<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             450 FIFTH STREET, N.W.
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]         Annual Report Pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934
        For the Fiscal Year Ended December 31, 2001
                                       OR
[  ]        Transition Report Pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934

            For the transition period from _______________ to _________________

                        COMMISSION FILE NUMBER: 000-31957

                             ALPENA BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

              UNITED STATES                                38-3567362
------------------------------------------       ------------------------------
     (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                  Identification Number)

 100 S. SECOND AVENUE, ALPENA, MICHIGAN                       49707
 --------------------------------------                       -----
(Address of Principal Executive Offices)                    Zip Code


                                 (989) 356-9041
                                 --------------
                         (Registrant's telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:   NONE

<TABLE>
<S>                                                           <C>
Securities Registered Pursuant to Section 12(g) of the Act:   COMMON STOCK, PAR VALUE $1.00 PER SHARE
                                                              ---------------------------------------
                                                                         (Title of Class)
</TABLE>

         Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past twelve months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
         YES      .   NO      .
             -----       -----

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X].

         As of February 28, 2002, there were issued and outstanding 1,641,579
shares of the Registrant's common stock.

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the last sale price on February 28,
2002 was $8.4 million. This amount does not include shares held by the Bank's
Employee Stock Ownership Plan, by executive officers and directors, and by
Alpena Bancshares, M.H.C.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.     Sections of the Annual Report to Stockholders for the year ended December
       31, 2001 (Part II).
2.     Portions of the Proxy Statement for the 2002 Annual Meeting of
       Stockholders (Part III).



                                        1
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Alpena Bancshares, Inc. (the "Company") is a federally chartered
holding company that conducts business principally through its wholly owned
subsidiary, First Federal of Northern Michigan, a federally chartered savings
association (the "Bank"). The Company was formed in November 2000 when the Bank
reorganized into the holding company structure. In this reorganization, each
outstanding share of the Bank's common stock was converted by operation of law
into one share of the Company's common stock. The Company's assets consist
primarily of shares of the Bank's common stock and cash it receives from the
Bank in the form of dividends or other capital distributions. The Company has
substantially no independent operations separate from its role as holding
company for the Bank. Accordingly, the operations of the Bank as described in
this report effectively describe the operations of the Company. At December 31,
2001, the Company had total assets of $241.5 million, total deposits of $166.5
million, and stockholders' equity of $20.6 million. The Company's principal
executive office is located at 100 South Second Avenue, Alpena, Michigan, and
its telephone number at that address is (989) 356-9041.

         The Bank is a federally chartered savings association that conducts its
operations from nine full-service facilities located in Cheboygan, Alpena,
Iosco, Montmorency, Otsego and Oscoda Counties, Michigan. The Bank has operated
in Alpena since its chartering in 1957. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund. The Bank has been a member of the Federal Home Loan Bank System
since 1957.

         The Bank is a community-oriented savings institution that is primarily
engaged in the business of attracting deposits from the general public in the
Bank's market area, and investing such deposits in one- to four-family
residential real estate mortgages, commercial real estate loans and consumer
loans.

         The Bank's principal executive office is located at 100 South Second
Avenue, Alpena, Michigan, and its telephone number at that address is (989)
356-9041.

MARKET AREA AND COMPETITION

         The Bank conducts operations through its main office in Alpena,
Michigan, which is located in the northeastern lower peninsula of Michigan, and
through its eight other branch offices in Michigan. The population of Alpena
(city and township) is approximately 21,000, and the population of the Bank's
primary market area, which includes Alpena County and seven surrounding
counties, is approximately 154,000. Alpena is the largest city located in the
northeastern lower peninsula of Michigan. This area has long been associated
with agricultural, wood and concrete products. Tourism has also been a major
industry in the Bank's primary market area. All of these industries tend to be
seasonal and are strongly affected by state and national economic conditions.
Therefore, unemployment rates in the Bank's primary market area are generally
higher than state and national levels.

         Major employers in the Bank's primary market area include various
public schools and governmental agencies, Alpena General Hospital, Besser
Company (an equipment and concrete products manufacturer), Treetops Sylvan
Resort (an operator of resort properties), Garland Resort (an operator of resort
properties), Otsego Memorial Hospital, Community Memorial Hospital, and various
other small companies.

         As of December 31, 2001, the Bank was the only thrift institution
headquartered in the Bank's market area. The Bank encounters strong competition
both in attracting deposits and in originating real estate and other loans. Its
most direct competition for deposits has historically come from commercial
banks, other savings associations, and credit unions in its market area.
Competition for loans comes from such financial institutions as well as mortgage
banking companies. The Bank expects continued strong competition in the
foreseeable future, including increased competition from "super-regional" banks
entering the market by purchasing other savings institutions. Many such
institutions have greater financial and marketing resources available to them
than does the Bank. The Bank competes for savings deposits by offering
depositors a high level of personal service and a wide range of competitively
priced financial services. In


                                        2
<PAGE>
recent years, additional strong competition has come from stock and bond dealers
and brokers. The Bank competes for real estate loans primarily through the
interest rates and loan fees it charges and through advertising.

LENDING ACTIVITIES

         Loan Portfolio. The principal components of the Bank's loan portfolio
are mortgage loans secured by one- to four-family residential real estate. A
majority of the fixed-rate conventional mortgage loans with 15, 20 and 30 year
terms secured by one-to-four family residential real estate originated by the
Bank is sold to the various secondary market agencies. A majority of the
servicing of these mortgages is retained by the Bank. To a lesser extent, the
Bank also originates commercial loans, commercial real estate loans and consumer
loans. At December 31, 2001, the Bank's total loans receivable totaled $176.8
million, of which $135.5 million, or 76.6%, were one- to four-family residential
real estate mortgage loans, and $14.1 million, or 8.0%, were commercial real
estate loans. Other loans, consisting primarily of consumer loans primarily
secured by mortgages, totaled $27.2 million, or 15.4% of the Bank's net loan
portfolio.



                                        3
<PAGE>

         Analysis of Loan Portfolio. Set forth below is selected data relating
to the composition of the Bank's loan portfolio by type of loan as of the dates
indicated.


<TABLE>
<CAPTION>
                                                                            For the Years Ended December 31,
                                                       ----------------------------------------------------------------------------
                                                                 2001                      2000                       1999
                                                       ----------------------------------------------------------------------------
                                                         Amount       Percent       Amount      Percent        Amount       Percent
                                                       ---------     ---------    ---------     --------     ----------     -------
                                                                                 (Dollars in thousands)
<S>                                                    <C>             <C>        <C>             <C>        <C>             <C>
Real estate loans:
  One-to four-family residential ....................  $ 135,489       76.92%     $ 176,548       80.63%     $ 195,237       87.21%
  Construction ......................................      3,036        1.72%         3,930        1.79%            --        0.00%
  Other real estate loans ...........................     14,152        8.03%        10,681        4.88%         8,969        4.01%
                                                       ---------      ------      ---------     -------      ---------      ------
   Total real estate loans ..........................    152,677       86.68%       191,159       87.30%       204,206       91.22%
                                                       ---------      ------      ---------     -------      ---------      ------

Other loans:
  Commercial loans ..................................      6,022        3.42%         1,410        0.64%            --        0.00%
  Consumer loans ....................................     21,010       11.93%        28,652       13.09%        21,160        9.45%
  Loans on savings deposits .........................        162        0.09%           137        0.06%            46        0.02%
                                                       ---------      ------      ---------     -------      ---------      ------
    Total other loans ...............................     27,194       15.44%        30,199       13.79%        21,206        9.47%
                                                       ---------      ------      ---------     -------      ---------      ------
    Total loans receivable ..........................    179,871      102.11%       221,358      101.10%       225,412      100.69%
Less:
Loans in process ....................................     (2,968)      -1.68%        (1,727)      -0.79%        (1,179)      -0.53%
Deferred loan costs, net of fees and unearned loan
discounts ...........................................        (68)      -0.04%           (25)      -0.01%            81        0.04%
Allowance for loan losses ...........................       (689)      -0.39%          (649)      -0.30%          (448)      -0.20%
                                                       ---------      ------      ---------     -------      ---------      ------

  Total loans receivable, net at end of period ......  $ 176,146      100.00%     $ 218,957      100.00%     $ 223,866      100.00%
                                                       =========      ======      =========     =======      =========      ======
</TABLE>

         Loan Maturity Schedule. The following table sets forth the maturity or
period of repricing of the Bank's loan portfolio at December 31, 2001. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than in which they contractually mature, and fixed rate loans are
included in the period in which the final contractual repayment is due.


<TABLE>
<CAPTION>
                                                    One        Three
                                       Within       Year       Years          Over
                                        One       Through     Through         Five
                                        Year    Three Years  Five Years       Years        Total
                                        ----    -----------  ----------       -----        -----
                                                         (In thousands)
<S>                                  <C>          <C>          <C>          <C>          <C>
Real estate loans:
  One-to four-family residential ..  $ 18,657     $ 38,128     $  9,771     $ 65,897     $132,453
  Construction ....................     2,986           50           --           --        3,036
  Other real estate loans .........       919        2,198        8,931        2,104       14,152
                                     --------     --------     --------     --------     --------
   Total real estate loans ........    22,562       40,376       18,702       68,001      149,641

Other loans:
  Commercial loans ................     5,776          246           --           --        6,022
  Consumer loans ..................     2,463        3,386        6,299        9,024       21,172
                                     --------     --------     --------     --------     --------
    Total other loans .............     8,239        3,632        6,299        9,024       27,194
                                     --------     --------     --------     --------     --------

Total loans receivable ............  $ 30,801     $ 44,008     $ 25,001     $ 77,025     $176,835
                                     ========     ========     ========     ========     ========
</TABLE>



                                       4
<PAGE>


         Fixed- and Adjustable-Rate Loan Schedule. The following table sets
forth at December 31, 2001, the dollar amount of all fixed rate and adjustable
rate loans that have a scheduled maturity or period to repricing after December
31, 2002.

<TABLE>
<CAPTION>
                                                Fixed     Adjustable
                                                Rate         Rate         Total
                                              --------     --------     --------
                                                         (In Thousands)
<S>                                           <C>          <C>          <C>
       Real estate loans:
           One-to four-family residential ... $105,250        8,546     $113,796
           Construction .....................       50           --           50
           Other real estate loans ..........   11,939           --       11,939
                                              --------     --------     --------
             Total real estate loans ........  117,239        8,546      125,785
                                              --------     --------     --------

       Other loans:
           Commercial loans .................    1,540           --        1,540
           Consumer loans ...................   18,710           --       18,710
                                              --------     --------     --------
             Total other loans ..............   20,250        8,546       20,250
                                              --------     --------     --------

       Total loans receivable ............... $137,489     $  8,546     $146,035
                                              ========     ========     ========
</TABLE>


         One- to Four-Family Residential Real Estate Loans. The Bank's primary
lending activity consists of the origination of one- to four-family
owner-occupied residential mortgage loans, virtually all of which are
collateralized by properties located in the Bank's market area. The Bank also
originates one- to four-family loans that pay interest only during the initial
construction period (which generally does not exceed nine months) and then pay
interest and principal for the remainder of the loan term. The Bank generally
sells all its originated longer term (20+ years) fixed-rate mortgages to Freddie
Mac and retains a majority of the loan servicing upon the sales to Freddie Mac.
Most, but not all, of the loans originated by the Bank qualify for resale in the
secondary mortgage market. One- to four-family loans are underwritten and
originated according to policies and guidelines established by the secondary
market agencies and approved by the Board of Directors. The Bank utilizes
savings deposit growth, loan repayments, and FHLB advances to meet demand for
loans.

         The Bank currently offers fixed rate one- to four-family residential
mortgage loans with terms ranging from 3 to 30 years. One- to four-family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The average length of time that the Bank's one- to
four-family residential mortgage loans remain outstanding varies significantly
depending upon trends in market interest rates and other factors. In recent
years, the average maturity of the Bank's mortgage loans has decreased
significantly due to the unprecedented volume of refinancing activity.
Accordingly, estimates of the average length of one- to four-family loans that
remain outstanding cannot be made with any degree of accuracy.

         Originations of fixed rate mortgage loans are regularly monitored and
are affected significantly by the level of market interest rates, the Bank's
interest rate gap position, and loan products offered by the Bank's competitors.
The Bank's fixed rate mortgage loans amortize on a monthly basis with principal
and interest due each month. To make the Bank's loan portfolio more interest
rate sensitive, loans originated with terms greater than fifteen years are
generally underwritten to secondary market standards and sold. Balloon mortgage
loans with three and five year terms are generally underwritten to secondary
market standards, but are retained in the Bank's loan portfolio.

         The Bank originates some fixed-rate loans which are generally amortized
over 15 years but which have "balloon payments" which are due upon the maturity
of the loan in three or five years. Upon maturity, the balloon mortgage loans
are either underwritten as fixed-rate loans and sold in the secondary market or
renewed at current market rates for a consecutive three or five year term. While
the majority of the Bank's balloon mortgage loans amortize over 15 years, some
amortize over 10 or 30 years, and a limited number amortize over 3 or 5 years.

         The Bank's one- to four-family residential mortgage loans customarily
include due-on-sale clauses, which are provisions giving the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale


                                       5
<PAGE>

clauses are an important means of adjusting the rates on the Bank's fixed-rate
mortgage loan portfolio, and the Bank has generally exercised its rights under
these clauses.

         Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. The Bank's lending policies limit the maximum
loan-to-value ratio on fixed-rate loans without private mortgage insurance to
90% of the lesser of the appraised value or the purchase price of the property
to serve as collateral for the loan.

         The Bank makes one- to four-family real estate loans with loan-to-value
ratios of up to 90%; however, for one- to four-family real estate loans with
loan-to-value ratios of between 80% and 90%, the Bank may require the first 20%
of the loan amount to be covered by private mortgage insurance. The Bank
requires fire and casualty insurance, as well as title insurance, on all
properties securing real estate loans made by the Bank.

         Other Real Estate Loans. At December 31, 2001, the Bank had a total of
118 loans secured primarily by commercial real estate properties, unimproved
vacant land and, to a limited extent, multifamily properties. The Bank's
commercial real estate loans are secured by income producing properties such as
office buildings, retail buildings and motels. The Bank has originated
commercial construction loans that are originated as permanent loans but are
interest-only during the initial construction period (which generally does not
exceed nine months). At December 31, 2001, the Bank's commercial real estate
loans totaled $14.2 million and had an average principal balance of $102,135.
The largest commercial real estate loan had a principal balance of $1.6 million.
The terms of each loan are negotiated on a case-by-case basis, although such
loans typically amortize over 15 years and have a three- or five-year balloon
feature. An origination fee of 1.0% is generally charged on commercial real
estate loans. The Bank generally makes commercial real estate loans up to 75% of
the appraised value of the property securing the loan.

         Loans secured by commercial real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by commercial real
estate is typically dependent upon the successful operation of the business or
the related real estate property. If the cash flow from the business operation
is reduced, the borrower's ability to repay the loan may be impaired.

         Other Loans. The Bank also originates other real estate and non-real
estate related loans, including commercial loans, consumer installment loans,
credit card advances, and loans secured by savings accounts, automobiles, mobile
homes, boats, recreational vehicles, and other personal property. Such other
loans are originated by the Bank in order to provide a full range of financial
services to its customers. Commercial loans carry a greater level of credit risk
due to their dependence on the successful operation and cash flow of the
business, which is the primary source of repayment for the debt. Consumer loans
entail greater credit risk than do residential mortgage loans, particularly in
the case of consumer loans that are secured by assets that depreciate rapidly,
such as automobiles, mobile homes, boats, and recreational vehicles. At December
31, 2001, the Bank's non real estate commercial loan portfolio totaled $6.0
million, or 3.4% of total loans receivable. The Bank's other consumer loans
totaled $21.2 million, or 12.0% of total loans receivable.

         Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate agent
referrals, existing customers, borrowers, builders, attorneys, the Bank's
directors and walk-in customers. Upon receiving a loan application, the Bank
obtains a credit report and employment verification to verify specific
information relating to the applicant's employment, income, and credit standing.
In the case of a real estate loan, the Bank obtains a determination of value of
the real estate intended to collateralize the proposed loan. Conventional one-
to four-family residential loans and consumer loans up to $275,000 generally may
be approved by loan officers. The loan committee must approve any loan from
$275,000 up to $400,000, and any loan request over $400,000 must be approved by
the Board of Directors. After the loan is approved, a loan commitment letter is
promptly issued to the applicant.

                                       6

<PAGE>




         The commitment letter specifies the terms and conditions of the
proposed loan including the amount of the loan, interest rate, amortization
term, a brief description of the required collateral, and required insurance
coverage. Commitments are typically issued for 30-day periods. The borrower must
provide proof of fire and casualty insurance on the property serving as
collateral, which insurance must be maintained during the full term of the loan.
A title insurance policy is required on all real estate loans. At December 31,
2001, the Bank had outstanding loan commitments of $24.3 million, including
unfunded commitments under lines of credit and commercial and standby letters of
credit.

         Origination, Purchase and Sale of Loans. The table below shows the
Bank's loan originations, purchases, sales, and repayments of loans for the
periods indicated.

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                      ---------------------------------------------
                                                         2001              2000              1999
                                                      ---------         ---------         ---------
                                                               (In Thousands)
<S>                                                   <C>               <C>               <C>
       Loans receivable at beginning of period .....  $ 221,358         $ 225,412         $ 207,705

       Originations:
         Real estate:
            Residential 1-4 family .................    107,557            42,814            53,694
            Commercial and Multi-family ............     24,652             8,485             1,458
         Consumer ..................................     13,867            14,676            18,954
                                                      ---------         ---------         ---------
      Total originations ...........................    146,076            65,975            74,106
                                                      ---------         ---------         ---------

Loan purchases .....................................         --                --                --
                                                      ---------         ---------         ---------


Loan sales .........................................    (82,123)          (17,508)               --
Transfer of mortgage loans
      to foreclosed real estate ....................       (372)             (563)             (150)
Repayments .........................................   (108,104)          (51,958)          (56,249)
                                                      ---------         ---------         ---------

   Total loans receivable at end of period .........  $ 176,835         $ 221,358         $ 225,412
                                                      =========         =========         =========

</TABLE>

         Loan Origination Fees and Other Income. In addition to interest earned
on loans, the Bank generally receives fees in connection with loan originations.
Such loan origination fees, net of costs to originate, are deferred and
amortized using an interest method over the contractual life of the loan. Fees
deferred are recognized into income immediately upon prepayment or subsequent
sale of the related loan. At December 31, 2001, the Bank had $43,000 of net
deferred loan origination fees. Such fees vary with the volume and type of loans
and commitments made and purchased, principal repayments, and competitive
conditions in the mortgage markets, which in turn respond to the demand and
availability of money. In addition to loan origination fees, the Bank also
generates other income through the sales and servicing of mortgage loans, late
charges on loans, and fees and charges related to deposit accounts. The Bank
recognized fees and service charges of $740,000, $462,000, and $600,000 for the
years ended December 31, 2001, 2000, and 1999, respectively.

DELINQUENCIES AND CLASSIFIED ASSETS

         Delinquencies. The Bank's collection procedures provide that when a
loan is 16 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment. If delinquency continues, a second delinquent
notice is mailed when the loan continues past due for 30 days. If a loan becomes
60 days past due, the loan becomes subject to possible legal action. The Bank's
attorney has been authorized by the Board of Directors to send a letter on the
first day of the third month advising of pending legal action. This letter
grants the mortgagor an additional 30 days to bring the account to date prior to
start of any legal action. If not paid, foreclosure proceedings are initiated
after 120 days. To the extent required by regulations of the Department of
Housing and Urban Development ("HUD"), generally within 45 days of delinquency,
a Section 160 HUD notice is given to the borrower which provides access to
consumer counseling services.


                                       7
<PAGE>

         It is sometimes necessary and desirable to arrange special repayment
schedules with mortgagors to prevent foreclosure or filing for bankruptcy. In
such cases, the mortgagors are required to submit a written repayment schedule
which is closely monitored for compliance.

         Nonperforming Assets. Loans are reviewed on a regular basis and are
placed on nonaccrual status when, in the opinion of management, the collection
of additional interest is doubtful or when extraordinary efforts are required to
collect the debt. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.

                                       8
<PAGE>

         Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is deemed real estate owned ("REO") until such time as it
is sold. In general, the Bank considers collateral for a loan to be
"in-substance" foreclosed if: (i) the borrower has little or no equity in the
collateral; (ii) proceeds for repayment of the loan can be expected to come only
from the operation or sale of the collateral; and (iii) the borrower has either
formally or effectively abandoned control of the collateral to the Bank, or
retained control of the collateral but is unlikely to be able to rebuild equity
in the collateral or otherwise repay the loan in the foreseeable future. Cash
flow attributable to in-substance foreclosures is used to reduce the carrying
value of the collateral.

         When collateral, other than real estate, securing commercial and
consumer loans is acquired as a result of delinquency or other reasons, it is
classified as Other Repossessed Assets ("ORA") and recorded at the lower of cost
or fair market value until it is disposed of.

         When collateral is acquired or otherwise deemed REO/ORA, it is recorded
at the lower of the unpaid principal balance of the related loan or its
estimated fair value. This write down is recorded against the allowance for loan
losses. Periodic future valuations are performed by management, and any
subsequent decline in fair value is charged to operations. At December 31, 2001,
the Bank held $197,000 of REO/ORA.

         Delinquent Loans and Nonperforming Assets. The following table sets
forth information regarding loans delinquent 90 days or more and REO/ORA held by
the Bank at the dates indicated. As of the dates indicated, the Bank did not
have any material restructured loans within the meaning of SFAS 15.

<TABLE>
<CAPTION>
                                                                    At December 31
                                                           ------------------------------
                                                           2001         2000         1999
                                                           ----         ----         ----
                                                               (Dollars in Thousands)

<S>                                                        <C>          <C>          <C>
Total non-accrual loans delinquent 90 days or more ....    $ --         $ --         $ --
                                                           ----         ----         ----

Accrual loans delinquent 90 days or more:
  One- to four-family residential .....................     475          498          626
  Other real estate loans .............................      --           39           --
  Consumer ............................................     201          168          125
                                                           ----         ----         ----

     Total accrual loans delinquent 90 days or more ...    $676         $705         $751
                                                           ====         ====         ====


Total nonperforming loans (1) .........................    $676         $705         $751
Total real estate owned (2) ...........................     197          150          100
                                                           ----         ----         ----

Total nonperforming assets ............................    $873         $855         $851
                                                           ====         ====         ====


Total nonperforming loans to net loans receivable .....    0.38%        0.32%        0.33%
Total nonperforming loans to total assets .............    0.28%        0.26%        0.29%
Total nonperforming assets to total assets ............    0.36%        0.32%        0.32%

</TABLE>


(1) All the Bank's loans delinquent 90 days or more are classified as
nonperforming.
(2) Represents the net book value of property acquired by the Bank through
foreclosure or deed in lieu of foreclosure. Upon acquisition, this property is
recorded at the lower of its fair market value or the principal balance of the
related loan.




                                       9
<PAGE>

     Delinquent Loans. The following table sets forth information with respect
to loans past due by 60-89 days and 90 days or more in the Bank's portfolio at
the dates indicated.

<TABLE>
<CAPTION>
                                                                    At December 31
                                                          ----------------------------------
                                                           2001          2000           1999
                                                          ------        ------        ------
                                                                  (In Thousands)
<S>                                                       <C>           <C>           <C>
Loans delinquent 60-90 days:
   One- to four-family residential ....................   $1,757        $1,315        $1,453
   Consumer ...........................................      171           298           144
                                                          ------        ------        ------
Total loans delinquent 60-89 days .....................    1,928         1,613         1,597
                                                          ------        ------        ------

Total non-accrual loans delinquent 90 days or more ....       --            --            --
                                                          ------        ------        ------

Accrual loans delinquent 90 days or more:
   One-to four-family residential .....................      475           498           626
   Other real estate loans ............................       --            39            --
   Consumer ...........................................      201           168           125
                                                          ------        ------        ------
Total accrual loans delinquent 90 days or more ........      676           705           751
                                                          ------        ------        ------

Total loans past due 60 days or more ..................   $2,604        $2,318        $2,348
                                                          ------        ------        ------
</TABLE>

         At December 31, 2001 there were no loans with known credit problems of
borrowers which caused management to have serious concerns as to the ability of
borrowers to comply with present loan repayment terms. Any such loans would be
classified as non-accrual, 90 days past due, or restructured.

         Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payments, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future.

         The Bank classifies its assets pursuant to criteria similar to the
classification structure provided in the OTS regulations. The following table
sets forth the aggregate amount of the Bank's internally classified assets at
the dates indicated.

<TABLE>
<CAPTION>
                                           At December 31,
                                 ----------------------------------
                                  2001          2000          1999
                                 ------        ------        ------
                                          (In Thousands)
<S>                              <C>           <C>           <C>
Substandard assets ...........   $2,198        $3,182        $2,526
Doubtful assets ..............       --            --            18
Loss assets ..................       --            --            --
                                 ------        ------        ------
  Total classified assets ....   $2,198        $3,182        $2,544
                                 ======        ======        ======
</TABLE>

         Substandard assets decreased to $2.2 million at December 31, 2001
compared to $3.2 million at December 31, 2000. The Bank's investment in
subsidiary of $900,000 at December 31, 2001 and $1.1 million at December 31,
2000 is classified as substandard due to slower than expected sales of building
lots and condominium units in the subsidiary's land


                                       10
<PAGE>

development project. This project (Wyndham Garden Estates) is an upscale
condominium community comprised of 25 single-family building lots and 18 planned
building units. Management believes this is a viable project with development
and sales ongoing. At December 31, 2001, the Bank had a recorded lower of cost
or market value adjustment of $159,000 to this development. All 25 lots are
developed, of which sixteen lots have been sold. There are 12 constructed
building units, eleven of which are sold. One completed unit is used as a model.
Several additional sales were pending.

         Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Bank's loan portfolio based on management's evaluation
of the estimated losses that may be incurred. The Bank regularly reviews its
loan portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses. Such evaluation, which includes a review of all loans of which full
collectibility of interest and principal may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral. During the years ended December 31, 2001, 2000, and 1999, the Bank
added $255,000, $280,000 and $120,000, respectively, to the allowance for loan
losses. The Bank's allowance for loan losses totaled $689,000, $649,000 and
$448,000 at December 31, 2001, 2000, and 1999, respectively.

         For the year ended December 31, 2001, net charge-offs totaled $215,000.
Management believes that the allowances for losses on loans and investments in
real estate are adequate with respect to quality of assets, as Bank loan losses
have generally been minimal. While management uses available information to
recognize losses on loans and investments in real estate, future additions to
the allowances may be necessary based on changes in economic conditions and the
composition of the loan portfolio. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and investments in real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.

         Analysis of the Allowance for Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.


<TABLE>
<CAPTION>
                                                                                      At December 31
                                                                      -----------------------------------------------
                                                                         2001              2000                1999
                                                                      ---------          ---------          ---------
                                                                                   (Dollars in Thousands)

<S>                                                                   <C>                <C>                <C>
Net loans outstanding ........................................        $ 176,146          $ 218,957          $ 223,866
Average loans outstanding ....................................          181,343            220,642            214,963

Allowance at beginning of period .............................        $     649          $     448          $     478
   Provisions for loan losses ................................              255                280                120
   Recoveries ................................................               74                 26                 34
   Charge-offs ...............................................             (289)              (105)              (184)
                                                                      ---------          ---------          ---------
Allowance balances at end of period ..........................        $     689          $     649          $     448
                                                                      =========          =========          =========


Allowance for loan losses as a percent
   of net loans receivable at end of period ..................             0.39%              0.30%              0.20%

Charge-offs as a percent of average
   loans outstanding .........................................             0.16%              0.05%              0.09%

Ratio of allowance for loan loss to total non-performing loans
   at end of period ..........................................           101.95%             92.06%             59.65%

Ratio of allowance for loan losses to
   total non-performing loans and REO at
   end of period .............................................            78.92%             75.91%             52.64%

</TABLE>



                                       11
<PAGE>

INVESTMENT ACTIVITIES

         The Bank's investment portfolio comprises investment securities,
mortgage-backed securities, FHLB stock, and other investments. At December 31,
2001, all of the Bank's investments were rated "investment grade". At December
31, 2001, $18.7 million, or 82.5% of the Bank's investment portfolio were
scheduled to mature in less than five years, and $4.0 million, or 17.5%, were
scheduled to mature in over five years.

         The Bank's mortgage-backed securities portfolio consists of
pass-through certificates. At December 31, 2001, mortgage-backed securities
totaled $2.0 million, or 0.83% of total assets. At December 31, 2001, 55.3% of
the Bank's mortgage-backed securities were secured by ARM loans. All of the
Bank's pass-through certificates are insured or guaranteed by Freddie Mac, the
Government National Mortgage Association ("GNMA"), or the Federal National
Mortgage Association ("FNMA"). The Bank's policy is to hold mortgage-backed
securities as available for sale. The Bank invests in mortgage-backed securities
to supplement local loan originations as well as to reduce interest rate risk
exposure.

         The Bank's pass-through certificates represent a participation interest
in a pool of single-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interest in the form of securities, to investors such as the Bank.
Such quasi-governmental agencies that guarantee the payment of principal and
interest to investors include Freddie Mac, the GNMA, or the FNMA. Pass-through
certificates typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates
and maturities that are within a specified range. The underlying pool of
mortgages can be composed of either fixed-rate mortgage loans or ARM loans. The
interest rate risk characteristics of the underlying pool of mortgages, i.e.,
fixed-rate or adjustable rate, are passed on to the certificate holder.

         The Bank is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. The Bank generally has maintained a portfolio of
liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short term demand for funds to be used in the Bank's loan origination and
other activities.

         Investment Portfolio. The following table sets forth certain
information regarding the carrying and market values of the Bank's investment
securities portfolio, mortgage-backed securities portfolio and its held-for-sale
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                          2001                          2000                          1999
                                                -----------------------       -----------------------       -----------------------
                                                Carrying         Market       Carrying         Market       Carrying         Market
                                                  Value          Value          Value          Value          Value          Value
                                                 -------        -------        -------        -------        -------        -------
                                                                                   (In Thousands)
<S>                                              <C>            <C>            <C>            <C>            <C>            <C>
Investment securities available for sale:
     Equity investments (1) .............        $   182        $   182        $   355        $   355        $ 2,110        $ 2,110
     U.S. Government agency securities ..         13,870         13,870         11,996         11,996             --             --
     Mortgage-backed securities .........          1,976          1,976          1,405          1,405             --             --
     Corporate and municipal bonds ......          7,184          7,184          1,669          1,669             --             --

Investments held to maturity:
     U.S. Government agency securities ..             --             --             --             --         10,999         10,708
     Mortgage-backed securities .........             --             --             --             --          1,646          1,649
                                                 -------        -------        -------        -------        -------        -------

          Total Investments .............        $23,212        $23,212        $15,425        $15,425        $14,755        $14,467
                                                 =======        =======        =======        =======        =======        =======
</TABLE>

(1)  Includes Freddie Mac and MIMLIC stocks.


                                       12
<PAGE>

  Investment Portfolio Maturities. The following table sets forth the scheduled
maturities, carrying/market values, and weighted average yields for the Bank's
investment portfolio at December 31, 2001.


<TABLE>
<CAPTION>
                                                                             At December 31, 2001
                                               -------------------------------------------------------------------------------
                                                   One Year or Less            One to Five Years          Five to  Ten Years
                                               -----------------------      ---------------------      -----------------------
                                                             Annualized                 Annualized                   Annualized
                                                Carrying/     Weighted      Carrying/    Weighted      Carrying/      Weighted
                                                 Market        Average        Market      Average        Market        Average
                                                  Value         Yield         Value        Yield         Value          Yield
                                                  -----         -----         -----        -----         -----          -----
                                                                       (Dollars in Thousands)
<S>                                              <C>            <C>          <C>            <C>          <C>            <C>
Investment securities available for sale:
     U.S. Government
        Agency securities ...............        $ 2,039        5.38%        $10,809        4.84%        $ 1,022        4.04%
     Mortgage-backed securities .........             --        0.00              --        0.00             885        6.07
     Corporate and municipal bonds ......            414        2.87           5,750        5.15           1,020        4.46
                                                 -------        ----         -------        ----         -------        ----
Total investments .......................        $ 2,453        4.96%        $16,559        4.95%        $ 2,927        4.80%
                                                 =======        ====         =======        ====         =======        ====




<CAPTION>


                                                               At December 31, 2001
                                               ----------------------------------------------------
                                                 More than Ten Years               Total
                                               ------------------------     -----------------------
                                                             Annualized                  Annualized
                                               Carrying/      Weighted      Carrying/     Weighted
                                                 Market       Average         Market      Average
                                                 Value          Yield         Value         Yield
                                                 -----          -----         -----         -----
                                                            (Dollars in Thousands)
<S>                                              <C>            <C>          <C>            <C>
Investment securities available for sale:
    U.S. Government
       Agency securities ....................    $    --        0.00%        $13,870        4.75%
    Mortgage-backed securities ..............      1,091        6.64           1,976        6.07
    Corporate and municipal bonds ...........         --        0.00         $ 7,184        8.91
                                                 -------        ----         -------        ----
      Total investments .....................    $ 1,091        6.64%        $23,030        5.01%
                                                 =======        ====         =======        ====


</TABLE>



                                       13

<PAGE>




SOURCES OF FUNDS

         General. The Bank's deposit-gathering activities are currently
conducted from the Bank's nine full-service offices in Alpena, Ossineke, Mio,
Cheboygan, Oscoda, Indian River, Lewiston and Gaylord. Deposits are the major
source of the Bank's funds for lending and other investment purposes. In
addition to deposits, the Bank derives funds from borrowings, proceeds from the
settlement of loan sales, the amortization and prepayment of loans and
mortgage-backed securities, the maturity of investment securities, and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings are
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes. The Bank is currently managing liquidity levels and loan funding
primarily through FHLB advances.

         Deposits. Deposits are attracted principally from within the Bank's
market area through the offering of a broad selection of deposit instruments
including NOW accounts, regular savings, money market deposit, term certificate
accounts and individual retirement accounts. Deposit account terms vary
according to the minimum balance required, the period of time during which the
funds must remain on deposit, and the interest rate, among other factors. The
maximum rate of interest which the Bank must pay is not established by
regulatory authority. The Bank regularly evaluates its internal cost of funds,
surveys rates offered by competing institutions, reviews the Bank's cash flow
requirements for lending and liquidity, and executes rate changes when deemed
appropriate. The Bank has sought to decrease the risk associated with changes in
interest rates by offering competitive rates on deposit accounts and by pricing
certificates of deposit to provide customers with incentives to choose
certificates of deposit with longer terms. The Bank also attracts non-interest
bearing commercial deposit accounts from its commercial borrowers and offers a
competitive sweep product that is not insured by the FDIC. The Bank periodically
obtains funds through brokers or through a solicitation of funds outside its
market area when rates for these deposits compare favorably to local market
rates. The Bank offers a limited amount of certificates of deposit in excess of
$100,000 which may have negotiated rates.

         Savings Portfolio. Savings in the Bank as of December 31, 2001 were
represented by the various types of deposit programs described below.


<TABLE>
<CAPTION>
     Weighted                                                                        Minimum                       Percentage
     Average                                                                         Opening                        of Total
       Rate       Original Term    Description                                       Amount        Balance          Deposits
       ----       -------------    -----------                                       ------        -------          --------
<S>              <C>               <C>                                              <C>            <C>             <C>
                                   Checking and Savings                                         (In Thousands)
       NA%        N/A              Non-interest checking                              $100        $   3,422           2.05%
       1.12       N/A              NOW accounts                                        100           14,390           8.64%
       2.48       N/A              Statement savings                                    50           28,668          17.22%
       2.48       N/A              IRA Savings                                         100               50           0.03%
       1.48       N/A              Investment sweep account                          2,500            2,254           1.35%
       1.74       N/A              Money market accounts                               500            7,736           4.65%
                                                                                                  ---------        -------
                                           Total checking and savings accounts                       56,520          33.94%
                                                                                                  ---------        -------
                                    Certificates of Deposit
       2.41       3 - 5 months     Fixed term, fixed rate                              500            1,874           1.13%
       3.29       6 -11 months     Fixed term, fixed rate                              500           14,514           8.72%
       4.17       12-17 months     Fixed term, fixed rate                              500           17,112          10.27%
       5.68       18-23 months     Fixed term, fixed rate                              500            4,201           2.52%
       6.16       24-35 months     Fixed term, fixed rate                              500           12,541           7.53%
       6.30       36-47 months     Fixed term, fixed rate                              500            5,486           3.29%
       6.09       48-59 months     Fixed term, fixed rate                              500            2,637           1.58%
       5.86       60+ months       Fixed term, fixed rate                              500           12,702           7.63%
       3.29       6 -11 months     IRA accounts fixed rate                             250              573           0.34%
       4.34       12-17 months     IRA accounts fixed rate                             250              778           0.47%
       5.70       18-23 months     IRA accounts fixed rate                             250            1,592           0.96%
       3.25       24-35 months     IRA accounts fixed rate                             500               55           0.03%
       6.44       36-47 months     IRA accounts fixed rate                             500            4,605           2.77%
       6.07       60+ months       IRA accounts fixed rate                             500           12,752           7.66%
       3.81       1-12 months      Jumbo                                           100,000            4,884           2.93%
       6.53       12+ months       Jumbo                                           100,000            9,175           5.51%
       5.60       N/A              Brokered CDs                                     99,000            4,537           2.72%
                                                                                                  ---------        -------
                                        Total certificates of deposit                               110,018          66.06%
                                                                                                  ---------        -------

                                        Total Deposits                                            $ 166,538         100.00%
                                                                                                  =========        =======
</TABLE>



                                       14

<PAGE>

         The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.

<TABLE>
<CAPTION>
                                                                               At December 31,
                                     -----------------------------------------------------------------------------------------------
                                                     2001                                 2000                         1999
                                     -------------------------------------  ----------------------------------   -------------------
                                                   Percent     Increase                 Percent     Increase                 Percent
                                       Amount    of Total(1) (Decrease)(2)  Amount    of Total(1) (Decrease)(2)  Amount     of Total
                                       ------    ----------- -------------  ------    ----------- -------------  ------     --------
                                                                             (Dollars in Thousands)
<S>                                  <C>             <C>      <C>          <C>           <C>       <C>          <C>            <C>
Noninterest bearing demand ........  $  3,422        2.05%    $  1,135     $  2,287      1.40%     $  1,164     $  1,123       0.72%
NOW accounts ......................    14,390        8.64          864       13,526      8.31         1,257       12,269       7.84
Passbooks .........................    28,668       17.21        3,613       25,055     15.39        (1,960)      27,015      17.27
Investment sweep account ..........     2,254        1.35          987        1,267      0.78         1,267           --         --
Money market deposit accounts .....     7,736        4.65        1,481        6,255      3.84           222        6,033       3.86

Time deposits that mature:
    less than 12 months ...........    16,959       10.18      (25,317)      42,276     25.98        (2,206)      44,482      28.42
    within 12-36 months ...........    36,481       21.91        6,234       30,247     18.58        10,777       19,470      12.45
    beyond 36 months ..............    42,569       25.56       13,372       29,197     17.94        (5,888)      35,085      22.43
Negotiated Jumbo ..................    14,059        8.44        1,398       12,661      7.78         1,690       10,971       7.01
                                     --------      ------     --------     --------    ------      --------     --------     ------

        Total deposits ............  $166,538      100.00%    $  3,767     $162,771    100.00%     $  6,323     $156,448     100.00%
                                     ========      ======     ========     ========    ======      ========     ========     ======
</TABLE>


------------------------------------
(1)  Represents percentage of total deposits.
(2)  Represents increase (decrease) in balance from end of prior period.


         Time Deposit Rates. The following table sets forth the time deposits in
the Bank classified by rates as of the dates indicated:

<TABLE>
<CAPTION>
                                 At December 31,
                     ----------------------------------------
     Rate              2001            2000            1999
     ----              ----            ----            ----
                                  (In Thousands)
<S>                  <C>             <C>             <C>
1.74% - 4.99% ...... $ 40,720        $  2,770        $ 21,976
5.00% - 6.99% ......   62,037          94,030          84,511
7.00% - 8.99% ......    7,311          17,581           3,588
                     --------        --------        --------
                     $110,068        $114,381        $110,075
                     ========        ========        ========
</TABLE>

         Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposits at December 31, 2001.

<TABLE>
<CAPTION>
                     Less Than         1 -2             2-3             3-5        Greater Than
     Rate            One Year          Years           Years           Years         5 Years           Total
     ----            --------          -----           -----           -----         -------           -----
<S>                  <C>             <C>             <C>             <C>             <C>             <C>
1.74% - 4.99%        $ 35,660        $  2,761        $    598        $  1,440        $    261        $ 40,720
5.00% - 6.99%          27,939          14,819           6,328           6,794           6,157          62,037
7.00% - 8.99%           2,573           1,783             329           1,233           1,393           7,311
                     --------        --------        --------        --------        --------        --------

                     $ 66,172        $ 19,363        $  7,255        $  9,467        $  7,811        $110,068
                     ========        ========        ========        ========        ========        ========
</TABLE>

         Large Certificates of Deposit Maturities. The following table indicates
the amount of the Bank's certificates of deposit of $100,000 or more by time
remaining until maturity at December 31, 2001. This amount does not include
savings account deposits of $100,000 or more, which totaled approximately $3.9
million at December 31, 2001.

<TABLE>
<CAPTION>
                                                                                               Certificates
         Maturity Period                                                                        of Deposit
         ---------------                                                                        ----------
                                                                                              (In Thousands)

<S>                                                                                            <C>
         Three months or less...................................................               $   2,828
         Three through six months...............................................                   4,774
         Six through twelve months..............................................                   4,388
         Over twelve months.....................................................                   8,289
                                                                                               ---------
              Total.............................................................               $  20,279
                                                                                               =========
</TABLE>


                                       15

<PAGE>

BORROWINGS

         Deposits are the Bank's primary source of funds. The Bank also obtains
funds from the FHLB. FHLB advances are required to be collateralized by selected
assets of the Bank. Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including the
Bank, for purposes other than meeting withdrawals, fluctuates from time to time
in accordance with the policies of the OTS and the FHLB. The maximum amount of
FHLB advances to a member institution generally is reduced by borrowings from
any other source. During the year ended December 31, 2001, the Bank decreased
its advances from the FHLB by $30.3 million, and such advances totaled $52.1
million at December 31, 2001.



                                       16
<PAGE>




         The following table sets forth certain information regarding borrowings
by the Bank for the periods indicated.

<TABLE>
<CAPTION>
                                          2001            2000            1999
                                          ----            ----            ----
                                                (Dollars in Thousands)
<S>                                     <C>             <C>             <C>
Weighted average rate paid on:
FHLB advances                              5.77%           6.18%           5.82%
Other borrowings                             --%             --%           7.90%

FHLB advances: (1)
Maximum balance at any month end        $70,435         $83,872         $85,872
Average balance                         $60,461         $80,317         $76,305

Other borrowings: (2)
Maximum balance                         $    --         $    --         $    75
Average balance                         $    --         $    --         $    33
</TABLE>


(1) FHLB advances, various adjustable and fixed-rate notes, with renewable
    one-year to ten-year maturities.
(2) ESOP note, interest rate tied to prime, repaid in 1999.


                           REGULATION AND SUPERVISION

         As a federally chartered SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of the Federal Home Loan Bank ("FHLB") system. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Company and the Bank and their operations. The description of statutory
provisions and regulations applicable to savings associations and their holding
companies set forth herein does not purport to be a complete description of such
statutes and regulations and their effect on the Bank and the Company.

         On November 12, 1999, the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 was signed into law. As a result of the legislation,
bank holding companies are permitted to engage in a wider variety of financial
activities than permitted under prior law, particularly with respect to
insurance and securities activities. In addition, in a change from prior law,
bank holding companies are in a position to be owned, controlled or acquired by
any company engaged in financially-related activities. However, to the extent
that it permits banks, securities firms and insurance companies to affiliate,
the financial services industry may experience further consolidation. This
additional consolidation could result in a growing number of larger financial
institutions that offer a wider variety of financial services than the Bank
might be able to offer. This could adversely impact the Bank's ability to retain
and attract customers that prefer to obtain all of their financial services from
one provider and, ultimately, the Bank's profitability.



FEDERAL REGULATION OF SAVINGS INSTITUTIONS

         Business Activities. The activities of savings institutions are
governed by federal law, which (1) restricts the solicitation of brokered
deposits by savings institutions that are troubled or not well-capitalized, (2)
prohibits the acquisition of any corporate debt security that is not rated in
one of the four highest rating categories, (3) restricts the aggregate amount of
loans secured by non-residential real estate property to 400% of capital, (4)
permits savings and loan holding companies to acquire up to 5% of the voting
shares of non-subsidiary savings institutions or savings and loan


                                       17
<PAGE>

holding companies without prior approval, and (5) permits bank holding companies
to acquire healthy savings institutions.

         Loans to One Borrower. Under federal law, savings institutions are
generally subject to the national bank limits on loans to one borrower.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the Bank's unimpaired capital
and surplus on an unsecured basis. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate. The Bank's maximum
loans-to-one-borrower limit was $3.1 million at December 31, 2001. As of
December 31, 2001, the Bank was in compliance with its loans-to-one-borrower
limitations.

         Qualified Thrift Lender Test. Federal law requires savings institutions
to meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly average basis in 9 out of every 12 months. A savings
association that fails the QTL test must either convert to a bank charter or
operate under certain restrictions. As of December 31, 2001, the Bank maintained
88.0% of its portfolio assets in qualified thrift investments and, therefore,
met the QTL test.

         Capital Distributions. OTS regulations govern capital distributions by
federal savings banks, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings bank. A savings bank
must file an application for OTS approval of a capital distribution if either
(1) the total capital distributions for the applicable calendar year exceed the
sum of the savings bank's net income for that year to date plus the bank's
retained net income for the preceding two years, (2) the savings bank would not
be at least adequately capitalized following the distribution, (3) the
distribution would violate any applicable statute, regulation, agreement or
OTS-imposed condition, or (4) the savings bank is not eligible for expedited
treatment of its filings. If an application is not required to be filed, savings
bank which are a subsidiary of a holding company, as well as certain other
savings bank, must still file a notice with the OTS at least 30 days before the
board of directors declares a dividend or approves a capital distribution.

         Any additional capital distributions would require prior OTS approval.
If the Bank's capital falls below its required levels or the OTS notifies it
that it is in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS may prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by regulation, if the OTS determines that the distribution would
constitute an unsafe or unsound practice.

         Liquidity. Liquidity represents the amount of an institution's assets
that can be quickly and easily converted into cash without significant loss. The
most liquid assets are cash, short-term U.S. Government securities, U.S.
Government agency guaranteed securities and certificates of deposit. The Company
is required to maintain sufficient levels of liquidity as defined by the OTS
regulations. This requirement may be varied at the direction of the OTS.
Regulations currently in effect require that the Company must maintain
sufficient liquidity to ensure its safe and sound operations. The Company's
objective for liquidity is to be above 6%. Liquidity as of December 31, 2001
averaged $37.2 million, or 17.3%, compared to $15.9 million, or 7.68% at
December 31, 2000. The levels of these assets are dependent on the Company's
operating, financing, lending and investing activities during any given period.

Community Reinvestment Act and Fair Lending Laws. Federal savings banks have a
responsibility under the Community Reinvestment Act and related regulations of
the OTS to help meet the credit needs of their communities, including low- and
moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and
the Fair Housing Act prohibit lenders from discriminating in their lending
practices on the basis of characteristics specified in those statutes. An
institution's failure to comply with the provisions of the CRA could, at a
minimum, result in regulatory restrictions on its activities, and failure to
comply with the Equal Credit Opportunity Act and the Fair Housing Act could
result in enforcement actions by the OTS, as well as other federal regulatory
agencies and the Department of Justice. The


                                       18
<PAGE>

         Bank received a satisfactory CRA rating under the current CRA
regulations in its most recent federal examination by the OTS.

         Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" or to make loans to specified
insiders is limited by Sections 23A and 23B of the Federal Reserve Act. The term
"affiliates" for these purposes generally means any company that controls or is
under common control with an institution, including the Company and its
non-savings institution subsidiaries. Section 23A limits the aggregate amount of
certain "covered" transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of covered transactions with all affiliates to 20% of the savings
institution's capital and surplus. Covered transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that covered transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.

         The Bank's authority to extend credit to executive officers, directors
and 10% stockholders, as well as entities controlled by these persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
also by Regulation O. Among other things, these regulations generally require
these loans to be made on terms substantially the same as those offered to
unaffiliated individuals and do not involve more than the normal risk of
repayment. However, recent regulations now permit executive officers and
directors to receive the same terms through benefit or compensation plans that
are widely available to other employees, as long as the director or executive
officer is not given preferential treatment compared to other participating
employees. Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to these persons based, in part, on the Bank's
capital position, and requires approval procedures to be followed. At December
31, 2001, the Bank was in compliance with these regulations.

         Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring enforcement action against
all "institution-related parties," including stockholders, and attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors of the institutions,
receivership, conservatorship or the termination of deposit insurance. Civil
penalties cover a wide range of violations and actions, and range up to $25,000
per day, unless a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. The FDIC also has the authority to
recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under specified
circumstances.

         Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under the Federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal controls and
information systems; internal audit systems; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to
submit a compliance plan.


                                       19
<PAGE>

         Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's consolidated total assets, as reported in the institution's latest
quarterly thrift financial report. The Bank paid assessments of approximately
$63,000 in 2001.

         Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain qualifying supervisory goodwill and certain
purchased mortgage servicing rights ("PMSRs"). Tangible capital is defined as
core capital less all intangible assets (including supervisory goodwill) plus a
specified amount of PMSRs. The OTS regulations also require that, in meeting the
tangible ratio, leverage and risk-based capital standards, institutions must
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank, and unrealized gains (losses) on certain
available for sale securities.

         The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.

         OTS regulatory capital rule also incorporates an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the excess change. The OTS has deferred, for
the present time, the date on which the interest rate component is to be
deducted from total capital. The rule also provides that the Director of the OTS
may waive or defer an institution's interest rate risk component on a
case-by-case basis.


                                       20
<PAGE>




The following table sets forth the Bank's capital position at December 31, 2001,
2000 and 1999 as compared to the minimum capital requirements.


<TABLE>
<CAPTION>
                                                                       At December 31,
                                        --------------------------------------------------------------------------------
                                                2001                         2000                        1999
                                        ----------------------       ----------------------        ---------------------
                                                       Percent                     Percent                      Percent
                                        Amount       Of Assets       Amount       of Assets        Amount      of Assets
                                        ------       ---------       ------       ---------        ------      ---------
                                                                 (Dollars in Thousands)
<S>                                     <C>             <C>          <C>             <C>          <C>             <C>
Equity Capital .................        $20,597         8.53%        $19,470         7.29%        $18,805         7.14%

Tangible Capital Requirement:
   Tangible Capital level ......        $17,212         7.24%        $15,760         5.99%        $13,461         5.24%
   Requirement .................          3,568         1.50%          3,948         1.50%          3,856         1.50%
                                        -------        -----         -------        -----         -------        -----

   Excess ......................        $13,644         5.74%        $11,812         4.49%        $ 9,605         3.74%
                                        =======        =====         =======        =====         =======        =====

Core Capital Requirement:

   Core Capital level ..........        $17,212         7.24%        $15,760         5.99%        $13,461         5.99%
   Requirement .................          9,516         4.00%         10,528         4.00%         10,283         4.00%
                                        -------        -----         -------        -----         -------        -----

   Excess ......................        $ 7,696         3.24%        $ 5,232         1.99%        $ 3,178         1.99%
                                        =======        =====         =======        =====         =======        =====


Risk-based Capital Requirement .        $17,974        13.11%         16,579        10.70%        $14,831        10.66%
   Requirement .................         10,972         8.00%         12,399         8.00%         11,127         8.00%
                                        -------        -----         -------        -----         -------        -----

   Excess ......................        $ 7,002         5.11%          4,180         2.70%        $ 3,704         2.66%
                                        =======        =====         =======        =====         =======        =====

</TABLE>

PROMPT CORRECTIVE REGULATORY ACTION

         Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.

FEDERAL HOME LOAN BANK SYSTEM

The Bank is a member of the FHLB of Indianapolis, which is one of the 12
regional FHLBs. As a member of the FHLB, the Bank is required to purchase and
maintain stock in the FHLB of Indianapolis in an amount equal to the greater of
1% of its aggregate unpaid residential mortgage loans, home purchase contracts
or similar obligations at the beginning of each year, or 1/20 (or such greater
fraction as established by the FHLB) of outstanding FHLB advances. At December
31, 2001 the Bank held $4.3 million in FHLB stock, which was in compliance with
this requirement. Certain provisions of FIRREA require all 12 Federal Home Loan
Banks to provide financial assistance for the resolution of troubled savings
associations and to contribute to affordable housing programs through direct
loans or interest subsidies on advances targeted for community investment and
low- and moderate-income housing projects. These contributions


                                       21
<PAGE>

could cause rates on the FHLB advances to increase and could affect adversely
the level of FHLB dividends paid and the value of FHLB stock in the future.

FEDERAL RESERVE SYSTEM

         The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Bank is in compliance with
these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS.

HOLDING COMPANY REGULATION

         General. The Holding Company and the Company are nondiversified mutual
savings and loan holding companies within the meaning of federal law. As such,
the Holding Company and the Company are registered with the OTS and are subject
to OTS regulations, examinations, supervision and reporting requirements. In
addition, the OTS has enforcement authority over the Holding Company and the
Company and any nonsavings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution. As federal
corporations, the Company and the Holding Company are generally not subject to
state business organizations law.

         Permitted Activities. Pursuant to federal law and OTS regulations and
policy, a mutual holding company and a federally chartered mid-tier holding
company such as the Company may engage in the following activities: (i)
investing in the stock of a savings association; (ii) acquiring a mutual
association through the merger of such association into a savings association
subsidiary of such holding company or an interim savings association subsidiary
of such holding company; (iii) merging with or acquiring another holding
company, one of whose subsidiaries is a savings association; (iv) investing in a
corporation, the capital stock of which is available for purchase by a savings
association under federal law or under the law of any state where the subsidiary
savings association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the
Director, by regulation, prohibits or limits any such activity for savings and
loan holding companies; or (B) in which multiple savings and loan holding
companies were authorized (by regulation) to directly engage on March 5, 1987;
and (x) purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such savings and loan
holding company is approved by the Director. If a mutual holding company
acquires or merges with another holding company, the holding company acquired or
the holding company resulting from such merger or acquisition may only invest in
assets and engage in activities listed in (i) through (x) above, and has a
period of two years to cease any nonconforming activities and divest of any
nonconforming investments.

         Federal law prohibits a savings and loan holding company, including the
Company and the Holding Company, directly or indirectly, or through one or more
subsidiaries, from acquiring another savings institution or holding company
thereof, without prior written approval of the OTS. It also prohibits the
acquisition or retention of, with certain exceptions, more than 5% of a
nonsubsidiary savings institution, a nonsubsidiary holding company, or a
nonsubsidiary company engaged in activities other than those permitted by
federal law; or acquiring or retaining control of an institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.

         The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another



                                       22
<PAGE>




state if the laws of the state of the target savings institution specifically
permit such acquisitions. The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.

         Waivers of Dividends by the Holding Company. OTS regulations require
the Holding Company to notify the OTS of any proposed waiver of its right to
receive dividends. The OTS reviews dividend waiver notices on a case-by-case
basis, and, in general, does not object to any such waiver if: (i) the Holding
Company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the Holding Company's members; (ii) for as long
as the savings association subsidiary is controlled by the Holding Company, the
dollar amount of dividends waived by the Holding Company are considered as a
restriction to the retained earnings of the savings association, which
restriction, if material, is disclosed in the public financial statements of the
savings association as a note to the financial statements; (iii) the amount of
any dividend waived by the Holding Company is available for declaration as a
dividend solely to the Holding Company, and, in accordance with SFAS No. 5,
where the savings association determines that the payment of such dividend to
the Holding Company is probable, an appropriate dollar amount is recorded as a
liability; (iv) the amount of any waived dividend is considered as having been
paid by the savings association in evaluating any proposed dividend under OTS
capital distribution regulations; and (v) in the event the Holding Company
converts to stock form, the appraisal submitted to the OTS in connection with
the conversion application takes into account the aggregate amount of the
dividends waived by the Holding Company.

         Conversion of the Holding Company to Stock Form. OTS regulations permit
the Holding Company to undertake a conversion from mutual to stock form
("Conversion Transaction"). In a Conversion Transaction a new holding company
would be formed as the successor to the Company (the "New Holding Company"), the
Holding Company's corporate existence would end, and certain customers of the
Bank would receive the right to subscribe for additional shares of the New
Holding Company. In a Conversion Transaction, each share of Common Stock held by
stockholders of the Company other than the Holding Company ("Minority
Stockholders") would be automatically converted into a number of shares of
common stock of the New Holding Company determined pursuant an exchange ratio
that ensures that after the Conversion Transaction, subject to any adjustment to
reflect the receipt of cash in lieu of fractional shares, the percentage of the
to-be outstanding shares of the New Holding Company issued to Minority
Stockholders in exchange for their Common Stock would be equal to the percentage
of the outstanding shares of Common Stock held by Minority Stockholders
immediately prior to the Conversion Transaction. The total number of shares held
by Minority Stockholders after the Conversion Transaction would also be affected
by any purchases by such persons in the offering that would be conducted as part
of the Conversion Transaction.

FEDERAL SECURITIES LAW

         The Common Stock is registered with the SEC under the Securities
Exchange Act of 1934 (the "Exchange Act"). The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act. Common Stock held by persons who
are affiliates (generally officers, directors and principal stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.



                                       23

<PAGE>

INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC

         The FDIC has adopted a risk-based deposit insurance assessment system.
The FDIC assigns an institution to one of three capital categories, based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, and one of three supervisory subcategories
within each capital group. The three capital categories are well capitalized,
adequately capitalized and undercapitalized. The supervisory subgroup to which
an institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates. The FDIC has
exercised this authority several times in the past and may raise insurance
premiums in the future. If this type of action is taken by the FDIC, it could
have an adverse effect on the earnings of the Bank.

                           FEDERAL AND STATE TAXATION

         Federal Taxation. For federal income tax purposes, the Company files a
federal income tax return on a calendar year basis. The Holding Company does not
file a consolidated federal income tax return with the Company. Because the
Holding Company has nominal income, it has had no material federal income tax
liability.

         The Company and the Holding Company are subject to the rules of federal
income taxation generally applicable to corporations under the Internal Revenue
Code of 1986, as amended (the "Code"). Most corporations are not permitted to
make deductible additions to bad debt reserves under the Code. However, savings
associations and savings banks such as the Bank, which met certain tests
prescribed by the Code, could for tax years beginning prior to January 1, 1996,
benefit from favorable provisions regarding deductions from taxable income for
annual additions to their bad debt reserve. For purposes of the bad debt reserve
deduction, loans were separated into "qualifying real property loans," which
generally are loans secured by interests in real property, and non-qualifying
loans, which are all other loans. The bad debt reserve deduction with respect to
non-qualifying loans was based on actual loss experience (the "experience
method") or a percentage of taxable income determined without regard to such
deduction (the "percentage of taxable income method").

         The Bank has elected to use the method that resulted in the greatest
deduction for federal income tax purposes, which historically had been the
percentage of taxable income method. The amount of the bad debt deduction that a
thrift institution may claim with respect to additions to its reserve for bad
debts is subject to certain limitations. First, the full deduction was available
only if at least 60% of the institution's assets fell within certain designated
categories. Second, under the percentage of taxable income method, the bad debt
deduction attributable to "qualifying real property loans" could not exceed the
greater of (i) the amount deductible under the experience method or (ii) the
amount which, when added to the bad debt deduction for non-qualifying loans,
equaled the amount by which 12% of the sum of the total deposits and the advance
payments by borrowers for taxes and insurance at the end of the taxable year
exceeds the sum of the surplus, undivided profits, and reserves at the beginning
of the taxable year. Third, the amount of the bad debt deduction attributable to
qualifying real property loans computed using the percentage of taxable income
method was permitted only to the extent that the institution's reserve for
losses on qualifying real property loans at the close of the taxable year did
not exceed 6% of such loans outstanding at such time.

         The Small Business Job Protection Act of 1996 (the "Act") repealed the
percentage of taxable income method for years beginning after December 31, 1995,
and "large" associations, i.e., the quarterly average of the association's total
assets or of the consolidated group of which it is a member, exceeds $500
million for the year, may no longer be entitled to use the experience method of
computing additions to their bad debt reserve. A "large" association must use
the direct write-off method for deducting bad debts, under which charge-offs are
deducted and recoveries are taken into taxable income as incurred. If the Bank
is not a "large" association, the Bank will continue to be permitted to use the
experience method. The Bank will be required to recapture (i.e., take into
income) over a six-year period its applicable excess reserves, i.e., the balance
of its reserves for losses on qualifying loans and nonqualifying loans, as of
the close of the last tax year beginning before January 1, 1996, over the
greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988
reserves) or (b) in the case of a bank which is not a "large" association, an
amount that would have been the



                                       24
<PAGE>

balance of such reserves as of the close of the last tax year beginning before
January 1, 1996, had the bank always computed the additions to its reserves
using the experience method. Postponement of the recapture is possible for a
two-year period if an association meets a minimum level of mortgage lending for
1996 and 1997. As of December 31, 2001, the Bank's bad debt reserve subject to
recapture over the remaining two years is approximately $141,000. The impact of
the recapture results in additional federal income tax expense of approximately
$24,000 per year, assuming amortization on a straight line basis over the
six-year period, commencing January 1, 1998.

         The Bank currently is accounting for income taxes in accordance with
SFAS No. 109. The liability method accounts for deferred income taxes by
applying the enacted statutory rates in effect at the balance sheet date to
differences between the book cost and the tax cost of assets and liabilities.
The resulting deferred tax liabilities and assets are adjusted to reflect
changes in tax laws. SFAS 109 was implemented by the Bank effective January 1,
1993.

         The Bank is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds the Bank's regular income tax for the year. The
alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base will be a number of preference items,
including the following: (i) 100% of the excess of a thrift institution's bad
debt deduction over the amount that would have been allowable on the basis of
actual experience; and (ii) interest on certain tax-exempt bonds issued after
August 7, 1986. In addition, for purposes of the alternative minimum tax, the
amount of alternative minimum taxable income that may be offset by net operating
losses is limited to 90% of alternative minimum taxable income.

         The Bank was last audited by the Internal Revenue Service in 1995, for
tax years 1992 and 1993. The audit did not result in material adjustments to the
Bank's tax returns.

         Michigan State Taxation. During 1999, the State of Michigan passed
legislation that resulted in elimination of the Michigan single business tax by
gradually phasing it out over the next 23 years. Public Act 115 reduces the
single business tax rate by 0.1% annually beginning January 1, 1999. The Bank
files Michigan Single Business Tax (SBT) returns, and in 2001 was subject to tax
at a rate equal to 2.0% of taxable income. For this purpose, "taxable income"
general means federal taxable income, subject to certain adjustments to arrive
at an adjusted tax base. The Bank was audited by the State of Michigan in 2001
for the tax years 1997 -- 2000. No material adjustments were found.

SUBSIDIARY ACTIVITY

         The Bank has one service corporation subsidiary, Financial Services &
Mortgage Corporation ("FSMC"). At December 31, 2001, the net book value of the
Bank's investment in FSMC was $900,000. The Bank may make additional investments
in FSMC in the future. FSMC invests in real estate which includes leasing,
selling, developing and maintaining real estate properties. FSMC also holds
MIMLIC stock. Because of the nature of FSMC's real estate development
activities, 100% of the Bank's investment in FSMC has been deducted from the
Bank's capital. FSMC had a net loss of $28,000 for the year ended December 31,
2001.

PERSONNEL

         As of December 31, 2001, the Bank had 87 full-time and 11 part-time
employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes its relationship with its employees to be
good.

ITEM 2.  PROPERTIES

         (a) The Company conducts its business through the Bank's main office
and eight full-service branch offices located in Alpena, Ossineke, Mio,
Cheboygan, Lewiston, Indian River, Oscoda and Gaylord, Michigan. The Lewiston
and Indian River locations are leased on short-term lease agreements of less
than four years. All of the remaining offices are owned by the Company. The
aggregate net book value of the Company's premises and equipment was $4.8
million, net of $1.6 million of depreciation at December 31, 2001.

                                       25
<PAGE>




         (b) INVESTMENT POLICIES. For a description of the Bank's policies (all
of which may be changed without a vote of the Bank's security holders) and the
limitations on the percentage of assets which may be invested in any one
investment, or type of investment with respect to: (1) investments in real
estate or interests in real estate; (2) investments in real estate mortgages;
and (3) securities of or interests in persons primarily engaged in real estate
activities, reference is made hereunder to the information presented above under
"Item 1. Description of Business."

         (c) DESCRIPTION OF REAL ESTATE AND OPERATING DATA. Not applicable; the
book value of each of the Company's properties is less than 10% of the Company's
total consolidated assets at December 31, 2001.

ITEM 3.  LEGAL PROCEEDINGS

         The Company and the Bank are periodically involved in claims and
lawsuits that are incident to their business. At December 31, 2001, neither the
Company nor the Bank was involved in any claims or lawsuits material to their
respective businesses.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted during the fourth quarter of the year ended
December 31, 2001 to a vote of security holders.


                                     PART II

ITEM 5.  MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         For information concerning the market for the Company's common stock,
the section captioned "Stockholder Information" of the Company's Annual Report
to Stockholders for the Year Ended December 31, 2001 (the "Annual Report to
Stockholders") is incorporated herein by reference.

         As of February 28, 2002, there were approximately 401 holders of record
of the Company's common stock.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.

         Information concerning dividends paid by the Company in the last two
years on its common stock follows:

<TABLE>
<CAPTION>
                                Dividend       Payment     Dividend
         Period                 Declared         Date      per share
<S>                           <C>            <C>          <C>
1st Quarter 2000                 3/15/00        4/25/00    $   0.150
2nd Quarter 2000                 6/21/00        7/25/00    $   0.125
3rd Quarter 2000                 9/20/00       10/25/00    $   0.125
4th Quarter 2000                12/19/00        1/25/01    $   0.125
1st Quarter 2001                 3/20/01        4/26/01    $   0.125
2nd Quarter 2001                 6/29/01        7/25/01    $   0.125
3rd Quarter 2001                 9/11/01       10/25/01    $   0.125
4th Quarter 2001                12/11/01        1/25/02    $   0.125
</TABLE>



                                       26
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

         Pages 13 to 45 of the Company's Annual Report to Stockholders are
incorporated herein by reference.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None
                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         Information concerning directors and executive officers of the Company
is incorporated herein by reference from the Company's definitive Proxy
Statement dated March 18, 2002 (the "Proxy Statement"), specifically the section
captioned "Proposal I--Election of Directors."

ITEM 10. EXECUTIVE COMPENSATION

         Information concerning executive compensation is incorporated herein by
reference from the Company's Proxy Statement, specifically the sections
captioned "Proposal I--Election of Directors--Executive Compensation,"
"--Directors' Compensation," and "--Benefits."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information concerning security ownership of certain owners and
management is incorporated herein by reference from the Company's Proxy
Statement (Section headed "Voting Securities and Principal Holders Thereof").

ITEM 12. CERTAIN TRANSACTIONS

         Information concerning relationships and transactions is incorporated
herein by reference from the Company's Proxy Statement (Section headed
"Transactions with Certain Related Persons").

                                     PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

                  The exhibits and financial statement schedules filed as a part
                  of this Form 10-KSB are as follows:

         (a)(1)   Financial Statements

                  -    Independent Auditors' Report

                  -    Consolidated Statements of Financial Condition,
                           December 31, 2001 and 2000

                  -    Consolidated Statements of Income,
                           Years Ended December 31, 2001, 2000 and 1999

                  -    Consolidated Statements of Retained Earnings,
                           Years Ended December 31, 2001, 2000 and 1999

                  -    Consolidated Statements of Cash Flows,
                           Years Ended December 31, 2001, 2000 and 1999

                  -    Notes to Consolidated Financial Statements.

         (a)(2)   Financial Statement Schedules


                                       27
<PAGE>




         No financial statement schedules are filed because the required
         information is not applicable or is included in the consolidated
         financial statements or related notes.

         (a)(3)   Exhibits


         13       2001 Annual Report to Stockholders

         21       Subsidiaries of the Registrant

         99       Report of Predecessor Accountant on Financial Statements

         (b)      Reports on Form 8-K:

                  Report dated May 23, 2001 naming Martin A. Thomson as
                  President and CEO.



                                       28
<PAGE>




                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S>                                                <C>
                                                     ALPENA BANCSHARES, INC.



Date:  March 30, 2002                                By:  /a/Martin A. Thomson
                                                          ----------------------------------------------------------
                                                          Martin A. Thomson
                                                          President and Chief Executive Officer

</TABLE>

         Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



<TABLE>
<S>                                                <C>
By:  /s/Martin A. Thomson                            By: /s/James D. Hubinger
     --------------------------------------------        ----------------------------------------------------------
     Martin A. Thomson, Director, President and            James D. Hubinger, Treasurer and Chief Financial Officer
        Chief Executive Officer                            (Principal Financial and Accounting Officer)
     (Principal Executive Officer)

Date:  March 30, 2002                                      Date:  March 30, 2002



By:  /s/Gary Bensinger                               By: /s/Keith Wallace
     --------------------------------------------        ----------------------------------------------------------
     Gary Bensinger, Director                              Keith Wallace, Director

Date:  March 30, 2002                                      Date:  March 30, 2002



By:  /s/James Rapin                                   By:  /s/Gary VanMassenhove
     --------------------------------------------          --------------------------------------------------------
     James Rapin, Chairman                                 Gary VanMassenhove, Vice Chairman

Date:  March 30, 2002                                        Date:  March 30, 2002

</TABLE>



                                       29


<PAGE>


                                 Exhibit Index

      Exhibit
       Number                          Description
       ------                          -----------

         13       2001 Annual Report to Stockholders

         21       Subsidiaries of the Registrant

         99       Report of Predecessor Accountant on Financial Statements