<PAGE>

                                                                      EXHIBIT 13

                FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      2006
                                  ANNUAL REPORT

                                 MARCH 31, 2007

<PAGE>

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

Dear Shareholders:

Fifty years ago a group of Alpena, Michigan businessmen had a vision. In 1957
they chartered our Bank as a federal thrift to meet the community needs for home
ownership loans and a safe place to build family savings. Our original founders
were men of integrity with a sense of community who took pride in unequaled
customer service in their own respective businesses. Therefore it is no surprise
that they excelled in setting up a bank with the same philosophy. First Federal
of Northern Michigan (the Bank) will spend 2007 celebrating its fiftieth
anniversary as a bank that is no longer a stand-alone thrift but is now a
federally chartered savings bank held by our holding company, First Federal of
Northern Michigan Bancorp, Inc. (the Company) and trades on the NASDAQ Global
Markets exchange under the symbol FFNM.

While we celebrate our heritage with the greatest of respect for those with the
courage to start our institution, this is no longer our "grandfather's bank".
Competitive pressure for home mortgages and deposits in our market areas have
necessitated the change in our business planning to include commercial loans and
the related commercial services. We will continue to rely on an increasing
percentage of our income being generated by our growth in the commercial
services area and in our non-banking subsidiary, the InsuranCenter of Alpena.

We did not meet our financial expectations in 2006. We are not pleased with our
performance and do not expect you, as a shareholder to be satisfied either. At
the Bank level our net interest margin fell from 3.30% to 3.24% year over year.
On a broad scale, the economy in the state of Michigan had its share of
challenges with the decline in the manufacturing base associated with the
automobile industry. More specifically, in the markets we serve in Northern
Michigan, we have seen the effect of the poor state economy which has led to
lower loan demand, higher delinquency trends and in many cases a decline in real
estate market values. Collectively, these factors caused the Bank to increase
its loan loss reserve by $663,000. The poor economy also resulted in a decline
in our mortgage production and the related fee income which finished the year
$210,000 below budget.

The economies of Michigan and our market area will not improve overnight. We
know there will be additional challenges in 2007 but we have made, and will
continue to make, adjustments to better position ourselves. We are aggressively
seeking lower cost deposits to improve our interest rate margin through
additional value added opportunities on the commercial services side of the
Bank. In addition, on the retail side we will be aggressively marketing to the
largest demographic group in our market area both with new Bank products,
including reverse mortgages, and insurance products, including long term care
insurance and non-insured investment products through our insurance subsidiary.
At the end of 2006, the Bank added a new secondary market purchaser of mortgages
to improve our competitiveness and ultimately help our profitability. We have
reduced the staff of our mortgage operation, closed a 30-year old branch office
in Ossineke (February 2007) and implemented a new bank software system that has
cut our monthly expenses while allowing us to grow.

Management and the Board have been actively exploring strategic opportunities to
deploy the capital raised in the stock conversion. In the meantime, the Company
initiated a 5% Stock Repurchase Program in May 2006 and on March 15, 2007 we
announced a second 5% Stock Repurchase Program. We fully understand the
importance of our need to improve our financial performance and will work
diligently on your behalf to do so in 2007.

Respectfully yours,


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

<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY

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

<TABLE>
<CAPTION>
                                               FOR YEARS ENDED DECEMBER 31,
                                   ----------------------------------------------------
                                     2006       2005       2004       2003       2002
                                   --------   --------   --------   --------   --------
                                                      (IN THOUSANDS)
<S>                                <C>        <C>        <C>        <C>        <C>
TOTAL ASSETS ...................   $280,959   $282,775   $262,800   $223,923   $228,808
LOANS RECEIVABLE, NET ..........    209,518    201,183    195,388    163,460    150,799
LOANS HELD FOR SALE ............         72         --      1,096        931        542
INVESTMENT SECURITIES ..........     44,850     55,187     42,033     34,670     46,944
CASH AND CASH EQUIVALENTS ......      4,993      4,780      4,739      6,706     15,099
DEPOSITS .......................    177,058    188,735    182,489    151,702    156,092
FHLB ADVANCES & NOTE PAYABLE ...     66,042     54,403     56,001     47,159     48,414
STOCKHOLDERS' EQUITY ...........     35,453     36,649     21,777     21,951     21,747
</TABLE>

OPERATING DATA:

<TABLE>
<CAPTION>
                                                   AT DECEMBER 31,
                                   -----------------------------------------------
                                     2006      2005      2004      2003      2002
                                   -------   -------   -------   -------   -------
                                                    (IN THOUSANDS)
<S>                                <C>       <C>       <C>       <C>       <C>
INTEREST INCOME ................   $17,170   $15,076   $13,278   $13,350   $14,499
INTEREST EXPENSE ...............     8,568     6,706     6,202     6,455     8,342
                                   -------   -------   -------   -------   -------
   NET INTEREST INCOME .........     8,602     8,370     7,076     6,895     6,157
PROVISION FOR LOAN LOSSES ......       851       368       323       267       415
                                   -------   -------   -------   -------   -------
   NET INTEREST INCOME AFTER
      PROVISION FOR LOAN
      LOSSES ...................     7,751     8,002     6,753     6,628     5,742
                                   -------   -------   -------   -------   -------
OTHER INCOME (LOSS):
SERVICE CHARGES AND FEES .......     1,044     1,030     1,012       801       818
MORTGAGE BANKING ACTIVITIES ....       344       482       579     1,563     1,401
NET GAIN (LOSS) ON SALE OF
   INVESTMENT SECURITIES .......       (45)       13       103       320        65
GAIN (LOSS) ON SALE OF REAL
   ESTATE ......................         4       (45)      (47)        7       (17)
LOSS ON ABANDONMENT OF FIXED
   ASSETS ......................        --        --        --        --         2
OTHER NON-INTEREST INCOME ......       103        37        97       255       116
INSURANCE & BROKERAGE
   COMMISSIONS .................     2,948     2,941     2,967     2,480        --
                                   -------   -------   -------   -------   -------
   TOTAL OTHER INCOME ..........     4,398     4,458     4,711     5,426     2,385
                                   -------   -------   -------   -------   -------
OTHER EXPENSES .................    11,528    11,815    10,856    10,327     7,072
                                   -------   -------   -------   -------   -------
   INCOME BEFORE INCOME TAX
      EXPENSE ..................       621       645       608     1,727     1,055
INCOME TAX EXPENSE .............       158       203       204       518       285
                                   -------   -------   -------   -------   -------
   NET INCOME ..................   $   463   $   442   $   404   $ 1,209   $   770
                                   =======   =======   =======   =======   =======
</TABLE>

KEY FINANCIAL RATIOS AND OTHER DATA:

<TABLE>
<CAPTION>
                                             FOR YEARS ENDED DECEMBER 31,
                                   -----------------------------------------------
                                     2006      2005      2004      2003      2002
                                   -------   -------   -------   -------   -------
                                                    (IN THOUSANDS)
<S>                                <C>       <C>       <C>       <C>       <C>
PERFORMANCE RATIOS:
RETURN ON AVERAGE ASSETS .......      0.16%     0.16%     0.17%     0.53%     0.33%
RETURN ON AVERAGE EQUITY .......      1.35%     1.49%     1.91%     5.52%     3.68%
AVERAGE INTEREST RATE SPREAD ...      2.83%     2.97%     2.88%     3.00%     2.50%
DIVIDEND PAYOUT RATIO ..........    133.33%   142.86%   153.85%    30.36%    47.01%
DIVIDENDS PER SHARE ............   $  0.20   $  0.20   $  0.20   $  0.27   $  0.27
NET INTEREST MARGIN ............      3.24%     3.30%     3.10%     3.26%     2.78%
EFFICIENCY RATIO ...............     89.37%    85.07%    96.38%    88.02%    87.54%
NON-INTEREST EXPENSE TO AVERAGE
   TOTAL ASSETS ................      4.04%     4.32%     4.39%     4.53%     3.01%
AVERAGE INTEREST-EARNING ASSETS
   TO AVERAGE INTEREST-BEARING
   LIABILITIES .................    112.99%   112.34%   108.08%   108.69%   107.42%
ASSET QUALITY RATIOS:
NON-PERFORMING ASSETS TO TOTAL
   ASSETS ......................      1.59%     1.57%     0.66%     1.04%     0.68%
NON-PERFORMING LOANS TO TOTAL
   LOANS .......................      1.90%     1.99%     0.87%     1.28%     0.94%
ALLOWANCE FOR LOAN LOSSES TO
   NONPERFORMING ASSETS ........     46.67%    35.33%    72.37%    48.89%    62.76%
ALLOWANCE FOR LOAN LOSSES TO
   TOTAL LOANS .................      0.98%     0.70%     0.61%     0.63%     0.61%
CAPITAL RATIOS:
EQUITY TO TOTAL ASSETS AT END OF
   PERIOD ......................     12.62%    12.96%     8.29%     9.80%     9.50%
AVERAGE EQUITY TO AVERAGE
   ASSETS ......................     12.07%    10.87%     8.82%     9.62%     8.90%
RISK-BASED CAPITAL RATIO (BANK
   ONLY) .......................     17.07%    16.82%    10.51%    11.96%    15.95%
OTHER DATA:
NUMBER OF FULL SERVICE
   OFFICES .....................        10*       10        10         8         9
</TABLE>

*    AS OF 12-31-06. IN FEBRUARY, 2007, THE BANK CLOSED A BRANCH TO REDUCE ITS
     FULL-SERVICE OFFICES TO 9.

<PAGE>

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

OVERVIEW

     First Federal of Northern Michigan is a full-service, community-oriented
savings bank whose primary lending activity is the origination of one- to
four-family residential real estate mortgages, commercial real estate loans,
commercial loans and consumer loans. As of December 31, 2006, $102.6 million, or
48.9%, of our total loan portfolio consisted of one- to four-family residential
real estate loans, $51.6 million, or 24.6%, and $ 28.2 million, or 13.5%, of our
total loan portfolio consisted of commercial mortgage loans and commercial
loans, respectively, and $29.6 million, or 14.1%, of our total loan portfolio
consisted of consumer and other loans. In recent years, commercial mortgage
loans and commercial loans have grown as a percentage of our loan portfolio for
three reasons. First, we have increased our emphasis on originating these loans,
which generally have higher interest rates compared to one- to four-family
residential real estate loans. In addition, most of these loans are originated
with adjustable interest rates, which assists us in managing interest rate risk.
Finally, most of our one- to four-family residential mortgage loan customers
prefer fixed-rate loans in the low interest rate environment that has prevailed
over the last several years. Since we sell into the secondary mortgage market a
majority of the fixed-rate one- to four-family residential mortgage loans that
we originate, one- to four-family residential real estate loans have decreased
as a percentage of our total loan portfolio.

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

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

BUSINESS STRATEGY

     OPERATING AS A COMMUNITY SAVINGS BANK. We are committed to meeting the
financial needs of the communities in which we operate. Our branch network of 9
offices enhances our ability to serve these communities. We provide a broad
range of individualized consumer and business financial services. We believe
that we can be more effective in servicing our customers than many of our
non-local competitors because our employees and senior management are able to
respond promptly to customer needs and inquiries. Our ability to provide these
services is enhanced by the experience of our senior management, which has an
average of 12 years' experience in the financial services industry.

     INCREASING OUR COMMERCIAL REAL ESTATE AND COMMERCIAL LENDING. Beginning in
2001, we began to increase our originations of commercial real estate and
commercial loans. At December 31, 2006, loans secured by commercial real estate
totaled $51.6 million, or 24.6% of our total loan portfolio, and commercial
loans totaled $28.2 million, or 13.5% of our total loan portfolio. We intend to
continue to emphasize the origination of these types of loans in the future and
retain them in our portfolio. Commercial real estate and commercial loans
generally are originated with higher interest rates compared to one- to
four-family residential real estate loans and, therefore, have a positive effect
on our net interest rate spread and net interest income. In addition, most of
these loans are originated with adjustable interest rates, which assists us in
managing interest rate risk. We believe that our branch network will enable us
to continue to increase our commercial and commercial real estate loan portfolio
without significant additional fixed costs.

<PAGE>

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

     INCREASING AND DIVERSIFYING OUR SOURCES OF NON-INTEREST INCOME. In June
2003, we acquired the InsuranCenter of Alpena ("ICA"), a licensed insurance
agency engaged in the business of property, casualty and health insurance, in an
effort to increase and diversify our sources of non-interest income. In 2006,
ICA's operations provided us with $2.9 million of income, representing 67% of
total non-interest income. In 2006, property commissions on insurance sales
represented approximately 20% of ICA's revenues, commissions on life insurance
sales represented approximately 7% of revenues and commissions on health
insurance sales represented approximately 73% of revenues. In November 2005, the
Company acquired several large group customers from another insurance agent for
approximately $564,000. The entire amount of the purchase was assigned to a
customer list intangible asset and is being amortized over five years. The
purchase included the issuance of a note payable in the amount of $338,000,
discussed in Note 9 of our financial statements, with the remainder being paid
in cash.

     MAINTAINING HIGH ASSET QUALITY AND CAPITAL STRENGTH. We are committed to
conservative loan underwriting standards and procedures, and we primarily
originate loans secured by real estate. As a result, we have consistently
experienced low levels of late payments and losses on loans. At December 31,
2006, our ratio of non-performing assets to total assets was 1.59%. At December
31, 2006, our ratio of equity to assets was 12.62%.

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

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2006 AND 2005

     Total assets decreased $1.8 million, or 0.6%, to $281.0 million at December
31, 2006 from $282.8 million at December 31, 2005. Net loans increased $8.3
million, or 4.1% to $209.5 million at December 31, 2006 from $201.2 million at
December 31, 2005. The increase in net loans was mainly the result of our
commercial lending activities. The commercial loan portfolio grew 12.4% to $79.8
million at December 31, 2006 from $71.0 million at December 31, 2005. The
continued growth of the commercial loan portfolio was the result of increased
emphasis on growing this portfolio, supported by the hiring of one additional
commercial lender in late 2006, as well as the hiring of a commercial credit
analyst in 2003. Mortgage lending originations declined in 2006 to total
originations of $33.4 million from $54.8 million in 2005, reflecting weaker
economic conditions in our primary market area. Cash and cash equivalents
increased slightly by $213,000, or 4.5%, to $5.0 million at December 31, 2006
from $4.8 million at December 31, 2005. Investment securities decreased $10.4
million, or 18.8%, to $44.8 million at December 31, 2006 from $55.2 million at
December 31, 2005 as we decreased our investment portfolio and paid down
high-cost FHLB advances.

     Deposits decreased $11.6 million, or 6.1%, to $177.1 million at December
31, 2006 from $188.7 million at December 31, 2005. This decrease reflected
substantial increased competition for deposits in our markets. Our focus in 2006
was on building deposit relationships rather than attracting higher-cost
non-core certificate of deposit money. Borrowings, consisting primarily of FHLB
advances, increased $11.6 million, or 21.4%, to $66.0 million at December

<PAGE>

31, 2006 from $54.4 million at December 31, 2005 as we funded loan growth
primarily with short-tem FHLB advances, with the expectation that market rates
would begin to drop in 2006.

     Stockholders' equity decreased $1.2 million, or 3.3% to $35.5 million at
December 31, 2006 from $36.7 million at December 31, 2005. The decrease was
mainly a result of our repurchase of 156,000 shares of our common stock at a net
cost of $1.6 million and dividends paid of $614,000. These decreases in equity
were offset by net income for the year of $463,000 and a recovery of $194,000 in
the value of available for sale (AFS) securities.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

     GENERAL. Net income increased to $463,000 for the twelve months ended
December 31, 2006 from $442,000 for the twelve months ended December 31, 2005.
Net interest income before provision for loan losses was $232,000 higher in 2006
than in 2005; however the provision for loan losses was $483,000 higher in 2006
than in 2005, resulting in net interest income after provision for loan losses
which was $251,000 lower in 2006 than in 2005. Non-interest expense was $287,000
lower in 2006 than in 2005.

     INTEREST INCOME. Interest income increased by $2.1 million, or 13.9%, to
$17.2 million for the twelve months ended December 31, 2006 from $15.1 million
for the twelve months ended December 31, 2005. The increase was primarily due to
the growth of $8.8 million and $3.6 million in our commercial and consumer loan
portfolios, respectively during the year ended December 31, 2006, which caused
an overall increase in the average yield on our loan portfolio to 7.08% for 2006
from 6.51% for 2005. The average balance of our loan portfolio increased by $8.0
million, or 3.9%, to $209.9 million for the twelve months ended December 31,
2006 from $202.0 million for the twelve months ended December 31, 2005. The
average balance of non-mortgage loans, principally commercial loans and consumer
loans, increased by $13.3 million, or 14.5%, to $105.2 million for the twelve
months ended December 31, 2006 from $91.9 million for the twelve months ended
December 31, 2005. The average yield on our commercial loans and consumer loans
increased 121 basis points and 50 basis points, respectively, for 2006 from
2005. The average balance of our one- to- four-family residential mortgage loans
decreased to $104.7 million for the twelve months ended December 31, 2006 from
$110.1 million for the twelve months ended December 31, 2005, while the average
yield on such loans increased to 6.18% from 6.13%.

     INTEREST EXPENSE. Interest expense increased to $8.6 million for the twelve
months ended December 31, 2006 from $6.7 million for the twelve months ended
December 31, 2005, due primarily to a $9.3 million increase in the average
balance of interest bearing liabilities. Higher interest rates paid on both our
deposits and FHLB advances in 2006 also contributed to the increase in interest
expense year over year. The average cost of deposits for the twelve months ended
December 31, 2006 increased to 3.13% from 2.47% for the same period in 2005. The
average cost of borrowings increased to 5.04% for 2006 from 4.61% for 2005. The
increases in the average cost of deposits and FHLB advances reflected higher
market interest rates.

     NET INTEREST INCOME. Net interest income increased to $8.6 million for the
twelve months ended December 31, 2006 from $8.4 million for the twelve months
ended December 31, 2005. The increase in net interest income was the result of
an increase in net average interest earning assets to $30.7 million from $28.0
million partially offset by a decrease in our average interest rate spread to
2.83% for 2006 from 2.98% for 2005.

     PROVISION FOR LOAN LOSSES. We recorded a provision for loan losses of
$851,000 for the twelve months ended December 31, 2006 compared to a provision
of $368,000 for the twelve months ended December 31, 2005. We had net
charge-offs of $208,000 and $249,500 during 2006 and 2005, respectively. These
increases reflected an increase in classified assets due to the current economic
conditions in the northern Michigan market, especially reflected in declining
real estate values. We used the same methodology and generally similar
assumptions in assessing the allowance for both periods. The allowance for loan
losses was $2.1 million, or 0.98% of total loans at December 31, 2006, compared
to $1.4 million, or 0.70% of total loans at December 31, 2005. The level of the
allowance is based on estimates, and ultimate losses may vary from the
estimates. Total non-performing loans were $4.0 million at both December 31,
2005 and December 31, 2006. Management believes the provision for loan loss is
adequate.

<PAGE>

     NON-INTEREST INCOME. Non-interest income decreased to $4.4 million for the
twelve months ended December 31, 2006 from $4.5 million for the twelve months
ended December 31, 2005. Income from mortgage banking activities decreased
$138,000 to $334,000 from $482,000 as loan refinancing activity continued to
slow due to the continued gradual increase in market interest rates in 2006. The
$138,000 decrease reflected a decrease of $134,000 in gain on the sale of
mortgages offset by a marginal increase of $4,000 in revenues associated with
mortgage servicing rights.

     NON-INTEREST EXPENSE. Non-interest expense decreased to $11.5 million for
the twelve months ended December 31, 2006 from $11.8 million for the twelve
months ended December 31, 2005. Non-interest expense for 2005 included a
one-time charitable contribution of $680,000 in cash and Company stock to the
First Federal Community Foundation which was established in connection with our
April 2005 stock offering. Amortization of intangible assets increased from
$331,000 for the twelve months ended December 31, 2005 to $500,000 for the same
period in 2006 due to the shortening of the amortization period, effective
January 1, 2006, of an exclusive agency contract related to the 2003 purchase of
our insurance subsidiary. Professional fees increased to $421,000 for the twelve
months ended December 31, 2006 from $233,000 for the twelve months ended
December 31, 2005 due to additional expenses in 2006 for commercial loan review,
internal audit services, Sarbanes-Oxley Section 404 information technology
controls documentation and temporary commercial credit administration services.

     INCOME TAXES. Federal income taxes decreased to $158,000 for the twelve
months ended December 31, 2006 from $203,000 for the twelve months ended
December 31, 2005. The effective tax rate was 25.4% and 33.6% for 2006 and 2005,
respectively. The decrease in the effective tax rate was mainly the result of a
higher level of tax-exempt interest in 2006 than in 2005.
<PAGE>

AVERAGE BALANCE SHEET

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

<TABLE>
<CAPTION>
                                                                               AVERAGE CONSOLIDATED STATEMENTS OF CONDITION
                                                                                       FOR YEARS ENDED DECEMBER 31,
                                                ACTUAL BALANCE AS     --------------------------------------------------------------
                                               OF DECEMBER 31, 2006                2006                             2005
                                               --------------------   ------------------------------   -----------------------------
                                                                                             AVERAGE                         AVERAGE
                                                           YIELD /     AVERAGE               YIELD /    AVERAGE              YIELD /
                                                 BALANCE     RATE      BALANCE   INTEREST     RATE      BALANCE   INTEREST     RATE
                                                --------   -------    --------   --------   --------   --------   --------   -------
                                                                              (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                            <C>         <C>        <C>        <C>        <C>        <C>        <C>        <C>
INTEREST-EARNING ASSETS:
MORTGAGE LOANS..............................                          $104,739    $ 6,473              $110,071   $  6,747
NON-MORTGAGE LOANS..........................                           105,186      8,388                91,903      6,403
                                                                      --------    -------              --------   --------
LOANS.......................................    $211,597     6.80%     209,925     14,861      7.08%    201,974     13,150     6.51%
MORTGAGE-BACKED SECURITIES (1)..............       5,021     3.36%       5,795        203      3.50%      7,386        248     3.36%
INVESTMENT SECURITIES.......................      39,829     4.15%      45,686      1,848      4.05%     39,873      1,450     3.64%
                                                --------              --------    -------              --------   --------
INVESTMENT SECURITIES.......................      44,850     4.06%      51,481      2,051      3.98%     47,259      1,698     3.59%
OTHER INVESTMENTS...........................       5,030     4.19%       5,339        258      4.83%      5,491        228     4.15%
                                                --------   ------     --------    -------    ------    --------   --------   ------
TOTAL INTEREST EARNING ASSETS...............     261,477     6.28%     266,745     17,170      6.44%    254,724     15,076     5.92%
                                                --------              --------    -------    ------    --------   --------   ------
NON INTEREST EARNING ASSETS.................      19,482                18,398                           18,482
                                                --------              --------                         --------
TOTAL ASSETS................................    $280,959              $285,143                         $273,206
                                                ========              ========                         ========
INTEREST BEARING LIABILITIES:
SAVINGS DEPOSITS............................    $ 18,958     1.12%    $ 21,130    $   177      0.84%   $ 27,982   $    177     0.63%
MONEY MARKET/NOW ACCOUNTS...................      34,432     1.35%      34,111        531      1.56%     33,421        288     0.86%
CERTIFICATES OF DEPOSIT.....................     113,601     4.50%     118,673      4,729      3.98%    113,989      3,873     3.40%
                                                --------   ------     --------    -------    ------    --------   --------   ------
   TOTAL INTEREST BEARING DEPOSITS..........     166,991     3.46%     173,914    $ 5,437      3.13%    175,392   $  4,338     2.47%
BORROWED FUNDS..............................      66,042     5.09%      62,171      3,131      5.04%     51,346      2,368     4.61%
                                                --------   ------     --------    -------    ------    --------   --------   ------
TOTAL INTEREST BEARING LIABILITIES..........     233,033     3.92%     236,085      8,568      3.61%    226,742      6,706     2.94%
NON INTEREST BEARING LIABILITIES............      12,473                14,638                           16,780
                                                --------              --------                         --------
   TOTAL LIABILITIES........................     245,506               250,723                          243,522
STOCKHOLDERS' EQUITY........................      35,453                34,420                           29,684
                                                --------              --------                         --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY....    $280,959              $285,143                         $273,206
                                                ========              ========                         ========
NET INTEREST INCOME.........................                                      $ 8,602                         $  8,370
                                                                                  =======                         ========
INTEREST RATE SPREAD........................                 2.36%                             2.83%                           2.98%
                                                           ======                            ======                          ======
NET INTEREST - EARNING ASSETS...............                          $ 30,660                         $ 27,982
                                                                      ========                         ========
NET INTEREST MARGIN (1).....................                 2.79%                             3.24%                           3.30%
                                                           ======                            ======                          ======
AVERAGE INTEREST-EARNING ASSETS
   TO AVERAGE INTEREST-BEARING LIABILITIES..               112.21%                           112.99%                         112.34%
                                                           ======                            ======                          ======

<CAPTION>



                                                            2004
                                               ------------------------------
                                                                      AVERAGE
                                                AVERAGE               YIELD /
                                                BALANCE   INTEREST     RATE
                                               --------   --------   --------
                                                       (IN THOUSANDS)
<S>                                            <C>        <C>        <C>
INTEREST-EARNING ASSETS:
MORTGAGE LOANS..............................   $106,338    $ 6,887
NON-MORTGAGE LOANS..........................     74,672      4,626
                                               --------    -------
LOANS.......................................   $181,010    $11,513      6.36%
MORTGAGE-BACKED SECURITIES (1)..............      6,986        166      2.38%
INVESTMENT SECURITIES.......................     35,480        918      2.59%
                                               --------    -------
INVESTMENT SECURITIES.......................   $ 42,458    $ 1,443      3.40%
OTHER INVESTMENTS...........................      6,436        322      5.00%
                                               --------    -------
TOTAL INTEREST EARNING ASSETS...............   $229,904     13,278      5.78%
                                               --------    -------    ------
NON INTEREST EARNING ASSETS.................     17,345
                                               --------
TOTAL ASSETS................................   $247,249
                                               ========
INTEREST BEARING LIABILITIES:
SAVINGS DEPOSITS............................   $ 27,615         66      0.24%
MONEY MARKET/NOW ACCOUNTS...................     30,777        256      0.83%
CERTIFICATES OF DEPOSIT.....................     99,857      3,294      3.30%
                                               --------    -------    ------
   TOTAL INTEREST BEARING DEPOSITS..........   $158,249    $ 3,616      2.29%
BORROWED FUNDS..............................     54,473      2,586      4.75%
                                               --------    -------    ------
TOTAL INTEREST BEARING LIABILITIES..........   $212,722    $ 6,202      2.90%
NON INTEREST BEARING LIABILITIES............     12,713
                                               --------
   TOTAL LIABILITIES........................   $225,435
STOCKHOLDERS' EQUITY........................     21,814
                                               --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY....   $247,249
                                               ========
NET INTEREST INCOME.........................               $ 7,076
                                                           =======
INTEREST RATE SPREAD........................                            2.88%
                                                                      ======
NET INTEREST - EARNING ASSETS...............   $ 17,182
                                               ========
NET INTEREST MARGIN (1).....................                            3.10%
                                                                      ======
AVERAGE INTEREST-EARNING ASSETS
   TO AVERAGE INTEREST-BEARING LIABILITIES..                          108.08%
                                                                      ======
</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,
                                                 2006 COMPARED TO
                                              YEAR ENDED DECEMBER 31,
                                             2005 INCREASE (DECREASE)
                                                      DUE TO:
                                             ------------------------
                                             VOLUME    RATE     TOTAL
                                             ------   ------   ------
                                                  (IN THOUSANDS)
<S>                                          <C>      <C>      <C>
INTEREST-EARNING ASSETS:
   LOANS RECEIVABLE ......................    $666    $1,045   $1,711
   INVESTMENT SECURITIES .................     169       182   $  351
   OTHER INVESTMENTS .....................      (6)       38   $   32
                                              ----    ------   ------
   TOTAL INTEREST-EARNING ASSETS .........     829     1,266    2,094
                                              ----    ------   ------
INTEREST-BEARING LIABILITIES:
SAVINGS DEPOSITS .........................      (8)      212      204
MONEY MARKET/NOW ACCOUNTS ................     (31)       69       38
CERTIFICATES OF DEPOSIT ..................     156       700      856
                                              ----    ------   ------
   DEPOSITS ..............................     117       981    1,098
   BORROWED FUNDS ........................     623       139      761
                                              ----    ------   ------
   TOTAL INTEREST-BEARING LIABILITIES ....     740     1,120    1,860
                                              ----    ------   ------
CHANGE IN NET INTEREST INCOME ............    $ 89    $  146   $  234
                                              ====    ======   ======
</TABLE>

MANAGEMENT OF INTEREST RATE RISK

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

     We actively evaluate interest rate risk in connection with our lending,
investing and deposit-taking activities. Generally, our loans, which represent
the significant majority of our assets, have longer-terms to maturity than our
deposits, which represent the significant majority of our liabilities. As of
December 31, 2006, $179.7 million, or 84.8% of our loan portfolio, consisted of
loans that mature or reprice after December 31, 2007. In contrast, as of
December 31, 2006, $89.4 million, or 78.7% of our time deposits as of that date,
consisted of deposits that mature or reprice in less than one year.

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

<PAGE>

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

     The table below sets forth, as of December 31, 2006, the estimated changes
in our NPV that would result from the designated instantaneous changes in the
U.S. Treasury yield curve. Computations of prospective effects of hypothetical
interest rate changes are based on numerous assumptions including relative
levels of market interest rates, loan prepayments and deposit decay, and should
not be relied upon as indicative of actual results.

<TABLE>
<CAPTION>
                                                                          NPV AS A PERCENTAGE
                                                                    OF PRESENT VALUE OF ASSETS (3)
                                               ESTIMATED INCREASE   ------------------------------
                                                (DECREASE) IN NPV                      INCREASE
CHANGE IN INTEREST RATES                       ------------------                     (DECREASE)
   (BASIS POINTS) (1)      ESTIMATED NPV (2)     AMOUNT   PERCENT   NPV RATIO (4)   (BASIS POINTS)
------------------------   -----------------    -------   -------   -------------   --------------
<S>                        <C>                 <C>        <C>       <C>             <C>
                             (DOLLARS IN THOUSANDS)
+300                            $31,420         ($8,140)    -21%        11.44%           (239)
+200                             34,671          (4,888)    -12%        12.44%           (139)
+100                             37,417          (2,142)     -5%        13.24%            (59)
 --                              39,559              --                 13.83%             --
-100                             40,373             813       2%        14.00%             17
-200                             40,904           1,344       3%        14.07%             24
</TABLE>

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

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

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

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

     The table set forth above indicates that at December 31, 2006, in the event
of an immediate 100 basis point decrease in interest rates, we would be expected
to experience a 2% increase in NPV and a 17 basis point increase in NPV ratio.
In the event of an immediate 200 basis point increase in interest rates, we
would be expected to experience a 12% decrease in NPV and a 139 basis point
decrease in NPV ratio.

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

LIQUIDITY AND CAPITAL RESOURCES

     The overall objective of our liquidity management is to ensure the
availability of sufficient cash funds to meet all financial commitments and to
take advantage of investment opportunities. We manage liquidity in order to meet
deposit
<PAGE>

withdrawals on demand or at contractual maturity, to repay borrowings as they
mature, and to fund new loans and investments as opportunities arise.

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

     Liquidity represents the amount of our assets that can be quickly and
easily converted into cash without significant loss. Our most liquid assets are
cash, short-term U.S. Government securities, U.S. Government agency or
government-sponsored enterprise securities and certificates of deposit. We are
required to maintain sufficient levels of liquidity as defined by the Office of
Thrift Supervision regulations. Current regulations require that we maintain
sufficient liquidity to ensure our safe and sound operation. Our current
objective is to maintain liquid assets equal to at least 20% of total deposits
and Federal Home Loan Bank borrowings due in one year or less. Liquidity as of
December 31, 2006 was $52.2 million, or 29.5% of total deposits and Federal Home
Loan Bank borrowings due in one year or less, compared to $77.8 million, or
39.3% of this amount at December 31, 2005. The levels of liquidity are dependent
on our operating, financing, lending and investing activities during any given
period. Our calculation of liquidity includes additional borrowing capacity
available with the Federal Home Loan Bank. As of December 31, 2006, we had
unused borrowing capacity of $24.7 million. We can pledge additional collateral
in the form of investment securities and certain loans to increase our borrowing
capacity.

     We currently retain in our portfolio all adjustable rate residential
mortgage loans, short-term balloon mortgage loans and fixed-rate residential
mortgage loans with maturities of less than 15 years, and generally sell the
remainder in the secondary mortgage market. We also originate for retention in
our loan portfolio, commercial and commercial real estate loans, including real
estate development loans. During the twelve months ended December 31, 2006, we
originated $33.4 million of one- to four-family residential mortgage loans, of
which $20.0 million were retained in our portfolio and the remainder were sold
into the secondary mortgage market or are being held for sale. This compares to
$54.8 million of one- to four-family originations during the twelve months ended
December 31, 2005, of which $33.1 million were retained in our portfolio. At
December 31, 2006, we had outstanding loan commitments of $27.8 million. These
commitments included $6.2 million for permanent one- to four-family residential
mortgage loans, $5.2 million for non-residential loans, $663,000 of undisbursed
loan proceeds for construction of one- to four-family residences, $8.3 million
of undisbursed lines of credit on home equity loans, $603,000 of unused credit
card lines, $6.4 million of unused commercial lines of credit, and $433,000 of
undisbursed commercial construction loans.

     Deposits are a primary source of funds for use in lending and for other
general business purposes. At December 31, 2006, deposits funded 63.0% of our
total assets compared to 66.8% at December 31, 2005. Certificates of deposit
scheduled to mature in less than one year at December 31, 2006 totaled $89.4
million. We believe that a significant portion of such deposits will remain with
us. We monitor the deposit rates offered by competitors in our market area, and
we set rates that take into account the prevailing market conditions along with
our liquidity position. Moreover, we currently believe that the growth in assets
is not expected to require significant in-flows of liquidity. As such, we do not
expect to be a market leader in rates paid for liabilities.

     Borrowings may be used to compensate for seasonal or other reductions in
normal sources of funds or for deposit outflows at more than projected levels.
Borrowings also may be used on a longer-term basis to support increased lending
or investment activities. At December 31, 2006, we had $64.9 million in Federal
Home Loan Bank advances. Total borrowings as a percentage of total assets were
23.5% at December 31, 2006 compared to 19.3% at December 31, 2005.

     As of December 31, 2006, management was not aware of any known trends,
events or uncertainties that have or are reasonably likely to have a material
impact on our liquidity. As of December 31, 2006, we had no material commitments
for capital expenditures.

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

<PAGE>

     First Federal of Northern Michigan is subject to federal regulations that
impose minimum capital requirements. At December 31, 2006, we exceeded all
applicable capital requirements.

CRITICAL ACCOUNTING POLICIES

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

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

     We have established a systematic method of periodically reviewing the
credit quality of the loan portfolio in order to establish an allowance for
losses on loans. The allowance for losses on loans is based on our current
judgments about the credit quality of individual loans and segments of the loan
portfolio. The allowance for losses on loans is established through a provision
for loan losses based on our evaluation of the losses inherent in the loan
portfolio, and considers all known internal and external factors that affect
loan collectibility as of the reporting date. Our evaluation, which includes a
review of all loans on which full collectibility may not be reasonably assured,
considers among other matters, the estimated net realizable value or the fair
value of the underlying collateral, economic conditions, historical loan loss
experience, our knowledge of inherent losses in the portfolio that are probable
and reasonably estimable and other factors that warrant recognition in providing
an appropriate loan loss allowance. Management believes this is a critical
accounting policy because this evaluation involves a high degree of complexity
and requires us to make subjective judgments that often require assumptions or
estimates about various matters. Historically, we believe our estimates and
assumptions have proven to be relatively accurate. For example, over the past
five years, our provision for loan losses as a percentage of average loans
outstanding has ranged from 0.16% to 0.37%, while our net charge-offs as a
percentage of average loans outstanding has ranged from 0.07% to 0.12%.
Nevertheless, because a small number of non-performing loans could result in net
charge-offs significantly in excess of the estimated losses inherent in our loan
portfolio, you should not place undue reliance on the accuracy of past
estimates.

     The analysis of the allowance for loan losses has two components: specific
and general allocations. Specific allocations are made for loans that are
determined to be impaired. Impairment is measured by determining the present
value of expected future cash flows or, for collateral-dependent loans, the fair
value of the collateral adjusted for market conditions and selling expenses. The
general allocation is determined by segregating the remaining loans by type of
loan, risk weighting (if applicable) and payment history. We also analyze
delinquency trends, which have remained stable, general economic conditions and
geographic and industry concentrations. This analysis establishes factors that
are applied to the loan groups to determine the amount of the general reserve.
The principal assumption used in deriving the allowance for loan losses is the
estimate of loss content for each risk rating. To illustrate, if recent loss
experience dictated that the projected loss ratios would be changed by 10% (of
the estimate) across all risk ratings, the allocated allowance as of December
31, 2006 would have changed by approximately $195,000. Actual loan losses may be
significantly more than the allowances we have established, which could have a
material negative effect on our financial results.

     MORTGAGE SERVICING RIGHTS. We sell to investors a portion of our originated
one- to four-family residential real estate mortgage loans. When we acquire
mortgage servicing rights through the origination of mortgage loans and sale of
those loans with servicing rights retained, we allocate a portion of the total
cost of the mortgage loans to the mortgage servicing rights based on their
relative fair value. As of December 31, 2006, we were servicing loans sold to
others totaling $137.7 million. We amortize capitalized mortgage servicing
rights as a reduction of servicing fee income in proportion to, and over the
period of, estimated net servicing income by use of a method that approximates
the level-yield method. We periodically evaluate capitalized mortgage servicing
rights for impairment using a model that takes into

<PAGE>

account several variables including expected prepayment speeds and prevailing
interest rates. If we identify impairment, we charge the amount of the
impairment to earnings by establishing a valuation allowance against the
capitalized mortgage servicing rights asset. The primary risk of material
changes to the value of the servicing rights resides in the potential volatility
in the economic assumptions used, particularly the prepayment speed. We monitor
this risk and adjust the valuation allowance as necessary to adequately record
any probable impairment in the portfolio. Management believes the estimation of
these variables makes this a critical accounting policy. For purposes of
measuring impairment, the mortgage servicing rights are stratified based on
financial asset type and interest rates. In addition, we obtain an independent
third-party valuation of the mortgage servicing portfolio on a quarterly basis.
In general, the value of mortgage servicing rights increases as interest rates
rise and decreases as interest rates fall. This is because the estimated life
and estimated income from a loan increase as interest rates rise and decrease as
interest rates fall. The key economic assumptions made in determining the fair
value of the mortgage servicing rights at December 31, 2006 included the
following:

<TABLE>
<S>                                            <C>
Annual constant prepayment speed (CPR):        12.55%
Weighted average life remaining (in months):     248
Discount rate used:                            8.50%
</TABLE>

     At the December 31, 2006 valuation, we calculated the value of our mortgage
servicing rights to be $1.3 million and the weighted average life remaining of
those rights was 43 months. The book value of our mortgage servicing rights as
of December 31, 2006 was $621,000 which was $666,000 less than the independent
valuation. Because the fair value exceeded the book value, there was no need to
establish a valuation allowance.

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

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

     In connection with our acquisition in 2003 of ICA, we allocated the excess
of the purchase price paid over the fair value of net assets acquired to
intangible assets, including goodwill. These intangible assets included the ICA
customer list and a third-party contract to which ICA is a party. From the date
of acquisition through April 30, 2005 we amortized the value assigned to the
customer and contract over a period of 20 years. On May 1, 2005 the former owner
of ICA retired. As a result, the amortization period for these intangible assets
was reduced to a 10-year period beginning May 1, 2005. Effective January 1, 2006
the exclusive third-party contract between ICA and Blue Cross Blue Shield of
Michigan was terminated. Prior to January 1, 2006 the ICA exclusive agent
contract with Blue Cross Blue Shield entitled ICA to an override commission of
1.9% on all health premiums written through local Chambers of Commerce in
Northeast Michigan. On any health insurance contracts in place as of December
31, 2005, ICA will continue to receive the 1.9% commission, however there will
be no new groups added to this program effective January 1, 2006. Management
considered the potential affect this could have on ICA health insurance
commissions in future years and made the decision to reduce the amortization
period of the third-party contract intangible asset to 5 years effective January
1, 2006.

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

     In connection with branch offices that were acquired over the last decade,
we assigned the excess of the purchase price over the fair value of the assets
acquired to core deposit intangible. The core deposit intangible is tested
periodically

<PAGE>

for impairment. Our original estimates related to the expected life of the
deposits have proven to be relatively accurate as evidenced by the fact that no
impairment has been recorded. If we determine through testing that a significant
portion of the acquired customers no longer do business with us, then the asset
would be deemed to be impaired thereby requiring a charge to earnings to the
extent appropriate given all of the known factors. We amortize core deposit
intangibles over a period of between 10 and 15 years.

OFF-BALANCE SHEET ARRANGEMENTS

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

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

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

     At December 31, 2006 and December 31, 2005, First Federal of Northern
Michigan had $12.5 million and $15.8 million, respectively, of commitments to
grant loans, $15.3 million and $20.8 million, respectively, of unfunded
commitments under lines of credit and $50,000 and $25,000, respectively, of
letters of credit. See Note 11 of the Notes to the Consolidated Financial
Statements.

SAFE HARBOR STATEMENT

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

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

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

IMPACT OF INFLATION AND CHANGING PRICES

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

<PAGE>

monetary in nature. As a result, changes in market interest rates have a greater
impact on performance than the effects of inflation.

SUBSEQUENT EVENTS

     On February 16, 2007, the Company closed its branch office in Ossineke,
Michigan. The closure is not expected to result in a significant decrease in
total deposits due to the close proximity of the closed branch to two of the
Company's other branches in Alpena, Michigan.

     On March 15, 2007 the Company announced that it intends to repurchase up to
5% of its outstanding common stock, or approximately 151,750 shares.

<PAGE>

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

DIRECTORS -

     James C. Rapin has been Chairman of the Board of Directors of the Company
and the Bank since March 2002. He has been a director of the Bank since 1985,
and a director of the Company since its formation in November 2000. Mr. Rapin
retired as a pharmacist with LeFave Pharmacy, Alpena, Michigan in 2004.

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

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

     Gary C. VanMassenhove is a partner in VanMassenhove, Kearly, Taphouse &
Faulman, CPAs. Mr. VanMassenhove has been a Certified Public Accountant for 35
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 30 years. Mr. Townsend has been a director of the
Company and the Bank since April 2002.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS-

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

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

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

<PAGE>

SENIOR MANAGEMENT TEAM OF THE BANK -

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

MANAGEMENT TEAM - INSURANCENTER OF ALPENA -

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

                             STOCKHOLDER INFORMATION

     The Annual Meeting of Stockholders will be held at 1:00 p.m., May 16, 2007
at the Thunder Bay National Marine Sanctuary, 145 Water Street, Alpena,
Michigan.

STOCK LISTING

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

PRICE RANGE OF COMMON STOCK

     The following sets forth the quarterly high and low sales price per share
during each of the four quarters in 2006 and 2005. Information for the quarter
ended March 31, 2005 does not reflect the 1.8477 for 1 share exchange that
occurred as of the close of business on April 1, 2005 upon consummation of our
second-step mutual to stock conversion and related stock offering.

<TABLE>
<CAPTION>
                       Market Price
                     ---------------
Quarter Ended         High      Low    Cash Dividends Declared
-------------        ------   ------   -----------------------
<S>                  <C>      <C>      <C>
December 31, 2006    $ 9.65   $ 9.08            $0.050
September 30, 2006   $10.02   $ 9.10            $0.050
June 30, 20006       $10.05   $ 9.40            $0.050
March 31, 2006       $ 9.69   $ 8.75            $0.050
December 31, 2005    $ 9.50   $ 8.70            $0.050
September 30, 2005   $ 9.59   $ 9.10            $0.050
June 30, 2005        $10.15   $ 8.30            $0.050
March 31, 2005       $27.00   $18.50            $0.100
</TABLE>

SPECIAL COUNSEL

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

INDEPENDENT AUDITOR

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

<PAGE>
TRANSFER AGENT

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

ANNUAL REPORT ON FORM 10-KSB

     A copy of the Company's Form 10-KSB for the year ended December 31, 2006
will be furnished without charge upon written request to: Amy E. Essex, Chief
Financial Officer, Treasurer and Corporate Secretary, First Federal of Northern
Michigan Bancorp, Inc. 100 S. Second Avenue, Alpena, Michigan 49707.
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

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


                                        1

<PAGE>

             Report of Independent Registered Public Accounting Firm

Board of Directors

First Federal of Northern Michigan Bancorp, Inc.

We have audited the consolidated statement of financial condition of First
Federal of Northern Michigan Bancorp, Inc. as of December 31, 2006 and 2005 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each year in the two-year period ended December 31, 2006.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Federal of Northern Michigan Bancorp, Inc. as of December 31, 2006 and 2005 and
the consolidated results of their operations and their cash flows for each year
in the two-year period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.

As described in Note 1, the Company adopted the provisions of SFAS 123(R) Share
Based Payments effective January 1, 2006.

/S/ Plante & Moran, PLLC
Auburn Hills, Michigan
March 29, 2007


                                        2

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                    December 31
                                                                -------------------
                                                                  2006       2005
                                                                --------   --------
<S>                                                             <C>        <C>
                            ASSETS
Cash and cash equivalents                                       $  4,160   $  4,498
Overnight deposits with Federal Home Loan Bank                       833        282
                                                                --------   --------
      Total cash and cash equivalents                              4,993      4,780
Securities available for sale (Note 2)                            43,100     53,412
Securities held to maturity (Note 2)                               1,750      1,775
Loans - Net (Note 3)                                             209,518    201,183
Loans held for sale                                                   72         --
Federal Home Loan Bank stock                                       4,197      4,765
Property and equipment (Note 4)                                    8,075      7,392
Accrued interest receivable                                        2,139      1,602
Intangible assets (Note 6)                                         2,589      3,089
Goodwill                                                           1,397      1,349
Other assets (Note 5)                                              3,129      2,641
                                                                --------   --------
      Total assets                                              $280,959   $282,775
                                                                ========   ========

             LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
   Non-interest bearing deposits                                $ 10,029   $ 10,878
   Interest bearing deposits (Note 7)                            167,029    177,857
   Advances from Federal Home Loan Bank (Note 8)                  64,850     52,925
   Note payable (Note 9)                                           1,192      1,478
   Accrued expenses and other liabilities                          2,406      2,988
                                                                --------   --------
      Total liabilities                                          245,506    246,126
STOCKHOLDERS' EQUITY (Note 12)
   Common stock ($0.01 par value 20,000,000 shares authorized
      3,190,999 and 3,115,510 shares issued, respectively)            32         31
   Additional paid-in capital                                     24,262     23,560
   Retained earnings                                              14,576     14,703
   Treasury stock at cost (156,000 shares)                        (1,565)        --
   Unallocated ESOP shares (Note 13)                              (1,059)    (1,187)
   Unearned compensation                                            (529)        --
   Accumulated other comprehensive loss                             (264)      (458)
                                                                --------   --------
      Total stockholders' equity                                  35,453     36,649
                                                                --------   --------
      Total liabilities and stockholders' equity                $280,959   $282,775
                                                                ========   ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                        3

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                December 31   December 31
                                                                    2006          2005
                                                                -----------   -----------
<S>                                                             <C>           <C>
INTEREST INCOME
   Loans, including fees                                          $14,861        $13,150
   Investments                                                      2,106          1,678
   Mortgage-backed securities                                         203            248
                                                                  -------        -------
      Total interest income                                        17,170         15,076
INTEREST EXPENSE
   Deposits (Note 8)                                                5,437          4,339
   Other borrowings                                                 3,131          2,367
                                                                  -------        -------
      Total interest expense                                        8,568          6,706
                                                                  -------        -------
NET INTEREST INCOME - Before provision for loan losses              8,602          8,370
PROVISION FOR LOAN LOSSES (NOTE 3)                                    851            368
                                                                  -------        -------
NET INTEREST INCOME - After provision for loan losses               7,751          8,002
OTHER INCOME (EXPENSES)
   Service charges and other fees                                   1,044          1,030
   Net gain on sale of loans                                          114            248
   Loan servicing fees                                                230            234
   Insurance and brokerage commissions                              2,948          2,941
   Other                                                               62              5
                                                                  -------        -------
      Total other income                                            4,398          4,458
OPERATING EXPENSES
   Compensation and employee benefits (Note 13)                     6,306          6,315
   Amortization of intangible assets                                  500            331
   Advertising                                                        271            197
   Occupancy and equipment                                          1,357          1,307
   Data processing service bureau                                     364            350
   Professional fees                                                  421            233
   Insurance and brokerage commission                               1,062          1,169
   Donation to First Federal Community Foundation                      --            680
   Other                                                            1,247          1,233
                                                                  -------        -------
      Total operating expenses                                     11,528         11,815
                                                                  -------        -------
INCOME - Before federal income tax                                    621            645
FEDERAL INCOME TAX (Note 10)                                          158            203
                                                                  -------        -------
NET INCOME                                                        $   463        $   442
                                                                  =======        =======
PER SHARE DATA
   Basic earnings per share                                       $  0.15        $  0.14
   Fully diluted earnings per share                                  0.15           0.14
   Dividends per common share                                        0.20           0.20
</TABLE>

See Notes to Consolidated Financial Statements.


                                        4
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.  AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                                       Additional                                           Other          Total
                                     Common  Treasury    Paid-in     Unearned    Retained  Unallocated  Comprehensive  Stockholders'
                             Shares   Stock    Stock     Capital   Compensation  Earnings  ESOP Shares  Income (Loss)      Equity
                             ------  ------  --------  ----------  ------------  --------  -----------  -------------  -------------
<S>                          <C>     <C>     <C>       <C>         <C>           <C>       <C>          <C>            <C>
BALANCE - January 1, 2005      1659  $1,659   $    --    $ 5,357       $  --      $14,788    $    --        $ (27)        $21,777
Comprehensive income:
   Net income                    --      --        --         --          --          442         --           --             442
   Other comprehensive
      income:
      Unrealized
         appreciation
         on available-for-
         sale securities -
         Net of tax of $217      --      --        --         --          --           --         --         (422)           (422)
      Less reclassification
         adjustment for
         realized gains
         included in net
         income - Net of
         tax of $4               --      --        --         --          --           --         --           (9)             (9)
                                                                                                                          -------
            Total
               comprehensive
               income                                                                                                          11
Merger of Alpena
   Bancshares, MHC             (920)   (920)       --      1,128          --           --         --           --             208
Exchange of Common Stock in
   reorganization               627    (726)       --        724          --           --         --           --              (2)
Proceeds of stock offering
   net of expenses            1,700      17        --     15,943          --           --         --           --          15,960
Stock donated to First
   Federal Community
   Foundation                    34       1        --        339          --           --         --           --             340
Stock options exercised          22      --        --        120          --           --         --           --             120
Tax benefit on stock
   options exercised             --      --        --         29          --           --         --           --              29
Retired stock                    (7)     --        --        (60)         --           --         --           --             (60)
Unallocated ESOP                 --      --        --         --          --           --     (1,387)          --          (1,387)
ESOP common stock committed
   to be released                --      --        --        (20)         --           13        200           --             193
Dividends declared               --      --        --         --          --         (540)        --           --            (540)
                              -----  ------   -------    -------       -----      -------    -------        -----         -------
BALANCE - December 31, 2005   3,115      31        --     23,560          --       14,703     (1,187)        (458)         36,649
Comprehensive income:
   Net income                    --      --        --         --          --          463         --           --             463
   Other comprehensive
      income:
      Unrealized
         appreciation
         on available-for-
         sale securities -
         Net of tax of $100      --      --        --         --          --           --         --          194             194
      Less reclassification
         adjustment for
         realized gains
         included in net
         income - Net of
         tax of $4               --      --        --         --          --           --         --           --              --
                                                                                                                          -------
            Total
               comprehensive
               income                                                                                                         657
Treasury stock at cost
   (156,000 shares)              --      --    (1,565)        --          --           --         --           --          (1,565)
Stock options exercised          18      --        --         99          --           --         --           --              99
Tax benefit on stock
   options exercised             --      --        --         15          --           --         --           --              15
Retired stock                    (6)     --        --        (60)         --           --         --           --             (60)
ESOP common stock committed
   to be released                --      --        --         (8)         --           24        128           --             144
MRP shares awarded               --       1        --        610        (610)          --         --           --               1
Stock options/MRP shares
   expensed                      64      --        --         46          81           --         --           --             127
Dividends declared               --      --        --         --          --         (614)        --           --            (614)
                              -----  ------   -------    -------       -----      -------    -------        -----         -------
BALANCE - December 31, 2006   3,191  $   32   $(1,565)   $24,262       $(529)     $14,576    $(1,059)       $(264)        $35,453
                              =====  ======   =======    =======       =====      =======    =======        =====         =======
</TABLE>

See Notes to Consolidated Financial Statements.


                                       5

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                Year Ended
                                                                               December 31
                                                                           -------------------
                                                                             2006       2005
                                                                           --------   --------
<S>                                                                        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                              $    463   $    442
   Adjustments to reconcile net income to cash from operating
      activities:
      Depreciation and amortization                                           1,044        852
      Provision for loan losses                                                 851        368
      Amortization and accretion on securities                                   88        156
      Gain on sale of investment securities                                      45        (13)
      ESOP contribution                                                         144        180
      Stock options/awards                                                      127         --
      Stock donation to charitable foundation                                    --        340
      Gain on sale of loans held for sale                                      (114)      (248)
      Originations of loans held for sale                                   (14,632)   (18,789)
      Proceeds from sale of loans held for sale                              14,674     20,133
      (Gain) loss on sale of real estate                                         (1)         3
      (Gain) loss on fixed assets                                                 7         --
      Change in accrued interest receivable                                    (537)      (567)
      Change in other assets                                                    301       (273)
      Change in accrued expenses and other liabilities                          (46)       893
      Change in deferred income taxes                                          (652)      (200)
                                                                           --------   --------
         Net cash provided by operating activities                            1,762      3,277
CASH FLOWS FROM INVESTING ACTIVITIES
   Net increase in loans                                                     (9,186)    (6,163)
   Proceeds from maturity of securities                                       4,534         --
   Proceeds from sale of securities available-for-sale                        7,940      7,562
   Purchase of securities available for sale                                 (1,976)   (21,511)
   Purchase of securities held to maturity                                       --         --
   Purchase of Federal Home Loan Bank stock                                      --        (99)
   Proceeds from sale of Federal Home Loan Bank stock                           568         --
   Purchase of insurance related businesses                                     (47)      (526)
   Purchase of premises and equipment                                        (1,235)    (1,119)
                                                                           --------   --------
         Net cash provided by (used for) investing activities                   598    (21,856)
CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase (decrease) in deposits                                      (11,677)     6,245
   Dividends paid on common stock                                              (614)      (540)
   Net increase (decrease) in advances from borrowers                            16        (17)
   Additions to advances from FHLB and Notes Payable                         22,425     10,925
   Repayments of advances from FHLB and Notes Payable                       (10,786)   (12,861)
   Net proceeds from stock offering                                              --     15,960
   Cash paid for fractional shares in stock offering                             --         (2)
   Purchase of shares for ESOP                                                   --     (1,387)
   Merger of Alpena Bancshares, M.H.C.                                           --        208
   Proceeds from exercise of stock options                                       99        120
   Shares retired                                                               (60)       (60)
   Purchase of treasury shares                                               (1,565)        --
   Tax benefit on stock options exercised                                        15         29
                                                                           --------   --------
         Net cash provided by (used for) financing activities                (2,147)    18,620
                                                                           --------   --------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                       213         41
CASH AND CASH EQUIVALENTS - Beginning of year                                 4,780      4,739
                                                                           --------   --------
CASH AND CASH EQUIVALENTS - End of year                                    $  4,993   $  4,780
                                                                           ========   ========
SUPPLEMENTAL CASH FLOW AND NONCASH INFORMATION
   Cash paid for income taxes                                              $    580   $    327
   Cash paid for interest on deposits and borrowings                          8,307      6,501
   Stock donated to charitable foundation                                        --        340
   Note issued in connection with purchase of insurance related business         --        338
</TABLE>

See Notes to Consolidated Financial Statements.


                                        6
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     NATURE OF OPERATIONS - First Federal of Northern Michigan Bancorp, Inc.
     (the "Company") and its subsidiary, First Federal of Northern Michigan (the
     "Bank"), conduct operations in the northeastern lower peninsula of
     Michigan. The Company's primary services include accepting deposits, making
     commercial, consume,r and mortgage loans, and engaging in mortgage banking
     activities.

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

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

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

     REORGANIZATION - Alpena Bancshares, Inc., the predecessor company to First
     Federal of Northern Michigan Bancorp, Inc. was formed on November 14, 2000
     pursuant to a plan of reorganization adopted by the Bank and its
     stockholders.


                                        7

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Prior to April 1, 2005 approximately 56 percent of the Company's capital
     stock was owned by Alpena Bancshares M.H.C., a mutual holding company. The
     remaining 44 percent of the Company's stock was owned by the general
     public, including the Bank's Employee Stock Ownership Plan.

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

     As a result of these transactions, Alpena Bancshares, M.H.C. ceased to
     exist and its remaining net assets of $207,000 were transferred into First
     Federal of Northern Michigan Bancorp, Inc., a Maryland company, the
     successor to Alpena Bancshares, Inc.

     CASH AND CASH EQUIVALENTS - For the purpose of the consolidated statements
     of cash flows, cash and cash equivalents include cash and balances due from
     depository institutions and federal funds sold and interest bearing
     deposits in other depository institutions which mature within ninety days
     when purchased.

     SECURITIES - Debt securities that management has the positive intent and
     ability to hold to maturity are classified as "held to maturity" and
     recorded at amortized cost. Securities not classified as held to maturity,
     including equity securities with readily determinable fair values, are
     classified as "available for sale" and recorded at fair value, with
     unrealized gains and losses excluded from earnings and reported in other
     comprehensive income net of applicable income taxes.

     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


                                        8

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     maturity and available for sale securities below their amortized cost that
     are deemed to be other-than-temporary are reflected in 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.

     FEDERAL HOME LOAN BANK STOCK - Federal Home Loan Bank (FHLB) Stock is
     considered a restricted investment security and is carried at cost.
     Purchases and sales of FHLB stock are made directly with the FHLB at par.

     MORTGAGE BANKING ACTIVITIES - The Company routinely sells to investors its
     originated long-term residential fixed-rate mortgage loans. Mortgage loans
     originated and intended for sale in the secondary market are carried at the
     lower of cost or estimated fair value in the aggregate. Net unrealized
     losses, if any, are recognized through a valuation allowance by charges to
     income.

     Mortgage loans held for sale are generally sold with the mortgage servicing
     rights retained by the Company. The carrying value of mortgage loans sold
     is reduced by the cost allocated to the associated mortgage servicing
     rights. Gains or losses on sales of mortgage loans are recognized based on
     the difference between the selling price and the carrying value of the
     related mortgage loans sold.

     The Company enters into commitments to originate loans whereby the interest
     rate on the loan is determined prior to funding, also known as rate lock
     commitments. Rate lock commitments on residential mortgage loans that are
     intended to be sold are considered to be derivatives. Fair value is based
     on fees currently charged to enter into similar agreements. The fair value
     of rate lock commitments was insignificant at December 31, 2006 and 2005.

     The Company uses forward contracts as part of its mortgage banking
     activities. Forward contracts provide for the delivery of financial
     instruments at a specified future date and at a specified price or yield.
     The fair value of forward contracts was insignificant at December 31, 2006
     and 2005.


                                        9

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

     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.

     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 relates to loans that are classified as either
     doubtful, substandard or special mention. For such loans that are also
     classified as impaired,


                                       10

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

     LOAN SERVICING - Servicing assets are recognized as separate assets when
     rights are acquired through the sale of originated residential mortgage
     loans. Capitalized servicing rights are reported in other assets and are
     amortized against noninterest income in proportion to, and over the period
     of, the estimated future net servicing income of the underlying loans.
     Servicing assets are evaluated for impairment based upon the fair value of
     the rights as compared to amortized cost. Impairment is determined by
     stratifying rights into tranches based on predominant


                                       11

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     characteristics, such as interest rate, loan type and investor type. Fair
     value is based on market prices for comparable mortgage servicing
     contracts, when available, or on a valuation model that calculates the
     present value of estimated future net servicing income using market based
     assumptions. Temporary 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. If it is later determined that
     all or a portion of the temporary impairment no longer exists, the
     valuation allowance is reduced through a recovery of income. An
     other-than-temporary impairment results in a permanent reduction to the
     carrying value of the servicing asset.

     Servicing income is recorded for fees earned for servicing loans. The fees
     are based on a contractual percentage of the outstanding principal, or a
     fixed amount per loan and are recorded as income when earned. The
     amortization of mortgage servicing rights is netted against loan servicing
     fee income.

     LOANS HELD FOR SALE - The Bank routinely sells to investors its long-term
     fixed rate residential mortgages. These loans are identified as held for
     sale and are accounted for at the lower of cost or market on an aggregate
     basis. The lower of cost or market allowance for loans held for sale was $0
     at December 31, 2006 and 2005.

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

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


                                       12

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Those costs include realtor commissions, legal and title transfer fees, and
     closing costs that must be incurred before legal title can be transferred.

     Quarterly, management uses recent sales of comparable property to determine
     estimated future cash flows. The estimated future cash flows are used as
     the "fair value". The fair value, less costs to sell, is compared to the
     net carrying amount. If the fair value less cost to sell exceeds the
     recorded amount, a loss is recognized. Losses recognized for the initial
     and subsequent write-down to fair value less cost to sell are recognized in
     the gain (loss) on the sale of real estate line in the statement of income.
     A gain is recognized for any subsequent increase in fair value less cost to
     sell, but not in excess of the cumulative loss previously recognized. A
     gain or loss not previously recognized that results from the sale of the
     property is recognized at the date of sale.

     PROPERTY AND EQUIPMENT - These assets are recorded at cost, less
     accumulated depreciation. The Bank uses the straight-line method of
     recording depreciation for financial reporting. The depreciable lives used
     by the company are: land improvements 7-10 years, buildings 7-40 years and
     equipment 3-10 years. Maintenance and repairs are charged to expense and
     improvements are capitalized.

     INTANGIBLE ASSETS - In connection with the purchase of certain branches,
     the excess of purchase price over fair value of net assets acquired has
     been allocated to core deposit intangible assets. The expected life for
     core deposit intangibles is based on the type of products acquired in an
     acquisition. The amortization periods range from 10 to 15 years and are
     based on the expected life of the products. The expected life was
     determined based on an analysis of the life of similar products within the
     Company and local competition in the markets where the branches were
     acquired. The core deposit intangibles are amortized on a straight line
     basis. The core deposit intangible is quarterly analyzed for impairment.

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


                                       13

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

     Using historical cash flows the customer list was assigned a value of
     $890,000 and the exclusive contract was valued at $597,000. Both assigned
     values were arrived at based on a discounted cash flow (DCF) analysis that
     assumed a 20 year life or 5% runoff of revenue each year. The analysis
     projected net income which was discounted back to present with a discount
     rate of 12%. The expected life was determined using historical runoff rates
     experienced by ICA before acquisition which were less than 5% per year.
     Effective May 1, 2005 the estimated life of the exclusive contract with
     BCBS was reduced to 10 years to reflect the retirement of one of the former
     owners of ICA.

     Effective January 1, 2006 the exclusive third-party contract with BCBS was
     terminated. Prior to January 1, 2006, the ICA exclusive agent contract with
     BCBS entitled ICA to an override commission of 1.9% on all health premiums
     written through local Chambers of Commerce in Northeast Michigan. On any
     health insurance contracts in place as of December 31, 2005, ICA will
     continue to receive the 1.9% commission; however, there will be no new
     groups added to this program effective January 1, 2006. Management
     considered the potential effect this could have on ICA health insurance
     commissions in future years and made the decision to reduce the
     amortization period of the third-party contract intangible asset to 5 years
     effective January 1, 2006.

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


                                       14

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     In December 2005, the Company purchased a customer list from an insurance
     agency for approximately $564,000. The entire amount of the purchase was
     assigned to a customer list intangible and is being amortized over five
     years. The purchase included the issuance of a note payable in the amount
     of $338,000 discussed in Note 9 and the remaining payment was made in cash.

     GOODWILL - Goodwill was created in both the 2003 ICA transaction and the
     2005 customer list purchase. Goodwill will not be amortized but tested
     annually for impairment. The $900,000 of payments made under the earn-out
     agreement in the ICA transaction were added to goodwill as was$48,000 in
     earn-out payments accrued in 2006 related to the 2005 customer list
     purchase.

     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.

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

     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. For letters of credit, a liability is
     recorded for the fair value of the obligation undertaken in issuing the
     guarantee.

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


                                       15

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     STOCK BASED COMPENSATION - Prior to January 1, 2006 the Company accounted
     for stock awards and options under the recognition and measurement
     principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,
     and related interpretations. The Company adopted the fair value recognition
     provisions of Statement of Financial Standards (SFAS) No. 123 (R),
     Share-Based Payment effective January 1, 2006 using the
     modified-prospective transition method. SFAS No. 123 (R) established a fair
     value method of accounting for stock options whereby compensation expense
     would be recognized based on the computed fair value of the options on the
     grant date. The Company recognizes compensation expense related to
     restricted stock awards over the period the services are performed. The
     Company granted 198,990 options in 2006. Implementation of SFAS No. 123 (R)
     resulted in additional compensation expense of $46,000 in 2006. The Company
     has provided below pro forma disclosures of net income and earnings per
     share for the years ended December 31, 2006 and 2005, as if the Company had
     applied the fair value based method to stock-based employee compensation
     (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                     December 31,
                                                    -------------
                                                     2006    2005
                                                    -----   -----
<S>                                                 <C>     <C>
As reported net income available to                 $ 463   $ 442
   common shareholders
Add: Stock-based compensation expense included
   in reported net income, net of tax                  30      --
Less: stock-based compensation expense
   determined under fair value method, net of tax     (30)     --
                                                    -----   -----
Pro forma net income                                $ 493   $ 442
                                                    =====   =====

As reported earnings per share                      $0.15   $0.14
Proforma earnings per share                         $0.15   $0.14
As reported earnings per diluted share              $0.15   $0.14
</TABLE>


                                       16

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes option-pricing model with the following weighted-average
     assumptions:

<TABLE>
<CAPTION>
                            Year Ended
                           December 31,
                               2006
                           ------------
<S>                        <C>
Expected Volatility              14%
Dividend yield                  2.2%
Expected term (in years)        8.0
Risk- free interest rate       5.08%
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                 December 31,
                                           -----------------------
                                              2006         2005
                                           ----------   ----------
<S>                                        <C>          <C>
Net income                                 $      463   $      442
                                           ==========   ==========
Average number of common shares
   outstanding                              3,081,525    3,094,960
Effect of dilutive options                        938       11,461
                                           ----------   ----------
Average number of common shares
   outstanding used to calculate diluted
   earnings per common share                3,082,463    3,106,421
                                           ==========   ==========
</TABLE>


                                       17

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     RECENT ACCOUNTING PRONOUNCEMENTS - In July 2006, the FASB issued FASB
     Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
     interpretation of FASB Statement No. 109 (FIN 48), which clarifies the
     accounting for uncertainty in tax positions. This Interpretation requires
     that the Company recognize in the financial statements, the impact of a tax
     position, if that position is more likely than not of being sustained on
     audit, based on the technical merits of the position. The provisions of FIN
     48 are effective as of the beginning of our 2007 fiscal year, with the
     cumulative effect of the change in accounting principle recorded as an
     adjustment to opening retained earnings. The Company is currently
     evaluating the impact of adopting FIN 48 on its financial statements.

     RECLASSIFICATIONS - Certain items in the 2006 financial statements have
     been reclassified to conform to the 2005 presentation format.


                                       18
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 2 - SECURITIES

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

<TABLE>
<CAPTION>
                                                            December 31, 2006
                                              ---------------------------------------------
                                                             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                             $36,271       $ --         $369      $35,902
   Municipal notes                               2,021         --           15        2,006
   Mortgage-backed securities                    5,205          3          187        5,021
   Other securities                                  3        168           --          171
                                               -------       ----         ----      -------
         Total                                 $43,500       $171         $571      $43,100
                                               =======       ====         ====      =======
SECURITIES HELD TO MATURITY
   Municipal notes                             $ 1,750       $ 38         $  5      $ 1,783
                                               =======       ====         ====      =======
</TABLE>

<TABLE>
<CAPTION>
                                                            December 31, 2005
                                              ---------------------------------------------
                                                             Gross        Gross
                                              Amortized   Unrealized   Unrealized    Market
                                                 Cost        Gains       Losses      Value
                                              ---------   ----------   ----------   -------
<S>                                           <C>         <C>          <C>          <C>
SECURITIES AVAILABLE FOR SALE
   U.S. Treasury securities and obligations
      of U.S. government corporations
      and agencies                             $43,825       $  2         $566       43,261
   Municipal notes                               3,820         --           82        3,738
   Mortgage-backed securities                    6,459          5          214        6,250
   Other securities                                  2        161           --          163
                                               -------       ----         ----      -------
         Total                                 $54,106       $168         $862      $53,412
                                               =======       ====         ====      =======
SECURITIES HELD TO MATURITY
   Municipal notes                             $ 1,775       $ 20         $  8      $ 1,787
                                               =======       ====         ====      =======
</TABLE>


                                       19

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 2 - SECURITIES (CONTINUED)

     The amortized cost and estimated market value of securities at December 31,
     2006, by contractual maturity, are shown below. Expected maturities will
     differ from contractual maturities because issuers may have the right to
     call or prepay obligations with or without call or prepayment penalties.
     Securities with no specified maturity date are separately stated:

<TABLE>
<CAPTION>
                                         December 31, 2006
                                        -------------------
                                        Amortized    Market
                                           Cost      Value
                                        ---------   -------
<S>                                     <C>         <C>
AVAILABLE FOR SALE:
Due in one year or less                  $13,835    $13,714
Due after one year through five years     24,457     24,194
                                         -------    -------
   Subtotal                               38,292     37,908
Equity securities                              3        171
Mortgage-backed securities                 5,205      5,021
                                         -------    -------
   Total                                 $43,500    $43,100
                                         =======    =======
HELD TO MATURITY
Due in one year or less                  $    25    $    25
Due after one year through five years        200        197
Due in five year through ten years           300        299
Due after ten years                        1,225      1,262
                                         -------    -------
   Total                                 $ 1,750    $ 1,783
                                         =======    =======
</TABLE>

     At December 31, 2006 and 2005, securities with a carrying value and fair
     value of $24,074,000 and $10,729,000, respectively, were pledged to secure
     certain deposit accounts and FHLB advances.

     Gross proceeds from the sale of available-for-sale securities for the years
     ended December 31, 2006 and 2005 were $7,940,000 and $7,562,000,
     respectively, resulting in gross gains of $0 and $13,000, respectively and
     gross losses of $45,000 and $0, respectively. The tax provision applicable
     to these net realized gains (losses) amounted to ($15,000) and $4,000,
     respectively.


                                       20

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 2 - SECURITIES (CONTINUED)

     The following is a summary of temporarily impaired investments that have
     been impaired for less than and more than twelve months as of December 31,
     2006 and 2005:

<TABLE>
<CAPTION>
                                                 December 31, 2006                            December 31, 2005
                                    ------------------------------------------   -------------------------------------------
                                                Gross                  Gross                  Gross                  Gross
                                             Unrealized             Unrealized             Unrealized             Unrealized
                                               Losses                 Losses                 Losses                 Losses
                                                less                  greater                 less                  greater
                                     Fair      than 12      Fair      than 12      Fair      than 12      Fair       than
                                     Value     months      Value       months     Value      months      Value     12 months
                                    ------   ----------   -------   ----------   -------   ----------   -------   ----------
<S>                                 <C>      <C>          <C>       <C>          <C>       <C>          <C>       <C>
U.S. Treasury securities and
   obligations of U.S. government
   corporations and agencies        $3,992       $ 8      $29,913       361      $22,713       240      $15,546      $326
   Municipal notes                  $   --       $--        2,451        20          767         8        3,737        82
   Mortgage-backed securities       $   --       $--        4,745       187        4,707        12        1,180       202
                                    ------       ---      -------       ---      -------       ---      -------      ----
      Total                         $3,992       $ 8      $37,109       568      $28,187       260      $20,463      $610
                                    ======       ===      =======       ===      =======       ===      =======      ====
</TABLE>

     Management does not believe any individual unrealized loss as of December
     31, 2006 represents an other-than-temporary impairment. These unrealized
     losses are primarily attributable to changes in interest rates. The
     unrealized losses were 5% or less of their respective amortized cost basis.
     The Company has both the intent and ability to hold the securities
     contained in the previous table for a time necessary to recover the
     amortized costs.


                                       21
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS

     Loans at December 31, 2006 and 2005 are summarized as follows:

<TABLE>
<CAPTION>
                                                          December 31
                                                      -------------------
                                                        2006       2005
                                                      --------   --------
<S>                                                   <C>        <C>
Real estate loans -One- to four-family residential    $102,609   $106,031
Commercial loans:
   Secured by real estate                               51,561     44,311
   Other                                                28,209     26,658
                                                      --------   --------
      Total commercial loans                            79,770     70,969
Consumer loans                                          29,556     25,907
                                                      --------   --------
      Total gross loans                                211,935    202,907
Less net deferred loan fees                                338        308
Less allowance for loan losses                           2,079      1,416
                                                      --------   --------
      Total loans - Net                               $209,518   $201,183
                                                      ========   ========
</TABLE>

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

<TABLE>
<CAPTION>
                                               December 31, 2006
                                   -----------------------------------------
                                               One Year    After
                                   Less Than    to Five     Five
                                    One Year     Years     Years      Total
                                   ---------   --------   -------   --------
<S>                                <C>         <C>        <C>       <C>
Loans at fixed interest rates       $17,375     $66,393   $50,727   $134,495
Loans at variable interest rates     14,822      13,980    48,638     77,440
                                    -------     -------   -------   --------
      Total                         $32,197     $80,373   $99,365   $211,935
                                    =======     =======   =======   ========
</TABLE>


                                       22

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS (CONTINUED)

     Certain directors and executive officers of the Company were loan customers
     during 2006 and 2005. 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, 2006 and 2005 is as follows:

<TABLE>
<CAPTION>
                                             December 31
                                          ----------------
                                           2006      2005
                                          ------   -------
<S>                                       <C>      <C>
Aggregate balance - Beginning of Period   $2,656   $ 2,068
New loans                                  1,009     2,036
Repayments                                  (805)   (1,448)
                                          ------   -------
Aggregate balance - End of Period         $2,860   $ 2,656
                                          ======   =======
</TABLE>

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

<TABLE>
<CAPTION>
                                Year Ended December 31
                                ----------------------
                                     2006     2005
                                    ------   ------
<S>                             <C>          <C>
Balance - Beginning of period       $1,416   $1,214
Provision for losses                   851      368
Charge-offs                           (208)    (249)
Recoveries                              20       83
                                    ------   ------
Balance - End of period             $2,079   $1,416
                                    ======   ======
</TABLE>


                                       23

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                December 31
                                                              ---------------
                                                               2006     2005
                                                              ------   ------
<S>                                                           <C>      <C>
Impaired loans without a
   valuation allowance                                        $   --   $  345
Impaired loans with a valuation
   allowance                                                   1,760      660
                                                              ------   ------
Total impaired loans                                          $1,760   $1,005
                                                              ======   ======
Valuation allowance related to
   impaired loans                                             $  277   $   43
Total non-accrual loans                                       $2,351   $1,353
Total loans past-due ninety days or more and still accruing   $1,629   $2,654
</TABLE>

<TABLE>
<CAPTION>
                                    Year Ended December 31
                                    ----------------------
                                          2006   2005
                                          ----   ----
<S>                                 <C>          <C>
Average investment in
   impaired loans                         $816   $798
                                          ====   ====
Interest income recognized
   on impaired loans                      $ --   $ --
                                          ====   ====
Interest income recognized on
   a cash basis on impaired loans         $ --   $ --
                                          ====   ====
</TABLE>


                                       24
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 4 - PROPERTY AND EQUIPMENT

     A SUMMARY OF PROPERTY AND EQUIPMENT IS AS FOLLOWS:

<TABLE>
<CAPTION>
                                     December 31
                                  -----------------
                                    2006      2005
                                  -------   -------
<S>                               <C>       <C>
Land                              $ 1,251   $ 1,251
Land improvements                     201       181
Buildings                           6,507     5,487
Equipment                           3,825     3,671
                                  -------   -------
   Total property and equipment    11,784    10,590
Less accumulated depreciation       3,709     3,198
                                  -------   -------
   Net property and equipment     $ 8,075   $ 7,392
                                  =======   =======
</TABLE>

     Depreciation expense was $544,000 and $521,000 for the periods ended
     December 31, 2006 and 2005, respectively.

NOTE 5 - 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 $137,700,000 and
     $139,132,000 at December 31, 2006 and 200, respectively.

     The balance of capitalized servicing rights, net of valuation allowance, is
     included in other assets at December 31, 2006 and 2005.

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

<TABLE>
<CAPTION>
                                         December 31,
                                         ------------
                                          2006   2005
                                         -----   ----
<S>                                      <C>     <C>
Annual constant prepayment speed (CPR)   12.55%  8.23%
Weighted average life (in months)          248    249
Discount rate                             8.50%  8.50%
</TABLE>

     We estimated the fair value of our mortgage servicing rights to be
     $1,287,000 and $1,668,000 and the weighted average life remaining of those
     rights was 43 months and 55 months at December 31, 2006 and 2005,
     respectively.


                                       25

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 5 - SERVICING (CONTINUED)

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

<TABLE>
<CAPTION>
                                                    December 31
                                                   -------------
                                                    2006    2005
                                                   -----   -----
<S>                                                <C>     <C>
Balance, beginning of period                       $ 751   $ 860
Originated mortgage servicing rights capitalized     123     178
Amortization of mortgage servicing rights           (253)   (287)
                                                   -----   -----
Balance - end of period                              621     751
Valuation allowances:
   Balance at beginning of year                       --      --
   Additions                                          --      --
   Reductions                                         --      --
   Write-downs                                        --      --
                                                   -----   -----
Balance, end of year (net of allowances)           $ 621   $ 751
                                                   =====   =====
</TABLE>

NOTE 6 - INTANGIBLE ASSETS

     Intangible assets of the Company are summarized as follows:

<TABLE>
<CAPTION>
                                          December 31, 2006
                               --------------------------------------
                                 Gross
                               Carrying    Accumulated   Net Carrying
                                Amount    Amortization      Amount
                               --------   ------------   ------------
<S>                            <C>        <C>            <C>
Amortized intangible assets:
   Customer list                $1,454       $  352         $1,102
   Customer contract               597          199            398
   Core deposit                  3,081        2,115            966
   Non-compete covenant            200           77            123
                                ------       ------         ------
   Total                        $5,332       $2,743         $2,589
                                ======       ======         ======
</TABLE>

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

     Amortization expense was $500,000 and $331,000 for the periods ended
     December 31, 2006 and 2005, respectively.


                                       26

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 6 - INTANGIBLE ASSETS (CONTINUED)

     Amortization periods for the major classes of intangible assets and in
     total are as follows as of December 31, 2006.

<TABLE>
<CAPTION>
                         Amortization
                            Period
Amortizable Intangible    (In years)
----------------------   ------------
<S>                      <C>
Customer list                 6.9
Customer contract             4.0
Core deposit                  7.4
Non-compete covenant          6.2
                              ---
                              7.9
                              ===
</TABLE>

     The expected amortization expense related to intangibles as of December 31,
     2006 is as follows:

<TABLE>
<CAPTION>
                            Annual
Year Ended December 31   Amortization
----------------------   -----------
<S>                      <C>
   2007                      $493
   2008                       490
   2009                       490
   2010                       481
   2011                       278
2012 and thereafter           357
</TABLE>

NOTE 7 - DEPOSITS

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

<TABLE>
<CAPTION>
                                       December 31
                                   -------------------
                                     2006       2005
                                   --------   --------
<S>                                <C>        <C>
   Account Type
NOW accounts and MMDA              $ 27,976   $ 28,164
Regular savings accounts             25,452     27,103
                                   --------   --------
   Total                             53,428     55,267

   Certificate of Deposit Rates
0.50 percent to 1.99 percent            757      7,443
2.00 percent to 2.99 percent          4,487     20,199
3.00 percent to 3.99 percent         25,847     59,350
4.00 percent to 4.99 percent         52,502     25,470
5.00 percent to 6.99 percent         28,503      8,667
7.00 percent to 8.99 percent          1,505      1,461
                                   --------   --------
   Total certificate of deposits    113,601    122,590
                                   --------   --------
   Total deposits                  $167,029   $177,857
                                   ========   ========
</TABLE>


                                       27

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 7 - DEPOSITS (CONTINUED)

     Certificates of deposit $100,000 or greater at December 31, 2006 and 2005
     were $27,814,000 and $30,166,000, respectively. The amounts in excess of
     $100,000 are not federally insured.

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

<TABLE>
<CAPTION>
                                         December 31, 2006
                                             Amount Due
                  ---------------------------------------------------------------
                  Less than     1-2       2-3      3-5    Greater than
      Rate          1 Year     Years     Years    Years      5 Years       Total
      ----        ---------   -------   ------   ------   ------------   --------
<S>               <C>         <C>       <C>      <C>      <C>            <C>
0.50 percent to
   1.99 percent    $   746    $    --   $   11   $   --     $   --       $    757
2.00 percent to
   2.99 percent      3,252        520      311      289        115          4,487
3.00 percent to
   3.99 percent     16,579      6,812    2,251       33        172         25,847
4.00 percent to
   4.99 percent     45,191      4,482      193    1,060      1,576         52,502
5.00 percent to
   6.99 percent     23,437        882    1,638    1,990        556         28,503
7.00 percent to
   8.99 percent        157         --       --    1,348         --          1,505
                   -------    -------   ------   ------     ------       --------
   Total           $89,362    $12,696   $4,404   $4,720     $2,419       $113,601
                   =======    =======   ======   ======     ======       ========
</TABLE>

     Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>
                          Year Ended December 31
                          ----------------------
                               2006     2005
                              ------   ------
<S>                       <C>          <C>
NOW and MMDAs                 $  326   $  288
Regular savings                  382      177
Certificates of deposit        4,729    3,874
                              ------   ------
   Total                      $5,437   $4,339
                              ======   ======
</TABLE>

     Deposits from related parties held by the Bank at December 31, 2006 and
     2005 amounted to $463,000 and $462,000, respectively.


                                       28
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

     Advances outstanding from the Federal Home Loan Bank (FHLB) bear interest
     that is payable monthly. Pursuant to blanket collateral agreements with the
     FHLB, advances are collateralized by one- to four-family whole mortgage
     loans, government agency securities, and highly rated private
     mortgage-backed securities. The FHLB requires eligible collateral to have a
     market value equal to 145 percent of advances. The carrying value of loans
     and securities pledged to secure these advances was approximately
     $104,684,000 and $81,468,000 at December 31, 2006 and 2005, respectively.

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

<TABLE>
<CAPTION>
                December 31, 2006
               ------------------
                         Weighted
                          Average
Years Ending             Interest
 December 31    Amount     Rate
------------   -------   --------
<S>            <C>       <C>
    2007       $25,350     5.16
    2008        20,500     4.70
    2009         1,000     3.40
    2010        18,000     5.49
               -------     ----
Total          $64,850     5.08
               =======     ====
</TABLE>


                                       29

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 9 - NOTE PAYABLE

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

<TABLE>
<CAPTION>
Years Ending
 December 31   Amount
------------   ------
<S>            <C>
    2007       $  124
    2008          130
    2009          138
    2010          146
    2011          153
 Thereafter       332
               ------
Total          $1,023
               ======

</TABLE>

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

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

NOTE 10 - FEDERAL INCOME TAX

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

<TABLE>
<CAPTION>
                      Year Ended
                     December 31
                    -------------
                     2006    2005
                    -----   -----
<S>                 <C>     <C>
Current provision   $ 810   $ 403
Deferred benefit     (652)   (200)
                    -----   -----
   Total            $ 158   $ 203
                    =====   =====
</TABLE>


                                       30

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 10 - FEDERAL INCOME TAX (CONTINUED)

     A reconciliation of the federal income tax expense and the amount computed
     by applying the statutory federal income tax rate (34 percent) to income
     before federal income tax is as follows:

<TABLE>
<CAPTION>
                          Year Ended
                         December 31
                        -------------
                         2006    2005
                        -----   -----
<S>                     <C>     <C>
Tax at statutory rate   $ 211   $ 219
Nontaxable dividend        --      (1)
Tax-exempt interest       (59)    (36)
Other                       7      21
                        -----   -----
   Federal income tax   $ 158   $ 203
                        -----   -----
Effective Tax Rate       25.4%   33.6%
                        =====   =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                         December 31
                                                       ---------------
                                                        2006     2005
                                                       ------   ------
<S>                                                    <C>      <C>
Deferred tax assets:
   Allowance for loan losses                           $  645   $  444
   Valuation allowance for real estate held for sale       34       34
   Unrealized loss on available-for-sale securities       136      236
   Other                                                  431        3
   Contributions carryover                                125      180
   Directors' benefit plan                                349      335
                                                       ------   ------
      Total deferred tax assets                         1,720    1,232
Valuation allowance for deferred tax assets                --       --
Deferred tax liabilities:
   Mortgage servicing rights                              211      255
   Partnership losses                                      94       84
   Depreciation                                           541      540
   Other                                                  268      299
                                                       ------   ------
      Total deferred tax liabilities                    1,114    1,178
                                                       ------   ------
      Net deferred tax asset                           $  606   $   54
                                                       ======   ======
</TABLE>

     The contribution carryforward relates to $368,000 in contributions that
     were not deductible in 2006. This carryforward expires in 2010.

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


                                       31

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 10 - FEDERAL INCOME TAX (CONTINUED)

     A deferred tax liability has not been recognized for the tax bad debt base
     year reserves of the Bank. The base year reserves are the balance of
     reserves as of December 31, 1987. At December 31, 2006 and 2005, the amount
     of those reserves was approximately $60,000. The amount of the unrecognized
     deferred tax liability at December 31, 2006 and 2005 was approximately
     $20,000.

NOTE 11 - OFF BALANCE SHEET RISK COMMITMENTS AND CONTINGENCIES

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

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

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

<TABLE>
<CAPTION>
                                                December 31
                                             -----------------
                                               2006      2005
                                             -------   -------
<S>                                          <C>       <C>
Commitments to grant loans                   $12,477   $15,772
Unfunded commitments under lines of credit    15,285    20,843
Commercial and standby letters of credit          50        25
</TABLE>

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


                                       32
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 11 - OFF BALANCE SHEET RISK COMMITMENTS AND CONTINGENCIES (CONTINUED)

     Unfunded commitments under commercial lines of credit, revolving credit
     lines, and overdraft protection agreements are commitments for possible
     future extensions of credit to existing customers. These lines of credit
     are collateralized and usually do not contain a specified maturity date 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. Under FIN 45, Guarantor's Accounting and
     Disclosure Requirements for Guarantees, fees earned on commercial and
     standby letters of credit are required to be deferred over the contractual
     life of the letter of credit. The Company determined that the fair value of
     guarantees on standby letters of credit has an immaterial effect on the
     financial results at December 31, 2006 and 2005.

     To reduce credit risk related to the use of credit-related financial
     instruments, the Company generally holds collateral supporting those
     commitments 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, equipment, and real estate.

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

     LEGAL CONTINGENCIES - At December 31, 2006, there were no material pending
     legal proceedings to which the Company is a party or to which any of its
     property was subject, except for proceedings which arise in the ordinary
     course of business. In the opinion of management, pending legal proceedings
     will not have a material effect on the consolidated financial position or
     results of operation of the Company.


                                       33

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 12- STOCKHOLDERS' EQUITY

     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.

     For the quarter ended March 31, 2005, the Bank filed a notice with the
     Office of Thrift Supervision (OTS) and the Federal Deposit Insurance
     Company (FDIC) requesting approval to waive payment of cash dividends to
     Alpena Bancshares M.H.C. (the "M.H.C.") (majority stockholder of the
     Company). The OTS and FDIC did not object to the dividend waiver request.

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

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

     During the most recent regulatory examination, the OTS categorized the Bank
     as "well-capitalized" per definition of 12 CFR Section 565.4(b)(1). To be
     categorized as well-capitalized, the Bank must maintain minimum total
     risk-based, tier 1 risk based, and tangible equity ratios as set forth in
     the table below. There are no conditions or events since that notification
     that management believes have changed the Bank's categorization.
     Consolidated data has not been disclosed as the amounts and ratios are not
     significantly different.


                                       34

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 12 - STOCKHOLDERS' EQUITY (CONTINUED)

<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, 2006:
   Total capital (to risk-
      weighted assets)        $32,705   17.10%   $15,302   8.00%       $19,127   10.00%
   Tier 1 capital (to risk-
      weighted assets)        $30,550   15.97%   $ 7,651   4.00%       $11,476    6.00%
   Tangible capital (to
      tangible assets)        $30,550   11.03%   $ 4,156   1.50%       $ 5,541    2.00%

December 31, 2005:
   Total capital (to risk-
      weighted assets)        $33,669   18.03%   $14,937   8.00%       $18,671   10.00%
   Tier 1 capital (to risk-
      weighted assets)        $32,181   17.24%   $ 7,468   4.00%       $11,202    6.00%
   Tangible capital (to
      tangible assets)        $32,181   11.56%   $ 4,175   1.50%       $ 5,567    2.00%
</TABLE>

<TABLE>
<CAPTION>
                                                December 31
                                             -----------------
                                               2006      2005
                                             -------   -------
<S>                                          <C>       <C>
GAAP Capital                                 $34,615   $36,649
Reconciling items:
Less: Investment in and advances to
   nonincludable subsidaries                    (343)     (487)
Less: Goodwill and other intangible assets    (3,986)   (4,439)
Unrealized (gain) loss on securities
   available for sale                            264       458
Disallowed mortgage servicing rights              --        --
                                             -------   -------
   Tangible and core capital                  30,550    32,181
Allowable unrealized (gain) loss on
   securities available for sale                  76        72
General valuation allowance                    2,079     1,416
                                             -------   -------
   Risk Based Capital                        $32,705   $33,669
                                             =======   =======
</TABLE>


                                       35

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 13 - EMPLOYEE BENEFIT PLANS

     DEFINED BENEFIT PENSION PLAN

     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. Effective July 1, 2005 the plan was frozen
     as to current participants and any new employees hired after July 1, 2004
     were excluded from the plan. The expense of the Plan allocated to the Bank
     for the years ended December 31, 2006 and 2005 was $117,000 and $252,000,
     respectively.

     401(K) SAVINGS PLAN

     The Bank has a Section 401(k) savings plan covering substantially all of
     its employees who meet certain age and service requirements. The Company
     matches a certain percentage of participant deferrals. Additional
     contributions may be made as approved by the Board of Directors. For the
     calendar years ended December 31, 2006 and 2005 the Bank's Board of
     Directors approved a discretionary profit sharing payment under this plan
     of 4% of each eligible employee's wages for the periods from January 1,
     2006 through December 31, 2006 and from July 1, 2005 through December 31,
     2005, respectively. The expense under the plan for the years ended December
     31, 2006 and 2005 was $239,000 and $136,000, respectively.

     NONQUALIFIED DEFERRED COMPENSATION PLAN

     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


                                       36

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)

     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 $775,000 and $719,000 at December 31, 2006 and 2005,
     respectively. The expense under the plan for the years ended December 31,
     2006 and 2005 was $100,000 and $102,000, respectively.

     EMPLOYEE STOCK OWNERSHIP PLAN

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

     Pursuant to the 2005 second-step conversion and stock offering, the
     shareholders of the Company approved the purchase of 8% of shares sold in
     the stock offering by the ESOP. The Company provided a loan to the ESOP,
     which was used to purchase 138,709 shares of the Company's common stock in
     the stock offering at $10 per share. The loan bears interest at a rate
     equal to the current prime rate, adjustable on January 1 of each year and
     provides for repayment of principal over the 15 year term of the loan.
     Since the Company is providing the loan to the ESOP, the note receivable is
     not included in the Company's balance sheet. Accordingly, the Company did
     not recognize interest income on the loan. In both 2006 and 2005, however,
     the Board of Directors of the Company authorized prepayments of principal
     on the ESOP loan. The scheduled maturities of the loan are as follows:


                                       37
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)

<TABLE>
<CAPTION>
Year Ended December 31   Principal Amount
----------------------   ----------------
<S>                      <C>
2007                          $   71
2008                              76
2009                              82
2010                              87
2011                              93
Thereafter                       672
                              ------
Total                         $1,081
                              ======
</TABLE>

     The Company makes annual contributions to the ESOP sufficient to support
     the debt service of the loan. The loan is secured by the shares purchased,
     which are held in a suspense account for allocation among the
     participations as the loan is paid. Dividends paid on unallocated shares
     are not considered dividends for financial reporting purposes and are used
     to pay principal and interest on the ESOP loan. Dividends on allocated
     shares are charged to retained earnings. Compensation expense is recognized
     for the ESOP equal to the average fair value of shares committed to be
     released for allocation to participant accounts. Any difference between the
     average fair value of shares committed to be released for allocation and
     the ESOP's original acquisition cost is charged or credited to
     stockholders' equity (additional paid-in capital). Total compensation
     expense for the years ended December 31, 2006 and 2005 was $120,000 and
     $180,000, respectively.

     Shares held by the ESOP include the following:

<TABLE>
<CAPTION>
                 December 31
              -----------------
                2006      2005
              -------   -------
<S>           <C>       <C>
Allocated      67,230    60,589
Unallocated   107,010   120,094
              -------   -------
Total         174,240   180,683
</TABLE>

     There were 6,443 and 166 shares distributed to ESOP participants in 2006
     and 2005, respectively.

     The cost of unallocated ESOP shares (shares not yet released for
     allocation) is reflected as a reduction of stockholders' equity. The fair
     value of the unallocated shares was approximately $974,000 at December 31,
     2006.


                                       38

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)

     STOCK BASED COMPENSATION PLANS

     Effective January 1, 2006, the Company adopted Statement of Financial
     Accounting Standard (SFAS) No. 123 (Revised) "Shareholder Based Payments",
     which requires that the grant-date fair value of awarded stock options be
     expensed over the requisite service period. The Company's 1996 Stock Option
     Plan (the "1996 Plan"), which was approved by shareholders, permits the
     grant of share options to its employees for up to 127,491 shares of common
     stock (retroactively adjusted for the exchange ratio applied in the
     Company's 2005 stock offering and related second-step conversion). The
     Company's 2006 Stock-Based Incentive Plan (the "2006 Plan"), which was
     approved by the shareholders on May 17, 2006, permits the award of up to
     242,740 shares of common stock of which the maximum number to be granted as
     Stock Options is 173,386 and the maximum that can be granted as Restricted
     Stock Awards is 69,354. Option awards are granted with an exercise price
     equal to the market price of the Company's stock at the date of grant;
     those option awards generally vest based on five years of continual service
     and have ten year contractual terms. Certain options provide for
     accelerated vesting if there is a change in control (as defined in the
     Plans). Shares issued under the Plan and exercised pursuant to the exercise
     of the stock option plan may be either authorized but unissued shares or
     reacquired shares held by the Company as treasury stock.

     STOCK OPTIONS - A summary of option activity under the Plan during the
     years ended December 31, 2006 and 2005 is presented below:


                                       39

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)

<TABLE>
<CAPTION>
                                             Weighted-   Weighted-Average
                                              Average        Remaining
                                              Exercise   Contractual Term       Aggregate
             Options                Shares     Price         (Years)        Intrinsic Value
             -------               -------   ---------   ----------------   ---------------
<S>                                <C>       <C>         <C>                <C>
OUTSTANDING AT JANUARY 1, 2005      48,800     $5.69                            $415,622
Granted in 2005                         --        --
Exercised in 2005                  (22,310)    $5.41
Forfeited or Expired in 2005        (1,848)    $7.44
                                   -------     -----
OUTSTANDING AT DECEMBER 31, 2005    24,642     $5.80           1.22             $ 72,694
Granted in 2006                    198,990     $9.56
Exercised in 2006                  (18,560)    $5.41
Forfeited or expired in 2006          (540)    $5.41
                                   -------     -----
OUSTANDING AT DECEMBER 31, 2006    204,532     $9.50           9.49             $      0
                                   =======     =====
</TABLE>

     A summary of the status of the Company's nonvested shares as of December
     31, 2006 and 2005 and changes during the years then ended is presented
     below:

<TABLE>
<CAPTION>
                                            Weighted-Average
                                               Grant-Date
        Nonvested Shares           Shares      Fair Value
        ----------------          -------   ----------------
<S>                               <C>       <C>
Nonvested at January 1, 2005        4,435         $1.73
Granted                                --            --
Vested                             (1,109)        $1.73
Forfeited                          (1,108)        $1.73
                                  -------         -----
Nonvested at December 31, 2005      2,218         $1.73
Granted                           198,990         $2.11
Vested                             (1,109)        $1.73
Forfeited                             --             --
                                  -------         -----
Nonvested at December 31, 2006    200,099         $2.11
                                  =======         =====
</TABLE>


                                       40

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)

     As of December 31, 2006 there was $307,000 of total unrecognized
     compensation cost, net of expected forfeitures, related to nonvested
     options under the Plan. That cost is expected to be recognized over a
     weighted-average period of 4.7 years. The total fair value of shares vested
     during the year ended December 31, 2006 was $1,900.

     RESTRICTED STOCK AWARDS - During the year ended December 31, 2006 the
     Company awarded 63,250 shares under the 2006 Stock Based Incentive Plan.
     Compensation expense for 2006 related to these awards was $81,000. The
     shares vest over a five year service period. As of December 31, 2006 there
     was $529,000 of unrecognized compensation cost related to nonvested
     restricted stock awards under the Plan.

     A summary of restricted stock award activity under the Plan during the year
     ended December 31, 2006 is presented below:

<TABLE>
<CAPTION>
                                               Restricted
                                                  Stock
                                                 Awards
                                               ----------
<S>                                            <C>
Maximum numbers of awards to be granted          69,354
Number of stock awards granted in 2006           63,250
Remaining shares available for future grants      6,104
</TABLE>

NOTE 14 - 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.


                                       41
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)


NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

     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.

     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.


                                       42

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

     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:

<TABLE>
<CAPTION>
                                           December 31, 2006       December 31, 2005
                                         ---------------------   ---------------------
                                         Carrying    Estimated   Carrying    Estimated
                                          Amounts   Fair Value    Amounts   Fair Value
                                         --------   ----------   --------   ----------
<S>                                      <C>        <C>          <C>        <C>
Financial assets:
   Cash and cash equivalents             $  4,993    $  4,993    $  4,780   $  4,780
   Securities                              44,850      44,883      55,187     55,199
   Loans and loans held for sale - Net    209,590     210,973     201,183    198,112
   Federal Home Loan Bank stock             4,197       4,197       4,765      4,765
   Accrued interest receivable              2,139       2,139       1,602      1,602

Financial liabilities:
   Customer deposits                      177,058     177,390     188,735    189,090
   Federal Home Loan Bank advances         64,850      64,512      52,925     52,461
   Note payable                             1,192       1,025       1,478      1,476
   Accrued interest payable                   947         947         686        686
</TABLE>


                                       43

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 15 - 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, 2006 and 2005, the Bank's retained earnings available for the payment
     of dividends totaled $1,117,000 and $1,349,000, respectively.

NOTE 16 - PARENT-ONLY FINANCIAL STATEMENTS

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

     The condensed balance sheet is as follows:



<TABLE>
<CAPTION>
                                                   December 31
                                                -----------------
                                                  2006      2005
                                                -------   -------
<S>                                             <C>       <C>
                    ASSETS
Cash at subsidiary bank                         $   407   $ 2,642
Investment in subsidiary                         34,722    33,839
Other assets                                        640       409
                                                -------   -------
   Total assets                                 $35,769   $36,890
                                                =======   =======

     LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities                                     $   181   $   241
Stockholders' equity                             35,588    36,649
                                                -------   -------
   Total liabilities and stockholders' equity   $35,769   $36,890
                                                =======   =======
</TABLE>


                                       44

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 16 - PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                    December 31
                                                   -------------
                                                    2006    2005
                                                   -----   -----
<S>                                                <C>     <C>
Operating income                                   $  --   $ 350
Operating expense                                    180     799
                                                   -----   -----
Income (loss) before income taxes and equity in
   undistributed net income of subsidiary           (180)   (449)
Income tax benefit                                    60     268
                                                   -----   -----
Income (loss) before equity in undistributed net
   income of subsidiary                             (120)   (181)
Equity in undistributed net income of subsidiary     583     623
                                                   -----   -----
Net income                                         $ 463   $ 442
                                                   =====   =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                       December 31
                                                   ------------------
                                                     2006      2005
                                                   -------   --------
<S>                                                <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                      $   463   $    442
   Adjustments to reconcile net income to net
      cash from operating activities:
         Equity in undistributed net income of
            subsidiary                                (583)      (623)
         Stock donation to charitable foundation        --        340
         Net change in other assets                   (224)      (201)
         Net change in other liabilities                60        241
                                                   -------   --------
            Net cash provided by (used in)
               operating activities                   (284)       199
CASH FLOWS FROM INVESTING ACTIVITIES
   Capitalization of subsidiary                         --    (12,013)
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from exercise of stock options              99        120
   Tax benefits of stock options exercised              15         29
   Stock retired                                       (60)       (60)
   Purchase of treasury shares                      (1,565)        --
   Net proceeds from stock conversion                   --     15,960
   Merger of Alpena Bancshares, Inc.
      and M.H.C.                                        --        206
   Purchase of shares for ESOP                          --     (1,387)
   ESOP Loan Repayment                                 174         --
   Dividends paid                                     (614)      (540)
                                                   -------   --------
            Net cash provided by (used in)
               financing activities                 (1,951)    14,328
                                                   -------   --------
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                      (2,235)     2,514
CASH AND CASH EQUIVALENTS - Beginning of year        2,642        128
                                                   -------   --------
CASH AND CASH EQUIVALENTS - End of year            $   407   $  2,642
                                                   =======   ========
</TABLE>


                                       45
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 17 - SEGMENT REPORTING

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

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


                                       46

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 17 - SEGMENT REPORTING (CONTINUED)

<TABLE>
<CAPTION>
                                                     For Year Ended
                                                   December 31, 2006
                                      -------------------------------------------
                                        Bank       ICA    Eliminations     Total
                                      --------   ------   ------------   --------
<S>                                   <C>        <C>      <C>            <C>
INTEREST INCOME                       $ 17,170   $   24      $ (24)     $ 17,170
INTEREST EXPENSE                         8,572       20        (24)        8,568
                                      --------   ------      -----      --------
NET INTEREST INCOME - Before
   provision for loan losses             8,598        4         --         8,602
PROVISION FOR LOAN LOSSES                  851       --         --           851
                                      --------   ------      -----      --------
NET INTEREST INCOME - After
   provision for loan losses             7,747        4         --         7,751
OTHER INCOME                             1,444    2,954         --         4,398
OPERATING EXPENSES                       8,645    2,883         --        11,528
                                      --------   ------      -----      --------
INCOME - Before federal income tax         546       75         --           621
FEDERAL INCOME TAX                         133       25         --           158
                                      --------   ------      -----      --------
NET INCOME                            $    413   $   50      $  --      $    463
                                      ========   ======      =====      ========
DEPRECIATION AND AMORTIZATION         $    700   $  344      $  --      $  1,044
                                      ========   ======      =====      ========
ASSETS                                $277,647   $4,151      $(590)     $281,208
                                      ========   ======      =====      ========
EXPENDITURES RELATED TO LONG-LIVED
   ASSETS:
   Goodwill                           $     --   $   47      $  --      $     47
   Property and equipment                1,212       23         --         1,235
                                      --------   ------      -----      --------
      TOTAL                           $  1,212   $   70      $  --      $  1,282
                                      ========   ======      =====      ========
</TABLE>

<TABLE>
<CAPTION>
                                                     For Year Ended
                                                   December 31, 2006
                                      -------------------------------------------
                                        Bank       ICA    Eliminations     Total
                                      --------   ------   ------------   --------
<S>                                   <C>        <C>      <C>            <C>
INTEREST INCOME                       $ 15,076   $   10      $ (10)      $ 15,076
INTEREST EXPENSE                         6,716       --        (10)         6,706
                                      --------   ------      -----       --------
NET INTEREST INCOME - Before
   provision for loan losses             8,360       10         --          8,370
PROVISION FOR LOAN LOSSES                  368       --         --            368
                                      --------   ------      -----       --------
NET INTEREST INCOME - After
   provision for loan losses             7,992       10         --          8,002
OTHER INCOME                             1,511    2,947         --          4,458
OPERATING EXPENSES                       8,994    2,821         --         11,815
                                      --------   ------      -----       --------
INCOME - Before federal income tax         509      136         --            645
FEDERAL INCOME TAX                         160       43         --            203
                                      --------   ------      -----       --------
NET INCOME                            $    349   $   93      $  --       $    442
                                      ========   ======      =====       ========
DEPRECIATION AND AMORTIZATION         $    809   $   42      $  --       $    851
                                      ========   ======      =====       ========
ASSETS                                $278,845   $4,416      $(326)      $282,575
                                      ========   ======      =====       ========
EXPENDITURES RELATED TO LONG-LIVED
   ASSETS:
   Goodwill                           $     --   $  300      $  --       $    300
   Intangible assets                        --      555         --            555
   Property and equipment                1,107       12         --          1,119
                                      --------   ------      -----       --------
      TOTAL                           $  1,107   $  867      $  --       $  1,974
                                      ========   ======      =====       ========
</TABLE>


                                       47

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2006 AND 2005
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following tables summarize the Company's quarterly results for the
     fiscal years ended December 31, 2006 and 2005:

<TABLE>
<CAPTION>
                                               For the Three-Month Period Ending
                                      ---------------------------------------------------
                                      March 31,   June 30,   September 30,   December 31,
                                        2006        2006          2006           2006
                                      ---------   --------   -------------   ------------
<S>                                   <C>         <C>        <C>             <C>
Interest income                         $4,034     $4,208        $4,603         $4,325
Interest expense                         1,909      2,084         2,254          2,321
                                        ------     ------        ------         ------
Net interest income                      2,125      2,124         2,349          2,004
Provision for losses on loans               70        133           216            433
Other income                             1,126      1,076         1,091          1,105
Other expenses                           2,861      2,919         2,735          3,012
                                        ------     ------        ------         ------
Income - Before income taxes               320        148           489           (336)
Federal income taxes                       108         49           163           (162)
                                        ------     ------        ------         ------
Net income                              $  212     $   99        $  326         $ (174)
                                        ======     ======        ======         ======
Basic earnings per share                $ 0.07     $ 0.03        $ 0.11         $(0.06)
Fully diluted earnings per share        $ 0.07     $ 0.03        $ 0.11         $(0.06)
Weighted average number of shares
   outstanding                           3,117      3,137         3,039          3,035
Weighted average number of shares
   outstanding, including dilutive
   stock options                         3,121      3,138         3,040          3,036
Cash dividends declared per common
   share                                $0.050     $0.050        $0.050         $0.050
</TABLE>

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


                                       48