|UNITED
      STATES                                                             
|--------------------------------------------------------------------------------
|SECURITIES
      AND EXCHANGE COMMISSION                                        
|Washington, D.C. 20549                                                          
|                                                                                
|FORM
      10-KSB                                                               
|[X]                                                                             
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|[  ]                                                                            
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|                                                                                
|(Name
      of small business issuer in its charter)                            
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|(State or other jurisdiction of
      incorporation or organization)            
|                                                                                
|2094 Jordan Avenue,
      Juneau, Alaska 99801                                  
|(Address of principal executive
      offices)                                  
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|Issuers's telephone number (907)789-4484                                        
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|Securities registered pursuant to Section 12(b) of the Exchange
      Act:  None
|                                                                                
|Securities registered pursuant to
      Section 12(g) of the Exchange Act:      
|                                                                                

Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. [ ] Check whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ] Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this
form, and no disclosure will be contained, to the best of the registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB.
[X]

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes [ ] No [X] The issuers revenues for the
fiscal year were $11.3 million. As of March 25, 2006, there were issued
and outstanding 627,754 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 24, 2006, the aggregate value of the Common Stock
outstanding held by nonaffiliates of the registrant was $12.5 million (575,321
shares at $21.30 per share). For purposes of this calculation, officers and
directors of the registrant are considered nonaffiliates.



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

|1. | Portions of the Annual Report to Stockholders for the Fiscal
      Year Ended December 31, 2005 (Parts I and II)
|-- | ----------------------------------------------------------------------------------------------------------------
|  
|2. | Portions of the Proxy Statement for the 2006 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, 2005, the Corporation had total assets of $177.2 million, total
deposits of $146.7 million and stockholders equity of $16.6 million. The
Corporation has not engaged in any significant activity other than holding the
stock of the Bank. Accordingly, the information set forth in this report,
including financial statements and related data, relates primarily to the Bank.

Alaska Pacific was founded as Alaska Federal
Savings and Loan Association of Juneau in 1935 and changed its name to Alaska
Federal Savings Bank in October 1993. In connection with the Conversion, Alaska
Pacific changed its name from Alaska Federal Savings Bank to its current
title. The Bank is regulated by the Office of Thrift Supervision (OTS) and the
Federal Deposit Insurance Corporation (FDIC). The FDIC, 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.



|Recent
      Developments
|-------------------------

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



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

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

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

Two full service offices of Alaska Pacific are
located in Ketchikan (population approximately 13,320). Ketchikan is an
industrial center and a major port of entry in Southeast Alaska with a diverse
economy. A large fishing fleet, fish processing facilities, timber and wood
products manufacturing, and tourism are Ketchikans main economic

- 2
-

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support. The
largest employers in the Ketchikan Gateway Borough include the city and state
government, Ketchikan General Hospital, the Ketchikan Gateway School District,
the Ketchikan Pulp Mill and the federal government.

One full service office of Alaska Pacific is
located in Sitka (population approximately 8,876) located on the west coast of
Baranof Island fronting the Pacific Ocean, on Sitka Sound. The primary economic
sources in Sitka are fishing, fish processing, tourism, government,
transportation, retail and health care services. The largest employers in Sitka
include the Southeast Alaska Regional Health Corp., the Sitka Borough School
District, city, state and federal governments and the Sitka Community Hospital.
Other Sitka employers include the Alaska State Trooper Training Academy and
numerous businesses involved in commercial and sport fishing and
tourism.



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

This information contained under the section
captioned Selected Consolidated Financial Information is incorporated by
reference from the 2005 Annual Report to Shareholders (Annual Report).



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

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



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

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



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

The
information contained under the section captioned Managements Discussion and
Analysis of Financial

Condition
and Results of Operations - Rate/Volume Analysis in the Annual Report is
incorporated herein by reference.



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

The
information contained under the section captioned Managements Discussion and
Analysis of Financial

Condition
and Results of Operations - Rate/Volume Analysis in the Annual Report is
incorporated herein by reference.



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

General.At December 31, 2005, Alaska Pacifics loan
portfolio (excluding loans held for sale) amounted to $152.7 million, or 86% of
total assets at that date. Alaska Pacific originates conventional mortgage
loans, construction loans, commercial real estate loans, land loans, consumer
loans and commercial business loans. Over 75% of Alaska Pacifics loan portfolio
is secured by real estate, either as primary or secondary collateral, located in
its primary market area.

- 3
-

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

|(dollars in thousands)December
      31, |  |   |  | 2005    |  |         |   |  |   |  | 2004    |  |         |  
|---------------------------------------- |  | - |  | ------- |  | ------- | - |  | - |  | ------- |  | ------- | -
|                                        
|                                         |  |   |  | Amount  |  | Percent |   |  |   |  | Amount  |  | Percent |  
|                                         |  |  
|Real estate:                             |  |   |  |         |  |         |   |  |   |  |         |  |         |  
|Permanent:                               |  |   |  |         |  |         |   |  |   |  |         |  |         |  
|One- to
      four-family                |  | $ |  | 49,425  |  | 32.36   | % |  | $ |  | 45,198  |  | 32.65   | %
|Multifamily                              |  |   |  | 1,261   |  | 0.83    |   |  |   |  | 782     |  | 0.56    |  
|Commercial
      nonresidential          |  |   |  | 45,874  |  | 30.04   |   |  |   |  | 44,150  |  | 31.89   |  
|                                        
|Total
      permanent                    |  |   |  | 96,560  |  | 63.23   |   |  |   |  | 90,130  |  | 65.10   |  
|Land                                     |  |   |  | 3,952   |  | 2.59    |   |  |   |  | 4,499   |  | 3.25    |  
|Construction:                            |  |   |  |         |  |         |   |  |   |  |         |  |         |  
|One- to
      four-family                |  |   |  | 9,174   |  | 6.01    |   |  |   |  | 3,759   |  | 2.72    |  
|Multifamily                              |  |   |  | 1,415   |  | 0.93    |   |  |   |  | -       |  | -       |  
|Commercial
      nonresidential          |  |   |  | 3,284   |  | 2.15    |   |  |   |  | 4,453   |  | 3.22    |  
|                                        
|Total
      construction                 |  |   |  | 13,873  |  | 9.09    |   |  |   |  | 8,212   |  | 5.94    |  
|Commercial business                      |  |   |  | 19,134  |  | 12.53   |   |  |   |  | 17,670  |  | 12.76   |  
|Consumer:                                |  |   |  |         |  |         |   |  |   |  |         |  |         |  
|Home equity                              |  |   |  | 13,454  |  | 8.81    |   |  |   |  | 12,287  |  | 8.88    |  
|Boat                                     |  |   |  | 3,914   |  | 2.56    |   |  |   |  | 4,174   |  | 3.02    |  
|Automobile                               |  |   |  | 696     |  | 0.45    |   |  |   |  | 514     |  | 0.37    |  
|Other                                    |  |   |  | 1,139   |  | 0.74    |   |  |   |  | 947     |  | 0.68    |  
|                                        
|Total
      consumer                     |  |   |  | 19,203  |  | 12.56   |   |  |   |  | 17,922  |  | 12.95   |  
|                                        
|Total loans                              |  |   |  | 152,722 |  | 100.00  | % |  |   |  | 138,433 |  | 100.00  | %
|Less:                                    |  |   |  |         |  |         |   |  |   |  |         |  |         |  
|Allowance for loan
      losses          |  |   |  | 1,448   |  |         |   |  |   |  | 1,380   |  |         |  
|                                        
|Loans,
      net                         |  | $ |  | 151,274 |  |         |   |  | $ |  | 137,053 |  |         |  
|                                         |  |  

One- to Four-Family Real Estate
Lending.
Historically, Alaska Pacific has concentrated its lending activities on the
origination of loans secured by first mortgages on existing one- to four-family
residences located in its primary market area. At December 31, 2005, $49.4
million, or 32.4%, of Alaska Pacifics total loan portfolio consisted of these
loans. Alaska Pacific originated $20.6 million and $30.4 million of one- to
four-family residential mortgage loans during the years ended December 31, 2005
and 2004, respectively.

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

Alaska Pacific offers adjustable rate mortgage loans at rates
and terms competitive with market conditions. At December 31, 2004, $2.5
million, or 5.1%, of Alaska Pacifics one- to four-family residential loan
portfolio consisted of adjustable rate mortgage loans. Demand for conventional
adjustable rate mortgage loans has been very low in the Banks market area, but
have increased recently with the advent of hybrid mortgages, which are
adjustable rate loans with the interest rate fixed for an initial period of
three to five years.

Alaska Pacific also originates one- to four-family mortgage
loans under Freddie Mac, the Federal Housing Administration, the Veterans
Administration, and AHFC programs. Alaska Pacific generally sells these loans in
the secondary market, with servicing retained. This means that Alaska Pacific
retains the right to collect principal and



|- 4 -
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interest payments on the loans and forward these payments to the purchaser of the loan, maintain escrow accounts for payment of taxes and insurance and perform other loan administration
functions.See -- Loan Originations, Sales and Purchases.

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

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

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

Land Lending.Alaska Pacific also originates loans secured by first mortgages on residential
building lots on which the borrower proposes to construct a primary residence. These loans generally have terms of up to five years and are fixed-rate, fully amortizing loans. Alaska Pacific also originates commercial land loans, which have floating
rates that adjust annually.  At December 31, 2005 and 2004, land loans amounted to $4.0 million and $4.5 million, respectively.

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

Construction Lending.At December 31, 2005, construction loans amounted to $13.9 million, or
9.1% of total loans, all of which were secured by properties located in Alaska Pacifics primary market area. This compares with $8.2 million, or 5.9% of the total loan portfolio at December 31, 2004. The increase is attributable to good
demand for construction loans, both residential and commercial.

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

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

Prior to making a commitment to fund a construction loan, Alaska Pacific requires an appraisal of the property by an independent state-licensed and qualified
appraiser approved by the Board of Directors. Alaska Pacifics staff also reviews and inspects projects prior to disbursement of funds during the term of the construction loan. Loan proceeds are generally disbursed after inspection of the
project.

- 5 -

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

Alaska Pacific has attempted to minimize the foregoing risks by, among other things, limiting its construction lending, and especially speculative loans, to a small
number of well-known local builders.  One- to four-family construction loans generally range in size from $100,000 to $600,000, while commercial nonresidential and multifamily construction loans have generally ranged from $500,000 to
$2.5 million. At December 31, 2005, all construction loans were performing according to the loan terms; the largest, for approximately $1.8 million, was for a residential development project.

Multifamily and Commercial Real Estate Lending. The multifamily residential loan portfolio
consists primarily of loans secured by small apartment buildings and the commercial real estate loan portfolio consists primarily of loans secured by retail, office, warehouse, mini-storage facilities and other improved commercial properties. These
loans generally range in size from $100,000 to $2.5 million and at December 31, 2005 the largest loan totaled $2.3 million and was performing in accordance with its terms. At December 31, 2005, Alaska Pacific had $1.3 million of
multifamily residential and $45.9 million of commercial real estate loans, which amounted to 0.8% and 30.0%, respectively, of the total loan portfolio at this date. Multifamily and commercial real estate loans are generally underwritten with
loan-to-value ratios of up to 75% of the lesser of the appraised value or the purchase price of the property. These loans generally are made at interest rates based on the prime rate for 15 to 20 year terms, with adjustment periods of one, three or
five years and they adjust at a rate equal to the prime rate plus a negotiated margin of 1% to 3%. A substantial portion of Alaska Pacifics multifamily and commercial real estate loans are secured by property located within Alaska
Pacifics primary market area.

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

From time to time, Alaska Pacific purchases participations in multifamily and commercial real estate loans from other banks in Alaska and the Pacific Northwest,
generally ranging from $500,000 to $2.5 million. Such loans are on similar terms and are subject to the same underwriting standards as loans originated by Alaska Pacific.

Multifamily residential and commercial real estate lending entails significant additional risks as compared with single-family residential property lending.
Multifamily residential and commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on these loans typically is dependent on the successful operation of the real
estate project. Supply and demand conditions in the market for office, retail and residential space can significantly affect these risks, and, as such, may be subject to a greater extent to adverse conditions in the economy generally. Alaska Pacific
reviews all commercial real estate loans in excess of $250,000 on an annual basis to ensure that the loan meets current underwriting standards.

- 6 -

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Future growth of commercial real estate loans is restricted due to regulation which generally limits such loans, under Alaska Pacifics federal thrift charter,
to 400% of total capital for regulatory purposes, or approximately $67 million at December 31, 2005.

Commercial Business Lending.At December 31, 2005, commercial business loans amounted to
$19.1 million, or 12.5% of total loans. Future growth of commercial business loans is restricted due to regulation which generally limits such loans, under Alaska Pacifics federal thrift charter, to 20% of total assets, or approximately
$35 million at December 31, 2005.

Alaska Pacific originates commercial business loans to small sized businesses in its primary market area. Commercial business loans are generally made to finance the
purchase of seasonal inventory needs, new or used equipment, and for short-term working capital. Security for these loans generally includes equipment, boats, accounts receivable and inventory, although commercial business loans are sometimes
granted on an unsecured basis. Commercial business loans are made for terms of seven years or less, depending on the purpose of the loan and the collateral, with loans to finance operating lines made for one year or less renewed annually at an
interest rate based on the prime rate plus a margin of between one half and three percentage points. Such loans generally are originated in principal amounts between $100,000 and $1 million. At December 31, 2005, the largest commercial
business loan was for $1.3 million and was secured by equipment and inventory. This loan was restructured in 2004 after the borrower encountered financial difficulties, but was performing according to the restructured terms at December 31, 2005.

Alaska Pacific originates guaranteed loans through the Small Business Administration, the U.S. Department of Agriculture and the Alaska Industrial Development and
Export Authority. Alaska Pacific has also worked with local municipal agencies, such as the Juneau Economic Development Council and the Cities of Sitka and Ketchikan in exploring participation or guaranty programs in each of these cities. Generally,
Alaska Pacific receives guarantees of between 75% and 90% of the loan amount. In addition, Alaska Pacific has retained portions of 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 Lending.At December 31, 2005, consumer loans totaled $19.2 million, or12.6% of
total loans. Consumer loans generally have shorter terms to maturity or repricing and higher interest rates than long-term, fixed-rate mortgage loans. In addition to home equity, boat loans and automobile loans, Alaska Pacifics consumer loans
consist of loans secured by airplanes, deposit accounts, and unsecured loans for personal or household purposes.

The largest category of Alaska Pacifics consumer loan portfolio is home equity loans that are made on the security of residences. At December 31, 2005, home
equity loans totaled $13.5 million, or 8.8% of the total loan portfolio, compared to $12.3 million, or 8.9% of the total loan portfolio at December 31, 2004. Home equity loans generally do not exceed 95% of the appraised value of the
residence or 100% of the tax assessment, less the outstanding



|- 7 -
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principal of the first mortgage. Closed-end loans are generally fixed-rate and have terms of up to 15 years requiring monthly payments of principal and interest. Home equity lines of credit
generally have adjustable interest rates.

At December 31, 2005, consumer boat loans amounted to $3.9 million, or 2.6%, of the total loan portfolio compared to $4.2 million, or 3.0% of the total loan
portfolio at December 31, 2004. 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, 2005, automobile loans amounted to $696,000, or 0.5%, of the total loan portfolio compared to $514,000, or 0.4% of the total loan portfolio
at December 31, 2004. Alaska Pacific offers automobile loans with maturities of up to six years with fixed rates of interest. The origination of auto loans has declined in recent years as a result of dealer financing offered at below-market rates.

Other consumer loans include loans collateralized by deposit accounts and other types of collateral, and by unsecured loans to qualified individuals. These loans
amounted to $1.1 million, or 0.8%, of total loans at December 31, 2005, compared to $947,000, or 0.7% of total loans at December 31, 2004.

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

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly
depreciating assets such as automobiles or boats and particularly used automobiles. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result
of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrowers continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans. These loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of these loans such as Alaska
Pacific, and a borrower may be able to assert against this assignee claims and defenses that it has against the seller of the underlying collateral.

- 8 -

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Loan Maturity and Repricing.The following table sets forth
certain information at December 31, 2005 regarding the dollar amount of loans
maturing in Alaska Pacifics portfolio based on their contractual terms to final
maturity, but does not include scheduled payments or potential prepayments.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. Loan balances
are net of undisbursed loan proceeds and unearned discounts, and do not include
loans held for sale.

|                                |  |   |  |        |  |   |  |                      |  |   |  |                       |  |   |  |                       |  |   |  |          |  |   |  |         |  |   |  | After 1 Year
|------------------------------- |  | - |  | ------ |  | - |  | -------------------- |  | - |  | --------------------- |  | - |  | --------------------- |  | - |  | -------- |  | - |  | ------- |  | - |  | ------------
|                                |  |  
|*(in
      thousands)*          |  |   |  | Within |  |   |  | After 1 Year Through |  |   |  | After 3 Years Through |  |   |  | After 5 Years Through |  |   |  | Beyond   |  |   |  |         |  |   |  | Fixed       
|December 31, 2005               |  |   |  | 1 Year |  |   |  | 3 Years              |  |   |  | 5 Years               |  |   |  | 10 Years              |  |   |  | 10 Years |  |   |  | Total   |  |   |  | Rates       
|                               
|Real estate:                    |  |   |  |        |  |   |  |                      |  |   |  |                       |  |   |  |                       |  |   |  |          |  |   |  |         |  |   |  |             
|Permanent:                      |  |   |  |        |  |   |  |                      |  |   |  |                       |  |   |  |                       |  |   |  |          |  |   |  |         |  |   |  |             
|One-to-four
      family        |  | $ |  | 3,184  |  | $ |  | 286                  |  | $ |  | 1,538                 |  | $ |  | 1,823                 |  | $ |  | 42,594   |  | $ |  | 49,425  |  | $ |  | 43,761      
|Multifamily                     |  |   |  | 16     |  |   |  | 834                  |  |   |  | 59                    |  |   |  | -                     |  |   |  | 352      |  |   |  | 1,261   |  |   |  | 833         
|Commercial
      nonresidential |  |   |  | 602    |  |   |  | 788                  |  |   |  | 3,228                 |  |   |  | 8,448                 |  |   |  | 32,808   |  |   |  | 45,874  |  |   |  | 2,967       
|Land                            |  |   |  | 1,163  |  |   |  | 147                  |  |   |  | 1,529                 |  |   |  | 427                   |  |   |  | 686      |  |   |  | 3,952   |  |   |  | 1,963       
|Construction:                   |  |   |  |        |  |   |  |                      |  |   |  |                       |  |   |  |                       |  |   |  |          |  |   |  |         |  |   |  |             
|One-to-four
      family        |  |   |  | 2,940  |  |   |  | 6,234                |  |   |  | -                     |  |   |  | -                     |  |   |  | -        |  |   |  | 9,174   |  |   |  | -           
|Multifamily                     |  |   |  | 447    |  |   |  | 232                  |  |   |  | -                     |  |   |  | 736                   |  |   |  | -        |  |   |  | 1,415   |  |   |  | 736         
|Commercial
      nonresidential |  |   |  | 744    |  |   |  | -                    |  |   |  | 767                   |  |   |  | -                     |  |   |  | 1,773    |  |   |  | 3,284   |  |   |  | 267         
|Commercial business             |  |   |  | 2,102  |  |   |  | 2,957                |  |   |  | 2,579                 |  |   |  | 6,971                 |  |   |  | 4,525    |  |   |  | 19,134  |  |   |  | 2,058       
|Consumer:                       |  |   |  |        |  |   |  |                      |  |   |  |                       |  |   |  |                       |  |   |  |          |  |   |  |         |  |   |  |             
|Home equity                     |  |   |  | 364    |  |   |  | 131                  |  |   |  | 677                   |  |   |  | 4,267                 |  |   |  | 8,015    |  |   |  | 13,454  |  |   |  | 9,748       
|Boat                            |  |   |  | 200    |  |   |  | 115                  |  |   |  | 170                   |  |   |  | 1,715                 |  |   |  | 1,714    |  |   |  | 3,914   |  |   |  | 2,819       
|Automobile                      |  |   |  | 30     |  |   |  | 136                  |  |   |  | 351                   |  |   |  | 179                   |  |   |  | -        |  |   |  | 696     |  |   |  | 666         
|Other                           |  |   |  | 370    |  |   |  | 87                   |  |   |  | 125                   |  |   |  | 169                   |  |   |  | 388      |  |   |  | 1,139   |  |   |  | 496         
|                               
|Total                           |  | $ |  | 12,162 |  | $ |  | 11,947               |  | $ |  | 11,023                |  | $ |  | 24,735                |  | $ |  | 92,855   |  | $ |  | 152,722 |  | $ |  | 66,314      
|                                |  |  

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

Loan approval authority varies based on loan type.
The 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 $300,000 that are originated for Alaska Pacifics
portfolio and up to the agency limit if the loan is to be sold in the secondary
market, multifamily and commercial real estate loans up to and including
$300,000, commercial business loans up to and including $300,000 ($100,000 if
unsecured), and consumer loans up to and including $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 $750,000. The
Directors Loan Committee must approve all loans in excess of the Senior Loan
Committees approval authority up to 75% of Alaska Pacifics legal lending
limit. The Board of Directors must approve all loans in excess of the Directors
Loan Committees approval authority.





|- 9
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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.

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

Pursuant to OTS regulations, loans to one borrower
cannot exceed 15% of Alaska Pacifics unimpaired capital and surplus. At
December 31, 2005, the loans-to-one-borrower limitation for Alaska Pacific was
$2.6 million and Alaska Pacific had no loans in excess of this limitation except
where guaranteed by a government agency.

Loan Originations, Sales and
Purchases.
Historically, Alaska Pacifics primary lending activity has been the origination
of one- to four-family residential mortgage loans and consumer loans. In recent
years, Alaska Pacific has significantly increased its emphasis on the
origination of commercial loans.

Alaska Pacific generally sells loans without
recourse and with servicing retained. By retaining the servicing, Alaska Pacific
receives fees for performing the traditional services of processing payments,
accounting for loan funds, and collecting and paying real estate taxes, hazard
insurance and other loan-related items, such as private mortgage insurance. At
December 31, 2005, Alaska Pacifics servicing portfolio was $100.0 million. For
the year ended December 31, 2005, loan servicing fees totaled $264,000 before
amortization of servicing rights.

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

In addition, Alaska Pacific retains certain
amounts in escrow for the benefit of investors. Alaska Pacific is able to invest
these funds but is not required to pay interest on them. At December 31, 2005,
these escrow balances totaled $890,000.

- 10
-

---

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

|(in thousands)Year
      ended December 31,         |  |   |  | 2005    |   |  |   |  | 2004    |  
|--------------------------------------------------- |  | - |  | ------- | - |  | - |  | ------- | -
|                                                   
|Loans originated:                                   |  |   |  |         |   |  |   |  |         |  
|Real estate:                                        |  |   |  |         |   |  |   |  |         |  
|Permanent:                                          |  |   |  |         |   |  |   |  |         |  
|One- to
      four-family                           |  | $ |  | 20,603  |   |  | $ |  | 30,435  |  
|Multifamily                                         |  |   |  | -       |   |  |   |  | 100     |  
|Commercial
      nonresidential                     |  |   |  | 22,206  |   |  |   |  | 36,708  |  
|Land                                                |  |   |  | 2,986   |   |  |   |  | 3,867   |  
|Construction:                                       |  |   |  |         |   |  |   |  |         |  
|One- to
      four-family                           |  |   |  | 13,792  |   |  |   |  | 7,749   |  
|Multifamily                                         |  |   |  | 2,894   |   |  |   |  | -       |  
|Commercial
      nonresidential                     |  |   |  | 597     |   |  |   |  | 13,909  |  
|Commercial business                                 |  |   |  | 17,604  |   |  |   |  | 9,661   |  
|Consumer:                                           |  |   |  |         |   |  |   |  |         |  
|Home equity                                         |  |   |  | 4,377   |   |  |   |  | 5,818   |  
|Boat                                                |  |   |  | 673     |   |  |   |  | 849     |  
|Automobile                                          |  |   |  | 570     |   |  |   |  | 306     |  
|Other                                               |  |   |  | 3,347   |   |  |   |  | 2,677   |  
|                                                   
|Total
      loans originated                        |  |   |  | 89,649  |   |  |   |  | 112,079 |  
|Loans purchased                                     |  |   |  | 3,205   |   |  |   |  | 3,433   |  
|Loans sold                                          |  |   |  | (10,648 | ) |  |   |  | (41,311 | )
|Foreclosed loans                                    |  |   |  | (101    | ) |  |   |  | (54     | )
|Principal repayments and other
      changes        |  |   |  | (66,422 | ) |  |   |  | (62,797 | )
|                                                   
|Net increase in loans and loans held for
      sale |  | $ |  | 15,683  |   |  | $ |  | 11,350  |  
|                                                    |  |  

Both loan originations and principal repayments have been
significantly impacted by refinance activity and resultant prepayments in the
low interest rate environment. A portion of Alaska Pacifics originations in
2005 and 2004 represent refinancing of loans originally made by Alaska Pacific
and other lenders.

Loan Commitments.Occasionally, Alaska Pacific issues,
without charge, commitments for fixed- and adjustable-rate single-family
residential mortgage loans conditioned upon the occurrence of certain events.
These commitments are made in writing on specified terms and conditions and are
honored for up to 60 days. Commercial commitments issued by Alaska Pacific
include commitments for fixed-term loans as well as business lines of credit;
letters of credit are not offered. At December 31, 2005, Alaska Pacific had
$12.8 million of outstanding net loan commitments, including unused portions on
commercial business lines of credit and undisbursed funds on construction loans.
For additional information on loan commitments, see Note 13 of Notes to the
Consolidated Financial Statements included in the Annual Report.

Loan Origination and Other Fees. Alaska Pacific, in most
instances, receives loan origination fees and discount points. Loan fees and
points are a percentage of the principal amount of the mortgage loan that are
charged to the borrower for funding the loan. The amount of fees and points
charged by Alaska Pacific varies, though the range generally is between one and
two points. Accounting standards require fees received (net of certain loan
origination costs) for originating loans to be deferred and amortized into
interest income over the contractual life of the loan. Net deferred fees
associated with loans that are prepaid are recognized as income at the time of
prepayment. Alaska Pacific had $835,000 of net deferred loan fees at December
31, 2005.

Nonperforming Assets and Delinquencies.Alaska Pacific
utilizes one loan collector to monitor the loan portfolio and communicate with
customers concerning past due payments. The size of the portfolio and
historically low delinquency rates allow one individual to manage consumer,
commercial and residential loans, including those loans serviced for other
investors. When a borrower fails to make a required payment, Alaska Pacific
institutes collection procedures. The process for monitoring consumer,
commercial and residential loans is the same for each type of loan



|- 11
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until
foreclosure or repossession of the collateral. Depending on the value or nature
of the collateral, the loan servicing manager, senior lender or senior
management directs any further action.

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

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

Alaska Pacific places all loans that are past due
90 days or more on nonaccrual status and all previously accrued interest income
is reversed. Alaska Pacific charges off consumer loans when it is determined
they are no longer collectible.

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

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

|(dollars in thousands)December
      31,                   |  |   |  | 2005  |   |  |   |  | 2004  |  
|---------------------------------------------------------- |  | - |  | ----- | - |  | - |  | ----- | -
|                                                          
|Loans accounted for on a nonaccrual
      basis:           |  |   |  |       |   |  |   |  |       |  
|Land                                                       |  |   |  | $ -   |   |  | $ |  | 55    |  
|Commercial
      business                                  |  |   |  | 1,288 |   |  |   |  | 1,418 |  
|Consumer                                                   |  |   |  | 11    |   |  |   |  | -     |  
|                                                          
|Total                                                      |  |   |  | 1,299 |   |  |   |  | 1,473 |  
|Accruing loans which are contractually past
      due 90   |  |   |  |       |   |  |   |  |       |  
|days or more                                               |  |   |  | -     |   |  |   |  | -     |  
|                                                          
|Total of
      nonaccrual and 90 days past due loans       |  |   |  | 1,299 |   |  |   |  | 1,473 |  
|                                                          
|Repossessed assets                                         |  |   |  | 101   |   |  |   |  | 47    |  
|                                                          
|Total
      nonperforming assets                           |  | $ |  | 1,400 |   |  | $ |  | 1,520 |  
|                                                           |  |  
|                                                          
|Nonaccrual and 90 days or more past due
      loans as a   |  |   |  |       |   |  |   |  |       |  
|percentage of
      loans                                  |  |   |  | 0.85  | % |  |   |  | 1.06  | %
|                                                          
|Nonaccrual and 90 days or more past due
      loans as a   |  |   |  |       |   |  |   |  |       |  
|percentage of total
      assets                           |  |   |  | 0.73  | % |  |   |  | 0.90  | %
|                                                          
|Nonperforming assets as a percentage of
      total assets |  |   |  | 0.79  | % |  |   |  | 0.93  | %
|                                                           |  |  

Gross interest income that would have been
recorded for the year ended December 31, 2005 if nonaccrual loans had been
current according to their original terms and had been outstanding throughout
the year was approximately $78,000, and the amount of interest income on these
loans that was included in net income for the year was zero.

Repossessed Assets.Alaska Pacific classifies real estate
acquired as a result of foreclosure and other repossessed collateral as
repossessed assets until sold. When Alaska Pacific acquires collateral, it is
recorded at the lower of its cost,



|- 12 -
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which is the
unpaid principal balance of the related loan plus acquisition costs, or fair
value. Subsequent to acquisition, the property is carried at the lower of the
acquisition amount or fair value. At December 31, 2005, repossessed assets
consisted of two boats with a balances totaling $101,000.

Asset Classification.The OTS has adopted various regulations
regarding problem assets of savings institutions. The regulations require that
each insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets must have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset-classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. The regulations have also created a special mention category,
described as assets which do not currently expose an insured institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving managements close attention. If
an asset or portion thereof is classified loss, the loss amount is charged off.

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

At December 31, 2005 and 2004, the aggregate
amounts of Alaska Pacifics classified and special mention assets (as determined
by Alaska Pacific), were as follows:

|(in thousands)December
      31, |  | 2005  |  | 2004 
|-------------------------------- |  | ----- |  | -----
|                                
|Loss                             |  | $ -   |  | $ -  
|Doubtful                         |  | 365   |  | 182  
|Substandard assets               |  | 3,040 |  | 1,238
|Special mention                  |  | 774   |  | 384  
|                                 |  |      

At December 31, 2005, assets classified as
substandard, doubtful or loss totaled $3.4 million compared to $1.4 million at
December 31, 2004. Substandard and doubtful assets as of December 31, 2005
consisted of four commercial business loans totaling $1.5 million, two
commercial real estate loans for $1.9 million, a consumer home equity loan for
$11,000, and two repossessed boats for $101,000. Management has estimated
potential impairment of $365,000 for these loans in its assessment of the
adequacy of the allowance for loan losses at December 31, 2005. The largest loan
in the substandard classification at December 31, 2005 was a $1.3 million
commercial business loan that was restructured in 2004 after the borrower
encountered financial difficulties, but was performing according to the
restructured terms at December 31, 2005. The largest component of classified
assets at December 31, 2004 was $1.3 million in commercial business
loans.

Special mention loans of $774,000 at December 31,
2005 consisted primarily of a commercial nonresidential real estate loan for
$363,000, a residential mortgage loan for $91,000, and three consumer loans
totaling $320,000. Alaska Pacific believes these loans are adequately secured,
but are being monitored carefully.

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

- 13
-

---

- All loans
  classified during the previous analysis. Current information as to payment history, or
  actions taken to correct the deficiency are reviewed, and if justified, the loan
  is no longer classified. If conditions have not improved, the loan classification is reviewed to
  ensure that the appropriate action is being taken to mitigate loss.
- Past Due
  Loans. The
  committee reviews loans that are past due 30 days or more, taking into
  consideration the borrower, nature of the collateral and its value, the
  circumstances that have caused the delinquency, and the likelihood of the borrower
  correcting the conditions that have resulted in the delinquent status. The
  committee may
  recommend more aggressive collection activity, inspection of the collateral,
  or no change in its classification.
- Reports from
  Alaska Pacifics managers.Lending managers may be aware of a borrowers circumstances
  that have not yet
  resulted in any past due payments but has the potential for problems in the
  future. Each lending manager reviews their respective lending units loans and
  identifies any that may have developing weaknesses.This self identification process is an
  important component of maintaining credit quality, as each lender is
  accountable for
  monitoring as well as originating loans.
- Current economic
  conditions.Alaska Pacific takes into consideration economic conditions in
  its market area, the states economy, and national economic factors that could
  influence the quality of the loan portfolio in general. The unique, isolated geography of
  Alaska Pacifics market area of Southeast Alaska requires that each
  communitys economic
  activity be reviewed.
- Trends in Alaska
  Pacifics delinquencies. Alaska Pacifics market area has seasonal trends and as a
  result, the portfolio tends to have similar fluctuations. Prior period
  statistics are reviewed and evaluated to determine if the current conditions exceed
  expected trends.

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

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

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

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

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

- 14
-

---

- Multifamily
  Residential -While there have been minimal losses taken in this segment of the
  portfolio, the rental market is very susceptible to the effects of an economic
  downturn. While Alaska Pacific monitors loan-to-value ratios, the conditions that would create
  a default and foreclosure would carry through to a new owner, which
  may require that Alaska
  Pacific discount the property or hold it until conditions improve.
- Commercial Real
  Estate -As
  with multifamily loans, the classification of commercial real estate loans
  closely corresponds to economic conditions which will limit the
  marketability of the property, resulting in higher risk than a loan secured by a
  single-family residence.
- Construction
  Loans (Residential and Commercial) -There are a variety of risks in construction
  lending, increased in Alaska by a short building season, difficult
  building sites and construction delays due to delivery of materials. While Alaska
  Pacific has established construction loan policies and underwriting guidelines
  designed to
  mitigate the risk, there is still a higher risk of loss with these
  loans.
- Commercial
  Business Loans -These types of loans carry the highest degree of risk, relying on
  the ongoing success of the business to repay the loan. Collateral for
  commercial credits is often difficult to secure, and even more difficult to liquidate in
  the event of a default.
- Consumer Loans -The consumer
  loan portfolio has a wide range of factors, determined primarily by the
  nature of the
  collateral and the credit history and capacity of the borrower. These loans
  tend to be smaller in principal amount and secured by second deeds of trust,
  automobiles, and pleasure boats. Loans for automobiles and pleasure boats generally
  experience higher than average wear in the Alaskan environment and hold a
  higher degree of
  risk of loss in the event of repossession.

Management believes that the allowance for loan
losses at December 31, 2005 was adequate at that date. Although management
believes that it uses the best information available to make these
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.

While Alaska Pacific believes it has established
its existing allowance for loan losses in accordance with generally accepted
accounting principles, there can be no assurance that regulators, in reviewing
Alaska Pacifics loan portfolio, will not request Alaska Pacific to increase
significantly its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses will be adequate or
that substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect Alaska Pacifics financial
condition and results of operations.

- 15
-

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

|(dollars in thousands)Year ended December 31,            |  |   |  | 2005   |   |  |   |  | 2004  |  
|-------------------------------------------------------- |  | - |  | ------ | - |  | - |  | ----- | -
|                                                        
|Allowance at beginning of period                         |  | $ |  | 1,380  |   |  | $ |  | 1,159 |  
|Provision for loan losses                                |  |   |  | 120    |   |  |   |  | 360   |  
|Charge-offs:                                             |  |   |  |        |   |  |   |  |       |  
|One- to- four family
      residential                   |  |   |  | -      |   |  |   |  | -     |  
|Commercial business                                      |  |   |  | (21    | ) |  |   |  | (204  | )
|Consumer:                                                |  |   |  |        |   |  |   |  |       |  
|Home equity                                              |  |   |  | -      |   |  |   |  | (14   | )
|Boat                                                     |  |   |  | (43    | ) |  |   |  | (11   | )
|Automobile                                               |  |   |  | -      |   |  |   |  | -     |  
|Other                                                    |  |   |  | -      |   |  |   |  | (1    | )
|                                                        
|Total charge-offs                                        |  |   |  | (64    | ) |  |   |  | (230  | )
|Recoveries:                                              |  |   |  |        |   |  |   |  |       |  
|Commercial business                                      |  |   |  |        |   |  |   |  |       |  
|Commercial nonresidential                                |  |   |  |        |   |  |   |  | 89    |  
|Consumer:                                                |  |   |  |        |   |  |   |  |       |  
|Boat                                                     |  |   |  | 10     |   |  |   |  | 2     |  
|Automobile                                               |  |   |  | 2      |   |  |   |  | -     |  
|                                                        
|Total recoveries                                         |  |   |  | 12     |   |  |   |  | 91    |  
|                                                        
|Net
      charge-offs                                    |  |   |  | (52    | ) |  |   |  | (139  | )
|                                                        
|Balance at end of period                                 |  | $ |  | 1,448  |   |  | $ |  | 1,380 |  
|                                                         |  |  
|                                                        
|Allowance for loan losses as a percentage of
      loans |  |   |  |        |   |  |   |  |       |  
|outstanding at the end of the
      period               |  |   |  | 0.95   | % |  |   |  | 1.00  | %
|                                                        
|Net
      charge-offs as a percentage of average loans   |  |   |  |        |   |  |   |  |       |  
|outstanding during the period                            |  |   |  | 0.04   |   |  |   |  | 0.10  |  
|                                                        
|Allowance for loan losses as a percentage of             |  |   |  |        |   |  |   |  |       |  
|nonperforming loans at end of
      period               |  |   |  | 111.47 |   |  |   |  | 93.69 |  
|                                                         |  |  

- 16
-

---

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

|December 31,                    |  |   |  |        |  | 2005        |   |  |          |   |  |   |  |        |  | 2004        |   |  |          |  
|------------------------------- |  | - |  | ------ |  | ----------- | - |  | -------- | - |  | - |  | ------ |  | ----------- | - |  | -------- | -
|                               
|                                |  |   |  |        |  |             |   |  | % of     |   |  |   |  |        |  |             |   |  | % of     |  
|                                |  |   |  |        |  | As a % of   |   |  | Loans in |   |  |   |  |        |  | As a % of   |   |  | Loans in |  
|                                |  |   |  |        |  | Outstanding |   |  | Category |   |  |   |  |        |  | Outstanding |   |  | Category |  
|                                |  |   |  |        |  | Loans in    |   |  | to Total |   |  |   |  |        |  | Loans in    |   |  | to Total |  
|(dollars in
      thousands)    |  |   |  | Amount |  | Category    |   |  | Loans    |   |  |   |  | Amount |  | Category    |   |  | Loans    |  
|                               
|Real estate:                    |  |   |  |        |  |             |   |  |          |   |  |   |  |        |  |             |   |  |          |  
|Permanent:                      |  |   |  |        |  |             |   |  |          |   |  |   |  |        |  |             |   |  |          |  
|One- to
      four-family       |  | $ |  | 57     |  | 0.12        | % |  | 32.36    | % |  | $ |  | 54     |  | 0.12        | % |  | 32.65    | %
|Multifamily                     |  |   |  | 5      |  | 0.40        |   |  | 0.83     |   |  |   |  | 4      |  | 0.45        |   |  | 0.56     |  
|Commercial
      nonresidential |  |   |  | 267    |  | 0.58        |   |  | 30.04    |   |  |   |  | 217    |  | 0.49        |   |  | 31.89    |  
|Land                            |  |   |  | 9      |  | 0.23        |   |  | 2.59     |   |  |   |  | 9      |  | 0.20        |   |  | 3.25     |  
|Construction:                   |  |   |  |        |  |             |   |  |          |   |  |   |  |        |  |             |   |  |          |  
|One- to
      four-family       |  |   |  | 6      |  | 0.07        |   |  | 6.01     |   |  |   |  | 2      |  | 0.07        |   |  | 2.72     |  
|Multifamily                     |  |   |  | 1      |  | 0.07        |   |  | 0.93     |   |  |   |  | -      |  | -           |   |  | -        |  
|Commercial
      nonresidential |  |   |  | 2      |  | 0.06        |   |  | 2.15     |   |  |   |  | 3      |  | 0.07        |   |  | 3.22     |  
|Commercial                      |  |   |  | 900    |  | 4.70        |   |  | 12.53    |   |  |   |  | 950    |  | 5.38        |   |  | 12.76    |  
|Consumer:                       |  |   |  |        |  |             |   |  |          |   |  |   |  |        |  |             |   |  |          |  
|Home equity                     |  |   |  | 98     |  | 0.73        |   |  | 8.81     |   |  |   |  | 83     |  | 0.67        |   |  | 8.88     |  
|Boat                            |  |   |  | 94     |  | 2.40        |   |  | 2.56     |   |  |   |  | 53     |  | 1.28        |   |  | 3.02     |  
|Automobile                      |  |   |  | 3      |  | 0.43        |   |  | 0.45     |   |  |   |  | 2      |  | 0.45        |   |  | 0.37     |  
|Other                           |  |   |  | 6      |  | 0.53        |   |  | 0.74     |   |  |   |  | 3      |  | 0.33        |   |  | 0.68     |  
|                               
|Total allowance for loan losses |  | $ |  | 1,448  |  | 0.95        | % |  | 100.00   | % |  | $ |  | 1,380  |  | 1.00        | % |  | 100.00   | %
|                                |  |  



|Investment
Activities
|---------------------

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

Investment securities provide liquidity for funding loan
originations and deposit withdrawals and enable Alaska Pacific to improve the
match between the maturities and repricing of its interest-rate sensitive assets
and liabilities. See Managements Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources in the
Annual Report and Regulation herein.

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

- 17
-

---



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

|December 31,                              |  |   |  |       |  |   |  | 2005      |  |           |   |  |   |  |       |  |   |  | 2004      |  |           |  
|----------------------------------------- |  | - |  | ----- |  | - |  | --------- |  | --------- | - |  | - |  | ----- |  | - |  | --------- |  | --------- | -
|                                         
|                                          |  |   |  |       |  |   |  |           |  | Percent   |   |  |   |  |       |  |   |  |           |  | Percent   |  
|                                          |  |   |  | Fair  |  |   |  | Amortized |  | of        |   |  |   |  | Fair  |  |   |  | Amortized |  | of        |  
|(dollars in
      thousands)              |  |   |  | Value |  |   |  | Cost      |  | Portfolio |   |  |   |  | Value |  |   |  | Cost      |  | Portfolio |  
|                                         
|Mortgage-backed securities:               |  |   |  |       |  |   |  |           |  |           |   |  |   |  |       |  |   |  |           |  |           |  
|Fannie Mae                                |  | $ |  | 5,980 |  | $ |  | 6,079     |  | 80.1      | % |  | $ |  | 5,707 |  | $ |  | 5,788     |  | 72.3      | %
|Freddie Mac                               |  |   |  | 613   |  |   |  | 641       |  | 8.2       |   |  |   |  | 869   |  |   |  | 908       |  | 11.0      |  
|Ginnie Mae                                |  |   |  | 731   |  |   |  | 639       |  | 9.8       |   |  |   |  | 1,172 |  |   |  | 1,034     |  | 14.8      |  
|U.S. agencies and corporations:           |  |   |  |       |  |   |  |           |  |           |   |  |   |  |       |  |   |  |           |  |           |  
|Small Business
      Administration pools |  |   |  | 140   |  |   |  | 141       |  | 1.9       |   |  |   |  | 149   |  |   |  | 147       |  | 1.9       |  
|                                         
|Total
      investment securities         |  |   |  |       |  |   |  |           |  |           |   |  |   |  |       |  |   |  |           |  |           |  
|available
      for sale                  |  | $ |  | 7,464 |  | $ |  | 7,500     |  | 100.0     | % |  | $ |  | 7,897 |  | $ |  | 7,877     |  | 100.0     | %
|                                          |  |  

While management has no specific plans to sell any
security, the entire portfolio has been designated as available-for-sale at
December 31, 2005 and 2004, to allow flexibility in managing the portfolio.

At December 31, 2005, the portfolio of U.S.
Government and agency securities had an aggregate estimated fair value of
$140,000 and the portfolio of mortgage-backed securities had an estimated fair
value of $7.3 million.

At December 31, 2005, mortgage-backed securities
consisted of Freddie Mac, Fannie Mae and Ginnie Mae issues with an amortized
cost of $7.4 million. The mortgage-backed securities portfolio had coupon rates
ranging from 2.9% to 9.0% and had a weighted average yield of 4.2% at December
31, 2005.

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

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



|- 18
      -
|------------

---

The table below sets forth certain information regarding the
carrying value, weighted average yields and maturities or periods to repricing
of Alaska Pacifics investment and mortgage-backed securities at December 31,
2005.

|Final Maturity
      or Repricing within:
|-----------------------------------------
|                                         
|                                         
|                                         
|                                         
|                                         
|*(dollars in**thousands)*                
|                                         
|December 31,2005                         
|                                         
|Mortgage-backed securities:              
|Fannie Mae                               
|Freddie Mac                              
|Ginnie Mae                               
|U.S. agencies and corporations:          
|Small Business                           
|Administration
      pools               
|                                         
|Total
      investment                   
|securities available for sale            
|                                         

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

As a member of the FHLB of Seattle, the Bank is required to own
capital stock in the FHLB of Seattle. The amount of stock we hold is based on
percentages specified by the FHLB of Seattle outstanding advances. The carrying
value of FHLB of Seattle stock totaled $1.8 million at December 31, 2005. The
redemption of any excess stock held by the Bank is at the discretion of the FHLB
of Seattle, and under present policies may take up to five years. The yield on
the FHLB of Seattle stock is normally paid through stock dividends that are
subject to the discretion of the board of directors of the FHLB of Seattle.
However, the FHLB of Seattle suspended the payment of dividends during the
fourth quarter of 2004, and no dividends were paid during the year ended
December 31, 2005. It is uncertain when the payment of dividends will resume.
Stock ownership in the FHLB of Seattle is expected to remain stable or increase
in response to the Banks borrowing needs.

At December 31, 2005, Alaska Pacifics investment in the common
stock of the FHLB of Seattle (carrying and fair values of $1.8 million) had an
aggregate book value in excess of 10% of Alaska Pacifics total equity.

Alaska Pacific had no securities (other than U.S. Government
and agency securities and mutual funds which invest exclusively in such
securities), which had an aggregate book value in excess of 10% of shareholders
equity at December 31, 2005.



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

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



|- 19
      -
|------------

---



Deposit Accounts. Alaska Pacific attracts deposits from within
Alaska Pacifics primary market area through the offering of a broad selection
of deposits as set forth in the following table. In determining the terms of its
deposit accounts, Alaska Pacific considers current market interest rates,
profitability to Alaska Pacific, matching deposit and loan products and its
customer preferences and concerns. Alaska Pacifics deposit mix and pricing is
generally reviewed weekly. Deposits from municipalities and other public
entities were approximately $7 million at December 31, 2005.

Alaska
Pacific had approximately $6.2 million of brokered deposits at December 31, 2005
issued through the Certificate of Deposit Account Registry Service (CDARS).
CDARS deposits range in maturities from one month to three years, and carry
interest rates that are generally higher than locally obtained time deposits. As
such, Alaska Pacific utilizes such deposits as an alternative supplemental
funding source in addition to advances from the FHLB of Seattle.

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

- 20
-

---

The
following table sets forth information concerning Alaska Pacifics time deposits
and other interest-bearing deposits at December 31, 2005.

|Weighted |   |  |                        |  |                               |  |   |  |           |  |   |  |         |  |            |  
|-------- | - |  | ---------------------- |  | ----------------------------- |  | - |  | --------- |  | - |  | ------- |  | ---------- | -
|Average  |   |  |                        |  |                               |  |   |  | Amount    |  |   |  |         |  | Percentage |  
|Interest |   |  | Original               |  |                               |  |   |  | (in thou- |  |   |  | Minimum |  | of Total   |  
|Rate     |   |  | Term                   |  | Category                      |  |   |  | sands)    |  |   |  | Balance |  | Deposits   |  
|        
|0.00     | % |  | N/A                    |  | Noninterest-bearing           |  | $ |  | 25,816    |  | $ |  | 100     |  | 17.59      | %
|0.34     |   |  | N/A                    |  | Interest-bearing demand       |  |   |  | 30,147    |  |   |  | 100     |  | 20.56      |  
|2.12     |   |  | N/A                    |  | Money market deposit accounts |  |   |  | 27,448    |  |   |  | 3,500   |  | 18.72      |  
|0.65     |   |  | N/A                    |  | Savings accounts              |  |   |  | 20,586    |  |   |  | 100     |  | 14.04      |  
|        
|         |   |  |                        |  | Certificates of
      Deposit |  |   |  |           |  |   |  |         |  |            |  
|0.39     |   |  | Seven days             |  | Fixed-rate                    |  |   |  | 722       |  |   |  | 500     |  | 0.49       |  
|0.96     |   |  | One month              |  | Fixed-rate                    |  |   |  | 57        |  |   |  | 500     |  | 0.04       |  
|1.25     |   |  | Two months             |  | Fixed-rate                    |  |   |  | 71        |  |   |  | 500     |  | 0.05       |  
|3.25     |   |  | Three months           |  | Fixed-rate                    |  |   |  | 4,711     |  |   |  | 500     |  | 3.21       |  
|2.23     |   |  | Six months             |  | Fixed-rate                    |  |   |  | 5,044     |  |   |  | 500     |  | 3.44       |  
|1.69     |   |  | Nine months            |  | Fixed-rate                    |  |   |  | 141       |  |   |  | 500     |  | 0.10       |  
|2.90     |   |  | One year               |  | Fixed-rate                    |  |   |  | 12,320    |  |   |  | 500     |  | 8.40       |  
|2.08     |   |  | 18 months              |  | Fixed-rate                    |  |   |  | 658       |  |   |  | 500     |  | 0.45       |  
|2.63     |   |  | Two years              |  | Fixed-rate                    |  |   |  | 3,272     |  |   |  | 500     |  | 2.23       |  
|3.07     |   |  | Three years            |  | Fixed-rate                    |  |   |  | 2,982     |  |   |  | 500     |  | 2.03       |  
|2.86     |   |  | Four years             |  | Fixed-rate                    |  |   |  | 219       |  |   |  | 500     |  | 0.15       |  
|3.62     |   |  | Five years             |  | Fixed-rate                    |  |   |  | 5,478     |  |   |  | 500     |  | 3.74       |  
|3.29     |   |  | Gold minor one year    |  | Fixed-rate                    |  |   |  | 2,307     |  |   |  | 500     |  | 1.57       |  
|8.00     |   |  | Deferred Comp one year |  | Fixed-rate                    |  |   |  | 1,044     |  |   |  | 500     |  | 0.71       |  
|3.19     |   |  | One year               |  | Variable-rate                 |  |   |  | 903       |  |   |  | 500     |  | 0.62       |  
|1.47     |   |  | 2-1/2 years            |  | Variable-rate                 |  |   |  | 2,724     |  |   |  | 500     |  | 1.86       |  
|        
|         |   |  |                        |  | TOTAL                         |  | $ |  | 146,650   |  |   |  |         |  | 100.00     | %
|         |   | 

The following table indicates the amount of Alaska
Pacifics jumbo certificates of deposit by time remaining until maturity as of
December 31, 2005. Jumbo certificates of deposit are certificates in amounts of
$100,000 or more.

|                               |  |   |  | Certificates of     
|------------------------------ |  | - |  | --------------------
|                               |  |   |  | Deposit             
|Maturity Period                |  |   |  | (in
      thousands)
|                              
|Three months or less           |  | $ |  | 2,354               
|Over three through six months  |  |   |  | 1,977               
|Over six through twelve months |  |   |  | 2,877               
|Over twelve months             |  |   |  | 2,036               
|                              
|Total                          |  | $ |  | 9,244               
|                               |  |  

- 21
-

---

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

|(dollars in thousands)December
      31,       |  |   |  |         |  | 2005       |   |  |   |  |            |   |  |   |  | 2004    | 
|---------------------------------------------- |  | - |  | ------- |  | ---------- | - |  | - |  | ---------- | - |  | - |  | ------- | 
|                                              
|                                               |  |   |  |         |  | Percent of |   |  |   |  | Increase   |   |  |   |  |         | 
|                                               |  |   |  | Amount  |  | Total      |   |  |   |  | (Decrease) |   |  |   |  | Amount  | 
|                                               |  |  
|Noninterest-bearing demand
      accounts      |  | $ |  | 25,816  |  | 17.60      | % |  | $ |  | 3,136      |   |  | $ |  | 22,680  | 
|Interest-bearing demand
      accounts         |  |   |  | 30,147  |  | 20.56      |   |  |   |  | (1,887     | ) |  |   |  | 32,034  | 
|Money market deposit accounts                  |  |   |  | 27,448  |  | 18.72      |   |  |   |  | 2,487      |   |  |   |  | 24,961  | 
|Savings accounts                               |  |   |  | 20,586  |  | 14.04      |   |  |   |  | (3,292     | ) |  |   |  | 23,878  | 
|Fixed-rate certificates which mature
      :   |  |   |  |         |  |            |   |  |   |  |            |   |  |   |  |         | 
|Within 1 year                                  |  |   |  | 29,662  |  | 20.23      |   |  |   |  | 9,802      |   |  |   |  | 19,861  | 
|After 1 year, but within 2
      years         |  |   |  | 4,428   |  | 3.02       |   |  |   |  | (1,280     | ) |  |   |  | 5,709   | 
|After 2 years, but within
      5 years        |  |   |  | 4,936   |  | 3.37       |   |  |   |  | (118       | ) |  |   |  | 5,054   | 
|Variable-rate certificates which
      mature: |  |   |  |         |  |            |   |  |   |  |            |   |  |   |  |         | 
|Within 1 year                                  |  |   |  | 1,943   |  | 1.32       |   |  |   |  | 75         |   |  |   |  | 1,867   | 
|After 1 year, but within 2
      years         |  |   |  | 1,304   |  | 0.89       |   |  |   |  | 223        |   |  |   |  | 1,080   | 
|After 2 years, but within
      5 years        |  |   |  | 380     |  | 0.25       |   |  |   |  | (279       | ) |  |   |  | 660     | 
|                                              
|Total                                          |  | $ |  | 146,650 |  | 100.00     | % |  | $ |  | 8,866      |   |  | $ |  | 137,784 | 
|                                               |  |  



|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, |  |   |  | 2005   |  |   |  | 2004  
|-------------------------------- |  | - |  | ------ |  | - |  | ------
|                                
|0.00                             |  | - |  | 0.99%  |  | $ |  | -     
|1.00                             |  | - |  | 1.99%  |  |   |  | 3,837 
|2.00                             |  | - |  | 2.99%  |  |   |  | 11,510
|3.00                             |  | - |  | 3.99%  |  |   |  | 14,981
|4.00                             |  | - |  | 4.99%  |  |   |  | 10,688
|5.00                             |  | - |  | 5.99%  |  |   |  | 517   
|6.00                             |  | - |  | 6.99%  |  |   |  | 76    
|7.00% and over                   |  |   |  | 1,044  |  |   |  | 1,013 
|                                
|Total                            |  | $ |  | 42,653 |  | $ |  | 34,231
|                                 | 



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

The following table sets forth
the amount and maturities of time deposits at December 31, 2005.

|                             |  |   |  |        |  |   |  |           |  |   |  |            |  |  |   | Amount Due |         |  |   |  |            |  |   |  |        |  |   |  |       
|---------------------------- |  | - |  | ------ |  | - |  | --------- |  | - |  | ---------- |  |  | - | ---------- | ------- |  | - |  | ---------- |  | - |  | ------ |  | - |  | ------
|                             |  |   |  |       
|                             |  |   |  |        |  |   |  |           |  |   |  | Over 1 And |  |  |   | Over 2 And |         |  |   |  | Over 3 And |  |   |  |        |  |   |  |       
|                             |  |   |  |        |  |   |  | Less Than |  |   |  | Less Than  |  |  |   | Less Than  |         |  |   |  | Less Than  |  |   |  | Over   |  |   |  |       
|(dollars in
      thousands) |  |   |  | 1 Year |  |   |  | 2 Years   |  |   |  | 3 Years    |  |  |   |            | 4 Years |  |   |  | 4 Years    |  |   |  | Total 
|                            
|1.00                         |  | - |  | 1.99%  |  | $ |  | 3,826     |  | $ |  | 11         |  |  |   | $ -        |         |  |   |  | $ -        |  |   |  | $ -    |  | $ |  | 3,837 
|2.00                         |  | - |  | 2.99%  |  |   |  | 10,282    |  |   |  | 1,071      |  |  |   | 157        |         |  |   |  | -          |  |   |  | -      |  |   |  | 11,510
|3.00                         |  | - |  | 3.99%  |  |   |  | 7,889     |  |   |  | 4,032      |  |  |   | 2,382      |         |  |   |  | 678        |  |   |  | -      |  |   |  | 14,981
|4.00                         |  | - |  | 4.99%  |  |   |  | 7,973     |  |   |  | 615        |  |  |   | 253        |         |  |   |  | 688        |  |   |  | 1,159  |  |   |  | 10,688
|5.00                         |  | - |  | 5.99%  |  |   |  | 517       |  |   |  | -          |  |  |   | -          |         |  |   |  | -          |  |   |  | -      |  |   |  | 517   
|6.00                         |  | - |  | 6.99%  |  |   |  | 77        |  |   |  | -          |  |  |   | -          |         |  |   |  | -          |  |   |  | -      |  |   |  | 77    
|7.00% and over               |  |   |  | 1,040  |  |   |  | 3         |  |   |  | -          |  |  |   |            | -       |  |   |  | -          |  |   |  | 1,043 
|                            
|Total                        |  | $ |  | 31,604 |  | $ |  | 5,732     |  | $ |  | 2,792      |  |  | $ |            | 1366    |  | $ |  | 1,159      |  | $ |  | 42,653
|                             |  |  
|                            
|                             |  |   |  |        |  |   |  |           |  |   |  |            |  |  |   | - 22       | -       |  |   |  |            |  |   |  |        |  |   |  |       

---



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

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

|(in thousands)Year
      ended December 31,              |  |   |  | 2005    |  |   |  | 2004    |  
|-------------------------------------------------------- |  | - |  | ------- |  | - |  | ------- | -
|                                                        
|Beginning balance                                        |  | $ |  | 137,784 |  | $ |  | 138,612 |  
|                                                        
|Net deposits (withdrawals) before
      interestcredited |  |   |  | 7,260   |  |   |  | (2,009  | )
|Interest credited                                        |  |   |  | 1,606   |  |   |  | 1,181   |  
|                                                        
|Net increase (decrease) in
      deposits                |  |   |  | 8,866   |  |   |  | (828    | )
|                                                        
|                                                        
|Ending balance                                           |  | $ |  | 146,650 |  | $ |  | 137,784 |  
|                                                         |  |  

Borrowings. Deposits and loan repayments are the primary
source of funds for Alaska Pacifics lending and investment activities. However,
Alaska Pacific may rely upon advances from the FHLB of Seattle to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The FHLB
of Seattle functions as a central reserve bank providing credit for thrift
institutions and many other member financial institutions. The FHLB of Seattle
requires Alaska Pacific, as a member, to own capital stock in the FHLB of
Seattle and authorizes it to apply for advances on the security of this stock
and certain of its mortgage loans and other assets (principally securities which
are obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. At December 31, 2005,
Alaska Pacific had a borrowing capacity of approximately $44.3 million with the
FHLB of Seattle, of which $32.3 million was unused compared with $40.6 million
and $32.3 million, respectively, at December 31, 2004.

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

|(dollars in thousands)Year
      ended December 31, |  |   |  | 2005   |   |  |   |  | 2004   |  
|--------------------------------------------------- |  | - |  | ------ | - |  | - |  | ------ | -
|                                                   
|Advances:                                           |  |   |  |        |   |  |   |  |        |  
|Maximum amount of
      borrowings outstanding      |  |   |  |        |   |  |   |  |        |  
|during
      the year at any month end              |  | $ |  | 14,095 |   |  | $ |  | 14,105 |  
|Average outstanding during
      the year           |  |   |  | 10,393 |   |  |   |  | 9,229  |  
|Balance outstanding at end
      of year            |  |   |  | 12,048 |   |  |   |  | 8,333  |  
|                                                   
|Approximate weighted average rate
      paid:       |  |   |  |        |   |  |   |  |        |  
|Average during the
      year                       |  |   |  | 4.84   | % |  |   |  | 4.81   | %
|At end of
      year                                |  |   |  | 4.87   |   |  |   |  | 4.99   |  

REGULATION

General

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

- 23 -

---

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



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

Office of Thrift Supervision. The OTS has extensive
authority over the operations of savings institutions. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. All savings
institutions are subject to a semi-annual assessment, based upon the
institutions total assets, to fund the operations of the OTS. The OTS also has
extensive enforcement authority over all savings institutions and their holding
companies, including the Bank and the Corporation. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.

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

The Bank's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 2005, the Bank's lending limit
under this restriction was $2.6 million and, at that date, the Bank had no loans
to one borrower exceeding this amount.

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

All savings institutions are required to pay assessments to the
OTS to fund the agencys operations. The general assessments, paid on a
semi-annual basis, are determined based on the institutions total assets,
including consolidated subsidiaries. The Banks OTS assessment for the year
ended December 31, 2005 was $54,000.

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

- 24
-

---

As a member, the Bank is required to purchase and maintain
stock in the FHLB of Seattle. At December 31, 2005, the Bank had $1.8 million in
FHLB stock, which was in compliance with this requirement. In past years, the
Bank has received substantial dividends on its FHLB stock until such dividends
were suspended late in 2004. For the year ended December 31, 2005,
Alaska Pacific received no dividends, compared with an average 3.2% for the year
ended December 31, 2004.

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

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

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

The FDICs deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Under the system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital, to risk-weighted assets (Tier 1 risk-based
capital) of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions is made by the FDIC for each semi-annual assessment
period.

The FDIC is authorized to increase assessment rates, on a
semi-annual basis, if it determines that the reserve ratio of the SAIF will be
less than the designated reserve ratio of 1.25% of SAIF insured deposits. In
setting these increased assessments, the FDIC must seek to restore the reserve
ratio to that designated reserve level, or such higher reserve ratio as
established by the FDIC. The FDIC may also impose special assessments on SAIF
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.

Since January 1, 1997, the premium schedule for Bank Insurance
Fund (BIF) and SAIF insured institutions has ranged from 0 to 27 basis points.
However, SAIF and BIF insured institutions are required to pay a Financing
Corporation assessment, in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s equal to approximately 1.70 points for each $100 in
domestic deposits annually. These assessments, which may be revised based upon
the level of BIF and SAIF deposits, will continue until the bonds mature in
2017.

On February 15, 2006, the President signed into law H.R. 4636,
the Federal Deposit Insurance Reform Conforming Amendment Act of 2005, as part
of other deposit insurance reform provisions contained in the Deficit Reduction
Act of 2005. The final bill provides for:

- the merging of the
  two deposit insurance funds,
- increasing coverage
  for retirement accounts to $250,000,
- indexing the
  insurance level for inflation,
- credits totaling
  $4.7 billion to offset premiums for banks that capitalized the FDIC by 1996
  (which addresses
  the fairness issue of fast growing banks),



|- 25
      -
|------------

---

- a cap on the level
  of the fund and cash dividends when it grows past a certain point, and
- the historical basis
  concept for distributing credits and dividends.

The FDIC is required to implement most of the
Act's provisions by November 5, 2006, with two provisions, merger of the two
insurance funds and raising to $250,000 coverage for retirement accounts, likely
to be implemented within 90 days.

Prompt Corrective Action. The OTS is required to take
certain supervisory actions against undercapitalized savings institutions, the
severity of which depends upon the institutions degree of undercapitalization.
Generally, an institution that has a ratio of total capital to risk-weighted
assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets
of less than 4%, or a ratio of core capital to total assets of less than 4% (3%
or less for institutions with the highest examination rating) is considered to
be undercapitalized. An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that is
less than 3% is considered to be significantly undercapitalized and an
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be critically undercapitalized. Subject to a narrow exception,
the OTS is required to appoint a receiver or conservator for a savings
institution that is critically undercapitalized. OTS regulations also require
that a capital restoration plan be filed with the OTS within 45 days of the date
a savings institution receives notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. Compliance
with the plan must be guaranteed by any parent holding company in an amount of
up to the lesser of 5% of the institutions assets or the amount which would
bring the institution into compliance with all capital standards. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS also could take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.

At December 31, 2005, Alaska Pacifics capital
ratios placed it in the well capitalized category under the prompt corrective
action regulations of the OTS.

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

The capital regulations require tangible capital
of at least 1.5% of adjusted total assets (as defined by regulation). Tangible
capital generally includes common stockholders equity and retained income, and
certain noncumulative perpetual preferred stock and related income. In addition,
all intangible assets, other than a limited amount of purchased mortgage
servicing rights, must be deducted from tangible capital for calculating
compliance with the requirement. At December 31, 2005, the Bank had tangible
capital of $15.9 million, or 9.08% of adjusted total assets, which is
approximately $13.3 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date.

The capital standards also require core capital
equal to at least 4% of adjusted total assets unless an institutions
supervisory condition is such to allow it to maintain a 3.0% ratio. Core capital
generally consists of tangible capital plus certain intangible assets, including
a limited amount of purchased credit card relationships. At December 31, 2005,
the Bank had core capital equal to $15.9 million, or 9.08% of adjusted total
assets, which is $8.9 million above the minimum leverage ratio requirement of 4%
in effect on that date.

The OTS
risk-based requirement requires savings institutions to have total capital of at
least 8% of risk-weighted assets. Total capital consists of core capital, as
defined above, and supplementary capital. Supplementary capital consists of
certain permanent and maturing capital instruments that do not qualify as core
capital and general valuation loan and lease loss allowances up to a maximum of
1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only to the extent of core capital. The OTS is also
authorized to require a savings institution to maintain an additional amount of
total capital to account for concentration of credit risk and the risk of
non-traditional activities.

- 26
-

---

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

On December 31, 2005, the Bank had total risk-based capital of
approximately $17.2 million, including $15.9 million in core capital and $1.3
million in qualifying supplementary capital, and risk-weighted assets of $132.0
million, or total capital of 13.01% of risk-weighted assets. This amount was
$6.6 million above the 8% requirement in effect on that date.

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

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

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

Standards for Safety and Soundness.The federal
banking regulatory agencies have prescribed, by regulation, standards for all
insured depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset
quality; (vii) earnings; and (viii) compensation, fees and benefits
(Guidelines). The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the OTS determines
that the Bank fails to meet any standard prescribed by the Guidelines, the OTS
may require the Bank to submit an acceptable plan to achieve compliance with the
standard. OTS regulations establish deadlines for the submission and review of
such safety and soundness compliance plans. Management of the Bank is not aware
of any conditions relating to these safety and soundness standards which would
require submission of a plan of compliance.

Qualified Thrift Lender Test.All savings institutions,
including Alaska Pacific, are required to meet a qualified thrift lender (QTL)
test to avoid certain restrictions on their operations. This test requires a
savings institution to have at least 65% of its portfolio assets, as defined by
regulation, in qualified thrift investments on a monthly average for nine out of
every 12 month period on a rolling basis. As an alternative, the savings
institution may maintain 60% of its assets in those assets specified in Section
7701(a)(19) of the Internal Revenue Code (Code). Under either test, such
assets primarily consist of residential housing related loans and investments.
At December 31, 2005, the Bank met the test, with a ratio of 84.6% .



|- 27 -
|------

---

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

Limitations on Capital
Distributions.
The OTS imposes various restrictions on savings institutions with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account.Generally, savings institutions, such as Alaska Pacific, that
before and after the proposed distribution are well-capitalized, may make
capital distributions during any calendar year equal to up to 100% of net income
for the year-to-date plus retained net income for the two preceding years.
However, an institution deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Bank may pay
dividends to the Corporation in accordance with this general
authority.

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

**Liquidity**. All savings institutions,
including the Bank, are required to maintain sufficient liquidity to ensure a
safe and sound operation.

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

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

Transactions with Affiliates. Generally, transactions
between a savings institution or its subsidiaries and its affiliates are
required to be on terms as favorable to the association as transactions with
non-affiliates. In addition, certain of these transactions, such as loans to an
affiliate, are restricted to a percentage of the institutions capital.
Affiliates of the Bank include the Corporation and any company which is under
common control with the Bank. In addition, a savings institution may not lend to
any affiliate engaged in activities not permissible for a bank holding company
or acquire the securities of most affiliates. The OTS has the discretion to
treat subsidiaries of savings institutions as affiliates on a case-by-case
basis.



|- 28 -
|------

---

The Federal Reserves Regulation W, which comprehensively amends sections 23A and 23B of the Federal Reserve Act, became effective in 2003. The Federal Reserve
Act and Regulation W are applicable to savings institutions such as the Bank. Regulation W unifies and updates staff interpretations issued over the years, incorporates several new interpretative proposals (such as to clarify when transactions with
an unrelated third party will be attributed to an affiliate) and addresses new issues arising as a result of the expanded scope of nonbanking activities engaged in by banks and bank holding companies in recent years and authorized for financial
holding companies under the Gramm-Leach-Bliley Act.

In addition, OTS regulations prohibit a savings institution from lending to any of its affiliates that is engaged in activities that are not permissible for bank
holding companies and from purchasing the securities of any affiliate, other than a subsidiary.

Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of
interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals.

Federal Reserve System. The Federal Reserve Board requires that all depository institutions
maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. Negotiable order of withdrawal (NOW) accounts and other types
of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a savings bank. As of December 31, 2005, the
Banks deposit with the Federal Reserve Bank and vault cash exceeded its reserve requirements.

Community Reinvestment Act. Under the Community Reinvestment Act, every FDIC-insured institution
has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish
specific lending requirements or programs for financial institutions nor does it limit an institutions discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the
Community Reinvestment Act. The Community Reinvestment Act requires the OTS, in connection with the examination of the Bank, to assess the institutions record of meeting the credit needs of its community and to take such record into account in
its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. Due to the heightened attention being given to the
Community Reinvestment Act in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community. The Bank was examined in 2004 for Community Reinvestment Act compliance and received a rating of
satisfactory in its latest examination.

Regulatory and Criminal Enforcement Provisions. The OTS has primary enforcement responsibility
over savings institutions and has the authority to bring action against all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action
likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1.1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Director of the OTS that enforcement
action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

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



|- 29 -
|------

---

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

**Privacy Standards.**On
November 12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act
of 1999 ("GLBA") was signed into law. The purpose of this legislation is to
modernize the financial services industry by establishing a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers.

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

The regulations also require the
Bank to provide its customers with initial and annual notices that accurately
reflect its privacy policies and practices. In addition, the Bank is required to
provide its customers with the ability to "opt-out" of having the Bank share
their non-public personal information with unaffiliated third parties before
they can disclose such information, subject to certain exceptions.

The Bank is subject to regulatory
guidelines establishing standards for safeguarding customer information. These
regulations implement certain provisions of the GLBA. The guidelines describe
the agencies' expectations for the creation, implementation and maintenance of
an information security program, which would include administrative, technical
and physical safeguards appropriate to the size and complexity of the
institution and the nature and scope of its activities. The standards set forth
in the guidelines are intended to insure the security and confidentiality of
customer records and information, protect against any anticipated threats or
hazards to the security or integrity of such records and protect against
unauthorized access to or use of such records or information that could result
in substantial harm or inconvenience to any customer.

**Anti-Money Laundering and
Customer Identification.**In response to the terrorist events of September
11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act")
was signed into law 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. 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. Title III of the USA Patriot Act and the related OTS
regulations impose the following requirements with respect to financial
institutions:

- establishment of
  anti-money laundering programs;
- establishment of a
  program specifying procedures for obtaining identifying information
  from customers
  seeking to open new accounts, including verifying the identity of customers
  within a reasonable period of time;
- establishment of
  enhanced due diligence policies, procedures and controls designed to detect
  and report money
  laundering;
- prohibitions on
  correspondent accounts for foreign-shelled banks and compliance with record
  keeping 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. The Bank's
policies and procedures have been updated to reflect the requirements of the USA
Patriot Act, which had a minimal impact on business and customers.



|- 30
      -
|------------

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

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

Acquisitions. Federal law and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings institution or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings institution not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.

Activities Restrictions. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions. If
the Corporation acquires control of another savings institution as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company and the activities of the Bank and any other
subsidiaries (other than the Bank or any other SAIF insured savings institution)
would generally become subject to additional restrictions. There generally are
more restrictions on the activities of a multiple savings and loan holding
company than on those of a unitary savings and loan holding company. Federal law
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than: (i) furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the OTS by regulation, prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
also must be approved by the OTS prior to being engaged in by a multiple savings
and loan holding company.

Qualified Thrift Lender Test. If the Bank fails the
qualified thrift lender test, within one year the Corporation must register as,
and will become subject to, the significant activity restrictions applicable to
bank holding companies. See -- Federal Regulation of Savings Institutions -
Qualified Thrift Lender Test for information regarding the Banks qualified
thrift lender test.

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

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

- 31
-

---



|TAXATION
|--------



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

General. The Corporation and the Bank report their income
on a fiscal year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Banks reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Corporation.

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

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

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

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



|- 32
      -
|------------

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



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

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



|Audits
|------

The Corporations income tax returns have not been
audited by federal or state authorities within the last five years. For
additional information regarding income taxes, see Note 12 of the Notes to
Consolidated Financial Statements contained in the Annual Report.



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

As of December 31, 2005, Alaska
Pacific did not own any active subsidiaries.



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

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

|                  |  | Age at       |  |                                 |  |                             
|----------------- |  | ------------ |  | ------------------------------- |  | ----------------------------
|                  |  | December 31, |  | Position                       
|                  |  |             
|Name              |  | 2005         |  | Corporation                     |  | Bank                        
|                 
|Craig E. Dahl     |  | 56           |  | Director, President             |  | Director, President         
|                  |  |              |  | and Chief Executive Officer     |  | and Chief Executive Officer 
|                 
|Lisa Corrigan     |  | 46           |  | Executive Vice President and    |  | Executive Vice President and
|                  |  |              |  | Chief Operating Officer         |  | Chief Operating Officer     
|                 
|Roger K. White    |  | 55           |  | Senior Vice President, Chief    |  | Senior Vice President and   
|                  |  |              |  | Financial Officer and Secretary |  | Chief Financial Officer     
|                 
|John E. Robertson |  | 58           |  | --                              |  | Senior Vice President and   
|                  |  |              |  |                                 |  | Chief Lending Officer       

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

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

Lisa Corriganjoined the Bank in 1992 and has been Chief
Operating Officer since 1996 and Executive Vice President since July
2001.

*Roger K. White*joined the Bank in 1995 and has
served in his current positions since that time.



|- 33
      -
|------------

---

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



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

As of December 31, 2005, the Bank had 65 full-time
and seven part-time employees, none of whom are represented by a collective
bargaining unit. The Bank believes its relationship with its employees is good.



|Competition
|-----------

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

Alaska Pacifics market share is approximately 13%
of deposits in Southeast Alaska, but the total market in this calculation
includes credit unions only for those based in Southeast Alaska. If one were to
include state-wide credit unions as well as non-bank competitors such as
brokerage firms and money market mutual funds, Alaska Pacifics share would be
somewhat less. Alaska Pacifics largest competitor is Wells Fargo, with a market
share of approximately 45%. 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.

- 34
-

---



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

The following table sets forth
certain information regarding Alaska Pacifics offices at December 31,
2005.

|                          |  | Year   |  | Square  |  |   |  | Deposits            
|------------------------- |  | ------ |  | ------- |  | - |  | --------------------
|Location                  |  | Opened |  | Footage |  |   |  | (in
      thousands)
|                         
|Main Office:              |  |        |  |         |  |   |  |                     
|                          |  |        |  |         |  |   |  |                     
|Nugget Mall Office (1)    |  | 1984   |  | 16,000  |  | $ |  | 57,229              
|2094 Jordan Avenue        |  |        |  |         |  |   |  |                     
|Juneau, Alaska 99801      |  |        |  |         |  |   |  |                     
|                          |  |        |  |         |  |   |  |                     
|Branch
      Offices:     |  |        |  |         |  |   |  |                     
|                          |  |        |  |         |  |   |  |                     
|301 N. Franklin Street    |  | 1960   |  | 6,268   |  |   |  | 34,088              
|Juneau, Alaska 99801      |  |        |  |         |  |   |  |                     
|                          |  |        |  |         |  |   |  |                     
|410 Mission Street (2)    |  | 1974   |  | 2,300   |  |   |  | 13,224              
|Ketchikan, Alaska 99901   |  |        |  |         |  |   |  |                     
|                          |  |        |  |         |  |   |  |                     
|2442 Tongass Avenue (3)   |  | 1997   |  | 1,550   |  |   |  | 5,781               
|Ketchikan, Alaska 99901   |  |        |  |         |  |   |  |                     
|                          |  |        |  |         |  |   |  |                     
|315 Lincoln Street (4)    |  | 1978   |  | 2,032   |  |   |  | 16,889              
|Sitka, Alaska 99835       |  |        |  |         |  |   |  |                     
|                          |  |        |  |         |  |   |  |                     
|310 Hill Street           |  |        |  |         |  |   |  |                     
|Hoonah, Alaska 99829 (5)  |  | 2000   |  | 900     |  |   |  | 3,852               
|                          |  |        |  |         |  |   |  |                     
|615 Mallott Avenue        |  |        |  |         |  |   |  |                     
|Yakutat, Alaska 99689 (6) |  | 2000   |  | 900     |  |   |  | 7,669               
|                          |  |       

|(1) | Lease expires in January 2009, with one 10-year option to
      renew.                         
|--- | -----------------------------------------------------------------------------------------------
|   
|(2) | Lease expires in February 2008, with option to renew for
      two consecutive five-year terms.
|   
|(3) | Lease expires in November 2006, with four six-month
      options to renew.                    
|   
|(4) | Lease expires in December 2013, with option to renew for
      two consecutive five-year terms.
|   
|(5) | Lease expires in January 2008. The office was closed in
      January 2006.                    
|   
|(6) | Month-to-month lease. The office was closed in January
      2006.                             
|   

Alaska Pacific maintains nine automated teller machines
including five in the Juneau area, two in the Sitka area, and one each at the
Ketchikan and Hoonah branch offices. At December 31, 2005, the net book value of
Alaska Pacifics properties and its fixtures, furniture and equipment was $2.1
million.



|Item 3. Legal
Proceedings
|-------------------------

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

- 35
-

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

No matters were submitted to a vote
of security holders during the fourth quarter of the year ended December 31,
2005.





|PART II
|-------

Item
5. Market for Common Equity and Related Stockholder Matters

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



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

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



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

During the fourth quarter of the
year ended December 31, 2005, the Corporation had no purchases of its Common
Stock.



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

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



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

Independent Auditors Report on
Consolidated Financial Statements for the years ended December 31, 2005 and
2004*

|(a) | Consolidated Statements of Financial Condition as of
      December 31, 2005 and 2004*               
|--- | -----------------------------------------------------------------------------------------------------
|   
|(b) | Consolidated Statements of Income for the Years Ended
      December 31, 2005 and 2004*              
|   
|(c) | Consolidated Statements of Stockholders Equity For the
      Years Ended December 31, 2005 and 2004*
|   
|(d) | Consolidated Statements of Cash Flows For the Years Ended
      December 31, 2005 and 2004*          
|   
|(e) | Notes to Consolidated Financial Statements*                                                          
|   

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

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

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



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

(a)Evaluation of Disclosure Controls and
Procedures: An
evaluation of the Corporations disclosure controls and procedures (as defined
in Section 13(a)-15(e) of the Securities Exchange Act of 1934 (the Exchange
Act)) was carried out under the supervision and with the participation of the
Corporations Chief Executive Officer, Chief Financial Officer and several other
members of the Corporations senior management within the 90-day period
preceding the filing



|- 36
      -
|------------

---

date of this
annual report. The Corporations Chief Executive Officer and Chief Financial
Officer concluded that the Corporations disclosure controls and procedures as
currently in effect are effective in ensuring that the information required to
be disclosed by the Corporation in the reports it files or submits under the
Exchange Act is (i) accumulated and communicated to the Corporations management
(including the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.

(b)Changes in Internal Controls: In the year ended December 31,
2005, the Corporation did not make any significant changes in, nor take any
corrective actions regarding, its internal controls or other factors that could
significantly affect these controls.



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

There was no information to be disclosed
by the Corporation in a report on Form 8-K during the fourth quarter of fiscal
2005 that was not so disclosed.



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

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

The information contained under the section
captioned Proposal I -- Election of Directors in the Corporationss Definitive
Proxy Statement for the 2005 Annual Meeting of Shareholders (Proxy Statement)
is incorporated herein by reference. For information regarding the executive
officers of the Corporation, see Item 1. Business - Executive Officers.



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

The Audit Committee consisting of
Directors Milner (Chairman), Grant, Grummett and McDowell is responsible for
reviewing the internal auditors report and results of their examination prior
to review by and with the entire Board of Directors and retains and establishes
the scope of the engagement of the Corporations independent auditors. The Board
of Directors has designated Director Milner as the Audit Committee financial
expert, as defined in the SECs Regulation S-B, by the Banks Board of
Directors. Director Milner is independent as that term is used in Item
7(d)(3)(iv) of Schedule 14A promulgated under the Exchange Act.



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

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

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



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

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

- 37
-

---

Item
10. Executive Compensation

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

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

(a)Security
Ownership of Certain Beneficial Owners

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

(b)Security
Ownership of Management

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

(c)Changes in
Control

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

(d)Equity Compensation Plan Information.The following table summarizes share and exercise
price information about the Corporations equity compensation plans as of
December 31, 2005.

|                                                              |  |                                  |  |   |  |                                 |  | (c)                            
|------------------------------------------------------------- |  | -------------------------------- |  | - |  | ------------------------------- |  | -------------------------------
|                                                              |  |                                  |  |   |  |                                 |  | Number of
      securities     
|                                                              |  | (a)                              |  |   |  | (b)                             |  | remaining available
      for  
|                                                              |  | Number of securities to
      be |  |   |  | Weighted-average
      exercise |  | future issuance
      under    
|                                                              |  | issued upon exercise
      of    |  |   |  | price of
      outstanding      |  | equity compensation
      plans
|                                                              |  | outstanding
      options,       |  |   |  | options, warrants,
      and    |  | (excluding
      securities    
|Plan
      category                                           |  | warrants and
      rights        |  |   |  | rights                          |  | reflected in column
      (a)) 
|                                                             
|Equity compensation plans                                     |  |                                  |  |   |  |                                 |  |                                
|approved by security
      holders                            |  |                                  |  |   |  |                                 |  |                                
|Option
      plan                                             |  | 60,320                           |  | $ |  | 10.19                           |  | -                              
|                                                             
|Equity compensation plans                                     |  |                                  |  |   |  |                                 |  |                                
|not approved by security
      holders                        |  | -                                |  |   |  |                                 |  | -                              
|                                                             
|Total                                                         |  | 60,320                           |  |   |  |                                 |  | -                              
|                                                              |  |                                 
|                                                             
|                                                             
|Item 12. Certain Relationships and Related
      Transactions |  |                                 

The information required by this item is
incorporated herein by reference to the section captioned Transactions with
Management in the Proxy Statement.

- 38
-

---



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

|(a) | Exhibits
|--- | --------
|   
|    | 3.1     
|    | 3.2     
|    | 10.1    
|    | 10.2    
|    | 10.3    
|    | 10.4    
|    | 10.5    
|    | 10.6    
|    | 10.7    
|    | 10.8    
|    | 10.9    
|    | 10.10   
|    | 10.11   
|    | 10.12   
|    | 10.13   
|    | 10.14   
|    | 13      
|    | 14      
|    | 21      
|    | 23      
|    | 31.1    
|    | 31.2    
|    | 32.1    
|    | 32.2    



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



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

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

- 39
-

---



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

Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on March 30, 2006, on its behalf by the undersigned, thereunto duly
authorized.

ALASKA
PACIFIC BANCSHARES, INC.

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

Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below onMarch 30, 2006 by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

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

40

---



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

Annual
Report to Stockholders

---

Exhibit
14

Code of
Ethics

---



|CODE OF
ETHICS
|--------------

The portion of the Companys Code of Ethics that pertains
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions
(executive officers) is set forth below:

A. PERSONAL CONDUCT

As
an executive officer of Alaska Pacific Bank (APB), you will follow the specific
guidelines, principles, and requirements set forth in this document, and in all
the applicable laws and regulations and regulatory requirements. You will make
all your business decisions based on the standards for personal and professional
conduct set forth in this document. If uncertainties occur, you should seek the
guidance of your immediate superior, the Chief Executive Officer of APB, or
APBs general counsel.

All executive officers of Alaska Pacific
Bank:

|1. | Will be honest and forthright in all APBs
      activities, including dealings with regulators, vendors and
      customers;                                                                                                                                                                                                                                 
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. | Will comply with the spirit as well as the letter of
      all the laws and regulations governing the banks operations;                                                                                                                                                                                                                                      
|  
|3. | Will avoid conflicts between personal interests and
      the interests of APB, or even the appearance of a conflict of
      interest;                                                                                                                                                                                                                       
|  
|4. | Will maintain APBs reputation by avoiding
      activities that might reflect adversely on APB;                                                                                                                                                                                                                                                              
|  
|5. | Will exhibit utmost integrity in dealing with APBs
      funds or assets;                                                                                                                                                                                                                                                                                    
|  
|6. | Will not use their position in APB to enrich
      themselves or others at the expense of APB or its customers;                                                                                                                                                                                                                                               
|  
|7. | Will preserve the confidentiality of APBs business
      and customer information;                                                                                                                                                                                                                                                                           
|  
|8. | Will not make false entries in the books or records
      of APB, or otherwise alter or manipulate the databases of APB for any
      reason; and                                                                                                                                                                                                             
|  
|9. | Including members of their immediate families, will
      not solicit, accept or retain a personal benefit from any individual or
      organization which conducts or seeks to conduct business with APB, or with
      which APB seeks to do business, or which competes with APB, or is known to
      be a potential acquirer of any of the assets of APB.
|  

These ethical standards and the policies and procedures
set forth in this document are the foundation of the bank's conscience and
therefore, are critical to the attitude of all officers and employees managing
the affairs of the bank.

The above ethical standards are APBs basic standard for
business and personal conduct.

1

---

|B. | CONFIDENTIALITY OF
      INFORMATION
|-- | ------------------------------------
|  
|   | 1.                                  
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   |                                     
|  
|   | 2.                                  
|  
|   |                                     
|  

2

---

|  
|--
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|  
|3.
|  
|  
|  
|  
|  
|4.
|  
|  
|  
|5.
|  
|  
|  

3

---

|C. | PERSONAL FINANCES AND
      INVESTMENTS
|-- | ---------------------------------------
|  
|   | 1.                                     
|  
|   |                                        
|  
|   |                                        
|  
|   |                                        
|  
|   |                                        
|  
|   |                                        
|  
|   |                                        
|  
|   | 2.                                     
|  
|   |                                        
|  
|   | 3.                                     
|  
|   |                                        
|  
|   | 4.                                     
|  
|   |                                        
|  
|   |                                        
|  
|   |                                        
|  
|   |                                        
|  
|   |                                        
|  

4

---

| |  | i.
          The enterprise is a substantial competitor of
      APB;                                                                                                                                                                                                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | ii.    The enterprise borrows
      from or has placed securities with APB; and you are directly involved in
      the relationship between APB and the enterprise;                                                                                                                                                             
|
| |  | iii.   Any part of the enterprise is
      a seller or supplier of securities, goods, or services to APB and you deal
      directly with the enterprise in that activity; or                                                                                                                                                   
|
| |  | iv.   You deal directly with the
      enterprise in its purchase or receipt of securities, goods, or services
      from APB.                                                                                                                                                                                                  
|
| |  | NOTE: A
      non-publicly owned enterprise is considered to be any enterprise that is
      not a corporation whose shares are listed on a national securities
      exchange, or are widely held and frequently traded in an over-the-counter
      market.                                                                 
|
| |  | A
      material interest is one which exceeds 10
      percent of the estimated value of the equity securities of the enterprise
      or the greater of $10,000 or 5% of the estimated gross value of assets of
      the family group, not including the value of personal residences and
      tangible personal property.
|
| |  | v.   You willnotuse APBs resources or influence to further your
      personal investments.                                                                                                                                                                                                                                    
|

|5. | Personal Borrowings                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | You will submit reports of your indebtedness to
      APBs Board of Directors according to the specific requirements of
      Regulation O.
|  
|6. | Borrowing from Customers or Investing with
      Customers                                                                                  
|  
|   | a.                                                                                                                                          
|  
|   | b.                                                                                                                                          
|  
|   | c.                                                                                                                                          
|  
|   | d.                                                                                                                                          
|  
|7. | Borrowing or Lending Between Employees                                                                                                      
|  
|   | The practice of borrowing from or lending money to
      another employee is discouraged.                                                   
|  

5

---

D. REPORTING A VIOLATION: WHISTLEBLOWER PROTECTION

Regardless of whether you are personally involved, you will make
prompt and full disclosure of any apparent violation of APBS CODE OF ETHICS AND
CONFLICTS OF INTEREST POLICIES AND PROCEDURES, any applicable laws and
regulations or regulatory requirements, or any activities which might adversely
affect the safety and soundness of APB.

Purported violations regarding the accuracy and integrity of the
corporations financial records will be reported directly to the Chairperson of
the Board of Directors Audit Committee.

There will be no retaliation nor any disciplinary action taken
against an employee, officer or director who, in good faith, reports an apparent
violation of any portion of this policy.



|* * * * *
|---------

6

---



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

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

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

---



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

CONSENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM



|The Board of DirectorsAlaska Pacific Bancshares,
      Inc.
|-----------------------------------------------------------

We consent to the incorporation
by reference in Registration Statement No. 333-58798 on Form S-8 of Alaska
Pacific Bancshares, Inc. of our report dated March 27, 2006, with respect to the
consolidated balance sheets of Alaska Pacific Bancshares, Inc. and subsidiary as
of December 31, 2005 and 2004, 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, 2005, annual
report on Form 10-KSB of Alaska Pacific Bancshares, Inc.



|/s/ Moss Adams LLPSpokane,
      WashingtonMarch 30, 2006
|---------------------------------------------------------

---



|Exhibit 31.1
|------------

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

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



| | 1. I have
      reviewed this Annual Report on Form 10-KSB of Alaska Pacific Bancshares,
      Inc.;2. Based on my knowledge, this report does not contain any
      untrue statement of a material fact or omit to statea material fact necessary
      to make the statements made, in light of the circumstances under which
      suchstatements were made, not misleading with respect to the
      period covered by this report;3. Based on my knowledge, the financial
      statements, and other financial information included in this report,fairly
      present in all material respects the financial condition, results of
      operations and cash flows of theregistrant as of, and for, the periods
      presented in this report;4. The registrants other certifying
      officer(s) and I are responsible for establishing and maintaining
      disclosurecontrols and procedures (as defined in Exchange Act Rules
      13a-15(e) and 15d-15(e)) for the registrant andhave:(a) Designed such
      disclosure controls and procedures, or caused such disclosure controls and
      proceduresto be designed under our supervision, to ensure that material
      information relating to the registrant,including its consolidated subsidiaries, is
      made known to us by others within those entities, particularlyduring
      the period in which this report is being prepared;(b) Evaluated the
      effectiveness of the registrants disclosure controls and procedures and
      presented in thisreport our conclusions about the effectiveness of the
      disclosure controls and procedures, as of the endof the period covered by
      this report based on such evaluation; and(c) Disclosed in this report any
      change in the registrants internal control over financial reporting thatoccurred
      during the registrants most recent fiscal quarter (the registrants
      fourth fiscal quarter in thecase of an annual report) that has
      materially affected, or is reasonably likely to materially affect, theregistrants internal control over financial reporting; and5.
      The registrants other certifying officer(s) and I have disclosed, based
      on our most recent evaluation ofinternal control over financial reporting,
      to the registrants auditors and the audit committee of theregistrants board of directors (or persons performing the
      equivalent functions):(a) All significant deficiencies and
      material weaknesses in the design or operation of internal control
      overfinancial reporting which are reasonably likely to adversely
      affect the registrants ability to record, process,summarize and report
      financial information; and(b) Any fraud, whether or not material, that
      involves management or other employees who have a
      significantrole in the registrants internal control over financial
      reporting.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: |  | March 30, 2006 |  | /s/Craig E. Dahl       
|----- |  | -------------- |  | -----------------------
|      |  |               
|      |  |                |  | Craig E. Dahl          
|      |  |                |  | President and          
|      |  |                |  | Chief Executive Officer

---



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

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

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



| | 1. I have
      reviewed this Annual Report on Form 10-KSB of Alaska Pacific Bancshares,
      Inc.;2. Based on my knowledge, this report does not contain any
      untrue statement of a material fact or omit to statea material fact necessary
      to make the statements made, in light of the circumstances under which
      suchstatements were made, not misleading with respect to the
      period covered by this report;3. Based on my knowledge, the financial
      statements, and other financial information included in this report,fairly
      present in all material respects the financial condition, results of
      operations and cash flows of theregistrant as of, and for, the periods
      presented in this report;4. The registrants other certifying
      officer(s) and I are responsible for establishing and maintaining
      disclosurecontrols and procedures (as defined in Exchange Act Rules
      13a-15(e) and 15d-15(e)) for the registrant andhave:(a) Designed such
      disclosure controls and procedures, or caused such disclosure controls and
      proceduresto be designed under our supervision, to ensure that material
      information relating to the registrant,including its consolidated subsidiaries, is
      made known to us by others within those entities,
      particularlyduring the period in which this report is being prepared;(b)
      Evaluated the effectiveness of the registrants disclosure controls and
      procedures and presented in thisreport our conclusions about the
      effectiveness of the disclosure controls and procedures, as of the endof the
      period covered by this report based on such evaluation; and(c)
      Disclosed in this report any change in the registrants internal control
      over financial reporting thatoccurred during the registrants most recent
      fiscal quarter (the registrants fourth fiscal quarter in thecase of
      an annual report) that has materially affected, or is reasonably likely to
      materially affect, theregistrants internal control over financial reporting; and5.The
      registrants other certifying officer(s) and I have disclosed, based on
      our most recent evaluation ofinternal control over financial reporting,
      to the registrants auditors and the audit committee of theregistrants board of directors (or persons performing the
      equivalent functions):(a) All significant deficiencies and material weaknesses in
      the design or operation of internal control overfinancial reporting which
      are reasonably likely to adversely affect the registrants ability to
      record,process, summarize and report financial information; and(b)
      Any fraud, whether or not material, that involves management or other
      employees who have asignificant role in the registrants internal control over
      financial reporting.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: |  | March 30, 2006 |  | /s/Roger K. White        
|----- |  | -------------- |  | -------------------------
|      |  |               
|      |  |                |  | Roger K. White           
|      |  |                |  | Senior Vice President and
|      |  |                |  | Chief Financial Officer  

---



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

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

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

- The report fully
  complies with the requirements of Sections 13(a) and 15(d) of the
  Securities Exchange Act of 1934, as amended, and
- The information
  contained in the report fairly presents, in all material respects, the
  Corporations financial condition and results of operations.

|March 30, 2006 |  | /s/Craig E.
      Dahl       
|-------------- |  | -----------------------------
|              
|Date           |  | Craig E. Dahl                
|               |  | President and                
|               |  | Chief
      Executive Officer

---



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

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

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

- The report fully
  complies with the requirements of Sections 13(a) and 15(d) of the
  Securities Exchange Act of 1934, as amended, and
- The information
  contained in the report fairly presents, in all material respects, the
  Corporations financial condition and results of operations.

|March 30, 2006 |  | /s/ Roger K. White       
|-------------- |  | -------------------------
|              
|Date           |  | Roger K. White           
|               |  | Senior Vice President and
|               |  | Chief Financial Officer  

---