NOTE 5 — Loans

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


December 31,	2011			2010
	(In Thousands)
Commercial	$	252,689		$	256,971
Real estate construction		40,182			62,620
Real estate term		315,860			312,128
Home equity lines and other consumer		39,834			43,264

Sub-total		648,565			674,983
Less: Unearned origination fees, net of origination costs		(3,003	)		(3,171	)

Total loans		645,562			671,812
Allowance for loan losses		(16,503	)		(14,406	)

Net Loans	$	629,059		$	657,406

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, 2011, approximately 68% and 32% 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.

Maturities of fixed and floating rate accrual loans, excluding loans held for resale, as of December 31, 2011 are as follows:


			Maturity
	Within 1 Year		1-5 Years		Over 5 Years		Total
	(In Thousands)
Commercial	$	115,986	$	74,064	$	59,279	$	249,329
Real estate construction		35,732		1,125		970		37,827
Real estate term		23,040		44,858		246,485		314,383
Home equity lines and other consumer		1,084		6,430		32,151		39,665

Total	$	175,842	$	126,477	$	338,885	$	641,204

Fixed interest rate	$	86,953	$	60,333	$	57,896	$	205,182
Floating interest rate		88,889		66,144		280,989		436,022

Total	$	175,842	$	126,477	$	338,885	$	641,204

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 may be 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 government 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 December 31, 2011 and 2010, respectively, are shown below:


December 31,	Commercial		Real estate construction		Real estate term		Home equity lines and other consumer		Total
	(In Thousands)
2011:
Risk Code 1 — Excellent		$540		$—		$—		$575		$1,115
Risk Code 2 — Good		65,315		—		55,617		849		121,781
Risk Code 3 — Satisfactory		164,767		29,063		247,330		35,914		477,074
Risk Code 4 — Watch		8,033		3,579		1,102		1,497		14,211
Risk Code 5 — Special Mention		9,671		—		3,339		364		13,374
Risk Code 6 — Substandard		3,694		7,540		8,026		635		19,895
Risk Code 7 — Doubtful		669		—		446		—		1,115

Subtotal		$252,689		$40,182		$315,860		$39,834		$648,565
Less: Unearned origination fees, net of origination costs										(3,003	)

										$645,562

2010:
Risk Code 1 — Excellent		$500		$—		$—		$852		$1,352
Risk Code 2 — Good		89,015		356		67,790		986		158,147
Risk Code 3 — Satisfactory		134,815		51,537		227,990		38,162		452,504
Risk Code 4 — Watch		5,147		174		2,107		2,137		9,565
Risk Code 5 — Special Mention		18,748		250		4,241		654		23,893
Risk Code 6 — Substandard		7,964		10,303		10,000		465		28,732
Risk Code 7 — Doubtful		782		—		—		8		790

Subtotal		$256,971		$62,620		$312,128		$43,264		$674,983
Less: Unearned origination fees, net of origination costs										(3,171	)

										$671,812

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 are brought current in accordance with the terms of the loan agreement and certain ongoing performance criteria have been met. Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms.

Nonaccrual loans totaled $7.4 million and $11.4 million at December 31, 2011, and 2010, respectively. Interest income which would have been earned on nonaccrual loans for 2011, 2010, and 2009 amounted to $464,000, $1.2 million, and $1.4 million, respectively. Nonaccrual loans, by major loan type, are presented below:


December 31,	2011		2010
	(In Thousands)
Commercial	$	3,360	$	5,207
Real estate construction		2,355		2,289
Real estate term		1,477		3,527
Home equity lines and other consumer		169		391

Total	$	7,361	$	11,414

There were no past due loans greater than 90 days and still accruing at December 31, 2011 and 2010, respectively. Past due loans at December 31, 2011 and 2010, respectively, are presented below:


December 31,	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Nonaccrual		Total Past Due		Current			Total Financing Receivables			Recorded Investment > 90 Days and Accruing
	(In Thousands)
2011:
Risk Code 1 — Excellent		$—		$—		$—		$—		$—		$1,115			$1,115			$—
Risk Code 2 — Good		—		—		—		—		—		121,781			121,781			—
Risk Code 3 — Satisfactory		—		—		—		—		—		477,074			477,074			—
Risk Code 4 — Watch		387		170		—		—		557		13,654			14,211			—
Risk Code 5 — Special Mention		86		—		—		170		256		13,118			13,374			—
Risk Code 6 — Substandard		—		21		—		6,076		6,097		13,798			19,895			—
Risk Code 7 — Doubtful		2		—		—		1,115		1,117		(2	)		1,115			—

Subtotal		$475		$191		$—		$7,361		$8,027		$640,538			$648,565			$—
Less: Unearned origination fees, net of origination costs															(3,003	)

															$645,562			$—

2010:
Risk Code 1 — Excellent		$—		$—		$—		$—		$—		$1,352			$1,352			$—
Risk Code 2 — Good		—		—		—		—		—		158,147			158,147			—
Risk Code 3 — Satisfactory		351		—		—		—		351		452,153			452,504			—
Risk Code 4 — Watch		103		500		—		—		603		8,962			9,565			—
Risk Code 5 — Special Mention		310		—		—		—		310		23,583			23,893			—
Risk Code 6 — Substandard		648		387		—		10,624		11,659		17,073			28,732			—
Risk Code 7 — Doubtful		—		—		—		790		790		—			790

Subtotal		$1,412		$887		$—		$11,414		$13,713		$661,270			$674,983			$—
Less: Unearned purchase discount
Less: Unearned origination fees, net of origination costs															(3,171	)

															$671,812			$—

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, 2011 and 2010, the recorded investment in loans that are evaluated for impairment and are considered to be impaired was $9.5 million and $18.3 million, respectively, (of which $7.1 million and $10.5 million, respectively, were on a nonaccrual basis). The following table presents information about impaired loans as of the dates indicated:


December 31,	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In Thousands)
2011:
With no related allowance recorded
Commercial — Risk Code 5 Special Mention		$327		$327		$—		$430		$23
Commercial — Risk Code 6 Substandard		2,166		2,810		—		2,380		5
Real estate construction — Risk Code 6 Substandard		1,349		1,527		—		1,463		—
Real estate term — Risk Code 5 Special Mention		170		248		—		193		—
Real estate term — Risk Code 6 Substandard		2,455		2,545		—		2,371		102
Consumer — Risk Code 5 Special Mention		97		97		—		49		5
Consumer — Risk Code 6 Substandard		52		52		—		53		—

		$6,616		$7,606		$—		$6,939		$135
With an allowance recorded
Commercial — Risk Code 6 Substandard		$511		$511		$44		$687		$—
Commercial — Risk Code 7 Doubtful		669		669		576		707		—
Real estate construction — Risk Code 6 Substandard		1,006		1,006		494		1,024		—
Real estate term — Risk Code 6 Substandard		204		204		5		215		—
Real estate term — Risk Code 7 Doubtful		446		446		62		447		—

		$2,836		$2,836		$1,181		$3,080		$—
Total

Commercial — Risk Code 5 Special Mention		$327		$327		$—		$430		$23
Commercial — Risk Code 6 Substandard		2,677		3,321		44		3,067		5
Commercial — Risk Code 7 Doubtful		669		669		576		707		—
Real estate construction — Risk Code 6 Substandard		2,355		2,533		494		2,487		—
Real estate term — Risk Code 5 Special Mention		170		248		—		193		—
Real estate term — Risk Code 6 Substandard		2,659		2,749		5		2,586		102
Real estate term — Risk Code 7 Doubtful		446		446		62		447		—
Consumer — Risk Code 5 Special Mention		97		97		—		49		5
Consumer — Risk Code 6 Substandard		52		52		—		53		—

		$9,452		$10,442		$1,181		$10,019		$135

2010:
With no related allowance recorded
Commercial — Risk Code 6 Substandard		$4,376		$6,497		$—		$5,204		$296
Commercial — Risk Code 7 Doubtful		239		239		—		369		—
Real estate construction — Risk Code 6 Substandard		5,719		5,798		—		6,344		12
Real estate term — Risk Code 6 Substandard		4,725		5,878		—		4,776		190
Consumer — Risk Code 6 Substandard		231		231		—		237		9

		$15,290		$18,643		$—		$16,930		$507
With an allowance recorded
Commercial — Risk Code 6 Substandard		$988		$988		$274		$975		$48
Real estate construction — Risk Code 6 Substandard		1,724		1,768		74		1,748		—
Real estate term — Risk Code 6 Substandard		256		256		36		263		9

		$2,968		$3,012		$384		$2,986		$57
Total

Commercial — Risk Code 6 Substandard		$5,364		$7,485		$274		$6,179		$344
Commercial — Risk Code 7 Doubtful		239		239		—		369		—
Real estate construction — Risk Code 6 Substandard		7,443		7,566		74		8,092		12
Real estate term — Risk Code 6 Substandard		4,981		6,134		36		5,039		199
Consumer — Risk Code 6 Substandard		231		231		—		237		9

		$18,258		$21,655		$384		$19,916		$564

The unpaid principle balances included in the table above represent the recorded investment at December 31, 2011 and 2010, respectively, plus amounts charged off for book purposes.

Loans classified as troubled debt restructurings totaled $4.5 million at December 31, 2011. There were no loans classified as troubled debt restructurings at December 31, 2010. 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 are included in this category.

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

The following table presents newly restructured loans that occurred during, 2011:


	Accrual Status		Nonaccrual Status		Total Modifications
	(In Thousands)
Troubled Debt Restructurings
Commercial risk code 5 — special mention	$	327	$	—	$	327
Commercial risk code 6 — substandard		58		894		952
Commercial risk code 7 — doubtful		—		668		668
Real estate term risk code 6 — substandard		1,823		632		2,455
Home equity lines and other consumer risk code 5 — special mention		97		—		97

Total	$	2,305	$	2,194	$	4,499

The following table presents newly restructured loans that occurred during 2011 by concession (terms modified):


	Number of Contracts		Rate Modification		Term Modification		Payment Modification		Combination Modification		Total Modifications
	(In Thousands)
Pre-Modification Outstanding Recorded Investment:
Commercial risk code 5 — special mention		1	$	—	$	510	$	—	$	—	$	510
Commercial risk code 6 — substandard		5		—		141		—		870		1,011
Commercial risk code 7 — doubtful		3		—		—		259		465		724
Real estate term risk code 6 — substandard		5		—		—		—		2,331		2,331
Home equity lines and other consumer risk code 5 — special mention		1		—		—		—		101		101

Total		15	$	—	$	651	$	259	$	3,767	$	4,677

Post-Modification Outstanding Recorded Investment:
Commercial risk code 5 — special mention		1	$	—	$	327	$	—	$	—	$	327
Commercial risk code 6 — substandard		5		—		140		—		812		952
Commercial risk code 7 — doubtful		3		—		—		222		446		668
Real estate term risk code 6 — substandard		5		—		—		—		2,455		2,455
Home equity lines and other consumer risk code 5 — special mention		1		—		—		—		97		97

Total		15	$	—	$	467	$	222	$	3,810	$	4,499

As of December 31, 2011, there were no troubled debt restructurings that have defaulted since the time of their modification. All troubled debt restructurings are performing according to their modified terms. The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in troubled debt restructurings. All troubled debt restructurings are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the Allowance for Loan Losses. There was one $90,000 charge off in 2011 on one real estate term loan that is now classified as a troubled debt restructuring. Four commercial troubled debt restructurings with a total recorded investment of $854,000 had a specific impairment amount totaling $595,000, respectively, at December 31, 2011.

At December 31, 2011 and 2010, there were no loans pledged as collateral to secure public deposits.

At December 31, 2011 and 2010, the Company serviced $83.7 million and $79.1 million of loans, respectively, which had been sold to various investors without recourse. At December 31, 2011 and 2010, the Company held $662,000 and $611,000, respectively, in trust for these loans for the payment of such items as taxes, insurance, and maintenance costs.

Loans held for sale: The Company has purchased residential loans from its 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. All loans purchased and sold in 2011 and 2010 were newly originated loans that did not affect nonperforming loans. The Company purchased $82.9 million and sold $60.7 million in residential loans during 2011 and recognized $11,000 in gains related to these transactions in 2011. The Company purchased $70.4 million and sold $64.9 million in residential loans during 2010 and recognized $23,000 in gains related to these transactions in 2010. There were $27.8 million and $5.6 million in loans held for sale as of December 31, 2011 and 2010, respectively.

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:


December 31,	2011		2010
	(In Thousands)
Balance, beginning of the year	$	692	$	974
Loans made		275		490
Repayments		565		772

Balance, end of year	$	402	$	692

The Company's unfunded loan commitments to these directors or their related interests on December 31, 2011 and 2010, were $198,000 and $194,000, respectively.