<PAGE>   1




                         [ALPENA BANCSHARES, INC. LOGO]



                                      2000
                                 ANNUAL REPORT



                      YOUR HOMETOWN FINANCIAL INSTITUTION!

         LOCALLY OWNED AND SERVING NORTHERN MICHIGAN FOR OVER 40 YEARS.

                               WITH LOCATIONS IN

                     - ALPENA - OSCODA - MIO - CHEBOYGAN -
                     - OSSINEKE - INDIAN RIVER - LEWISTON -


                             www.first-federal.com


                                  Member FDIC


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                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                               PAGE


<S>                                                                                                          <C>
Message of President and Chief Executive Officer.........................................................         1
Selected Consolidated Financial and Other Data...........................................................         2
Management's Discussion and Analysis of
     Financial Condition and Results of Operations.......................................................         3
Report of Management and Independent Auditors............................................................        13
Consolidated Statements of Financial Condition...........................................................        14
Consolidated Statements of Income........................................................................        15
Consolidated Statements of Stockholders' Equity..........................................................        16
Consolidated Statements of Cash Flows....................................................................        17
Notes to Consolidated Financial Statements...............................................................        18
Directors and Officers of First Federal Savings
     and Loan Association of Alpena......................................................................        42
Stockholder Information..................................................................................        43

</TABLE>



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[ALPENA BANCSHARES, INC. LETTERHEAD]


March 19, 2001



Dear Stockholders:

The year 2000 has been an exciting one for our Company. First Federal Savings
and Loan Association completed the formation of Alpena Bancshares, Inc., its
holding company, on November 14, 2000. The formation of the holding company will
allow us greater flexibility to take advantage of financial and growth
opportunities in the future. Another aspect of our strategic planning was the
changing of the Bank's name to "First Federal of Northern Michigan", which more
accurately reflects the market area of our business plan. While we have changed
our name, we have not changed our commitment to provide superior customer
service and quality products in the communities we serve.

Net income for the year grew to $2.1 million or $1.29 per share. Return on
average assets and on average equity was 0.82% and 11.37%, respectively.

While maintaining a relatively stable loan portfolio, the Company established a
serviced loan portfolio of over $17 million. This was a result of selling longer
term fixed rate residential mortgage loans in the secondary market while
maintaining the servicing relationship with our customers. These mortgage
banking activities produced income of $243,000 in 2000. Commercial and consumer
lending has remained strong throughout the year. The average balance of these
portfolios combined grew $9.8 million, or 61.5%.

The Bank opened two new full service offices in 2000 in an effort to expand our
market area. These offices are located in Indian River and Lewiston, Michigan.
For cost control, these offices are presently leased, and will remain so until
volume warrants an investment into facilities. In addition, we are excited to
announce the planned opening of a full service branch in Gaylord in the second
quarter of 2001. As a growing and substantial market, Gaylord fits well into our
strategy of better servicing our banking area of Northern Michigan.

Competition is becoming very strong in our market area, both on the lending and
deposit sides. We are confident with our strong capital position we can meet
this competition head-on and succeed. We look forward to the opportunities and
challenges of the coming year and beyond and seek to reward your commitment and
investment in Alpena Bancshares, Inc.

Very truly yours,


/s/ Jerry A. Christensen
Jerry A. Christensen
President and Chief Executive Officer

<PAGE>   4
         Set forth below are selected financial and other data of the Company.
This information is derived in part from and should be read in conjunction with
the Consolidated Financial Statements of the Company and the notes thereto
presented elsewhere in this Annual Report.


SELECTED FINANCIAL CONDITION DATA:

<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31,
                                                               ------------------------------------------------------------
                                                                  2000         1999         1998        1997        1996
                                                               ----------   ----------   ----------  ----------  ----------
                                                                                       (IN THOUSANDS)


<S>                                                           <C>            <C>         <C>         <C>         <C>
Total assets................................................. $   267,009    $263,549    $242,380    $221,575    $150,724
Interest-earning deposits at other financial institutions ...      12,299       2,695       3,982       3,011       1,095
Investment securities .......................................      18,314      17,403      17,608      21,223       9,383
Mortgage-backed securities ..................................       1,405       1,646       2,105       2,657       3,104
Loans receivable, net .......................................     219,807     223,866     205,460     181,123     128,521
Deposits ....................................................     162,771     156,393     147,159     143,329      98,181
Stockholders' equity ........................................      19,471      18,805      18,664      17,017      15,812

</TABLE>

SELECTED OPERATING DATA:

<TABLE>
<CAPTION>

                                                                                    YEARS ENDED DECEMBER 31,
                                                               ------------------------------------------------------------
                                                                   2000         1999        1998       1997        1996
                                                               ------------  ----------  ----------- ---------- -----------
                                                                                 (IN THOUSANDS)

<S>                                                           <C>         <C>            <C>         <C>         <C>
Total interest income .......................................    $ 19,018     $ 17,607    $ 16,716    $ 14,112    $ 10,471
Total interest expense ......................................      12,558       11,726      11,239       9,014       6,356
                                                                 --------     --------    --------    --------    --------
     Net interest income ....................................       6,460        5,881       5,477       5,098       4,115
Provision for loan losses ...................................         280          120         115          98          67
                                                                 --------     --------    --------    --------    --------
     Net interest income after provision
       for loan losses ......................................       6,180        5,761       5,362       5,000       4,048

Other income:
  Service charges and fees ..................................         364          279         207         109          87
  Mortgage companying activities ............................         243           --          --          --          --
  Net gain on sale of investment securities .................       2,028           --          --          --          --
  Loss on impairment of real estate held for investment .....        (211)          --          --          --          --
  Loss on abandonment of fixed assets .......................        (258)          --          --          --          --
  Other .....................................................         111          440         166         156          82
                                                                 --------     --------    --------    --------    --------
       Total other income ...................................       2,277          719         373         265         169
                                                                 --------     --------    --------    --------    --------

Other expense ...............................................       5,298        5,104       4,094       3,735       3,442
                                                                 --------     --------    --------    --------    --------

  Income before income tax expense
  and cumulative effect of change in
  accounting principle ......................................       3,159        1,376       1,641       1,530         775
Income tax expense ..........................................       1,035          452         558         444         210
                                                                 --------     --------    --------    --------    --------

  Net income................................................     $  2,124     $    924    $  1,083    $  1,086    $    565
                                                                 ========     ========    ========    ========    ========
</TABLE>


                                       2

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<TABLE>
<CAPTION>

                                                                                       YEARS ENDED DECEMBER 31,
                                                                      --------------------------------------------------------
                                                                          2000        1999        1998      1997      1996
                                                                      ------------ ---------- ----------- --------- ----------

<S>                                                                    <C>        <C>         <C>         <C>       <C>
KEY FINANCIAL RATIOS AND OTHER DATA:

Return on average assets (net income
  divided by average total assets) ................................         0.82%      0.37%      0.48%      0.58%     0.41%
Return on average equity (net income
  divided by average equity) ......................................        11.37       5.46       6.85       7.08      3.78
Average equity to average assets ..................................         7.24       6.77       6.98       8.23     10.84
Equity to total assets ............................................         7.29       7.15       7.06       7.23     10.07
Net interest rate spread (average yield on
  interest-earning assets less average yield
  on interest-bearing liabilities) ................................         2.49       2.36       2.41       2.74      2.69
Net interest margin (net interest income as a
  percentage of average interest-earning assets) ..................         2.65       2.50       2.54       2.93      3.14
Noninterest expense to average assets .............................         2.05       2.04       1.81       2.01      2.49
Net interest income to noninterest expense.........................       121.93     112.85     134.88     137.56    119.55
Nonperforming loans to net loans receivable .......................         0.31       0.34       0.55       0.69      0.31
Nonperforming assets to total assets ..............................         0.31       0.32       0.48       0.57      0.27
Allowance for loan losses to nonperforming assets..................        79.21      52.64      41.21      33.25     82.88
Allowance for loan losses to net loans receivable .................         0.30       0.20       0.23       0.23      0.26
Average interest-bearing assets to
  average interest-bearing liabilities.............................       103.20%    102.75%    102.86%    103.67%   109.25%
Number of full-service offices ....................................            8          6          6          6         4

</TABLE>


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

         Alpena Bancshares, Inc. (the "Company") is a holding company whose
primary asset is the investment in First Federal Savings & Loan Association of
Alpena, MI (the "Bank"), which reorganized into the holding company structure,
effective November 14, 2000. In the holding company reorganization, each
outstanding share of the Bank's common stock was converted into one share of the
Company's common stock by operation of law, and each stockholder of the Bank
received the same ownership interest in the Company immediately following the
holding company reorganization as he or she had in the Bank immediately prior to
that transaction.

         The Company focuses on establishing and maintaining long-term
relationships with customers, and is committed to serving the financial service
needs of the communities in its market area. The Company attracts retail
deposits from the general public and uses those deposits, together with borrowed
funds, to originate residential mortgage loans, and commercial and consumer
loans. The Company is the only thrift institution headquartered in its market
area, which in recent years has experienced an influx of new commercial banks
headquartered outside of northeast Michigan. The Company is committed to meeting
the financial needs of the community in which it operates. The Company believes
it is large enough to provide a full range of personal and business financial
services, and yet small enough to be able to provide such services on a
personalized and efficient basis. Management believes that the Company can be
more effective in servicing its customers than many of its nonlocal competitors
because of the Company's ability to quickly and effectively provide senior
management responses to customer needs and inquiries. The Company is majority
owned by Alpena Bancshares, M.H.C., a mutual holding company. The Company
intends to use the mutual holding company structure to enhance its focus as a
community-oriented, independent savings institution.

         The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and independent community-oriented savings
association dedicated to providing quality customer service. Generally, the
Company has sought to implement this strategy by using retail deposits and FLHB
advances as its source of funds and maintaining a substantial part of its assets
in loans secured by one- to four-family residential real estate located in the


                                       3

<PAGE>   6

Company's market area, home equity loans, commercial real estate loans,
mortgage-backed securities and in other liquid investment securities.
Specifically, the Company's business strategy incorporates the following
elements: (1) operating as a community-oriented financial institution,
maintaining a strong core customer base by providing quality service and
offering customers the access to senior management and services that a
community-based institution can offer; (2) maintaining high asset quality by
emphasizing investment in residential mortgage loans, mortgage-backed securities
and other securities issued or guaranteed by the United States Government or
agencies thereof; (3) maintaining capital in excess of regulatory requirements
and growing only to the extent that adequate capital levels can be maintained;
and (4) managing interest rate risk exposure while achieving desirable levels of
profitability.

         Asset Quality and Emphasis on Residential Mortgage Lending.
Historically, the Company had emphasized fixed-rate balloon mortgage loans with
three and five-year terms secured by one- to four-family properties located in
its market area. The Company had been a portfolio lender however, in 2000 the
bank began to offer Freddie Mac mortgage products as an additional service to
our customers. These products include 15 year and 30 year fixed rate mortgage
loans. The Company generally retains all loan servicing on any loans sold to
Freddie Mac. The Company anticipates a continued commitment to financing the
purchase or improvement of residential real estate in its market area. To
supplement local mortgage loan originations where available funds exceed local
mortgage loan demand, the Company also invests in mortgage-backed securities and
investment securities that are issued or guaranteed by the United States
Government or agencies thereof. By investing in these types of assets, the
Company's strategy has been to reduce the credit risk of its asset base in
exchange for lower yields than would typically be available on commercial real
estate loans and multi-family real estate loans.

         Generally, the yield on mortgage loans originated by the Company is
greater than that of mortgage-backed securities purchased by the Company.
However, due to the highly competitive market in which the Company operates,
there can be no assurance that the Company will be able to originate a
sufficient number of new mortgage loans to offset the amortization and
prepayments of its existing loan portfolio. Accordingly, new loan originations
may be reduced in the future, and the Company may increase its investment in
mortgage-backed securities during periods of reduced loan demand.

         Capital Position and Controlled Growth. The Company's stockholders'
equity increased from $7.1 million at December 31, 1992, to $19.5 million at
December 31, 2000, an increase of 174.6%. This includes a net increase of $5.9
million from the proceeds of the Company's initial public offering. Given the
current regulatory environment that focuses on the need for higher capital
ratios, the Company intends to maintain its level of stockholders' equity and
capital ratios by growing only to the extent that adequate capital levels can be
maintained.

         Strong Retail Deposit Base. The Company has had a relatively stable
retail deposit base drawn from its eight full-service offices located in Alpena,
Oscoda, Montmorency, Cheboygan and Iosco Counties in Northeast Michigan. At
December 31, 2000, 29.7% of its deposit base consisted of core deposits, which
included NOW accounts, regular savings accounts, and money market deposit
accounts. Core deposits are considered to be a more stable and lower cost source
of funds than certificates of deposit or outside borrowings. The Company will
continue to emphasize retail deposits by providing quality customer service,
offering competitive rates on deposit accounts, and providing depositors with a
full range of accounts.

         The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of loans receivable,
mortgage-backed securities, investment securities, and interest-bearing deposits
at other institutions, and the interest paid on interest-bearing liabilities,
which consist primarily of savings deposits and FHLB advances. Interest income
is a function of the Company's interest rate spread, which is the difference
between the average yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities, as well as a function of the average
balance of interest-earning assets as compared to interest-bearing liabilities.
The Company's earnings also are affected by its level of noninterest income,
including primarily service fees and charges, and noninterest expense, including
primarily compensation and employee benefits, occupancy expenses, and SAIF
deposit insurance premiums. Earnings of the Company also are affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities, which events are beyond the control of the Company.

                                       4

<PAGE>   7


COMPARISON OF FINANCIAL CONDITION

         Total assets increased $3.5 million, or 1.3%, to $267.0 million at
December 31, 2000 from $263.5 million at December 31, 1999. Cash and cash
equivalents increased by $6.9 million, or 68.7%, to $16.8 million on December
31, 2000 from $10.0 million at December 31, 1999. Investment securities (other
than mortgage-backed securities) increased $911,000, or 6.9%, to $14.0 million
at December 31, 2000 from $13.1 million at December 31,1999. Net loans decreased
$4.1 million, or 1.8%, to $219.8 million at December 31, 2000 from $223.9
million at December 31, 1999. Mortgage-backed securities decreased $241,000, or
14.6%, to $1.4 million at December 31, 2000 from $1.6 million at December 31,
1999.

         Deposits increased $6.4 million, or 4.1%, to $162.8 million at December
31, 2000 from $156.4 million at December 31, 1999. Borrowings in the form of
Federal Home Loan Bank advances declined $3.4 million, or 4.0%, to $82.4 million
at December 31, 2000 from $85.9 million one year earlier.

         Stockholders' equity increased by $666,000, or 3.5%, to $19.5 million
at December 31, 2000 from $18.8 million at December 31, 1999. The increase in
stockholders' equity was due to net income of $2.1 million; offset by dividends
of $377,000 being paid to the stockholders, and by a decrease in accumulated
other comprehensive income of $1.2 million as the result of sales of available
for sale securities.


COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

         The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of mortgage loans,
consumer loans, mortgage-backed securities, investment securities, and
interest-bearing deposits at other institutions, and the interest paid on
interest-bearing liabilities, which consist primarily of savings deposits and
FHLB advances. The Company had net income of $2.1 million and $924,000 for the
years ended December 31, 2000 and 1999, respectively.

         Interest Income. Total interest income increased by $1.4 million, or
8.0% to $19.0 million for the year ended December 31, 2000 from $17.6 million
for the year ended December 31, 1999. The increase in interest income was
attributable to an increase in the average balance of the Company's average
interest-earning assets by $8.3 million, or 3.5%, to $243.6 million for the year
ended December 31, 2000 from $235.4 million for the year ended December 31, 1999
and by an increase in the average yield on the Company's average interest
earning assets to 7.81% for the year ended December 31, 2000 from 7.48% for the
year ended December 31, 1999. The increase in the average balance of
interest-earning assets reflected a $122,000 increase in the average balance of
mortgage loans, a $9.8 million increase in the average balance of other loans,
and a $202,000 increase in the average balance of investment securities. This
was partially offset by a $336,000 decrease in the average balance of
mortgage-backed securities and a $1.5 million decrease in the average balance of
other investments. The increase in average yield was caused primarily by the
increase in yield on mortgage loans due to loans being originated in 2000 at
higher interest rates, and also partially due to higher interest rates during
2000 on other loans, mortgage-backed securities and interest-earning deposits.

         Interest income on loans receivable increased by $1.4 million, or 8.4%,
to $17.6 million for the year ended December 31, 2000 from $16.2 million for the
year ended December 31, 1999. Interest income on mortgage loans increased by
$303,000, or 2.0%, to $15.2 million from $14.9 million, and interest income on
other loans increased by $1.0 million, or 76.5%, to $2.4 million from $1.4
million. The increase in interest income on loans resulted primarily from an
increase in the average balance of other loans to $25.7 million for the year
ended December 31, 2000 from $15.9 million for the year ended December 31, 1999,
and was accompanied by an increase in the average yield on other loans to 9.46%
from 8.65%. The increase in average yield on other loans was primarily because
of higher interest rates on loans originated during 2000 along with existing
adjustable rate loans resetting at higher current market interest rates.

         Interest Expense. Total interest expense increased by $832,000, or
7.1%, to $12.6 million for the year ended December 31, 2000 from $11.7 million
for the year ended December 31, 1999. The increase was primarily

                                       5

<PAGE>   8

attributable to increases in the average balance of deposits of $3.0 million, or
2.0%, to $155.7 million for the year ended December 31, 2000 from $152.7 million
for the same period one year earlier and an increase in the average balance of
borrowed funds to $80.3 million from $76.3 million for the years ended December
31, 2000 and 1999, respectively and in the average cost of deposits to 4.88%
from 4.77% and in the average cost of borrowed funds to 6.18% from 5.82%. The
increase in average balance of deposits was primarily due to promotions for
acquiring certificate accounts. The increase in the average balance of deposits
and borrowed funds was used to fund loan originations. The increase in the
average cost of deposits and borrowed funds was attributable to higher market
interest rates during 2000.

         Net Interest Income. Net interest income increased by $580,000, or
9.9%, to $6.5 million for the year ended December 31, 2000 from $5.9 million for
the year ended December 31, 1999. The principal reason for the increase in net
interest income was an increase in the Company's interest rate spread to 2.5%
from 2.4%, and an increase in the Company's ratio of average interest-earning
assets to average interest-bearing liabilities.

         Provision for Loan Losses. The Company maintains an allowance for loan
losses based upon management's evaluation of risks in the loan portfolio, the
Company's past loss experience, and current and expected future economic
conditions. The Company increased its provision for loan losses to $280,000 for
the year ended December 31, 2000 from $120,000 for the year ended December 31,
1999. The increased provision was because of the inherent risk of the expanding
loan (primarily commercial and consumer) portfolio. Management believes that its
provisions for loan losses have maintained its allowance for loan losses will
not exceed estimated amounts. Management continues to monitor activity and will
make adjustments to this allowance provision as conditions warrant.

         Other Income. Other income increased by $1.6 million to $2.3 million
for the year ended December 31, 2000 from $719,000 for the year ended December
31, 1999. The increase for the 2000 period was primarily attributable to gains
on the sale of assets, income from mortgage banking activities, and also
partially due to increases in various fees collected. These increases were
partially offset by costs associated with the retirement of certain fixed
assets, a valuation adjustment to real estate held for sale, along with a
decrease in miscellaneous other income items. In 2000, the Company recognized
gains in the liquidation of certain available-for-sale securities to enhance
both liquidity and future earnings. These gains totaled approximately $2.0
million. Certain fixed assets, relating to the Company's in-house computer
system were retired during the third quarter of 2000. These costs amounted to
approximately $258,000. In the fourth quarter of 2000, the Company made an
adjustment of approximately $211,000 related to the valuation of its investment
in Wyndham Garden Estates. This development is required by accounting standards
to be valued at the lower of actual cost or current market values. During 2000,
the Company began selling originations of 15 to 30 year fixed rate loans to
Freddie Mac with servicing generally retained. For the year ended December 31,
2000, the Company had income from mortgage banking activities of $243,000.

         Other Expense. Noninterest expense increased by $195,000 to $5.3
million for the year ended December 31, 2000 from $5.1 million for the year
ended December 31, 1999. The increase was attributable to the $297,000 increase
in compensation and benefits expense, the $82,000 increase in occupancy expense,
and partially offset by declines of $56,000 in Federal insurance premiums and
$117,000 in other operating expenses. Compensation and benefit expenses were
higher primarily because of additional employees hired to accommodate some the
Company's significant growth over the past few years and overall wage increases
in 2000, and also partially due to continued increases in pension plan and
health insurance costs. Occupancy expense increased primarily due to the
increased cost of depreciation and maintenance of equipment. The decline in
other operating expenses was primarily attributable to a $95,000 adjustment in
the Michigan Single Business Tax in 1999.

         Income Taxes. Federal income tax expense increased $583,000 to $1.0
million for the year ended December 31, 2000 from $452,000 for the year ended
December 31, 1999. The increase was primarily due to the $1.8 million increase
in income before federal income tax expense to $3.2 million for the year ended
December 31, 2000 from $1.4 million for the year ended December 31, 1999.

                                       6

<PAGE>   9


OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

         Interest Income. Total interest income increased by $890,000, or 5.3%,
to $17.6 million for the year ended December 31, 1999 from $16.7 million for the
year ended December 31, 1998. The increase in interest income was principally
attributable to an increase in an average balance of the Company's average
interest-earning assets by $20.0 million, or 9.3%, to $235.4 million for the
year ended December 31, 1999 from 215.3 million for the year ended December 31,
1998 and partially offset by a decrease in the average yield on the Company's
average interest earning assets to 7.48% for the year ended December 31, 1999
from 7.76% for the year ended December 31, 1998. The increase in the average
balance of interest-earning assets reflected an $18.1 million increase in the
average balance of mortgage loans, a $4.3 million increase in the average
balance of other loans, and a $261,000 increase in the average balance of
interest-earning deposits. This was partially offset by a $527,000 decrease in
the average balance of mortgage-backed securities and a $2.2 million decrease in
the average balance of investment securities. The decrease in average yield was
caused primarily by the decrease in yield on mortgage loans due to loans being
originated in 1999 at lower interest rates, and also partially due to lower
interest rates during 1999 on other loans, mortgage-backed securities and
interest-earning deposits.

         Interest income on loans increased by $1.0 million, or 7.1%, to $16.2
million for the year ended December 31, 1999 from $15.2 million for the year
ended December 31, 1998. Interest income on mortgage loans increased by
$767,000, or 5.4%, to $14.9 million from $14.1 million, and interest income on
other loans increased by $303,000, or 28.2%, to $1.4 million from $1.1 million.
The increase in interest income on loans resulted primarily from a $18.1
million, or 10.0%, increase in the average balance of mortgage loans to $199.0
million for the year ended December 31, 1999 from $180.9 million for the year
ended December 31, 1998, and was partially offset by a decrease in the average
yield on mortgage loans to 7.46% from 7.79%. The decrease in the average yield
on mortgage loans was due to lower interest rates on new and refinanced loans
during 1999. The increase in interest income on other loans resulting primarily
from an increase in the average balance of other loans to $15.9 million for the
year ended December 31, 1999 from $11.6 million for the year ended December 31,
1998, and was partially offset by a decrease in the average yield on other loans
to 8.65% from 9.27%. The decrease in average yield on other loans was primarily
because of lower interest rates on loans originated during 1999. Interest income
on mortgage-backed securities decreased to $119,000 for the year ended December
31, 1999 from $162,000 for the year ended December 31, 1998. This decrease
resulted from a decrease in the average balance of mortgage-backed securities to
$1.9 million for the year ended December 31, 1999 from $2.4 million for the year
ended December 31, 1998, and also partially by a decrease in the average yield
on mortgage-backed securities to 6.40% from 6.79%. The lower average balance of
mortgage-backed securities was the result of principal payments and prepayments,
and the lower average yield on mortgage-backed securities resulted from downward
adjustments to adjustable rate mortgage-backed securities in the lower market
interest rate environment. Interest income on investment securities decreased to
$1.0 million from $1.1 million, primarily the result of a decrease in the
average balance of investment securities to $14.8 million for the year ended
December 31, 1999 from $17.0 million for the year ended December 31, 1998, and
partially offset by a slight increase in the average yield on investments to
6.88% from 6.77%. The decrease in average balance was caused by utilization of
funds from maturing securities to fund loan originations. Interest income from
interest-earning deposits decreased by $6,000 to $238,000 for the year ended
December 31, 1999 from $244,000 for the year ended December 31, 1998, reflecting
an increase in the average balance of interest-earning deposits to $3.7 million
from $3.5 million, which was more than offset by a decrease in the average yield
on interest earning deposits to 6.36% from 7.01%. The increase in the average
balance was primarily due to higher balances maintained during 1999, and the
decrease in average yield was primarily the result of lower market interest
rates during 1999.

         Interest Expense. Total interest expense increased by $487,000, or
4.3%, to $11.7 million for the year ended December 31, 1999 from $11.2 million
for the year ended December 31, 1998. The increase was primarily attributable to
an increase in the average balance of deposits to $152.7 million from $144.1
million and the average balance of borrowed funds to $76.3 million from $65.3
million, and partially offset by a decrease in the average cost of deposits to
4.77% from 5.11% and the decrease in the average cost of borrowed funds to 5.82%
from 5.93%. The increase in average balance of deposits was primarily due to
promotions for acquiring checking and certificate accounts. The increase in the
average balance of deposits and borrowed funds was used to fund loan
originations. The decrease in the average cost of deposits and borrowed funds
was attributable to lower market interest rates during 1999.

                                       7

<PAGE>   10


         Net Interest Income. Net interest income increased by $402,000, or
7.3%, to $5.9 million for the year ended December 31, 1999 from $5.5 million for
the year ended December 31, 1998. This increase was primarily attributable to
the $20.0 million increase in the average balance of interest-earning assets for
the year ended December 31, 1999, and partially offset by the $19.7 million
increase in the average balance of interest-bearing liabilities. The net
interest rate spread decreased to 2.36% for the year ended December 31, 1999
from 2.39% for the year ended December 31, 1998, as the average yield on
interest-earning assets decreased to 7.48% from 7.76%, while the average cost of
interest-bearing liabilities decreased to 5.12% from 5.37%.

         Provision for Loan Losses. The Company increased its provision for loan
losses to $120,000 for the year ended December 31, 1999 from $115,000 for the
year ended December 31, 1998. The increased provision was because of the
additional inherent risk of the increase in net loans receivable. Net loans
receivable increased $18.4 million during the year ended December 31, 1999.

         Other Income. Noninterest income increased by $346,000 to $719,000 for
the year ended December 31, 1999 from $373,000 for the year ended December 31,
1998. The increase was primarily attributable to $185,000 of appraisal income
from FSMC, the Company's indirect subsidiary, which income had been offset by
corresponding appraisal expenses to the Company in prior years. The Company
adjusted its accounting methods in early 1999 to pass through appraisal bill
payments to borrowers. As of January 1, 2000, all appraisal services are being
outsourced. The increase was also partially attributable to the Company's
increase of various fees.

          Other Expense. Noninterest expense increased by $1.0 million to $5.1
million for the year ended December 31, 1999 from $4.1 million for the year
ended December 31, 1998. The increase was attributable to the $624,000 increase
in compensation and benefits expense, the $22,000 increase in advertising
expense, the $134,000 increase in occupancy expense, and the $231,000 increase
in other operating expenses. Compensation and benefit expenses were higher
primarily because of additional employees hired to accommodate some the
Company's significant growth over the past few years and overall wage increases
in 1999, and also partially due to large increases in pension plan and health
insurance costs. Occupancy expense increased primarily due to the increased cost
of depreciation and maintenance of equipment, and also partially due to overall
increases in several occupancy expenses. The increase in advertising expenses
was primarily due to promotion of certificate of deposit and checking account
programs, and also partially due to general cost increases. The increase in
other operating expenses was primarily attributable to a $95,000 increase in the
Michigan Single Business Tax. The increase in operating expense was also
partially due to smaller increases in several other expense accounts.

         Income Taxes. Federal income tax expense decreased by $107,000 to
$452,000 for the year ended December 31, 1999 from $558,000 for the year ended
December 31, 1998. The decrease was primarily due to the $266,000 decrease in
income before federal income tax expense to $1,376,000 for the year ended
December 31, 1999 from $1,642,000 for the year ended December 31, 1998.

                                       8

<PAGE>   11


AVERAGE BALANCE SHEET

         The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from average daily balances.

<TABLE>
<CAPTION>

                                                                         Average Consolidated Statements of Condition
                                      Consolidated Statement                     For Years Ended December 31,
                                      Of Financial Condition   ----------------------------------------------------------------
                                      December 31,2000                2000                                    1999
                                      -------------------      ------------------------------      ----------------------------
                                                                                     Average                            Average
                                       Actual      Yield/      Average                Yield/       Average               Yield/
                                       Balance      Cost       Balance   Interest      Cost        Balance   Interest     Cost
                                      ---------    ------      -------   --------    -------       -------   --------   -------

<S>                                <C>           <C>         <C>       <C>         <C>           <C>        <C>         <C>
Interest-earning assets:
Mortgage loans.................       $191,657      7.66%      $199,159   $15,157      7.61%      $199,037   $14,854      7.46%
Non-mortgage loans.............         28,800      9.33         25,702     2,432      9.46         15,926     1,378      8.65
Mortgage-backed securities.....          1,405      7.22          1,523       104      6.83          1,859       119      6.40
Investment securities..........         14,020      5.67         11,120       789      7.10         14,791     1,018      6.38
Other Investments..............         16,593      7.03          6,110       536      8.77          3,741       238      6.36
                                      --------      ----       --------   -------      ----       --------   -------      ----

Total Interest-earning assets..        252,475      7.70        243,614    19,018      7.81        235,354    17,607      7.48
Non-interest earning assets....         14,534                   14,388                             14,496
                                      --------                 --------                           --------

Total assets...................       $267,009                 $258,002                           $ 249,850
                                      ========                 ========                           =========

Interest-bearing liabilities:
Deposits.......................       $162,771      5.18       $155,736     7,596      4.88       $152,714     7,281      4.77
Borrowed Funds.................         82,435      6.13         80,317     4,962      6.18         76,337     4,445      5.82
                                      --------                 --------   -------                 --------   -------

Total interest-bearing
      liabilities..............        245,206      5.50        236,052    12,558      5.32        229,051    11,726      5.12
Non-interest bearing
      Liabilities..............          2,332                    3,271                              3,889
                                       -------                 --------                           --------

Total liabilities..............        247,538                  239,323                            232,940
Stockholders Equity............         19,471                   18,679                             16,910
                                      ---------                --------                           --------

Total liabilities and
     Stockholders equity.......       $267,009                 $258,002                           $249,850
                                      ========                 ========                           ========

Net interest income............                                           $ 6,460                            $ 5,881
                                                                          =======                            =======

Interest rate spread...........                     2.20%                              2.49%                              2.36%
                                                  ======                             ======                             ======

Net interest margin (1)........                     2.36%                              2.65%                              2.50%
                                                  ======                             ======                             ======

Ratio of average interest-earning
     Assets to average interest-
     Bearing liabilities.......                   102.96%                            103.20%                            102.75%
                                                  ======                             ======                             ======

</TABLE>

<TABLE>
<CAPTION>                             -----------------------------------
                                                     1998
                                      -----------------------------------
                                                                  Average
                                      Average                      Yield/
                                      Balance      Interest         Cost
                                      -------      ---------       ------

<S>                                 <C>           <C>            <C>
Interest-earning assets:
Mortgage loans.................       $180,895      $14,087         7.79%
Non-mortgage loans.............         11,597        1,075         9.27
Mortgage-backed securities.....          2,386          162         6.79
Investment securities..........         16,978        1,149         6.77
Other Investments..............          3,480          244         7.01
                                       -------

Total Interest-earning assets..        215,336       16,717         7.76
Non-interest earning assets....         11,412


Total assets...................       $226,748
                                      ========

Interest-bearing liabilities:
Deposits.......................       $144,081        7,368         5.11
Borrowed Funds.................         65,266        3,871         5.93
                                      --------      -------

Total interest-bearing
      liabilities..............         209,347      11,239         5.37
Non-interest bearing
      Liabilities..............          1,583
                                      --------

Total liabilities..............        210,930
Stockholders Equity............         15,818
                                      --------

Total liabilities and
     Stockholders equity.......       $226,748
                                      ========

Net interest income............                     $ 5,478
                                                    =======

Interest rate spread...........                                     2.39%
                                                                  ======

Net interest margin (1)........                                     2.54%
                                                                  ======

Ratio of average interest-earning
     Assets to average interest-
     Bearing liabilities.......                                   102.86%
                                                                  ======
</TABLE>

------------------------------------

(1)  Net interest margin represents net interest income divided by average
     interest-earning assets.


                                       9

<PAGE>   12




RATE/VOLUME ANALYSIS

         The following table sets forth certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided in each category with respect to (i)
changes attributable to changes in volume (change in volume multiplied by prior
rate), (ii) changes in rates (changes in rate multiplied by prior average
volume), and (iii) the net change. Changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.

<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31,
                                                ------------------------------------------------------------------
                                                        2000 VS. 1999                       1999 VS. 1998
                                                ------------------------------      ------------------------------
                                                      INCREASE/(DECREASE)                 INCREASE/(DECREASE)
                                                             DUE TO                             DUE TO
                                                ------------------------------      ------------------------------
                                                 VOLUME      RATE         NET       VOLUME       RATE         NET
                                                -------      ----        -----      ------       ----        -----
                                                                          (IN THOUSANDS)

<S>                                           <C>         <C>        <C>          <C>         <C>        <C>
Interest income:
        Loans Receivable ...................... $   716     $   642     $ 1,358     $ 1,758     $ (688)    $ 1,070
        Mortgage-backed securities ............     (23)          8         (15)        (34)        (9)        (43)
        Investment securities .................      21          60          81        (150)        19        (131)
        Interest-earning deposits .............    (119)        107         (12)         18        (24)         (6)
                                                -------     -------     -------     -------     ------     -------
          Total interest-earning assets .......     595         817       1,412       1,592       (702)        890
                                                -------     -------     -------     -------     ------     -------

Interest-bearing liabilities:
        Deposits .............................. $   146     $   169     $   315     $   423     $ (510)    $   (87)
        Borrowed funds ........................     241         276         517         548        (74)        574
                                                -------     -------     -------     -------     ------     -------
          Total interest-bearing liabilities... $   387     $   445     $   832     $ 1,071     $ (584)    $   487
                                                =======     =======     =======     =======     ======     =======

Net change in interest income ................. $   208     $   372     $   580     $   521     $ (118)    $   403
                                                =======     =======     =======     =======     ======     =======

</TABLE>

------------------------------------
(1)  Includes one- to four-family residential real estate and commercial real
     estate loans.


ASSET AND LIABILITY MANAGEMENT - INTEREST RATE SENSITIVITY ANALYSIS

         The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to positively affect net interest income. Similarly,
during a period of falling interest rates, a negative gap would tend to
positively affect net interest income while a positive gap would tend to
adversely affect net interest income.

         Historically the Company has been almost exclusively a fixed-rate
lender and the Company's policy in recent years has been to reduce its exposure
to interest rate risk generally by better matching the maturities and interest
rates of its interest rate sensitive assets and liabilities by originating and
retaining for the portfolio balloon mortgage loans with three and five year
terms, shorter term home equity loans and selling longer term 15 and 30 year
fixed rate mortgages. While the Company has not purchased mortgage-backed
securities since 1990, such securities have generally been adjustable-rate
mortgage-backed securities, which are more liquid than mortgage loans held in
portfolio. Finally, the Company also maintains a significant percentage of its
assets in cash and other liquid investments, which permits the Company to
reinvest such assets more quickly in response to changes in market interest
rates. In addition, the Company offers competitive rates on deposit accounts and
prices certificates of deposit to provide customers with incentives to choose
certificates of deposit with longer terms. To reduce the potential volatility


                                       10
<PAGE>   13

of the Company's earnings in a changing interest rate environment, the Company
has sought to manage interest rate risk by retaining for the portfolio certain
originated residential mortgage loans (primarily adjustable rate and balloon
mortgages) and generally sell the remainder in the secondary market by
originating shorter-term home equity loans, and by investing in adjustable-rate
mortgage-backed securities, short- and medium-term agency securities, and
short-term investments such as interest-bearing deposits in other financial
institutions.

         Net Portfolio Value. The OTS adopted a final rule in August 1993
incorporating an interest rate risk component into the risk-based capital rules.
The IRR component is a dollar amount that will be deducted from total capital
for the purpose of calculating an institution's risk-based capital requirement
and is measured in terms of the sensitivity of its net portfolio value ("NPV")
to changes in interest rates. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities, and off-balance sheet
contracts. An institution's IRR is measured as the change to its NPV as a result
of a hypothetical 200 basis point change in market interest rates. A resulting
change in NPV of more than 2% of the estimated market value of its assets will
require the institution to deduct from its capital 50% of that excess change.

         The Company utilizes NPV to supplement its gap analysis in managing
interest rate risk. Unlike gap analysis, the NPV model utilized by the OTS
updates cash flow assumptions (by changing prepayment estimates) for different
rate scenarios. The following table presents the Company's NPV as of December
31, 2000, as calculated by the OTS, based on information provided to the OTS by
the Company.

<TABLE>
<CAPTION>

                       CHANGE IN
                    INTEREST RATES                    NET PORTFOLIO VALUE
                    IN BASIS POINTS              ----------------------------
                     (RATE SHOCK)                AMOUNT                 RATIO
                     ------------                ------                 -----
                                               (DOLLARS IN THOUSANDS)

<S>                                             <C>                      <C>
                      +300                      $  13,942                5.50%
                      +200                         16,335                6.33
                      +100                         18,665                7.10
                      Static                       20,420                7.65
                      (100)                        20,641                7.65
                      (200)                        20,366                7.48
                      (300)                        20,767                7.53

</TABLE>

         As indicated above, management has structured its assets and
liabilities to minimize its exposure to interest rate risk, particularly in a
decreasing interest rate environment. There is no significant change to the
Company's NPV with decreasing rates up to 300 basis points. The Company's NPV
would fall from 7.65% to 5.50% with a 300 basis point increase in interest
rates. Management considers such an increase unlikely in the current interest
rate environment.

LIQUIDITY AND CAPITAL RESOURCES

         The Company is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 4.0%. The
Company's liquidity ratio averaged 8.05% during the month of December 2000.
Liquidity ratios averaged 7.68% for the three months ended December 31, 2000.
The Company adjusts its liquidity levels in order to meet funding needs of
deposit outflows, payment of real estate taxes on mortgage loans, repayment of
borrowings and loan commitments. The Company also adjusts liquidity as
appropriate to meet its asset and liability management objectives.

         The Company's primary sources of funds are deposits, borrowed funds,
amortization and prepayment of loans and mortgage-backed securities, maturities
of investment securities and other investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans and
mortgage-backed securities are a

                                       11

<PAGE>   14

relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions, and
competition. The Company manages the pricing of its deposits to maintain a
desired deposit balance. In addition, the Company invests in short-term
interest-earning assets, which provide liquidity to meet lending requirements.
At December 31, 2000, $14.0 million, or 90.9%, of the Company's investment
securities and mortgage-backed securities, was scheduled to mature in less than
five years, and $1.4 million, or 9.1%, was scheduled to mature in over five
years. Assets qualifying for liquidity outstanding at December 31, 2000,
amounted to $28.1 million.

         A major portion of the Company's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash are net income, principal repayments on
loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB, which provide an
additional source of funds.

         At December 31, 2000, the Company had outstanding loan commitments of
$3.5 million. This amount did not include $1.7 million for construction of 1-4
family dwellings, $1.9 million of undisbursed lines of credit on home equity
loans, and $2.5 million of unused commercial lines of credit. Certificates of
deposit scheduled to mature in less than one year at December 31, 2000 totaled
$59.9 million. Based on prior experience, management believes that a significant
portion of such deposits will remain with the Company.

SAFE HARBOR STATEMENT

         When used in this annual report or future filings by Alpena Bancshares,
Inc. with the Securities Exchange Commission ("SEC"), in the Company's press
releases or other public or stockholder communications, or in oral statements
made with the approval of an authorized executive officer, the words or phrases
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.

         The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit and other risks
of lending and investment activities and competitive and regulatory factors,
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected.

         The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.

                                       12
<PAGE>   15
                        [PLANTE & MORAN, LLP LETTERHEAD]


                          Independent Auditor's Report



To the Board of Directors
Alpena Bancshares, Inc. and Subsidiaries


We have audited the accompanying consolidated statement of financial condition
of Alpena Bancshares, Inc. and subsidiaries as of December 31, 2000 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year 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 audit. The
consolidated financial statements of Alpena Bancshares, Inc. and subsidiaries
for the years ended December 31, 1999 and 1998 were audited by other auditors
whose report dated February 14, 2000 expressed an unqualified opinion on those
statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.

In our opinion, the 2000 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Alpena Bancshares, Inc. and subsidiaries as of December 31, 2000 and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.





                                        /s/ PLANTE & MORAN, LLP


Auburn Hills, Michigan
January 31, 2001



                                       13
<PAGE>   16

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                   CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                                              December 31
                                                                                        -------------------------
                                                                                          2000            1999
                                                                                        ---------       ---------
                                     ASSETS
<S>                                                                                   <C>             <C>
Cash and cash equivalents                                                               $   4,528       $   7,279
Overnight deposits with Federal Home Loan Bank                                             12,299           2,695
                                                                                        ---------       ---------
        Total cash and cash equivalents                                                    16,827           9,974

Securities available for sale (Note 2)                                                     15,425           2,110
Securities to be held to maturity (Note 2)                                                     --          12,645
Loans - Net (Note 3)                                                                      218,957         223,867
Loans held for sale                                                                           850              --
Foreclosed real estate                                                                        150             100
Real estate held for sale (Note 4)                                                          1,113           1,486
Federal Home Loan Bank stock                                                                4,294           4,294
Property and equipment (Note 5)                                                             4,486           4,291
Accrued interest receivable                                                                 1,490           1,315
Intangible assets                                                                           2,141           2,341
Other assets                                                                                1,276           1,126
                                                                                        ---------       ---------

        Total assets                                                                    $ 267,009       $ 263,549
                                                                                        =========       =========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
   Customer deposits (Note 6)                                                           $ 162,771       $ 156,393
   Advances from borrowers for taxes and insurance                                            255             251
   Advances from Federal Home Loan Bank (Note 7)                                           82,435          85,872
   Accrued expenses and other liabilities                                                   1,878           1,295
   Deferred income taxes (Note 8)                                                             199             933
                                                                                        ---------       ---------

        Total liabilities                                                                 247,538         244,744

STOCKHOLDERS' EQUITY
   Common stock - $1 par value:
     Authorized - 20,000,000 shares
     Issued and outstanding - 1,642,200 shares in 1999 and 2000                             1,642           1,642
   Additional paid-in capital                                                               5,122           5,082
   Retained earnings - Restricted                                                           3,427           2,944
   Retained earnings                                                                        9,059           7,795
   Shares purchased by Recognition and Retention Plan                                          (4)            (10)
   Accumulated other comprehensive income                                                     225           1,352
                                                                                        ---------       ---------

        Total stockholders' equity                                                         19,471          18,805
                                                                                        ---------       ---------
        Total liabilities and stockholders' equity                                      $ 267,009       $ 263,549
                                                                                        =========       =========
</TABLE>


See Notes to Consolidated
  Financial Statements.


                                       14
<PAGE>   17

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                                CONSOLIDATED STATEMENT OF INCOME
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                       Year Ended December 31
                                                           -------------------------------------------
                                                                2000           1999            1998
                                                           -----------     -----------     -----------
<S>                                                      <C>             <C>             <C>
INTEREST INCOME
    Interest and fees on loans                             $    17,589     $    16,232     $    15,206
    Interest and dividends on investments                        1,325           1,256           1,348
    Interest on mortgage-backed securities                         104             119             162
                                                           -----------     -----------     -----------

        Total interest income                                   19,018          17,607          16,716
INTEREST EXPENSE
    Interest on deposits                                         7,596           7,281           7,368
    Interest on other borrowings                                 4,962           4,445           3,871
                                                           -----------     -----------     -----------

        Total interest expense                                  12,558          11,726          11,239
                                                           -----------     -----------     -----------

        Net interest income                                      6,460           5,881           5,477
    Provision for loan losses                                      280             120             115
                                                           -----------     -----------     -----------

        Net interest income after provision for loan losses      6,180           5,761           5,362
OTHER INCOME (EXPENSES)
    Service charges and other fees                                 364             279             207
    Mortgage banking activities                                    243              --              --
    Gain on sale of investment securities                        2,028              --              --
    Gain (loss) on sale of real estate                             (47)             35               9
    Loss on impairment of real estate held for sale               (211)             --              --
    Loss on abandonment of fixed assets                           (258)             --              --
    Other                                                          158             405             157
                                                           -----------     -----------     -----------

        Total other income                                       2,277             719             373
OPERATING EXPENSES
    Compensation and employee benefits                           2,962           2,664           2,040
    Federal insurance premiums                                      32              88              88
    Advertising                                                    184             193             171
    Occupancy                                                      868             787             653
    Other                                                        1,252           1,372           1,142
                                                           -----------     -----------     -----------

        Total operating expenses                                 5,298           5,104           4,094
                                                           -----------     -----------     -----------

INCOME - Before federal income tax                               3,159           1,376           1,641

FEDERAL INCOME TAX                                               1,035             452             558
                                                           -----------     -----------     -----------

NET INCOME                                                 $     2,124     $       924     $     1,083
                                                           ===========     ===========     ===========

PER SHARE DATA
    Basic earnings per share                               $      1.29     $      0.56     $      0.66
    Fully diluted earnings per share                       $      1.29     $      0.56     $      0.65
    Weighted average number of shares outstanding            1,642,181       1,641,848       1,639,246
    Weighted average number of shares outstanding,
       including dilutive stock options                      1,642,181       1,650,641       1,667,498
    Dividends per common share                             $      0.53     $      0.60     $      0.55
</TABLE>


See Notes to Consolidated
Financial Statements.




                                       15
<PAGE>   18


ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                                                        Accumulated
                                                       Additional                 ESOP       Shares       Other           Total
                                              Common     Paid-in    Retained      Debt      Acquired   Comprehensive   Stockholders'
                                               Stock     Capital    Earnings    Guaranty     by RRP    Income (Loss)      Equity
                                             --------  ----------   --------    --------    --------   -------------   ------------
<S>                                        <C>        <C>         <C>         <C>         <C>           <C>           <C>
BALANCE - January 1, 1998                    $  1,637   $  4,845    $  9,545    $   (190)   $    (21)     $  1,202      $ 17,018

Comprehensive income:
   Net income                                      --         --       1,083          --          --            --         1,083
   Unrealized appreciation on available-
       for-sale securities - Net of tax
       of $338                                     --         --          --          --          --           660           660
                                                                                                                        --------

           Total comprehensive income                                                                                      1,743

Stock options exercised                             4         30          --          --          --            --            34
RRP stock release                                  --         46          --          --           5            --            46
ESOP stock release                                 --        205          --          --          --            --           210
Principal payments on ESOP loan                    --       (115)         --         115          --            --            --
Dividends paid                                     --         --        (387)         --          --            --          (387)
                                             --------   --------    --------    --------    --------      --------      ---------
BALANCE - December 31, 1998                     1,641      5,011      10,241         (75)        (16)        1,862        18,664
Comprehensive income:
   Net income                                      --         --         924          --          --            --           924
   Unrealized depreciation on
   available-for-sale
   securities - Net of tax of $263                 --         --          --          --          --          (510)         (510)
                                                                                                                        --------
            Total comprehensive income                                                                                       414

Stock options exercised                             1         11          --          --          --            --            12
RRP stock release                                  --         53          --          --          --            --            53
ESOP stock release                                 --         82          --          --           5            --            87
Principal payments on ESOP loan                    --        (75)         --          75          --            --            --
Dividends paid                                     --         --        (426)         --          --            --          (426)
                                             --------   --------    --------    --------    --------      --------      ---------
BALANCE - December 31, 1999                     1,642      5,082      10,739          --         (11)        1,352        18,804
Comprehensive income:
   Net income                                      --         --       2,124          --          --            --         2,124
   Other comprehensive income:
       Unrealized depreciation on available-for-
         sale securities -
         Net of tax of $109                        --         --          --          --          --           211           211
       Less reclassification adjustment for
         realized gains included in net income -
         Net of tax of $690                        --         --          --          --          --        (1,338)       (1,338)
                                                                                                                        --------
           Total comprehensive income                                                                                        997

Stock options exercised                            --          2          --          --          --            --             2
Forfeiture of shares in connection with RRP        --         --          --          --          --            --            --
RRP stock release                                  --         38          --          --           6            --            44
Dividends paid                                     --         --        (377)         --          --            --          (377)
                                             --------   --------    --------    --------    --------      --------      --------
BALANCE - December 31, 2000                  $  1,642   $  5,122    $ 12,486    $     --    $     (5)     $    225      $ 19,470
                                             ========   ========    ========    ========    ========      ========      ========
</TABLE>


                                       16
<PAGE>   19


ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                            CONSOLIDATED STATEMENT OF CASH FLOWS
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                                         Years Ended December 31
                                                                                -----------------------------------------
                                                                                   2000            1999           1998
                                                                                ---------       ---------       ---------
<S>                                                                            <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                                                 $   2,124       $     924       $   1,083
     Adjustments to reconcile net income to net cash from operating activities:
        Depreciation and amortization                                                 576             493             446
        Provision for loan losses                                                     280             120             115
        Amortization and accretion on securities                                       48             267             (40)
        Gain on sale of investment securities                                      (2,028)             --              --
        Originations of loans held for sale                                       (18,712)             --              --
        Principal amount of loans sold                                             17,862              --              --
        Loss (gain) on sale of real estate                                             47             (35)             (9)
        Loss on impairment of real estate held for sale                               210              --              --
        Loss on abandonment of fixed assets                                           258              --              --
        Changes in accrued interest receivable                                       (175)            (40)             25
        Change in other assets                                                       (149)             90            (277)
        Change in accrued expenses and other liabilities                              595            (323)             57
        Change in deferred income taxes                                              (154)            (19)             72
                                                                                ---------       ---------       ---------
            Net cash provided by operating activities                                 782           1,477           1,472

CASH FLOWS FROM INVESTING ACTIVITIES
     Net (increase) decrease in loans                                               4,102         (18,590)        (24,470)
     Purchase of real estate held for sale                                             --            (187)           (416)
     Proceeds from sale of real estate                                                601             432             462
     Proceeds from maturity of held-to-maturity investment securities                 249           3,456          17,958
     Proceeds from sale of securities available for sale                            2,066              --              --
     Purchase of securities available for sale                                     (2,712)             (3)             (2)
     Purchase of investment securities to be held to maturity                          --          (3,000)        (12,000)
     Purchase of Federal Home Loan Bank stock                                          --            (564)           (780)
     Purchase of premises and equipment                                              (836)           (396)           (150)
                                                                                ---------       ---------       ---------
            Net cash provided by (used in) investing activities                     3,470         (18,852)        (19,398)

CASH FLOWS FROM FINANCING ACTIVITIES
     Net increase in deposits                                                       6,365           9,248           3,829
     Dividends paid on common stock                                                  (377)           (426)           (387)
     Net increase (decrease) in advances from borrowers                                 4            (165)            206
     Additions to advances from Federal Home Loan Bank                            139,500          37,000          25,000
     Repayments of advances from Federal Home Loan Bank                          (142,937)        (25,218)         (9,910)
     Issuance of RRP shares                                                            44               6              47
     Proceeds from exercise of stock options                                            2              12              34
     Net decrease in loans to Employee Stock Ownership Plan (ESOP)                     --             (75)           (115)
     Contribution for shares acquired by ESOP                                          --              75             115
     ESOP stock rebate                                                                 --              61              96
                                                                                ---------       ---------       ---------
            Net cash provided by financing activities                               2,601          20,518          18,915
                                                                                ---------       ---------       ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                           6,853           3,143             989

CASH AND CASH EQUIVALENTS - Beginning of year                                       9,974           6,831           5,842
                                                                                ---------       ---------       ---------

CASH AND CASH EQUIVALENTS - End of year                                         $  16,827       $   9,974       $   6,831
                                                                                =========       =========       =========

SUPPLEMENTAL CASH FLOW AND NONCASH INFORMATION
     Cash paid for income taxes                                                 $     925       $     532       $     787
     Cash paid for interest on deposits and borrowing                              12,555          11,726          11,239
     Stock issued to employees                                                         --               6               5
</TABLE>




See Notes to Consolidated
  Financial Statements.


                                       17
<PAGE>   20

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         NATURE OF OPERATIONS - Alpena Bancshares, Inc. (the "Company") and its
         subsidiary, First Federal Savings and Loan Association of Alpena (the
         "Bank"), conduct operations in the northeastern lower peninsula of
         Michigan. The Bank is primarily engaged in the business of attracting
         deposits from the general public in its market area and investing those
         deposits in one- to four-family residential real estate mortgages and,
         to a lesser extent, commercial real estate loans and consumer loans.

         Alpena Bancshares, Inc. was formed on November 14, 2000 pursuant to a
         plan of reorganization adopted by the Bank and its stockholders.
         Pursuant to the reorganization, each share of First Federal Savings and
         Loan Association of Alpena stock held by existing stockholders of the
         Bank was exchanged for a share of common stock of Alpena Bancshares,
         Inc., by operation of law. The reorganization had no financial
         statement impact and is reflected for all prior periods presented.
         Approximately 56 percent of the Company's capital stock is owned by
         Alpena Bancshares M.H.C., a mutual holding company. The remaining 44
         percent of the Company's stock is owned by the general public,
         including the Bank's Employee Stock Ownership Plan.

         The Bank's loan portfolio is concentrated in residential first-mortgage
         loans. The Bank is not dependent upon any single industry or customer.

         PRINCIPLES OF CONSOLIDATION AND ORGANIZATION - The consolidated
         financial statements include the accounts of Alpena Bancshares, Inc.,
         First Federal Savings and Loan Association of Alpena, and the Bank's
         wholly owned subsidiary, Financial Services & Mortgage Corporation
         ("FSMC"). FSMC invests in real estate, which includes leasing, selling,
         developing, and maintaining real estate properties. All significant
         intercompany balances and transactions have been eliminated in the
         consolidation.

         CASH AND CASH EQUIVALENTS - For presentation purposes on both the
         consolidated statement of financial condition and the consolidated
         statement of cash flows, the Bank considers all highly liquid debt
         instruments purchased with a maturity of three months or less to be
         cash equivalents.

         SECURITIES - Securities are classified as held to maturity when
         management has the intent and ability to hold them to maturity.
         Held-to-maturity securities are reported at amortized cost. All other
         securities are classified as available for sale and are reported at
         fair value, with unrealized gains and losses, net of related deferred
         income taxes, included in equity as a component of accumulated other
         comprehensive income. Federal Home Loan Bank stock is considered
         restricted investment security and is carried at cost.


                                       18
<PAGE>   21


ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, Statement
         of Financial Accounting Standards No. 133, Accounting for Derivative
         Instruments and Hedging Activities ("SFAS 133"), was issued. SFAS 133
         requires all derivative instruments to be recorded on the balance sheet
         at estimated fair value. Changes in the fair value of derivative
         instruments are to be reported each period either in current earnings
         or other comprehensive income, depending on whether a derivative is
         designated as part of a hedge transaction and, if it is, on the type of
         hedge transaction. Certain commitments in the connection with its
         mortgage banking activities are considered derivatives under SFAS 133,
         which was adopted by the Bank in October 2000. The Bank had no material
         derivative instruments at the time of adoption or at year end. The
         implementation did not have a material effect on the consolidated
         financial position or results of operation. Concurrent with adoption of
         SFAS 133, $12,457 of held-to-maturity securities was transferred to
         available-for-sale. The unrealized loss at the time of transfer was
         $183.

         LOAN INTEREST AND FEE INCOME - Loans are generally reported at the
         principal amount outstanding, net of unearned income. Nonrefundable
         loan origination fees and certain direct loan origination costs are
         deferred and included in interest income over the term of the related
         loan as a yield adjustment.

         Interest on loans is accrued and credited to income based on the
         principal amount outstanding. The accrual of interest on loans is
         discontinued when, in the opinion of management, there is an indication
         that the borrower may be unable to meet payments as they become due.
         Upon such discontinuance, all unpaid interest accrued is reversed.
         Interest accruals are generally resumed when all delinquent principal
         and interest have been brought current or the loan becomes both well
         secured and in the process of collection.

         ALLOWANCE FOR POSSIBLE LOAN LOSSES - The allowance for possible loan
         losses is maintained at a level considered by management to be adequate
         to absorb losses inherent in existing loans and loan commitments. The
         adequacy of the allowance is based on evaluations that take into
         consideration such factors as prior loss experience, changes in the
         nature and volume of the portfolio, overall portfolio quality, loan
         concentrations, specific impaired or problem loans and commitments, and
         current economic conditions that may affect the borrower's ability to
         pay.

         LOANS HELD FOR SALE - The Bank routinely sells to investors its
         long-term fixed rate residential mortgages. These loans are identified
         as held for sale and are accounted for at the lower of cost or market
         on an aggregate basis. The lower of cost or market allowance for loans
         held for sale at December 31, 2000 was $0.


                                       19
<PAGE>   22

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         FORECLOSED REAL ESTATE - Real estate acquired in settlement of loans is
         recorded at the lower of the balance of the loan or at estimated fair
         value, minus estimated costs to sell, at the date acquired, plus
         capital improvements made thereafter to facilitate sale. Adjustments
         are made to reflect declines, if any, in net realizable values below
         the recorded amounts. Costs of holding real estate acquired in
         settlement of loans are reflected in income currently.

         REAL ESTATE HELD FOR SALE - FSMC is engaged in the development and sale
         of real estate. Land held for sale or development is carried at cost,
         including development costs not in excess of fair value, less costs to
         sell, determined on an individual project basis.

         FEDERAL HOME LOAN BANK STOCK - The Bank is required to maintain an
         investment in the stock of the Federal Home Loan Bank of Indianapolis
         (FHLB) in an amount equal to at least 1 percent of the unpaid principal
         balances of the Bank's residential mortgage loans or 0.3 percent of its
         total assets, whichever is greater. Purchases and sales of stock are
         made directly with the FHLB at par value.

         PROPERTY AND EQUIPMENT - These assets are recorded at cost, less
         accumulated depreciation. The Bank uses the straight-line method of
         recording depreciation for financial reporting. Maintenance and repairs
         are charged to expense and improvements are capitalized.

         INTANGIBLE ASSETS - In connection with the purchase of certain
         branches, the excess of purchase price over fair value of net assets
         acquired has been allocated to intangible assets, which is being
         amortized over 5 to 15 years.

         INCOME TAXES - The Company records income tax expense based on the
         amount of taxes due on its tax return plus deferred taxes computed
         based on the expected future tax consequences of temporary differences
         between the carrying amounts and tax bases of assets and liabilities,
         using enacted tax rates. As changes in tax laws or rates are enacted,
         deferred tax assets and liabilities are adjusted through the provision
         for income taxes.

         MORTGAGE BANKING ACTIVITIES - In 2000, the Bank began selling to
         investors its originated residential mortgage loans. The mortgage loans
         serviced for others are not included in the consolidated statement of
         financial condition. Loans serviced for others were approximately
         $17,509 at December 31, 2000.


                                       20
<PAGE>   23


ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         When the Bank acquires mortgage servicing rights through the
         origination of mortgage loans and sells those loans with servicing
         rights retained, it allocates the total cost of the mortgage loans to
         the mortgage servicing rights based on their relative fair value.
         Capitalized mortgage servicing rights are amortized as a reduction of
         servicing fee income in proportion to, and over the period of,
         estimated net servicing income by use of a method that approximates the
         level-yield method. Capitalized mortgage servicing rights are
         periodically evaluated for impairment. If impairment is identified, the
         amount of impairment is charged to earnings with the establishment of a
         valuation allowance against the capitalized mortgage servicing rights.

         A summary of the activity relating to mortgage servicing rights is as
         follows:

<TABLE>
<CAPTION>
                                                                             2000
                                                                           --------
<S>                                                                      <C>
         Carrying amount - Beginning of year                               $     --
         Originated mortgage servicing rights capitalized                       156
         Amortization of mortgage servicing rights                              (11)
                                                                           --------
                 Subtotal                                                       145

         Impairment valuation allowance                                          --
                                                                           --------
         Carrying amount - End of year                                     $    145
                                                                           ========
</TABLE>

         OTHER COMPREHENSIVE INCOME - Accounting principles generally require
         that recognized revenue, expenses, gains, and losses be included in net
         income. Certain changes in assets and liabilities, however, such as
         unrealized gains and losses on available-for-sale securities, are
         reported as a separate component in the equity section of the
         consolidated balance sheet. Such items, along with net income, are
         components of comprehensive income.

         USE OF ESTIMATES - The preparation of financial statements in
         conformity with generally accepted accounting principles 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 revenue and expenses during the reporting period.
         Actual results could differ from those estimates.


                                       21
<PAGE>   24


ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         EARNINGS PER SHARE - Earnings per share is based on the weighted
         average number of shares outstanding in each period. Fully diluted
         earnings per share are based on weighted average shares outstanding
         assuming the exercise of the dilutive stock options. The Company uses
         the treasury stock method to compute fully diluted earnings per share,
         which assumes proceeds from the assumed exercise of stock options would
         be used to purchase common stock at the average market price during the
         period.

         RECLASSIFICATIONS - Certain items from December 31, 1999 and 1998 have
         been reclassified to conform with the December 31, 2000 presentation.

NOTE 2 - INVESTMENT SECURITIES

         Investment securities have been classified according to management's
         intent and the Bank's ability to hold securities to maturity. The
         carrying value and estimated fair value of securities at December 31,
         2000 and 1999 are as follows:

<TABLE>
<CAPTION>

                                                                              2000
                                                       ---------------------------------------------------
                                                                        Gross        Gross
                                                       Amortized     Unrealized    Unrealized      Market
                                                          Cost          Gains        Losses         Value
                                                       ---------     ----------    ----------      -------
<S>                                                    <C>           <C>           <C>           <C>
         SECURITIES AVAILABLE FOR SALE
         U.S. Treasury securities and obligations
            of U.S. government corporations
            and agencies                                 $11,996       $    19       $    61       $11,954
         Municipal notes                                     721            --            --           721
         Corporation securities                              947            --            --           947
         Mortgage-backed securities                        1,395            17             7         1,405
         Other securities                                     25           373            --           398
                                                         -------       -------       -------       -------

                 Total                                   $15,084       $   409       $    68       $15,425
                                                         =======       =======       =======       =======
</TABLE>


                                       22
<PAGE>   25


ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

<TABLE>
<CAPTION>

                                                                           1999
                                                     -------------------------------------------------
                                                                     Gross        Gross
                                                     Amortized    Unrealized    Unrealized      Market
                                                        Cost         Gains        Losses         Value
                                                     ---------    ----------    ----------      ------
<S>                                                 <C>           <C>           <C>           <C>
         SECURITIES AVAILABLE-FOR-SALE - Other
             securities                               $    62       $ 2,048       $    --       $ 2,110
                                                      =======       =======       =======       =======
         SECURITIES TO BE HELD TO MATURITY
         U.S. Treasury securities and obligations
             of U.S. government corporations
             and agencies                             $10,999       $    --       $   292       $10,707
         Mortgage-backed securities                     1,646             5             2         1,649
                                                      -------       -------       -------       -------

                 Total                                $12,645       $     5       $   294       $12,356
                                                      =======       =======       =======       =======
</TABLE>

         The amortized cost and estimated market value of securities at December
         31, 2000, by contractual maturity, are shown below. Expected maturities
         will differ from contractual maturities because issuers may have the
         right to call or prepay obligations with or without call or prepayment
         penalties:

<TABLE>
<CAPTION>

                                                       Amortized      Market
                                                          Cost         Value
                                                       ---------      -------
<S>                                                   <C>           <C>
         Due in one year or less                        $ 5,025       $ 5,376
         Due after one year through five years            8,664         8,644
                                                        -------       -------

                 Subtotal                                13,689        14,020

         Mortgage-backed securities                       1,395         1,405
                                                        -------       -------

                 Total                                  $15,084       $15,425
                                                        =======       =======
</TABLE>

         At December 31, 2000, securities with a carrying and fair value of
         $3,004 were pledged to secure certain deposit accounts.

         Proceeds from the sale of available-for-sale securities during 2000
         were $2,066, resulting in a gain of $2,028. There were no sales of
         securities in 1999 or 1998.


                                       23

<PAGE>   26

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 3 - LOANS

         Loans at December 31, 2000 and 1999 are summarized as follows:

<TABLE>
<CAPTION>

                                                                       2000            1999
                                                                     --------        --------
<S>                                                                <C>             <C>
         Real estate loans - One- to four-family
           residential                                               $179,024        $194,165

         Commercial loans:
           Secured by real estate                                      10,681           8,969
           Other                                                        1,143              --
                                                                     --------        --------
                 Total commercial loans                                11,824           8,969

         Consumer loans                                                28,758          21,181
                                                                     --------        --------

                 Total gross loans                                    219,606         224,315

         Less allowance for loan losses                                   649             448
                                                                     --------        --------
                 Total loans - Net                                   $218,957        $223,867
                                                                     ========        ========
</TABLE>

         Final loan maturities and rate sensitivity of the loan portfolio at
         December 31, 2000, are as follows:

<TABLE>
<CAPTION>

                                                              One Year          After
                                              Less Than        to Five          Five
                                              One Year          Years           Years           Total
                                              --------        --------        --------        --------
<S>                                          <C>             <C>             <C>             <C>
         Loans at fixed interest rates        $ 34,027        $ 84,385        $ 94,962        $213,374
         Loans at variable interest rates        4,283           1,495             454           6,232
                                              --------        --------        --------        --------

                 Total                        $ 38,310        $ 85,880        $ 95,416        $219,606
                                              ========        ========        ========        ========
</TABLE>


                                       24
<PAGE>   27

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 3 - LOANS (CONTINUED)

         Certain directors and executive officers of the Company were loan
         customers during 2000 and 1999. Such loans were made in the ordinary
         course of business and do not involve more than a normal risk of
         collectibility. An analysis of aggregate loans outstanding to directors
         and executive officers for the years ended December 31, 2000 and 1999
         is as follows:

<TABLE>
<CAPTION>

                                                            2000       1999
                                                          -------     -------
<S>                                                     <C>         <C>
         Aggregate balance - January 1                    $ 1,014     $   659

         New loans                                             59         714
         Repayments                                          (201)       (359)
                                                          -------     -------

         Aggregate balance - December 31                  $   872     $ 1,014
                                                          =======     =======
</TABLE>

         The Bank considers a loan impaired when it is probable that all
         interest and principal will not be collected in accordance with
         contractual terms of the loan agreement. Consistent with this
         definition, all nonaccrual and reduced-rate loans (with the exception
         of residential mortgages and consumer loans) are considered impaired.
         The Bank had $0 impaired loans in 2000, 1999, and 1998.

         An analysis of the allowance for loan losses is as follows:

<TABLE>
<CAPTION>

                                                        2000         1999        1998
                                                       -----        -----       -----
<S>                                                  <C>          <C>         <C>
         Balance - Beginning of year                   $ 448        $ 478       $ 419

         Provision for losses                            280          120         115
         Loans - Charged off                            (106)        (184)        (56)
         Recoveries                                       27           34          --
                                                       -----        -----       -----

         Balance - End of period                       $ 649        $ 448       $ 478
                                                       =====        =====       =====
</TABLE>

NOTE 4 - REAL ESTATE HELD FOR SALE

         In 2000, the real estate held for sale was determined to be impaired
         and was written down to fair value. Fair value, which was determined
         based on recent sales of comparable real estate and existing real
         estate listings, exceeded cost by approximately $211 at December 31,
         2000. An impairment loss of that amount has been charged to operations
         during the year ended December 31, 2000.



                                       25
<PAGE>   28


ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 5 - PROPERTY AND EQUIPMENT

         A summary of property and equipment for the years ended December 31,
         2000 and 1999 is as follows:

<TABLE>
<CAPTION>

                                                        2000             1999
                                                       ------           ------
<S>                                                  <C>              <C>
         Land                                          $  768           $  768
         Land improvements                                 17               14
         Buildings                                      3,067            2,751
         Equipment                                      1,908            2,336
                                                       ------           ------

                 Total property and equipment           5,760            5,869

         Less accumulated depreciation                  1,274            1,578
                                                       ------           ------

                 Net property and equipment            $4,486           $4,291
                                                       ======           ======
</TABLE>

NOTE 6 - DEPOSITS

         Deposit accounts, by type and range of rates at December 31, 2000 and
         1999, consist of the following:

<TABLE>
<CAPTION>

         Account Type and Rate                           2000                    1999
         ------------------------------------         --------                 --------
<S>                                                 <C>                      <C>
         Noninterest-bearing demand                   $  2,287                 $  1,123
         NOW accounts and MMDA                          19,781                   18,265
         Regular savings accounts                       26,322                   26,930
                                                      --------                 --------

                 Total                                  48,390                   46,318

         Certificate of Deposit Rates
         ------------------------------------
         3.00 percent to 4.99 percent                    2,770                   21,976
         5.00 percent to 6.99 percent                   94,030                   84,511
         7.00 percent to 8.99 percent                   17,581                    3,588
                                                      --------                 --------

                 Total certificate of deposits         114,381                  110,075
                                                      --------                 --------

                 Total deposits                       $162,771                 $156,393
                                                      ========                 ========
</TABLE>


                                       26
<PAGE>   29

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                                 NOTES TO CONSOLIDATED FINANCIAL
                                           STATEMENTS DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 6 - DEPOSITS (CONTINUED)

         Certificates of deposit and savings accounts $100 or greater at
         December 31, 2000 and 1999 were $22,936 and $19,893, respectively.

         The following table sets forth the amount and maturities of
         certificates of deposit at December 31, 2000:

<TABLE>
<CAPTION>

                                                                   Amount Due
                                -------------------------------------------------------------------------------
                                                                                         Greater
                                Less than         1-2          2-3            3-5         than
                Rate              1 Year         Years        Years          Years       5 Years        Total
         --------------------   ---------      --------      --------      --------      --------      --------
<S>                            <C>           <C>           <C>           <C>           <C>           <C>
         3.00 percent to
            4.99 percent         $  2,104      $    378      $    288      $     --      $     --      $  2,770
         5.00 percent to
            6.99 percent           47,571        20,993        12,339         6,891         6,236        94,030
         7.00 percent to
            8.99 percent           10,186         2,639         1,891         1,498         1,367        17,581
                                 --------      --------      --------      --------      --------      --------

                 Total           $ 59,861      $ 24,010      $ 14,518      $  8,389      $  7,603      $114,381
                                 ========      ========      ========      ========      ========      ========
</TABLE>

         Interest expense on deposits for the years ended December 31, 2000,
         1999, and 1998 is summarized as follows:

<TABLE>
<CAPTION>

                                              2000        1999         1998
                                             ------      ------       ------
<S>                                        <C>         <C>          <C>
         NOW and MMDAs                       $  488      $  425       $  366
         Regular savings                        737         720          709
         Certificates of deposit              6,371       6,135        6,293
                                             ------      ------       ------

                 Total                       $7,596      $7,280       $7,368
                                             ======      ======       ======
</TABLE>

NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES

         Advances outstanding from the Federal Home Loan Bank (FHLB) bear
         interest that is payable monthly. Pursuant to blanket collateral
         agreements with the FHLB, advances are collateralized by one- to
         four-family whole mortgage loans, government agency securities and
         highly rated private mortgage-backed securities. The FHLB requires
         eligible collateral to have a market value equal to 145 percent of
         advances.


                                       27
<PAGE>   30

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES (CONTINUED)

         The advances are subject to prepayment penalties subject to the
         provisions and conditions of the credit policy of the Federal Home Loan
         Bank. Future maturities of the advances are as follows:

<TABLE>
<CAPTION>

            Years Ending                                       Weighted Average
            December 31                              Amount     Interest Rate
         ------------------                        ---------   ----------------
<S>                                              <C>           <C>
                2001                               $  32,500        6.45
                2002                                   9,000        6.62
                2003                                  10,500        5.29
                2004                                   4,935        6.37
                2008                                  25,500        6.30
                                                   ---------

                        Total                      $  82,435        6.27
                                                   =========
</TABLE>

NOTE 8 - FEDERAL INCOME TAX

         The analysis of the consolidated provision for federal income tax for
         the years ended December 31, 2000, 1999, and 1998 is as follows:

<TABLE>
<CAPTION>

                                                       2000            1999           1998
                                                     -------         -------         -------
<S>                                                 <C>             <C>             <C>
         Current provision                           $ 1,189         $   471         $   486
         Deferred provision (credit)                    (154)            (19)             72
                                                     -------         -------         -------

                 Total                               $ 1,035         $   452         $   558
                                                     =======         =======         =======
</TABLE>

         A reconciliation of the federal income tax expense and the amount
         computed by applying the statutory federal income tax rate (34 percent)
         to income before federal income tax for the years ended December 31,
         2000, 1999, and 1998 is as follows:

<TABLE>
<CAPTION>

                                                       2000            1999           1998
                                                     -------         -------         -------
<S>                                                 <C>             <C>             <C>
         Tax at statutory rate                       $ 1,074         $   468         $   558
         Nontaxable dividend                             (32)             (6)             (5)
         Tax-exempt interest                              --              (5)             (8)
         Other                                            (7)             (5)             13
                                                     -------         -------         -------

                 Federal income tax                  $ 1,035         $   452         $   558
                                                     =======         =======         =======
</TABLE>



                                       28
<PAGE>   31

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 8 - FEDERAL INCOME TAX (CONTINUED)

         The net deferred tax liability was comprised of the following temporary
         differences at December 31, 2000 and 1999:

<TABLE>
<CAPTION>

                                                                         2000        1999
                                                                        ------      ------
<S>                                                                   <C>         <C>
         Deferred tax assets:
            Bad debt reserve                                            $  199      $  152
            Valuation allowance for real estate held
                for sale                                                    70          --
            Deferred compensation - Key employees                           20          19
            Directors' benefit plan                                        130         107
                                                                        ------      ------
                   Total deferred tax assets                               419         278

         Valuation allowance for deferred tax assets                        --          --

         Deferred tax liabilities:
            Bad debt recapture                                              72          96
            Mortgage servicing rights                                       50          --
            Partnership losses                                              40          40
            Depreciation                                                   266         324
            Other                                                           74          55
            Unrealized gains on available-for-sale
                securities                                                 116         696
                                                                        ------      ------
                   Total deferred tax liabilities                          618       1,211
                                                                        ------      ------

                   Net deferred tax liability                           $  199      $  933
                                                                        ======      ======
</TABLE>

         For tax years beginning prior to January 1, 1996, a qualified thrift
         institution was allowed a bad debt deduction for tax purposes based on
         a percentage of taxable income or on actual experience. The Bank used
         the percentage of taxable income method through December 31, 1995.

         The Small Business Job Protection Act of 1996 (the "Act") requires
         qualified thrift institutions, such as the Bank, to recapture the
         portion of their tax bad debt reserves at January 1, 1996 that exceeds
         the December 31, 1987 ("base year") reserve balance. The amount of this
         excess reserve is $422, which will be taken into taxable income ratably
         over a six-year period beginning in 1998.


                                       29
<PAGE>   32

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 8 - FEDERAL INCOME TAX (CONTINUED)

         A deferred tax liability has not been recognized for the tax bad debt
         base year reserves of the Bank. The base year reserves are the balance
         of reserves as of December 31, 1987. At December 31, 2000, the amount
         of those reserves was approximately $60. The amount of the unrecognized
         deferred tax liability at December 31, 2000 was approximately $20.

NOTE 9 - OFF-BALANCE-SHEET RISK COMMITMENTS AND CONTINGENCIES

         OFF-BALANCE-SHEET RISK - The Bank is party to financial instruments
         with off-balance-sheet risk in the normal course of business to meet
         the financing needs of its customers and to reduce its own exposure to
         fluctuations in interest rates. These financial instruments include
         commitments to extend credit and forward contracts to sell mortgage
         loans. These instruments involve, to varying degrees, elements of
         credit and interest rate risk that are not recognized in the
         consolidated balance sheet.

         Commitments to extend credit are agreements to lend to a customer as
         long as there are no violations of any condition established in the
         contract. Commitments generally have fixed expiration dates or other
         termination clauses and may require payment of a fee. Fees from issuing
         these commitments to extend credit are recognized over the period to
         maturity. Since a portion of the commitments is expected to expire
         without being drawn upon, the total commitments do not necessarily
         represent future cash requirements. The Bank evaluates each customer's
         creditworthiness on a case-by-case basis. The amount of collateral
         obtained upon extension of credit is based on management's credit
         evaluation of the customer.

         Exposure to credit loss in the event of nonperformance by the other
         party to the financial instrument for commitments to extend credit and
         financial guarantees written is represented by the contractual amount
         of those items. The Bank generally requires collateral to support such
         financial instruments in excess of the contractual amount of those
         instruments.

         Forward contracts are used to manage risk positions associated with
         mortgage origination activities. Substantially all forward contracts
         mature within 90 days of origination. Forward contracts are traded in
         the over-the-counter markets and do not have standardized terms.
         Counterparties to the Bank's forward contracts are primarily U.S.
         government agencies and brokers and dealers in mortgage-backed
         securities. In the event the counterparty is unable to meet contractual
         obligations, the Bank may be exposed to selling mortgage loans at
         prevailing market prices. There were no counterparty default losses on
         forward contracts for the years ended December 31, 2000, 1999, and
         1998. At December 31, 2000, the Bank had no material forward contracts.


                                       30
<PAGE>   33

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE  9  - OFF-BALANCE-SHEET RISK COMMITMENTS AND CONTINGENCIES (CONTINUED)

           At December 31, 2000 and 1999, the Bank had loan commitments of
           $9,562 and $3,457, respectively, consisting of unused lines of credit
           and loans that have been committed but not closed, and that are not
           included in the accompanying consolidated financial statements.

NOTE 10 -  STOCKHOLDERS' EQUITY

           The Company declared $.525, $.60 and $.55 regular cash dividends on
           its shares of common stock for the years ended December 31, 2000,
           1999, and 1998, respectively. Payment of dividends on the common
           stock is subject to determination and declaration by the Board of
           Directors and depends on a number of factors, including capital
           requirements, regulatory limitation on payment of dividends, the
           Bank's results of operation and financial condition, tax
           considerations, and general economic conditions.

           The Bank filed a notice with the Office of Thrift Supervision (OTS)
           and the Federal Deposit Insurance Corporation (FDIC) requesting
           approval to waive payment of cash dividends to Alpena Bancshares
           M.H.C. (the "M.H.C.") (majority stockholder of the Company). The OTS
           and FDIC did not object to the dividend waiver request subject to the
           following conditions:

           (1)   For as long as the Company and the Bank are controlled by the
                 M.H.C., the amount of dividends waived by the M.H.C. must be
                 segregated and considered as a restriction on retained earnings
                 of the Company;

           (2)   The amount of the dividend waived by the M.H.C. shall be
                 available for declaration as a dividend solely to the M.H.C.;
                 and

           (3)   The amount of the dividend waived by the M.H.C. must be
                 considered as having been paid by the Company in evaluating any
                 proposed dividend.

           In addition, the OTS may rescind its nonobjection to the waiver of
           dividends for subsequent periods, if based on subsequent
           developments, the proposed waivers are determined to be detrimental
           to the safe and sound operation of the Bank.

           If management determines that it is probable that the waived
           dividends will be paid, it will be necessary to record a liability in
           accordance with Statement of Financial Accounting Standards No. 5. In
           management's opinion, it is not probable that the waived dividends
           will be paid; therefore, a liability has not been recorded in the
           financial statements of the Company.


                                       31
<PAGE>   34

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)

          The Bank is subject to various regulatory capital requirements
          administered by the OTS. Failure to meet certain capital requirements
          can initiate certain mandatory and possibly additional discretionary
          action 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,
          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 regarding
          components, risk-weightings, and other factors.

          As of December 31, 2000 and 1999, the OTS categorized the Bank as
          "well capitalized" per definition of 12 CFR Section 565.4(b)(1). To be
          categorized as well capitalized, the Bank must maintain minimum total
          risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
          in the table. There are no conditions or events since that
          notification that management believes have changed the Bank's
          categorization.

<TABLE>
<CAPTION>

                                                                                                To be Categorized as
                                                                                               Well Capitalized Under
                                                                            For Capital          Prompt Corrective
                                                        Actual           Adequacy Purposes       Action Provisions
                                              -----------------------------------------------------------------------
                                                 Amount        Ratio     Amount     Ratio        Amount      Ratio
                                              ----------       ------   --------    -----       -------      --------
                                                                      (Dollars in Thousands)
<S>                                         <C>              <C>      <C>          <C>        <C>          <C>
         December 31, 2000
             Total capital (to
                 risk-weighted assets)        $   16,425       10.59%   $ 12,416     8.00%      $ 15,520     10.00%
             Tier 1 capital (to
                 risk-weighted assets)            15,622       10.07%      6,205     4.00%         9,307      6.00%
             Tier 1 capital (to total
                 assets)                          15,622        5.93%     10,530     4.00%        13,163      5.00%

         December 31, 1999
             Total capital (to
                 risk-weighted assets)            13,908       10.00%     11,127     8.00%        13,908     10.00%
             Tier 1 capital (to
                 risk-weighted assets)            13,460        9.68%      5,562     4.00%         8,343      6.00%
             Tier 1 capital (to total
                 assets)                          13,460        5.22%     10,310     4.00%        12,887      5.00%
</TABLE>


                                       32
<PAGE>   35

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 11 - EMPLOYEE BENEFIT PLANS

          RETIREMENT PLANS

          The Bank is a participant in the multiemployer Financial Institutions
          Retirement Fund (FIRF or the "Plan"), which covers substantially all
          of its officers and employees. The defined benefit plan covers all
          employees who have completed one year of service, attained age 21, and
          worked at least 1,000 hours during the year. Normal retirement age is
          65, with reduced benefits available at age 55. The Bank's
          contributions are determined by FIRF and generally represent the
          normal cost of the Plan. Specific Plan assets and accumulated benefit
          information for the Bank's portion of the Plan are not available.
          Under the Employee Retirement Income Security Act of 1974 (ERISA), a
          contributor to a multiemployer pension plan may be liable in the event
          of complete or partial withdrawal for the benefit payments guaranteed
          under ERISA. The Bank was fully funded in the Plan as of December 31,
          2000. The expense of the Plan allocated to the Bank for the years
          ended December 31, 2000, 1999, and 1998 was $137, $93, and ($12),
          respectively.

          In 1999, the Bank instituted a Section 401(k) savings plan covering
          substantially all of its employees who meet certain age and service
          requirements. Under the plan, the Bank matches 50 percent of
          participant contributions up to 3 percent of each participant's
          compensation during the year. This contribution is dependent upon
          availability of sufficient net earnings from current or prior years.
          Additional contributions may be made as approved by the Board of
          Directors. Expense under the plan for the years ended December 31,
          2000 and 1999 was $47 and $72, respectively.

          The Bank has entered into a nonqualified deferred compensation plan
          for its directors. Each director may voluntarily defer all or part of
          his or her director's fees to participate in this program. The plan is
          currently unfunded and amounts deferred are unsecured and remain
          subject to claims of the Bank's general creditors. Directors are paid
          once they reach normal retirement age or sooner for reason of death,
          total disability, or termination. The Bank may terminate the plan at
          any time. The amount recorded under the plan totaled approximately
          $383 and $316 at December 31, 2000 and 1999, respectively. The expense
          associated with the plan was $67, $55, and $48 for the years ended
          December 31, 2000, 1999, and 1998, respectively.


                                       33
<PAGE>   36

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 11 - EMPLOYEE BENEFIT PLANS (CONTINUED)

          EMPLOYEE STOCK OWNERSHIP PLAN

          Effective January 1, 1994, the Bank implemented an employee stock
          ownership plan (ESOP). The ESOP covers substantially all employees
          with more than one year of service who have completed at least 1,000
          hours of service and who have attained the age of 21. To fund the
          ESOP, the Bank borrowed $480 from an outside party to purchase 48,000
          shares of the Company's common stock at $10 per share. The ESOP note
          was payable quarterly with interest (New York prime) and was retired
          in 1999. All shares were allocated as of December 31, 1999.
          Compensation expense, measured by the fair value of ESOP shares
          allocated to participants during a fiscal year, amounted to $0, $75,
          and $194 in compensation expense for the years ended December 31,
          2000, 1999, and 1998, respectively.

          STOCK AWARD PLAN

          The 1996 Recognition and Retention Plan for employees and outside
          directors authorized the issuance of authorized, but unissued shares
          of common stock of the Company in an aggregate amount of 27,600 shares
          of common stock, of which amount, 17,940 shares were available to be
          awarded to employees and 9,660 shares were available to be awarded to
          nonemployee directors. Restricted stock awards are nontransferable and
          nonassignable. Awards to nonemployee directors vest at the rate of 20
          percent of the amount awarded commencing one year from the date of the
          award, April 17, 1996. Awards to executive officers and employees
          would become fully vested upon termination of employment or service
          due to death, disability, or normal retirement. Upon termination of
          employment or service for any other reason, unvested shares are
          forfeited. A provision of $54, $54, and $53 was charged to expense for
          the years ended December 31, 2000, 1999, and 1998, respectively.



                                       34
<PAGE>   37

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 11 - EMPLOYEE BENEFIT PLANS (CONTINUED)

          A summary of shares relating to the Recognition and Retention Plan is
          as follows:

<TABLE>

<S>                                              <C>
          Outstanding - January 1, 1998           $ 21,440
              Granted in 1998                          500
              Vested in 1998                        (5,360)
              Forfeited in 1998                        (60)
                                                  --------
          Outstanding - December 31, 1998           16,520
              Vested in 1999                        (6,200)
              Forfeited in 1999                       (340)
                                                  --------
          Outstanding - December 31, 1999            9,980
              Vested in 2000                        (5,587)
              Forfeited in 2000                       (200)
                                                  --------

          Outstanding - December 31, 2000         $  4,193
                                                  ========
</TABLE>

          STOCK OPTION PLAN

          The 1996 stock option plan for certain employees and nonemployee
          directors authorized the grant of stock options and limited rights to
          purchase 69,000 shares of common stock. Pursuant to the stock option
          plan, grants may be made of incentive stock options, nonstatutory
          stock options, and limited rights. Nonemployee directors are only
          eligible to receive nonstatutory options. Under the terms of the plan,
          fully vested incentive stock options have been granted at fair market
          value as of the date of the grant that are exercisable any time prior
          to 10 years from the grant date. Nonstatutory stock options have been
          granted at fair market value on the date the option is granted and are
          exercisable prior to 10 years from the date of grant.


                                       35
<PAGE>   38

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 11 - EMPLOYEE BENEFIT PLANS (CONTINUED)

<TABLE>
<CAPTION>

                                                            2000                     1999                   1998
                                                   -----------------------  -----------------------  ------------------------
                                                                  Weighted                 Weighted                  Weighted
                                                                   Average                  Average                   Average
                                                   Number of      Exercise  Number of      Exercise  Number of       Exercise
                                                     Shares         Price     Shares         Price     Shares          Price
                                                   ---------      --------  ---------      --------  ---------      ---------
<S>                                               <C>          <C>         <C>          <C>         <C>          <C>
          Options outstanding at
             beginning of year                       60,589       $   9.94    63,329       $   9.92    65,829       $    9.76
          Options granted                                --             --        --             --     2,000           14.50
          Options exercised                            (200)          9.63    (1,200)          9.63    (3,500)           9.63
          Options forfeited                          (6,421)          9.63    (1,540)          9.63    (1,000)           9.63
                                                    -------                  -------                  -------
          Options outstanding at end
             of year                                 53,968           9.97    60,589           9.94    63,329            9.92
                                                    =======                  =======                  =======

          Exercisable at end of year                 53,968           9.97    60,589           9.94    63,329            9.92

          Weighted average estimated
             fair value of options granted
             during the year                            N/A            N/A      8.57
</TABLE>

          At December 31, 2000, options outstanding had exercise prices ranging
          between $9.63 and $14.50 per share and a weighted average remaining
          contractual life of 5.5 years. The Company accounts for the options
          granted using the intrinsic value method, under which compensation
          expenses are recorded at the amount by which the market price of the
          underlying stock at the grant date exceeds the exercise price of an
          option. Under the Company's plan, the exercise price on all of the
          options granted equals or exceeds the fair value of the stock at the
          grant date. Accordingly, no compensation cost is recorded as a result
          of stock options awarded under plans. If the fair value method of
          accounting had been used, which reflects additional compensation cost
          for options grants based on the value of the options granted, the
          Company's net income attributable to common stock would have been
          reduced by $0, $0, and $11 for the years ended December 31, 2000,
          1999, and 1998, respectively.

          The fair value of options granted under the Company's stock option
          plan is estimated on the date of the grant using the Black-Scholes
          option-pricing model with the following weighted-average assumptions
          used for grants in 1998: annual dividend yield of 6.0 percent;
          expected volatility of 62.84 percent; risk-free interest rate of 5.23
          percent; and an expected life of ten years.


                                       36
<PAGE>   39

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS

          FAIR VALUES OF FINANCIAL INSTRUMENTS - The carrying amounts and
          estimated fair values of the Bank's financial instruments are
          presented below. Certain assets, the most significant being premises
          and equipment and the deposit base and other customer relationship
          intangibles, do not meet the definition of a financial instrument and
          are excluded from this disclosure. Accordingly, this fair value
          information is not intended to, and does not, represent Alpena
          Bancshares, Inc. and subsidiaries underlying value. Many of the assets
          and liabilities subject to the disclosure requirements are not
          actively traded, requiring fair values to be estimated by management.
          These estimates necessarily involve the use of judgment about a wide
          variety of factors, including, but not limited to, relevancy of market
          prices of comparable instruments, expected future cash flows, and
          appropriate discount rates.

          The carrying amounts and estimated fair values of financial
          instruments at December 31, 2000 and 1999 are as follows (items that
          are not financial instruments are not included):

<TABLE>
<CAPTION>

                                                          2000                         1999
                                                 ------------------------      ------------------------
                                                 Carrying      Estimated       Carrying      Estimated
                                                  Amounts      Fair Value       Amounts      Fair Value
                                                 ---------     ----------      ---------     ----------
<S>                                             <C>            <C>            <C>            <C>
          Financial assets:
               Cash and cash equivalents          $ 16,827       $ 16,827       $  9,974       $  9,974
               Securities                           15,425         15,425         14,755         14,466
               Loans - Net                         218,957        215,148        223,867        220,653
               Federal Home Loan Bank stock          4,294          4,294          4,294          4,294
               Accrued interest receivable           1,490          1,490          1,315          1,315

          Financial liabilities:
               Customer deposits                   162,771        158,988        156,393        156,841
               Advances from borrowers for
                  taxes and insurance                  255            255            251            251
               Federal Home Loan Bank advances      82,435         81,478         85,872         83,820
               Accrued interest payable                267            267            263            263
</TABLE>


                                       37
<PAGE>   40

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

          The terms and short-term nature of certain assets and liabilities
          result in their carrying amount approximating fair value. These
          include cash and due from banks, interest-bearing deposits in banks,
          federal funds sold and accrued interest receivable and payable. The
          following methods and assumptions were used by the Bank to estimate
          the fair value of the remaining classes of financial instruments:

          Securities are valued based on quoted market prices, where available.
          If quoted market prices are not available, fair values are based on
          quoted market prices of comparable instruments.

          For variable rate loans that reprice frequently, fair values are based
          on carrying amounts, as adjusted for estimated credit losses. The fair
          values for other loans are estimated using discounted cash flow
          analyses and employ interest rates currently being offered for loans
          with similar terms to borrowers of similar credit quality.

          The fair values of demand deposits, savings accounts and money market
          deposits are, by definition, equal to the amount payable on demand.
          The fair values of fixed rate time deposits are estimated by
          discounting cash flows using interest rates currently being offered on
          certificates with similar maturities.

          The fair value of the Bank's fixed rate long-term debt is based on
          quoted market prices or, in the absence of quoted market prices,
          discounted cash flows using rates for similar debt with the same
          maturities. The fair value of variable rate notes is based on their
          carrying amount.

          The fair value of loan commitments and standby letters of credit,
          valued on the basis of fees currently charged for commitments for
          similar loan terms to new borrowers with similar credit profiles, is
          not considered material.

          The fair value of off-balance-sheet financial instruments used for
          risk management purposes, which consists solely of forward contracts
          extending from 45-90 days to sell mortgage loans, is estimated by
          obtaining quotes from brokers and U.S. government agencies or by cash
          flow analysis comparing forward with current rates. The notional
          amount of forward contracts at December 31, 2000 and 1999 was $39 and
          $0, respectively. The fair value of these contracts is not material.



                                       38
<PAGE>   41

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 13 - PARENT-ONLY FINANCIAL STATEMENTS

          The following represents the condensed financial statements of Alpena
          Bancshares, Inc. ("Parent") only. The Parent-only financial
          information should be read in conjunction with the Company's
          consolidated financial statements.

          The condensed balance sheet at December 31, 2000 is as follows:

<TABLE>
<CAPTION>

                                             ASSETS

<S>                                                             <C>
          Cash at subsidiary bank                                 $    48
          Investment in subsidiary                                 19,333
          Other                                                        90
                                                                  -------
                  Total assets                                    $19,471
                                                                  =======

          LIABILITIES AND STOCKHOLDERS' EQUITY

          Liabilities                                             $    --
          Stockholder's equity                                     19,471
                                                                  -------

                  Total liabilities and stockholders' equity      $19,471
                                                                  =======
</TABLE>


          The condensed statement of operations for the year ended December 31,
          2000 is as follows:

<TABLE>

<S>                                                                    <C>
          Operating income                                               $    --
          Operating expense                                                    2

                  Income - Before income taxes and equity in
                      income of subsidiary                                    (2)

          Income tax expense                                                  --
                                                                         -------
                  Income - Before equity in income of subsidiary              (2)

          Equity in income of subsidiary                                   2,126
                                                                         -------

                  Net income                                             $ 2,124
                                                                         =======
</TABLE>



                                       39
<PAGE>   42

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 13 - PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED)

          The condensed statement of cash flows for the year ended December 31,
          2000 is as follows:

<TABLE>

<S>                                                                          <C>
          CASH FLOWS FROM OPERATING ACTIVITIES
              Net income                                                       $ 2,124
              Adjustments to reconcile net income to net cash from
                    operating activities:
                        Equity in income of subsidiary                         $(2,126)
                        Net change in other assets                                 (90)
                                                                               -------
                            Net cash used in operating activities                  (92)

          CASH FLOWS FROM INVESTING ACTIVITIES - Upstream
              dividend from subsidiary                                             140
                                                                               -------

          NET INCREASE IN CASH AND CASH EQUIVALENTS                                 48

          CASH AND CASH EQUIVALENTS - Beginning of year                             --
                                                                               -------
          CASH AND CASH EQUIVALENTS - End of year                              $    48
                                                                               =======
</TABLE>



                                       40
<PAGE>   43

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
================================================================================
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2000 AND 1999
                                        (000S OMITTED EXCEPT FOR PER SHARE DATA)

NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

          The following tables summarize the Company's quarterly results for the
          fiscal years ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>

                                                       For the Three-month Periods Ending
                                            ------------------------------------------------------------
                                             March 31,       June 30,     September 30,     December 31,
                                               2000            2000            2000            2000
                                            ----------      ---------    ---------------   -------------
<S>                                         <C>             <C>             <C>             <C>
          Interest income                     $4,571          $4,803          $4,779          $4,865
          Interest expense                     2,999           3,084           3,212           3,263
                                              ------          ------          ------          ------

          Net interest income                  1,572           1,719           1,567           1,602
          Provision for losses on loans           45              45              45             145
          Other income                           309             245             671           1,053
          Other expenses                       1,259           1,283           1,316           1,440
                                              ------          ------          ------          ------
          Income before income taxes             577             636             877           1,070
          Federal income taxes                   198             213             301             324
                                              ------          ------          ------          ------
          Net income                          $  379          $  423          $  576          $  746
                                              ======          ======          ======          ======

          Basic earnings per share - Net
                income                        $ 0.23          $ 0.26          $ 0.35          $ 0.45
          Weighted average number of
                shares outstanding             1,642           1,642           1,642           1,642
          Cash dividends declared per
                common share                  $0.150          $0.125          $0.125          $0.125
</TABLE>

<TABLE>
<CAPTION>

                                                       For the Three-month Periods Ending
                                            ------------------------------------------------------------
                                             March 31,       June 30,     September 30,     December 31,
                                               1999            1999            1999            1999
                                            ----------      ---------    ---------------   -------------
<S>                                         <C>             <C>             <C>             <C>
          Interest income                     $4,349          $4,347          $4,374          $4,537
          Interest expense                     2,852           2,913           2,932           3,029
                                              ------          ------          ------          ------

          Net interest income                  1,497           1,434           1,442           1,508
          Provision for losses on loans           30              30              30              30
          Other income                            86             143             308             182
          Other expenses                       1,142           1,133           1,461           1,368
                                              ------          ------          ------          ------

          Income before income taxes             411             414             259             292
          Federal income taxes                   126             126              87             113
                                              ------          ------          ------          ------
          Net income                          $  285          $  288          $  172          $  179
                                              ======          ======          ======          ======

          Basic earnings per share - Net
                income                        $ 0.17          $ 0.18          $ 0.10          $ 0.11
          Weighted average number of
                shares outstanding             1,641           1,642           1,643           1,642
          Cash dividends declared per
                common share                  $0.150          $0.150          $0.150          $0.150
</TABLE>





                                       41
<PAGE>   44


                       DIRECTORS AND EXECUTIVE OFFICERS OF
                             ALPENA BANCSHARES, INC.


         Directors -

         Gary W. Bensinger is owner of Bensinger's Western Auto Store in Alpena,
Michigan. Mr. Bensinger has been a director of the Company since 1985.

         Keith D. Wallace is the senior partner of the law firm of Isackson and
Wallace, located in Alpena, Michigan. Mr. Wallace has acted as general counsel
to the Company since 1988. Mr. Wallace has been a director of the Company since
1988.

         James C. Rapin is a pharmacist with LeFave Pharmacy, Alpena, Michigan.
Mr. Rapin has been a director of the Company since 1985.

         Martin A. Thomson is Executive Vice President and General Manager of
Presque Isle Electric and Gas Cooperative, Inc., Onaway, Michigan. Mr. Thomson
has been a director of the Company since 1986.

         Duane I. Dickey is Chairman of the Board of Directors of the Company.
Mr. Dickey was made Chairman of the Board of Directors in 1988. Mr. Dickey
retired from his position as Chief Executive Officer of the Company on November
9, 1998 and as President as of December 31, 1998. Mr. Dickey joined the Company
in 1970. He has been a member of the Board of Directors since 1976.

         Jerry A. Christensen was named Chief Executive Officer of the Company
in November 1998 and President, effective January 1, 1999. Prior to this
appointment, Mr. Christensen served as President and Chief Executive Officer of
Homestead Savings Bank, Albion, Michigan, a position he held since 1992.

         Executive Officers -

         James I. Malaski is Executive Vice President of the Company and has
served in this position since 1988. In November 1998, Mr. Malaski was made Chief
Operations Officer of the Company as well. Also, Mr. Malaski was made Secretary
of the Company in October 1999. Mr. Malaski joined the Company in 1983.

         Thomas S. Davis joined the Company and was named Vice President of
Operations in July 1999. Prior to joining the Company, Mr. Davis served as the
Chief Financial Officer of Bank of Ann Arbor. Mr. Davis also previously held
operations and financial officer positions at other banks since 1987.

         Jerome W. Tracey joined the Company and was named Vice President of
Commercial Services in November 1999. Prior to this appointment, Mr. Tracey
served as Vice President of Commercial Lending for National City Bank, Alpena,
Michigan, a position he held since 1996. Mr. Tracey has been in the banking
profession since 1981.




                                       42

<PAGE>   45


                             STOCKHOLDER INFORMATION


         The Annual Meeting of Stockholders will be held at 1:00 p.m., April 17,
2001 at the Thunder Bay Recreational Center, 701 Woodward Avenue, Alpena,
Michigan.

STOCK LISTING

         The Company's common stock is traded over-the-counter through the
National Daily Quotation System "pink sheets" published by the National
Quotation Bureau, Inc.

PRICE RANGE OF COMMON STOCK

         There are no uniformly quoted prices for the Company's common stock.
Stockbrokers can provide recent price ranges using information contained in the
National Daily Quotation System "pink sheets."



GENERAL COUNSEL                                INDEPENDENT AUDITOR

Isackson & Wallace, P.C.                       Plante & Moran, LLP
114 S. Second Avenue                           2601 Cambridge Ct.
Alpena, MI  49707                              Auburn Hills, Michigan 48326

SPECIAL COUNSEL                                TRANSFER AGENT

Luse Lehman Gorman Pomerenk & Schick           Registrar and Transfer Company
5335 Wisconsin Avenue, N.W.                    10 Commerce Drive
Suite 400                                      Cranford, New Jersey 07016
Washington, D.C.  20015                        800-346-6084


ANNUAL REPORT ON FORM 10-KSB

         A COPY OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
2000 WILL BE FURNISHED WITHOUT CHARGE UPON WRITTEN REQUEST TO JAMES I. MALASKI,
CORPORATE SECRETARY, ALPENA BANCSHARES, INC., 100 S. SECOND AVENUE, ALPENA,
MICHIGAN 49707.





                                       43