<PAGE>

                                                                      EXHIBIT 13

                    [ALPENA BANCSHARES, INC. COVER PICTURE]

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                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                PAGE
<S>                                                                                                             <C>
Message of President and Chief Executive Officer.........................................................         1
Directors and Senior Management Team of Alpena Bancshares, Inc. and
     First Federal of Northern Michigan..................................................................         2
Selected Consolidated Financial and Other Data...........................................................         3
Management's Discussion and Analysis of
     Financial Condition and Results of Operations.......................................................         4
Report of Management and Independent Auditors............................................................        16
Consolidated Statement of Financial Condition............................................................        17
Consolidated Statement of Income.........................................................................        18
Consolidated Statement of Stockholders' Equity...........................................................        19
Consolidated Statement of Cash Flows.....................................................................        20
Notes to Consolidated Financial Statements...............................................................        21
Directors and Senior Officers of Alpena Bancshares, Inc. and First Federal of Northern Michigan..........        54
Stockholder Information..................................................................................        55
Highlights of 2003.......................................................................................        56
Branch Locations.........................................................................................        57
</TABLE>

<PAGE>

March 1, 2004

[PHOTO OF MARTIN A. THOMSON]

Dear Shareholders:

2003 was another successful year of attaining the goals in our Strategic Plan.
Reflecting back on how we reached our goals is interesting to say the least. We
projected and anticipated a rise in interest rates that never materialized, and
the mortgage refinance market we expected to decline and disappear, remained
strong throughout the last quarter. In spite of less than favorable market
conditions we were successful in achieving our income goal by improving the
Bank's Net Interest Margin and Non-Interest Income.

The Board of Directors and Management devoted considerable time updating and
focusing efforts on our Strategic Business Plan. Our Vision Statement, Mission
Statement and Strategic Plan were established in 2001 and have become the focus
of everyone's - Board, Management and Employees - effort at improving the Bank's
performance compared to measurable benchmarks of peer banks. We are using this
peer data to determine our Return on Assets and Return on Equity goals for each
year of our five year Strategic Plan. These goals are then translated into a Net
Income target which becomes the performance benchmark. The audited financial
statements confirm that for the second year in succession, First Federal
employees have met the aggressive goals established in the Strategic Plan. The
year-end pretax earnings of $1.7 million in 2003 were 63.7% higher than 2002 and
the 2003 Net Income of $1.2 million is 57% above 2002!

In addition to planning, staff worked on several different business issues that
have been completed or are in the process of being completed since our last
annual report. Some of the highlights include:

     -    Purchased  the  InsuranCenter  of Alpena (ICA) which  provided  strong
          earnings to the Bank's  Non-Interest  Income. The owners/sellers  have
          remained with the agency and the seamless  transition of ownership has
          been significantly influenced by their efforts.

     -    Relocated our backroom operations center to a renovated downtown
          building providing improved work conditions for our accounting,
          deposit operations and mortgage service operations.

     -    Developed and implemented a Branch Profitability Analysis Model. This
          will provide management a tool with which to measure the performance
          of each branch compared to acceptable benchmarks and identify good
          practices to share with all branches for improved profitability.

     -    Closed the Indian River Branch which was opened in 1999 in a leased
          office.

     -    Signed a purchase agreement to acquire the deposits and the branch
          facilities of North Country Bank and Trust located in Alanson and
          Mancelona.

     -    Signed an agreement to sell our Cheboygan Branch to a developer and
          signed a purchase agreement for property to build a new Cheboygan
          Branch to accommodate growth.

     -    Signed a purchase agreement for property in Lewiston for the
          construction of a new branch. Our current branch in Lewiston is in a
          leased office.

We will continue to focus on earnings and profitability in 2004; however, we
will concentrate our efforts on growing the Bank. Growth of the Bank requires an
emphasis on our products and strengthening our community commitment. Our success
in accomplishing our goals will continue to enhance shareholder value and
continue to support our commitment to be an integral part of the communities we
serve.

Respectfully yours,

/s/Martin A. Thomson
-------------------------
Martin A. Thomson
President and Chief Executive Officer

                                       1

<PAGE>

                               BOARD OF DIRECTORS

                         [PHOTO OF BOARD OF DIRECTORS]

Pictured left to right: James C. Rapin; Keith D. Vallace; Gary C. VanMassenhove;
                     Thomas R. Townsend; Martin A. Thomson

                             SENIOR MANAGEMENT TEAM

                         [PHOTO SENIOR MANAGEMENT TEAM]

Seated from left to right: Amy E. Essex; Jerome W. Tracey; Cathy L. Gilbertson;
        Standing from left to right: Michael W. Mahler; Debra S. Weiss;
                     Joseph W. Gentry II; Martin A. Thomson

                                       2
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY

         Set forth below is selected financial and other data of Alpena
Bancshares, Inc. This information is derived in part from and should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto presented elsewhere in this Annual Report.

FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
                                                                                For Years Ended December 31,
                                                            ---------------------------------------------------------------------
                                                               2003          2002           2001           2000           1999
                                                            ----------    ----------     ----------     ----------     ----------
                                                                                                      (In thousands)
<S>                                                         <C>           <C>            <C>            <C>            <C>
Total assets ...........................................    $  223,923    $  228,808     $  241,472     $  267,009     $  263,549
Loans receivable, net ..................................       163,460       151,341        178,037        219,807        223,866
Investment securities ..................................        34,670        46,944         23,212         19,719         19,049
Cash and cash equivalents ..............................         6,705        15,099         24,990         16,827          9,974
Deposits ...............................................       151,702       156,092        166,538        162,771        156,393
FHLB advances & Note Payable ...........................        47,159        48,414         52,120         82,435         85,872
Stockholders' equity ...................................        21,951        21,747         20,597         19,471         18,805
</TABLE>

OPERATING DATA:

<TABLE>
<CAPTION>
                                                                                        At December 31,
                                                            ---------------------------------------------------------------------
                                                               2003          2002           2001           2000           1999
                                                            ----------    ----------     ----------     ----------     ----------
                                                                                                      (In thousands)
<S>                                                         <C>           <C>            <C>            <C>            <C>
Interest income ........................................    $   13,350    $   14,499     $   17,586     $   18,654     $   17,059
Interest expense .......................................         6,455         8,342         11,439         12,558         11,726
                                                            ----------    ----------     ----------     ----------     ----------

  Net interest income ..................................         6,895         6,157          6,147          6,096          5,333
Provision for loan losses ..............................           267           415            255            280            120
                                                            ----------    ----------     ----------     ----------     ----------

  Net interest income after provision for loan losses ..         6,628         5,742          5,892          5,816          5,213
                                                            ----------    ----------     ----------     ----------     ----------
Other income (loss):
Service charges and fees ...............................           801           818            740            462            600
Mortgage banking activities ............................         1,563         1,401          1,352            243             --
Net gain on sale of investment securities ..............           320            65            183          2,028             --
Gain (loss) on sale of real estate .....................             2           (17)          (107)           (46)            35
Loss on impairment of real estate held for investment ..            --            --             --           (211)            --
Loss on abandonment of fixed assets ....................            --             2            (88)          (258)            --
Other non-interest income ..............................           260           116            125            158            405
Insurance & Brokerage Commissions ......................         2,480            --             --             --             --
                                                            ----------    ----------     ----------     ----------     ----------

  Total other income ...................................         5,426         2,385          2,205          2,376          1,040
                                                            ----------    ----------     ----------     ----------     ----------
Other expenses .........................................        10,327         7,072          6,166          5,033          4,877
                                                            ----------    ----------     ----------     ----------     ----------

  Income before income tax expense .....................         1,727         1,055          1,931          3,159          1,376
Income tax expense .....................................           518           285            646          1,035            452
                                                            ----------    ----------     ----------     ----------     ----------
  Net income ...........................................    $    1,209    $      770     $    1,285     $    2,124     $      924
                                                            ==========    ==========     ==========     ==========     ==========
</TABLE>

                                       3
<PAGE>

KEY FINANCIAL RATIOS AND OTHER DATA:

<TABLE>
<CAPTION>
                                                                        For Years Ended December 31,
                                                        ------------------------------------------------------------
                                                          2003         2002         2001         2000         1999
                                                        --------     --------     --------     --------     --------
<S>                                                     <C>          <C>          <C>          <C>          <C>
Other data:
Return on average assets ...........................       0.55%        0.33%        0.51%        0.82%        0.37%
Return on average equity ...........................        5.76         3.68         6.52        11.37         5.46
Average equity to average assets ...................        9.62         8.90         7.88         7.24         6.77
Equity to Total Assets .............................        9.80         9.50         8.53         7.29         7.15
Interest rate spread ...............................        3.07         2.50         2.37         2.49         2.36
Net interest margin ................................        3.21         2.78         2.60         2.65         2.50
Other expenses to average assets ...................        4.53         3.01         2.47         2.05         2.04
Net interest income to noninterest expense .........       64.19        87.06        99.69       121.93       112.85
Non-performing loans to net loans receivable .......        0.82         0.41         0.38         0.31         0.34
Non-performing assets to total assets ..............        0.68         0.33         0.36         0.31         0.32
Allowance for loan losses to nonperforming assets ..       67.57       122.16        78.94        79.21        52.64
Allowance for loan losses to net loans receivable ..        0.63         0.61         0.39         0.30         0.20
Average interest-earning assets to average
 interest-bearing liabilities .....................       104.70       107.42       104.66       103.20       102.75
Number of full service offices .....................           8            9            9            8            6
</TABLE>



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

GENERAL

         Alpena Bancshares, Inc. (the "Company") is a holding company whose
primary asset is the investment in First Federal of Northern Michigan (the
"Bank"), which reorganized into the holding company structure effective November
14, 2000.

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

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

BUSINESS STRATEGY

         The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and independent community-oriented savings bank
dedicated to providing quality customer service. Generally, the Company has
sought to implement this strategy by using retail deposits and FHLB advances as
its source of funds and maintaining a substantial part of its assets in loans
secured by one-to four-family residential real estate located in the Company's
market area, home equity loans, commercial real estate loans, mortgage-backed
securities and in other liquid investment securities. Specifically, the
Company's business strategy incorporates the following elements: (1) operating
as a community-oriented financial institution, maintaining a strong core
customer base by providing quality service and offering customers the access to
senior management and services that a community-based institution can offer; (2)
maintaining high asset quality by emphasizing investment in residential mortgage
loans, mortgage-backed securities and other securities issued or guaranteed by
the United States Government or agencies thereof; (3) maintaining capital in
excess of regulatory requirements and growing only to the extent that adequate
capital levels can be maintained; and (4) managing interest rate risk exposure
while achieving desirable levels of profitability.

<PAGE>

         Community Oriented Financial Institution. As a community oriented
financial institution, the Company has sought to provide a full range of
competitive products and services from commercial loans to consumer loans that
meet the needs of the areas served by the branch network. In fitting with the
community orientation, the Bank services all of its loans locally which provides
customers with a means to discuss their accounts and loans with a bank employee
face to face. The Company encourages employees to be involved in civic and
community functions. Many of our employees sit on civic boards and volunteer
their time to numerous local causes.

         Asset Quality and Emphasis on Residential Mortgage Lending.
Historically, the Company has emphasized fixed-rate balloon mortgage loans with
three- and five-year terms secured by one-to four-family dwellings located in
its market area. However, in 2000 the Company began to offer Freddie Mac
mortgage products as an additional service to its customers. These products
include 15 year to 30 year fixed rate mortgage loans. The Company generally
retains all servicing rights on any loans sold to Freddie Mac. The Company
anticipates a continued commitment to financing the purchase or improvement of
residential real estate in its market area. However, in recent years, the
Company has also sought to increase its commercial loan portfolio to help
improve the overall yield of the total loan portfolio. To supplement local loan
originations where available funds exceed local loan demand, the Company also
invests in mortgage-backed securities, corporate, municipal and tax free
municipal bonds and investment securities that are issued or guaranteed by the
United States Government or agencies thereof.

         Capital Position and Controlled Growth. The Company's
equity-to-total-assets ratio has increased every year in the last five years,
and was 9.80% for the year ended December 31, 2003. The Company intends to
maintain its level of stockholders' equity and capital ratios by growing only to
the extent that adequate capital levels can be maintained.

         Strong Retail Deposit Base. The Company has had a relatively stable
retail deposit base drawn from its eight full-service offices located in Alpena,
Cheboygan, Iosco, Montmorency, Oscoda and Otsego counties in Northeast Michigan.
At December 31, 2003, 38.8% of its deposit base consisted of core deposits,
which included Demand Deposit Accounts (DDA's) NOW accounts, regular savings
accounts, and money market deposit accounts. Core deposits are considered to be
a more stable and lower cost source of funds than certificates of deposit or
outside borrowings. The Company will continue to emphasize retail deposits by
providing quality customer service, offering competitive rates on deposit
accounts, and providing depositors with a full range of accounts. In 2003, the
Company implemented a rewards-based incentive program designed to encourage
employee efforts to increase these types of accounts.

INSURANCE AGENCY OPERATIONS

         In an effort to increase and diversify sources of income, in 2003 the
Bank acquired the InsuranCenter of Alpena (ICA), a licensed insurance agency
engaged in the business of property, casualty and health insurance, for $2.6
million. The financial data set forth in this Annual Report includes ten months
of ICA ownership. The former owners of ICA remain with the organization and are
entitled to an "earn-out" payment of up to $300,000 per year for three years if
specific net sales levels are achieved. The earn out payment level for net sales
was achieved for 2003 and was recorded at December 31, 2003. The $300,000
payment was made to the former owners in February 2004. This amount was added to
the Goodwill associated with the purchase. The acquisition of ICA will allow the
Company, through this subsidiary, to offer investment and annuity products.

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

OVERVIEW

         For the year ended December 31, 2003, the Company's pretax earnings
were $1.7 million compared to $1.1 million one year earlier, an improvement of
$672,000 or 63.7%. The Bank's Return on Average Assets (ROA) was 55 basis points
compared to 33 basis points for the same period one year earlier. Management
uses ROA as a tool to measure the performance of the Bank. ROA is reviewed on a
trailing twelve-month basis each month by management and the Board of Directors.
The earnings improvement can be broken down into a few key areas which include
the Net Interest Margin (NIM) improvement, mortgage banking activities,
subsidiary earnings and cost containment measures.

<PAGE>

         NET INTEREST MARGIN - The Company's Net Interest Margin (NIM), which
represents the difference between the yield on assets and the cost of funds,
improved by 43 basis points to 3.21%. The improvement was significant given the
interest rate environment that existed in 2003 during which many financial
institutions experienced significant net interest margin compression. The
improvement in NIM can be partly attributed to the changes in the balance sheet.
Cash balances were converted into commercial loans which carry much higher
yields when compared to the overnight rates earned by the cash. In addition, the
new commercial relationships resulting from the increased commercial lending
bring business checking accounts which are a low cost source of funds for the
Company which reduced the overall cost of funds in 2003. The improvement in the
margin can also be attributed to the reduced rates the Company offered on
deposit products as well as the pay down and re-pricing of Federal Home Loan
Bank (FHLB) advances that matured in 2003.

         MORTGAGE BANKING - The Company generated higher income from mortgage
banking activity in 2003 as interest rates hit 45 year lows which caused a
significant wave of refinance activity. This income came from loan fees and the
gain on sale from the mortgage loans that were sold. Management expects to see a
return to more normal levels of mortgage originations in 2004.

         SUBSIDIARY INCOME - The Company generated additional income in 2003
from the acquisition of ICA. On a pretax basis, ICA generated an additional
$314,000 of income during ten months of ownership by the Bank. These earnings do
not take into account the related amortization expenses of $86,000 or the
$41,000 of interest expense that was recorded during the year. Management
expects ICA to continue to contribute strong positive earnings for the Bank in
2004. Financial Services Mortgage Corporation (FSMC), a subsidiary of the Bank
engaged in real estate development activities, earned $54,000 on a pretax basis
in 2003 versus a loss of $15,000 in 2002. The income resulted from the
profitable sales of condominiums that were built during the year. More
condominiums are planned for development in 2004.

         COST CONTAINMENT - In 2003, the Company initiated a program to reduce
costs throughout the organization. The Company upgraded communication systems
which helped reduce communications costs, rerouted courier services, and reduced
reliance on costly outside consultants by recruiting an internal auditor and
compliance officer. This move helped the Company to achieve a reduction in
professional service-related expenses in 2003. Management expects these savings
to continue in 2004. Hours of operation were analyzed and staffing needs
reviewed over the course of the 2003 year. This analysis brought about changes
which helped to reduce controllable expenses at the branch level.

COMPARISON OF FINANCIAL CONDITION

         Total assets decreased $4.9 million, or 2.1%, to $223.9 million at
December 31, 2003 from $228.8 million at December 31, 2002. Net loans increased
$12.1 million, or 8.0%, to $163.4 million at December 31, 2003 from $151.3
million at December 31, 2002. The increase in net loans was the result of the
Company's commercial lending activities. The commercial loan portfolio grew
55.5% from $27.9 million at December 31, 2002 to $43.4 million at December 31,
2003. Among the reasons for the growth of the commercial loan portfolio was the
hiring of a new commercial lender early in 2003. Mortgage lending was very
strong for the year with total originations exceeding $133.1 million in 2003,
representing an increase of 36.5% versus 2002. This increased activity was a
function of 45 year lows in mortgage interest rates plus the addition by the
Company of two seasoned mortgage lenders that were in place most of the year.
Because of the low interest rates, the Company elected to not keep these loans
in portfolio but to sell most of them in the secondary market to Freddie Mac.
This activity increased the Company's liquidity as the loan sales generated
cash. The cash was utilized to fund the origination of commercial loans and to
pay off high cost Federal Home Loan Bank ("FHLB") advances. Cash and cash
equivalents decreased by $8.4 million, or 55.6%, to $6.7 million at December 31,
2003 from $15.1 million at December 31, 2002. Investment securities decreased
$12.3 million, or 26.1%, to $34.7 million at December 31, 2003 from $46.9
million at December 31, 2002.

         Deposits decreased $4.4 million, or 2.8%, to $151.7 million at December
31, 2003 from $156.1 million at December 31, 2002 as increased liquidity allowed
the Company to reduce the rates offered on deposit products which led to the
slight decline in deposit balances. Borrowings in the form of FHLB advances
declined $2.6 million, or 5.4%, to $45.8 million at December 31, 2003 from $48.4
million as the Company used liquidity to repay high cost advances.

<PAGE>

         Stockholders' equity increased by $204,000, or 0.9%, to $22.0 million
at December 31, 2003 from $21.7 million at December 31, 2002. The increase in
stockholders' equity was due to net income of $1.2 million which was partially
offset by dividends paid of $366,000 and by lower other comprehensive income
resulting from the decline of value in available-for-sale (AFS) securities as
market interest rates rose in the fall of 2003.

         COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003
         AND 2002

         The Company had net income of $1,209,000 and $770,000 for the years
ended December 31, 2003 and 2002, respectively. The $439,000, or 57.0%, increase
in net income was due primarily to higher net interest income and non-interest
income.

         Interest Income - Total interest income decreased by $1.2 million, or
8.3% to $13.3 million for the year ended December 31, 2003 from $14.5 million
for the year ended December 31, 2002. The decrease in interest income was
attributable to a decline in the average balance of the Company's average
interest-earning assets by $10.1 million, or 4.6%, to $211.7 million for the
year ended December 31, 2003 from $221.8 million for the year ended December 31,
2002 and by a decrease in the average yield on the Company's average
interest-earning assets to 6.26% for the year ended December 31, 2003 from 6.54%
for the year ended December 31, 2002. The decrease in the average balance of
interest-earning assets reflected an $18.6 million decline in the average
balance of mortgage loans, partially offset by an $11.0 million increase in the
average balance of other loans. The average balance of other investments
decreased by $2.5 million during the year ended December 31 2003. The overall
decline of $7.5 million in average assets to $227.8 million for the year was the
result of the Company's secondary market activities, which resulted in the sale
of $81.5 million of mortgage loans during 2003. Historically low interest rates
on 15- and 30-year mortgage loans caused a large portion of the Company's
balloon mortgage portfolio to refinance into fixed-rate products, which in turn
were sold to reduce interest rate risk, thereby decreasing the portfolio
balance. The balances of the balloon products were $41.1 million and $45.7
million at December 31, 2003 and 2002, respectively. The decrease in average
yield was caused primarily by the lower market interest rates during 2003 on
non-mortgage loans and interest-earning deposits.

         Interest income on total loans receivable decreased by $919,000, or
7.6%, to $11.2 million for the year ended December 31, 2003 from $12.1 million
for the year ended December 31, 2002. Interest income on mortgage loans
decreased by $1.2 million, or 13.7%, to $7.5 million from $8.7 million, and
interest income on other loans increased by $275,000, or 8.0%, to $3.7 million
from $3.4 million. The increase in interest income on other loans resulted
primarily from an increase in the average balance of other loans to $55.4
million for the year ended December 31, 2003 from $44.3 million for the year
ended December 31, 2002. The increase in the average balance of other loans
related to the $15.5 million increase in the commercial loan portfolio. The
growth in loans was accompanied by a decrease in the average yield on other
loans to 6.69% from 7.73%. The decrease in average yield on other loans was
primarily because of lower interest rates on loans originated during 2003 along
with existing adjustable rate loans (often indexed against the Prime Rate)
resetting at lower current market interest rates.

         Interest income on investments including mortgage-backed securities and
overnight funds decreased $324,000 to $2.0 million from $2.3 million for the
twelve months ended December 31, 2003 and 2002, respectively. This decrease was
primarily attributable to decreases in the average yield of mortgage backed and
investment securities. The average yields declined to 3.83% and 3.97%,
respectively, for the period ended December 31, 2003 compared to 5.14% and
4.37%, respectively, for the period ended December 31, 2002.

         Interest Expense - Total interest expense decreased by $1.9 million, or
22.9%, to $6.45 million for the year ended December 31, 2003 from $8.3 million
for the year ended December 31, 2002. The decrease was attributable to a decline
in the average balance of borrowed funds to $48.0 million from $49.5 million for
the years ended December 31, 2003 and 2002, respectively, plus a decline in the
average balance of deposits of $2.8 million, or 1.8%, to $154.2 million for the
year ended December 31, 2003 from $157.0 million for the same period one year
earlier. The average cost of deposits decreased to 2.41% from 3.48% and the
average cost of borrowed funds declined to 5.70% from 5.82%. The decrease in
average balance of deposits was due primarily to run-off related to certificates
of deposits (CD's) as depositors sought higher rates outside of the Company. The
lower bank CD rates were a function of the excess liquidity created from selling
loans into the secondary market. Attracting deposits by paying higher CD yields
was not necessary given the available liquidity that was maintained throughout
the year. The decrease in the average cost of deposits was

<PAGE>

attributable to lower market interest rates during 2003, while the decrease in
the cost of borrowings resulted from the repayment and re-pricing of matured
high-cost FHLB advances. Future liquidity needs may be satisfied through the use
of FHLB borrowings as necessary. Management does not generally plan on paying
above market rates on deposit products. However, as mortgage activity slows and
fewer loans are sold, management may need to raise rates to attract the dollars
necessary to fund consumer and commercial loans. Each week, management compares
the rates offered by the Company to other competing institutions in the areas we
serve. Management watches this closely and may adjust rates depending upon a
number of factors including, but not limited to, liquidity needs, cash position,
loan demand and market dynamics.

         Net Interest Income - Net Interest Income was $6.9 million for the
period ended December 31, 2003 which represents an increase of $738,000 or 12.0%
compared to the $6.2 million for the period ended December 31, 2002.

Provision for Loan Losses - The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectability of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. The allowance for
loan losses is evaluated on a regular basis by management and is based upon
management's periodic review of the collectability of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective, as it requires estimates that are susceptible to
significant revision as more information becomes available. The provision for
loan losses amounted to $267,000 and $415,000 for the twelve month periods ended
December 31, 2003 and 2002, respectively. The decrease in the provision for loan
loss is partly related to the settlement of a consumer loan that had a specific
allocation of $115,000 assigned to it. The loan was paid off in 2003 with only a
small loss compared to the provision that had been allocated. Additionally, in
2003 the Company sold off approximately fifty five percent of the credit card
portfolio which was part of the consumer loan portfolio. Typically, the credit
card portfolio carries more risk than other loan types and usually requires a
larger loss provision. Since fifty five percent of the credit card portfolio was
sold, the need to record additional provision was reduced. As commercial and
consumer loan levels change as a percent of the overall loan portfolio, the
reserve may be adjusted upward (as the percentages of these assets rise) or
downward (as the percentages of these assets fall). This change in the provision
is based on the assumption that there is inherently higher risk levels
associated with commercial and consumer loans when compared to mortgages backed
by real estate. The combined increased balances of commercial and consumer loans
as a percentage of the overall loan portfolio are highlighted in the following
table:

                            CHANGES TO LOAN PORTFOLIO
                             (Dollars in thousands)
                            Balances at December 31:

<TABLE>
<CAPTION>
                          2003         2002      % Change
                          ----         ----      --------
<S>                    <C>          <C>          <C>
Real Estate Loans      $  101,129   $  104,780     3.5%
Commercial Loans       $   43,375   $   27,896    55.5%
Consumer Loans         $   20,923   $   19,587     6.8%
                       ----------   ----------
Totals                 $  165,427   $  152,263     8.6%
</TABLE>

         Other Income - Other income increased by $3.0 million to $5.4 million
for the year ended December 31, 2003 from $2.4 million for the year ended
December 31, 2002, an increase of 127.4%, due primarily to $2.5 million in
insurance and brokerage commissions generated by ICA in 2003. Since ICA was
purchased during 2003, this income was not included in the Company's income for
the period ended December 31, 2002. Mortgage banking activities income increased
by $163,000 or 11.6% to $1.6 million for the twelve months ended December 31,
2003 compared to $1.4 million for the 12 months ended December 31, 2002. This
increase related to the gain on sale of mortgages sold into the secondary
market. For the 12 months ended December 31, 2003, the gain on sale of mortgage
loans finished at $1.1 million compared $951,000 one year earlier, due to the
increased volume of refinance activity in 2003 when compared to 2002. Management
anticipates a return to more levels of mortgage activity in 2004 and expects to
see less revenue from mortgage fees and a reduction in the gain in sale related
income. This is based on management's belief that most homeowners that could
refinance and take advantage of the lower mortgage rates have already done so.
Management has made the decision to sell most fixed-rate mortgage loans given
the low interest rate environment. For the year ended

<PAGE>

December 31, 2003, the gain on sale of investments was $320,000 compared to
$64,000 for the same period one year earlier. In 2003, management elected to
sell certain bonds during the year to fund loans and pay off high cost maturing
Federal Home Loan Bank (FHLB) advances.

Operating Expense - Non-interest expense increased by $3.3 million, or 46.0%, to
$10.3 million for the year ended December 31, 2003 from $7.1 million for the
year ended December 31, 2002. Much of this increase related to the inclusion of
the various expenses associated with ICA, which totaled $2.2 million for the
year ended December 31, 2003. Overall, the increases were broken down into a
couple of major categories including compensation and benefits along with
brokerage and commission expenses. Total compensation and benefits expenses were
$6.8 million for the year ended December 31, 2003 compared to $4.0 million for
the same period one year earlier. Of this $2.8 million increase in compensation
and benefits expenses, $800,000 related to the inclusion of the employees
associated with ICA. Additional mortgage and commercial lending staff were hired
by the Company late in 2002 to improve market penetration and bolster revenues.
There were additional back room staff and branch personnel added to continue to
provide quality customer service. In addition to salaries, commissions and
incentives increased by $93,000 primarily due to the higher commission levels
tied to higher loan production levels. The new compensation initiative that
aligns Company goals with personal accomplishment and performance was also met
in 2003 with an expected payout to exceed last year's by $30,000. Employee
benefit expenses including health, life and pension, rose 20.3% to $640,000 in
2003 from $532,000 the prior year.

         The other major variance in non-interest expenses related to the costs
associated with the brokerage and commission expenses for ICA. These costs
totaled $1.1 million during the year ended December 31, 2003. Since ICA was
purchased during 2003, these costs were not included in the Company's
non-interest expenses for 2002. The inclusion of ICA costs represented the
single biggest piece of the overall increase in non-interest expenses for the
year. There was also the amortization expense associated with the intangible
assets created in the acquisition of ICA which totaled $87,000 for the year
ended December 31, 2003. The imputed interest associated with the purchase of
ICA added $41,000 of additional expense in 2003. Marketing and advertising
expenses increased $40,000 in 2003 to $215,000. The increase was related to the
advertising done by ICA. In 2003, occupancy and equipment expenses increased by
$155,000 to $1.2 million. This increase related to the addition of ICA which
added $133,000 of expense that did not exist in 2002. Other expense increased
$155,000 to $1.5 million in 2003 from $1.4 million in 2002. This increase was
attributable to the other expenses recorded within ICA.

         Income Taxes - Federal income tax expense increased to $518,000 from
$285,000 for the years ended December 31, 2003 and December 31, 2002
respectively. The increase was primarily due to the increase of $671,000 in
pre-tax earnings for the year. Pretax income was $1.7 million for the period
ended December 31, 2003 compared to $1.1 million for the year ended December 31,
2002. The effective rate for 2003 was 30.0% compared to 27% in 2002. The reason
for the increase was that in 2002 there was an excess accrual for federal tax on
the balance sheet that was reversed thereby reducing the effective rate for the
year.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

         The Company had net income of $770,000 and $1.3 million for the years
ended December 31, 2002 and 2001, respectively.

         Interest Income - Total interest income decreased by $3.1 million, or
17.6% to $14.5 million for the year ended December 31, 2002 from $17.6 million
for the year ended December 31, 2001. The decrease in interest income was
attributable to a decline in the average balance of the Company's average
interest-earning assets by $14.8 million, or 6.3%, to $221.8 million for the
year ended December 31, 2002 from $236.6 million for the year ended December 31,
2001 and by a decrease in the average yield on the Company's average
interest-earning assets to 6.54% for the year ended December 31, 2002 from 7.43%
for the year ended December 31, 2001. The decrease in the average balance of
interest-earning assets reflected a $44.4 million decline in the average balance
of mortgage loans, partially offset by a $6.2 million increase in the average
balance of other loans, and a $21.0 million increase in the average balance of

<PAGE>

investment securities. The overall decline in assets was the result of the
Company's secondary market activities, which resulted in the sale of $70.0
million of mortgage loans during 2002. Historically low interest rates on 15 and
30 year mortgage loans caused a large portion of the Company's balloon mortgage
portfolio to refinance into fixed-rate products, which in turn were sold to
reduce interest rate risk, thereby decreasing the portfolio balance. The
balances of the balloon products were $45.7 million and $62.0 million at
December 31, 2002 and 2001, respectively. The decrease in average yield was
caused primarily by the lower current market interest rates during 2002 on
non-mortgage loans and interest-earning deposits.

         Interest income on loans receivable decreased by $3.7 million, or
23.4%, to $12.1 million for the year ended December 31, 2002 from $15.8 million
for the year ended December 31, 2001. Interest income on mortgage loans
decreased by $3.7 million, or 29.8%, to $8.7 million from $12.4 million, and
interest income on other loans increased by $100,000, or 3.0%, to $3.4 million
from $3.3 million. The increase in interest income on other loans resulted
primarily from an increase in the average balance of other loans to $44.3
million for the year ended December 31, 2002 from $38.1 million for the year
ended December 31, 2001, and was accompanied by a decrease in the average yield
on other loans to 7.73% from 8.73%. The decrease in average yield on other loans
was primarily because of lower interest rates on loans originated during 2002
along with existing adjustable rate loans resetting at lower current market
interest rates.

         Interest income on investments including mortgage-backed securities and
overnight funds increased $542,000 to $2.3 million from $1.8 million for the
twelve months ended December 31, 2002 and 2001, respectively. This increase was
primarily attributable to an increase in the average balance of the investment
portfolio of $21.0 million to $37.7 million for the twelve months ended December
31, 2002 from $16.7 million for the same period one year earlier.

         Interest Expense - Total interest expense decreased by $3.1 million, or
27.2%, to $8.3 million for the year ended December 31, 2002 from $11.4 million
for the year ended December 31, 2001. The decrease was primarily attributable to
a decline in the average balance of borrowed funds to $49.5 million from $60.5
million for the years ended December 31, 2002 and 2001, respectively, plus a
decline in the average balance of deposits of $8.6 million, or 5.2%, to $157.0
million for the year ended December 31, 2002 from $165.6 million for the same
period one year earlier. The average cost of deposits decreased to 3.48% from
4.77% and the average cost of borrowed funds declined to 5.82% from 5.84%. The
decrease in average balance of deposits was due primarily to run-off related to
certificates of deposits as depositors sought higher rates outside of the Bank.
The lower bank CD rates were a function of the excess liquidity created by the
heavy refinance activity this past year. Attracting deposits by paying higher CD
yields was not necessary given the available liquidity that was maintained
through the year. The decrease in the average cost of deposits was attributable
to lower market interest rates during 2002, while the decrease in the cost of
borrowings resulted from the repayment of high cost FHLB advances. Future
liquidity needs are expected to be satisfied through the use of FHLB borrowings
as necessary. Management does not generally plan on paying above market rates on
deposit products.

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

The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect he borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available. The
provision for loan losses amounted to $415,000 and $255,000 for the twelve month
periods ended December 31, 2002 and 2001, respectively. The increase to the
allowance included an $115,000 provision for a specific consumer loan. As
commercial and consumer loans levels change as a percent of the overall loan
portfolio, the reserve may be adjusted upward (as the percentages of these
assets rise) or downward (as the percentages of these assets fall). This change
in the provision is based on the assumption that there is inherently higher risk
levels associated with commercial and consumer loans when compared to mortgages
backed by real estate. The combined increased balances of commercial and
consumer loans as a percentage of the overall loan portfolio are highlighted in
the following table:

<PAGE>

                            CHANGES TO LOAN PORTFOLIO
                             (Dollars in thousands)
                            Balances at December 31:

<TABLE>
<CAPTION>
                          2002         2001      % Change
                          ----         ----      --------
<S>                    <C>          <C>          <C>
Real Estate Loans      $  104,780   $  135,489     22.7%
Commercial Loans       $   27,896   $   20,174     38.3%
Consumer Loans         $   19,587   $   21,172      7.5%
                       ----------   ----------
Totals                 $  152,263   $  176,835     13.9%
</TABLE>

         Other Income - Other income increased by $180,000 to $2.4 million for
the year ended December 31, 2002 from $2.2 million for the year ended December
31, 2001. Service charges and other fees increased $78,000, or 10.5% to $818,000
due to increases in non-sufficient funds fees of $65,000. Net gain on sale of
loans increased $169,000 or 21.6% to $951,000 for the twelve months ended
December 31, 2002 compared to $782,000 for the 12 months ended December 31,
2001. This increase was due to the increase in the margin associated with the
sale of mortgages sold in the secondary market. For 2002, the average margin was
1.38% versus 1.0% in 2001. Loan servicing fees decreased to $450,000 in 2002
from $570,000 in 2001. This $120,000 decline of fee income relates to the
reduction in the amount of loans sold on the secondary market in 2002. When a
loan is sold, the Company recognizes not only the income from the gain on the
sale, but also recognizes the income associated with the value of the right to
service the loan in the future. As loans that are currently being serviced
through the Bank get refinanced, the income associated with the new servicing
asset is offset by the reversal of the previously recorded asset. Loans sold in
2002 totaled $70.0 million versus $77.6 million in 2001. In 2002, the Company
liquidated available-for-sale securities and recorded a gain of $65,000 compared
to gains totaling $183,000 in 2001. If interest rates trend up, management does
not expect to see the same volume of refinancing activity and would not expect
to achieve these same results in future periods.

         Operating Expense - Non-interest expense increased by $906,000 to $7.1
million for the year ended December 31, 2002 from $6.2 million for the year
ended December 31, 2001.

         Compensation and employee benefits increased $600,000 or 17.6% to $4.0
million in 2002 from $3.4 million in 2001. Salaries increased $400,000 to $2.9
million in 2002 as additional staff was added to service our office expansion in
Gaylord, Michigan. Additional income producing staff was added to improve market
penetration and bolster revenues. There were additional back room staff and
branch personnel added to continue to follow the strategy of promoting quality
customer service. In addition to salaries, commissions and incentives increased
by $200,000 in 2002. This was primarily due to the new compensation initiative
that aligns Bank goals with personal accomplishment and performance. This
compensation program was based upon a study conducted in 2001 and implemented in
2002. Since the Bank met the financial net core income objective established for
2002, the payout was initiated under the plan. This payout represented $170,000
recorded in commissions and incentives in 2002. Employee benefit costs,
including health, life and pension, rose 20.1% to $532,000 in 2002 from $443,000
the prior year. Marketing and advertising expenses increased $42,000 in 2002 to
$175,000. The increase was related to advertising as the Bank continued to
pursue penetration into the Gaylord market as well as the other markets. In 2002
occupancy and equipment expenses decreased by $23,000 to $1.03 million. Data
processing service bureau costs increased $205,000 to $281,000 in 2002. This
increase over the $76,000 in 2001 expense relates to timing. The migration to
the service bureau for the Bank's core operating system occurred in September
2001 so only four months of those expenses were incurred in 2001. In 2002, there
was a full year of those expenses. Other expense increased $62,000 to $1.36
million in 2002 from $1.30 million in 2001. This increase was attributable
primarily to the use of various professional consulting services that were
engaged to review internal controls and compliance related functions.

         Income Taxes - Federal income tax expense decreased $361,000 to
$285,000 for the year ended December 31, 2002 from $646,000 for the year ended
December 31, 2001. The decrease was primarily due to the $876,000 decline in
pre-tax earnings for the year. Pretax income was $1.1 million for the period
ended December 31, 2002 compared to $1.9 million for the year ended December 31,
2001. Besides lower earnings, the increase of the investment portfolio in 2002
included the purchase of several tax free municipal bonds which are exempt from
federal tax which lowers the effective

<PAGE>

tax rate. In 2002, the Company elected to take the accumulation of excess tax
accruals back into income which reduced the tax provision for the year.

AVERAGE BALANCE SHEET

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


<TABLE>
<CAPTION>
                                                                        Average Consolidated Statements of Condition
                                                                                For Years Ended December 31,
                                                                 ----------------------------------------------------------
                                           At December 31, 2003              2003                          2002
                                           --------------------  ----------------------------  ----------------------------
                                                                                      Average                       Average
                                                       Yield /    Average             Yield /   Average             Yield /
                                            Balance     Cost      Balance   Interest    Cost    Balance   Interest    Cost
                                           ---------   --------  ---------  --------  -------  ---------  --------  -------
                                                                            (In thousands)
<S>                                        <C>         <C>       <C>        <C>       <C>      <C>        <C>       <C>
Interest-earning assets:
Mortgage loans ......................      $ 101,129     7.43%   $ 100,771  $  7,510    7.45%  $ 119,400  $  8,704    7.29%
Non-mortgage loans ..................         64,298     5.76       55,360     3,704    6.69      44,346     3,429    7.73
Mortgage-backed
  securities (1) ....................          7,335     3.68        7,042       270    3.83       5,118       263    5.14
Investment
  securities (1) ....................         27,335     5.36       36,897     1,466    3.97      37,687     1,648    4.37
Other investments ...................          7,786     3.93       11,639       306    2.63      15,267       455    2.98
                                           ---------             ---------  --------           ---------  --------

Total interest-
  earning assets ....................        207,883     6.38      211,709    13,256    6.26     221,818    14,499    6.54
                                                                            --------                      --------

Non-interest-
  earning assets ....................         16,040                16,018                        13,375
                                           ---------             ---------                     ---------

Total assets ........................      $ 223,923             $ 227,727                     $ 235,193
                                           =========             =========                     =========

Interest-bearing liabilities:
Deposits ............................      $ 144,995     2.56    $ 146,806     3,719    2.53   $ 157,025     5,466    3.48
Borrowed funds                                47,159     5.80       47,977     2,736    5.70      49,462     2,876    5.81
                                           ---------             ---------  --------           ---------  --------

Total interest-bearing
  liabilities .......................        192,154     3.36      194,783     6,455    3.31     206,487     8,342    4.04
                                                                            --------                      --------
Non-interest-
  bearing liabilities ...............          9,818                11,040                         7,770
                                           ---------             ---------                     ---------

Total liabilities ...................        201,972               205,823                       214,257
Stockholders' equity ................         21,951                21,904                        20,936
                                           ---------             ---------                     ---------

Total liabilities and
  stockholders' equity ..............      $ 223,923             $ 227,727                     $ 235,193
                                           =========             =========                     =========

Net interest income .................                                       $  6,801                      $  6,158
                                                                            ========                      ========

Interest rate spread ................                    3.02%                          2.95%                         2.50%
                                                       ======                         ======                        ======

Net interest margin (1) .............                    3.27%                          3.21%                         2.78%
                                                       ======                         ======                        ======
Ratio of average interest-
  earning assets to average
  interest-bearing liabilities ......                  108.19%                        108.69%                       107.42%
                                                       ======                         ======                        ======
</Table>
<PAGE>

<Table>
<CAPTION>
                                           Average Consolidated Statements of Condition
                                                   For Years Ended December 31,
                                           --------------------------------------------
                                                              2001
                                           --------------------------------------------
                                                                                Average
                                            Average                             Yield /
                                            Balance          Interest            Cost
                                           ---------         --------           -------
                                                           (In thousands)
<S>                                        <C>               <C>                <C>
Interest-earning assets:
Mortgage loans ......................      $ 163,807         $ 12,435             7.59%
Non-mortgage loans ..................         38,119            3,326             8.73
Mortgage-backed
  securities (1) ....................          2,143              140             6.53
Investment
  securities (1) ....................         16,704              916             5.48
Other investments ...................         15,856              769             4.85
                                           ---------         --------

Total interest-
  earning assets ....................        236,629           17,586             7.43
                                                             --------

Non-interest-
  earning assets ....................         13,469
                                           ---------

Total assets ........................      $ 250,098
                                           =========

Interest-bearing liabilities:
Deposits ............................      $ 165,642            7,906             4.77
Borrowed funds ......................         60,461            3,533             5.84
                                           ---------         --------

Total interest-bearing
  liabilities .......................        226,103           11,439             5.06
                                                             --------

Non-interest-
  bearing liabilities ...............          4,291
                                           ---------

Total liabilities ...................        230,394
Stockholders' equity ................         19,704
                                           ---------

Total liabilities and
  stockholders' equity ..............      $ 250,098
                                           =========

Net interest income .................                        $  6,147
                                                             ========

Interest rate spread ................                                             2.37%
                                                                                ======

Net interest margin (1) .............                                             2.60%
                                                                                ======

Ratio of average interest-
  earning assets to average
  interest-bearing liabilities ......                                           104.66%
                                                                                ======
</TABLE>

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

RATE/VOLUME ANALYSIS

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



<PAGE>
<TABLE>
<CAPTION>
                                           Year ended December 31, 2003           Year ended December 31, 2002
                                                   Compared to                            Compared to
                                           Year ended December 31, 2002           Year ended December 31, 2001
                                            Increase (Decrease) Due to:            Increase (Decrease) Due to:
                                        ----------------------------------     ----------------------------------
                                         Volume        Rate        Total        Volume        Rate        Total
                                        --------     --------     --------     --------     --------     --------
                                                  (In thousands)                         (In thousands)
<S>                                     <C>          <C>          <C>          <C>          <C>          <C>
Interest-earning assets:
 Loans receivable ..................    $   (516)    $   (330)    $   (846)    $ (2,827)    $   (800)    $ (3,627)
 Mortgage-backed securities ........         106          (71)          35          194          (71)         123
 Investment securities .............           4         (188)        (184)       1,150         (418)         732
 Other investments .................        (110)         (38)        (148)         (29)        (285)        (314)
                                        --------     --------     --------     --------     --------     --------

  Total interest-earning assets ....        (516)        (627)      (1,143)      (1,512)      (1,574)      (3,086)
                                        --------     --------     --------     --------     --------     --------


Interest-bearing liabilities:
 Deposits ..........................        (356)      (1,492)      (1,848)        (411)      (2,029)      (2,440)
 Borrowed funds ....................         (86)         (50)        (136)        (642)         (14)        (656)
                                        --------     --------     --------     --------     --------     --------

  Total interest-bearing liabilities        (442)      (1,542)      (1,984)      (1,053)      (2,043)      (3,096)
                                        --------     --------     --------     --------     --------     --------

Net increase (decrease) in
 net interest income ...............    $    (74)    $    915     $    841     $   (459)    $    469     $     10
                                        ========     ========     ========     ========     ========     ========
</TABLE>
(1) Includes one- to four-family residential real estate and commercial real
estate loans.

ASSET AND LIABILITY MANAGEMENT - INTEREST RATE RISK ANALYSIS

         The Company uses two methods to measure and manage interest rate risk.
The first is the earnings at risk simulation which measures the impact of
changes in interest rates on earnings. The second method is the economic value
of equity (EVE) which measures the impact of interest rate changes on the value
of the equity. The Company has an asset/liability committee (the "ALCO"), which
includes an outside consultant, the Company's president and senior Company
officers. The ALCO meets monthly to review the monthly financial performance,
loan and deposit pricing, production volumes, interest rate risk analysis,
liquidity and borrowing needs and other asset and liability management topics.
The risk simulation and EVE analysis are updated each month by the ALCO
consultant.

         Historically the Company has been almost exclusively a fixed-rate
lender and the Company's policy has been to reduce its exposure to interest rate
risk generally by better matching the maturities and interest rates of its
interest rate sensitive assets and liabilities by originating and retaining for
the portfolio balloon mortgage loans with three and five year terms, shorter
term home equity loans and selling longer term 15 and 30 year fixed rate
mortgages. The Company also maintains a significant percentage of its assets in
cash and other liquid investments, which permits the Company to reinvest such
assets more quickly in response to changes in market interest rates. In
addition, the Company offers competitive rates on deposit accounts and prices
some certificates of deposit to provide customers with incentives to choose
certificates of deposit with longer terms. To reduce the potential volatility of
the Company's earnings in a changing interest rate environment, the Company has
sought to manage interest rate risk by retaining for the portfolio certain
originated residential mortgage loans (primarily adjustable rate, balloon and
shorter term fixed rate mortgages) and generally selling the remainder in the
secondary market, by originating shorter-term home equity loans, and by
investing in adjustable-rate mortgage-backed securities, short- and medium-term
agency securities, and short-term investments such as interest-bearing deposits
in other financial institutions.

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

         The Company utilizes NPV analysis in managing interest rate risk. The
NPV model utilized by the Company updates cash flow assumptions (by changing
prepayment estimates) for different rate scenarios. The following table presents
the Company's NPV as calculated by the OTS NPV Model as of December 31, 2003.
The table shows the NPV under rate change scenarios of -100 basis points to +300
basis points in increments of 100 basis points. NPV estimates for rate scenarios
of -200 and -300 were suppressed due to the abnormally low interest rate
environment. As illustrated by the table, the Company's NPV is more sensitive in
a rising rate scenario than in a falling rate scenario. As market rates
increase, the market value of the Company's large portfolio of mortgage loans
and securities declines significantly as prepayments slow. As rates decrease,
the market value of mortgage loans and mortgage backed securities increase less
dramatically due to prepayment risk, rate caps and other embedded options.

<PAGE>

<TABLE>
<CAPTION>
                                Present
   Change in                     Value
Interest Rates            Net Portfolio Value
in Basis Points    --------------------------------
 (Rate Shock)        Amount       Assets      Ratio
---------------    --------------------------------
              (Dollars in thousands)
<S>                <C>          <C>           <C>
     +300          $  16,407    $  219,751    7.47%
     +200             19,117       223,548    8.55%
     +100             21,243       227,104    9.35%
    STATIC            22,384       230,035    9.73%
     -100             22,178       232,287    9.55%
</TABLE>

         As indicated above, management has structured its assets and
liabilities in an effort to minimize its exposure to interest rate risk. The
Company's NPV would be expected to decline 118 basis points from 9.73% to 8.55%
(as a percent of assets) with a 200 basis point increase in interest rates. A
100 basis point decline in rates would be expected to reduce the Company's NPV
18 basis points from 9.73% to 9.55%.

         Actual changes in market value will differ from estimated changes in
the above table due to various risks and uncertainties.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's primary sources of funds are deposits, FHLB advances, and
proceeds from principal and interest payments and prepayments on loans and
mortgage-backed and investment securities. While maturities and scheduled
amortization of loans and mortgage-backed securities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Company manages the
pricing of its deposits to maintain a desired deposit balance. In addition, the
Company invests in short-term interest-earning assets, which provide liquidity
to meet lending requirements. At December 31, 2003, $26.5 million, or 77.3%, of
the Company's investment securities were scheduled to mature in less than five
years, and $7.7 million, or 22.7%, were scheduled to mature in over five years.

         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, 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 maintain sufficient liquidity to ensure its safe
and sound operation. The Company's objective for liquidity is to be above 6%.
Liquidity as of December 31, 2003 was $42.3 million, or 26.9%, compared to $47.0
million, or 24.4% at December 31, 2002. The levels of these assets are dependent
on the Company's operating, financing, lending and investing activities during
any given period.

         The Company intends to retain for the portfolio certain originated
residential mortgage loans (primarily adjustable rate, balloon and shorter term
fixed rate mortgage loans) and to generally sell the remainder in the secondary
market. The Company will from time to time participate in or originate
commercial real estate loans, including real estate development loans. During
the twelve months ended December 31, 2003 the Company originated $133.1 million
in residential mortgage loans, of which $51.6 million were retained in the
portfolio while the remainder were sold in the secondary market or are being
held for sale. This compares to $97.5 million in originations during 2002 of
which $31.4 million were retained in the portfolio. The Company also originated
$35.0 million of commercial loans and $18.2 million of consumer loans in 2003
compared to $27.2 million of commercial loans and $8.3 million of consumer loans
for 2002. Of total loans receivable, excluding loans held for sale, mortgage
loans comprised 60.9% and 68.8%, commercial loans 26.4% and 18.3% and consumer
loans 12.7% and 12.9% at December 31, 2003 and December 31, 2002, respectively.
At December 31, 2003, the Company had outstanding loan commitments of $32.4
million.

         Deposits are a primary source of funds for use in lending and for
other general business purposes. At December 31, 2003, deposits funded 67.7% of
the Company's total assets compared to 68.2% at December 31, 2002. Certificates
of

<PAGE>

deposit scheduled to mature in less than one year at December 31, 2003 totaled
$43.2 million. Management believes that a significant portion of such deposits
will remain with the Company. Borrowings may be used to compensate for seasonal
or other reductions in normal sources of funds or for deposit outflows at more
than projected levels. Borrowings may also be used on a longer-term basis to
support increased lending or investment activities. At December 31, 2003, the
Company had $45.8 million in FHLB advances. Total borrowings as a percentage of
total assets were 20.5% at December 31, 2003 as compared to 21.2% at December
31, 2002. The Company has sufficient available collateral to obtain additional
advances from the FHLB, and, based upon current FHLB stock ownership, could
obtain up to a total of approximately $89 million in such advances.

CRITICAL ACCOUNTING POLICIES

         The Company's critical accounting policy relates to the allowance for
losses on loans. The Company has established a systematic method of periodically
reviewing the credit quality of the loan portfolio in order to establish an
allowance for losses on loans. The allowance for losses on loans is based on
management's current judgments about the credit quality of individual loans and
segments of the loan portfolio. The allowance for losses on loans is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio, and considers all known internal and external
factors that affect loan collectability as of the reporting date. Such
evaluation, which includes a review of all loans on which full collectability
may not be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, management's knowledge of inherent
risks in the portfolio that are probable and reasonably estimable and other
factors that warrant recognition in providing an appropriate loan loss
allowance. This evaluation involves a high degree of complexity and requires
management to make subjective judgments that often require assumptions or
estimates about uncertain matters.

         Mortgage Servicing Rights - In 2000, the Bank began selling to
investors a portion of its originated residential mortgage loans. The mortgage
loans serviced for others are not included in the consolidated statements of
financial condition.

         When the Bank acquires mortgage servicing rights through the
origination of mortgage loans and sells those loans with servicing rights
retained, it allocates the total cost of the mortgage loans to the mortgage
servicing rights based on their relative fair value. As of December 31, 2003 and
December 31, 2002, the Bank was servicing loans sold to others totaling $141.3
million and $119.7 million respectively. Capitalized mortgage servicing rights
are amortized as a reduction of servicing fee income in proportion to, and over
the period of, estimated net servicing income by use of a method that
approximates the level-yield method. Capitalized mortgage servicing rights are
periodically evaluated for impairment using a model that takes into account
several variables. If impairment is identified, the amount of impairment is
charged to earnings with the establishment of a valuation allowance against the
capitalized mortgage servicing rights asset. In general, the value of mortgage
servicing rights increases as interest rates rise and decreases as interest
rates fall. This is because the estimated life and estimated income from a loan
increase as interest rates rise and decrease as interest rates fall. The last
evaluation was performed as of December 31, 2003. The key economic assumptions
made in determining the fair value of the mortgage servicing rights included the
following:

<TABLE>
<S>                                                       <C>
Annual Constant Prepayment Speed (CPR):                   13.89%
Weighted Average Life Remaining (in months):              253.3
Discount Rate used:                                        7.25%
</TABLE>

         At the December 31, 2003 valuation, the mortgage servicing rights value
was calculated, based on the above factors, to be $1,421,175. The book value as
of December 31, 2003 was $993,108. Because the fair value exceeded the book
value, there was no adjustment required.

         Goodwill - In connection with the purchase of the InsuranCenter of
Alpena (ICA), the Company allocated the excess of the purchase price paid over
the fair value of net assets acquired to intangible assets including goodwill.
These intangible assets included the customer list and the Blue Cross Blue
Shield Contract. The unallocated portion of the excess purchase price became
true goodwill. The Company is amortizing the value assigned to the customer list
and the Blue Cross contract over a 20 year period. Additionally, the Company is
testing each of those assets for impairment on an annual basis. If, through the
annual testing, it was determined that there was significant runoff of the
customer list or

<PAGE>

material changes to the Blue Cross contract, then there might be a need to
further write down the value of those intangible assets. Writing down the assets
would create expense to the company and negatively impact earnings. In 2003,
there was no impairment based upon the testing. The true goodwill, which is not
amortized, must also be tested for impairment on an annual basis. It was
determined that there was no impairment of true goodwill in 2003.

         A summary of significant accounting policies followed by the Company is
set forth in Note 1 of the Company's 2003 Annual Report to Stockholders and is
incorporated herein by reference. The Company's critical accounting policies and
their application are periodically reviewed by the Audit Committee and the full
Board of Directors.

OFF-BALANCE SHEET ARRANGEMENTS

         The Company is a party to credit related financial instruments with off
balance sheet risk in the normal course of the business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit, and commercial letters of credit. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated statement of
financial condition. The Company's exposure to credit loss is represented by the
contractual amount of these commitments. The Company follows the same credit
policies in making commitments as it does for on-balance sheet instruments. At
December 31, 2003 and December 31, 2002, the commitments to grant loans were
$32.4 million and $34.4 million, respectively. Unfunded commitments under lines
of credit including commercial, credit card and home equity lines were $11.5
million and $8.6 million as of those same dates respectively. Commercial standby
letters of credit were $35,000 December 31, 2003 and $250,000 at December 31,
2002. As of December 31, 2003, there was $3.5 million of undisbursed
construction loans compared to $1.5 million to as of December 31, 2002.

         Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Unfunded commitments under lines of credit and revolving credit lines are
collateralized and may not be drawn upon to the total extent to which the
Company is committed. Commitments for equity lines of credit do not necessarily
represent future cash requirements because they may expire without being drawn
upon.

         The Company may reduce the risk associated with these credit-related
financial instruments by obtaining collateral if deemed necessary. The amount
and nature of the collateral obtained is based on the Company's credit
evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant, and equipment and
real estate.

         A summary of the off-balance sheet risks for the Company can be found
in Note 11 to the Company's 2003 Consolidated Financial Report.

SAFE HARBOR STATEMENT

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

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

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

<PAGE>

IMPACT OF INFLATION AND CHANGING PRICES

         The Consolidated Financial Statements of the Company and the notes
thereto, presented elsewhere herein, have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most manufacturing or industrial companies,
nearly all of the assets and liabilities of the Company are monetary. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.

SUBSEQUENT EVENTS

         On February 6, 2004, the Company agreed to acquire from North Country
Bank and Trust, a Michigan state-chartered bank, two branch offices located at
6230 River Street, Alanson, Michigan and 625 North Williams Street, Mancelona,
Michigan. The transaction will include the assumption of approximately $13.0
million in deposits and the purchase of approximately $17,000 in loans related
to the two branches. The transaction, which is subject to regulatory approval,
is expected to be completed in the second quarter of 2004.

<PAGE>

[PLANTE MORAN LOGO]                                         PLANTE & MORAN, PLLC
                                                                       Suite 500
                                                            2601 Cambridge Court
                                                          Auburn Hills, MI 48326
                                                               Tel: 248.375.7100
                                                               Fax: 248.375.7101
                                                                 plantemoran.com

                          Independent Auditor's Report

Board of Directors
Alpena Bancshares, Inc. and Subsidiaries

We have audited the consolidated statement of financial condition of Alpena
Bancshares, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each year in the three-year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Alpena
Bancshares, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the
consolidated results of their operations and their cash flows for each year in
the three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

                                                          (PLANTE & MORAN, PLLC)

Auburn Hills, Michigan
January 30, 2004                                                      [MRI LOGO]

<PAGE>

<TABLE>
<CAPTION>
                                                                                                 December 31
                                                                                      --------------------------------
                                                                                            2003            2002
                                                                                      ----------------  --------------
                                                                                     (000s omitted except share data)
                                     ASSETS
<S>                                                                                   <C>               <C>
Cash and cash equivalents                                                             $          3,380  $       3,091
Overnight deposits with Federal Home Loan Bank                                                   3,326         12,008
                                                                                      ----------------  -------------
        Total cash and cash equivalents                                                          6,706         15,099
Securities available for sale (Note 2)                                                          34,670         46,944
Loans - Net (Note 3)                                                                           163,460        151,341
Loans held for sale                                                                                931            542
Foreclosed assets                                                                                  199            128
Real estate held for sale (Note 4)                                                                 439            490
Federal Home Loan Bank stock                                                                     4,460          4,294
Property and equipment (Note 5)                                                                  5,817          4,761
Accrued interest receivable                                                                      1,066          1,323
Core deposit intangible                                                                          1,493          1,698
Other intangible assets (Note 7)                                                                 2,358              -
Other assets (Note 6)                                                                            2,324          2,188
                                                                                      ----------------  -------------
        Total assets                                                                  $        223,923  $     228,808
                                                                                      ================  =============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
   Customer deposits (Note 8)                                                         $        151,702  $     156,092
   Advances from borrowers for taxes and insurance                                                  96              4
   Advances from Federal Home Loan Bank (Note 9)                                                45,802         48,414
   Note payable (Note 10)                                                                        1,357              -
   Accrued expenses and other liabilities (Note 14)                                              2,496          1,834
   Deferred income taxes (Note 11)                                                                 519            717
                                                                                      ----------------  -------------
        Total liabilities                                                                      201,972        207,061

STOCKHOLDERS' EQUITY (Note 13)
   Common stock - $1 par value:
     Authorized - 20,000,000 shares
     Issued and outstanding - 1,657,480 shares in 2003 and 1,645,258 shares in 2002              1,657          1,645
   Additional paid-in capital                                                                    5,338          5,216
   Retained earnings - Restricted                                                                4,807          4,347
   Retained earnings                                                                             9,854          9,472
   Accumulated other comprehensive income                                                          295          1,067
                                                                                      ----------------  -------------
        Total stockholders' equity                                                              21,951         21,747
                                                                                      ----------------  -------------
        Total liabilities and stockholders' equity                                    $        223,923  $     228,808
                                                                                      ================  =============
</TABLE>

See Notes to Consolidated
   Financial Statements.

<PAGE>

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31
                                                                       ---------------------------------------------
                                                                            2003               2002          2001
                                                                       --------------       ---------     ----------
                                                                               (000s omitted except per share data)
<S>                                                                    <C>                  <C>           <C>
INTEREST INCOME
     Loans, including fees                                             $       11,214       $  12,133     $   15,761
     Investments                                                                1,866           2,103          1,685
     Mortgage-backed securities                                                   270             263            140
                                                                       --------------       ---------     ----------
       Total interest income                                                   13,350          14,499         17,586
INTEREST EXPENSE
     Deposits (Note 8)                                                          3,719           5,466          7,906
     Other borrowings                                                           2,736           2,876          3,533
                                                                       --------------       ---------     ----------
       Total interest expense                                                   6,455           8,342         11,439
                                                                       --------------       ---------     ----------
NET INTEREST INCOME - Before provision for loan losses                          6,895           6,157          6,147
PROVISION FOR LOAN LOSSES (Note 3)                                                267             415            255
                                                                       --------------       ---------     ----------
NET INTEREST INCOME - After provision for loan losses                           6,628           5,742          5,892
OTHER INCOME (EXPENSES)
     Service charges and other fees                                               801             818            740
     Net gain on sale of loans                                                  1,138             951            782
     Loan servicing fees                                                          425             450            570
     Insurance and brokerage commissions                                        2,480               -              -
     Gain on sale of investment securities (Note 2)                               320              65            183
     (Gain) loss on sale of real estate                                             7             (17)          (107)
     Gain (loss) on fixed assets                                                   (5)              2            (88)
     Other                                                                        260             116            125
                                                                       --------------       ---------     ----------
       Total other income                                                       5,426           2,385          2,205

OPERATING EXPENSES
     Compensation and employee benefits (Note 14)                               6,859           4,016          3,362
     Amortization of intangible assets                                            292             205            239
     Advertising                                                                  215             175            133
     Occupancy and equipment                                                    1,140           1,033          1,056
     Data processing service bureau                                               304             281             76
     Other                                                                      1,517           1,362          1,300
                                                                       --------------       ---------     ----------
       Total operating expenses                                                10,327           7,072          6,166
                                                                       --------------       ---------     ----------
INCOME - Before federal income tax                                              1,727           1,055          1,931
FEDERAL INCOME TAX (Note 11)                                                      518             285            646
                                                                       --------------       ---------     ----------
NET INCOME                                                             $        1,209       $     770     $    1,285
                                                                       ==============       =========     ==========
PER SHARE DATA
     Basic earnings per share                                          $         0.73       $    0.47     $     0.78
     Fully diluted earnings per share                                            0.73            0.47           0.78
     Dividends per common share                                                  0.50            0.50           0.50
</TABLE>

See Notes to Consolidated
   Financial Statements.

<PAGE>
\
<TABLE>
<CAPTION>

                                                                          (000s omitted)
                                                                                        Accumulated
                                                      Additional               Shares       Other       Total
                                            Common      Paid-in   Retained    Acquired Comprehensive Stockholders'
                                            Stock      Capital    Earnings     by RRP  Income (Loss)    Equity
                                           --------    --------   --------    -------- ------------- -------------
<S>                                        <C>        <C>         <C>         <C>      <C>           <C>
BALANCE - January 1, 2001                  $  1,642    $  5,122   $ 12,486    $     (5)   $    225     $ 19,470

Comprehensive income:
  Net income                                      -           -      1,285           -           -        1,285
  Other comprehensive income:
   Unrealized appreciation on
     securities available for
     sale - Net of tax of $109                    -           -          -           -         262          262
   Less reclassification
     adjustment for realized
     gains included in net income -
     Net of tax of $62                            -           -          -           -        (121)        (121)
                                                                                                     ----------
            Total comprehensive income                                                                    1,426

Forfeiture of shares in connection
 with RRP                                        (1)          -          -           1           -            -
RRP stock release                                 -          57          -           4           -           61
Dividends paid                                    -           -       (360)          -           -         (360)
                                           --------    --------   --------    --------    --------   ----------
BALANCE - December 31, 2001                   1,641       5,179     13,411           -         366       20,597

Comprehensive income:
  Net income                                      -           -        770           -           -          770
  Other comprehensive income:
   Unrealized appreciation on
     securities available for
     sale - Net of tax of $384                    -           -          -           -         744          744
   Less reclassification
     adjustment for realized gains
     included in net income -
     Net of tax of $22                            -           -          -           -         (43)         (43)
                                                                                                     ----------
            Total comprehensive income                                                                    1,471

Stock options exercised                           3          22          -           -           -           25
RRP stock release                                 1          15          -           -           -           16
Dividends paid                                    -           -       (362)          -           -         (362)
                                           --------    --------   --------    --------    --------   ----------

BALANCE - December 31, 2002                   1,645       5,216     13,819           -       1,067       21,747

Comprehensive income:
  Net income                                      -           -      1,209           -           -        1,209
  Other comprehensive income:
   Unrealized appreciation on
     securities available for
     sale - Net of tax of $289                    -           -          -           -        (561)        (561)
   Less reclassification
     adjustment for realized gains
     included in net income -
     Net of tax of $109                           -           -          -           -        (211)        (211)
                                                                                                     ----------

            Total comprehensive income                                                                      437

Stock options exercised                          12         119          -           -           -          131
RRP stock release                                 -           3          -           -           -            3
Dividends paid                                    -           -       (367)          -           -         (367)
                                           --------    --------   --------    --------    --------   ----------
BALANCE - December 31, 2003                $  1,657    $  5,338   $ 14,661    $      -    $    295     $ 21,951
                                           ========    ========   ========    ========    ========   ==========
</TABLE>

See Notes to Consolidated
   Financial Statements


<PAGE>

<TABLE>
<CAPTION>
                                                                                            Years Ended December 31
                                                                             ------------------------------------------------------
                                                                                   2003               2002              2001
                                                                             ----------------    -------------    -----------------
                                                                                                 (000s omitted)
<S>                                                                          <C>                 <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                                              $          1,209    $         770    $           1,285
     Adjustments to reconcile net income to net cash from
        operating activities:
        Depreciation and amortization                                                     782              676                  665
        Provision for loan losses                                                         267              415                  255
        Amortization and accretion on securities                                          339              253                   47
        Gain on sale of investment securities                                            (320)             (65)                (183)
        Originations of loans held for sale                                           (81,510)         (68,631)             (78,667)
        Principal amount of loans sold                                                 81,121           69,980               77,626
        (Gain) loss on sale of real estate                                                 (7)              17                  107
        (Gain) loss on fixed assets                                                         5               (2)                  88
        Change in accrued interest receivable                                             257               27                  140
        Change in other assets                                                           (288)            (313)                (599)
        Change in accrued expenses and other liabilities                                  250               91                  (59)
        Change in deferred income taxes                                                   200                -                   84
                                                                             ----------------    -------------    -----------------
          Net cash provided by operating activities                                     2,305            3,218                  789

CASH FLOWS FROM INVESTING ACTIVITIES
     Net decrease in loans                                                            (12,386)          24,390               42,556
     Purchase of real estate held for sale                                               (340)            (676)                (150)
     Proceeds from sale of real estate                                                    398            1,008                  339
     Proceeds from maturity of available-for-sale securities                           16,852            7,820                9,542
     Proceeds from sale of securities available for sale                               11,982            4,977                  186
     Purchase of securities available for sale                                        (17,750)         (35,654)             (17,166)
     Purchase of Federal Home Loan Bank stock                                            (166)               -                    -
     Purchase of InsuranCenter of Alpena                                               (1,028)               -                    -
     Purchase of premises and equipment                                                (1,114)            (386)                (873)
                                                                             ----------------    -------------    -----------------
          Net cash provided by (used in) investing activities                          (3,552)           1,479               34,434

CASH FLOWS FROM FINANCING ACTIVITIES
     Net increase (decrease) in deposits                                               (4,390)         (10,446)               3,767
     Dividends paid on common stock                                                      (367)            (362)                (360)
     Net increase (decrease) in advances from borrowers                                    92              (99)                (152)
     Additions to advances from Federal Home Loan Bank                                  9,500                -               22,500
     Repayments of advances from Federal Home Loan Bank                               (12,112)          (3,706)             (52,815)
     Proceeds from exercise of stock options                                              131               25                    -
                                                                             ----------------    -------------    -----------------
          Net cash used in financing activities                                        (7,146)         (14,588)             (27,060)
                                                                             ----------------    -------------    -----------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   (8,393)          (9,891)               8,163

CASH AND CASH EQUIVALENTS - Beginning of year                                          15,099           24,990               16,827
                                                                             ----------------    -------------    -----------------
CASH AND CASH EQUIVALENTS - End of year                                      $          6,706    $      15,099    $          24,990
                                                                             ================    =============    =================
SUPPLEMENTAL CASH FLOW AND NONCASH INFORMATION
     Cash paid for income taxes                                              $            556    $         506    $             475
     Cash paid for interest on deposits and borrowings                                  6,430            8,239               11,465
     Stock issued to employees                                                              3               16                   61
</TABLE>

See Notes to Consolidated
   Financial Statements.

<PAGE>

NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

         PRINCIPLES OF CONSOLIDATION AND ORGANIZATION - The consolidated
         financial statements include the accounts of Alpena Bancshares, Inc.,
         First Federal of Northern Michigan, and the Bank's wholly owned
         subsidiaries, Financial Services & Mortgage Corporation (FSMC) and
         InsuranCenter of Alpena. FSMC invests in real estate, which includes
         leasing, selling, developing, and maintaining real estate properties.
         All significant intercompany balances and transactions have been
         eliminated in the consolidation. The 000s have been omitted in tabular
         columns.

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

         In an effort to increase and diversify sources of income, on June 12,
         2003, First Federal of Northern Michigan acquired 100 percent of the
         stock of the InsuranCenter of Alpena (ICA). Beginning June 13, 2003,
         the financial results of ICA are included in the consolidated financial
         statements of the Company. ICA is a licensed insurance agency engaged
         in the business of property, casualty, and health insurance. The
         purchase price of $2,866,400 was based on pricing determined by an
         independent consultant. There is a provision for an earn-out payment
         for the former owners who remain with the organization, of up to
         $300,000 per year for three years if specific net sales levels are
         achieved. For the year ended December 31, 2003, the net sales level was
         achieved, and the earn-out payment was accrued for at year-end and
         added to the cost of the acquisition and recorded as goodwill.

<PAGE>

NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         The following table summarizes the estimated fair value of the assets
         acquired (000s omitted):
<TABLE>
<S>                                                       <C>
Current assets                                            $      151
Plant, property, and equipment                                   439
Intangible assets                                              1,687
Goodwill                                                         657
                                                          ----------
   Total assets acquired                                       2,934

Current liabilities                                               68
                                                          ----------

Net assets acquired                                       $    2,866
                                                          ==========
</TABLE>

         Of the identifiable intangible assets acquired, $890,000 relates to the
         value of the existing customer list and $597,000 relates to an
         exclusive health care contract. Both of these will be amortized over a
         20 year period. The monthly amortization expense associated with these
         items will be $6,200. The value placed on the non-compete agreement is
         $200,000, which will be amortized over a 10 year period. The monthly
         amortization for this expense equates to $1,700 per month. These
         amortization expenses will be recorded in non-interest expenses on a
         monthly basis. The goodwill of $657,100 that was created in the
         transaction will not be amortized but tested annually for impairment.
         Any future payments made under the earn-out agreement will be added to
         goodwill. The goodwill created in the acquisition is non-deductible for
         tax purposes.

         The purchase was paid for with cash of $1,028,000 plus a note payable
         (debt) of $1,357,000 and a non-compete liability (balance to be paid
         over the next nine years) of $180,000.

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

         SECURITIES - Securities are classified as available for sale and are
         reported at fair value, with unrealized gains and losses, net of
         related deferred income taxes, included in equity as a component of
         accumulated other comprehensive income. Federal Home Loan Bank stock is
         considered restricted investment security and is carried at cost.

<PAGE>

NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Purchase premiums and discounts are recognized in interest income using
         the interest method over the terms of the securities. Declines in the
         fair value of held-to-maturity and available-for-sale securities below
         their cost that are deemed to be other than temporary are reflected in
         the earnings as realized losses. Gains and losses on the sale of
         securities are recorded on the trade date and are determined using the
         specific identification method.

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

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

         The accrual of interest on loans is discontinued at the time the loan
         is 90 days delinquent unless the credit is well-secured and in process
         of collection. In all cases, loans are placed on nonaccrual or charged
         off at an earlier date if collection of principal or interest is
         considered doubtful.

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

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

<PAGE>

NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

         A loan is considered impaired when, based on current information and
         events, it is probable that the Company will be unable to collect the
         scheduled payments of principal or interest when due according to the
         contractual terms of the loan agreement. Factors considered by
         management in determining impairment include payment status, collateral
         value, and the probability of collecting scheduled principal and
         interest payments when due. Loans that experience insignificant payment
         delays and payment shortfalls generally are not classified as impaired.
         Management determines the significance of payment delays and payment
         shortfalls on a case-by-case basis, taking into consideration all of
         the circumstances surrounding the loan and the borrower, including
         length of the delay, the reasons for the delay, the borrower's prior
         payment record, and the amount of the shortfall in relation to the
         principal and interest owed. Impairment is measured on a loan-by-loan
         basis for commercial and construction loans by either the present value
         of expected future cash flows discounted at the loan's effective
         interest rate, the loan's obtainable market price, or the fair value of
         the collateral if the loan is collateral dependent.

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

<PAGE>

NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         LOANS HELD FOR SALE - The Bank routinely sells to investors its
         long-term fixed rate residential mortgages. These loans are identified
         at origination as held for sale and are accounted for at the lower of
         cost or market on an aggregate basis. The lower of cost or market
         allowance for loans held for sale was $0 at December 31, 2003 and 2002.

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

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

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

         CORE DEPOSIT INTANGIBLE - In connection with the purchase of certain
         branches, the excess of purchase price over fair value of net assets
         acquired has been allocated to intangible assets, which is being
         amortized over 5 years to 15 years. The estimated amortization expense
         for each period during the years ended December 31, 2004 through
         December 31, 2010 is approximately $205,000.

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

<PAGE>

NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

         OFF BALANCE SHEET INSTRUMENTS - In the ordinary course of business, the
         Corporation has entered into commitments to extend credit, including
         commitments under credit card arrangements, commercial letters of
         credit and standby letters of credit.

         In November 2002, the FASB issued Interpretation No. 45, (FIN 45)
         Guarantor's Accounting and Disclosure Requirements for Guarantees,
         Including Indirect Guarantees of Indebtedness of Others, which
         elaborates on the disclosures to be made by a guarantor about its
         obligations under certain guarantees issued. It also clarifies that a
         guarantor is required to recognize, at the inception of a guarantee, a
         liability for the fair value of the obligation undertaken in issuing
         the guarantee. The initial recognition and measurement provisions of
         this Interpretation have been applied on a prospective basis to
         guarantees issued or modified after December 31, 2002. However, the
         value of such guarantees is immaterial and the adoption of this
         Standard did not have a material effect on the Corporation's financial
         statements.

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

<PAGE>

NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

         STOCK COMPENSATION PLAN - The Company has a stock-based employee
         compensation plan, which is described more fully in Note 12. The
         Company accounts for this plan under the recognition and measurement
         principles of APB Opinion No. 25, Accounting for Stock Issued to
         Employees, and related Interpretations. No stock-based employee
         compensation cost is reflected in net income, as all options granted
         under those plans had an exercise price equal to the market value of
         the underlying common stock on the date of grant. The pro forma
         compensation cost related to options is insignificant.

         The weighted average fair value of options granted in 2002 was $1.04.
         There were no options granted in 2003 and 2001. The fair value of
         options granted in 2002 is estimated on the date of grant using the
         Black-Scholes option-pricing model using the following assumptions:
         dividend yield of 7 percent, expected life of 8 years, expected
         volatility of 19.7 percent and a risk free interest rate of 4 percent.

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

<PAGE>
NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Earnings per common share have been computed based on the following
         (000s omitted, except share data):

<TABLE>
<CAPTION>
                                                                2003               2002           2001
                                                            -----------       ---------------   ----------
<S>                                                         <C>               <C>               <C>
Net income                                                  $     1,209       $           770   $    1,285
                                                            ===========       ===============   ==========
Average number of common shares
   outstanding                                                1,650,919             1,643,966    1,641,702
Effect of dilutive options                                       10,729                10,347        3,122
                                                            -----------       ---------------   ----------
Average number of common shares
   outstanding used to calculate diluted
   earnings per common share                                  1,661,648             1,654,313    1,644,824
                                                            ===========       ===============   ==========
</TABLE>


Reclassifications - Certain items from December 31, 2002 and 2001 have been
reclassified to conform to the December 31, 2003 presentation.
<PAGE>

NOTE 2 - INVESTMENT SECURITIES

         Investment securities have been classified according to management's
         intent. The carrying value and estimated fair value of securities at
         December 31, 2003 and 2002 are as follows (000s omitted):

<TABLE>
<CAPTION>
                                                                    2003
                                                   -----------------------------------------
                                                                Gross      Gross
                                                   Amortized  Unrealized Unrealized  Market
                                                      Cost      Gains      Losses     Value
                                                   ---------  ---------- ----------  -------
<S>                                                <C>        <C>        <C>         <C>
SECURITIES AVAILABLE FOR SALE
   U.S. Treasury securities and obligations
     of U.S. government corporations
     and agencies                                   $16,700    $   367    $     -    $17,067
   Municipal notes                                    3,900         60          -      3,960
   Corporation securities                             6,163          -         16      6,147
   Mortgage-backed securities                         7,443          -        108      7,335
   Other securities                                      17        144          -        161
                                                    -------    -------    -------    -------
        Total                                       $34,223    $   571    $   124    $34,670
                                                    =======    =======    =======    =======
</TABLE>

<TABLE>
<CAPTION>
                                                                     2002
                                                   -----------------------------------------
                                                                Gross      Gross
                                                   Amortized Unrealized  Unrealized  Market
                                                      Cost      Gains      Losses     Value
                                                   --------- ----------  ----------  -------
<S>                                                <C>       <C>         <C>         <C>
SECURITIES AVAILABLE FOR SALE
   U.S. Treasury securities and obligations
     of U.S. government corporations
     and agencies                                   $30,940    $ 1,041    $     -    $31,981
   Municipal notes                                    3,170        116          -      3,286
   Corporation securities                             4,488         92          -      4,580
   Mortgage-backed securities                         6,708        224          1      6,931
   Other securities                                      21        145          -        166
                                                    -------    -------    -------    -------
        Total                                       $45,327    $ 1,618    $     1    $46,944
                                                    =======    =======    =======    =======
</TABLE>

<PAGE>

NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

         The amortized cost and estimated market value of securities at December
         31, 2003, by contractual maturity, are shown below. Expected maturities
         will differ from contractual maturities because issuers may have the
         right to call or prepay obligations with or without call or prepayment
         penalties (000s omitted):

<TABLE>
<CAPTION>
                                              Amortized   Market
                                                 Cost      Value
                                              ---------   -------
<S>                                           <C>         <C>
Due in one year or less                        $ 6,947    $ 7,219
Due after one year through five years           19,503     19,782
Due after five years                               330        335
                                               -------    -------
   Subtotal                                     26,780     27,336
Mortgage-backed securities                       7,443      7,334
                                               -------    -------
   Total                                       $34,223    $34,670
                                               =======    =======
</TABLE>

         At December 31, 2003 and 2002, securities with a carrying value of
         $3,500,000 and $4,686,000 and fair value of $3,611,000 and $4,686,000,
         respectively, were pledged to secure certain deposit accounts.

         Gross proceeds from the sale of securities available for sale during
         2003, 2002, and 2001 were $11,982,000, $4,977,000 and $186,000,
         respectively, resulting in gross gains of $320,000, $65,000 and
         $183,000, respectively.

NOTE 3 - LOANS

         Loans at December 31, 2003 and 2002 are summarized as follows (000s
         omitted):

<TABLE>
<CAPTION>
                                                            2003        2002
                                                          --------    --------
<S>                                                       <C>         <C>
Real estate loans - One-to-four family residential        $100,199    $104,780
Commercial loans:
   Secured by real estate                                   29,452      20,369
   Other                                                    13,922       7,527
                                                          --------    --------
     Total commercial loans                                 43,374      27,896
Consumer loans                                              20,923      19,587
                                                          --------    --------
     Total gross loans                                     164,496     152,263
Less allowance for loan losses                               1,036         922
                                                          --------    --------
     Total loans - Net                                    $163,460    $151,341
                                                          ========    ========
</TABLE>

<PAGE>

NOTE 3 - LOANS (CONTINUED)

         Final loan maturities and rate sensitivity of the loan portfolio at
         December 31, 2003 are as follows (000s omitted):

<TABLE>
<CAPTION>
                                                    One Year     After
                                        Less Than    to Five      Five
                                        One Year      Years       Years       Total
                                        --------    --------    --------    --------
<S>                                     <C>         <C>         <C>         <C>
Loans at fixed interest rates           $ 31,380    $ 60,596    $ 52,154    $144,130
Loans at variable interest rates          14,245       4,930       1,191      20,366
                                        --------    --------    --------    --------
   Total                                $ 45,625    $ 65,526    $ 53,345    $164,496
                                        ========    ========    ========    ========
</TABLE>

         Certain directors and executive officers of the Company were loan
         customers during 2003 and 2002. Such loans were made in the ordinary
         course of business and do not involve more than a normal risk of
         collectibility. An analysis of aggregate loans outstanding to directors
         and executive officers for the years ended December 31, 2003 and 2002
         is as follows (000s omitted):

<TABLE>
<CAPTION>
                                        2003         2002
                                       -------     -------
<S>                                    <C>         <C>
Aggregate balance - January 1          $   981     $   716

New loans                                4,073         817
Repayments                              (2,586)       (552)
                                       -------     -------
Aggregate balance - December 31        $ 2,468     $   981
                                       =======     =======
</TABLE>

         An analysis of the allowance for loan losses is as follows (000s
         omitted):

<TABLE>
<CAPTION>
                                   2003        2002       2001
                                 -------     -------     -------
<S>                              <C>         <C>         <C>
Balance - Beginning of year      $   922     $   689     $   649

Provision for losses                 267         415         255
Loans - Charged off                 (215)       (234)       (289)
Recoveries                            62          52          74
                                 -------     -------     -------

Balance - End of year            $ 1,036     $   922     $   689
                                 =======     =======     =======
</TABLE>

<PAGE>

NOTE 3 - LOANS (CONTINUED)

         The following is a summary of information pertaining to impaired,
         non-accrual, and delinquent loans (000s omitted):

<TABLE>
<CAPTION>
                                                  2003      2002
                                                 ------    ------
<S>                                              <C>       <C>
Impaired loans without a
   valuation allowance                           $    -    $    -
Impaired loans with a valuation
   allowance                                      1,040         -
                                                 ------    ------

Total impaired loans                             $1,040    $    -
                                                 ======    ======

Valuation allowance related to
   impaired loans                                $  120    $    -

Total non-accrual loans                          $1,291    $  627

Total loans past due 90 days or more
     and still accruing                          $  828    $  807
</TABLE>

<TABLE>
<CAPTION>
                                           2003    2002    2001
                                           ----    ----    ----
<S>                                        <C>     <C>     <C>
Average investment in
   impaired loans                          $829    $  -    $  -
                                           ====    ====    ====

Interest income recognized
   on impaired loans                       $  -    $  -    $  -
                                           ====    ====    ====

Interest income recognized on
   a cash basis on impaired loans          $  -    $  -    $  -
                                           ====    ====    ====
</TABLE>

<PAGE>

NOTE 4 - REAL ESTATE HELD FOR SALE

         In 2003, the real estate held for sale was determined to be impaired
         and was written down to fair value. The valuation allowance on this
         project, which was determined based on recent sales of comparable real
         estate and existing real estate listings, was approximately $121,000
         and $102,000 at December 31, 2003 and 2002, respectively.

NOTE 5 - PROPERTY AND EQUIPMENT

         A summary of property and equipment for the years ended December 31,
         2003 and 2002 is as follows (000s omitted):

<TABLE>
<CAPTION>
                                          2003      2002
                                         ------    ------
<S>                                      <C>       <C>
Land                                     $  878    $  838
Land improvements                            62        21
Buildings                                 4,504     3,243
Equipment                                 3,187     2,745
                                         ------    ------

   Total property and equipment           8,631     6,847

Less accumulated depreciation             2,814     2,086
                                         ------    ------

   Net property and equipment            $5,817    $4,761
                                         ======    ======
</TABLE>

NOTE 6 - SERVICING

         Loans serviced for others are not included in the accompanying
         consolidated statement of financial condition. The unpaid principal
         balances of mortgage and other loans serviced for others were
         approximately $141,340,000 and $119,651,000 at December 31, 2003 and
         2002, respectively.

         The balance of capitalized servicing rights, net of valuation
         allowance, is included in other assets at December 31, 2003 and 2002.

<PAGE>

NOTE 6 - SERVICING (CONTINUED)

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

<TABLE>
<CAPTION>
                                                          2003          2002
                                                         ------        ------
<S>                                                      <C>           <C>
Annual constant prepayment speed (CPR)                   13.89%        17.55%
Weighted average life (in months)                          253           264
Discount rate                                             7.25%         7.25%
</TABLE>

         The following summarizes mortgage servicing rights capitalized and
         amortized, along with the aggregate activity in related valuation
         allowances (000s omitted):

<TABLE>
<CAPTION>
                                                           2003     2002
                                                          -----     -----
<S>                                                       <C>       <C>
Carrying amount - Beginning of year                       $ 869     $ 630
Originated mortgage servicing rights capitalized            656       557
Amortization of mortgage servicing rights                  (541)     (318)
                                                          -----     -----
     Subtotal                                               984       869
Valuation allowances:
   Balance at beginning of year                               -         -
   Additions                                                 29         -
   Reductions                                               (29)        -
   Write-downs                                                -         -
                                                          -----     -----
   Balance at end of year                                 $ 984     $ 869
                                                          =====     =====
</TABLE>

<PAGE>

NOTE 7 - INTANGIBLE ASSETS AND GOODWILL

         Intangible assets of the Company at December 31, 2003 are summarized as
         follows (000s omitted):

<TABLE>
<CAPTION>
                                        Gross
                                       Carrying     Accumulated  Net Carrying
                                        Amount     Amortization     Amount
                                       --------    ------------  ------------
<S>                                    <C>         <C>           <C>
Amortized intangible assets:
  Customer list                         $  890        $   37        $  853
  Customer contract                        597            25           572
  Non-compete covenant                     200            16           184
  Acquisition costs                        100             8            92
                                        ------        ------        ------
     Total                               1,787            86         1,701
Unamortized intangible assets:
  Goodwill                                 657             -           657
                                        ------        ------        ------
     Total                              $2,444        $   86        $2,358
                                        ======        ======        ======
</TABLE>

NOTE 8 - DEPOSITS

         Deposit accounts, by type and range of rates at December 31, 2003 and
         2002, consist of the following (000s omitted):

<TABLE>
<CAPTION>
        Account Type                                2003               2002
        ------------                                ----               ----
<S>                                               <C>                <C>
Noninterest-bearing demand                        $  7,281           $  5,418
NOW accounts and MMDA                               25,209             23,115
Regular savings accounts                            28,838             32,198
                                                  --------           --------
     Total                                          61,328             60,731

  Certificate of Deposit Rates

0.50 percent to 1.99 percent                        26,192             19,670
2.00 percent to 2.99 percent                        14,384             11,537
3.00 percent to 3.99 percent                        15,349             11,111
4.00 percent to 4.99 percent                        12,498             13,576
5.00 percent to 6.99 percent                        18,768             34,394
7.00 percent to 8.99 percent                         3,183              5,073
                                                  --------           --------
     Total certificate of deposits                  90,374             95,361
                                                  --------           --------
     Total deposits                               $151,702           $156,092
                                                  ========           ========
</TABLE>

<PAGE>

NOTE 8 - DEPOSITS (CONTINUED)

         Certificates of deposit $100,000 or greater at December 31, 2003 and
         2002 were $17,391,000 and $23,562,000, respectively.

         The following table sets forth the amount and maturities of
         certificates of deposit at December 31, 2003 (000s omitted):

<TABLE>
<CAPTION>
                                                Amount Due
                      ---------------------------------------------------------------
                                                                   Greater
                      Less than     1-2        2-3        3-5       than
       Rate            1 Year      Years      Years      Years     5 Years     Total
       ----           ---------   -------    -------    -------    -------    -------
<S>                   <C>         <C>        <C>        <C>        <C>        <C>
0.50 percent to
   1.99 percent        $22,979    $ 1,931    $ 1,224    $    59    $     -    $26,193
2.00 percent to
   2.99 percent         10,314      1,589      1,501        942         37     14,383
3.00 percent to
   3.99 percent            564      5,185      5,764      3,658        178     15,349
4.00 percent to
   4.99 percent          2,934        302      7,843      1,109        310     12,498
5.00 percent to
   6.99 percent          6,044      3,870      2,822      1,732      4,300     18,768
7.00 percent to
   8.99 percent            378      1,306          -        128      1,371      3,183
                       -------    -------    -------    -------    -------    -------

      Total            $43,213    $14,183    $19,154    $ 7,628    $ 6,196    $90,374
                       =======    =======    =======    =======    =======    =======
</TABLE>

         Interest expense on deposits for the years ended December 31, 2003,
         2002, and 2001 is summarized as follows (000s omitted):

<TABLE>
<CAPTION>
                                 2003      2002      2001
                                ------    ------    ------
<S>                             <C>       <C>       <C>
NOW and MMDAs                   $  190    $  288    $  132
Regular savings                    119       363     5,723
Certificates of deposit          3,410     4,815     2,051
                                ------    ------    ------

   Total                        $3,719    $5,466    $7,906
                                ======    ======    ======
</TABLE>

         Deposits from related parties held by the Bank at December 31, 2003 and
         2002 amounted to $558,000 and $170,000, respectively.

<PAGE>

NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES

         Advances outstanding from the Federal Home Loan Bank (FHLB) bear
         interest that is payable monthly. Pursuant to blanket collateral
         agreements with the FHLB advances are collateralized by one-to-four
         family whole mortgage loans. The FHLB requires eligible collateral to
         have a market value equal to 145 percent of advances. Total collateral
         pledged for the following advances totaled $69,907,000 as of December
         31, 2003.

         The advances are subject to prepayment penalties subject to the
         provisions and conditions of the credit policy of the Federal Home Loan
         Bank. Future maturities of the advances are as follows (000s omitted):

<TABLE>
<CAPTION>
Years Ending                                   Weighted Average
December 31                    Amount           Interest Rate
------------                  --------         ----------------
<S>                           <C>              <C>
2004                          $  8,052              4.20
2005                            12,250              5.74
2006                             2,000              2.84
2008                             6,500              5.40
2010                            17,000              5.59
                              --------
     Total                    $ 45,802              5.24
                              ========
</TABLE>

NOTE 10 - NOTE PAYABLE

         Unsecured note payable to two individuals, payable in annual
         installments of $180,000, including interest at 5.5 percent. Future
         maturities of the note are as follows (000s omitted):

<TABLE>
<CAPTION>
Years Ending
 December 31                  Amount
------------                 --------
<S>                          <C>
2004                         $    105
2005                              111
2006                              117
2007                              124
2008                              130
Thereafter                        770
                             --------
        Total                $  1,357
                             ========
</TABLE>

<PAGE>

NOTE 11 - FEDERAL INCOME TAX

         The analysis of the consolidated provision for federal income tax for
         the years ended December 31, 2003, 2002, and 2001 is as follows (000s
         omitted):

<TABLE>
<CAPTION>
                          2003    2002    2001
                          ----    ----    ----
<S>                       <C>     <C>     <C>
Current provision         $318    $285    $562
Deferred provision         200       -      84
                          ----    ----    ----
   Total                  $518    $285    $646
                          ====    ====    ====
</TABLE>

         A reconciliation of the federal income tax expense and the amount
         computed by applying the statutory federal income tax rate (34 percent)
         to income before federal income tax for the years ended December 31,
         2003, 2002, and 2001 is as follows (000s omitted):

<TABLE>
<CAPTION>
                                2003     2002      2001
                               -----     -----     -----
<S>                            <C>       <C>       <C>
Tax at statutory rate          $ 587     $ 359     $ 657
Nontaxable dividend              (22)       (8)      (19)
Tax-exempt interest              (20)      (24)      (16)
Other                            (27)      (42)       24
                               -----     -----     -----
   Federal income tax          $ 518     $ 285     $ 646
                               =====     =====     =====
</TABLE>

<PAGE>

NOTE 11 - FEDERAL INCOME TAX (CONTINUED)

         The net deferred tax liability was comprised of the following temporary
         differences at December 31, 2003 and 2002 (000s omitted):

<TABLE>
<CAPTION>
                                                               2003      2002
                                                              ------    ------
<S>                                                           <C>       <C>
Deferred tax assets:
   Allowance for loan losses                                  $  311    $  282
   Valuation allowance for real estate held
     for sale                                                     41        35
   Other                                                          45        24
   Directors' benefit plan                                       152       189
                                                              ------    ------

        Total deferred tax assets                                549       530

Valuation allowance for deferred tax assets                        -         -

Deferred tax liabilities:
   Bad debt recapture                                              -        24
   Mortgage servicing rights                                     334       295
   Partnership losses                                             65        58
   Depreciation                                                  502       306
   Other                                                          15        14
   Unrealized gains on securities available for sale             152       550
                                                              ------    ------

        Total deferred tax liabilities                         1,068     1,247
                                                              ------    ------

        Net deferred tax liability                            $  519    $  717
                                                              ======    ======
</TABLE>

<PAGE>

NOTE 11 - FEDERAL INCOME TAX (CONTINUED)

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

         The Small Business Job Protection Act of 1996 (the "Act") requires
         qualified thrift institutions, such as the Bank, to recapture the
         portion of their tax bad debt reserves at January 1, 1996 that exceeds
         the December 31, 1987 ("base year") reserve balance. The amount of this
         excess reserve is $422,000, which will be taken into taxable income
         ratably over a six-year period beginning in 1998.

         A deferred tax liability has not been recognized for the tax bad debt
         base year reserves of the Bank. The base year reserves are the balance
         of reserves as of December 31, 1987. At December 31, 2003, the amount
         of those reserves was approximately $60,000. The amount of the
         unrecognized deferred tax liability at December 31, 2003 was
         approximately $20,000.

NOTE 12 - OFF BALANCE SHEET RISK COMMITMENTS AND CONTINGENCIES

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

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

         At December 31, 2003 and 2002, the following financial instruments were
         outstanding whose contract amounts represent credit risk (000s
         omitted):

<TABLE>
<CAPTION>
                                                      Contract Amount
                                                     ------------------
                                                      2003       2002
                                                     -------    -------
<S>                                                  <C>        <C>
Commitments to grant loans                           $35,868    $33,363
Unfunded commitments under lines of credit            11,499     10,339
Commercial and standby letters of credit                  35        250
</TABLE>

<PAGE>

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

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

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

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

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

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

<PAGE>

NOTE 13 - STOCKHOLDERS' EQUITY

         The Company declared $.50, $.50, and $.50 regular cash dividends on its
         shares of common stock for the years ended December 31, 2003, 2002, and
         2001, respectively. Payment of dividends on the common stock is subject
         to determination and declaration by the Board of Directors and depends
         on a number of factors, including capital requirements, regulatory
         limitation on payment of dividends, the Bank's results of operations
         and financial condition, tax considerations, and general economic
         conditions.

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

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

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

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

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

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

<PAGE>

NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)

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

         As of December 31, 2003 and 2002, the OTS categorized the Bank as
         "well-capitalized" per definition of 12 CFR Section 565.4(b)(1). To be
         categorized as well-capitalized, the Bank must maintain minimum total
         risk-based, tier 1 risk based, and tangible equity ratios as set forth
         in the table. There are no conditions or events since that notification
         that management believes have changed the Bank's categorization.

<TABLE>
<CAPTION>
                                                                                 To be Categorized as
                                                                                Well-Capitalized Under
                                                               For Capital        Prompt Corrective
                                          Actual           Adequacy Purposes      Action Provisions
                                    ------------------     ------------------   ----------------------
                                    Amount      Ratio      Amount      Ratio      Amount      Ratio
                                    -------    -------     -------    -------     -------    -------
                                                          (Dollars in Thousands)
<S>                                 <C>        <C>         <C>        <C>         <C>        <C>
December 31, 2003:
   Total capital (to risk-
     weighted assets)               $18,119      11.96%    $12,116       8.00%    $15,146      10.00%
   Tier 1 capital (to risk-
     weighted assets)               $17,019      11.24%    $ 6,058       4.00%    $ 9,087       6.00%
   Tangible capital (to
     tangible assets)               $17,019       7.78%    $ 3,283       1.50%    $ 4,377       2.00%

December 31, 2002:
   Total capital (to risk-
     weighted assets)               $19,137      15.95%    $ 9,596       8.00%    $11,995      10.00%
   Tier 1 capital (to risk-
     weighted assets)               $18,149      15.13%    $ 4,798       4.00%    $ 7,197       6.00%
   Tangible capital (to
     tangible assets)               $18,149       8.08%    $ 3,370       1.50%    $ 4,493       2.00%
</TABLE>

<PAGE>

NOTE 14 - EMPLOYEE BENEFIT PLANS

         RETIREMENT PLANS

         The Bank is a participant in the multiemployer Financial Institutions
         Retirement Fund (FIRF or the "Plan"), which covers substantially all of
         its officers and employees. The defined benefit plan covers all
         employees who have completed one year of service, attained age 21, and
         worked at least 1,000 hours during the year. Normal retirement age is
         65, with reduced benefits available at age 55. The Bank's contributions
         are determined by FIRF and generally represent the normal cost of the
         Plan. Specific plan assets and accumulated benefit information for the
         Bank's portion of the Plan are not available. Under the Employee
         Retirement Income Security Act of 1974 (ERISA), a contributor to a
         multiemployer pension plan may be liable in the event of complete or
         partial withdrawal for the benefit payments guaranteed under ERISA. The
         Bank was fully funded in the Plan as of December 31, 2003. The expense
         of the Plan allocated to the Bank for the years ended December 31,
         2003, 2002, and 2001 was $263,000, $212,000 and $168,000, respectively.

         The Bank has a Section 401(k) savings plan covering substantially all
         of its employees who meet certain age and service requirements. Under
         the plan, the Bank matches 50 percent of participant contributions up
         to 3 percent of each participant's compensation during the year. This
         contribution is dependent upon availability of sufficient net earnings
         from current or prior years. Additional contributions may be made as
         approved by the Board of Directors. The expense under the plan for the
         years ended December 31, 2003, 2002, and 2001 was $65,000, $64,000 and
         $56,000, respectively.

         The Bank has a nonqualified deferred compensation plan for its
         directors. Through 1998, each director could voluntarily defer all or
         part of his or her director's fees to participate in the program. The
         plan is currently unfunded and amounts deferred are unsecured and
         remain subject to claims of the Bank's general creditors. Directors are
         paid once they reach normal retirement age or sooner for reason of
         death, total disability, or termination. The Bank may terminate the
         plan at any time. The amount recorded under the plan totaled
         approximately $617,000 and $550,000 at December 31, 2003 and 2002,
         respectively. The expense associated with the plan was $67,000, $90,000
         and $77,000 for the years ended December 31, 2003, 2002, and 2001,
         respectively.

<PAGE>

NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED)

         EMPLOYEE STOCK OWNERSHIP PLAN

         Effective January 1, 1994, the Bank implemented an employee stock
         ownership plan (ESOP). The ESOP covers substantially all employees who
         have completed one year of service, attained age 21, and worked at
         least 1,000 hours during the year. To fund the ESOP, the Bank borrowed
         $480,000 from an outside party to purchase 48,000 shares of the
         Company's common stock at $10 per share. The ESOP note was payable
         quarterly with interest at the prime rate and was retired in 1999. All
         shares were allocated as of December 31, 1999. Compensation expense is
         measured by the fair value of ESOP shares allocated to participants
         during a fiscal year. There was no compensation expense for the years
         ended December 31, 2003, 2002, and 2001.

         STOCK AWARD PLAN

         The 1996 Recognition and Retention Plan for employees and outside
         directors authorized the issuance of authorized, but unissued shares of
         common stock of the Company in an aggregate amount of 27,600 shares of
         common stock, of which 17,940 shares were available to be awarded to
         employees and 9,660 shares were available to be awarded to non-employee
         directors. Restricted stock awards are nontransferable and
         non-assignable. Awards to non-employee directors vest at the rate of 20
         percent of the amount awarded commencing one year from the date of the
         award, which was April 17, 1996. Awards to executive officers and
         employees would become fully vested upon termination of employment or
         service due to death, disability, or normal retirement. Upon
         termination of employment or service for any other reason, unvested
         shares are forfeited. A provision of $3,000, $16,000 and $61,000 was
         charged to expense for the years ended December 31, 2003, 2002, and
         2001, respectively.

<PAGE>

NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED)

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

<TABLE>
<S>                                        <C>
Outstanding - January 1, 2001               4,913
   Vested in 2001                          (3,472)
   Forfeited in 2001                         (621)
   Available to be re-awarded                 621
                                           ------

Outstanding - December 31, 2001             1,441
   Vested in 2002                               -
   Forfeited in 2002                            -
   Re-awarded in 2002                      (1,199)
                                           ------

Outstanding - December 31, 2002               242
   Vested in 2003                               -
   Forfeited in 2003                            -
   Re-awarded in 2003                        (200)
                                           ------

Outstanding - December 31, 2003                42
                                           ======
</TABLE>

         STOCK OPTION PLAN

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

<PAGE>

NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED)

         The following is a summary of activity for stock options for the years
         ended December 31:

<TABLE>
<CAPTION>
                                        2003                   2002                    2001
                                ---------------------  --------------------   ---------------------
                                             Weighted              Weighted                Weighted
                                             Average                Average                Average
                                Number of    Exercise  Number of   Exercise   Number of    Exercise
                                 Shares       Price     Shares       Price     Shares       Price
                                ---------    --------  ---------   --------   ---------    --------
<S>                             <C>          <C>       <C>         <C>        <C>          <C>
Options outstanding at
   beginning of year              41,033     $ 10.35     39,513     $  9.85     46,256     $ 10.03
Options granted                        -           -      7,000       13.75          -           -
Options exercised                (12,022)       9.81     (2,480)         10          -           -
Options forfeited                      -           -     (3,000)      12.38     (6,743)      11.07
                                 -------                -------                -------

Options outstanding at end
   of year                        29,011       10.57     41,033       10.35     39,513        9.85
                                 =======                =======                =======

Exercisable at end of year        25,011       10.06     36,033        9.88     39,513        9.85
</TABLE>

         Information pertaining to options outstanding at December 31, 2003 is
         as follows:

<TABLE>
<CAPTION>
                              Options Outstanding                      Options Exerciseable
                    --------------------------------------- ---------------------------------------
                                    Weighted                               Weighted
                                     Average       Weighted                 Average        Weighted
                                    Remaining       Average                Remaining        Average
                       Number      Contractual     Exercise    Number     Contractual      Exercise
Exercise Prices     Outstanding  Life (in years)     Price  Exercisable  Life (in years)    Price
---------------     -----------  ---------------   -------- -----------  ---------------   --------
<S>                 <C>          <C>               <C>      <C>          <C>               <C>
    9.625               5,900         2.45          $ 9.63      5,900         2.45          $ 9.63
    10.00              18,111         2.30           10.00     18,111         2.30           10.00
    13.75               5,000         8.24           13.75      1,000         8.24           13.75
                       ------                                  ------
        Total          29,011         3.35          $10.57     25,011         2.57          $10.06
                       ======                                  ======
</TABLE>

<PAGE>

NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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

<PAGE>

NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

         DEPOSIT LIABILITIES - The fair values disclosed for demand deposits
         (e.g., interest and noninterest checking, passbook savings, and certain
         types of money market accounts) are, by definition, equal to the amount
         payable on demand at the reporting date (i.e., their carrying amounts).
         The carrying amounts of variable-rate, fixed-term money market
         accounts, and certificates of deposit approximate their fair values at
         the reporting date. Fair values for fixed-rate certificates of deposit
         are estimated using a discounted cash flow calculation that applies
         interest rates currently being offered on certificates to a schedule of
         aggregated expected monthly maturities on time deposits.

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

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

         The estimated fair values and related carrying or notional amounts of
         the Company's financial instruments are as follows (000s omitted):

<TABLE>
<CAPTION>
                                                         2003                    2002
                                                ---------------------   ---------------------
                                                Carrying   Estimated    Carrying   Estimated
                                                Amounts    Fair Value    Amounts   Fair Value
                                                --------   ----------   --------   ----------
<S>                                             <C>        <C>          <C>        <C>
Financial assets:
   Cash and cash equivalents                    $  6,706    $  6,706    $ 15,099    $ 15,099
   Securities                                     34,670      34,670      46,944      46,944
   Loans and loans held for sale - Net           164,391     165,114     151,883     156,013
   Federal Home Loan Bank stock                    4,460       4,460       4,294       4,294
   Accrued interest receivable                     1,066       1,066       1,323       1,323

Financial liabilities:
   Customer deposits                             151,702     153,572     156,092     160,895
   Advances from borrowers for
     taxes and insurance                              96          96           4           4
   Federal Home Loan Bank advances                45,802      50,925      48,414      53,485
   Note payable                                    1,357       1,357           -           -
   Accrued interest payable                          368         368         344         344
</TABLE>

<PAGE>

NOTE 16 - RESTRICTIONS ON DIVIDENDS

         OTS regulations impose limitations upon all capital distributions
         including cash dividends. The total amount of dividends that may be
         paid is generally limited to the sum of the net profits of the bank for
         the preceding three years. An application to and the approval of the
         OTS is required prior to any capital distribution if the institution
         does not meet the criteria for "expedited treatment" of applications
         under OTS regulations. If an application is not required, the
         institution must still provide prior notice to the OTS of the capital
         distribution. In the event the Bank's capital falls below its
         regulatory requirements or the OTS notifies it that it was in need of
         more than normal supervision, the Bank's ability to make capital
         distributions could be restricted. In addition, the OTS could prohibit
         a proposed capital distribution by any institution, which would
         otherwise be permitted by the regulation, if the OTS determines that
         such distribution would constitute an unsafe or unsound practice. At
         December 31, 2003, the Bank's retained earnings available for the
         payment of dividends totaled $2,191,000.

<PAGE>

NOTE 17 - PARENT-ONLY FINANCIAL STATEMENTS

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

         The condensed balance sheet at December 31, 2003 and 2002 is as follows
         (000s omitted):

<TABLE>
<CAPTION>
                                                      2003        2002
                                                     -------    -------
<S>                                                  <C>        <C>
      ASSETS

Cash at subsidiary bank                              $   148    $    90
Investment in subsidiary                              21,822     21,698
Other assets                                               -         13
                                                     -------    -------
   Total assets                                      $21,970    $21,801
                                                     =======    =======

      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities                                          $    19    $    54
Stockholders' equity                                  21,951     21,747
                                                     -------    -------
   Total liabilities and stockholders' equity        $21,970    $21,801
                                                     =======    =======
</TABLE>

         The condensed statement of operations for the years ended December 31,
         2003 and 2002 are as follows (000s omitted):

<TABLE>
<CAPTION>
                                                                2003       2002
                                                              -------     -------
<S>                                                           <C>         <C>
Operating income                                              $     -     $     -
Operating expense                                                  60          64
                                                              -------     -------
Loss before income taxes and equity in undistributed
   net income of subsidiary                                       (60)        (64)
Income tax benefit                                                 18          22
                                                              -------     -------
Loss before equity in undistributed net income of
   subsidiary                                                     (42)        (42)
Equity in undistributed net income of subsidiary                1,251         812
                                                              -------     -------
Net income                                                    $ 1,209     $   770
                                                              =======     =======
</TABLE>

<PAGE>

NOTE 17 - PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED)

         The condensed statement of cash flows for the years ended December 31,
         2003 and 2002 is as follows (000s omitted):

<TABLE>
<CAPTION>
                                                               2003         2002
                                                              -------     -------
<S>                                                           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                 $ 1,209     $   770
   Adjustments to reconcile net income to net cash
     from operating activities:
        Equity in undistributed net income of
          subsidiary                                           (1,251)       (812)
        Net change in other assets                                 13         (13)
        Net change in other liabilities                           (27)          1
                                                              -------     -------
             Net cash used in operating
               activities                                         (56)        (54)

CASH FLOWS FROM INVESTING ACTIVITIES
   Upstream dividend from subsidiary                              350         459

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from exercise of stock options                        131          25
   Dividends paid                                                (367)       (362)
                                                              -------     -------
             Net cash used in financing activities               (236)       (337)
                                                              -------     -------
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                                     58          68

CASH AND CASH EQUIVALENTS - Beginning of year                      90          22
                                                              -------     -------
CASH AND CASH EQUIVALENTS - End of year                       $   148     $    90
                                                              =======     =======
</TABLE>

<PAGE>

NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following tables summarize the Company's quarterly results for the
         fiscal years ended December 31, 2003 and 2002

<TABLE>
<CAPTION>
                                                          For the Three-Month Period Ending
                                                    ----------------------------------------------
                                                    March 31, June 30,  September 30, December 31,
                                                      2003      2003        2003          2003
                                                    --------- --------  ------------- ------------
                                                   (Dollars in Thousands, except for per share data)
<S>                                                 <C>       <C>       <C>           <C>
Interest income                                      $3,400    $3,311      $3,414        $3,225
Interest expense                                      1,702     1,652       1,576         1,525
                                                     ------    ------      ------        ------
Net interest income                                   1,698     1,659       1,838         1,700
Provision for losses on loans                           162        65          11            29
Other income                                            582     1,943       1,367         1,534
Other expenses                                        1,994     2,896       2,774         2,663
                                                     ------    ------      ------        ------
Income - Before income taxes                            124       641         420           542
Federal income taxes                                     38       215         140           125
                                                     ------    ------      ------        ------
Net income                                           $   86    $  426      $  280        $  417
                                                     ======    ======      ======        ======
Basic earnings per share                             $ 0.05    $ 0.26      $ 0.17        $ 0.25
Fully diluted earnings per share                     $ 0.05    $ 0.26      $ 0.17        $ 0.25
Weighted average number of shares outstanding         1,646     1,646       1,654         1,645
Weighted average number of shares outstanding,
   including dilutive stock options                   1,657     1,659       1,663         1,654
Cash dividends declared per common share             $0.125    $0.125      $0.125        $0.125
</TABLE>

<TABLE>
<CAPTION>
                                                           For the Three-Month Period Ending
                                                    ----------------------------------------------
                                                    March 31, June 30,  September 30, December 31,
                                                      2002      2002       2002           2002
                                                    --------- --------  ------------- ------------
                                                  (Dollars in Thousands, except for per share data)
<S>                                                 <C>       <C>       <C>           <C>
Interest income                                      $3,747    $3,691      $3,661        $3,400
Interest expense                                      2,300     2,142       2,038         1,862
                                                     ------    ------      ------        ------
Net interest income                                   1,447     1,549       1,623         1,538
Provision for losses on loans                            75        75          75           190
Other income                                            596       376         828           585
Other expenses                                        1,825     1,622       1,936         1,689
                                                     ------    ------      ------        ------
Income - Before income taxes                            143       228         440           244
Federal income taxes                                     52        81         155            (3)
                                                     ------    ------      ------        ------
Net income                                           $   91    $  147      $  285        $  247
                                                     ======    ======      ======        ======
Basic earnings per share                             $ 0.06    $ 0.09      $ 0.17        $ 0.15
Fully diluted earnings per share                     $ 0.06    $ 0.09      $ 0.17        $ 0.15
Weighted average number of shares outstanding         1,642     1,644       1,644         1,645
Weighted average number of shares outstanding,
   including dilutive stock options                   1,653     1,656       1,657         1,654
Cash dividends declared per common share             $0.125    $0.125      $0.125        $0.125
</TABLE>

<PAGE>

NOTE 19 - SUBSEQUENT EVENTS

         On February 6, 2004, the Company entered into an agreement to purchase
         two branches located in northern Michigan. The Company acquired
         approximately $17,000 in loans and assumed approximately $13,000,000.
         The purchase is subject to regulatory approval and is expected to be
         approved in the second quarter of 2004.

<PAGE>

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

DIRECTORS -

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

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

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

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

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

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS -

         Jerome W. Tracey was named Senior Vice President, Senior Lender of the
Company and the Bank in September 2001, after serving as Vice President of
Commercial Services since joining the Bank in November 1999. Prior to joining
the Bank, Mr. Tracey served as Vice President of Commercial Lending for National
City Bank, Alpena, Michigan, a position he held since 1996. Mr. Tracey has been
in the banking profession since 1981.

         Debra S. Weiss was named Senior Vice President, Retail Banking of the
Bank in August 2002, after serving as Vice President, Retail Services of the
Bank since September 2001, and serving as the Gaylord Branch Manager since
joining the Bank in May 2001. Prior to joining the Bank, Ms. Weiss served as
Secondary Market Officer and Compliance Officer for Alden State Bank, Alden,
Michigan. Ms. Weiss was employed as a Compliance Specialist Examiner for the
Office of Comptroller of the Currency from 1998 - 1999, and she held various
officer positions with First National Bank, Gaylord, Michigan from 1992 - 1998.

         Michael W. Mahler was named Chief Financial Officer, Treasurer of the
Company and the Bank in November 2002. In December 2003 Mr. Mahler was also
named Acting Corporate Secretary. Prior to this, Mr. Mahler was employed for two
years by the Besser Company, in Alpena, Michigan, which is an international
producer of concrete products equipment, where he served as their Corporate
Controller. He was previously employed for ten years by LTV Steel Company, where
he was a financial analyst in East Chicago, Indiana for seven years and for
three years he was the controller of a division in Northeastern Michigan.

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

<PAGE>

                             STOCKHOLDER INFORMATION

         The Annual Meeting of Stockholders will be held at 1:00 p.m., April 21,
2004 at the Thunder Bay Recreational Center, 701 Woodward Avenue, Alpena,
Michigan.

Stock Listing

         The Company's common stock is traded on the over-the-counter (O.T.C.)
bulletin board under the symbol ALPN.OB

<Table>
<Caption>
                       High/Low
<S>     <C>            <C>
2002    Quarter 1      $15.00/$12.10
2002    Quarter 2      $16.00/$13.20
2002    Quarter 3      $16.00/$14.00
2002    Quarter 4      $14.30/$12.70
2003    Quarter 1      $15.65/$14.00
2003    Quarter 2      $18.50/$14.80
2003    Quarter 3      $19.00/$16.50
2003    Quarter 4      $24.00/$18.95

</Table>

Price Range of Common Stock

         The following sets forth the quarterly high and low sales price per
share during each of the four quarters in, 2002 and 2003.

GENERAL COUNSEL                                   INDEPENDENT AUDITOR

Isackson & Wallace, P.C.                          Plante & Moran, PLLC
114 S. Second Avenue                              2601 Cambridge Ct. Suite 500
Alpena, MI 49707                                  Auburn Hills, Michigan 48326

SPECIAL COUNSEL                                   TRANSFER AGENT

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

ANNUAL REPORT ON FORM 10-KSB

         A COPY OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
2003 WILL BE FURNISHED WITHOUT CHARGE UPON WRITTEN REQUEST TO MICHAEL W. MAHLER,
CHIEF FINANCIAL OFFICER, ALPENA BANCSHARES, INC., 100 S. SECOND AVENUE, ALPENA,
MICHIGAN 49707.

HIGHLIGHTS OF 2003

The mortgage, accounting and deposit operations departments moved to the newly
renovated backroom center.

<PAGE>

The purchase of The InsuranCenter of Alpena was successfully completed in 2003.

A successful renovation of the Gaylord Branch integrated the building into the
town's Bavarian theme.

LOCATIONS:

ALPENA
100 South Second Avenue - Alpena, MI 49707
Telephone: (989) 356-9041 - Fax: (989) 354-8671

300 South Ripley Boulevard - Alpena, MI 49707
Telephone: (989) 354-3147 - Fax: (989) 354-5170

CHEBOYGAN
101 South Main Street - Cheboygan, MI 49721
Telephone: (231) 627-9951 - Fax: (231) 627-4727

GAYLORD
1000 South Wisconsin - Gaylord, MI 49735
Telephone: (989) 705-1582 - Fax: (989) 705-7378

LEWISTON
P.O. Box 673 - 4236 Salling Street - Lewiston, MI 49756
Telephone: (989) 786-9114 - Fax: (989) 786-9133

MIO
308 North Morenci - Mio, MI 48647
Telephone: (989) 826-3274 - Fax: (989) 826-6605

OSCODA
201 North State Street - Oscoda, MI 48750
Telephone: (989) 739-2061 - Fax: (989) 739-0760

OSSINEKE
11874 U.S. 23 South - Ossineke, MI 49766
Telephone: (989) 471-2183 - Fax: (989) 471-9119
www.first-federal.com