FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
                        2006 STOCK-BASED INCENTIVE PLAN

                                    FORM OF
                             STOCK OPTION AGREEMENT
                                  (EMPLOYEES)

     A.  STOCK  OPTIONS  ("Options")  for a total of  ________  shares of Common
Stock, par value $0.01 per share, of First Federal of Northern Michigan Bancorp,
Inc. (the "Company") are hereby granted to _______________  (the "Participant").
Stock  Appreciation  Rights with respect to a total of _____________  shares are
also granted to the Participant and relate to the Options granted hereunder. The
grant and terms of the Options and Stock Appreciation Rights shall be subject in
all  respects  to the First  Federal of Northern  Michigan  Bancorp,  Inc.  2006
Stock-Based  Incentive  Plan  (the  "Plan").  The  terms  of this  Stock  Option
Agreement are subject to the terms and conditions of the Plan.

     B. The Option  exercise  price of the Common Stock is $9.65 per share,  the
Fair Market  Value (as defined in the Plan) of the Common Stock on May 17, 2006,
the date of grant.

     C.  The  Options  granted   hereunder  shall  vest  in  five  equal  annual
installments,  with the  first  installment  becoming  exercisable  on the first
anniversary of the date of grant,  or May 17, 2007, and succeeding  installments
on each  anniversary  thereafter  through  May 17,  2011.  The  Options  granted
hereunder  may be  exercised  for up to ten (10)  years  from the date of grant,
subject to sub-paragraph E below.

     D. All Options granted to Participant shall be deemed to be Incentive Stock
Options to the extent permitted under the Internal Revenue Code and regulations.

     E. If  Participant  ceases to maintain  employment  with the Company or its
affiliates,  including  First Federal of Northern  Michigan (the "Bank") for any
reason other than  Disability  (as defined in the Plan),  death,  Retirement (as
defined in the Plan) or termination following a Change in Control (as defined in
the  Plan),  unvested  Options  will be  forfeited  and vested  Options  will be
exercisable  for a period of up to three (3) months  following such cessation of
employment.  If Participant  ceases  employment  with the Bank or Company due to
death, Disability,  Retirement or following a Change in Control, Options granted
hereunder,  whether or not exercisable at such time, will become  exercisable by
Participant (or his/her legal  representative  or beneficiary)  for one (1) year
following  cessation of  employment;  provided,  however,  except in the case of
death or  Disability,  such  Options  shall not be  eligible  for  treatment  as
Incentive  Stock  Options in the event such Option is exercised  more than three
(3) months  following  termination.  In order to obtain  Incentive  Stock Option
treatment for an Option  exercised by the heirs or devisees of the  Participant,
the  death of the  Participant  must have  occurred  while  the  Participant  is
employed  by the  Company  or an  affiliate,  or within  three (3) months of the
Participant's  cessation of employment.  In no event will the period of exercise
extend beyond the expiration of the Option term.  Options awarded to an employee
who also serves as a director  shall not be deemed to vest due to  Retirement so
long as such person  continues as a member of the board of directors,  provided,
that  nothing  herein  shall  increase  the  period  that  such  options  can be
considered Incentive Stock Options.

     F. Stock  Appreciation  Rights  ("SARs") are hereby granted with respect to
all  Options  granted  hereunder.  SARs are  granted in tandem  with the Options
granted  hereunder  and the exercise of one will cause the  cancellation  of the
other. If the Participant  exercises SARs, the Participant  will not be required
to pay the exercise  price of the related Option and will be entitled to receive
Common Stock of the Company  equal in value to the  difference  between the Fair
Market Value of the Common Stock on the date of exercise and the exercise  price
of the related Options (which will be cancelled).

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     Example:  Participant  receives 1,000 Options and related SARs. The Options
     have an exercise  price of $12.  When the Company  Stock is trading at $18,
     the Participant  exercises 300 SARs.  Because the Participant has exercised
     SARs,  the  Participant  does  not  have to pay  the  exercise  price.  The
     Participant receives 100 shares of the Company stock.

         $18      Common Stock
       - $12      exercise price
         -----------------------
          $6      SAR value
       x 300      SARs exercised
         -----------------------
      $1,800/18   Common Stock = 100 shares

     G.  Options may not be  exercised if the issuance of shares of Common Stock
of the Company upon such exercise would constitute a violation of any applicable
federal or state securities or other law or regulation.  The  Participant,  as a
condition  to exercise of the Options,  shall  represent to the Company that the
shares of Common  Stock of the  Company  that he/she  acquires  pursuant to such
exercise are being  acquired by such  Participant  for investment and not with a
present view to distribution  or resale,  unless counsel for the Company is then
of the opinion that such a  representation  is not required under the Securities
Act of 1933 or any other applicable law, regulation, or rule of any governmental
agency.

     H. All Options  granted to the  Participant as Incentive  Stock Options may
not be transferred in any manner otherwise than by will or the laws of intestate
succession,  and may be exercised during the lifetime of the Participant only by
such Participant.

     I. A copy of the Plan has been provided to Participant.  Participant is not
required to exercise  the Options as to any  particular  number or shares at one
time, but the Options must be exercised,  if at all and to the extent exercised,
by no later than ten years from the date of grant.  The Options may be exercised
during such term only in accordance  with the terms of the Plan. In the event of
any  inconsistency  between this  Agreement and the Plan,  the terms of the Plan
will control.

     J. All exercises of the Options must be made by executing and returning the
Notice of  Exercise  of Stock  Options  attached  hereto as  Exhibit A, and upon
receipt of any shares of Common  Stock upon the  exercise  of any  Options,  the
recipient shall complete and return to the Company the Acknowledgment of Receipt
of Stock Option Shares attached hereto as Exhibit B.

     K.  This  Agreement  shall  not be  deemed  to  constitute  a  contract  of
employment  between the parties hereto,  nor shall any provision hereof restrict
the right of the Company or the Bank to discharge  the  Participant  or restrict
the right of the Participant to terminate his employment.

     L. The Participant  acknowledges  receipt of a copy of the First Federal of
Northern Michigan Bancorp,  Inc. 2006 Stock-Based  Incentive Plan and represents
that he is  familiar  with the terms and  provisions  thereof.  The  Participant
hereby accepts the Options subject to all the terms and provisions of such Plan.
The Participant  hereby agrees to accept as binding,  conclusive,  and final all
decisions and  interpretations  of the Committee  established to administer such
Plan upon any questions arising under such plan.


                                       2
<page>


Dated:
      ------------------
ATTEST:                                     FIRST FEDERAL OF NORTHERN MICHIGAN
                                            BANCORP, INC.


-----------------------------               ------------------------------------


WITNESS:                                    PARTICIPANT


-----------------------------               ------------------------------------

 This Stock Option Agreement must be executed in duplicate originals, with one
 original retained by the Company and one original retained by the Participant

                                       3


<page>

                                   EXHIBIT A
                      NOTICE OF EXERCISE OF STOCK OPTIONS
                                 (BY EMPLOYEE)

     I hereby  exercise the stock option (the  "Option")  granted to me by First
Federal of Northern  Michigan  Bancorp,  Inc. (the  "Company") or its affiliate,
subject to all the terms and provisions set forth in the Stock Option  Agreement
(the "Agreement") and the First Federal of Northern Michigan Bancorp,  Inc. 2006
Stock-Based  Incentive Plan (the "Plan") referred to therein,  and notify you of
my desire to purchase  _________________  shares of common  stock of the Company
("Common Stock") for a purchase price of $_________ per share.

     Enclosed please find (check one):

     ___  Cash, my check in the sum of $_______,  or electronic  funds  transfer
          (EFT) in the sum of  $____________  in full  payment  of the  purchase
          price.

     ___  Stock of the  Company  with a fair  market  value of  $______  in full
          payment of the purchase price.*

     ___  My check in the sum of $_______  and stock of the Company  with a fair
          market value of $________, in full payment of the purchase price.*

     ___  Please sell ______  Shares from my Option  Shares  through a broker in
          full/partial payment of the purchase price.

     I understand that after this exercise,  ____________ shares of Common Stock
remain  subject to the Option,  subject to all terms and provisions set forth in
the Agreement and the Plan.

     I hereby  represent that it is my intention to acquire these shares for the
following purpose:

     ___  investment
     ___  resale or distribution

     Please  note:  if your  intention  is to resell (or  distribute  within the
meaning of Section 2(11) of the  Securities  Act of 1933) the shares you acquire
through  this Option  exercise,  the  Company or  transfer  agent may require an
opinion  of counsel  that such  resale or  distribution  would not  violate  the
Securities Act of 1933 prior to your exercise of such Option.

Dated: _______________, ______                       ---------------------------
                                                     Participant's signature

     * If I elect to  exercise  by  exchanging  shares  I  already  own,  I will
constructively  return  shares  that I already  own to  purchase  the new option
--------------
shares. If my shares are in certificate form, I must attach a separate statement
indicating  the  certificate  number  of the  shares  I am  treating  as  having
exchanged.  If the shares are held in "street  name" by a registered  broker,  I
must provide the Company with a notarized  statement  attesting to the number of
shares  owned  that will be treated as having  been  exchanged.  I will keep the
shares that I already  own and treat them as if they are shares  acquired by the
option  exercise.  In addition,  I will receive  additional  shares equal to the
difference between the shares I constructively exchange and the total new option
shares that I acquire.


<page>


                                   EXHIBIT B

                ACKNOWLEDGMENT OF RECEIPT OF STOCK OPTION SHARES

     I hereby  acknowledge  the  delivery  to me by First  Federal  of  Northern
Michigan    Bancorp,    Inc.    (the    "Company")    or   its    affiliate   on
______________________________________,     of    stock     certificates     for
________________  shares of common stock of the Company purchased by me pursuant
to the terms and conditions of the Stock Option  Agreement and the First Federal
of  Northern  Michigan  Bancorp,   Inc.  2006  Stock-Based  Incentive  Plan,  as
applicable,  which shares were  transferred to me on the Company's  stock record
books on _____________________.


Dated:
      ---------------


                                                     ---------------------------
                                                     Participant's Signature