EXHIBIT
13





2009
ANNUAL REPORT TO STOCKHOLDERS







FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.





2009





ANNUAL
REPORT





March
31, 2010














Dear
Fellow Shareholder,





Timing is
everything. This is my second shareholder letter as CEO of First Federal of
Northern Michigan. I would love nothing more than to be writing a happy
shareholder letter discussing how all of our effort translated into the creation
of shareholder value that, in turn, helped increase the value of your investment
in our company. I can report that we did work very hard and made meaningful
progress in many areas that will eventually lead to increases in shareholder
value. Unfortunately, the recent economic hurricane has brought powerful
headwinds that has left many parts of the economy damaged and broken,
particularly in Michigan. All of our effort and progress during the year was
more than offset by the extraordinarily difficult operating environment. I am
confident that one day I will get my chance to write one of those happy letters.
But that is for another year.





Our goals
for 2009 were simple:





Ø
            Rehabilitating
      or liquidating non-performing
assets;


Ø
            Growing
      non-interest income;


Ø
            Increasing
      our net interest margin (NIM); and


Ø
            Reducing
      controllable expenses.





We made
meaningful progress in all four of these areas in 2009.  This progress
helped bring about a significant improvement in pretax, pre-provision earnings
for the Bank.





In terms
of asset quality, we successfully worked through certain problem commercial
credits that either resulted in the credit being upgraded and removed from the
watch list or liquidated.  However, new problem credits emerged as old
credits were upgraded or liquidated.





In terms
of non-interest income, we took advantage of the low interest rate environment
and leveraged our outstanding mortgage staff by originating $58.9 million in
mortgage loans and generating over $1.4 million in mortgage banking fees during
the year, an improvement of 227% from last year. It was more than the rate
environment that drove this improvement. Our strong reputation as a mortgage
lender, the exit from the market of mortgage brokers and the capital constraints
of many of our competitors all contributed to our success in 2009. We increased
mortgage market share in all of the markets we serve.





We
improved our NIM by 33 basis points over the course of the year.  This
was accomplished by establishing floors on our variable rate loans, maintaining
pricing discipline for both deposits and loans, and growing core deposit
balances by $4.8 million during the year.  Our significant margin
growth took place in spite of the elevated level of non-performing assets within
the Bank.  We expect to see continued margin improvement as these
non-performing assets are rehabilitated or converted to cash over
time.





We
reduced controllable expenses by decreasing compensation costs, marketing costs,
occupancy costs and the costs associated with the amortization of intangible
assets.  We also sold off our insurance subsidiary, further improving
the core profitability of the Bank.  As a result of these efforts, on
a pre-tax, pre-provision basis, we improved the profitability of the bank by
$929,000 in 2009, an increase of 258% from last year.





While we
made many difficult decisions and significant sacrifices to return to
profitability, much of that work was wiped out by factors beyond our
control.  To illustrate, the FDIC raised our deposit insurance
premiums by $358,000, or 293%, to $480,000 in 2009 from $122,000 in
2008.  Your board and management actively opposed these increases by
reaching out to our elected officials and expressing our frustration in having
to pay for the cleanup associated with problems we did not create.  In
addition, we were required to pre-fund our FDIC premiums for 2010, 2011and 2012
at the end of 2009.  This represents an interest-free loan to the
government in the amount of $1.4 million to replenish the depleted FDIC
fund.  As a result, we must forgo the opportunity to invest those same
dollars in an interest-earning asset.   Our pre-tax,
pre-provision results would have grown by $1.3 million without the FDIC
increases in 2009.





We have
always proactively managed risk.  In that spirit, beginning in 2006,
we participated, on a limited basis, in commercial opportunities outside of
Michigan to avoid the geographic risk posed by only lending in Michigan, one of
the most economically stressed states in the country.  Certain of
these transactions ran into trouble during late 2008 and 2009 as the severe
economic downturn damaged the projects and the strength of the underlying
borrowers which had a significant impact on our 2009 results.  Yet
another challenge in 2009 was the number of bank
failures.  Specifically, the considerable assets of the failed banks
were offered for sale by the FDIC helping drive loan and collateral values
lower. This environment has reduced the appraised values for some of our
troubled credits requiring us to record large reserves for these distressed
credits.  We must accept these appraisals no matter how little sense
they make today.  In 2009 it was these weak appraised values that
created the need for the vast majority of our recorded reserves and
charge-offs.


3


It took a
long time to create this broken economy and it will take a long time for the
problems to work through the system.  In the meantime, your Bank has
strong liquidity, strong capital and a focus on the long term creation of
shareholder value.  We are committed to working in a prudent, sensible
manner and seeking signals that the recovery is far enough along to restore our
dividend.  Restoring the dividend and returning the shareholder value
lost through this economic downturn are our highest priorities.





Michael
W. Mahler


President
and Chief Executive Officer


4


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. (the “Company”). This information is derived in part from
and should be read in conjunction with the Consolidated Financial Statements of
the Company and the notes thereto presented elsewhere in this Annual Report. The
information at December 31, 2009 and December 31, 2008 and for the years ended
December 31, 2009 and 2008 is derived in part from the audited consolidated
financial statements of the Company that appear in this Annual Report. The
information for the years ended December 31, 2007, 2006, and 2005 is derived in
part from audited consolidated financial statements that do not appear in this
Annual Report.





Financial
condition data:





For Years Ended December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(In thousands)Total
      assets
                
                $
                233,506
                
                
                $
                247,672
                
                
                $
                250,831
                
                
                $
                280,959
                
                
                $
                282,775Loans
      receivable, net
                
                
                171,219
                
                
                
                192,270
                
                
                
                201,333
                
                
                
                209,518
                
                
                
                201,183Loans
      held for sale
                
                
                52
                
                
                
                107
                
                
                
                -
                
                
                
                72
                
                
                
                -Investment
      securities
                
                
                37,641
                
                
                
                29,687
                
                
                
                23,451
                
                
                
                44,850
                
                
                
                55,187Cash
      and cash equivalents
                
                
                3,099
                
                
                
                3,471
                
                
                
                5,341
                
                
                
                4,993
                
                
                
                4,780Deposits
                
                
                158,100
                
                
                
                165,778
                
                
                
                157,833
                
                
                
                170,530
                
                
                
                183,442FHLB
      advances and note payable
                
                
                45,031
                
                
                
                40,969
                
                
                
                52,684
                
                
                
                66,042
                
                
                
                54,403Repo
      Sweep agreements
                
                
                5,408
                
                
                
                9,447
                
                
                
                6,637
                
                
                
                6,528
                
                
                
                5,293Stockholders'
      equity
                
                
                23,052
                
                
                
                29,419
                
                
                
                32,503
                
                
                
                35,453
                
                
                
                36,649





Operating
data:





At December 31,2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005(In
      thousands)Interest
      income
                    
                    $
                    12,442
                    
                    
                    $
                    13,967
                    
                    
                    $
                    16,200
                    
                    
                    $
                    17,170
                    
                    
                    $
                    15,076Interest
      expense
                    
                    
                    5,088
                    
                    
                    
                    7,130
                    
                    
                    
                    8,437
                    
                    
                    
                    8,548
                    
                    
                    
                    6,704Net
      interest income
                    
                    
                    7,354
                    
                    
                    
                    6,837
                    
                    
                    
                    7,763
                    
                    
                    
                    8,622
                    
                    
                    
                    8,372Provision
      for loan losses
                    
                    
                    6,196
                    
                    
                    
                    4,421
                    
                    
                    
                    2,377
                    
                    
                    
                    851
                    
                    
                    
                    368Net
      interest income after provision for loan losses
                    
                    
                    1,158
                    
                    
                    
                    2,416
                    
                    
                    
                    5,386
                    
                    
                    
                    7,771
                    
                    
                    
                    8,004Other
      income (loss):Service
      charges and fees
                    
                    
                    869
                    
                    
                    
                    942
                    
                    
                    
                    911
                    
                    
                    
                    1,044
                    
                    
                    
                    1,030Mortgage
      banking activities
                    
                    
                    1,414
                    
                    
                    
                    432
                    
                    
                    
                    418
                    
                    
                    
                    344
                    
                    
                    
                    482Net
      gain (loss) on sale of investment securities
                    
                    
                    -
                    
                    
                    
                    6
                    
                    
                    
                    (97
                    )
                    
                    
                    (45
                    )
                    
                    
                    13Gain
      (loss) on sale of real estate
                    
                    
                    20
                    
                    
                    
                    22
                    
                    
                    
                    (40
                    )
                    
                    
                    4
                    
                    
                    
                    (45
                    )Other
      non-interest income
                    
                    
                    102
                    
                    
                    
                    95
                    
                    
                    
                    64
                    
                    
                    
                    103
                    
                    
                    
                    37Insurance
      & brokerage commissions
                    
                    
                    170
                    
                    
                    
                    180
                    
                    
                    
                    180
                    
                    
                    
                    180
                    
                    
                    
                    180Total
      other income
                    
                    
                    2,575
                    
                    
                    
                    1,677
                    
                    
                    
                    1,436
                    
                    
                    
                    1,630
                    
                    
                    
                    1,697Other
      expenses
                    
                    
                    9,360
                    
                    
                    
                    8,874
                    
                    
                    
                    9,313
                    
                    
                    
                    8,761
                    
                    
                    
                    9,193Income
      (loss) from continuing operations before income tax expense
      (benefit)
                    
                    
                    (5,627
                    )
                    
                    
                    (4,781
                    )
                    
                    
                    (2,491
                    )
                    
                    
                    640
                    
                    
                    
                    508Income
      tax expense (benefit) from continuing operations
                    
                    
                    1,090
                    
                    
                    
                    (1,601
                    )
                    
                    
                    (908
                    )
                    
                    
                    164
                    
                    
                    
                    157Net
      income (loss) from continuing operations
                    
                    
                    (6,717
                    )
                    
                    
                    (3,180
                    )
                    
                    
                    (1,583
                    )
                    
                    
                    476
                    
                    
                    
                    351Income
      (loss) from discontinued operations, net of tax expense or
      benefit
                    
                    
                    (46
                    )
                    
                    
                    (61
                    )
                    
                    
                    (17
                    )
                    
                    
                    (13
                    )
                    
                    
                    91Net
      income (loss)
                    
                    $
                    (6,763
                    )
                    
                    $
                    (3,241
                    )
                    
                    $
                    (1,600
                    )
                    
                    $
                    463
                    
                    
                    $
                    442Pre-Provision
      Pre-Tax Net Income (Loss)
                    
                    $
                    569
                    
                    
                    $
                    (360
                    )
                    
                    $
                    (131
                    )
                    
                    $
                    1,478
                    
                    
                    $
                    967


5





Key
Financial Ratios and Other Data:





For Years Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005Performance
      Ratios:Return
      on average assets
                    
                    
                    -2.80
                    %
                    
                    
                    -1.30
                    %
                    
                    
                    -0.60
                    %
                    
                    
                    0.16
                    %
                    
                    
                    0.16
                    %Return
      on average equity
                    
                    
                    -23.21
                    %
                    
                    
                    -10.05
                    %
                    
                    
                    -4.84
                    %
                    
                    
                    1.35
                    %
                    
                    
                    1.49
                    %Average
      interest rate spread
                    
                    
                    2.97
                    %
                    
                    
                    2.51
                    %
                    
                    
                    2.68
                    %
                    
                    
                    2.83
                    %
                    
                    
                    2.97
                    %Dividend
      payout ratio
                    
                    
                    0.00
                    %
                    
                    
                    N/M
                    ***
                    
                    
                    N/M
                    ***
                    
                    
                    133.33
                    %
                    
                    
                    142.86
                    %Dividends
      per share
                    
                    $
                    0.00
                    
                    
                    $
                    0.15
                    
                    
                    $
                    0.20
                    
                    
                    $
                    0.20
                    
                    
                    $
                    0.20Net
      interest margin
                    
                    
                    3.26
                    %
                    
                    
                    2.93
                    %
                    
                    
                    3.13
                    %
                    
                    
                    3.24
                    %
                    
                    
                    3.30
                    %Efficiency
      ratio
                    
                    
                    95.08
                    %
                    
                    
                    104.54
                    %
                    
                    
                    101.18
                    %
                    
                    
                    89.37
                    %
                    
                    
                    85.07
                    %Non-interest
      expense to average total assets
                    
                    
                    3.88
                    %
                    
                    
                    3.56
                    %
                    
                    
                    4.45
                    %
                    
                    
                    4.04
                    %
                    
                    
                    4.32
                    %Average
      interest-earning assets to average interest-bearing
      liabilities
                    
                    
                    113.32
                    %
                    
                    
                    113.85
                    %
                    
                    
                    113.65
                    %
                    
                    
                    112.99
                    %
                    
                    
                    112.34
                    %Asset
      Quality Ratios:Non-performing
      assets to total assets
                    
                    
                    6.58
                    %
                    
                    
                    5.57
                    %
                    
                    
                    4.15
                    %
                    
                    
                    1.59
                    %
                    
                    
                    1.57
                    %Non-performing
      loans to total loans
                    
                    
                    6.73
                    %
                    
                    
                    6.14
                    %
                    
                    
                    4.54
                    %
                    
                    
                    1.90
                    %
                    
                    
                    1.99
                    %Allowance
      for loan losses to nonperforming loans
                    
                    
                    31.05
                    %
                    
                    
                    46.41
                    %
                    
                    
                    43.93
                    %
                    
                    
                    52.24
                    %
                    
                    
                    35.34
                    %Allowance
      for loan losses to total loans
                    
                    
                    2.09
                    %
                    
                    
                    2.85
                    %
                    
                    
                    1.95
                    %
                    
                    
                    0.98
                    %
                    
                    
                    0.70
                    %Capital
      Ratios:Equity
      to total assets at end of period
                    
                    
                    9.87
                    %
                    
                    
                    11.88
                    %
                    
                    
                    12.96
                    %
                    
                    
                    12.62
                    %
                    
                    
                    12.96
                    %Average
      equity to average assets
                    
                    
                    12.07
                    %
                    
                    
                    12.44
                    %
                    
                    
                    12.38
                    %
                    
                    
                    12.07
                    %
                    
                    
                    10.87
                    %Risk-based
      capital ratio (Bank only)
                    
                    
                    13.58
                    %
                    
                    
                    15.75
                    %
                    
                    
                    16.27
                    %
                    
                    
                    17.07
                    %
                    
                    
                    16.82
                    %Other
      Data:Number
      of full service offices
                    
                    
                    8
                    
                    
                    
                    8
                    
                    
                    
                    9
                    **
                    
                    
                    10
                    *
                    
                    
                    10





*as
of 12-31-06. In February 2007, the Bank closed a branch to reduce its
full-service offices to 9.


**as
of 12-31-07. In February 2008, the Bank closed a branch to reduce its
full-service offices to 8.


***Not
meaningful


6





MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Overview





First
Federal of Northern Michigan, the Company’s principal operating subsidiary, 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, 2009, $81.6 million, or 46.6%, of our total loan portfolio
consisted of one- to four-family residential real estate loans, $62.4 million,
or 35.6%, and $9.9 million, or 5.6%, of our total loan portfolio consisted of
commercial mortgage loans and commercial loans, respectively, and $21.3 million,
or 12.2%, 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, mortgage
banking activities and security transactions.  Our non-interest
expense consists primarily of salaries and employee benefits, FDIC insurance
premiums, occupancy and office expenses, advertising and promotion expense and
data processing expenses.





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
eight 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 18 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, 2009, loans secured by commercial real estate
totaled $62.4 million, or 35.6% of our total loan portfolio, and commercial
loans totaled $9.9 million, or 5.6% of our total loan 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.  As market conditions allow, we
will continue to originate these types of loans in the future to viable
borrowers and retain them in our portfolio, however in 2010, in light of the
continued difficult operating environment in our market area, we expect our
focus will continue to be more on credit quality than on origination of new
loans.  In 2007 we began participating, on a limited basis, in
commercial opportunities outside of our market areas and, in some cases, outside
of the State or Michigan to help mitigate the geographic risk of lending only in
Michigan. We had no new out-of-state commercial participations in
2009.


7





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 shorter-term 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 continue 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 typically are not a market leader in
deposit rates, although from time-to-time we do offer higher rates as liquidity
needs dictate. We also intend to continue to market our non-interest-bearing
checking accounts in conjunction with our focus on commercial business
lending.  We grew our core deposits by $4.8 million in
2009.





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
historically experienced low levels of late payments and losses on loans.
However, during the economic recession that continued to deepen in 2009, we have
seen delinquency trends increase despite our conservative underwriting practices
due to declining economic conditions and increasing unemployment in our market
area. At December 31, 2009, our ratio of non-performing assets to total assets
was 6.58%.  At December 31, 2009, our ratio of equity to assets was
9.87%.  Despite losses over the past three years, our Bank hasregulatory capital at
levels in excess of regulatory requirements and is categorized as “well
capitalized.”





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, as now, 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.





Comparison
of Financial Condition at December 31, 2009 and 2008





Total
assets decreased $14.2 million, or 5.7%, to $233.5 million at December 31,
2009  from $247.7 million at December 31, 2008.  Net loans
decreased $21.1 million, or 10.9% to $171.2 million at December 31, 2009 from
$192.3 million at December 31, 2008.  Mortgage loan originations
increased by $28.7 million to $58.9 million in 2009 from $30.2 million in
2008: however our mortgage loan portfolio decreased $10.7 million, or 11.6%, to
$81.6 million at December 31, 2009 from $92.3 million at December 31, 2008. The
decrease in the portfolio was due to our continued focus on selling lower rate
mortgage loans into the secondary market where possible. The commercial loan
portfolio decreased 9.8% to $72.2 million at December 31, 2009 from $80.0
million at December 31, 2008.   Cash and cash equivalents
decreased  by $372, 000, or 10.7%, to $3.1 million at December 31,
2009 from $3.5 million at December 31, 2008.  Investment securities
increased $8.0 million, or 26.7%, to $37.6 million at December 31, 2009 from
$29.7 million at December 31, 2008.





Deposits
decreased $7.7 million, or 4.6%, to $158.1 million at December 31, 2009 from
$165.8 million at December 31, 2008. This decrease was due in large part to our
certificate of deposit accounts. As these deposits matured and were set to
reprice lower, some left the Bank and were replaced with lower costing FHLB
advances.  Our focus in 2009 continued to be on building deposit
relationships rather than attracting higher-cost non-core certificate of deposit
accounts, although from time-to-time we offered higher rates as liquidity needs
dictated.  REPO Sweep accounts decreased $4.0 million, or 42.6% to
$5.4 million at December 31, 2009 from $9.4 million at December 31, 2008.
Borrowings, consisting primarily of FHLB advances, increased  $4.0
million, or 9.8%, to $45.0 million at December 31, 2009 from $41.0 million at
December 31, 2008 as we offset our decline in deposits in part with FHLB
advances.





Stockholders’
equity decreased $6.3 million, or 21.4%, to $23.1 million at December 31, 2009
from $29.4 million at December 31, 2008.   The decrease was
mainly a result of our net loss for the year of $6.8 million, partially offset
by a recovery of $130,000 in the value of available-for-sale (AFS)
securities.


8





Comparison
of Operating Results for the Years Ended December 31, 2009 and 2008




General.  Net income from
continuing operations decreased to a loss of $6.8 million for the year ended
December 31, 2009 from a loss of $3.2 million for the year ended December 31,
2008. Net interest income before provision for loan losses was $517,000 higher
in 2009 than in 2008, due in large part to our increased net interest margin
year over year. The provision for loan losses was $1.8 million higher in 2009
than in 2008, resulting in net interest income after provision for loan losses
which was $1.3 million lower in 2009 than in 2008. Non-interest income related
to continuing operations was $898,000 higher in 2009 than in 2008. Non-interest
expenses related to continuing operations were $486,000 higher in 2009 than in
2008 due in large part to an industry-wide special FDIC assessment in
2009.





Interest
Income.  Interest income decreased by $1.6 million, or 11.4%,
to $12.4 million for the year ended December 31, 2009 from $14.0 million for the
year ended December 31, 2008.  The decrease was primarily due to two
factors: a decrease in the average balance of our loan portfolio of $10.6
million, or 5.3%, year over year, and an increase in the average balance of
impaired loans, on which we did not recognize interest income, of $5.3 million
year over year.  The average balance of our non-mortgage loans,
principally commercial loans and consumer loans, decreased by $1.9 million, or
1.8%, to $103.1 million for the twelve months ended December 31, 2009 from
$105.0 million for the twelve months ended December 31, 2008. The average yield
on our commercial loans decreased 69 basis points due in large part to the
increase in the average balance of our non-performing loans year over year, and
the average yield on our consumer loans decreased 85 basis points from 2008 to
2009 due in large part to lower interest rate environment in 2009 as compare to
2008. .  The average balance of our one- to- four-family residential
mortgage loans decreased to $86.0 million for the year ended December 31, 2009
from $94.8 million for the year ended December 31, 2008, while the average yield
on such loans decreased to 6.25% from 6.30%.





Interest
Expense.  Interest expense decreased to $5.1 million for the
year ended December 31, 2009 from $7.1 million for the year ended December 31,
2008, due primarily to a $6.7 million, or 3.3%, decrease in the average balance
of interest bearing liabilities. The average balance of interest-bearing
deposits decreased slightly by $680,000 from 2008 to 2009, while the average
cost of those deposits decreased 93 basis points to 2.31% for 2009 from 3.24%
for 2008, reflecting a continued decline in market interest rates during 2009.
The average balance of   FHLB borrowings decreased $5.3 million
from 2008 to 2009 while the cost of those borrowings decreased from 4.44% to
3.79% year over year.  During 2009 certain high-cost FHLB bank
advances matured and we were able to re-borrow those funds at a substantially
lower rate. The average balance of REPO Sweep accounts decreased $737,000 year
over year, while the average cost of these accounts decreased 103 basis points
from 1.41% for 2008 to 0.38% for 2009 as market rates declined substantially
year over year.





Net Interest
Income.  Net interest income increased to $7.4 million for the
year ended December 31, 2009 from $6.8 million for the year ended December 31,
2008.  The increase is primarily due to an increase of 46 basis points
in our average interest rate spread to 2.97% for the year ended December 31,
2009 from 2.51% for the year ended December 31, 2008.





Provision for
Loan Losses.We
recorded a provision for loan losses of $6.2 million for the year ended December
31, 2009 compared to a provision of $4.4 million for the year ended December 31,
2008. We had net charge-offs of $8.2 million and $2.8 million during 2009 and
2008, respectively. These increases reflected
a continued decline in general economic conditions, particularly declining real
estate values.The allowance for loan losses was $3.7 million, or 2.09%
of total loans at December 31, 2009, compared to $5.6 million, or 2.85% of total
loans at December 31, 2008. The level of the allowance is based on estimates,
and ultimate losses may vary from estimates. Total non-performing loans were
$11.8 million at December 31, 2009 and $12.2 million at December 31, 2008.
Management has developed an aggressive plan for 2010 and beyond designed to
reduce the level of non-performing loans and other non-performing
assets.





Non-Interest
Income.  Non-interest income related to continuing operations
increased to $2.6 million for the year ended December 31, 2009 from $1.7 million
for the year ended December 31, 2008.  Income from mortgage banking
activities increased $1.0 million to $1.4 million as we sold $37.8 million more
loans into the secondary market in 2009 than in 2008 due to declines in market
mortgage rates and due to a Relief Refinance program offered by our investor.
Service charges and other fees decreased $73,000 from $942,000 in 2008 to
$869,000 in 2009, due in large part to a decrease in insufficient funds fees,
which we expect to continue into 2010.


9





Non-Interest
Expense.  Non-interest expense related to continuing operations
increased to $9.4 million for the year ended December 31, 2009 from $8.9 million
for the year ended December 31, 2008. FDIC premiums
increased  $358,000 to $480,000 in 2009 from $122,000 in 2008 due
mainly to an industry-wide FDIC special assessment, but also due to an increase
in our general assessment.  Other expense increased $264,000 to $1.7
million in 2009 from $1.5 million in 2008, due mainly to increased expenses
associated with our real estate owned, including costs to repossess and repair
properties and declines in the market value of many of these properties due to
rapidly declining real estate market values in late
2009.   Professional fees increased to $478,000 for the year
ended December 31, 2009 from $409,000 for the year ended December 31, 2008
related primarily to additional legal and audit fees for general audit services
and benefit plans, the Bank Secrecy Act and loan collection.





Income
Taxes.  Federal income taxes related to losses from continuing
operations increased to an expense of   $1.1 million for the year
ended December 31, 2009 from a benefit of $1.6 million for the year ended
December 31, 2008. Federal income tax expense for the year ended December 31,
2009 was impacted by the valuation allowance on our deferred tax assets of $3.4
million. The Company recorded this valuation allowance because it concluded,
based on currently available evidence, that it is “more likely than not” that
the future tax assets recognized will not be realized before their
expiration.




10


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.




Average Consolidated Statements of ConditionFor Years Ended December 31,As of December 31,2009
                    
                    
                    2009
                    
                    
                    2008Average
                    
                    
                    
                    
                    
                    
                    
                    
                    AverageYield
      /
                    
                    
                    Average
                    
                    
                    
                    
                    
                    Yield
      /
                    
                    
                    Average
                    
                    
                    
                    
                    
                    Yield
      /Balance
                    
                    
                    Rate
                    
                    
                    Balance
                    
                    
                    Interest
                    
                    
                    Rate
                    
                    
                    Balance
                    
                    
                    Interest
                    
                    
                    Rate(In
      thousands)
                    
                    
                    (In
      thousands)Interest-earning
      assets:Mortgage
      loans
                    
                    
                    
                    
                    
                    
                    
                    $
                    86,015
                    
                    
                    $
                    5,372
                    
                    
                    
                    
                    
                    $
                    94,787
                    
                    
                    $
                    5,969Non-mortgage
      loans
                    
                    
                    
                    
                    
                    
                    
                    
                    103,134
                    
                    
                    
                    5,732
                    
                    
                    
                    
                    
                    
                    104,983
                    
                    
                    
                    6,619Loans
                    
                    $
                    171,271
                    
                    
                    
                    6.02
                    %
                    
                    
                    189,149
                    
                    
                    
                    11,104
                    
                    
                    
                    5.87
                    %
                    
                    
                    199,770
                    
                    
                    
                    12,588
                    
                    
                    
                    6.30
                    %Mortgage-backed
      securities
                    
                    
                    15,979
                    
                    
                    
                    4.82
                    %
                    
                    
                    13,714
                    
                    
                    
                    577
                    
                    
                    
                    4.21
                    %
                    
                    
                    10,071
                    
                    
                    
                    421
                    
                    
                    
                    4.18
                    %Other
      Investment securities
                    
                    
                    21,662
                    
                    
                    
                    3.24
                    %
                    
                    
                    18,316
                    
                    
                    
                    646
                    
                    
                    
                    3.53
                    %
                    
                    
                    16,423
                    
                    
                    
                    671
                    
                    
                    
                    4.09
                    %Investment
      securities
                    
                    
                    37,641
                    
                    
                    
                    3.53
                    %
                    
                    
                    32,030
                    
                    
                    
                    1,223
                    
                    
                    
                    3.82
                    %
                    
                    
                    26,494
                    
                    
                    
                    1,092
                    
                    
                    
                    4.12
                    %Other
      investments
                    
                    
                    4,713
                    
                    
                    
                    2.40
                    %
                    
                    
                    4,784
                    
                    
                    
                    115
                    
                    
                    
                    2.40
                    %
                    
                    
                    8,387
                    
                    
                    
                    297
                    
                    
                    
                    3.54
                    %Total
      interest earning assets
                    
                    
                    213,625
                    
                    
                    
                    5.50
                    %
                    
                    
                    225,963
                    
                    
                    
                    12,442
                    
                    
                    
                    5.51
                    %
                    
                    
                    234,651
                    
                    
                    
                    13,967
                    
                    
                    
                    5.95
                    %Non
      Interest Earning Assets
                    
                    
                    19,881
                    
                    
                    
                    
                    
                    
                    
                    15,417
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    14,709Total
      Assets
                    
                    $
                    233,506
                    
                    
                    
                    
                    
                    
                    $
                    241,380
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    249,360Interest
      bearing liabilities:Savings
      Deposits
                    
                    $
                    15,722
                    
                    
                    
                    0.15
                    %
                    
                    $
                    15,123
                    
                    
                    $
                    17
                    
                    
                    
                    0.12
                    %
                    
                    $
                    15,071
                    
                    
                    $
                    25
                    
                    
                    
                    0.18
                    %Money
      market/NOW accounts
                    
                    
                    37,092
                    
                    
                    
                    1.21
                    %
                    
                    
                    36,558
                    
                    
                    
                    384
                    
                    
                    
                    1.04
                    %
                    
                    
                    28,889
                    
                    
                    
                    415
                    
                    
                    
                    1.43
                    %Certificates
      of deposit
                    
                    
                    94,212
                    
                    
                    
                    2.61
                    %
                    
                    
                    98,772
                    
                    
                    
                    3,056
                    
                    
                    
                    3.09
                    %
                    
                    
                    107,213
                    
                    
                    
                    4,457
                    
                    
                    
                    4.16
                    %Total
      Interest bearing deposits
                    
                    
                    147,026
                    
                    
                    
                    1.99
                    %
                    
                    
                    150,453
                    
                    
                    $
                    3,457
                    
                    
                    
                    2.30
                    %
                    
                    
                    151,173
                    
                    
                    $
                    4,897
                    
                    
                    
                    3.24
                    %Borrowed
      funds
                    
                    
                    50,439
                    
                    
                    
                    2.84
                    %
                    
                    
                    48,942
                    
                    
                    
                    1,631
                    
                    
                    
                    3.33
                    %
                    
                    
                    55,104
                    
                    
                    
                    2,233
                    
                    
                    
                    4.05
                    %Total
      Interest bearing liabilities
                    
                    
                    197,465
                    
                    
                    
                    2.21
                    %
                    
                    
                    199,395
                    
                    
                    
                    5,088
                    
                    
                    
                    2.55
                    %
                    
                    
                    206,277
                    
                    
                    
                    7,130
                    
                    
                    
                    3.44
                    %Non
      interest bearing liabilities
                    
                    
                    12,989
                    
                    
                    
                    
                    
                    
                    
                    12,848
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10,849Total
      liabilities
                    
                    
                    210,454
                    
                    
                    
                    
                    
                    
                    
                    212,243
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    217,126Stockholders'
      equity
                    
                    
                    23,052
                    
                    
                    
                    
                    
                    
                    
                    29,137
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    32,234Total
      Liabilities & stockholders' equity
                    
                    $
                    233,506
                    
                    
                    
                    
                    
                    
                    $
                    241,380
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    249,360Net
      interest income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    7,354
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    6,837Interest
      rate spread
                    
                    
                    
                    
                    
                    
                    3.29
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.97
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.51
                    %Net
      interest-earning assets
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    26,568
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    28,374Net
      interest margin (1)
                    
                    
                    
                    
                    
                    
                    3.46
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.26
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.93
                    %Average
      interest-earning assets to average interest-bearing
      liabilities
                    
                    
                    
                    
                    
                    
                    108.18
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    113.32
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    113.76
                    %







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


11





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.





Year
      ended December 31, 2009Compared
      toYear
      ended December 31, 2008Increase (Decrease) Due to:Volume
                          
                          
                          Rate
                          
                          
                          Total(In
      thousands)Interest-earning
      assets:Loans
      receivable
                          
                          $
                          (665
                          )
                          
                          $
                          (819
                          )
                          
                          $
                          (1,484
                          )Investment
      securities
                          
                          
                          293
                          
                          
                          
                          (160
                          )
                          
                          $
                          133Other
      investments
                          
                          
                          4
                          
                          
                          
                          (178
                          )
                          
                          $
                          (174
                          )Total
      interest-earning assets
                          
                          
                          (368
                          )
                          
                          
                          (1,157
                          )
                          
                          
                          (1,525
                          )Interest-bearing
      liabilities:Savings
      Deposits
                          
                          
                          1
                          
                          
                          
                          (8
                          )
                          
                          
                          (7
                          )Money
      Market/NOW accounts
                          
                          
                          15,196
                          
                          
                          
                          (15,228
                          )
                          
                          
                          (32
                          )Certificates
      of Deposit
                          
                          
                          (401
                          )
                          
                          
                          (1,000
                          )
                          
                          
                          (1,401
                          )Deposits
                          
                          
                          14,796
                          
                          
                          
                          (16,236
                          )
                          
                          
                          (1,440
                          )Borrowed
      funds
                          
                          
                          (350
                          )
                          
                          
                          (252
                          )
                          
                          
                          (602
                          )Total
      interest-bearing liabilities
                          
                          
                          14,446
                          
                          
                          
                          (16,488
                          )
                          
                          
                          (2,042
                          )Change
      in net interest income
                          
                          $
                          (14,814
                          )
                          
                          $
                          15,331
                          
                          
                          $
                          517





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
ourdeposits,
which represent the significant majority of our liabilities.  However,
in anticipation of lowering interest rates we have, over the past year,
endeavored to reduce the duration of our liabilities. As of December 31, 2009,
$147.4 million, or 84.1% of our loan portfolio, consisted of loans that mature
or reprice after December 31, 2009.  In contrast, as of December 31,
2009, $60.6 million, or 64.3% of our time deposits as of that date, consisted of
deposits that mature or reprice in less than one year.


12





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





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





The table
below sets forth, as of December 31, 2009, 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.





Change in
      Interest
                            
                            
                            
                            
                            
                            
                            
                            NPV as a Percentage of Present Value of Assets (3)Rates (basis points)
                            
                            
                            
                            
                            Estimated Increase (Decrease) in NPV
                            
                            
                            
                            
                            
                            Increase (Decrease)(1)
                            
                            Estimated
      NPV (2)
                            
                            
                            Amount
                            
                            
                            Percent
                            
                            
                            NPV
      Ratio (4)
                            
                            
                            (basis points)(Dollars
      in thousands)+300
                            
                            
                            26,829
                            
                            
                            
                            (4,555
                            )
                            
                            
                            -15.0
                            %
                            
                            
                            11.36
                            %
                            
                            
                            (144
                            )+200
                            
                            
                            29,072
                            
                            
                            
                            (2,311
                            )
                            
                            
                            -7.0
                            %
                            
                            
                            12.12
                            %
                            
                            
                            (68
                            )+100
                            
                            
                            30,545
                            
                            
                            
                            (838
                            )
                            
                            
                            -3.0
                            %
                            
                            
                            12.58
                            %
                            
                            
                            (22
                            )+50
                            
                            
                            31,066
                            
                            
                            
                            (318
                            )
                            
                            
                            -1.0
                            %
                            
                            
                            12.73
                            %
                            
                            
                            (7
                            )—
                            
                            
                            31,384
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            12.80
                            %
                            
                            
                            —-50
                            
                            
                            31,560
                            
                            
                            
                            177
                            
                            
                            
                            1.0
                            %
                            
                            
                            12.82
                            %
                            
                            
                            2-100
                            
                            
                            31,655
                            
                            
                            
                            271
                            
                            
                            
                            1.0
                            %
                            
                            
                            12.81
                            %
                            
                            
                            1





(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, 2009, in the event of an
immediate 100 basis point decrease in interest rates, we would be expected to
experience a 1% increase in NPV and a 1 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 7% decrease in NPV and a 68 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.


13





Liquidity
and Capital Resources





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





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





Liquidity
represents the amount of our assets that can be quickly and easily converted
into cash without significant loss.  Our most liquid assets are cash,
short-term U.S. Government securities and U.S. Government agency or
government-sponsored enterprise securities..  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, 2009 was $27.5 million, or 22.0%
of total deposits and Federal Home Loan Bank borrowings due in one year or less,
compared to $32.1 million, or 26.8% of this amount at December 31,
2008.  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, 2009, we had unused
borrowing capacity of $10.6 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 year ended December 31, 2009, we
originated $58.9 million of one- to four-family residential mortgage loans, of
which $9.4 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 $30.2 million of one- to four-family originations during the year
ended December 31, 2008, of which $18.5 million were retained in our
portfolio.  At December 31, 2009, we had outstanding loan commitments
of $26.0 million.  These commitments included $8.2 million for
permanent one- to four-family residential mortgage loans, $2.5 million for
non-residential  loans, $500,000  to purchase commercial
participation loans, $116,000 of undisbursed loan proceeds for construction of
one- to four-family residences, $4.7 million of undisbursed lines of credit on
home equity loans, $1.2 million of unused credit card lines, $6.9 million of
unused commercial lines of credit, and $677,000 of undisbursed commercial
construction loans, unused bounce protection. of $1.2 million and letters
of credit of $5,000.





Deposits
are a primary source of funds for use in lending and for other general business
purposes.  At December 31, 2009, deposits funded 67.7% of our total
assets compared to 67.5% at December 31, 2008.  Certificates of
deposit scheduled to mature in less than one year at December 31, 2009 totaled
$60.6 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, 2009, we
had $44.4 million in Federal Home Loan Bank advances.  Total
borrowings as a percentage of total assets were 19.3% at December 31, 2009
compared to 16.5% at December 31, 2008.


14





As of
December 31, 2009, 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, 2009, we had no material
commitments for capital expenditures.





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





First
Federal of Northern Michigan is subject to federal regulations that impose
minimum capital requirements.  At December 31, 2009, 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 followingaccounting 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 acritical
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.





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, 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 increased by 10% (of the estimate) across all risk ratings, the
allocated allowance as of December 31, 2009 would have changed by approximately
$275,000.  Actual loan losses may be significantly more than the
allowances we have established, which could have a material negative effect on
our financial results.


15


Mortgage
Servicing Rights.We sellto 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, 2009, we were servicing loans sold to others totaling $140.6
million. We amortize capitalized mortgage servicing rights as a reduction of
servicing fee income in proportion to, and over the period of, estimated net
servicing income by use of a method that approximates the level-yield
method.  We periodically evaluate capitalized mortgage servicing
rights for impairment using a model that takes into account several variables
including expected prepayment speeds and prevailing interest
rates.  If we identify impairment, we charge the amount of the
impairment to earnings by establishing a valuation allowance against the
capitalized mortgage servicing rights asset.  The primary risk of
material changes to the value of the servicing rights resides in the potential
volatility in the economic assumptions used, particularly the prepayment speed.
We monitor this risk and adjust the valuation allowance as necessary to
adequately record any probable impairment in the portfolio. Management believes
the estimation of these variables makes this a critical accounting policy. For
purposes of measuring impairment, the mortgage servicing rights are stratified
based on financial asset type and interest rates. In addition, we obtain an
independent third-party valuation of the mortgage servicingportfolio 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, 2009
included the following:





Annual
      constant prepayment speed (CPR):
                      
                      
                      17.2
                      %Weighted
      average life remaining (in months):
                      
                      
                      249Discount
      rate used:
                      
                      
                      8.2
                      %





At the
December 31, 2009 valuation, we calculated the value of our mortgage servicing
rights to be $1.1 million and the weighted average life remaining of those
rights was 37 months.  The book value of our mortgage servicing rights
as of December 31, 2009 was $730,000 which was less than the independent
valuation: therefore there was no need to establish a valuation
allowance.





Impairment of Intangible
Assets.





On June
12, 2003, we acquired 100% of the stock of the InsuranCenter of Alpena
(ICA).  We allocated the excess of the purchase price paid over the
fair value of net assets acquired to intangible assets, including
goodwill.  On February 27, 2009 the Company sold the majority of the
assets of ICA.  The remaining goodwill on our books of $600,000
related to certain assets of the Company that were not sold in the sale of ICA.
We allocated the goodwill between the assets sold and the assets retained and
determined a value of the assets that remained of $600,000. Since the $600,000
allocation relates to a finite life asset, we re-characterized the goodwill as
an amortizable intangible and began amortizing the asset in March 2009. The
intangible asset was analyzed for impairment at December 31, 2009.





We have
in the past purchased a branch or branches from other financial
institutions.  Our analysis of these branch acquisitions led us to
conclude that in each case, we acquired a business and therefore, the excess of
purchase price over fair value of net assets acquired has been allocated to core
deposit intangible assets.  Our conclusion was based on the fact that
in each case we acquired employees, customers and branch facilities. 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 analyzed
annually for impairment.





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.




16




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, 2009 and December 31, 2008 First Federal of Northern Michigan had
$12.0 million and   $14.2 million, respectively, of commitments
to grant loans, $14.0 million and $17.8 million, respectively, of unfunded
commitments under lines of credit and $5,000 and $5,000, 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 monetary in nature.  As a result, changes in market
interest rates have a greater impact on performance than the effects of
inflation.




17







DIRECTORS
AND EXECUTIVE OFFICERS OF


FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.


AND
FIRST FEDERAL OF NORTHERN MICHIGAN








Directors
-





Martin A. Thomsonhas been
Chairman of the Board of Directors since May, 2008.  He was President
and Chief Executive Officer of the Company and Bank from May 2001.  In
January 2006, Mr. Thomson relinquished the position of President and in May,
2008 relinquished the position of Chief Executive Officer and assumed the role
of  Chairman of the Board of Directors of the Company and Bank. 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.





James C. Rapin  has
been a director of the Bank since 1985, and a director of the Company since its
formation in November 2000.   He was Chairman of the Board of
Directors of the Company and the Bank from March 2002 until May
2008.  Mr. Rapin retired as a pharmacist with LeFave Pharmacy, Alpena,
Michigan in 2004.





Keith D. Wallaceis the
senior partner of the law firm of Isackson and Wallace, P.C., located in Alpena,
Michigan.  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 39 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
33 years.  Mr. Townsend has been a director of the Company and the
Bank since April 2002.





Michael W. Mahlerwas named President and
Chief Executive Officer of the Company and the Bank in May, 2008. He 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. Mr. Mahler was
appointed as a Director in May, 2008.





Executive
Officers Who Are Not Directors-





Amy E. Essexwas 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.


18





Senior
Management Team of the Bank -





Michael
W. Mahler, Jerome W. Tracey, Amy E. Essex, Joseph W. Gentry II,
Kathleen  R. Brown, Linda K. Sansom,  Gregory S. Matthews,
Julie A. Curtis





STOCKHOLDER
INFORMATION







The
Annual Meeting of Stockholders will be held at 1:00 p.m., May 19, 2010 at the
Thunder Bay National Marine Sanctuary, 500 W. Fletcher St., Alpena,
MI  49707.





Stock
Listing





The
Company's common stock is traded on Nasdaq Capital Market under the symbol
“FFNM”.





Price
Range of Common Stock





The
following sets forth the quarterly high and low closing price per share and cash
dividends declared during each of the four quarters in 2009 and
2008.





Market PriceQuarter Ended
                      
                      High
                      
                      
                      Low
                      
                      
                      Cash DividendsDeclaredDecember
      31, 2009
                      
                      $
                      2.15
                      
                      
                      $
                      1.21
                      
                      
                      $
                      -September
      30, 2009
                      
                      $
                      2.15
                      
                      
                      $
                      1.81
                      
                      
                      $
                      -June
      30, 2009
                      
                      $
                      2.20
                      
                      
                      $
                      0.70
                      
                      
                      $
                      -March
      31, 2009
                      
                      $
                      2.35
                      
                      
                      $
                      0.66
                      
                      
                      $
                      -December
      31, 2008
                      
                      $
                      4.79
                      
                      
                      $
                      1.16
                      
                      
                      $
                      -September
      30, 2008
                      
                      $
                      6.34
                      
                      
                      $
                      4.53
                      
                      
                      $
                      0.050June
      30, 2008
                      
                      $
                      7.44
                      
                      
                      $
                      4.51
                      
                      
                      $
                      0.050March
      31, 2008
                      
                      $
                      8.74
                      
                      
                      $
                      6.12
                      
                      
                      $
                      0.050




19





Special
      Counsel
              
              Independent
      AuditorLuse
      Gorman Pomerenk & Schick, PC
              
              Plante
      & Moran, PLLC5335
      Wisconsin Avenue, N.W.
              
              2601
      Cambridge Ct.  Suite 500Suite
      400
              
              Auburn
      Hills, Michigan 48326Washington,
      D.C.  20015Transfer
      AgentMarket
      MakersRegistrar
      and Transfer CompanyHowe
      Barnes Hoefer & Arnett
              
              10
      Commerce Drive222
      South Riverside Plaza
              
              Cranford,
      New Jersey 070167th
      Floor 60606
              
              800-346-6084Chicago,
      IL312-655-3000Stifel
      Nicolaus237
      Park Avenue8th
      FloorNew
      York, NY 10017212-847-6500Keefe,
      Bruyette & Woods787
      7th
      Avenue4th
      FloorNew
      York, NY 10019212-887-7777FIG
      Partners, LLC1175
      Peachtree St. NE100
      Colony Sq, Suite 2250Atlanta,
      GA 30361866-344-2657





Annual
Report on Form 10-K





A copy of
the Company's Form 10-K for the year ended December 31, 2009 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.


20




First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
  ContentsReport
      Letter
                2Consolidated
      Financial StatementsBalance
      Sheet
                3Statement
      of Operations
                4Statement
      of Changes in Stockholders’ Equity
                5Statement
      of Cash Flows
                6Notes
      to Consolidated Financial Statements
                7
  1
 
 Report of
Independent Registered Public Accounting Firm
  Board of
Directors
 First
Federal of Northern Michigan Bancorp, Inc.
  We have
audited the consolidated balance sheet of First Federal of Northern Michigan
Bancorp, Inc. as of December 31, 2009 and 2008 and the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows for
each year in the two-year period ended December 31,2009.  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.  The company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also 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, 2009 and 2008 and the
consolidated results of their operations and their cash flows for each year in
the two-year period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.
  /s/
Plante & Moran, PLLC
  Auburn
Hills, Michigan
 March 30,
2010
  2
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 Consolidated
Balance Sheet
 (000s
omitted, except per share data)
  December 312009
                  
                  
                  2008AssetsCash
      and cash equivalents
                  
                  $
                  2,583
                  
                  
                  $
                  3,098Overnight
      deposits with Federal Home Loan Bank
                  
                  
                  516
                  
                  
                  
                  373Total
      cash and cash equivalents
                  
                  
                  3,099
                  
                  
                  
                  3,471Securities
      available for sale (Note 2)
                  
                  
                  33,713
                  
                  
                  
                  25,665Securities
      held to maturity (Note 2)
                  
                  
                  3,928
                  
                  
                  
                  4,022Loans
      - Net (Note 3)
                  
                  
                  171,219
                  
                  
                  
                  192,270Loans
      held for sale
                  
                  
                  52
                  
                  
                  
                  107Federal
      Home Loan Bank stock
                  
                  
                  4,197
                  
                  
                  
                  4,197Property
      and equipment (Note 4)
                  
                  
                  6,564
                  
                  
                  
                  7,090Foreclosed
      real estate
                  
                  
                  3,580
                  
                  
                  
                  1,638Accrued
      interest receivable
                  
                  
                  1,230
                  
                  
                  
                  1,469Prepaid
      FDIC insurance premiums
                  
                  
                  1,315
                  
                  
                  
                  -Intangible
      assets (Note 6)
                  
                  
                  920
                  
                  
                  
                  1,193Deferred
      tax asset
                  
                  
                  559
                  
                  
                  
                  2,379Other
      assets (Note 5)
                  
                  
                  3,130
                  
                  
                  
                  2,561Assets
      of discontinued operations (Note 15)
                  
                  
                  -
                  
                  
                  
                  1,610Total
      assets
                  
                  $
                  233,506
                  
                  
                  $
                  247,672Liabilities
      and Stockholders' EquityLiabilitiesNon-interest
      bearing deposits
                  
                  $
                  11,074
                  
                  
                  $
                  10,410Interest-bearing
      deposits (Note 7)
                  
                  
                  147,026
                  
                  
                  
                  155,368Advances
      from Federal Home Loan Bank (Note 8)
                  
                  
                  44,400
                  
                  
                  
                  40,200Note
      payable (Note 9)
                  
                  
                  631
                  
                  
                  
                  769REPO
      sweep accounts
                  
                  
                  5,408
                  
                  
                  
                  9,447Accrued
      expenses and other liabilities (Note 13)
                  
                  
                  1,915
                  
                  
                  
                  1,982Liabilities
      of discontinued operations (Note 15)
                  
                  
                  -
                  
                  
                  
                  77Total
      liabilities
                  
                  
                  210,454
                  
                  
                  
                  218,253Stockholders' Equity
      (Note 12)Common
      stock ($0.01 par value 20,000,000 shares authorized  3,191,999
      shares issued)
                  
                  
                  32
                  
                  
                  
                  32Additional
      paid-in capital
                  
                  
                  23,723
                  
                  
                  
                  24,306Retained
      earnings
                  
                  
                  2,000
                  
                  
                  
                  8,763Treasury
      stock at cost (307,750 shares)
                  
                  
                  (2,964
                  )
                  
                  
                  (2,964
                  )Unallocated
      ESOP shares (Note 13)
                  
                  
                  -
                  
                  
                  
                  (765
                  )Unearned
      compensation
                  
                  
                  (162
                  )
                  
                  
                  (290
                  )Accumulated
      other comprehensive income
                  
                  
                  423
                  
                  
                  
                  337Total
      stockholders' equity
                  
                  
                  23,052
                  
                  
                  
                  29,419Total
      liabilities and stockholders' equity
                  
                  $
                  233,506
                  
                  
                  $
                  247,672
 
 See Notes
to Consolidated
 Financial
Statements.
  3
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
  
 Consolidated
Statement of Operations
 (000s
omitted, except per share data)
 
 Year Ended December 312009
                  
                  
                  2008Interest
      IncomeLoans,
      including fees
                  
                  $
                  11,104
                  
                  
                  $
                  12,588InvestmentsTaxable
                  
                  
                  548
                  
                  
                  
                  757Tax-exempt
                  
                  
                  213
                  
                  
                  
                  201Mortgage-backed
      securities
                  
                  
                  577
                  
                  
                  
                  421Total
      interest income
                  
                  
                  12,442
                  
                  
                  
                  13,967Interest
      ExpenseDeposits
      (Note 7)
                  
                  
                  3,457
                  
                  
                  
                  4,897Borrowings
                  
                  
                  1,631
                  
                  
                  
                  2,233Total
      interest expense
                  
                  
                  5,088
                  
                  
                  
                  7,130Net Interest Income -
      Before provision for loan losses
                  
                  
                  7,354
                  
                  
                  
                  6,837Provision
      for Loan Losses (Note 3)
                  
                  
                  6,196
                  
                  
                  
                  4,421Net Interest Income -
      After provision for loan losses
                  
                  
                  1,158
                  
                  
                  
                  2,416Other
      IncomeService
      charges and other fees
                  
                  
                  869
                  
                  
                  
                  942Net
      gain on sale of loans
                  
                  
                  585
                  
                  
                  
                  116Loan
      servicing fees
                  
                  
                  829
                  
                  
                  
                  316Insurance
      and brokerage commissions
                  
                  
                  170
                  
                  
                  
                  180Other
                  
                  
                  122
                  
                  
                  
                  123Total
      other income
                  
                  
                  2,575
                  
                  
                  
                  1,677Operating
      ExpensesCompensation
      and employee benefits (Note 13)
                  
                  
                  4,735
                  
                  
                  
                  4,825FDIC
      insurance premiums
                  
                  
                  480
                  
                  
                  
                  122Amortization
      of intangible assets
                  
                  
                  273
                  
                  
                  
                  308Advertising
                  
                  
                  117
                  
                  
                  
                  151Occupancy
      and equipment
                  
                  
                  1,202
                  
                  
                  
                  1,263Data
      processing service bureau
                  
                  
                  335
                  
                  
                  
                  320Professional
      fees
                  
                  
                  478
                  
                  
                  
                  409Other
                  
                  
                  1,740
                  
                  
                  
                  1,476Total
      operating expenses
                  
                  
                  9,360
                  
                  
                  
                  8,874Loss
      from continuing operations - before federal income tax expense
      (benefit)
                  
                  
                  (5,627
                  )
                  
                  
                  (4,781
                  )Income
      tax expense (benefit) from continuing operations (Note 10)
                  
                  
                  1,090
                  
                  
                  
                  (1,601
                  )Net
      loss from continuing operations
                  
                  
                  (6,717
                  )
                  
                  
                  (3,180
                  )Loss
      from discontinued operations, net of tax benefit of $24 and $31,
      respectively (Note 15)
                  
                  
                  (46
                  )
                  
                  
                  (61
                  )Net
      loss
                  
                  $
                  (6,763
                  )
                  
                  $
                  (3,241
                  )Per
      Share DataLoss
      per share from continuing operationsBasic
                  
                  $
                  (2.33
                  )
                  
                  $
                  (1.10
                  )Diluted
                  
                  $
                  (2.33
                  )
                  
                  $
                  (1.10
                  )Loss
      per share from discontinued operationsBasic
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.02
                  )Diluted
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.02
                  )Net
      loss per shareBasic
                  
                  $
                  (2.34
                  )
                  
                  $
                  (1.12
                  )Diluted
                  
                  $
                  (2.34
                  )
                  
                  $
                  (1.12
                  )Dividends
      per common share
                  
                  $
                  -
                  
                  
                  $
                  0.15
 
 See Notes
to Consolidated
 Financial
Statements.
  4
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
  
  Consolidated
Statement of Changes in Stockholders’ Equity
 (000s
omitted)
  Shares
                  
                  
                  Common
                    Stock
                  
                  
                  Treasury
      Stock
                  
                  
                  Additional
                    Paid-in
                    Capital
                  
                  
                  Unearned
                    Compensation
                  
                  
                  Retained
                    Earnings
                  
                  
                  Unallocated
                    ESOP Shares
                  
                  
                  Accumulated
                    Other
                    Comprehensive
                    Income
      (Loss)
                  
                  
                  Total
                    Stockholders'
                    EquityBalance
      - January 1, 2008
                  
                  
                  3,192
                  
                  
                  $
                  32
                  
                  
                  $
                  (2,964
                  )
                  
                  $
                  24,328
                  
                  
                  $
                  (415
                  )
                  
                  $
                  12,416
                  
                  
                  $
                  (959
                  )
                  
                  $
                  65
                  
                  
                  $
                  32,503Comprehensive
      income (loss):Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,241
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,241
                  )Other
      comprehensive income:Unrealized
      appreciation on available-for- sale securities - Net of tax of
      $140
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  272
                  
                  
                  
                  272Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,969
                  )ESOP
      common stock committed to be released
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (123
                  )
                  
                  
                  -
                  
                  
                  
                  20
                  
                  
                  
                  194
                  
                  
                  
                  -
                  
                  
                  
                  91Stock
      options/MRP shares expensed
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  101
                  
                  
                  
                  125
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  226Dividends
      declared
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (432
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (432
                  )Balance
      - December 31, 2008
                  
                  
                  3,192
                  
                  
                  
                  32
                  
                  
                  
                  (2,964
                  )
                  
                  
                  24,306
                  
                  
                  
                  (290
                  )
                  
                  
                  8,763
                  
                  
                  
                  (765
                  )
                  
                  
                  337
                  
                  
                  
                  29,419Comprehensive
      income (loss):Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (6,763
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (6,763
                  )Other
      comprehensive income:Unrealized
      appreciation on available-for- sale securities - Net of tax of
      $44
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  86
                  
                  
                  
                  86Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (6,677
                  )ESOP
      common stock committed to be released
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (666
                  )
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  765
                  
                  
                  
                  
                  
                  
                  
                  99Stock
      options/MRP shares expensed
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  83
                  
                  
                  
                  128
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  211Balance
      - December 31, 2009
                  
                  
                  3,192
                  
                  
                  $
                  32
                  
                  
                  $
                  (2,964
                  )
                  
                  $
                  23,723
                  
                  
                  $
                  (162
                  )
                  
                  $
                  2,000
                  
                  
                  $
                  -
                  
                  
                  $
                  423
                  
                  
                  $
                  23,052
  See Notes
to Consolidated
 Financial
Statements.
  5
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Consolidated
Statement of Cash Flows
 (000s
omitted, except per share data)
 
 Year Ended December 312009
                      
                      
                      2008Cash
      Flows from Operating ActivitiesNet
      loss
                      
                      $
                      (6,763
                      )
                      
                      $
                      (3,241
                      )Adjustments
      to reconcile net loss to cash from operating activities:Depreciation
      and amortization
                      
                      
                      835
                      
                      
                      
                      781Provision
      for loan losses
                      
                      
                      6,196
                      
                      
                      
                      4,421Amortization
      and accretion on securities
                      
                      
                      82
                      
                      
                      
                      60ESOP
      contribution
                      
                      
                      99
                      
                      
                      
                      91Stock
      options/awards
                      
                      
                      211
                      
                      
                      
                      226Gain
      on sale of loans held for sale
                      
                      
                      (585
                      )
                      
                      
                      (116
                      )Originations
      of loans held for sale
                      
                      
                      (49,858
                      )
                      
                      
                      (11,641
                      )Proceeds
      from sale of loans held for sale
                      
                      
                      50,497
                      
                      
                      
                      11,650Net
      change in:Accrued
      interest receivable
                      
                      
                      239
                      
                      
                      
                      231Other
      assets
                      
                      
                      (2,735
                      )
                      
                      
                      (1,872
                      )Prepaid
      FDIC insurance premiums
                      
                      
                      (1,315
                      )
                      
                      
                      -Accrued
      expenses and other liabilities
                      
                      
                      276
                      
                      
                      
                      948Deferred
      income tax expense (benefit)
                      
                      
                      1,775
                      
                      
                      
                      (1,179
                      )Net
      cash (used in) provided by operating activities
                      
                      
                      (1,046
                      )
                      
                      
                      359-
                      
                      
                      
                      -Cash
      Flows from Investing ActivitiesNet
      decrease in loans
                      
                      
                      14,856
                      
                      
                      
                      4,642Proceeds
      from maturity of securities
                      
                      
                      13,890
                      
                      
                      
                      16,802Proceeds
      from sale of securities available-for-sale
                      
                      
                      -
                      
                      
                      
                      1,022Net
      change in discontinued operations
                      
                      
                      1,534
                      
                      
                      
                      350Proceeds
      from sale of property and equipment
                      
                      
                      11
                      
                      
                      
                      157Purchase
      of securities available for sale
                      
                      
                      (21,795
                      )
                      
                      
                      (22,363
                      )Purchases
      of securities held-to-maturity
                      
                      
                      -
                      
                      
                      
                      (1,339
                      )Purchase
      of premises and equipment
                      
                      
                      (167
                      )
                      
                      
                      (193
                      )Net
      cash provided by (used for) investing activities
                      
                      
                      8,329
                      
                      
                      
                      (922
                      )Cash
      Flows from Financing ActivitiesNet
      increase (decrease) in deposits
                      
                      
                      (7,678
                      )
                      
                      
                      7,945Dividends
      paid on common stock
                      
                      
                      -
                      
                      
                      
                      (432
                      )Net
      increase (decrease) in Repo Sweep Accts
                      
                      
                      (4,039
                      )
                      
                      
                      2,810Additions
      to advances from FHLB and Notes Payable
                      
                      
                      85,180
                      
                      
                      
                      22,200Repayments
      of advances from FHLB and Notes Payable
                      
                      
                      (81,118
                      )
                      
                      
                      (33,830
                      )Net
      cash used in financing activities
                      
                      
                      (7,655
                      )
                      
                      
                      (1,307
                      )Net
      Decrease in Cash and Cash Equivalents
                      
                      
                      (372
                      )
                      
                      
                      (1,870
                      )Cash and Cash Equivalents- Beginning of year
                      
                      
                      3,471
                      
                      
                      
                      5,341Cash and Cash
      Equivalents - End of year
                      
                      $
                      3,099
                      
                      
                      $
                      3,471Supplemental
      Cash Flow and Noncash InformationCash
      paid for income taxes
                      
                      $
                      15
                      
                      
                      $
                      -Cash
      paid for interest on deposits and borrowings
                      
                      
                      5,284
                      
                      
                      
                      7,360Transfer
      of loans to real estate owned
                      
                      
                      6,382
                      
                      
                      
                      2,916
 
 See Notes
to Consolidated
 Financial
Statements.
  6
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (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, consumer and mortgage
loans, and engaging in mortgage banking activities.
  Discontinued Operations– In
accordance with FASB ASC 360-10, Accounting for Impairment or
Disposal of Long-Lived Assets, on February 27, 2009 the Company announced
that it had sold the InsuranCenter of Alpena. Accordingly, the financial
position and results of operations of the InsuranCenter are removed from the
detail line items in the Company’s consolidated financial statements and
presented separately as “discontinued operations.” Please refer to Note 15 to
the Company’s Consolidated Financial Statements for additional
information.
  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 FFNM Agency.  FSMC invests in real estate, which includes
leasing, selling, developing, and maintaining real estate
properties.  The main activity of FFNM Agency is to collect the stream
of income associated with the sale of the Blue Cross/Blue Shield override
business to an outside party and, to a lesser extent, the collection of
commissions for the sale of non-insured investment products. 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 intangible assets, deferred tax assets and
mortgage servicing rights.
  7
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
1 - Summary of Significant Accounting Policies (Continued)
  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.
  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-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized
losses.  In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value.  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.
  8
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
  Note
1 - Summary of Significant Accounting Policies (Continued)
  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, 2009 and 2008.
  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, 2009 and 2008.
  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.
  Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off 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 using the interest method.
  9
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
  Note
1 - Summary of Significant Accounting Policies (Continued)
  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, 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.
  10
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
1 - Summary of Significant Accounting Policies (Continued)
  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 non-interest 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
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.
  11
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
1 - Summary of Significant Accounting Policies (Continued)
    Loans Held for Sale - The Bank
routinely sells to investors its long-term fixed rate residential mortgages.
These loans are identified 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, 2009 and 2008.
  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.
  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 - The
Company has in the past purchased a branch or branches from other financial
institutions. The analysis of these branch acquisitions led the
Company to conclude that in each case, we acquired a business and
therefore, the excess of purchase price over fair value of net assets acquired
has been allocated to core deposit intangible assets. The conclusion was
based on the fact that in each case we acquired employees, customers and branch
facilities. 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 straightline basis. The core deposit intangible is analyzed quarterly for
impairment.
  12
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
1 - Summary of Significant Accounting Policies (Continued)
  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 were achieved.  All of the sales
level targets were achieved and the earn-out payments were added to the cost of
acquisition and goodwill.
  On
February 27, 2009 the Company announced that it had sold the majority of the
assets of the InsuranCenter of Alpena. In accordance FASB ASC 360-10, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” the financial position and results of
operations of the InsuranCenter of Alpena are removed from the detailed line
items in the Company’s financial statements and presented separately as
“discontinued operations.” Included in the discontinued operations as of
December 31, 2008 is $802,000 of amortizable intangibles which represents the
entire balance of amortizable intangibles related to ICA as of December 31,
2008.
  Goodwill
was created in the ICA transaction.The remaining goodwill of
$600,000 relates to certain assets of the Company that were not sold in the sale
of ICA. The Company allocated the goodwill between the assets sold and the
assets retained. The assets retained relate to a future stream of commissions.
Under an agreement, the Company will receive a portion of the override
commission through April, 2014. Management computed an estimated cash flow on
this commission and using a 6.0% discount rate determined a fair value of
$600,000. Since the $600,000 allocation of fair value relates to a finite life
asset, the Company re-characterized the goodwill as an amortizable intangible
and began amortizing the asset in March, 2009.
  Income Taxes - Deferred income
tax assets and liabilities are recognized for temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
  13
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
1 - Summary of Significant Accounting Policies (Continued)
 
 The
Company records a valuation allowance if it believes, based on available
evidence, that it is “more likely than not” that the future tax assets
recognized will not be realized before their expiration. Realization of the
Company’s deferred tax assets is primarily dependent upon the generation of a
sufficient level of future taxable income.
 
 At
December 31, 2009, management did not believe it was more likely than not
that all of the deferred tax assets would be realized and, accordingly, recorded
a $3.4 million valuation allowance leaving a net deferred tax asset recorded of
$559,000.
 
 Off Balance Sheet
Instruments-In
the ordinary course of business, the Company 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.
 
 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.
  Stock Based Compensation – The
Company applies the recognition and measurement of stock based compensation
accounting rules for stock based compensation which is referred to as the fair
value method. Compensation cost is based on the fair value of the equity issued
to employees. The Company recognizes compensation expense related to restricted
stock awards over the period the services are performed. The Company granted no
options in 2009 and 2008. Compensation costs charged to earnings were $211,000
and $226,000 in 2009 and 2008, respectively.
  14
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
1 - Summary of Significant Accounting Policies (Continued)
  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. Approximately 115,000 and 80,000 options were not considered for
dilution in 2009 and 2008, respectively, based on the Company’s net loss for the
periods.
  Earnings
per common share have been computed based on the following:
  December 31,2009
                    
                    
                    2008Net
      loss from continuing operations
                    
                    $
                    (6,717
                    )
                    
                    $
                    (3,180
                    )Net
      loss from discontinued operations
                    
                    
                    (46
                    )
                    
                    
                    (61
                    )Net
      loss
                    
                    $
                    (6,763
                    )
                    
                    $
                    (3,241
                    )Average
      number of common shares outstanding
                    
                    
                    2,884,249
                    
                    
                    
                    2,884,249Effect
      of dilutive options
                    
                    
                    -
                    
                    
                    
                    -Average
      number of common shares outstanding used to calculate diluted earnings per
      common share
                    
                    
                    2,884,249
                    
                    
                    
                    2,884,249
 
 Fair Value Measurements -
Accounting standards require certain assets and liabilities be reported at fair
value on the financial statements and provide a framework for establishing that
fair value.  The framework for determining fair value is based on a
hierarchy that prioritizes the inputs and valuation techniques used to measure
fair value.
 
 The
following tables present information about the Company’s assets measured at fair
value on a recurring basis at December 31, 2009 and 2008, and the valuation
techniques used by the Company to determine those fair values.
  15
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
1 - Summary of Significant Accounting Policies (Continued)
  Assets Measured at Fair Value on a Recurring Basis at December 31, 2009Quoted Prices
                            in Active
                            Markets for
                            Identical Assets
                            (Level 1)
                          
                          
                          Significant
                            Other
                            Observable
                            Inputs (Level 2)
                          
                          
                          Significant
                            Unobservable
                            Inputs (Level 3)
                          
                          
                          Balance at
                            December 31,
                            2009AssetsInvestment
      securities- available-for-sale
                          
                          $
                          -
                          
                          
                          $
                          33,713
                          
                          
                          $
                          -
                          
                          
                          $
                          33,713
 
 Assets Measured at Fair Value on a Recurring Basis at December 31, 2008Quoted Prices
                            in Active
                            Markets for
                            Identical Assets
                            (Level 1)
                          
                          
                          Significant
                            Other
                            Observable
                            Inputs (Level 2)
                          
                          
                          Significant
                            Unobservable
                            Inputs (Level 3)
                          
                          
                          Balance at
                            December 31,
                            2008AssetsInvestment
      securities- available-for-sale
                          
                          $
                          -
                          
                          
                          $
                          25,665
                          
                          
                          $
                          -
                          
                          
                          $
                          25,665
 
 In
general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that the Corporation has the ability
to access.
 
 Fair
values determined by Level 2 inputs use other inputs that are observable, either
directly or indirectly. These Level 2 inputs include quoted prices for similar
assets and liabilities in active markets, and other inputs such as interest
rates and yield curves that are observable at commonly quoted
intervals.
 
 Level 3
inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset.
These Level 3 fair value measurements are based primarily on management’s own
estimates using pricing models, discounted cash flow methodologies, or similar
techniques taking into account the characteristics of the asset.
 
 In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company’s assessment of the significance of particular inputs to
these fair value measurements requires judgment and considers factors specific
to each asset or liability.
  16
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
1 - Summary of Significant Accounting Policies (Continued)
  The
Company also has assets that under certain conditions are subject to measurement
at fair value on a nonrecurring basis. These assets include impaired loans and
other real estate owned.  The Company has estimated the fair values of
these assets based primarily on Level 3 inputs as described above.  At
December 31, 2009 and 2008, the Company recognized noncash impairment charges of
$4,550,000 and $3,746,000, respectively, to adjust these assets to their
estimated fair values.
 
 Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2009Balance at
                                December 31,
                                2009
                              
                              
                              Quoted Prices
                                in Active
                                Markets for
                                IdenticalAssets
                                (Level1)
                              
                              
                              Significant
                                Other
                                Observable
                                Inputs (Level2)
                              
                              
                              Significant
                                Unobservable
                                Inputs (Level 3)
                              
                              
                              Change in fair
                                value for the
                                twelve-month
                                period ended
                                December 31,
                                2009Impaired
      loans accounted for under FASB ASC 310-10
                              
                              $
                              5,846
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              5,846
                              
                              
                              $
                              3,584Other
      real estate owned -residential mortgages
                              
                              $
                              584
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              584
                              
                              
                              $
                              11Other
      Real estate owned - commercial
                              
                              $
                              2,996
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              2,996
                              
                              
                              $
                              955Total
      change in fair value
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              4,550
  17
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
1 - Summary of Significant Accounting Policies (Continued)
  Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2008Balance at
                                December 31,
                                2008
                              
                              
                              Quoted Prices
                                in Active
                                Markets for
                                IdenticalAssets
                                (Level 1)
                              
                              
                              Significant
                                Other
                                Observable
                                Inputs (Level 2)
                              
                              
                              Significant
                                Unobservable
                                Inputs (Level 3)
                              
                              
                              Change in fair
                                value for the
                                twelve-month
                                period ended
                                December 31,
                                2008Impaired
      loans accounted for under FASB ASC 310-10
                              
                              $
                              9,986
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              9,986
                              
                              
                              $
                              3,562Other
      real estate owned -residential mortgages
                              
                              $
                              686
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              686
                              
                              
                              $
                              68Other
      Real estate owned - commercial
                              
                              $
                              952
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              882
                              
                              
                              $
                              116Total
      change in fair value
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              3,746
  The
Company does not record loans at fair value on a recurring
basis.  However, on occasion, a loan is considered impaired and an
allowance for loan loss is established.  A loan is considered impaired
when it is probable that all of the principal and interest under the original
terms of the loan may not be collected.  Once a loan is identified as
individually impaired, management measures the impairment in accordance with
FASB ASC 310-10, Accounting by
Creditors for Impairment of a Loan.  In accordance with FASB
ASC 820-10, Fair Value
Measurements, impaired loans where an allowance is established based on
fair value of collateral require classification in the fair value
hierarchy.  When fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the
impaired loan as nonrecurring Level 2.  When an appraised value is not
available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the
Company records the impaired value as nonrecurring Level 3.
 
 Other
real estate owned assets are reported in the above nonrecurring table at initial
recognition of impairment and on an ongoing basis until recovery or charge-off.
At the time of foreclosure or repossession, real estate owned and repossessed
assets are adjusted to fair value less costs to sell upon transfer of the loans
to real estate
owned and repossessed assets, establishing a new cost basis. At that time, they
are reported in the Company’s fair value disclosures in the above nonrecurring
table.
  18
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
1 - Summary of Significant Accounting Policies (Continued)
 
 Recent Accounting
Pronouncements –
  In June
2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, The FASB
Accounting Standards CodificationTM and the Hierarchy of Generally Accepted
Accounting Principles — a replacement of FASB Statement No. 162. SFAS No.
168 establishes the FASB Accounting Standard CodificationTM (Codification) as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with generally accepted accounting principles in the United States
(U.S. GAAP). All guidance contained in the Codification carries an equal level
of authority. The Codification does not change current U.S. GAAP, but is
intended to simplify user access to all authoritative U.S. GAAP by providing all
the authoritative literature related to a particular topic in one place. On the
effective date of SFAS No. 168, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. The Codification is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The implementation of the Codification during the year ended December 31,
2009 had no impact on the Company’s results of operations or financial position.
However, as a result of implementation of the Codification, previous references
to new accounting standards and literature are no longer applicable. All future
references to authoritative accounting literature in our consolidated financial
statements will be referenced in accordance with the
Codification.
  19
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (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:
  December 31, 2009Amortized
                        Cost
                      
                      
                      Gross
                        Unrealized
                        Gains
                      
                      
                      Gross
                        Unrealized
                        Losses
                      
                      
                      Market
                        ValueSecurities
      Available for SaleU.S.
      Treasury securities and obligations of U.S. government corporations and
      agencies
                      
                      $
                      8,220
                      
                      
                      $
                      37
                      
                      
                      $
                      -
                      
                      
                      
                      8,257Municipal
      notes
                      
                      
                      7,870
                      
                      
                      
                      183
                      
                      
                      
                      -
                      
                      
                      
                      8,053Corporate
      securities
                      
                      
                      1,000
                      
                      
                      
                      2
                      
                      
                      
                      -
                      
                      
                      
                      1,002Mortgage-backed
      securities
                      
                      
                      15,979
                      
                      
                      
                      419
                      
                      
                      
                      1
                      
                      
                      
                      16,397Other
      securities
                      
                      
                      3
                      
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      4Total
                      
                      $
                      33,072
                      
                      
                      $
                      642
                      
                      
                      $
                      1
                      
                      
                      $
                      33,713Securities
      Held to MaturityMunicipal
      notes
                      
                      $
                      3,928
                      
                      
                      $
                      159
                      
                      
                      $
                      3
                      
                      
                      $
                      4,084
 
 December 31, 2008Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gains
                    
                    
                    Gross
                      Unrealized
                      Losses
                    
                    
                    Market
                      ValueSecurities
      Available for SaleU.S.
      Treasury securities and obligations of U.S. government corporations and
      agencies
                    
                    $
                    5,680
                    
                    
                    $
                    88
                    
                    
                    $
                    -
                    
                    
                    $
                    5,768Municipal
      notes
                    
                    
                    3,920
                    
                    
                    
                    58
                    
                    
                    
                    3
                    
                    
                    
                    3,975Corporate
      securities
                    
                    
                    1,500
                    
                    
                    
                    4
                    
                    
                    
                    -
                    
                    
                    
                    1,504Mortgage-backed
      securities
                    
                    
                    14,051
                    
                    
                    
                    366
                    
                    
                    
                    1
                    
                    
                    
                    14,416Other
      securities
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    1
                    
                    
                    
                    2Total
                    
                    $
                    25,154
                    
                    
                    $
                    516
                    
                    
                    $
                    5
                    
                    
                    $
                    25,665Securities
      Held to MaturityMunicipal
      notes
                    
                    $
                    4,022
                    
                    
                    $
                    14
                    
                    
                    $
                    87
                    
                    
                    $
                    3,949
  20
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
  Note
2 - Securities (Continued)
  The
amortized cost and estimated market value of securities at December 31,
2009, 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:
  December 31, 2009Amortized
                      Cost
                    
                    
                    Market
                      ValueAvailable
      For Sale:Due
      in one year or less
                    
                    $
                    1,502
                    
                    
                    $
                    1,506Due
      after one year through five years
                    
                    
                    14,730
                    
                    
                    
                    14,936Due
      in five year through ten years
                    
                    
                    613
                    
                    
                    
                    622Due
      after ten years
                    
                    
                    245
                    
                    
                    
                    248Subtotal
                    
                    
                    17,090
                    
                    
                    
                    17,312Equity
      securities
                    
                    
                    3
                    
                    
                    
                    4Mortgage-backed
      securities
                    
                    
                    15,979
                    
                    
                    
                    16,397Total
                    
                    $
                    33,072
                    
                    
                    $
                    33,713Held
      To MaturityDue
      in one year or less
                    
                    $
                    85
                    
                    
                    $
                    86Due
      after one year through five years
                    
                    
                    1,375
                    
                    
                    
                    1,428Due
      in five year through ten years
                    
                    
                    923
                    
                    
                    
                    954Due
      after ten years
                    
                    
                    1,545
                    
                    
                    
                    1,616Total
                    
                    $
                    3,928
                    
                    
                    $
                    4,084
  At
December 31, 2009 and 2008, securities with a carrying value and fair value
of $24,265,000 and $13,257,000, 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, 2009 and 2008 were $0 and $1,022,000, respectively, resulting
in gross gains of $0 and $16,000, respectively and gross losses of $0 and
$10,000, respectively.  The tax provision applicable to these net
realized gains amounted to $0 and $2,000, respectively.
   21
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (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, 2009
and 2008:
  December 31, 2009
                        
                        
                        December 31, 2008Gross
                          Unrealized
                          Losses
                        
                        
                        
                        
                        
                        Gross
                          Unrealized
                          Losses
                        
                        
                        
                        
                        
                        Gross
                          Unrealized
                          Losses
                        
                        
                        
                        
                        
                        Gross
                          Unrealized
                          LossesFairValue
                        
                        
                        <12
                          months
                        
                        
                        FairValue
                        
                        
                        > 12
                          months
                        
                        
                        FairValue
                        
                        
                        <12months
                        
                        
                        FairValue
                        
                        
                        > 12
                          monthsAvailable
      For Sale:U.S.
      Treasury securities and obligations of U.S. government corporations and
      agencies
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Corporate
      and other securities
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Municipal
      notes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        243
                        
                        
                        
                        3
                        
                        
                        
                        -
                        
                        
                        
                        -Mortgage-backed
      securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        13
                        
                        
                        
                        1
                        
                        
                        
                        22
                        
                        
                        
                        -
                        
                        
                        
                        15
                        
                        
                        
                        1Total
      Securities available for sale
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        13
                        
                        
                        $
                        1
                        
                        
                        $
                        265
                        
                        
                        $
                        3
                        
                        
                        $
                        15
                        
                        
                        $
                        1Held
      to Maturity:Municipal
      notes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        27
                        
                        
                        
                        3
                        
                        
                        
                        1,901
                        
                        
                        
                        68
                        
                        
                        
                        216
                        
                        
                        
                        20Total
      Securities held to maturity
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        27
                        
                        
                        $
                        3
                        
                        
                        $
                        1,901
                        
                        
                        $
                        68
                        
                        
                        $
                        216
                        
                        
                        $
                        20
  The
unrealized losses on the securities held in the portfolio are not considered
other than temporarily impaired (OTTI) and have not been recognized into income.
This decision is based on the Company’s ability and intent to hold any
potentially impaired security until maturity. The performance of the security is
based on the contractual terms of the agreement, the extent of the impairment
and the financial condition and credit quality of the issuer. The decline in
market value is considered temporary and a result of changes in interest rates
and other market variables.
  22
  First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
  Note
3 - Loans
  Loans at
December 31, 2009 and 2008 are summarized as follows:
  December 312009
                      
                      
                      2008Real
      estate loans - One- to four-family residential
                      
                      $
                      81,620
                      
                      
                      $
                      92,364Commercial
      loans:Secured
      by real estate
                      
                      
                      62,376
                      
                      
                      
                      62,340Other
                      
                      
                      9,873
                      
                      
                      
                      17,620Total
      commercial loans
                      
                      
                      72,249
                      
                      
                      
                      79,960Consumer
      loans:Secured
      by real estate
                      
                      
                      18,732
                      
                      
                      
                      22,303Other
                      
                      
                      2,553
                      
                      
                      
                      3,564Total
      consumer loans
                      
                      
                      21,285
                      
                      
                      
                      25,867Total
      gross loans
                      
                      
                      175,154
                      
                      
                      
                      198,191Less:Net
      deferred loan fees
                      
                      
                      275
                      
                      
                      
                      274Allowance
      for loan losses
                      
                      
                      3,660
                      
                      
                      
                      5,647Total
      loans - net
                      
                      $
                      171,219
                      
                      
                      $
                      192,270
  Final
loan maturities and rate sensitivity of the loan portfolio are as
follows:
  December 31, 2009Less Than
                      One Year
                    
                    
                    One Year
                      to Five
                      Years
                    
                    
                    After
                      Five
                      Years
                    
                    
                    TotalLoans
      at fixed interest rates
                    
                    $
                    14,024
                    
                    
                    $
                    37,241
                    
                    
                    $
                    48,420
                    
                    
                    $
                    99,685Loans
      at variable interest rates
                    
                    
                    13,746
                    
                    
                    
                    10,804
                    
                    
                    
                    50,919
                    
                    
                    
                    75,469Total
                    
                    $
                    27,770
                    
                    
                    $
                    48,045
                    
                    
                    $
                    99,339
                    
                    
                    $
                    175,154
  Certain
directors and executive officers of the Company were loan customers during 2009
and 2008.  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, 2009 and 2008 is as follows:
  December 312009
                    
                    
                    2008Aggregate
      balance - Beginning of Period
                    
                    $
                    4,428
                    
                    
                    $
                    3,737New
      loans
                    
                    
                    2,379
                    
                    
                    
                    3,528Repayments
                    
                    
                    (2,876
                    )
                    
                    
                    (2,837
                    )Aggregate
      balance - End of Period
                    
                    $
                    3,931
                    
                    
                    $
                    4,428
  23
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
3 - Loans (Continued)
  An
analysis of the allowance for loan losses is as follows:
  Year Ended December 312009
                    
                    
                    2008Balance
      - Beginning of period
                    
                    $
                    5,647
                    
                    
                    $
                    4,013Provision
      for losses
                    
                    
                    6,196
                    
                    
                    
                    4,421Charge-offs
                    
                    
                    (8,247
                    )
                    
                    
                    (2,837
                    )Recoveries
                    
                    
                    64
                    
                    
                    
                    50Balance
      - End of period
                    
                    $
                    3,660
                    
                    
                    $
                    5,647
 
 The
following is a summary of information pertaining to impaired, non-accrual and
delinquent loans:
  December 312009
                    
                    
                    2008Impaired
      loans without a valuation allowance
                    
                    $
                    3,502
                    
                    
                    $
                    -Impaired
      loans with a valuation allowance
                    
                    
                    2,344
                    
                    
                    
                    9,986Total
      impaired loans
                    
                    $
                    5,846
                    
                    
                    $
                    9,986Valuation
      allowance related to impaired loans
                    
                    $
                    743
                    
                    
                    $
                    3,617Total
      non-accrual loans
                    
                    $
                    8,947
                    
                    
                    $
                    11,952Total
      loans past-due ninety days or more and still accruing
                    
                    $
                    2,839
                    
                    
                    $
                    217
  Year Ended December 312009
                    
                    
                    2008Average
      investment in impaired loans
                    
                    $
                    14,914
                    
                    
                    $
                    9,565Interest
      income recognized on impaired loans
                    
                    $
                    -
                    
                    
                    $
                    -Interest
      income recognized on a cash basis on impaired loans
                    
                    $
                    -
                    
                    
                    $
                    -
  No additional funds are committed to be
advanced in connection with impaired loans.
  24
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
4 - Property and Equipment
  A summary
of property and equipment is as follows:
  December 312009
                        
                        
                        2008Land
                        
                        $
                        1,198
                        
                        
                        $
                        1,198Land
      improvements
                        
                        
                        221
                        
                        
                        
                        209Buildings
                        
                        
                        6,528
                        
                        
                        
                        6,552Equipment
                        
                        
                        3,570
                        
                        
                        
                        3,616Total
      property and equipment
                        
                        
                        11,517
                        
                        
                        
                        11,575Accumulated
      depreciation
                        
                        
                        4,953
                        
                        
                        
                        4,485Net
      property and equipment
                        
                        $
                        6,564
                        
                        
                        $
                        7,090
  Depreciation
expense was $562,000 and $592,000 for the periods ended December 31, 2009
and 2008, 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 $140,562,000 and $127,018,000
at December 31, 2009 and 2008, respectively.
  The
balance of capitalized servicing rights, net of valuation allowance, is included
in other assets at December 31, 2009 and 2008.
  The key
economic assumptions used in determining the fair value of the mortgage
servicing rights are as follows:
  December 31,2009
                        
                        
                        2008Annual
      constant prepayment speed (CPR)
                        
                        
                        17.23
                        %
                        
                        
                        12.72
                        %Weighted
      average life (in months)
                        
                        
                        249
                        
                        
                        
                        241Discount
      rate
                        
                        
                        8.17
                        %
                        
                        
                        8.00
                        %
  The fair
value of our mortgage servicing rights was estimated to be $1,144,000 and
$1,163,000 and the weighted average life remaining of those rights was 37 months
and 44 months at December 31, 2009 and December 31, 2008,
respectively.
  25
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (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:
  December 312009
                        
                        
                        2008Balance,
      beginning of period
                        
                        $
                        430
                        
                        
                        $
                        492Originated
      mortgage servicing rights capitalized
                        
                        
                        584
                        
                        
                        
                        130Amortization
      of mortgage servicing rights
                        
                        
                        (284
                        )
                        
                        
                        (192
                        )Balance
      - end of period
                        
                        
                        730
                        
                        
                        
                        430Valuation
      allowances:Balance
      at beginning of year
                        
                        
                        -
                        
                        
                        
                        -Additions
                        
                        
                        -
                        
                        
                        
                        -Reductions
                        
                        
                        -
                        
                        
                        
                        -Write-downs
                        
                        
                        -
                        
                        
                        
                        -Balance,
      end of year (net of allowances)
                        
                        $
                        730
                        
                        
                        $
                        430
  26
 
 First
Federal of Northern Michigan Bancorp, Inc.  and
Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)
 
 Note
6 - Intangible Assets
  Intangible
assets of the Company are summarized as follows:
  December 31, 2009Gross Carrying
                        Amount
                      
                      
                      Accumulated
                        Amortization
                      
                      
                      Net Carrying
                        AmountAmortized
      intangible assets:Customer
      list
                      
                      $
                      1,454
                      
                      
                      $
                      1,454
                      
                      
                      $
                      -Customer
      contract
                      
                      
                      597
                      
                      
                      
                      597
                      
                      
                      
                      -Core
      deposit
                      
                      
                      3,081
                      
                      
                      
                      2,664
                      
                      
                      
                      417Non-compete
      covenant
                      
                      
                      200
                      
                      
                      
                      200
                      
                      
                      
                      -Commission
      residual
                      
                      
                      600
                      
                      
                      
                      97
                      
                      
                      
                      503Total
                      
                      $
                      5,932
                      
                      
                      $
                      5,012
                      
                      
                      $
                      920
 
 December 31, 2008Gross Carrying
                        Amount
                      
                      
                      Accumulated
                        Amortization
                      
                      
                      Net Carrying
                        AmountAmortized
      intangible assets:Customer
      list
                      
                      $
                      1,454
                      
                      
                      $
                      735
                      
                      
                      $
                      719Customer
      contract
                      
                      
                      597
                      
                      
                      
                      597
                      
                      
                      
                      -Core
      deposit
                      
                      
                      3,081
                      
                      
                      
                      2,488
                      
                      
                      
                      593Non-compete
      covenant
                      
                      
                      200
                      
                      
                      
                      117
                      
                      
                      
                      83Total
                      
                      $
                      5,332
                      
                      
                      $
                      3,937
                      
                      
                      $
                      1,395
  27


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)




Note 6 - Intangible
Assets(Continued)




The
intangibles listed above relate to both continuing operations and discontinued
operations. The core deposit and re-characterized goodwill of $600,000 (as
discussed below) relate to continuing operations. The customer list and
non-compete covenant items relate to discontinued operations (as discussed in
Note 15).




Amortization
expense was $273,000 and $425,000 for the periods ended December 31, 2009
and 2008, respectively.




As
discussed in Note 1, on February 27, 2009 the Company announced that it had sold
the majority of the assets of the InsuranCenter of Alpena. The Company allocated
the goodwill between the assets sold and the assets retained. The assets
retained relate to a future stream of commissions related to the override
commission discussed earlier. Under an agreement, the Company will receive a
portion of the override commission through April, 2014. Management computed an
estimated cash flow on this commission and using a 6.0% discount rate determined
a fair value of $600,000. Since the $600,000 allocation of fair value relates to
a finite life asset, the Company re-characterized the goodwill as an amortizable
intangible and began amortizing the asset in March, 2009. The remaining
estimated life as of December 31, 2009 is 4.3 years and the asset will be
amortized straight-line through April 1, 2014, or approximately $9,700 per
month.




The
remaining amortization period for the core deposit intangible as of December 31,
2009 is 2.4 years. The core deposit intangible will be amortized straight-line
through May, 2012 or approximately $14,700 per month.


28


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)


Note
7 - Deposits




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




December 312009
                          
                          
                          2008Account
      TypeNOW
      accounts and MMDA
                          
                          $
                          37,092
                          
                          
                          $
                          34,046Regular
      savings accounts
                          
                          
                          15,722
                          
                          
                          
                          14,857Total
                          
                          
                          52,814
                          
                          
                          
                          48,903Certificate of Deposit
Rates0.50
      percent to 0.99 percent
                          
                          
                          5,926
                          
                          
                          
                          -1.00
      percent to 1.99 percent
                          
                          
                          32,658
                          
                          
                          
                          8,5772.00
      percent to 2.99 percent
                          
                          
                          24,116
                          
                          
                          
                          11,7763.00
      percent to 3.99 percent
                          
                          
                          15,629
                          
                          
                          
                          42,4034.00
      percent to 4.99 percent
                          
                          
                          11,912
                          
                          
                          
                          38,2785.00
      percent to 8.99 percent
                          
                          
                          3,971
                          
                          
                          
                          5,431Total
      certificate of deposits
                          
                          
                          94,212
                          
                          
                          
                          106,465Total
      interest-bearing deposits
                          
                          $
                          147,026
                          
                          
                          $
                          155,368





Certificates
of deposit $100,000 or greater at December 31, 2009 and 2008 were
$31,642,000 and $35,649,000, respectively.  Congress temporarily
increased FDIC deposit insurance from $100,000 to $250,000 per depositor through
December 31, 2013.




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




December 31, 2009Amount DueRate
                                        
                                        Less than
                                          1 Year
                                        
                                        
                                        1-2
                                          Years
                                        
                                        
                                        2-3
                                          Years
                                        
                                        
                                        3-5
                                          Years
                                        
                                        
                                        Greater
                                          than
                                          5 Years
                                        
                                        
                                        Total0.50
      percent to0.99
      percent
                                        
                                        $
                                        5,926
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        5,9261.00
      percent to1.99
      percent
                                        
                                        
                                        28,203
                                        
                                        
                                        
                                        4,455
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        32,6582.00
      percent to2.99
      percent
                                        
                                        
                                        7,171
                                        
                                        
                                        
                                        10,448
                                        
                                        
                                        
                                        1,793
                                        
                                        
                                        
                                        3,809
                                        
                                        
                                        
                                        895
                                        
                                        
                                        
                                        24,1163.00
      percent to3.99
      percent
                                        
                                        
                                        7,568
                                        
                                        
                                        
                                        4,529
                                        
                                        
                                        
                                        440
                                        
                                        
                                        
                                        2,522
                                        
                                        
                                        
                                        570
                                        
                                        
                                        
                                        15,6294.00
      percent to4.99
      percent
                                        
                                        
                                        8,382
                                        
                                        
                                        
                                        2,235
                                        
                                        
                                        
                                        900
                                        
                                        
                                        
                                        264
                                        
                                        
                                        
                                        131
                                        
                                        
                                        
                                        11,9125.00
      percent to8.99
      percent
                                        
                                        
                                        3,303
                                        
                                        
                                        
                                        492
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        176
                                        
                                        
                                        
                                        3,971Total
                                        
                                        $
                                        60,553
                                        
                                        
                                        $
                                        22,159
                                        
                                        
                                        $
                                        3,133
                                        
                                        
                                        $
                                        6,595
                                        
                                        
                                        $
                                        1,772
                                        
                                        
                                        $
                                        94,212


29


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)


Note
7 – Deposits (Continued)




Interest
expense on deposits is summarized as follows:




Year Ended December 312009
                  
                  
                  2008NOW
      and MMDAs
                  
                  $
                  384
                  
                  
                  $
                  415Regular
      savings
                  
                  
                  17
                  
                  
                  
                  25Certificates
      of deposit
                  
                  
                  3,056
                  
                  
                  
                  4,457Total
                  
                  $
                  3,457
                  
                  
                  $
                  4,897





Deposits
from related parties held by the Bank at December 31, 2009 and 2008
amounted to $617,000 and $607,000, respectively.





Note
8 - Federal Home Loan Bank Advances




The Bank
has advances from the Federal Home Loan Bank. Interest rates range from 0.47% to
5.10% with a weighted average interest rate of 2.72%. These advances contain
varying maturity dates through December 30, 2013 with a weighted average
maturity of approximately 23 months. The advances are collateralized by
approximately $58,846,000 and $66,767,000 of mortgage loans as of December 31,
2009 and 2008, respectively.  In addition, at December 31, 2009 and
2008, securities with a carrying value of $16,256,000 and $13,257,000,
respectively, were pledged as collateral for Federal Home Loan Bank advances.
Available borrowings with the Federal Home Loan Bank at December 31, 2009
totaled $54,988,000, of which $44,400,000 was outstanding.




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:




December 31, 2009Years Ending
                    December 31
                  
                  Amount
                  
                  
                  Weighted Average
                    Interest Rate2010
                  
                  $
                  17,400
                  
                  
                  
                  3.662011
                  
                  
                  5,500
                  
                  
                  
                  1.512012
                  
                  
                  17,000
                  
                  
                  
                  2.412013
                  
                  
                  4,500
                  
                  
                  
                  3.29Total
                  
                  $
                  44,400
                  
                  
                  
                  2.72





Variable
rate advances totaled $400,000 at December 31, 2009.


30


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(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.  In January 2010, the balance of the note of $631,000 was
fully paid by the Company.




Note
10 - Federal Income Tax




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




Year Ended December 312009
                  
                  
                  2008Continuing
      operations:Current
      provision
                  
                  $
                  (685
                  )
                  
                  $
                  (422
                  )Deferred
      benefit
                  
                  
                  1,775
                  
                  
                  
                  (1,179
                  )-Total
      from continuing operations
                  
                  $
                  1,090
                  
                  
                  $
                  (1,601
                  )Discontinued
      operations
                  
                  
                  (24
                  )
                  
                  
                  (31
                  )Total
                  
                  $
                  1,066
                  
                  
                  $
                  (1,632
                  )





The
Company has net operating loss carryforwards of approximately  $8.2
million generated from inception through December 31, 2009 that are available to
reduce total taxable income through the years ending December 31,
2029.




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




Year Ended December 312009
                  
                  
                  2008Tax
      at statutory rate
                  
                  $
                  (1,913
                  )
                  
                  $
                  (1,626
                  )Increase
      (decrease) from:Change
      in valuation allowance
                  
                  
                  3,372
                  
                  
                  
                  -ESOP
      expense
                  
                  
                  (235
                  )
                  
                  
                  -Tax-exempt
      interest
                  
                  
                  (81
                  )
                  
                  
                  (65
                  )Other
                  
                  
                  (53
                  )
                  
                  
                  90Total
      income tax expense (recovery)
                  
                  $
                  1,090
                  
                  
                  $
                  (1,601
                  )


31


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)




Note
10 - Federal Income Tax (Continued)




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




December 312009
              
              
              2008Deferred tax assets:Allowance
      for loan losses
              
              $
              660
              
              
              $
              1,712Valuation
      allowance for real estate held for sale
              
              
              136
              
              
              
              70Non-accrual
      loan interest
              
              
              12
              
              
              
              142Directors'
      benefit plan
              
              
              361
              
              
              
              360Contributions
      carryover
              
              
              134
              
              
              
              133Net
      operating loss carryforward
              
              
              2,773
              
              
              
              433Investment
      in  subsidiary
              
              
              784
              
              
              
              493Other
              
              
              250
              
              
              
              164Total
      deferred tax assets
              
              
              5,110
              
              
              
              3,507Less:
      valuation allowance
              
              
              3,372
              
              
              
              -Deferred
      tax liabilities:Mortgage
      servicing rights
              
              
              248
              
              
              
              146Partnership
      losses
              
              
              113
              
              
              
              110Unrealized
      gain on available-for-sale securities
              
              
              218
              
              
              
              173Depreciation
              
              
              361
              
              
              
              457Other
              
              
              239
              
              
              
              242Total
      deferred tax liabilities
              
              
              1,179
              
              
              
              1,128Net
      deferred tax asset
              
              $
              559
              
              
              $
              2,379





The
contribution carryforward relates to $394,000 in contributions that were not
deductible in 2009.  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.




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, 2009 and 2008,
the amount of those reserves was approximately $60,000.  The amount of
the unrecognized deferred tax liability at December 31, 2009 and 2008 was
approximately $20,000.


32


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)


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:




December 312009
                    
                    
                    2008Commitments
      to grant loans
                    
                    $
                    12,000
                    
                    
                    $
                    14,242Unfunded
      commitments under lines of credit
                    
                    
                    13,976
                    
                    
                    
                    17,804Commercial
      and standby letters of credit
                    
                    
                    5
                    
                    
                    
                    5





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





Unfunded
commitments under commercial lines of credit, revolving credit lines, and
overdraft protection agreements are commitments for possible future extensions
of credit to existing customers. In most cases, 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.


33


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)





Note
11 - Off Balance Sheet Risk Commitments and Contingencies
(continued)




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 ASC 840-10-25-34, 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, 2009 and 2008.





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, 2009, 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.




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.




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


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)





Note
12- Stockholders’ Equity (continued)




Actual
                                    
                                    
                                    For Capital
                                      Adequacy Purposes
                                    
                                    
                                    To be Categorized as
                                      Well-Capitalized Under
                                      Prompt Corrective
                                      Action ProvisionsAmount
                                    
                                    
                                    Ratio
                                    
                                    
                                    Amount
                                    
                                    
                                    Ratio
                                    
                                    
                                    Amount
                                    
                                    
                                    Ratio(Dollars in Thousands)December
      31, 2009Total
      capital (to risk-weighted
      assets)
                                    
                                    $
                                    22,304
                                    
                                    
                                    
                                    13.6
                                    %
                                    
                                    $
                                    13,153
                                    
                                    
                                    
                                    8.0
                                    %
                                    
                                    $
                                    16,442
                                    
                                    
                                    
                                    10.0
                                    %Tier
      1 capital (to risk-weighted
      assets)
                                    
                                    $
                                    20,239
                                    
                                    
                                    
                                    12.3
                                    %
                                    
                                    $
                                    6,577
                                    
                                    
                                    
                                    4.0
                                    %
                                    
                                    $
                                    9,865
                                    
                                    
                                    
                                    6.0
                                    %Tangible
      capital (totangible
      assets)
                                    
                                    $
                                    20,239
                                    
                                    
                                    
                                    8.8
                                    %
                                    
                                    $
                                    3,470
                                    
                                    
                                    
                                    1.5
                                    %
                                    
                                    $
                                    4,627
                                    
                                    
                                    
                                    2.0
                                    %December
      31, 2008Total
      capital (to risk-weighted
      assets)
                                    
                                    $
                                    27,079
                                    
                                    
                                    
                                    15.8
                                    %
                                    
                                    $
                                    13,757
                                    
                                    
                                    
                                    8.0
                                    %
                                    
                                    $
                                    17,197
                                    
                                    
                                    
                                    10.0
                                    %Tier
      1 capital (to risk-weighted
      assets)
                                    
                                    $
                                    24,886
                                    
                                    
                                    
                                    14.5
                                    %
                                    
                                    $
                                    6,879
                                    
                                    
                                    
                                    4.0
                                    %
                                    
                                    $
                                    10,318
                                    
                                    
                                    
                                    6.0
                                    %Tangible
      capital (totangible
      assets)
                                    
                                    $
                                    24,886
                                    
                                    
                                    
                                    10.2
                                    %
                                    
                                    $
                                    3,655
                                    
                                    
                                    
                                    1.5
                                    %
                                    
                                    $
                                    4,873
                                    
                                    
                                    
                                    2.0
                                    %





Reconciliation
of GAAP to Regulatory Capital:





December 312009
                  
                  
                  2008GAAP
      Capital
                  
                  $
                  22,119
                  
                  
                  $
                  28,320Reconciling
      items:Less:
      Investment in and advances to nonincludable subsidaries
                  
                  
                  (311
                  )
                  
                  
                  (293
                  )Core
      deposit and other intangible assets
                  
                  
                  (920
                  )
                  
                  
                  (2,804
                  )Disallowed
      deferred tax asset
                  
                  
                  (226
                  )Unrealized
      (gain) loss on securities available for sale
                  
                  
                  (423
                  )
                  
                  
                  (337
                  )Tangible
      and core capital
                  
                  
                  20,239
                  
                  
                  
                  24,886Allowable
      unrealized (gain) loss on securities available for sale
                  
                  
                  1
                  
                  
                  
                  -General
      valuation allowance
                  
                  
                  2,064
                  
                  
                  
                  2,193Risk
      Based Capital
                  
                  $
                  22,304
                  
                  
                  $
                  27,079


35


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (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 was $36,000 and $68,000
for the years ended December 31, 2009 and 2008, 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.  Contributions to the
plan by the Bank are discretionary in nature in such amounts determined by the
Board of Directors. The expense under the plan for the years ended December 31,
2009 and 2008 was $0 and $158,000, 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 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
$850,000 and $836,000 at December 31, 2009 and 2008,
respectively.  The expense under the plan for the years ended
December 31, 2009 and 2008 was $98,000 and $101,000,
respectively.


36


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)


Note
13 - Employee Benefit Plans (Continued)




Employee Stock Ownership
Plan




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




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.




The Board
of Directors of the Company authorized prepayments of principal on the ESOP loan
of $715,000 and $24,000 in 2009 and 2008, respectively.  The loan was
paid in full as of December 31, 2009.


37


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)




Note
13 - Employee Benefit Plans (Continued)




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). During the year ended December 31, 2008 the
Company authorized the purchase by the ESOP of an additional 4,875 shares of
Company stock using the accumulated cash balance in the Plan, and 833 and 824
shares were sold into the open market during the years ended December 31, 2009
and 2008. Total compensation expense for the years ended December 31, 2009 and
2008 was $99,000 and $71,000, respectively.




Shares
held by the ESOP include the following:




December 312009
                  
                  
                  2008Allocated
                  
                  
                  182,570
                  
                  
                  
                  107,990Unallocated
                  
                  
                  -
                  
                  
                  
                  77,586Total
                  
                  
                  182,570
                  
                  
                  
                  185,576





There
were 2,173 and 1,212 shares distributed to ESOP participants in 2009 and 2008,
respectively.




The cost
of unallocated ESOP shares (shares not yet released for allocation) is reflected
as a reduction of stockholders’ equity. As of December 31, 2009 all shares in
the plan were allocated due to the prepayment of the ESOP loan.




Stock Based Compensation
Plans




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.


38


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)




Note
13 - Employee Benefit Plans (Continued)





Stock Options-A summary of option activity
under the Plan during the years ended December 31, 2009 and 2008 is presented
below:





Weighted-AverageWeighted-
                              
                              
                              RemainingAverage
                              
                              
                              Contractual Term
                              
                              
                              AggregateOptions
                              
                              Shares
                              
                              
                              Exercise Price
                              
                              
                              (Years)
                              
                              
                              Intrinsic ValueOutstanding
      at January 1, 2008
                              
                              
                              196,992
                              
                              
                              $
                              9.48
                              
                              
                              
                              8.5
                              
                              
                              $
                              0Granted
      in 2008
                              
                              
                              -
                              
                              
                              $
                              0.00Exercised
      in 2008
                              
                              
                              -
                              
                              
                              $
                              0.00Forfeited
      or Expired in 2008
                              
                              
                              (4,860
                              )
                              
                              $
                              9.56Outstanding
      at December 31, 2008
                              
                              
                              192,132
                              
                              
                              $
                              9.48
                              
                              
                              
                              7.5
                              
                              
                              $
                              0Granted
      in 2009
                              
                              
                              0
                              
                              
                              $
                              0.00Exercised
      in 2009
                              
                              
                              0
                              
                              
                              $
                              0.00Forfeited
      or expired in 2009
                              
                              
                              (4,000
                              )
                              
                              $
                              9.57Oustanding
      at December 31, 2009
                              
                              
                              188,132
                              
                              
                              $
                              9.47
                              
                              
                              
                              6.3
                              
                              
                              $
                              0Options
      Exercisable at December 31, 2009
                              
                              
                              114,656
                              
                              
                              $
                              9.44
                              
                              
                              
                              6.2
                              
                              
                              $
                              0


39


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)




Note
13 - Employee Benefit Plans (Continued)




A summary
of the status of the Company’s nonvested shares as of December 31, 2009 and 2008
and changes during the years then  ended is presented
below:




Weighted-AverageGrant-DateNonvested Shares
                  
                  Shares
                  
                  
                  Fair ValueNonvested
      at January 1, 2008
                  
                  
                  154,400
                  
                  
                  $
                  2.11Granted
                  
                  
                  -
                  
                  
                  $
                  0.00Vested
                  
                  
                  (39,876
                  )
                  
                  $
                  2.10Forfeited
                  
                  
                  (2,750
                  )
                  
                  $
                  2.11Nonvested
      at December 31, 2008
                  
                  
                  111,774
                  
                  
                  $
                  2.11Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (36,368
                  )
                  
                  $
                  2.11Forfeited
                  
                  
                  (1,930
                  )
                  
                  $
                  2.10Nonvested
      at December 31, 2009
                  
                  
                  73,476
                  
                  
                  $
                  2.11




As of
December 31, 2009 there was $118,000 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 1.4 years.
The total fair value of shares vested during the year ended December 31, 2009
and 2008 was $60,000 and $98,000, respectively.




Restricted Stock Awards – The
Company did not grant any award shares during the years ended December 31, 2009
and 2008. Compensation expense for 2009 and 2008 related to awards granted under
this plan was $128,000 and $125,000. The shares vest over a five year service
period. As of December 31, 2009 there was $162,000 of unrecognized compensation
cost related to nonvested restricted stock awards under the
Plan.


40


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)




Note
13 - Employee Benefit Plans (Continued)




The
following table summarizes the activity of restricted stock awards under the
Plan during the years ended December 31, 2009 and 2008:




2009
                    
                    
                    2008Beginning
      of period
                    
                    
                    38,850
                    
                    
                    
                    51,700Granted
                    
                    
                    -
                    
                    
                    
                    0Vested
                    
                    
                    (12,255
                    )
                    
                    
                    (12,850
                    )Forfeited
                    
                    
                    (200
                    )
                    
                    
                    0Nonvested,
      end of period
                    
                    
                    26,395
                    
                    
                    
                    38,850





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. Certain financial instruments and all
nonfinancial instruments are excluded from disclosure.  Accordingly,
the aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Company.




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




Cash and Cash Equivalents -
The carrying amounts of cash and short-term instruments approximate fair
values.




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


41


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)




Note
14 - Fair Values of Financial Instruments (Continued)




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.




REPO Sweep Accounts- The fair
values disclosed for REPO Sweeps are equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts).




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.


42


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)




Note
14 - Fair Values of Financial Instruments (Continued)




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




December 31, 2009
                  
                  
                  December 31, 2008Carrying
                    Amounts
                  
                  
                  Estimated
                    Fair Value
                  
                  
                  Carrying
                    Amounts
                  
                  
                  Estimated
                    Fair ValueFinancial
      assets:Cash
      and cash equivalents
                  
                  $
                  3,099
                  
                  
                  $
                  3,099
                  
                  
                  $
                  3,471
                  
                  
                  $
                  3,471Securities
      available for sale
                  
                  
                  33,713
                  
                  
                  
                  33,713
                  
                  
                  
                  25,665
                  
                  
                  
                  25,665Securities
      held to maturity
                  
                  
                  3,928
                  
                  
                  
                  4,084
                  
                  
                  
                  4,022
                  
                  
                  
                  3,949Loans
      and loans held for sale - Net
                  
                  
                  171,271
                  
                  
                  
                  171,544
                  
                  
                  
                  192,377
                  
                  
                  
                  197,804Federal
      Home Loan Bank stock
                  
                  
                  4,197
                  
                  
                  
                  4,197
                  
                  
                  
                  4,197
                  
                  
                  
                  4,197Accrued
      interest receivable
                  
                  
                  1,230
                  
                  
                  
                  1,230
                  
                  
                  
                  1,469
                  
                  
                  
                  1,469Financial
      liabilities:Customer
      deposits
                  
                  
                  158,100
                  
                  
                  
                  159,081
                  
                  
                  
                  165,778
                  
                  
                  
                  166,931Federal
      Home Loan Bank advances
                  
                  
                  44,400
                  
                  
                  
                  45,552
                  
                  
                  
                  40,200
                  
                  
                  
                  41,688Note
      payable
                  
                  
                  631
                  
                  
                  
                  634
                  
                  
                  
                  769
                  
                  
                  
                  773REPO
      sweep accounts
                  
                  
                  5,408
                  
                  
                  
                  5,210
                  
                  
                  
                  9,447
                  
                  
                  
                  9,447Accrued
      interest payable
                  
                  
                  322
                  
                  
                  
                  322
                  
                  
                  
                  518
                  
                  
                  
                  518





Note
15 – Discontinued Operations




On
February 27, 2009 the Company announced that it had sold the majority of the
assets of the InsuranCenter of Alpena. Accordingly, the financial position and
results of operations of the InsuranCenter of Alpena are removed from the detail
line items in the Company’s financial statements and presented separately as
“discontinued operations.”




The
condensed balance sheet (unaudited) as of December 31, 2009 and 2008 for the
InsuranCenter of Alpena is as follows:




2009
                  
                  
                  2008AssetsIntangible
      Assets
                  
                  $
                  -
                  
                  
                  $
                  202Goodwill
                  
                  
                  -
                  
                  
                  
                  1,408Total
      Assets
                  
                  $
                  -
                  
                  
                  $
                  1,610Liabilities
      & Shareholders' EquityAccrued
      expenses & other liabilities
                  
                  $
                  -
                  
                  
                  $
                  77Shareholders'
      equity
                  
                  
                  -
                  
                  
                  
                  1,533Total
      Liabilities & Shareholders' Equity
                  
                  $
                  -
                  
                  
                  $
                  1,610





The
condensed income statement (unaudited) for the two months ended December 31,
2009 and the twelve months ended December 31, 2008 for the InsuranCenter of
Alpena is as follows:




2009
                  
                  
                  2008Interest
      income
                  
                  $
                  -
                  
                  
                  $
                  -Interest
      expense
                  
                  
                  -
                  
                  
                  
                  -Net
      interest income
                  
                  
                  -
                  
                  
                  
                  -Noninterest
      income
                  
                  
                  210
                  
                  
                  
                  1,465Noninterest
      expenses
                  
                  
                  280
                  
                  
                  
                  1,558Loss
      before taxes
                  
                  
                  (70
                  )
                  
                  
                  (93
                  )Income
      tax benefit
                  
                  
                  (24
                  )
                  
                  
                  (32
                  )Net
      loss
                  
                  $
                  (46
                  )
                  
                  $
                  (61
                  )


43


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)




Note
16 - Restrictions on Dividends




OTS
regulations impose limitations upon all capital distributions including cash
dividends.  The total amount of dividends that may be paid is
generally limited to the sum of the net profits of the bank for the preceding
three years.  An application to and the approval of the OTS is
required prior to any capital distribution if the institution does not meet the
criteria for “expedited treatment” of applications under OTS
regulations.  If an application is not required, the institution must
still provide prior notice to the OTS of the capital distribution.  In
the event the Bank’s capital falls below its regulatory requirements or the OTS
notifies it that it was in need of more than normal supervision, the Bank’s
ability to make capital distributions could be restricted.  In
addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice.  At December 31, 2009 and 2008, the Bank did not have
retained earnings available for the payment of dividends to the
Company.





Note
17 - Parent-Only Financial Statements




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




The
condensed balance sheet is as follows:




December 312009
                      
                      
                      2008AssetsCash
      at subsidiary bank
                      
                      $
                      517
                      
                      
                      $
                      416Investment
      in subsidiary
                      
                      
                      22,119
                      
                      
                      
                      28,320Deferred
      Tax Asset
                      
                      
                      318
                      
                      
                      
                      200Other
      assets
                      
                      
                      98
                      
                      
                      
                      483Total
      assets
                      
                      $
                      23,052
                      
                      
                      $
                      29,419Liabilities
      and Stockholders' EquityLiabilities
                      
                      $
                      -
                      
                      
                      $
                      -Stockholders'
      equity
                      
                      
                      23,052
                      
                      
                      
                      29,419Total
      liabilities and stockholders' equity
                      
                      $
                      23,052
                      
                      
                      $
                      29,419




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




December 312009
                          
                          
                          2008Operating
      income
                          
                          $
                          -
                          
                          
                          $
                          -Operating
      expense
                          
                          
                          186
                          
                          
                          
                          203Loss
      before income taxes and equity inundistributed
      net income of subsidiary
                          
                          
                          (186
                          )
                          
                          
                          (203
                          )Income
      tax (expense) benefit
                          
                          
                          (290
                          )
                          
                          
                          68Loss
      before equity in undistributed loss of subsidiary
                          
                          
                          (476
                          )
                          
                          
                          (135
                          )Equity
      in undistributed net loss of subsidiary
                          
                          
                          (6,287
                          )
                          
                          
                          (3,106
                          )Net loss
                          
                          $
                          (6,763
                          )
                          
                          $
                          (3,241
                          )


44


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
 
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
 (000s
omitted, except per share data)




Note
17 - Parent-Only Financial Statements (Continued)




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




December 312009
                    
                    
                    2008Cash
      Flows from Operating ActivitiesNet
      loss
                    
                    $
                    (6,763
                    )
                    
                    $
                    (3,241
                    )Adjustments
      to reconcile net loss to net cashfrom
      operating activities:Equity
      in undistributed net loss of subsidiary
                    
                    
                    6,287
                    
                    
                    
                    3,106Net
      change in other assets
                    
                    
                    267
                    
                    
                    
                    (124
                    )Net
      change in other liabilities
                    
                    
                    -
                    
                    
                    
                    (199
                    )Net
      cash used in operating activities
                    
                    
                    (209
                    )
                    
                    
                    (458
                    )Cash
      Flows from Financing ActivitiesESOP
      Loan Repayment
                    
                    
                    99
                    
                    
                    
                    91Payment
      for subsidiary stock-based compensation plan
                    
                    
                    211
                    
                    
                    
                    226Dividends
      paid
                    
                    
                    -
                    
                    
                    
                    (432
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    310
                    
                    
                    
                    (115
                    )Net
      Increase  (Decrease) in Cash
                    
                    
                    101
                    
                    
                    
                    (573
                    )Cash - Beginning of
      year
                    
                    
                    416
                    
                    
                    
                    989Cash - End of
      year
                    
                    $
                    517
                    
                    
                    $
                    416




Note
18 – Segment Reporting




The
Company’s principal activities include banking and, prior to February
2009,  the sale of insurance products through its wholly owned
subsidiary, ICA. The Company sold the majority of the assets of ICA in February
2009 (see Note 1).  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 related to a deposit on behalf of 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.


45


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)




Note 18 - Segment Reporting
(Continued)




For Year EndedDecember 31, 2009Bank
                    
                    
                    ICA
                    
                    
                    Eliminations
                    
                    
                    TotalInterest
      Income
                    
                    $
                    12,442
                    
                    
                    $
                    4
                    
                    
                    $
                    (4
                    )
                    
                    $
                    12,442Interest
      Expense
                    
                    
                    5,092
                    
                    
                    
                    -
                    
                    
                    
                    (4
                    )
                    
                    
                    5,088Net Interest Income -
      Before provision for loan losses
                    
                    
                    7,350
                    
                    
                    
                    4
                    
                    
                    
                    -
                    
                    
                    
                    7,354Provision
      for Loan Losses
                    
                    
                    6,196
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,196Net Interest Income -
      After provision for loan losses
                    
                    
                    1,154
                    
                    
                    
                    4
                    
                    
                    
                    -
                    
                    
                    
                    1,158Other
      Income
                    
                    
                    2,198
                    
                    
                    
                    252
                    
                    
                    
                    -
                    
                    
                    
                    2,785Operating
      Expenses
                    
                    
                    8,941
                    
                    
                    
                    294
                    
                    
                    
                    -
                    
                    
                    
                    9,640Loss
      - Before federal income tax
                    
                    
                    (5,589
                    )
                    
                    
                    (38
                    )
                    
                    
                    -
                    
                    
                    
                    (5,697
                    )Federal
      Income Tax
                    
                    
                    1,079
                    
                    
                    
                    (13
                    )
                    
                    
                    -
                    
                    
                    
                    1,066Net
      Loss
                    
                    $
                    (6,668
                    )
                    
                    $
                    (25
                    )
                    
                    $
                    -
                    
                    
                    $
                    (6,763
                    )Depreciation
      and amortization
                    
                    $
                    824
                    
                    
                    $
                    47
                    
                    
                    $
                    -
                    
                    
                    $
                    871Assets
                    
                    $
                    234,069
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    234,069Expenditures
      related to long-lived assets:Goodwill
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Intangible
      assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Property
      and equipment
                    
                    
                    276
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    276Total
                    
                    $
                    276
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    276





For Year EndedDecember 31, 2008Bank
                  
                  
                  ICA
                  
                  
                  Eliminations
                  
                  
                  TotalInterest
      Income
                  
                  $
                  13,967
                  
                  
                  $
                  36
                  
                  
                  $
                  (36
                  )
                  
                  $
                  13,967Interest
      Expense
                  
                  
                  7,166
                  
                  
                  
                  -
                  
                  
                  
                  (36
                  )
                  
                  
                  7,130Net Interest Income -
      Before provision for loan losses
                  
                  
                  6,801
                  
                  
                  
                  36
                  
                  
                  
                  -
                  
                  
                  
                  6,837Provision
      for Loan Losses
                  
                  
                  4,421
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,421Net Interest Income -
      After provision for loan losses
                  
                  
                  2,380
                  
                  
                  
                  36
                  
                  
                  
                  -
                  
                  
                  
                  2,416Other
      Income
                  
                  
                  1,470
                  
                  
                  
                  1,672
                  
                  
                  
                  -
                  
                  
                  
                  3,142Operating
      Expenses
                  
                  
                  8,655
                  
                  
                  
                  1,776
                  
                  
                  
                  -
                  
                  
                  
                  10,431Loss
      - Before federal income tax
                  
                  
                  (4,805
                  )
                  
                  
                  (68
                  )
                  
                  
                  -
                  
                  
                  
                  (4,873
                  )Federal
      Income Tax
                  
                  
                  (1,609
                  )
                  
                  
                  (23
                  )
                  
                  
                  -
                  
                  
                  
                  (1,632
                  )Net
      Loss
                  
                  $
                  (3,196
                  )
                  
                  $
                  (45
                  )
                  
                  $
                  -
                  
                  
                  $
                  (3,241
                  )Depreciation
      and amortization
                  
                  $
                  749
                  
                  
                  $
                  268
                  
                  
                  $
                  -
                  
                  
                  $
                  1,017Assets
                  
                  $
                  244,769
                  
                  
                  $
                  4,149
                  
                  
                  $
                  (1,246
                  )
                  
                  $
                  247,672Expenditures
      related to long-lived assets:Goodwill
                  
                  $
                  -
                  
                  
                  $
                  47
                  
                  
                  $
                  -
                  
                  
                  $
                  47Intangible
      assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Property
      and equipment
                  
                  
                  193
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  193Total
                  
                  $
                  193
                  
                  
                  $
                  47
                  
                  
                  $
                  -
                  
                  
                  $
                  240


46


First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements


December 31,
2009 and 2008


(000s
omitted, except per share data)





Note
19 - Quarterly Results of Operations (Unaudited)




The
following tables summarize the Company’s quarterly results for the fiscal years
ended December 31, 2009 and 2008:




For the Three-Month Period EndingMarch 31,
                        2009
                      
                      
                      June 30,
                        2009
                      
                      
                      September 30,
                        2009
                      
                      
                      December 31,
                        2009Interest
      income
                      
                      $
                      3,291
                      
                      
                      $
                      3,185
                      
                      
                      $
                      3,111
                      
                      
                      $
                      2,855Interest
      expense
                      
                      
                      1,489
                      
                      
                      
                      1,309
                      
                      
                      
                      1,218
                      
                      
                      
                      1,072Net
      interest income
                      
                      
                      1,802
                      
                      
                      
                      1,876
                      
                      
                      
                      1,893
                      
                      
                      
                      1,783Provision
      for losses on loans
                      
                      
                      264
                      
                      
                      
                      252
                      
                      
                      
                      2,977
                      
                      
                      
                      2,703Other
      income
                      
                      
                      798
                      
                      
                      
                      764
                      
                      
                      
                      491
                      
                      
                      
                      522Other
      expenses
                      
                      
                      2,138
                      
                      
                      
                      2,346
                      
                      
                      
                      2,076
                      
                      
                      
                      2,800Income
      (loss) from continuing operations - before income tax expense or
      benefit
                      
                      
                      198
                      
                      
                      
                      42
                      
                      
                      
                      (2,669
                      )
                      
                      
                      (3,198
                      )Income
      tax expense (benefit) from continuing operations
                      
                      
                      51
                      
                      
                      
                      -
                      
                      
                      
                      1,149
                      
                      
                      
                      (110
                      )Net
      income (loss) from continuing operations
                      
                      
                      147
                      
                      
                      
                      42
                      
                      
                      
                      (3,818
                      )
                      
                      
                      (3,088
                      )Loss
      from discontinued operations, net of tax benefit
                      
                      
                      (46
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      income (loss)
                      
                      $
                      101
                      
                      
                      $
                      42
                      
                      
                      $
                      (3,818
                      )
                      
                      $
                      (3,088
                      )Income
      (loss) per share from continuing operationsBasic
                      
                      $
                      0.05
                      
                      
                      $
                      0.01
                      
                      
                      $
                      (1.32
                      )
                      
                      $
                      (1.07
                      )Diluted
                      
                      $
                      0.05
                      
                      
                      $
                      0.01
                      
                      
                      $
                      (1.32
                      )
                      
                      $
                      (1.07
                      )Income
      (loss) per share from discontinued operationsBasic
                      
                      $
                      (0.01
                      )
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Diluted
                      
                      $
                      (0.01
                      )
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Net
      income (loss) per shareBasic
                      
                      $
                      0.04
                      
                      
                      $
                      0.01
                      
                      
                      $
                      (1.32
                      )
                      
                      $
                      (1.07
                      )Diluted
                      
                      $
                      0.04
                      
                      
                      $
                      0.01
                      
                      
                      $
                      (1.32
                      )
                      
                      $
                      (1.07
                      )Weighted
      average number of shares outstanding
                      
                      
                      2,884
                      
                      
                      
                      2,884
                      
                      
                      
                      2,884
                      
                      
                      
                      2,884Weighted
      average number of shares outstanding, including dilutive stock
      options
                      
                      
                      2,884
                      
                      
                      
                      2,884
                      
                      
                      
                      2,884
                      
                      
                      
                      2,884Cash
      dividends declared per common share
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -





For the Three-Month Period EndingMarch 31,
                            2008
                          
                          
                          June 30,
                            2008
                          
                          
                          September 30,
                            2008
                          
                          
                          December 31,
                            2008Interest
      income
                          
                          $
                          3,590
                          
                          
                          $
                          3,491
                          
                          
                          $
                          3,525
                          
                          
                          $
                          3,361Interest
      expense
                          
                          
                          1,867
                          
                          
                          
                          1,790
                          
                          
                          
                          1,808
                          
                          
                          
                          1,665Net
      interest income
                          
                          
                          1,723
                          
                          
                          
                          1,701
                          
                          
                          
                          1,717
                          
                          
                          
                          1,696Provision
      for losses on loans
                          
                          
                          25
                          
                          
                          
                          342
                          
                          
                          
                          876
                          
                          
                          
                          3,178Other
      income
                          
                          
                          412
                          
                          
                          
                          459
                          
                          
                          
                          400
                          
                          
                          
                          406Other
      expenses
                          
                          
                          2,131
                          
                          
                          
                          2,172
                          
                          
                          
                          2,158
                          
                          
                          
                          2,413Loss
      from continuing operations - before income tax benefit
                          
                          
                          (21
                          )
                          
                          
                          (354
                          )
                          
                          
                          (917
                          )
                          
                          
                          (3,489
                          )Income
      tax benefit from continuing operations
                          
                          
                          (7
                          )
                          
                          
                          (119
                          )
                          
                          
                          (307
                          )
                          
                          
                          (1,168
                          )Net
      loss from continuing operations
                          
                          
                          (14
                          )
                          
                          
                          (235
                          )
                          
                          
                          (610
                          )
                          
                          
                          (2,321
                          )Loss
      from discontinued operations, net of tax benefit
                          
                          
                          (17
                          )
                          
                          
                          (15
                          )
                          
                          
                          (25
                          )
                          
                          
                          (4
                          )Net
      Loss
                          
                          $
                          (31
                          )
                          
                          $
                          (250
                          )
                          
                          $
                          (635
                          )
                          
                          $
                          (2,325
                          )Loss
      per share from continuing operationsBasic
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.08
                          )
                          
                          $
                          (0.21
                          )
                          
                          $
                          (0.80
                          )Diluted
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.08
                          )
                          
                          $
                          (0.21
                          )
                          
                          $
                          (0.80
                          )Loss
      per share from discontinued operationsBasic
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.00
                          )Diluted
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.00
                          )Net
      loss per shareBasic
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.09
                          )
                          
                          $
                          (0.22
                          )
                          
                          $
                          (0.81
                          )Diluted
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.09
                          )
                          
                          $
                          (0.22
                          )
                          
                          $
                          (0.81
                          )Weighted
      average number of shares outstanding
                          
                          
                          2,884
                          
                          
                          
                          2,884
                          
                          
                          
                          2,884
                          
                          
                          
                          2,884Weighted
      average number of shares outstanding, including dilutive stock
      options
                          
                          
                          2,884
                          
                          
                          
                          2,884
                          
                          
                          
                          2,884
                          
                          
                          
                          2,884Cash
      dividends declared per common share
                          
                          $
                          0.050
                          
                          
                          $
                          0.050
                          
                          
                          $
                          0.050
                          
                          
                          $
                          -




47