<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]  Annual Report Under to Section 13 or 15(d) of the Securities Exchange Act
     of 1934

     For the Fiscal Year Ended December 31, 2005

                                       OR

[ ]  Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
     of 1934

     For the transition period from _______________ to ______________________

                        COMMISSION FILE NUMBER: 000-31957

                FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                       <C>
                MARYLAND                                        32-0135202
    (State or other jurisdiction of                          (I.R.S. Employer
     incorporation or organization)                       Identification Number)
</TABLE>

<TABLE>
<S>                                                              <C>
 100 S. SECOND AVENUE, ALPENA, MICHIGAN                           49707
(Address of Principal Executive Offices)                         Zip Code
</TABLE>

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

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

Securities Registered Pursuant   COMMON STOCK, PAR VALUE $.01 PER SHARE
to Section 12(g) of the Act:     (Title of Class)

     Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ].

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
twelve months (or for such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days.

     1. YES   X  .   NO      .
            -----       -----

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X].

     Indicate by check mark whether the Registrant is a shell company (as
defined by Rule 12b-2 of the Exchange Act). [ ].

     The Registrant's revenues for the year ended December 31, 2005 were $15.1
million.

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the last sale price on March 15, 2006
($9.28 per share) was $25.9 million.

     As of March 15, 2006, there were issued and outstanding 3,120,344 shares of
the Registrant's common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Proxy Statement for the 2006 Annual Meeting of Stockholders (Parts I and
     III).

2.   Annual Report to Shareholders for the Year Ended December 31, 2005 (Part
     II).

     Transitional Small Business Disclosure Format

     YES      .   NO   X  .
         -----       -----
<PAGE>
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

FORWARD-LOOKING STATEMENTS

     This Annual Report contains certain "forward-looking statements" which may
be identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage, commercial and
other loans, real estate values, competition, changes in accounting principles,
policies, or guidelines, changes in legislation or regulation, and other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing products and services.

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

     First Federal of Northern Michigan Bancorp, Inc. is a Maryland corporation
that owns all of the outstanding shares of common stock of First Federal of
Northern Michigan. At December 31, 2005, First Federal of Northern Michigan
Bancorp, Inc. had consolidated assets of $282.8 million, deposits of $188.7
million and stockholders' equity of $36.7 million. As of December 31, 2005,
First Federal of Northern Michigan Bancorp, Inc. had 3,115,510 shares of common
stock issued and outstanding.

FIRST FEDERAL OF NORTHERN MICHIGAN

     First Federal of Northern Michigan is a full-service, community-oriented
savings bank that provides financial services to individuals, families and
businesses from ten full-service facilities located in Alpena, Antrim,
Cheboygan, Emmett, Iosco, Otsego, Montmorency and Oscoda Counties, Michigan.
First Federal of Northern Michigan was chartered in 1957, and reorganized into
the mutual holding company structure in 1994. First Federal of Northern Michigan
became the wholly owned subsidiary of Alpena Bancshares, Inc., the predecessor
company to First Federal of Northern Michigan Bancorp, Inc., in November 2000.

     First Federal of Northern Michigan's business consists primarily of
accepting deposits from the general public and investing those deposits,
together with funds generated from operations and borrowings, in one- to
four-family residential mortgage loans, commercial real estate loans, commercial
business loans, consumer loans and in investment securities and mortgage-backed
securities.

MARKET AREA AND COMPETITION

     First Federal of Northern Michigan conducts operations through its main
office in Alpena, Michigan, which is located in the northeastern lower peninsula
of Michigan, and through its nine other branch offices in Michigan. The
population of Alpena (city and township), from which the majority of our
deposits is drawn, has decreased since 2000, and currently is approximately
21,000. The population of our primary market area, which includes Alpena County
and seven surrounding counties, is approximately 187,000, and increased by 2.2%
from 2000 to 2004. The population of our primary market area is expected to
increase by 2.1% by 2009. Per capita income in our market area was $20,386 in
2004, which was 15.4% less than the national level, and 16.7% less than the
state of Michigan as a whole, reflecting the largely


                                                                               2

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rural nature of our market area and the absence of more densely populated urban
and suburban areas. Growth in per capita income in our market area is projected
to increase only modestly over the next five years. The unemployment rate in our
primary market area was 6.9% at December 31, 2005, compared to 4.9% nationally
and 6.7% for the state of Michigan.

     Alpena is the largest city located in the northeastern lower peninsula of
Michigan. This area has long been associated with agricultural, wood and
concrete industries. Tourism has also been a major industry in our primary
market area. All of these industries tend to be seasonal and are strongly
affected by state and national economic conditions.

     Major employers in our primary market area include various public schools
and governmental agencies, Alpena Regional Medical Center, Besser Company (a
manufacturer of concrete products equipment), Lafarge Corporation (a limestone
mining and cement producer), Treetops Sylvan Resort (an operator of resort
properties), Garland Resort (an operator of resort properties), Otsego Memorial
Hospital, Community Memorial Hospital, Decorative Panels International (a
hardboard manufacturer), OMNI Metalcraft Corp. (a diversified manufacturer),
Great Lakes Tissue (a paper manufacturer) and various other small companies.

     As of December 31, 2005, First Federal of Northern Michigan was the only
thrift institution headquartered in our market area. We encounter strong
competition both in attracting deposits and in originating real estate and other
loans. Our most direct competition for deposits has historically come from
commercial banks, other savings institutions, and credit unions in our market
area. Competition for loans comes from such financial institutions as well as
mortgage banking companies. We expect continued strong competition in the
foreseeable future, including increased competition from "super-regional" banks
entering the market by purchasing other financial institutions. Many such
institutions have greater financial and marketing resources than we have. We
compete for savings deposits by offering depositors a high level of personal
service and a wide range of competitively priced financial services. In recent
years, additional strong competition for deposits has come from securities
brokers. We compete for real estate loans primarily on the basis of the interest
rates and fees we charge and through advertising. Strong competition for
deposits and loans may limit our ability to grow and may adversely affect our
profitability in the future.

LENDING ACTIVITIES

     GENERAL. The largest part of our loan portfolio is mortgage loans secured
by one- to four-family residential real estate. In recent years, we have sold
into the secondary mortgage market most of the fixed-rate conventional one- to
four-family mortgage loans that we originate that have terms of 15 years or
more. We retain the servicing on a majority of the mortgages that we sell. To a
lesser extent, we also originate commercial loans, commercial real estate loans
and consumer loans. At December 31, 2005, we had total loans of $202.6 million,
of which $100.0 million, or 49.3%, were one-to four-family residential real
estate mortgage loans, $40.2 million, or 19.9%, were commercial real estate
loans, and $26.7 million, or 13.1%, were commercial loans. Other loans consisted
primarily of consumer loan, which totaled $25.9 million, or 12.8% of total
loans, and construction loans, which totaled $10.0 million or 4.9% of total
loans.

     ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. Our primary lending
activity consists of originating one- to four-family owner-occupied residential
mortgage loans, virtually all of which are collateralized by properties located
in our market area. We also originate one- to four-family loans that pay
interest only during the initial construction period (which generally does not
exceed twelve months) and then pay interest and principal for the remainder of
the loan term. We generally sell into the secondary mortgage market all of our
one- to four-family fixed-rate mortgage loans with terms of 15 years or more and
retain the loan servicing on a majority of these mortgage loans. One- to
four-family residential mortgage loans are underwritten and originated according
to policies and guidelines established by the secondary mortgage market agencies
and approved by our Board of Directors. We utilize existing liquidity, savings
deposit growth, loan repayments, and Federal Home Loan Bank advances to fund new
loan originations.

     We currently offer fixed rate one- to four-family residential mortgage
loans with terms ranging from 15 to 30 years. One- to four-family residential
mortgage loans often remain outstanding for significantly shorter periods than
their contractual terms because borrowers may refinance or prepay loans at their
option. The average length of time that our one- to four-family residential
mortgage loans remain outstanding varies significantly depending upon trends in
market interest rates and other factors. In recent years, the average maturity
of our mortgage loans has decreased significantly because of the declining trend
in market interest rates and the unprecedented volume of refinancing activity


                                                                               3

<PAGE>

resulting from such interest rate decreases. Accordingly, estimates of the
average length of one- to four-family loans that remain outstanding cannot be
made with any degree of certainty.

     Originations of fixed rate mortgage loans are regularly monitored and are
affected significantly by the level of market interest rates, our interest rate
gap position, and loan products offered by our competitors. Our fixed rate
mortgage loans amortize on a monthly basis with principal and interest due each
month. To make our loan portfolio less interest rate sensitive, loans originated
with terms of 15 years or greater are generally underwritten to secondary
mortgage market standards and sold. Balloon mortgage loans with five-year terms
and adjustable rate mortgage loans are generally underwritten to secondary
mortgage market standards, but are retained in our loan portfolio.

     We originate some fixed-rate loans that are generally amortized over 15
years but that have "balloon payments" that are due upon the maturity of the
loan in five years. Upon maturity, the balloon mortgage loans are either
underwritten as fixed-rate loans and sold in the secondary mortgage market or
renewed at current market rates for an additional five-year term. While the
majority of our balloon mortgage loans amortize over 15 years, some amortize
over 10 or 30 years, and a limited number amortize over five years.

     Our one- to four-family residential mortgage loans customarily include
due-on-sale clauses, which are provisions giving us the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells or otherwise disposes of the underlying real property serving as security
for the loan. Due-on-sale clauses are an important means of adjusting the rates
on our fixed-rate mortgage loan portfolio, and we have generally exercised our
rights under these clauses.

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

     We make one- to four-family real estate loans with loan-to-value ratios of
up to 90%. However, for one- to four-family real estate loans with loan-to-value
ratios of between 80% and 90%, we may require the total loan amount to be
covered by private mortgage insurance. In 2005 we began making 80/20 loans and
interest-only loans subject to Board-approved dollar limits to limit risk
exposure. We require fire and casualty insurance, flood insurance when
applicable, as well as title insurance, on all properties securing real estate
loans made by us.

     Beginning in November 2004 we initiated a "skip pay" program for customers
with seasoned loans and with an exemplary past payment history. Under this
program, for a fee, the customer may choose to skip a residential mortgage
payment or a home equity line of credit payment. The program generated $35,000
in fee income in 2005.

     COMMERCIAL REAL ESTATE LENDING. We also originate commercial real estate
loans. At December 31, 2005, we had a total of 191 loans secured primarily by
commercial real estate properties, unimproved vacant land and, to a limited
extent, multifamily properties. Our commercial real estate loans are secured by
income-producing properties such as office buildings, retail buildings and
motels. Substantially all of our commercial real estate loans are secured by
properties located in our primary market area. We have originated commercial
construction loans that are originated as permanent loans but are interest-only
during the initial construction period, which generally does not exceed nine
months. At December 31, 2005, our commercial real estate loans totaled $40.3
million, or 19.84% of our total loans, and had an average principal balance of
$210,995. The terms of each loan are negotiated on a case-by-case basis,
although such loans typically amortize over 15 years and have a three- or
five-year balloon feature. An origination fee of 0.5% to 1.0% is generally
charged on commercial real estate loans. We generally make commercial real
estate loans up to 75% of the appraised value of the property securing the loan.
Our largest commercial real estate loan had a principal balance of $1.5 million
and was secured by a commercial building and all corporate assets of the
borrower. At December 31, 2005, this loan was performing according to its
repayment terms.

     Commercial real estate loans generally carry higher interest rates and have
shorter terms than those on one- to four-family residential mortgage loans.
However, loans secured by commercial real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of


                                                                               4

<PAGE>

evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the business or the related real estate property. If the
cash flow from the business operation is reduced, the borrower's ability to
repay the loan may be impaired. This may be particularly true in the early years
of the business operation when the risk of failure is greatest. Many of our
commercial real estate loans have been made to borrowers whose business
operations are untested, which increases our risk.

     CONSUMER AND OTHER LOANS. We originate a variety of consumer and other
loans, including loans secured by savings accounts, new and used automobiles,
mobile homes, boats, recreational vehicles, and other personal property. As of
December 31, 2005, consumer and other loans totaled $25.9 million, or 12.8% of
our total loan portfolio. At such date, $891,500, or 3.4% of our consumer loans,
were unsecured. As of December 31, 2005, home equity loans totaled $8.4 million,
or 3.2% of our total loan portfolio, and automobile loans totaled $3.3 million,
or 1.3% of our total loan portfolio. We originate automobile loans directly to
our customers and have no outstanding agreements with automobile dealerships to
generate indirect loans.

     Our procedures for underwriting consumer loans include an assessment of an
applicant's credit history and the ability to meet existing obligations and
payments on the proposed loan. Although an applicant's creditworthiness is a
primary consideration, the underwriting process also includes a comparison of
the value of the collateral security, if any, to the proposed loan amount.

     Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly, such as automobiles, mobile homes,
boats and recreational vehicles. In addition, the repayment of consumer loans
depends on the borrower's continued financial stability, as repayment is more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy than a single family mortgage loan.

     COMMERCIAL LOANS. At December 31, 2005, we had $26.7 million in commercial
loans which amounted to 13.1% of total loans. We make commercial business loans
primarily in our market area to a variety of professionals, sole proprietorships
and small businesses. Commercial lending products include term loans and
revolving lines of credit. The maximum amount of a commercial business loan is
our loans-to-one-borrower limit, which was $4.8 million at December 31, 2005.
Such loans are generally used for longer-term working capital purposes such as
purchasing equipment or furniture. Commercial loans are made with either
adjustable or fixed rates of interest. Variable rates are generally based on the
prime rate, as published in The Wall Street Journal, plus a margin. Fixed rate
commercial loans are set at a margin above the Federal Home Loan Bank comparable
advance rate.

     When making commercial loans, we consider the financial statements of the
borrower, our lending history with the borrower, the debt service capabilities
of the borrower, the projected cash flows of the business and the value of the
collateral. Commercial loans are generally secured by a variety of collateral,
primarily accounts receivable, inventory and equipment, and are supported by
personal guarantees. Depending on the collateral used to secure the loans,
commercial loans are made in amounts of up to 75% of the value of the collateral
securing the loan.

     Commercial loans generally have greater credit risk than residential
mortgage loans. Unlike residential mortgage loans, which generally are made on
the basis of the borrower's ability to make repayment from his or her employment
or other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial loans generally are made on the basis of
the borrower's ability to repay the loan from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
loans may depend substantially on the success of the business itself. If the
cash flow from the business operation is reduced, the borrower's ability to
repay the loan may be impaired. This may be particularly true in the early years
of the business operation when the risk of failure is greatest. Many of our
commercial loans have been made to borrowers whose business operations are
untested, which increases our risk. Moreover, any collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value. We seek to minimize these risks through our underwriting standards. At
December 31, 2005, our largest commercial loan was a $1.0 million loan for the
borrower's working capital purposes secured by fixed assets located in our
primary market area. This loan was performing according to its repayment terms
at December 31, 2005.

     CONSTRUCTION LOANS. We originate construction loans to local home builders
in our market area, generally with whom we have an established relationship, and
to individuals engaged in the construction of their residence. Our


                                                                               5

<PAGE>

construction loans totaled $10.0 million, or 4.9% of our total loan portfolio,
at December 31, 2005. To a lesser extent, we also originate commercial
construction loans.

     Our construction loans to home builders are repaid on an interest-only
basis for the term of the loan (which is generally six to 12 months), with
interest calculated on the amount disbursed to the builders based upon a
percentage of completion of construction. These loans have a maximum
loan-to-value ratio of 80%, based on the appraised value. Interest rates are
fixed during the construction phase of the loan. Loans to builders are made on
either a pre-sold or speculative (unsold) basis. Construction loans to
individuals who intend to occupy the completed dwelling are terminated and
replaced with a new permanent loan at the end of the construction period. The
permanent loans are generally originated pursuant to the same policy guidelines
regarding loan-to-value ratios and interest rates that are used in connection
with loans secured by one- to four-family residential real estate. Prior to
funding a construction loan, we require an appraisal of the property from a
qualified appraiser approved by us, and all appraisals are reviewed by us.

     Construction lending exposes us to greater credit risk than permanent
mortgage financing because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. If the estimate of construction costs is inaccurate, we may be required
to advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value upon completion is inaccurate, the value
of the property may be insufficient to assure full repayment. Projects also may
be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors. Loans to builders to construct homes
for which no purchaser has been identified carry more risk because the repayment
of the loan depends on the builder's ability to sell the property prior to the
time that the construction loan is due. We have attempted to minimize these
risks by, among other things, limiting our construction lending primarily to
residential properties in our market area and generally requiring personal
guarantees from the principals of corporate borrowers.

     LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of our loan portfolio by type of loan at the dates indicated.

<TABLE>
<CAPTION>
                                                                              At December 31,
                                       ---------------------------------------------------------------------------------------------
                                              2005              2004                2003              2002               2001
                                       -----------------  -----------------  -----------------  -----------------  -----------------
                                        Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent
                                       --------  -------  --------  -------  --------  -------  --------  -------  --------  -------
                                                                           (Dollars in thousands)
<S>                                    <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>
Real estate loans:
   Residential mortgage .............  $100,042     49.3% $102,600     52.1% $ 94,988    57.7%  $101,943    66.9%  $132,491    74.9%
   Commercial mortgage ..............    40,270     19.8%   29,690     15.1%   29,452    17.9%    20,369    13.4%    14,152     8.0%
   Construction .....................    10,030      4.9%    8,906      4.5%    5,907     3.6%     2,946     1.9%     3,036     1.7%
Non real estate loans ...............
   Commercial .......................    26,658     13.1%   30,174     15.3%   13,495     8.2%     7,528     4.9%     6,052     3.4%
   Consumer and other loans .........    25,907     12.8%   25,544     13.0%   20,895    12.7%    19,587    12.9%    21,172    12.0%
                                       --------   ------  --------   ------  --------   -----   --------   -----   --------   -----
   Total Loans ......................  $202,907   100.00% $196,914   100.00% $164,737   100.0%   152,373   100.0%  $176,903   100.0%
                                                  ======             ======             =====              =====              =====
Other items:
   Unadvanced construction loans ....        --                 --                 --                 --                 --
   Deferred loan origination costs ..        28                 37                 28                 --                 --
   Deferred loan origination fees ...      (336)              (349)              (269)              (110)               (68)
   Allowance for loan losses ........    (1,416)            (1,214)            (1,036)              (922)              (689)
                                       --------           --------           --------           --------           --------
   Total loans, net .................  $201,183           $195,388           $163,460           $151,341           $176,146
                                       ========           ========           ========           ========           ========
</TABLE>

     LOAN MATURITY AND YIELD SCHEDULE. The following table summarizes the
scheduled repayments of our loan portfolio at December 31, 2005. Demand loans,
loans having no stated repayment or maturity, and overdraft loans are reported
as being due in one year or less.


                                                                               6
<PAGE>

<TABLE>
<CAPTION>
                         Residential Mortgage   Commercial Mortgage      Construction
                         --------------------   -------------------   ------------------
                                     Weighted              Weighted             Weighted
                                      Average               Average              Average
                           Amount      Rate       Amount     Rate      Amount     Rate
                          --------   --------    -------   --------   -------   --------
                                              (Dollars in thousands)
<S>                      <C>         <C>        <C>        <C>        <C>       <C>
Due During the Years
   Ending December 31,
2006 ...............      $  2,138     6.59%     $ 2,685     7.43%    $10,004     7.19%
2007 ...............         3,430     6.22%       1,776     6.69%         --     0.00%
2008 ...............        12,188     5.99%       8,549     6.94%         --     0.00%
2009 to 2010 .......         6,264     6.18%      25,556     7.39%         26     7.75%
2011 to 2015 .......         6,823     6.28%       1,052     5.96%         --     0.00%
2016 to 2020 .......        17,861     5.70%         652     7.38%         --     0.00%
2020 and beyond ....        51,338     5.82%          --     0.00%         --     0.00%
                          --------     ----      -------     ----     -------     ----
   Total ...........      $100,042     5.91%     $40,270     7.23%    $10,030     7.19%
                          ========               =======              =======

<CAPTION>
                             Commercial       Consumer and Other          Total
                         ------------------   ------------------   -------------------
                                   Weighted             Weighted              Weighted
                                    Average              Average               Average
                          Amount     Rate      Amount     Rate      Amount      Rate
                         -------   --------   -------   --------   --------   --------
                                             (Dollars in thousands)
<S>                      <C>       <C>        <C>       <C>        <C>        <C>
Due During the Years
   Ending December 31,
2006 ...............     $14,980     7.59%    $   850     7.04%    $ 30,657     7.36%
2007 ...............       1,241     7.20%      1,126     8.07%       7,573     6.77%
2008 ...............       5,135     6.96%      4,426     7.70%      30,298     6.67%
2009 to 2010 .......       4,165     6.72%      8,366     7.52%      44,377     7.18%
2011 to 2015 .......         659     6.90%      6,089     7.26%      14,623     6.69%
2016 to 2020 .......          --     0.00%      2,034     7.59%      20,547     5.94%
2020 and beyond ....         478     7.39%      3,016     7.43%      54,832     5.92%
                         -------     ----     -------     ----     --------     ----
   Total ...........     $26,658     7.29%    $25,907     7.49%    $202,907     6.62%
                         =======              =======              ========
</TABLE>

     FIXED-AND ADJUSTABLE-RATE LOAN SCHEDULE. The following table sets forth the
scheduled repayments of fixed- and adjustable-rate loans at December 31, 2005
that are contractually due after December 31, 2006.

<TABLE>
<CAPTION>
                             Due After December 31, 2006
                          --------------------------------
                            Fixed    Adjustable     Total
                          --------   ----------   --------
                                   (In thousands)
<S>                       <C>        <C>          <C>
Residential mortgage ..   $ 57,810     $40,094    $ 97,904
Commercial mortgage ...     26,249      11,335    $ 37,584
Construction ..........         26          --    $     26
Commercial ............      7,132       4,546    $ 11,678
Consumer and other ....     24,635         422    $ 25,057
                          --------     -------    --------
   Total loans ........   $115,852     $56,397    $172,249
                          ========     =======    ========
</TABLE>

     LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. While we originate both
fixed-rate and adjustable-rate loans, our ability to generate each type of loan
depends upon borrower demand, market interest rates, borrower preference for
fixed- versus adjustable-rate loans, and the interest rates offered on each type
of loan by other lenders in our market area. These lenders include competing
banks, savings banks, credit unions, mortgage banking companies and life
insurance companies that may also actively compete for local commercial real
estate loans. Loan originations are derived from a number of sources, including
real estate agent referrals, existing customers, borrowers, builders, attorneys,
our directors and walk-in customers. Upon receiving a loan application, we
obtain a credit report and employment verification to verify specific
information relating to the applicant's employment, income, and credit standing.
In the case of a real estate loan, we obtain a determination of value of the
real estate intended to collateralize the proposed loan. Our lending limits vary
by officer experience but range from $50,000 to $359,650. The loan committee
must approve any loan from $359,650 up to $400,000, and any loan request over
$400,000 must be approved by our Board of Directors. Consumer lending limits by
officer range from $15,000 to $200,000. For secured commercial loans, the limit
ranges from $150,000 to $400,000.

     A commercial commitment letter specifies the terms and conditions of the
proposed loan including the amount of the loan, interest rate, amortization
term, a brief description of the required collateral, and required insurance
coverage. Commitments are typically issued for 15-day periods. The borrower must
provide proof of fire and casualty insurance on the property serving as
collateral, which insurance must be maintained during the full term of the loan.
A title insurance policy is required on all real estate loans. At December 31,
2005, we had outstanding loan commitments of $36.6 million, including unfunded
commitments under lines of credit and commercial and standby letters of credit.


                                                                               7

<PAGE>

     Our loan origination and sales activity may be adversely affected by a
rising interest rate environment that typically results in decreased loan
demand, while declining interest rates may stimulate increased loan demand.
Accordingly, the volume of loan originations, the mix of fixed- and
adjustable-rate loans, and the profitability of this activity can vary from
period to period. One- to four-family residential mortgage loans are generally
underwritten to current Freddie Mac seller/servicer guidelines, and closed on
standard Freddie Mac documents. If such loans are sold, the sales are conducted
using standard Freddie Mac purchase contracts and master commitments as
applicable. All one- to four-family mortgage loans that we have sold to Freddie
Mac have been sold on a non-recourse basis, whereby foreclosure losses are
generally the responsibility of the purchaser and not First Federal of Northern
Michigan.

     We are a qualified loan servicer for Freddie Mac. Our policy has been to
retain the servicing rights for all conforming loans sold, and to continue to
collect payments on the loans, maintain tax escrows and applicable fire and
flood insurance coverage, and supervise foreclosure proceedings if necessary. We
retain a portion of the interest paid by the borrower on the loans as
consideration for our servicing activities.

     We require appraisals of real property securing loans. Appraisals are
performed by independent appraisers, who are approved by our Board of Directors
annually. We require fire and extended coverage insurance in amounts adequate to
protect our principal balance. Where appropriate, flood insurance is also
required. Private mortgage insurance is required for most residential mortgage
loans with loan-to-value ratios greater than 80%.

     LOAN ORIGINATION FEES AND COSTS. In addition to interest earned on loans,
we generally receive fees in connection with loan originations. Such loan
origination fees, net of costs to originate, are deferred and amortized using an
interest method over the contractual life of the loan. Fees deferred are
recognized into income immediately upon prepayment or subsequent sale of the
related loan. At December 31, 2005, we had $308,000 of net deferred loan
origination fees. Such fees vary with the volume and type of loans and
commitments made and purchased, principal repayments, and competitive conditions
in the mortgage markets, which in turn respond to the demand and availability of
money. In addition to loan origination fees, we also generate other income
through the sales and servicing of mortgage loans, late charges on loans, and
fees and charges related to deposit accounts. We recognized fees and service
charges of $1,030,000, $1,012,000 and $801,000 the years ended December 31,
2005, 2004 and 2003, respectively.

     To the extent that originated loans are sold with servicing retained, we
capitalize a mortgage servicing asset at the time of the sale in accordance with
applicable accounting standards (Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities"). The capitalized amount is amortized thereafter
(over the period of estimated net servicing income) as a reduction of servicing
fee income. The unamortized amount is fully charged to income when loans are
prepaid. Originated mortgage servicing rights with an amortized cost of $751,000
were included in other assets at December 31, 2005.


                                                                               8

<PAGE>

     ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows our loan
originations, purchases, sales, and repayments of loans for the periods
indicated.

<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                                ------------------------------
                                                  2005       2004       2003
                                                --------   --------   --------
                                                        (In Thousands)
<S>                                             <C>        <C>        <C>
Loans receivable at beginning of period .....   $196,914   $164,496   $152,263
Originations:
   Real estate:
      Residential 1-4 family ................     54,767     60,361    132,146
      Commercial and Multi-family ...........     35,454     32,837     35,004
   Consumer .................................     12,569     17,901     18,176
                                                --------   --------   --------
      Total originations ....................    102,790    111,099    185,326
                                                --------   --------   --------
Loan purchases ..............................      8,149     11,715         --
                                                --------   --------   --------
Loan sales ..................................    (20,070)   (24,362)   (81,510)
Transfer of mortgage loans
   to foreclosed real estate ................       (695)       (79)      (441)
Repayments ..................................    (84,181)   (65,955)   (91,142)
                                                --------   --------   --------
   Total loans receivable at end of period ..   $202,907   $196,914   $164,496
                                                ========   ========   ========
</TABLE>

DELINQUENT LOANS, OTHER REAL ESTATE OWNED AND CLASSIFIED ASSETS

     COLLECTION PROCEDURES. Our general collection procedures provide that
before a mortgage, consumer or commercial loan becomes 16 days past due, a
computer-generated late charge notice is sent to the borrower requesting
payment. If delinquency continues, a second delinquent notice is mailed when the
loan continues past due for 30 days. If a loan becomes 60 days past due, the
loan becomes subject to possible legal action. We will generally send a "due and
payable" letter upon a loan becoming 60 days delinquent. This letter grants the
mortgagor 30 days to bring the account paid to date prior to the start of any
legal action. If not paid, foreclosure proceedings are initiated after this
30-day period. To the extent required by regulations of the Department of
Housing and Urban Development ("HUD"), generally within 45 days of delinquency,
a Section 160 HUD notice is given to the borrower which provides access to
consumer counseling services. General collection procedures may vary with
particular circumstances on a loan by loan basis. Also, collection procedures
for Freddie Mac serviced loans follow the Freddie Mac guidelines which are
different from our general procedures.

     LOANS PAST DUE AND NON-PERFORMING ASSETS. Loans are reviewed on a regular
basis and are placed on non-accrual status when, in the opinion of management,
the collection of additional interest is doubtful or when extraordinary efforts
are required to collect the debt. Interest accrued and unpaid at the time a loan
is placed on non-accrual status is charged against interest income.

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


                                                                               9
<PAGE>

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

     When collateral is acquired or otherwise deemed REO/ORA, it is recorded at
the lower of the unpaid principal balance of the related loan or its estimated
net realizable value. This write down is recorded against the allowance for loan
losses. Periodic future valuations are performed by management, and any
subsequent decline in fair value is charged to operations. At December 31, 2005,
we held $435,000 in properties that were classified REO/ORA.

     DELINQUENT LOANS. The following table sets forth certain information with
respect to our loan portfolio delinquencies at the dates indicated.

<TABLE>
<CAPTION>
                                      Loan Delinquent For
                              ----------------------------------
                                 60-89 Days     90 Days and Over        Total
                              ---------------   ----------------   ---------------
                              Number   Amount    Number   Amount   Number   Amount
                              ------   ------    ------   ------   ------   ------
                                             (Dollars In Thousands)
<S>                           <C>      <C>      <C>       <C>      <C>      <C>
At December 31, 2005
   Residential Mortgages ..     24     $1,375      19     $1,684     43     $3,059
   Commercial Mortgages ...     --         --       4        670      4        670
   Construction ...........      1        341      --         --      1        341
   Commercial .............      8        506       2        115     10        621
   Consumer ...............     23        197      13        185     36        382
                               ---     ------     ---     ------    ---     ------
      Total ...............     56     $2,419      38     $2,654     94     $5,073
                               ===     ======     ===     ======    ===     ======
At December 31, 2004
   Residential Mortgages ..      6     $1,045      16     $  960     22     $2,005
   Commercial Mortgages ...     --         --      --         --     --         --
   Construction ...........     --         --      --         --     --         --
   Commercial .............      2        195       1        105      3        300
   Consumer ...............      5        179      16        175     21        354
                               ---     ------     ---     ------    ---     ------
      Total ...............     13     $1,419      33     $1,240     46     $2,659
                               ===     ======     ===     ======    ===     ======
At December 31, 2003
   Residential Mortgages ..     23     $1,248      10     $  617     33     $1,865
   Commercial Mortgages ...     --         --       1         77      1         77
   Construction ...........      1         43      --         --      1         43
   Commercial .............      3        221      --         --      3        221
   Consumer ...............     12         90      11        134     23        224
                               ---     ------     ---     ------    ---     ------
      Total ...............     39     $1,602      22     $  828     61     $2,430
                               ===     ======     ===     ======    ===     ======
</TABLE>


                                                                              10

<PAGE>

     NONPERFORMING ASSETS. The following table sets forth the amounts and
categories of our non-performing assets at the dates indicated. At each date
presented, we had no troubled debt restructurings (loans for which a portion of
interest or principal has been forgiven and loans modified at interest rates
materially less than current market rates).

<TABLE>
<CAPTION>
                                                                       AT DECEMBER 31,
                                                          -----------------------------------------
                                                           2005     2004     2003     2002     2001
                                                          ------   ------   ------   ------   -----
                                                                    (Dollars in thousands)
<S>                                                       <C>      <C>      <C>      <C>      <C>
Non-Accrual Loans delinquent 90 days or more:
   Residential Mortgage ...............................      308       21      245      366      --
   Commercial Mortgage ................................    1,006      442    1,040       --      --
   Construction .......................................       --       --       --       --      --
   Commercial .........................................       --       --       --       --      --
   Consumer and other .................................       39       15        6      261      --
                                                          ------   ------   ------   ------   -----
Total non-accrual loans delinquent 90 days or more ....   $1,353   $  478   $1,291   $  627   $  --
                                                          ------   ------   ------   ------   -----
Accrual loans delinquent 90 days or more:
   Residential Mortgage ...............................    1,684      960      617      566     475
   Commercial Mortgage ................................      670       --       --       --      --
   Construction .......................................       --       --       77       --      --
   Commercial .........................................      115      105       --      152      --
   Consumer and other .................................      185      175      134       89     201
                                                          ------   ------   ------   ------   -----
      Total accrual loans delinquent 90 days or more ..   $2,654   $1,240   $  828   $  807   $ 676
                                                          ------   ------   ------   ------   -----
Total nonperforming loans (1) .........................   $4,007   $1,718   $2,119   $1,434   $ 676
                                                          ======   ======   ======   ======   =====
Real Estate Owned and Other Repossessed Assets:
   Residential Mortgage ...............................      427        9      199      101     167
   Commercial Mortgage ................................       --       --       --       --      --
   Construction .......................................       --       --       --       --      --
   Commercial .........................................       --       --       --       --      --
   Consumer and other .................................        8       20       --       27      30
                                                          ------   ------   ------   ------   -----
Total real estate owned (2) ...........................   $  435   $   29   $  199   $  128   $ 197
                                                          ======   ======   ======   ======   =====
Total nonperforming assets ............................   $4,442   $1,747   $2,318   $1,562   $ 873
                                                          ======   ======   ======   ======   =====
Total nonperforming loans to net loans receivable .....     1.97%    0.87%    1.28%    0.94%   0.38%
Total nonperforming assets to total assets ............     1.57%    0.66%    1.04%    0.68%   0.36%
</TABLE>

(1)  All of our loans delinquent 90 days or more are classified as
     nonperforming.

(2)  Represents the net book value of property acquired by us through
     foreclosure or deed in lieu of foreclosure. Upon acquisition, this property
     is recorded at the lower of its fair market value or the principal balance
     of the related loan.


                                                                              11

<PAGE>

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

     When we classify assets as either substandard or doubtful, we allocate a
portion of the related general loss allowances to such assets as deemed prudent
by management. The allowance for loan losses represents amounts that have been
established to recognize losses inherent in the loan portfolio that are both
probable and reasonably estimable at the date of the financial statements. When
we classify problem assets as loss, we charge-off such amount. Our determination
as to the classification of our assets and the amount of our loss allowances are
subject to review by our regulatory agencies, which can order the establishment
of additional loss allowances. Management regularly reviews our asset portfolio
to determine whether any assets require classification in accordance with
applicable regulations. On the basis of management's review of our assets at
December 31, 2005, classified assets consisted of substandard assets of $3.0
million, doubtful assets of $105,000 and no assets classified as loss.

     We classify our assets pursuant to criteria similar to the classification
structure provided in the OTS regulations. The following table sets forth the
aggregate amount of our internally classified assets at the dates indicated.

<TABLE>
<CAPTION>
                                              AT DECEMBER 31,
                                ------------------------------------------
                                 2005     2004     2003     2002     2001
                                ------   ------   ------   ------   ------
                                              (In Thousands)
<S>                             <C>      <C>      <C>      <C>      <C>
Substandard assets ..........   $3,045   $1,847   $2,295   $1,263   $2,198
Doubtful assets .............      105      105      105      370       --
Loss assets .................       --       --       --       --       --
                                ------   ------   ------   ------   ------
   Total classified assets ..   $3,150   $1,952   $2,400   $1,633   $2,198
                                ======   ======   ======   ======   ======
</TABLE>

     Our investment in land and real estate at December 31, 2005 was classified
as substandard by the Office of Thrift Supervision due to slower than expected
sales of building lots and condominium units. This project (Wyndham Garden
Estates) is an upscale condominium community comprised of 25 single-family
building lots and 18 planned condominium units located in Alpena, Michigan. At
December 31, 2005, all but six of the residential lots had been developed and
sold and all condominium units were completed and all but one had been sold.
Management believes this is a viable project with development and sales ongoing.
At December 31, 2005, our investment in these properties was approximately
$352,000, which is net of an allowance of $100,000 to record the investment at
the lower of cost or fair value, less costs to sell. For reporting purposes,
this investment is considered "impaired" under the definition of SFAS 144,
Accounting for Impairment or Disposal of Long-Lived Assets.

     ALLOWANCE FOR LOAN LOSSES. We provide for loan losses based on the
allowance method. Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the allowance for
loan losses


                                                                              12

<PAGE>

are provided by charges to income based on various factors which, in
management's judgment, deserve current recognition in estimating probable
losses. Management regularly reviews the loan portfolio and makes provisions for
loan losses in order to maintain the allowance for loan losses in accordance
with accounting principles generally accepted in the United States of America.
The allowance for loan losses consists of amounts specifically allocated to
non-performing loans and other criticized or classified loans (if any) as well
as general allowances determined for each major loan category. Commercial loans
and loans secured by commercial real estate are evaluated individually for
impairment. Other smaller-balance, homogeneous loan types, including loans
secured by one- to four-family residential real estate and consumer installment
loans, are evaluated for impairment on a collective basis. After we establish a
provision for loans that are known to be non-performing, criticized or
classified, we calculate percentage loss factors to apply to the remaining
categories within the loan portfolio to estimate probable losses inherent in
these categories of the portfolio. When the loan portfolio increases, therefore,
the percentage calculation results in a higher dollar amount of estimated
probable losses than would be the case without the increase, and when the loan
portfolio decreases, the percentage calculation results in a lower dollar amount
of estimated probable losses than would be the case without the decrease. These
percentage loss factors are determined by management based on our historical
loss experience and credit concentrations for the applicable loan category,
which may be adjusted to reflect our evaluation of levels of, and trends in,
delinquent and non-accrual loans, trends in volume and terms of loans, and local
economic trends and conditions.

     We consider commercial and commercial real estate loans and construction
loans to be riskier than one- to four-family residential mortgage loans.
Commercial and commercial real estate loans have greater credit risks compared
to one- to four-family residential mortgage loans, as they typically involve
large loan balances concentrated with single borrowers or groups of related
borrowers. In addition, the payment experience on loans secured by
income-producing properties typically depends on the successful operation of the
related real estate project and thus may be subject to a greater extent to
adverse conditions in the real estate market and in the general economy.
Construction loans have greater credit risk than permanent mortgage financing
because of the inherent difficulty in estimating both a property's value at
completion of the project and the estimated cost of the project. If the estimate
of construction costs is inaccurate, we may be required to advance funds beyond
the amount originally committed to permit completion of the project. If the
estimate of value upon completion is inaccurate, the value of the property may
be insufficient to assure full repayment. Projects also may be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no purchaser
has been identified carry more risk because the repayment of the loan depends on
the builder's ability to sell the property prior to the time that the
construction loan is due. The increased risk characteristics associated with
commercial real estate and land loans and construction loans are considered by
management in the evaluation of the allowance for loan losses and generally
result in a larger loss factor applied to these segments of the loan portfolio
in developing an estimate of the required allowance for loan losses.

     We intend to increase our originations of commercial and commercial real
estate loans, and we intend to retain these loans in our portfolio. Because
these loans entail significant additional credit risks compared to one- to
four-family residential mortgage loans, an increase in our origination (and
retention in our portfolio) of these types of loans would, in the absence of
other offsetting factors, require us to make additional provisions for loan
losses.

     The carrying value of loans is periodically evaluated and the allowance is
adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the information used in making the
evaluations. In addition, as an integral part of their examination process, our
regulatory agencies periodically review the allowance for loan losses. Such
agencies may require us to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination

     ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the activity on our allowance for loan losses for the periods indicated.


                                                                              13
<PAGE>

<TABLE>
<CAPTION>
                                                                    FOR THE YEARS ENDED DECEMBER 31,
                                                              -------------------------------------------
                                                               2005     2004     2003     2002      2001
                                                              ------   ------   ------   ------   -------
                                                                         (Dollars in thousands)
<S>                                                           <C>      <C>      <C>      <C>      <C>
Allowance at beginning of period ..........................   $1,214   $1,036   $  922   $  689   $   649
                                                              ------   ------   ------   ------   -------
Charge-offs:
   Residential Mortgages ..................................       21       12       28       36        52
   Commercial Mortgages ...................................       --       --       --        8        --
   Construction ...........................................       --       --       --       --        --
   Commercial   ...........................................       57       --       --       --        --
   Consumer and other .....................................      171      179      187      190       237
                                                              ------   ------   ------   ------   -------
      Total charge offs ...................................      249      191      215      234       289
Recoveries:
   Residential Mortgages ..................................       --        1       --       --         8
   Commercial Mortgages ...................................       --       --       --       --        --
   Construction ...........................................       --       --       --       --        --
   Commercial   ...........................................       --       --       --       --        --
   Consumer and other .....................................       83       45       62       52        66
                                                              ------   ------   ------   ------   -------
      Total recoveries  ...................................       83       46       62       52        74
Net (charge offs) recoveries ..............................      166      145      153      182       215
Provision for loan losses .................................      368      323      267      415       255
                                                              ------   ------   ------   ------   -------
Balance at end of year ....................................   $1,416   $1,214   $1,036   $  922   $   689
                                                              ======   ======   ======   ======   =======
Ratios:
Net Charge-offs to average loans
   outstanding (annualized) ...............................     0.08%    0.07%    0.10%    0.12%     0.12%
Allowance for loan loss to non-performing
   loans at end of period .................................    35.34%   70.67%   48.90%   62.77%   101.92%
Allowance for loan losses to total
   loans at end of period .................................     0.70%    0.62%    0.63%    0.61%     0.39%
</TABLE>

MORTGAGE BANKING ACTIVITIES

     Our mortgage banking activities involve the origination and subsequent sale
into the secondary mortgage market of one- to four-family residential mortgage
loans. When loans are sold into the secondary market, we generally retain the
rights to service those loans thereby maintaining our customer relationships. We
intend to use these customer relationships to cross-sell additional products and
services. Loans that we sell are originated using the same personnel and the
same underwriting policies as loans that we maintain in our portfolio. The
decision whether to sell a loan is dependent upon the type of loan product and
the term of the loan. In recent years, we have sold most of our fixed-rate one-
to four-family residential loans with maturities of 15 years or greater, and
have retained servicing on all of these loans.

     Mortgage servicing involves the administration and collection of home loan
payments. When we acquire mortgage servicing rights through the origination of
mortgage loans and the subsequent 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,
2005, we were servicing loans sold to third parties totaling $139.1 million, and
the mortgage servicing rights associated with such loans had a book value, at
such date, of $751,000. Generally, the value of mortgage servicing rights
increases as interest rates rise and decreases as interest rates fall, because
the estimated life and estimated income from the underlying loans increase with
rising interest rates and decrease with falling interest rates.

INSURANCE BROKERAGE ACTIVITIES


                                                                              14

<PAGE>

     In March 2003, we acquired ICA, a licensed insurance agency, to increase
and diversify our sources of non-interest income. ICA sells life, property,
casualty and health insurance products and, to a lesser extent, non-insured
investment products. All of these products are sold on an agency basis only.
Unlike First Federal of Northern Michigan's net interest income and loan and
deposit fee income, which are subject to and largely dependent on swings in
market interest rates, the commissions earned on the sales of insurance and
investment products generally are not affected by interest rate movements. As
such, we expect the income contributed by ICA to add stability to our
non-interest income specifically and net income generally.

     ICA sells life, property, casualty and health insurance products to First
Federal of Northern Michigan's borrower customers and others. For example, we
routinely offer credit life insurance sold through ICA to all borrower customers
of First Federal of Northern Michigan, and we expect that borrower customers
will be a significant source of business for ICA in the future. In addition, ICA
offers workers' compensation insurance, key-man life insurance and property and
casualty insurance to our commercial borrowers, which often are small
businesses, and we expect this activity to increase as we increase our
origination of commercial and commercial real estate loans. Conversely, we
expect to provide the community bank services of First Federal of Northern
Michigan to the existing insurance clients of ICA. Finally, ICA and First
Federal of Northern Michigan are now able to jointly offer complementary
products, including Health Savings Accounts (HSAs) and High Deductible Health
Insurance Plans (HDHPs) to customers of both entities and the public in general.
An HSA is a tax-free savings account established by an eligible individual or by
an employer for an eligible employee that works like an IRA, except that the
money is intended to be used for qualified health care costs. An HSA plan
combines an HDHP with a tax-deductible savings account. An HSA plan can result
in lower health insurance premiums coupled with tax savings, enabling many
people to substantially cut their health care cost. HSA-qualified health
insurance typically costs 10-50% less than traditional full coverage health
insurance because of the higher policy deductibles. HSA assets are required by
Federal law to be held by a qualified trustee or custodian. First Federal of
Northern Michigan has recently completed the requirements to become a qualified
HSA custodian and ICA is able to offer HDHPs through Blue Cross/Blue Shield.

     All of the revenue from our insurance segment is derived through sales
commissions calculated as a percentage of the premium paid for the insurance
product or the dollar value of the investment product. Generally, commission
rates vary in amount depending on the type of insurance or investment product
sold, as well as the volume and profitability to the underwriter of the business
placed with it by ICA during specific periods. Sales commissions on insurance
products generally are collected from the underwriter of the insurance and not
from the insureds. Sales commissions on investment products generally are
collected from the individual investor.

     In recent years, approximately 75% of ICA's revenues have been derived from
the sale of Blue Cross/Blue Shield health insurance products. For the twelve
months ended December 31, 2005, 31% of ICA's health insurance revenues were
generated through an exclusive Blue Cross/Blue Shield contract under which
business members of 11 chambers of commerce in our market area use ICA as their
insurance agency. ICA earns a 1.9% commission on insurance products sold to
business members of the chambers of commerce, and earns a 7% commission on
insurance products sold to others. ICA has been operating under this exclusive
contract since 1988. The contract provides for an indefinite term, though it may
be terminated by either party on 60 days notice. Blue Cross/Blue Shield may
revise the schedule of commissions under the contract no more frequently than
annually. Effective January 1, 2006, this exclusive contract was terminated.
However, ICA will continue to receive commissions on insurance products sold
through the chambers of commerce prior to the termination and can continue to
sell health insurance products to non-chamber of commerce customers.

     The insurance brokerage industry generally and ICA's activities
specifically are affected by premium rate levels in the industry and available
insurance capacity, since commissions generally are related to the premiums paid
by insureds. Revenue is also affected by fluctuations in retained limits,
insured values, the development of new products, markets and services, and the
volume of business from new and existing clients.

     ICA has operated in Alpena, Michigan since its inception in 1984 and
currently employs six insurance agents. See "--Subsidiary Activity" for a
further discussion of ICA. ICA also currently employs a broker that sell
non-insured investment products in one of the branch offices of First Federal of
Northern Michigan.

REAL ESTATE DEVELOPMENT ACTIVITIES


                                                                              15

<PAGE>

     On a limited basis, we have purchased real estate for development through
our subsidiary Financial Services & Mortgage Corporation. See "--Subsidiary
Activity" for a discussion of our real estate development subsidiary, Financial
Services & Mortgage Corporation. The last such purchase was a 37 acre lot which
we purchased in 1994 for $130,000. As of December 31, 2005, we had sold 36 of
the 43 lots comprising this property and two of the smaller lots had been
combined into one lot, so that at December 31, 2005 six lots remained unsold.
Our investment in land and real estate is "held for sale" and separately stated
in the statement of financial condition, net of any allowance for impairment.
Management is actively marketing the property by using local real estate agents
to facilitate the sale of these properties. For reporting purposes, this
investment is considered "impaired" under the definition in SFAS 144, Accounting
for Impairment or Disposal of Long-Lived Assets. Accordingly, the investment is
recorded at the lower of its cost or fair value less cost to sell, which may
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 cost 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.

     At December 31, 2005, our investment in these properties was approximately
$352,000, which was net of an allowance of $100,000. At December 31, 2005,
management prepared an analysis by obtaining an updated fair value, less cost to
sell, on these properties. Based on the analysis, no further impairment or loss
was identified and the allowance remained at $100,000.

INVESTMENT ACTIVITIES

     Our investment securities portfolio comprises U.S. Government and state
agency obligations and municipal obligations, mortgage-backed securities,
Federal Home Loan Bank stock, corporate bonds and other investments. At December
31, 2005, we had no investments in unrated securities. At December 31, 2005,
$52.1 million, or 95.2% of our investment portfolio was scheduled to mature in
less than five years, and $3.8 million, or 6.8%, was scheduled to mature in over
five years. At December 31, 2005, $9.2 million, or 16.7% of our investment
portfolio was scheduled to mature in less than one year.

     At December 31, 2005, we held U.S. Government and state agency obligations
and municipal obligations classified as available-for-sale, with a fair market
value of $48.8 million. While these securities generally provide lower yields
than other investments such as mortgage-backed securities, our current
investment strategy is to maintain investments in such instruments to the extent
appropriate for liquidity purposes, as collateral for borrowings, and for
prepayment protection.

     We invest in mortgage-backed securities in order to: generate positive
interest rate spreads with minimal administrative expense; lower credit risk as
a result of the guarantees provided by Freddie Mac, Fannie Mae and Ginnie Mae;
supplement local loan originations; reduce interest rate risk exposure; and
increase liquidity. Our mortgage-backed securities portfolio consists of
pass-through certificates. At December 31, 2005, mortgage-backed securities
totaled $6.3 million, or 2.2% of total assets. At December 31, 2005, 66.8% of
our mortgage-backed securities were secured by balloon loans. All of our
pass-through certificates are insured or guaranteed by Freddie Mac, Ginnie Mae
or Fannie Mae. Our policy is to hold mortgage-backed securities as available for
sale.

     We have interests in pools of single-family mortgages in which the
principal and interest payments are passed from the mortgage originators,
through intermediaries (generally government-sponsored agencies) that pool and
repackage loans and sell the participation interest in the form of securities,
to investors. These government-sponsored agencies include Freddie Mac, Ginnie
Mae, or Fannie Mae. The underlying pool of mortgages can be comprised of either
fixed-rate mortgage loans or adjustable-rate mortgage loans. The interest rate
risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable rate, are shared by the investors in that pool.


                                                                              16

<PAGE>

     Our investment policy also permits investment in corporate debt
obligations. Although corporate bonds may offer higher yields than U.S. Treasury
or agency securities of comparable duration, corporate bonds also have a higher
risk of default due to possible adverse changes in the creditworthiness of the
issuer.

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

     SFAS No. 115 requires that, at the time of purchase, we designate a
security as held to maturity, available for sale, or trading, depending on our
ability and intent. Securities available for sale are reported at fair value. As
of December 31, 2005, all of our investment securities were designated as
available for sale except for a $1.8 million state municipal bond investment
designated as held to maturity.

     Investment Securities Portfolio. The following table sets forth the
composition of our investment securities portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                           AT DECEMBER 31,
                                   ---------------------------------------------------------------
                                           2005                  2004                  2003
                                   -------------------   -------------------   -------------------
                                   Amortized     Fair    Amortized     Fair    Amortized     Fair
                                     Cost       Value      Cost       Value       Cost      Value
                                   ---------   -------   ---------   -------   ---------   -------
                                                            (In Thousands)
<S>                                <C>         <C>       <C>         <C>       <C>         <C>
Debt Securities:
   U.S. Government and
      agency obligations .......    $43,825    $43,260    $27,954    $27,862    $16,700    $17,067
   State agency and municipal
      obligations ..............      5,595      5,525      5,994      5,974      3,900      3,960
                                    -------    -------    -------    -------    -------    -------
   Corporate bonds and other
      obligations ..............         --         --         --         --      6,163      6,148
                                    -------    -------    -------    -------    -------    -------
Mortgage-backed securities:
   Pass-through securities:
      Fannie Mae ...............        675        634        851        824        982        942
      Freddie Mac ..............      3,698      3,559      4,722      4,666      5,940      5,855
      Ginnie Mae ...............      2,086      2,057      2,552      2,556        521        537
                                    -------    -------    -------    -------    -------    -------
   Total debt securities .......     55,879     55,035     42,073     41,882     34,206     34,509
                                    -------    -------    -------    -------    -------    -------
Marketable equity securities
   Common stock ................          2        163          2        184         17        161
                                    -------    -------    -------    -------    -------    -------
   Total equity securities .....          2        163          2        184         17        161
                                    -------    -------    -------    -------    -------    -------
   Total interest securities ...    $55,881    $55,198    $42,075    $42,066    $34,223    $34,670
                                    =======    =======    =======    =======    =======    =======
</TABLE>


                                                                              17
<PAGE>

     Portfolio Maturities and Yields. The composition and maturities of the
investment securities portfolio at December 31, 2005 are summarized in the
following table. Maturities are based on the final contractual payment dates,
and do not reflect the impact of prepayments or early redemptions that may
occur. State and municipal securities yields have not been adjusted to a
tax-equivalent basis.

<TABLE>
<CAPTION>
                                                                      AT DECEMBER 31, 2005
                                               ------------------------------------------------------------------
                                                                       More than One Year    More than Five Years
                                                 One Year or Less      Through Five years      Through Ten Years
                                               --------------------   --------------------   --------------------
                                                           Weighted               Weighted               Weighted
                                               Amortized    Average   Amortized    Average   Amortized    Average
                                                  Cost       Yield       Cost       Yield       Cost       Yield
                                               ---------   --------   ---------   --------   ---------   --------
                                                                     (Dollars in Thousands)
<S>                                            <C>         <C>        <C>         <C>        <C>         <C>
DEBT SECURITIES:
   U.S. Government and agency
      securities ...........................     $7,509      3.49%     $36,316      5.01%       $ --       0.00%
   State agency and municipal
      obligations ..........................      1,792      2.47%       2,228      4.18%        275       3.84%
                                                 ------      ----      -------      ----        ----       ----
   Corporate bonds and other obligations ...         --      0.00%          --      0.00%         --       0.00%
                                                 ------      ----      -------      ----        ----       ----
   Mortgage-backed securities
      Fannie Mae ...........................         --      0.00%         675      3.50%         --       0.00%
      Freddie Mac ..........................         --      0.00%       3,536      3.65%        129       4.00%
      Ginnie Mae ...........................         --      0.00%          --      0.00%         37       5.38%
                                                 ------      ----      -------      ----        ----       ----
   Total debt securities ...................      9,301                 42,755                   441
                                                 ------                -------                  ----

MARKETABLE EQUITY SECURITIES:
   Common Stock ............................         --      0.00%          --      0.00%         --       0.00%
                                                 ------                -------                  ----
Total investment securities ................     $9,301                $42,755                  $441
                                                 ======                =======                  ====

<CAPTION>
                                                                AT DECEMBER 31, 2005
                                               -----------------------------------------------------

                                                More than Ten Years          Total Securities
                                               --------------------   ------------------------------
                                                           Weighted                         Weighted
                                               Amortized    Average   Amortized     Fair     Average
                                                  Cost       Yield       Cost      Value      Yield
                                               ---------   --------   ---------   -------   --------
                                                               (Dollars in Thousands)
<S>                                            <C>         <C>        <C>         <C>       <C>
DEBT SECURITIES:
   U.S. Government and agency
      securities ...........................     $   --      0.00%     $43,825    $43,260     3.57%
   State agency and municipal
      obligations ..........................      1,300      4.78%       5,595      5,525     3.75%
                                                 ------      ----      -------    -------
   Corporate bonds and other obligations ...         --      0.00%          --         --     0.00%
                                                 ------      ----      -------    -------     ----
   Mortgage-backed securities
      Fannie Mae ...........................         --      0.00%         675        634     3.50%
      Freddie Mac ..........................         32      4.48%       3,698      3,559     3.67%
      Ginnie Mae ...........................      2,049      3.61%       2,086      2,057     3.64%
                                                 ------      ----      -------    -------     ----
   Total debt securities ...................      3,381                 55,879     55,035
                                                 ------                -------    -------

MARKETABLE EQUITY SECURITIES:
   Common Stock ............................          2      0.00%           2        163     0.00%
                                                 ------                -------    -------     ----
Total investment securities ................     $3,383                $55,881    $55,198
                                                 ======                =======    =======
</TABLE>

SOURCES OF FUNDS

     GENERAL. Deposits are the major source of our funds for lending and other
investment purposes. We generate deposits from our ten full-service offices in
Alpena, Ossineke, Mio, Cheboygan, Oscoda, Lewiston, Mancelona, Alanson and
Gaylord. In addition to deposits, we derive funds from borrowings, proceeds from
the settlement of loan sales, the amortization and prepayment of loans and
mortgage-backed securities, the maturity of investment securities, and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings are
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes. We currently are managing liquidity levels and loan funding primarily
through secondary mortgage market sales.

     DEPOSITS. We generate deposits primarily from our market area by offering a
broad selection of deposit instruments including NOW accounts, regular savings,
money market deposits, term certificate accounts and individual retirement
accounts. Deposit account terms vary according to the minimum balance required,
the period of time during which the funds must remain on deposit, and the
interest rate, among other factors. The maximum rate of interest which we must
pay is not established by regulatory authority. The asset/liability committee
regularly evaluates our internal cost of funds, surveys rates offered by
competing institutions, reviews the cash flow requirements for lending and
liquidity, and executes rate changes when deemed appropriate. We have sought to
decrease the risk associated with changes in interest rates by offering
competitive rates on some deposit accounts and by pricing certificates of
deposit to provide customers with incentives to choose certificates of deposit
with longer maturities. We also attract non-interest bearing commercial deposit
accounts from our commercial borrowers and offer a competitive sweep product
that is not insured by the FDIC. In recent periods, we generally have not
obtained funds through brokers or through a solicitation of funds outside our
market area. However, at December 31, 2005, we had $600,000 of brokered
deposits. We offer a limited amount of certificates of deposit in excess of
$100,000 which may have negotiated rates. Future liquidity needs are expected to
be satisfied through the use of Federal Home Loan Bank borrowings as necessary.
Management does not generally plan on paying above market rates on deposit
products.


                                                                              18

<PAGE>

The following table sets forth the distribution of total deposit accounts, by
account type, at the dates indicated.

<TABLE>
<CAPTION>
                                                             At December 31,
                                -------------------------------------------------------------------------
                                                2005                                  2004
                                -----------------------------------   -----------------------------------
                                                         Weighted                              Weighted
                                            Percent      Average                  Percent      Average
                                 Amount    of Total   Interest Rate    Amount    of Total   Interest Rate
                                --------   --------   -------------   --------   --------   -------------
                                                          (Dollars in thousands)
<S>                             <C>        <C>        <C>             <C>        <C>        <C>
Non-interest-bearing ........   $ 10,878      5.76%         NA        $ 10,929      5.99%         NA
NOW accounts ................     16,620      8.81%       0.32%         19,664     10.78%       0.34%
Passbook ....................     21,853     11.58%       0.30%         25,039     13.72%       0.30%
Investment sweep account ....      5,250      2.78%       3.14%          3,147      1.72%       1.45%
Money market accounts .......     11,544      5.12%       1.53%         16,837      9.22%       1.64%

Time deposits that mature:
   Less than 12 months ......     82,397     43.66%       3.63%         32,224     17.66%       2.05%
   Within 12-36 months ......     30,324     16.07%       3.17%         60,894     33.37%       2.24%
   Beyond 36 months .........      8,554      4.53%       4.16%         11,436      6.27%       3.36%
   Jumbo ....................      1,315      0.70%       4.26%          2,319      1.27%       5.46%
                                --------    ------        ----        --------    ------        ----
Total deposits ..............   $188,735    100.00%       2.56%       $182,489    100.00%       1.64%
                                ========    ======        ====        ========    ======        ====

<CAPTION>
                                          At December 31,
                                -----------------------------------
                                                2003
                                -----------------------------------
                                                         Weighted
                                            Percent      Average
                                 Amount    of Total   Interest Rate
                                --------   --------   -------------
                                       (Dollars in thousands)
<S>                             <C>        <C>        <C>
Non-interest-bearing ........   $  7,282      4.80%         NA
NOW accounts ................     13,596      8.96%       0.35%
Passbook ....................     25,851     17.04%       0.30%
Investment sweep account ....      2,987      1.97%       0.73%
Money market accounts .......     11,613      7.66%       1.22%

Time deposits that mature:
   Less than 12 months ......     41,943     27.65%       1.49%
   Within 12-36 months ......     31,934     21.05%       2.27%
   Beyond 36 months .........     13,524      8.91%       4.74%
   Jumbo ....................      2,972      1.96%       5.79%
                                --------    ------        ----
Total deposits ..............   $151,702    100.00%       1.62%
                                ========    ======        ====
</TABLE>

     TIME DEPOSIT RATES. The following table sets forth time deposits classified
by rates as of the dates indicated (see Note 8 to our consolidated financial
statements contained within Exhibit 13) for a more detailed breakdown by rate
range):

<TABLE>
<CAPTION>
                                      At December 31,
                               -----------------------------
            Rate                 2005       2004       2003
            ----               --------   --------   -------
                                       (In Thousands)
<S>                            <C>        <C>        <C>
Less than 2%                   $  7,443   $ 22,980   $26,192
2.00 percent to 2.99 percent     20,199     24,924    14,384
3.00 percent to 3.99 percent     59,350     33,124    15,349
4.00 percent to 4.99 percent     25,470     10,227    12,498
5.00 percent to 6.99 percent      8,667     12,869    18,768
7.00 percent to 8.99 percent      1,461      2,749     3,183
                               --------   --------   -------
                               $122,590   $106,873   $90,374
                               ========   ========   =======
</TABLE>

     TIME DEPOSIT MATURITIES. The following table sets forth the amount and
maturities of time deposits at December 31, 2005.

<PAGE>

<TABLE>
<CAPTION>
                                           1 - Less   2 - Less   3 - Less   5 years
                               Less Than    than 2     than 3     than 5      and
            Rate                One Year     Years      Years      Years    Greater     Total
            ----               ---------   --------   --------   --------   -------   --------
<S>                            <C>         <C>        <C>        <C>        <C>       <C>
Less than 2%                    $ 7,426     $    17    $   --     $   --     $   --   $  7,443
2.00 percent to 2.99 percent     18,248         368       652        773        158     20,199
3.00 percent to 3.99 percent     34,788      18,367     5,933         90        172     59,350
4.00 percent to 4.99 percent     19,793       3,684       211      1,347        435     25,470
5.00 percent to 6.99 percent      2,757         725       921      3,691        573      8,667
7.00 percent to 8.99 percent         --         147        --      1,314         --      1,461
                                -------     -------    ------     ------     ------   --------
                                $83,012     $23,308    $7,717     $7,215     $1,338   $122,590
                                =======     =======    ======     ======     ======   ========
</TABLE>

     As of December 31, 2005, the aggregate amount of outstanding certificates
of deposit in amounts greater than or equal to $100,000 was $30.2 million. The
following table sets forth the maturity of those certificates as of December 31,
2005.

<TABLE>
<CAPTION>
                                Certificates
       Maturity Period           of Deposit
       ---------------         --------------
                               (In thousands)
<S>                            <C>
Three months or less .......      $ 6,069
Three through six months ...        1,567
Six through twelve months ..       12,045
Over twelve months .........       10,485
                                  -------
Total ......................      $30,166
                                  =======
</TABLE>

     BORROWINGS. Our borrowings consist primarily of advances from the Federal
Home Loan Bank of Indianapolis. At December 31, 2005, we had access to
additional Federal Home Loan Bank advances of up to $25.4 million. The following
table sets forth information concerning balances and interest rates on our
Federal Home Loan Bank advances and other borrowings at the dates and for the
periods indicated.

<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                  ---------------------------
                                                    2005      2004     2003
                                                  -------   -------   -------
                                                     (Dollars in Thousands)
<S>                                               <C>       <C>       <C>
Balance at end of period                          $54,405   $56,001   $47,159
Average balance during period                     $51,627   $54,473   $49,594
Maximum outstanding at any month end              $61,440   $63,758   $49,802
Weighted average interest rate at end of period      4.40%     4.50%     5.25%
Average interest rate during period                  4.51%     3.71%     4.73%
</TABLE>


                                                                              20
<PAGE>

SUBSIDIARY ACTIVITY

     First Federal of Northern Michigan Bancorp, Inc.'s only direct subsidiary
is First Federal of Northern Michigan.

     First Federal of Northern Michigan has two wholly owned subsidiaries. First
Federal of Northern Michigan and these subsidiaries have been consolidated in
the financial statements and all inter-company balances and transactions have
been eliminated in consolidation.

     One subsidiary, Financial Services & Mortgage Corporation, leases, sells,
develops and maintains real estate properties. For reporting purposes, Financial
Services & Mortgage Corporation is included in our banking segment. As of
December 31, 2005, First Federal of Northern Michigan's investment in Financial
Services & Mortgage Corporation was $487,000. The primary asset of the
subsidiary is an investment in land and real estate. See "Real Estate
Development Activities." At December 31, 2005, Financial Services & Mortgage
Corporation owned six developed building sites and one condominium, all of which
were being offered for sale. Financial Services & Mortgage Corporation is not
currently a party to any agreement that is material to First Federal of Northern
Michigan Bancorp, Inc. on a consolidated basis.

     First Federal of Northern Michigan's second subsidiary, ICA, is a licensed
insurance agency engaged in the business of property, casualty and health
insurance sales. ICA currently employs one broker that sell non-insured
investment products in one branch office of First Federal of Northern Michigan.
First Federal of Northern Michigan acquired ICA in June 2003 for $2.87 million.
ICA's revenues are derived from the sale of life insurance, property and
casualty insurance and health insurance. At December 31, 2005, life insurance
revenues represented 6% of sales, property and casualty insurance revenues
represented 21% of sales and health insurance sales represented 72% of sales. At
December 31, 2005, 31% of the health insurance sales resulted from a contract
under which 11 chambers of commerce in 10 surrounding counties offer their
constituents the opportunity to purchase group health plans through ICA. This
contract was terminated effective January 1, 2006, however ICA will continue to
receive commissions on polices sold under this contract prior to December 31,
2005 and can continue to sell health products to non-chamber of commerce
customers.

     As part of the acquisition of ICA, First Federal of Northern Michigan
entered into an employment agreement with one of ICA's former owners, which was
set to expire in February 2006. However the former employee terminated the
contract effective May 1, 2005. In addition, First Federal of Northern Michigan
entered into an "earn out" agreement with one of the former ICA owners that pays
up to $300,000 per year if certain net sales goals are achieved. One $300,000
payment was made in February 2004, the second in February 2005, and the final
payment was made in January 2006.

PERSONNEL

     As of December 31, 2005, the Bank had 86 full-time and 23 part-time
employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes its relationship with its employees to be
good. ICA had 19 full-time and 1 part-time employees as of the same date. First
Federal of Northern Michigan Bancorp, Inc. and FSMC have no separate employees.

                           SUPERVISION AND REGULATION

GENERAL

     As a federally chartered savings bank, First Federal of Northern Michigan
is regulated and supervised by the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation. This regulation and supervision establishes a
comprehensive framework of activities in which we may engage, and is intended
primarily for the protection of the Federal Deposit Insurance Corporation's
deposit insurance funds and depositors. Under this system of federal regulation,
financial institutions are periodically examined to ensure that they satisfy
applicable standards with respect to their


                                                                              21

<PAGE>

capital adequacy, assets, management, earnings, liquidity and sensitivity to
market interest rates. After completing an examination, the federal agency
critiques the financial institution's operations and assigns its rating (known
as an institution's CAMELS). Under federal law, an institution may not disclose
its CAMELS rating to the public. First Federal of Northern Michigan also is a
member of, and owns stock in, the Federal Home Loan Bank of Indianapolis, which
is one of the twelve regional banks in the Federal Home Loan Bank System. First
Federal of Northern Michigan also is regulated, to a lesser extent, by the Board
of Governors of the Federal Reserve System, governing reserves to be maintained
against deposits and other matters. The Office of Thrift Supervision examines
First Federal of Northern Michigan and prepares reports for consideration by our
board of directors on any operating deficiencies. First Federal of Northern
Michigan's relationship with our depositors and borrowers also is regulated to a
great extent by both federal and state laws, especially in matters concerning
the ownership of deposit accounts and the form and content of our loan
documents.

     There can be no assurance that changes to existing laws, rules and
regulations, or any other new laws, rules or regulations, will not be adopted in
the future, which could make compliance more difficult or expensive or otherwise
adversely affect our business, financial condition or prospects. Any change in
these laws or regulations, or in regulatory policy, whether by the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision or Congress,
could have a material adverse impact on our business, financial condition or
operations.

FEDERAL BANKING REGULATION

     BUSINESS ACTIVITIES. A federal savings bank derives its lending and
investment powers from the Home Owners' Loan Act, and the regulations of the
Office of Thrift Supervision. Under these laws and regulations, First Federal of
Northern Michigan may invest in mortgage loans secured by residential and
commercial real estate, commercial business and consumer loans, certain types of
debt securities and certain other loans and assets. First Federal of Northern
Michigan also may establish subsidiaries that may engage in activities not
otherwise permissible for First Federal of Northern Michigan directly, including
real estate investment, securities brokerage and insurance agency services.

     CAPITAL REQUIREMENTS. Office of Thrift Supervision regulations require
savings banks to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest CAMELS
rating) and an 8% risk-based capital ratio. The prompt corrective action
standards discussed below, in effect, establish a minimum 2% tangible capital
standard.

     The risk-based capital standard for savings banks requires the maintenance
of Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks inherent in the type of asset. Core capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, allowance for loan and lease
losses up to a maximum of 1.25% of risk-weighted assets, and up to 45% of net
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.

     At December 31, 2005, First Federal of Northern Michigan's capital exceeded
all applicable requirements. The following table sets forth the Bank's capital
position at December 31, 2005 and 2004, as compared to the minimum capital
requirements.


                                                                              22

<PAGE>

<TABLE>
<CAPTION>
                                                  AT DECEMBER 31,
                                     -----------------------------------------
                                             2005                  2004
                                     -------------------   -------------------
                                                Percent               Percent
                                      Amount   of Assets    Amount   of Assets
                                     -------   ---------   -------   ---------
                                               (Dollars in Thousands)
<S>                                  <C>       <C>         <C>       <C>
Equity capital ...................   $36,650     12.97%    $21,777      8.29%
Tangible Capital Requirement:
   Tangible capital level ........    32,181     11.54%     17,140      6.64%
   Requirement ...................     4,175      1.50%      3,873      1.50%
                                     -------     -----     -------     -----
   Excess ........................    28,006     10.04%     13,267      5.14%
Core Capital Requirement:
   Core capital level ............    32,181     11.54%     17,140      6.64%
   Requirement ...................    11,134      4.00%     10,327      4.00%
                                     -------     -----     -------     -----
   Excess ........................    21,047      7.54%      6,813      2.64%
Risk-based Capital Requirement:
   Risk-based capital level ......    33,669     18.03%     18,436     10.68%
   Requirement ...................    14,937      8.00%     13,806      8.00%
                                     -------     -----     -------     -----
   Excess ........................    18,732     10.03%      4,630      2.68%
</TABLE>

     LOANS TO ONE BORROWER. A federal savings bank generally may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
unimpaired capital and surplus on an unsecured basis. An additional amount may
be loaned, equal to 10% of unimpaired capital and surplus, if the loan is
secured by readily marketable collateral, which generally does not include real
estate. As of December 31, 2005, First Federal of Northern Michigan was in
compliance with the loans-to-one-borrower limitations.

     QUALIFIED THRIFT LENDER TEST. As a federal savings bank, First Federal of
Northern Michigan is subject to a qualified thrift lender, or "QTL," test. Under
the QTL test, First Federal of Northern Michigan must maintain at least 65% of
its "portfolio assets" in "qualified thrift investments" in at least nine months
of the most recent 12-month period. "Portfolio assets" generally means total
assets of a savings institution, less the sum of specified liquid assets up to
20% of total assets, goodwill and other intangible assets, and the value of
property used in the conduct of the institution's business.

     "Qualified thrift investments" include various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
portfolio assets. "Qualified thrift investments" also include 100% of an
institution's credit card loans, education loans and small business loans. First
Federal of Northern Michigan also may satisfy the QTL test by qualifying as a
"domestic building and loan association" as defined in the Internal Revenue Code
of 1986.

     A savings bank that fails the QTL test must either convert to a bank
charter or operate under specified restrictions. At December 31, 2005, First
Federal of Northern Michigan maintained approximately 94.4% of its portfolio
assets in qualified thrift investments, and therefore satisfied the QTL test.

     CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations govern
capital distributions by a federal savings bank, which include cash dividends,
stock repurchases and other transactions charged to the institution's capital
account. A savings bank must file an application for approval of a capital
distribution if:

     -    the total capital distributions for the applicable calendar year
          exceed the sum of the savings bank's net income for that year to date
          plus the savings bank's retained net income for the preceding two
          years;


                                                                              23

<PAGE>

     -    the savings bank would not be at least adequately capitalized
          following the distribution;

     -    the distribution would violate any applicable statute, regulation,
          agreement or Office of Thrift Supervision-imposed condition; or

     -    the savings bank is not eligible for expedited treatment of its
          filings.

     Even if an application is not otherwise required, every savings bank that
is a subsidiary of a holding company must still file a notice with the Office of
Thrift Supervision at least 30 days before the board of directors declares a
dividend or approves a capital distribution.

     The Office of Thrift Supervision may disapprove a notice or application if:

     -    the savings bank would be undercapitalized following the distribution;

     -    the proposed capital distribution raises safety and soundness
          concerns; or

     -    the capital distribution would violate a prohibition contained in any
          statute, regulation or agreement.

     LIQUIDITY. A federal savings bank is required to maintain a sufficient
amount of liquid assets to ensure its safe and sound operation.

     COMMUNITY REINVESTMENT ACT AND FAIR LENDING LAWS. All savings banks have a
responsibility under the Community Reinvestment Act and related regulations of
the Office of Thrift Supervision to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In connection
with its examination of a federal savings bank, the Office of Thrift Supervision
is required to assess the savings bank's record of compliance with the Community
Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair
Housing Act prohibit lenders from discriminating in their lending practices on
the basis of characteristics specified in those statutes. A savings bank's
failure to comply with the provisions of the Community Reinvestment Act could,
at a minimum, result in regulatory restrictions on its activities. The failure
to comply with the Equal Credit Opportunity Act and the Fair Housing Act could
result in enforcement actions by the Office of Thrift Supervision, as well as
other federal regulatory agencies and the Department of Justice. First Federal
of Northern Michigan received a "Satisfactory" Community Reinvestment Act rating
in its most recent federal examination.

     TRANSACTIONS WITH RELATED PARTIES. A federal savings bank's authority to
engage in transactions with its "affiliates" is limited by Office of Thrift
Supervision regulations and Regulation W of the Federal Reserve Board, which
implements Sections 23A and 23B of the Federal Reserve Act. The term
"affiliates" for these purposes generally means any company that controls or is
under common control with an institution. First Federal of Northern Michigan
Bancorp, Inc. and its non-savings institution subsidiaries will be affiliates of
First Federal of Northern Michigan. In general, transactions with affiliates
must be on terms that are as favorable to the savings bank as comparable
transactions with non-affiliates. In addition, certain types of these
transactions are restricted to an aggregate percentage of the savings bank's
capital. Collateral in specified amounts must usually be provided by affiliates
in order to receive loans from the savings bank. In addition, Office of Thrift
Supervision regulations prohibit a savings bank from lending to any of its
affiliates that are engaged in activities that are not permissible for bank
holding companies and from purchasing the securities of any affiliate, other
than a subsidiary.

     First Federal of Northern Michigan's authority to extend credit to its
directors, executive officers and 10% stockholders, as well as to entities
controlled by such persons, is currently governed by the requirements of
Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the
Federal Reserve Board. Among other things, these provisions require that
extensions of credit to insiders (i) be made on terms that are substantially the
same as, and follow credit underwriting procedures that are not less stringent
than, those prevailing for comparable transactions with unaffiliated persons and
that do not involve more than the normal risk of repayment or present other
unfavorable features, and (ii) not exceed certain limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of First Federal of Northern Michigan's
capital. In addition,


                                                                              24

<PAGE>

extensions of credit in excess of certain limits must be approved by First
Federal of Northern Michigan's board of directors.

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

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

     PROMPT CORRECTIVE ACTION REGULATIONS. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings banks. For this purpose, a
savings bank is placed in one of the following five categories based on the
savings bank's capital:

     -    well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based
          capital and 10% total risk-based capital);

     -    adequately capitalized (at least 4% leverage capital, 4% tier 1
          risk-based capital and 8% total risk-based capital);

     -    undercapitalized (less than 3% leverage capital, 4% tier 1 risk-based
          capital or 8% total risk-based capital);

     -    significantly undercapitalized (less than 3% leverage capital, 3% tier
          1 risk-based capital or 6% total risk-based capital); or

     -    critically undercapitalized (less than 2% tangible capital).

     Generally, the Office of Thrift Supervision is required to appoint a
receiver or conservator for a savings bank that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the Office of Thrift Supervision within 45 days of the date a
savings bank receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the savings bank,
including, but not limited to, restrictions on growth, investment activities,
capital distributions and affiliate transactions. The Office of Thrift
Supervision may also take any one of a number of discretionary supervisory
actions against undercapitalized savings banks, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.


                                                                              25

<PAGE>

     At December 31, 2005, First Federal of Northern Michigan met the criteria
for being considered "well-capitalized."

     INSURANCE OF DEPOSIT ACCOUNTS. Deposit accounts in First Federal of
Northern Michigan are insured by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation, generally up to a maximum of $100,000 per
separately insured depositor. First Federal of Northern Michigan's deposits,
therefore, are subject to Federal Deposit Insurance Corporation deposit
insurance assessments. The Federal Deposit Insurance Corporation has adopted a
risk-based system for determining deposit insurance assessments. The Federal
Deposit Insurance Corporation is authorized to raise the assessment rates as
necessary to maintain the required ratio of reserves to insured deposits of
1.25%. In addition, all Federal Deposit Insurance Corporation-insured
institutions must pay assessments to the Federal Deposit Insurance Corporation
at an annual rate of approximately .0212% of insured deposits to fund interest
payments on federal agency bonds maturing in 2017 that were issued to
recapitalize the predecessor to the Savings Association Insurance Fund.

     On February 15, 2006, federal legislation to reform federal deposit
insurance was enacted. This new legislation requires, among other things, the
merger of the Savings Association Insurance Fund and the Bank Insurance Fund
into a unified insurance deposit fund and an increase in the amount of federal
deposit insurance coverage from $100,000 to $130,000 (with a cost of living
adjustment to become effective in five years). The Act also requires the reserve
ratio to be modified to provide for a range between 1.15% and 1.50% of estimated
insured deposits. The new legislation requires the Federal Deposit Insurance
Corporation to issue regulations implementing the law. The changes required by
the law will not become effective until final regulations have been issued,
which must be no later than 270 days from the date of the enactment of the
legislation.

     PROHIBITIONS AGAINST TYING ARRANGEMENTS. Federal savings banks are
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the savings bank or its affiliates or not obtain services of a
competitor of the savings bank.

     FEDERAL HOME LOAN BANK SYSTEM. First Federal of Northern Michigan is a
member of the Federal Home Loan Bank System, which consists of 12 regional
Federal Home Loan Banks. The Federal Home Loan Bank System provides a central
credit facility primarily for member institutions. As a member of the Federal
Home Loan Bank of Indianapolis, First Federal of Northern Michigan is required
to acquire and hold shares of capital stock in the Federal Home Loan Bank in an
amount equal to at least 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is
greater. As of December 31, 2005, First Federal of Northern Michigan was in
compliance with this requirement.

FEDERAL RESERVE SYSTEM

     Federal Reserve Board regulations require savings banks to maintain
non-interest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At December 31,
2005, First Federal of Northern Michigan was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements
imposed by the Office of Thrift Supervision.

THE USA PATRIOT ACT

     The USA PATRIOT Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. Certain provisions of the Act impose affirmative
obligations on a broad range of financial institutions, including federal
savings banks, like First Federal of Northern Michigan. These obligations
include


                                                                              26

<PAGE>

enhanced anti-money laundering programs, customer identification programs and
regulations relating to private banking accounts or correspondence accounts in
the United States for non-United States persons or their representatives
(including foreign individuals visiting the United States).

     First Federal of Northern Michigan has established policies and procedures
to ensure compliance with the USA PATRIOT Act's provisions, and the impact of
the USA PATRIOT Act on our operations has not been material.

PRIVACY REQUIREMENTS OF THE GRAMM-LEACH-BLILEY ACT

     The Gramm-Leach-Bliley Act of 1999 provided for sweeping financial
modernization for commercial banks, savings banks, securities firms, insurance
companies, and other financial institutions operating in the United States.
Among other provisions, the Gramm-Leach-Bliley Act places limitations on the
sharing of consumer financial information with unaffiliated third parties.
Specifically, the Gramm-Leach-Bliley Act requires all financial institutions
offering financial products or services to retail customers to provide such
customers with the financial institution's privacy policy and provide such
customers the opportunity to "opt out" of the sharing of personal financial
information with unaffiliated third parties.

HOLDING COMPANY REGULATION

     First Federal of Northern Michigan Bancorp, Inc. is a unitary savings and
loan holding company, subject to regulation and supervision by the Office of
Thrift Supervision. The Office of Thrift Supervision has enforcement authority
over First Federal of Northern Michigan Bancorp, Inc. and its non-savings
institution subsidiaries. Among other things, this authority permits the Office
of Thrift Supervision to restrict or prohibit activities that are determined to
be a risk to First Federal of Northern Michigan.

     Under prior law, a unitary savings and loan holding company generally had
no regulatory restrictions on the types of business activities in which it could
engage, provided that its subsidiary savings association was a qualified thrift
lender. The Gramm-Leach-Bliley Act, however, restricts unitary savings and loan
holding companies not existing on, or applied for before, May 4, 1999, to those
activities permissible for financial holding companies or for multiple savings
and loan holding companies. First Federal of Northern Michigan Bancorp, Inc. is
not a grandfathered unitary savings and loan holding company and, therefore, is
limited to the activities permissible for financial holding companies or for
multiple savings and loan holding companies. A financial holding company may
engage in activities that are financial in nature, including underwriting equity
securities and insurance, incidental to financial activities or complementary to
a financial activity. A multiple savings and loan holding company is generally
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
Office of Thrift Supervision, and certain additional activities authorized by
Office of Thrift Supervision regulations.

     Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another savings institution or holding company thereof, without prior written
approval of the Office of Thrift Supervision. It also prohibits the acquisition
or retention of, with specified exceptions, more than 5% of the equity
securities of a company engaged in activities that are not closely related to
banking or financial in nature or acquiring or retaining control of an
institution that is not federally insured. In evaluating applications by holding
companies to acquire savings institutions, the Office of Thrift Supervision must
consider the financial and managerial resources and future prospects of the
savings institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.


                                                                              27

<PAGE>

SARBANES-OXLEY ACT OF 2002

     The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns
regarding corporate accountability. The stated goals of the Sarbanes-Oxley Act
are to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies, and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally
applies to all companies that file or are required to file periodic reports with
the SEC, under the Securities Exchange Act of 1934.

     The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules requiring the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and
other related rules, and mandates further studies of certain issues by the SEC.
The Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.

FEDERAL SECURITIES LAWS

     First Federal of Northern Michigan Bancorp, Inc.'s common stock is
registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. First Federal of Northern Michigan Bancorp, Inc. is
subject to the information, proxy solicitation, insider trader restrictions and
other requirements under the Securities Exchange of 1934.

     First Federal of Northern Michigan Bancorp, Inc. common stock held by
persons who are affiliates (generally officers, directors and principal
stockholders) of First Federal of Northern Michigan Bancorp, Inc. may not be
resold without registration or unless sold in accordance with certain resale
restrictions. If First Federal of Northern Michigan Bancorp, Inc. meets
specified current public information requirements, each affiliate of First
Federal of Northern Michigan Bancorp, Inc. is able to sell in the public market,
without registration, a limited number of shares in any three-month period.

                                    TAXATION

FEDERAL TAXATION

     GENERAL. First Federal of Northern Michigan Bancorp, Inc. and First Federal
of Northern Michigan are subject to federal income taxation in the same general
manner as other corporations, with some exceptions discussed below. The
following discussion of federal taxation is intended only to summarize material
federal income tax matters and is not a comprehensive description of the tax
rules applicable to First Federal of Northern Michigan Bancorp, Inc. and First
Federal of Northern Michigan.

     METHOD OF ACCOUNTING. For federal income tax purposes, First Federal of
Northern Michigan currently reports its income and expenses on the accrual
method of accounting and uses a tax year ending December 31 for filing its
consolidated federal income tax returns. The Small Business Protection Act of
1996 eliminated the use of the reserve method of accounting for bad debt
reserves by savings institutions, effective for taxable years beginning after
1995.

     BAD DEBT RESERVES. Prior to the Small Business Protection Act of 1996,
First Federal of Northern Michigan was permitted to establish a reserve for bad
debts for tax purposes and to make annual additions to the reserve. These
additions could, within specified formula limits, be deducted in arriving at
First Federal of Northern Michigan's taxable income. As a result of the Small
Business Protection Act, First Federal of Northern Michigan must use the
specific charge off method in computing its bad debt deduction for tax purposes.

     TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the Small Business Protection
Act of 1996, bad debt reserves created prior to 1988 were subject to recapture
into taxable income if First Federal of Northern Michigan failed to meet


                                                                              28

<PAGE>

certain thrift asset and definitional tests. The Small Business Protection Act
of 1996 eliminated these thrift-related recapture rules. However, under current
law, pre-1988 reserves remain subject to tax recapture should First Federal of
Northern Michigan make certain distributions from its tax bad debt reserve or
cease to maintain a bank charter. At December 31, 2005, First Federal of
Northern Michigan's total federal pre-1988 reserve was approximately $60,000.
This reserve reflects the cumulative effects of federal tax deductions by First
Federal of Northern Michigan for which no federal income tax provision has been
made.

     MINIMUM TAX. The Internal Revenue Code of 1986, as amended, imposes an
alternative minimum tax at a rate of 20% on a base of regular taxable income
plus certain tax preferences ("alternative minimum taxable income" or "AMTI").
The alternative minimum tax is payable to the extent such AMTI is in excess of
an exemption amount. Net operating losses can, in general, offset no more than
90% of AMTI. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years. First Federal of Northern
Michigan has not been subject to the alternative minimum tax and has no such
amounts available as credits for carryover.

     NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. At December 31, 2005, First Federal of Northern
Michigan had no net operating loss carryforwards for federal income tax
purposes.

     CORPORATE DIVIDENDS. We may exclude from our income 100% of dividends
received from First Federal of Northern Michigan as a member of the same
affiliated group of corporations.

     The federal income tax returns of First Federal of Northern Michigan
Bancorp, Inc. and its predecessor, Alpena Bancshares, Inc. have not been audited
by the Internal Revenue Service in the last five fiscal years.

STATE AND LOCAL TAXATION

     During 1999, the State of Michigan enacted legislation that resulted in
elimination of the Michigan single business tax by gradually phasing it out over
the next 23 years. Public Act 115 reduces the single business tax rate by 0.1%
annually beginning January 1, 1999. First Federal of Northern Michigan files
Michigan Single Business Tax (SBT) returns, and in 2005 was subject to tax at a
rate equal to 1.9% of taxable income. For this purpose, "taxable income"
generally means federal taxable income, subject to certain adjustments to arrive
at an adjusted tax base. First Federal of Northern Michigan was audited by the
State of Michigan in 2001 for the tax years 1997 through 2000. No material
adjustments were found.

     Other applicable state taxes include generally applicable sales, use and
real property taxes.

     As a Maryland business corporation, First Federal of Northern Michigan
Bancorp, Inc. is required to file annual returns with the State of Maryland.


                                                                              29

<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

     As of December 31, 2005, First Federal of Northern Michigan owned its main
office and all of its branch offices except for the Lewiston branch office. At
December 31, 2005, the aggregate net book value of our premises and equipment
was $7.4 million, net of $3.2 million of depreciation. The following is a list
of our locations:

MAIN OFFICE

100 South Second Avenue
Alpena, Michigan 49707

BRANCH OFFICES

300 South Ripley Boulevard
Alpena, Michigan 49707

6230 River Street
Alanson, Michigan 49706

101 South Main Street
Cheboygan, Michigan 49721

1000 South Wisconsin
Gaylord, Michigan 49735

4236 Salling Street(1)
Lewiston, Michigan 49756

625 North Williams Street
Mancelona, Michigan 49659

308 North Morenci
Mio, Michigan 48647

201 North State Street
Oscoda, Michigan 48750

11874 U.S. 23 South
Ossineke, Michigan 49766

INSURANCENTER OF ALPENA

123 S. Second Avenue
Alpena, Michigan 49707

----------
(1)  Month-to-month lease.

ITEM 3. LEGAL PROCEEDINGS

     The Company and the Bank are periodically involved in claims and lawsuits
that are incident to their business. At December 31, 2005, neither the Company
nor the Bank was involved in any claims or lawsuits material to their respective
businesses.

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

     No matters were submitted during the fourth quarter of the year ended
December 31, 2005 to a vote of security holders.


                                                                              30

<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The following table sets forth the quarterly high and low sales price per
share during each of the four quarters in 2004 and 2005. High and low per share
price and cash dividend declared data for the quarters ended December 31, 2005,
September 30, 2005, and June 30, 2005 reflect the 1.8477 for 1 stock split which
occurred as of the close of business on April 1, 2005 upon consummation of the
second-step mutual to stock conversion and related stock offering. As of
December 31, 2005 there were 3,115,510 shares of First Federal of Northern
Michigan Bancorp, Inc. common stock outstanding. At December 31, 2005, First
Federal of Northern Michigan Bancorp, Inc. had approximately 600 stockholders of
record.

<TABLE>
<CAPTION>
                       Market Price       Cash
                     ---------------   Dividends
   Quarter Ended      High      Low     Declared
   -------------     ------   ------   ---------
<S>                  <C>      <C>      <C>
December 31, 2005    $ 9.50   $ 8.70     $0.050
September 30, 2005   $ 9.59   $ 9.10     $0.050
June 30, 2005        $10.15   $ 8.30     $0.050
March 31, 2005       $27.00   $18.50     $0.100
December 31, 2004    $27.00   $16.30     $0.100
September 30, 2004   $17.75   $15.60     $0.100
June 30, 2004        $23.56   $17.50     $0.050
March 31, 2004       $25.00   $20.00     $0.125
</TABLE>

     Payment of dividends on First Federal of Northern Michigan Bancorp, Inc.'s
common stock is subject to determination and declaration by the Board of
Directors and depends on a number of factors, including capital requirements,
regulatory limitations on the payment of dividends, the results of operations
and financial condition, tax considerations and general economic conditions. No
assurance can be given that dividends will be declared or, if declared, what the
amount of dividends will be, or whether such dividends will continue.

     The Company did not repurchase any of its shares in 2005.

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

     Information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is incorporated by
reference to Exhibit 13, the Company's Annual Report to Stockholders.

ITEM 7. FINANCIAL STATEMENTS

     Information contained in the section captioned "Financial Statements" is
incorporated by reference to Exhibit 13, the Company's Annual Report to
Shareholders.

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

     None


                                                                              31

<PAGE>

ITEM 8A. CONTROLS AND PROCEDURES

     Under the supervision and with the participation of our management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Company's disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports the Company
files or submits under the Securities Exchange Act of 1934 (1) is recorded,
processed, summarized and reported, within the time periods specified by the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate, to allow timely decisions regarding required disclosure.

     There has been no change in the Company's internal control over the
financial reporting during the Company's fourth quarter of fiscal year 2005 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.

ITEM 8B. OTHER INFORMATION

     None.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
          WITH SECTION 16(A) OF THE EXCHANGE ACTT

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

ITEM 10. EXECUTIVE COMPENSATION

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

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

     Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Company's Proxy Statement,
specifically the Section captioned "Proposal I - Election of Directors."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information concerning relationships and transactions is incorporated
herein by reference from the Company's Proxy Statement, specifically the section
captioned "Transactions with Certain Related Persons".


                                                                              32

<PAGE>

ITEM 13. EXHIBITS

          The exhibits filed as a part of this form 10-KSB are as follows:

<TABLE>
<S>    <C>
3.1    Articles of Incorporation of First Federal of Northern Michigan Bancorp,
       Inc.*
3.2    Bylaws of First Federal of Northern Michigan Bancorp, Inc.*
4      Form of Common Stock Certificate of First Federal of Northern Michigan
       Bancorp, Inc.*
10.1   Change in Control Agreements*
10.2   1996 Stock Option Plan*
10.3   1996 Recognition and Retention Plan*
13     Annual Report to Shareholders
14     Code of Ethics **
21     Subsidiaries of Registrant
23     Consent of Plante & Moran PLLC
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the
       Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the
       Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the
       Sarbanes-Oxley Act of 2002
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the
       Sarbanes-Oxley Act of 2002
</TABLE>

----------
*    Incorporated by reference to the Registration Statement on Form SB-2 of
     First Federal of Northern Michigan Bancorp, Inc. (Registration No.
     333-121178), originally filed with the Commission on December 10, 2004.

**   Incorporated by reference to the Annual Report on Form 10-KSB of Alpena
     Bancshares, Inc. filed with the Commission on March 30, 2004 (Registration
     No. 000-31957).

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning principal accountant fees and services is incorporated
herein by reference to the Company's Proxy Statement, specifically the section
captioned "Proposal II - Ratification of Appointment of Auditors."


                                                                              33

<PAGE>

                                   SIGNATURES

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

                                        FIRST FEDERAL OF NORTHERN MICHIGAN
                                        BANCORP, INC.


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

                                        Date: March 28, 2006
                                              ----------------------------------

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


By: /s/ Martin A. Thomson               By: /s/ Amy E. Essex
    ---------------------------------       ------------------------------------
    Martin A. Thomson, Director and         Amy E. Essex, Chief Financial
    Chief Executive Officer                 Officer, Treasurer and Corporate
    (Principal Executive Officer)           Secretary
                                            (Principal Financial and Accounting
                                            Officer)

Date: March 28, 2006                    Date: March 28, 2006


By: /s/ James Rapin                     By: /s/ Keith Wallace
    ---------------------------------       ------------------------------------
    James Rapin, Chairman                   Keith Wallace, Director

Date: March 28, 2006                    Date: March 28, 2006


By: /s/ Gary VanMassenhove              By: /s/ Thomas R. Townsend
    ---------------------------------       ------------------------------------
    Gary VanMassenhove, Director            Thomas R. Townsend, Director

Date: March 28, 2006                    Date: March 28, 2006


                                                                              34

<PAGE>

                                  Exhibit Index

<TABLE>
<CAPTION>
Exhibit No.                               Description
-----------                               -----------
<S>           <C>
    3.1       Articles of Incorporation of First Federal of Northern Michigan
              Bancorp, Inc.*
    3.2       Bylaws of First Federal of Northern Michigan Bancorp, Inc.*
    4         Form of Common Stock Certificate of First Federal of Northern
              Michigan Bancorp, Inc.*
    10.1      Change in Control Agreements*
    10.2      1996 Stock Option Plan*
    10.3      1996 Recognition and Retention Plan*
    13        Annual Report to Shareholders
    14        Code of Ethics **
    21        Subsidiaries of Registrant
    23        Consent of Plante & Moran PLLC
    31.1      Certification of Chief Executive Officer pursuant to Section 302
              of the Sarbanes-Oxley Act of 2002
    31.2      Certification of Chief Financial Officer pursuant to Section 302
              of the Sarbanes-Oxley Act of 2002
    32.1      Certification of Chief Executive Officer pursuant to Section 906
              of the Sarbanes-Oxley Act of 2002
    32.2      Certification of Chief Financial Officer pursuant to Section 906
              of the Sarbanes-Oxley Act of 2002
</TABLE>

----------
*    Incorporated by reference to the Registration Statement on Form SB-2 of
     First Federal of Northern Michigan Bancorp, Inc. (Registration No.
     333-121178), originally filed with the Commission on December 10, 2004.

**   Incorporated by reference to the Annual Report on Form 10-KSB of Alpena
     Bancshares, Inc. filed with the Commission on March 30, 2004 (Registration
     No. 000-31957).