafter with the bank moving into the role
of "anchor tenant" for the new owner. In Sitka, ground was broken at the end of
the year for a new corporate headquarters building for the Sitka-based native
corporation, Shee Atika. The bank will be the primary tenant on the center floor
of the building, providing customers better access, parking and a new drive-up.
The new office, which is being relocated from the basement floor of the Westmark
Shee Atika Hotel, is scheduled to be opened in late summer of 2003.

The board of directors was able to increase dividends by 20% during 2002 as
we all watched the value of the bank's stock become stronger throughout the
year. We believe the confidence shown by our shareholders mirrors the commitment
by the company's board of directors and management to maintain our focus on
operating a sound and competitive bank in what is otherwise a very unique and
challenging market  - Southeast Alaska.

Please take the time to read the financial reports. We have all been impacted
by the wave of legislation resulting from the large corporate scandals of the
past two years, but we believe that we, like all financial institutions, have
been fairly presenting our information to the public for many years. Executive
management now signs very onerous certification statements with each release of
our financial information, which we do with confidence. But I encourage you to
take the time to read this report, the schedules and the footnotes; they are
there for a reason.

On behalf of the board of directors, the officers, and the employees of the
company, I assure you we begin and end each day with a clear understanding of
our commitment to you, the shareholders of the company.

Respectfully,

/s/ Craig E. Dahl
Craig E. Dahl
President and Chief Executive Officer

3



Alaska Pacific Bancshares, Inc. (the "Company") was organized on March 19,
1999 for the purpose of becoming the holding company for Alaska Pacific Bank
(formerly Alaska Federal Savings Bank) (the "Bank"), upon its conversion from a
federal mutual savings bank to a federal stock savings bank. The conversion was
completed on July 1, 1999 with the issuance of 655,415 shares of common stock at
$10.00 per share. The Company is not engaged in any significant business
activity other than holding the stock of the Bank. Accordingly, the information
in this report, including the consolidated financial statements and related
data, applies primarily to the Bank.

The Bank is a federal stock savings bank originally organized in 1935. The
Bank is regulated by the Office of Thrift Supervision ("OTS"), and its deposits
are insured up to applicable limits by the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation ("FDIC"). The Bank has been a member
of the Federal Home Loan Bank System since 1937.

The Bank operates as a community-oriented financial institution and is
devoted to serving the needs of its customers, primarily in Southeast Alaska.
The Bank's business consists primarily of attracting deposits from the general
public and using those funds to originate residential real estate loans,
commercial real estate loans, commercial business loans, and a variety of
consumer loans.

The Company's common stock is traded on the over-the-counter market through
the OTC "Electronic Bulletin Board" under the symbol "AKPB." As of December 31,
2002, there were approximately 500 stockholders of record and 623,132 shares
outstanding (including 28,789 unearned Employee Stock Ownership Plan ("ESOP")
shares and 13,544 unvested shares issued as restricted stock awards). Generally,
if the Bank satisfies its regulatory capital requirements, it may make dividend
payments up to the limits prescribed in the OTS regulations. However,
institutions that have converted to the stock form of ownership may not declare
or pay a dividend on, or repurchase any of, its common stock if the effect
thereof would cause the regulatory capital of the institution to be reduced
below the amount required for the liquidation account which was established in
connection with the Bank's mutual-to-stock conversion.

The following table sets forth market price information of the Company's
stock for 2001 and 2002.

|                         | Market Price |       
|------------------------ | ------------ | ------
|Years Ended December 31, | High         | Low   
|2001:                    |              |       
|First Quarter            | $12.19       | $11.13
|Second Quarter           | 11.60        | 11.12 
|Third Quarter            | 11.39        | 10.90 
|Fourth Quarter           | 11.09        | 10.45 
|2002:                    |              |       
|First Quarter            | 13.20        | 10.60 
|Second Quarter           | 16.10        | 12.50 
|Third Quarter            | 15.25        | 14.40 
|Fourth Quarter           | 17.14        | 14.50 



|Financial Condition Data:                                           |          |          |            |          |         
|------------------------------------------------------------------- | -------- | -------- | ---------- | -------- | --------
|(in thousands) December 31,                                         | 2002     | 2001     | 2000       | 1999     | 1998    
|Total assets                                                        | $154,339 | $154,572 | $135,465   | $121,542 | $110,806
|Loans, net                                                          | 106,122  | 110,253  | 104,836    | 85,796   | 70,836  
|Loans held for sale                                                 | 4,590    | 995      | 735        | 1,359    | 899     
|Investment securities available
    for sale                        | 8,076    | 12,351   | 16,257     | 19,849   | 18,176  
|Cash, due from banks, and
    interest-earning    deposits in banks | 28,229   | 23,886   | 6,847      | 7,785    | 14,584  
|Deposits                                                            | 132,681  | 126,309  | 107,989    | 102,547  | 101,945 
|Federal Home Loan Bank advances                                     | 5,000    | 13,000   | 13,400     | 5,000    | -       
|Shareholders' equity                                                | 14,967   | 12,991   | 12,383     | 12,477   | 7,250   
|                                                                    |          |          |            |          |         
|Operating Data:                                                     |          |          |            |          |         
|(in thousands) Year ended December 31,                              | 2002     | 2001     | 2000       | 1999     | 1998    
|Interest income                                                     | $9,315   | $10,582  | $9,843     | $8,477   | $8,218  
|Interest expense                                                    | 2,453    | 4,441    | 4,398      | 3,669    | 3,807   
|Net interest income                                                 | 6,862    | 6,141    | 5,445      | 4,808    | 4,411   
|Provision for loan losses                                           | 370      | 210      | 395        | 15       | 60      
|Net interest income after provision for loan    losses              | 6,492    | 5,931    | 5,050      | 4,793    | 4,351   
|Noninterest income                                                  | 1,272    | 1,212    | 813        | 713      | 888     
|Noninterest expense                                                 | 6,579    | 6,683    | 5,744      | 5,235    | 4,903   
|Income before income tax                                            | 1,185    | 460      | 119        | 271      | 336     
|Provision for income tax
    (benefit)                              | (592)    | -        | -          | -        | -       
|Net income                                                          | $1,777   | $ 460    | $ 119      | $ 271    | $ 336   
|                                                                    |          |          |            |          |         
|Net income per
    share:                                           |          |          |            |          |         
|Basic                                                               | $   3.10 | $ 0.82   | $
    0.20 | -        | -       
|Diluted                                                             | 2.98     | 0.80     | 0.20       | -        | -       

5

|Other Data:                   |        |        |        |        |       
|----------------------------- | ------ | ------ | ------ | ------ | ------
|December 31,                  | 2002   | 2001   | 2000   | 1999   | 1998  
|Number of:                    |        |        |        |        |       
|Real estate loans outstanding | 854    | 924    | 896    | 824    | 720   
|Deposit accounts              | 13,369 | 13,735 | 13,434 | 12,436 | 12,508
|Full service offices          | 7      | 7      | 9      | 7      | 6     



|Key Financial Ratios:                                                               |        |        |        |        |       
|----------------------------------------------------------------------------------- | ------ | ------ | ------ | ------ | ------
|At and for Year ended December 31,                                                  | 2002   | 2001   | 2000   | 1999   | 1998  
|Performance ratios:                                                                 |        |        |        |        |       
|Return on average assets                                                            | 1.21%  | 0.32%  | 0.09%  | 0.23%  | 0.31% 
|Return on average equity                                                            | 12.93  | 3.63   | 0.96   | 2.68   | 4.67  
|Interest rate spread
    (1)                                                        | 4.66   | 4.04   | 4.18   | 4.11   | 3.99  
|Net interest margin:                                                                |        |        |        |        |       
|On average earning assets                                                           | 4.97   | 4.51   | 4.63   | 4.44   | 4.29  
|On average total assets                                                             | 4.66   | 4.23   | 4.32   | 4.09   | 4.01  
|Average interest-earning
    assets to average
        interest-bearing liabilities | 117.50 | 114.49 | 112.08 | 109.83 | 108.11
|Noninterest expense as a
    percent of
    average total assets                    | 4.47   | 4.60   | 4.55   | 4.45   | 4.45  
|Efficiency ratio
    (2)                                                            | 84.29  | 95.73  | 93.50  | 95.70  | 98.71 
|                                                                                    |        |        |        |        |       
|Asset Quality Ratios:                                                               |        |        |        |        |       
|Nonaccrual loans as a percent
    of net      loans                                 | 1.67   | 1.23   | 0.79   | 0.08   | -     
|Nonperforming assets as a
    percent of      total assets                          | 1.27   | 0.99   | 0.69   | 0.18   | 0.28  
|Allowance for losses as a
    percent of total
     loans                           | 1.07   | 0.84   | 0.75   | 0.66   | 0.94  
|Allowance for losses as a
    percent of
     nonperforming loans                   | 64.83  | 69.09  | 94.60  | 814.29 | -     
|Net chargeoffs to average
    loans                                                 | 0.14   | 0.05   | 0.18   | 0.14   | 0.19  
|                                                                                    |        |        |        |        |       
|Equity Ratios:                                                                      |        |        |        |        |       
|Total equity to assets                                                              | 9.70   | 8.40   | 9.14   | 10.27  | 6.54  
|Average equity to average assets                                                    | 9.34   | 8.73   | 9.81   | 8.59   | 6.54  

(1)

(2)

Management's Discussion and
Analysis of Financial Condition
                                          and Results of Operations

The Bank's results of operations depend primarily on its net interest income,
which is the difference between the income earned on its interest-earning
assets, consisting of loans and investments, and the cost of its
interest-bearing liabilities, consisting of deposits and Federal Home Loan Bank
("FHLB") borrowings. Among other things, fee income, provisions for loan losses,
operating expenses and income tax provisions also affect the Bank's net income.
General economic and competitive conditions, particularly changes in market
interest rates, government legislation and policies concerning monetary and
fiscal affairs, housing and financial institutions and the attendant actions of
the regulatory authorities also significantly affect the Bank's results of
operations.

Forward-Looking StatementsThis annual report contains forward-looking statements which are based on
assumptions and describe future plans, strategies and expectations of the
Company. These forward-looking statements are generally identified by use of the
word "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar words. The Company's ability to predict results or the actual effect of
future plans or strategies is uncertain. Factors which could have a material
adverse effect on our operations include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in our market areas, and accounting
principles and guidelines. You should consider these risks and uncertainties in
evaluating forward-looking statements and you should not rely too much on these
statements.

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

Financial Condition Total assets declined slightly to $154.3 million at December 31, 2002 from
$154.6 million at December 31, 2001. 
                                                                                7

Loans decreased $3.9 million, or 3.5%, to $107.3 million at December 31, 2002
from $111.2 million at December 31, 2001. Loan demand continued to be strong in
2002, as loans originated and purchased increased to $71.1 million from
$62.6 million in 2001. However, the increased originations were offset by rapid
loan prepayments, especially in mortgage loans. New mortgage loan originations
of $39.5 million outpaced prepayments, but $25.2 million, or 63.7%, of these
mortgages were sold in the secondary market.

Following is a comparison of the composition of the portfolio at both dates:

|(dollars in
    thousands)December 31, | 2002     | 2001   
|-------------------------------------- | -------- | -------
|                                       | Amount   | Percent
|Real estate:                           |          |        
|Permanent:                             |          |        
|One- to four-family                    | $41,419  | 38.60% 
|Multifamily                            | 2,209    | 2.06   
|Commercial nonresidential              | 26,075   | 24.31  
|Land                                   | 5,120    | 4.77   
|Construction:                          |          |        
|One- to four-family                    | 3,643    | 3.40   
|Commercial nonresidential              | 52       | 0.05   
|Commercial business                    | 12,975   | 12.10  
|Consumer:                              |          |        
|Home
    equity                        | 8,912    | 8.31   
|Boat                                   | 5,249    | 4.89   
|Automobile                             | 831      | 0.77   
|Other                                  | 789      | 0.74   
|Total loans                            | 107,274  | 100.00%
|Less:                                  |          |        
|Allowance for loan losses              | 1,152    |        
|Loans, net                             | $106,122 |        

As a result of prepayments and sales of current production, one- to four-family
mortgage loans declined to 38.6% of the portfolio at the end of 2002 from 44.3%
a year earlier. However, there was significant growth in commercial
nonresidential real estate loans, which increased to $26.1 million (24.3% of the
portfolio) at the end of 2002 from $17.5 million (15.7% of the portfolio) at the
end of 2001.

Cash and cash equivalents increased $4.3 million to $28.2 million at December
31, 2002, compared to $23.9 million at December 31, 2001. The increase was
primarily the result of an increase in deposits and a decrease in loan and
investment balances, offset by the repayment of $8.0 million of one-year FHLB
advances which matured early in 2002. Balances in excess of current needs is
intended to be used primarily to fund growth in loans and investment securities
in 2003.

Available-for-sale securities decreased $4.3 million to $8.1 million at
December 31, 2002, compared to $12.4 million at December 31, 2001. The decrease
resulted from principal repayments. Subsequent to year end, in January 2003, the
Bank purchased approximately $10 million of securities to replenish the
portfolio, which had been reduced by rapid prepayments in mortgage-backed
securities.

Premises and equipment at December 31, 2002 remained unchanged from December
31, 2001 at approximately $3.1 million Subsequent to year end, in February 2003,
the Bank sold its office building in Ketchikan, Alaska, for $1.4 million. At
December 31, 2002, the building had a depreciated cost of $1.36 million. The
Bank will lease back a portion of the building at market rental rates for
continued use as a banking office.
                                                                                 8

Total deposits increased $6.4 million, or 5.0%, to $132.7 million at December
31, 2002 from $126.3 million at December 31, 2001. With the exception of
certificates of deposits, balances increased in all deposit categories,
particularly noninterest demand accounts, which increased $5.2 million, or
39.9%, primarily as a result of marketing efforts aimed at increasing deposits
from business customers. Certificates of deposit declined $3.2 million, or 7.7%,
primarily due to less aggressive pricing in this type of deposit.

Total shareholders' equity increased nearly $2.0 million to $15.0 million at
December 31, 2002 compared to $13.0 million at December 31, 2001. The increase
is primarily the result of net income of $1.8 million and a $205,000 increase in
net unrealized gains on securities available for sale.

Results of Operations
Net Income. Net income increased by $1.3 million, or 286%, to $1.8 million
for 2002, compared with $460,000 for 2001. A portion of the increase in net
income is a result of recognizing a net income tax benefit of $592,000 in 2002,
compared with an income tax provision of zero in 2001. See "Income Tax"
elsewhere in this discussion.

Income before income tax increased $725,000, or 158%, to $1.2 million for
2002, compared with $460,000 for 2001. The increase is the result of higher
revenues and lower noninterest expense (which included the cost of closing two
unprofitable branches in 2001), offset by a higher provision for loan losses.
For purposes of comparison, pre-tax income might be separated into major
components as follows:

|                                                    |         |         | Income Increase
|--------------------------------------------------- | ------- | ------- | ---------------
|(in thousands)Year ended December 31,               | 2002    | 2001    | (Decrease)     
|Net interest income                                 | $6,862  | $6,141  | $ 721          
|Gain on sale of
    mortgage loans                  | 329     | 372     | (43)           
|Other noninterest income                            | 943     | 840     | 103            
|Net revenues                                        | 8,134   | 7,353   | 781            
|Noninterest expense, excluding branch closure costs | (6,579) | (6,548) | (31)           
|Subtotal                                            | 1,555   | 805     | 750            
|Provision for loan losses                           | (370)   | (210)   | (160)          
|Pre-tax income,
    excluding branch closure costs  | 1,185   | 595     | 590            
|Branch closure costs                                | -       | (135)   | 135            
|Income before income tax                            | $1,185  | $ 460   | $ 725          

Net Interest Income. Net interest income increased $721,000, or 11.7%, to
$6.9 million in 2002 from $6.1 million in 2001. The improvement resulted
primarily from growth in average loans, a favorable interest-rate environment,
and changes in the relative mix of assets and liabilities. See the table in
"Average Balances, Interest and Average Yields/Cost" elsewhere in this
discussion.

Total interest income decreased $1.3 million, or 12.0%, to $9.3 million in
2002 from $10.6 million in 2001, primarily due to a decline in the average yield
on earning assets to 6.75% in 2002 from 7.78% in 2001, as a result of lower
market interest rates.

Total interest expense decreased $2.0 million, or 44.8%, to $2.5 million in
2002 from $4.4 million in 2001. The decrease is attributable not only to lower
market interest rates, but also to a shift away from relatively high-cost
borrowings and certificates of deposit to relatively low-cost demand and savings
deposits. Following is a comparison of the composition of average deposits and
borrowings for 2002 and 2001:
                                                                                  9

|(dollars in thousands)Year ended December 31, | 2002    | 2001  
|--------------------------------------------- | ------- | ------
|Average daily balance of:                     |         |       
|Noninterest-bearing demand deposits           | $14,346 | 10.9% 
|Interest-bearing demand deposits              | 29,123  | 22.1  
|Money market
    accounts                     | 21,630  | 16.4  
|Savings
    accounts                          | 21,134  | 16.0  
|Certificates
    of deposit                   | 40,126  | 30.4  
|FHLB advances                                 | 5,485   | 4.2   
|Total deposits and borrowings                 | 131,844 | 100.0%

As a result of these factors, the net interest margin on average earning
assets increased to 4.97% in 2002 from 4.51% in 2001. The improvement in the net
interest margin was somewhat moderated by higher average balances in low-earning
cash equivalents on the asset side of the balance sheet.

Noninterest Income. Total noninterest income increased $60,000, or 5.0%,
to $1.3 million in 2002, compared with $1.2 million in 2001.

Gains on sale of mortgage loans decreased $43,000, or 11.6%, to $329,000 in
2002 from $372,000 in 2001. Such gains are a part of the Bank's core business,
but tend to be more variable than other components of noninterest income due to
(1) changes in market interest rates which greatly affect the level of mortgage
refinancing activity and (2) management's ongoing decisions on what portion of
the mortgage loan production is sold or kept in the loan portfolio. Generally
the "keep or sell" decisions are made for purposes of overall asset and
liability management, including managing interest-rate risk. The volume of gains
was relatively high in both 2002 and 2001 due to lower mortgage interest rates
and increased refinance activity.

Excluding gains on sale of mortgage loans, noninterest income increased
$103,000, or 12.3%, to $943,000 in 2002 compared with $840,000 in 2001. The
largest contributor to this increase was service charges on deposit accounts,
which increased $91,000, or 19.3%. The increase in service charge income is
primarily attributable to continued growth in deposits, particularly checking
accounts.

Noninterest Expense. Noninterest expense decreased $104,000, or 1.6% to
$6.6 million in 2002, compared with $6.7 million in 2001. However, 2001 included
costs of $135,000 for closing two unprofitable offices - the Wrangell Office in
Wrangell, Alaska and the Auke Bay Office in Juneau, Alaska. These offices were
closed in October 2001 to reduce operating costs and improve efficiency.

Noninterest expense, excluding the branch closure costs in 2001, increased
$31,000, or 0.5%, from 2001 to 2002. This small increase reflects normal
increases in various costs, offset by savings in operating costs in 2002 as a
result of eliminating the two unprofitable offices in 2001.

Income Tax. In 2001 and for several previous years, the Company did not
recognize any tax on current income because of the existence of tax net
operating loss carryforwards ("NOLs"). During this period, net deferred tax
assets in the balance sheet (resulting from the NOLs and other temporary
differences between accounting income and taxable income) were substantially
decreased through a valuation allowance because full realization was dependent
upon earning sufficient taxable income prior to the expiration of the NOLs, and
the Company's income levels did not support a conclusion that their realization
was more likely than not. Thus, the tax benefit was recognized only to the
extent of each year's taxable income, resulting in a net provision for income
tax of zero for each of those years.
                                                                                 10

In 2002, however, the Company recognized the deferred tax benefits not only
to the extent of current-year income but also the benefit of the remaining
deferred tax assets at December 31, 2002, amounting to $592,000. Management
believes that it is more likely than not that future earnings will result in
full realization of these tax benefits. Periods beginning after December 31,
2002 will now reflect a "normal" provision for federal and state income taxes
amounting to approximately 40% of taxable income.

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

The provision for loan losses increased to $370,000 for 2002 compared to
$210,000 for 2001. The provisions for both years were considered appropriate in
order for the allowance for loan losses to reflect management's best estimate of
losses inherent in the loan portfolio. The allowance for loan losses was
$1.2 million (1.07% of total loans) at December 31, 2002, compared with $939,000
(0.84% of total loans) at December 31, 2001. The provisions and the resulting
allowance are reflective of numerous factors, including the following:

- Loan losses
- Growth and composition of the portfolio
- Management analysis of potential problem loans
- Nonperforming and classified loans
- Economic conditions

The Company's accounting for the allowance for loan losses is its most
critical accounting process and is also the most subjective. While management
believes that it uses the best information available to determine the allowance
for loan losses, unforeseen market conditions and other events might result in
adjustment to the allowance if circumstances differ substantially from the
assumptions used in making the final determination. One or more of these events
could have a significant effect on net income, and the effect could be both
material and adverse.
                                                                                 11

For further information on the Bank's accounting for the allowance for loan
losses as well as how loan impairment is determined, see Note 1 of Notes to
Consolidated Financial Statements.

12Average Balances, Interest and Average Yields/Cost

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

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

|(dollars in thousands)Year ended December 31,                                      |                 | 2002     |                     |  |                 | 2001     |                    
|---------------------------------------------------------------------------------- | --------------- | -------- | ------------------- |  | --------------- | -------- | -------------------
|                                                                                   | Average Balance | Interest | Average Yield/ Cost |  | Average Balance | Interest | Average Yield/ Cost
|Interest-earning assets:                                                           |                 |          |                     |  |                 |          |                    
|Loans(1)                                                                           | $114,864        | $8,477   | 7.38%               |  | $112,030        | $9,295   | 8.30%              
|Investment securities
    (1)                                                      | 12,021          | 667      | 5.55                |  | 16,346          | 1,068    | 6.53               
|Interest-earning deposits in
    banks                                             | 11,181          | 171      | 1.53                |  | 7,629           | 219      | 2.88               
|Total interest-earning
    assets                                                  | 138,066         | 9,315    | 6.75                |  | 136,005         | 10,582   | 7.78               
|Allowance for loan losses                                                          | (1,052)         |          |                     |  | (796)           |          |                    
|Cash and due from banks                                                            | 5,420           |          |                     |  | 4,778           |          |                    
|Other assets                                                                       | 4,832           |          |                     |  | 5,159           |          |                    
|Total assets                                                                       | $147,266        |          |                     |  | $145,146        |          |                    
|                                                                                   |                 |          |                     |  |                 |          |                    
|Interest-bearing liabilities:                                                      |                 |          |                     |  |                 |          |                    
|Deposits:                                                                          |                 |          |                     |  |                 |          |                    
|Interest-bearing demand                                                            | $ 29,123        | $ 227    | 0.78%               |  | $ 26,922        | $ 461    | 1.71%              
|Money market                                                                       | 21,630          | 359      | 1.66                |  | 18,004          | 571      | 3.17               
|Savings                                                                            | 21,134          | 309      | 1.46                |  | 18,817          | 494      | 2.63               
|Certificates of deposit                                                            | 40,126          | 1,220    | 3.04                |  | 41,893          | 2,154    | 5.14               
|Total interest-bearing
    deposits                                                | 112,013         | 2,115    | 1.89                |  | 105,636         | 3,680    | 3.48               
|Borrowings                                                                         | 5,485           | 338      | 6.16                |  | 13,155          | 761      | 5.78               
|Total interest-bearing
    liabilities                                             | 117,498         | 2,453    | 2.09                |  | 118,791         | 4,441    | 3.74               
|Noninterest-bearing demand
    deposits                                            | 14,346          |          |                     |  | 11,167          |          |                    
|Other liabilities                                                                  | 1,674           |          |                     |  | 2,516           |          |                    
|Shareholders' equity                                                               | 13,748          |          |                     |  | 12,672          |          |                    
|Total liabilities and shareholders' equity                                         | $147,266        |          |                     |  | $145,146        |          |                    
|                                                                                   |                 |          |                     |  |                 |          |                    
|Net interest income                                                                |                 | $6,862   |                     |  |                 | $6,141   |                    
|                                                                                   |                 |          |                     |  |                 |          |                    
|Interest rate spread                                                               |                 |          | 4.66%               |  |                 |          | 4.04%              
|                                                                                   |                 |          |                     |  |                 |          |                    
|Net interest margin:                                                               |                 |          |                     |  |                 |          |                    
|On average interest-earning
    assets                                             |                 |          | 4.97%               |  |                 |          | 4.51%              
|On average total assets                                                            |                 |          | 4.66                |  |                 |          | 4.23               
|                                                                                   |                 |          |                     |  |                 |          |                    
|Ratio of average interest-earning assets
  to average interest-bearing liabilities | 117.50%         |          |                     |  | 114.49%         |          |                    

(1)

13Rate/Volume Analysis

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

|(in thousands)Year ended December 31, 2002 compared with 2001 | Rate     | Volume | Rate/ Volume | Total  
|------------------------------------------------------------- | -------- | ------ | ------------ | -------
|Interest-earning assets:                                      |          |        |              |        
|Loans                                                         | $(1,027) | $ 235  | $ (26)       | $(818) 
|Investment securities                                         | (161)    | (283)  | 43           | (401)  
|Interest-earning deposits in banks                            | (102)    | 102    | (48)         | (48)   
|Total net change in interest
    income                       | (1,290)  | 54     | (31)         | (1,267)
|                                                              |          |        |              |        
|Interest-bearing liabilities:                                 |          |        |              |        
|Interest-bearing demand
    accounts                          | (251)    | 38     | (21)         | (234)  
|Money market accounts                                         | (272)    | 115    | (55)         | (212)  
|Savings accounts                                              | (219)    | 61     | (27)         | (185)  
|Certificates of deposit                                       | (880)    | (91)   | 37           | (934)  
|Borrowings                                                    | 50       | (444)  | (29)         | (423)  
|Total net change in interest
    expense                      | (1,572)  | (321)  | (95)         | (1,988)
|                                                              |          |        |              |        
|Net change in net interest income                             | $ 282    | $ 375  | $64          | $ 721  

14Yields Earned and Rates Paid

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

|                                       | At
    December 31, |  | For the Year Ended December 31,
|-------------------------------------- | ------------------- |  | -------------------------------
|                                       | 2002                |  | 2002                           
|                                       |                     |  |                                
|Weighted average yield on:             |                     |  |                                
|Loans                                  | 6.96%               |  | 7.38%                          
|Investment securities                  | 5.42                |  | 5.55                           
|Interest-earning deposits in
    banks | 1.41                |  | 1.53                           
|Total interest-earning
    assets      | 6.02                |  | 6.75                           
|                                       |                     |  |                                
|Weighted average rate paid on:         |                     |  |                                
|Interest-bearing demand
    accounts   | 0.69                |  | 0.78                           
|Money market accounts                  | 1.26                |  | 1.66                           
|Savings accounts                       | 1.01                |  | 1.46                           
|Certificates of deposit                | 2.54                |  | 3.04                           
|Total interest-bearing
    deposits    | 1.49                |  | 1.89                           
|Borrowings                             | 6.13                |  | 6.16                           
|Total interest-bearing
    liabilities | 1.68                |  | 2.09                           
|                                       |                     |  |                                
|Interest rate spread                   | 4.34                |  | 4.66                           
|                                       |                     |  |                                
|Net interest margin on:                |                     |  |                                
|Average interest-earning
    assets    | 4.61                |  | 4.97                           
|Average total assets                   | 4.28                |  | 4.66                           
|                                       |                     |  |                                

Asset and Liability Management and Market Risk

Qualitative Analysis - Risks When Interest Rates Change. The Bank's
profitability depends primarily on its net interest income, which is the
difference between the income it receives on its loan and investment portfolios
and its cost of funds, which consists of interest paid on deposits and
borrowings. The relative amounts of interest-earning assets and interest-bearing
liabilities also affect net interest income. When interest-earning assets equal
or exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income. The Bank's profitability is also affected by the
level of noninterest income and expenses. Noninterest income includes service
charges and fees and gain on sale of loans and investments. Noninterest expenses
primarily include compensation and benefits, occupancy and equipment expenses,
deposit insurance premiums and data processing expenses. General economic and
competitive conditions, particularly changes in market interest rates,
government legislation and regulation, and monetary and fiscal policies also
significantly affect the Bank's results of operations.

Quantitative Analysis - How the Bank Measures Its Risk of Interest Rate
Changes. The Bank does not maintain a trading account for any class of
financial instrument nor does it engage in hedging activities or purchase
high-risk derivative instruments. Furthermore, the Bank has no significant
foreign currency exchange rate risk or commodity price risk.
                                                                                  15

The Bank has sought to reduce the exposure of its earnings to changes in
market interest rates by attempting to manage the mismatch between asset and
liability maturities and interest rates. Principal elements in achieving this
objective include increasing the interest-rate sensitivity of the Bank's
interest-earning assets by originating for its portfolio loans with interest
rates that periodically adjust to market conditions, as well as continuing
decisions to sell fixed-rate mortgage production versus keeping them in the
portfolio. The Bank relies on retail deposits as its primary source of funds.
Management believes retail deposits, compared to brokered deposits, reduce the
effects of interest rate fluctuations because they generally represent a more
stable source of funds.

In order to encourage institutions to reduce interest rate risk, the OTS
adopted a rule incorporating an interest rate risk component into the risk-based
capital rules. Using data compiled by the OTS, the Bank receives a report that
measures interest rate risk by modeling the change in net portfolio value over a
variety of interest rate scenarios. The OTS developed this procedure for
measuring interest rate risk to replace the "gap" analysis, which is the
difference between interest-earning assets and interest-bearing liabilities that
mature or reprice within a specific time period. Net portfolio value is the
present value of expected cash flows from assets, liabilities and
off-balance-sheet contracts. The calculation is intended to illustrate the
change in net portfolio value that will occur upon an immediate change in
interest rates of at least 200 basis points with no effect given to any steps
that management might take to counter the effect of that interest rate movement.
Under OTS regulations, an institution with a greater than "normal" level of
interest rate risk takes a deduction from total capital for purposes of
calculating its risk-based capital. The OTS, however, has delayed the
implementation of this regulation. An institution with a "normal" level of
interest rate risk is defined as one whose "measured interest rate risk" is less
than 2.0%. Institutions with assets of less than $300 million and a risk-based
capital ratio of more than 12.0% are exempt. The Bank is exempt because of its
asset size and risk-based capital ratio. Based on the Bank's regulatory capital
levels at December 31, 2002, the Bank believes that, if the proposed regulation
had been implemented at that date, the Bank's level of interest rate risk would
not have caused it to be treated as an institution with greater than "normal"
interest rate risk.

The following table illustrates the change in net portfolio value at December
31, 2002, based on OTS assumptions, that would occur in the event of an
immediate change in interest rates, with no effect given to any steps which
management might take to counter the effect of that interest rate movement.

|(dollars
    in thousands)         |  | Net Portfolio Value |                        | Net Portfolio as % of
    Portfolio Value of Assets
|---------------------------------- |  | ------------------- | ---------------------- | ---------------------------------------------------
|Basis Point ("bp") Change in Rates |  | Dollar Amount       | Dollar  
    Change(1) | Percent Change                                     
|300 bp                             |  | $20,187             | $(1,104)               | (5)%                                               
|200                                |  | 21,147              | (144)                  | (1)                                                
|100                                |  | 21,755              | 464                    | 2                                                  
|0                                  |  | 21,291              | -                      | -                                                  
|(100)                              |  | 20,431              | (859)                  | (4)                                                

(1)

(2)

(3)

The above table illustrates, for example, that at December 31, 2002 an
instantaneous 200 basis point increase in market interest rates would reduce the
Bank's net portfolio value by $144,000, or 1%, and an instantaneous 100 basis
point decrease in market interest rates would reduce the Bank's net portfolio
value by $859,000, or 4%. 
                                                                                    16

The following summarizes key exposure measures for the dates indicated. They
measure the change in net portfolio value ratio for an adverse change in
interest rates of 200 basis points upward or 100 basis points downward.

|                                            | December 31, 
    2002 | September 30, 
    2002 | December 31, 
    2001
|------------------------------------------- | ---------------------- | ----------------------- | ----------------------
|Pre-shock net portfolio    value ratio      | 13.26%                 | 13.59%                  | 13.09%                
|Post-shock net portfolio
       value ratio | 12.74%                 | 13.09%                  | 11.66%                
|Decline in net portfolio
       value ratio | 51 bp                  | 50 bp                   | 143 bp                

The calculated risk exposure measures indicate that the Bank's interest-rate
risk at December 31, 2002 has decreased from the previous year end, in that a
"shock" increase or decrease in market rates would have a relatively smaller
negative effect on net portfolio value. These measures indicate a relatively low
level of interest-rate risk at the present time. Among other factors, this is
due to a decrease in fixed-rate mortgages and a gradual shift to earning assets
which tend to reprice with greater frequency.

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

Liquidity and Capital Resources

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

The primary investing activity of the Bank has traditionally been the
origination of one- to four-family mortgage loans and consumer loans, but in
recent years the Bank has increased significantly its originations of other
types of real estate loans and commercial business loans. Between December 31,
2002 and 2001, one- to four-family mortgages (excluding those held for sale)
decreased $7.8 million (15.9%) while loans to commercial borrowers increased
$6.3 million (19.0%). Deposits, FHLB borrowings, and principal repayments on
loans and mortgage-backed securities were the primary means for funding these
activities.
                                                                                  17

The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Bank's sources of funds include deposits, principal and
interest payments from loans and investments, and FHLB advances. During 2002 and
2001, the Company used its sources of funds primarily to fund new loans and to
pay maturing certificates and other deposit withdrawals. At December 31, 2002,
the Bank had loan commitments (excluding loans in process), including unused
portions of commercial business lines of credit, of $4.1 million.

At December 31, 2002, the Bank had $211,000 of net unrealized gains on
investment securities classified as available for sale, which represented 2.7%
of the amortized cost ($7.9 million) of the securities. This represented an
improvement of $205,000 compared with $6,000 of unrealized gains at December 31,
2001, primarily due to declining market interest rates in 2002. Movements in
market interest rates will continue to affect the unrealized gains and losses in
these securities. However, assuming that the securities are held to their
individual dates of maturity, even in periods of increasing market interest
rates, as the securities approach their dates of maturity, any unrealized gains
or losses will begin to decrease and eventually be eliminated.

At December 31, 2002, certificates of deposit amounted to $38.8 million, or
29.2% of the Bank's total deposits, including $31.7 million scheduled to mature
by December 31, 2003. Historically, the Bank has been able to retain a
significant amount of its deposits as they mature. Management believes it has
adequate resources to fund all loan commitments with deposits and, as needed,
FHLB advances and sale of mortgage loans and that it can adjust the offering
rates of certificates of deposits to retain deposits in changing interest rate
environments. In addition, the Bank has available a line of credit with the FHLB
generally equal to 25% of the Bank's total assets, or approximately $38.6
million at December 31, 2002, of which $33.6 million was unused.

The Bank is required to maintain specific amounts of capital pursuant to OTS
requirements. As of December 31, 2002, Alaska Pacific was in compliance with all
regulatory capital requirements which were effective as of this date with
tangible, core, and risk-based capital ratios of 9.36%, 9.36% and 15.68%,
respectively. For further information, see Note 3 of Notes to Consolidated
Financial Statements.

Recent Accounting Pronouncements

Significant recent Statements of Financial Accounting Standards ("SFAS") and
the impact of their adoption are described below.

SFAS 143, Accounting for Asset Retirement Obligations, issued in
  August 2001, addresses the accounting for the legal obligation associated with
  the retirement of a tangible long-lived asset. The statement is effective
  beginning in 2003.

SFAS 144, Accounting for the Impairment of or Disposal of Long-Lived
  Assets, issued in October 2001, addresses financial accounting and
  reporting for the impairment or disposal of long-lived assets. The statement
  was effective beginning in 2002.

SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
  FASB Statement No. 13, and Technical Corrections, issued in April 2002,
  makes a number of technical modifications to existing accounting
  pronouncements, including the financial statement presentation of gains and
  losses on extinguishments of debt. The statement is effective beginning in
  2002.

SFAS 146, Accounting for Costs Associated with Exit or Disposal
  Activities, issued in June 2002, addresses financial accounting and
  reporting costs associated with exit or disposal activities. The statement is
  effective beginning in 2003
                                                                                 18

SFAS 147, Acquisitions of Certain Financial Institutions - an amendment
  of FASB Statements No. 72 and 144 and FASB Interpretation No. 9, issued in
  October 2002, discontinues specialized guidance in accounting for acquisitions
  of banks and thrift institutions. The statement was effective beginning in
  October 2002

SFAS 148, Accounting for Stock-Based Compensation - Transition and
  Disclosure - an amendment of FASB Statement No. 123, issued in December
  2002, provides alternative methods of transition for a voluntary change to the
  fair value based method of accounting for stock-based employee compensation.
  The statement also requires certain disclosures in interim as well as annual
  financial statements. The statement is effective beginning in 2002.

Management believes that these new accounting standards will not have a
significant impact on the Company's financial position, results of operations,
or liquidity.

19

INDEPENDENT
AUDITORS' REPORT



Board of Directors and Shareholders
Alaska Pacific Bancshares, Inc.:

We have audited the accompanying consolidated balance sheets of Alaska
Pacific Bancshares, Inc. and subsidiary (the "Company") as of December 31, 2002
and 2001, and the related consolidated statements of income, changes in
shareholders' equity and comprehensive income, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alaska
Pacific Bancshares, Inc. and subsidiary as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.



/s/KPMG
LLP

Anchorage, Alaska
February 14, 2003

20

Alaska Pacific Bancshares, Inc. and
Subsidiary

|(dollars in thousands) December 31,                                                                                 | 2002     | 2001    
|------------------------------------------------------------------------------------------------------------------- | -------- | --------
|Assets                                                                                                              |          |         
|Cash and due from banks                                                                                             | $ 6,758  | $ 5,473 
|Interest-earning deposits in banks                                                                                  | 21,471   | 18,413  
|Total cash and cash equivalents                                                                                     | 28,229   | 23,886  
|Investment
    securities available for sale, at fair value (amortized cost: 
      2001 - $12,345; 2000 - $16,399) | 8,076    | 12,351  
|Federal Home Loan
    Bank stock                                                                                    | 1,649    | 1,553   
|Loans held for sale                                                                                                 | 4,590    | 995     
|Loans                                                                                                               | 107,274  | 111,192 
|Less allowance for loan losses                                                                                      | 1,152    | 939     
|Loans, net                                                                                                          | 106,122  | 110,253 
|Accrued interest receivable                                                                                         | 579      | 668     
|Premises and equipment                                                                                              | 3,088    | 3,109   
|Repossessed assets                                                                                                  | 189      | 166     
|Other assets                                                                                                        | 1,817    | 1,591   
|Total Assets                                                                                                        | $154,339 | $154,572



|Liabilities and Shareholders' Equity                  |              |           
|----------------------------------------------------- | ------------ | ----------
|Deposits:                                             |              |           
|Noninterest-bearing demand                            | $ 18,094     | $ 12,932  
|Interest-bearing demand                               | 31,044       | 29,114    
|Money market                                          | 21,999       | 21,020    
|Savings                                               | 22,790       | 21,263    
|Certificates of deposit                               | 38,754       | 41,980    
|Total deposits                                        | 132,681      | 126,309   
|Federal Home Loan Bank advances                       | 5,000        | 13,000    
|Advance payments by borrowers for taxes and insurance | 754          | 905       
|Accounts payable and accrued expenses                 | 425          | 426       
|Accrued interest payable                              | 282          | 609       
|Other liabilities                                     | 230          | 332       
|Total liabilities                                     | 139,372      | 141,581   
|Commitments and contingencies (Notes 12 and 14)       |              |           
|Shareholders' Equity:                                 |              |           
|                                                      | December 31, |           
|Common stock ($0.01 par
    value):                   | 2002         | 2001      
|Authorized shares                                     | 20,000,000   | 20,000,000
|Issued                                                | 655,415      | 655,415   
|Outstanding                                           | 623,132      | 623,132   
|Additional paid-in capital                            |              |           
|Treasury stock                                        | (32,283)     | (32,283)  
|Unearned ESOP shares                                  | (28,789)     | (34,621)  
|Unvested shares in stock award
    plan               | (13,544)     | (18,788)  
|Retained earnings                                     | 9,754        | 8,116     
|Accumulated other comprehensive income                | 211          | 6         
|Total shareholders' equity                            | 14,967       | 12,991    
|Total Liabilities and Shareholders' Equity            | $154,339     | $154,572  
|                                                      |              |           
|See notes to
    consolidated financial statements.   |              |           



|(in thousands, except per share) Year ended December
    31, | 2002   | 2001  
|------------------------------------------------------------ | ------ | ------
|Interest Income                                              |        |       
|Loans                                                        | $8,477 | $9,295
|Investment securities                                        | 667    | 1,068 
|Interest-earning deposits in
    banks                       | 171    | 219   
|Total interest income                                        | 9,315  | 10,582
|Interest Expense                                             |        |       
|Deposits                                                     | 2,115  | 3,680 
|Federal Home Loan Bank
    advances                          | 338    | 761   
|Total interest expense                                       | 2,453  | 4,441 
|Net Interest Income                                          | 6,862  | 6,141 
|Provision for loan losses                                    | 370    | 210   
|Net interest income after
    provision for loan losses      | 6,492  | 5,931 
|Noninterest Income                                           |        |       
|Mortgage servicing income                                    | 189    | 195   
|Service charges on deposit
    accounts                      | 562    | 471   
|Other service charges and fees                               | 192    | 174   
|Gain on sale of mortgage loans                               | 329    | 372   
|Total noninterest income                                     | 1,272  | 1,212 
|Noninterest Expense                                          |        |       
|Compensation and benefits                                    | 3,429  | 3,387 
|Occupancy and equipment                                      | 1,343  | 1,450 
|Data processing                                              | 350    | 349   
|Professional and consulting
    fees                         | 249    | 276   
|Marketing and public relations                               | 181    | 204   
|Real estate owned expense, net                               | 98     | 18    
|Branch closure costs                                         | -      | 135   
|Other                                                        | 929    | 864   
|Total noninterest expense                                    | 6,579  | 6,683 
|Income before income tax                                     | 1,185  | 460   
|Provision for income tax
    (benefit)                       | (592)  | -     
|Net Income                                                   | $1,777 | $  460
|                                                             |        |       
|Net income per share:                                        |        |       
|Basic                                                        | $3.10  | $ 0.82
|Diluted                                                      | 2.98   | 0.80  
|                                                             |        |       
|See notes to consolidated
    financial statements.          |        |       



|(in thousands)                                                                                 | Common Stock | Additional Paid-In Capital | Treasury 
    Stock | Unearned ESOP Shares | Unvested Shares in 
    Stock 
    Award Plan | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total 
    Share-holders' Equity
|---------------------------------------------------------------------------------------------- | ------------ | -------------------------- | ------------------- | -------------------- | --------------------------------------------- | ----------------- | --------------------------------------------- | --------------------------------
|Balance, January 1, 2001                                                                       | $ 7          | $ 5,783                    | $(400)              | $ (407)              | $(234)                                        | $7,776            | $(142)                                        | $ 12,383                        
|                                                                                               |              |                            |                     |                      |                                               |                   |                                               |                                 
|Net income                                                                                     |              |                            |                     |                      |                                               | 460               |                                               | 460                             
|Other comprehensive income:                                                                    |              |                            |                     |                      |                                               |                   |                                               |                                 
|Change in net unrealized gains and         losses on
    securities available for         sale |              |                            |                     |                      |                                               |                   | 148                                           | 148                             
|Comprehensive income                                                                           |              |                            |                     |                      |                                               |                   |                                               | 608                             
|ESOP shares earned                                                                             |              | 8                          |                     | 61                   |                                               |                   |                                               | 69                              
|Accrued vesting of restricted
    stock                                                        |              |                            |                     |                      | 51                                            |                   |                                               | 51                              
|Cash dividends ($.20 per share)                                                                |              |                            |                     |                      |                                               | (120)             |                                               | (120)                           
|Balance, December 31, 2001                                                                     | 7            | 5,791                      | (400)               | (346)                | (183)                                         | 8,116             | 6                                             | 12,991                          
|                                                                                               |              |                            |                     |                      |                                               |                   |                                               |                                 
|Net income                                                                                     |              |                            |                     |                      |                                               | 1,777             |                                               | 1,777                           
|Other comprehensive income:                                                                    |              |                            |                     |                      |                                               |                   |                                               |                                 
|Change in net unrealized gains and         losses on
    securities available for         sale |              |                            |                     |                      |                                               |                   | 205                                           | 205                             
|Comprehensive income                                                                           |              |                            |                     |                      |                                               |                   |                                               | 1,982                           
|ESOP shares earned                                                                             |              | 23                         |                     | 58                   |                                               |                   |                                               | 81                              
|Accrued vesting of restricted
    stock                                                        |              |                            |                     |                      | 52                                            |                   |                                               | 52                              
|Cash dividends ($.23 per share)                                                                |              |                            |                     |                      |                                               | (139)             |                                               | (139)                           
|Balance, December 31, 2002                                                                     | $ 7          | $5,814                     | $(400)              | $(288)               | $(131)                                        | $9,754            | $ 211                                         | $14,967                         
|                                                                                               |              |                            |                     |                      |                                               |                   |                                               |                                 
|See notes to
    consolidated financial statements.                                            |              |                            |                     |                      |                                               |                  

23Alaska Pacific Bancshares, Inc. and SubsidiaryConsolidated Statements of Cash Flows

|(in thousands) Year ended December 31,                                                      | 2002        | 2001       
|------------------------------------------------------------------------------------------- | ----------- | -----------
|Operating
    Activities                                                                    |             |            
|Net income                                                                                  | $1,777      | $ 460      
|Adjustments to
    reconcile net income to net cash provided by
      operating activities: |             |            
|Provision for
    loan losses                                                               | 370         | 210        
|Depreciation
    and amortization                                                           | 420         | 446        
|Gain on sale of
    mortgage loans                                                          | (329)       | (372)      
|Federal Home
    Loan Bank stock dividends                                                  | (96)        | (102)      
|Amortization of
    fees, discounts, and premiums, net                                      | (96)        | (33)       
|ESOP expense                                                                                | 81          | 69         
|Stock award
    expense                                                                     | 52          | 51         
|Loss on sale of
    repossessed assets                                                      | 8           | -          
|Cash provided
    by changes in operating assets and liabilities:                           |             |            
|Accrued
    interest receivable                                                             | 89          | 114        
|Other assets                                                                                | (226)       | (587)      
|Advance
    payments by borrowers for taxes and insurance                                   | (151)       | 59         
|Accrued
    interest payable                                                                | (327)       | 44         
|Accounts
    payable and accrued expenses                                                   | (1)         | 245        
|Other liabilities                                                                           | (102)       | 231        
|Net cash
    provided by operating activities                                               | 1,469       | 835        
|Investing
    Activities                                                                    |             |            
|Maturities and principal
    repayments of investment securities available for
        sale | 4,449       | 4,060      
|Loan originations, net of
    principal repayments                                          | (25,025)    | (32,163)   
|Proceeds from sale of mortgage
    loans                                                    | 25,501      | 26,505     
|Purchase of premises and
    equipment                                                      | (399)       | (108)      
|Proceeds from sale of repossessed assets                                                    | 115         | 110        
|Net cash used in investing
    activities                                                   | 4,641       | (1,596)    
|Financing
    Activities                                                                    |             |            
|Cash dividends
    paid                                                                     | (139)       | (120)      
|Net increase
    (decrease) in Federal Home Loan Bank advances                              | (8,000)     | (400)      
|Net increase in
    demand and savings deposits                                             | 9,598       | 13,866     
|Net increase (decrease) in certificates of deposit                                          | (3,226)     | 4,454      
|Net cash provided by (used in) financing activities                                         | (1,767)     | 17,800     
|Increase in cash
    and cash equivalents                                                   | 4,343       | 17,039     
|Cash and cash
    equivalents at beginning of year                                          | 23,886      | 6,847      
|Cash and cash equivalents at end of year                                                    | $28,229     | $23,886    
|Supplemental
    information:                                                               |             |            
|Cash paid for interest                                                                      | $
    2,780 | $
    4,397
|Loans repossessed and
    transferred to repossessed assets                                 | 146         | 170        
|Net change in unrealized loss on securities available
    for sale                          | 205         | 148        
|See notes to consolidated financial statements.                                             |             |            

24

Alaska Pacific Bancshares, Inc. and
Subsidiary

_________________________________________________________________________________
Note 1 - Summary of Significant Accounting Policies

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

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

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

INVESTMENT SECURITIES: Securities
available for sale, including mortgage-backed and related securities, are
carried at fair value with unrealized gains and losses excluded from earnings
and reported in a separate component of equity. Any security that management
determines may not be held to maturity is classified as available for sale at
the time the security is acquired. Any gains and losses realized on the sale of
these securities are based on the specific identification method and included in
earnings.

Purchase discounts and premiums on investment securities are amortized using
the level yield method.

LOANS: Loans are reported at the
principal amount outstanding, adjusted for net deferred loan fees and costs and
other unamortized premiums or discounts.

Interest is accrued as earned unless management doubts the collectibility of
the loan or the unpaid interest. Interest accrual is generally discontinued and
loans are transferred to nonaccrual status when they become 90 days past due.
All previously accrued but uncollected interest is deducted from interest income
upon transfer to nonaccrual status. Income from nonaccrual loans is recorded
only when interest payments are received.

Loan origination fees and direct loan origination costs are deferred and
recognized as an adjustment to interest income over the contractual life of the
loan using the level yield method. When loans are sold, the related net
unamortized loan fees and costs are included in the determination of the gain on
sale of loans.

LOANS HELD FOR SALE: Loans held for sale
consist primarily of residential mortgage loans and are individually valued at
the lower of cost or market. Loans are recorded as sold when the loan documents
are sent to the investor.
                                                                              25

ALLOWANCE FOR LOAN LOSSES: The allowance
for loan losses is maintained at a level believed to be sufficient to absorb
losses probable and inherent in the loan portfolio. Management's determination
of the adequacy of the allowance is based on a number of factors, including the
level of nonperforming loans, loan loss experience, collateral values, a review
of the credit quality of the loan portfolio, and current economic conditions.
Loans are categorized as either pass-graded or problem-graded based on periodic
reviews of the loan portfolio. The allowance is evaluated quarterly based on an
estimated range of probable loss comprised of two elements:

General component The general allowance component is calculated by loan
  category as a range of estimated loss by applying various loss factors to
  pass-graded outstanding loans. The loss factors are based primarily on
  industry loss statistics, adjusted for the Bank's historical loss experience
  and other significant factors that, in management's judgment, affect the
  collectibility of the portfolio as of the evaluation date.

Specific component The specific allowance component is established in
  cases where management has identified conditions or circumstances related to a
  problem-graded loan that management believes indicate a probable loss. A range
  of estimated loss is established for each such loan.

Loan impairment is measured in accordance with Statement of Financial
  Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
  Impairment of a Loan and SFAS No. 118, Accounting by Creditors for
  Impairment of a Loan - Income Recognition and Disclosures.Under these
  standards, loans are deemed to be impaired when management determines that it
  is probable that all amounts due under the contractual terms of the loan
  agreements will not be collectible in accordance with the original loan
  agreement. All problem-graded loans are evaluated for impairment. Impairment
  is measured by comparing the fair value of the collateral or present value of
  future cash flows to the recorded investment in the loan.

MORTGAGE SERVICING RIGHTS: Mortgage
servicing rights are stated at amortized cost. Cost is amortized in proportion
to, and over the period of, future expected net servicing income. Mortgage
servicing rights are assessed for impairment based on the fair value of those
rights and any impairment is recognized through a valuation allowance. In
assessing impairment, the mortgage servicing rights are stratified based on the
nature and risk characteristics, including coupon rates, of the underlying
loans, which at December 31, 2002 and 2001, consisted entirely of one- to
four-family residential mortgage loans.

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

Long-lived assets are assessed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, estimated future cash
flows expected to result from the use of the asset and its eventual disposition
are compared with the carrying value, and a direct writedown is recorded for the
amount of impairment, if any.
                                                                                          26

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

FEDERAL HOME LOAN BANK STOCK: The Bank's
investment in Federal Home Loan Bank of Seattle ("FHLB") stock is carried at
cost because there is no active market for the stock. As a member of the FHLB
system, the Bank is required to maintain a minimum level of investment in FHLB
stock based on specified percentages of its outstanding mortgages, total assets
or FHLB advances. At December 31, 2002, the Bank's minimum investment
requirement was approximately $722,000. The Bank may request redemption at par
value on any stock in excess of the amount the Bank is required to hold. Stock
redemptions are granted at the discretion of the FHLB.

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

STOCK OPTION PLAN: The Company accounts
for the cost of stock options using the intrinsic value method. Note 11 of Notes
to Consolidated Financial Statements presents pro forma information as though
the cost were determined in accordance with the fair value method as defined by
SFAS 123.

STATEMENT OF CASH FLOWS: The statement
of cash flows has been prepared using the "indirect" method for presenting cash
flows from operating activities. For purposes of this statement, cash and cash
equivalents include cash and due from banks and interest-bearing deposits with
banks.

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

RECENT ACCOUNTING PRONOUNCEMENTS:

SFAS 143, Accounting for Asset Retirement Obligations, issued in
  August 2001, addresses the accounting for the legal obligation associated with
  the retirement of a tangible long-lived asset. The statement is effective
  beginning in 2003.

SFAS 144, Accounting for the Impairment of or Disposal of Long-Lived
  Assets, issued in October 2001, addresses financial accounting and
  reporting for the impairment or disposal of long-lived assets. The statement
  was effective beginning in 2002.

SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
  FASB Statement No. 13, and Technical Corrections, issued in April 2002,
  makes a number of technical modifications to existing accounting
  pronouncements, including the financial statement presentation of gains and
  losses on extinguishments of debt. The statement is effective beginning in
  2002.

SFAS 146, Accounting for Costs Associated with Exit or Disposal
  Activities, issued in June 2002, addresses financial accounting and
  reporting costs associated with exit or disposal activities. The statement is
  effective beginning in 2003.
                                                                                   27

SFAS 147, Acquisitions of Certain Financial Institutions - an amendment
  of FASB Statements No. 72 and 144 and FASB Interpretation No. 9, issued in
  October 2002, discontinues specialized guidance in accounting for acquisitions
  of banks and thrift institutions. The statement was effective beginning in
  October 2002

SFAS 148, Accounting for Stock-Based Compensation - Transition and
  Disclosure - an amendment of FASB Statement No. 123, issued in December
  2002, provides alternative methods of transition for a voluntary change to the
  fair value based method of accounting for stock-based employee compensation.
  The statement also requires certain disclosures in interim as well as annual
  financial statements. The statement is effective beginning in 2002.

Management believes that these new accounting standards will not have a
significant impact on the Company's financial position, results of operations,
or liquidity.

FAIR VALUE OF FINANCIAL INSTRUMENTS: The
fair value of cash and cash equivalents and accrued interest receivable is
estimated to be equal to the carrying value, due to their short-term nature. The
fair value of investment securities is based upon estimated market prices
obtained from independent safekeeping agents. The fair value of FHLB stock is
considered to be equal to its carrying value, since it may be redeemed at that
value. The fair value of loans is estimated using present value methods which
discount the estimated cash flows, including prepayments as well as contractual
principal and interest, using current interest rates appropriate for the type
and maturity of the loans.

For demand and savings deposits and accrued interest payable, fair value is
considered to be carrying value. The fair values of fixed-rate certificates of
deposit and FHLB advances are estimated using present value methods and current
offering rates for such deposits and advances.

USE OF ESTIMATES: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Material estimates that are particularly susceptible to change
in the near term relate to the determination of the allowance for loan losses,
deferred income taxes, and useful lives for depreciation of premises and
equipment. Actual results could differ from these estimates.

Note 2 - Branch Closures

In October 2001, the Bank closed two of its banking offices - the Wrangell
Office in Wrangell, Alaska and the Auke Bay Office in Juneau, Alaska. The
decision to close was based on the branches' small size and resulting operating
inefficiencies, as well as their limited potential, in management's opinion, for
growth. Both communities remain well served by competing banks and, in the case
of the Auke Bay Office, by the Bank's two remaining offices in Juneau.

The cost of closing the two branches, $135,000, is included in the
accompanying consolidated income statement for the year ended December 31, 2001,
as "branch closure costs."
                                                                                    28

Note 3 - Regulatory Capital Requirements

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

Quantitative measures have been established by regulation to ensure capital
adequacy and require the Bank to maintain minimum capital amounts and ratios
(set forth in the following table). The Bank's primary regulatory agency, the
Office of Thrift Supervision, requires that the Bank maintain minimum amounts
and ratios of tangible capital (as defined in the regulations) of 1.5%, core
capital (as defined) of 3%, and total risk-based capital (as defined) of 8%. The
Bank is also subject to PCA capital requirement regulations set forth by the
Federal Deposit Insurance Corporation ("FDIC"). The FDIC requires the Bank to
maintain minimum amounts and ratios of total and Tier I capital (as defined) to
risk-weighted assets (as defined). Management believes that, as of December 31,
2002 and 2001, the Bank meets all capital adequacy requirements to which it is
subject. The Bank was categorized as "well capitalized" in the most recent
notification by the Office of Thrift Supervision. There have been no events or
conditions since that notification that management believes would change the
Bank's capital category.

|                                                            |         | Minimum Capital Required     
|----------------------------------------------------------- | ------- | -----------------------------
|(dollars in thousands)                                      | Actual  | For Capital Adequacy Purposes
|                                                            | Amount  | Ratio                        
|December 31,
    2002:                                      |         |                              
|Tangible capital
    (to total assets)                      | $14,230 | 9.36%                        
|Core capital (to
    total assets)                          | 14,230  | 9.36                         
|Total risk-based
    capital (to risk     weighted assets)  | 15,382  | 15.68                        
|Tier I risk-based
    capital (to risk     weighted assets) | 14,230  | 14.51                        
|                                                            |         |                              
|December 31,
    2001:                                      |         |                              
|Tangible capital
    (to total assets)                      | $12,628 | 8.27%                        
|Core capital (to
    total assets)                          | 12,628  | 8.27                         
|Total risk-based
    capital (to risk      weighted assets) | 13,567  | 14.24                        
|Tier I risk-based
    capital (to risk     weighted assets) | 12,628  | 13.25                        

29

Note 4 - Investment Securities Available for Sale

Amortized cost and fair values of investment securities available for sale,
including mortgage-backed securities, are summarized as follows:

|(in thousands)                      | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair
    Value
|----------------------------------- | -------------- | ---------------------- | ----------------------- | --------------
|December 31, 2002:                  |                |                        |                         |               
|Mortgage-backed securities:         |                |                        |                         |               
|FNMA                                | $1,330         | $ 2                    | $ (45)                  | $1,287        
|FHLMC                               | 1,517          |                        | (86)                    | 1,431         
|GNMA                                | 4,733          | 358                    | (22)                    | 5,069         
|U.S. agencies and
    corporations: |                |                        |                         |               
|SBA pools                           | 285            | 4                      |                         | 289           
|Total                               | $7,865         | $364                   | $(153)                  | $8,076        
|                                    |                |                        |                         |               
|December 31, 2001:                  |                |                        |                         |               
|Mortgage-backed securities:         |                |                        |                         |               
|FNMA                                | $ 1,822        | $ 2                    | $ (49)                  | $ 1,775       
|FHLMC                               | 2,322          |                        | (119)                   | 2,203         
|GNMA                                | 7,832          | 197                    | (16)                    | 8,013         
|U.S. agencies and
    corporations: |                |                        |                         |               
|SBA pools                           | 369            | 3                      | (12)                    | 360           
|Total                               | $12,345        | $202                   | $(196)                  | $12,351       

No securities were designated as held to maturity at December 31, 2002 or
2001.

The following table summarizes the amortized cost and fair values of debt
securities by maturity group:

|(in thousands)December 31, 2002     | Amortized Cost | Fair Value
|----------------------------------- | -------------- | ----------
|Amount with final maturity:         |                |           
|After five but within ten
    years | $ 121          | $ 124     
|After ten years                     | 7,744          | 7,952     
|Total                               | $7,865         | $8,076    

Maturities of mortgage-backed securities are classified based on their final
contractual maturities. Actual maturities may vary due to prepayment of the
underlying loans.

At December 31, 2002, investment securities with amortized cost of $7,426,000
and market value of $7,622,000 were pledged to secure public funds deposited
with the Bank.

There were no sales of securities during 2002 or 2001. The Bank does not have
a trading securities portfolio. 
                                                                                    30

Note 5 - Loans

Loans are summarized as follows:

|(in thousands) December 31,   | 2002     | 2001      
|----------------------------- | -------- | ----------
|Real estate:                  |          |           
|Permanent:                    |          |           
|One- to
    four-family       | $41,419  | $  49,242 
|Multifamily                   | 2,209    | 1,972     
|Commercial
    nonresidential | 26,075   | 17,470    
|Land                          | 5,120    | 5,366     
|Construction:                 |          |           
|One- to
    four-family       | 3,643    | 4,006     
|Commercial
    nonresidential | 52       | 1,378     
|Commercial business           | 12,975   | 14,000    
|Consumer:                     |          |           
|Home equity                   | 8,912    | 9,918     
|Boat                          | 5,249    | 5,538     
|Automobile                    | 831      | 1,289     
|Other                         | 789      | 1,013     
|Loans                         | $107,274 | $111,192  
|                              |          |           
|Loans held for sale           | $4,590   | $      995

Loans are net of deferred loan fees and other discounts amounting to $493,000
and $382,000 at December 31, 2002 and 2001, respectively.

Interest income from tax-exempt loans was $68,000 and $84,000 in 2002 and
2001, respectively.

Real estate loans are secured primarily by properties located in Southeast
Alaska. Commercial real estate loans are generally secured by warehouse, retail,
and other improved commercial properties. Commercial business loans are
generally secured by equipment, inventory, accounts receivable, or other
business assets.

The Bank had impaired loans amounting to $766,000 and $195,000 at December
31, 2002 and 2001, respectively.

Nonaccrual loans were $1,777,000 and $1,359,000 at December 31, 2002 and
2001, respectively. For the year ended December 31, 2002, approximately $122,000
of interest would have been recorded if these loans would have been current
according to their original terms and had been outstanding throughout the year;
the amount of interest income on these loans that was included in net income for
the year was approximately $23,000.

MORTGAGE LOAN SERVICING: The Bank
services one- to four-family residential mortgage loans for Alaska Housing
Finance Corporation ("AHFC"), U.S. Government agencies, and institutional and
private investors totaling $82,669,000 and $82,352,000 as of December 31, 2002
and 2001, respectively. These loans are the assets of the investors and,
accordingly, are not included in the accompanying balance sheets. Related
servicing income, net of amortization of mortgage servicing rights, amounted to
$189,000 and $195,000 for 2002 and 2001, respectively.
                                                                                   31

The amortized cost of mortgage servicing rights, which approximates fair
value, is $534,000 and $418,000 at December 31, 2002 and 2001, respectively. The
amount of servicing assets recognized during 2002 was $176,000 and amortization
was $60,000 for the year. The amount of servicing assets recognized during 2001
was $182,000 and amortization was $44,000 for the year. It has been determined
that a valuation allowance for impairment is not required at December 31, 2002
or 2001.

Included in loans serviced for others at December 31, 2002 are 11 loans with
current balances totaling $701,000 for which the Bank is subservicer under
agreements with AHFC. Of these, eight loans totaling $616,000 are owned by the
Government National Mortgage Association ("GNMA") and three loans totaling
$85,000 are owned by the Federal National Mortgage Association ("FNMA").

RELATED PARTY LOANS: In the ordinary
course of business, the Bank makes loans to executive officers and directors of
the Bank and to their affiliates. Such loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions. The aggregate dollar amount of these loans was
$2,749,000 and $3,629,000 at December 31, 2002 and 2001, respectively. During
the year ended December 31, 2002 and 2001, new loans of this type were $792,000
and $763,000, respectively, and repayments were $1,672,000 and $621,000,
respectively.

Note 6 - Allowance for Loan Losses

Following is an analysis of the changes in the allowance for loan losses:

|(in thousands) Year ended December 31, | 2002   | 2001
|-------------------------------------- | ------ | ----
|Balance at beginning of year           | $ 939  | $788
|Provision for loan losses              | 370    | 210 
|Loans charged off                      | (164)  | (63)
|Recoveries                             | 7      | 4   
|Balance at end of year                 | $1,152 | $939

Note 7 - Premises and Equipment

Following is a summary of premises and equipment:

|(in thousands) December 31,       | 2002    | 2001   
|--------------------------------- | ------- | -------
|Land                              | $ 676   | $ 676  
|Buildings                         | 4,154   | 3,866  
|Leasehold
    improvements        | 1,541   | 1,490  
|Furniture, fixtures and equipment | 2,116   | 2,499  
|                                  | 8,487   | 8,531  
|Less accumulated
    depreciation | (5,399) | (5,422)
|                                  | $3,088  | $3,109 

Depreciation and amortization expense for the years ended December 31, 2002
and 2001 amounted to $420,000 and $446,000, respectively.

Note 8 - Deposits

Deposits in excess of $100,000 are not federally insured. Certificates of
deposit exceeding $100,000 at December 31, 2002 and 2001, were $11,849,000 and
$12,016,000, respectively, and the uninsured excess over $100,000 amounted to
$6,149,000 and $6,816,000, respectively. 
                                                                               32

The scheduled maturities of certificates of deposit as of December 31, 2002,
are as follows:

|(in thousands) Year ending December 31, |         | 
|--------------------------------------- | ------- | 
|2003                                    | $31,706 | 
|2004                                    | 2,819   | 
|2005                                    | 1,823   | 
|2006                                    | 1,871   | 
|2007 and
    thereafter                 | 535     | 
|                                        | $38,754 | 

Interest expense on deposits consists of the following:

|(in thousands)Year ended December 31, | 2002   | 2001  
|------------------------------------- | ------ | ------
|Interest-bearing demand               | $ 227  | $ 461 
|Money market                          | 359    | 571   
|Savings                               | 309    | 494   
|Certificates of deposit               | 1,220  | 2,154 
|                                      | $2,115 | $3,680

The weighted averages interest rates paid on deposits are as follows:

|Year ended December 31, | 2002  | 2001 
|----------------------- | ----- | -----
|Interest-bearing demand | 0.78% | 1.71%
|Money market            | 1.66  | 3.17 
|Savings                 | 1.46  | 2.63 
|Certificates of deposit | 3.04  | 5.14 

Note 9 - Federal Home Loan Bank Advances

FHLB advances consist of the following:

|(dollars in thousands) December 31,                                               |  |  | 2002     | 2001   
|--------------------------------------------------------------------------------- |  |  | -------- | -------
|Short-term advances maturing in 2002, 5.38%                                       |  |  | $      - | 8,000  
|Putable advance, maturing in
    2009, putable (at     discretion of FHLB), 6.13% |  |  | 5,000    | 5,000  
|                                                                                  |  |  | $5,000   | $13,000

The average balance of FHLB advances outstanding during 2002 and 2001 was
$5,485,000 and $13,155,000, respectively. The maximum amount of advances
outstanding at any month end during 2002 and 2001 was $13,000,000 and
$16,000,000, respectively. Under a blanket pledge agreement, all funds on
deposit at FHLB, as well as all unencumbered qualifying loans and investment
securities, are available to collateralize FHLB advances. 
The Bank has available a line of credit with the FHLB generally equal to 25% of
the Bank's total assets, or approximately $38.6 million at December 31, 2002, of
which $33.6 million was unused.

Note 10 - Retirement Plans

The Bank has a salary deferral 401(k) plan. Employees who are at least 18
years of age and have completed three months of service are eligible to
participate in the plan. Employees may contribute on a pretax basis up to 17% of
their annual salary up to a maximum limit under the law. The Bank matches 75% of
the first $2,667 of employee contribution. For the years ended December 31, 2002
and 2001, the Bank contributed $67,000 and $64,000, respectively, to the plan,
including administrative expenses.
                                                                                   33

The Company has an Employee Stock Ownership Plan ("ESOP") established in
connection with the conversion to stock ownership. Eight percent of the shares
issued in the conversion, or 52,433 shares, were purchased by the ESOP in
exchange for a note payable to the Holding Company. The shares are allocated to
employees over a ten-year period in proportion to the principal and interest
paid on the note at the end of each year. At December 31, 2002 and 2001, 23,644
and 17,812 shares, respectively, were allocated to employees. The Company's
expense for the plan, including administrative expenses, amounted to $82,000 and
$72,000 for the years ended December 31, 2002 and 2001, respectively.
Unallocated shares had a market value of $398,000 and $369,000 at December 31,
2002 and 2001, respectively.

Note 11 - Stock-Based Compensation

STOCK OPTION PLAN:

|(in thousands)Year ended December 31,          | 2002                        | 2001          
|---------------------------------------------- | --------------------------- | --------------
|                                               | Number 
    of 
    Options | Exercise Price
|Stock options outstanding at beginning of year | 64,542                      | $9.75         
|Exercised                                      | -                           |               
|Forfeited                                      | (2,400)                     | 9.75          
|Stock options outstanding at end of year       | 62,142                      | $9.75         
|                                               |                             |               
|Options exercisable at end of year             | 25,818                      | $9.75         

We have adopted SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123. This
statement amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, that Statement requires prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. We have elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure as required by SFAS 148.

For purposes of pro forma disclosures, the estimated fair value of options at
the time they are granted is amortized to expense over the options' vesting
period of five years. The fair value of options granted, all in 2000, was
estimated using the Black-Scholes option pricing model, assuming a risk-free
interest rate of 6.17%, a dividend yield of 2%, a stock price volatility factor
of 0.19, and a weighted-average expected life of seven years. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS 148 to its stock
option plan.

|Year ended December 31, 2002                                                                     | 2002       | 2001    
|------------------------------------------------------------------------------------------------ | ---------- | --------
|Net income, as reported                                                                          | $1,777,000 | $460,000
|Total stock option employee
    compensation expense    determined under fair value based method | (36,000)   | (36,000)
|Pro forma net income                                                                             | $1,741,000 | $424,000
|                                                                                                 |            |         
|Earnings per share:                                                                              |            |         
|Basic - as reported                                                                              | $3.10      | $.82    
|Basic - pro forma                                                                                | 3.04       | .76     
|Diluted - as reported                                                                            | 2.98       | .80     
|Diluted - pro forma                                                                              | 2.92       | .74     

34

MANAGEMENT RECOGNITION PLAN:

Note 12 - Operating Leases

The Bank leases certain of its premises and equipment under noncancelable
operating leases with terms in excess of one year. Future minimum lease payments
under these leases at December 31, 2002, are summarized as follows:

|(in thousands) Year ending December 31, |       
|--------------------------------------- | ------
|2003                                    | $ 378 
|2004                                    | 319   
|2005                                    | 317   
|2006                                    | 289   
|2007                                    | 289   
|2008 and
    thereafter                 | 313   
|                                        | $1,904

Rent expense was $422,000 and $431,000 for the years ended December 31, 2002
and 2001, respectively. Rental income on owned premises amounted to $72,000 and
$98,000 for the years ended December 31, 2002 and 2001, respectively.

Note 13 - Income Tax

The provision for income tax consisted of the following:

|(in thousands) Year ended December 31, | 2002    | 2001  
|-------------------------------------- | ------- | ------
|Taxes paid or currently payable        | $     - | $    -
|Change in deferred taxes               | 456     | 147   
|Adjustment of valuation
    allowance  | (1,048) | (147) 
|Income tax benefit                     | $ 592   | $    -

A reconciliation of taxes computed at federal statutory corporate tax rates
(34% in 2002 and 2001) to tax expense, as shown in the accompanying statements
of income and changes in shareholders' equity, is as follows:

|(in thousands) Year ended December 31,                  | 2002    | 2001 
|------------------------------------------------------- | ------- | -----
|Income tax expense at statutory rate                    | $ 403   | $ 156
|Income tax effect of:                                   |         |      
|Interest on municipal
    obligations                   | (23)    | (29) 
|Other                                                   | (76)    | 20   
|Reduction of valuation allowance
    for deferred taxes | (1,048) | (147)
|Income tax                                              | $ (592) | $ -  
|Effective tax rate                                      | ( 50%)  | 0%   

35
Deferred federal income tax is provided for the temporary differences between
the tax basis and financial statement carrying amounts of assets and
liabilities. Components of the Company's net deferred tax assets consisted of
the following:

|(in thousands) December 31,                        | 2002  | 2001   
|-------------------------------------------------- | ----- | -------
|Deferred tax assets:                               |       |        
|Net operating loss
    carryforward                | $ 596 | $ 1,394
|Bad debt reserves                                  | 639   | 383    
|Property, plant and
    equipment                  | 50    | 51     
|Accrued vacation and bonus                         | 134   | 87     
|Charitable contribution
    carryforward           | -     | 12     
|Other                                              | 25    | -      
|Gross deferred tax assets                          | 1,444 | 1,927  
|Deferred tax liabilities:                          |       |        
|Deferred loan fees, net                            | (38)  | (106)  
|FHLB stock dividends                               | (507) | (469)  
|Other                                              | (7)   | (4)    
|Gross deferred tax liabilities                     | (552) | (579)  
|Deferred tax asset, before
    valuation allowance | 892   | 1,348  
|Valuation allowance                                | -     | (1,048)
|Net deferred tax assets                            | $ 892 | $  300 



Based on estimated taxable income of approximately $1.7 million for 2002 and
projected future taxable income, management believes it is more likely than not
that the deferred tax asset is fully realizable.

In August 1996, the Small Business Job Protection Act of 1996 ("the Act") was
signed into law. Under the Act, the percentage of taxable income method of
accounting for tax basis bad debts is no longer available effective for the
years ending after December 31, 1995. As a result, the Bank is required to use
the experience method of accounting for tax basis bad debts for 1998 and later
years. In addition, the Act requires the recapture of post-1987 (the base year)
additions to the tax bad debt reserves made pursuant to the percentage of
taxable income method. The Bank is not subject to this recapture in 2002 or
2001, as its tax bad debt reserves do not exceed its base year reserve. As a
result of the bad debt deductions, shareholders' equity as of December 31, 2002,
includes accumulated earnings of approximately $1,759,000 for which federal
income tax has not been provided. If, in the future, this portion of retained
earnings is used for any purpose other than to absorb losses on loans or on
property acquired through foreclosure, federal income tax may be imposed at
then-applicable rates.
                                                                              36

For federal income tax purposes, the Company had net operating loss
carryforwards at December 31, 2002, which expire as follows:

|(in thousands)Year ending December 31, |       
|-------------------------------------- | ------
|2007                                   | $ 794 
|2008                                   | 203   
|2010                                   | 81    
|2011                                   | 29    
|2017                                   | 28    
|2018                                   | 51    
|2019                                   | 205   
|2020                                   | 50    
|2021                                   | 23    
|2022                                   | 27    
|                                       | $1,491

These loss carryovers could potentially be limited under Internal Revenue
Code Section 382 should there be a more-than-50% change in ownership of the
Company. This code section limits the amount of annual usage of net operating
losses incurred prior to such ownership change.

Note 14 - Commitments and Contingencies

COMMITMENTS:

Undisbursed loan proceeds, primarily for real estate construction loans,
total $2,114,000 and $2,405,000 at December 31, 2002 and 2001, respectively.
These amounts are excluded from the balance of loans at year end.

At December 31, 2002, the Bank is committed to making future minimum payments
of approximately $208,000 under contractual agreements for data processing and
related services.

CONCENTRATIONS:

Note 15 - Earnings per Share

Basic earnings per share ("EPS") is computed by dividing net income by the
weighted-average number of common shares outstanding during the period less
treasury stock, unvested stock awards under the Management Recognition Plan
("unvested stock awards"), and unallocated and not yet committed to be released
Employee Stock Ownership Plan shares ("unearned ESOP shares"). Diluted EPS is
calculated by dividing net income by the weighted-average number of common
shares used to compute basic EPS plus the incremental amount of potential common
stock from unvested stock awards and stock options, determined by the treasury
stock method. 
                                                                                 37

|Year ended December 31,                     | 2002           | 2001          
|------------------------------------------- | -------------- | --------------
|                                            | Net
    Income | Average Shares
|Net income/average 
      shares issued     | $1,777,000     | 655,415       
|Treasury stock                              |                | (32,283)      
|Unvested stock awards                       |                | (16,167)      
|Unearned ESOP shares                        |                | (34,621)      
|Basic EPS                                   | 1,777,000      | 572,344       
|Incremental shares under   stock
    plans: |                |               
|Stock awards                                |                | 4,965         
|Stock options                               |                | 19,636        
|Diluted EPS                                 | $1,777,000     | 596,945       

Note 16 - Fair Value of Financial Instruments

The following information is presented in accordance with the requirements of
SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Bank using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Bank could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.

|(in thousands) December 31,                  | 2002           | 2001                   
|-------------------------------------------- | -------------- | -----------------------
|                                             | CarryingAmount | Estimated
    FairValue
|Financial Assets                             |                |                        
|Cash and cash equivalents                    | $ 28,229       | $ 28,229               
|Investment securities available
    for sale | 8,076          | 8,076                  
|FHLB stock                                   | 1,649          | 1,649                  
|Loans, net, including held for
    sale      | 110,712        | 113,675                
|Accrued interest receivable                  | 579            | 579                    
|                                             |                |                        
|Financial Liabilities                        |                |                        
|Demand and savings deposits                  | 93,927         | 93,927                 
|Certificates of deposit                      | 38,754         | 39,391                 
|FHLB Advances                                | 5,000          | 5,895                  
|Accrued interestpayable                      | 282            | 282                    

The estimated fair value of loan commitments is zero at December 31, 2002 and
2001. Although management is not aware of any subsequent events that would
significantly affect the estimated fair value amounts as of December 31, 2002,
such amounts have not been comprehensively revalued since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
                                                                              38

Note 17 - Parent Company Financial Information

Summarized financial information for Alaska Pacific Bancshares, Inc. (parent
company only) is presented below:

Parent Company Condensed Balance Sheet

|(in thousands) December 31,                | 2002    | 2001   
|------------------------------------------ | ------- | -------
|Assets                                     |         |        
|Cash                                       | $ 452   | $ 268  
|Investment in
    subsidiary               | 14,515  | 12,722 
|Other assets                               | 1       | 1      
|Total Assets                               | $14,967 | $12,991
|                                           |         |        
|Liabilities and
    Shareholders' Equity   |         |        
|Shareholders' equity                       | $14,967 | $12,991
|Total Liabilities and Shareholders' Equity | $14,967 | $12,991

Parent Company Condensed Income Statement

|(in thousands) Year ended December 31, | 2002   | 2001
|-------------------------------------- | ------ | ----
|Equity in earnings of subsidiary       | $1,859 | $557
|Total income                           | 1,859  | 557 
|Operating expenses                     | 82     | 97  
|Income before income tax               | 1,777  | 460 
|Income tax                             | -      | -   
|Net income                             | $1,777 | $460

Parent Company Condensed Statement of Cash Flows

|(in thousands) Year ended December 31,                                                | 2002    | 2001 
|------------------------------------------------------------------------------------- | ------- | -----
|Cash flows from operating activities:                                                 |         |      
|Net income                                                                            | $1,777  | $ 460
|Adjustments to
    reconcile net income to net cash     used in operating activities: |         |      
|Equity in
    earnings of subsidiary                                                  | (1,859) | (557)
|Increase in other assets                                                              | -       | -    
|Net cash provided by operating activities                                             | (82)    | (97) 
|                                                                                      |         |      
|Cash flows from
    investing activities:                                             |         |      
|Distributions received from subsidiary                                                | 405     | 312  
|Net cash used in investing activities                                                 | 405     | 312  
|                                                                                      |         |      
|Cash flows from
    financing activities:                                             |         |      
|Purchase of
    treasury stock                                                        | -       | -    
|Cash dividends
    paid                                                               | (139)   | (120)
|Net cash used in
    financing activities                                             | (139)   | (120)
|                                                                                      |         |      
|Net increase (decrease) in cash                                                       | 184     | 95   
|Cash at beginning of
    year                                                         | 268     | 173  
|Cash at end of year                                                                   | $ 452   | $ 268

39Note 18 - Subsequent Event - Sale of Building

Subsequent to year end, in February 2003, the Bank sold its office building
in Ketchikan, Alaska for $1,400,000 in cash. The Bank will lease back a portion
of the building at market rental rates for continued use as a banking office. At
December 31, 2002, the building had a depreciated cost of $1,366,000.



---

Form 10-KSB

A copy of the Form 10-KSB, including consolidated 
financial statements, as filed with the Securities
 and Exchange Commission, will be furnished
 without charge to stockholders as of the record
 date for voting at the annual meeting of 
stockholders upon written request to Roger K. 
White, Secretary, Alaska Pacific Bancshares, Inc., 
2094 Jordan Avenue, Juneau, Alaska 99801.

---





Directors of Alaska Pacific Bancshares,
Inc.
and Alaska Pacific Bank

Craig E. DahlPresident and Chief Executive Officer
Alaska Pacific Bancshares, Inc. and Alaska Pacific Bank

Avrum M. Gross, Chairman of the BoardPartner
Gross & Burke

Roger GrummettPartner
Shattuck & Grummett, Inc.

Hugh N. GrantReal estate and retailing

Deborah R. MarshallDirector of Alaska InvestNet

Scott C. MilnerPresident
Shuham, Milner, Schafer

Eric McDowellPresident
McDowell Group, Inc.

Marta RymanDirector and former Chairman
Shee Atika, Inc.

William J. SchmitzPartner
Schmitz & Buck



Executive Officers

Craig E. DahlPresident and Chief Executive Officer of 
Alaska Pacific Bancshares, Inc. and Alaska Pacific Bank

Lisa C. BellExecutive Vice President and Chief Operating Officer of 
Alaska Pacific Bancshares, Inc. and Alaska Pacific Bank

Roger K. WhiteSenior Vice President, Chief Financial Officer and Secretary of 
Alaska Pacific Bancshares, Inc. and 
Senior Vice President and Chief Financial Officer of Alaska Pacific Bank

Patrick H. Wonser(retired September 2002)Senior Vice President and Loan Administrator of Alaska Pacific Bank

John E. Robertson(joined the Savings Bank December 2002)Senior Vice President and Chief Lending Officer of Alaska Pacific Bank

---

Corporate Information

Corporate Headquarters

2094 Jordan Avenue
Juneau, AK 99801
907-789-4844
www.alaskapacificbank.com

Independent Auditors

KPMG LLP
701 West 8th Avenue
Suite 600
Anchorage, AK 99501

Stock Registrar and Transfer Agent

Computershare Trust Company, Inc.
P.O. Box 1596
Golden, CO 80201

Common Stock

Traded on the OTC Electronic Bulletin Board 
under the symbol: AKPB

Special Counsel

Breyer & Associates PC
8180 Greensboro Drive
Suite 785
McLean, VA 22102

General Counsel

Baxter Bruce & Sullivan PC
P.O. Box 32819
Juneau, AK 99803

Annual Meeting of Stockholders

May 22, 2003
11:00 a.m.
Ray Renshaw Room 
Aspen Hotel
1800 Shell Simmons Drive
Juneau, AK 99801

42



---

Exhibit21

Subsidiaries of the Registrant

Parent

Alaska Bancshares, Inc.

Percentage                     	Jurisdiction orSubsidiaries (a)                                                
  of Ownership                	State of Incorporation

Alaska Pacific Bank                                                 	100%                             	United States



---



Exhibit 23

Independent Auditors' Consent

---

INDEPENDENT AUDITORS' CONSENT



The Board of Directors

Alaska 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 February 14, 2003, with respect to the consolidated balance sheets of Alaska Pacific Bancshares, Inc. and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in shareholders' equity and comprehensive income and cash flows for the years then ended, which appear in the December 31, 2002 annual report on Form 10-KSB of Alaska Pacific Bancshares, Inc.



/s/ KPMG LLP



Anchorage, Alaska
March 27, 2003

---



Exhibit 99.1

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

The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-KSB, that:

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

2.	the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations.

|                        |  |                        
|----------------------- |  | -----------------------
|/s/Craig E. Dahl        |  | /s/Roger K. White      
|Craig E. Dahl           |  | Roger K. White         
|Chief Executive Officer |  | Chief Financial Officer

Dated: March 27, 2003