NOTE 6 - Loans

The composition of the loan portfolio as of the periods indicated is as follows:



		December 31, 2012				December 31, 2011
	Dollar		Percent		Dollar		Percent
(In Thousands)	Amount		of Total		Amount		of Total
Commercial	$	273,432	38.8	%	$	252,689	39.3	%
Real estate construction one-to-four family		32,573	4.6	%		21,859	3.4	%
Real estate construction other		21,061	3.0	%		18,323	2.8	%
Real estate term owner occupied		78,107	11.1	%		81,481	12.6	%
Real estate term non-owner occupied		234,643	33.3	%		195,454	30.3	%
Real estate term other		31,809	4.5	%		38,925	6.0	%
Consumer secured by 1st deeds of trust		17,714	2.5	%		20,212	3.1	%
Consumer other		18,305	2.6	%		19,622	3.0	%
Subtotal	$	707,644			$	648,565
Less: Unearned origination fee,
net of origination costs		(3,431)	(0.4)	%		(3,003)	(0.5)	%
Total loans	$	704,213			$	645,562

The Company’s primary market areas are Anchorage, the Matanuska-Susitna Valley, and Fairbanks, Alaska, where the majority of its lending has been with Alaska businesses and individuals. At December 31, 2012, approximately 69% and 31% of the Company’s loans are secured by real estate, or for general commercial uses, including professional, retail, and small businesses, respectively. Substantially all of these loans are collateralized and repayment is expected from the borrowers’ cash flow or, secondarily, the collateral. The Company’s exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is proved to be of no value.

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. As of December 31, 2012, the Company utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. A description of the general characteristics of the AQR risk classifications are as follows:

Pass grade loans, – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The company has competent management with an acceptable track record. The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses.

Special Mention – 7: A "special mention" credit has weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of either the repayment prospects for the asset or the Bank's credit position at some future date. Special mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Loans are currently protected, but are weak due to negative trends in the balance sheet and income statement. Current cash flow may be insufficient to meet debt service, with prospects that the condition may not be temporary. Profitability and key balance sheet ratios are below peers. There is a lack of effective control over collateral or there are documentation deficiencies as well as a potential risk of payment default. Collateral coverage is minimal in gross dollars or due to quality issues. Financial information may be inadequate to show the recent condition of borrower. The loan would not be approved as a new credit, and new loans would not be granted. Management may not be adequately qualified or may have very limited prior experience with similar activities or markets. The ability of management to cope with current conditions is questionable. Internal conflict and turnover in key positions may be present. Succession is unclear. The borrower's asset quality is below average. The capital base may be insufficient to cover capital losses. Leverage is above average or increasing. The industry outlook is generally negative but there are reasonable expectations of a turnaround within 12-18 months. The firm may be new, resulting in competitive deficiencies in comparison to the older, more established firms in the industry. Over-capacity may be evident in the industry. Collateral and guarantor strength are comparable to Management Attention - 6, but agings and certifications of accounts receivable and inventory are required and are not being provided on a regular basis.

Substandard – 8: A "substandard" credit is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans have well-defined weaknesses where a payment default and/or a loss are possible, but not yet probable. Cash flow is insufficient to service debt, with prospects that the condition is permanent. Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower, and there is a likelihood that collateral will have to be liquidated and/or the guarantor called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage. Loan(s) may have been restructured at less than market terms or have been partially charged off. If deficiencies are not corrected quickly, there is a probability of loss and the borrower’s ability to operate as a going concern may be deemed questionable/is questionable. Management has no prior experience with similar activities, demonstrating inability to realistically address problems and meet commitments. The borrower’s asset quality is poor. The capital base is weak and insufficient to absorb continuing losses, and leverage is significantly above peers. Liquidity is poor with significant reliance on short-term borrowing to support trade debt. Key balance sheet ratios are substantially inferior to industry norms. The industry is currently trending downward or demonstrating recovery from an adverse cycle. The outlook is generally negative at this time. Timing of recovery is unclear, but expectations are that market conditions will improve within 18-24 months. The borrower has substantial competitive deficiencies when compared to other firms, such as excess capacity and over-supply, resulting in frequent and significant concessions and discounting. Business failures are prevalent. Collateral coverage is marginal or non-existent. Collateral may be located outside the borrower’s market area. There are no agings or certifications of accounts receivable and inventory being received from the borrower, and collateral has doubtful marketability/convertibility. If guaranteed, the guarantor has limited outside worth and is highly leveraged with a poor credit report, which may reflect liens, collection problems, or lawsuits.

Doubtful – 9: An asset classified "doubtful" has all the weaknesses inherent in one that is classified "substandard - 8" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. The loan has substandard characteristics, and available information suggests that it is unlikely that the loan will be repaid in its entirety. Cash flow is insufficient to service debt. The company has had a series of substantial losses. If the current material adverse trends continue, it is unlikely the borrower will have the ability to meet the terms of the loan agreement. It may be difficult to predict the exact amount of loss, but the probability of some loss is greater than 50%. Loans are to be placed on non-accrual status when any portion is classified as doubtful. Non-accrual loans would not be classified "doubtful" as long as the collateral appears adequate to retire the outstanding balance. Management is clearly unable to address problems and meet commitments, and there is little expectation either of improvement or for sustaining the relationship with current management. The company is highly illiquid with excessive leverage. Key balance sheet ratios are at unacceptable levels, and downturn is severe. Timing of recovery is undeterminable. The company is unable to compete; collateral and guarantees provide limited support.

Loss – 10: An asset classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future. The loan has doubtful characteristics, but the loan will definitely not be repaid in full. Debt service coverage clearly reflects the company's inability to service debt. The borrower cannot generate sufficient cash flow to cover fixed charges. All near-term and long-term trends concerning cash flow and earnings are negative. The damage to the financial condition of the company cannot be reversed at this point in time. Collateral and guarantees provide no support.

The loan portfolio segmented by risk class at December 31, 2012 and 2011, respectively, are shown below:



(In Thousands)	Commercial		Real estate construction one-to-four family		Real estate construction other		Real estate term owner occupied		Real estate term non-owner occupied		Real estate term other		Consumer secured by 1st deeds of trust		Consumer other		Total

December 31, 2012
AQR Pass	$	265,562	$	28,780	$	21,061	$	73,985	$	230,010	$	28,304	$	16,911	$	17,817	$	682,430
AQR Special Mention		6,064		1,282		-		2,522		2,546		126		620		238		13,398
AQR Substandard		1,597		2,511		-		1,600		2,087		3,379		183		250		11,607
AQR Doubtful		189		-		-		-		-		-		-		-		189
AQR Loss		20		-		-		-		-		-		-		-		20
Subtotal	$	273,432	$	32,573	$	21,061	$	78,107	$	234,643	$	31,809	$	17,714	$	18,305	$	707,644
Less: Unearned origination fees, net of origination costs																		(3,431)
																	$	704,213

December 31, 2011
AQR Pass	$	242,491	$	21,859	$	12,071	$	79,084	$	192,533	$	35,667	$	19,533	$	18,200	$	621,438
AQR Special Mention		6,690		-		3,897		1,407		2,288		226		232		465		15,205
AQR Substandard		1,354		-		2,355		990		608		2,878		72		794		9,051
AQR Doubtful		1,612		-		-		-		25		154		375		163		2,329
AQR Loss		542		-		-		-		-		-		-		-		542
Subtotal	$	252,689	$	21,859	$	18,323	$	81,481	$	195,454	$	38,925	$	20,212	$	19,622	$	648,565
Less: Unearned origination fees, net of origination costs																		(3,003)
																	$	645,562

Loans are carried at their principal amount outstanding, net of charge-offs, unamortized fees and direct loan origination costs. Loan balances are charged to the Allowance when management believes that collection of principal is unlikely. 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 and considered impaired 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 is brought current in accordance with the terms of the loan agreement. Additionally, certain ongoing performance criteria, which generally includes a performance period of six months, must be met in order for a loan to be returned to accrual status. Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms.

Nonaccrual loans totaled $4.5 million and $7.4 million December 31, 2012 and December 31, 2011, respectively. Interest income which would have been earned on nonaccrual loans for 2012, 2011, and 2010 amounted to $108,000, $464,000 and $1.2 million, respectively. Nonaccrual loans at the periods indicated, by segment are presented below:



(In Thousands)	December 31, 2012		December 31, 2011
Commercial	$	1,214	$	3,360
Real estate construction one-to-four family		1,264		-
Real estate construction other		-		2,355
Real estate term owner occupied		-		924
Real estate term non-owner occupied		185		229
Real estate term other		1,451		324
Consumer secured by 1st deeds of trust		183		-
Consumer other		234		169
Total	$	4,531	$	7,361

There were no past due loans greater than 90 days and still accruing interest at December 31, 2012 and 2011, respectively. Past due loans and nonaccrual loans at the periods indicated are presented below by loan class:



(In Thousands)	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Still Accruing		Nonaccrual		Total Past Due		Current		Total

December 31, 2012
AQR Pass	$	401	$	-	$	-	$	-	$	401	$	682,029	$	682,430
AQR Special Mention		534		-		-		596		1,130		12,268		13,398
AQR Substandard		-		-		-		3,726		3,726		7,881		11,607
AQR Doubtful		-		-		-		189		189		-		189
AQR Loss		-		-		-		20		20		-		20
Subtotal	$	935	$	-	$	-	$	4,531	$	5,466	$	702,178	$	707,644
Less: Unearned origination fees, net of origination costs														(3,431)
													$	704,213

December 31, 2011
AQR Pass	$	473	$	-	$	-	$	419	$	892	$	620,546	$	621,438
AQR Special Mention		-		21		-		1,016		1,037		14,168		15,205
AQR Substandard		-		170		-		3,750		3,920		5,131		9,051
AQR Doubtful		2		-		-		1,699		1,701		628		2,329
AQR Loss		-		-		-		477		477		65		542
Subtotal	$	475	$	191	$	-	$	7,361	$	8,027	$	640,538	$	648,565
Less: Unearned origination fees, net of origination costs														(3,003)
													$	645,562

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 December 31, 2012, 2011, and 2010 the recorded investment in loans that are considered to be impaired was $13.1 million, $9.5 million, and $18.3million, respectively. The following table presents information about impaired loans by class for the years ended December 31, 2012 and 2011:



(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2012
With no related allowance recorded
Commercial - AQR pass	$	53	$	53	$	-	$	190	$	10
Commercial - AQR special mention		332		332		-		328		26
Commercial - AQR substandard		981		1,064		-		1,284		32
Real estate construction one-to-four family - AQR special mention		470		470		-		348		-
Real estate construction other - AQR pass		2,748		2,748		-		2,861		-
Real estate term owner occupied- AQR special mention		1,083		1,083		-		1,086		83
Real estate term non-owner occupied- AQR special mention		555		555		-		581		69
Real estate term non-owner occupied- AQR substandard		1,705		1,705		-		1,785		141
Real estate term other - AQR special mention		126		205		-		148		-
Real estate term other - AQR substandard		3,379		3,659		-		4,072		144
Consumer secured by 1st deeds of trust - AQR pass		93		93		-		95		5
Consumer other - AQR substandard		158		240		-		199		-
	$	11,683	$	12,207	$	-	$	12,977	$	510



With an allowance recorded
Commercial - AQR substandard	$	427	$	427	$	284	$	360	$	-
Commercial - AQR doubtful		189		189		160		206		-
Real estate construction one-to-four family - AQR doubtful		794		794		215		900		-
	$	1,410	$	1,410	$	659	$	1,466	$	-



Total
Commercial - AQR pass	$	53	$	53	$	-	$	190	$	10
Commercial - AQR special mention		332		332		-		328		26
Commercial - AQR substandard		1,408		1,491		284		1,644		32
Commercial - AQR doubtful		189		189		160		206		-
Real estate construction one-to-four family - AQR special mention		470		470		-		348		-
Real estate construction one-to-four family - AQR doubtful		794		794		215		900		-
Real estate construction other - AQR pass		2,748		2,748		-		2,861		-
Real estate term owner-occupied - AQR special mention		1,083		1,083		-		1,086		83
Real estate term non-owner occupied - AQR special mention		555		555		-		581		69
Real estate term non-owner occupied - AQR substandard		1,705		1,705		-		1,785		141
Real estate term other - AQR special mention		126		205		-		148		-
Real estate term other - AQR substandard		3,379		3,659		-		4,072		144
Consumer secured by 1st deeds of trust - AQR pass		93		93		-		95		5
Consumer other - AQR substandard		158		240		-		199		-
	$	13,093	$	13,617	$	659	$	14,443	$	510



(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2011
With no related allowance recorded
Commercial - AQR pass	$	327	$	327	$	-	$	430	$	23
Commercial - AQR special mention		140		140		-		153		-
Commercial - AQR substandard		908		908		-		1,006		-
Commercial - AQR doubtful		1,118		1,762		-		1,221		5
Real estate construction other - AQR substandard		1,349		1,527		-		1,463		-
Real estate term non-owner occupied - AQR pass		1,660		1,660		-		1,513		93
Real estate term non-owner occupied - AQR substandard		479		479		-		499		-
Real estate term other - AQR special mention		170		248		-		193		-
Real estate term other - AQR substandard		162		162		-		154		9
Real estate term other - AQR doubtful		154		244		-		205		-
Consumer secured by 1st deeds of trust - AQR pass		97		97		-		49		5
Consumer other - AQR doubtful		52		52		-		53		-
	$	6,616	$	7,606	$	-	$	6,939	$	135



With an allowance recorded
Commercial - AQR pass	$	185	$	185	$	19	$	195	$	-
Commercial - AQR special mention		258		258		20		258		-
Commercial - AQR substandard		68		68		5		234		-
Commercial - AQR doubtful		223		223		212		233		-
Commercial - AQR loss		446		446		364		474		-
Real estate construction other - AQR substandard		1,006		1,006		494		1,024		-
Real estate term non-owner occupied - AQR pass		204		204		5		215		-
Real estate term non-owner occupied - AQR special mention		446		446		62		447		-
	$	2,836	$	2,836	$	1,181	$	3,080	$	-



Total
Commercial - AQR pass	$	512	$	512	$	19	$	625	$	23
Commercial - AQR special mention		398		398		20		411		-
Commercial - AQR substandard		976		976		5		1,240		-
Commercial - AQR doubtful		1,341		1,985		212		1,454		5
Commercial - AQR loss		446		446		364		474		-
Real estate construction other - AQR substandard		2,355		2,533		494		2,487		-
Real estate term non-owner occupied - AQR pass		1,864		1,864		5		1,728		93
Real estate term non-owner occupied - AQR special mention		446		446		62		447		-
Real estate term non-owner occupied - AQR substandard		479		479		-		499		-
Real estate term other - AQR special mention		170		248		-		193		-
Real estate term other - AQR substandard		162		162		-		154		9
Real estate term other - AQR doubtful		154		244		-		205		-
Consumer secured by 1st deeds of trust - AQR pass		97		97		-		49		5
Consumer other - AQR doubtful		52		52		-		53		-
	$	9,452	$	10,442	$	1,181	$	10,019	$	135

The unpaid principal balance included in the table above represents the recorded investment at the dates indicated, plus amounts charged off for book purposes.

Loans classified as troubled debt restructurings (“TDR”) totaled $12.1 million and $4.5 million at December 31, 2012 and December 31, 2011, respectively. A troubled debt restructuring is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind. The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Payment Modification: A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time is included in this category.

Combination Modification: Any other type of modification, including the use of multiple categories above.

AQR pass graded loans included above in the impaired loan data are loans classified as TDRs. By definition, TDRs are considered impaired loans. All of the Company’s TDRs are included in impaired loans.

The following table presents newly restructured loans that occurred during 2012:



	Accrual		Nonaccrual		Total
(In Thousands)	Status		Status		Modifications
New Troubled Debt Restructurings
Commercial - AQR special mention	$	147	$	-	$	147
Commercial - AQR substandard		176		105		281
Real estate construction one-to-four family - AQR special mention		-		470		470
Real estate construction one-to-four family - AQR substandard		-		794		794
Real estate construction other - AQR pass		2,748		-		2,748
Real estate owner occupied - AQR special mention		559		-		559
Real estate term non-owner occupied - AQR special mention		555		-		555
Real estate term non-owner occupied - AQR substandard		-		171		171
Real estate term other - AQR substandard		1,896		1,325		3,221
Subtotal	$	6,081	$	2,865	$	8,946

Existing Troubled Debt Restructurings		2,546		628		3,174
Total	$	8,627	$	3,493	$	12,120

The following table presents newly restructured loans that occurred during 2012 by concession (terms modified):



			December 31, 2012
	Number of	Rate		Term		Payment		Combination		Total
(In Thousands)	Contracts	Modification		Modification		Modification		Modification		Modifications
Pre-Modification Outstanding Recorded Investment:
Commercial - AQR special mention	1	$	-	$	-	$	147	$	-	$	147
Commercial - AQR substandard	3		-		293		-		-		293
Real estate construction one-to-four family -
AQR special mention	1		470		-		-		-		470
Real estate construction one-to-four family -
AQR substandard	1		-		1,015		-		-		1,015
Real estate construction other - AQR pass	1		-		2,827		-		-		2,827
Real estate term owner occupied - AQR special mention	5		-		-		569		-		569
Real estate term non-owner occupied -
AQR special mention	2		-		-		-		579		579
Real estate term non-owner occupied - AQR substandard	1		-		195		-		-		195
Real estate term other - AQR substandard	3		-		-		2,589		1,886		4,475
Total	18	$	470	$	4,330	$	3,305	$	2,465	$	10,570

Post-Modification Outstanding Recorded Investment:
Commercial - AQR special mention	1	$	-	$	-	$	147	$	-	$	147
Commercial - AQR substandard	3		-		281		-		-		281
Real estate construction one-to-four family -
AQR special mention	1		470		-		-		-		470
Real estate construction one-to-four family -
AQR substandard	1		-		794		-		-		794
Real estate construction other - AQR pass	1		-		2,748		-		-		2,748
Real estate term owner occupied - AQR special mention	5		-		-		559		-		559
Real estate term non-owner occupied -
AQR special mention	2		-		-		-		555		555
Real estate term non-owner occupied - AQR substandard	1		-		171		-		-		171
Real estate term other - AQR substandard	3		-		-		1,326		1,895		3,221
Total	18	$	470	$	3,994	$	2,032	$	2,450	$	8,946

The following table presents TDRs that have defaulted in 2012:



		December 31, 2012		December 31, 2011
	Number	Recorded		Recorded
(In Thousands)	of Contracts	Investment		Investment
Troubled Debt Restructurings that Subsequently Defaulted:
Commercial - AQR substandard	2	$	300	$	-
Real estate construction one-to-four family - AQR substandard	1		794		-
Real estate term non-owner occupied - AQR substandard	1		846		-
Real estate term other - AQR substandard	1		1,044		-
Consumer secured by 1st deeds of trust - AQR pass	1		93		-
Total	6	$	3,077	$	-

At December 31, 2012, $2.2 million of these restructured loans are classified as nonaccrual loans. The remaining $923,000 in TDRs that defaulted in 2012 are not past due and are accruing interest at December 31, 2012. The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in troubled debt restructurings. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the Allowance. There were two charge offs totaling $280,000 in December 31, 2012 on loans that were later classified as TDRs in the real estate term category. Five TDRs with a total recorded investment of $1.4 million had a specific impairment amount totaling $659,000 at December 31, 2012.

At December 31, 2012 and 2011, there were no loans pledged as collateral to secure public deposits.

At December 31, 2012 and 2011, the Company serviced $89.0 million and $83.7 million of loans, respectively, which had been sold to various investors without recourse. At December 31, 2012 and 2011, the Company held $648,000 and $662,000, respectively, in trust for these loans for the payment of such items as taxes, insurance, and maintenance costs.

Certain directors, and companies of which directors are principal owners, have loans and other transactions such as architectural fees with the Company. Such transactions are made on substantially the same terms, including interest rates and collateral required, as those prevailing for similar transactions of unrelated parties. An analysis of the loan transactions follows:



(In Thousands)	2012		2011
Balance, beginning of the year	$	402	$	692
Loans made		210		275
Repayments		239		565
Balance, end of year	$	373	$	402

The Company’s unfunded loan commitments to these directors or their related interests on December 31, 2012 and 2011, were $136,000 and $198,000, respectively.