<PAGE>

                                                                      EXHIBIT 13

                FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

                                      2007
                                  ANNUAL REPORT

                                 MARCH 31, 2008

<PAGE>

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

Dear Shareholders:

2007 was a bittersweet year. It was a year filled with pride as we celebrated
the 50th anniversary of the Bank with many community events that included most
of our employees and a year of extreme disappointment as we report to you our
first loss in the Bank's 50-year history.

At the Bank level we did not come close to meeting our earnings or growth
projections. As the national mortgage "sub-prime crisis" started to unfold many
months ago we were not naive enough to think that it would not affect our Bank
even though we are not in the sub-prime business, but most certainly we did not
comprehend the enormous economic impact it would have on the financial sector
and specifically on our Bank. The reductions in the underlying value of our
collateral are a direct result of the sub-prime crisis. The difficult economic
conditions in Michigan have challenged some of our commercial and retail
customers translating into negative delinquency trends for the Bank. High
unemployment rates in northern Michigan (2 of the counties we serve are in the
highest 3 in unemployment in lower Michigan) and higher energy costs have caused
several adverse changes in the amount and way consumers spend disposable income.
That had a negative impact on certain commercial relationships.

In response to these credit challenges, we took preemptive action and added a
Chief Credit Officer in mid-2007. Many process and philosophical changes have
occurred with regard to credit management and administration, including changes
to underwriting standards and product offerings, and the formation of a senior
loan committee to review commercial loan applications. While we saw only a small
amount of growth in the loans on our commercial watch list, we did see
deterioration among some of them. As a result of that deterioration, we recorded
a $2.4 million provision for loan loss for 2007 which is a $1.5 million increase
over the 2006 provision expense and $2.1 million higher than the 2005 provision
expense.

In addition to the changes we made on the credit side, the Board and Management
have been aggressive in our approach to cutting expenses. During 2007 we reduced
our full time work force by about 10%, which included a branch closure that
occurred in February. At the end of 2007 we began the process of closing a
second branch location. That closure was completed in February 2008.

The Bank has positioned itself to deal with this phase of the credit cycle.
Going forward, we will maintain our pricing and credit disciplines while
focusing strict attention on the commercial and consumer watch lists to minimize
our losses and maximize our recoveries. We also recognize our responsibility to
provide our shareholders with acceptable levels of return on equity. We
understand the need to make the best use of our capital and as we set out to
stabilize earnings in this environment, we are also on the watch for
opportunities that may arise from this unique era in banking.


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



<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY

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

FINANCIAL CONDITION DATA:

<TABLE>
<CAPTION>
                                              FOR YEARS ENDED DECEMBER 31,
                                    ----------------------------------------------------
                                      2007       2006       2005       2004       2003
                                    --------   --------   --------   --------   --------
                                                       (IN THOUSANDS)
<S>                                 <C>        <C>        <C>        <C>        <C>
TOTAL ASSETS ....................   $250,831   $280,959   $282,775   $262,800   $223,923
LOANS RECEIVABLE, NET ...........    201,333    209,518    201,183    195,388    163,460
LOANS HELD FOR SALE .............         --         72         --      1,096        931
INVESTMENT SECURITIES ...........     23,451     44,850     55,187     42,033     34,670
CASH AND CASH EQUIVALENTS .......      5,341      4,993      4,780      4,739      6,706
DEPOSITS ........................    164,470    177,058    188,735    182,489    151,702
FHLB ADVANCES AND NOTE PAYABLE ..     52,684     66,042     54,403     56,001     47,159
STOCKHOLDERS' EQUITY ............     32,503     35,453     36,649     21,777     21,951
</TABLE>

OPERATING DATA:

<TABLE>
<CAPTION>
                                                                           AT DECEMBER 31,
                                                           -----------------------------------------------
                                                             2007      2006     2005      2004      2003
                                                           -------   -------   -------   -------   -------
                                                                            (IN THOUSANDS)
<S>                                                        <C>       <C>       <C>       <C>       <C>
INTEREST INCOME ........................................   $16,200   $17,170   $15,076   $13,278   $13,350
INTEREST EXPENSE .......................................     8,447     8,568     6,706     6,202     6,455
                                                           -------   -------   -------   -------   -------
   NET INTEREST INCOME .................................     7,753     8,602     8,370     7,076     6,895
PROVISION FOR LOAN LOSSES ..............................     2,377       851       368       323       267
                                                           -------   -------   -------   -------   -------
   NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .     5,376     7,751     8,002     6,753     6,628
                                                           -------   -------   -------   -------   -------
OTHER INCOME (LOSS):
SERVICE CHARGES AND FEES ...............................       911     1,044     1,030     1,012       801
MORTGAGE BANKING ACTIVITIES ............................       418       344       482       579     1,563
NET GAIN (LOSS) ON SALE OF INVESTMENT SECURITIES .......       (97)      (45)       13       103       320
GAIN (LOSS) ON SALE OF REAL ESTATE .....................       (40)        4       (45)      (47)        7
OTHER NON-INTEREST INCOME ..............................        64       103        37        97       255
INSURANCE & BROKERAGE COMMISSIONS ......................     2,726     2,948     2,941     2,967     2,480
                                                           -------   -------   -------   -------   -------
   TOTAL OTHER INCOME ..................................     3,982     4,398     4,458     4,711     5,426
                                                           -------   -------   -------   -------   -------
OTHER EXPENSES .........................................    11,874    11,528    11,815    10,856    10,327
                                                           -------   -------   -------   -------   -------
   INCOME (LOSS) BEFORE INCOME TAX EXPENSE .............    (2,516)      621       645       608     1,727
INCOME TAX EXPENSE (BENEFIT) ...........................      (916)      158       203       204       518
                                                           -------   -------   -------   -------   -------
   NET INCOME (LOSS) ...................................   $(1,600)  $   463   $   442   $   404   $ 1,209
                                                           =======   =======   =======   =======   =======
</TABLE>

KEY FINANCIAL RATIOS AND OTHER DATA:

<TABLE>
<CAPTION>
                                                                      FOR YEARS ENDED DECEMBER 31,
                                                           -------------------------------------------------
                                                             2007        2006      2005      2004      2003
                                                           -------     -------   -------   -------   -------
<S>                                                        <C>         <C>       <C>       <C>       <C>
PERFORMANCE RATIOS:
RETURN ON AVERAGE ASSETS ...............................     -0.60%       0.16%     0.16%     0.17%     0.53%
RETURN ON AVERAGE EQUITY ...............................     -4.84%       1.35%     1.49%     1.91%     5.52%
AVERAGE INTEREST RATE SPREAD ...........................      2.67%       2.83%     2.97%     2.88%     3.00%
DIVIDEND PAYOUT RATIO ..................................       N/M***   133.33%   142.86%   153.85%    30.36%
DIVIDENDS PER SHARE ....................................   $  0.20     $  0.20   $  0.20   $  0.20   $  0.27
NET INTEREST MARGIN ....................................      3.14%       3.24%     3.30%     3.10%     3.26%
EFFICIENCY RATIO .......................................    101.18%      89.37%    85.07%    96.38%    88.02%
NON-INTEREST EXPENSE TO AVERAGE TOTAL ASSETS ...........      4.45%       4.04%     4.32%     4.39%     4.53%
AVERAGE INTEREST-EARNING ASSETS TO AVERAGE
   INTEREST-BEARING LIABILITIES ........................    113.65%     112.99%   112.34%   108.08%   108.69%
ASSET QUALITY RATIOS:
NON-PERFORMING ASSETS TO TOTAL ASSETS ..................      4.15%       1.59%     1.57%     0.66%     1.04%
NON-PERFORMING LOANS TO TOTAL LOANS ....................      4.54%       1.90%     1.99%     0.87%     1.28%
ALLOWANCE FOR LOAN LOSSES TO NONPERFORMING ASSETS ......     38.58%      46.67%    35.33%    72.37%    48.89%
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS ...............      1.99%       0.98%     0.70%     0.61%     0.63%
CAPITAL RATIOS:
EQUITY TO TOTAL ASSETS AT END OF PERIOD ................     12.96%      12.62%    12.96%     8.29%     9.80%
AVERAGE EQUITY TO AVERAGE ASSETS .......................     12.38%      12.07%    10.87%     8.82%     9.62%
RISK-BASED CAPITAL RATIO (BANK ONLY) ...................     16.27%      17.07%    16.82%    10.51%    11.96%
OTHER DATA:
NUMBER OF FULL SERVICE OFFICES .........................         9**        10*       10        10         8
</TABLE>

*    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

<PAGE>

                     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, 2007, $99.4 million, or 48.3%, of our total loan
portfolio consisted of one- to four-family residential real estate loans, $50.8
million, or 24.7%, and $26.8 million, or 13.0%, of our total loan portfolio
consisted of commercial mortgage loans and commercial loans, respectively, and
$28.7 million, or 13.9%, of our total loan portfolio consisted of consumer and
other loans. In recent years, commercial mortgage loans and commercial loans
have grown as a percentage of our loan portfolio for three reasons. First, we
have increased our emphasis on originating these loans, which generally have
higher interest rates compared to one- to four-family residential real estate
loans. In addition, most of these loans are originated with adjustable interest
rates, which assists us in managing interest rate risk. Finally, most of our
one- to four-family residential mortgage loan customers prefer fixed-rate loans
in the low interest rate environment that has prevailed over the last several
years. Since we sell into the secondary mortgage market a majority of the
fixed-rate one- to four-family residential mortgage loans that we originate,
one- to four-family residential real estate loans have decreased as a percentage
of our total loan portfolio.

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

     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 8
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 16 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, 2007, loans secured by commercial real estate
totaled $50.8 million, or 24.7% of our total loan portfolio, and commercial
loans totaled $26.8 million, or 13.0% of our total loan portfolio. We intend to
continue to emphasize the origination of these types of loans in the future and
retain them in our portfolio. Commercial real estate and commercial loans
generally are originated with higher interest rates compared to one- to
four-family residential real estate loans and, therefore, have a positive effect
on our net interest rate spread and net interest income. In addition, most of
these loans are originated with adjustable interest rates, which assists us in
managing interest rate risk. We believe that our branch network will enable us
to continue to increase our commercial and commercial real estate loan portfolio
without significant additional fixed costs.

<PAGE>

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

     INCREASING AND DIVERSIFYING OUR SOURCES OF NON-INTEREST INCOME. In June
2003, we acquired the InsuranCenter of Alpena ("ICA"), a licensed insurance
agency engaged in the business of property, casualty and health insurance, in an
effort to increase and diversify our sources of non-interest income. In 2007,
ICA's operations generated $2.7 million of income, representing 70% of total
non-interest income. In 2007, commissions on property insurance sales
represented approximately 24% of ICA's revenues, commissions on life insurance
sales represented approximately 6% of revenues and commissions on health
insurance sales represented approximately 70% of revenues. In November 2005, ICA
acquired several large group customers from another insurance agent for
approximately $564,000.

     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, over the
past year, we have seen delinquency trends increase despite our conservative
underwriting practices. At December 31, 2007, our ratio of non-performing assets
to total assets was 4.15%. At December 31, 2007, our ratio of equity to assets
was 12.96%.

     MANAGING OUR INTEREST RATE RISK EXPOSURE BY SELLING FIXED-RATE RESIDENTIAL
REAL ESTATE LOANS. Historically, most borrowers have preferred long-term,
fixed-rate residential real estate loans when, 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, 2007 AND 2006

     Total assets decreased $30.0 million, or 10.7%, to $251.0 million at
December 31, 2007 from $281.0 million at December 31, 2006. Net loans decreased
$8.2 million, or 3.9% to $201.3 million at December 31, 2007 from $209.5 million
at December 31, 2006. Mortgage lending originations decreased by $1.9 million to
$31.5 million in 2007 from $33.4 million in 2006, and the mortgage loan
portfolio decreased $3.3 million, or 3.2%, to $99.3 million at December 31, 2007
from $102.6 million at December 31, 2006. 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 2.6% to $77.6
million at December 31, 2007 from $79.8 million at December 31, 2006. Although
we continue to place emphasis on growing this portfolio, market conditions were
such that quality commercial lending opportunities were scarce. Cash and cash
equivalents increased slightly by $348,000, or 7.0%, to $5.3 million at December
31, 2007 from $5.0 million at December 31, 2006. Investment securities decreased
$21.4 million, or 47.7%, to $23.5 million at December 31, 2007 from $44.8
million at December 31, 2006 as we decreased our investment portfolio and paid
down high-cost FHLB advances.

     Deposits decreased $12.6 million, or 7.1%, to $164.5 million at December
31, 2007 from $177.1 million at December 31, 2006. This decrease reflected
substantial increased competition for deposits in our markets. Our focus in 2007
continued to be on building deposit relationships rather than attracting
higher-cost non-core certificate of deposit accounts. Borrowings, consisting
primarily of FHLB advances, decreased $13.3 million, or 20.2%, to $52.7 million
at December 31, 2007 from $66.0 million at December 31, 2006 as we used the
proceeds from the sale of investment securities to pay down FHLB advances.

     Stockholders' equity decreased $3.0 million, or 8.3% to $32.5 million at
December 31, 2007 from $35.5 million at December 31, 2006. The decrease was
mainly a result of our repurchase of 151,750 shares of our common stock at a

<PAGE>

net cost of $1.4 million and dividends paid of $582,000, combined with a net
loss for the year of $1.6 million. These decreases in equity were partially
offset by a recovery of $329,000 in the value of available-for-sale (AFS)
securities.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

     GENERAL. Net income decreased to a loss of $1.6 million for the twelve
months ended December 31, 2007 from net income of $463,000 for the twelve months
ended December 31, 2006. Net interest income before provision for loan losses
was $849,000 lower in 2007 than in 2006 and the provision for loan losses was
$1.5 million higher in 2007 than in 2006, resulting in net interest income after
provision for loan losses which was $2.4 million lower in 2007 than in 2006.
Non-interest income was $416,000 lower in 2007 than in 2006. Non-interest
expenses remained relatively constant year over year.

     INTEREST INCOME. Interest income decreased by $969,000, or 5.6%, to $16.2
million for the twelve months ended December 31, 2007 from $17.2 million for the
twelve months ended December 31, 2006. The decrease was primarily due to two
factors: a decrease in the average balance of our investment portfolio of $17.0
million year over year, and an increase in the average balance of impaired
loans, on which we did not recognize interest income, of $888.000 year over
year. The average balance of our loan portfolio decreased by $815,000, or 0.4%,
to $209.1 million for the twelve months ended December 31, 2007 from $209.9
million for the twelve months ended December 31, 2006. The average balance of
non-mortgage loans, principally commercial loans and consumer loans, increased
by $1.7 million, or 1.6%, to $106.9 million for the twelve months ended December
31, 2007 from $105.2 million for the twelve months ended December 31, 2006. The
average yield on our commercial loans decreased 60 basis points due in large
part to the aggregate decreases in the prime rate of 75 basis points in late
2007, and the average yield on our consumer loans increased 4 basis points from
2006 to 2007. The average balance of our one- to- four-family residential
mortgage loans decreased to $102.2 million for the twelve months ended December
31, 2007 from $104.7 million for the twelve months ended December 31, 2006,
while the average yield on such loans increased to 6.24% from 6.18%.

     INTEREST EXPENSE. Interest expense decreased to $8.4 million for the twelve
months ended December 31, 2007 from $8.6 million for the twelve months ended
December 31, 2006, due primarily to a $17.3 million decrease in the average
balance of interest bearing liabilities. The average balance of interest-bearing
deposits decreased $13.9 million from 2006 to 2007, while the average cost of
those deposits increased to 3.43% for 2007 from 3.13% for 2006, reflecting the
continued upward pressure on market interest rates that persisted through most
of 2007. The average balance of FHLB borrowings decreased $3.2 million from 2006
to 2007 while the cost of those borrowings decreased from 4.96% to 4.88% year
over year. During 2007 we paid off high-cost FHLB bank advances, incurring a
pre-payment penalty, but we were able to re-borrow those funds at a rate
substantially lower than the rate we had been paying.

     NET INTEREST INCOME. Net interest income decreased to $7.8 million for the
twelve months ended December 31, 2007 from $8.6 million for the twelve months
ended December 31, 2006. The decrease in net interest income was the result of a
decrease in net average interest earning assets to $29.9 million for 2007 from
$30.7 million for 2006 and a decrease in our average interest rate spread to
2.68% for 2007 from 2.83% for 2006.

     PROVISION FOR LOAN LOSSES. We recorded a provision for loan losses of $2.4
million for the twelve months ended December 31, 2007 compared to a provision of
$851,000 for the twelve months ended December 31, 2006. We had net charge-offs
of $443,000 and $188,000 during 2007 and 2006, respectively. These increases
reflected an increase in classified assets due to the current economic
conditions in the northern Michigan market, especially reflected in declining
real estate values. We used the same methodology and generally similar
assumptions in assessing the allowance for both periods. The allowance for loan
losses was $4.0 million, or 1.99% of total loans at December 31, 2007, compared
to $2.1 million, or 0.98% of total loans at December 31, 2006. The level of the
allowance is based on estimates, and ultimate losses may vary from the
estimates. Total non-performing loans were $9.1 million at December 31, 2007 and
$4.0 million at December 31, 2006.

     NON-INTEREST INCOME. Non-interest income decreased to $4.0 million for the
twelve months ended December 31, 2007 from $4.4 million for the twelve months
ended December 31, 2006. Income from mortgage banking activities increased
$74,000 to $418,000 from $344,000 as we sold more loans into the secondary
market in 2007 than in 2006. Service charges and other fees declined $133,000
from $1.0 million in 2006 to $911,000 in 2007, due in part to a reduction in
loan fee income due to lower loan originations and also due in part to our
termination of the Skip-A-Pay

<PAGE>

program, which had generated approximately $40,000 in fee income in 2006.
Insurance and brokerage commissions decreased $222,000 from $2.9 million in 2006
to $2.7 million in 2007 as a result of the soft insurance market and some
migration by Blue Cross customers to competing health insurance products.

     NON-INTEREST EXPENSE. Non-interest expense increased to $11.9 million for
the twelve months ended December 31, 2007 from $11.5 million for the twelve
months ended December 31, 2006. Other expense increased $600,000 to $1.8 million
in 2007 from $1.2 million in 2006, due mainly to FHLB pre-payment penalties of
$464,000 incurred when we pre-paid high-cost advances and replaced them with
lower-cost advances, and to an increase of $101,000 year over year in expenses
associated with our real-estate owned, including costs to repossess and repair
properties and write-downs in the market value of many of these properties due
to rapidly declining real-estate market values in late 2007. Occupancy expense
increased $148,000 from $1.4 million in 2006 to $1.5 million in 2007, which was
mainly due to increased costs of depreciation on our new building and related
equipment in our Lewiston market. Also included in this increase was a $30,000
reserve recorded on our Mancelona branch building, reflecting the decline in
market value on this building,. The branch was closed on February 1, 2008 and we
sold the branch building in March,2008. Insurance and brokerage commission
expense decreased $114,000 from $1.1 million in 2006 to $948,000 in 2007, in
step with decreased insurance and brokerage commission income described above.
Professional fees decreased to $325,000 for the twelve months ended December 31,
2007 from $421,000 for the twelve months ended December 31, 2006, due to
additional expenses in 2006 for commercial loan review, internal audit services,
Sarbanes-Oxley Section 404 information technology controls documentation and
temporary commercial credit administration services.

     INCOME TAXES. Federal income taxes decreased to a benefit of $916,000 for
the twelve months ended December 31, 2007 from an expense of $158,000 for the
twelve months ended December 31, 2006.

<PAGE>

AVERAGE BALANCE SHEET

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

<TABLE>
<CAPTION>

                                                                AVERAGE CONSOLIDATED STATEMENTS OF CONDITION
                                                                        FOR YEARS ENDED DECEMBER 31,
                                            -------------------------------------------------------------------------------------
                           AS OF DECEMBER               2007                         2006                   2005
                              31, 2007      ---------------------------  ---------------------------  ---------------------------
                          ----------------                      AVERAGE                      AVERAGE                      AVERAGE
                                     YIELD   AVERAGE            YIELD /   AVERAGE            YIELD /   AVERAGE            YIELD /
                           BALANCE  / RATE   BALANCE  INTEREST    RATE    BALANCE  INTEREST    RATE    BALANCE  INTEREST    RATE
                          --------  ------  --------  --------  -------  --------  --------  -------  --------  --------  -------
                                                  (IN THOUSANDS)                (IN THOUSANDS)               (IN THOUSANDS)
<S>                       <C>       <C>     <C>       <C>       <C>      <C>       <C>       <C>      <C>       <C>       <C>
INTEREST-EARNING ASSETS:
MORTGAGE LOANS .........                    $102,200   $ 6,380           $104,739   $ 6,473           $110,071   $ 6,747
NON-MORTGAGE LOANS .....                     106,920     8,076            105,186     8,388             91,903     6,403
                                            --------    ------           --------   -------           --------   -------
LOANS ..................  $201,333    6.28%  209,120    14,456    6.91%   209,925    14,861    7.08%   201,974    13,150    6.51%
MORTGAGE-BACKED
   SECURITIES  (1) .....     1,273    3.82%    2,268        93    4.10%     5,795       203    3.50%     7,386       248    3.36%
INVESTMENT SECURITIES ..    22,178    4.38%   32,023     1,408    4.40%    45,686     1,848    4.05%    39,873     1,450    3.64%
                          --------          --------   -------           --------   -------           --------   -------
INVESTMENT SECURITIES ..    23,451    4.32%   34,291     1,501    4.38%    51,481     2,051    3.98%    47,259     1,698    3.59%
OTHER INVESTMENTS ......     5,970    3.63%    5,192       243    4.68%     5,339       258    4.83%     5,491       228    4.15%
                          --------  ------  --------   -------  ------   --------   -------  ------   --------   -------  ------
TOTAL INTEREST EARNING
   ASSETS ..............   230,754    6.05%  248,603    16,200    6.52%   266,745    17,170    6.44%   254,724    15,076    5.92%
                          --------          --------   -------  ------    -------   -------  ------   --------   -------  ------
NON INTEREST EARNING
   ASSETS ..............    20,077            17,556                       18,398                       18,482
                          --------          --------                     --------                     --------
TOTAL ASSETS ...........  $250,831          $266,159                     $285,143                     $273,206
                          ========          ========                     ========                     ========
INTEREST BEARING
   LIABILITIES:
SAVINGS DEPOSITS .......  $ 22,602    1.23% $ 24,566   $   325    1.33%  $ 21,130   $   177    0.84%  $ 27,982   $   177    0.63%
MONEY MARKET/NOW
   ACCOUNTS ............    26,246    1.41%   27,489       378    1.37%    34,111       531    1.56%    33,421       288    0.86%
CERTIFICATES OF
   DEPOSIT .............   105,432    4.35%  107,892     4,851    4.50%   118,673     4,729    3.98%   113,989     3,873    3.40%
                          --------  ------  --------   -------  ------   --------   -------  ------   --------   -------  ------
   TOTAL INTEREST
      BEARING
      DEPOSITS .........   154,280    3.24%  159,947   $ 5,554    3.47%   173,914   $ 5,437    3.13%   175,392   $ 4,338    2.47%
BORROWED FUNDS .........    52,684    4.68%   58,794     2,893    4.92%    62,171     3,131    5.04%    51,346     2,368    4.61%
                          --------  ------  --------   -------  ------   --------   -------  ------   --------   -------  ------
TOTAL INTEREST BEARING
   LIABILITIES .........   206,964    3.61%  218,741     8,447    3.84%   236,085     8,568    3.61%   226,742     6,706    2.94%
NON INTEREST BEARING
   LIABILITIES .........    11,335            12,907                       14,638                       16,780
                          --------          --------                     --------                     --------
   TOTAL LIABILITIES ...   218,328           231,648                      250,723                      243,522
STOCKHOLDERS' EQUITY ...    32,503            34,511                       34,420                       29,684
                          --------          --------                     --------                     --------
TOTAL LIABILITIES &
   STOCKHOLDERS'
   EQUITY ..............  $250,831          $266,159                     $285,143                     $273,206
                          ========          ========                     ========                     ========
NET INTEREST INCOME ....                               $ 7,753                      $ 8,602                      $ 8,370
                                                       =======                      =======                      =======
INTEREST RATE SPREAD ...              2.44%                       2.68%                        2.83%                        2.98%
                                    ======                      ======                       ======                       ======
NET INTEREST - EARNING
   ASSETS ..............                    $ 29,862                     $ 30,660                     $ 27,982
                                            ========                     ========                     ========
NET INTEREST MARGIN
   (1) .................              2.82%                       3.13%                        3.24%                        3.30%
                                    ======                      ======                       ======                       ======
AVERAGE INTEREST-EARNING
   ASSETS TO AVERAGE
   INTEREST-BEARING
   LIABILITIES .........            111.49%                     113.65%                      112.99%                      112.34%
                                    ======                      ======                       ======                       ======
</TABLE>

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

RATE/VOLUME ANALYSIS

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

<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31, 2007
                                                       COMPARED TO
                                              YEAR ENDED DECEMBER 31, 2006
                                               INCREASE (DECREASE) DUE TO:
                                              ----------------------------
                                                 VOLUME    RATE   TOTAL
                                                 ------   -----   -----
                                                     (IN THOUSANDS)
<S>                                           <C>         <C>     <C>
INTEREST-EARNING ASSETS:
   LOANS RECEIVABLE .......................      $ (29)   $(376)  $(405)
   INVESTMENT SECURITIES ..................       (744)     195   $(549)
   OTHER INVESTMENTS ......................         (7)      (9)  $ (16)
                                                 -----    -----   -----
      TOTAL INTEREST-EARNING ASSETS .......       (780)    (190)   (970)
                                                 -----    -----   -----
INTEREST-BEARING LIABILITIES:
SAVINGS DEPOSITS ..........................        (28)     (28)    (56)
MONEY MARKET/NOW ACCOUNTS .................        (15)      67      52
CERTIFICATES OF DEPOSIT ...................       (488)     591     103
                                                 -----    -----   -----
   DEPOSITS ...............................       (531)     630      99
   BORROWED FUNDS .........................       (173)     (47)   (220)
                                                 -----    -----   -----
      TOTAL INTEREST-BEARING LIABILITIES ..       (704)     583    (121)
                                                 -----    -----   -----
CHANGE IN NET INTEREST INCOME .............      $ (76)   $(773)  $(849)
                                                 =====    =====   =====
</TABLE>

MANAGEMENT OF INTEREST RATE RISK

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

     We actively evaluate interest rate risk in connection with our lending,
investing and deposit-taking activities. Generally, our loans, which represent
the significant majority of our assets, have longer-terms to maturity than our
deposits, which represent the significant majority of our liabilities. 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, 2007,
$162.8 million, or 80.8% of our loan portfolio, consisted of loans that mature
or reprice after December 31, 2008. In contrast, as of December 31, 2007, $77.3
million, or 73.3% of our time deposits as of that date, consisted of deposits
that mature or reprice in less than one year.

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

<PAGE>

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

     The table below sets forth, as of December 31, 2007, the estimated changes
in our NPV that would result from the designated instantaneous changes in the
U.S. Treasury yield curve. Computations of prospective effects of hypothetical
interest rate changes are based on numerous assumptions including relative
levels of market interest rates, loan prepayments and deposit decay, and should
not be relied upon as indicative of actual results.

<TABLE>
<CAPTION>
                                                        NPV AS A PERCENTAGE OF PRESENT
   CHANGE IN                  ESTIMATED INCREASE             VALUE OF ASSETS (3)
INTEREST RATES                 (DECREASE) IN NPV     -----------------------------------
(BASIS POINTS)   ESTIMATED   ---------------------                   INCREASE (DECREASE)
      (1)         NPV (2)      AMOUNT     PERCENT    NPV RATIO (4)      (BASIS POINTS)
--------------   ---------   ---------   ---------   -------------   -------------------
                (DOLLARS IN THOUSANDS)
<S>              <C>         <C>         <C>         <C>             <C>
     +200          31,221     (3,565)      -10%          12.44%             (110)
     +100          33,510     (1,276)       -4%          13.17%              (37)
      +50          34,256       (530)       -2%          13.39%              (15)
       --          34,786         --         --          13.54%               --
      -50          35,072        286         1%          13.60%                6
     -100          35,309        523         2%          13.64%               10
     -200          35,542        756         2%          13.64%               10
</TABLE>

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

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

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

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

     The table set forth above indicates that at December 31, 2007, in the event
of an immediate 100 basis point decrease in interest rates, we would be expected
to experience a 2% increase in NPV and a 10 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 10% decrease in NPV and a 110 basis point
decrease in NPV ratio.

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

LIQUIDITY AND CAPITAL RESOURCES

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

<PAGE>

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

     Liquidity represents the amount of our assets that can be quickly and
easily converted into cash without significant loss. Our most liquid assets are
cash, short-term U.S. Government securities, U.S. Government agency or
government-sponsored enterprise securities and certificates of deposit. We are
required to maintain sufficient levels of liquidity as defined by the Office of
Thrift Supervision regulations. Current regulations require that we maintain
sufficient liquidity to ensure our safe and sound operation. Our current
objective is to maintain liquid assets equal to at least 20% of total deposits
and Federal Home Loan Bank borrowings due in one year or less. Liquidity as of
December 31, 2007 was $57.3 million, or 32.1% of total deposits and Federal Home
Loan Bank borrowings due in one year or less, compared to $52.2 million, or
29.5% of this amount at December 31, 2006. 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, 2007, we had
unused borrowing capacity of $37.8 million. We can pledge additional collateral
in the form of investment securities and certain loans to increase our borrowing
capacity.

     We currently retain in our portfolio all adjustable-rate residential
mortgage loans, short-term balloon mortgage loans and fixed-rate residential
mortgage loans with maturities of less than 15 years, and generally sell the
remainder in the secondary mortgage market. We also originate for retention in
our loan portfolio, commercial and commercial real estate loans, including real
estate development loans. During the twelve months ended December 31, 2007, we
originated $31.5 million of one- to four-family residential mortgage loans, of
which $15.4 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
$33.4 million of one- to four-family originations during the twelve months ended
December 31, 2006, of which $20.0 million were retained in our portfolio. At
December 31, 2007, we had outstanding loan commitments of $33.3 million. These
commitments included $5.0 million for permanent one- to four-family residential
mortgage loans, $1.2 million for non-residential loans, $1.1 million of
undisbursed loan proceeds for construction of one- to four-family residences,
$7.6 million of undisbursed lines of credit on home equity loans, $1.4 million
of unused credit card lines, $10.5 million of unused commercial lines of credit,
$4.6 million of undisbursed commercial construction loans, unused bounce
protection of $1.7 million and letters of credit of $220,000.


     Deposits are a primary source of funds for use in lending and for other
general business purposes. At December 31, 2007, deposits funded 65.5% of our
total assets compared to 63.0% at December 31, 2006. Certificates of deposit
scheduled to mature in less than one year at December 31, 2007 totaled $77.3
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, 2007, we had $51.7 million in Federal
Home Loan Bank advances. Total borrowings as a percentage of total assets were
21.0% at December 31, 2007 compared to 23.5% at December 31, 2006.

     As of December 31, 2007, 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, 2007, 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, 2007, we exceeded all
applicable capital requirements.

<PAGE>

CRITICAL ACCOUNTING POLICIES

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

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

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

     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 changed by 10% (of the estimate) across all risk
ratings, the allocated allowance as of December 31, 2007 would have changed by
approximately $374,000. Actual loan losses may be significantly more than the
allowances we have established, which could have a material negative effect on
our financial results.

     MORTGAGE SERVICING RIGHTS. We sell to investors a portion of our originated
one- to four-family residential real estate mortgage loans. When we acquire
mortgage servicing rights through the origination of mortgage loans and sale of
those loans with servicing rights retained, we allocate a portion of the total
cost of the mortgage loans to the mortgage servicing rights based on their
relative fair value. As of December 31, 2007, we were servicing loans sold to
others totaling $131.5 million. We amortize capitalized mortgage servicing
rights as a reduction of servicing fee income in proportion to, and over the
period of, estimated net servicing income by use of a method that approximates
the level-yield method. We periodically evaluate capitalized mortgage servicing
rights for impairment using a model that takes into account several variables
including expected prepayment speeds and prevailing interest rates. If we
identify impairment, we charge the amount of the impairment to earnings by
establishing a valuation allowance against the capitalized mortgage servicing
rights asset. The primary risk of material changes to the value of the servicing
rights resides in the potential volatility in the economic assumptions used,
particularly the prepayment speed. We monitor this risk and adjust the valuation
allowance as necessary to adequately record any probable impairment in the
portfolio. Management believes the estimation of these variables makes this a
critical accounting policy. For purposes of measuring impairment, the mortgage
servicing rights are stratified based on financial asset type and interest
rates. In addition, we obtain an independent third-party valuation of the
mortgage servicing portfolio on a quarterly basis. In general, the value of
mortgage servicing rights increases as interest rates rise and decreases as
interest rates fall. This is because the estimated

<PAGE>

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, 2007
included the following:

<TABLE>
<S>                                            <C>
Annual constant prepayment speed (CPR):        12.36%
Weighted average life remaining (in months):     243
Discount rate used:                              9.0%
</TABLE>

     At the December 31, 2007 valuation, we calculated the value of our mortgage
servicing rights to be $1.2 million and the weighted average life remaining of
those rights was 44 months. The book value of our mortgage servicing rights as
of December 31, 2007 was $492,000 which was $708,000 less than the independent
valuation. Because the fair value exceeded the book value, there was no need to
establish a valuation allowance.

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

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

     In connection with our acquisition in 2003 of ICA, we allocated the excess
of the purchase price paid over the fair value of net assets acquired to
intangible assets, including goodwill. These intangible assets included the ICA
customer list and a third-party contract to which ICA is a party. From the date
of acquisition through April 30, 2005 we amortized the value assigned to the
customer and contract over a period of 20 years. Effective May 1, 2005, one of
the former owners of ICA retired, requiring an evaluation of the impact that
this retirement could have on both the customer list intangible and the
exclusive BCBS contract. Management determined that the retirement could open
the door for BCBS to re-negotiate the exclusive contract, including the
possibility that the contract could be terminated. In addition, Management
considered the possibility that the customer base could deteriorate as a result
of the retirement. Management made assumptions based on this uncertainty and
estimated the impact this could have on long-term cash flows. Management did not
believe there was uncertainty with respect to near-term cash flows. Based on the
guidance of SFAS 142, Management prospectively changed the amortization for
these assets based on our new expectations. At that point, the remaining useful
life of the assets was determined to be 10 years. Despite the decrease in
estimated useful lives, cash flows from these assets have not deteriorated.

     Effective January 1, 2006 the exclusive third-party contract with BCBS was
terminated. Prior to January 1, 2006, the ICA exclusive agent contract with BCBS
entitled ICA to an override commission of 1.9% on all health premiums written
through local Chambers of Commerce in Northeast Michigan. On any health
insurance contracts in place as of December 31, 2005, ICA will continue to
receive the 1.9% commission; however, there will be no new groups added to this
program effective January 1, 2006. At that point, due to the uncertainty of
potential run-off of customer accounts, Management decreased the estimated
useful life to 5 years beginning January 1, 2006. However, given the amount of
actual override commissions received, Management did not anticipate a decrease
in cash flows in the near term.

     Goodwill was created in both the 2003 ICA transaction and the 2005 customer
list purchase. Goodwill will not be amortized but tested annually for
impairment. Annual tests of impairment have included obtaining third party sales
multiple information for comparable companies. The mean of the multiples is
applied to annual net sales of ICA and added to the value of tangible assets
less current liabilities. This value is then compared to the current book value
of Goodwill, Intangibles, and Investment in ICA. Each year this analysis has
indicated no impairment of Goodwill exists.

<PAGE>

The $900,000 of payments made under the earn-out agreement in the ICA
transaction were added to goodwill as was $59,000 in earn-out payments accrued
in 2007 and 2006 related to the 2005 customer list purchase.

     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
quarterly 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.

     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, 2007 and December 31, 2006, First Federal of Northern
Michigan had $11.8 million and $12.5 million, respectively, of commitments to
grant loans, $21.2 million and $15.3 million, respectively, of unfunded
commitments under lines of credit and $220,000 and $50,000, 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.

<PAGE>

IMPACT OF INFLATION AND CHANGING PRICES

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

SUBSEQUENT EVENTS

     On February 1, 2008, the Company closed its branch office in Mancelona,
Michigan. The closure is not expected to result in a significant decrease in
total deposits due to the close proximity of the closed branch to the Company's
other branch in Gaylord, Michigan. The Company has booked a reserve of $30,000
to reflect the decline in market value of the physical assets of the branch. The
branch building was sold in March 2008.

     On March 4, 2008, the Company announced that its wholly owned subsidiary,
the InsuranCenter of Alpena ("ICA"), intends to sell to the Grotenhuis Group (a
managing agent for Blue Cross Blue Shield of Michigan) the rights to service
insurance contracts and collect commissions on such contracts written through
local Chambers of Commerce located in an 11-county area in northeast Michigan.
The purchase is expected to close on April 1, 2008. As part of the transaction,
certain employees of ICA will transfer to the Grotenhuis Group to service the
contracts. The Company expects to record a nominal gain in connection with the
sale.

<PAGE>

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

DIRECTORS -

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

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

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

     Gary C. VanMassenhove is a partner in VanMassenhove, Kearly, Taphouse &
Faulman, CPAs. Mr. VanMassenhove has been a Certified Public Accountant for 37
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 31 years. Mr. Townsend has been a director of the
Company and the Bank since April 2002.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS-

     Michael W. Mahler was named President and Chief Operating Officer of the
Company and the Bank in January 2006. Prior to that appointment, since November
2004, Mr. Mahler served as Executive Vice President of the Company and the Bank
and had served, since November 2002, as Chief Financial Officer. Mr. Mahler was
named as a director of the Bank in June, 2007. From September 2000 until
November 2002, Mr. Mahler was Corporate Controller at Besser Company, Alpena,
Michigan, an international producer of concrete products equipment. From 1990
until 2000, Mr. Mahler was employed at LTV Steel Company, East Chicago, Indiana
where he served in financial roles of increasing responsibility and served, from
1997 until 2000, as Controller for a northeast Michigan division.

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

     Jerome W. Tracey was named Executive Vice President and Chief Lending
Officer of the Company and the Bank in January 2006. Mr. Tracey had served as
Senior Vice President, Senior Lender of the Company and the Bank since September
2001 and served as Vice President of Commercial Services since joining the Bank
in November 1999. Prior to joining the Bank, Mr. Tracey served as Vice President
of Commercial Lending for National City Bank, Alpena, Michigan, a position he
held since 1996. Mr. Tracey has been in the banking profession since 1981.

<PAGE>

SENIOR MANAGEMENT TEAM OF THE BANK -

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

MANAGEMENT TEAM - INSURANCENTER OF ALPENA -

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

                             STOCKHOLDER INFORMATION

     The Annual Meeting of Stockholders will be held at 1:00 p.m., May 21, 2008
at the Company's newest branch facility at 2885 South County Rd. #489, Lewiston,
Michigan.

STOCK LISTING

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

PRICE RANGE OF COMMON STOCK

     The following sets forth the quarterly high and low sales price per share
during each of the four quarters in 2007 and 2006.

<TABLE>
<CAPTION>
                      Market Price
                     --------------   Cash Dividends
   Quarter Ended      High     Low       Declared
------------------   ------   -----   --------------
<S>                  <C>      <C>     <C>
December 31, 2007    $ 8.50   $6.61       $0.050
September 30, 2007   $ 9.02   $7.05       $0.050
June 30, 2007        $ 9.24   $8.76       $0.050
March 31, 2007       $ 9.33   $9.10       $0.050
December 31, 2006    $ 9.65   $9.08       $0.050
September 30, 2006   $10.02   $9.10       $0.050
June 30, 20006       $10.05   $9.40       $0.050
March 31, 2006       $ 9.69   $8.75       $0.050
</TABLE>

SPECIAL COUNSEL

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

INDEPENDENT AUDITOR

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

TRANSFER AGENT

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

<PAGE>

ANNUAL REPORT ON FORM 10-KSB

     A copy of the Company's Form 10-KSB for the year ended December 31, 2007
will be furnished without charge upon written request to: Amy E. Essex, Chief
Financial Officer, Treasurer and Corporate Secretary, First Federal of Northern
Michigan Bancorp, Inc., 100 S. Second Avenue, Alpena, Michigan 49707.
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

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


                                       1

<PAGE>

             Report of Independent Registered Public Accounting Firm

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

We have audited the consolidated statement of financial condition of First
Federal of Northern Michigan Bancorp, Inc. as of December 31, 2007 and 2006 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each year in the two-year period ended December 31, 2007.
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, 2007 and 2006 and
the consolidated results of their operations and their cash flows for each year
in the two-year period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Plante & Moran, PLLC
Auburn Hills, Michigan
March 28, 2008


                                       2

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                    December 31
                                                                -------------------
                                                                  2007       2006
                                                                --------   --------
<S>                                                             <C>        <C>
                            ASSETS
Cash and cash equivalents                                       $  3,568   $  4,160
Overnight deposits with Federal Home Loan Bank                     1,773        833
                                                                --------   --------
      Total cash and cash equivalents                              5,341      4,993
Securities available for sale (Note 2)                            20,681     43,100
Securities held to maturity (Note 2)                               2,770      1,750
Loans - Net (Note 3)                                             201,333    209,518
Loans held for sale                                                   --         72
Federal Home Loan Bank stock                                       4,197      4,197
Property and equipment (Note 4)                                    7,619      8,075
Accrued interest receivable                                        1,700      2,139
Intangible assets (Note 6)                                         2,094      2,589
Goodwill                                                           1,397      1,397
Other assets (Note 5)                                              3,699      3,129
                                                                --------   --------
      Total assets                                              $250,831   $280,959
                                                                ========   ========
             LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
   Non-interest bearing deposits                                $ 10,186   $ 10,029
   Interest bearing deposits (Note 7)                            154,284    167,029
   Advances from Federal Home Loan Bank (Note 8)                  51,700     64,850
   Note payable (Note 9)                                             984      1,192
   Accrued expenses and other liabilities                          1,174      2,406
                                                                --------   --------
      Total liabilities                                          218,328    245,506
STOCKHOLDERS' EQUITY (Note 12)
   Common stock ($0.01 par value 20,000,000 shares authorized
      3,191,999 and 3,190,999 shares issued, respectively)            32         32
   Additional paid-in capital                                     24,328     24,262
   Retained earnings                                              12,416     14,576
   Treasury stock at cost (307,750 and 156,000 shares,
      respectively)                                               (2,964)    (1,565)
   Unallocated ESOP shares (Note 13)                                (959)    (1,059)
   Unearned compensation                                            (415)      (529)
   Accumulated other comprehensive (loss) income                      65       (264)
                                                                --------   --------
      Total stockholders' equity                                  32,503     35,453
                                                                --------   --------
      Total liabilities and stockholders' equity                $250,831   $280,959
                                                                ========   ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       3

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                            Year Ended
                                                            December 31
                                                         -----------------
                                                           2007      2006
                                                         -------   -------
<S>                                                      <C>       <C>
INTEREST INCOME
   Loans, including fees                                 $14,456   $14,861
   Investments                                             1,651     2,106
   Mortgage-backed securities                                 93       203
                                                         -------   -------
      Total interest income                               16,200    17,170
INTEREST EXPENSE
   Deposits (Note 8)                                       5,533     5,437
   Other borrowings                                        2,914     3,131
                                                         -------   -------
      Total interest expense                               8,447     8,568
                                                         -------   -------
NET INTEREST INCOME - Before provision for loan losses     7,753     8,602
PROVISION FOR LOAN LOSSES (NOTE 3)                         2,377       851
                                                         -------   -------
NET INTEREST INCOME - After provision for loan losses      5,376     7,751
OTHER INCOME (EXPENSES)
   Service charges and other fees                            911     1,044
   Net gain on sale of loans                                 175       114
   Loan servicing fees                                       243       230
   Insurance and brokerage commissions                     2,726     2,948
   Other                                                     (73)       62
                                                         -------   -------
      Total other income                                   3,982     4,398
OPERATING EXPENSES
   Compensation and employee benefits (Note 13)            6,237     6,306
   Amortization of intangible assets                         495       500
   Advertising                                               200       271
   Occupancy and equipment                                 1,505     1,357
   Data processing service bureau                            318       364
   Professional fees                                         325       421
   Insurance and brokerage commission                        948     1,062
   Other                                                   1,846     1,247
                                                         -------   -------
      Total operating expenses                            11,874    11,528
                                                         -------   -------
INCOME (loss) - Before federal income tax                 (2,516)      621
FEDERAL INCOME TAX (Note 10)                                (916)      158
                                                         -------   -------
NET (LOSS) INCOME                                        $(1,600)  $   463
                                                         =======   =======
PER SHARE DATA
   Basic (loss) earnings per share                       $ (0.56)  $  0.15
   Fully diluted (loss) earnings per share                 (0.56)     0.15
   Dividends per common share                               0.20      0.20
</TABLE>

See Notes to consolidated
  Financial Statements.


                                       4

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                      Additional                                           Other          Total
                                    Common  Treasury    Paid-in     Unearned    Retained  Unallocated  Comprehensive  Stockholders'
                            Shares   Stock    Stock     Capital   Compensation  Earnings  ESOP Shares  Income (Loss)      Equity
                           -------  ------  --------  ----------  ------------  --------  -----------  -------------  -------------
<S>                        <C>      <C>     <C>       <C>         <C>           <C>       <C>          <C>            <C>
BALANCE - January 1, 2006  $ 3,115    $31   $    --    $23,560       $  --       $14,703    $(1,187)       $(458)        $36,649
Comprehensive income:
   Net income                   --     --        --         --          --           463         --           --             463
   Other comprehensive
      income:
      Unrealized
         appreciation on
         available-for-
         sale securities
         - Net of tax of
         $100                   --     --        --         --          --            --         --          194             194
                                                                                                                         -------
         Total
            comprehensive
            income                                                                                                           657
Treasury stock at cost
   (156,000 shares)             --     --    (1,565)        --          --            --         --           --          (1,565)
Stock options exercised         18     --        --         99          --            --         --           --              99
Tax benefit on stock
   options exercised            --     --        --         15          --            --         --           --              15
Retired stock                   (6)    --        --        (60)         --            --         --           --             (60)
ESOP common stock
   committed to be
   released                     --     --        --         (8)         --            24        128           --             144
MRP shares awarded              64      1        --        610        (610)           --         --           --               1
Stock options/MRP shares
   expensed                     --     --        --         46          81            --         --           --             127
Dividends declared              --     --        --         --          --          (614)        --           --            (614)
                           -------    ---   -------    -------       -----       -------    -------        -----         -------
BALANCE - December 31,
   2006                      3,191     32    (1,565)    24,262        (529)       14,576     (1,059)        (264)         35,453
Comprehensive income
   (loss):
   Net loss                     --     --        --         --          --        (1,600)        --           --          (1,600)
   Other comprehensive
      income:
      Unrealized
         appreciation on
         available-for-
         sale securities
         - Net of tax of
         $169                   --     --        --         --          --            --         --          329             329
                                                                                                                         -------
         Total
            comprehensive
            loss                                                                                                          (1,271)
Treasury stock at cost
   (151,750 shares)             --     --    (1,399)        --          --            --         --           --          (1,399)
ESOP common stock
   committed to be
   released                                                (15)                       22        100                          107
MRP shares awarded               2     --        --         13         (13)           --         --           --              --
MRP shares forfeited            (1)    --                   (5)          5                                                    --
Stock options/MRP shares
   expensed                     --     --        --         73         122            --         --           --             195
Dividends declared              --     --        --         --          --          (582)        --           --            (582)
                           -------    ---   -------    -------       -----       -------    -------        -----         -------
BALANCE - December 31,
   2007                      3,192    $32   $(2,964)   $24,328       $(415)      $12,416    $  (959)       $  65         $32,503
                           =======    ===   =======    =======       =====       =======    =======        =====         =======
</TABLE>

See Notes to Consolidated Financial Statements.


                                       5

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                       Year Ended December 31
                                                                       ----------------------
                                                                          2007       2006
                                                                        --------   --------
<S>                                                                    <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)                                                    $ (1,600)  $    463
   Adjustments to reconcile net income (loss) to cash from operating
      activities:
      Depreciation and amortization                                        1,100      1,044
      Provision for loan losses                                            2,377        851
      Amortization and accretion on securities                                19         88
      Loss on sale of investment securities                                   96         45
      ESOP contribution                                                      107        144
      Stock options/awards                                                   195        127
      Gain on sale of loans held for sale                                   (175)      (114)
      Originations of loans held for sale                                (10,596)   (14,632)
      Proceeds from sale of loans held for sale                           10,843     14,674
      (Gain) loss on sale of real estate                                      72         (1)
      (Gain) loss on fixed assets                                             30          7
      Change in accrued interest receivable                                  439       (537)
      Change in other assets                                                 124        301
      Change in accrued expenses and other liabilities                      (315)       (46)
      Change in deferred income taxes                                       (903)      (652)
                                                                        --------   --------
         Net cash provided by operating activities                         1,813      1,762
CASH FLOWS FROM INVESTING ACTIVITIES
   Net (increase) decrease in loans                                        4,931     (9,186)
   Proceeds from maturity of securities                                   18,930      4,534
   Proceeds from sale of securities available-for-sale                     4,727      7,940
   Purchase of securities available for sale                                (855)    (1,976)
   Purchases of securities held-to-maturity                               (1,020)        --
   Proceeds from sale of Federal Home Loan Bank stock                         --        568
   Purchase of insurance related businesses                                   --        (47)
   Purchase of premises and equipment                                       (207)    (1,235)
                                                                        --------   --------
         Net cash provided by (used for) investing activities             26,506        598
CASH FLOWS FROM FINANCING ACTIVITIES
   Net decrease in deposits                                              (12,588)   (11,677)
   Dividends paid on common stock                                           (582)      (614)
   Net increase (decrease) in advances from borrowers                        (44)        16
   Additions to advances from FHLB and Notes Payable                      42,200     22,425
   Repayments of advances from FHLB and Notes Payable                    (55,558)   (10,786)
   Proceeds from exercise of stock options                                    --         99
   Shares retired                                                             --        (60)
   Purchase of treasury shares                                            (1,399)    (1,565)
   Tax benefit on stock options exercised                                     --         15
                                                                        --------   --------
        Net cash provided by (used for) financing activities             (27,971)    (2,147)
                                                                        --------   --------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                    348        213
CASH AND CASH EQUIVALENTS - Beginning of year                              4,993      4,780
                                                                        --------   --------
CASH AND CASH EQUIVALENTS - End of year                                 $  5,341   $  4,993
                                                                        ========   ========
SUPPLEMENTAL CASH FLOW AND NONCASH INFORMATION
   Cash paid for income taxes                                           $    175   $    580
   Cash paid for interest on deposits and borrowings                       8,684      8,307
</TABLE>

See Notes to Consolidated Financial Statements.


                                       6
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (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.

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

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

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

     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.


                                       7

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     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
     amortized cost that are deemed to be other-than-temporary are reflected in
     earnings as realized losses. Gains and losses on the sale of securities are
     recorded on the trade date and are determined using the specific
     identification method.

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

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

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

     The Company enters into commitments to originate loans whereby the interest
     rate on the loan is determined prior to funding, also known as rate lock
     commitments. Rate lock commitments on residential mortgage loans that are
     intended to be sold are considered to be derivatives. Fair value is based
     on fees currently charged to enter into similar agreements. The fair value
     of rate lock commitments was insignificant at December 31, 2007 and 2006.


                                       8

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     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, 2007
     and 2006.

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

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

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

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

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


                                       9

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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


                                       10

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     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.

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

     LOANS HELD FOR SALE - The Bank routinely sells to investors its long-term
     fixed rate residential mortgages. These loans are identified as held for
     sale and are accounted for at the lower of cost or market on an aggregate
     basis. The lower of cost or market allowance for loans held for sale was $0
     at December 31, 2007 and 2006.

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

     REAL ESTATE HELD FOR SALE - Real estate held for sale is comprised of
     developed vacant residential lots and completed condominiums in a
     subdivision located in Alpena, Michigan. For reporting purposes, these
     properties are included in the Banking segment. These properties are
     considered "impaired" under the definition in SFAS 144, Accounting for
     Impairment or Disposal of Long-Lived Assets. Accordingly, the properties
     are recorded at the lower of its cost or fair value less


                                       11

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     cost to sell. Costs to sell are the incremental direct costs to transact a
     sale, that is, the costs that result directly from and are essential to a
     sale transaction and that would not have been incurred by the entity had
     the decision to sell not been made. Those costs include realtor
     commissions, legal and title transfer fees, and closing costs that must be
     incurred before legal title can be transferred.

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

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

     INTANGIBLE ASSETS - 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 quarterly for
     impairment.


                                       12

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (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.

     After allocating the purchase price to the tangible assets the remainder
     was allocated to the intangible assets. The primary intangible assets are a
     customer list and an exclusive contract with BCBSM, a health insurance
     company based in Michigan. The exclusive contract provides for a commission
     of approximately 2% related to all insurance premiums collected by ICA sold
     through a 10 county Chamber of Commerce group. The intangible asset
     recorded for this exclusive contract applies to all existing healthcare
     customers obtained through the group and is in effect for as long as those
     customers remain with the ICA.

     Using historical cash flows the customer list was assigned a value of
     $890,000 and the exclusive contract was valued at $597,000. Both assigned
     values were arrived at based on a discounted cash flow (DCF) analysis that
     assumed a 20 year life or 5% runoff of revenue each year. The expected life
     was determined using historical runoff rates experienced by ICA before
     acquisition which were less than 5% per year.

     Effective May 1, 2005, one of the former owners of ICA retired, requiring
     an evaluation of the impact that this retirement could have on both the
     customer list intangible and the exclusive BCBSM contract. Management
     determined that the retirement could open the door for BCBSM to
     re-negotiate the exclusive contract, including the possibility that the
     contract could be terminated. In addition, Management considered the
     possibility that the customer base could deteriorate as a result of the
     retirement. Management made assumptions based on this uncertainty and
     estimated the impact this could have on long-term cash flows. Management
     did not believe there was uncertainty with respect to near-term cash flows.
     Based on the guidance of SFAS 142, Management prospectively changed the
     amortization for these assets based on our new expectations. At that point,
     the remaining useful life of the assets was determined to be 10 years.
     Despite the


                                       13

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     decrease in estimated useful lives, cash flows from these assets have not
     deteriorated below projected levels.

     Effective January 1, 2006 the exclusive third-party contract with BCBSM was
     terminated. Prior to January 1, 2006, the ICA exclusive agent contract with
     BCBSM entitled ICA to an override commission of approximately 2.0% on all
     health premiums written through local Chambers of Commerce in Northeast
     Michigan. On any health insurance contracts in place as of December 31,
     2005, ICA will continue to receive the commission; however, there will be
     no new groups added to this program effective January 1, 2006. At that
     point, due to the uncertainty of potential run-off of customer accounts,
     Management decreased the estimated useful life to 5 years beginning January
     1, 2006. However, given the amount of actual override commissions received,
     Management did not anticipate a decrease in cash flows in the near term.

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

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

     GOODWILL - Goodwill was created in both the 2003 ICA transaction and the
     2005 customer list purchase. Goodwill will not be amortized but tested
     annually for impairment. Annual tests of impairment have included obtaining
     third party sales multiple information for comparable companies. The mean
     of the multiples is applied to annual net sales of ICA and added to the
     value of tangible assets less current liabilities. This value is then
     compared to the current book value of Goodwill, Intangibles, and Investment
     in ICA. Each year this analysis has indicated no impairment of Goodwill
     exists. The $900,000 of payments made under the earn-out agreement in the
     ICA transaction were added to goodwill as was $59,000 in


                                       14

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     earn-out payments accrued in 2007 and 2006 related to the 2005 customer
     list purchase.

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

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

     OFF BALANCE SHEET INSTRUMENTS - In the ordinary course of business, the
     Corporation has entered into commitments to extend credit, including
     commitments under credit card arrangements, commercial letters of credit
     and standby letters of credit. For letters of credit, a liability is
     recorded for the fair value of the obligation undertaken in issuing the
     guarantee.

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

     STOCK BASED COMPENSATION - Prior to January 1, 2006 the Company accounted
     for stock awards and options under the recognition and measurement
     principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,
     and related interpretations. The Company adopted the fair value recognition
     provisions of Statement of Financial Standards (SFAS) No. 123 (R),
     Share-Based Payment effective January 1, 2006 using the
     modified-prospective transition method. SFAS No. 123 (R) established a fair
     value method of accounting for stock options whereby compensation expense
     would be recognized based on the computed fair value of the options on the
     grant date. The Company recognizes compensation expense related to
     restricted stock awards over the period the services are performed. The
     Company granted 6,200 options in 2007 and 198,990 options in 2006.


                                       15

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Implementation of SFAS No. 123 (R) resulted in additional compensation
     expense of $73,000 in 2007 and $46,000 in 2006.

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

<TABLE>
<CAPTION>
                             Year Ended
                            December 31,
                           -------------
                            2007   2006
                            ----   ----
<S>                         <C>    <C>
Expected Volatility           18%    14%
Dividend yield               2.2%   2.2%
Expected term (in years)     8.0    8.0
Risk- free interest rate    5.21%  5.08%
</TABLE>

     EARNINGS PER COMMON SHARE - Basic earnings per share represents income
     available to common stockholders divided by the weighted-average number of
     common shares outstanding during the period. Diluted earnings per share
     reflects additional common shares that would have been outstanding if
     dilutive potential common shares had been issued, as well as any adjustment
     to income that would result from the assumed issuance. Potential common
     shares that may be issued by the Company relate solely to outstanding stock
     options and are determined using the treasury stock method. Approximately
     43,000 options were not considered for dilution in 2007 based on the
     Company's net loss for the period.

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

<TABLE>
<CAPTION>
                                                 December 31,
                                           -----------------------
                                              2007         2006
                                           ----------   ----------
<S>                                        <C>          <C>
Net (loss) income                          $   (1,600)  $      463
                                           ==========    =========
Average number of common shares
   outstanding                              2,873,250    3,081,525
Effect of dilutive options                         --          938
                                           ----------    ---------
Average number of common shares
   outstanding used to calculate diluted
   earnings per common share                2,873,250    3,082,463
                                           ==========    =========
</TABLE>


                                       16

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     RECENT ACCOUNTING PRONOUNCEMENTS - FASB NO. 157 AND FASB NO. 159 - FAIR
     VALUE MEASUREMENT AND THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND
     FINANCIAL LIABILITIES - SFAS No. 157 clarifies the definition of fair
     value, establishes a framework for measuring fair value, and expands the
     disclosures on fair value measurements. It applies under other accounting
     pronouncements that require or permit fair value measurements and does not
     require any new fair value measurements. SFAS No. 159 permits entities to
     choose to measure many financial instruments and certain other items at
     fair value. SFAS No. 157 and SFAS No. 159 are effective for fiscal years
     beginning after November 15, 2007. The Company did not early adopt and does
     not anticipate the adoption of these statements to have a significant
     effect on the consolidated financial statements.

     FASB INTERPRETATION NO. 48 - ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES -
     In July 2006, the Financial Accounting Standards Board (FASB) issued this
     interpretation to clarify the accounting for uncertainty in tax positions.
     FIN 48 requires, among other matters, that the Company recognizes in its
     consolidated financial statements the impact of a tax position, if that
     position is more likely than not of being sustained on audit, based on the
     technical merits of the position. The provisions of FIN 48 become effective
     as of the beginning of the Company's 2007 fiscal year. There was no impact
     to the financial statements as a result of adopting FIN 48.


                                       17
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 2 - SECURITIES

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

<TABLE>
<CAPTION>
                                                            December 31, 2007
                                              ---------------------------------------------
                                                             Gross        Gross
                                              Amortized   Unrealized   Unrealized    Market
                                                 Cost        Gains       Losses      Value
                                              ---------   ----------   ----------   -------
<S>                                           <C>         <C>          <C>          <C>
SECURITIES AVAILABLE FOR SALE
   U.S. Treasury securities and obligations
      of U.S. government corporations
      and agencies                             $18,477       $ 41          $ 4      $18,514
   Municipal notes                                 830         --            1          829
   Mortgage-backed securities                    1,273          3           25        1,251
   Other securities                                  3         84           --           87
                                               -------       ----          ---      -------
         Total                                 $20,583       $128          $30      $20,681
                                               =======       ====          ===      =======
SECURITIES HELD TO MATURITY
   Municipal notes                             $ 2,770       $ 33          $ 8      $ 2,795
                                               =======       ====          ===      =======
</TABLE>

<TABLE>
<CAPTION>
                                                            December 31, 2006
                                              ---------------------------------------------
                                                             Gross        Gross
                                              Amortized   Unrealized   Unrealized    Market
                                                 Cost        Gains       Losses      Value
                                              ---------   ----------   ----------   -------
<S>                                           <C>         <C>          <C>          <C>
SECURITIES AVAILABLE FOR SALE
   U.S. Treasury securities and obligations
      of U.S. government corporations
      and agencies                             $36,271       $ --         $369       35,902
   Municipal notes                               2,021         --           15        2,006
   Mortgage-backed securities                    5,205          3          187        5,021
   Other securities                                  3        168           --          171
                                               -------       ----         ----      -------
         Total                                 $43,500       $171         $571      $43,100
                                               =======       ====         ====      =======
SECURITIES HELD TO MATURITY
   Municipal notes                             $ 1,750       $ 38         $  5      $ 1,783
                                               =======       ====         ====      =======
</TABLE>


                                       18

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 2 - SECURITIES (CONTINUED)

     The amortized cost and estimated market value of securities at December 31,
     2007, by contractual maturity, are shown below. Expected maturities will
     differ from contractual maturities because issuers may have the right to
     call or prepay obligations with or without call or prepayment penalties.
     Securities with no specified maturity date are separately stated:

<TABLE>
<CAPTION>
                                         December 31, 2007
                                        -------------------
                                        Amortized    Market
                                           Cost      Value
                                        ---------   -------
<S>                                     <C>         <C>
AVAILABLE FOR SALE:
Due in one year or less                  $ 5,498    $ 5,503
Due after one year through five years     13,229     13,260
Due in five year through ten years           332        331
Due after ten years                          248        249
                                         -------    -------
   Subtotal                               19,307     19,343
Equity securities                              3         87
Mortgage-backed securities                 1,273      1,251
                                         -------    -------
   Total                                 $20,583    $20,681
                                         =======    =======
HELD TO MATURITY
Due in one year or less                  $    80    $    80
Due after one year through five years        345        347
Due in five year through ten years           545        550
Due after ten years                        1,800      1,818
                                         -------    -------
   Total                                 $ 2,770    $ 2,795
                                         =======    =======
</TABLE>

     At December 31, 2007 and 2006, securities with a carrying value and fair
     value of $14,472,000 and $24,074,000, 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, 2007 and 2006 were $4,727,000 and $7,940,000,
     respectively, resulting in gross gains of $0 and $0, respectively and gross
     losses of $97,000 and $45,000, respectively. The tax provision applicable
     to these net realized gains (losses) amounted to ($32,000) and ($15,000),
     respectively.


                                       19

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (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,
     2007 and 2006:

<TABLE>
<CAPTION>
                                                December 31, 2007                           December 31, 2006
                                    ----------------------------------------   ------------------------------------------
                                               Gross                 Gross                 Gross                  Gross
                                            Unrealized            Unrealized            Unrealized             Unrealized
                                              Losses                Losses                Losses                 Losses
                                            ----------            ----------            ----------             ----------
                                                                    Greater                                      Greater
                                     Fair    Less than    Fair       than       Fair     Less than     Fair       than
                                    Value    12 months    Value    12 months    Value    12 months    Value    12 months
                                    -----   ----------   ------   ----------   ------   ----------   -------   ----------
<S>                                 <C>     <C>          <C>      <C>          <C>      <C>          <C>       <C>
U.S. Treasury securities and
   obligations of U.S. government
   corporations and agencies         $ --       $--      $4,994       $ 4      $3,992       $ 8      $29,913      $361
Municipal notes                       697         8         150         1          --        --        2,451        20
Mortgage-backed securities             22         1       1,008        24          --        --        4,745       187
                                     ----       ---      ------       ---      ------       ---      -------      ----
      Total                          $719       $ 9      $6,152       $29      $3,992       $ 8      $37,109      $568
                                     ====       ===      ======       ===      ======       ===      =======      ====
</TABLE>

     Management does not believe any individual unrealized loss as of December
     31, 2007 represents an other-than-temporary impairment. These unrealized
     losses are primarily attributable to changes in interest rates. The
     unrealized losses were 5% or less of their respective amortized cost basis.
     The Company has both the intent and ability to hold the securities
     contained in the previous table for a time necessary to recover the
     amortized costs.


                                       20

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS

     Loans at December 31, 2007 and 2006 are summarized as follows:

<TABLE>
<CAPTION>
                                                          December 31
                                                      -------------------
                                                        2007       2006
                                                      --------   --------
<S>                                                   <C>        <C>
Real estate loans - One- to four-family residential   $ 99,373   $102,609

Commercial loans:
   Secured by real estate                               50,819     51,561
   Other                                                26,783     28,209
                                                      --------   --------
      Total commercial loans                            77,602     79,770

Consumer loans:
   Secured by real estate                               24,095     24,868
   Other                                                 4,555      4,688
                                                      --------   --------
      Total consumer loans                              28,650     29,556
                                                      --------   --------
      Total gross loans                                205,625    211,935

Less:
   Net deferred loan fees                                  279        338
   Allowance for loan losses                             4,013      2,079
                                                      --------   --------
      Total loans - Net                               $201,333   $209,518
                                                      ========   ========
</TABLE>

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

<TABLE>
<CAPTION>
                                               December 31, 2007
                                   -----------------------------------------
                                               One Year    After
                                   Less Than   to Five      Five
                                    One Year     Years     Years      Total
                                   ---------   --------   -------   --------
<S>                                <C>         <C>        <C>       <C>
Loans at fixed interest rates       $25,827     $54,293   $51,283   $131,403
Loans at variable interest rates     16,952       8,617    48,653     74,222
                                    -------     -------   -------   --------
   Total                            $42,779     $62,910   $99,936   $205,625
                                    =======     =======   =======   ========
</TABLE>


                                       21

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS (CONTINUED)

     Certain directors and executive officers of the Company were loan customers
     during 2007 and 2006. 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, 2007 and 2006 is as follows:

<TABLE>
<CAPTION>
                                             December 31
                                          -----------------
                                            2007      2006
                                          -------   -------
<S>                                       <C>       <C>
Aggregate balance - Beginning of Period   $ 2,860    $2,656
New loans                                   2,031     1,009
Repayments                                 (1,154)     (805)
                                          -------    ------
Aggregate balance - End of Period         $ 3,737    $2,860
                                          =======    ======
</TABLE>

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

<TABLE>
<CAPTION>
                                       Year
                                Ended December 31
                                -----------------
                                  2007      2006
                                -------   -------
<S>                             <C>       <C>
Balance - Beginning of period    $2,079    $1,416
Provision for losses              2,377       851
Charge-offs                        (478)     (208)
Recoveries                           35        20
                                 ------    ------
Balance - End of period          $4,013    $2,079
                                 ======    ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                December 31
                                                              ---------------
                                                               2007     2006
                                                              ------   ------
<S>                                                           <C>      <C>
Impaired loans without a
   valuation allowance                                        $  343   $   --
Impaired loans with a valuation
   allowance                                                   7,390    1,760
                                                              ------   ------
Total impaired loans                                          $7,733   $1,760
                                                              ======   ======
Valuation allowance related to
   impaired loans                                             $2,333   $  277
Total non-accrual loans                                       $8,460   $2,351
Total loans past-due ninety days or more and still accruing   $  677   $1,629
</TABLE>


                                       22

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS (CONTINUED)

<TABLE>
<CAPTION>
                                                 Year Ended
                                                December 31
                                               -------------
                                                2007    2006
                                               ------   ----
<S>                                            <C>      <C>
Average investment in impaired loans           $1,704   $816
                                               ======   ====
Interest income recognized on impaired loans   $   --   $ --
                                               ======   ====
Interest income recognized on
   a cash basis on impaired loans              $   --   $ --
                                               ======   ====
</TABLE>

NOTE 4 - PROPERTY AND EQUIPMENT

     A SUMMARY OF PROPERTY AND EQUIPMENT IS AS FOLLOWS:

<TABLE>
<CAPTION>
                                     December 31
                                  -----------------
                                    2007      2006
                                  -------   -------
<S>                               <C>       <C>
Land                              $ 1,251   $ 1,251
Land improvements                     211       201
Buildings                           6,555     6,507
Equipment                           3,534     3,825
                                  -------   -------
   Total property and equipment    11,551    11,784
Less accumulated depreciation       3,932     3,709
                                  -------   -------
   Net property and equipment     $ 7,619   $ 8,075
                                  =======   =======
</TABLE>

     Depreciation expense was $605,000 and $544,000 for the periods ended
     December 31, 2007 and 2006, 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 $131,500,000 and
     $137,700,000 at December 31, 2007 and 2006, respectively.

     The balance of capitalized servicing rights, net of valuation allowance, is
     included in other assets at December 31, 2007 and 2006.


                                       23
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.  AND SUBSIDIARIES

                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
                                                      December 31, 2007 and 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 5 - SERVICING (CONTINUED)

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

<TABLE>
<CAPTION>
                                          December 31,
                                         -------------
                                          2007    2006
                                         -----   -----
<S>                                      <C>     <C>
Annual constant prepayment speed (CPR)   12.36%  12.55%
Weighted average life (in months)          243     248
Discount rate                             9.00%   8.50%
</TABLE>

     We estimated the fair value of our mortgage servicing rights to be
     $1,212,000 and $1,287,000 and the weighted average life remaining of those
     rights was 44 months and 43 months at December 31, 2007 and 2006,
     respectively.

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

<TABLE>
<CAPTION>
                                                    December 31
                                                   -------------
                                                    2007    2006
                                                   -----   -----
<S>                                                <C>     <C>
Balance, beginning of period                       $ 621   $ 751
Originated mortgage servicing rights capitalized      99     123
Amortization of mortgage servicing rights           (228)   (253)
                                                   -----   -----
Balance - end of period                              492     621
Valuation allowances:
  Balance at beginning of year                        --      --
  Additions                                           --      --
  Reductions                                          --      --
  Write-downs                                         --      --
                                                   -----   -----
Balance, end of year (net of allowances)           $ 492   $ 621
                                                   =====   =====
</TABLE>


                                       24

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.  AND SUBSIDIARIES

                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
                                                      December 31, 2007 and 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 6 - INTANGIBLE ASSETS

     Intangible assets of the Company are summarized as follows:

<TABLE>
<CAPTION>
                                        December 31, 2007
                               ----------------------------------
                                 Gross                      Net
                               Carrying    Accumulated   Carrying
                                Amount    Amortization    Amount
                               --------   ------------   --------
<S>                            <C>        <C>            <C>
Amortized intangible assets:
   Customer list                $1,454       $  542       $  912
   Customer contract               597          299          298
   Core deposit                  3,081        2,300          781
   Non-compete covenant            200           97          103
                                ------       ------       ------
   Total                        $5,332       $3,238       $2,094
                                ======       ======       ======
</TABLE>

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

     Amortization expense was $495,000 and $500,000 for the periods ended
     December 31, 2007 and 2006, respectively.

     Amortization periods for the major classes of intangible assets and in
     total are as follows as of December 31, 2007.

<TABLE>
<CAPTION>
                         Amortization
                            Period
Amortizable Intangible    (In years)
----------------------   ------------
<S>                      <C>
Customer list                 6.7
Customer contract             3.0
Core deposit                  6.4
Non-compete covenant          5.2
                              ---
                              7.4
                              ===
</TABLE>

     The expected amortization expense related to intangibles as of December 31,
     2007 is as follows:

<TABLE>
<CAPTION>
                            Annual
Year Ended December 31   Amortization
----------------------   ------------
<S>                      <C>
          2008              $  500
          2009                 491
          2010                 472
          2011                 278
          2012                 161
2013 and thereafter            192
                            ------
                             2,094
                            ======
</TABLE>


                                       25

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.  AND SUBSIDIARIES

                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
                                                      December 31, 2007 and 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 7 - DEPOSITS

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

<TABLE>
<CAPTION>
                                        December 31
                                   -------------------
                                     2007       2006
                                   --------   --------
<S>                                <C>        <C>
Account Type
NOW accounts and MMDA              $ 26,251   $ 27,976
Regular savings accounts             22,601     25,452
                                   --------   --------
   Total                             48,852     53,428
Certificate of Deposit Rates
0.50 percent to 1.99 percent             --        757
2.00 percent to 2.99 percent         11,346      4,487
3.00 percent to 3.99 percent         11,977     25,847
4.00 percent to 4.99 percent         70,900     52,502
5.00 percent to 6.99 percent          9,857     28,503
7.00 percent to 8.99 percent          1,352      1,505
                                   --------   --------
   Total certificate of deposits    105,432    113,601
                                   --------   --------
   Total deposits                  $154,284   $167,029
                                   ========   ========
</TABLE>

     Certificates of deposit $100,000 or greater at December 31, 2007 and 2006
     were $30,120,000 and $27,814,000, respectively. The amounts in excess of
     $100,000 are not federally insured.

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

<TABLE>
<CAPTION>
                                       December 31, 2007
                                          Amount Due
                  ----------------------------------------------------------
                                                          Greater
                  Less than     1-2       2-3      3-5      than
Rate                1 Year     Years     Years    Years   5 Years     Total
----              ---------   -------   ------   ------   -------   --------
<S>                <C>        <C>       <C>      <C>      <C>       <C>
0.50 percent to
   1.99 percent    $    --    $    --   $   --   $   --     $ --    $     --
2.00 percent to
   2.99 percent     10,750        218      265       --      113      11,346
3.00 percent to
   3.99 percent      7,997      2,787      864      183      146      11,977
4.00 percent to
   4.99 percent     52,796     14,566    1,280    2,075      183      70,900
5.00 percent to
   6.99 percent      5,732      1,599    2,013      513       --       9,857
7.00 percent to
   8.99 percent         --         --    1,352       --       --       1,352
                   -------    -------   ------   ------     ----    --------
    Total          $77,275    $19,170   $5,774   $2,771     $442    $105,432
                   =======    =======   ======   ======     ====    ========
</TABLE>


                                       26

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.  AND SUBSIDIARIES

                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
                                                      December 31, 2007 and 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 7 - DEPOSITS (CONTINUED)

     Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>
                             Year Ended
                            December 31
                          ---------------
                           2007     2006
                          ------   ------
<S>                       <C>      <C>
NOW and MMDAs             $  378   $  326
Regular savings              326      382
Certificates of deposit    4,829    4,729
                          ------   ------
   Total                  $5,533   $5,437
                          ======   ======
</TABLE>

     Deposits from related parties held by the Bank at December 31, 2007 and
     2006 amounted to $447,000 and $463,000, respectively.

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

     Advances outstanding from the Federal Home Loan Bank (FHLB) bear interest
     that is payable monthly. Pursuant to blanket collateral agreements with the
     FHLB, advances are collateralized by one- to four-family whole mortgage
     loans, government agency securities, and highly rated private
     mortgage-backed securities. The FHLB requires eligible collateral to have a
     market value equal to 145 percent of advances. The carrying value of loans
     and securities pledged to secure these advances was approximately
     $88,012,000 and $104,684,000 at December 31, 2007 and 2006, respectively.

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

<TABLE>
<CAPTION>
           December 31, 2007
--------------------------------------
                           Weighted
Years Ending                Average
December 31     Amount   Interest Rate
------------   -------   -------------
<S>            <C>       <C>
   2008        $25,500        4.70
   2009         15,700        4.43
   2010         10,500        4.91
               -------
Total          $51,700        4.66
               =======
</TABLE>

     There were no variable rate advances at December 31, 2007.


                                       27

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
                                                      December 31, 2007 and 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 9 - NOTE PAYABLE

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

<TABLE>
<CAPTION>
Note Payable
Years Ending
December 31    Amount
------------   ------
<S>            <C>
   2008         $130
   2009          138
   2010          145
   2011          153
   2012          162
 Thereafter      171
                ----
Total           $899
                ====
</TABLE>

     In connection with the purchase of an existing book of insurance business
     by ICA, a two-year unsecured note payable was issued to an individual, with
     the first annual payment of $190,000 and the second annual payment of
     $179,000, both payments including interest at 6.0 percent. The second
     annual payment was split into two payments, with the first payment made in
     November, 2007 and the second made in January, 2008. Future maturities of
     the note are as follows:

<TABLE>
<CAPTION>
Years Ending
December 31,   Amount
------------   ------
<S>            <C>
   2008          $85
                 ---
 Total           $85
                 ===
</TABLE>

NOTE 10 - FEDERAL INCOME TAX

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

<TABLE>
<CAPTION>
                      Year Ended
                     December 31
                    -------------
                     2007    2006
                    -----   -----
<S>                 <C>     <C>
Current provision   $ (13)  $ 810
Deferred benefit     (903)   (652)
                    -----   -----
   Total            $(916)  $ 158
                    =====   =====
</TABLE>


                                       28

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.  AND SUBSIDIARIES

                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
                                                      December 31, 2007 and 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 10 - FEDERAL INCOME TAX (CONTINUED)

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

<TABLE>
<CAPTION>
                         Year Ended
                         December 31
                        ------------
                         2007   2006
                        -----   ----
<S>                     <C>     <C>
Tax at statutory rate   $(855)  $211
Nontaxable dividend        --     --
Tax-exempt interest       (56)   (59)
Other                      (5)     7
                        -----   ----
   Federal income tax   $(916)  $158
                        =====   ====
</TABLE>

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

<TABLE>
<CAPTION>
                                                         December 31
                                                       ---------------
                                                        2007     2006
                                                       ------   ------
<S>                                                    <C>      <C>
Deferred tax assets:
   Allowance for loan losses                           $1,299   $  645
   Valuation allowance for real estate held for sale       44       34
   Unrealized loss on available-for-sale securities        --      136
   Other                                                  606      431
   Contributions carryover                                130      125
   Directors' benefit plan                                359      349
                                                       ------   ------
      Total deferred tax assets                         2,438    1,720
Valuation allowance for deferred tax assets                --       --
Deferred tax liabilities:
   Mortgage servicing rights                              167      211
   Partnership losses                                     103       94
   Unrealized gain on available-for-sale securities        33       --
   Depreciation                                           531      541
   Other                                                  231      268
                                                       ------   ------
      Total deferred tax liabilities                    1,098    1,114
                                                       ------   ------
      Net deferred tax asset                           $1,340   $  606
                                                       ======   ======
</TABLE>

     The contribution carryforward relates to $384,000 in contributions that
     were not deductible in 2007. 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.


                                       29
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 10 - FEDERAL INCOME TAX (CONTINUED)

     A deferred tax liability has not been recognized for the tax bad debt base
     year reserves of the Bank. The base year reserves are the balance of
     reserves as of December 31, 1987. At December 31, 2007 and 2006, the amount
     of those reserves was approximately $60,000. The amount of the unrecognized
     deferred tax liability at December 31, 2007 and 2006 was approximately
     $20,000.

NOTE 11 - OFF BALANCE SHEET RISK COMMITMENTS AND CONTINGENCIES

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

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

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

<TABLE>
<CAPTION>
                                                December 31
                                             -----------------
                                               2007      2006
                                             -------   -------
<S>                                          <C>       <C>
Commitments to grant loans                   $11,842   $12,477
Unfunded commitments under lines of credit    21,213    15,285
Commercial and standby letters of credit         220        50
</TABLE>

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


                                       30

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

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

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

     Commercial and standby letters of credit are conditional commitments issued
     by the Company to guarantee the performance of a customer to a third party.
     Those letters of credit are primarily used to support public and private
     borrowing arrangements. Essentially all letters of credit issued have
     expiration dates within one year. Under FIN 45, Guarantor's Accounting and
     Disclosure Requirements for Guarantees, fees earned on commercial and
     standby letters of credit are required to be deferred over the contractual
     life of the letter of credit. The Company determined that the fair value of
     guarantees on standby letters of credit has an immaterial effect on the
     financial results at December 31, 2007 and 2006.

     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, 2007, 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.


                                       31

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 12- STOCKHOLDERS' EQUITY

     Payment of dividends on the common stock is subject to determination and
     declaration by the Board of Directors and depends on a number of factors,
     including capital requirements, regulatory limitation on payment of
     dividends, the Bank's results of operations and financial condition, tax
     considerations, and general economic conditions.

     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.


                                       32
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 12 - STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
                                                                    To be Categorized
                                                                        as Well-
                                                                    Capitalized Under
                                                   For Capital      Prompt Corrective
                                   Actual       Adequacy Purposes   Action Provisions
                              ---------------   -----------------   -----------------
                               Amount   Ratio    Amount     Ratio    Amount    Ratio
                              -------   -----   --------   ------   --------   ------
                                               (Dollars in Thousands)
<S>                           <C>       <C>     <C>        <C>      <C>        <C>
December 31, 2007
   Total capital (to risk-
      weighted assets)        $29,607   16.27%   $14,558    8.00%    $18,198    10.00%
   Tier 1 capital (to risk-
      weighted assets)        $27,295   15.00%   $ 7,279    4.00%    $10,919     6.00%
   Tangible capital (to
      tangible assets)        $27,295   11.05%   $ 3,705    1.50%    $ 4,940     2.00%
December 31, 2006:
   Total capital (to risk-
      weighted assets)        $32,705   17.10%   $15,302    8.00%    $19,127    10.00%
   Tier 1 capital (to risk-
      weighted assets)        $30,550   15.97%   $ 7,651    4.00%    $11,476     6.00%
   Tangible capital (to
      tangible assets)        $30,550   11.03%   $ 4,156    1.50%    $ 5,541     2.00%
</TABLE>

<TABLE>
<CAPTION>
                                                 December 31
                                             -------------------
                                               2007       2006
                                             --------   --------
<S>                                          <C>        <C>
GAAP Capital                                 $ 31,154   $ 34,615
Reconciling items:
Less: Investment in and advances to
   nonincludable subsidaries                     (304)      (343)
Less: Goodwill and other intangible assets     (3,491)    (3,986)
Unrealized (gain) loss on securities
   available for sale                             (65)       264
Disallowed mortgage servicing rights               --         --
                                             --------   --------
   Tangible and core capital                   27,294     30,550
Allowable unrealized (gain) loss on
   securities available for sale                   38         76
General valuation allowance                     2,275      2,079
                                             --------   --------
   Risk Based Capital                        $ 29,607   $ 32,705
                                             ========   ========
</TABLE>


                                       33

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (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 $117,000 for each of the years ended December 31, 2007 and 2006.

     401(K) SAVINGS PLAN

     The Bank has a Section 401(k) savings plan covering substantially all of
     its employees who meet certain age and service requirements. The Company
     matches a certain percentage of participant deferrals. Additional
     contributions may be made as approved by the Board of Directors. For the
     calendar years ended December 31, 2007 and 2006 the Bank's Board of
     Directors approved a discretionary profit sharing payment under this plan
     of 4% of each eligible employee's wages for the periods from January 1,
     2007 through December 31, 2007 and from January 1, 2006 through December
     31, 2006, respectively. The expense under the plan for the years ended
     December 31, 2007 and 2006 was $229,000 and $239,000, 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


                                       34
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)

     general creditors. Directors are paid once they reach normal retirement age
     or sooner for reason of death, total disability, or termination. The Bank
     may terminate the plan at any time. The amount recorded under the plan
     totaled approximately $820,000 and $775,000 at December 31, 2007 and 2006,
     respectively. The expense under the plan for the years ended December 31,
     2007 and 2006 was $98,000 and $100,000, respectively.

     EMPLOYEE STOCK OWNERSHIP PLAN

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

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

<TABLE>
<CAPTION>
Year Ended    Principal
December 31     Amount
-----------   ---------
<S>           <C>
   2008        $   73
   2009            79
   2010            85
   2011            92
   2012           100
Thereafter        584
               ------
   Total       $1,013
               ======
</TABLE>


                                       35

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)

     The Company makes annual contributions to the ESOP sufficient to support
     the debt service of the loan. The loan is secured by the shares purchased,
     which are held in a suspense account for allocation among the
     participations as the loan is paid. Dividends paid on unallocated shares
     are not considered dividends for financial reporting purposes and are used
     to pay principal and interest on the ESOP loan. Dividends on allocated
     shares are charged to retained earnings. Compensation expense is recognized
     for the ESOP equal to the average fair value of shares committed to be
     released for allocation to participant accounts. Any difference between the
     average fair value of shares committed to be released for allocation and
     the ESOP's original acquisition cost is charged or credited to
     stockholders' equity (additional paid-in capital). During the year ended
     December 31, 2007, the Company authorized the purchase by the ESOP of an
     additional 12,900 shares of Company stock using the accumulated cash
     balance in the Plan. Total compensation expense for the years ended
     December 31, 2007 and 2006 was $65,000 and $120,000, respectively.

     Shares held by the ESOP include the following:

<TABLE>
<CAPTION>
                 December 31
              -----------------
                2007      2006
              -------   -------
<S>           <C>       <C>
Allocated      85,785    67,230
Unallocated    96,962   107,010
              -------   -------
Total         182,747   174,240
</TABLE>

     There were 4,376 and 6,443 shares distributed to ESOP participants in 2007
     and 2006, respectively.

     The cost of unallocated ESOP shares (shares not yet released for
     allocation) is reflected as a reduction of stockholders' equity. The fair
     value of the unallocated shares was approximately $726,000 at December 31,
     2007.

     STOCK BASED COMPENSATION PLANS

     Effective January 1, 2006, the Company adopted Statement of Financial
     Accounting Standard (SFAS) No. 123 (Revised) "Shareholder Based Payments",
     which requires that the grant-date fair value of awarded stock options be
     expensed over the requisite service period. The Company's 1996 Stock Option
     Plan (the "1996 Plan"), which was approved by shareholders, permits the
     grant of share options to its employees for up to 127,491 shares of common
     stock


                                       36
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)

     (retroactively adjusted for the exchange ratio applied in the Company's
     2005 stock offering and related second-step conversion). The Company's 2006
     Stock-Based Incentive Plan (the "2006 Plan"), which was approved by the
     shareholders on May 17, 2006, permits the award of up to 242,740 shares of
     common stock of which the maximum number to be granted as Stock Options is
     173,386 and the maximum that can be granted as Restricted Stock Awards is
     69,354. Option awards are granted with an exercise price equal to the
     market price of the Company's stock at the date of grant; those option
     awards generally vest based on five years of continual service and have ten
     year contractual terms. Certain options provide for accelerated vesting if
     there is a change in control (as defined in the Plans). Shares issued under
     the Plan and exercised pursuant to the exercise of the stock option plan
     may be either authorized but unissued shares or reacquired shares held by
     the Company as treasury stock.

     STOCK OPTIONS - A summary of option activity under the Plan during the
     years ended December 31, 2007 and 2006 is presented below:

<TABLE>
<CAPTION>
                                                              Weighted-Average
                                                Weighted-         Remaining
                                                 Average      Contractual Term      Aggregate
             Options                Shares   Exercise Price        (Years)       Intrinsic Value
             -------               -------   --------------   ----------------   ---------------
<S>                                <C>       <C>              <C>                <C>
OUTSTANDING AT JANUARY 1, 2006      24,642        $5.80             1.22             $72,694
Granted in 2006                    198,990        $9.56
Exercised in 2006                  (18,560)       $5.41
Forfeited or Expired in 2006          (540)       $5.41
                                   -------        -----
OUTSTANDING AT DECEMBER 31, 2006   204,532        $9.50             9.49             $     0
Granted in 2007                      6,200        $8.79
Exercised in 2007                        0        $0.00
Forfeited or expired in 2007       (13,740)       $9.53
                                   -------        -----
OUSTANDING AT DECEMBER 31, 2007    196,992        $9.48             8.52             $     0
                                   =======        =====
</TABLE>


                                       37

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (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, 2007 and 2006 and changes during the years then ended is presented
     below:

<TABLE>
<CAPTION>
                                            Weighted-Average
                                               Grant-Date
       Nonvested Shares            Shares      Fair Value
       ----------------           -------   ----------------
<S>                               <C>       <C>
Nonvested at January 1, 2006        2,218        $1.73
Granted                           198,990        $2.11
Vested                             (1,109)       $1.73
Forfeited                              --           --
                                  -------        -----
Nonvested at December 31, 2006    200,099        $2.11
Granted                             6,200        $1.91
Vested                            (38,159)       $2.10
Forfeited                         (13,740)       $2.10
                                  -------        -----
Nonvested at December 31, 2007    154,400        $2.11
                                  -------        -----
</TABLE>

     As of December 31, 2007 there was $291,000 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 3.4 years. The total fair value of shares vested
     during the years ended December 31, 2007 and 2006 was $73,000 and $46,000,
     respectively.

     RESTRICTED STOCK AWARDS - During the years ended December 31, 2007 and 2006
     the Company awarded 1,500 and 63,250 shares, respectively, under the 2006
     Stock Based Incentive Plan. Compensation expense for 2007 and 2006 related
     to these awards was $122,000 and $81,000. The shares vest over a five year
     service period. As of December 31, 2007 there was $415,000 of unrecognized
     compensation cost related to nonvested restricted stock awards under the
     Plan.


                                       38

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (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, 2007 and 2006:

<TABLE>
<CAPTION>
                             2007     2006
                           -------   ------
<S>                        <C>       <C>
Beginning of period         63,250        0
Granted                      1,500   63,250
Vested                     (12,550)       0
Forfeited                     (500)       0
                           -------   ------
Nonvested, end of period    51,700   63,250
                           =======   ======
</TABLE>

NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS

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

     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.


                                       39

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (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.

     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.


                                       40

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (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:

<TABLE>
<CAPTION>
                                           December 31, 2007       December 31, 2006
                                         ---------------------   ---------------------
                                         Carrying    Estimated   Carrying   Estimated
                                          Amounts   Fair Value    Amounts   Fair Value
                                         --------   ----------   --------   ----------
<S>                                      <C>        <C>          <C>        <C>
Financial assets:
   Cash and cash equivalents             $  5,341   $  5,341     $  4,993    $  4,993
   Securities                              23,451     23,476       44,850      44,883
   Loans and loans held for sale - Net    201,333    204,516      209,590     210,973
   Federal Home Loan Bank stock             4,197      4,197        4,197       4,197
   Accrued interest receivable              1,700      1,700        2,139       2,139

Financial liabilities:
   Customer deposits                      164,470    164,588      177,058     177,390
   Federal Home Loan Bank advances         51,700     51,824       64,850      64,512
   Note payable                               984        986        1,192       1,025
   Accrued interest payable                   710        710          947         947
</TABLE>

NOTE 15 - RESTRICTIONS ON DIVIDENDS

     OTS regulations impose limitations upon all capital distributions including
     cash dividends. The total amount of dividends that may be paid is generally
     limited to the sum of the net profits of the bank for the preceding three
     years. An application to and the approval of the OTS is required prior to
     any capital distribution if the institution does not meet the criteria for
     "expedited treatment" of applications under OTS regulations. If an
     application is not required, the institution must still provide prior
     notice to the OTS of the capital distribution. In the event the Bank's
     capital falls below its regulatory requirements or the OTS notifies it that
     it was in need of more than normal supervision, the Bank's ability to make
     capital distributions could be restricted. In addition, the OTS could
     prohibit a proposed capital distribution by any institution, which would
     otherwise be permitted by the regulation, if the OTS determines that such
     distribution would constitute an unsafe or unsound practice. At December
     31, 2007 and 2006, the Bank's retained earnings available for the payment
     of dividends totaled $0 and $1,117,000, respectively.


                                       41

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 16 - PARENT-ONLY FINANCIAL STATEMENTS

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

     The condensed balance sheet is as follows:

<TABLE>
<CAPTION>
                                          December 31
                                       -----------------
                                         2007      2006
                                       -------   -------
<S>                                    <C>       <C>
                         ASSETS
Cash at subsidiary bank                $   989   $   407
Investment in subsidiary                31,154    34,615
Other assets                               559       612
                                       -------   -------
 Total assets                          $32,702   $35,634
                                       =======   =======

          LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities                            $   199   $   181
Stockholders' equity                    32,503    35,453
                                       -------   -------
Total liabilities and stockholders'
   equity                              $32,702   $35,634
                                       =======   =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                    December 31
                                                  ---------------
                                                    2007     2006
                                                  -------   -----
<S>                                               <C>       <C>
Operating income                                  $ 2,300   $  --
Operating expense                                     165     180
                                                  -------   -----
Income (loss) before income taxes and equity in
   undistributed net income of subsidiary           2,135    (180)
Income tax benefit                                     55      60
                                                  -------   -----
Income (loss) before equity in undistributed
   net income (loss) of subsidiary                  2,190    (120)
Equity in undistributed net income (loss) of
   subsidiary                                      (3,790)    583
                                                  -------   -----
Net income (loss)                                 $(1,600)  $ 463
                                                  =======   =====
</TABLE>


                                       42

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 16 - PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                  December 31
                                                               -----------------
                                                                 2007      2006
                                                               -------   -------
<S>                                                            <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                  $(1,600)  $   463
   Adjustments to reconcile net income to net cash
      from operating activities:
      Equity in undistributed net income (loss) of
         subsidiary                                              3,790      (583)
      Net change in other assets                                    53      (322)
      Net change in other liabilities                               18        60
                                                               -------   -------
         Net cash provided by (used in) operating
            activities                                           2,261      (382)

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from exercise of stock options                          --        99
   Tax benefits of stock options exercised                          --        15
   Stock retired                                                    --       (60)
   Purchase of treasury shares                                  (1,399)   (1,565)
   ESOP Loan Repayment                                             107       145
   Payment for subsidiary stock-based compensation plan            195       127
   Dividends paid                                                 (582)     (614)
                                                               -------   -------
         Net cash provided by (used in) financing activities    (1,679)   (1,853)
                                                               -------   -------
NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS              582    (2,235)
CASH AND CASH EQUIVALENTS - Beginning of year                      407     2,642
                                                               -------   -------
CASH AND CASH EQUIVALENTS - End of year                        $   989   $   407
                                                               =======   =======
</TABLE>


                                       43
<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 17 - SEGMENT REPORTING

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

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


                                       44

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 17 - SEGMENT REPORTING (CONTINUED)

<TABLE>
<CAPTION>
                                                                        For Year Ended
                                                                      December 31, 2007
                                                         -------------------------------------------
                                                           Bank      ICA     Eliminations     Total
                                                         --------   ------   ------------   --------
<S>                                                      <C>        <C>      <C>            <C>
INTEREST INCOME                                          $ 16,200   $   32      $ (32)      $ 16,200
INTEREST EXPENSE                                            8,469       10        (32)         8,447
                                                         --------   ------      -----       --------
NET INTEREST INCOME - Before provision for loan losses      7,731       22         --          7,753
PROVISION FOR LOAN LOSSES                                   2,377       --         --          2,377
                                                         --------   ------      -----       --------
NET INTEREST INCOME - After provision for loan losses       5,354       22         --          5,376
OTHER INCOME                                                1,256    2,726         --          3,982
OPERATING EXPENSES                                          9,136    2,738         --         11,874
                                                         --------   ------      -----       --------
INCOME - Before federal income tax                         (2,526)      10         --         (2,516)
FEDERAL INCOME TAX                                           (919)       3         --           (916)
                                                         --------   ------      -----       --------
NET INCOME                                               $ (1,607)  $    7      $  --       $ (1,600)
                                                         ========   ======      =====       ========
DEPRECIATION AND AMORTIZATION                            $    755   $  345      $  --       $  1,100
                                                         ========   ======      =====       ========
ASSETS                                                   $247,268   $4,421      $(858)      $250,831
                                                         ========   ======      =====       ========
EXPENDITURES RELATED TO LONG-LIVED ASSETS:
   Goodwill                                              $     --   $   --      $  --       $     --
   Intangible assets                                           --       --         --             --
   Property and equipment                                     183       24         --            207
                                                         --------   ------      -----       --------
      TOTAL                                              $    183   $   24      $  --       $    207
                                                         ========   ======      =====       ========
</TABLE>

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


                                       45

<PAGE>

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2007 AND 2006
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following tables summarize the Company's quarterly results for the
     fiscal years ended December 31, 2007 and 2006:

<TABLE>
<CAPTION>
                                                          For the Three-Month Period Ending
                                                 ---------------------------------------------------
                                                 March 31,   June 30,   September 30,   December 31,
                                                    2007       2007          2007           2007
                                                 ---------   --------   -------------   ------------
<S>                                              <C>         <C>        <C>             <C>
Interest income                                   $4,130      $4,057       $4,140         $ 3,873
Interest expense                                   2,234       2,115        2,100           1,998
                                                  ------      ------       ------         -------
Net interest income                                1,896       1,942        2,040           1,875
Provision for losses on loans                         86         113          111           2,067
Other income                                         988         883        1,022           1,089
Other expenses                                     2,789       3,104        3,024           2,957
                                                  ------      ------       ------         -------
Income - Before income taxes                           9        (392)         (73)         (2,060)
Federal income taxes                                 (13)       (156)         (48)           (699)
                                                  ------      ------       ------         -------
Net income                                        $   22      $ (236)      $  (25)        $(1,361)
                                                  ======      ======       ======         =======
Basic earnings per share                          $ 0.01      $(0.08)      $(0.01)        $ (0.48)
Fully diluted earnings per share                  $ 0.01      $(0.08)      $(0.01)        $ (0.48)
Weighted average number of shares outstanding      2,981       2,848        2,832           2,873
Weighted average number of shares outstanding,
   including dilutive stock options                2,982       2,848        2,832           2,873
Cash dividends declared per common share          $0.050      $0.050       $0.050         $ 0.050
</TABLE>



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


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