Alaska Pacific Bancshares (AKPB) 10-K/A 2009 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

        For the fiscal year ended December 31, 2009

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

        For the transition period from ______ to _________

Commission File Number:  0-26003

ALASKA PACIFIC BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Alaska	92-0167101
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2094 Jordan Avenue, Juneau, Alaska 99801 (Address of principal executive offices) (Zip code) Registrant’s telephone number, including area code: (907) 789-4844
Securities registered pursuant to Section 12(b) of the Exchange Act:  None
Securities registered pursuant to Section 12(g) of the Exchange Act:	Common Stock, par value $0.01 per share
	(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes [  ]  No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange

Act. Yes [  ]  No [X]

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES [ X  ]       NO  [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.  [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check One.

Large accelerated filer [  ]    Accelerated filer [  ]    Non-accelerated filer [  ]    Smaller reporting company [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]

As of March 1, 2010, there were 655,415 issued and 654,486 outstanding 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 closing price of the Common Stock on June 30, 2009, the aggregate value of the Common Stock outstanding held by nonaffiliates of the registrant was  $2.1

million (512,035 shares at $4.05 per share). For purposes of this calculation, shares of common stock held by each executive officer and director have been excluded.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Proxy Statement for the 2009 Annual Meeting of Stockholders are incorporated by reference in this Form 10-K in response to Part III.

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EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A amends our Annual Report on Form 10-K for the year ended December 31, 2009, initially filed with the Securities and Exchange Commission on March 30, 2010. (“Original Form 10-K”), is being filed to correct the auditor’s report provided by the Company’s independent registered public accounting firm and included in Item 8 of the Original Form 10-K.  The auditor’s report from the prior year-end was inadvertently included in the Original Form 10-K and has been corrected in this amendment.  No other changes to the Original Form 10-K have been made.

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

	Page No.
Report of Independent Registered Public Accounting Firm	64
Consolidated Balance Sheets as of December 31, 2009 and 2008	65
Consolidated Statements of Operations For the Years Ended
December 31, 2009 and 2008	66
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) For the
Years Ended December 31, 2009 and 2008	67
Consolidated Statements of Cash Flows For the Years Ended
December 31, 2009 and 2008	68
Notes to Consolidated Financial Statements	70

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[LETTERHEAD OF MOSS ADAMS LLP]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Alaska Pacific Bancshares, Inc. and Subsidiary

Juneau, Alaska

We have audited the accompanying consolidated balance sheets of Alaska Pacific Bancshares, Inc. and Subsidiary (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive income (loss), and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alaska Pacific Bancshares, Inc. and Subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with United States of America generally accepted accounting principles.

/s/Moss Adams LLP

Spokane, Washington

March 30, 2010

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Alaska Pacific Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

(dollars in thousands) December 31,	2009		2008
Assets
Cash and due from banks	$   6,273		$   6,344
Interest-earning deposits in banks	669		3,058
Total cash and cash equivalents	6,942		9,402
Investment securities available for sale, at fair value (amortized cost:     2009 - $2,536; 2008 - $3,233)	2,606		3,243
Federal Home Loan Bank stock, at cost	1,784		1,784
Loans held for sale	55		2,586
Loans	158,108		168,982
Less allowance for loan losses	(1,786	)	(2,688	)
Loans, net	156,322		166,294
Accrued interest receivable	698		822
Premises and equipment, net	2,816		3,122
Repossessed assets	2,598		408
Other assets	4,487		3,190
Total Assets	$178,308		$190,851

Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$  27,416		$  25,707
Interest-bearing demand	32,474		31,042
Money market	28,982		33,072
Savings	19,170		17,536
Certificates of deposit	40,175		54,818
Total deposits	148,217		162,175
Federal Home Loan Bank advances	9,834		10,320
Advance payments by borrowers for taxes and insurance	751		733
Accounts payable and accrued expenses	379		480
Accrued interest payable	307		449
Other liabilities	140		411
Total liabilities	159,628		174,568
Commitments and contingencies (Note 14)
Shareholders’ Equity:
Preferred stock ($0.01 par value; 1,000,000 shares authorized; Series A – Liquidation preference $1,000 per share, 4,781 and –0- shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively)	4,497		-
Common stock ($0.01 par value; 20,000,000 shares authorized; 655,415 shares issued; 654,486 shares outstanding at December 31, 2009 and at December 31, 2008)	7		7
Additional paid-in capital	6,446		6,121
Treasury stock	(11	)	(11	)
Retained earnings	7,699		10,161
Accumulated other comprehensive income	42		5
Total shareholders’ equity	18,680		16,283
Total Liabilities and Shareholders’ Equity	$178,308		$190,851
See notes to consolidated financial statements.

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Alaska Pacific Bancshares, Inc. and Subsidiary

Consolidated Statements of Operations

(in thousands, except per share) Year ended December 31,	2009		2008
Interest Income
Loans, including fees	$10,053		$11,838
Investment securities	126		195
Interest-earning deposits in banks	5		42
Total interest income	10,184		12,075
Interest Expense
Deposits	1,369		2,585
Federal Home Loan Bank advances	493		730
Total interest expense	1,862		3,315
Net Interest Income	8,322		8,760
Provision for loan losses	2,947		5,034
Net interest income after provision for loan losses	5,375		3,726
Noninterest Income
Mortgage servicing income	186		161
Service charges on deposit accounts	729		709
Other service charges and fees	257		165
Gain on sale of loans	712		251
Other noninterest income	-		56
Total noninterest income	1,884		1,342
Noninterest Expense
Compensation and benefits	4,696		4,871
Occupancy and equipment	1,393		1,537
Data processing	258		255
Professional and consulting fees	541		487
Marketing and public relations	268		317
Repossessed property, net	235		116
Loss on sale or impairment of repossessed assets	503		-
Other	1,538		1,208
Total noninterest expense	9,432		8,791
Loss before income tax	(2,173	)	(3,723	)
Expense (Benefit) for income tax	18		(1,405	)
Net Loss	$ (2,191	)	$ (2,318	)
Preferred stock dividend and discount accretion
Preferred stock dividend	$     216		$          -
Preferred stock discount accretion	55		-
Net loss available to common shareholders	$ (2,462	)	$ (2,318	)
Net loss per share:
Basic	$(3.76	)	$(3.54	)
Diluted	(3.76	)	(3.54	)
See notes to consolidated financial statements.

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Alaska Pacific Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Loss

(in thousands)	Preferred Stock	Common Stock	Additional Paid-In Capital		Treasury Stock		Unearned ESOP Shares	Retained Earnings		Accumulated Other Comprehensive Income (Loss)	Total Share-holders’ Equity
Balance, January 1, 2008	$-	$7	$6,067		$(30	)	$(41)	$12,675		$(9)	$18,669
Net loss								(2,318	)		(2,318	)
Other comprehensive income:
Change in net unrealized losses on     securities available for sale, net of     related income tax effect										14	14
Comprehensive loss											(2,304	)
Exercise of stock options			(4	)	19						15
Excess tax benefits from share-based payment arrangements			7								7
ESOP shares earned			25				41				66
Stock compensation expense			26								26
Cash dividends on common stock ($0.30 per share)								(196	)		(196	)
Balance, December 31, 2008	-	7	6,121		(11	)	-	10,161		5	16,283
Net loss								(2,191	)		(2,191	)
Other comprehensive income:
Change in net unrealized gains on     securities available for sale, net of     related income tax effect										37	37
Comprehensive loss											(2,154	)
Stock compensation expense			27								27
Issuance of preferred stock to U.S. Treasury	4,442										4,442
Issuance of common stock warrants to U.S.        Treasury			339								339
Accretion of preferred stock discount	55							(55	)
Preferred stock issuance costs			(41	)							(41	)
Cash dividends on preferred stock								(216	)		(216	)
Balance, December 31, 2009	$4,497	$7	$6,446		$(11	)	$-	$7,699		$42	$18,680

See notes to consolidated financial statements.

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Alaska Pacific Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(in thousands) Year ended December 31,	2009		2008
Operating Activities
Net loss	$(2,191	)	$(2,318	)
Adjustments to reconcile net loss to net cash provided by    operating activities:
Provision for loan losses	2,947		5,034
Provision for income tax benefit	905		-
Gain on sale of loans	(712	)	(251	)
Depreciation and amortization	335		462
Deferred income tax benefit	(421	)	(513	)
Amortization of fees, discounts, and premiums, net	(201	)	(326	)
ESOP expense	-		66
Stock compensation expense	27		26
Loans originated for sale	(43,260	)	(16,816	)
Proceeds from sale of loans originated for sale	46,503		17,401
Excess tax benefits from share-based payments arrangements	-		(7	)
Loss on sale or impairment of repossessed assets	503		-
Cash provided by (used in) changes in operating assets and liabilities:
Accrued interest receivable	124		156
Other assets	(1,804	)	(1,060	)
Advance payments by borrowers for taxes and insurance	18		2
Accrued interest payable	(142	)	(219	)
Accounts payable and accrued expenses	(101	)	(54	)
Other liabilities	(302	)	(19	)
Net cash provided by operating activities	2,228		1,564
Investing Activities
Maturities and principal repayments of investment securities     available for sale	687		681
Loan originations, net of principal repayments	3,728		(8,007	)
Purchase of premises and equipment	(29	)	(148	)
Proceeds from sale of repossessed assets	815		334
Net cash used in investing activities	(5,201	)	(7,140	)
Financing Activities
Cash dividends paid on preferred stock	(185	)	-
Cash dividends paid on common stock	-		(196	)
Proceeds from issuance of preferred stock and common stock warrants	4,781		-
Stock issuance costs paid	(41	)	-

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Net decrease in Federal Home Loan Bank advances	(486	)	(6,756	)
Net increase in demand and savings deposits	685		5,714
Net increase (decrease) in certificates of deposit	(14,643	)	7,094
Excess tax benefits from share-based payments arrangements	-		7
Proceeds from exercise of stock options	-		15
Net cash provided by (used in) financing activities	(9,889	)	5,878
Increase (decrease) in cash and cash equivalents	(2,460	)	302
Cash and cash equivalents at beginning of year	9,402		9,100
Cash and cash equivalents at end of year	$6,942		$9,402
Supplemental information:
Cash paid for interest	$ 2,004		$ 3,534
Cash paid for (received from) income taxes	(9	)	344
Loans repossessed and transferred to repossessed assets	3,508		742
Net change in unrealized gains and losses on securities available for sale, net of tax	37		14
See notes to consolidated financial statements.

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Alaska Pacific Bancshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

Note 1 – Summary of Significant Accounting Policies

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

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

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

Subsequent Events:  The Company has evaluated subsequent events and there were no additional events requiring disclosure.

Cash and Cash Equivalents:  Cash equivalents are any highly liquid investment with a remaining maturity of three months or less at the date of purchase. The Company has cash and cash equivalents on deposit with other banks and financial institutions in amounts that periodically exceed the federal insurance limit. The Company evaluates the credit quality of these banks and financial institutions to mitigate its credit risk.

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

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

Prior to the adoption of the recent accounting guidance on April 1, 2009, management considered in determining whether other-than-temporary impairment exits, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For equity securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period of which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.

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

Interest is accrued as earned unless management doubts the collectability of the loan or the unpaid interest. Interest accrual is generally discontinued and loans are transferred to nonaccrual status when they become 90 days past due or earlier if the loan is impaired and collection is considered doubtful. All previously accrued but uncollected interest is

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deducted from interest income upon transfer to nonaccrual status. Income from nonaccrual loans is recorded only when interest payments are received.

Loans or portions of loans are charged off against the allowance for loan losses when considered uncollectible. Prior to charging a loan off, a loss allowance may be recognized on impaired loans for an estimated probable loss.

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

Loans Held for Sale:  Loans held for sale consist primarily of residential mortgage loans and are individually valued at the lower of cost or market. Loans are recorded as sold when the loan documents are sent to the investor. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

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

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

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

Loans are deemed to be impaired when management determines that it is probable that all amounts due under the contractual terms of the loan agreements will not be collectible in accordance with the original loan agreement. All problem-graded loans are evaluated for impairment. Impairment is measured by comparing the fair value of the collateral or present value of future cash flows to the recorded investment in the loan. Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Mortgage Servicing Rights:  Mortgage servicing rights are stated at amortized cost. Cost is amortized in proportion to, and over the period of, future expected net servicing income. Mortgage servicing rights are assessed for impairment based on the fair value of those rights and any impairment is recognized through a valuation allowance. In assessing impairment, the mortgage servicing rights are stratified based on the nature and risk characteristics, including coupon rates, of the underlying loans which, at December 31, 2009 and 2008, consisted primarily of one- to four-family residential mortgage loans.

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

Long-lived assets are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, estimated future cash flows

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expected to result from the use of the asset and its eventual disposition are compared with the carrying value, and a direct writedown is recorded for the amount of impairment, if any.

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

Federal Home Loan Bank Stock:  The Bank’s investment in Federal Home Loan Bank of Seattle (“FHLB”) stock is carried at cost because there is no active market for the stock. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specified percentages of its outstanding mortgages, total assets or FHLB advances. The Bank’s minimum investment requirement was approximately $491,200 and $361,200 at December 31, 2009 and 2008, respectively. The Bank may request redemption at par value on any stock in excess of the amount the Bank is required to hold. Stock redemptions are granted at the discretion of the FHLB. This security is reported at par value, which represents the Company’s cost. Management reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock.

Management periodically evaluates FHLB stock for other-than-temporary or permanent impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB. As of December 31, 2009, management has concluded that our investment in FHLB stock is not impaired.

Advertising Expense:  Advertising costs are expensed as incurred. Advertising expense was $185,000 and $200,000 for the years ended December 31, 2009 and 2008, respectively.

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

Treasury Stock:  Treasury stock is accounted for on the basis of average cost, or $12.375 per share at December 31, 2009 and 2008.

Employee Stock Ownership Plan:  Compensation expense under the Company’s Employee Stock Ownership Plan (“ESOP”) is based upon the number of shares allocated to employees each year multiplied by the average share price for the year. Expense is reduced by the amount of dividends paid on unallocated shares.  In computing earnings per share, shares outstanding are reduced by shares held by the ESOP that have not yet been allocated to employees.

Stock Option Plan:  The Company accounts for its stock option plans in accordance with the provisions of FASB Accounting Standards Codification 718, Stock Compensation which establishes accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans and requires that the compensation cost relating to share-based payment transactions such as stock options be recognized in the Company’s financial statements over the period the options are earned by employees. The adoption of this standard using the modified prospective method, resulted in $27,000 and $26,000 of compensation expense for the years ended December 31, 2009 and 2008, respectively.

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Fair Value Measurements:  FASB Accounting Standards Codification 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. The standards require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 - Unadjusted quoted prices for identical instruments in active markets;

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and

Level 3 - Instruments whose significant value drivers are unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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

Statement of Cash Flows:  The statement of cash flows has been prepared using the “indirect” method for presenting cash flows from operating activities. For purposes of this statement, cash and cash equivalents include cash and due from banks and interest-bearing deposits with banks.

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

Recent Accounting Pronouncements:  Significant recent accounting pronouncements are described below.

On April 1, 2009, the FASB issued FSP FAS 141(R)-1 (codified in ASC 805), Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. FSP FAS 141(R)-1 addresses concerns about the application of Statement 141(R), Business Combinations, to assets and liabilities arising from contingencies in a business combination. Under the FSP, an acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, then the acquirer follows the recognition criteria in Statement 54 and Interpretation 145 to determine whether the contingency should be recognized as of the acquisition date or after it. Like Statement 141(R), the FSP is effective for business combinations whose acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. FSP FAS 141(R)-1 did not have a material impact on the Company’s financial condition or results of operations.

On April 9, 2009, the FASB issued FSP FAS 157-4 (codified in ASC 820-10), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. The FSP provides additional guidance for estimating fair value of an asset or liability in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also includes guidance on identifying circumstances that indicate a

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transaction is not orderly. The FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Company did not early adopt FSP 157-4 for the interim period ended March 31, 2009. The FSP did not have a material impact on the Company’s financial condition or results of operations.

On April 9, 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1 (codified in ASC 825-10-50), Interim Disclosures About Fair Value of Financial Instruments. The FSP requires disclosure about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company did not early adopt FSP 107-1 and APB 28-1 for the interim period ended March 31, 2009.  The FSP did not have a material impact on the Company’s financial condition or results of operations.

On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 (codified in ASC 320-10-35), Recognition and Presentation of Other-Than-Temporary Impairments. The FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 and 124-2 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company did not early adopt FSP 115-2 and 124-2 for the interim period ended March 31, 2009. The FSP did not have a material impact on the Company’s financial condition or results of operations.

On May 28, 2009, the FASB issued Statement No. 165, Subsequent Events (codified in ASC 855-10).  ASC 855-10 is intended to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Entities are required to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009. The Statement did not have a material impact on the Company’s financial condition or results of operations.

On June 12, 2009, the FASB issued Statement No. 166 (codified in Accounting Standards Update (“ASU”) 2009-16), Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140 (“SFAS 166”).  SFAS 166 amends the derecognition guidance in Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities (“QSPEs”). As a result, a transferor will need to evaluate all existing QSPEs to determine whether they must now be consolidated in accordance with Statement No. 167. SFAS 166 is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009.  The Statement is not expected to have a material impact on the Company’s financial condition or results of operations.

On June 12, 2009, the FASB issued Statement No. 167 (codified in ASU 2009-17), Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under Interpretation 46(R).  SFAS 167 is effective as of the beginning of the first fiscal year that begins after November 15, 2009. The Statement is not expected to have a material impact on the Company’s financial condition or results of operations.

On June 30, 2009, the FASB issued Statement No. 168 (codified in ASC 105), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162. Statement No. 162 identified the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with U.S. generally accepted accounting principles (“GAAP”). ASC 105 divides nongovernmental U.S. GAAP into the authoritative Codification and guidance that is nonauthoritative, doing away with the previous four-level hierarchy.  ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Statement did not have a material impact on the Company’s financial condition or results of operations.

On August 28, 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value.The Update provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value

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measurement of liabilities. ASU 2009-05 reaffirms that fair value measurement of a liability assumes a liability is transferred to a market participant as of the measurement date. The guidance in ASU 2009-05 is effective for the first reporting period beginning after issuance. For the Company, ASU 2009-05 was effective on October 1, 2009. ASU 2009-05 did not have a material impact on the Company’s financial condition or results of operations.

On September 30, 2009, the FASB issued ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent). The Update provides guidance on measuring the fair value of certain alternative investments in entities that calculate net asset value per share. The guidance applies to investments in which (1) the fair value of the investment is not readily determinable and (2) the investment is in an entity that has all of the attributes of an investment company that are specified in ASC 946-10-15-2 or is in an entity that lacks one or more of the attributes specified in ASC 946-10-15-2. The guidance in ASU 2009-12 is effective for the first reporting period ending after December 15, 2009.  For the Company, ASU 2009-12 was effective on October 1, 2009. ASU 2009-12 did not have a material impact on the Company’s financial condition or results of operations.

On January 21, 2010, the FASB issued ASU 2010-06, Improving Disclosures About Fair Value Measurements.The Update amends ASC 820, Fair Value Measurements and Disclosures, to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair values. The guidance in ASU 2010-06 is effective for the first reporting period beginning after December 15, 2009. ASU 2009-05 is not expected to not have a material impact on the Company’s financial condition or results of operations.

Note 2 – Cash and Cash Equivalents

The Company is required to maintain prescribed reserves with the Federal Reserve Bank in the form of cash.  Cash reserve requirements are computed by applying prescribed percentages to various types of deposits. The Company is required to maintain a $25,000 minimum average daily balance with the Federal Reserve Bank for purposes of settling financial transactions and charges for Federal Reserve Bank services. The Company is also required to maintain cash balances or deposits with the Federal Reserve Bank sufficient to meet its statutory reserve requirements. The average reserve requirement for the maintenance period, which included December 31, 2009 and 2008 was $1.3 million and $1.2 million, respectively.

Note 3 – Regulatory Capital Requirements and Restrictions

The Bank is restricted on the amount of dividends it may pay to the Company.  It is generally limited to the net income of the current fiscal year and that of the two previous fiscal years, less dividends already paid during those periods. Based on this calculation, at December 31, 2009, none of the Bank’s retained earnings were available for dividends to the Company. However, payment of dividends may be further restricted by the Bank’s regulatory agency if such payment would reduce the Bank’s capital ratios below required minimums or would otherwise be considered to adversely affect the safety and soundness of the institution.

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

Quantitative measures have been established by regulation to ensure capital adequacy and require the Bank to maintain minimum capital amounts and ratios (set forth in the following table). The Bank’s primary regulatory agency, the Office of Thrift Supervision (“OTS”), requires that the Bank maintain minimum amounts and ratios (as defined in

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the regulations) of tangible capital of 1.5%, core capital of 4%, and total risk-based capital of 8%. The Bank is also subject to PCA capital requirement regulations set forth by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC requires the Bank to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier I capital to risk-weighted assets.

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Following is a summary of the Bank’s capital ratios:

					Minimum Capital Required
(dollars in thousands)	Actual			For Capital Adequacy Purposes				To Be Categorized as “Well Capitalized” Under PCA Provisions
	Amount	Ratio	Amount			Ratio	Amount		Ratio
December 31, 2009:
Tangible capital (to total assets)	$17,237	9.70%	$  2,666			1.50%	N/A		N/A
Core capital (to total assets)	17,237	9.70	7,110			4.00	$  8,887		5.00%
Total risk-based capital (to risk weighted assets)	18,508	12.84	11,531			8.00	14,413		10.00
Tier I risk-based capital (to risk weighted assets)	17,237	11.96	N/A			N/A	8,648		6.00
December 31, 2008:
Tangible capital (to total assets)	$16,053	8.43%	$  2,857			1.50%	N/A		N/A
Core capital (to total assets)	16,053	8.43	7,618			4.00	$  9,522		5.00%
Total risk-based capital (to risk weighted assets)	17,724	11.58	12,241			8.00	15,302		10.00
Tier I risk-based capital (to risk weighted assets)	16,053	10.49	N/A			N/A	9,181		6.00

On January 7, 2009 the Office of Thrift Supervision (“OTS”) finalized a supervisory agreement (a memorandum of understanding or “MOU”) which was reviewed and approved by the Board of Directors of Alaska Pacific Bank on December 19, 2008.  The MOU specifically requires the Bank to submit a business plan that sets forth a plan for maintaining Tier 1 (Core) Leverage Ratio of 8% and a minimum Total Risk-Based Capital Ratio of 12%. As of December 31, 2009, the Bank’s Tier-1 (Core) Leverage Ratio was 9.70% (1.70% over the minimum required under the MOU) and its Risk-Based Capital Ratio was 12.84%, (0.84% over the minimum required under the MOU).

Note 4 – Investment Securities Available for Sale

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

(in thousands)	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
December 31, 2009:
Mortgage-backed securities:	$2,445	$81	$(12	)	$2,514
U.S. government agencies	91	1	-		92
Total	$2,536	$82	$(12	)	$2,606
December 31, 2008:
Mortgage-backed securities:	$3,134	$49	$(38	)	$3,145
U.S. government agencies	99	-	(1	)	98
Total	$3,233	$49	$(39	)	$3,243

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Impaired securities (those with unrealized losses) at December 31, 2009 are summarized as follows:

	Impaired less than 12 months		Impaired 12 months or more		Total
(in thousands)	Fair Value	Unrealized     Losses	Fair Value	Unrealized     Losses	Fair Value	Unrealized     Losses
Mortgage-backed     securities	$12	$(1)	$571	$(11)	$583	$(12)
U.S. government     agencies	-	-	-	-	-	-
Total	$12	$(1)	$571	$(11)	$583	$(12)

Impaired securities (those with unrealized losses) at December 31, 2008 are summarized as follows:

	Impaired less than 12 months		Impaired 12 months or more		Total
(in thousands)	Fair Value	Unrealized     Losses	Fair Value	Unrealized     Losses	Fair Value	Unrealized      Losses
Mortgage-backed     securities	$-	$-	$1,180	$(38)	$1,180	$(38)
U.S. agencies and     corporations	-	-	98	(1)	98	(1)
Total	$-	$-	$1,278	$(39)	$1,278	$(39)

Eight and thirteen securities with unrealized losses at December 31, 2009 and 2008, respectively, were mortgage-backed or other securities issued by the U.S. government and agencies; collectability of principal and interest is considered to be reasonably assured. The fair values of individual securities fluctuate significantly with interest rates and with market demand for securities with specific structures and characteristics. Management does not consider these unrealized losses to be other than temporary.

No securities were designated as held to maturity at December 31, 2009 or 2008.

All investment securities at December 31, 2009 have final contractual maturities of more than five years. Actual maturities may vary due to prepayment of the underlying loans.

At December 31, 2009 and 2008, investment securities with amortized cost of $2.5 million market value of $2.6 million and $3.2 million market value of $3.2 million, respectively, were pledged to secure public funds deposited with the Bank.

There were no sales of securities during 2009 or 2008. The Bank does not have a securities trading portfolio or securities held to maturity.

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Note 5 – Loans

Loans are summarized as follows:

(in thousands) December 31,	2009	2008
Real estate:
Permanent:
One- to four-family	$  33,787	$  38,875
Multifamily	1,736	2,575
Commercial nonresidential	64,453	56,019
Land	9,697	13,360
Construction:
One- to four-family	3,050	4,179
Commercial nonresidential	2,637	5,064
Commercial business	19,856	24,429
Consumer:
Home equity	16,522	18,661
Boat	4,287	4,060
Automobile	1,269	998
Other	814	762
Loans	$158,108	$168,982

Loans held for sale $55 $2,586

Loans are net of deferred loan fees and other discounts amounting to $567,000 and $701,000 at December 31, 2009 and 2008, respectively.

Loans include overdrawn balances of deposit accounts of $35,000 and $36,000 at December 31, 2009 and 2008, respectively.

Interest income from tax-exempt loans was $35,000 and $36,000 in 2009 and 2008, respectively.

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

Impaired loans are summarized as follows:

(in thousands) Year ended December 31,	2009	2008
Impaired loans at end of year	$5,342	$10,685
Impaired loans at end of year for which specific valuation allowances have been provided	1,922	10,685
Amount of allowances at end of year	514	875

(in thousands) Year ended December 31,	2009	2008
Average investment in impaired loans	$11,503	$8,892
Interest income recognized on impaired loans	151	313
Interest income recognized on a cash basis on impaired loans	151	313

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Included in impaired loans were certain loans that are troubled debt restructurings and classified as impaired. At December 31, 2009, the Company had $845,000 of loans that were modified in troubled debt restructurings and impaired. In addition to these amounts, the Company had troubled debt restructurings of $538,000 that were performing in accordance with their modified loan terms and were not classified as impaired.

Nonaccrual loans were $2.9 million and $6.1 million at December 31, 2009 and 2008, respectively. As of December 31, 2009 and 2008, approximately $789,000 and $665,000, respectively, of interest would have been recorded if these loans had been current according to their original terms and had been outstanding throughout the year. There were no loans greater than 90 days past due that were accruing interest at December 31, 2009 and 2008, respectively.

Mortgage Loan Servicing:  The Bank services residential and other real estate loans for the Alaska Housing Finance Corporation (“AHFC”), U.S. Government agencies, and institutional and private investors totaling $119.6 million and $101.3 million, as of December 31, 2009 and 2008, respectively. These loans are the assets of the investors and, accordingly, are not included in the accompanying balance sheets. Related servicing income, net of amortization of mortgage servicing rights, amounted to $186,000 and $161,000 for 2009 and 2008, respectively.

The amortized cost of mortgage servicing rights was $813,000 and $646,000 at December 31, 2009 and 2008, respectively. The amount of servicing assets recognized during 2009 was $276,000 and amortization was $109,000 for the year. The amount of servicing assets recognized during 2008 was $72,000 and amortization was $101,000 for the year. Management has determined that a valuation allowance for impairment was not required at December 31, 2009 or 2008.

Related Party Loans:  In the ordinary course of business, the Bank makes loans to executive officers and directors of the Bank and to their affiliates. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions. The aggregate dollar amount of these loans was $3.2 million at December 31, 2009. During the years ended December 31, 2009 and 2008, new loans of this type were $388,000 and $196,000, respectively, and repayments were $359,000 and $162,000, respectively.

Repossessed Assets:  The Company held repossessed assets of $2.6 million and $408,000 at December 31, 2009 and 2008, respectively. During 2009, the Company received $815,000 in proceeds from the sale of repossessed assets and recognized $503,000 net loss on sales. During 2008, the Company received $334,000 in proceeds from the sale of repossessed assets and did not recognize any net gain on sales. The Company also incurred $235,000 and $116,000 in operating expenses related to repossessed assets in 2009 and 2008, respectively.

Note 6 – Allowance for Loan Losses

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

(in thousands) Year ended December 31,	2009		2008
Balance at beginning of year	$2,688		$1,783
Provision for loan losses	2,947		5,034
Loans charged off	(3,875	)	(4,182	)
Recoveries	26		53
Balance at end of year	$1,786		$2,688

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Note 7 – Premises and Equipment

Following is a summary of premises and equipment:

(in thousands) December 31,	2009	2008
Land	$   424	$   424
Buildings	2,254	2,254
Leasehold improvements	3,670	3,667
Furniture, fixtures and equipment	3,021	2,998
	9,369	9,343
Less accumulated depreciation and amortization	(6,553)	(6,221)
	$2,816	$3,122

Depreciation and amortization expense for the years ended December 31, 2009 and 2008 amounted to $335,000 and $462,000, respectively.

Note 8 – Deposits

Certificates of deposit of $100,000 and more at December 31, 2009 and 2008 were $12.9 million and $23.7 million, respectively.

The scheduled maturities of certificates of deposit as of December 31, 2009, are as follows:

(in thousands) Year ending December 31,
	2010	$23,452
	2011	11,371
	2012	2,443
	2013	240
	2014 and thereafter	2,669
		$40,175

Interest expense on deposits consists of the following:

(in thousands) Year ended December 31,	2009	2008
Interest-bearing demand	$   54	$   93
Money market	218	545
Savings	47	64
Certificates of deposit	1,050	1,883
	$1,369	$2,585

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

Year ended December 31,	2009	2008
Interest-bearing demand	0.17%	0.32%
Money market	0.50	1.84
Savings	0.23	0.38
Certificates of deposit	2.36	3.51

Deposits from the Company’s executive officers, directors, and their related companies were $2.9 million and $2.2 at December 31, 2009 and 2008, respectively.

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Note 9 – Federal Home Loan Bank Advances

FHLB advances consist of the following:

(dollars in thousands) December 31,	2009	2008
Overnight advances, 0.64%	$4,800	$  -
Putable advance, maturing in 2009, putable earlier    at discretion of FHLB, 6.13%	-	5,000
Seven-year amortizing advance, final maturity in    2010, 3.62%	34	320
Four-year advance, maturing in 2010, 5.24%	1,500	1,500
Five-year advance, maturing in 2011, 5.26%	2,000	2,000
Seven-year advance, maturing in 2013, 5.30%	1,500	1,500
	$9,834	$10,320

FHLB advances at December 31, 2009 with final maturities of more than one year have scheduled maturities as follows:

(in thousands) Year ending December 31,
2010	$1,534
2011	2,000
2012	-
2013	1,500
Total	$5,034

The average balance of FHLB advances outstanding during 2009 and 2008 was $12.2 million and $14.6 million, respectively.  The maximum amount of advances outstanding at any month end during 2009 and 2008 was $13.4 million and $23.7 million, respectively.  Under a blanket pledge agreement, all funds on deposit at the FHLB, as well as all unencumbered qualifying loans and investment securities, are available to collateralize FHLB advances.

The Bank has available a line of credit with the FHLB generally equal to 25% of the Bank’s total assets, or approximately $44.6 million at December 31, 2009. The line is secured by a blanket pledge of the Company’s assets. At December 31, 2009, there was $9.8 million outstanding on the line of credit.

Note 10 – Stock-Based Compensation

Stock Option Plan:  In previous years, the Board of Directors, upon stockholder approval, approved two stock option plans (the “Plans”); one for key employees and one for directors of the Company.  The Incentive and Director Stock Option Plan permits the grant of stock options to authorized key employees for up to 65,574 shares of common stock plus (i) the number of shares repurchased by the Company in the open market or otherwise with an aggregate price no greater than the cash proceeds received by the Company from the exercise of options granted under the Plan; plus (ii) any shares surrendered to the Company in payment of the exercise price of options granted under the Plan. The Committee of the Plans shall determine the time or times at which an option may be exercised. Previous option awards generally vest based on five years of continuous service.  The term of each option award shall be no greater than 10 years in the case of an Incentive Stock Option or 15 years in the case of a Non-Qualified Stock Option. Option awards under the Plans shall not be less than 100% of the Market Value (as defined in the Plans) of a share on the date of grant of such option. Stock options granted are eligible for adjustment in the event that the outstanding common stock of the Company changes as a result of a stock dividend, stock split, or other changes to existing stock. The 2000 Stock Option Plan and the 2003 Stock Option Plan will terminate on July 2, 2010 and May 22, 2013, respectively.

In 2000, the Company’s shareholders approved the 2000 Stock Option Plan, providing for the granting of options for up to 65,542 shares. Options for 65,542 shares were granted in 2000, with an exercise price equal to the market price of the

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stock at the date of grant, or $9.75. Options on 3,400 shares were granted in 2003, replacing forfeitures, with an exercise price of $17.50.

In 2003, the Company’s shareholders approved the 2003 Stock Option Plan, providing for the granting of options for up to 32,000 shares. Options for 22,600 shares were granted in 2007, with an exercise price equal to the market price of the stock at the date of grant, or $25.50. Options become exercisable in five equal annual installments commencing one year after the date of grant, and unexercised options expire ten years after the date of grant.

The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

Following is a summary of the changes in stock options:

(in thousands) Year ended December 31,	2009		2008
	Number of Options	Weighted Average Exercise Price	Number of Options	Weighted Average Exercise Price
Stock options outstanding at    beginning of year	54,188	$16.08	57,665	$16.25
Granted	-	-	-	-
Exercised	-	-	(1,477)	$9.75
Forfeited	-	-	(2,000)	$25.50
Stock options outstanding at    end of year	54,188	$16.08	54,188	$16.08
Options exercisable at end of     year	45,288	$14.23	41,268	$13.13

There were no options exercised during the year ended December 31, 2009. Options exercised during the year ended December 31, 2008 had an aggregate intrinsic value of $17,000. Stock options outstanding at December 31, 2009 are summarized as follows:

Weighted- Average Exercise Price	Number Outstanding at End of Year	Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value	Exercisable
				Number of Shares	Aggregate Intrinsic Value
$  9.75	31,188	0.6	$ -	31,188	$ -
17.50   25.50	2,400 20,600	3.1 7.7	-   -	2,400 11,700	-   -
$16.08	54,188	3.4	$ -	45,288	$ -

ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated income statement based on their fair values. Compensation cost is recorded as if each vesting portion of the award is a separate award. The adoption of this standard, as of January 1, 2006, using the modified prospective method, resulted in $27,000 and $26,000 of compensation expense for the years ended December 31, 2009 and 2008, related to the unvested portion of options granted in prior years. Net of taxes for the years ended December 31, 2009 and 2008, respectively, this reduced net income by $11,000 and $10,000, respectively. The basic and diluted earnings per

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share basis effect in December 31, 2009 and 2008, was zero. There was $51,000 in unamortized stock-based compensation expense at December 31, 2009 with a weighted average expense period of 2.3 years.

ASC 718 requires the recognition of stock-based compensation for the number of awards that are expected to vest. Recognized stock compensation expense was not reduced by estimated forfeitures because management believes the future effect to be minimal. Estimated forfeitures will be continually evaluated in subsequent periods and may change based on new facts and circumstances.

Note 11 – Retirement Plans

The Bank has a salary deferral 401(k) plan. Employees who are at least 18 years of age and have completed three months of service are eligible to participate in the plan. Employees may contribute on a pretax basis a portion of their annual salary up to a maximum limit under the law. Beginning in 2006, the Bank matches 100% of employee contributions of up to 4% of compensation. For the years ended December 31, 2009 and 2008, the Bank contributed $111,000 and $109,000, respectively, to the plan, including administrative expenses.

The Company has an Employee Stock Ownership Plan (“ESOP”) that was established in connection with the mutual to stock conversion. Eight percent of the shares issued in the conversion, or 52,433 shares, were purchased by the ESOP in exchange for a note payable to the Company. The shares are allocated to employees over a ten-year period in proportion to the principal and interest paid on the note at the end of each year. All employees who have completed one year’s service automatically participate in the plan, and each year’s allocation is distributed in proportion to total compensation of employees. Employees are vested in the plan over a seven-year period. Dividends paid on allocated shares are credited to employee’s accounts, but dividends on unallocated shares are used to reduce the expense of the plan. At December 31, 2009 and 2008, 52,433 shares were allocated to employees. The Company’s expense for the plan, including administrative expenses, amounted to $13,000 and $81,000 for the years ended December 31, 2009 and 2008, respectively.

Note 12 – Operating Leases

The Bank leases certain of its premises and equipment under noncancelable operating leases with terms in excess of one year. Future minimum lease payments under these leases at December 31, 2009, are summarized as follows:

(in thousands) Year ending December 31,
	2010	$   479
	2011	449
	2012	449
	2013	377
	2014	271
	2015 and  thereafter	1,107
		$3,132

Rent expense was $498,000 and $501,000 for the years ended December 31, 2009 and 2008, respectively. Rental income on owned premises amounted to $19,000 and $21,000 for the years ended December 31, 2009 and 2008, respectively.

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Note 13 – Income Tax

The expense (benefit) for income tax consisted of the following:

(in thousands) Year ended December 31,	2009	2008
Current tax expense (benefit):
Federal	$(397)	$(758)
State	(70)	(134)
Total current	(467)	(892)
Deferred tax expense (benefit):
Federal	(357)	(436)
State	(63)	(77)
Total deferred	(420)	(513)
Increase in deferred tax valuation allowance	905
Expense (Benefit) for income tax	$18	$(1,405)

A reconciliation of taxes computed at federal statutory corporate tax rates (34% in 2009 and 2008) to tax expense, as shown in the accompanying statements of operations and changes in shareholders’ equity and comprehensive income (loss), is as follows:

(in thousands) Year ended December 31,	2009	2008
Income tax expense (benefit) at statutory rate	$(739)	$(1,266)
Income tax effect of:
State income tax	(134)	(223)
Tax-exempt interest	(12)	(14)
Increase in deferred tax valuation allowance	905	-
Other	(2)	98
Expense (Benefit) for income tax	$18	$(1,405)
Effective tax rate	(1%)	38%

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

(in thousands) December 31,	2009		2008
Deferred tax assets:
Bad debt reserves	$929		$1,227
Nonaccrual loan interest	308		252
Premises and equipment	128		-
Accrued vacation	68		68
Nondeductible REO write-down	21		-
Net operating loss carry-forward	524
Other	29		28
Gross deferred tax assets	2,007		1,575
Deferred tax liabilities:
Deferred loan fees, net	(48	)	(42	)
FHLB stock dividends	(610	)	(610	)
Prepaids	(94	)	-
Premises and equipment	-		(38	)
Other	-		(50	)
Gross deferred tax liabilities	(752	)	(740	)
Net deferred tax assets	1,255		835
Valuation allowance for deferred tax asset	(905	)	-
Net deferred tax assets after valuation allowance	$350		$835

In August 1996, the Small Business Job Protection Act of 1996 (“the Act”) was signed into law. Under the Act, the percentage of taxable income method of accounting for tax basis bad debts is no longer available effective for the years ending after December 31, 1995. As a result, the Bank is required to use the experience method of accounting for tax basis bad debts for 1998 and later years. In addition, the Act requires the recapture of post-1987 (the base year) additions to the tax bad debt reserves made pursuant to the percentage of taxable income method. The Bank is not subject to this recapture in 2009 or 2008, as its tax bad debt reserves do not exceed its base year reserve. As a result of the bad debt deductions, shareholders’ equity as of December 31, 2009, includes accumulated earnings of approximately $1.8 million for which federal income tax has not been provided. If, in the future, this portion of retained earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal income tax may be imposed at then-applicable rates.

On January 1, 2007, the Bank adopted FASB ASC 740, Income Taxes. ASC 740 provides guidance on derecognition, classification, interest and penalties, and accounting in interim periods; and requires expanded disclosure with respect to the Company’s methodology for estimating and reporting uncertain tax positions.

Currently, the Company is subject to U.S. federal income tax and income tax in the state of Alaska. The federal and state

income taxes paid for the calendar years ending December 31, 2009, 2008, 2007, and 2006 may remain subject to examination by the applicable authorities. The Company recognizes interest and penalties related to unrecognized tax

benefits as income tax expense in the Statements of operations. During the years ended December 31, 2009 and 2008, the

Company recognized no interest and penalties.

The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for the open years based on an assessment of many factors, including past experience and interpretations of tax law. The Company had no unrecognized tax benefits which would require an adjustment to the January 1, 2009, beginning balance of retained earnings. The Company had no unrecognized tax benefits at December 31, 2009 or 2008.

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Note 14 – Commitments and Contingencies

Commitments:   Commitments to extend credit, including lines of credit, totaled $11.4 million and $10.5 million at December 31, 2009 and 2008, respectively. Commitments to extend credit, generally at a variable interest rate, are arrangements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates creditworthiness for commitments on an individual customer basis.

There are no commitments to lend additional funds to debtors loans whose terms have been modified in troubled debt restructurings.

Undisbursed loan proceeds, primarily for real estate construction loans, totaled $3.6 million and $1.8 million at December 31, 2009 and 2008, respectively. These amounts are excluded from the balance of loans at year end.

Concentrations:   More than 75% of all loans in the Bank’s portfolio are secured by real estate located in communities of Southeast Alaska.

Note 15 – Preferred Stock

On February 6, 2009, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company sold (i) 4,781 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 175,772 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), for an aggregate issuance price of $4.8 million in cash.

The Series A Preferred Stock qualifies as Tier 1 capital and is entitled to cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock may be redeemed by the Company after three years. Prior to the end of three years, the Series A Preferred Stock may be redeemed by the Company only with proceeds from the sale of qualifying equity securities of the Company (a “Qualified Equity Offering”). The restrictions on redemption are set forth in the Certificate of Designation attached to the Statement of Establishment and Designation of Series of Preferred Stock, which amends the Company’s Articles of Incorporation (the “Certificate of Designation”).

The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $4.08 per share of the Common Stock. Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant that it holds.

Pursuant to the terms of the Purchase Agreement, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its Junior Stock (as defined below) and Parity Stock (as defined below) is be subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($0.10) declared on the Common Stock prior to February 6, 2009. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also is restricted. These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Series A Preferred Stock, (b) the date on which the Series A Preferred Stock has been redeemed in whole, and (c) the date Treasury has transferred all of the Series A Preferred Stock to third parties.

In addition, pursuant to the Certificate of Designation, the ability of the Company to declare or pay dividends or distributions on, or repurchase, redeem or otherwise acquire for consideration, shares of its Junior Stock and Parity Stock will be subject to restrictions in the event that the Company fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on its Series A Preferred Stock.

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“Junior Stock” means the Common Stock and any other class or series of stock of the Company the terms of which expressly provide that it ranks junior to the Series A Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of the Company. “Parity Stock” means any class or series of stock of the Company the terms of which do not expressly provide that such class or series will rank senior or junior to the Series A Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of the Company (in each case without regard to whether dividends accrue cumulatively or non-cumulatively).

In accordance with the relevant accounting pronouncements, the Company recorded the Series A Preferred Stock and Warrants within Stockholders’ Equity on the Consolidated Balance Sheets. The Series A Preferred Stock and Warrants were initially recognized based on their relative fair values at the date of issuance. As a result, the Series A Preferred Stock’s carrying value is at a discount to the liquidation value or stated value. In accordance with the SEC’s Staff Accounting Bulletin No. 68, Increasing Rate Preferred Stock, the discount is considered an unstated dividend cost that is amortized over the period preceding commencement of the perpetual dividend using the effective interest method, by charging the imputed dividend cost against retained earnings and increasing the carrying amount of the Series A Preferred Stock by a corresponding amount. The discount is therefore being amortized over five years using a 6.71% effective interest rate. The total stated dividends (whether or not declared) and unstated dividend cost combined represents a period’s total preferred stock dividend, which is deducted from net income (loss) to arrive at net income (loss) available to common shareholders on the Consolidated Statements of Operations.

The Series A Preferred Stock and Warrants were initially recognized based on their relative fair values at the date of issuance in accordance with Accounting Principles Board (“APB”) Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. As a result, the value allocated to the Warrant is different than the estimated fair value of the Warrant as of the grant date. The following assumptions were used to determine the fair value of the Warrant as of the grant date:

Dividend yield 1.50%

Expected life (years) 10.0

Expected volatility 37%

Risk-free rate 3.05%

Fair value per warrant at grant date $ 4.15

Note 16 – Earnings (Loss) per Share

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

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(in thousands) December 31,	2009	2008
Net loss	$     (2,191)	$      (2,318)
Preferred stock dividend accrual	(216)	-
Preferred stock discount accretion	(55)	-
Net loss available to common shareholders	$     (2,462)	$      (2,318)
Average shares issued	655,415	655,415
Less treasury stock	(929)	(1,114)
Less unallocated ESOP shares	-	-
Basic weighted average shares outstanding	654,486	654,301
Net incremental shares	-	-
Weighted incremental shares	654,486	654,301
Loss per common share
Basic	$             (3.76)	$               (3.54)
Diluted	$             (3.76)	$               (3.54)

Because the Company recorded a net loss for the year ended December 31, 2009 and 2008, all potentially dilutive shares were anti-dilutive and basic and diluted loss per share were the same.

Note 17 – Fair Value of Financial Instruments

The following table sets forth the estimated fair values of the Company’s financial instruments as of December 31, 2009 and 2008, whether or not recognized or recorded at fair value in the Consolidated Balance Sheet.

(in thousands) December 31,	2009		2008
	Carrying Amount	Estimated Fair Value	Carrying Amount	Estimated Fair Value
Financial Assets
Cash and cash equivalents	$   6,942	$   6,942	$   9,402	$   9,402
Investment securities available for sale	2,606	2,606	3,243	3,243
FHLB stock	1,784	1,784	1,784	1,784
Loans, including held for sale	158,163	166,184	171,568	179,691
Accrued interest receivable	698	698	822	822
Mortgage servicing rights	813	1,234	646	804
Financial Liabilities
Demand and savings deposits	108,042	108,042	107,357	107,357
Certificates of deposit	40,175	40,230	55,814	48,166
FHLB Advances	9,834	10,082	10,320	10,915
Accrued interest payable	307	307	449	449

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The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2009.

	Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable  Inputs (Level 3)
	(in thousands)
December 31, 2009:
Recurring:
Available for sale securities:
Mortgage backed securities	$	2,514	$	–	$	2,514	$	–
U.S. government agencies		92				92
Mortgage servicing rights		1,234		–		1,234		–
Non-recurring:
Impaired loans		1,408		–		–		1,408
Repossessed assets		2,598		–		2,598		–
December 31, 2008:
Recurring:
Available for sale securities:
Mortgage backed securities	$	3,145	$	–	$	3,145	$	–
U.S. government agencies		98				98
Mortgage servicing rights		804		–		804		–
Non-recurring:
Impaired loans		3,033		–		–		3,033
Repossessed assets		408				408

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and cash equivalents:  The fair value of cash and cash equivalents and accrued interest receivable is estimated to be equal to the carrying value, due to their short-term nature.

Securities:  The fair value of investment securities is based upon estimated market prices obtained from independent safekeeping agents. Securities available-for-sale are recorded at fair value on a recurring basis. Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated based on quoted market prices of comparable instruments with similar characteristics or discounted cash flows. Changes in fair market value are recorded in other comprehensive income, as the securities are available for sale.

FHLB stock:  The fair value of FHLB stock is considered to be equal to its carrying value, since it may be redeemed at that value.

Loans:  The fair value of loans is estimated using present value methods which discount the estimated cash flows, including prepayments as well as contractual principal and interest, using current interest rates appropriate for the type and maturity of the loans.

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

Mortgage servicing rights:  Mortgage servicing rights (“MSR”) are measured at fair value on a recurring basis. These assets are classified as Level 2 as quoted prices are not available and the Company uses a model derived valuation methodology to estimate the fair value of MSR obtained from an independent broker on an annual basis.  The model pools loans into buckets of homogeneous characteristics and performs a present value analysis of the future cash flows. The buckets are created by individual loan characteristics such as note rate, product type, and the remittance schedule. Current market rates are utilized for discounting the future cash flows. Significant assumptions used in the valuation of MSR include discount rates, projected prepayment speeds, escrow calculations, ancillary income, delinquencies and option adjusted spreads. These assets are recorded at amortized cost.

Impaired loans:  Impaired loans are measured at fair value on a non-recurring basis. These assets are classified as Level 3 where significant value drivers are unobservable. The fair value of impaired loans are determined using the fair value of each loan’s collateral for collateral-dependent loans as determined, when possible, by an appraisal of the property, less estimated costs related to liquidation of the collateral. The appraisal amount may also be adjusted for current market conditions. Impaired loans were $5.3 million and $10.7 million at December 31, 2009 and 2008, respectively, with estimated reserves for impairment of $514,000 and $875,000, respectively.

Note 18 – Parent Company Financial Information

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

Parent Company Condensed Balance Sheet

(in thousands) December 31,	2009	2008
Assets
Cash	$  1,431	$     224
Investment in subsidiary	17,280	16,059
Total Assets	$18,711	$16,283
Liabilities and Shareholders’ Equity
Other liabilities	$       31	$         -
Shareholders’ equity	18,680	16,283
Total Liabilities and Shareholders’ Equity	$18,711	$16,283

Parent Company Condensed Income Statement

(in thousands) Year ended December 31,	2009	2008
Deficit in earnings of subsidiary	$(2,043)	$(2,174)
Total loss	(2,043)	(2,174)
Operating expenses, net	148	144
Net loss	$(2,191)	$(2,318)

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Parent Company Condensed Statement of Cash Flows

(in thousands) Year ended December 31,	2009		2008
Cash flows from operating activities:
Net loss	$(2,191	)	$(2,318	)
Adjustments to reconcile net loss to net cash used in    operating activities:
Deficit in earnings of subsidiary	2,043		2,174
Net cash used in operating activities	(148	)	(144	)
Cash flows from investing activities:
Distributions received from subsidiary	-		252
Investment in subsidiary	(3,200	)	-
Net cash provided by (used in) investing activities	(3,200	)	252
Cash flows from financing activities:
Proceeds from issuance of preferred stock and common     stock warrants	4,781		-
Stock issuance costs paid	(41	)	-
Issuance of common stock	-		15
Cash dividends paid on preferred stock	(185	)	-
Cash dividends paid on common stock	-		(196	)
Net cash provided by (used in) financing activities	4,555		(181	)
Net increase (decrease) in cash	1,207		(73	)
Cash at beginning of year	224		297
Cash at end of year	$1,431		$224

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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 its behalf by the undersigned, thereunto duly authorized.

	ALASKA PACIFIC BANCSHARES, INC.
Date: March 31, 2010	/s/ Craig E. Dahl
	Craig E. Dahl
	President and Chief Executive Officer
	(Duly Authorized Representative)

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Exhibit Index

Exhibit No.                      Description

     31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002