<PAGE>

                                                                      Exhibit 13

                FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      2005
                                  ANNUAL REPORT

                                 MARCH 31, 2006

<PAGE>

(FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. LOGO)

March 31, 2006

Dear Shareholders:

Two solid building blocks were cemented in place in the Company's foundation
during the past year. First, a second- step conversion and stock offering were
completed effective April 1, 2005, providing the necessary capital to support
our continued growth and a bright future. And second, by promoting several
members of our management, we have the increased bench strength to take on the
challenges of banking for the next decade. Our people are our most important
asset.

STOCK CONVERSION

     -    A total of 1,699,869 shares of common stock were sold to investors at
          $10.00 per share, which represented the ownership interest of Alpena
          Bancshares, MHC in Alpena Bancshares, Inc. (ABI). A new stock holding
          company was formed, First Federal of Northern Michigan Bancorp, Inc.
          (the Company), which trades on the NASDAQ exchange under the symbol
          FFNM, and is the parent of First Federal of Northern Michigan (the
          Bank), a federal savings bank. As a result of the conversion existing
          shares of stock in ABI were exchanged for 1.8477 shares of FFNM stock.
          We established a charitable foundation, First Federal Community
          Foundation, as a part of the conversion and funded the foundation with
          a combination of cash and stock to carry on philanthropic efforts in
          the communities we serve.

     -    Our mission is very clear. It is imperative for the future of the
          Company and the Bank that we deploy the new capital timely and wisely.
          Our growing Commercial Services area of the Bank can now continue to
          recruit new business clients and support the growing needs of existing
          customers. The Bank's $20 million of internal loan growth in 2005 will
          utilize some of the new capital, but we will not rest thinking that is
          all we need to do. We will continue to look for outside opportunities.

BENCH STRENGTH

     -    You will be pleased to know that we have taken a major step in
          strengthening our Executive Management Team at the Company and Bank
          effective January 25, 2006. The following appointments and promotions
          were made from within: Michael W. Mahler was named President and Chief
          Operating Officer; Jerome W. Tracey was named Executive Vice President
          and Chief Lending Officer; and Amy E. Essex, Chief Financial Officer
          was given the added responsibilities of Treasurer and Corporate
          Secretary. In addition, the following appointments were made at the
          Bank level: Julie A. Curtis was named Vice President, Commercial
          Services Manager and Josh A. Lucas was named Assistant Vice President,
          Retail Banking Manager. These appointments, along with other existing
          managers, give us the talent, enthusiastic energy and dedicated spirit
          we need to take the Company and the Bank to the next level.

     -    In the Bank's subsidiary insurance agency, the InsuranCenter of Alpena
          (ICA), Sandra Grant was appointed President and Mark Boyk was
          appointed Chief Operating Officer. Sandy and Mark each have long
          tenure in leadership positions with ICA and have made the transition
          since we purchased ICA in June 2003 a smooth one. Our management has
          been working closely with ICA management to integrate both entities in
          a manner that best serves both sets of customers.

<PAGE>

Setting aside the contribution to the Foundation, the Company's 2005 net income
was more than double 2004 results. The sustainable improvement was based upon
containing expenses while growing the size of the Bank. I am extremely proud of
our Board of Directors and Management for their efforts in planning, then
implementing our roadmap to the future. We are well on our way toward meeting
the goals established as part of the conversion process, and thereby enhancing
shareholder value.

Respectfully yours,


/s/ Martin A. Thomson
-------------------------------------
Martin A. Thomson
Chief Executive Officer
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY

     Set forth below are selected financial and other data of First Federal of
Northern Michigan Bancorp, Inc. 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.

<TABLE>
<CAPTION>
                                                 FOR YEARS ENDED DECEMBER 31,
                                     ----------------------------------------------------
                                       2005       2004       2003       2002       2001
                                     --------   --------   --------   --------   --------
                                                        (IN THOUSANDS)
<S>                                  <C>        <C>        <C>        <C>        <C>
TOTAL ASSETS .....................   $282,575   $262,800   $223,923   $228,808   $241,472
LOANS RECEIVABLE, NET ............    201,183    195,388    163,460    150,799    178,037
LOANS HELD FOR SALE ..............         --      1,096        931        542      1,891
INVESTMENT SECURITIES ............     55,187     42,033     34,670     46,944     23,212
DEPOSITS .........................    188,735    182,489    151,702    156,092    166,538
FHLB ADVANCES & NOTE PAYABLE .....     54,405     56,001     47,159     48,414     52,120
STOCKHOLDERS' EQUITY .............     36,650     21,777     21,951     21,747     20,597
</TABLE>

OPERATING DATA:

<TABLE>
<CAPTION>
                                                                             AT DECEMBER 31,
                                                             -----------------------------------------------
                                                               2005      2004      2003      2002      2001
                                                             -------   -------   -------   -------   -------
                                                                              (IN THOUSANDS)
<S>                                                          <C>       <C>       <C>       <C>       <C>
INTEREST INCOME ..........................................   $15,076   $13,278   $13,350   $14,499   $17,586
INTEREST EXPENSE .........................................     6,706     6,202     6,455     8,342    11,439
                                                             -------   -------   -------   -------   -------
   NET INTEREST INCOME ...................................     8,370     7,076     6,895     6,157     6,147
PROVISION FOR LOAN LOSSES ................................       368       323       267       415       255
                                                             -------   -------   -------   -------   -------
   NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ...     8,002     6,753     6,628     5,742     5,892
                                                             -------   -------   -------   -------   -------
OTHER INCOME (LOSS):
SERVICE CHARGES AND FEES .................................     1,030     1,012       801       818       740
MORTGAGE BANKING ACTIVITIES ..............................       482       579     1,563     1,401     1,352
NET GAIN ON SALE OF INVESTMENT SECURITIES ................        13       103       320        65       183
GAIN (LOSS) ON SALE OF REAL ESTATE .......................       (45)      (47)        7       (17)     (107)
LOSS ON ABANDONMENT OF FIXED ASSETS ......................        --        --        --         2       (88)
OTHER NON-INTEREST INCOME ................................        37        97       255       116       125
INSURANCE & BROKERAGE COMMISSIONS ........................     2,941     2,967     2,480        --        --
                                                             -------   -------   -------   -------   -------
   TOTAL OTHER INCOME ....................................     4,458     4,711     5,426     2,385     2,205
                                                             -------   -------   -------   -------   -------
OTHER EXPENSES ...........................................    11,815    10,856    10,327     7,072     6,166
                                                             -------   -------   -------   -------   -------
   INCOME BEFORE INCOME TAX EXPENSE ......................       645       608     1,727     1,055     1,931
INCOME TAX EXPENSE .......................................       203       204       518       285       646
                                                             -------   -------   -------   -------   -------
   NET INCOME ............................................   $   442   $   404   $ 1,209   $   770   $ 1,285
                                                             =======   =======   =======   =======   =======
</TABLE>

KEY FINANCIAL RATIOS AND OTHER DATA:

<TABLE>
<CAPTION>
                                                                    FOR YEARS ENDED DECEMBER 31,
                                                          -----------------------------------------------
                                                            2005      2004      2003      2002      2001
                                                          -------   -------   -------   -------   -------
<S>                                                       <C>       <C>       <C>       <C>       <C>
PERFORMANCE RATIOS:
RETURN ON AVERAGE ASSETS ..............................      0.16%     0.17%     0.53%     0.33%     0.51%
RETURN ON AVERAGE EQUITY ..............................      1.49%     1.91%     5.52%     3.68%     6.52%
AVERAGE INTEREST RATE SPREAD ..........................      2.97%     2.88%     3.00%     2.50%     2.30%
DIVIDEND PAYOUT RATIO .................................    142.86%   153.85%    30.36%    47.01%    28.02%
DIVIDENDS PER SHARE ...................................   $  0.20   $  0.20   $  0.27   $  0.27   $  0.27
NET INTEREST MARGIN ...................................      3.30%     3.10%     3.26%     2.78%     2.60%
EFFICIENCY RATIO ......................................     85.07%    96.38%    88.02%    87.54%    76.04%
NON-INTEREST EXPENSE TO AVERAGE TOTAL ASSETS ..........      4.32%     4.39%     4.53%     3.01%     2.47%
AVERAGE INTEREST-EARNING ASSETS TO AVERAGE
   INTEREST-BEARING LIABILITIES .......................    112.34%   108.08%   108.69%   107.42%   104.66%

ASSET QUALITY RATIOS:
NON-PERFORMING ASSETS TO TOTAL ASSETS .................      1.57%     0.66%     1.04%     0.68%     0.36%
NON-PERFORMING LOANS TO TOTAL LOANS ...................      1.99%     0.87%     1.28%     0.94%     0.38%
ALLOWANCE FOR LOAN LOSSES TO NONPERFORMING ASSETS .....     35.33%    72.37%    48.89%    62.76%   101.92%
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS ..............      0.70%     0.61%     0.63%     0.61%     0.39%

CAPITAL RATIOS:
EQUITY TO TOTAL ASSETS AT END OF PERIOD ...............     12.96%     8.29%     9.80%     9.50%     8.53%
AVERAGE EQUITY TO AVERAGE ASSETS ......................     10.87%     8.82%     9.62%     8.90%     7.88%
RISK-BASED CAPITAL RATIO (BANK ONLY) ..................     16.82%    10.51%    11.96%    15.95%    13.11%

OTHER DATA:
NUMBER OF FULL SERVICE OFFICES ........................        10        10         8         9         9
</TABLE>

<PAGE>

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

GENERAL

     First Federal of Northern Michigan is a full-service, community-oriented
savings bank whose primary lending activity is the origination of one- to
four-family residential real estate mortgages, commercial real estate loans,
commercial loans and consumer loans. As of December 31, 2005, $106.0 million, or
52.3%, of our total loan portfolio consisted of one- to four-family residential
real estate loans, $44.3 million, or 21.8%, and $ 26.7 million, or 13.1%, of our
total loan portfolio consisted of commercial mortgage loans and commercial
loans, respectively, and $25.9 million, or 12.8%, of our total loan portfolio
consisted of consumer and other loans. In recent years, commercial mortgage
loans and commercial loans have grown as a percentage of our loan portfolio for
two reasons. First, we have increased our emphasis on originating these loans,
which generally have higher interest rates compared to one- to four-family
residential real estate loans. In addition, most of these loans are originated
with adjustable interest rates, which assists us in managing interest rate risk.
Second, most of our one- to four-family residential mortgage loan customers
prefer fixed-rate loans in the low interest rate environment that has prevailed
over the last several years. Since we sell into the secondary mortgage market a
majority of the fixed-rate one- to four-family residential mortgage loans that
we originate, one- to four-family residential real estate loans have decreased
as a percentage of our total loan portfolio.

     Our results of operations depend primarily on our net interest income,
which is the difference between the interest income we receive on our
interest-earning assets, such as loans and securities, and the interest expense
we pay on our deposits and borrowings. Our results of operations are also
affected by non-interest income and non-interest expense, the provision for loan
losses and income tax expense. Non-interest income consists primarily of banking
fees, service charges, insurance commissions and gains (losses) on sales of
loans and securities available for sale. Our non-interest expense consists
primarily of salaries and employee benefits, occupancy and office expenses,
advertising and promotion expense and data processing expenses.

     As the holding company of a federally chartered savings bank, our results
of operations are significantly affected by general economic and competitive
conditions, and particularly changes in market interest rates, government
policies and actions of regulatory authorities. Numerous factors that are beyond
our control can cause market interest rates to increase or decline. In addition,
we are unable to predict future changes in government policies and actions of
regulatory authorities that could have a material impact on our financial
performance. As a result, we believe that changes in market interest rates,
government policies and actions of regulatory authorities represent the primary
uncertainties in predicting our future performance.

BUSINESS STRATEGY

     OPERATING AS A COMMUNITY SAVINGS BANK. We are committed to meeting the
financial needs of the communities in which we operate. Our branch network of 10
offices enhances our ability to serve these communities. We provide a broad
range of individualized consumer and business financial services. We believe
that we can be more effective in servicing our customers than many of our
non-local competitors because our employees and senior management are able to
respond promptly to customer needs and inquiries. Our ability to provide these
services is enhanced by the experience of our senior management, which has an
average of 11 years' experience in the financial services industry.

     INCREASING OUR COMMERCIAL REAL ESTATE AND COMMERCIAL LENDING. Beginning in
2001, we began to increase our originations of commercial real estate and
commercial loans. At December 31, 2005, loans secured by commercial real estate
totaled $44.3 million, or 21.8% of our total loan portfolio, and commercial
loans totaled $26.7 million, or 13.1% of our total loan portfolio. We intend to
emphasize the origination of these types of loans in the future and retain them
in our portfolio. Commercial real estate and commercial loans generally are
originated with higher interest rates compared to one- to four-family
residential real estate loans and, therefore, have a positive effect on our net
interest rate spread and net interest income. In addition, most of these loans
are originated with adjustable interest rates, which assists us in managing
interest rate risk. We believe that our 10-branch network will enable us to
continue to increase our commercial and commercial real estate loan portfolio
without significant additional fixed costs.

<PAGE>

     INCREASING OUR SHARE OF LOWER-COST DEPOSITS. In past years our cost of
funds has been relatively high as we accepted higher-costing long-term
certificates of deposit to fund our long-term assets such as one- to four-family
residential mortgage loans. As we have increased our origination of commercial
real estate and commercial loans, most of which are originated with adjustable
interest rates, we have decreased our need for higher-costing long-term
certificates of deposit. We intend to lower our cost of funds by increasing our
share of lower-cost short-term certificates of deposit and lower-cost money
market deposits. We also intend to continue to market our non-interest-bearing
checking accounts in conjunction with our focus on commercial business lending.

     INCREASING AND DIVERSIFYING OUR SOURCES OF NON-INTEREST INCOME. In June
2003, we acquired the InsuranCenter of Alpena ("ICA"), a licensed insurance
agency engaged in the business of property, casualty and health insurance, in an
effort to increase and diversify our sources of non-interest income. In 2005
ICA's operations provided us with $2.9 million of income, representing 66.0% of
total non-interest income. In 2005, property commissions on insurance sales
represented approximately 21% of ICA's revenues, commissions on life insurance
sales represented approximately 6% of revenues and commissions on health
insurance sales represented approximately 72% of revenues. In November 2005, the
Company acquired several large group customers from another insurance agent for
approximately $564,000. The entire amount of the purchase was assigned to a
customer list intangible asset and is being amortized over five years. The
purchase included the issuance of a note payable in the amount of $383,000,
discussed in Note 10, with the remainder being paid in cash.

     MAINTAINING HIGH ASSET QUALITY AND CAPITAL STRENGTH. We are committed to
conservative loan underwriting standards and procedures, and we primarily
originate loans secured by real estate. As a result, we have consistently
experienced low levels of late payments and losses on loans. At December 31,
2005, our ratio of non-performing assets to total assets was 1.57%. At December
31, 2005, our ratio of equity to assets was 12.96%.

     MANAGING OUR INTEREST RATE RISK EXPOSURE BY SELLING FIXED-RATE RESIDENTIAL
REAL ESTATE LOANS. Historically, most borrowers have preferred long-term,
fixed-rate residential real estate loans when market interest rates are at
relatively low levels. These loans expose us to interest rate risk because our
liabilities, consisting primarily of deposits, have relatively short maturities.
In order to better match the maturities of our loan portfolio to the maturities
of our deposits in the current low interest rate environment, we have sold
substantially all of the fixed-rate, one- to four-family residential real estate
loans with maturities of 15 years or more that we have originated since 2002,
and we intend to continue this practice for so long as interest rates remain at
relatively low levels. However, as interest rates rise in future periods as we
expect, we anticipate deploying our existing cash and cash equivalents, as well
as the net proceeds from our 2005 stock offering, to increase the origination,
and retention, of one-to four-family residential mortgage loans in our
portfolio.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2005 AND 2004

     Total assets increased $19.8 million, or 7.2%, to $282.6 million at
December 31, 2005 from $262.8 million at December 31, 2004. Net loans increased
$5.8 million, or 2.33% to $201.2 million at December 31, 2005 from $195.4
million at December 31, 2004. The increase in net loans was mainly the result of
the Company's commercial lending activities. The commercial loan portfolio grew
14.1% to $71.0 million at December 31, 2005 from $61.0 million at December 31,
2004. The continued growth of the commercial loan portfolio was the result of
the Bank's increased emphasis on growing this portfolio, supported by the hiring
of two new commercial lenders, one in early in 2003, and the other in mid 2004,
as well as the hiring of a commercial credit analyst in 2003. Mortgage lending
originations declined in 2005 to total originations of $54.8 million from $60.4
million in 2004. In 2003 mortgage lending activity reflected the results of high
volume loan refinances which resulted from historically low market interest
rates. This refinance activity slowed significantly in 2004 and 2005 as
historically low rates began to slowly rise. Cash and cash equivalents increased
slightly by $100,000, or 1.0%, to $4.8 million at December 31, 2005 from $4.7
million at December 31, 2004. Investment securities increased $13.2 million, or
31.3%, to $55.2 million at December 31, 2005 from $42.0 million at December 31,
2004 as we increased our investment portfolio as an alternative to funding loans
due to slow mortgage loan originations.

     Deposits increased $6.2 million, or 3.4%, to $188.7 million at December 31,
2005 from $182.5 million at December 31, 2004. This growth reflected success in
attracting deposits through various time deposit promotions despite

<PAGE>

increased competitive pressures on rates. However we did not experience the rate
of deposit growth we experienced in 2004. Borrowings, consisting primarily of
FHLB advances, decreased $1.6 million, or 2.9%, to $54.4 million at December 31,
2005 from $56.0 million at December 31, 2004 as we paid down overnight advances
with the proceeds of our stock offering and then re-borrowed during the year to
fund loan growth and investment purchases in a year with lower than expected
deposit growth

     Stockholders' equity increased $14.8 million, or 41.0% to $36.7 million at
December 31, 2005 from $21.8 million at December 31, 2004. The increase was
mainly a result of raising $15.6 million in capital, after expenses, in our
second-step mutual-to-stock conversion and related stock offering which closed
on April 1, 2005 and net income for the year of $442,000. These increases in
equity were offset by lower other comprehensive income resulting from the
decline in value of available for sale (AFS) securities and to dividends paid of
$540,000.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

     GENERAL. Net income increased to $442,000 for the twelve months ended
December 31, 2005 from $404,000 million for the twelve months ended December 31,
2004. Notably, in April, 2005, in connection with our stock offering, we made a
one time charitable contribution of $680,000 in cash and Company stock to our
newly created First Federal Community Foundation. Absent this one time
contribution, our results from operations showed significant improvement from
2004 to 2005. In 2005 we achieved a $1.2 million increase over 2004 in net
interest income after provision for loan loss. This was offset by a decrease in
other income of $250,000 year over year, due mainly to decreases of $98,000 and
$90,000 respectively in mortgage banking activities and gain on sale of AFS
investments, and an increase of $958,000 in other expense, of which $680,000 was
the one-time contribution to the charitable foundation. We also experienced a
$286,000 increase in salaries and benefits year over year.

     INTEREST INCOME. Interest income increased by $1.8 million, or 13.5%, to
$15.1 million for the twelve months ended December 31, 2005 from $13.3 million
for the twelve months ended December 31, 2004. The increase was primarily due to
the growth in our commercial loan portfolio of $10 million during the year ended
December 31, 2005, which caused an overall increase in the yield on our loan
portfolio to 6.51% for the twelve months ended December 31, 2005 from 6.36% for
the twelve months ended December 31, 2004. The average balance of our loan
portfolio increased by $21.0 million, or 11.6%, to $202.0 million for the twelve
months ended December 31, 2005 from $181.0 million for the twelve months ended
December 31, 2004. The average balance of non-mortgage loans, principally
commercial loans and consumer loans, increased by $17.2 million, or 23.0%, to
$91.9 million for the twelve months ended December 31, 2005 from $74.7 million
for the twelve months ended December 31, 2004. The average yield on our
commercial loans and consumer loans increased 100 basis points and 30 basis
points, respectively, for the twelve months ended December 31, 2005 from the
twelve months ended December 31, 2004. The average balance of our one- to
four-family residential mortgage loans also increased to $110.1 million for the
twelve months ended December 31, 2005 from $106.3 million for the twelve months
ended December 31, 2004, while the average yield on such loans decreased to
6.13% from 6.48%.

     INTEREST EXPENSE. Interest expense increased to $6.7 million for the twelve
months ended December 31, 2005 from $6.2 million for the twelve months ended
December 31, 2004, due primarily to an increase in the average balance of
interest bearing liabilities of $14M from December 2004 to December 2005. Higher
interest rates paid on our deposits in 2005 also contributed to the increase in
interest expense year over year. The average cost of deposits for the twelve
months ended December 31, 2005 increased to 2.47% from 2.29% for the twelve
months ended December 31, 2004. The average cost of borrowings decreased to
4.55% for the twelve months ended December 31, 2005 from 4.67% for the twelve
months ended December 31, 2004. The increase in the average cost of deposits
reflected higher market interest rates, while the decrease in the average cost
of borrowings also reflected an increase in market rates, but was offset by
maturing higher-cost FHLB advances which re-priced at lower rates.

     NET INTEREST INCOME. Net interest income increased to $8.4 million for the
twelve months ended December 31, 2005 from $7.1 million for the twelve months
ended December 31, 2004. The increase in net interest income was the result of
an increase in net average interest earning assets to $28.0 million from $17.2
million combined with an increase in our average interest rate spread to 2.97%
for the twelve months ended December 31, 2005 from 2.88% for the twelve months
ended December 31, 2004.

<PAGE>

     PROVISION FOR LOAN LOSSES. We recorded a provision for loan losses of
$368,000 for the twelve months ended December 31, 2005 compared to a provision
of $323,000 for the twelve months ended December 31, 2004. We had net
charge-offs of $249,000 and $144,500 during the twelve months ended December 31,
2005 and 2004, respectively. We used the same methodology and generally similar
assumptions in assessing the allowance for both periods. The allowance for loan
losses was $1.4 million, or 0.70% of total loans at December 31, 2005, compared
to $1.2 million, or 0.61% of total loans at December 31, 2004. The level of the
allowance is based on estimates, and ultimate losses may vary from the
estimates. Although total non-performing loans increased $2.3 million to $4.0
million from $1.7 million from December 31, 2004 to December 31, 2005,
management believes the provision for loan loss is adequate. The two areas of
increase in nonperforming loans were non-accrual loans, the increase in which
represents mostly well-collateralized mortgage and commercial real-estate loans,
and accrual loans delinquent more than 90 days, the increase in which also
represents mostly well-collateralized commercial real estate loans.

     NON-INTEREST INCOME. Non-interest income decreased to $4.5 million for the
twelve months ended December 31, 2005 from $4.7 million for the twelve months
ended December 31, 2004. The decrease was primarily attributable to our mortgage
banking activities, which decreased $98,000 to $ 482,000 from $580,000 as loan
refinances continued to slow due to the gradual increase in market interest
rates in 2005 after reaching record lows in 2003 and early 2004. The $98,000
decrease reflected a decrease of $103,000 in gain on the sale of mortgages
offset by a marginal increase of $11,000 in revenues associated with mortgage
servicing rights. Our gain on the sale of investment securities decreased to
$13,000 for the twelve months ended December 31, 2005 from $103,000 for the
twelve months ended December 31, 2004 as we sold less investments at a gain in
2005 due to market conditions.

     NON-INTEREST EXPENSE. Non-interest expense increased to $11.8 million for
the twelve months ended December 31, 2005 from $10.9 million for the twelve
months ended December 31, 2004. The main reason for increased expense year over
year was the one-time charitable contribution in 2005 of $680,000 in cash and
Company stock to the First Federal Community Foundation which was established in
connection with our April 2005 stock offering. Compensation and employee
benefits increased to $6.3 million for the twelve months ended December 31, 2005
from $6.0 million for the twelve months ended December 31, 2004. The increase in
employee compensation and benefits was mainly the result of $180,000 in
compensation costs related to the Employee Stock Ownership Plan (ESOP). The 15
year amortization period for the ESOP loan, which was used to purchase shares
for the ESOP in the April 2005 stock offering, would have resulted in the
release of 9,245 shares of stock by the ESOP and compensation of approximately
$83,000 in 2005. However, the Board of Directors of the Company approved the
release of an additional 10,770 shares, resulting in total 2005 ESOP expense of
$180,000.

     INCOME TAXES. Federal income taxes decreased slightly to $203,000 for the
twelve months ended December 31, 2005 from $204,000 for the twelve months ended
December 31, 2004. The effective tax rate was 31.5% and 33.5% for 2005 and 2004,
respectively. The reduction in the effective tax rate was a result of a higher
level of tax-exempt interest in 2005 than in 2004.

<PAGE>

AVERAGE BALANCE SHEET

     The following tables set forth average balance sheets, average yields and
costs, and certain other information for the periods indicated. No
tax-equivalent yield adjustments were made, as the effect thereof was not
material. All average balances are daily average balances. Non-accrual loans
were included in the computation of average balances, but have been reflected in
the table as loans carrying a zero yield. The yields set forth below include the
effect of deferred fees, discounts and premiums that are amortized or accreted
to interest income or expense.

<TABLE>
<CAPTION>
                                                                           AVERAGE CONSOLIDATED STATEMENTS OF CONDITION
                                                                                   FOR YEARS ENDED DECEMBER 31,
                                                                     --------------------------------------------------------
                                                                                 2005                         2004
                                                             AT      ---------------------------  ---------------------------
                                                         12/31/2005                      AVERAGE                      AVERAGE
                                                           YIELD /    AVERAGE            YIELD /   AVERAGE            YIELD /
                                                             RATE     BALANCE  INTEREST    RATE    BALANCE  INTEREST    RATE
                                                         ----------  --------  --------  -------  --------  --------  -------
                                                                            (IN THOUSANDS)               (IN THOUSANDS)
<S>                                            <C>       <C>         <C>       <C>       <C>      <C>       <C>       <C>
INTEREST-EARNING ASSETS:
MORTGAGE LOANS ..............................                        $110,071   $ 6,747           $106,338   $ 6,887
NON-MORTGAGE LOANS ..........................                          91,903     6,403             74,672     4,626
                                                                     --------   -------           --------   -------
LOANS .......................................  $201,183      6.64%   $201,974   $13,150    6.51%  $181,010   $11,513    6.36%
MORTGAGE-BACKED SECURITIES (1) ..............     6,250      3.40%      7,386       248    3.36%     6,986       166    2.38%
INVESTMENT SECURITIES .......................    48,937      3.90%     39,873     1,450    3.64%    35,480       918    2.59%
                                               --------              --------   -------           --------   -------
INVESTMENT SECURITIES .......................  $ 55,187      3.84%   $ 47,259   $ 1,698    3.59%  $ 42,458   $ 1,443    3.40%
OTHER INVESTMENTS ...........................     5,047      4.05%      5,491       228    4.15%     6,436       322    5.00%
                                               --------    ------    --------   -------  ------   --------   -------
TOTAL INTEREST EARNING ASSETS ...............  $261,417      6.00%   $254,724   $15,076    5.92%  $229,904   $13,278    5.78%
                                                                                         ------                       ------
NON INTEREST EARNING ASSETS .................    21,358                18,482                       17,345
                                               --------              --------                     --------
TOTAL ASSETS ................................  $282,775              $273,206                     $247,249
                                               ========              ========                     ========

INTEREST-BEARING LIABILITIES:
SAVINGS DEPOSITS ............................  $ 27,103      0.30%   $ 27,982       177    0.63%  $ 27,615        66    0.24%
MONEY MARKET/NOW ACCOUNTS ...................    28,164      1.53%     33,421       288    0.86%    30,777       256    0.83%
CERTIFICATES OF DEPOSIT .....................   122,590      3.63%    113,989     3,873    3.40%    99,857     3,294    3.30%
                                               --------    ------    --------   -------  ------   --------   -------  ------
   TOTAL DEPOSITS ...........................  $177,857      2.79%   $175,392   $ 4,338    2.47%  $158,249   $ 3,616    2.29%
BORROWED FUNDS ..............................    54,403      4.69%     51,346     2,368    4.67%    54,473     2,586    4.67%
                                               --------    ------    --------   -------  ------   --------   -------  ------
TOTAL INTEREST BEARING LIABILITIES ..........  $232,260      3.24%   $226,742   $ 6,706    2.94%  $212,722   $ 6,202    2.90%
NON-INTEREST BEARING LIABILITIES ............    13,866                16,780                       12,713
                                               --------              --------                     --------
   TOTAL LIABILITIES ........................  $246,126              $243,522                     $225,435
STOCKHOLDERS' EQUITY ........................    36,649                29,684                       21,814
                                               --------              --------                     --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ....  $282,775              $273,206                     $247,249
                                               ========              ========                     ========
NET INTEREST INCOME .........................                                   $ 8,370                      $ 7,076
                                                                                =======                      =======
INTEREST RATE SPREAD ........................                2.76%                         2.98%                        2.88%
                                                           ======                        ======                       ======
NET INTEREST - EARNING ASSETS ...............                        $ 27,982                     $ 17,182
                                                                     ========                     ========
NET INTEREST MARGIN (1) .....................                3.12%                         3.30%                        3.10%
                                                           ======                        ======                       ======
AVERAGE INTEREST-EARNING ASSETS
   TO AVERAGE INTEREST-BEARING LIABILITIES ..              112.55%                       112.34%                      108.08%
                                                           ======                        ======                       ======
</TABLE>

----------
(1)  NET INTEREST MARGIN REPRESENTS NET INTEREST INCOME DIVIDED BY THE
     INTEREST-EARNING ASSETS.

<PAGE>

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, 2005
                                                    COMPARED TO
                                           YEAR ENDED DECEMBER 31, 2004
                                            INCREASE (DECREASE) DUE TO:
                                           ----------------------------
                                              VOLUME   RATE    TOTAL
                                              ------   ----   ------
                                                  (IN THOUSANDS)
<S>                                        <C>         <C>    <C>
INTEREST-EARNING ASSETS:
   LOANS RECEIVABLE ....................      $1,595   $ 41   $1,636
   INVESTMENT SECURITIES ...............         170     84   $  255
   OTHER INVESTMENTS ...................         (97)     3   $  (94)
                                              ------   ----   ------
   TOTAL INTEREST-EARNING ASSETS .......       1,668    129    1,798
                                              ------   ----   ------

INTEREST-BEARING LIABILITIES:
SAVINGS DEPOSITS .......................           1    111      112
MONEY MARKET/NOW ACCOUNTS ..............          23      9       32
CERTIFICATES OF DEPOSIT ...............          481     97      578
                                              ------   ----   ------
   DEPOSITS ............................         505    217      722
   BORROWED FUNDS ......................        (153)   (65)    (218)
                                              ------   ----   ------
   TOTAL INTEREST-BEARING LIABILITIES ..         352    152      504
                                              ------   ----   ------
CHANGE IN NET INTEREST INCOME ..........      $1,317   $(23)  $1,294
                                              ======   ====   ======
</TABLE>

MANAGEMENT OF INTEREST RATE RISK

     QUALITATIVE ANALYSIS. Our most significant form of market risk is interest
rate risk. The general objective of our interest rate risk management is to
determine the appropriate level of risk given our business strategy, and then
manage that risk in a manner that is consistent with our policy to reduce the
exposure of our net interest income to changes in market interest rates. First
Federal of Northern Michigan's asset/liability management committee ("ALCO"),
which consists of senior management, evaluates the interest rate risk inherent
in our assets and liabilities, our operating environment and capital and
liquidity requirements, and modifies our lending, investing and deposit-taking
strategies accordingly. The Board of Directors reviews the ALCO's activities and
strategies, the effect of those strategies on our net interest margin, and the
effect that changes in market interest rates would have on the economic value of
our loan and securities portfolios, as well as the intrinsic value of our
deposits and borrowings.

     We actively evaluate interest rate risk in connection with our lending,
investing and deposit-taking activities. Generally, our loans, which represent
the significant majority of our assets, have longer-terms to maturity than our
deposits, which represent the significant majority of our liabilities. As of
December 31, 2005, $172.2 million, or 84.9% of our loan portfolio, consisted of
loans that mature or reprice during the year ending December 31, 2007 and
beyond. In

<PAGE>

contrast, as of December 31, 2005, $83.0 million, or 44.0% of our deposits as of
that date, consisted of deposits that mature or reprice in less than one year.

     In an effort to better manage interest rate risk, we have increased our
focus on the origination and retention in our portfolio of adjustable-rate
residential mortgage loans. In addition, we have increased the origination and
retention in our portfolio of commercial real estate and commercial loans, since
most of these loans are originated with adjustable interest rates. In the
current low interest rate environment, we also have generally sold into the
secondary mortgage market all of the fixed-rate, longer-term (15 years or more)
residential mortgage loans that we originate, generally on a servicing-retained
basis. Finally, we have primarily invested in short- and medium-term securities
and have maintained high levels of liquid assets, such as cash and cash
equivalents. Shortening the average maturity of our interest-earning assets
through these strategies helps us to better match the maturities and interest
rates of our assets and liabilities, thereby reducing the exposure of our net
interest income to changes in market interest rates. Maintaining high levels of
liquid assets also permits us to invest in higher-yielding securities and loans
when market interest rates increase. However, these strategies can be expected
to adversely affect net interest income if long-term interest rates remain at
low levels. We expect that as long-term interest rates rise, as we expect, we
will reduce our mortgage-banking operations, and will retain in our portfolio a
larger percentage of the one- to four-family loans that we originate.

     QUANTITATIVE ANALYSIS. We evaluate interest rate sensitivity using a model
that estimates the change in our net portfolio value ("NPV") over a range of
interest rate scenarios. NPV is the discounted present value of expected cash
flows from assets, liabilities and off-balance sheet contracts. In calculating
changes in NPV, we assume estimated loan prepayment rates, reinvestment rates
and deposit decay rates that seem most likely based on historical experience
during prior interest rate changes.

     The table below sets forth, as of December 31, 2005, the estimated changes
in our NPV that would result from the designated instantaneous changes in the
U.S. Treasury yield curve. Computations of prospective effects of hypothetical
interest rate changes are based on numerous assumptions including relative
levels of market interest rates, loan prepayments and deposit decay, and should
not be relied upon as indicative of actual results.

<TABLE>
<CAPTION>
                                                                       NPV AS A PERCENTAGE OF PRESENT
                                               ESTIMATED INCREASE           VALUE OF ASSETS (3)
                                                (DECREASE) IN NPV   -----------------------------------
   CHANGE IN INTEREST                          ------------------                   INCREASE (DECREASE)
RATES (BASIS POINTS) (1)   ESTIMATED NPV (2)    AMOUNT    PERCENT   NPV RATIO (4)      (BASIS POINTS)
------------------------   -----------------   --------   -------   -------------   -------------------
<S>                        <C>                 <C>        <C>       <C>             <C>
                              (DOLLARS IN THOUSANDS)
          +300                  $29,908         ($8,962)    -23%        10.91%             (261)
          +200                   33,433          (5,437)    -14%        11.99%             (153)
          +100                   36,507          (2,363)     60%        12.88%              (64)
            --                   38,870              --                 13.52%               --
          -100                   39,462             592       2%        13.60%                8
          -200                   38,891              21       0%        13.32%              (20)
</TABLE>

(1)  Assumes an instantaneous uniform change in interest rates at all
     maturities.

(2)  NPV is the discounted present value of expected cash flows from assets,
     liabilities and off-balance sheet contracts.

(3)  Present value of assets represents the discounted present value of incoming
     cash flows on interest-earning assets.

(4)  NPV Ratio represents NPV divided by the present value of assets.

     The table set forth above indicates that at December 31, 2005, in the event
of an immediate 100 basis point decrease in interest rates, we would be expected
to experience a 2% increase in NPV and an 8 basis point increase in NPV ratio.
In the event of an immediate 200 basis point increase in interest rates, we
would be expected to experience a 14% decrease in NPV and a 153 basis point
decrease in NPV ratio.

<PAGE>

     Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV and net interest income
requires making certain assumptions that may or may not reflect the manner in
which actual yields and costs respond to changes in market interest rates. The
NPV and net interest income table presented above assumes that the composition
of our interest-rate sensitive assets and liabilities existing at the beginning
of a period remains constant over the period being measured and, accordingly,
the data do not reflect any actions management may undertake in response to
changes in interest rates. The table also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or the repricing characteristics of specific assets and
liabilities. Accordingly, although the NPV and net interest income table
provides an indication of our sensitivity to interest rate changes at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
our net interest income and will differ from actual results.

LIQUIDITY AND CAPITAL RESOURCES

     The overall objective of our liquidity management is to ensure the
availability of sufficient cash funds to meet all financial commitments and to
take advantage of investment opportunities. We manage liquidity in order to meet
deposit withdrawals on demand or at contractual maturity, to repay borrowings as
they mature, and to fund new loans and investments as opportunities arise.

     Our primary sources of funds are deposits, principal and interest payments
on loans and securities, and, to a lesser extent, borrowings (Federal Home Loan
Bank advances), the proceeds from maturing securities and short-term
investments, and the proceeds from the sales of loans and securities. The
scheduled amortization of loans and securities, as well as proceeds from
borrowings, are predictable sources of funds. Other funding sources, however,
such as deposit inflows, mortgage prepayments, mortgage loan sales and
mortgage-backed securities sales are greatly influenced by market interest
rates, economic conditions and competition.

     Liquidity represents the amount of our assets that can be quickly and
easily converted into cash without significant loss. Our most liquid assets are
cash, short-term U.S. Government securities, U.S. Government agency or
government-sponsored enterprise securities and certificates of deposit. We are
required to maintain sufficient levels of liquidity as defined by the Office of
Thrift Supervision regulations. Current regulations require that we maintain
sufficient liquidity to ensure our safe and sound operation. Our current
objective is to maintain liquid assets equal to at least 20% of total deposits
and Federal Home Loan Bank borrowings due in one year or less. Liquidity as of
December 31, 2005 was $77.8 million, or 39.27% of total deposits and Federal
Home Loan Bank borrowings due in one year or less, compared to $76.4 million, or
40.02% of this amount at December 31, 2004. The levels of liquidity are
dependent on our operating, financing, lending and investing activities during
any given period. Our calculation of liquidity includes additional borrowing
capacity available with the Federal Home Loan Bank. As of December 31, 2005, we
had unused borrowing capacity of $25.6 million. We can pledge additional
collateral in the form of investment securities to increase our borrowing
capacity.

     We currently retain in our portfolio all adjustable rate residential
mortgage loans, short term balloon mortgage loans and fixed rate residential
mortgage loans with maturities of less than 15 years, and generally sell the
remainder in the secondary mortgage market. We also originate for retention in
our loan portfolio, commercial and commercial real estate loans, including real
estate development loans. During the twelve months ended December 31, 2005, we
originated $54.2 million one- to four-family residential mortgage loans, of
which $33.1 million were retained in our portfolio and the remainder were sold
into the secondary mortgage market or are being held for sale. This compares to
$58.6 million one- to four-family originations during the twelve months ended
December 31, 2004, of which $35.6 million were retained in our portfolio. At
December 31, 2005, we had outstanding loan commitments of $36.6 million. These
commitments included $7.5 million for permanent one- to four-family residential
mortgage loans, $3.7 million for non-residential loans, $2.4 million of
undisbursed loan proceeds for construction of one- to four-family residences,
$8.1 million of undisbursed lines of credit on home equity loans, $1.5 million
of unused credit card lines, $11.3 million of unused commercial lines of credit,
and $2.1 million of undisbursed commercial construction loans.

     Deposits are a primary source of funds for use in lending and for other
general business purposes. At December 31, 2005, deposits funded 66.8% of our
total assets compared to 69.4% at December 31, 2004. Certificates of deposit
scheduled to mature in less than one year at December 31, 2005 totaled $83.0
million. We believe that a significant

<PAGE>

portion of such deposits will remain with us. We monitor the deposit rates
offered by competitors in our market area, and we set rates that take into
account the prevailing market conditions along with our liquidity position.
Moreover, we currently believe that the growth in assets is not expected to
require significant in-flows of liquidity. As such, we do not expect to be a
market leader in rates paid for liabilities. Borrowings may be used to
compensate for seasonal or other reductions in normal sources of funds or for
deposit outflows at more than projected levels. Borrowings also may be used on a
longer-term basis to support increased lending or investment activities. At
December 31, 2005, we had $52.9 million in Federal Home Loan Bank advances.
Total borrowings as a percentage of total assets were 19.3% at December 31, 2005
compared to 21.3% at December 31, 2004.

     As of December 31, 2005, management was not aware of any known trends,
events or uncertainties that have or are reasonably likely to have a material
impact on our liquidity. As of December 31, 2005, we had no material commitments
for capital expenditures.

     Our cash flows are derived from operating activities, investing activities
and financing activities as reported in our Consolidated Statement of Cash Flows
included with our Consolidated Financial Statements.

     First Federal of Northern Michigan is subject to federal regulations that
impose minimum capital requirements. At December 31, 2005, we exceeded all
applicable capital requirements.

CRITICAL ACCOUNTING POLICIES

     Our accounting and reporting policies are prepared in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. We consider accounting
policies that require significant judgment and assumptions by management that
have, or could have, a material impact on the carrying value of certain assets
or on income to be critical accounting policies. Changes in underlying factors,
assumptions or estimates could have a material impact on our future financial
condition and results of operations. Based on the size of the item or
significance of the estimate, the following accounting policies are considered
critical to our financial results.

     ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is calculated with
the objective of maintaining an allowance sufficient to absorb estimated
probable loan losses. Management's determination of the adequacy of the
allowance is based on periodic evaluations of the loan portfolio and other
relevant factors. However, this evaluation is inherently subjective, as it
requires an estimate of the loss content for each risk rating and for each
impaired loan, an estimate of the amounts and timing of expected future cash
flows, and an estimate of the value of collateral.

     We have established a systematic method of periodically reviewing the
credit quality of the loan portfolio in order to establish an allowance for
losses on loans. The allowance for losses on loans is based on our current
judgments about the credit quality of individual loans and segments of the loan
portfolio. The allowance for losses on loans is established through a provision
for loan losses based on our evaluation of the losses inherent in the loan
portfolio, and considers all known internal and external factors that affect
loan collectibility as of the reporting date. Our evaluation, which includes a
review of all loans on which full collectibility may not be reasonably assured,
considers among other matters, the estimated net realizable value or the fair
value of the underlying collateral, economic conditions, historical loan loss
experience, our knowledge of inherent losses in the portfolio that are probable
and reasonably estimable and other factors that warrant recognition in providing
an appropriate loan loss allowance. Management believes this is a critical
accounting policy because this evaluation involves a high degree of complexity
and requires us to make subjective judgments that often require assumptions or
estimates about various matters. Historically, we believe our estimates and
assumptions have proven to be relatively accurate. For example, over the past
five years, our provision for loan losses as a percentage of average loans
outstanding has ranged from 0.06% to 0.25%, while our net charge-offs as a
percentage of average loans outstanding has ranged from 0.04% to 0.12%.
Nevertheless, because a small number of non-performing loans could result in net
charge-offs significantly in excess of the estimated losses inherent in our loan
portfolio, you should not place undue reliance on the accuracy of past
estimates.

     The analysis of the allowance for loan losses has two components: specific
and general allocations. Specific allocations are made for loans that are
determined to be impaired. Impairment is measured by determining the present
value of expected future cash flows or, for collateral-dependent loans, the fair
value of the collateral adjusted for market

<PAGE>

conditions and selling expenses. The general allocation is determined by
segregating the remaining loans by type of loan, risk weighting (if applicable)
and payment history. We also analyze delinquency trends, which have remained
stable, general economic conditions and geographic and industry concentrations.
This analysis establishes factors that are applied to the loan groups to
determine the amount of the general reserve. The principal assumption used in
deriving the allowance for loan losses is the estimate of loss content for each
risk rating. To illustrate, if recent loss experience dictated that the
projected loss ratios would be changed by 10% (of the estimate) across all risk
ratings, the allocated allowance as of December 31, 2004 would have changed by
approximately $100,000. Actual loan losses may be significantly more than the
allowances we have established, which could have a material negative effect on
our financial results.

     MORTGAGE SERVICING RIGHTS. We sell to investors a portion of our originated
one- to four-family residential real estate mortgage loans. When we acquire
mortgage servicing rights through the origination of mortgage loans and sale of
those loans with servicing rights retained, we allocate a portion of the total
cost of the mortgage loans to the mortgage servicing rights based on their
relative fair value. As of December 31, 2005, we were servicing loans sold to
others totaling $139.1 million. We amortize capitalized mortgage servicing
rights 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. We periodically evaluate capitalized mortgage servicing
rights for impairment using a model that takes into account several variables
including expected prepayment speeds and prevailing interest rates. If we
identify impairment, we charge the amount of the impairment to earnings by
establishing a valuation allowance against the capitalized mortgage servicing
rights asset. The primary risk of material changes to the value of the servicing
rights resides in the potential volatility in the economic assumptions used,
particularly the prepayment speed. We monitor this risk and adjust the valuation
allowance as necessary to adequately record any probable impairment in the
portfolio. Management believes the estimation of these variables makes this a
critical accounting policy. For purposes of measuring impairment, the mortgage
servicing rights are stratified based on financial asset type and interest
rates. In addition, we obtain an independent third-party valuation of the
mortgage servicing portfolio on a quarterly basis. In general, the value of
mortgage servicing rights increases as interest rates rise and decreases as
interest rates fall. This is because the estimated life and estimated income
from a loan increase as interest rates rise and decrease as interest rates fall.
The key economic assumptions made in determining the fair value of the mortgage
servicing rights at December 31, 2005 included the following:

<TABLE>
<S>                                            <C>
Annual constant prepayment speed (CPR):        8.23%
Weighted average life remaining (in months):    249
Discount rate used:                            8.50%
</TABLE>

     At the December 31, 2005 valuation, we calculated the value of our mortgage
servicing rights to be $1.7 million and the weighted average life remaining of
those rights was 55 months. The book value of our mortgage servicing rights as
of December 31, 2005 was $751,000 which was $917,000 less than the independent
valuation. Because the fair value exceeded the book value, there was no need to
establish a valuation allowance.

     IMPAIRMENT OF INTANGIBLE ASSETS. Goodwill arising from business
acquisitions represents the value attributable to unidentifiable intangible
elements in the business acquired. The fair value of goodwill is dependent upon
many factors, including our ability to provide quality, cost-effective services
in the face of competition. Because of these many factors, management believes
this is a critical accounting policy. A decline in earnings as a result of
business or market conditions or a run-off of insurance customers over sustained
periods could lead to an impairment of goodwill that could adversely affect
earnings in future periods.

     A significant portion of our intangible assets, including goodwill, relates
to the acquisition premiums recorded with the purchase of the InsuranCenter of
Alpena ("ICA") and certain branches over the last several years. Intangible
assets are reviewed periodically for impairment by comparing the fair value of
the intangible asset to the book value of the intangible asset. If the book
value is in excess of the fair value, impairment is indicated and the
intangibles must be written down to their fair value.

     In connection with our acquisition in 2003 of ICA, we allocated the excess
of the purchase price paid over the fair value of net assets acquired to
intangible assets, including goodwill. These intangible assets included the ICA
customer list and a third-party contract to which ICA is a party. From the date
of acquisition through April 30, 2005 we amortized the value assigned to the
customer and contract over a period of 20 years. On May 1, 2005 the former owner
of ICA retired. As a result, the amortization period for these intangible assets
was reduced to a 10-year period

<PAGE>

beginning May 1, 2005. The amortization period for the third-party contract was
further reduced to 5 years effective January 1, 2006. See "Subsequent Events"
below. Goodwill is not amortized. The impairment test of goodwill and identified
intangible assets that have an indefinite useful life, performed as of December
31, 2005 and December 31, 2004 in accordance with SFAS No. 142, did not indicate
that an impairment charge was required. If, through testing, we determine that
there is impairment based, for example, on significant runoff of the customer
list or material changes to the third party contract, then we may need to reduce
the recorded value of those intangible assets, which would increase expense and
reduce our earnings.

     In connection with branch offices that were acquired over the last decade,
we assigned the excess of the purchase price over the fair value of the assets
acquired to core deposit intangible. The core deposit intangible is tested
periodically for impairment. Our original estimates related to the expected life
of the deposits have proven to be relatively accurate as evidenced by the fact
that no impairment has been recorded. If we determine through testing that a
significant portion of the acquired customers no longer do business with us,
then the asset would be deemed to be impaired thereby requiring a charge to
earnings to the extent appropriate given all of the known factors. We amortize
core deposit intangibles over a period of between 10 and 15 years.

OFF-BALANCE SHEET ARRANGEMENTS

     In the ordinary course of business, First Federal of Northern Michigan is a
party to credit-related financial instruments with off-balance-sheet risk to
meet the financing needs of its customers. These financial instruments include
commitments to extend credit and letter of credit. First Federal of Northern
Michigan follows the same credit policies in making off-balance sheet
commitments as it does for on-balance-sheet instruments.

     Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The commitments for equity lines of credit may
expire without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by First Federal of Northern Michigan, is
based on management's credit evaluation of the customer.

     Unfunded commitments under construction lines of credit for residential and
commercial properties and commercial lines of credit are commitments for
possible future extensions of credit to existing customers, for which funds have
not been advanced by First Federal of Northern Michigan.

     At December 31, 2005 and December 31, 2004, First Federal of Northern
Michigan had $15.8 million and $25.7 million, respectively, of commitments to
grant loans, $20.8 million and $16.6 million, respectively, of unfunded
commitments under lines of credit and $25,000 and $35,000, respectively, of
letters of credit. See Note 12 of the Notes to the Consolidated Financial
Statements.

SAFE HARBOR STATEMENT

     When used in this annual report or future filings by First Federal of
Northern Michigan Bancorp, Inc. with the Securities and Exchange Commission, 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.

<PAGE>

     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.

IMPACT OF INFLATION AND CHANGING PRICES

     The financial statements and related notes of First Federal of Northern
Michigan Bancorp, Inc. have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). GAAP
generally requires the measurement of financial position and operating results
in terms of historical dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike industrial companies,
our assets and liabilities are primarily monetary in nature. As a result,
changes in market interest rates have a greater impact on performance than the
effects of inflation.

SUBSEQUENT EVENTS

     Effective January 1, 2006 the exclusive third-party contract between ICA
and Blue Cross Blue Shield of Michigan has been terminated. Prior to January 1,
2006 the ICA exclusive agent contract with Blue Cross Blue Shield entitled ICA
to an override commission of 2.5% on all health premiums written through local
Chambers of Commerce in Northeast Michigan. On any health insurance contracts in
place as of December 31, 2005, ICA will continue to receive the 2.5% commission,
however there will be no new groups added to this program effective January 1,
2006. Management considered the potential affect this could have on ICA health
insurance commissions in future years and made the decision to reduce the
amortization period of the third-party contract intangible asset to 5 years
effective January 1, 2006.
<PAGE>

                       DIRECTORS AND EXECUTIVE OFFICERS OF
                FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
                     AND FIRST FEDERAL OF NORTHERN MICHIGAN

DIRECTORS -

     James C. Rapin was elected as the Chairman of the Board of Directors of the
Company and the Bank in March 2002. He has been a director of the Bank since
1985, and a director of the Company since its formation in November 2000, and
had been Vice Chairman of the Board since April 2001. Mr. Rapin is a pharmacist
with LeFave Pharmacy, Alpena, Michigan.

     Martin A. Thomson was named Acting President and Chief Executive Officer of
the Company and Bank in May 2001 and later named President and Chief Executive
Officer in October 2001. In January 2006, Mr. Thomson relinquished the position
of President, but remains with the Company and the Bank as Chief Executive
Officer and Director. Mr. Thomson previously held the position of President and
Chief Executive Officer of Presque Isle Electric and Gas Co-op., Onaway,
Michigan. Mr. Thomson has been a director of the Bank since 1986, and a director
of the Company since its formation in November 2000.

     Keith D. Wallace is the senior partner of the law firm of Isackson and
Wallace, P.C., located in Alpena, Michigan. Mr. Wallace has acted as general
counsel to the Bank since 1988. Mr. Wallace has been a director of the Bank
since 1988, and a director of the Company since its formation in November 2000.

     Gary C. VanMassenhove is a partner in VanMassenhove, Kearly, Taphouse &
Faulman, CPAs. Mr. VanMassenhove has been a Certified Public Accountant for 31
years. He has been a director of the Company and the Bank since September 2001.

     Thomas R. Townsend is the President of the R.A. Townsend Co., a plumbing,
heating and air conditioning distributor located in Alpena, Michigan, where he
has been employed for the past 26 years. Mr. Townsend has been a director of the
Company and the Bank since April 2002.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS-

     Michael W. Mahler was named President and Chief Operating Officer of the
Company and the Bank in January 2006. Prior to that appointment, since November
2004, Mr. Mahler served as Executive Vice President of the Company and the Bank
and had served, since November 2002, as Chief Financial Officer. From September
2000 until November 2002, Mr. Mahler was Corporate Controller at Besser Company,
Alpena, Michigan, an international producer of concrete products equipment. From
1990 until 2000, Mr. Mahler was employed at LTV Steel Company, East Chicago,
Indiana where he served in financial roles of increasing responsibility and
served, from 1997 until 2000, as Controller for a northeast Michigan division.

     Amy E. Essex was named Chief Financial Officer, Treasurer and Corporate
Secretary of the Company and the Bank in January 2006. Ms. Essex had served as
Chief Financial Officer of the Company and the Bank since November 2004 and
prior to that appointment, since March 2003, served as the Internal Auditor and
Compliance Officer for Alpena Bancshares, Inc. Prior to March 2003, Ms. Essex
spent eight years as the Director of Tax and Risk for Besser Company, Alpena,
Michigan, an international producer of concrete products equipment. Ms. Essex is
a certified public accountant.

     Jerome W. Tracey was named Executive Vice President and Chief Lending
Officer of the Company and the Bank in January 2006. Mr. Tracey had served as
Senior Vice President, Senior Lender of the Company and the Bank since September
2001 and served as Vice President of Commercial Services since joining the Bank
in November 1999.

<PAGE>

Prior to joining the Bank, 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.

     Joseph W. Gentry II was named Vice President, Human Resources of the Bank
in February 2002, after serving as Director of Human Resources since joining the
Bank in October 2001. Prior to joining the Bank, Mr. Gentry served as Manager -
Industrial Relations / Safety for Lafarge - Presque Isle Corporation, producer
of chemical grade and aggregate limestone for the construction and building
materials market, since 1991, and was employed by Besser Company, an
international producer of concrete products equipment, from 1973 to 1991 as
Personnel Manager / Safety Director. All previous employers are in the Alpena,
Michigan area. Mr. Gentry has taught economics at Alpena Community College as an
adjunct professor for the past 16 years.

SENIOR MANAGEMENT TEAM OF THE BANK -

Martin A. Thomson, Michael W. Mahler, Jerome W. Tracey, Amy E. Essex, Joseph W.
Gentry II, Kathleen R. Brown

MANAGEMENT TEAM - INSURANCENTER OF ALPENA -

Michael W. Mahler, Sandra Grant, Mark Boyk, Donna M. Tucker, Mary Kollen, Debbie
Wardman

                             STOCKHOLDER INFORMATION

     The Annual Meeting of Stockholders will be held at 1:00 p.m., May 17, 2006
at the Thunder Bay Recreational Center, 701 Woodward Avenue, Alpena, Michigan.

Stock Listing

     The Company's common stock is traded on Nasdaq National Market under the
symbol "FFNM".

Price Range of Common Stock

     The following sets forth the quarterly high and low sales price per share
during each of the four quarters in 2004 and 2005. High & low per share price
and cash dividend declared data for the quarters ended December 31, 2005,
September 30, 2005 and June 30, 2005 reflect the 1.8477 for 1 stock split which
occurred as of the close of business on April 1, 2005 upon consummation of the
second-step mutual to stock conversion and related stock offering.

<TABLE>
<CAPTION>
                       Market Price
                     ---------------
   Quarter Ended      High      Low    Cash Dividends Declared
   -------------     ------   ------   -----------------------
<S>                  <C>      <C>      <C>
December 31, 2005    $ 9.50   $ 8.70            $0.050
September 30, 2005   $ 9.59   $ 9.10            $0.050
June 30, 2005        $10.15   $ 8.30            $0.050
March 31, 2005       $27.00   $18.50            $0.100
December 31, 2004    $27.00   $16.30            $0.100
September 30, 2004   $17.75   $15.60            $0.100
June 30, 2004        $23.56   $17.50            $0.050
March 31, 2004       $25.00   $20.00            $0.125
</TABLE>

<PAGE>

SPECIAL COUNSEL

Luse Gorman Pomerenk & Schick, PC
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015

INDEPENDENT AUDITOR

Plante & Moran, PLLC
2601 Cambridge Ct. Suite 500
Auburn Hills, Michigan 48326

TRANSFER AGENT

Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
800-346-6084

ANNUAL REPORT ON FORM 10-KSB

     A copy of the Company's Form 10-KSB for the year ended December 31, 2005
will be furnished without charge upon written request to: Amy E. Essex, Chief
Financial Officer, Treasurer and Corporate Secretary, First Federal of Northern
Michigan Bancorp, Inc. 100 S. Second Avenue, Alpena, Michigan 49707.
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

<TABLE>
<CAPTION>
                                                                        CONTENTS
                                                                        --------
<S>                                                                     <C>
REPORT LETTER                                                               2
CONSOLIDATED FINANCIAL STATEMENTS
   Statement of Financial Condition                                         3
   Statement of Income                                                      4
   Statement of Changes in Stockholders' Equity                             5
   Statement of Cash Flows                                                  6
   Notes to Consolidated Financial Statements                               7
</TABLE>


                                        1

<PAGE>

             Report of Independent Registered Public Accounting Firm

Board of Directors
First Federal of Northern Michigan Bancorp, Inc.

We have audited the consolidated statement of financial condition of First
Federal of Northern Michigan Bancorp, Inc. as of December 31, 2005 and 2004 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each year in the two-year period ended December 31, 2005.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards established by the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Federal of Northern Michigan Bancorp, Inc. as of December 31, 2005 and 2004 and
the consolidated results of their operations and their cash flows for each year
in the two-year period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.

Auburn Hills, Michigan
March 3, 2006


                                       2

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                   CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                           December 31
                                                                       -------------------
                                                                         2005       2004
                                                                       --------   --------
<S>                                                                    <C>        <C>
                               ASSETS
Cash and cash equivalents                                              $  4,498   $  4,686
Overnight deposits with Federal Home Loan Bank                              282         53
                                                                       --------   --------
      Total cash and cash equivalents                                     4,780      4,739

Securities available for sale (Note 2)                                   53,412     40,233
Securities held to maturity (Note 2)                                      1,775      1,800
Loans - Net (Note 3)                                                    201,183    195,388
Loans held for sale                                                          --      1,096
Foreclosed assets                                                           435         29
Real estate held for sale (Note 4)                                          352        563
Federal Home Loan Bank stock                                              4,765      4,666
Property and equipment (Note 5)                                           7,392      6,794
Accrued interest receivable                                               1,602      1,035
Intangible assets (Note 7)                                                3,089      2,856
Goodwill                                                                  1,349      1,049
Other assets (Note 6)                                                     2,641      2,552
                                                                       --------   --------
      Total assets                                                     $282,775   $262,800
                                                                       ========   ========
                LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
   Non-interest bearing deposits                                       $ 10,878   $ 10,929
   Interest bearing deposits (Note 8)                                   177,857    171,560
   Advances from borrowers for taxes and insurance                           28         45
   Advances from Federal Home Loan Bank (Note 9)                         52,925     54,750
   Note payable (Note 10)                                                 1,478      1,251
   Accrued expenses and other liabilities (Note 14)                       2,960      2,488
                                                                       --------   --------
      Total liabilities                                                 246,126    241,023

STOCKHOLDERS' EQUITY (Note 13)
   Common stock - $0.01 par value 20,000,000 shares authorized and :
      $1.00 par value 20,000,000 authorized, respectively Issued and
      outstanding - 3,115,100 at December 31, 2005 and 1,659,480
      shares at December 31, 2004                                            31      1,659
   Additional paid-in capital                                            23,560      5,357
   Retained earnings - Restricted                                            --      5,152
   Retained earnings                                                     14,703      9,636
   Unallocated ESOP shares (Note 14)                                     (1,187)        --
   Accumulated other comprehensive income (loss)                           (458)       (27)
                                                                       --------   -------
      Total stockholders' equity                                         36,649     21,777
                                                                       --------   --------
      Total liabilities and stockholders' equity                       $282,775   $262,800
                                                                       ========   ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                        3
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                                CONSOLIDATED STATEMENT OF INCOME
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                         Year Ended December 31
                                                         ----------------------
                                                              2005      2004
                                                            -------   -------
<S>                                                      <C>          <C>
INTEREST INCOME
   Loans, including fees                                    $13,150   $11,513
   Investments                                                1,678     1,530
   Mortgage-backed securities                                   248       235
                                                            -------   -------
      Total interest income                                  15,076    13,278
INTEREST EXPENSE
   Deposits (Note 8)                                          4,339     3,616
   Other borrowings                                           2,367     2,586
                                                            -------   -------
      Total interest expense                                  6,706     6,202
                                                            -------   -------
NET INTEREST INCOME - Before provision for loan losses        8,370     7,076
PROVISION FOR LOAN LOSSES (NOTE 3)                              368       323
                                                            -------   -------
NET INTEREST INCOME - After provision for loan losses         8,002     6,753
OTHER INCOME (EXPENSES)
   Service charges and other fees                             1,030     1,012
   Net gain on sale of loans                                    248       350
   Loan servicing fees                                          234       229
   Insurance and brokerage commissions                        2,941     2,967
   Other                                                          5       153
                                                            -------   -------
      Total other income                                      4,458     4,711
OPERATING EXPENSES
   Compensation and employee benefits (Note 14)               6,315     6,029
   Amortization of intangible assets                            331       293
   Advertising                                                  197       240
   Occupancy and equipment                                    1,307     1,264
   Data processing service bureau                               350       339
   Professional fees                                            233       202
   Insurance and brokerage commission                         1,169     1,264
   Donation to First Federal Community Foundation               680        --
   Other                                                      1,233     1,225
                                                            -------   -------
      Total operating expenses                               11,815    10,856
                                                            -------   -------
INCOME - Before federal income tax                              645       608
FEDERAL INCOME TAX (Note 11)                                    203       204
                                                            -------   -------
NET INCOME                                                  $   442   $   404
                                                            =======   =======
PER SHARE DATA
   Basic earnings per share                                 $  0.14   $  0.13
   Fully diluted earnings per share                            0.14      0.13
   Dividends per common share                                  0.20      0.20
</TABLE>

See Notes to Consolidated Financial Statements.


                                       4

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                       CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                                                  (000S OMITTED)

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                                                     Additional                             Other          Total
                                                             Common    Paid-in   Retained  Unallocated  Comprehensive  Stockholders'
                                                     Shares   Stock    Capital   Earnings  ESOP Shares  Income (Loss)      Equity
                                                     ------  ------  ----------  --------  -----------  -------------  -------------
<S>                                                  <C>     <C>     <C>         <C>       <C>          <C>            <C>
BALANCE - January 1, 2004                             1657   $1,657    $ 5,338   $14,661     $    --        $ 295         $21,951

Comprehensive income:
   Net income                                           --       --         --       404          --           --             404
   Other comprehensive income:
      Unrealized appreciation on available-for-
         sale securities - Net of tax of $131           --       --         --        --          --         (254)           (254)
      Less reclassification adjustment for
         realized gains included in net income -
         Net of tax of $35                              --       --         --        --          --          (68)            (68)
                                                                                                                          -------
            Total comprehensive income                                                                                         82
Stock options exercised                                  2        2         19        --          --           --              21
Dividends declared                                      --       --         --      (277)         --           --            (277)
                                                     -----   ------    -------   -------     -------        -----         -------
BALANCE - December 31, 2004                          1,659    1,659      5,357    14,788          --          (27)         21,777

Comprehensive income:
   Net income                                           --       --         --       442          --           --             442
   Other comprehensive income:
      Unrealized appreciation on available-for-
         sale securities - Net of tax of $217           --       --         --        --          --         (422)           (422)
      Less reclassification adjustment for
         realized gains included in net income -
         Net of tax of $4                               --       --         --        --          --           (9)             (9)
                                                                                                                          -------
            Total comprehensive income                                                                                         11
Merger of Alpena Bancshares, MHC                      (920)    (920)     1,128        --          --           --             208
Exchange of Common Stock in reorganization             627     (726)       724        --          --           --              (2)
Proceeds of stock offering net of expenses           1,700       17     15,943        --          --           --          15,960
Stock donated to First Federal Community Foundation     34        1        339        --          --           --             340
Stock options exercised                                 22       --        120        --          --           --             120
Tax benefit on stock options exercised                  --       --         29        --          --           --              29
Retired stock                                           (7)      --        (60)       --          --           --             (60)
Unallocated ESOP                                        --       --         --        --      (1,387)          --          (1,387)
ESOP common stock committed to be released              --       --        (20)       13         200           --             193
Dividends declared                                      --       --         --      (540)         --           --            (540)
                                                     -----   ------    -------   -------     -------        -----         -------
BALANCE - December 31, 2005                          3,115   $   31    $23,560   $14,703     $(1,187)       $(458)        $36,649
                                                     =====   ======    =======   =======     =======        =====         =======
</TABLE>

See Notes to Consolidated Financial Statements.


                                       5

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                            CONSOLIDATED STATEMENT OF CASH FLOWS
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

See Notes to Consolidated Financial Statements.


<TABLE>
<CAPTION>
                                                                Year Ended December 31
                                                                ----------------------
                                                                    2005       2004
                                                                  --------   --------
<S>                                                             <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                     $    442   $    404
   Adjustments to reconcile net income to cash from operating
      activities:
      Depreciation and amortization                                    852        766
      Provision for loan losses                                        368        323
      Amortization and accretion on securities                         156        360
      Gain on sale of investment securities                            (13)      (103)
      ESOP contribution                                                180         --
      Stock donation to charitable foundation                          340         --
      Gain on sale of loans held for sale                             (248)      (362)
      Originations of loans held for sale                          (18,789)   (23,813)
      Proceeds from sale of loans held for sale                     20,133     24,010
      Purchase of real estate held for sale                           (902)      (124)
      Proceeds from sale of real estate                                703         --
      (Gain) loss on sale of real estate                                 3         --
      (Gain) loss on fixed assets                                       --         47
      Change in accrued interest receivable                           (567)        31
      Change in other assets                                           (74)      (478)
      Change in accrued expenses and other liabilities                 893        (44)
      Change in deferred income taxes                                 (200)        --
                                                                  --------   --------
         Net cash provided by operating activities                   3,277      1,017
CASH FLOWS FROM INVESTING ACTIVITIES
   Net increase in loans                                            (6,163)   (32,251)
   Proceeds from maturity of available-for-sale securities              --     10,694
   Proceeds from sale of securities available-for-sale               7,562     19,213
   Purchase of securities available for sale                       (21,511)   (36,216)
   Purchase of securities held to maturity                              --     (1,800)
   Purchase of Federal Home Loan Bank stock                            (99)      (206)
   Purchase of insurance related businesses                           (526)      (300)
   Purchase of premises and equipment                               (1,119)    (1,335)
                                                                  --------   --------
         Net cash used for investing activities                    (21,856)   (42,201)
CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase (decrease) in deposits                               6,245     30,787
   Dividends paid on common stock                                     (540)      (277)
   Net increase (decrease) in advances from borrowers                  (17)       (51)
   Additions to advances from FHLB and Notes Payable                10,925     11,455
   Repayments of advances from FHLB and Notes Payable              (12,861)    (2,718)
   Net proceeds from stock offering                                 15,960         --
   Cash paid for fractional shares in stock offering                    (2)        --
   Purchase of shares for ESOP                                      (1,387)        --
   Merger of Alpena Bancshares, M.H.C                                  208         --
   Proceeds from exercise of stock options                             120         21
   Shares retired                                                      (60)        --
   Tax benefit on stock options exercised                               29         --
                                                                  --------   --------
         Net cash provided by (used for) financing
            activities                                              18,620     39,217
                                                                  --------   --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    41     (1,967)
CASH AND CASH EQUIVALENTS - Beginning of year                        4,739      6,706
                                                                  --------   --------
CASH AND CASH EQUIVALENTS - End of year                           $  4,780   $  4,739
                                                                  ========   ========
SUPPLEMENTAL CASH FLOW AND NONCASH INFORMATION
   Cash paid for income taxes                                     $    327   $    435
   Cash paid for interest on deposits and borrowings                 6,501      6,049
   Stock donated to charitable foundation                              340         --
   Note issued in connection with purchase of insurance
      related business                                                 338         --
</TABLE>

See Notes to Consolidated Financial Statements.


                                       6
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     NATURE OF OPERATIONS - First Federal of Northern Michigan Bancorp, Inc.
     (the "Company") and its subsidiary, First Federal of Northern Michigan (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.

     PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
     the accounts of First Federal of Northern Michigan Bancorp, Inc., First
     Federal of Northern Michigan, and the Bank's wholly owned subsidiaries,
     Financial Services & Mortgage Corporation ("FSMC") and InsuranCenter of
     Alpena. ("ICA"). FSMC invests in real estate, which includes leasing,
     selling, developing, and maintaining real estate properties. ICA is a
     licensed insurance agency engaged in the business of property, casualty,
     and health insurance. All significant intercompany balances and
     transactions have been eliminated in the consolidation.

     REORGANIZATION - Alpena Bancshares, Inc., the predecessor company to First
     Federal of Northern Michigan Bancorp, 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. Prior to April 1,
     2005 approximately 56 percent of the Company's capital stock was owned by
     Alpena Bancshares M.H.C., a mutual holding company. The remaining 44


                                       7

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     percent of the Company's stock was owned by the general public, including
     the Bank's Employee Stock Ownership Plan.

     On April 1, 2005 the Company completed the second-step mutual-to-stock
     conversion of Alpena Bancshares, M.H.C. in which shares representing Alpena
     Bancshares, M.H.C.'s ownership interest in Alpena Bancshares, Inc. were
     sold to investors in a public offering. A total of 1,699,869 shares of
     First Federal of Northern Michigan Bancorp, Inc. common stock were sold at
     $10.00 per share. In addition, each outstanding share of common stock of
     Alpena Bancshares, Inc. held by the general public as of the close of
     trading on April 1, 2005 received 1.8477 shares of First Federal of
     Northern Michigan Bancorp, Inc. common stock, plus cash in lieu of any
     fractional shares at the rate of $10.00 per share. The Company also issued
     33,997 shares of common stock and contributed $339,997 in cash to First
     Federal Community Foundation, a new charitable foundation established in
     the conversion.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     As a result of these transactions, Alpena Bancshares, M.H.C. ceased to
     exist and its remaining net assets of $207,000 were transferred into First
     Federal of Northern Michigan Bancorp, Inc., a Maryland company, the
     successor to Alpena Bancshares, Inc. All references to the number of shares
     outstanding for purposes of calculating per share amounts for the period
     ending December 31, 2004 have been adjusted to give retroactive recognition
     to the exchange ratio of 1.8477 applied in the conversion.

     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


                                       8

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     instruments purchased with a maturity of three months or less to be cash
     equivalents.

     SECURITIES - Securities classified as available for sale are reported at
     quoted market value or market value for comparable securities which
     represents fair value, with unrealized gains and losses, net of related
     deferred income taxes, included in equity as a component of accumulated
     other comprehensive income. Gains or losses on the sale of securities and
     the amount reclassified out of accumulated other comprehensive income are
     computed based on the adjusted cost of the specific security sold. Mortgage
     backed securities are all issued by government sponsored agencies such as
     Freddie Mac and Fannie Mae. Securities classified as held to maturity are
     carried at cost. Federal Home Loan Bank stock is considered restricted
     investment security and is carried at cost.

     SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - Most of the Company's
     activities are with customers located within the northeastern lower
     peninsula of Michigan. Note 2 discusses the types of securities in which
     the Company invests. Note 3 discusses the types of lending in which the
     Company engages. The Company does not have any significant concentrations
     to any one industry or customer.

     LOANS - The Company grants mortgage, commercial, and consumer loans to
     customers. Loans are reported at their outstanding unpaid principal
     balances adjusted for charge-offs, the allowance for loan losses, and any
     deferred fees or costs on originated loans. Interest income is accrued on
     the unpaid principal balance. Loan origination fees, net of certain direct
     origination costs, are deferred and recognized as an adjustment of the
     related loan yield over the contractual life of the loan.


                                       9

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     The accrual of interest on loans is discontinued at the time the loan is 90
     days' delinquent unless the credit is well-secured and in process of
     collection. In all cases,

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     loans are placed on nonaccrual or charged off at an earlier date if
     collection of principal or interest is considered doubtful.

     All interest accrued but not collected, for loans that are placed on
     nonaccrual or charged off, is reversed against interest income. The
     interest on these loans is accounted for on the cash basis or cost recovery
     method, until qualifying for return to accrual. Loans are returned to
     accrual status when all the principal and interest amounts contractually
     due are brought current and future payments are reasonably assured.

     ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established as
     losses are estimated to have occurred through a provision for loan losses
     charged to earnings. Loan losses are charged against the allowance when
     management believes the uncollectibility of a loan balance is confirmed.
     Subsequent recoveries, if any, are credited to the allowance.

     The allowance for loan losses is evaluated on a regular basis by management
     and is based on management's periodic review of the collectibility of the
     loans in light of historical experience, the nature and volume of the loan
     portfolio, adverse situations that may affect the borrower's ability to
     repay, estimated value of any underlying collateral, and prevailing
     economic conditions. This evaluation is inherently subjective as it
     requires estimates that are susceptible to significant revision as more
     information becomes available.


                                       10

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     The allowance consists of specific, general and unallocated components. The
     specific components relates to loans that are classified as either
     doubtful, substandard or special mention. For such loans that are also
     classified as impaired, an allowance is established when the discounted
     cash flows (or collateral value or observable market price) of the impaired
     loan is lower that the carrying value of that loan. The general component
     covers non-classified loans and is based on historical loss experience
     adjusted for qualitative factors. An unallocated component is maintained to
     cover uncertainties that could affect management's estimate of probable
     losses. The unallocated component of the allowance reflects the margin of
     imprecision inherent in the underlying assumptions used in the
     methodologies for estimating specific and general losses in the portfolio.

     A loan is considered impaired when, based on current information and
     events, it is probable that the Company will be unable to collect the
     scheduled payments of principal or interest when due according to the
     contractual terms of the loan agreement. Factors considered by management
     in determining impairment include payment status, collateral value, and the
     probability of collecting scheduled principal

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     and interest payments when due. Loans that experience insignificant payment
     delays and payment shortfalls generally are not classified as impaired.
     Management determines the significance of payment delays and payment
     shortfalls on a case-by-

     case basis, taking into consideration all of the circumstances surrounding
     the loan and the borrower, including length of the delay, the reasons for
     the delay, the borrower's prior payment record, and the amount of the
     shortfall in relation to the principal and interest


                                       11

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     owed. Impairment is measured on a loan-by-loan basis for commercial and
     construction loans by either the present value of expected future cash
     flows discounted at the loan's effective interest rate, the loan's
     obtainable market price, or the fair value of the collateral if the loan is
     collateral dependent.

     Large groups of homogeneous loans are collectively evaluated for
     impairment. Accordingly, the Company does not separately identify
     individual consumer and residential loans for impairment disclosures.

     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 was $0
     at December 31, 2005 and 2004.

     FORECLOSED ASSETS - Assets acquired in settlement of loans are recorded at
     the lower of the loan balance or fair value, minus estimated costs to sell,
     plus capital improvements made thereafter to facilitate sale. Adjustments
     are made to reflect declines, if any, in the fair value below the recorded
     amounts. Costs of holding real estate acquired in settlement of loans are
     charged to expense currently.

     REAL ESTATE HELD FOR SALE - Real estate held for sale is comprised of
     developed vacant residential lots and completed condominiums in a
     subdivision located in Alpena, Michigan. For reporting purposes, these
     properties are included in the Banking segment. These properties are
     considered "impaired" under the definition in SFAS 144, Accounting for
     Impairment or Disposal of Long-Lived Assets. Accordingly, the properties
     are recorded at the lower of its cost or fair value less cost to sell.
     Costs to sell are the incremental direct costs to transact a sale, that is,
     the costs that result directly from and are essential to a sale transaction
     and that would not have been incurred


                                       12

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     by the entity had the decision to sell not been made. Those costs include
     realtor commissions, legal and title transfer fees, and closing costs that
     must be incurred before legal title can be transferred.

     Quarterly, management uses recent sales of comparable property to determine
     estimated future cash flows. The estimated future cash flows are used as
     the "fair value". The fair value, less costs to sell, is compared to the
     net carrying amount. If

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     the fair value less cost to sell exceeds the recorded amount, a loss is
     recognized. Losses recognized for the initial and subsequent write-down to
     fair value less cost to sell are recognized in the gain (loss) on the sale
     of real estate line in the statement of income. A gain is recognized for
     any subsequent increase in fair value less cost to sell, but not in excess
     of the cumulative loss previously recognized. A gain or loss not previously
     recognized that results from the sale of the property is recognized at the
     date of sale.

     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. The depreciable lives used
     by the company are: land improvements 7-10 years, buildings 7-40 years and
     equipment 3-10 years. 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 core deposit intangible assets. The expected life for
     core deposit intangibles is based on the type of products acquired in an
     acquisition. The amortization periods range from 10 to 15 years and are
     based on the expected life of the products. The expected life was
     determined based on an analysis of


                                       13

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     the life of similar products within the Company and local competition in
     the markets where the branches were acquired. The core deposit intangibles
     are amortized on a straight line basis. The core deposit intangible is
     quarterly analyzed for impairment.

     On June 12, 2003, First Federal of Northern Michigan acquired 100% of the
     stock of the InsuranCenter of Alpena (ICA). The purchase price was
     $2,866,400. There is a provision for an earn-out payment for the former
     owners who remain with the organization, of up to $300,000 per year for
     three years if specific net sales levels are achieved. For the years ended
     December 31, 2005, 2004 and 2003, the net sales level was achieved and the
     earn-out payment was added to the cost of the acquisition and recorded as
     goodwill.

     After allocating the purchase price to the tangible assets the remainder
     was allocated to the intangible assets. The primary intangible assets are a
     customer list and an exclusive contract with BCBS, a health insurance
     company based in Michigan. The exclusive contract provides for a commission
     of approximately two percent related to all insurance premiums collected by
     ICA sold through a 10 county Chamber of Commerce group. The intangible
     asset recorded for this exclusive contract applies to all existing
     healthcare customers obtained through the group and is in effect for as
     long as those customers remain with the ICA.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Using historical cash flows the customer list was assigned a value of
     $890,000 and the exclusive contract was valued at $597,000. Both assigned
     values were arrived at based on a discounted cash flow (DCF) analysis that
     assumed a 20 year life or 5% runoff of revenue each year. The analysis
     projected net income which was discounted


                                       14

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     back to present with a discount rate of 12%. The expected life was
     determined using historical runoff rates experienced by ICA before
     acquisition which were less than 5% per year. Thus far the actual runoff
     since acquisition has been lower than 5% per year. Effective May 1, 2005
     the estimated life of the exclusive contract with BCBS was reduced to 10
     years to reflect the resignation of one of the former owners of ICA and the
     establishment of a 10 year consulting contract between this former employee
     and ICA. Effective January 1, 2006, based on this resignation, the
     exclusive contract with BCBS does not apply to new business and management
     adjusted the estimated useful life to five years.

     The value assigned to the non-compete agreement received in connection with
     the purchase of the ICA was $200,000. This agreement is being amortized
     over a 10 year period. The monthly amortization for this expense equates to
     $1,700 per month. These amortization expenses will be recorded in
     non-interest expenses on a monthly basis.

     In December 2005, the Company purchased a customer list from an insurance
     agency for approximately $564,000. The entire amount of the purchase was
     assigned to a customer list intangible and is being amortized over five
     years. The purchase included the issuance of a note payable in the amount
     of $338,000 discussed in Note 10 and the remaining payment was made in
     cash.

     GOODWILL - Goodwill was created in the ICA transaction. Goodwill will not
     be amortized but tested annually for impairment. The $900,000 of payments
     made under the earn-out agreement were added to goodwill.

     INCOME TAXES - The Company records income tax expense based on the amount
     of taxes due on its tax return plus deferred taxes


                                       15

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     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.

     INSURANCE AND BROKERAGE COMMISSIONS - Insurance and brokerage commissions
     received are recognized over the life of the related insurance contracts as
     premiums are paid and commissions are earned.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     SERVICING - Servicing assets are recognized as separate assets when rights
     are acquired through sale of financial assets. Capitalized servicing rights
     are reported in other assets and are amortized into noninterest income in
     proportion to, and over the period of, the estimated future net servicing
     income of the underlying financial assets. Servicing assets are evaluated
     for impairment quarterly based on the fair value of the rights as compared
     to amortized cost. Impairment is determined by stratifying rights by
     predominant characteristics, such as interest rates and terms. Fair value
     is determined using prices for similar assets with similar characteristics,
     when available, or based on discounted cash flows using market-based
     assumptions.

     Impairment is recognized through a valuation allowance for an individual
     stratum, to the extent that fair value is less than the capitalized amount
     for the stratum.

     OFF BALANCE SHEET INSTRUMENTS - In the ordinary course of business, the
     Corporation has entered into commitments to extend credit,


                                       16

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     including commitments under credit card arrangements, commercial letters of
     credit and standby letters of credit. For letters of credit, a liability is
     recorded for the fair value of the obligation undertaken in issuing the
     guarantee.

     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 statement of
     financial condition. Such items, along with net income, are components of
     comprehensive income.

     USE OF ESTIMATES - The preparation of financial statements in conformity
     with accounting principles generally accepted in the United States of
     America requires management to make estimates and assumptions that affect
     the reported amounts of assets and liabilities and disclosure of contingent
     assets and liabilities at the date of the financial statements and the
     reported amounts of revenue and expenses during the reporting period.
     Actual results could differ from those estimates. Material estimates that
     are particularly susceptible to significant change in the near term relate
     to the determination of the allowance for loan losses, and the valuation of
     goodwill, mortgage servicing rights and other intangible assets.

     STOCK COMPENSATION PLAN - The Company has a stock-based employee
     compensation plan, which is described more fully in Note 12. The Company
     accounts for this plan under the recognition and measurement principles of
     APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
     Interpretations. No stock-based employee compensation cost is reflected in
     net


                                       17

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     income, as all options granted under those plans had an exercise price
     equal to the market value of the underlying common stock on the date of
     grant.

     There were no options granted in 2005 and 2004.

     The Company's as reported and pro forma information, including stock based
     compensation expense as if the fair value based method had been applied:

<TABLE>
<CAPTION>
                                                     December 31,
                                                    -------------
                                                     2005    2004
                                                    -----   -----
<S>                                                 <C>     <C>
As reported net income available to
   common shareholders                              $ 442   $ 404
Less: stock-based compensation expense
   determined under fair value method, net of tax      --       1
                                                    -----   -----
Pro forma net income                                $ 442   $ 403
                                                    =====   =====
As reported earnings per share                      $0.14   $0.13
Proforma earnings per share                         $0.14   $0.13
As reported earnings per diluted share              $0.14   $0.13
Pro forma earnings per diluted share                $0.14   $0.13
</TABLE>

     EARNINGS PER COMMON SHARE - Basic earnings per share represents income
     available to common stockholders divided by the weighted-average number of
     common shares outstanding during the period. Diluted earnings per share
     reflects additional common shares that would have been outstanding if
     dilutive potential common shares had been issued, as well as any adjustment
     to income that would result from the assumed issuance. Potential common
     shares that may be issued by the Company relate solely to outstanding stock
     options and are determined using the treasury stock method.


                                       18

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     Earnings per common share have been computed based on the following:

<TABLE>
<CAPTION>
                                              December 31,
                                        -----------------------
                                           2005         2004
                                        ----------   ----------
<S>                                     <C>          <C>
Net income                              $      442   $      404
                                        ==========   ==========
Average number of common shares
   outstanding                           3,094,960    3,065,318
Effect of dilutive options                  11,461       22,355
                                        ----------   ----------
Average number of common shares
   outstanding used to calculate
   diluted earnings per common share     3,106,421    3,087,673
                                        ==========   ==========
</TABLE>


                                       19
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     RECENT ACCOUNTING PRONOUNCEMENTS - In December 2004, the Financial
     Accounting Standards Board ("FASB") issued SFAS No. 123(R), Accounting for
     Stock-Based Compensation ("SFAS 123R"). SFAS 123R requires all share-based
     payments to employees, including grants of employee stock options, to be
     recognized as expense in the income statement based on their fair values.
     Prior to SFAS 123R, only certain pro forma disclosures of fair value were
     required. The amount of compensation is measured at the fair value of the
     options when granted, and this cost is expensed over the required service
     period, which is normally the vesting period of the options. SFAS 123R will
     apply to awards granted or modified after January 1, 2006. Compensation
     cost will also be recorded for prior option grants that vest after the date
     of adoption. The future effect of the adoption of the new accounting
     principle on results of operations will depend on the level of future
     option grants, the vesting period for those grants, and the fair value of
     the options granted at such future date. Existing options that are
     scheduled to vest after the adoption date are expected to result in
     additional compensation expense of approximately $5,000 in 2006.

     RECLASSIFICATIONS - Certain items in the 2004 financial statements have
     been reclassified to conform to the 2005 presentation format.


                                       20

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 2 - INVESTMENT SECURITIES

     Investment securities have been classified according to management's
     intent. The carrying value and estimated fair value of securities are as
     follows:

<TABLE>
<CAPTION>
                                                            December 31, 2005
                                              ---------------------------------------------
                                                             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                             $43,825       $  2         $566      $43,261
   Municipal notes                               3,820         --           82        3,738
   Mortgage-backed securities                    6,459          5          214        6,250
   Other securities                                  2        161           --          163
                                               -------       ----         ----      -------
      Total                                    $54,106       $168         $862      $53,412
                                               =======       ====         ====      =======
SECURITIES HELD TO MATURITY
   Municipal notes                             $ 1,775       $ 20         $  8      $ 1,787
                                               =======       ====         ====      =======
</TABLE>

<TABLE>
<CAPTION>
                                                            December 31, 2004
                                              ---------------------------------------------
                                                             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                             $27,954       $ 51         $143       27,862
   Municipal notes                               4,194         20           72        4,142
   Mortgage-backed securities                    8,125         17           97        8,045
   Other securities                                  2        182           --          184
                                               -------       ----         ----      -------
      Total                                    $40,275       $270         $312      $40,233
                                               =======       ====         ====      =======
SECURITIES HELD TO MATURITY
   Municipal notes                             $ 1,800       $ 33         $ --      $ 1,833
                                               =======       ====         ====      =======
</TABLE>


                                       21

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

     The amortized cost and estimated market value of securities at December 31,
     2005, 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.
     Securities with no specified maturity date are separately stated:

<TABLE>
<CAPTION>
                                         December 31, 2005
                                        -------------------
                                        Amortized    Market
                                           Cost      Value
                                        ---------   -------
<S>                                     <C>         <C>
AVAILABLE FOR SALE:
Due in one year or less                  $ 9,276    $ 9,174
Due after one year through five years     38,369     37,825
                                         -------    -------
   Subtotal                               47,645     46,999
Equity securities                              2        163
Mortgage-backed securities                 6,459      6,250
                                         -------    -------
   Total                                 $54,106    $53,412
                                         =======    =======
HELD TO MATURITY
Due in one year or less                  $    25    $    25
Due after one year through five years        175        173
Due in five year through ten years           275        271
Due after ten years                        1,300      1,318
                                         -------    -------
   Total                                 $ 1,775    $ 1,787
                                         =======    =======
</TABLE>

     At December 31, 2005 and 2004, securities with a carrying value and fair
     value of $10,729,000 and $8,931,000, respectively, were pledged to secure
     certain deposit accounts and FHLB advances.

     Gross proceeds from the sale of available-for-sale securities for the years
     ended December 31, 2005 and 2004 were $7,562,000 and


                                       22

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     $19,213,000, respectively, resulting in gross gains of $13,000 and
     $178,000, respectively and gross losses of $0 and $75,000, respectively.


                                       23
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

     The following is a summary of temporarily impaired investments that have
     been impaired for less than and more than twelve months as of December 31,
     2005 and 2004:

<TABLE>
<CAPTION>
                                             December 31, 2005                               December 31, 2004
                              ----------------------------------------------  ----------------------------------------------
                                             Gross                   Gross                   Gross                   Gross
                                          Unrealized              Unrealized              Unrealized              Unrealized
                                            Losses                  Losses                  Losses                  Losses
                                             < 12                    > 12                    < 12                    > 12
                              Fair Value    months    Fair Value    months    Fair Value    months    Fair Value    months
                              ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------
<S>                           <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
U.S. Treasury securities
   and obligations
   of U.S. government
   corporations and agencies    $22,713        $240      $15,546       $326     $12,812        $143      $   --       $ --
Municipal notes                     767           8        3,737         82       1,411          45       2,371         27
Mortgage-backed securities        4,707          12        1,180        202         820           4       5,317         93
                                -------        ----      -------       ----     -------        ----      ------       ----
   Total                        $28,187        $260      $20,463       $610     $15,043        $192      $7,688       $120
                                =======        ====      =======       ====     =======        ====      ======       ====
</TABLE>

     The Company does not believe that the unrealized losses as of December 31,
     2005 and 2004 represent other-than-temporarily impairment. The unrealized
     losses reported for the above securities relate primarily to changes in
     interest rates. Individually, the losses were less than 3.0% or less of
     their respective amortized cost basis. The Company has both the intent and
     ability to hold the investment securities contained in the previous table
     for a time necessary to recover the amortized cost.


                                       24

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS

     Loans at December 31, 2005 and 2004 are summarized as follows:

<TABLE>
<CAPTION>
                                                          December 31
                                                      -------------------
                                                        2005       2004
                                                      --------   --------
<S>                                                   <C>        <C>
Real estate loans - One- to four-family residential   $106,031   $110,402
Commercial loans:
   Secured by real estate                               44,311     30,794
   Other                                                26,658     30,174
                                                      --------   --------
      Total commercial loans                            70,969     60,968
Consumer loans                                          25,907     25,544
                                                      --------   --------
      Total gross loans                                202,907    196,914
Less net deferred fees (costs)                             308        312
Less allowance for loan losses                           1,416      1,214
                                                      --------   --------
      Total loans - Net                               $201,183   $195,388
                                                      ========   ========
</TABLE>

     Final loan maturities and rate sensitivity of the loan portfolio are as
     follows:

<TABLE>
<CAPTION>
                                               December 31, 2005
                                   -----------------------------------------
                                               One Year    After
                                   Less Than    to Five     Five
                                    One Year     Years     Years      Total
                                   ---------   --------   -------   --------
<S>                                <C>         <C>        <C>       <C>
Loans at fixed interest rates       $17,885     $76,830   $50,358   $145,073
Loans at variable interest rates     12,772       4,995    40,067     57,834
                                    -------     -------   -------   --------
   Total                            $30,657     $81,825   $90,425   $202,907
                                    =======     =======   =======   ========
</TABLE>


                                       25

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS (CONTINUED)

     Certain directors and executive officers of the Company were loan customers
     during 2005 and 2004. 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, 2005 and 2004 is as follows:

<TABLE>
<CAPTION>
                                             December 31
                                          ----------------
                                            2005     2004
                                          -------   ------
<S>                                       <C>       <C>
Aggregate balance - Beginning of Period   $ 2,068   $1,832
New loans                                   2,036      381
Repayments                                 (1,448)    (145)
                                          -------   ------
Aggregate balance - End of Period         $ 2,656   $2,068
                                          =======   ======
</TABLE>

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

<TABLE>
<CAPTION>
                                   Year Ended
                                  December 31
                                ---------------
                                 2005     2004
                                ------   ------
<S>                             <C>      <C>
Balance - Beginning of period   $1,214   $1,036
Provision for losses               368      323
Loans - Charged off               (249)    (191)
Recoveries                          83       46
                                ------   ------
Balance - End of period         $1,416   $1,214
                                ======   ======
</TABLE>


                                       26
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS (CONTINUED)

     The following is a summary of information pertaining to impaired,
     non-accrual and delinquent loans:

<TABLE>
<CAPTION>
                                     December 31
                                   ---------------
                                    2005     2004
                                   ------   ------
<S>                                <C>      <C>
Impaired loans without a
   valuation allowance             $  345   $   --
Impaired loans with a valuation
   allowance                          660      441
                                   ------   ------
Total impaired loans               $1,005   $  441
                                   ======   ======
Valuation allowance related to
   impaired loans                  $   43   $   51
Total non-accrual loans            $1,353   $  478
Total loans past-due ninety days
   or more and still accruing      $2,654   $1,240
</TABLE>

<TABLE>
<CAPTION>
                                     Year Ended
                                    December 31
                                    -----------
                                    2005   2004
                                    ----   ----
<S>                                 <C>    <C>
Average investment in
   impaired loans                   $798   $965
                                    ====   ====
Interest income recognized
   on impaired loans                $ --   $ --
                                    ====   ====
Interest income recognized on
   a cash basis on impaired loans   $ --   $ --
                                    ====   ====
</TABLE>


                                       27

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 4 - REAL ESTATE HELD FOR SALE

     Management is actively marketing the real estate by using local real estate
     agents to facilitate the sale of these properties. The real estate held for
     sale is determined to be impaired and is recorded at the lower of cost or
     fair value less costs to sell. The valuation allowance on this project was
     determined based on recent sales of comparable real estate and existing
     real estate listings. Losses recognized for the initial and subsequent
     write-down to fair value less cost to sell are recognized in the "gain
     (loss) on the sale of real estate" line in the statement of income. The
     activity in the allowance is as follows:

<TABLE>
<CAPTION>
                                   Year Ended
                                  December 31
                                  -----------
                                  2005   2004
                                  ----   ----
<S>                               <C>    <C>
Valuation allowances:
   Balance at beginning of year   $121   $121
   Additions                        --     --
   Reductions                       21     --
                                  ----   ----
   Balance at end of year         $100   $121
                                  ====   ====
</TABLE>

NOTE 5 - PROPERTY AND EQUIPMENT

     A summary of property and equipment is as follows:

<TABLE>
<CAPTION>
                                     December 31
                                  ----------------
                                    2005     2004
                                  -------   ------
<S>                               <C>       <C>
Land                              $ 1,251   $1,251
Land improvements                     181      121
Buildings                           5,487    4,495
Equipment                           3,671    3,867
                                  -------   ------
   Total property and equipment    10,590    9,734
Less accumulated depreciation       3,198    2,940
                                  -------   ------
   Net property and equipment     $ 7,392   $6,794
                                  =======   ======
</TABLE>


                                       28

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     Depreciation expense was $521,000 and $527,000 for the periods ended
     December 31, 2005 and 2004, respectively.

NOTE 6 - SERVICING

     Loans serviced for others are not included in the accompanying consolidated
     statement of financial condition. The unpaid principal balances of mortgage
     and other loans serviced for others were approximately $139,132,000 and
     $139,304,000 at December 31, 2005 and 2004, respectively.

     The balance of capitalized servicing rights, net of valuation allowance, is
     included in other assets at December 31, 2005 and 2004.

     The key economic assumptions used in determining the fair value of the
     mortgage servicing rights are as follows:

<TABLE>
<CAPTION>
                                         December 31,
                                         ------------
                                         2005    2004
                                         ----   -----
<S>                                      <C>    <C>
Annual constant prepayment speed (CPR)   8.23%  11.91%
Weighted average life (in months)         249     250
Discount rate                            8.50%   7.50%
</TABLE>

     We estimated the fair value of our mortgage servicing rights to be
     $1,668,000 and $1,502,000 and the weighted average life remaining of those
     rights was 55 months and 52 months at December 31, 2005 and 2004,
     respectively.

     The following summarizes mortgage servicing rights capitalized and
     amortized, along with the aggregate activity in related valuation
     allowances:


                                       29

<PAGE>


FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                    December 31
                                                   -------------
                                                    2005    2004
                                                   -----   -----
<S>                                                <C>     <C>
Carrying amount - Beginning of year                $ 860   $ 984
Originated mortgage servicing rights capitalized     178     196
Amortization of mortgage servicing rights           (287)   (320)
                                                   -----   -----
      Subtotal                                       751     860
Valuation allowances:
   Balance at beginning of year                       --      --
   Additions                                          --      --
   Reductions                                         --      --
   Write-downs                                        --      --
                                                   -----   -----
   Balance at end of year                          $ 751   $ 860
                                                   =====   =====
</TABLE>


                                       30
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 7 - INTANGIBLE ASSETS

     Intangible assets of the Company are summarized as follows:

<TABLE>
<CAPTION>
                                             December 31, 2005
                               --------------------------------------------
                               Gross Carrying    Accumulated   Net Carrying
                                   Amount       Amortization      Amount
                               --------------   ------------   ------------
<S>                            <C>              <C>            <C>
Amortized intangible assets:
   Customer list                   $1,454          $  159         $1,295
   Customer contract                  597             100            497
   Core deposit                     3,081           1,927          1,154
   Non-compete covenant               200              57            143
                                   ------          ------         ------
   Total                           $5,332          $2,243         $3,089
                                   ======          ======         ======
</TABLE>

<TABLE>
<CAPTION>
                                             December 31, 2004
                               --------------------------------------------
                               Gross Carrying    Accumulated   Net Carrying
                                   Amount       Amortization      Amount
                               --------------   ------------   ------------
<S>                            <C>              <C>            <C>
Amortized intangible assets:
   Customer list                   $  890          $   82         $  808
   Customer contract                  597              55            542
   Core deposit                     3,081           1,739          1,342
   Non-compete covenant               200              36            164
                                   ------          ------         ------
   Total                           $4,768          $1,912         $2,856
                                   ======          ======         ======
</TABLE>

     Amortization expense was $331,000 and $293,000 for the periods ended
     December 31, 2005 and 2004, respectively.


                                       31

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 7 - INTANGIBLE ASSETS (CONTINUED)

     Amortization periods for the major classes of intangible assets and in
     total are as follows as of December 31, 2005.

<TABLE>
<CAPTION>
                         Amortization Period
Amortizable Intangible        (In years)
----------------------   -------------------
<S>                      <C>
Customer list                    6.9
Customer contract                5.0
Core deposit                     8.4
Non-compete covenant             7.2
                                 ---
                                 9.4
                                 ===
</TABLE>

     The expected amortization expense related to intangibles as of December 31,
     2005 is as follows:

<TABLE>
<CAPTION>
Year Ended December 31   Annual Amortization
----------------------   -------------------
<S>                      <C>
         2006                    $500
         2007                     493
         2008                     490
         2009                     490
         2010                     481
</TABLE>


                                       32

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 8 - DEPOSITS

     Deposit accounts, by type and range of rates, consist of the following:

<TABLE>
<CAPTION>
                                       December 31
                                   -------------------
                                     2005       2004
                                   --------   --------
<S>                                <C>        <C>
          Account Type
NOW accounts and MMDA              $ 28,164   $ 36,501
Regular savings accounts             27,103     28,186
                                   --------   --------
   Total                             55,267     64,687

  Certificate of Deposit Rates
0.50 percent to 1.99 percent          7,443     22,980
2.00 percent to 2.99 percent         20,199     24,924
3.00 percent to 3.99 percent         59,350     33,124
4.00 percent to 4.99 percent         25,470     10,227
5.00 percent to 6.99 percent          8,667     12,869
7.00 percent to 8.99 percent          1,461      2,749
                                   --------   --------
   Total certificate of deposits    122,590    106,873
                                   --------   --------
   Total deposits                  $177,857   $171,560
                                   ========   ========
</TABLE>

     Certificates of deposit $100,000 or greater at December 31, 2005 and 2004
     were $30,166,000 and $23,417,000, respectively. The amounts is excess of
     $100,000 are not federally insured.


                                       33
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 8 - DEPOSITS (CONTINUED)

     The following table sets forth the amount and maturities of certificates of
     deposit:

<TABLE>
<CAPTION>
                                       December 31, 2005
                                          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>
0.50 percent to
   1.99 percent    $ 7,426    $    17   $   --   $   --    $   --   $  7,443
2.00 percent to
   2.99 percent     18,248        368      652      773       158     20,199
3.00 percent to
   3.99 percent     34,788     18,367    5,933       90       172     59,350
4.00 percent to
   4.99 percent     19,793      3,684      211    1,347       435     25,470
5.00 percent to
   6.99 percent      2,757        725      921    3,691       573      8,667
7.00 percent to
   8.99 percent         --        147       --    1,314        --      1,461
                   -------    -------   ------   ------    ------   --------
   Total           $83,012    $23,308   $7,717   $7,215    $1,338   $122,590
                   =======    =======   ======   ======    ======   ========
</TABLE>

Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>
                             Year Ended
                            December 31
                          ---------------
                           2005     2004
                          ------   ------
<S>                       <C>      <C>
NOW and MMDAs             $  288   $  256
Regular savings              177       66
Certificates of deposit    3,874    3,294
                          ------   ------
   Total                  $4,339   $3,616
                          ======   ======
</TABLE>

     Deposits from related parties held by the Bank at December 31, 2005 and
     2004 amounted to $462,000 and $564,000, respectively.


                                       34

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 9 - 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. The carrying value of loans
     pledged to secure these advances was approximately $79,264,000 and
     $91,101,000 at December 31, 2005 and 2004, respectively.

     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>
           December 31, 2005                        December 31, 2004
--------------------------------------   --------------------------------------
                            Weighted                                 Weighted
Years Ending                Average      Years Ending                Average
 December 31    Amount   Interest Rate    December 31    Amount   Interest Rate
------------   -------   -------------   ------------   -------   -------------
<S>            <C>       <C>             <C>            <C>       <C>
   2006        $18,925        3.75          2005        $22,250        4.04
   2007          2,500        4.28          2006          6,000        2.89
   2008         12,500        4.55          2008          7,500        4.78
   2009          1,000        3.40          2009          1,000         3.4
   2010         18,000        5.49          2010         18,000        5.49
               -------                                  -------
Total          $52,925        4.55       Total          $54,750        4.48
               =======                                  =======
</TABLE>


                                       35

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 10 - NOTE PAYABLE

     In connection with the purchase of ICA, an unsecured note payable was
     issued to an individual, payable in annual installments of $180,000,
     including interest at 5.5 percent. Future maturities of the note are as
     follows:

<TABLE>
<CAPTION>
Years Ending
 December 31   Amount
------------   ------
<S>            <C>
   2006        $  117
   2007           124
   2008           130
   2009           138
   2010           146
Thereafter        485
               ------
Total          $1,140
               ======
</TABLE>

     In connection with the purchase of an existing book of insurance business
     by ICA, a two-year unsecured note payable was issued to an individual, with
     the first annual payment of $190,000 and the second annual payment of
     $179,000, both payments including interest at 6.0 percent. Future
     maturities of the note are as follows:

<TABLE>
<CAPTION>
Years Ending
December 31,   Amount
------------   ------
<S>            <C>
   2006         $169
   2007          169
                ----
Total           $338
                ====
</TABLE>


                                       36
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 11 - FEDERAL INCOME TAX

     The analysis of the consolidated provision for federal income tax is as
     follows:

<TABLE>
<CAPTION>
                               Year Ended
                               December 31
                              ------------
                               2005   2004
                              -----   ----
<S>                           <C>     <C>
Current provision             $ 403   $204
Deferred provision (credit)    (200)    --
                              -----   ----
   Total                      $ 203   $204
                              =====   ====
</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 is as follows:

<TABLE>
<CAPTION>
                          Year Ended
                         December 31
                        -------------
                         2005    2004
                        -----   -----
<S>                     <C>     <C>
Tax at statutory rate   $ 219   $ 207
Nontaxable dividend        (1)    (18)
Tax-exempt interest       (36)    (11)
Other                      21      26
                        -----   -----
   Federal income tax   $ 203   $ 204
                        =====   =====
Effective Tax Rate       31.5%   33.6%
                        =====   =====
</TABLE>


                                       37

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 11 - FEDERAL INCOME TAX (CONTINUED)

     The net deferred tax liability was comprised of the following temporary
     differences:

<TABLE>
<CAPTION>
                                                         December 31
                                                       ---------------
                                                        2005     2004
                                                       ------   ------
<S>                                                    <C>      <C>
Deferred tax assets:
   Allowance for loan losses                           $  444   $  358
   Valuation allowance for real estate held for sale       34       41
   Unrealized loss on available-for-sale securities       221       14
   Other                                                    3       98
   Contributions Carryover                                180       --
   Directors' benefit plan                                335      222
                                                       ------   ------
      Total deferred tax assets                         1,217      733
Valuation allowance for deferred tax assets                         --
Deferred tax liabilities:
   Mortgage servicing rights                              255      293
   Partnership losses                                      84       74
   Depreciation                                           540      579
   Other                                                  284      140
                                                       ------   ------
      Total deferred tax liabilities                    1,163    1,086
                                                       ------   ------
      Net deferred tax asset (liability)               $   54   $ (353)
                                                       ======   ======
</TABLE>

     The contribution carryforward relates to $529,000 in contributions that
     were not deductible in 2005. This carryforward expires in 2010.

     For tax years beginning prior to January 1, 1996, a qualified thrift
     institution was allowed a bad debt deduction for tax purposes based


                                       38

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     on a percentage of taxable income or on actual experience. The Bank used
     the percentage of taxable income method through December 31, 1995.

NOTE 11 - 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, 2005 and 2004, the amount
     of those reserves was approximately $60,000. The amount of the unrecognized
     deferred tax liability at December 31, 2005 and 2004 was approximately
     $20,000.

NOTE 12 - OFF BALANCE SHEET RISK COMMITMENTS AND CONTINGENCIES

     CREDIT-RELATED FINANCIAL INSTRUMENTS - The Company is a party to
     credit-related financial instruments with off balance sheet risk in the
     normal course of business to meet the financing needs of its customers.
     These financial instruments include commitments to extend credit, standby
     letters of credit, and commercial letters of credit. Such commitments
     involve, to varying degrees, elements of credit and interest rate risk in
     excess of the amount recognized in the consolidated statement of financial
     condition.

     The Company's exposure to credit loss is represented by the contractual
     amount of these commitments. The Company follows the same credit policies
     in making commitments as it does for on-balance-sheet instruments.

     The following financial instruments were outstanding whose contract amounts
     represent credit risk:


                                       39

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                December 31
                                             -----------------
                                               2005      2004
                                             -------   -------
<S>                                          <C>       <C>
Commitments to grant loans                   $15,772   $25,710
Unfunded commitments under lines of credit    20,843    16,641
Commercial and standby letters of credit          25        35
</TABLE>

     Commitments to extend credit are agreements to lend to a customer as long
     as there is no violation of any condition established in the contract.
     Commitments generally have fixed expiration dates or other termination
     clauses and may require payment of a fee. The commitments for equity lines
     of credit may expire without being drawn upon. Therefore, the total
     commitment amounts do not necessarily represent future cash requirements.
     The amount of collateral obtained, if it is deemed necessary by the
     Company, is based on management's credit evaluation of the customer.


                                       40
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 12 - OFF BALANCE SHEET RISK COMMITMENTS AND CONTINGENCIES (CONTINUED)

     Unfunded commitments under commercial lines of credit, revolving credit
     lines, and overdraft protection agreements are commitments for possible
     future extensions of credit to existing customers. These lines of credit
     are collateralized and may not be drawn upon to the total extent to which
     the Company is committed.

     Commercial and standby letters of credit are conditional commitments issued
     by the Company to guarantee the performance of a customer to a third party.
     Those letters of credit are primarily used to support public and private
     borrowing arrangements. Essentially all letters of credit issued have
     expiration dates within one year. The Company generally holds collateral
     supporting those commitments if deemed necessary.

     COLLATERAL REQUIREMENTS - To reduce credit risk related to the use of
     credit-related financial instruments, the Company might deem it necessary
     to obtain collateral. The amount and nature of the collateral obtained is
     based on the Company's credit evaluation of the customer. Collateral held
     varies but may include cash, securities, accounts receivable, inventory,
     property, plant, and equipment, and real estate.

     If the counterparty does not have the right and ability to redeem the
     collateral or if the Company is permitted to sell or repledge the
     collateral on short notice, the Company records the collateral in its
     statement of financial condition at fair value with a corresponding
     obligation to return it.

NOTE 13 - STOCKHOLDERS' EQUITY

     Payment of dividends on the common stock is subject to determination and
     declaration by the Board of Directors and


                                       41

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     depends on a number of factors, including capital requirements, regulatory
     limitation on payment of dividends, the Bank's results of operations and
     financial condition, tax considerations, and general economic conditions.

     For the quarter ended March 31, 2005, the Bank filed a notice with the
     Office of Thrift Supervision (OTS) and the Federal Deposit Insurance
     Company (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.

NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)

     In 2005, in connection with the second-step conversion of Alpena
     Bancshares, M.H.C., the dividends previously waived by the M.H.C. were
     permanently forgiven and $5,512,000 in restricted retained earnings related
     to the waived dividends were transferred to unrestricted retained earnings.

     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


                                       42

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     regulators regarding components, risk-weightings, and other factors.

     During the most recent regulatory examination, 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 tangible equity ratios as set forth in
     the table below. There are no conditions or events since that notification
     that management believes have changed the Bank's categorization.
     Consolidated data has not been disclosed as the amounts and ratios are not
     significantly different.

<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, 2005:
   Total capital (to risk-
      weighted assets)        $33,669   18.03%   $14,937   8.00%       $18,671   10.00%
   Tier 1 capital (to risk-
      weighted assets)        $32,181   17.24%   $ 7,468   4.00%       $11,202    6.00%
   Tangible capital (to
      tangible assets)        $32,181   11.56%   $ 4,175   1.50%       $ 5,567    2.00%
December 31, 2004:
   Total capital (to risk-
      weighted assets)        $18,436   10.68%   $13,806   8.00%       $17,258   10.00%
   Tier 1 capital (to risk-
      weighted assets)        $17,140    9.93%   $ 6,903   4.00%       $10,355    6.00%
   Tangible capital (to
      tangible assets)        $17,140    6.64%   $ 3,873   1.50%       $ 5,164    2.00%
</TABLE>


                                       43

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)

     Reconcilliation of GAAP to Regulatory Capital

<TABLE>
<CAPTION>
                                                December 31
                                             -----------------
                                               2005      2004
                                             -------   -------
<S>                                          <C>       <C>
GAAP Capital                                 $36,649   $21,777
Reconciling items:
Less: Investment in and advances to
   nonincludable subsidaries                    (487)     (759)
Less: Goodwill and other intangible assets    (4,439)   (3,905)
Unrealized (gain) loss on securities
   available for sale                            458        27
Disallowed mortgage servicing rights              --        --
                                             -------   -------
   Tangible and core capital                  32,181    17,140
Allowable unrealized (gain) loss on
   securities available for sale                  72        82
General valuation allowance                    1,416     1,214
                                             -------   -------
   Risk Based Capital                        $33,669   $18,436
                                             =======   =======
</TABLE>

NOTE 14 - 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


                                       44

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     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, 2005 and 2004. Effective July 1, 2005 the plan was frozen as
     to current participants and any new employees hired after July 1, 2004 were
     excluded from the plan. The expense of the Plan allocated to the Bank for
     the years ended December 31, 2005 and 2004 was $252,000 and $392,000,
     respectively.

NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED)

     The Bank has a Section 401(k) savings plan covering substantially all of
     its employees who meet certain age and service requirements. The Company
     matches a certain percentage of participant deferrals. Additional
     contributions may be made as approved by the Board of Directors. For the
     calendar year ended December 31, 2005 the Bank's Board of Directors
     approved a discretionary profit sharing payment under this plan of 4% of
     each eligible employee's wages for the period from July 1, 2005 through
     December 31, 2005. The expense under the plan for the years ended December
     31, 2005 and 2004 was $136,000 and $71,000, respectively.

     The Bank has a nonqualified deferred compensation plan for its directors.
     Through 1998, each director could voluntarily defer all or part of his or
     her director's fees to participate in the 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 $719,000 and $654,000 at
     December 31, 2005 and 2004, respectively. The expense under the plan for
     the years ended


                                       45

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     December 31, 2005 and 2004 was $102,000 and $59,000, respectively.

     EMPLOYEE STOCK OWNERSHIP PLAN

     Effective January 1, 1994, the Bank implemented an employee stock ownership
     plan (ESOP). The ESOP covers substantially all employees who have completed
     one year of service, attained age 21, and worked at least 1,000 hours
     during the year. To fund the ESOP, the Bank borrowed $480,000 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 at the
     prime rate and was retired in 1999. All of the 1994 shares were allocated
     as of December 31, 1999. Compensation expense is measured by the fair value
     of ESOP shares allocated to participants during a fiscal year.


                                       46
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED)

     Pursuant to the 2005 second-step conversion and stock offering, the
     shareholders of the Company approved the purchase of 8% of shares sold in
     the stock offering by the ESOP. The Company provided a loan to the ESOP,
     which was used to purchase 138,709 shares of the Company's common stock in
     the stock offering at $10 per share. The loan bears interest at the rate of
     5.75 percent and provides for repayment of principal over the 15 year term
     of the loan. Since the Company is providing the loan to the ESOP, the note
     receivable is not included in the Company's balance sheet. Accordingly, the
     Company did not recognize interest income on the loan. In 2005, however,
     the Board of Directors of the Company authorized a prepayment of principal
     on the ESOP loan. The scheduled maturities of the loan are as follows:

<TABLE>
<CAPTION>
 Year Ended
December 31   Principal Amount
-----------   ----------------
<S>           <C>
   2006            $   71
   2007                75
   2008                80
   2009                84
   2010                89
Thereafter            769
                   ------
   Total           $1,168
                   ======
</TABLE>

     The Company makes annual contributions to the ESOP sufficient to support
     the debt service of the loan. The loan is secured by the shares purchased,
     which are held in a suspense account for allocation among the
     participations as the loan is paid. Dividends


                                       47

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     paid on unallocated shares are not considered dividends for financial
     reporting purposes and are used to pay principal and interest on the ESOP
     loan. Dividends on allocated shares are charged to retained earnings.
     Compensation expense is recognized for the ESOP equal to the average fair
     value of shares committed to be released for allocation to participant
     accounts. Any difference between the average fair value of shares committed
     to be released for allocation and the ESOP's original acquisition cost is
     charged or credited to stockholders' equity (additional paid-in capital).
     Total compensation expense for the year ended December 31, 2005 was
     $180,000.


                                       48

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED)

     Shares held by the ESOP include the following:

<TABLE>
<CAPTION>
                2005     2004
              -------   ------
<S>           <C>       <C>
Allocated      42,281   42,281
Unallocated   138,709       --
              -------   ------
Total         180,990   42,281
</TABLE>

     The cost of unallocated ESOP shares (shares not yet released for
     allocation) is reflected as a reduction of stockholders' equity. The fair
     value of the unallocated shares was approximately $1,214,000 at December
     31, 2005.

     STOCK OPTION PLAN

     The 1996 stock option plan for certain employees and nonemployee directors
     authorized the grant of stock options to purchase 69,000 shares of common
     stock of the Company. Pursuant to the stock option plan, grants may be made
     of incentive stock options and nonstatutory stock options. Simultaneously
     with the grant of stock options, the Company may grant limited rights. The
     limited rights may be exercised only in the event of a change in control.
     The Company has not issued limited rights under this plan and and has no
     intention to do so under this plan. Nonemployee directors are only eligible
     to receive nonstatutory options. Under the terms of the plan, 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.
     The incentive stock options vest ratably over a five year period.
     Nonstatutory fully vested 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. As discussed in Note 1, the Company
     reorganized in 2005.


                                       49

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     Therefore, all references to the number of shares outstanding and related
     exercise prices have been adjusted to give retroactive recognition to the
     exchange ratio of 1.8477 applied in the conversion.

NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED)

     The following is a summary of activity for stock options:

<TABLE>
<CAPTION>
                                         December 31
                         --------------------------------------------
                                 2005                   2004
                         --------------------   --------------------
                                     Weighted               Weighted
                                      Average                Average
                         Number of   Exercise   Number of   Exercise
                           Shares      Price      Shares      Price
                         ---------   --------   ---------   --------
<S>                      <C>         <C>        <C>         <C>
Options outstanding at
   beginning of period     48,800      $5.69     53,604       $5.72
Options granted                --                    --          --
Options exercised         (22,310)      5.41     (3,695)       5.77
Options forfeited          (1,848)      7.44     (1,109)       7.44
                          -------                ------
Options outstanding at
   end of period           24,642       5.80     48,800        5.69
                          =======                ======
Exercisable at end of
   period                  20,208       5.63     44,365        5.51
</TABLE>


                                       50
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     Information pertaining to options outstanding is as follows:

<TABLE>
<CAPTION>
                                               December 31, 2005
             -------------------------------------------------------------------------------------
                        Options Outstanding                         Options Exerciseable
             -----------------------------------------   -----------------------------------------
                              Weighted-                                   Weighted-
                               Average       Weighted-                     Average       Weighted-
                              Remaining       Average                     Remaining       Average
 Exercise       Number       Contractual      Exercise      Number       Contractual      Exercise
Prices ($)   Outstanding   Life (in years)     Price     Exercisable   Life (in years)     Price
----------   -----------   ---------------   ---------   -----------   ---------------   ---------
<S>          <C>           <C>               <C>         <C>           <C>               <C>
5.21             7,945           0.44          $5.21         7,945           0.44          $5.21
5.41            11,155           0.29           5.41         9,306           0.29           5.41
7.44             5,542           6.24           7.44         2,957           6.24           7.44
                ------                                      ------
   Total        24,642           1.68          $5.80        20,208           1.22          $5.63
                ======                                      ======
</TABLE>


                                       51

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS

     The fair value of a financial instrument is the current amount that would
     be exchanged between willing parties, other than in a forced liquidation.
     Fair value is best determined based on quoted market prices. However, in
     many instances, there are no quoted market prices for the Company's various
     financial instruments. In cases where quoted market prices are not
     available, fair values are based on estimates using present value or other
     valuation techniques. Those techniques are significantly affected by the
     assumptions used, including the discount rate and estimates of future cash
     flows. Accordingly, the fair value estimates may not be realized in an
     immediate settlement of the instrument. SFAS 107 excludes certain financial
     instruments and all nonfinancial instruments from its disclosure
     requirements. Accordingly, the aggregate fair value amounts presented may
     not necessarily represent the underlying fair value of the Company.

     The following methods and assumptions were used by the Company in
     estimating fair value disclosures for financial instruments:

     CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-term
     instruments approximate fair values.

     SECURITIES - Fair values for securities, excluding Federal Home Loan Bank
     stock, are based on quoted market prices. The carrying value of Federal
     Home Loan Bank stock approximates fair value based on the redemption
     provisions of the Federal Home Loan Bank.

     LOANS HELD FOR SALE - Fair values of mortgage loans held for sale are based
     on commitments on hand from investors or prevailing market prices.


                                       52

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     LOANS RECEIVABLE - For variable-rate loans that reprice frequently and with
     no significant change in credit risk, fair values are based on carrying
     values. Fair values for certain mortgage loans (e.g., one- to four-family
     residential), credit card loans, and other consumer loans are based on
     quoted market prices of similar loans sold in conjunction with
     securitization transactions, adjusted for differences in loan
     characteristics. Fair values for other loans (e.g., commercial real estate
     and investment property mortgage loans, commercial, and industrial loans)
     are estimated using discounted cash flow analyses, using interest rates
     currently being offered for loans with similar terms to borrowers of
     similar credit quality. Fair values for nonperforming loans are estimated
     using discounted cash flow analyses or underlying collateral values, where
     applicable.

     DEPOSIT LIABILITIES - The fair values disclosed for demand deposits (e.g.,
     interest and noninterest checking, passbook savings, and certain types of
     money market accounts) are, by definition, equal to the amount payable on
     demand at the

NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

     reporting date (i.e., their carrying amounts). The carrying amounts of
     variable-rate, fixed-term money market accounts and certificates of deposit
     approximate their fair values at the reporting date. Fair values for
     fixed-rate certificates of deposit are estimated using a discounted cash
     flow calculation that applies interest rates currently being offered on
     certificates to a schedule of aggregated expected monthly maturities on
     time deposits

     LONG-TERM BORROWINGS - The fair values of the Company's long-term
     borrowings are estimated using discounted cash flow analyses based on the
     Company's current incremental borrowing rates for similar types of
     borrowing arrangements.


                                       53

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

     ACCRUED INTEREST - The carrying amounts of accrued interest approximate
     fair value.

     The estimated fair values and related carrying or notional amounts of the
     Company's financial instruments are as follows:

<TABLE>
<CAPTION>
                                           December 31, 2005       December 31, 2004
                                         ---------------------   ---------------------
                                         Carrying    Estimated   Carrying    Estimated
                                          Amounts   Fair Value    Amounts   Fair Value
                                         --------   ----------   --------   ----------
<S>                                      <C>        <C>          <C>        <C>
Financial assets:
   Cash and cash equivalents             $  4,780    $  4,780    $  4,739    $  4,739
   Securities                              55,187      55,199      42,033      42,066
   Loans and loans held for sale - Net    201,183     198,112     196,484     196,416
   Federal Home Loan Bank stock             4,765       4,765       4,666       4,666
   Accrued interest receivable              1,602       1,602       1,035       1,035

Financial liabilities:
   Customer deposits                      188,735     189,090     182,489     183,774
   Advances from borrowers for
      taxes and insurance                      28          28          45          45
   Federal Home Loan Bank advances         52,925      52,461      54,750      54,286
   Note payable                             1,478       1,476       1,251       1,249
   Accrued interest payable                   686         686         481         481
</TABLE>


                                       54
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 16 - RESTRICTIONS ON DIVIDENDS

     OTS regulations impose limitations upon all capital distributions including
     cash dividends. The total amount of dividends that may be paid is generally
     limited to the sum of the net profits of the bank for the preceding three
     years. An application to and the approval of the OTS is required prior to
     any capital distribution if the institution does not meet the criteria for
     "expedited treatment" of applications under OTS regulations. If an
     application is not required, the institution must still provide prior
     notice to the OTS of the capital distribution. In the event the Bank's
     capital falls below its regulatory requirements or the OTS notifies it that
     it was in need of more than normal supervision, the Bank's ability to make
     capital distributions could be restricted. In addition, the OTS could
     prohibit a proposed capital distribution by any institution, which would
     otherwise be permitted by the regulation, if the OTS determines that such
     distribution would constitute an unsafe or unsound practice. At December
     31, 2005 and 2004, the Bank's retained earnings available for the payment
     of dividends totaled $1,661,000 and $1,038,000, respectively.

NOTE 17 - PARENT-ONLY FINANCIAL STATEMENTS

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

     The condensed balance sheet is as follows:


                                       55

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                   December 31
                                                -----------------
                                                  2005      2004
                                                -------   -------
<S>                                             <C>       <C>
                            ASSETS

Cash at subsidiary bank                         $ 2,642   $   128
Investment in subsidiary                         33,839    21,470
Other assets                                        409       179
                                                -------   -------
   Total assets                                 $36,890   $21,777
                                                =======   =======

    LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities                                     $   241   $    --
Stockholders' equity                             36,649    21,777
                                                -------   -------
   Total liabilities and stockholders' equity   $36,890   $21,777
                                                =======   =======
</TABLE>

NOTE 17 - PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED)

     The condensed statement of operations for the years ended
     are as follows:

<TABLE>
<CAPTION>
                                                              December 31
                                                             ------------
                                                              2005   2004
                                                             -----   ----
<S>                                                          <C>     <C>
Operating income                                             $ 350   $411
Operating expense                                              799     89
                                                             -----   ----
Income (loss) before income taxes and equity in
   undistributed net income of subsidiary                     (449)   322
Income tax benefit                                             268     30
                                                             -----   ----
Income (loss) before equity in undistributed net income of
   subsidiary                                                 (181)   352
Equity in undistributed net income of subsidiary               623     52
                                                             -----   ----
Net income                                                   $ 442   $404
                                                             =====   ====
</TABLE>


                              56

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 17 - PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED)

     The condensed statement of cash flows for the years ended
     is as follows:

<TABLE>
<CAPTION>
                                                               December 31
                                                            ----------------
                                                              2005      2004
                                                            --------   -----
<S>                                                         <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                               $    442   $ 404
   Adjustments to reconcile net income to net cash
      from operating activities:
      Equity in undistributed net income of
         subsidiary                                             (623)    (52)
      Stock donation to charitable foundation                    340      --
      Net change in other assets                                (201)   (135)
      Net change in other liabilities                            241      19
                                                            --------   -----
         Net cash provided by operating
            activities                                           199     236
CASH FLOWS FROM INVESTING ACTIVITIES
   Capitalization of subsidiary                              (12,013)     --
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from exercise of stock options                       120      21
   Tax benefits of stock options exercised                        29      --
   Stock retired                                                 (60)
   Net proceeds from stock conversion                         15,960      --
   Merger of Alpena Bancshares, Inc. and M.H.C                   206      --
   Purchase of shares for ESOP                                (1,387)     --
   Dividends paid                                               (540)   (277)
                                                            --------   -----
         Net cash provided (used) in financing activities     14,328    (256)
                                                            --------   -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS           2,514     (20)
CASH AND CASH EQUIVALENTS - Beginning of year                    128     148
                                                            --------   -----
CASH AND CASH EQUIVALENTS - End of year                     $  2,642   $ 128
                                                            ========   =====
</TABLE>


                              57
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 18 - SEGMENT REPORTING

     The Company's principal activities include banking and the sale of
     insurance products through its wholly owned subsidiary, ICA, purchased in
     2003. The Bank provides financial products including retail and commercial
     loans as well as retail and commercial deposits. ICA received commissions
     from the sale of various insurance products including health, life, and
     property. The segments were determined based on the nature of the products
     provided to customers.

     The financial information for each operating segment is reported on the
     basis used internally to evaluate performance and allocate resources. The
     allocations have been consistently applied for all periods presented.
     Revenues and expenses between affiliates have been transacted at rates that
     unaffiliated parties would pay. The only transaction between the segments
     thus far relates to a deposit on behalf of the ICA included in the Bank.
     The interest income and interest expense for this transaction has been
     eliminated. All other transactions are with external customers. The
     performance measurement of the operating segments is based on the
     management structure of the Company and is not necessarily comparable with
     similar information for any other financial institution. The information
     presented is also not necessarily indicative of the segment's financial
     condition and results of operations if they were independent entities.


                                       58

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 18 - SEGMENT REPORTING (CONTINUED)

<TABLE>
<CAPTION>
                                                                        For Year Ended
                                                                      December 31, 2005
                                                         -------------------------------------------
                                                           Bank       ICA    Eliminations     Total
                                                         --------   ------   ------------   --------
<S>                                                      <C>        <C>      <C>            <C>
INTEREST INCOME                                          $ 15,076   $   10      $ (10)      $ 15,076
INTEREST EXPENSE                                            6,716       --        (10)         6,706
                                                         --------   ------      -----       --------
NET INTEREST INCOME - Before provision for loan losses      8,360       10         --          8,370
PROVISION FOR LOAN LOSSES                                     368       --         --            368
                                                         --------   ------      -----       --------
NET INTEREST INCOME - After provision for loan losses       7,992       10         --          8,002
OTHER INCOME                                                1,511    2,947         --          4,458
OPERATING EXPENSES                                          8,994    2,821         --         11,815
                                                         --------   ------      -----       --------
INCOME - Before federal income tax                            509      136         --            645
FEDERAL INCOME TAX                                            160       43         --            203
                                                         --------   ------      -----       --------
NET INCOME                                               $    349   $   93      $  --       $    442
                                                         ========   ======      =====       ========
DEPRECIATION AND AMORTIZATION                            $    677   $  175      $  --       $    852
                                                         ========   ======      =====       ========
ASSETS                                                   $278,684   $4,416      $(325)      $282,775
                                                         ========   ======      =====       ========
EXPENDITURES RELATED TO LONG-LIVED ASSETS:
   Goodwill                                              $     --   $  300      $  --       $    300
   Intangible assets                                           --      555         --            555
   Property and equipment                                   1,107       12         --          1,119
                                                         --------   ------      -----       --------
      TOTAL                                              $  1,107   $  867      $  --       $  1,974
                                                         ========   ======      =====       ========
</TABLE>

<TABLE>
<CAPTION>
                                                                        For Year Ended
                                                                      December 31, 2004
                                                         -------------------------------------------
                                                           Bank       ICA    Eliminations     Total
                                                         --------   ------   ------------   --------
<S>                                                      <C>        <C>      <C>            <C>
INTEREST INCOME                                          $ 13,278   $    9      $  (9)      $ 13,278
INTEREST EXPENSE                                            6,211       --         (9)         6,202
                                                         --------   ------      -----       --------
NET INTEREST INCOME - Before provision for loan losses      7,067        9         --          7,076
PROVISION FOR LOAN LOSSES                                     323       --         --            323
                                                         --------   ------      -----       --------
NET INTEREST INCOME - After provision for loan losses       6,744        9         --          6,753
OTHER INCOME                                                1,733    2,978         --          4,711
OPERATING EXPENSES                                          8,071    2,785         --         10,856
                                                         --------   ------      -----       --------
INCOME - Before federal income tax                            406      202         --            608
FEDERAL INCOME TAX                                            136       68         --            204
                                                         --------   ------      -----       --------
NET INCOME                                               $    270   $  134      $  --       $    404
                                                         ========   ======      =====       ========
DEPRECIATION AND AMORTIZATION                            $    641   $  125      $  --       $    766
                                                         ========   ======      =====       ========
ASSETS                                                   $259,858   $3,677      $(735)      $262,800
                                                         ========   ======      =====       ========
EXPENDITURES RELATED TO LONG-LIVED ASSETS:
   Goodwill                                              $     --   $  300      $  --       $    300
   Intangible assets                                           47       --         --             47
   Property and equipment                                   1,294       41         --          1,335
                                                         --------   ------      -----       --------
      TOTAL                                              $  1,341   $  341      $  --       $  1,682
                                                         ========   ======      =====       ========
</TABLE>


                                       59

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2005 AND 2004
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 19 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following tables summarize the Company's quarterly results for the
     fiscal years ended December 31, 2005 and 2004:

<TABLE>
<CAPTION>
                                                          For the Three-Month Period Ending
                                                 ---------------------------------------------------
                                                 March 31,   June 30,   September 30,   December 31,
                                                    2005       2005          2005           2005
                                                 ---------   --------   -------------   ------------
<S>                                              <C>         <C>        <C>             <C>
Interest income                                    $3,505     $3,723        $3,899         $3,949
Interest expense                                    1,599      1,644         1,683          1,780
                                                   ------     ------        ------         ------
Net interest income                                 1,906      2,079         2,216          2,169
Provision for losses on loans                          79        183             4            102
Other income                                        1,099      1,098         1,156          1,105
Other expenses                                      2,712      3,446         2,822          2,835
                                                   ------     ------        ------         ------
Income - Before income taxes                          214       (452)          546            337
Federal income taxes                                   72       (152)          183            100
                                                   ------     ------        ------         ------
Net income                                         $  142     $ (300)       $  363         $  237
                                                   ======     ======        ======         ======
Basic earnings per share                           $ 0.04     $(0.09)       $ 0.12         $ 0.07
Fully diluted earnings per share                   $ 0.04     $(0.09)       $ 0.12         $ 0.07
Weighted average number of shares outstanding       3,065      3,100         3,101          3,112
Weighted average number of shares outstanding,
   including dilutive stock options                 3,089      3,114         3,111          3,111
Cash dividends declared per common share           $0.054     $0.050        $0.050         $0.050
</TABLE>

<TABLE>
<CAPTION>
                                                          For the Three-Month Period Ending
                                                 ---------------------------------------------------
                                                 March 31,   June 30,   September 30,   December 31,
                                                    2004       2004          2004           2004
                                                 ---------   --------   -------------   ------------
<S>                                              <C>         <C>        <C>             <C>
Interest income                                   $3,091      $3,261        $3,446         $3,480
Interest expense                                   1,445       1,504         1,622          1,631
                                                  ------      ------        ------         ------
Net interest income                                1,646       1,757         1,824          1,849
Provision for losses on loans                         81          65            68            109
Other income                                       1,138       1,209         1,252          1,112
Other expenses                                     2,724       2,748         2,641          2,743
                                                  ------      ------        ------         ------
Income - Before income taxes                         (21)        153           367            109
Federal income taxes                                  (7)         51           123             37
                                                  ------      ------        ------         ------
Net income                                        $  (14)     $  102        $  244         $   72
                                                  ======      ======        ======         ======
Basic earnings per share                          $(0.00)     $ 0.03        $ 0.08         $ 0.02
Fully diluted earnings per share                  $(0.00)     $ 0.03        $ 0.08         $ 0.02
Weighted average number of shares outstanding      3,065       3,065         3,065          3,065
Weighted average number of shares outstanding,
   including dilutive stock options                3,088       3,089         3,088          3,089
Cash dividends declared per common share          $0.068      $0.027        $0.054         $0.054
</TABLE>


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