4. Loans

The composition of the loan portfolio, excluding loans held for resale, is presented below:


	June 30, 2011						December 31, 2010						June 30, 2010
	Dollar			Percent			Dollar			Percent			Dollar			Percent
	Amount			of Total			Amount			of Total			Amount			of Total
							(In Thousands)
Commercial	$	232,765			37	%	$	256,971			38	%	$	244,316			39	%
Real estate construction		47,639			8	%		62,620			9	%		49,122			8	%
Real estate term		314,093			50	%		312,128			46	%		290,122			46	%
Home equity lines and other consumer		42,458			7	%		43,264			6	%		47,311			8	%

Subtotal	$	636,955					$	674,983					$	630,871
Less: Unearned origination fee, net of origination costs		(2,825	)		0	%		(3,171	)		0	%		(2,498	)		0	%

Total loans	$	634,130					$	671,812					$	628,373

At June 30, 2011, approximately 31% of the portfolio was scheduled to mature over the next 12 months, and 23% was scheduled to mature between July 1, 2012, and June 30, 2016.

As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends in past due and nonaccrual loans, gross and net charge offs, and movement in loan balances within the risk classifications. The Company utilizes a risk grading matrix to assign a risk classification to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the 8 risk classifications are as follows:

	•		Risk Code 1 — Excellent: Loans in this grade are those where the borrower has substantial financial capacity, above average profit margins, and excellent liquidity. Cash flow has been consistent and is well in excess of debt servicing requirements. Loans in this grade be may secured by cash and/or negotiable securities having a readily ascertainable market value and may also be fully guaranteed by the U.S. Government, and other approved governments and financial institutions. Loans in this grade have borrowers with exceptional credit ratings and would compare to AA ratings as established by Standard & Poor's.

	•		Risk Code 2 — Good: Loans in this grade are those to borrowers who have demonstrated satisfactory asset quality, earnings history, liquidity and other adequate margins of creditor protection. Borrowers exhibit positive fundamentals in terms of working capital, cash flow sufficient to service the debt, and debt to worth ratios. Borrowers for loans in this grade are capable of absorbing normal economic or other setbacks without difficulty. The borrower may exhibit some weaknesses or varying historical profitability. Management is considered adequate in all cases. Borrowing facilities may be unsecured or secured by customary acceptable collateral with well-defined market values. Additional support for the loan is available from secondary repayment sources and/or adequate guarantors.

	•		Risk Code 3 — Satisfactory: Loans in this grade represent moderate credit risk due to some instability in borrower capacity and financial condition. These loans generally require average loan officer attention. Characteristics of assets in this classification may include: marginal debt service coverage, newly established ventures, limited or unstable earnings history, some difficulty in absorbing normal setbacks, and atypical maturities, collateral or other exceptions to established loan policies. In all cases, such weaknesses are offset by well secured collateral positions and/or acceptable guarantors.

	•		Risk Code 4 — Watch List: Loans in this grade are acceptable, but additional attention is needed. This is an interim classification reserved for loans that are intrinsically creditworthy but which require specific attention. Loans may have documentation deficiencies that are deemed correctable, may be contrary to current lending policies, or may have insufficient credit or financial information. Loans in this grade may also be characterized by borrower failure to comply with loan covenants or to provide other required information. If such conditions are not resolved within 90 days from the date of the assignment of Risk Code 4, the loan may warrant further downgrade.

	•		Risk Code 5 — Special Mention: Loans in this grade have had a deterioration of financial condition or collateral value, but are still reasonably secured by collateral or net worth of the borrower. Although the Company is presently protected from loss, potential weaknesses are apparent which, if not corrected, could cause future problems. Loans in this classification warrant more than the ordinary amount of attention but have not yet reached the point of concern for loss. Loans in this category have deteriorated sufficiently that they would have difficulty in refinancing. Loans in this classification may show one or more of the following characteristics: inadequate loan documentation, deteriorating financial condition or control over collateral, economic or market conditions which may adversely impact the borrower in the future, unreliable or insufficient credit or collateral information, adverse trends in operations that are not yet jeopardizing repayment, or adverse trends in secondary repayment sources.

	•		Risk Code 6 — Substandard: Loans in this grade are no longer adequately protected due to declining net worth of the borrower, lack of earning capacity, or insufficient collateral. The possibility for loss of some portion of the loan principal cannot be ruled out. Loans in this grade exhibit well-defined weaknesses that bring normal repayment into doubt. Some of these weaknesses may include: unprofitable or poor earnings trends of the borrower or property, declining liquidity, excessive debt, significant unfavorable industry comparisons, secondary repayment sources are not available, or there is a possibility of a protracted work-out.

	•		Risk Code 7 — Doubtful: Loans in this grade exhibit the same weaknesses as those classified Substandard, but the traits are more pronounced. Collection in full is improbable, however the extent of the loss may be indeterminable due to pending factors which may yet occur that could salvage the loan, such as possible pledge of additional collateral, sale of assets, merger, acquisition or refinancing. Borrowers in this grade may be on the verge of insolvency or bankruptcy, and stringent action is required on the part of the loan officer.

	•		Risk Code 8 — Loss: Loans in this grade are those that are largely non-collectible or those in which ultimate recovery is too distant in the future to warrant continuance as a bankable asset. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer charging the loan off even though recovery may be affected in the future.

A risk rating is assigned for each loan at origination. The risk ratings for commercial, real estate construction, and real estate term loans may change throughout the life of the loan as a multitude of risk factors change. The risk rating for consumer loans may change as loans become delinquent. Delinquent loans are those that are thirty days or more past due.

The loan portfolio, segmented by risk class at June 30, 2011, is shown below:


							Home equity
			Real estate				lines and
	Commercial		construction		Real estate term		other consumer		Total
					(In Thousands)
Risk Code 1 - Excellent	$	725	$	—	$	—	$	704	$	1,429
Risk Code 2 - Good		75,285		—		58,182		908		134,375
Risk Code 3 - Satisfactory		131,788		33,918		240,814		37,698		444,218
Risk Code 4 - Watch		8,842		3,431		1,285		2,193		15,751
Risk Code 5 - Special Mention		10,834		—		3,260		496		14,590
Risk Code 6 - Substandard		4,822		10,290		10,552		459		26,123
Risk Code 7 - Doubtful		469		—		—		—		469

Subtotal	$	232,765	$	47,639	$	314,093	$	42,458	$	636,955
Less: Unearned origination fees, net of origination costs										(2,825	)

									$	634,130

Loans are carried at their principal amount outstanding, net of unamortized fees and direct loan origination costs. Interest income on loans is accrued and recognized on the principal amount outstanding except for loans in a nonaccrual status. All classes of loans are placed on nonaccrual when management believes doubt exists as to the collectability of the interest or principal. Cash payments received on nonaccrual loans are directly applied to the principal balance. Generally, a loan may be returned to accrual status when the delinquent principal and interest are brought current in accordance with the terms of the loan agreement and certain ongoing performance criteria have been met.

Nonaccrual loans totaled $9.6 million, $11.4 million and $14.4 million at June 30, 2011, December 31, 2010, and June 30, 2010, respectively. Nonaccrual loans at June 30, 2011, by major loan type, are presented below:


	(In Thousands)
\|
Commercial	$	4,218
Real estate construction		2,033
Real estate term		3,094
Home equity lines and other consumer		286

Total	$	9,631

Past due loans and nonaccrual loans at June 30, 2011 are presented below by loan class:


	30-59
	DaysPast		60-89 Days		Greater Than				Total Past				Total
	Due Still		Past Due Still		90 Days Still				Due and				Financing
	Accruing		Accruing		Accruing		Nonaccrual		Nonaccrual		Total Current		Receivables
					(In Thousands)
Risk Code 1 - Excellent	$	—	$	—	$	—	$	—	$	—	$	1,429	$	1,429
Risk Code 2 - Good		—		—		—		—		—		134,375		134,375
Risk Code 3 - Satisfactory		—		—		—		—		—		444,218		444,218
Risk Code 4 - Watch		99		22		—		—		121		15,630		15,751
Risk Code 5 - Special Mention		240		443		225		—		908		13,682		14,590
Risk Code 6 - Substandard		1,247		—		—		9,163		10,410		15,713		26,123
Risk Code 7 - Doubtful		—		—		—		468		468		1		469

Subtotal	$	1,586	$	465	$	225	$	9,631	$	11,907	$	625,048	$	636,955
Less: Unearned origination fees, net of origination costs														(2,825	)

													$	634,130

The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate, except that if the loan is collateral dependent, the impairment is measured by using the fair value of the loan's collateral. Nonperforming loans greater than $50,000 are individually evaluated for impairment based upon the borrower's overall financial condition, resources, and payment record, and the prospects for support from any financially responsible guarantors.

At June 30, 2011, December 31, 2010 and June 30, 2010, the recorded investment in loans that are considered to be impaired was $12.7 million, $18.3 million, and $25.1 million, respectively. The following table presents information about impaired loans as of June 30, 2011:


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In Thousands)
With no related allowance recorded
Commercial	$	3,879	$	4,477	$	—	$	4,019	$	36
Real estate construction		1,381		1,460		—		1,407		—
Real estate term		4,688		4,778		—		4,718		51
Home equity lines and other consumer		209		209		—		163		2

	$	10,157	$	10,924	$	—	$	10,307	$	89
With an allowance recorded
Commercial	$	964	$	964	$	513	$	1,153	$	—
Real estate construction		1,568		1,613		183		1,573		—
Real estate term		—		—		—		—		—
Home equity lines and other consumer		—		—		—		—		—

Total	$	2,532	$	2,577	$	696	$	2,726	$	—

Commercial	$	4,843	$	5,441	$	513	$	5,172	$	36
Real estate construction		2,949		3,073		183		2,980		—
Real estate term		4,688		4,778		—		4,718		51
Home equity lines and other consumer		209		209		—		163		2

	$	12,689	$	13,501	$	696	$	13,033	$	89

The unpaid principle balance included in the table above represents the recorded investment at June 30, 2011 and amounts charged off for book purposes.

Loans held for sale: The Company has purchased residential loans from our mortgage affiliate, Residential Mortgage Holding Company LLC ("RML"), from time to time since 1998. The Company then sells these loans in the secondary market. During 2009, the Company renewed its agreement with RML in anticipation of higher than normal refinance activity in the Anchorage market. The Company did not purchase or sell any loans in the second quarter of 2011. The Company sold $5.6 million in loans in the six-month period ending June 30, 2011 and did not purchase any loans in the six-month period ending June 30, 2011. The Company purchased $8.2 million and did not sell any loans in the six-month period ending June 30, 2010.