-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fn9amtrgi9nueYUd9Kdfetkp8FUScpKOL1veaUwLILuQYq+NohlC/OY93i2UJlRq KdF6UqzPrHfxfjL1cCSATA== 0001188112-05-000135.txt : 20060320 0001188112-05-000135.hdr.sgml : 20060320 20050126172507 ACCESSION NUMBER: 0001188112-05-000135 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20050126 DATE AS OF CHANGE: 20050214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALPENA BANCSHARES INC CENTRAL INDEX KEY: 0001128227 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 383567362 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-121178 FILM NUMBER: 05551039 BUSINESS ADDRESS: STREET 1: 100 SOUTH SECOND AVENUE CITY: ALPNEA STATE: MI ZIP: 49707 BUSINESS PHONE: (989) 356-9041 MAIL ADDRESS: STREET 1: 100 SOUTH SECOND AVENUE CITY: ALPENA STATE: MI ZIP: 49707 FORMER COMPANY: FORMER CONFORMED NAME: ALPENA BANCSHARES INC DATE OF NAME CHANGE: 20001114 SB-2/A 1 sb2a-4648.txt SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 2005 REGISTRATION NO. 333-121178 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. (Name of Small Business Issuer in Its Charter)
MARYLAND 6712 32-0135202 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
100 SOUTH SECOND AVENUE ALPENA, MICHIGAN 49707 (989) 356-9041 (Address and Telephone Number of Principal Executive Offices) 100 SOUTH SECOND AVENUE ALPENA, MICHIGAN 49707 (Address of Principal Place of Business) MARTIN A. THOMSON 100 SOUTH SECOND AVENUE ALPENA, MICHIGAN 49707 (989) 356-9041 (Name, Address and Telephone Number of Agent for Service) COPIES TO: ROBERT B. POMERENK, ESQ. STEVE LANTER, ESQ. LUSE GORMAN POMERENK & SCHICK, P.C. 5335 WISCONSIN AVENUE, N.W., SUITE 400 WASHINGTON, D.C. 20015 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: 9 If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: 9 If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: 9 If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: 9
CALCULATION OF REGISTRATION FEE ======================================== =================== ==================== ==================== ===================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE - ---------------------------------------- ------------------- -------------------- -------------------- --------------------- Common Stock, $0.01 par value per share 3,853,613 shares $10.00 $38,536,130 (1) $4,883(2) - ---------------------------------------- ------------------- -------------------- -------------------- ---------------------
(1) Estimated solely for the purpose of calculating the registration fee. (2) Registration fee previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. PROSPECTUS SUPPLEMENT - --------------------- INTERESTS IN FIRST FEDERAL OF NORTHERN MICHIGAN EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST ADOPTED BY FIRST FEDERAL OF NORTHERN MICHIGAN OFFERING OF UP TO 123,963 SHARES OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. COMMON STOCK In connection with the adoption of a plan of conversion and reorganization, First Federal of Northern Michigan Bancorp, Inc. is allowing participants in the First Federal of Northern Michigan Employees' Savings & Profit Sharing Plan and Trust adopted by First Federal of Northern Michigan (the "Plan") to invest all or a portion of their accounts in the common stock of First Federal of Northern Michigan Bancorp, Inc. (the "Common Stock"). First Federal of Northern Michigan Bancorp, Inc. has registered a number of participation interests through the Plan in order to enable the trustee of the Plan to purchase up to 123,963 shares of the Common Stock, assuming a purchase price of $10.00 per share. This prospectus supplement relates to the initial election of Plan participants to direct the trustee of the Plan to invest all or a portion of their Plan accounts in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund at the time of the stock offering. The First Federal of Northern Michigan Bancorp, Inc.'s prospectus, dated February __, 2005, is attached to this prospectus supplement. It contains detailed information regarding the plan of conversion and reorganization, First Federal of Northern Michigan Bancorp, Inc. common stock and the financial condition, results of operations and business of First Federal of Northern Michigan. This prospectus supplement provides information regarding the Plan. You should read this prospectus supplement together with the prospectus and keep both for future reference. -------------------------------- FOR A DISCUSSION OF RISKS THAT YOU SHOULD CONSIDER, SEE "RISK FACTORS" BEGINNING ON PAGE __ OF THE PROSPECTUS. THE INTERESTS IN THE PLAN AND THE OFFERING OF THE COMMON STOCK HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF THRIFT SUPERVISION, THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL OR STATE AGENCY. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES OFFERED IN THIS PROSPECTUS SUPPLEMENT ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. This prospectus supplement may be used only in connection with offers and sales by First Federal of Northern Michigan Bancorp, Inc. of interests or shares of Common Stock pursuant to the Plan. No one may use this prospectus supplement to reoffer or resell interests or shares of Common Stock acquired through the Plan. You should rely only on the information contained in this prospectus supplement and the attached prospectus. First Federal of Northern Michigan Bancorp, Inc., First Federal of Northern Michigan and the Plan have not authorized anyone to provide you with information that is different. This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of Common Stock shall under any circumstances imply that there has been no change in the affairs of First Federal of Northern Michigan or the Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement. The date of this prospectus supplement is _____________, 2005. TABLE OF CONTENTS
THE OFFERING.............................................................................i SECURITIES OFFERED....................................................................i ELECTION TO PURCHASE COMMON STOCK IN THE OFFERING:....................................i PRIORITIES............................................................................i VALUE OF PLAN ASSETS.................................................................ii ELECTION TO PURCHASE COMMON STOCK IN THE STOCK OFFERING.............................iii METHOD OF DIRECTING TRANSFER........................................................iii TIME FOR DIRECTING TRANSFER.........................................................iii IRREVOCABILITY OF TRANSFER DIRECTION................................................iii DIRECTION TO PURCHASE COMMON STOCK...................................................iv VOTING RIGHTS OF COMMON STOCK........................................................iv DESCRIPTION OF THE PLAN..................................................................1 INTRODUCTION..........................................................................1 ELIGIBILITY AND PARTICIPATION.........................................................1 CONTRIBUTIONS UNDER THE PLAN..........................................................2 LIMITATIONS ON CONTRIBUTIONS..........................................................2 BENEFITS UNDER THE PLAN...............................................................2 WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN...........................................3 INVESTMENT OF CONTRIBUTIONS AND ACCOUNT BALANCES......................................4 PERFORMANCE HISTORY...................................................................5 INVESTMENT IN COMMON STOCK OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.........9 ADMINISTRATION OF THE PLAN...........................................................10 AMENDMENT AND TERMINATION............................................................11 MERGER, CONSOLIDATION OR TRANSFER....................................................11 FEDERAL INCOME TAX CONSEQUENCES......................................................11 ADDITIONAL EMPLOYEE RETIREMENT INCOME SECURITY ACT ("ERISA") CONSIDERATIONS..........12 SECURITIES AND EXCHANGE COMMISSION REPORTING AND SHORT-SWING PROFIT LIABILITY........13 FINANCIAL INFORMATION REGARDING PLAN ASSETS..........................................13 LEGAL OPINION...........................................................................14 FINANCIALS.............................................................................F-1
THE OFFERING SECURITIES OFFERED First Federal of Northern Michigan Bancorp, Inc. is offering participation interests in the First Federal of Northern Michigan Employees' Savings & Profit Sharing Plan and Trust adopted by First Federal of Northern Michigan (the "Plan"). The participation interests represent indirect ownership of First Federal of Northern Michigan Bancorp, Inc.'s common stock through the Plan. Assuming a purchase price of $10 per share, the Plan may acquire up to 123,963 shares of First Federal of Northern Michigan Bancorp, Inc. common stock in the offering. Only employees of First Federal of Northern Michigan may become participants in the Plan. Your investment in the common stock of First Federal of Northern Michigan Bancorp, Inc. in the offering through the purchase of units in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund available under the Plan is subject to the purchase priorities contained in the Plan of Conversion and Reorganization of Alpena Bancshares, M.H.C. Information with regard to the Plan is contained in this prospectus supplement and information with regard to the financial condition, results of operations and business of First Federal of Northern Michigan is contained in the attached prospectus. The address of the principal executive office of First Federal of Northern Michigan is 100 S. Second Avenue, Alpena, Michigan 49707. ELECTION TO PURCHASE In connection with the stock offering, you may elect to COMMON STOCK IN transfer all or part of your account balances in the THE OFFERING: Plan to the First Federal of Northern Michigan Bancorp, PRIORITIES Inc. Stock Fund, to be used to purchase units in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund which will consist of common stock issued in the offering. All Plan participants are eligible to direct a transfer of funds to the First Federal of Northern Michigan Bancorp, Inc. Stock Fund. However, such directions are subject to the purchase priorities in the plan of conversion and reorganization as follows: (1) eligible account holders, (2) tax-qualified employee benefit plans of First Federal of Northern Michigan, including the employee stock ownership plan, (3) supplemental eligible account holders, and (4) other members. An eligible account holder is a depositor whose deposit account(s) totaled $50.00 or more on October 31, 2003. A supplemental eligible account holder is a depositor whose deposit account(s) totaled $50.00 or more on December 31, 2004. Other members are depositors as of January 31, 2005 who are not eligible account holders or supplemental eligible account holders, and borrowers as of November 4, 1994 whose borrowings remain outstanding as of January 31, 2005. If you fall into subscription offering categories (1), (3) or (4), you have subscription rights to purchase shares of First Federal of Northern Michigan Bancorp, Inc. common stock in the subscription offering and you may use funds in the Plan account to pay for the shares of First Federal of Northern Michigan Bancorp, Inc. common stock which you are eligible to purchase. You may also be able to purchase shares of First Federal of Northern Michigan Bancorp, Inc. common stock in the subscription offering even though you are unable to purchase through subscription offering categories (1), (3) or (4) if First Federal of Northern Michigan determines to allow the Plan to purchase shares through subscription offering category (2), reserved for its tax-qualified employee plans, including the employee stock ownership plan. The trustee of the First Federal of Northern Michigan Bancorp, Inc. Stock Fund will purchase common stock in accordance with your directions. No later than the closing date of the subscription offering period, the amount that you elect to transfer from your existing account balances for the purchase of common stock in the offering will be removed from your existing accounts and transferred to an interest-bearing account, pending the closing of the offering. At the close of the offering, and subject to a determination as to whether all or any portion of your order may be filled (based on your purchase priority and whether the offering is oversubscribed), all or a portion of the amount that you have transferred to purchase stock in the offering will be applied to the common stock purchase. In the event the offering is oversubscribed, I.E. there are more orders for common stock than shares available for sale in the offering, and the trustee is unable to use the full amount allocated by you to purchase common stock in the offering, the amount that cannot be invested in common stock, and any interest earned, will be reinvested in the investment funds of the Plan. The amount that cannot be applied to the purchase of common stock in the offering and any interest your account earned, pending investment in common stock, will be reinvested in accordance with your then existing investment election (in proportion to your investment direction for future contributions). If you fail to direct the investment of your account balances towards the purchase of any shares in connection with the offering, your account balances will remain in the investment funds of the Plan as previously directed by you. VALUE OF PLAN ASSETS As of December 31, 2004, the market value of the assets of the Plan was approximately $1,256,865, of which approximately $1,239,635 is eligible to purchase common stock. The Plan administrator informed each participant of the value of his or her account balance under the Plan as of December 31, 2004. ii ELECTION TO PURCHASE In connection with the stock offering, the Plan will COMMON STOCK IN THE permit you to direct the trustee to transfer all or part STOCK OFFERING of the funds which represent your current beneficial interest in the assets of the Plan to the First Federal of Northern Michigan Bancorp, Inc. Stock Fund. The trustee of the Plan will subscribe for First Federal of Northern Michigan Bancorp, Inc. common stock offered for sale in connection with the stock offering, in accordance with each participant's direction. In order to purchase shares in the offering through the Plan, the minimum investment is $250, which will purchase 25 shares. The trustee will pay $10.00 per share, which will be the same price paid by all other persons who purchase shares in the offering. METHOD OF DIRECTING You will receive a Special Election Form on which you TRANSFER can elect to transfer all or a portion of your account balance in the Plan to the First Federal of Northern Michigan Bancorp, Inc. Stock Fund for the purchase of stock in the offering, provided that you invest at least $250 to purchase units consisting of at least 25 shares. If you wish to use all or part of your account balance in the Plan to purchase common stock issued in the offering, you should indicate that decision on the Special Election Form. If you do not wish to purchase First Federal of Northern Michigan Bancorp, Inc. common stock in the offering through the Plan, you must fill out the waiver portion of the Special Election Form by checking the box at the bottom of the form, and returning the form to Joseph W. Gentry II, Vice President Human Resources. Please note that all Special Election Forms must be returned to Joseph W. Gentry II, Vice President Human Resources no later than 12:00 Noon on Tuesday, March 8, 2005, even if you do not wish to make an election at this time. TIME FOR DIRECTING If you wish to purchase common stock with your Plan TRANSFER account balances, you must return your Special Election Form to Joseph W. Gentry II, Vice President Human Resources, a representative of the Plan administrator, First Federal of Northern Michigan, 100 S. Second Avenue, Alpena, Michigan, no later than 12:00 Noon on Tuesday, March 8, 2005. You may return your Special Election Form by mail or by faxing it to (989) 354-8839, so long as it is returned by the time specified. IRREVOCABILITY OF YOU MAY NOT CHANGE YOUR SPECIAL ELECTION TO TRANSFER TRANSFER DIRECTION AMOUNTS TO THE FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. STOCK FUND FOR THE PURCHASE OF STOCK IN THE OFFERING. Your election is irrevocable until after the offering has concluded. You will, however, continue to have the ability to transfer amounts not directed towards the purchase of stock in the offering amongst all of the other investment funds on a daily basis. iii DIRECTION TO PURCHASE You will be able to purchase stock AFTER the offering COMMON STOCK through your investment in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund. You may direct that your future contributions or your account balance in the Plan be transferred to the First Federal of Northern Michigan Bancorp, Inc. Stock Fund. After the offering, the trustee of the Plan will acquire common stock in open market transactions at the prevailing price. You may change your investment allocation on a daily basis. Special restrictions may apply to transfers directed to and from the First Federal of Northern Michigan Bancorp, Inc. Stock Fund by the participants who are subject to the provisions of section 16(b) of the Securities Exchange Act of 1934, as amended, relating to the purchase and sale of securities by officers, directors and principal shareholders of First Federal of Northern Michigan Bancorp, Inc. VOTING RIGHTS OF The Plan Administrator shall direct the Trustee as to COMMON STOCK the voting of any shares of Common Stock held by the First Federal of Northern Michigan Bancorp, Inc. Stock Fund and credited to your account and as to all rights in the event of a tender or exchange offer involving such Common Stock. iv DESCRIPTION OF THE PLAN INTRODUCTION First Federal of Northern Michigan adopted the Financial Institutions Thrift Plan (referred to as the "Thrift Plan"), effective May 1, 1999. In connection with the stock offering, First Federal of Northern Michigan elected to cease participation in the Thrift Plan and adopted a new individually designed 401(k) plan, effective as of February 1, 2005, to be known as the First Federal of Northern Michigan Employees' Savings & Profit Sharing Plan and Trust (the "Plan") in order to allow participants the right to purchase stock in the stock offering. The Plan is a tax-qualified plan with a cash or deferred compensation feature established in accordance with the requirements under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). First Federal of Northern Michigan intends that the Plan, in operation, will comply with the requirements under Section 401(a) and Section 401(k) of the Code. First Federal of Northern Michigan will adopt any amendments to the Plan that may be necessary to ensure the continuing qualified status of the Plan under the Code and applicable Treasury Regulations. EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 ("ERISA"). The Plan is an "individual account plan" other than a "money purchase pension plan" within the meaning of ERISA. As such, the Plan is subject to all of the provisions of Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the Code Relating to Retirement Plans) of ERISA, except to the funding requirements contained in Part 3 of Title I of ERISA which by their terms do not apply to an individual account plan (other than a money purchase plan). The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding requirements contained in Title IV of ERISA are not applicable to participants or beneficiaries under the Plan . REFERENCE TO FULL TEXT OF PLAN. The following portions of this prospectus supplement summarize certain provisions of the Plan. They are not complete and are qualified in their entirety by the full text of the Plan. Copies of the Plan are available to all employees by filing a request with the Plan administrator c/o First Federal of Northern Michigan, 100 S. Second Avenue, Alpena, MI 49707. You are urged to read carefully the full text of the Plan. ELIGIBILITY AND PARTICIPATION All employees of First Federal of Northern Michigan, except short-term employees and leased employees, are eligible to become participants in the Plan as of the later of the Plan's effective date or the first day of the calendar month coinciding with or immediately following the employee's date of employment. The Plan year is January 1 to December 31 (the "Plan Year"). As of December 31, 2004, there were approximately 98 employees, former employees and beneficiaries eligible to participate in the Plan and 78 employees participating by making elective deferral contributions. CONTRIBUTIONS UNDER THE PLAN 401(K) PLAN CONTRIBUTIONS. Commencing January 1, 2002, you are permitted to defer on a pre-tax basis up to 50% of your monthly salary (expressed in terms of whole percentages), subject to certain restrictions imposed by the Code, and to have that amount contributed to the Plan on your behalf. For purposes of the Plan, "salary" means your total taxable compensation as reported on your Form W-2 (exclusive of any compensation deferred from a prior year). In 2005, the annual salary of each participant taken into account under the Plan is limited to $210,000. (Limits established by the Internal Revenue Service are subject to increase pursuant to an annual cost-of-living adjustment, as permitted by the Code). You may elect to modify the amount contributed to the Plan by filing a new elective deferral agreement with the Plan administrator once per pay period. EMPLOYER MATCHING CONTRIBUTIONS. Effective January 1, 2002, First Federal of Northern Michigan makes matching contributions of 50% of the participant's contribution, with the match being up to 6% of the participant's eligible annual compensation for the year. ROLLOVER CONTRIBUTIONS. Employees may make rollover contributions prior to meeting the eligibility requirements for participation in the Plan. LIMITATIONS ON CONTRIBUTIONS LIMITATIONS ON EMPLOYEE SALARY DEFERRALS. For the Plan Year beginning January 1, 2005, the amount of your before-tax contributions may not exceed $14,000 per calendar year. This amount is increased in $1,000 increments through 2006 and thereafter may be adjusted periodically by law, based on changes in the cost of living. Contributions in excess of this limit are known as excess deferrals. If you defer amounts in excess of this limitation, your gross income for federal income tax purposes will include the excess in the year of the deferral. In addition, unless the excess deferral is distributed before April 15 of the following year, it will be taxed again in the year distributed. Income on the excess deferral distributed by April 15 of the immediately succeeding year will be treated, for federal income tax purposes, as earned and received by you in the tax year in which the contribution is made. LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES. Special provisions of the Code limit the amount of employee deferrals and employer matching contributions that may be made to the Plan in any year on behalf of highly compensated employees, in relation to the amount of employee deferrals and employer matching contributions made by or on behalf of all other employees eligible to participate in the Plan. A highly compensated employee includes any employee who (1) was a 5% owner of First Federal of Northern Michigan Bancorp, Inc. at any time during the current or preceding year, or (2) had compensation for the preceding year of more than $90,000 and, if First Federal of Northern Michigan Bancorp, Inc. so elects, was in the top 20% of employees by compensation for the preceding year. The dollar amounts in the foregoing sentence may be adjusted annually to reflect increases in the cost of living. If these limitations are exceeded, the level of deferrals by highly compensated employees may have to be adjusted. 2 BENEFITS UNDER THE PLAN VESTING. Individuals who were employees of First Federal of Northern Michigan at the time of the establishment of the Plan on May 1, 1999 were 100% vested in their contributions and in employer's matching contributions. Subsequently, new employees became 100% vested in employer's matching contributions after five years of employment. However, beginning January 1, 2002, the vesting schedule was changed to a graded vesting schedule, so that employees hired after May 1, 1999, become vested in their employer contributions as follows: COMPLETED VESTED YEARS OF EMPLOYMENT PERCENTAGE ------------------- ---------- Less than 1 0% 1 but less than 2 20% 2 but less than 3 40% 3 but less than 4 60% 4 but less than 5 80% 5 or more 100% At all times, you have a fully vested, nonforfeitable interest in the 401(k) deferrals you have made and any earnings related thereto. A plan participant will become 100% vested upon death while in the employ of First Federal of Northern Michigan, disability or attainment of normal retirement age (age 65). WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH FIRST FEDERAL OF NORTHERN MICHIGAN. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH FIRST FEDERAL OF NORTHERN MICHIGAN OR AFTER TERMINATION OF EMPLOYMENT. WITHDRAWALS FROM YOUR 401(K) ACCOUNT. A withdrawal from the vested portion of your 401(k) account may be made only upon attainment of age 59 1/2, in the event of hardship, termination of employment, death, disabilitY, or termination of First Federal of Northern Michigan's participation in the Plan. In general, employer contributions credited on your behalf will not be available for in-service withdrawal until such employer contributions have been invested in the Plan for at least 2 years or you have been a participant in the Plan for at least 5 years or in the event of your death, disability, retirement, attainment of age 59 1/2 or termination of employment. WITHDRAWAL UPON TERMINATION OF EMPLOYMENT. You may make withdrawals from your account at any time after you terminate employment. You may also leave your account with the Plan and defer commencement of receipt of your vested balance until April 1 of the calendar year following the calendar year in which you attain age 70 1/2. If your total vested account 3 equals or exceeds $500, you may elect, in lieu of a lump sum payment, to be paid in annual installments with the right to take in a lump sum the vested balance of your account at any time during such payment period. - - WITHDRAWAL UPON DISABILITY. If you are disabled in accordance with the definition of disability under the Plan, you will be entitled to the same withdrawal rights as if you had terminated your employment. WITHDRAWAL UPON DEATH. If you die while you are a participant in the Plan, the value of your entire account will be payable to your beneficiary. You may elect to have your beneficiary receive distribution in 5 annual installments (10 if your spouse is your beneficiary, provided that you spouse's remaining life expectancy is at least 10 years). If such an election is not in effect at the time of your death, your beneficiary may elect to receive the benefit in the form of annual installments over a period not to exceed 5 years (10 years if your spouse is your beneficiary, provided that you spouse's remaining life expectancy is at least 10 years) or make withdrawals as often as once per year, except that any balance remaining must be withdrawn on or before the December 31 of the calendar year which contains the 5th anniversary of your death (10th anniversary if your spouse is your beneficiary, provided that you spouse's remaining life expectancy is at least 10 years). First Federal of Northern Michigan allows Plan participants to obtain loans from their accounts. INVESTMENT OF CONTRIBUTIONS AND ACCOUNT BALANCES All amounts credited to your accounts under the Plan are held in the Plan trust (the "Trust") which is administered by the trustee appointed by First Federal of Northern Michigan's Board of Directors. Prior to the effective date of the offering, you were provided the opportunity to direct the investment of your account into one of the following funds: 1. International Stock Fund (600) 2. Nasdaq 100 Stock Fund (520) 3. Russell 2000 Stock Fund (510) 4. S&P MidCap Stock Fund (500) 5. S&P 500/Growth Stock Fund (420) 6. S&P 500/Value Stock Fund (410) 7. S&P 500 Stock Fund (400) 8. Government Bond Fund (300) 9. Stable Value Fund (210) 10. Money Market Fund (200) 11. Income Plus Asset Allocation Fund (100) 12. Growth & Income Asset Allocation Fund (110) 13. Growth Asset Allocation Fund (120) 4 In connection with the offering, the Plan now provides that in addition to the funds specified above, you may direct the trustee, or its representative, to invest all or a portion of your account in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund. You may elect to have both past contributions and earnings, as well as future contributions to your account invested among the funds listed above. If you fail to provide an effective investment direction, your contributions will be invested in the Money Market Fund until such time as you provide an effective investment direction. Transfers of past contributions and the earnings thereon do not affect the investment mix of future contributions. You may change your investment directions one time each business day. This may be done either by filing a form or by telephone or other electronic medium. You may also redirect the investment of your investment accounts such that a percentage of any one or more investment accounts may be transferred to any one or more other investment accounts either by filing a form or by telephone or other electronic medium. PERFORMANCE HISTORY The following table provides performance data with respect to the investment funds available under the Plan through December 31, 2004:
FUND RETURNS THROUGH DECEMBER 31, 2004 5 CALENDAR 10 CALENDAR MONTHLY YEAR TO LAST 12 YEARS YEARS STOCK FUNDS RETURN DATE MONTHS ANNUALIZED ANNUALIZED INTERNATIONAL STOCK FUND 600(2) 4.2% 19.6% 19.6% -2.3% 5.8% Benchmark: MSCI EAFE Index 4.4% 20.2% 20.2% -1.2% 6.7% NASDAQ 100 STOCK FUND 520(8) 3.2% 9.9% 9.9% -15.6% 14.4% Benchmark: NASDAQ 100 Index 3.2% 10.4% 10.4% -15.3% 14.9% RUSSELL 2000 STOCK FUND 510(7) 2.9% 17.7% 17.7% 6.1% 10.9% Benchmark: Russell 2000 Index 3.0% 18.3% 18.3% 6.6% 11.5% S&P MIDCAP STOCK FUND 500(3) 4.1% 16.0% 16.0% 9.0% 15.6% Benchmark: S&P MidCap 400 Index 4.2% 16.5% 16.5% 9.5% 16.1% S&P 500/GROWTH STOCK FUND 420(7) 3.5% 5.5% 5.5% -7.7% 10.8% Benchmark: S&P/BARRA Growth Index 3.6% 6.1% 6.1% -7.1% 11.4% S&P 500/VALUE STOCK FUND 410(7) 3.2% 15.1% 15.1% 1.9% 11.6% Benchmark: S&P/BARRA Value Index 3.3% 15.7% 15.7% 2.5% 12.2% S&P 500 STOCK FUND 400(3) 3.3% 10.2% 10.2% -2.8% 11.5% Benchmark: S&P 500 Index 3.4% 10.9% 10.9% -2.3% 12.1% BOND/FIXED INCOME FUNDS GOVERNMENT BOND FUND 300(3) 2.7% 8.4% 8.4% 9.8% 9.2% Benchmark: Lehman Brothers 20+ Year Treasury Bond Index 2.8% 9.0% 9.0% 10.3% 9.8% STABLE VALUE FUND 210(4) 0.3% 3.6% 3.6% 4.9% 5.6% Benchmark: Ryan Labs 3 Yr. GIC 0.3% 3.5% 3.5% 5.3% 5.7% MONEY MARKET FUND 200(3) 0.1% 1.0% 1.0% 2.7% 4.1% Benchmark: SSB 3 Month Treasury Bill 0.2% 1.2% 1.2% 2.8% 4.0% ASSET ALLOCATION FUNDS (2,5) INCOME PLUS 100 1.5% 6.6% 6.6% 3.8% 6.6% GROWTH & INCOME 110 2.6% 9.8% 9.8% 1.4% 8.1% GROWTH 120 3.6% 12.7% 12.7% -2.2% 9.7%
5 Returns are shown net of fees. Dividends and interest are automatically reinvested. Past performance is no guarantee of future performance. Total expenses charged to each fund, as a percentage of each fund's estimated average assets per year, are for investment management services, trustee services, recordkeeping and administration and are as follows: International Stock Fund ..71%; Nasdaq 100 Stock Fund .584%; Russell 2000 Stock Fund .584%; S&P MidCap Stock Fund .584%; S&P 500/Growth Stock Fund .5844%; S&P 500/Value Stock Fund ..584%; S&P 500 Stock Fund .584%; Government Bond Fund .66%; Stable Value Fund ..611%; Money Market Fund .44%; Asset Allocation Funds .91%. 1 Barclays Global Investors (BGI) is the Investment Manager for all Funds. Unit values are determined as of the last business day of each month. See following notes. Investment funds' returns are calculated net of fees. Benchmark indices are not investment funds and have no fees. 2 The Asset Allocation Funds and the International Stock Fund inception date was July 2, 1997. Returns prior to inception are simulated using the returns of market indices for, or actual funds of, the Fund's investment components, and are net of fees. 3 BGI became the manager of the S&P MidCap, S&P 500, Government Bond and Money Market Funds as of June 17, 1997. Results prior to June 17, 1997 are hypothetical and are based on investment in the current underlying funds managed by BGI, and are net of fees. Accordingly, actual past performance of Pentegra's Funds will be different. 4 The Stable Value Fund is a separately managed account; historical return data represents actual performance of this Fund. 5 The Asset Allocation Funds are designed investment vehicles utilizing various asset classes represented by index funds managed by BGI. They are specifically for Pentegra and its clients. Hypothetical results only exist from January 1992 to July 2, 1997 (the inception date of the Funds). 6 Prior to September 30, 1999, this Fund was limited to no more than 25% exposure to Japan. 7 BGI became the manager of the Russell 2000, S&P 500/Growth and S&P 500/Value Stock Funds as of January 4, 2000. Returns prior to January 4, 2000 are hypothetical and are based on investment in the current underlying funds managed by BGI, and are net of fees. 8 BGI became the manager of the Nasdaq 100 Stock Fund as of May 1, 2002. Returns prior to May 1, 2002 but after the Fund's inception date within BGI of August 7, 2000 are hypothetical and are based on investment in the current underlying funds managed by BGI, and are net of fees. Returns prior to the Fund inception date of August 7, 2000 are hypothetical and are based on the returns of the Nasdaq 100 index, and are net of fees. The following is a description of each of the Plan's investment funds: INTERNATIONAL STOCK FUND. This fund invests in approximately 1,000 foreign stocks in approximately 20 countries. Its long-term objective is to offer the potential return of investing in the stocks of established non-U.S. companies, as well as the potential risk-reduction derived from broad diversification. The fund invests in the stocks of established companies based in Europe, Australia, and the Far East. 6 NASDAQ 100 STOCK FUND. This fund invests in the stocks of the 100 largest and most actively traded non-financial companies on the Nasdaq Stock Market. Its objective is long term and offers investors the opportunity to share in the potential of substantial capital growth. The Nasdaq 100 Stock Fund is an index fund whose goal is to match the performance of the Nasdaq 100 Index by investing in most of the same stock. The Nasdaq 100 Index reflects Nasdaq's largest non-financial companies across major industry groups, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. This is a higher risk fund as the securities included in the index tend to be concentrated in specific industries that tend to experience a high degree of volatility. RUSSELL 2000 STOCK FUND. This fund invests in the stocks of a broad array of small U.S. companies. Its objective is long-term: to earn higher returns that reflect the growth potential of such companies. The Russell 2000 Stock Fund is an index fund whose goal is to match the performance of the Russell 2000 Index. The Russell 2000 Stock Fund invests in most or all of the same stocks held in the Russell 2000 Index. The Russell 2000 is one of the better known indices used to measure the performance of U.S. small company stocks. These 2000 companies make a up a subset of the smallest companies held in the Russell 3000 Index. Companies of this size generally have greater investment risk and potentially higher returns than mid- and large-capitalization stocks. Because this is an index of 2000 companies, it is broadly diversified in terms of industries and economic sectors. S&P MIDCAP STOCK FUND. This fund invests in the stocks of mid-sized U.S. companies. Its objective is long-term: to earn higher returns which reflect the growth potential of such companies. The fund invests in the stocks of mid-sized companies which are expected to grow faster than larger, more established companies. It is an index fund whose goal is to match the performance of the Standard & Poor's MidCap 400 Index (the "MidCap Index") by investing in many of the same stocks as the MidCap Index. MidCap refers to a company's size as measured by its market capitalization. The MidCap Index includes 400 stocks which represent the middle tier of the U.S. stock market (the S&P 500 represents the largest tier). S&P 500/GROWTH STOCK FUND. This fund invests in most or all of the stocks held in the S&P/BARRA Growth Index. Its objective is long-term: to earn higher returns by investing in a diversified portfolio of large-capitalization growth stocks. The S&P 500 Growth Stock Fund is an index fund whose goal is to match the performance of the S&P/BARRA Growth Index by investing in most of the same stocks. The S&P/BARRA Growth Index represents approximately 50% of the market capitalization of the S&P 500 Stock Index. The S&P/BARRA Growth and Value Indexes are constructed by dividing the stocks in the S&P 500 by a single attribute: market price to book value ratio. The S&P/BARRA Growth Index includes companies with higher price to book value ratios. S&P 500/VALUE STOCK FUND. This fund invests in most or all of the stocks held in the S&P/BARRA Value Index. Its objective is long-term: to earn higher returns by investing in a diversified portfolio of large-capitalization value stocks. The S&P 500 Value Stock Fund is an index fund whose goal is to match the performance of the S&P/BARRA Value Index by investing in most of the same stocks. The S&P/BARRA Value Index represents 7 approximately 50% of the market capitalization of the S&P 500 Stock Index. The S&P/BARRA Value and Growth Indexes are constructed by dividing the stocks in the S&P 500 by a single attribute: market price to book value ratio. The S&P/BARRA Value Index includes companies with lower price to book value ratios. S&P 500 STOCK FUND. This fund invests in the stocks of a broad array of established U.S. companies. Its objective is long-term: to earn higher returns by investing in the largest companies in the U.S. economy. The S&P 500 Stock Fund is an index fund whose goal is to match the performance of the S&P 500 Index by investing in most or all of the same stocks. The S&P 500 Index represents almost 75% of the value of all publicly traded common stocks in the U.S. Because the S&P 500 Index includes 500 established companies of different sizes and different sectors of the U.S. economy (industrial, utilities, financial, and transportation), this fund is broadly diversified in common stocks. GOVERNMENT BOND FUND. This fund invests in U.S. Treasury bonds with a maturity of 20 years or more. Its objective is to earn a higher level of income over the long-term along with the potential for capital appreciation. The fund's goal is to match the performance of the Lehman Brothers 20+ Year Treasury Bond Index. This index invests in U.S. Treasury bonds with 20 years or more to maturity. The fund is not exposed to credit risk since it invests only in bonds backed by the full faith and credit of the U.S. Government. The fund is exposed to interest rate risk, however, since the long maturity of the bonds means that the fund's value may fluctuate substantially in response to changes in long-term interest rates. STABLE VALUE FUND. This fund invests primarily in fully benefit-responsive Guaranteed Investment Contracts ("GICs"), Synthetic GICs and Bank Investment Contracts. Its objective is short- to intermediate-term: to achieve a stable return over short to intermediate periods of time while preserving principal. Fully benefit-responsive investment contracts provide a liquidity guarantee by the issuer and prior to maturity, at contract value, permit withdrawals, transfers and loans by employees without penalty or adjustment. As of December 31, 2002, investment contracts were obtained from 15 providers. MONEY MARKET FUND. This fund invests in a broad range of high-quality, short-term instruments. Its objective is to achieve competitive, short-term rates of return while preserving principal. The fund invests in short-term instruments issued by banks, corporations, and the U.S. Government and its agencies. These instruments include certificates of deposit and U.S. Treasury bills. INCOME PLUS ASSET ALLOCATION FUND. This fund is an asset allocation fund that invests approximately 70% of its portfolio in a combination of stable value investments and U.S. bonds. The balance is invested in U.S. and international stocks. Its objective is to preserve principal over short periods of time and to offer some potential for growth over time. The fund diversifies among a broad range of stable value securities to reduce short-term risk and among a broad range of large U.S. and international companies to capture growth potential. The fund is structured to take advantage of market opportunities with a small flexible component. 8 GROWTH & INCOME ASSET ALLOCATION FUND. This fund is an asset allocation fund that invests in U.S. domestic and international stocks, U.S. domestic bonds, and stable value investments. Its objective is to provide a balance between the pursuit of growth and protection from risk over time. The fund diversifies among U.S. and international stocks, U.S. bonds and stable value investments to pursue long-term appreciation and short-term stability and takes advantage of market opportunities with a small flexible component. The fund invests in a portfolio of approximately 60% U.S. and international stocks. The remaining 40% of the fund is held in U.S. fixed income and stable value investments such as GICs, Synthetic GICs and Bank Investment Contracts. GROWTH ASSET ALLOCATION FUND. This fund is an asset allocation fund that invests the majority of its assets in stock--both domestic and international. Its objective is to pursue high growth over time. The fund diversifies among a broad range of domestic and international stocks and takes advantage of market opportunities with a large flexible component. The fund invests approximately 55% of its portfolio in U.S. equities. The fund also invests 25% of its assets in a tactical component which, over the long term, is normally invested in the S&P 500, such that the total allocation in U.S. domestic equities could be 80%. As markets change, the fund manager may shift a portion of the tactical components to various fixed income securities. The fund invests another 20% of its portfolio in international stocks. The international component represents the markets of up to 20 economically developed countries, which are weighted to reduce risk. Stock investments include the S&P 500 Index and the MSCI Europe, Australia and Far East Index. AN INVESTMENT IN ANY OF THE FUNDS LISTED ABOVE IS NOT A DEPOSIT OF A BANK AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AS WITH ANY MUTUAL FUND INVESTMENT, THERE IS ALWAYS A RISK THAT YOU MAY LOSE MONEY ON YOUR INVESTMENT IN ANY OF THE FUNDS LISTED ABOVE. INVESTMENT IN COMMON STOCK OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. In connection with the conversion and stock offering, the Plan now offers the First Federal of Northern Michigan Bancorp, Inc. Stock Fund as an additional choice to these investments options. The First Federal of Northern Michigan Bancorp, Inc. Stock Fund invests primarily in the common stock of First Federal of Northern Michigan Bancorp, Inc. In connection with the stock offering, you may direct the trustee to invest up to 100% of your Plan account in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund as a one-time special election. Subsequent to the stock offering, you may elect to invest all or a portion of your payroll deduction contributions or matching contributions in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund; you may also elect to transfer into the First Federal of Northern Michigan Bancorp, Inc. Stock Fund all or a portion of your accounts currently invested in other funds under the Plan. The First Federal of Northern Michigan Bancorp, Inc. Stock Fund consists primarily of investments in the common stock of First Federal of Northern Michigan Bancorp, Inc. After the 9 stock offering, the trustee of the Plan will, to the extent practicable, use all amounts held by it in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund, including cash dividends paid on the Common Stock held in the fund, to purchase additional shares of common stock of First Federal of Northern Michigan Bancorp, Inc. As of the date of this prospectus supplement, none of the shares of First Federal of Northern Michigan Bancorp, Inc. common stock have been issued or are outstanding and there is no established market for First Federal of Northern Michigan Bancorp, Inc. common stock. Accordingly, there is no record of the historical performance of the First Federal of Northern Michigan Bancorp, Inc. Stock Fund. Performance of the First Federal of Northern Michigan Bancorp, Inc. Stock Fund depends on a number of factors, including the financial condition and profitability of First Federal of Northern Michigan Bancorp, Inc. and First Federal of Northern Michigan and market conditions for First Federal of Northern Michigan Bancorp, Inc. common stock generally. Investments in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund involve special risks common to investments in the common stock of First Federal of Northern Michigan Bancorp, Inc. FOR A DISCUSSION OF MATERIAL RISKS YOU SHOULD CONSIDER, SEE "RISK FACTORS" BEGINNING ON PAGE __ OF THE ATTACHED PROSPECTUS. ADMINISTRATION OF THE PLAN THE TRUSTEE AND CUSTODIAN. The Bank of New York serves as trustee for all of the core investments funds under the Plan and as custodian for the First Federal of Northern Michigan Bancorp, Inc. Stock Fund. The trustee for the First Federal of Northern Michigan Bancorp, Inc. Stock Fund is Martin A. Thomson, President and Chief Executive Officer of First Federal of Northern Michigan. PLAN ADMINISTRATOR. Pursuant to the terms of the Plan, the Plan is administered by the Plan administrator. The address of the Plan administrator is First Federal of Northern Michigan, Attention: Joseph W. Gentry II, Vice President Human Resources, 100 S. Second Avenue, Alpena, Michigan 49707, telephone number (989) 356-9041. The Plan administrator is responsible for the administration of the Plan, interpretation of the provisions of the Plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the Plan, maintenance of Plan records, books of account and all other data necessary for the proper administration of the Plan, preparation and filing of all returns and reports relating to the Plan which are required to be filed with the U.S. Department of Labor and the Internal Revenue Service, and for all disclosures required to be made to participants, beneficiaries and others under Sections 104 and 105 of ERISA. REPORTS TO PLAN PARTICIPANTS. The Plan administrator will furnish you a statement at least quarterly showing the balance in your account as of the end of that period, the amount of contributions allocated to your account for that period, any withdrawal or distribution activity and any adjustments to your account to reflect earnings or losses (if any). 10 AMENDMENT AND TERMINATION It is the intention of First Federal of Northern Michigan to continue the Plan indefinitely. Nevertheless, First Federal of Northern Michigan may terminate the Plan at any time. If the Plan is terminated in whole or in part, then regardless of other provisions in the Plan, you will have a fully vested interest in your accounts. First Federal of Northern Michigan reserves the right to make any amendment or amendments to the Plan which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that First Federal of Northern Michigan may make any amendment it determines necessary or desirable, with or without retroactive effect, to comply with ERISA. MERGER, CONSOLIDATION OR TRANSFER In the event of the merger or consolidation of the Plan with another plan, or the transfer of the trust assets to another plan, the Plan requires that you would, if either the Plan or the other plan terminates, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer, if the Plan had then terminated. FEDERAL INCOME TAX CONSEQUENCES The following is a brief summary of the material federal income tax aspects of the Plan. You should not rely on this summary as a complete or definitive description of the material federal income tax consequences relating to the Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. Please consult your tax advisor with respect to any distribution from the Plan and transactions involving the plan. As a "tax-qualified retirement plan," the Code affords the Plan special tax treatment, including: (1) the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the Plan each year; (2) participants pay no current income tax on amounts contributed by the employer on their behalf; and (3) earnings of the Plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments. First Federal of Northern Michigan will administer the Plan to comply with the requirements of the Code as of the applicable effective date of any change in the law. LUMP-SUM DISTRIBUTION. A distribution from the Plan to a participant or the beneficiary of a participant will qualify as a lump-sum distribution if it is made within one taxable year, on 11 account of the participant's death, disability or separation from service, or after the participant attains age 59 1/2, and consists of the balance credited to participants under the Plan and all other profit sharing plans, if any, maintained by First Federal of Northern Michigan. The portion of any lump-sum distribution required to be included in your taxable income for federal income tax purposes consists of the entire amount of the lump-sum distribution, less the amount of after-tax contributions, if any, you have made to this Plan and any other profit sharing plans maintained by First Federal of Northern Michigan, which is included in the distribution. FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. COMMON STOCK INCLUDED IN LUMP-SUM DISTRIBUTION. If a lump-sum distribution includes First Federal of Northern Michigan Bancorp, Inc. common stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount may be reduced by the amount of any net unrealized appreciation with respect to First Federal of Northern Michigan Bancorp, Inc. common stock; that is, the excess of the value of First Federal of Northern Michigan Bancorp, Inc. common stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of First Federal of Northern Michigan Bancorp, Inc. common stock, for purposes of computing gain or loss on its subsequent sale, equals the value of First Federal of Northern Michigan Bancorp, Inc. common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of First Federal of Northern Michigan Bancorp, Inc. common stock, to the extent of the amount of net unrealized appreciation at the time of distribution, will constitute long-term capital gain, regardless of the holding period of First Federal of Northern Michigan Bancorp, Inc. common stock. Any gain on a subsequent sale or other taxable disposition of First Federal of Northern Michigan Bancorp, Inc. common stock, in excess of the amount of net unrealized appreciation at the time of distribution, will be considered long-term capital gain. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed by regulations to be issued by the Internal Revenue Service. DISTRIBUTIONS: ROLLOVERS AND DIRECT TRANSFERS TO ANOTHER QUALIFIED PLAN OR TO AN IRA. You may roll over virtually all distributions from the Plan to another qualified plan or to an individual retirement account in accordance with the terms of the other plan or account. ADDITIONAL EMPLOYEE RETIREMENT INCOME SECURITY ACT ("ERISA") CONSIDERATIONS As noted above, the Plan is subject to certain provisions of ERISA, including special provisions relating to control over the Plan's assets by participants and beneficiaries. The Plan's feature that allows you to direct the investment of your account balances is intended to satisfy the requirements of section 404(c) of ERISA relating to control over plan assets by a participant or beneficiary. The effect of this is two-fold. First, you will not be deemed a "fiduciary" because of your exercise of investment discretion. Second, no person who otherwise is a fiduciary, such as First Federal of Northern Michigan, the Plan administrator, or the Plan's trustee is liable under the fiduciary responsibility provision of ERISA for any loss which results from your exercise of control over the assets in your Plan account. Because you will be entitled to invest all or a portion of your account balance in the Plan in First Federal of Northern Michigan Bancorp, Inc. common stock, the regulations under section 12 404(c) of the ERISA require that the Plan establish procedures that ensure the confidentiality of your decision to purchase, hold, or sell employer securities, except to the extent that disclosure of such information is necessary to comply with federal or state laws not preempted by ERISA. These regulations also require that your exercise of voting and similar rights with respect to the Common Stock be conducted in a way that ensures the confidentiality of your exercise of these rights. SECURITIES AND EXCHANGE COMMISSION REPORTING AND SHORT-SWING PROFIT LIABILITY Section 16 of the Securities Exchange Act of 1934 imposes reporting and liability requirements on officers, directors, and persons beneficially owning more than 10% of public companies such as First Federal of Northern Michigan Bancorp, Inc. Section 16(a) of the Securities Exchange Act of 1934 requires the filing of reports of beneficial ownership. Within 10 days of becoming an officer, director or person beneficially owning more than 10% of the shares of First Federal of Northern Michigan Bancorp, Inc., a Form 3 reporting initial beneficial ownership must be filed with the Securities and Exchange Commission. Changes in beneficial ownership, such as purchases, sales and gifts generally must be reported periodically, either on a Form 4 within 2 business days after the change occurs, or annually on a Form 5 within 45 days after the close of First Federal of Northern Michigan Bancorp, Inc.'s fiscal year. Discretionary transactions in and beneficial ownership of the Common Stock through the First Federal of Northern Michigan Bancorp, Inc. Stock Fund of the Plan by officers, directors and persons beneficially owning more than 10% of the common stock of First Federal of Northern Michigan Bancorp, Inc. generally must be reported to the Securities and Exchange Commission by such individuals. In addition to the reporting requirements described above, section 16(b) of the Securities Exchange Act of 1934 provides for the recovery by First Federal of Northern Michigan Bancorp, Inc. of profits realized by an officer, director or any person beneficially owning more than 10% of First Federal of Northern Michigan Bancorp, Inc.'s common stock resulting from non-exempt purchases and sales of First Federal of Northern Michigan Bancorp, Inc. common stock within any six-month period. The Securities and Exchange Commission has adopted rules that provide exemptions from the profit recovery provisions of section 16(b) for all transactions in employer securities within an employee benefit plan, provided certain requirements are met. These requirements generally involve restrictions upon the timing of elections to acquire or dispose of employer securities for the accounts of section 16(b) persons. Except for distributions of Common Stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons affected by section 16(b) are required to hold shares of Common Stock distributed from the Plan for six months following such distribution and are prohibited from directing additional purchases of units within the First Federal of Northern Michigan Bancorp, Inc. stock fund for six months after receiving such a distribution. 13 FINANCIAL INFORMATION REGARDING PLAN ASSETS Financial information representing the net assets available for benefits and changes in net assets available for benefits for the year ended December 31, 2003, are attached to this prospectus supplement. LEGAL OPINION The validity of the issuance of the Common Stock has been passed upon by Luse Gorman Pomerenk & Schick, A Professional Corporation, Washington, D.C., which firm acted as special counsel to First Federal of Northern Michigan in connection with Alpena Bancshares, M.H.C.'s conversion from the mutual to the stock form of organization and First Federal of Northern Michigan Bancorp, Inc.'s stock offering. 14 FIRST FEDERAL OF NORTHERN MICHIGAN EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST ADOPTED BY FIRST FEDERAL OF NORTHERN MICHIGAN ("401(K) PLAN") SPECIAL ONE-TIME ELECTION FORM - USE IN CONNECTION WITH FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. STOCK OFFERING - -------------------------------------------------------------------------------- SECTION A: NAME / SOCIAL SECURITY # - -------------------------------------------------------------------------------- ________________________________________________________ _____________________ PLEASE PRINT: Last Name First Name Middle Social Security # - -------------------------------------------------------------------------------- SECTION B: SPECIAL ONE-TIME ELECTION FORM - -------------------------------------------------------------------------------- Participants with existing account balances in the following funds may change the investment of existing account balances to invest all or a portion of their account in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund. This will not affect the investment of future contributions. FUND NAME INDICATE WHOLE PERCENTAGES TO TRANSFER TO THE FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. STOCK FUND 1. International Stock Fund _______________% 2. NASDAQ 100 Stock Fund _______________% 3. Russell 2000 Stock Fund _______________% 4. S&P MidCap Stock Fund _______________% 5. S&P 500/Growth Stock Fund _______________% 6. S&P 500/Value Stock Fund _______________% 7. S&P 500 Stock Fund _______________% 8. Government Bond Fund _______________% 9. Stable Value Fund _______________% 10. Money Market Fund _______________% 11. Income Plus Asset Allocation Fund _______________% 12. Growth & Income Asset Allocation Fund _______________% 13. Growth Asset Allocation Fund _______________% The percentage amount you elect should be the percentage you wish to have removed from that fund. For example, if you have $10,000 in the 401(k) Plan and $2,000 in the S&P MidCap Stock Fund and you elect to transfer 50% from the S&P MidCap Stock Fund, we will remove $1,000 from that fund (or 50% of $2,000) to transfer to the First Federal of Northern Michigan Bancorp, Inc. Stock Fund to purchase stock in the Stock Offering. Please note, percentages will be transferred to the nearest $10 increment. For example if you elect to transfer 50% from the S&P MidCap Stock Fund and at the time you have $2,348 in that Fund, we will transfer $1,170 to the First Federal of Northern Michigan Bancorp, Inc. Stock Fund to purchase stock in the offering ($2,348 x 50% = $1,174 or $1,170 to the nearest $10 increment). - -------------------------------------------------------------------------------- SECTION C: IMPORTANT CONSIDERATIONS - -------------------------------------------------------------------------------- Please note that your election made on this special election form to invest all or a portion of your account in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund will be subject to the purchase priorities set forth in the Prospectus and will be IRREVOCABLE during the stock offering. As you know, you are permitted to change your investment election among the various investment funds in the 401(k) Plan on a daily basis. However, you will not be permitted to change your investment election made on this election form with respect to that portion of your account that you invest in the First Federal of Northern Michigan Bancorp, Inc. Stock Fund for the purchase of stock in the offering. Following the conclusion of the offering, when the election on this form takes effect, you will be permitted to change your investment in the amounts you transferred to the First Federal of Northern Michigan Bancorp, Inc. Stock Fund to purchase stock in the offering in accordance with the 401(k) Plan's standard investment procedures. - -------------------------------------------------------------------------------- SECTION D: PARTICIPANT AUTHORIZATION - -------------------------------------------------------------------------------- I certify that I have received a copy of the Prospectus of First Federal of Northern Michigan Bancorp, Inc. dated February __, 2005, which provides detailed information with respect to the offering of First Federal of Northern Michigan Bancorp, Inc. common stock and the Prospectus Supplement relating to the election to direct investments under the 401(k) Plan to the First Federal of Northern Michigan Bancorp, Inc. Stock Fund. I understand that the value of the common stock may fluctuate over time and that risks are associated with investing in the common stock. Furthermore, I authorize the Plan Administrator to execute my directions as set forth above. I understand these directions are irrevocable during the stock offering. PARTICIPANT SIGNATURE ______________________________________ DATE ______________ o IF YOU WISH TO PURCHASE SHARES OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. COMMON STOCK IN THE STOCK OFFERING WITH YOUR 401(K) PLAN ACCOUNT BALANCES, YOU MUST RETURN THIS SPECIAL ONE-TIME ELECTION FORM TO JOSEPH W. GENTRY II, VICE PRESIDENT HUMAN RESOURCES, FIRST FEDERAL OF NORTHERN MICHIGAN, 100 S. SECOND AVENUE, ALPENA, MI 49707, OR YOU MAY FAX IT TO JOSEPH W. GENTRY II AT (989) 354-8839, NO LATER THAN 12:00 NOON ON TUESDAY, MARCH 8, 2005. [ ] IF YOU DO NOT WISH TO PURCHASE SHARES OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. COMMON STOCK THROUGH THE 401(K) PLAN, CHECK THIS BOX AND RETURN THIS SPECIAL ELECTION FORM AS INDICATED ABOVE. KEEP A COPY OF YOUR COMPLETED FORM PROSPECTUS FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. (PROPOSED HOLDING COMPANY FOR FIRST FEDERAL OF NORTHERN MICHIGAN) UP TO 2,116,000 SHARES OF COMMON STOCK First Federal of Northern Michigan Bancorp, Inc. is offering shares of common stock for sale in connection with the conversion of Alpena Bancshares, M.H.C. from the mutual to the stock form of organization. The shares of common stock we are offering represent the ownership interest in Alpena Bancshares, Inc., a federal corporation, now owned by Alpena Bancshares, M.H.C. The existing shares of Alpena Bancshares, Inc. common stock held by the public will be exchanged for new shares of common stock of First Federal of Northern Michigan Bancorp, Inc. All shares of common stock are being offered for sale at a price of $10.00 per share. In addition, we intend to establish a charitable foundation and to fund the foundation with a contribution of up to 37,500 shares of our common stock and up to $375,000 in cash. We expect that our shares of common stock will trade on the Nasdaq National Market under the symbol "FFNM." IF YOU ARE OR WERE A DEPOSITOR OF FIRST FEDERAL OF NORTHERN MICHIGAN: o You may have priority rights to purchase shares of common stock. IF YOU ARE CURRENTLY A STOCKHOLDER OF ALPENA BANCSHARES, INC.: o You may have the opportunity to purchase additional shares of common stock in the offering after priority orders are filled. o Each of your shares of common stock will be exchanged at the conclusion of the offering for between 1.4783 and 2.0000 new shares (subject to adjustment to up to 2.3000 new shares) of common stock of First Federal of Northern Michigan Bancorp, Inc. o Your percentage ownership will remain essentially equivalent to your current percentage ownership interest in Alpena Bancshares, Inc., before giving effect to our contribution of shares of common stock to a charitable foundation. IF YOU FIT NONE OF THE CATEGORIES ABOVE, BUT ARE INTERESTED IN PURCHASING SHARES OF OUR COMMON STOCK: o You may have the opportunity to purchase shares of common stock after priority orders in the preceding categories are filled. We are offering up to 1,840,000 shares of common stock for sale on a best efforts basis. We may sell up to 2,116,000 shares of common stock because of demand for the shares or changes in market conditions, without resoliciting subscribers. In addition to the shares we are selling, we also will issue up to 1,478,360 shares of common stock to current stockholders of Alpena Bancshares, Inc. in exchange for their existing shares. The number of shares to be issued in exchange may be increased to up to 1,700,113 shares, depending on the number of shares sold in the offering. We must sell a minimum of 1,360,000 shares in the offering, and we must issue 1,092,701 shares in the exchange in order to complete the offering and the exchange of existing shares. The minimum number of shares you can order is 25 shares. The offering is expected to expire at 10:00 a.m., Alpena, Michigan time, on March 15, 2005. We may extend this expiration date without notice to you until April 29, 2005, unless the Office of Thrift Supervision approves a later date, which may not be beyond March __, 2007. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond April 29, 2005, or the number of shares of common stock to be sold is increased to more than 2,116,000 shares or decreased to less than 1,360,000 shares. If the offering is extended beyond April 29, 2005, or if the number of shares of common stock to be sold is increased to more than 2,116,000 shares or decreased to less than 1,360,000 shares, subscribers will be resolicited, and all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to subscribers, with interest. Funds received during the offering will be held in a segregated account at First Federal of Northern Michigan or another insured depository institution and will earn interest at our passbook savings rate. Ryan Beck & Co., Inc. will assist us in selling our shares of common stock on a best efforts basis. Ryan Beck & Co., Inc. is not required to purchase any shares of the common stock that are being offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering. OFFERING SUMMARY PRICE: $10.00 PER SHARE
ADJUSTED MINIMUM MAXIMUM MAXIMUM Number of shares: 1,360,000 1,840,000 2,116,000 Gross offering proceeds: $ 13,600,000 $ 18,400,000 $ 21,160,000 Estimated offering expenses: $ 716,000 $ 760,000 $ 786,000 Estimated net proceeds: $ 12,884,000 $ 17,640,000 $ 20,374,000 Estimated net proceeds per share: $ 9.47 $ 9.59 $ 9.63
THIS INVESTMENT INVOLVES A DEGREE OF RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. PLEASE READ "RISK FACTORS" BEGINNING ON PAGE 20. THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, NOR ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. RYAN BECK & CO. For assistance, please contact the Stock Information Center at (989) ___-_____ The date of this Prospectus is February __, 2005. [MAP SHOWING FIRST FEDERAL OF NORTHERN MICHIGAN'S MARKET AREA APPEARS HERE] i OFFICE LOCATIONS: - ----------------- HEADQUARTERS: 100 South Second Avenue Alpena, MI 49707 BRANCH LOCATIONS: 300 South Ripley Boulevard 625 N. Williams Street Alpena, MI 49707 Mancelona, MI 49659 6230 River Street 308 North Morenci Alanson, MI 49706 Mio, MI 48647 101 South Main Street 201 North State Street Cheboygan, MI 49721 Oscoda, MI 48750 1000 South Wisconsin 11874 U.S. 23 South Gaylord, MI 49735 Ossineke, MI 49766 P.O. Box 673 4236 Salling Street Lewiston, MI 49756 ii
TABLE OF CONTENTS Page ---- SUMMARY...........................................................................................................4 RISK FACTORS.....................................................................................................20 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF ALPENA BANCSHARES, INC. AND SUBSIDIARY.........................27 RECENT DEVELOPMENTS..............................................................................................29 FORWARD-LOOKING STATEMENTS.......................................................................................35 HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING..............................................................36 OUR DIVIDEND POLICY..............................................................................................37 MARKET FOR THE COMMON STOCK......................................................................................38 HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE...........................................................40 CAPITALIZATION...................................................................................................41 PRO FORMA DATA...................................................................................................43 COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE FOUNDATION................................52 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................53 BUSINESS OF ALPENA BANCSHARES, INC. AND FIRST FEDERAL OF NORTHERN MICHIGAN.......................................72 SUPERVISION AND REGULATION.......................................................................................95 TAXATION........................................................................................................102 MANAGEMENT OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC...................................................103 BENEFICIAL OWNERSHIP OF COMMON STOCK............................................................................114 SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS...............................................................114 THE CONVERSION..................................................................................................115 FIRST FEDERAL COMMUNITY FOUNDATION..............................................................................138 COMPARISON OF STOCKHOLDERS' RIGHTS FOR EXISTING STOCKHOLDERS OF ALPENA BANCSHARES, INC..........................142 RESTRICTIONS ON ACQUISITION OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC..................................149 DESCRIPTION OF CAPITAL STOCK OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. FOLLOWING THE CONVERSION.......152 TRANSFER AGENT..................................................................................................154 EXPERTS.........................................................................................................154 LEGAL MATTERS...................................................................................................154 WHERE YOU CAN FIND ADDITIONAL INFORMATION.......................................................................154 ALPENA BANCSHARES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..............................................F-1
iii SUMMARY The following summary explains the significant aspects of the conversion, the offering and the exchange of existing shares of Alpena Bancshares, Inc. common stock for new shares of First Federal of Northern Michigan Bancorp, Inc. common stock. It may not contain all the information that is important to you. For additional information before making an investment decision, you should read this entire document carefully, including the consolidated financial statements and the notes to the consolidated financial statements, and the section titled "Risk Factors." THE COMPANIES ALPENA BANCSHARES, M.H.C. Alpena Bancshares, M.H.C. is the federally chartered mutual holding company of Alpena Bancshares, Inc., a federal corporation. Alpena Bancshares, M.H.C.'s principal business activity is the ownership of 920,000 shares of common stock of Alpena Bancshares, Inc., or 55.4% of the issued and outstanding shares as of September 30, 2004. After the completion of the conversion, Alpena Bancshares, M.H.C. will no longer exist. Alpena Bancshares, M.H.C.'s executive offices are located at 100 South Second Avenue, Alpena, Michigan 49707. Its telephone number at this address is (989) 356-9041. ALPENA BANCSHARES, INC. Alpena Bancshares, Inc. is a federally chartered corporation that owns all of the outstanding common stock of First Federal of Northern Michigan, a federal savings bank with ten full-service branches. At September 30, 2004, Alpena Bancshares, Inc. had consolidated assets of $254.5 million, deposits of $182.4 million and stockholders' equity of $21.9 million. After the completion of the conversion, Alpena Bancshares, Inc. will cease to exist, but will be succeeded by a new Maryland corporation with the name First Federal of Northern Michigan Bancorp, Inc. As of September 30, 2004, Alpena Bancshares, Inc. had 1,659,180 shares of common stock issued and outstanding. As of that date, Alpena Bancshares, M.H.C. owned 920,000 shares of common stock of Alpena Bancshares, Inc., representing 55.4% of the issued and outstanding shares of common stock. The remaining 739,180 shares were owned by the public. Alpena Bancshares, Inc.'s executive offices are located at 100 South Second Avenue, Alpena, Michigan 49707. Its telephone number at this address is (989) 356-9041. FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. First Federal of Northern Michigan Bancorp, Inc. is a newly formed Maryland corporation that will own all of the outstanding common stock of First Federal of Northern Michigan upon completion of the conversion and the offering. Concurrently with the completion of the conversion and offering, First Federal of Northern Michigan Bancorp, Inc. will be the successor to Alpena Bancshares, Inc., the federal corporation. First Federal of Northern Michigan Bancorp, Inc.'s executive offices are located at 100 South Second Avenue, Alpena, Michigan 49707. Our telephone number at this address is (989) 356-9041. 4 FIRST FEDERAL OF NORTHERN MICHIGAN First Federal of Northern Michigan is a full-service, community-oriented federal savings bank that provides financial services to individuals, families and businesses from ten full-service facilities located in Alpena, Antrim, Charlevoix, Cheboygan, Iosco, Otsego, Montmorency and Oscoda Counties, Michigan. First Federal of Northern Michigan has operated in Alpena, Michigan since its chartering in 1957. First Federal of Northern Michigan reorganized into the mutual holding company structure in 1994. First Federal of Northern Michigan has operated historically as a traditional savings bank. Its business has consisted primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in loans, consisting primarily of one- to four-family residential mortgage loans and, to a lesser extent, commercial real estate loans, commercial loans and consumer loans, as well as in agency securities and mortgage-backed securities. First Federal of Northern Michigan's market area is sparsely populated, and has had slow population growth and limited industrial development compared to more urban and suburban markets. Because of the limited growth opportunities for residential mortgage lending in our market area, in recent years First Federal of Northern Michigan has taken steps to become more "bank-like," by emphasizing commercial and commercial real estate lending. Commercial and commercial real estate loans typically offer higher yields than traditional one- to four-family residential mortgage loans and generally are of shorter duration. Therefore, these loans can increase interest income and assist in managing our interest rate risk. Residential mortgage loans as a percentage of our total loan portfolio have decreased in each of the past five years, and we expect this trend to continue. Conversely, while management has not established targets, we expect that commercial and commercial real estate loans will continue to increase as a percentage of our total loan portfolio in future periods. At September 30, 2004, commercial real estate loans comprised 14.0% of total loans, commercial loans comprised 15.4% of total loans and one- to four-family residential mortgage loans comprised 53.1% of total loans. For the nine months ended September 30, 2004, interest income on our commercial real estate and commercial loans represented 24.9% of our total interest income. The shift to a more "bank-like" loan portfolio also reflects First Federal of Northern Michigan's increased mortgage origination and sales activity. Since 2000, First Federal of Northern Michigan has sold a large percentage of its one- to four-family, fixed-rate residential mortgage loans to help manage interest rate risk. For the nine months ended September 30, 2004, First Federal of Northern Michigan originated $49.1 million of one- to four-family residential mortgage loans, of which $19.2 million were sold in the secondary mortgage market. First Federal of Northern Michigan retained servicing on all of the sold loans. Non-interest income attributable to mortgage banking activities was $460,700 for the nine months ended September 30, 2004, and comprised 12.8% of total non-interest income for the period. First Federal of Northern Michigan's executive offices are located at 100 South Second Avenue, Alpena, Michigan 49707. Its telephone number at this address is (989) 356-9041. 5 OUR ORGANIZATIONAL STRUCTURE In 1994, First Federal of Northern Michigan's mutual predecessor reorganized into the mutual holding company form of organization. In 2000, First Federal of Northern Michigan formed Alpena Bancshares, Inc. as its mid-tier stock holding company. The majority of the outstanding shares of common stock of Alpena Bancshares, Inc. is owned by Alpena Bancshares, M.H.C., which is a mutual holding company that has no stockholders. Alpena Bancshares, Inc. owns 100% of the outstanding shares of common stock of First Federal of Northern Michigan. Pursuant to the terms of Alpena Bancshares, M.H.C.'s plan of conversion and reorganization, Alpena Bancshares, M.H.C. will convert from the mutual holding company to the stock holding company corporate structure. As part of the conversion, we are offering for sale in a subscription offering and possibly in a community offering the majority ownership interest of Alpena Bancshares, Inc. that is currently held by Alpena Bancshares, M.H.C. Upon the completion of the conversion and offering, Alpena Bancshares, M.H.C. will cease to exist, and we will complete the transition from partial to full public stock ownership. Upon completion of the conversion, existing public stockholders of Alpena Bancshares, Inc. will receive new shares of common stock of First Federal of Northern Michigan Bancorp, Inc. (our newly formed Maryland corporation that will be the successor to Alpena Bancshares, Inc.) in exchange for their existing shares of Alpena Bancshares, Inc. at the completion of the conversion. The following chart shows our current organizational structure, which is commonly referred to as the "two-tier" mutual holding company structure: ------------------------------------ PUBLIC ALPENA BANCSHARES, M.H.C. STOCKHOLDERS ------------------------------------ 55.4% of Alpena 44.6% of Alpena Bancshares, Inc. Bancshares, Inc. common common stock stock ---------------------------------------- ALPENA BANCSHARES, INC. (A FEDERAL CORPORATION) ---------------------------------------- 100% of common stock ---------------------------------------- FIRST FEDERAL OF NORTHERN MICHIGAN ---------------------------------------- After the conversion and offering are completed, we will be organized as a fully public holding company, as follows: PUBLIC STOCKHOLDERS (including charitable foundation) 100% of common stock ----------------------------------------- FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. (A MARYLAND CORPORATION) ----------------------------------------- 100% of common stock ----------------------------------------- FIRST FEDERAL OF NORTHERN MICHIGAN ----------------------------------------- 6 BUSINESS STRATEGY Our goal is to operate and grow as a well-capitalized and profitable financial institution. We seek to accomplish this goal by: o operating as a community savings bank and offering personalized customer service; o increasing our commercial real estate and commercial lending; o increasing our share of lower-cost deposits; o increasing and diversifying our sources of non-interest income; o maintaining high asset quality and capital strength; and o managing our interest rate risk exposure by selling into the secondary market the majority of fixed-rate residential real estate loans with maturities of 15 years or more that we originate. See page 56_of "Management's Discussion and Analysis of Financial Condition and Results of Operations --Business Strategy" for a fuller discussion of our business strategy, including quantitative analysis that highlights elements of our business strategy. REASONS FOR THE CONVERSION We believe that our conversion to a fully public company and the increased capital resources that will result from the sale of our common stock will provide us with the flexibility: o to support internal growth through lending in the communities we serve; o to enhance existing products and services and support the development of new products and services; o to facilitate growth through branch and whole bank acquisitions as opportunities arise; o to improve our overall competitive position; and o to improve the liquidity of our shares of common stock and enhance stockholder returns through higher earnings and more flexible capital management strategies. As a fully converted stock holding company, we will have greater flexibility in structuring mergers and acquisitions, including the form of consideration that we can use to pay for an acquisition. Our current mutual holding company structure and our relatively small asset size limit our ability to offer 7 shares of our common stock as consideration in a merger or acquisition since Alpena Bancshares, M.H.C. is required to own a majority of our outstanding shares of common stock. Potential sellers often want stock for at least part of the purchase price. Our new stock holding company structure will enable us to offer stock or cash consideration, or a combination of stock and cash, and will therefore enhance our ability to compete with other bidders when acquisition opportunities arise. We currently have no arrangements or understandings regarding any specific acquisition. TERMS OF THE CONVERSION AND OFFERING Pursuant to Alpena Bancshares, M.H.C.'s plan of conversion and reorganization, our organization will convert from a partially public to a fully public form of holding company structure. In connection with the conversion, we are selling shares that represent the ownership interest in Alpena Bancshares, Inc. currently held by Alpena Bancshares, M.H.C. We are offering between 1,360,000 and 1,840,000 shares of common stock to eligible depositors and borrowers of First Federal of Northern Michigan, our tax-qualified employee benefit plans and, to the extent shares remain available, to our existing public stockholders and the general public. The number of shares of common stock to be sold may be increased to up to 2,116,000 as a result of regulatory considerations, demand for the shares, or changes in the market for financial institution stocks. Unless the number of shares of common stock to be offered is increased to more than 2,116,000 shares or decreased to less than 1,360,000 shares, or the offering is extended beyond April 29, 2005, subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the number of shares of common stock to be sold is increased to more than 2,116,000 shares or decreased to less than 1,360,000 shares, or if the offering is extended beyond April 29, 2005, subscribers will be resolicited, and all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to subscribers with interest. The purchase price of each share of common stock to be offered for sale in the offering is $10.00. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock in the offering. Ryan Beck & Co., Inc., our marketing advisor in the offering, will use its best efforts to assist us in selling shares of our common stock. Ryan Beck & Co., Inc. is not obligated to purchase any shares of common stock in the offering. In addition, as part of the conversion and offering, we intend to contribute up to 37,500 shares of our common stock and up to $375,000 in cash to a charitable foundation to be established by First Federal of Northern Michigan. PERSONS WHO MAY ORDER SHARES OF COMMON STOCK IN THE OFFERING We are offering the shares of common stock in a "subscription offering" in the following descending order of priority: (i) First, to depositors with accounts at First Federal of Northern Michigan with aggregate balances of at least $50 on October 31, 2003. (ii) Second, to First Federal of Northern Michigan's employee stock ownership plan. (iii) Third, to depositors with accounts at First Federal of Northern Michigan with aggregate balances of at least $50 on December 31, 2004. 8 (iv) Fourth, to depositors of First Federal of Northern Michigan as of January 31, 2005 and to borrowers of First Federal of Northern Michigan as of November 4, 1994 whose borrowings remained outstanding as of January 31, 2005. Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a "community offering," with a preference given first to natural persons residing in the Michigan counties of Alpena, Alcona, Antrim, Charlevoix, Cheboygan, Crawford, Emmet, Iosco, Kalkaska, Montmorency, Ogemaw, Oscoda, Otsego and Presque Isle, and then to Alpena Bancshares, Inc. public stockholders as of February 3, 2005. The community offering, if held, may begin concurrently with, during or promptly after the subscription offering as we may determine at any time. We also may offer for sale shares of common stock not purchased in the subscription offering or community offering through a "syndicated community offering" managed by Ryan Beck & Co., Inc. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated community offering. Any determination to accept or reject purchase orders in the community offering and the syndicated community offering will be based on the facts and circumstances available to management at the time of the determination. If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares will be allocated first to categories in the subscription offering. A detailed description of share allocation procedures can be found in the section entitled "The Conversion." HOW WE DETERMINED THE OFFERING RANGE AND THE $10.00 PER SHARE STOCK PRICE The amount of common stock we are offering is based on an independent appraisal of the estimated market value of First Federal of Northern Michigan Bancorp, Inc., assuming the conversion and offering are completed. RP Financial, LC., our independent appraiser, has estimated that, as of November 26, 2004, this market value, including the establishment of the Foundation, ranged from $24,799,010 to $33,551,600, with a midpoint of $29,175,300. Based on this valuation, the ownership interest of Alpena Bancshares, M.H.C. being sold in the offering and the $10.00 per share price, the number of shares of common stock being offered for sale by First Federal of Northern Michigan Bancorp, Inc. will range from 1,360,000 shares to 1,840,000 shares. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. The appraisal is based in part on Alpena Bancshares, Inc.'s financial condition and results of operations, the effect of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of 13 publicly traded savings bank and thrift holding companies that RP Financial considered comparable to Alpena Bancshares, Inc. The following table presents a summary of selected pricing ratios for the peer group companies and First Federal of Northern Michigan Bancorp, Inc., based on earnings and other information as of and for the twelve months ended September 30, 2004. Compared to the average pricing of the peer group, First Federal of Northern Michigan Bancorp, Inc.'s pro forma pricing ratios at the maximum of the offering range indicated a premium of 174.4% on a price-to-core earnings basis, a discount of 25.4% on a price-to-book basis and a discount of 22.3% on a price-to-tangible book basis. The pricing ratios result from our generally higher levels of equity than the companies in the peer group, but lower earnings. Our board of directors, in reviewing and approving the appraisal, considered the range of price-to-core earnings multiples and the range of price-to-book value ratios at the different amounts of shares to be sold in the offering, and did not consider one valuation approach to be more important than the other. Instead, in approving the appraisal, the board concluded that these ranges represented the appropriate balance of the two approaches to valuing First Federal of Northern Michigan Bancorp, Inc., and the number of shares to be sold, in comparison to the peer group institutions. Specifically, in approving the appraisal, the board believed that First Federal of Northern Michigan Bancorp, Inc. would not be able to sell its 9 shares at a price-to-book value that was in line with the peer group without unreasonably exceeding the peer group on a price-to-earnings basis. The estimated appraised value and the resulting premium/discount took into consideration the potential financial impact of the conversion and offering.
PRO FORMA PRO FORMA PRO FORMA PRICE-TO-CORE EARNINGS PRICE-TO-BOOK PRICE-TO-TANGIBLE MULTIPLE VALUE RATIO BOOK VALUE RATIO ------------------------ ------------------------ ------------------------ FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. Maximum............................... 57.44x 89.67% 99.42% Minimum............................... 43.57x 74.52% 83.75% VALUATION OF PEER GROUP COMPANIES AS OF NOVEMBER 26, 2004 Averages.............................. 20.93x 120.13% 127.89% Medians............................... 20.38x 112.49 120.13%
THE INDEPENDENT APPRAISAL DOES NOT INDICATE MARKET VALUE. DO NOT ASSUME OR EXPECT THAT THE VALUATION OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AS INDICATED ABOVE MEANS THAT, AFTER THE CONVERSION AND OFFERING, THE SHARES OF COMMON STOCK WILL TRADE AT OR ABOVE THE $10.00 PURCHASE PRICE. The independent appraisal will be updated prior to the completion of the conversion. If the appraised value changes to either below $24,799,010 or above $38,536,130, we will resolicit persons who submitted stock orders, and all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to subscribers with interest. See "The Conversion--Stock Pricing and Number of Shares to be Issued." In addition, we intend to contribute to a charitable foundation cash in an amount equal to 2% of the shares we sell to purchasers in the offering, PROVIDED the cash does not exceed $375,000 and common stock equal to 2% of the shares we sell to purchasers in the offering, PROVIDED the common stock contribution does not exceed 37,500 shares. The contribution of common stock to the charitable foundation will have the effect of reducing our pro forma valuation. See "Comparison of Valuation and Pro Forma Information with and without the Foundation." THE EXCHANGE OF EXISTING SHARES OF ALPENA BANCSHARES, INC. COMMON STOCK If you are currently a stockholder of Alpena Bancshares, Inc, your shares will be canceled at the conclusion of the offering and become the right to receive shares of common stock of First Federal of Northern Michigan Bancorp, Inc. The number of shares of common stock you receive will be based on an exchange ratio determined as of the closing of the conversion, which will depend upon our final appraised value. The number of shares you receive is not based on the market price of our currently outstanding shares. The following table shows how the exchange ratio will adjust, based on the valuation of First Federal of Northern Michigan Bancorp, Inc. and the number of shares of common stock issued in the offering. The table also shows the number of new shares a hypothetical owner of Alpena Bancshares, Inc. common stock would receive in exchange for 100 shares of Alpena Bancshares, Inc. common stock owned at the consummation of the conversion, depending on the number of shares of common stock issued in the offering. 10
NEW SHARES NEW SHARES TO BE EXCHANGED TOTAL SHARES OF TO BE NEW SHARES TO BE SOLD FOR EXISTING SHARES OF COMMON STOCK TO RECEIVED IN THIS OFFERING(1) ALPENA BANCSHARES, INC. BE ISSUED IN FOR 100 --------------------- --------------------- CONVERSION AND EXCHANGE EXISTING AMOUNT PERCENT AMOUNT PERCENT OFFERING RATIO SHARES ---------- --------- ---------- --------- --------------- ----------- ----------- Minimum............ 1,360,000 55.4% 1,092,701 44.6% 2,479,901 1.4783 147 Midpoint........... 1,600,000 55.4 1,285,530 44.6 2,917,530 1.7391 173 Maximum............ 1,840,000 55.4 1,478,360 44.6 3,355,160 2.0000 200 15% above Maximum.. 2,116,000 55.4 1,700,113 44.6 3,853,613 2.3000 230
- ---------- (1) Does not include 27,200, 32,000, 36,800 and 37,500 shares issued to the charitable foundation at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. If you own shares of Alpena Bancshares, Inc. common stock in a brokerage account in "street name," you do not need to take any action to exchange your shares of common stock. If you own shares in the form of Alpena Bancshares, Inc. stock certificates, you will receive a transmittal form with instructions to surrender your stock certificates after consummation of the conversion. New certificates of First Federal of Northern Michigan Bancorp, Inc. common stock will be mailed to you within five business days after the exchange agent receives properly executed transmittal forms and your Alpena Bancshares, Inc. stock certificates. YOU SHOULD NOT SUBMIT A STOCK CERTIFICATE UNTIL YOU RECEIVE A TRANSMITTAL FORM. No fractional shares of First Federal of Northern Michigan Bancorp, Inc. common stock will be issued to any public stockholder of Alpena Bancshares, Inc. For each fractional share that would otherwise be issued, First Federal of Northern Michigan Bancorp, Inc. will pay in cash an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10.00 per share subscription price. DISSENTERS' RIGHTS OF APPRAISAL Office of Thrift Supervision regulations generally provide that a stockholder of a federally chartered corporation that merges, consolidates or sells all or substantially all of its assets has the right to demand from the corporation payment of the fair or appraised value of his or her stock in the corporation, subject to specified procedural requirements. Current stockholders of Alpena Bancshares, Inc. have dissenters' rights in connection with the conversion under these regulations. See "Comparison of Stockholders' Rights for the Existing Stockholders of Alpena Bancshares, Inc. - Dissenters' Rights of Appraisal" on page 147. LIMITS ON HOW MUCH COMMON STOCK YOU MAY PURCHASE The minimum number of shares of common stock that may be purchased is 25 shares. IF YOU ARE NOT CURRENTLY AN ALPENA BANCSHARES, INC. STOCKHOLDER - No individual, or individual exercising subscription rights through a qualifying account held jointly, may purchase more than $150,000 (15,000 shares) of common stock. If any of the following persons purchases shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed $250,000 (25,000 shares) of common stock: o your spouse or relatives of you or your spouse living in your house; 11 o most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior position; or o other persons who may be your associates or persons acting in concert with you. See the detailed description of "acting in concert" and "associate" in "The Conversion--Limitations on Common Stock Purchases." IF YOU ARE CURRENTLY AN ALPENA BANCSHARES, INC. STOCKHOLDER - In addition to the above purchase limitations, there is an ownership limitation. Shares of common stock that you purchase in the offering individually and together with persons described above, PLUS any new shares you and they receive in the exchange for existing shares of Alpena Bancshares, Inc. common stock, may not exceed 5% of the total shares of common stock to be issued and outstanding after the completion of the conversion. Subject to Office of Thrift Supervision approval, we may increase or decrease the purchase and ownership limitations at any time. ISSUANCE OF SHARES OF OUR COMMON STOCK AND CONTRIBUTION OF CASH TO THE CHARITABLE FOUNDATION To further our commitment to our local community, we have made substantial charitable contributions over the years. In 2004 and 2003, these contributions totaled $26,000 and $31,000, respectively. As part of the conversion and offering, we intend to establish a charitable foundation which will be dedicated exclusively to supporting charitable causes and community development activities in the communities in which we operate and which will serve as our vehicle for charitable contributions in future periods. We intend to fund the foundation through a contribution of cash in an amount equal to 2% of the shares we sell to purchasers in the offering, PROVIDED the cash does not exceed $375,000, and common stock equal to 2% of the shares we sell to purchasers in the offering, PROVIDED the common stock contribution does not exceed 37,500 shares. As a result of the contribution of shares and cash to the charitable foundation, we will record an after-tax expense of up to $495,000 during the quarter in which the conversion is completed. We do not expect to make additional contributions to the charitable foundation subsequent to this initial funding. Issuing additional shares of common stock to the charitable foundation will: o dilute the voting interests of purchasers of shares of our common stock in the offering; and o result in an expense, and a reduction in earnings, during the quarter in which the contribution is made, equal to the full amount of the contribution to the charitable foundation, offset in part by a corresponding tax benefit. The establishment and funding of the charitable foundation has been approved by the boards of directors of Alpena Bancshares, Inc. and First Federal of Northern Michigan. See "Risk Factors--The Issuance of Shares to the Charitable Foundation Will Dilute Your Ownership Interests and Adversely Affect Net Income in Fiscal 2005," "Comparison of Valuation and 12 Pro Forma Information With and Without the Foundation" and "First Federal Community Foundation" at page __. HOW YOU MAY PURCHASE SHARES OF COMMON STOCK In the subscription offering and community offering, you may pay for your shares only by: (i) personal check, bank check or money order made payable directly to First Federal of Northern Michigan Bancorp, Inc.; or (ii) authorizing us to withdraw funds from the types of First Federal of Northern Michigan deposit accounts designated on the stock order form. First Federal of Northern Michigan is not permitted to lend funds to anyone for the purpose of purchasing shares of common stock in the offering. Additionally, you may not use a First Federal of Northern Michigan line of credit check or third party check to pay for shares of common stock. You can subscribe for shares of common stock in the offering by delivering a signed and completed original stock order form, together with full payment payable to First Federal of Northern Michigan Bancorp, Inc. or authorization to withdraw from one or more of your First Federal of Northern Michigan qualified deposit accounts, provided that we receive the stock order form before 10:00 a.m., Alpena, Michigan time, March 15, 2005, which is the end of the offering period. Checks will be deposited with First Federal of Northern Michigan or another insured depository institution upon receipt. We will pay interest at First Federal of Northern Michigan's passbook savings rate from the date funds are received until completion or termination of the conversion. Withdrawals from certificates of deposit to purchase shares of common stock in the offering may be made without incurring an early withdrawal penalty. If a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will earn interest at the current passbook rate subsequent to the withdrawal. All funds authorized for withdrawal from deposit accounts with First Federal of Northern Michigan must be in the accounts at the time the stock order is received. However, funds will not be withdrawn from the accounts until the completion of the offering and will earn interest at the applicable deposit account rate until that time. A hold will be placed on those funds when your stock order is received, making the designated funds unavailable to you. Additionally, you may not designate a withdrawal from First Federal of Northern Michigan accounts with check-writing privileges. Please provide a check instead, because we cannot place holds on checking accounts. If you request that we do so, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account(s). After we receive an order for shares of our common stock, the order cannot be cancelled or changed. By signing the stock order form, you are acknowledging both receipt of a Prospectus and that the shares of common stock are not deposits or savings accounts that are federally insured or otherwise guaranteed by First Federal of Northern Michigan or the federal government. You may be able to subscribe for shares of common stock using funds in your individual retirement account, or IRA. However, shares of common stock must be held in a self-directed retirement account, such as those offered by a brokerage firm. By regulation, First Federal of Northern Michigan's individual retirement accounts are not self-directed, so they cannot be invested in our common stock. If 13 you wish to use some or all of the funds in your First Federal of Northern Michigan individual retirement account, the applicable funds must be transferred to a self-directed account maintained by an independent trustee, such as a brokerage firm. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent trustee. Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the end of the offering period, for assistance with purchases using your individual retirement account or other retirement account that you may have. Whether you may use such funds for the purchase of shares in the stock offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held. DELIVERY OF STOCK CERTIFICATES Certificates representing shares of common stock sold in the offering will be mailed to the persons entitled thereto at the certificate registration address noted on the order form, as soon as practicable following consummation of the offering and receipt of all necessary regulatory approvals. IT IS POSSIBLE THAT, UNTIL CERTIFICATES FOR THE COMMON STOCK ARE DELIVERED TO PURCHASERS, PURCHASERS MIGHT NOT BE ABLE TO SELL THE SHARES OF COMMON STOCK WHICH THEY ORDERED, EVEN THOUGH THE COMMON STOCK WILL HAVE BEGUN TRADING. HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING We estimate net proceeds from the offering will be between $12,822,000 and $17,482,000, or $20,209,000 if the offering range is increased by 15%. First Federal of Northern Michigan Bancorp, Inc. intends to retain between $2.5 million and $6.6 million of the net proceeds, or $9.0 million if the offering range is increased by 15%. Approximately $10.3 million to $10.9 million of the net proceeds (or $11.2 million if the offering range is increased by 15%) will be invested in First Federal of Northern Michigan. A portion of the net proceeds retained by First Federal of Northern Michigan Bancorp, Inc. will be loaned to the employee stock ownership plan to fund its purchase of shares of common stock in the offering (between 110,976 shares and 150,144 shares, or 172,280 shares if the offering is increased by 15%). The employee stock ownership plan was established in connection with the 1994 mutual holding company reorganization of our mutual predecessor. As of September 30, 2004, there were no remaining unallocated shares in the plan. The remainder of the net proceeds will be used for general corporate purposes, including paying cash dividends and repurchasing shares of our common stock. Funds invested in First Federal of Northern Michigan will be used to support increased lending and new products and services. The net proceeds retained by First Federal of Northern Michigan Bancorp, Inc. and First Federal of Northern Michigan also may be used for future business expansion through acquisitions of branch offices or banking or financial services companies. Initially, a substantial portion of the net proceeds will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities. Please see the section of this Prospectus entitled "How We Intend to Use the Proceeds From the Offering" for more information on the proposed use of the proceeds from the offering. YOU MAY NOT SELL OR TRANSFER YOUR SUBSCRIPTION RIGHTS Office of Thrift Supervision regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or 14 state regulatory agencies, against anyone who we believe has sold or given away his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights. On the order form, you may not add the names of others for joint stock registration who do not have subscription rights or who qualify only in a lower subscription offering priority than you do, unless they were eligible to purchase shares of common stock in the subscription offering at your date of eligibility. In addition, the stock order form requires that you list all deposit accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation, if there is an oversubscription. DEADLINE FOR ORDERS OF COMMON STOCK If you wish to purchase shares of common stock, a properly completed original stock order form, together with full payment for the shares of common stock, must be received (not postmarked) by the Stock Information Center or our main office no later than 10:00 a.m., Alpena, Michigan time, on March 15, 2005, unless we extend this deadline. You may submit your stock order form by mail using the return envelope provided, by overnight courier to the indicated address on the stock order form, or by delivery to our Stock Information Center at our main office. Order forms may not be delivered to First Federal of Northern Michigan's branches (other than to our main office). Deliveries made to other than our main office will be deemed invalid and will not be accepted. Once submitted, your order is irrevocable unless the offering is terminated or extended beyond April 29, 2005 or the number of shares of common stock to be sold is increased to more than 2,116,000 shares or decreased to fewer than 1,360,000 shares. If the subscription offering and/or community offering extend beyond April 29, 2005, we will be required to resolicit subscriptions before proceeding with the offering, and all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest. Although we will make reasonable attempts to provide a Prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 10:00 a.m., Alpena, Michigan time, on March 15, 2005, whether or not we have been able to locate each person entitled to subscription rights. STEPS WE MAY TAKE IF WE DO NOT RECEIVE ORDERS FOR THE MINIMUM NUMBER OF SHARES If we do not receive orders for at least 1,360,000 shares of common stock, we may take several steps in order to issue the minimum number of shares of common stock in the offering range. Specifically, we may: (i) increase the purchase and ownership limitations; and (ii) seek regulatory approval to extend the offering beyond the April 29, 2005 expiration date, provided that any such extension will require us to resolicit subscriptions received in the offering. PURCHASES BY OFFICERS AND DIRECTORS We expect our directors and executive officers, together with their associates, to subscribe for 30,000 shares of common stock in the offering. The purchase price paid by them will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Following the conversion, our directors and executive officers, together with their associates, are expected to own 121,116 shares of common stock, or 4.1% of our total outstanding shares of common stock at the midpoint of the offering range (including the shares issued to the charitable foundation). 15 BENEFITS TO MANAGEMENT AND POTENTIAL DILUTION TO STOCKHOLDERS RESULTING FROM THE CONVERSION Our tax-qualified employee stock ownership plan expects to purchase up to 8% of the shares of common stock we sell in the offering (including shares we issue to the charitable foundation), or 150,144 shares of common stock, assuming we sell the maximum number of the shares proposed to be sold. If we receive orders for more shares of common stock than the maximum of the offering range, the employee stock ownership plan will have first priority to purchase shares over this maximum, up to a total of 8% of the shares of common stock sold in the offering (including the shares we issue to the charitable foundation). We reserve the right to purchase shares of common stock in the open market following the offering in order to fund the employee stock ownership plan. This plan is a tax-qualified retirement plan for the benefit of all our employees which was established in 1994, and which as of September 30, 2004, had no remaining unallocated shares within the plan. Assuming the employee stock ownership plan purchases 150,144 shares in the offering, we will recognize additional compensation expense of $1.5 million (or $991,000 after tax) over a 15-year period, assuming the loan to the employee stock ownership plan has a 15 year term and the shares of common stock have a fair market value of $10.00 per share for the full 15-year period. If, in the future, the shares of common stock have a fair market value greater or less than $10.00, the compensation expense will increase or decrease accordingly. We also intend to implement a stock-based recognition and retention plan and a stock option plan no earlier than six months after completion of the conversion. Stockholder approval of these plans will be required. If adopted within 12 months following the completion of the conversion, the stock recognition and retention plan will reserve a number of shares equal to 4% of the shares sold in the offering (including the shares we issue to the charitable foundation), or up to 75,072 shares of common stock at the maximum of the offering range, for awards to key employees and directors, at no cost to the recipients. If the shares of common stock awarded under the stock recognition and retention plan come from authorized but unissued shares of common stock, stockholders would experience dilution of up to approximately 2.2% in their ownership interest in First Federal of Northern Michigan Bancorp, Inc. If adopted within 12 months following the completion of the conversion, the stock option plan will reserve a number of shares equal to 10% of the shares of common stock sold in the offering, or up to 187,680 shares of common stock at the maximum of the offering range (including shares we issue to the charitable foundation), for key employees and directors upon their exercise. If the shares of common stock issued upon the exercise of options come from authorized but unissued shares of common stock, stockholders would experience dilution of approximately 5.3% in their ownership interest in First Federal of Northern Michigan Bancorp, Inc. Awards made under these plans would be subject to vesting over a period of years. If the stock recognition and retention plan or stock option plan are adopted more than one year after the completion of the conversion, awards or grants under such plans may exceed 4% and 10%, respectively, of the shares issued in the offering. The following table summarizes the number of shares of common stock and the aggregate dollar value of grants that are expected under the new stock recognition and retention plan and the new stock option plan as a result of the conversion. The table also shows the dilution to stockholders if all such shares are issued from authorized but unissued shares, instead of shares purchased in the open market. A portion of the stock grants shown in the table below may be made to non-management employees. 16
NUMBER OF SHARES TO BE GRANTED OR PURCHASED VALUE OF GRANTS (1) ------------------------------------------- --------------------------- DILUTION AS A RESULTING PERCENTAGE FROM AT AT OF COMMON ISSUANCE OF AT AT MINIMUM MAXIMUM STOCK TO BE SHARES FOR MINIMUM MAXIMUM OF OFFERING OF OFFERING ISSUED IN THE STOCK BENEFIT OF OFFERING OF OFFERING RANGE RANGE OFFERING (2) PLANS (3) RANGE RANGE ----------- ----------- -------------- ------------- ------------- ----------- (DOLLARS IN THOUSANDS) Employee stock ownership plan...... 110,976 150,144 8.1% 4.3% $ 1,110 $ 1,472 Recognition and retention plan..... 55,488 75,072 4.1 2.2 555 736 Stock option plan.................. 138,720 187,680 10.2 5.3 -- -- ----------- ----------- -------------- ------------- ------------- ----------- Total........................... 299,200 404,800 22.4% 11.8% $ 1,665 $ 2,208 =========== =========== ============== ============= ============= ===========
(1) The actual value of restricted stock grants will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $3.85 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 0%; an expected option life of 10 years; a risk free interest rate of 4.27%; and a volatility rate of 14.89% based on an index of publicly traded thrift institutions. The actual expense of the stock option plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. (2) Percentage does not reflect shares to be issued to the charitable foundation. The stock option plan and recognition and retention plan may award a greater number of options and shares, respectively, if the plans are adopted more than one year after the completion of the conversion, although such plans may remain subject to supervisory restrictions. (3) Calculated at the maximum of the offering range. The value of the shares awarded under the stock recognition and retention plan is assumed to be the price of First Federal of Northern Michigan Bancorp, Inc.'s common stock at the time the shares are awarded. The stock recognition and retention plan is subject to stockholder approval, and cannot be implemented until at least six months after the offering. The following table presents the total value of all shares that would be available for award and issuance under the stock recognition and retention plan, assuming the shares are awarded when the market price of our common stock ranges from $8.00 per share to $14.00 per share.
86,140 SHARES AWARDED 55,488 SHARES AWARDED 65,280 SHARES AWARDED 75,072 SHARES AWARDED AT MAXIMUM OF RANGE, SHARE PRICE AT MINIMUM OF RANGE AT MIDPOINT OF RANGE AT MAXIMUM OF RANGE AS ADJUSTED - ------------------- ----------------------- ----------------------- ----------------------- ----------------------- (Dollars in thousands) $ 8.00 $ 444 $ 522 $ 601 $ 689 $10.00 555 653 751 861 $12.00 666 783 901 1,034 $14.00 777 914 1,051 1,206
The grant-date fair value of the options granted under the stock option plan will be based in part on the price of shares of common stock of First Federal of Northern Michigan Bancorp, Inc. at the time the options are granted. The stock option plan is subject to stockholder approval and cannot be implemented until at least six months after the completion of the conversion. The value will also depend on the various assumptions utilized in the option pricing model ultimately adopted. The following table presents the total estimated value of the options to be available for grant under the stock option plan, assuming the market price and exercise price for the stock options are equal and the range of market prices for the shares are $8.00 per share to $14.00 per share. 17
215,350 OPTIONS AT GRANT-DATE FAIR 138,720 OPTIONS AT 163,200 OPTIONS AT 187,680 OPTIONS AT MAXIMUM OF EXERCISE PRICE VALUE PER OPTION MINIMUM OF RANGE MIDPOINT OF RANGE MAXIMUM OF RANGE RANGE, ASADJUSTED - ------------------ ------------------ -------------------- -------------------- -------------------- -------------------- $ 8.00 $ 3.08 $ 427,258 $ 502,656 $ 578,054 $ 663,278 10.00 3.85 534,072 628,320 722,568 829,097 12.00 4.62 640,886 753,984 867,081 994,917 14.00 5.39 747,701 879,648 1,011,595 1,160,736
The tables presented above are provided for informational purposes only. There can be no assurance that our stock price will not trade below $10.00 per share. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the section entitled "Risk Factors" beginning on page 20. MARKET FOR COMMON STOCK Existing publicly held shares of Alpena Bancshares, Inc.'s common stock trade over the counter on the OTC Bulletin Board under the symbol "ALPN." Upon completion of the conversion, the new shares of common stock of First Federal of Northern Michigan Bancorp, Inc. will replace existing shares, and we expect the new shares will be traded on the Nasdaq National Market under the symbol "FFNM." We will try to get at least four market makers to make a market in our common stock. Ryan Beck & Co., Inc. has advised us that it intends to make a market in our common stock following the offering, but it is under no obligation to do so. While we will attempt before completion of the offering to obtain commitments from at least three other broker-dealers to make a market in our common stock, there can be no assurance that we will be successful in obtaining such commitments. If we cannot obtain at least four broker-dealers to make a market in our common stock, we could be de-listed from the Nasdaq National Market. OUR DIVIDEND POLICY Alpena Bancshares, Inc. currently pays a quarterly cash dividend of $0.10 per share, which equals $.40 per share on an annualized basis. After the conversion, we intend to continue to pay cash dividends on a quarterly basis. After adjustment for the exchange ratio, we expect the quarterly dividends to equal $.07, $.06, $.05 and $.04 per share at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, which represents an annual dividend yield of 2.8%, 2.4%, 2.0% and 1.6%, at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, based upon a price of $10.00 per share. The amount of dividends that we intend to pay after the conversion will preserve the dividend amount that Alpena Bancshares, Inc. stockholders currently receive, as adjusted to reflect the exchange ratio. However, the dividend rate and the continued payment of dividends will depend on a number of factors, including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurance can be given that we will continue to pay dividends or that they will not be reduced or eliminated in the future. See "Selected Consolidated Financial and Other Data of Alpena Bancshares, Inc. and Subsidiary" and "Market for the Common Stock" for information regarding our historical dividend payments. TAX CONSEQUENCES As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to Alpena Bancshares, M.H.C., Alpena Bancshares, Inc., First Federal of Northern Michigan, persons eligible to subscribe in the subscription offering, or existing stockholders of Alpena Bancshares, Inc. Existing stockholders of Alpena Bancshares, Inc. who receive cash in lieu of fractional 18 share interests in new shares of First Federal of Northern Michigan Bancorp, Inc. will recognize a gain or loss equal to the difference between the cash received and the tax basis of the fractional share. CONDITIONS TO COMPLETION OF THE CONVERSION We cannot complete the conversion and offering unless: o The plan of conversion and reorganization is approved by at least A MAJORITY OF VOTES ELIGIBLE to be cast by members of Alpena Bancshares, M.H.C. (depositors and certain borrowers of First Federal of Northern Michigan); o The plan of conversion and reorganization is approved by at least TWO-THIRDS OF THE OUTSTANDING shares of common stock of Alpena Bancshares, Inc.; o The plan of conversion and reorganization is approved by at least A MAJORITY OF THE OUTSTANDING shares of common stock of Alpena Bancshares, Inc., excluding those shares held by Alpena Bancshares, M.H.C.; o We sell at least the minimum number of shares of common stock offered; and o We receive the final approval of the Office of Thrift Supervision to complete the conversion and offering. Alpena Bancshares, M.H.C. intends to vote its ownership interest in favor of the plan of conversion and reorganization. At September 30, 2004, Alpena Bancshares, M.H.C. owned 55.4% of the outstanding shares of common stock of Alpena Bancshares, Inc. The directors and executive officers of Alpena Bancshares, Inc. and their affiliates owned 53,135 shares of Alpena Bancshares, Inc., or 3.2% of the outstanding shares of common stock. They intend to vote those shares in favor of the plan of conversion and reorganization. DECREASE IN STOCKHOLDERS' RIGHTS FOR EXISTING STOCKHOLDERS OF ALPENA BANCSHARES, INC. As a result of the conversion, existing stockholders of Alpena Bancshares, Inc. will become stockholders of First Federal of Northern Michigan Bancorp, Inc.. Some rights of stockholders of the new Maryland corporation will be reduced compared to the rights stockholders currently have. The reduction in stockholder rights results from differences between the federal and Maryland charters and bylaws, and from distinctions between Maryland and federal law. Many of the differences in stockholder rights under the Maryland articles of incorporation and bylaws are not mandated by Maryland law but have been chosen by management as being in the best interests of First Federal of Northern Michigan Bancorp, Inc. and all of its stockholders. The differences in stockholder rights include the following: (i) approval by at least 80% of outstanding shares required to remove a director for cause; (ii) greater lead time required for stockholders to submit proposals for new business or nominate directors; (iii) approval by at least 80% of outstanding shares required to amend the articles of incorporation and bylaws; (iv) a residency requirement for directors; and (v) approval by at least 80% of outstanding shares required to approve business combinations involving an interested stockholder. See "Comparison of Stockholders' Rights For Existing Stockholders of Alpena Bancshares, Inc." for a discussion of these differences. HOW YOU CAN OBTAIN ADDITIONAL INFORMATION Our branch office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, please call or visit our Stock 19 Information Center, located at 100 South Second Avenue, Alpena, Michigan, at ____________, Monday through Friday between 9:30 a.m. and 4:00 p.m., Alpena, Michigan time. The Stock Information Center will be closed weekends and bank holidays. TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION DATE OF MARCH 15, 2005 IN ACCORDANCE WITH FEDERAL LAW, NO PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR TO MARCH 15, 2005 OR HAND-DELIVERED ANY LATER THAN TWO DAYS PRIOR TO MARCH 15, 2005. 20 RISK FACTORS You should consider carefully the following risk factors in evaluating an investment in the shares of common stock. RISKS RELATED TO OUR BUSINESS OUR COMMERCIAL REAL ESTATE AND COMMERCIAL LOANS EXPOSE US TO INCREASED CREDIT RISKS AND MAY REQUIRE US TO INCREASE OUR PROVISIONS FOR LOAN LOSSES. At September 30, 2004, our portfolio of commercial real estate loans totaled $26.5 million, or 14.0% of total loans, and our portfolio of commercial loans totaled $29.0 million, or 15.3% of total loans. Commercial real estate and commercial loans have increased as a percentage of our total loan portfolio as we have originated these loans for retention in our portfolio and sold into the secondary mortgage market many of our one- to four-family fixed-rate residential real estate loans. We plan to continue to originate commercial real estate and commercial loans and retain them in our portfolio. Commercial real estate and commercial loans generally have greater credit risk than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful business operations of the borrowers. These loans typically have larger loan balances compared to one- to four-family residential mortgage loans. Many of our borrowers also have more than one commercial real estate or commercial loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Finally, if we foreclose on a commercial real estate or commercial loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. Because we plan to continue to increase our originations of commercial real estate and commercial loans, it may be necessary to increase the level of our allowance for loan losses because of the increased risk characteristics associated with these types of loans. Any such increase to our allowance for loan losses could adversely affect our earnings. OUR CONCENTRATION OF LOANS IN OUR PRIMARY MARKET AREA MAY INCREASE OUR RISK. Our success depends primarily on the general economic conditions in Alpena, Alcona, Antrim, Charlevoix, Cheboygan, Iosco, Montmorency, Oscoda, Otsego and Presque Isle Counties, Michigan where we primarily conduct business. Unlike larger banks that are more geographically diversified, we provide banking and financial services to customers primarily in these areas. The local economic conditions in our market area have a significant impact on our loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. Unemployment rates in our primary market area are generally higher than state and national levels. Our market area is also sparsely populated, has experienced slow population growth, and has limited industrial development compared to more urban and suburban areas. The population of Alpena (city and township), from which the majority of our deposits are 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, was approximately 187,000 in 2004, an increase of 2.2% from 2000, and is expected to increase by 2.1% through 2009. Per capita income in our market area in 2004 was 15.4% lower than the national level and 16.7% lower than Michigan as a whole. Growth in per capita income is projected to increase only modestly in our primary market area over the next five years. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our 21 control would affect economic conditions in our market area and could adversely affect our financial condition and results of operations. THE SIZE OF OUR BRANCH NETWORK HAS INCREASED OUR EXPENSES AND MAY CONTINUE TO REDUCE OUR PROFITABILITY IN THE NEAR TERM. At September 30, 2004, we operated ten full-service branch offices, including two full-service branch offices acquired in 2004. We believe our ratio of branch offices to total assets is higher than most of our peer institutions. As a result of this extensive branch network, including the expenses associated with our new offices, our efficiency ratio, which is the ratio of non-interest expense to net interest income and other income, has been high. Our efficiency ratio has increased from 76.04% for the year ended December 31, 2001 to 95.34% for the nine months ended September 30, 2004. We expect it will take some time for our branch network to generate sufficient loans and deposits to produce enough income to offset our ongoing expenses, some of which, like compensation and occupancy costs, are substantially fixed. CHANGES IN MARKET INTEREST RATES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Our financial condition and results of operations are significantly affected by changes in market interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income that we earn on our interest-earning assets (consisting primarily of loans and securities) and the interest expense that we pay on our interest-bearing liabilities (consisting primarily of deposits). As of September 30, 2004, loans and securities represented 90.4% of our total assets, and deposits and borrowings represented 98.8% of our liabilities. As a result, for the nine months ended September 30, 2004, interest income represented 73.1% of our gross revenues (interest income and non-interest income), and interest expense represented 36.0% of our total expenses (interest expense and non-interest expense). Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would result in a decrease in our net interest income. We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates often result in increased prepayments of loans and mortgage-related securities, as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments in loans or other investments that have interest rates that are comparable to the interest rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable rate loans. As of September 30, 2004, we were servicing loans sold to third parties totaling $140.4 million which had a book value, at such date, of $898,000. 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. Changes in interest rates also affect the current market value of our interest-earning assets, and in particular our securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. At September 30, 2004, our agency securities and mortgage-backed securities available for sale totaled $42.9 million. Unrealized gains on securities available for sale, net of tax, amounted to $133,700 for the nine months ended September 30, 2004 and are reported as a separate component of 22 stockholders' equity. However, decreases in the fair value of securities available for sale in future periods could have an adverse effect on stockholders' equity. Management evaluates interest rate sensitivity using a model that estimates the change in our net portfolio value over a range of interest rate scenarios. Net portfolio value is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. At September 30, 2004, in the event of an immediate 200 basis point increase in interest rates, we would be expected to experience a 20% decrease in net portfolio value. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Management of Interest Rate Risk" for further information on the potential effects of interest rate risk on our financial condition. STRONG COMPETITION WITHIN OUR MARKET AREA MAY LIMIT OUR GROWTH AND PROFITABILITY. Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we have and offer certain services that we do not or cannot provide. Within our market area, we hold only 6.2% of all bank and thrift deposits; our ten full-service offices compare with 106 branch offices of other financial institutions in our market area. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by our competition may limit our ability to increase our interest earning assets. For additional information, see "Business of Alpena Bancshares, Inc. and First Federal of Northern Michigan--Market Area and Competition." RISKS RELATED TO THE CONVERSION THE FUTURE PRICE OF THE SHARES OF COMMON STOCK MAY BE LESS THAN THE PURCHASE PRICE IN THE OFFERING. We cannot assure you that if you purchase shares of common stock in the offering you will be able to sell them later at or above the $10.00 purchase price in the offering. In several cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the price at which such shares were sold in the offering conducted by those companies. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The appraisal is based on estimates and projections of a number of matters, all of which are subject to change from time to time. After our shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, investor perceptions of First Federal of Northern Michigan Bancorp, Inc. and the outlook for the financial institutions industry in general. OUR FAILURE TO UTILIZE EFFECTIVELY THE NET PROCEEDS OF THE OFFERING COULD REDUCE OUR PROFITABILITY AND OUR RETURN ON STOCKHOLDERS' EQUITY. First Federal of Northern Michigan Bancorp, Inc. intends to contribute between $10.3 million and $10.9 million of the net proceeds of the offering (or $11.2 million at the adjusted maximum of the offering range) to First Federal of Northern Michigan. First Federal of Northern Michigan Bancorp, Inc. may use the remaining net proceeds to finance the acquisition of other financial institutions or financial services companies, pay dividends to stockholders, repurchase shares of common stock, purchase investment securities, or for other general corporate purposes. First Federal of Northern Michigan 23 Bancorp, Inc. expects to use a portion of the net proceeds to fund the purchase of shares of common stock in the offering by the employee stock ownership plan. First Federal of Northern Michigan may use the proceeds it receives to acquire new branches, acquire financial institutions or financial services companies, fund new loans, purchase investment securities, or for general corporate purposes. We have not allocated specific amounts of the proceeds for any of these purposes, and we will have significant flexibility in determining how much of the net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively could reduce our profitability. Additionally, net income divided by average stockholders' equity, known as "return on equity," is a ratio many investors use to compare the performance of a financial institution to its peers. Our return on equity ratio for the twelve months ended September 30, 2004 was 3.44%, compared to an average of 8.38% for all public companies over the same period. We expect our return on equity to decrease as compared to our performance in recent years until we are able to utilize effectively the additional capital raised in the offering. Until we can increase our net interest income and non-interest income, we expect our return on equity to be below the industry average, which may negatively affect the value of our common stock. THE OWNERSHIP INTEREST OF MANAGEMENT AND EMPLOYEES COULD ENABLE INSIDERS TO PREVENT A MERGER THAT MAY PROVIDE STOCKHOLDERS A PREMIUM FOR THEIR SHARES. The shares of common stock that our directors and officers intend to purchase in the conversion, when combined with the shares that they will receive in the exchange is expected to result in management and the board controlling approximately 4% of our outstanding shares of common stock. These shares, when combined with the 8% of the shares expected to be purchased by our employee stock ownership plan, will result in management and employees controlling a significant percentage of our common stock. If these individuals were to act together, they could have significant influence over the outcome of any stockholder vote. This voting power may discourage a potential sale of First Federal of Northern Michigan Bancorp, Inc. that our stockholders may desire. In addition, the total voting power of management and employees could, in the future, exceed 20% of our outstanding shares of common stock if a stock option plan or a stock recognition and retention plan is adopted in the future. That level would enable management and employees as a group to defeat any stockholder matter that requires an 80% vote, including removal of directors, approval of certain business combinations with interested stockholders and certain amendments to our articles of incorporation and bylaws. THERE MAY BE A LIMITED MARKET FOR OUR COMMON STOCK, WHICH MAY LOWER OUR STOCK PRICE. We have applied to list our shares of common stock for trading on the Nasdaq National Market. We cannot guarantee that the shares will be regularly traded. If an active trading market for our common stock does not develop, you may not be able to sell all of your shares of common stock on short notice, and the sale of a large number of shares at one time could temporarily depress the market price. THE ISSUANCE OF SHARES AND THE CONTRIBUTION OF CASH TO THE CHARITABLE FOUNDATION WILL DILUTE YOUR OWNERSHIP INTERESTS AND ADVERSELY AFFECT NET INCOME IN FISCAL 2005. We intend to establish a charitable foundation in connection with the conversion and intend to make a contribution of cash in an amount equal to 2% of the shares we sell to purchasers in the offering, PROVIDED the cash does not exceed $375,000 and common stock equal to 2% of the shares we sell to purchasers in the offering, PROVIDED the common stock contribution does not exceed 37,500 shares. This contribution will have an adverse effect on our net income for the quarter and year in which we make the 24 contribution. The after-tax expense of the contribution will reduce net income in our 2005 fiscal year by up to approximately $495,000. Persons purchasing shares in the offering will have their ownership and voting interests in First Federal of Northern Michigan Bancorp, Inc. diluted by 1.1% (at the midpoint of the offering range) due to the issuance of additional shares of common stock to the charitable foundation. OUR CONTRIBUTION TO THE CHARITABLE FOUNDATION MAY NOT BE TAX DEDUCTIBLE, WHICH COULD REDUCE OUR PROFITS. We believe that the contribution to the charitable foundation, valued at up to $750,000, will be deductible for federal income tax purposes. However, we cannot assure you that the Internal Revenue Service will grant tax-exempt status to the charitable foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. In addition, even if the contribution is tax deductible, under federal tax regulations, we are permitted to deduct only up to 10% of our net income for charitable contributions; accordingly, we may not have sufficient profits to be able to use the deduction fully. THE IMPLEMENTATION OF STOCK-BASED BENEFIT PLANS MAY DILUTE YOUR OWNERSHIP INTEREST. We intend to adopt a stock option plan and a recognition and retention plan following the offering, subject to receipt of stockholder approval. These stock-based benefit plans may be funded either through open market purchases or from the issuance of authorized but unissued shares of common stock of First Federal of Northern Michigan Bancorp, Inc. While our intention is to fund these plans through open market purchases, stockholders will experience a reduction or dilution in ownership interest of approximately 7.5% (approximately 5.3% dilution for the stock option plan and approximately 2.2% dilution for the recognition and retention plan) in the event newly issued shares are used to fund stock option exercises and stock awards equal to 10% and 4%, respectively, of the shares sold in the offering, including shares contributed to the charitable foundation. OUR RECOGNITION AND RETENTION PLAN WILL INCREASE OUR COSTS, WHICH WILL REDUCE OUR PROFITABILITY AND STOCKHOLDERS' EQUITY. We intend to implement a recognition and retention plan after the conversion, subject to receipt of stockholder approval. Under this plan, our officers and directors may be awarded, at no cost to them, shares of common stock in an aggregate amount equal to 4% of the shares of common stock sold in the offering (including shares contributed to the charitable foundation) if the plan is adopted within 12 months after completion of the conversion, and may exceed 4% of the shares sold in the offering (including shares issued to the charitable foundation) if adopted more than 12 months after the completion of the conversion. The shares of common stock awarded under the recognition and retention plan will be expensed by us over their vesting period at the fair market value of the shares on the date they are awarded. The recognition and retention plan cannot be implemented until at least six months after the completion of the conversion. If the plan is adopted within 12 months after the completion of the conversion, it will be subject to Office of Thrift Supervision regulations, including restrictions on accelerated vesting in the event of retirement, maximum awards to individual officers and directors, and minimum vesting over five years. If the shares of common stock to be awarded under the plan are repurchased in the open market (rather than issued directly from authorized but unissued shares by First Federal of Northern Michigan Bancorp, Inc.) and cost the same as the purchase price in the offering, the reduction to stockholders' equity from the plan would be between $554,800 at the minimum of the offering range and $861,400 at the adjusted maximum of the offering range. To the extent we repurchase shares of common stock in the open market to fund the recognition and retention plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to stockholders' equity would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders' equity would be less than the range described above. 25 VARIOUS FACTORS MAY MAKE TAKEOVER ATTEMPTS MORE DIFFICULT TO ACHIEVE. Our board of directors has no current intention to sell control of First Federal of Northern Michigan Bancorp, Inc. Provisions of our articles of incorporation and bylaws, federal regulations, Maryland law and various other factors may make it more difficult for companies or persons to acquire control of First Federal of Northern Michigan Bancorp, Inc. without the consent of our board of directors. You may want a takeover attempt to succeed because, for example, a potential acquiror could offer a premium over the then prevailing price of our common stock. The factors that may discourage takeover attempts or make them more difficult include: o OFFICE OF THRIFT SUPERVISION REGULATIONS. Office of Thrift Supervision regulations prohibit, for three years following the completion of a conversion, the direct or indirect acquisition of more than 10% of any class of equity security of a converted savings institution without the prior approval of the Office of Thrift Supervision. o ARTICLES OF INCORPORATION AND STATUTORY PROVISIONS. Provisions of the articles of incorporation and bylaws of First Federal of Northern Michigan Bancorp, Inc. and Maryland law may make it more difficult and expensive to pursue a takeover attempt which management opposes, even if the takeover is favored by a majority of our stockholders. These provisions also would make it more difficult to remove our current board of directors or management, or to elect new directors. Specifically, our articles of incorporation provide that certain mergers must be approved by stockholders owning 80% of our shares of common stock unless the transaction has been approved by a majority of the disinterested directors or certain fair price and procedure requirements have been satisfied. Additional provisions include limitations on voting rights of beneficial owners of more than 10% of our common stock, the election of directors to staggered terms of three years and not permitting cumulative voting in the election of directors. Our bylaws also contain provisions regarding the timing and content of stockholder proposals and nominations and qualification for service on the board of directors. o REQUIRED CHANGE IN CONTROL PAYMENTS AND ISSUANCE OF STOCK OPTIONS. We intend to enter into change in control agreements with certain executive officers, which will require payments to be made to them in the event their employment is terminated following a change in control of First Federal of Northern Michigan Bancorp, Inc. or First Federal of Northern Michigan. We also intend to issue stock options to key employees and directors that will require payments to them in connection with a change in control of First Federal of Northern Michigan Bancorp, Inc. These payments may have the effect of increasing the costs of acquiring First Federal of Northern Michigan Bancorp, Inc., thereby discouraging future takeover attempts. THE RIGHTS OF EXISTING STOCKHOLDERS OF ALPENA BANCSHARES, INC. WILL BE REDUCED UNDER FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.'S MARYLAND ARTICLES OF INCORPORATION AND BYLAWS. As a result of the conversion, existing stockholders of Alpena Bancshares, Inc. will become stockholders of First Federal of Northern Michigan Bancorp, Inc. Some rights of stockholders of the new Maryland corporation will be reduced compared to the rights stockholders currently have. Many of the differences in stockholder rights under the Maryland articles of incorporation and bylaws, while not mandated by Maryland law, are permitted and have been chosen by management as being in the best interests of First Federal of Northern Michigan Bancorp, Inc. and all of its stockholders. 26 For example, current stockholders must submit nominations for election of directors at an annual meeting of stockholders and any new business to be taken up at such a meeting by filing the proposal in writing with Alpena Bancshares, Inc. at least five days before the date of any such meeting. However, First Federal of Northern Michigan Bancorp, Inc.'s Maryland bylaws generally provide that any stockholder desiring to make a nomination for the election of directors or a proposal for new business at an annual meeting of stockholders must submit written notice to First Federal of Northern Michigan Bancorp, Inc. at least 90 days prior to the anniversary date of the mailing of proxy materials in connection with the immediately preceding annual meeting of stockholders. Similarly, under the current federal charter, special meetings of stockholders may be called by the holders of not less than one-tenth of the outstanding capital stock entitled to vote at the meeting. However, First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation provide that special meetings of the stockholders of First Federal of Northern Michigan Bancorp, Inc. may be called by the president or by a majority of the whole board. In addition, the Maryland bylaws provide that special meetings of stockholders shall be called on the written request of stockholders entitled to cast at least a majority of all votes. See "Comparison of Stockholders' Rights for Existing Stockholders of Alpena Bancshares, Inc." for a discussion of these differences. 27 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF ALPENA BANCSHARES, INC. AND SUBSIDIARY The summary financial information presented below is derived in part from the consolidated financial statements of Alpena Bancshares, Inc. The following is only a summary and you should read it in conjunction with the financial statements and notes beginning on page F-1. The information at December 31, 2003 and 2002 and for the years ended December 31, 2003 and 2002 is derived in part from the audited consolidated financial statements of Alpena Bancshares, Inc. that appear in this prospectus. The information for the years ended December 31, 2001, 2000 and 1999 is derived in part from audited consolidated financial statements that do not appear in this prospectus. The operating data for the nine months ended September 30, 2004 and 2003 and the financial condition data at September 30, 2004 were not audited, but, in the opinion of management, reflect all adjustments necessary for a fair presentation. No adjustments were made other than normal recurring entries. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results of operations that may be expected for the entire year.
AT AT DECEMBER 31, SEPTEMBER ------------------------------------------------------------- 30, 2004 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) SELECTED FINANCIAL CONDITION DATA: Total assets...................... $ 254,476 $ 223,923 $ 228,808 $ 241,472 $ 267,009 $ 263,549 Loans receivable, net............. 187,099 163,460 151,341 176,146 218,957 223,866 Loans held-for-sale............... 656 931 542 1,891 850 N/A Investment securities............. 42,880 34,670 46,944 23,212 19,719 19,049 Deposits.......................... 182,428 151,702 156,092 166,538 162,771 156,393 Borrowings........................ 47,303 47,159 48,414 52,120 82,435 85,872 Stockholders' equity.............. 21,936 21,951 21,747 20,597 19,471 18,805 NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ----------------------- ------------------------------------------------------------- 2004 2003 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) SELECTED OPERATING DATA: Interest income................... $ 9,798 $ 10,125 $ 13,350 $ 14,499 $ 17,586 $ 18,654 $ 17,059 Interest expense.................. 4,571 4,931 6,455 8,342 11,439 12,558 11,726 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income............ 5,227 5,194 6,895 6,157 6,147 6,096 5,333 Provision for loan losses......... 214 238 267 415 255 280 120 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses.... 5,013 4,956 6,628 5,742 5,892 5,816 5,213 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Non-interest income............... 3,599 3,892 5,426 2,385 2,205 2,376 1,040 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Non-interest expense.............. 8,113 7,663 10,327 7,072 6,166 5,033 4,877 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before income tax expense.. 499 1,185 1,727 1,055 1,931 3,159 1,376 Income tax expense................ 167 394 518 285 646 1,035 452 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income..................... $ 332 $ 791 $ 1,209 $ 770 $ 1,285 $ 2,124 $ 924 ========== ========== ========== ========== ========== ========== ==========
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AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, AT OR FOR THE YEARS ENDED DECEMBER 31, ------------------ ------------------------------------------------ 2004 2003 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- -------- -------- SELECTED FINANCIAL RATIOS AND OTHER DATA: PERFORMANCE RATIOS: Return on assets (ratio of net income to average total assets) (1)............................... 0.18% 0.46% 0.53% 0.33% 0.51% 0.82% 0.37% Return on equity (ratio of net income to average equity) (1)..................................... 2.03% 4.81% 5.52% 3.68% 6.52% 11.37% 5.46% Average interest rate spread (1) (2)............... 2.87% 2.99% 3.00% 2.50% 2.37% 2.49% 2.36% Dividend payout ratio.............................. 61.23% 35.04% 30.36% 47.01% 28.02% 17.75% 46.10% Dividends per share (3)............................ .275 .375 .50 .50 .50 .525 .60 Net interest margin (1)(4)......................... 3.09% 3.27% 3.26% 2.78% 2.60% 2.65% 2.50% Efficiency ratio (5)............................... 95.34% 87.19% 88.02% 87.54% 76.04% 76.29% 79.19% Non-interest expense to average total assets (1)... 4.45% 4.47% 4.53% 3.01% 2.47% 2.05% 2.04% Average interest-earning assets to average interest-bearing liabilities.................... 108.00% 108.45% 108.69% 107.42% 104.66% 103.20% 102.75% ASSET QUALITY RATIOS: Non-performing assets to total assets.............. 0.69% 0.77% 1.04% 0.70% 0.36% 0.32% 0.32% Non-performing loans to total loans................ 0.94% 1.09% 1.30% 0.97% 0.38% 0.32% 0.34% Allowance for loan losses to non-performing loans.. 65.43% 57.99% 48.88% 62.76% 101.92% 92.06% 59.65% Allowance for loan losses to total loans........... 0.62% 0.63% 0.63% 0.61% 0.39% 0.30% 0.20% CAPITAL RATIOS: Equity to total assets at end of period............ 8.62% 9.45% 9.80% 9.50% 8.53% 7.29% 7.14% Average equity to average assets................... 8.97% 9.63% 9.62% 8.90% 7.88% 7.24% 6.77% Risk-based capital ratio (bank only)............... 11.13% 11.68% 11.96% 15.95% 13.11% 10.69% 10.66% OTHER DATA: Number of full service offices..................... 10 8 8 9 9 8 6
- ------------------ (1) Ratios for the nine months ended September 30, 2004 and 2003 are annualized. (2) The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted- average cost of interest-bearing liabilities for the period. (3) The following table sets forth aggregate cash dividends paid per period, which is calculated by multiplying the dividend declared per share by the number of shares outstanding as of the applicable record date:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31, ---------------------- ------------------------------------------------------------ 2004 2003 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Dividends paid to public stockholders.. $ 203 $ 277 $ 367 $ 362 $ 360 $ 377 $ 426 Dividends paid to Alpena Bancshares, M.H.C.................. --- --- --- --- --- --- --- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total dividends paid... $ 203 $ 277 $ 367 $ 362 $ 360 $ 377 $ 426 ========== ========== ========== ========== ========== ========== ==========
Payments listed above exclude cash dividends waived by Alpena Bancshares, M.H.C. of $253,000 and 345,000 during each of the nine-month periods ending September 30, 2004 and 2003, and $460,000, $460,000, $460,000, $483,000, and $552,000 during the years ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively. Alpena Bancshares, M.H.C. began waiving dividends in March 1995, and, as of December 31, 2003, had waived dividends totaling $4.8 million. (4) The net interest margin represents net interest income as a percent of average interest-earning assets for the period. (5) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. 29 RECENT DEVELOPMENTS The following tables set forth selected consolidated historical financial and other data of Alpena Bancshares, Inc. for the periods and at the dates indicated. The information should be read together with the audited consolidated financial statements and notes thereto of Alpena Bancshares, Inc. beginning at page F-2 of this prospectus. The information as of and for the year ended December 31, 2003 is derived from the audited consolidated financial statements of Alpena Bancshares, Inc. The information at December 31, 2004 and September 30, 2004 and for the three and twelve months ended December 31, 2004 and 2003 is unaudited. However, in the opinion of management of Alpena Bancshares, Inc., all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations for the unaudited periods have been made.
AT DECEMBER 31, AT SEPTEMBER 30, AT DECEMBER 31, 2004 2004 2003 ---------------- ----------------- ---------------- (IN THOUSANDS) SELECTED FINANCIAL CONDITION DATA: Total assets...................................... $ 262,796 $ 254,476 $ 223,923 Loans receivable, net............................. 195,390 187,099 163,460 Loans held for sale............................... 1,096 656 931 Investment securities............................. 42,033 42,880 34,670 Deposits.......................................... 182,489 182,428 151,702 Borrowings........................................ 56,001 47,303 47,159 Stockholders' equity.............................. 21,779 21,936 21,951 THREE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31, DECEMBER 31, ---------------------------- ---------------------------- 2004 2003 2004 2003 ------------- -------------- ------------- -------------- (IN THOUSANDS) SELECTED OPERATING DATA: Interest income................................... $ 3,483 $ 3,225 $ 13,281 $ 13,350 Interest expense.................................. 1,631 1,524 6,202 6,455 ------------- -------------- ------------- -------------- Net interest income............................ 1,852 1,701 7,079 6,895 Provision for loan losses......................... 109 29 323 267 ------------- -------------- ------------- -------------- Net interest income after provision for loan losses....................................... 1,743 1,672 6,756 6,628 ------------- -------------- ------------- -------------- Non-interest income............................... 1,116 1,534 4,715 5,426 ------------- -------------- ------------- -------------- Non-interest expense ............................. 2,746 2,664 10,859 10,327 ------------- -------------- ------------- -------------- Income before income tax expense.................. 113 542 612 1,727 Income tax expense................................ 38 124 205 518 ------------- -------------- ------------- -------------- Net income..................................... $ 75 $ 418 $ 407 $ 1,209 ============= ============== ============= ==============
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AT OR FOR THE THREE AT OR FOR THE TWELVE MONTHS ENDED MONTHS ENDED DECEMBER 31, DECEMBER 31, ---------------------- ---------------------- 2004(1) 2003(1) 2004 2003 ---------- ---------- ---------- ---------- SELECTED FINANCIAL RATIOS AND OTHER DATA: PERFORMANCE RATIOS: Return on assets (ratio of net income to average total assets)..................................... 0.12% 0.74% 0.17% 0.53% Return on equity (ratio of net income to average equity)........................................... 1.37% 7.63% 1.91% 5.52% Average interest rate spread (2).................... 2.86% 2.97% 2.88% 3.00% Dividend payout ratio (3)........................... 98.67% 22.06% 68.06% 30.36% Net interest margin (4)............................. 3.08% 3.24% 3.10% 3.26% Dividends per share................................. .10 .125 .375 .50 Efficiency ratio (5)................................ 96.05% 83.10% 96.38% 88.02% Non-interest expense to average total assets........ 4.22% 4.72% 4.39% 4.53% Average interest-earning assets to average interest-bearing liabilities...................... 108.08% 108.69% 108.08% 108.69% ASSET QUALITY RATIOS: Non-performing assets to total assets............... 0.85% 1.30% 0.85% 1.30% Non-performing loans to total loans................. 0.65% 1.04% 0.65% 1.04% Allowance for loan losses to non-performing loans... 72.37% 48.88% 72.37% 48.88% Allowance for loan losses to total loans............ 0.61% 0.63% 0.61% 0.63% CAPITAL RATIOS: Equity to total assets at end of period............. 8.29% 9.80% 8.29% 9.80% Average equity to average assets.................... 8.82% 9.62% 8.82% 9.62% Risk-based capital ratio (bank only)................ 10.52% 11.96% 10.52% 11.96% OTHER DATA: Number of full service offices...................... 10 8 10 8
- ------------------------------- (1) Ratios for the three months ended December 31, 2004 and 2003 are annualized. (2) The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted- average cost of interest-bearing liabilities for the period. (3) The dividend payout ratio represents dividends per share divided by basic earnings per share. (4) The following table sets forth aggregate cash dividends paid per period, which is calculated by multiplying the dividend declared per share by the number of shares outstanding as of the applicable record date: FOR THE THREE MONTHS FOR TWELVE MONTHS ENDED DECEMBER 31, ENDED DECEMBER 31, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Dividends paid to public stockholders.. $ 74,000 $ 92,000 $ 277,000 $ 367,000 Dividends paid to Alpena Bancshares, M.H.C.................. --- --- --- --- ---------- ---------- ---------- ---------- Total dividends paid... $ 74,000 $ 92,000 $ 277,000 $ 367,000 ========== ========== ========== ========== Payments listed above exclude cash dividends waived by Alpena Bancshares, M.H.C. of $92,000 and 115,000 during each of the three-month periods ending December 31, 2004 and 2003, and $345,000 and $460,000 during the twelve months ended December 31, 2004 and 2003, respectively. Alpena Bancshares, M.H.C. began waiving dividends in March 1995, and, as of December 31, 2004, had waived dividends totaling $5.2 million. (5) The net interest margin represents net interest income as a percent of average interest-earning assets for the period. (6) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND SEPTEMBER 30, 2004 ASSETS. Total assets increased $8.3 million, or 3.3%, to $262.8 million at December 31, 2004 from $254.5 million at September 30, 2004. Net loans receivable increased $8.3 million, or 4.4%, to 31 $195.4 million at December 31, 2004 from $187.8 million at September 30, 2004, reflecting growth in all loan categories. The 8.4% growth in commercial and commercial real estate loans and the 2.2% growth in consumer loans reflected our ongoing efforts to increase originations of these types of loans. Cash and cash equivalents decreased by $85,000, or 1.8%, to $4.7 million at December 31, 2004 from $4.8 million at September 30, 2004, as we invested excess cash in bonds that pay higher yields than the overnight yields on Federal Funds. LIABILITIES. Deposits increased slightly to $182.5 million at December 31, 2004 from $182.4 million at September 30, 2004, reflecting our continuing success in attracting deposits through various time deposit promotions conducted during the three months ended December 31, 2004. Borrowings, consisting primarily of Federal Home Loan Bank advances, increased $8.7 million, or 18.4%, to $56.0 million at December 31, 2004 from $47.3 million at September 30, 2004, as we funded loan growth from short-term borrowings rather than deposits in anticipation of the net proceeds of the offering. STOCKHOLDERS' EQUITY. Stockholders' equity decreased by $157,000 to $21.8 million at December 31, 2004 from $21.9 million at September 30, 2004. The decrease was due to lower market values on our investment portfolio. Compared to September 30, 2004, the net unrealized gain on available for sale securities decreased $161,000 at December 31, 2004 due to the increase in market interest rates over the period. The decrease in net unrealized gains on available for sale securities was partially offset by net income of $75,000 for the three months ended December 31, 2004. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003 GENERAL. Net income decreased to $75,000 for the three months ended December 31, 2004 from $418,000 for the same period ended December 31, 2003, primarily due to a $418,000, or 27.2%, decrease in non-interest income. The decrease in non-interest income included a $153,000, or 56.3%, decrease in non-interest income attributable to our mortgage banking activities and a $227,000 decrease in the gain on sale of investment securities. These decreases were partially offset by a $22,000 increase in service charges and other fees related to our "skip pay" program. The decrease in net income also reflected an increase in our provision for loan losses to $109,000 for the three months ended December 31, 2004 compared to $29,000 for the same period in 2003. INTEREST INCOME. Our interest income increased to $3.5 million for the three months ended December 31, 2004 from $3.2 million for the comparable period in 2003. The $258,000, or 8.0%, increase reflected the higher average balance of residential mortgage loans to $109.7 million from $100.5 million, and of non-mortgage loans to $84.2 million from $63.7 million. The increase in the average balance of mortgage loans reflected our purchase of $9.1 million of one- to four-family residential mortgage loans in May 2004. The higher loan balances more than offset the lower average yield on our mortgage loan portfolio, which decreased 78 basis points to 6.28%, and the lower average yield on our non-mortgage portfolio, which decreased 8 basis points to 6.36%. INTEREST EXPENSE. Interest expense increased to $1.6 million for the three months ended December 31, 2004 from $1.5 million for the same period in 2003, due to an increase in the average balance of our interest-bearing liabilities to $223.0 million for the three months ended December 31, 2004 from $193.0 million for the three months ended December 31, 2004. The higher average balance more than offset the lower average interest rate paid on interest-bearing liabilities over the three months ended December 31, 2004 compared to the three months ended December 31, 2003. 32 The average cost of interest-bearing liabilities for the three months ended December 31, 2004 declined to 2.89% from 3.12% for the same period one year earlier. The average cost of borrowings declined to 4.68% for the three months ended December 31, 2004 from 5.53% for the same period in 2003, due to additional shorter-term borrowings at lower rates in the 2004 period and the re-pricing of higher-cost advances late in 2003. NET INTEREST INCOME. Net interest income increased $151,000 to $1.9 million for the three months ended December 31, 2004 from $1.7 million for the same period in 2003. For the three months ended December 31, 2004, average interest-earning assets increased $30.1 million, or 14.2% when compared to the same period in 2003. Average interest-bearing liabilities increased $30.0 million, or 15.5% for the same period. While our average interest rate spread declined 11 basis points to 2.86% for the three months ended December 31, 2004 from 2.97% for the same period in 2003, the increase in the amount of our interest earning assets more than compensated for the decline in our average interest rate spread. PROVISION FOR LOAN LOSSES. We recorded a provision for loan losses of $109,000 for the three months ended December 31, 2004 compared to a provision of $29,000 for the three months ended December 31, 2003. We had net charge-offs of $47,000 and $25,000 during the three months ended December 31, 2004 and 2003, respectively. We used the same methodology and generally similar assumptions in assessing the adequacy of our allowance for loan losses for both periods. The allowance for loan losses was $1.2 million, or 0.61% of total loans at December 31, 2004, as compared to $1.0 million, or 0.63% of total loans at December 31, 2003. The level of the allowance is based on estimates, and ultimate losses may vary from the estimates. NON-INTEREST INCOME. Non-interest income decreased $416,000, or 27.2%, to $1.1 million for the three months ended December 31, 2004 from $1.5 million for the same period in 2003. Non-interest income attributable to our mortgage banking activities decreased by $153,000, or 56.3%, as the very high volume of residential mortgage loan refinancing in the 2003 period caused by historically low market interest rates slowed significantly in the 2004 period. Gain on the sale of mortgages was $92,000 lower in the 2004 period compared to the 2003 period, and the revenue associated with mortgage servicing rights was $61,000 lower in the 2004 period compared to the 2003 period. In addition, we recorded a gain of $227,000 on the sale of investment securities in the 2003 period, which did not recur in the 2004 period. The declines were partially offset by a $22,000, or 8.9%, increase in service charges and other fees due to "skip pay" fees that we introduced in November 2004. NON-INTEREST EXPENSE. Non-interest expenses increased $82,000, or 3.1%, to $2.7 million for the three months ended December 31, 2004 from $2.6 million for the same period in 2003. Compensation and employee benefits increased $30,000 to $1.6 million for the three months ended December 31, 2004. Advertising increased to $62,000 for the three months ended December 31, 2004 from $55,000 for the same period in 2003, reflecting an increase in promotional expenses related to our "skip- pay" promotion, along with a direct mail campaign and a comprehensive customer survey. Other operating expenses increased to $453,000 for the three months ended December 31, 2004 from $374,000 for the same period in 2003. The largest component of these increased other operating expenses was a $12,000 increase in service bureau charges related to the third quarter addition of internet banking. Partially offsetting these increases, insurance and brokerage commission expense for ICA totaled $294,000 for the three months ended December 31, 2004 compared to $317,000 for the earlier year period, reflecting a reduction in commissions paid to outside Blue Cross/Blue Shield producers. In addition, occupancy expense decreased to $297,000 for the three months ended December 31, 2004 compared to $305,000 for the earlier year period, reflecting a reduction in property taxes. 33 INCOME TAXES. Federal income taxes decreased to $38,000 for the three months ended December 31, 2004 from $124,000 for the same period in 2003. The effective tax rate was 33.5% for the 2004 period and 23.0% for the 2003 period. The reduction in income tax reflected lower earnings for the three months ended December 31, 2004 compared to the earlier year period. COMPARISON OF OPERATING RESULTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003 GENERAL. Net income decreased to $407,000 for the twelve months ended December 31, 2004 from $1.2 million for the twelve months ended December 31, 2003. The decrease in net income resulted primarily from a $709,000, or 13.1%, decrease in non-interest income attributable to our mortgage banking activities to $580,000 for the twelve months ended December 31, 2004 from $1.6 million for the twelve months ended December 31, 2003. This decrease was partially offset by a $487,000, or 19.6%, increase in insurance and brokerage commissions related to ICA and a $210,000, or 26.2%, increase in service charges and other fees. INTEREST INCOME. Interest income decreased by $100,000, or 1.0%, to $13.3 million for the twelve months ended December 31, 2004 from $13.4 million for the twelve months ended December 31, 2003. The decrease was primarily due to our sale of longer-term fixed rate mortgage loans in the secondary mortgage market and the reinvestment of sale proceeds in lower-yielding assets, such as investment securities and shorter-duration non-mortgage loans, which caused an overall decline in the yield on our loan portfolio to 6.36% for the twelve months ended December 31, 2004 from 7.18% for the twelve months ended December 31, 2003. The average balance of our loan portfolio increased by $24.9 million, or 15.9%, to $181.0 million for the twelve months ended December 31, 2004 from $156.1 million for the twelve months ended December 31, 2003. The average balance of non-mortgage loans, principally commercial loans and consumer loans, increased by $19.3 million, or 34.8%, to $74.7 million for the twelve months ended December 31, 2004 from $55.4 million for the twelve months ended December 31, 2003. However, the average yield on our commercial loans and consumer loans declined 10 basis points and 102 basis points, respectively, for the twelve months ended December 31, 2004 from the twelve months ended December 31, 2003. The average balance of our one- to four-family residential mortgage loans also increased to $106.3 million for the twelve months ended December 31, 2004 from $100.8 million for the twelve months ended December 31, 2003, while the average yield on such loans decreased to 6.48% from 7.40%. INTEREST EXPENSE. Interest expense decreased to $6.2 million for the twelve months ended December 31, 2004 from $6.5 million for the twelve months ended December 31, 2003, due primarily to lower interest rates paid on our interest bearing liabilities. The average cost of deposits for the twelve months ended December 31, 2004 decreased to 2.29% from 2.53% for the twelve months ended December 31, 2003. Similarly, the average cost of borrowings decreased to 4.67% for the twelve months ended December 31, 2004 from 5.70% for the twelve months ended December 31, 2003. The decrease in the average cost of deposits and borrowings reflected lower market interest rates, and more than offset an increase in the average balance of deposits and borrowings to $212.7 million for the twelve months ended December 31, 2004 from $194.8 million for the twelve months ended December 31, 2003. NET INTEREST INCOME. Net interest income increased to $7.0 million for the twelve months ended December 31, 2004 from $6.9 million for the twelve months ended December 31, 2003. The increase reflected an increase in average interest earning assets to $17.2 million from $17.0 million. This 34 increase more than offset a decrease in our average interest rate spread to 2.88% for the twelve months ended December 31, 2004 from 3.00% for the twelve months ended December 31, 2003. PROVISION FOR LOAN LOSSES. We recorded a provision for loan losses of $323,000 for the twelve months ended December 31, 2004 compared to a provision of $267,000 for the twelve months ended December 31, 2003. We had net charge-offs of $_144,500 and $153,000 during the twelve months ended December 31, 2004 and 2003, respectively. We used the same methodology and generally similar assumptions in assessing the allowance for both periods. The allowance for loan losses was $1.2 million, or 0.61% of total loans at December 31, 2004, compared to $1.0 million, or 0.63% of total loans at December 31, 2003. The level of the allowance is based on estimates, and ultimate losses may vary from the estimates. NON-INTEREST INCOME. Non-interest income decreased to $4.7 million for the twelve months ended December 31, 2004 from $5.4 million for the twelve months ended December 31, 2003. The decrease was primarily attributable to lower non-interest income attributable to our mortgage banking activities, which decreased to $580,000 from $1.6 million as the high volume loan refinances in 2003 which resulted from historically low market interest rates, slowed significantly in 2004. This decrease reflected a decrease of $730,000 in gain on the sale of mortgages and a decrease of $239,000 in revenues associated with mortgage servicing rights. Other non-interest income decreased to $97,000 for the twelve months ended December 31, 2004 from $257,000 for the twelve months ended December 31, 2003 reflecting, in part, the settlement of an insurance claim in 2003 that did not recur in 2004. Gain on the sale of investment securities decreased to $103,000 for the twelve months ended December 31, 2004 from $320,000 for the twelve months ended December 31, 2003. In 2003management elected to sell certain bonds during the year to fund loans and pay off high cost maturing Federal Home Loan Bank advances. These decreases in non-interest income were partially offset by a $487,000, or 19.6%, increase in insurance and brokerage commissions attributable to the operations of InsuranCenter of Alpena (ICA). NON-INTEREST EXPENSE. Non-interest expenses increased to $10.9 million for the twelve months ended December 31, 2004 from $10.3 million for the twelve months ended December 31, 2003. Insurance and brokerage commission expense for ICA increased to $1.3 million from $1.1 million, and compensation and employee benefits increased to $6.0 million from $5.8 million. THE INCREASES REFLECTED INCLUSION OF 12 MONTHS OF INSURANCE AND BROKERAGE COMMISSIONS PAID TO ICA BROKERS IN 2004 AS COMPARED TO 10 MONTHS IN 2003 WHICH WAS THE YEAR THAT WE ACQUIRED ICA. THE INCREASE IN EMPLOYEE COMPENSATION AND BENEFITS IS A RESULT OF HIGHER FUNDING REQUIREMENTS FOR THE PENSION PLAN ALONG GENERAL INCREASES IN SALARIES AND HEALTH BENEFITS EXPENSE IN 2004. INCOME TAXES. Federal income taxes decreased to $205,000 for the twelve months ended December 31, 2004 from $518,000 for the twelve months ended December 31, 2003. The effective tax rate was 33.5% and 30.0% for 2004 and 2003, respectively. The reduction in income tax reflected lower earnings for the twelve months ended December 31, 2004 compared to December 31, 2003. THE INCREASE IN EFFECTIVE TAX RATE REFLECTED EXCESS INCOME TAX ACCRUALS WHICH WERE REVERSED PARTLY IN 2003, RESULTING IN A LOWER EFFECTIVE RATE FOR 2003. 35 FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and words of similar meaning. These forward-looking statements include, but are not limited to: o statements of our goals, intentions and expectations; o statements regarding our business plans, prospects, growth and operating strategies; o statements regarding the asset quality of our loan and investment portfolios; and o estimates of our risks and future costs and benefits. These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: o general economic conditions, either nationally or in our market areas, that are worse than expected; o competition among depository and other financial institutions; o inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; o adverse changes in the securities markets; o changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; o our ability to enter new markets successfully and capitalize on growth opportunities; o our ability to successfully integrate acquired entities; o changes in consumer spending, borrowing and savings habits; o changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board; and o changes in our organization, compensation and benefit plans. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see "Risk Factors" beginning on page 20. 36 HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $12.9 million and $17.6 million, or $20.4 million if the offering range is increased by 15%. First Federal of Northern Michigan Bancorp, Inc. expects to contribute to First Federal of Northern Michigan sufficient net proceeds so that First Federal of Northern Michigan's tangible and core capital ratios will exceed 10% upon completion of the conversion and offering (or, between $10.3 million and $10.9 million, or $11.2 million if the offering range is increased by 15%). We intend to retain between $2.6 million and $6.7 million of the net proceeds, or $9.1 million if the offering range is increased by 15%. Between $1.1 million and $1.5 million (or $1.7 million if the offering range is increased) will be used for the loan to the employee stock ownership plan to fund its purchase of shares of common stock in the offering. A summary of the anticipated net proceeds at the minimum, midpoint, maximum and adjusted maximum of the offering range and distribution of the net proceeds is as follows:
BASED UPON THE SALE AT $10.00 PER SHARE OF -------------------------------------------------------------------------------------- 1,360,000 SHARES 1,600,000 SHARES 1,840,000 SHARES 2,116,000 SHARES (1) -------------------- -------------------- -------------------- -------------------- PERCENT PERCENT PERCENT PERCENT OF NET OF NET OF NET OF NET AMOUNT PROCEEDS AMOUNT PROCEEDS AMOUNT PROCEEDS AMOUNT PROCEEDS -------- ---------- -------- ---------- -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Offering proceeds.................. $ 13,600 $ 16,000 $ 18,400 $ 21,160 Less offering expenses............. 716 738 760 786 -------- -------- -------- -------- Net offering proceeds........... $ 12,884 100.0% $ 15,262 100.0% $ 17,640 100.0% $ 20,374 100.0% ======== ========== ======== ========== ======== ========== ======== ========== Distribution of net proceeds: To First Federal of Northern Michigan...................... $ 10,312 80.0% $ 10,606 69.5% $ 10,900 61.8% $ 11,232 55.1% To fund loan to employee stock ownership plan.......... $ 1,110 8.6% $ 1,306 8.6% $ 1,501 8.5% $ 1,723 8.5% Retained by First Federal of Northern Michigan Bancorp, Inc........................... $ 1,462 11.4% $ 3,350 21.9% $ 5,239 29.7% $ 7,419 36.4%
- ------------------------------------ (1) As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares, changes in market or general financial conditions following the commencement of the offering, or regulatory considerations. Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of First Federal of Northern Michigan's deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering were used to sell shares of common stock not purchased in the subscription and community offerings. FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. MAY USE THE PROCEEDS IT RETAINS FROM THE OFFERING: o to fund a loan to the employee stock ownership plan to purchase shares of common stock in the offering (between $1.1 million and $1.5 million, or $1.7 million if the offering is increased by 15%); o to finance the acquisition of financial institutions or other financial service companies as opportunities arise, although we do not currently have any agreements or 37 understandings regarding any specific acquisition transaction and it is impossible to determine when, if ever, such opportunities may arise; o to pay cash dividends to stockholders; o to repurchase shares of our common stock; o to invest in securities; and o for other general corporate purposes. Initially, a substantial portion of the net proceeds will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities. Under current Office of Thrift Supervision regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except when extraordinary circumstances exist and with prior regulatory approval. FIRST FEDERAL OF NORTHERN MICHIGAN MAY USE THE NET PROCEEDS IT RECEIVES FROM THE OFFERING: o to fund new loans, including one-to four-family residential mortgage loans, commercial real estate and commercial loans, construction loans and consumer loans; o to expand its retail banking franchise by acquiring new branches or by acquiring other financial institutions or other financial services companies as opportunities arise, although we do not currently have any agreements or understandings regarding any acquisition transaction and it is impossible to determine when, if ever, such opportunities may arise; o to enhance existing products and services and to support the development of new products and services; o to invest in securities; and o for other general corporate purposes. Initially, the net proceeds will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities. We expect our return on equity to decrease as compared to our performance in recent years until we are able to utilize effectively the additional capital raised in the offering. Until we can increase our net interest income and non-interest income, we expect our return on equity to be below the industry average, which may negatively affect the value of our common stock. See "Risk Factors -- Our Failure to Utilize Effectively the Net Proceeds of the Offering Could Reduce Our Profitability and Our Return on Stockholders' Equity." OUR DIVIDEND POLICY We currently pay a quarterly cash dividend of $0.10 per share, which equals $.40 per share on an annualized basis. After the conversion, we intend to continue to pay cash dividends on a quarterly basis. 38 After adjustment for the exchange ratio, we expect the quarterly dividends to equal $.07, $.06, $.05 and $.04 per share at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, which represents an annual dividend yield of 2.8%, 2.4%, 2.0% and 1.6% at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, based upon a stock price of $10.00 per share. The amount of dividends that we intend to pay to our stockholders following the conversion is intended to preserve the per share dividend amount, adjusted to reflect the exchange ratio, that our stockholders currently receive on their shares of Alpena Bancshares, Inc. common stock. However, the dividend rate and the continued payment of dividends will depend on a number of factors including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. We cannot assure you that we will not reduce or eliminate dividends in the future. Under the rules of the Office of Thrift Supervision, First Federal of Northern Michigan will not be permitted to pay dividends on its capital stock to First Federal of Northern Michigan Bancorp, Inc., its sole stockholder, if First Federal of Northern Michigan's stockholder's equity would be reduced below the amount of the liquidation account established in connection with the conversion. In addition, First Federal of Northern Michigan will not be permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. See "The Conversion--Liquidation Rights." For information concerning additional federal and state law and regulations regarding the ability of First Federal of Northern Michigan to make capital distributions, including the payment of dividends to First Federal of Northern Michigan Bancorp, Inc., see "Taxation--Federal Taxation" and "Supervision and Regulation--Federal Banking Regulation." Unlike First Federal of Northern Michigan, we are not restricted by Office of Thrift Supervision regulations on the payment of dividends to our stockholders, although the source of dividends will depend on the net proceeds retained by us and earnings thereon, and dividends from First Federal of Northern Michigan. However, First Federal of Northern Michigan Bancorp, Inc. will be subject to state law limitations on the payment of dividends. Maryland law generally limits dividends to an amount equal to the excess of our capital surplus over payments that would be owed upon dissolution to stockholders whose preferential rights upon dissolution are superior to those receiving the dividend, and to an amount that would not make us insolvent. Finally, pursuant to Office of Thrift Supervision regulations, during the three-year period following the conversion, we will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes. See "Selected Consolidated Financial and Other Data of Alpena Bancshares, Inc. and Subsidiary" and "Market for the Common Stock" for information regarding our historical dividend payments. MARKET FOR THE COMMON STOCK Alpena Bancshares, Inc.'s common stock currently trades over the counter on the OTC Bulletin Board. At September 30, 2004, we had eight market makers in our common stock. Upon completion of the conversion, the new shares of common stock of First Federal of Northern Michigan Bancorp, Inc. will replace existing shares. We expect the new shares will be traded on the Nasdaq National Market under the symbol "FFNM." We will try to get at least four market makers to make a market in our common stock. Ryan Beck & Co., Inc. has advised us that it intends to make a market in our common stock following the conversion, but it is under no obligation to do so. While we will attempt before completion of the conversion to obtain commitments from at least three other broker-dealers to make a market in our common stock, there can be no assurance that we will be successful in obtaining such commitments. 39 The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends on the existence of willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of our common stock at any particular time may be limited, which may have an adverse effect on the price at which our common stock can be sold. There can be no assurance that persons purchasing the common stock will be able to sell their shares at or above the $10.00 price per share in the offering. Purchasers of our common stock should have a long-term investment intent and should recognize that there may be a limited trading market in our common stock. The following table sets forth the high and low trading prices for shares of Alpena Bancshares, Inc. common stock and cash dividends paid per share for the periods indicated. As of September 30, 2004, there were 739,180 publicly held shares of Alpena Bancshares, Inc. common stock issued and outstanding (excluding shares held by Alpena Bancshares, M.H.C.). In connection with the conversion, each existing publicly held share of common stock of Alpena Bancshares, Inc. will be converted into a right to receive a number of new shares of common stock, based upon the exchange ratio that is described in other parts of this prospectus. See "The Conversion-Share Exchange Ratio."
YEAR ENDING DECEMBER 31, 2005 HIGH LOW DIVIDEND PAID PER SHARE - ------------------------------------------ ---------------- ---------------- ------------------------- First quarter (through February __) $ $ $ --(1) YEAR ENDED DECEMBER 31, 2004 HIGH LOW DIVIDEND PAID PER SHARE - ------------------------------------------ ---------------- ---------------- ------------------------- Fourth quarter Third quarter 17.75 15.60 .10 Second quarter 23.75 17.50 .05 First quarter 25.00 22.50 .125 YEAR ENDED DECEMBER 31, 2003 HIGH LOW DIVIDEND PAID PER SHARE - ------------------------------------------ ---------------- ---------------- ------------------------- Fourth quarter 24.00 18.95 .125 Third quarter 19.00 16.50 .125 Second quarter 18.50 14.80 .125 First quarter 15.65 14.00 .125
- ------------------------------------ (1) Dividend of $______ per share for the first quarter will be paid on February __, 2005. On November 12, 2004, the business day immediately preceding the public announcement of the conversion, and on February __, 2005, the closing prices of Alpena Bancshares, Inc. common stock as reported on the OTC Bulletin Board were $16.30 per share and $_____ per share, respectively. At February __, 2005, Alpena Bancshares, Inc. had approximately _____ stockholders of record. On the effective date of the conversion, all publicly held shares of Alpena Bancshares, Inc. common stock, including shares of common stock held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of First Federal of Northern Michigan Bancorp, Inc. common stock determined pursuant to the exchange ratio. See "The Conversion -- Share Exchange Ratio." Options to purchase shares of Alpena Bancshares, Inc. common stock will be converted into options to purchase a number of shares of First Federal of Northern Michigan Bancorp, Inc. common stock determined pursuant to the exchange ratio, for the same aggregate exercise price. See "Beneficial Ownership of Common Stock." 40 HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE At September 30, 2004, First Federal of Northern Michigan exceeded all of the applicable regulatory capital requirements. The table below sets forth the historical equity capital and regulatory capital of First Federal of Northern Michigan at September 30, 2004, and the pro forma regulatory capital of First Federal of Northern Michigan, after giving effect to the sale of shares of common stock at a $10.00 per share purchase price and assuming that First Federal of Northern Michigan received net proceeds in an amount such that it will have at least a 10% regulatory tangible and core capital ratio upon completion of the conversion and offering. Accordingly, the table assumes the receipt by First Federal of Northern Michigan of between $10.3 million and $10.9 million of the net offering proceeds at the minimum and maximum of the offering range, respectively.
FIRST FEDERAL OF NORTHERN MICHIGAN PRO FORMA AT SEPTEMBER 30, 2004, BASED UPON THE SALE IN THE OFFERING OF HISTORICAL AT ------------------------------------------------------------------------------------- SEPTEMBER 30, 2004 1,360,000 SHARES 1,600,000 SHARES 1,840,000 SHARES 2,116,000 SHARES (1) ------------------- ------------------- ------------------- ------------------- ------------------- PERCENT PERCENT PERCENT PERCENT PERCENT OF OF OF OF OF ASSETS ASSETS ASSETS ASSETS ASSETS AMOUNT (2) AMOUNT (2) AMOUNT (2) AMOUNT (2) AMOUNT (2) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Equity capital...... $ 21,936 8.62% $ 30,584 11.62% $ 30,584 11.62% $ 30,584 11.62% $ 30,584 11.62% Tangible capital.... $ 17,207 6.89% $ 25,855 10.00% $ 25,855 10.00% $ 25,855 10.00% $ 25,855 10.00% Tangible requirement....... 3,748 1.50 3,878 1.50 3,878 1.50 3,878 1.50 3,878 1.50 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Excess.............. $ 13,459 5.39% $ 21,976 8.50% $ 21,976 8.50% $ 21,976 8.50% $ 21,976 8.50% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Core (leverage) capital........... $ 17,207 6.89% $ 25,855 10.00% $ 25,855 10.00% $ 25,855 10.00% $ 25,855 10.00% Core (leverage) requirement (3)... 9,996 4.00 10,342 4.00 10,342 4.00 10,342 4.00 10,342 4.00 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Excess.............. $ 7,211 2.89% $ 15,513 6.00% $ 15,513 6.00% $ 15,513 6.00% $ 15,513 6.00% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Total risk-based capital (4)....... $ 18,433 11.13% $ 27,081 16.18% $ 27,081 16.18% $ 27,081 16.18% $ 27,081 16.18% Risk-based requirement....... 13,249 8.00 13,387 8.00 13,387 8.00 13,387 8.00 13,387 8.00 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Excess.............. $ 5,184 3.13% $ 13,694 8.18% $ 13,694 8.18% $ 13,694 8.18% $ 13,694 8.18% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Net Proceeds Infused $ 10,313 $ 10,606 $ 10,900 $ 11,232 Less: ESOP.......... (1,110) (1,306) (1,501) (1,723) Less: MRP........... (555) (653) (751) (861) -------- -------- -------- -------- Pro Forma Increase.. $ 8,648 $ 8,648 $ 8,648 $ 8,648 ======== ======== ======== ========
- ------------------------------------ (1) As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares, changes in market or general financial conditions following the commencement of the offering, or regulatory considerations. (2) Tangible and core capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets. (3) The current Office of Thrift Supervision core capital requirement for financial institutions is 3% of total adjusted assets for financial institutions that receive the highest supervisory rating for safety and soundness and a 4% to 5% core capital ratio requirement for all other financial institutions. (4) Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting. 41 CAPITALIZATION The following table presents the historical consolidated capitalization of Alpena Bancshares, Inc. at September 30, 2004 and the pro forma consolidated capitalization of First Federal of Northern Michigan Bancorp, Inc. after giving effect to the conversion and offering, based upon the assumptions set forth in the "Pro Forma Data" section.
PRO FORMA AT SEPTEMBER 30, 2004, ALPENA BASED UPON THE SALE IN THE OFFERING OF BANCSHARES, ------------------------------------------------------------- INC. 1,360,000 1,600,000 1,840,000 2,116,000 HISTORICAL AT SHARES AT SHARES AT SHARES AT SHARES AT SEPTEMBER 30, $10.00 $10.00 $10.00 $10.00 2004 PER SHARE PER SHARE PER SHARE PER SHARE ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Deposits (2)............................ $ 182,428 $ 182,218 $ 182,218 $ 182,218 $ 182,218 Borrowed funds.......................... 47,303 47,303 47,303 47,303 47,303 ------------ ------------ ------------ ------------ ------------ Total deposits and borrowed funds.... $ 229,731 $ 229,521 $ 229,521 $ 229,521 $ 229,521 ============ ============ ============ ============ ============ STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 10,000,000 shares authorized (post-conversion) (3)................ -- -- -- -- -- Common stock $.01 par value, 20,000,000 shares authorized (post-conversion); shares to be issued as reflected (3) (4).......... 1,659 25 29 34 39 Additional paid-in capital (3)........ 5,354 20,355 22,776 25,198 27,934 Retained earnings (5)................. 14,789 14,789 14,789 14,789 14,789 LESS: Expense of contribution to foundation........................... -- (544) (640) (736) (750) PLUS: Tax benefit of contribution to foundation (6)....................... -- 185 218 250 255 Accumulated other comprehensive income............................... 134 134 134 134 134 LESS: Common stock held by existing recognition and retention plan -- -- -- -- -- Common stock to be acquired by the employee stock ownership plan (7)............................. -- (1,110) (1,306) (1,501) (1,723) Common stock to be acquired by the recognition and retention plan (8)............................. -- (555) (653) (751) (861) Total stockholders' equity............ $ 21,936 $ 33,279 $ 35,348 $ 37,416 $ 39,816 ============ ============ ============ ============ ============ PRO FORMA SHARES OUTSTANDING Total shares outstanding.............. 2,479,901 2,917,530 3,355,160 3,853,613 Exchange shares issued................ 1,092,701 1,285,530 1,478,360 1,700,113 Shares issued to foundation........... 27,200 32,000 36,800 37,500 Shares offered for sale............... 1,360,000 1,600,000 1,840,000 2,116,000 Total stockholders' equity as a percentage of total assets........... 8.62% 12.52% 13.19% 13.86% 14.62%
- ------------------------------------ (1) As adjusted to give effect to an increase in the number of shares of common stock which could occur due to a 15% increase in the offering range to reflect demand for shares, changes in market or general financial conditions following the commencement of the subscription and community offerings, or regulatory considerations. (2) Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits by the amount of the withdrawals. On a pro forma basis, reflects transfer of Alpena Bancshares, M.H.C. deposits of $210,000 to equity. 42 (3) Alpena Bancshares, Inc. currently has 10,000,000 authorized shares of preferred stock and 20,000,000 authorized shares of common stock, par value $1.00 per share. On a pro forma basis, First Federal of Northern Michigan Bancorp, Inc. common stock and additional paid-in capital have been revised to reflect the number of shares of First Federal of Northern Michigan Bancorp, Inc. common stock to be outstanding, which is 2,479,901 shares, 2,917,530 shares, 3,355,160 shares and 3,853,613 shares at the minimum, midpoint, maximum and adjustment maximum of the offering range, respectively. (4) No effect has been given to the issuance of additional shares of First Federal of Northern Michigan Bancorp, Inc. common stock pursuant to a stock option plan. If this plan is implemented, an amount up to 10% of the shares of First Federal of Northern Michigan Bancorp, Inc. common stock sold in the offering (including shares contributed to the foundation) will be reserved for issuance upon the exercise of options under the stock option plan. No effect has been given to the exercise of options currently outstanding. See "Management of First Federal of Northern Michigan Bancorp, Inc." (5) The retained earnings of First Federal of Northern Michigan will be substantially restricted after the conversion. See "The Conversion--Liquidation Rights" and "Supervision and Regulation--Federal Banking Regulation." (6) Represents the tax effect of the contribution to the charitable foundation based on a 34.0% tax rate. The realization of the deferred tax benefit is limited annually to a maximum deduction for charitable foundations equal to 10% of First Federal of Northern Michigan Bancorp, Inc.'s annual taxable income, subject to our ability to carry forward any unused portion of the deduction for five years following the year in which the contribution is made. (7) Assumes that 8.1% of the shares sold in the offering (not including shares contributed to the foundation) will be acquired by the employee stock ownership plan financed by a loan from First Federal of Northern Michigan Bancorp, Inc. The loan will be repaid principally from First Federal of Northern Michigan's contributions to the employee stock ownership plan. Since First Federal of Northern Michigan Bancorp, Inc. will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on First Federal of Northern Michigan Bancorp, Inc.'s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders' equity. (8) Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the offering (including shares contributed to the foundation) will be purchased by the recognition and retention plan in open market purchases. The funds to be used by the stock recognition and retention plan to purchase the shares will be provided by First Federal of Northern Michigan Bancorp, Inc. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. As First Federal of Northern Michigan Bancorp, Inc. accrues compensation expense to reflect the vesting of shares pursuant to the recognition and retention plan, the credit to capital will be offset by a charge to operations. Implementation of the recognition and retention plan will require stockholder approval. If the shares to fund the plan are assumed to come from authorized but unissued shares of First Federal of Northern Michigan Bancorp, Inc., the number of outstanding shares at the minimum, midpoint, maximum and the maximum, as adjusted, of the offering range would be 2,535,389, 2,982,810, 3,430,232 and 3,939,753, respectively, total stockholders' equity would be $33.8 million, $36.0 million, $38.2 million and $40.7 million, respectively, and total stockholders' ownership in First Federal of Northern Michigan Bancorp, Inc. would be diluted by approximately 2.2% at the maximum of the offering range. 43 PRO FORMA DATA The following tables summarize historical data of Alpena Bancshares, Inc. and pro forma data at and for the nine months ended September 30, 2004 and at and for the year ended December 31, 2003. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering. Moreover, pro forma stockholders' equity per share does not give effect to the liquidation account to be established in the conversion or, in the event of a liquidation of First Federal of Northern Michigan, to the recoverability of intangibles or the tax effect of the recapture of the bad debt reserve. See "The Conversion--Liquidation Rights." The net proceeds in the tables are based upon the following assumptions: (i) all shares of common stock will be sold in the subscription and community offerings; (ii) 30,000 shares of common stock will be purchased by our executive officers and directors, and their associates; (iii) our employee stock ownership plan will purchase 8% of the shares of common stock sold in the offering, including shares contributed to the foundation, with a loan from First Federal of Northern Michigan Bancorp, Inc. The loan will be repaid in substantially equal payments of principal and interest over a period of 15 years; (iv) Ryan Beck & Co. will receive a fee equal to 1.0% of the dollar amount of shares of common stock sold in the offering. No fee will be paid with respect to shares of common stock purchased by our qualified and non-qualified employee stock benefit plans, or stock purchased by our officers, directors and employees, and their immediate families, or with respect to shares issued to the charitable foundation; and (v) total expenses of the offering, including the marketing fees to be paid to Ryan Beck & Co., will be between $716,000 at the minimum of the offering range and $786,000 at the maximum of the offering range, as adjusted. We calculated pro forma consolidated net earnings for the nine months ended September 30, 2004 and the year ended December 31, 2003 as if the estimated net proceeds we received had been invested at assumed interest rates of 2.16% and 1.26%, respectively (1.42% and 0.83%, respectively, on an after-tax basis), which represented the yield on the one-year U.S. Treasury Bill as of September 30, 2004 and December 31, 2003, respectively (which we consider to reflect more accurately the pro forma reinvestment rate than an arithmetic average method in light of current market interest rates). The effect of withdrawals from deposit accounts for the purchase of shares of common stock has not been reflected. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of common stock. No effect has been given in the pro forma stockholders' equity calculations for the assumed earnings on the net proceeds. It is assumed that First Federal of Northern Michigan Bancorp, Inc. will retain between $2.5 million and $6.6 million of the estimated net proceeds in the offering, or $9.0 million if the offering range is increased by 15%. The actual net proceeds from the sale of shares of common stock will not be determined until the offering is completed. However, we currently estimate the net proceeds to be between $12.8 million and $17.5 million, or $20.2 million if the offering range is increased by 15%. 44 The following pro forma information may not be representative of the financial effects of the offering at the dates on which the offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders' equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders' equity is not intended to represent the fair market value of the shares of common stock.
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 BASED UPON THE SALE AT $10.00 PER SHARE OF ----------------------------------------------------------------- 1,360,000 1,600,000 1,840,000 2,116,000- SHARES SHARES SHARES SHARES (1) ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Gross proceeds of offering........................ $ 13,600 $ 16,000 $ 18,400 $ 21,160 Market value of shares issued to the foundation... 272 320 368 375 ------------- ------------- ------------- ------------- Market value of offering and foundation shares.... 13,872 16,320 18,768 21,535 Gross proceeds of offering........................ 13,600 16,000 18,400 21,160 Less: Cash contribution to Foundation............ (272) (320) (368) (375) Less: Expenses................................... (716) (738) (760) (786) Plus: Assets received from the MHC............... 210 210 210 210 ------------- ------------- ------------- ------------- Estimated Net Proceeds.......................... $ 12,822 15,152 17,482 20,209 ============= ============= ============= ============= Less: Common stock acquired by employee stock ownership plan................................. (1,110) (1,306) (1,501) (1,723) Less: Common stock acquired by recognition and retention plan................................. (555) (653) (751) (861) ------------- ------------- ------------- ------------- Estimated net proceeds, as adjusted............... $ 11,157 13,194 15,230 17,625 ============= ============= ============= ============= FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 Consolidated net earnings: Historical..................................... $ 332 $ 332 $ 332 $ 332 Pro forma adjustments: Income on adjusted net proceeds................ 117 139 161 186 Employee stock ownership plan (2).............. (37) (43) (50) (57) Recognition and retention plan (3)............. (55) (65) (74) (85) Stock option plan (5).......................... (72) (85) (97) (112) ------------- ------------- ------------- ------------- Pro forma net income......................... $ 285 $ 278 $ 272 $ 264 ============= ============= ============= ============= Earnings per share (4): Historical..................................... $ 0.14 $ 0.12 $ 0.10 $ 0.09 Pro forma adjustments: Income on adjusted net proceeds................ 0.05 0.05 0.05 0.05 Employee stock ownership plan (2).............. (0.02) (0.02) (0.02) (0.02) Recognition and retention plan (3)............. (0.02) (0.02) (0.02) (0.02) Stock option plan (5).......................... (0.03) (0.03) (0.03) (0.03) ------------- ------------- ------------- ------------- Pro forma earnings per share (4) (6)......... $ 0.12 $ 0.10 $ 0.08 $ 0.07 ============= ============= ============= ============= Offering price to pro forma net earnings per share (4)....................................... 62.50x 75.00x 93.75x 107.14x Number of shares used in earnings per share calculations.................................... 2,374,474 2,793,498 3,212,523 3,689,947 AT SEPTEMBER 30, 2004 Stockholders' equity: Historical..................................... $ 21,936 $ 21,936 $ 21,936 $ 21,936 Estimated net proceeds......................... 13,094 15,472 17,850 20,584 Plus: Shares issued to foundation............. 272 320 368 375 Less: Shares contribution to foundation ...... (272) (320) (368) (375) Less: Cash contribution to foundation......... (272) (320) (368) (375) Plus: Tax benefit of the foundation........... 185 218 250 255 Less: Common stock acquired by ESOP........... (1,110) (1,306) (1,501) (1,723) Less: Common stock acquired by MRP (3)........ (555) (653) (751) (861) ------------- ------------- ------------- ------------- Pro forma stockholders equity.................. $ 33,279 $ 35,348 $ 37,416 $ 39,816 Less: Intangible assets....................... (3,668) (3,668) (3,668) (3,668) ------------- ------------- ------------- ------------- Pro forma tangible stockholders' equity........ 29,610 31,679 33,748 36,148 ============= ============= ============= ============= Stockholders' equity per share:(7) Historical..................................... $ 8.85 $ 7.52 $ 6.54 $ 5.69
45
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 BASED UPON THE SALE AT $10.00 PER SHARE OF ----------------------------------------------------------------- 1,360,000 1,600,000 1,840,000 2,116,000- SHARES SHARES SHARES SHARES (1) ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Estimated net proceeds......................... 5.28 5.31 5.32 5.34 Plus: Shares issued to foundation............. 0.11 0.11 0.11 0.10 Less: Shares contribution to foundation ...... (0.11) (0.11) (0.11) (0.10) Less: Cash contribution to foundation......... (0.11) (0.11) (0.11) (0.10) Plus: Tax benefit of the foundation........... 0.07 0.07 0.07 0.07 Less: Common stock acquired by ESOP........... (0.45) (0.45) (0.45) (0.45) Less: Common stock acquired by MRP............ (0.22) (0.22) (0.22) (0.22) ------------- ------------- ------------- ------------- Pro forma stockholders' equity per share (6) (7)........................................ $ 13.42 $ 12.12 $ 11.15 $ 10.33 Pro forma tangible stockholders' equity per share (6) (7).............................. $ 11.94 $ 10.86 $ 10.06 $ 9.38 Offering price as percentage of pro forma stockholders' equity per share.......... 74.52% 82.51% 89.69% 96,81% Offering price as percentage of pro forma tangible stockholders' equity per share. 83.75% 92.08% 99.40% 106.61% Number of shares outstanding for pro forma book value per share calculations....... 2,479,901 2,917,530 3,355,160 3,853,613 - ------------------------------------------------------------------------------------------------------------------------- (FOOTNOTES BEGIN ON FOLLOWING PAGE)
46 - ------------------------------------ (1) As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares, changes in market and financial conditions following the commencement of the offering, or regulatory considerations. (2) Assumes that 8% of shares of common stock sold in the offering (including shares issued to the charitable foundation) will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from First Federal of Northern Michigan Bancorp, Inc. First Federal of Northern Michigan intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments due on the debt. First Federal of Northern Michigan's total annual payments on the employee stock ownership plan debt are based upon 15 equal annual installments of principal and interest. Statement of Position 93-6 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by First Federal of Northern Michigan, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 34.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders' equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 5,549, 6,528, 7,507 and 8,614 shares were committed to be released during the period at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and in accordance with Statement of Position 93-6, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of net income per share calculations. (3) If approved by First Federal of Northern Michigan Bancorp, Inc.'s stockholders, the stock recognition and retention plan may purchase an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering (including shares issued to the charitable foundation) (or a greater number of shares if the plan is implemented more than one year after completion of the conversion although such plan, including the amount awarded under such plan, may remain subject to supervisory restrictions). Stockholder approval of the stock recognition and retention plan, and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from First Federal of Northern Michigan Bancorp, Inc. or through open market purchases. The funds to be used by the stock recognition and retention plan to purchase the shares will be provided by First Federal of Northern Michigan Bancorp, Inc. The table assumes that (i) the stock recognition and retention plan acquires the shares through open market purchases at $10.00 per share, (ii) 15% of the amount contributed to the stock recognition and retention plan is amortized as an expense during the nine months ended September 30, 2004 and (iii) the stock recognition and retention plan expense reflects an effective combined federal and state tax rate of 34.0%. Assuming stockholder approval of the stock recognition and retention plan and that shares of common stock (equal to 4% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 2.2% at the maximum of the offering range. (4) Per share figures include publicly held shares of Alpena Bancshares, Inc. common stock that will be exchanged for new shares of First Federal of Northern Michigan Bancorp, Inc. common stock in the conversion. See "The Conversion -- Share Exchange Ratio." Net income per share computations are determined by taking the number of shares assumed to be sold in the offering (including shares issued to the charitable foundation) and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with Statement of Position 93-6, subtracting the employee stock ownership plan shares which have not been committed for release during the respective periods. See note 2. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts. Pro forma net income per share has been annualized. (5) If approved by First Federal of Northern Michigan Bancorp, Inc.'s stockholders, the stock option plan may grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering (including shares contributed to the foundation, or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion, although such plan, including the amount awarded under the plan, may remain subject to supervisory restrictions). Stockholder approval of the stock option plan may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock option plan, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $3.85 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25.0% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 39.75%. The actual expense of the stock option plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock option plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock option plan are obtained from the issuance of authorized but unissued shares, our net income per share 47 and stockholders' equity per share will decrease. The issuance of authorized but previously unissued shares of common stock pursuant to the exercise of options under such plan would dilute existing stockholders' ownership and voting interests by approximately 9.1% at the maximum of the offering range. (6) The retained earnings of First Federal of Northern Michigan will be substantially restricted after the conversion. See "Our Dividend Policy," "The Conversion--Liquidation Rights" and "Supervision and Regulation--Federal Banking Regulation--Capital Distributions." (7) Per share figures include publicly held shares of Alpena Bancshares, Inc. common stock that will be exchanged for new shares of First Federal of Northern Michigan Bancorp, Inc. common stock in the conversion. Stockholders' equity per share calculations are based upon the sum of (i) the number of subscription shares assumed to be sold in the offering (including shares issued to the charitable foundation) and (ii) new shares to be issued in exchange for publicly held shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The exchange shares reflect an exchange ratio of 1.4783, 1.7391, 2.0000 and 2.3000 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The number of subscription shares actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts. 48
AT OR FOR THE YEAR ENDED DECEMBER 31, 2003 ---------------------------------------------------------------- BASED UPON THE SALE AT $10.00 PER SHARE OF 1,360,000 1,600,000 1,840,000 2,116,000 SHARES SHARES SHARES SHARES (1) ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Gross proceeds of offering........................ $ 13,600 $ 16,000 $ 18,400 $ 21,160 Market value of shares issued to the foundation... 272 320 368 375 ------------ ------------ ------------ ------------ Market value of offering and foundation shares.... 13,872 16,320 18,768 21,535 Gross proceeds of offering........................ 13,600 16,000 18,400 21,160 Less: Cash contribution to foundation............ (272) (320) (368) (375) Less: Expenses................................... (716) (738) (760) (786) Plus: Assets received from the MHC............... 210 210 210 210 ------------ ------------ ------------ ------------ Estimated Net Proceeds.......................... $ 12,822 15,152 17,482 20,209 ============ ============ ============ ============ Less: Common stock purchased by ESOP............ (1,110) (1,306) (1,501) (1,723) Less: Common stock purchased by recognition and retention plan................................. (555) (653) (751) (861) ------------ ------------ ------------ ------------ Estimated net proceeds, as adjusted............. $ 11,157 13,194 15,230 17,625 ============ ============ ============ ============ FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2003 Consolidated net earnings: Historical..................................... $ 1,209 $ 1,209 $ 1,209 $ 1,209 Pro forma adjustments: Income on adjusted net proceeds................ 91 108 125 145 Employee stock ownership plan (2).............. (49) (57) (66) (76) Recognition and retention plan (3)............. (73) (86) (99) (114) Stock option plan (5).......................... (96) (113) (130) (149) ------------ ------------ ------------ ------------ Pro forma net income......................... $ 1,082 $ 1,061 $ 1,039 $ 1,015 ============ ============ ============ ============ Earning per share Historical..................................... 0.51 0.43 0.38 0.33 Pro form adjustments Income on adjusted net proceeds................ 0.04 0.04 0.04 0.04 Employee stock ownership plan (2).............. (0.02) (0.02) (0.02) (0.02) Recognition and retention plan (3)............. $ (0.03) $ (0.03) $ (0.03) $ (0.03) Stock option plan (4).......................... (0.04) (0.04) (0.04) (0.04) ------------ ------------ ------------ ------------ Pro forma earnings per share (5) (6) ........ $ 0.46 $ 0.38 $ 0.33 $ 0.28 ============= ============= ============= ============= Offering price to pro forma net earnings per share 21.74x 26.32x 30.30x 35.71x Number of shares used in earnings per share calculations................................... 2,376,324 2,795,674 3,215,026 3,692,818 AT DECEMBER 31, 2003 Stockholders' equity: Historical..................................... $ 21,951 $ 21,951 $ 21,951 $ 21,951 Estimated net proceeds......................... 13,094 15,472 17,850 20,584 Plus: Shares issued to foundation............. 272 320 368 375 Less: Shares contribution to foundation ...... (272) (320) (368) (375) Less: Cash contribution to foundation......... (272) (320) (368) (375) Plus: Tax benefit of the foundation........... 185 218 250 255 Less: Common stock acquired by ESOP........... (1,110) (1,306) (1,501) (1,723) Less: Common stock acquired by MRP (3)........ (555) (653) (751) (861) ------------ ------------ ------------ ------------ Pro forma stockholders equity.................. $ 33,293 $ 35,362 $ 37,431 $ 39,831 Less: Intangible assets....................... (3,851) (3,851) (3,851) (3,851) ------------- ------------- ------------- ------------- Pro forma tangible stockholders' equity........ 29,442 31,511 33,580 35,980 ============ ============ ============ ============ Stockholders' equity per share:(8) Historical..................................... $ 8.85 $ 7.52 $ 6.54 $ 5.70 Estimated net proceeds......................... 5.28 5.30 5.32 5.34 Plus: Shares issued to foundation............. 0.11 0.11 0.11 0.10 Less: Shares contribution to foundation ...... (0.11) (0.11) (0.11) (0.10) Less: Cash contribution to foundation......... (0.11) (0.11) (0.11) (0.10) Plus: Tax benefit of the foundation........... 0.07 0.07 0.07 0.07 Less: Common stock acquired by ESOP........... (0.45) (0.45) (0.45) (0.45) Less: Common stock acquired by MRP (3)........ (0.22) (0.22) (0.22) (0.22) ------------- ------------- ------------- ------------- Pro forma stockholders' equity per share (7) (8)........................................ $ 13.42 $ 12.11 $ 11.15 $ 10.34 Pro forma tangible stockholders' equity per share (7) (8).............................. $ 11.87 $ 10.80 $ 10.01 $ 9.34 Offering price as percentage of pro forma stockholders' equity per share.......... 74.52% 82.58% 89.69% 96.71%
49
AT OR FOR THE YEAR ENDED DECEMBER 31, 2003 ---------------------------------------------------------------- BASED UPON THE SALE AT $10.00 PER SHARE OF 1,360,000 1,600,000 1,840,000 2,116,000 SHARES SHARES SHARES SHARES (1) ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Offering price as percentage of pro forma tangible stockholders' equity per share. 84.25% 92.59% 99.90% 107.07% Number of shares outstanding for pro forma book value per share calculations....... 2,479,901 2,917,530 3,355,160 3,853,613
50 - ------------------------------------ (1) As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares, changes in market and financial conditions following the commencement of the offering, or regulatory considerations. (2) Assumes that 8% of shares of common stock sold in the offering (including shares issued to the charitable foundation) will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from First Federal of Northern Michigan Bancorp, Inc. First Federal of Northern Michigan intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. First Federal of Northern Michigan's total annual payments on the employee stock ownership plan debt are based upon 15 equal annual installments of principal and interest. Statement of Position 93-6 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by First Federal of Northern Michigan, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 34.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders' equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 7,398, 8,704, 10,010 and 11,485 shares were committed to be released during the period at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and in accordance with Statement of Position 93-6, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of net income per share calculations. (3) If approved by First Federal of Northern Michigan Bancorp, Inc.'s stockholders, the stock recognition and retention plan may purchase an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering (including shares issued to the charitable foundation) (or a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock recognition and retention plan, and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from First Federal of Northern Michigan Bancorp, Inc. or through open market purchases. The funds to be used by the stock recognition and retention plan to purchase the shares will be provided by First Federal of Northern Michigan Bancorp, Inc. The table assumes that (i) the stock recognition and retention plan acquires the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the stock recognition and retention plan is amortized as an expense during the year ended December 31, 2003, and (iii) the stock recognition and retention plan expense reflects an effective combined federal and state tax rate of 34.0%. Assuming stockholder approval of the stock recognition and retention plan and that shares of common stock (equal to 4% of the shares sold in the offering, including shares issued to the charitable foundation) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 2.2% at the maximum of the offering range. (4) If approved by First Federal of Northern Michigan Bancorp, Inc.'s stockholders, the stock option plan may grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion, although such plan, including the amount awarded under the plan, may remain subject to supervisory restrictions). Stockholder approval of the stock option plan may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock option plan, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $3.85 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25.0% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 39.75%. The actual expense of the stock option plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock option plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock option plan are obtained from the issuance of authorized but unissued shares, our net income per share and stockholders' equity per share will decrease. The issuance of authorized but previously unissued shares of common stock pursuant to the exercise of options under such plan would dilute existing stockholders' ownership and voting interests by approximately 9.1% at the maximum of the offering range. (5) Per share figures include publicly held shares of Alpena Bancshares, Inc. common stock that will be exchanged for new shares of First Federal of Northern Michigan Bancorp, Inc. common stock in the conversion. See "The Conversion -- Share Exchange Ratio." Net income per share computations are determined by taking the number of shares assumed to be sold in the offering (including shares issued to the charitable foundation) and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with Statement of Position 93-6, subtracting the employee stock ownership plan shares which have not been committed for release during the respective periods. See note 2. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts. 51 (6) The retained earnings of First Federal of Northern Michigan will be substantially restricted after the conversion. See "Our Dividend Policy," "The Conversion--Liquidation Rights" and "Supervision and Regulation--Federal Banking Regulation--Capital Distributions." (7) Per share figures include publicly held shares of Alpena Bancshares, Inc. common stock that will be exchanged for new shares of First Federal of Northern Michigan Bancorp, Inc. common stock in the conversion. Stockholders' equity per share calculations are based upon the sum of (i) the number of subscription shares assumed to be sold in the offering (including shares issued to the charitable foundation) and (ii) new shares to be issued in exchange for publicly held shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The exchange shares reflect an exchange ratio of 1.4783, 1.7391, 2.0000 and 2.3000 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The number of subscription shares actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts. 52 COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE FOUNDATION As reflected in the table below, if the charitable foundation is not established and funded as part of the conversion and offering, RP Financial estimates that the pro forma valuation of First Federal of Northern Michigan Bancorp, Inc. would be greater and, as a result, a greater number of shares of common stock would be issued in the conversion. At the minimum, midpoint, maximum and adjusted maximum of the valuation range, the pro forma valuation of First Federal of Northern Michigan Bancorp, Inc. is $24.8 million, $29.2 million, $33.6 million and $38.5 million with the charitable foundation, as compared to $25.1 million, $29.6 million, $34.0 million and $39.1 million, respectively, without the charitable foundation. There is no assurance that in the event the charitable foundation were not formed, the appraisal prepared at that time would conclude that the pro forma market value of First Federal of Northern Michigan Bancorp, Inc. would be the same as that estimated in the table below. Any appraisal prepared at that time would be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions. For comparative purposes only, set forth below are certain pricing ratios and financial data and ratios at and for the nine months ended September 30, 2004 at the minimum, midpoint, maximum and adjusted maximum of the offering range, assuming the conversion and offering was completed at September 30, 2004, with and without the charitable foundation. Pro forma financial ratios are annualized. The valuation amounts referred to in the table below relate to the value of the shares sold to the depositors and the public.
1,360,000 SHARES SOLD 1,600,000 SHARES SOLD -------------------------- -------------------------- WITH WITHOUT WITH WITHOUT FOUNDATION FOUNDATION FOUNDATION FOUNDATION ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Estimated offering amount...................... $ 13,600 $ 13,940 $ 16,000 $ 16,400 Pro forma Second Step Value.................... $ 13,872 $ 13,940 $ 16,320 $ 16,400 Estimated market capitalization................ $ 24,799 $ 25,141 $ 29,175 $ 29,577 Total assets................................... $ 265,819 $ 266,235 $ 267,888 $ 268,377 Total liabilities.............................. $ 232,540 $ 232,540 $ 232,540 $ 232,540 Pro forma stockholders' equity................. $ 33,279 $ 33,695 $ 35,348 $ 35,837 Pro forma net income........................... $ 285 $ 289 $ 278 $ 283 Pro forma stockholders' equity per share....... $ 13.42 $ 13.40 $ 12.12 $ 12.12 Pro forma net income per share................. $ 0.12 $ 0.12 $ 0.10 $ 0.10 Pro forma shares outstanding for earnings calculation.................................. 2,374,474 2,408,125 2,793,498 2,833,087 PRO FORMA PRICING RATIOS: Offering price as a percentage of pro forma stockholders' equity per share............... 74.52% 74.63% 82.51% 82.51% Offering price to pro forma net income per share........................................ 62.50x 62.50x 75.00x 75.00x Offering price to pro forma assets............. 9.33% 9.44% 10.89% 11.02% PRO FORMA FINANCIAL RATIOS: Return on assets (1)........................... 0.11% 0.11% 0.10% 0.11% Return on equity (1)........................... .86% .86% .79% .79% Equity to assets............................... 12.52% 12.66% 13.19% 13.35% Total shares issued............................ 2,479,901 2,514,071 2,917,530 2,957,730 (CONTINUED) 1,840,000 SHARES SOLD 2,116,000 SHARES SOLD -------------------------- -------------------------- WITH WITHOUT WITH WITHOUT FOUNDATION FOUNDATION FOUNDATION FOUNDATION ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Estimated offering amount...................... $ 18,400 $ 18,860 $ 21,160 $ 21,689 Pro forma Second Step Value.................... $ 18,768 $ 18,860 $ 21,535 $ 21,689 Estimated market capitalization................ $ 33,552 $ 34,014 $ 38,536 $ 39,116 Total assets................................... $ 269,957 $ 270,519 $ 272,356 $ 272,982 Total liabilities.............................. $ 232,540 $ 232,540 $ 232,540 $ 232,540 Pro forma stockholders' equity................. $ 37,416 $ 37,979 $ 39,816 $ 40,442 Pro forma net income........................... $ 272 $ 276 $ 264 $ 270 Pro forma stockholders' equity per share....... $ 11.15 $ 11.17 $ 10.33 $ 10.34 Pro forma net income per share................. $ 0.08 $ 0.08 $ 0.07 $ 0.07 Pro forma shares outstanding for earnings calculation.................................. 3,212,523 3,258,052 3,689,947 3,746,758 PRO FORMA PRICING RATIOS: Offering price as a percentage of pro forma stockholders' equity per share............... 89.69% 89.53% 96.81% 96.71% Offering price to pro forma net income per share........................................ 93.75x 93.75x 107.14x 107.14x Offering price to pro forma assets............. 12.43% 12.57% 14.15% 14.33% PRO FORMA FINANCIAL RATIOS: Return on assets (1)........................... 0.10% 0.10% 0.10% 0.10% Return on equity (1)........................... .73% .73% .66% .67% Equity to assets............................... 13.86% 14.04% 14.62% 14.81% Total shares issued............................ 3,355,160 3,401,390 3,853,613 3,911,598
- ----------------- (1) Annualized. 53 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited consolidated financial statements, which appear beginning on page F-1 of this prospectus. You should read the information in this section in conjunction with the business and financial information regarding Alpena Bancshares, Inc. provided in this prospectus. The financial condition and results of operations reported at September 30, 2004 and for the nine-month periods ended September 30, 2003 and 2004 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Federal of Northern Michigan is a full-service, community-oriented savings bank whose primary lending activity is the origination of one- to four-family residential real estate mortgages, commercial real estate loans, commercial loans and consumer loans. As of September 30, 2004, $100.2 million, or 53.1% of our total loan portfolio consisted of one- to four-family residential real estate loans, $26.5 million, or 14.0%, and $29.0 million, or 15.4%,of our total loan portfolio consisted of commercial mortgage loans and commercial loans, respectively, and $25.0 million, or 13.3%, of our total loan portfolio consisted of consumer and other loans. In recent years, commercial mortgage loans and commercial loans have grown as a percentage of our loan portfolio for two reasons. First, we have increased our emphasis on originating these loans, which generally have higher interest rates compared to one- to four-family residential real estate loans. In addition, most of these loans are originated with adjustable interest rates, which assists us in managing interest rate risk. Second, most of our one- to four-family residential mortgage loan customers prefer fixed-rate loans in the low interest rate environment that has prevailed over the last several years. Since we sell in the secondary mortgage market a majority of the fixed-rate one- to four-family residential mortgage loans that we originate, one- to four-family residential real estate loans have decreased as a percentage of our total loan portfolio. Our results of operations depend primarily on our net interest income, which is the difference between the interest income we receive on our interest-earning assets, such as loans and securities, and the interest expense we pay on our deposits and borrowings. Our results of operations are also affected by non-interest income and non-interest expense, the provision for loan losses and income tax expense. Non-interest income consists primarily of banking fees, service charges, insurance commissions and gains (losses) on sales of loans and securities available for sale. Our non-interest expense consists primarily of salaries and employee benefits, occupancy and office expenses, advertising and promotion expense and data processing expenses. As the holding company of a federally chartered savings bank, our results of operations are significantly affected by general economic and competitive conditions, and particularly changes in market interest rates, government policies and actions of regulatory authorities. Numerous factors that are beyond our control can cause market interest rates to increase or decline. In addition, we are unable to predict future changes in government policies and actions of regulatory authorities that could have a material impact on our financial performance. As a result, we believe that changes in market interest rates, government policies and actions of regulatory authorities represent the primary uncertainties in predicting our future performance. See "--Management of Interest Rate Risk" and "Supervision and Regulation." 54 EXPECTED INCREASE IN NON-INTEREST EXPENSE AS A RESULT OF THE CONVERSION Following the completion of the conversion, our non-interest expense can be expected to increase because of the increased compensation expenses associated with the purchases of shares of common stock by our employee stock ownership plan, the funding of our charitable contribution, and the adoption of the recognition and retention plan, if approved by our stockholders. Assuming that 2,116,000 shares are sold in the offering and up to 37,500 shares are issued to the charitable foundation: (i) the employee stock ownership plan will acquire 172,280 shares of common stock with a $1.7 million loan that is expected to be repaid over 15 years, resulting in an annual expense (pre-tax) of approximately $115,000 (assuming that the shares of common stock maintain a value of $10.00 per share); (ii) the recognition and retention plan would award a number of shares equal to 4% of the shares sold in the offering (including shares issued to the charitable foundation), or 86,140 shares, to eligible participants, and such awards would be expensed as the awards vest. Assuming all shares are awarded under the recognition and retention plan at a price of $10.00 per share, and that the awards vest over five years, the corresponding annual expense (pre-tax) associated with shares awarded under the recognition and retention plan would be approximately $172,000; and (iii) the after-tax expense of our funding of the charitable contribution will be approximately $495,000, all of which will be recorded in the quarter in which we fund the charitable contribution. The actual expense that will be recorded for the employee stock ownership plan will be determined by the market value of the shares of common stock as they are released to employees over the term of the loan, and whether the loan is repaid faster than its contractual term. Accordingly, increases in the stock price above $10.00 per share will increase the total employee stock ownership plan expense, and accelerated repayment of the loan will increase the employee stock ownership plan expense for those periods in which accelerated or larger loan repayments are made. Further, the actual expense of the recognition and retention plan will be determined by the fair market value of the stock on the grant date, which might be greater than $10.00 per share. CRITICAL ACCOUNTING POLICIES Our accounting and reporting policies are prepared in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. We consider accounting policies that require significant judgment and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. Changes in underlying factors, assumptions or estimates could have a material impact on our future financial condition and results of operations. Based on the size of the item or significance of the estimate, the following accounting policies are considered critical to our financial results. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is calculated with the objective of maintaining a reserve sufficient to absorb estimated probable future loan losses. Management's determination of the adequacy of the 55 allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss content for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of collateral. We have established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish an allowance for losses on loans. The allowance for losses on loans is based on our current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for losses on loans is established through a provision for loan losses based on our evaluation of the losses inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectability as of the reporting date. Our evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, our knowledge of inherent losses in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management believes this is a critical accounting policy because this evaluation involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters. Historically our estimates and assumptions have proven to be relatively accurate as evidenced by normal and expected provisions and charge-offs to our allowance for loan losses. For example, over the past five years, the provision for loan losses has ranged from $120,000 to $415,000 per year while the historical loss experience over that same period has ranged from $105,000 to $289,000. The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze delinquency trends, which have remained stable, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. The principal assumption used in deriving the allowance for loan losses is the estimate of loss content for each risk rating. To illustrate, if recent loss experience dictated that the projected loss ratios would be changed by 10% (of the estimate) across all risk ratings, the allocated allowance as of September 30, 2004 would have changed by approximately $100,000. Actual loan losses may be significantly more than the reserves we have established, which could have a material negative effect on our financial results. MORTGAGE SERVICING RIGHTS. In 2000, we began selling to investors a portion of our originated one- to four-family residential real estate mortgage loans. When we acquire mortgage servicing rights through the origination of mortgage loans and sale of those loans with servicing rights retained, we allocate a portion of the total cost of the mortgage loans to the mortgage servicing rights based on their relative fair value. As of September 30, 2004, we were servicing loans sold to others totaling $140.4 million. We amortize capitalized mortgage servicing rights as a reduction of servicing fee income in proportion to, and over the period of, estimated net servicing income by use of a method that approximates the level-yield method. We periodically evaluate capitalized mortgage servicing rights for impairment using a model that takes into account several variables including expected prepayment speeds and prevailing interest rates. If we identify impairment, we charge the amount of the impairment to earnings by establishing a valuation allowance against the capitalized mortgage servicing rights asset. The primary risk of material changes to the value of the servicing rights resides in the potential volatility in the economic assumptions used, particularly the prepayment speed. We monitor this risk and adjust the valuation allowance as necessary to adequately reserve for any probable impairment in the portfolio. 56 Management believes the estimation of these variables makes this a critical accounting policy. For purposes of measuring impairment, the mortgage servicing rights are stratified based on financial asset type and interest rates. In addition, we obtain an independent third-party valuation of the mortgage servicing portfolio on a quarterly basis. In general, the value of mortgage servicing rights increases as interest rates rise and decreases as interest rates fall. This is because the estimated life and estimated income from a loan increase as interest rates rise and decrease as interest rates fall. The key economic assumptions made in determining the fair value of the mortgage servicing rights at September 30, 2004 included the following: Annual constant prepayment speed (CPR): 11.08% Weighted average life remaining (in months): 54 Discount Rate Used: 7.50% At the September 30, 2004 valuation, we calculated the value of our mortgage servicing rights to be $1.6 million. The book value of our mortgage servicing rights as of September 30, 2004 was $898,000, which was $677,000 less than the independent valuation. Because the fair value exceeded the book value, there was no need to establish a valuation reserve. Management believes that the assumptions and estimates used to record and amortize the mortgage servicing rights have been relatively accurate. As evidence for this statement, the only time it was necessary to record a valuation reserve was in June of 2003 when mortgage interest rates reached near historic lows. The reserve recorded at that time was $29,000. That reserve was reversed in December 2003 when the valuation calculation showed the fair value to be $428,000 higher than the book value. IMPAIRMENT OF INTANGIBLE ASSETS. Goodwill arising from business acquisitions represents the value attributable to unidentifiable intangible elements in the business acquired. The fair value of goodwill is dependent upon many factors, including our ability to provide quality, cost effective services in the face of competition. Because of these many factors, management believes this is a critical accounting policy. A decline in earnings as a result of business or market conditions, a shrinking of deposit customers or a run off of insurance customers over sustained periods could lead to an impairment of goodwill which could adversely impact earnings in future periods. A significant portion of our intangible assets, including goodwill, relates to the acquisition premiums recorded with the purchase of the InsuranCenter of Alpena ^("ICA") and certain branches over the last several years. Intangible assets are reviewed periodically for impairment by comparing the fair value of the intangible asset to the book value of the intangible asset. If the book value is in excess of the fair value, impairment is indicated and the goodwill must be written down to its fair value. In connection with our acquisition in 2003 of the ICA, we allocated the excess of the purchase price paid over the fair value of net assets acquired to intangible assets, including goodwill. These intangible assets included the ICA customer list and a third party contract to which ICA is a party. We are amortizing the value assigned to the customer list and the contract over 20 years. Goodwill is not amortized. The impairment test of goodwill and identified intangible assets that have an indefinite useful life, performed as of September 30, 2004, and December 31, 2003 in accordance with SFAS No. 142, did not indicate that an impairment charge was required. If, through testing, we determine that there is impairment, based, for 57 example, on significant runoff of the customer list or material changes to the third party contract, then we may need to reduce the recorded value of those intangible assets, which would create expense and reduce our earnings. To illustrate, if it were determined that 10% of the acquired customers were to leave ICA in a single year, then we would need to record an impairment charge that would equal an additional 5% of the original value assigned to the customer list which, in this case, would be $45,000 on a pretax basis. This scenario might also lead to impairment of the goodwill asset which would further impact earnings. Presently, the customer base and the third party contracts have proven to be longstanding and stable. The third party contract is with a health insurance provider that is the market leader in northeast lower Michigan in providing healthcare coverage supporting management's evaluation that the asset in not impaired. In connection with branch offices that were acquired over the last decade, we assigned the excess of the purchase price over the fair value of the assets acquired to core deposit intangible. The core deposit intangible is tested periodically for impairment. Our original estimates related to the expected life of the deposits have proven to be relatively accurate as evidenced by the fact that no impairment has been recorded. If we determine through testing that a significant portion of the acquired customers no longer do business with us then the asset would be deemed to be impaired thereby requiring a charge to earnings to the extent appropriate given all of the known factors. We amortize core deposit intangibles over a period of between 10 and 15 years. BUSINESS STRATEGY OPERATING AS A COMMUNITY SAVINGS BANK. We are committed to meeting the financial needs of the communities in which we operate. Our branch network of 10 offices enhances our ability to serve these communities. We provide a broad range of individual consumer and business financial services on a personalized basis. We believe that we can be more effective in servicing our customers than many of our non-local competitors because our employees and senior management are able to respond promptly to customer needs and inquiries. Our ability to provide these services is enhanced by the experience of our senior management, which has an average of 10 years' experience in the financial services industry. INCREASING OUR COMMERCIAL REAL ESTATE AND COMMERCIAL LENDING. Beginning in 2001, we began to increase our originations of commercial real estate and commercial loans. At September 30, 2004, loans secured by commercial real estate totaled $26.5 million, or 14.0% of our total loan portfolio, and commercial loans totaled $29.0 million, or 15.4% of our total loan portfolio. We intend to emphasize the origination of these types of loans in the future and retain them in our portfolio. Commercial real estate and commercial loans generally are originated with higher interest rates compared to one- to four-family residential real estate loans, and therefore, have a positive impact on our net interest rate spread and net interest income. In addition, most of these loans are originated with adjustable interest rates, which assists us in managing interest rate risk. We believe that our 10-branch network will enable us to increase our commercial and commercial real estate loan portfolio without significant additional fixed costs. INCREASING OUR SHARE OF LOWER-COST DEPOSITS. In past years our cost of funds has been relatively high as we accepted higher-costing long-term certificates of deposit to fund our long-term assets such as one- to four-family residential mortgage loans. As we have increased our origination of commercial real estate and commercial loans, most of which are originated with adjustable interest rates, we have decreased our need for higher-costing long-term certificates of deposit. We intend to lower our cost of funds by increasing our share of lower-cost short-term certificates of deposit and lower-cost money market deposits. We also intend to market our non-interest-bearing checking accounts in conjunction with our focus on commercial business lending. 58 INCREASING AND DIVERSIFYING OUR SOURCES OF NON-INTEREST INCOME. In June 2003, we acquired InsuranCenter of Alpena ("ICA"), a licensed insurance agency engaged in the business of property, casualty and health insurance, in an effort to increase and diversify our sources of non-interest income. MAINTAINING HIGH ASSET QUALITY AND CAPITAL STRENGTH. We are committed to conservative loan underwriting standards and procedures, and we primarily originate loans secured by real estate. See "Business of Alpena Bancshares, Inc. and First Federal of Northern Michigan--Lending Activities." As a result, we have consistently experienced low levels of late payments and losses on loans. As of September 30, 2004, our ratio of non-performing assets to total assets was 0.70%. At September 30, 2004, our ratio of equity to assets was 8.62%. Assuming the sale of 1,600,000 shares of common stock at the midpoint of the offering range, we expect that the ratio of equity to assets will increase to approximately 13.1% following the conversion. MANAGING OUR INTEREST RATE RISK EXPOSURE BY SELLING FIXED-RATE RESIDENTIAL REAL ESTATE LOANS. Historically, most borrowers have preferred long-term, fixed-rate residential real estate loans when market interest rates are at relatively low levels. These loans expose us to interest rate risk because our liabilities, consisting primarily of deposits, have relatively short maturities. In order to better match the maturities of our loan portfolio to the maturities of our deposits in the current low interest rate environment, we have sold substantially all of the fixed-rate, one- to four-family residential real estate loans with maturities of 15 years or more that we have originated since 2002, and we intend to continue this practice in the future. MANAGEMENT OF INTEREST RATE RISK QUALITATIVE ANALYSIS. Our most significant form of market risk is interest rate risk. The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy, and then manage that risk in a manner that is consistent with our policy to reduce the exposure of our net interest income to changes in market interest rates. First Federal of Northern Michigan's asset/liability management committee ("ALCO"), which consists of senior management, evaluates the interest rate risk inherent in our assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit-taking strategies accordingly. The Board of Directors reviews the ALCO's activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios, as well as the intrinsic value of our deposits and borrowings. We actively evaluate interest rate risk in connection with our lending, investing and deposit-taking activities. Generally, our loans, which represent the significant majority of our assets, have longer-terms to maturity than our deposits, which represent the significant majority of our liabilities. As of September 30, 2004, $169.0 million, or 88.2% of our loan portfolio, consisted of loans that mature or reprice during the year ending December 31, 2005 and beyond. In contrast, as of September 30, 2004, $104.5 million, or 68.9% of our deposits as of that date, consisted of deposits that mature or reprice in less than one year. In an effort to better manage interest-rate risk, we have increased our focus on the origination and retention in our portfolio of adjustable-rate residential mortgage loans. In addition, we intend to increase our originations and retention in our portfolio of commercial real estate and commercial loans. Most of these loans are originated with adjustable interest rates, which assists us in managing interest rate risk. Depending on market interest rates and our capital and liquidity position, we generally sell into the secondary mortgage market all of the fixed-rate, longer-term (15 years or more) residential mortgage loans that we originate, generally on a servicing-retained basis. We primarily invest in short- and medium-term securities, which generally have lower yields compared to longer-term investments. 59 Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term securities, as well as originating loans with adjustable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. We have also maintained high levels of liquid assets, such as cash and cash equivalents, which will permit us to invest in higher-yielding securities in the event of an increase in interest rates. These strategies may adversely affect net interest income due to lower initial yields on these investments in comparison to longer-term, fixed-rate loans and investments. QUANTITATIVE ANALYSIS. We evaluate interest rate sensitivity using a model that estimates the change in our net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. In calculating changes in NPV, we assume estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem most likely based on historical experience during prior interest rate changes. The table below sets forth, as of September 30, 2004, the estimated changes in our NPV that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
NPV AS A PERCENTAGE OF ESTIMATED INCREASE PRESENT VALUE OF ASSETS (3) (DECREASE) IN NPV ------------------------------- CHANGE IN INTEREST --------------------------- INCREASE RATES (BASIS ESTIMATED (DECREASE) POINTS) (1) NPV (2) AMOUNT PERCENT NPV RATIO (4) (BASIS POINTS) -------------------- ----------- ------------ ------------- -------------- -------------- (DOLLARS IN THOUSANDS) +300 $ 19,588 $ (5,171) (21)% 7.85% (164) +200 22,028 (2,730) (11)% 8.68% (81) +100 23,911 (848) (3)% 9.28% (21) -- 24,758 -- 0% 9.50% -- -100 23,963 (795) (3)% 9.12% (38)
--------------------------- (1) Assumes an instantaneous uniform change in interest rates at all maturities. (2) NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. (3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets. (4) NPV Ratio represents NPV divided by the present value of assets. The table set forth above indicates that at September 30, 2004, in the event of an immediate 100 basis point decrease in interest rates, we would be expected to experience a 3% decrease in NPV and a 38 basis point decrease in NPV ratio. In the event of an immediate 200 basis point increase in interest rates, we would be expected to experience an 11% decrease in NPV and an 81 basis point decrease in NPV ratio. Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data do not reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such 60 measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. ANALYSIS OF NET INTEREST INCOME Net interest income is the difference between our interest income on interest-earning assets and our interest expense on interest-bearing liabilities. Our net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them, respectively. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------------------------------------- AT 2004 2003 SEPTEMBER --------------------------------------- --------------------------------------- 30, 2004 AVERAGE AVERAGE ------------ OUTSTANDING OUTSTANDING YIELD/RATE BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE(1) ------------ ----------- ---------- -------------- ----------- ---------- -------------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Loans......................... 6.40% $ 176,682 $ 8,447 6.39% $ 153,420 $ 8,408 7.33% Investment securities......... 3.42% 42,466 1,084 3.41% 45,677 1,380 4.04% Other investments (2)......... 3.74% 6,854 267 5.21% 13,051 337 3.45% ----------- ---------- ----------- ---------- Total interest-earning assets.................... 5.79% 226,002 9,798 5.79% 212,148 10,125 6.37% ----------- ---------- ----------- ---------- Non-interest-earning assets... 17,158 15,562 ----------- ----------- Total assets............... $ 243,160 $ 227,710 =========== =========== INTEREST-BEARING LIABILITIES: Savings deposits.............. 0.26% $ 27,556 46 0.22% $ 30,027 98 0.44% Money market/NOW accounts..... 0.90% 29,385 172 0.78% 23,715 145 0.82% Certificates of deposit....... 3.31% 97,360 2,402 3.30% 93,662 2,631 3.75% ------------ ----------- ---------- -------------- ----------- ---------- -------------- Total deposits............. 2.33% 154,301 2,620 2.27% 147,404 2,874 2.61% FHLB advances and other (3)... 5.07% 54,956 1,951 4.74% 47,963 2,057 5.73% ------------ ----------- ---------- -------------- ----------- ---------- -------------- Total interest-bearing liabilities............... 2.95% 209,257 4,571 2.92% 195,367 4,931 3.38% Non-interest-bearing liabilities.................. 12,088 10,413 ----------- ----------- Total liabilities.......... 221,345 205,780 Stockholders' equity.......... 21,815 21,924 ----------- ----------- Total liabilities and stockholders' equity..... $ 243,160 $ 227,704 =========== =========== Net interest income........... $ 5,227 $ 5,194 ========== ========== Net interest rate spread 42).. 2.84% 2.87% 2.99% ============ ============== ============== Net interest-earning assets (5) $ 16,745 $ 16,781 =========== =========== Net interest margin (6)....... 3.07% 3.09% 3.27% ============ ============== ============== Average interest-earning assets to interest-bearing liabilities................ 108.21% 108.00% 108.59% ============ ============== ============== (FOOTNOTES ON FOLLOWING PAGE)
61
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------------- 2003 2002 2001 -------------------------------- -------------------------------- -------------------------------- AVERAGE AVERAGE AVERAGE OUTSTANDING YIELD/ OUTSTANDING YIELD/ OUTSTANDING YIELD/ BALANCE INTEREST RATE(1) BALANCE INTEREST RATE(1) BALANCE INTEREST RATE(1) ----------- ---------- --------- ----------- ---------- --------- ----------- ---------- --------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Loans...................... $ 156,131 $ 11,214 7.18% $ 163,746 $ 12,133 7.41% $ 201,926 $ 15,761 7.81% Investment securities...... 43,939 1,736 3.95% 42,805 1,911 4.46% 18,847 1,056 5.60% Other investments (2)...... 11,639 400 3.44% 15,267 455 2.98% 15,856 769 4.85% ----------- ---------- ----------- ---------- ----------- ---------- Total interest-earning assets................. 211,709 13,350 6.31% 221,818 14,499 6.54% 236,629 17,586 7.43% ----------- ---------- ----------- ---------- ----------- ---------- Non-interest-earning assets 16,018 13,375 13,469 ----------- ----------- ----------- Total assets............ $ 227,727 $ 235,193 $ 250,098 =========== =========== =========== INTEREST-BEARING LIABILITIES: Savings deposits........... $ 29,700 119 0.40% $ 31,007 196 0.63% $ 27,582 363 1.32% Money market/NOW accounts.. 24,206 189 0.78% 23,648 288 1.22% 22,772 288 1.26% Certificates of deposit.... 92,900 3,411 3.67% 102,370 4,982 4.87% 115,288 7,255 6.29% ----------- ---------- --------- ----------- ---------- --------- ----------- ---------- --------- Total deposits.......... 146,806 3,719 2.53% 157,025 5,466 3.48% 165,642 7,906 4.77% FHLB advances and other (3) 47,977 2,736 5.70% 49,462 2,876 5.81% 60,461 3,533 5.84% ----------- ---------- --------- ----------- ---------- --------- ----------- ---------- --------- Total interest-bearing liabilities........... 194,783 6,455 3.31% 206,487 8,342 4.04% 226,103 11,439 5.06% Non-interest-bearing liabilities............... 11,040 7,770 4,291 ----------- ----------- ----------- Total liabilities....... 205,823 214,257 230,394 Stockholders' equity....... 21,904 20,936 19,704 ----------- ----------- ----------- Total liabilities and stockholders' equity.. $ 227,727 $ 235,193 $ 250,098 =========== =========== =========== Net interest income........ $ 6,895 $ 6,157 $ 6,147 ========== ========== ========== Net interest rate spread (4)................ 3.00% 2.50% 2.37% ========= ========= ========= Net interest-earning assets (5)................ $ 16,926 $ 15,331 $ 10,526 =========== =========== =========== Net interest margin (6).... 3.26% 2.78% 2.60% ========= ========= ========= Average of interest-earning assets to interest-bearing liabilities............. 108.69% 107.42% 104.66% ========= ========= =========
- --------------------------- (1) Yields and rates for the nine months ended September 30, 2004 and 2003 are annualized. (2) Includes income from subsidiary. (3) Includes $1.3 million in a note payable in annual installments over 10 years to the former owners of InsuranCenter. (4) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (5) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. (6) Net interest margin represents net interest income divided by average total interest-earning assets. 62 The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to changes in rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, 2004 VS. 2003 2003 VS. 2002 2002 VS. 2001 -------------------------------- -------------------------------- -------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE) DUE TO TOTAL DUE TO TOTAL DUE TO TOTAL ------------------- INCREASE ------------------- INCREASE ------------------- INCREASE VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- (IN THOUSANDS) INTEREST-EARNING ASSETS: Loans................... $ 1,140 $ (1,100) $ 40 $ (600) $ (319) $ (919) $ (2,748) $ (880) $ (3,628) Investment securities... (93) (204) (297) 49 (224) (175) 1,108 (253) 855 Other Investments(1).... (199) 131 (69) (118) 63 (55) (28) (286) (314) -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- Total interest-earning assets............. 848 (1,174) (326) (669) (480) (1,149) (1,668) (1,419) (3,087) -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- INTEREST-BEARING LIABILITIES: Savings deposits........ (7) (46) (53) (8) (69) (77) 41 (208) (167) Money market/NOW accounts............. 34 (6) 28 7 (106) (99) 10 (10) -- Certificates of deposit 100 (328) (228) (429) (1,142) (1,571) (754) (1,519) (2,273) -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- Total deposits........ 127 (380) (253) (430) (1,317) (1,747) (703) (1,737) (2,440) FHLB Advances and others(2)............ 281 (388) (106) (67) (73) (140) (639) (18) (657) -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- Total interest-bearing liabilities........ 409 (768) (360) (497) (1,390) (1,887) (1,342) (1,755) (3,097) -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- Change in net interest income............... $ 439 $ (406) $ 33 $ (172) $ 910 $ 738 $ (326) $ 336 $ 10 ======== ======== ========== ======== ======== ========== ======== ======== ==========
- --------------------------- (1) Includes income from subsidiary. (2) Includes $1.3 million in a note payable in annual installments over 10 years to the former owners of InsuranCenter. COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 ASSETS. Total assets increased $30.6 million, or 13.6%, to $254.5 million at September 30, 2004 from $223.9 million at December 31, 2003. Net loans receivable increased $23.4 million, or 14.2%, to $187.8 million at September 30, 2004 from $164.4 million at December 31, 2003, reflecting growth in all loan categories. The mortgage loan portfolio grew primarily as the result of our purchase of $9.1 million in mortgage loans from another Michigan bank, of which $7.8 million remained at September 30, 2004. Except for a single loan that was secured by real estate in Indiana, all of the loans purchased were secured by real estate within the state of Michigan. Growth in both the commercial and consumer loan portfolios resulted from of our efforts to increase these types of loans. Cash and cash and equivalents decreased by $1.9 million, or 28.1%, to $4.8 million at September 30, 2004 from $6.7 million at December 31, 2003 as we invested excess cash in bonds that pay higher yields than the overnight yields on federal funds. Investment securities increased $8.2 million, or 23.7% in the first nine months of 2004 due to a leveraging strategy we implemented during the period in which we purchased $10.0 million in short-term (less than three years) corporate bonds funded with short-duration Federal Home Loan Bank advances. 63 LIABILITIES. Deposits increased $30.7 million, or 20.3%, to $182.4 million at September 30, 2004 from $151.7 million at December 31, 2003. This increase was primarily attributable to the $12.1 million of deposits acquired in our May 2004 acquisition from another financial institution of two branches located in Mancelona and Alanson, Michigan. We also were successful in attracting deposit through various time deposit promotions conducted during this period. Federal Home Loan Bank advances increased $250,000, or 0.5%, to $46.1 million at September 30, 2004 from $45.8 million at December 31, 2003. STOCKHOLDERS' EQUITY. Stockholders' equity decreased by $15,000 to $21.9 million at September 30, 2004 from $22.0 million at December 31, 2003. The decrease was due to lower market values on our investment portfolio. Compared to December 31, 2003, the net unrealized gain on available for sale securities decreased $161,000 at September 30, 2004 due to the rise in market interest rates over the period. The decrease in net unrealized gain on available for sale securities was partially offset by net income of $332,000 for the nine months ended September 30, 2004. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND DECEMBER 31, 2002 ASSETS. Total assets decreased $4.9 million, or 2.1%, to $223.9 million at December 31, 2003 from $228.8 million at December 31, 2002. Net loans increased $12.6 million, or 8.2%, to $164.4 million at December 31, 2003 from $151.9 million at December 31, 2002, due primarily to increased commercial lending activities. Our commercial loan portfolio grew 54.0% to $42.8 million at December 31, 2003 from $27.8 million at December 31, 2002. Among the reasons for the growth of our commercial loan portfolio was our hiring of a new commercial lender early in 2003. Mortgage lending was strong in 2003 as originations of one- to four-family residential mortgage loans totaled $133.1 million in 2003, representing an increase of 36.5% compared to 2002. The increased loan origination activity reflected the near historic lows in mortgage interest rates generally, plus our addition of two experienced mortgage lenders who were employed by us for most of the year. Because low market interest rates resulted in relatively low rates on these newly originated loans, we elected to sell most of these loans to reduce our interest rate risk. The cash proceeds of the sales were used to fund the origination of commercial loans, which increased to $13.4 million at December 31, 2003 from $7.5 million at December 31, 2002. The cash proceeds also were used to pay off high-cost Federal Home Loan Bank advances. To fund the growth in higher-yielding loans, we reduced cash and cash equivalents by $8.4 million, or 55.6%, to $6.7 million at December 31, 2003 from $15.1 million at December 31, 2002. We also reduced investment securities by $12.3 million, or 26.1%, to $34.7 million at December 31, 2003 from $46.9 million at December 31, 2002. LIABILITIES. Deposits decreased $4.4 million, or 2.8%, to $151.7 million at December 31, 2003 from $156.1 million at December 31, 2002 as increased liquidity from our mortgage banking activities and the reduction in cash and cash equivalents and investment securities allowed us to reduce the rates offered on our deposits which led to the decline in deposit balances. Borrowings in the form of Federal Home Loan Bank advances declined by $2.6 million, or 5.4%, to $45.8 million at December 31, 2003 from $48.4 million at December 31, 2002 as we used our increased liquidity to repay high-cost advances. STOCKHOLDERS' EQUITY. Stockholders' equity increased by $204,000, or 0.9%, to $22.0 million at December 31, 2003 from $21.7 million at December 31, 2002. The increase in stockholders' equity was due to net income of $1.2 million, which was partially offset by dividends paid of $366,000 and by lower other comprehensive income resulting from the decline in the value of our available-for-sale securities as market interest rates rose in the fall of 2003. 64 COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 GENERAL. Net income decreased 58.1% to $332,000 for the nine months ended September 30, 2004 from $791,000 for the same period ended September 30, 2003, primarily due to the significant decrease in mortgage lending resulting from a reduction in mortgage refinancing activity. Non-interest income decreased $293,000, or 7.5%, reflecting an $831,000, or 64.3%, decrease in non-interest income attributable to our mortgage banking activities. This decrease was partially offset by the $493,000 increase in insurance and brokerage commissions related to ICA due to the inclusion of nine months of ICA ownership in 2004 compared to seven months of ownership in 2003. INTEREST INCOME. Interest income was $9.8 million for the nine months ended September 30, 2004, compared to $10.1 million for the comparable period in 2003. The decrease of $326,000, or 3.2%, was primarily due to our sale of longer-term fixed rate mortgage loans and the subsequent reinvestment of these proceeds into lower-yielding assets such as investment securities and shorter-duration non-mortgage loans, which caused an overall decline in the yield on our loan portfolio. The average yield of our loan portfolio fell 94 basis points to 6.39% for the nine months ended September 30, 2004 from 7.33% for the nine months ended September 30, 2004. The average balance of non-mortgage loans increased during the nine-month period ended September 30, 2004 by $18.9 million, or 36.0%, reflecting a $16.0 million, or 48.6%, increase in the average balance of commercial loans and a $3.0 million, or 15.1%, increase in the average balance of consumer loans. The yield on our commercial loans declined 21 basis points to 5.75% at September 30, 2004 from 5.96% at September 30, 2003. The yield on our consumer loans declined 123 basis points to 6.96% at September 30, 2004 from 8.19% at September 30, 2003, which was attributable in part to a home equity loan promotion which offered a sub-prime introductory interest rate. Partially offsetting these factors was an increase in the average balance of one- to four-family residential mortgage loans for the nine months ended September 30, 2004 compared to the same period in 2003 due to our purchase of $9.1 million such loans in May 2004. The average balance of investment securities decreased to $42.5 million for the nine months ended September 30, 2004 from $45.7 million for the earlier year period and the average yield on the investment securities declined to 3.41% for the nine months ended September 30, 2004 from 4.04% for the same period in 2003, reflecting the lower market interest rate environment. As a result, interest income from investment securities decreased to $1.2 million from $1.5 million. Similarly, the average balance of interest-earning deposits decreased to $6.9 million for the nine months ended September 30, 2004 from $13.1 million for the earlier year period as these assets were deployed into higher-yielding loans, which caused a decrease in interest income to $171,000 from $244,000. INTEREST EXPENSE. Interest expense decreased to $4.6 million for the nine months ended September 30, 2004 from $4.9 million for the same period in 2003, due to lower interest rates paid on interest-bearing liabilities in 2004 compared to the 2003 period. The average cost of deposits for the nine months ended September 30, 2004 declined to 2.27% from 2.61% for the same period in 2003. The average cost of borrowings decreased to 4.74% for the nine months ended September 30, 2004 from 5.73% for the same period in 2003. The 99 basis point reduction in the cost of these funds was the result of additional shorter term borrowings at lower rates and the re-pricing of higher cost advances late in 2003. The declines in the average cost of deposits and borrowings more than offset an increase in the average balance of deposits and borrowings to $209.3 million from $195.4 million. Of this $13.9 million increase in average balances, $7.0 million was related to Federal Home Loan Bank borrowings, which increased to $55.0 million for the nine months ended September 30, 2004 from $48.0 million for the same period in 2003. 65 NET INTEREST INCOME. Net interest income increased by $33,000 to $5.2 million for the nine months ended September 30, 2004 from $5.2 million for the same period in 2003. For the nine months ended September 30, 2004, average interest-earning assets increased $13.9 million, or 6.5%, from the same period in 2003. Average interest-bearing liabilities increased $13.1 million, or 7.1%, for the same period. While our net interest rate spread declined 12 basis points to 2.87% for the nine months ended September 30, 2004 from 3.20% for the same period in 2003, the increase in our total interest earning assets more than compensated for the decline. PROVISION FOR LOAN LOSSES. We establish provisions for loan losses, which are charged to operations, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on our evaluation of these factors, management made a provision of $214,000 for the nine months ended September 30, 2004 and a provision of $238,000 for the nine months ended September 30, 2003. We had net charge-offs of $98,000 and $128,000 during the nine months ended September 30, 2004 and 2003, respectively. We used the same methodology and generally similar assumptions in assessing the allowance for both periods. The allowance for loan losses was $1.2 million, or 0.61% of total loans at September 30, 2004, as compared to $1.0 million, or 0.63% of total loans at September 30, 2003. The level of the allowance is based on estimates, and ultimate losses may vary from the estimates. Because we plan to continue to increase our originations of commercial real estate and commercial loans, it may be necessary to increase the level of our allowance for loan losses because of the increased risk characteristics associated with these types of loans. Any such increase to our allowance for loan losses could adversely affect our earnings. Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require us to recognize adjustments to the allowance based on its judgment regarding the adequacy of our allowance for loan losses at the time of its examination. NON-INTEREST INCOME. Non-interest income decreased $293,000, or 7.5%, to $3.6 million for the nine months ended September 30, 2004 from $3.9 million for the same period in 2003. Non-interest income attributable to our mortgage banking activities decreased by $831,000, or 64.3%, as the high volume of loan refinancings in the 2003, which resulted from historically low market interest rates, slowed significantly in 2004. Gain on the sale of mortgages was $636,000 lower in the 2004 period compared to the 2003 period and the revenue associated with mortgage servicing rights was $177,000 lower in the 2004 period compared to the 2003 period. In addition, we recorded other non-interest income of $100,000 for the nine months ended September 30, 2003 related to the settlement of an insurance claim, which did not recur in the 2004 period. These items were partially offset by an increase of $493,000, or 28.4%, in insurance and brokerage commissions attributable to the operations of ICA to $2.2 million for the nine months ended September 30, 2004 from $1.7 million for the same period one year earlier. This increase was due to nine full months of commissions paid to brokers in 2004 compared to only seven months in 2003 as the effective date of our acquisition of ICA was March 1, 2003. The declines also were partially offset by a $189,000, or 33.7%, increase in service charges and other fees due to an increase in overdraft fees associated with an overdraft protection product that we introduced in July 2003. 66 NON-INTEREST EXPENSE. Non-interest expense increased $450,000, or 5.9%, to $8.1 million for the nine months ended September 30, 2004 from $7.7 million for the same period in 2003. Insurance and brokerage commission expense for ICA totaled $970,000 for the nine months ended September 30, 2004 compared to $771,000 for the earlier year period, representing the seven months of ICA operations that were included in the 2003 results. Compensation and employee benefits increased $218,000 to $4.5 million for the nine months ended September 30, 2004 from $4.2 million for the same period in 2003. This increase was mainly due to the two additional months of ICA's compensation expense totaling $227,000. In addition, compensation and employee benefits increased $113,000 for the nine-month period ended September 30, 2004 when compared to the same period in 2003 to make up for a shortfall in funding of the Financial Institutions Retirement Fund, the pension plan for First Federal of Northern Michigan. At September 30, 2004, the plan was fully funded. Following completion of the reorganization and offering, non-interest expense is likely to increase. Compensation expense will increase as a result of our employee stock ownership plan, and could increase if we implement a recognition and retention plan and a stock option plan. INCOME TAXES. Federal income taxes decreased to $167,000 for the nine months ended September 30, 2004 compared to $393,000 for the same period in 2003. The effective tax rate for both time periods was 33.5%. The reduction in income tax reflected lower earnings for the nine months ended September 30, 2004 compared to the earlier year period. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002 GENERAL. Net income increased $430,000, or 57.0%, to $1.2 million for the year ended December 31, 2003 from $770,000 for the year ended December 31, 2002. The increase in net income was due primarily to higher net interest income and non-interest income. INTEREST INCOME. Interest income decreased by $1.1 million, or 7.9% to $13.4 million for the year ended December 31, 2003 from $14.5 million for the year ended December 31, 2002. Interest income on mortgage loans decreased by $1.2 million, or 13.7%, to $7.5 million from $8.7 million, and interest income on other loans increased by $275,000, or 8.0%, to $3.7 million from $3.4 million. The decrease in interest income was attributable to a $10.1 million, or 4.6%, decrease in the average balance of interest-earning to $211.7 million for the year ended December 31, 2003 from $221.8 million for the year ended December 31, 2002, and to a decrease in the average yield on interest-earning assets to 6.26% for the year ended December 31, 2003 from 6.54% for the year ended December 31, 2002. The decrease in the average balance of interest-earning assets reflected an $18.6 million decrease in the average balance of mortgage loans, which was partially offset by an $11.0 million increase in the average balance of other loans. The decrease in the average balance of mortgage loans resulted from our secondary mortgage market activities, as we sold $81.5 million of mortgage loans during 2003. Historically low interest rates on 15- and 30-year mortgage loans caused a large portion of our balloon mortgage portfolio to refinance into fixed-rate loans, which we in turn sold in the secondary mortgage market to reduce interest rate risk. The balances of our balloon mortgage portfolio were $41.1 million and $45.7 million at December 31, 2003 and 2002, respectively. The average balance of other investments (comprised of investment securities and interest-earning deposits) also decreased by $2.5 million, or 4.3%, during the year ended December 31, 2003. The decreases in the average balances of mortgage loans and other investments were partially offset by an increase in the average balance of other loans to $55.4 million for the year ended December 31, 2003 from $44.3 million for the year ended December 31, 2002, including a $15.5 million increase in the average balance of our commercial loans. 67 The average yield on our interest earning assets decreased to 6.26% for the year ended December 31, 2003 from 6.54% for the year ended December 31, 2002, reflecting lower market interest rates which led to lower rates on loans originated in 2003 as well as lower rates on our existing adjustable rate loans (which are often indexed to the prime interest rate). Interest income on investment securities and interest-earning deposits decreased $230,000 to $2.1 million for the year ended December 31, 2003 from $2.4 million for the year ended December 31, 2002. This decrease was primarily due to decreases in the average yield of our mortgage-backed securities and debt securities (including corporate bonds and federal and state agency obligations), which decreased to 3.83% and 3.97% for the year ended December 31, 2003 from 5.14% and 4.37%, respectively, for the year ended December 31, 2002. INTEREST EXPENSE. Interest expense decreased by $1.9 million, or 22.9%, to $6.5 million for the year ended December 31, 2003 from $8.3 million for the year ended December 31, 2002. The decrease in interest expense resulted from decreases in all categories of interest expense, and specifically a $1.7 million, or 32.0%, decrease in interest expense on deposits and a $140,000, or 4.9%, decrease in interest expense on borrowings. The decrease in interest expense was attributable to a decrease in the average balance of borrowed funds to $48.0 million for the year ended December 31, 2003 from $49.5 million for the year ended December 31, 2002, and a $2.8 million, or 1.8%, decrease in the average balance of deposits to $154.2 million for the year ended December 31, 2003 from $157.0 million for the year ended December 31, 2002. The average cost of interest-bearing liabilities decreased to 3.31% from 4.04% as the average cost of borrowed funds decreased to 5.70% from 5.82% and the average cost of deposits decreased to 2.41% from 3.48%. The decrease in the average balance of deposits was due primarily to run-off related to certificates of deposit as depositors sought higher rates from other financial institutions. We did not try to generate additional funds from deposits by paying high rates on certificates of deposit because we had sufficient liquidity from secondary market loan sales during the year. The decrease in the average cost of deposits was attributable to lower market interest rates during 2003, while the decrease in the cost of borrowings resulted from the re-pricing of matured high-cost Federal Home Loan Bank advances and our repayment of some advances during the year. NET INTEREST INCOME. Because the decrease in our interest expense was greater than the decrease in our interest income, our net interest income increased 738,000, or 12.0%, to $6.9 million for the year ended December 31, 2003, from $6.2 million for the year ended December 31, 2002. Our interest rate spread increased to 2.95% from 2.50% and our net interest margin increased to 3.21% from 2.78%. In addition, our ratio of average interest-earning assets to average interest-bearing liabilities increased to 108.69% from 107.42%. PROVISION FOR LOAN LOSSES. The provision for loan losses totaled $267,000 and $415,000 for the years ended December 31, 2003 and 2002, respectively. The decrease in the provision for loan losses in 2003 resulted partly from the settlement of a consumer loan that had a specific allocation of $115,000 assigned to it. The loan was paid off in 2003 with only a small loss compared to the provision that had been allocated to it. Additionally, in 2003 we sold approximately 55% of the credit card portfolio which was part of our consumer loan portfolio. The credit card portfolio generally carries higher credit risk than other loan types and generally requires a larger loss allowance. Accordingly, the sale of the credit card portfolio permitted a reduction in the associated allowance. However, an increase in the balance of our credit card portfolio may result in future increases to our provision for loan losses. We had net charge-offs of $153,000 and $182,000 during the years ended December 31, 2003 and 2002, respectively. We used the same methodology and generally similar assumptions in assessing the allowance for both periods. The allowance for loan losses was $1.0 million, 68 or 0.63% of total loans at December 31, 2003, as compared with $922,000, or 0.61% of total loans at December 31, 2002. NON-INTEREST INCOME. Non-interest income increased by $3.0 million, or 127.5%, to $5.4 million for the year ended December 31, 2003 from $2.4 million for the year ended December 31, 2002, due primarily to $2.5 million in insurance and brokerage commissions generated by ICA in 2003. Since ICA was purchased during 2003, this income was not included in our non-interest income for the year ended December 31, 2002. Income from our mortgage banking activities increased by $163,000, or 11.6%, to $1.6 million for the year ended December 31, 2003 from $1.4 million for the year ended December 31, 2002, as gain on the sale of mortgage loans increased to $1.1 million for the year ended December 31, 2003 from $951,000 one year earlier, reflecting increased refinancing activity in 2003 when compared to 2002. During the year ended December 31, 2003, we sold most fixed-rate mortgage loans that we originated because of the low interest rate environment and our desire to manage interest rate risk. For the year ended December 31, 2003, the gain on sale of investments was $320,000 compared to $64,000 for the same period in 2002. In 2003, we sold certain bonds to fund loans and pay off high cost Federal Home Loan Bank advances. NON-INTEREST EXPENSE. Non-interest expense increased by $3.3 million, or 46.0%, to $10.3 million for the year ended December 31, 2003 from $7.1 million for the year ended December 31, 2002. Much of this increase related to the inclusion of various expenses associated with the acquisition of ICA, which totaled $2.2 million for the year ended December 31, 2003. Since ICA was purchased during 2003, these costs were not included in our non-interest expense for 2002. Compensation and employee benefits expenses increased to $6.9 million for the year ended December 31, 2003 from $4.0 million for the same period in 2002. Of this $2.9 million increase, $800,000 related to the inclusion of the employees associated with ICA. We hired additional mortgage and commercial lending staff late in 2002 to improve our competitive position in our market area. We also added back-office staff and branch personnel to improve customer services. In addition to salary increases, commissions and incentives increased by $93,000 primarily due to higher commissions paid because of increased loan originations. A new compensation initiative designed to align compensation with individual performance resulted in a $30,000 increase in compensation expense. Employee benefit expenses including health, life and pension expenses, rose 20.3% to $640,000 for the year ended December 31, 2003 from $532,000 for the prior year. Brokerage and commission expenses for ICA totaled $1.1 million during the year ended December 31, 2003. Since ICA was purchased during 2003, these costs were not included in our non-interest expense for 2002. Amortization expense associated with the intangible assets created in the acquisition of ICA totaled $87,000 for the year ended December 31, 2003. Marketing and advertising expenses increased $40,000 to $215,000 for the year ended December 31, 2003 from $175,000 for the year ended December 31, 2002. The increase related to advertising by ICA. In 2003 occupancy and equipment expenses increased by $155,000 to $1.2 million. This increase related to the addition of ICA which added $133,000 of occupancy and equipment expense that was not incurred in 2002. Other expense increased $155,000 to $1.5 million in 2003 from $1.4 million in 2002, and was attributable to the other expenses recorded within ICA. INCOME TAXES. Federal income tax expense increased to $518,000 for the year ended December 31, 2003 from $285,000 for the year ended December 31, 2002. The increase was primarily due to the increase of $671,000 in pre-tax earnings to $1.7 million for the year ended December 31, 2003 from 69 $1.1 million for the year ended December 31, 2002. The effective tax rate for the year ended December 31, 2003 was 30.0% compared to 27.0% for the year ended December 31, 2002. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related notes of Alpena Bancshares, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation. LIQUIDITY AND CAPITAL RESOURCES The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, borrowings (Federal Home Loan Bank advances), the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments, mortgage loan sales and mortgage-backed securities sales are greatly influenced by market interest rates, economic conditions and competition. Liquidity represents the amount of our assets that can be quickly and easily converted into cash without significant loss. Our most liquid assets are cash, short-term U.S. Government securities, U.S. Government agency or government-sponsored enterprise securities and certificates of deposit. We are required to maintain sufficient levels of liquidity as defined by the Office of Thrift Supervision regulations. Current regulations require that we maintain sufficient liquidity to ensure our safe and sound operation. Our current objective is to maintain liquid assets equal to at least 20% of total deposits and Federal Home Loan Bank borrowings due in one year or less. Liquidity as of September 30, 2004 was $86.0 million, or 46.8% of total deposits and Federal Home Loan Bank borrowings due in one year or less, compared to $85.4 million, or 54.4% of this amount at December 31, 2003. The levels of liquidity are dependent on our operating, financing, lending and investing activities during any given period. Our calculation of liquidity includes additional borrowing capacity available with the Federal Home Loan Bank. As of September 30, 2004, we had unused borrowing capacity of $20.5 million. We can pledge additional collateral in the form of investment securities to increase our borrowing capacity. We currently retain in our portfolio all adjustable rate residential mortgage loans, short term balloon mortgage loans and fixed rate residential mortgage loans with maturities of less than 15 years, and generally sell the remainder in the secondary mortgage market. We also originate for retention in our loan portfolio, commercial and commercial real estate loans, including real estate development loans. During the nine months ended September 30, 2004, we originated $49.1 million one- to four-family residential mortgage loans, of which $29.8 million were retained in our portfolio and the remainder were sold in the secondary 70 mortgage market or are being held for sale. This compares to $115.4 million one- to four-family originations during the nine months ended September 30, 2003, of which $44.6 million were retained in our portfolio. At September 30, 2004, we had outstanding loan commitments of $43.8 million. These commitments included $12.3 million for permanent one- to four-family residential mortgage loans, $10.6 million for non-residential loans, $3.9 million of undisbursed loan proceeds for construction of one- to four-family residences, $8.6 million of undisbursed lines of credit on home equity loans, $1.1 million of unused credit card lines, $6.5 million of unused commercial lines of credit, and $802,000 of undisbursed commercial construction loans. Deposits are a primary source of funds for use in lending and for other general business purposes. At September 30, 2004, deposits funded 71.6% of our total assets compared to 67.7% at December 31, 2003. Certificates of deposit scheduled to mature in less than one year at September 30, 2004 totaled $36.7 million. We believe that a significant portion of such deposits will remain with us. We monitor the deposit rates offered by competitors in our market area, and we set rates that take into account the prevailing market conditions along with our liquidity position. Moreover, we currently believe that the growth in assets is not expected to require significant in-flows of liquidity. As such, we do not expect to be a market leader in rates paid for liabilities. Borrowings may be used to compensate for seasonal or other reductions in normal sources of funds or for deposit outflows at more than projected levels. Borrowings also may be used on a longer-term basis to support increased lending or investment activities. At September 30, 2004, we had $46.1 million in Federal Home Loan Bank advances. Total borrowings as a percentage of total assets were 18.6% at September 30, 2004 compared to 21.06% at December 31, 2003. As of September 30, 2004, management was not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of September 30, 2004, we had no material commitments for capital expenditures. Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statement of Cash Flows included with our Consolidated Financial Statements. First Federal of Northern Michigan is subject to federal regulations that impose minimum capital requirements. For a discussion on these capital levels, see "Historical and Pro Forma Capital Compliance" on page 34 and "Supervision and Regulation-Federal Banking Regulation-Capital Requirements" on page 85. At September 30, 2004, we exceeded all applicable capital requirements. OFF-BALANCE SHEET ARRANGEMENTS In the ordinary course of business, First Federal of Northern Michigan is a party to credit-related financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letter of credit. First Federal of Northern Michigan follows the same credit policies in making off-balance sheet commitments as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by First Federal of Northern Michigan, is based on management's credit evaluation of the customer. 71 Unfunded commitments under construction lines of credit for residential and commercial properties and commercial lines of credit are commitments for possible future extensions of credit to existing customers, for which funds have not been advanced by First Federal of Northern Michigan. At September 30, 2004 and December 31, 2003, First Federal of Northern Michigan had $27.6 million and $35.9 million, respectively, of commitments to grant loans, $16.2 million and $11.5 million, respectively, of unfunded commitments under lines of credit and $0 and $35,000, respectively, of letters of credit. See Note 12 of the Notes to the Consolidated Financial Statements. RECENT ACCOUNTING STANDARDS In May 2003, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Such instruments may have been previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. The adoption of this statement did not have a material effect on our reported equity. In December 2003, the FASB issued a revision to Interpretation 46, "Consolidation of Variable Interest Entities," which established standards for identifying a variable interest entity ("VIE") and for determining under what circumstances a VIE should be consolidated with its primary beneficiary. Application of this Interpretation is required in financial statements of public entities that have interests in special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. Small business issuers must apply this Interpretation to all other types of VIEs at the end of the first reporting period ending after December 15, 2004. The adoption of this Interpretation has not and is not expected to have a material effect on our financial position or results of operations. In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 105, APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN COMMITMENTS, which provides guidance regarding loan commitments that are accounted for as derivative instruments. In this SAB, the Securities and Exchange Commission determined that an interest rate lock commitment should generally be valued at zero at inception. The rate locks will continue to be adjusted for changes in value resulting from changes in market interest rates. We not anticipate this standard will have a material effect on our financial condition or results of operations. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("Statement No. 123R"), which requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). The cost is recognized as an expense over the period during which the employee is required to provide service in exchange for the award, which is usually the vesting period. The scope of Statement No. 123R includes the recognition and retention plan and the stock option plan we expect to adopt following the stock offering. For shares awarded under the recognition and retention plan, we will recognize the grant-date fair value of the shares as compensation expense on a straight-line basis over the applicable vesting period, which is the same accounting required prior to Statement No. 123R. For options granted under the stock option plan, we will recognize the grant-date fair value of the options as compensation expense 72 on a straight-line basis over the applicable vesting period. This accounting treatment differs significantly from the previous accounting for fixed stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which generally required expense recognition only when the exercise price of the option was less than the market price of the underlying stock on the grant date. As required by Statement No. 123R, we will estimate the fair value of our stock options on each grant date, using an appropriate valuation approach such as the Black-Scholes option pricing model. Statement No. 123R did not change existing accounting principles applicable to employee stock ownership plans. The provisions of this Statement will be effective for us beginning with our fiscal year ending 2006. We are currently evaluating the impact this new Standard will have on our financial position, results of operations or cash flows. BUSINESS OF ALPENA BANCSHARES, INC. AND FIRST FEDERAL OF NORTHERN MICHIGAN ALPENA BANCSHARES, INC. Alpena Bancshares, Inc. is a federally chartered corporation that owns all of the outstanding shares of common stock of First Federal of Northern Michigan. At September 30, 2004, Alpena Bancshares, Inc. had consolidated assets of $254.5 million, deposits of $182.4 million and stockholders' equity of $21.9 million. As of September 30, 2004, Alpena Bancshares, Inc. had 1,659,180 shares of common stock issued and outstanding. As of that date, Alpena Bancshares, M.H.C. owned 920,000 shares of common stock of Alpena Bancshares, Inc., representing 55.4% of the issued and outstanding shares of common stock. The remaining 739,180 shares of common stock were held by the public. Upon completion of the conversion and stock offering, First Federal of Northern Michigan Bancorp, Inc. will succeed to all of the business and operations of Alpena Bancshares, Inc. and Alpena Bancshares, Inc. will cease to exist. 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, Charlevoix, Cheboygan, 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. 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 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 6.6% at September 30, 2004, compared to 5.1% nationally and 6.2% for the state of Michigan. 73 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), Champion Fortune Corp. (a hardboard manufacturer), Great Lakes Tissue (a paper manufacturer) and various other small companies. As of September 30, 2004, 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. We sell a majority 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 September 30, 2004, we had total loans of $188.6 million, of which $100.2 million, or 53.1%, were one-to four-family residential real estate mortgage loans, $26.5 million, or 14.0%, were commercial real estate loans, and $29.0 million, or 15.4%, were commercial loans. Other loans, consisting primarily of consumer loans, totaled $25.0 million, or 13.3% of total loans. ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. Our primary lending activity consists of originating of 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 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. Most of the mortgage loans originated by us qualify for resale in the secondary mortgage market. 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. 74 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 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 5 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. 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. COMMERCIAL REAL ESTATE LENDING. We also originate commercial real estate loans. At September 30, 2004, we had a total of 136 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 September 30, 2004, our commercial real estate loans totaled $26.5 million, or 14.0% of our total loans, and had an average principal balance of $218,000. Our largest commercial real estate loan had a principal balance of $3.1 million. 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. 75 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 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 September 30, 2004, consumer and other loans totaled $25.0 million, or 13.26% of our total loan portfolio. At such date, $876,000, or 3.5% of our consumer loans, were unsecured. As of September 30, 2004, home equity loans totaled $9.2 million, or 4.9% of our total loan portfolio, and automobile loans totaled $4.5 million, or 2.3% 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 September 30, 2004, we had $29.0million in commercial loans which amounted to 15.39% 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 $2.9 million at September 30, 2004. 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. 76 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 September 30, 2004, 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 September 30, 2004. 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 construction loans totaled $7.9 million, or 4.21% of our total loan portfolio, at September 30, 2004. 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. 77 LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
AT DECEMBER 31, ---------------------------------------------- AT SEPTEMBER 30, 2004 2003 2002 --------------------- --------------------- --------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- --------- ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS) Real estate loans: Residential mortgage..... $ 100,163 53.12% $ 94,988 57.66% $ 101,943 66.90% Commercial mortgage...... 26,452 14.03% 29,452 17.88% 20,369 13.37% Construction............. 7,932 4.21% 5,907 3.59% 2,946 1.93% Non real estate loans Commercial............... 29,026 15.39% 13,495 8.19% 7,528 4.94% Consumer and other loans. 25,001 13.26% 20,895 12.68% 19,587 12.85% ---------- ---------- ---------- Total loans................. $ 188,574 100.00% $ 164,737 100.00% $ 152,373 100.00% ========= ========= ========= Other items: Unadvanced construction loans.................... -- -- -- Deferred loan origination costs.................... 38 28 -- Deferred loan origination fees..................... (361) (269) (110) Allowance for loan losses... (1,152) (1,036) (922) ---------- ---------- ---------- Total loans, net............ $ 187,099 $ 163,460 $ 151,341 ========== ========== ========== (continued) AT DECEMBER 31, ------------------------------------------------------------------- 2001 2000 1999 --------------------- --------------------- --------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- --------- ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS) Real estate loans: Residential mortgage..... $ 132,491 74.89% $ 175,646 79.60% $ 194,106 86.56% Commercial mortgage...... 14,152 8.00% 10,681 4.86% 8,969 4.00% Construction............. 3,036 1.72% 3,930 1.79% -- 0.00% Non real estate loans Commercial............... 6,052 3.42% 1,410 0.65% -- 0.00% Consumer and other loans. 21,172 11.97% 28,789 13.10% 21,158 9.44% ---------- ---------- ---------- Total loans................. $ 176,903 100.00% $ 219,631 100.00% $ 224,253 100.00% ========= ========= ========= Other items: Unadvanced construction loans.................... -- -- -- Deferred loan origination costs.................... -- 24 84 Deferred loan origination fees..................... (68) (49) (3) Allowance for loan losses... (689) (649) (488) ---------- ---------- ---------- Total loans, net............ $ 176,146 $ 218,957 $ 223,866 ========== ========== ==========
78 LOAN PORTFOLIO MATURITIES AND YIELDS. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2003. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
RESIDENTIAL MORTGAGE COMMERCIAL MORTGAGE CONSTRUCTION ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE AMOUNT RATE ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Due During the Years ENDING DECEMBER 31, 2004................... $ 9,870 5.624% $ 1,519 5.000% $ 5,9075 5.792% 2005................... 8,644 6.132% 2,889 5.555% -- 4.918% 2006................... 6,779 6.253% 5,993 5.632% -- 0.000% 2007 to 2008........... 25,195 6.082% 16,285 6.162% -- 0.000% 2009 to 2013........... 11,396 6.196% 2,073 6.040% -- 0.000% 2014 to 2018........... 18,945 6.576% 693 7.183% -- 0.000% 2018 and beyond........ 14,159 6.085% -- 7.216% -- 0.000% ---------- --------- --------- --------- ---------- --------- Total......... $ 94,988 6.094% $ 29,452 $ 5,907 5.267% ========== ========= ========== (continued) COMMERCIAL CONSUMER AND OTHER TOTAL ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE AMOUNT RATE ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Due During the Years ENDING DECEMBER 31, 2004................... $ 6,139 5.915% $ 1,287 7.632% $ 24,722 5.795% 2005................... 237 4.617% 793 8.612% 12,563 5.357% 2006................... 861 7.500% 1,624 8.403% 15,257 6.617% 2007 to 2008........... 6,000 5.987% 10,408 6.118% 57,888 6.087% 2009 to 2013........... -- 5.876% 4,767 6.350% 16,256 6.172% 2014 to 2018........... -- 0.000% 1,898 7.523% 21,536 7.086% 2018 and beyond........ 258 5.000% 98 7.230% 14,515 6.110% ---------- ---------- ---------- ---------- ---------- ---------- Total......... $ 13,495 5.629% $ 20,895 6.655% $ 164,737 6.055% ========== ========== ==========
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2003 that are contractually due after December 31, 2004. DUE AFTER DECEMBER 31, 2004 --------------------------------------- FIXED ADJUSTABLE TOTAL ----------- ----------- ----------- (IN THOUSANDS) Residential mortgage................. $ 78,612 $ 6,506 $ 65,118 Commercial mortgage.................. 27,933 -- 27,933 Construction......................... -- -- -- -- -- Commercial........................... 3,049 4,307 7,536 Consumer and other................... 19,608 -- 9,608 ----------- ----------- ----------- Total loans................. $ 129,202 $ 10,813 $ 140,015 =========== =========== =========== 79 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 $333,700. The loan committee must approve any loan from $333,701 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 September 30, 2004, we had outstanding loan commitments of $43.8 million, including unfunded commitments under lines of credit and commercial and standby letters of credit. 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 all 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 80 September 30, 2004, we had $314,000 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 $749,000, $802,000 and $818,000 for the nine months ended September 30, 2004 and the years ended December 31, 2003 and 2002, 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 $898,152 were included in other assets at September 30, 2004. DELINQUENT LOANS, OTHER REAL ESTATE OWNED AND CLASSIFIED ASSETS COLLECTION PROCEDURES. Our general collection procedures provide that when a mortgage, consumer or commercial loan is 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. 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 81 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 September 30, 2004, we held no properties that were classified REO/ORA. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.
LOANS DELINQUENT FOR --------------------------------------------------- 60-89 DAYS 90 DAYS AND OVER TOTAL ------------------------ ------------------------ ------------------------ NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) AT SEPTEMBER 30, 2004 Residential mortgage....... 10 $ 522 16 $ 910 26 $ 1,432 Commercial mortgage........ -- -- 3 256 3 256 Construction............... -- -- -- -- -- -- Commercial................. 3 2 -- -- 3 2 Consumer and other......... 21 84 18 132 39 216 ---------- ---------- ---------- ---------- ---------- ---------- Total.................... 34 $ 608 37 $ 1,298 71 $ 1,906 ========== ========== ========== ========== ========== ========== AT DECEMBER 31, 2003 Residential mortgage....... 23 $ 1,248 10 $ 617 33 $ 1,865 Commercial mortgage........ -- -- 1 77 1 77 Construction............... 1 43 -- -- 1 43 Commercial................. 3 221 -- -- 3 221 Consumer and other......... 12 90 11 134 23 224 ---------- ---------- ---------- ---------- ---------- ---------- Total.................... 39 $ 1,602 22 $ 828 61 $ 2,430 ========== ========== ========== ========== ========== ========== AT DECEMBER 31, 2002 Residential mortgage....... 31 $ 1,411 10 $ 566 41 $ 1,977 Commercial mortgage........ -- -- -- -- -- -- Construction............... -- -- -- -- -- -- Commercial................. 3 123 2 152 5 275 Consumer and other......... 21 1,090 12 89 33 1,179 ---------- ---------- ---------- ---------- ---------- ---------- Total.................... 55 $ 2,624 24 $ 807 79 $ 3,431 ========== ========== ========== ========== ========== ==========
82 NON-PERFORMING ASSETS. The table below 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).
AT AT DECEMBER 31, SEPTEMBER -------------------------------------------------------------- 30, 2004 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Non-accrual loans: Residential mortgage........... $ 23 $ 245 $ 366 $ -- $ -- $ -- Commercial mortgage............ -- 1040 -- -- -- -- Construction................... -- -- -- -- -- -- Commercial..................... 441 -- 30 -- -- -- Consumer and other............. 16 6 261 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total non-performing loans... $ 480 $ 1,291 $ 627 $ -- $ -- $ -- ---------- ---------- ---------- ---------- ---------- ---------- Loans 90 days or more delinquent and still accruing: Residential mortgage........... $ 910 $ 617 $ 566 $ 475 $ 498 $ 626 Commercial mortgage............ 256 77 -- -- 39 -- Construction................... -- -- -- -- -- -- Commercial..................... -- -- 152 -- -- -- Consumer and other............. 132 134 89 201 168 125 ---------- ---------- ---------- ---------- ---------- ---------- Total loans 90 days or more delinquent and still accruing.................... $ 1,298 $ 828 $ 807 $ 676 $ 705 $ 751 ---------- ---------- ---------- ---------- ---------- ---------- Total non-performing loans... $ 1,778 $ 2,119 $ 1,469 $ 676 $ 705 $ 751 ---------- ---------- ---------- ---------- ---------- ---------- Real estate owned: Residential mortgage........... $ -- $ 199 $ 101 $ 167 $ 134 $ 100 Commercial mortgage............ -- -- -- -- -- -- Construction................... -- -- -- -- -- -- Commercial..................... -- -- -- -- -- -- Consumer and other............. 1 -- 27 30 16 -- ---------- ---------- ---------- ---------- ---------- ---------- Total real estate owned...... 1 199 128 197 150 100 ---------- ---------- ---------- ---------- ---------- ---------- Total non-performing assets....... $ 1,779 $ 2,318 $ 1,562 $ 873 $ 855 $ 851 ========== ========== ========== ========== ========== ========== Ratios: Non-performing loans to total loans......................... 0.94% 1.28% 0.94% 0.38% 0.32% 0.33% Non-performing assets to total assets........................ 0.70% 1.04% 0.68% 0.36% 0.32% 0.32%
For the nine months ended September 30, 2004 and the year ended December 31, 2003, gross interest income that would have been recorded had the non-accrual loans at the end of the period remained on accrual status throughout the period amounted to $62,000 and $181,000, respectively. CLASSIFICATION OF ASSETS. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets such as debt and equity securities 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 83 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, 2003, classified assets consisted of substandard assets of $1.4 million, doubtful assets of $105,000 and no assets classified as loss. Our investment in land and real estate owned by our subsidiary Financial Services & Mortgage Corporation (FSMC) at December 31, 2003 was classified as substandard due to slower than expected sales of building lots and condominium units in FSMC's land development project. This project (Wyndham Garden Estates) is an upscale condominium community comprised of 25 single-family building lots and 18 planned building units located in Alpena, Michigan. At September 30, 2004, only 18 of the residential lots had been developed and only two condominium units had been completed. However, management believes this is a viable project with development and sales ongoing. At September 30, 2004, we had a recorded lower of cost or market value adjustment of $121,000 for this development. 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 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 84 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. 85 The following table sets forth activity in our allowance for loan losses for the periods indicated.
AT OR FOR THE NINE MONTHS ENDED AT OR FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- 2004 2003 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance at beginning of period.. $ 1,036 $ 922 $ 922 $ 689 $ 649 $ 448 $ 478 -------- -------- -------- -------- -------- -------- -------- Charge-offs: Residential mortgage......... 12 -- 28 36 52 -- -- Commercial mortgage.......... -- -- -- 8 -- -- -- Construction................. -- -- -- -- -- -- -- Commercial................... -- -- -- -- -- -- -- Consumer and other........... 123 180 187 190 237 105 184 -------- -------- -------- -------- -------- -------- -------- Total charge-offs.......... 135 180 215 234 289 105 184 Recoveries: Residential mortgage......... -- -- -- -- 8 -- -- Commercial mortgage.......... -- -- -- -- -- -- -- Construction................. -- -- -- -- -- -- -- Commercial................... -- -- -- -- -- -- -- Consumer and other........... 37 51 62 52 66 26 34 -------- -------- -------- -------- -------- -------- -------- Total recoveries........... 37 51 62 52 74 26 34 Net (charge-offs) recoveries.... 98 128 153 182 215 79 150 Provision for loan losses....... 214 238 267 415 255 280 120 -------- -------- -------- -------- -------- -------- -------- Balance at end of year.......... $ 1,152 $ 1,031 $ 1,036 $ 922 $ 689 $ 649 $ 448 ======== ======== ======== ======== ======== ======== ======== Ratios: Net charge-offs to average loans outstanding (annualized).............. 0.07% 0.11% 0.10% 0.12% 0.11% 0.04% 0.07% Allowance for loan losses to non-performing loans at end of period....................... 64.79% 51.19% 48.89% 62.76% 101.92% 92.06% 64.98% Allowance for loan losses to total loans at end of period.................... 0.61% 0.63% 0.63% 0.61% 0.39% 0.30% 0.22%
86 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category (including loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowances include both specific and general allowances within each category. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
AT DECEMBER 31, -------------------------------------------- AT SEPTEMBER 30, 2004 2003 -------------------------------------------- -------------------------------------------- PERCENT OF PERCENT OF ALLOWANCE LOAN LOANS IN EACH ALLOWANCE LOAN LOANS IN EACH FOR LOAN BALANCES BY CATEGORY TO FOR LOAN BALANCES BY CATEGORY TO LOSSES CATEGORY TOTAL LOANS LOSSES CATEGORY TOTAL LOANS ------------ ------------- ------------- ------------ ------------- ------------- (DOLLARS IN THOUSANDS) Residential mortgage.. $ 138 $ 100,565 53.24% $ 151 $ 95,748 57.88% Commercial and commercial mortgage.. 558 55,371 29.31% 515 42,849 25.9% Construction.......... -- 7,932 4.20% -- 5,907 3.57% Consumer and other.... 456 25,039 13.25% 370 20,923 12.65% Unallocated........... -- -- 0.00% -- -- 0.00% ------------ ------------- ------------ ------------- Total................. $ 1,152 $ 188,907 100.00% $ 1,036 $ 165,427 100.00% ============ ============= =========== ============ ============= =========== (CONTINUED) AT DECEMBER 31, -------------------------------------------- 2002 -------------------------------------------- PERCENT OF ALLOWANCE LOAN LOANS IN EACH FOR LOAN BALANCES BY CATEGORY TO LOSSES CATEGORY TOTAL LOANS ------------ ------------- ------------- (DOLLARS IN THOUSANDS) Residential mortgage.. $ 227 $ 102,449 67.05% Commercial and commercial mortgage.. 448 27,823 18.21% Construction.......... -- 2,946 1.93% Consumer and other.... 247 19,587 12.82% Unallocated........... -- -- 0.00% ------------ ------------- Total................. $ 922 $ 152,805 100.00% ============ ============= =========== AT DECEMBER 31, ------------------------------------------------------------------------------------------- 2001 2000 -------------------------------------------- -------------------------------------------- PERCENT OF PERCENT OF ALLOWANCE LOAN LOANS IN EACH ALLOWANCE LOAN LOANS IN EACH FOR LOAN BALANCES BY CATEGORY TO FOR LOAN BALANCES BY CATEGORY TO LOSSES CATEGORY TOTAL LOANS LOSSES CATEGORY TOTAL LOANS ------------ ------------- ------------- ------------ ------------- ------------- (DOLLARS IN THOUSANDS) Residential mortgage.. $ 149 $ 134,344 75.17% $ 163 $ 175,646 79.67% Commercial and commercial mortgage.. 366 20,174 11.29% 105 12,091 5.48% Construction.......... -- 3,036 1.70% -- 3,930 1.78% Consumer and other.... 22 21,172 11.85% 304 28,789 13.06% Unallocated........... 152 -- 0.00% 77 -- 0.00% ------------ ------------- ------------ ------------- Total................. $ 689 $ 178,726 100.00% $ 649 $ 220,456 100.00% ============ ============= =========== ============ ============= =========== (CONTINUED) AT DECEMBER 31, -------------------------------------------- 1999 -------------------------------------------- PERCENT OF ALLOWANCE LOAN LOANS IN EACH FOR LOAN BALANCES BY CATEGORY TO LOSSES CATEGORY TOTAL LOANS ------------ ------------- ------------- (DOLLARS IN THOUSANDS) Residential mortgage.. $ 241 $ 194,139 86.55% Commercial and commercial mortgage.. 33 8,969 4.00% Construction.......... -- -- 0.00% Consumer and other.... 158 21,206 9.45% Unallocated........... 16 -- 0.00% ------------ ------------- Total................. $ 448 $ 224,314 100.00% ============ ============= ===========
87 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 September 30, 2004, we had no investments in unrated securities. At September 30, 2004, $34.7 million, or 81.4% of our investment portfolio was scheduled to mature in less than five years, and $8.0 million, or 18.6%, was scheduled to mature in over five years. At September 30, 2004, $3.8 million, or 8.9% of our investment portfolio is scheduled to mature in less than one year. At September 30, 2004, we held U.S. Government and state agency obligations and municipal obligations classified as available-for-sale, with a fair market value of $34.3 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 September 30, 2004, mortgage-backed securities totaled $8.4 million, or 3.3% of total assets. At September 30, 2004, 66.2% 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, GNMA, or FNMA. The underlying pool of mortgages can be composed 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. 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 September 30, 2004, 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. 88 INVESTMENT SECURITIES PORTFOLIO. The following table sets forth the composition of our investment securities portfolio at the dates indicated.
AT DECEMBER 31, ------------------------------------------------------------------------ AT SEPTEMBER 30, 2004 2003 2002 2001 ---------------------- ---------------------- ---------------------- ---------------------- AMORTIZED AMORTIZED AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- --------- ---------- --------- ---------- (IN THOUSANDS) DEBT SECURITIES: U.S. Government and agency obligations....... $ 27,991 $ 28,100 $ 16,700 $ 17,067 $ 30,940 $ 31,981 $ 13,614 $ 13,870 State agency and municipal obligations.... 6,232 6,233 3,900 3,960 3,171 3,287 3,686 3,730 --------- ---------- --------- ---------- --------- ---------- --------- ---------- Corporate bonds and other obligations.............. -- -- 6,163 6,148 4,488 4,580 3,403 3,454 --------- ---------- --------- ---------- --------- ---------- --------- ---------- MORTGAGE-BACKED SECURITIES: Fannie Mae.................. 884 857 982 942 1,896 1,957 -- -- Freddie Mac................. 4,976 4,925 5,940 5,855 4,098 4,234 946 965 Ginnie Mae.................. 2,592 2,598 520 537 713 739 984 1,008 --------- ---------- --------- ---------- --------- ---------- --------- ---------- Total debt securities...... 42,675 42,713 34,205 34,509 45,305 46,778 22,633 23,026 --------- ---------- --------- ---------- --------- ---------- --------- ---------- MARKETABLE EQUITY SECURITIES: Common stock............... 2 167 17 161 21 166 21 182 --------- ---------- --------- ---------- --------- ---------- --------- ---------- Total equity securities............... 2 167 17 161 21 166 21 182 --------- ---------- --------- ---------- --------- ---------- --------- ---------- Total investment securities............... $ 42,677 $ 42,880 $ 34,222 $ 34,670 $ 45,326 $ 46,944 $ 22,654 $ 23,208 ========= ========== ========= ========== ========= ========== ========= ==========
89 PORTFOLIO MATURITIES AND YIELDS. The composition and maturities of the investment securities portfolio at September 30, 2004 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.
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) DEBT SECURITIES: U.S. Government and agency securities.................... $ 3,534 4.89% $ 24,457 3.89% $ -- 0.00% State agency and municipal obligations................... 255 5.72% 4,302 3.51% 250 3.63% --------- --------- --------- Corporate bonds and other obligations................... -- 0.00% -- 0.00% -- 0.00% --------- --------- --------- --------- --------- --------- Mortgage-backed securities: Fannie Mae.................. -- 0.00% -- 0.00% 884 3.50% Freddie Mac................. -- 0.00% 2,178 3.65% 2,759 3.84% Ginnie Mae.................. -- 0.00% -- 0.00% -- 0.00% --------- --------- --------- --------- --------- --------- Total debt securities........... 3,789 30,937 3,893 --------- --------- --------- MARKETABLE EQUITY SECURITIES: Common stock.................... -- 0.00% -- 0.00% -- 0.00% --------- --------- --------- Total investment securities..... $ 3,789 $ 30,937 $ 3,893 ========= ========= ========= (CONTINUED) MORE THAN TEN YEARS TOTAL SECURITIES --------------------- ---------------------------------- WEIGHTED WEIGHTED AMORTIZED AVERAGE AMORTIZED AVERAGE COST YIELD COST FAIR VALUE YIELD --------- --------- --------- ---------- --------- (DOLLARS IN THOUSANDS) DEBT SECURITIES: U.S. Government and agency securities.................... $ -- 0.00% $ 27,991 $ 28,100 4.01% State agency and municipal obligations................... 1,425 4.70% 6,232 6,233 3.87% --------- --------- ---------- Corporate bonds and other obligations................... -- 0.00% -- -- 0.00% --------- --------- --------- ---------- --------- Mortgage-backed securities: Fannie Mae.................. -- 0.00% 884 857 3.50% Freddie Mac................. 39 2.75% 4,976 4,925 3.75% Ginnie Mae.................. 2,592 3.60% 2,592 2,598 3.60% --------- --------- --------- ---------- --------- Total debt securities........... 4,056 42,675 42,713 --------- --------- ---------- MARKETABLE EQUITY SECURITIES: Common stock.................... 2 0.00% 2 167 0.00% --------- --------- ---------- Total investment securities..... $ 4,058 $ 42,677 $ 42,880 ========= ========= ==========
90 The composition and maturities of the investment securities portfolio at December 31, 2003 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.
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) DEBT SECURITIES: U.S. Government and agency securities.................... $ 3,007 4.32% $ 13,693 4.65% $ -- 0.00% State agency and municipal obligations................... 1,459 5.97% 2,111 2.75% 330 4.25% --------- --------- --------- Corporate bonds and other obligations..................... 2,464 5.95% 3,699 5.65% -- 0.00% --------- --------- --------- --------- --------- --------- Mortgage-backed securities: Fannie Mae.................. -- 0.00% -- 0.00% 982 3.50% Freddie Mac................. -- 0.00% 2,727 3.66% 3,168 3.89% Ginnie Mae.................. -- 0.00% -- 0.00% -- 0.00% --------- --------- --------- --------- --------- --------- Total debt securities........... 6,930 22,230 4,480 --------- --------- --------- MARKETABLE EQUITY SECURITIES: Common stock.................... -- 0.00% -- 0.00% -- 0.00% --------- --------- --------- Total investment securities..... $ 6,930 $ 22,230 $ 4,480 ========= ========= ========= (continued) MORE THAN TEN YEARS TOTAL SECURITIES --------------------- ---------------------------------- WEIGHTED WEIGHTED AMORTIZED AVERAGE AMORTIZED AVERAGE COST YIELD COST FAIR VALUE YIELD --------- --------- --------- ---------- --------- (DOLLARS IN THOUSANDS) DEBT SECURITIES: U.S. Government and agency securities.................... $ -- 0.00% $ 16,700 $ 17,067 4.59% State agency and municipal obligations................... -- 0.00% 3,900 3,960 2.59% --------- --------- ---------- Corporate bonds and other obligations..................... -- 0.00% 6,163 6,148 5.77% --------- --------- --------- ---------- --------- Mortgage-backed securities: Fannie Mae.................. -- 0.00% 982 942 3.50% Freddie Mac................. 46 3.07% 5,940 5,855 3.78% Ginnie Mae.................. 520 4.89% 520 537 4.89% --------- --------- --------- ---------- --------- Total debt securities........... 566 34,206 34,509 --------- --------- ---------- MARKETABLE EQUITY SECURITIES: Common stock.................... 17 0.00% 17 161 0.00% --------- --------- ---------- Total investment securities..... $ 583 $ 34,223 $ 34,670 ========= ========= ==========
91 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 September 30, 2004, we had $1.6 million 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. The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.
AT SEPTEMBER 30, AT DECEMBER 31, ------------------------------ ------------------------------ 2004 2003 ------------------------------ ------------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE BALANCE PERCENT RATE BALANCE PERCENT RATE --------- --------- -------- --------- --------- -------- (DOLLARS IN THOUSANDS) DEPOSIT TYPE: Demand deposits......... $ 11,664 6.36% 0.00% $ 7,282 4.80% 0.00% NOW deposits............ 17,225 9.88% 0.33% 13,596 8.96% 0.35% Money market deposits... 16,641 9.08% 1.62% 11,613 7.66% 1.22% Regular savings......... 28,082 15.32% 0.14% 28,838 19.01% 0.34% --------- --------- --------- --------- Total transaction accounts........... 73,612 40.64% 61,328 40.43% --------- --------- --------- --------- Certificates of deposit............ 108,816 59.36% 3.31% 90,374 59.57% 3.36% Total deposits....... $ 182,428 100.00% $ 151,702 100.00% ========= ========= ========= ========
92
AT DECEMBER 31, --------------------------------------------------------------- 2002 2001 ------------------------------ ------------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE BALANCE PERCENT RATE BALANCE PERCENT RATE --------- --------- -------- --------- --------- -------- (DOLLARS IN THOUSANDS) DEPOSIT TYPE: Demand deposits........ $ 5,418 3.47% 0.00% $ 3,422 2.06% 0.00% NOW deposits........... 14,651 9.39% 0.84% 14,390 8.64% 1.12% Money market deposits.. 8,464 5.42% 1.20% 7,736 4.65% 1.74% Regular savings........ 32,198 20.62% 0.54% 30,922 18.57% 2.48% --------- --------- --------- --------- Total transaction accounts.......... 60,371 38.90% 56,470 33.92% --------- --------- --------- --------- Certificates of deposit........... 95,361 61.10% 4.87% 110,068 66.08% 6.29% --------- --------- --------- --------- Total deposits...... $ 156,092 100.00% $ 166,538 100.00% ========= ========= ========= ========
The following table sets forth the time deposits in the Bank classified by interest rate as of the dates indicated. AT AT DECEMBER 31, SEPTEMBER ------------------------------------- 30, 2004 2003 2002 2001 ---------- ---------- ---------- ---------- (IN THOUSANDS) INTEREST RATE Less than 2%... $ 28,132 $ 26,192 $ 19,670 $ 2,399 2.00% -2.99%... 21,623 14,384 11,537 6,729 3.00% -3.99%... 29,463 15,349 11,111 21,037 4.00% -4.99%... 12,090 12,498 13,576 10,555 5.00% -6.99%... 14,769 18,768 34,394 62,037 7.00% - 8.99%.. 2,739 3,183 5,073 7,311 ---------- ---------- ---------- ---------- Total.......... $ 108,816 $ 90,374 $ 95,361 $ 110,068 ========== ========== ========== ========== The following table sets forth the amount and maturities of time deposits at September 30, 2004.
AFTER SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 30, 2005 30, 2006 30, 2007 30, 2008 30, 2009 30, 2005 TOTAL ----------- ----------- ----------- ----------- ----------- ----------- ----------- INTEREST RATE Less than 2%... $ 22,139 $ 5,883 $ 110 $ -- $ -- $ -- $ 28,132 2.00% -2.99%... 4,417 15,049 721 729 512 195 21,623 3.00% -3.99%... 2,037 10,639 9,520 7,086 2 179 29,463 4.00% -4.99%... 1,984 7,518 2,247 30 23 288 12,090 5.00% -5.99%... 1,118 2,269 220 -- 1,361 376 5,344 6.00% -6.99%... 3,768 1,489 425 904 221 2,618 9,425 7.00%- 8.99%... 1,223 100 135 2 -- 1,279 2,739 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total.......... $ 36,686 $ 42,947 $ 13,378 $ 8,751 $ 2,119 $ 4,935 $ 108,816 =========== =========== =========== =========== =========== =========== ===========
93 As of September 30, 2004, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $27.3 million. The following table sets forth the maturity of those certificates as of September 30, 2004. AT SEPTEMBER 30, 2004 ------------------ (IN THOUSANDS) Three months or less................ $ 4,840 Over three months through six months 1,854 Over six months through one year.... 1,557 Over one year to three years........ 13,268 Over three years.................... 5,819 ---------- Total............................... $ 27,338 ========== BORROWINGS. Our borrowings consist primarily of advances from the Federal Home Loan Bank. At September 30, 2004, we had access to additional Federal Home Loan Bank advances of up to $20.5 million. The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at the dates and for the periods indicated.
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------- -------------------------------------------- 2004 2003 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Balance at end of period (1)........... $ 47,303 $ 53,771 $ 47,159 $ 48,414 $ 52,120 Average balance during period.......... $ 58,570 $ 50,604 $ 49,594 $ 48,532 $ 55,589 Maximum outstanding at any month end... $ 60,802 $ 52,414 $ 49,802 $ 48,414 $ 56,935 Weighted average interest rate at end of period........................ 5.14% 5.29% 5.25% 5.73% 5.77% Average interest rate during period.... 4.27% 5.00% 4.73% 5.77% 5.49%
- ---------------------------- (1) Includes $1.3 million at September 30, 2004 and $1.4 million at September 30, 2003 and December 31, 2003 in a note payable to former owners of InsuranCenter. EMPLOYEES As of September 30, 2004, we had 112 full-time employees and 16 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good. 94 PROPERTIES As of September 30, 2004, First Federal of Northern Michigan owned its main office and all of its branch offices except for the Lewiston branch office. At September 30, 2004, the net book value of our properties was $4.6 million. The following is a list of our locations: MAIN OFFICE 100 South Second Avenue Alpena, Michigan 49707 BRANCH OFFICES 300 South Ripley Boulevard 625 N. Williams Street Alpena, Michigan 49707 Mancelona, MI 49659 6230 River Street 308 North Morenci Alanson, MI 49706 Mio, Michigan 48647 101 South Main Street 201 North State Street Cheboygan, Michigan 49721 Oscoda, Michigan 48750 1000 South Wisconsin 11874 U.S. 23 South Gaylord, Michigan 49735 Ossineke, Michigan 49766 P.O. Box 673 (1) 4236 Salling Street Lewiston, Michigan 49756 - -------------------------------- (1) Month to month lease. LEGAL PROCEEDINGS We are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which management believes are immaterial to our financial condition, our results of operations and our cash flows. SUBSIDIARY ACTIVITY Alpena Bancshares, Inc.'s only direct subsidiary is First Federal of Northern Michigan. First Federal of Northern Michigan has two subsidiaries. One subsidiary, Financial Services & Mortgage Corporation, leases, sells, develops and maintains real estate properties. As of September 30, 2004, Financial Services & Mortgage Corporation had developed seven building sites and two condominiums, all of which were being offered for sale. Financial Services & Mortgage Corporation is not currently a party to any agreement that is material to Alpena Bancshares, Inc. on a consolidated basis. First Federal of Northern Michigan's second subsidiary, the InsuranCenter of Alpena ("ICA"), is a licensed insurance agency engaged in the business of property, casualty and health insurance sales. ICA currently employs twobrokers that sell non-insured investment products in two branch offices of First Federal of Northern Michigan. First Federal of Northern Michigan 95 acquired ICA in June 2003 for $2.87 million. As part of the acquisition, First Federal of Northern Michigan entered into an employment agreement with one of ICA's former owners, which will expire in February 2006. 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 and another $300,000 payment is expected to be paid in February 2005. The earn out agreement expires in December 2005. FIRST FEDERAL COMMUNITY FOUNDATION In connection with the conversion and offering, we are establishing the First Federal Community Foundation, which is a private charitable foundation. This foundation, which is not a subsidiary of First Federal of Northern Michigan, will provide grants to individuals and not-for-profit organizations within the communities that First Federal of Northern Michigan serves. The foundation's board of directors consists of Gary C. VanMassenhove, Michael W. Mahler and Amy E. Essex. Additionally, as required by Office of Thrift Supervision regulations, for at least the first five years after its organization, we will select one additional person to serve on the initial board of directors who will not be one of our officers or directors and who will have experience with local charitable organizations and grant making. As part of the conversion, we will fund the foundation through a contribution of cash in an amount equal to 2% of the shares we sell to purchasers in the offering, PROVIDED the cash does not exceed $375,000 and common stock equal to 2% of the shares we sell to purchasers in the offering, PROVIDED the common stock contribution does not exceed 37,500 shares. After the conversion, First Federal of Northern Michigan will continue to maintain the foundation, but does not expect to make any further contributions to the foundation. See "First Federal Community Foundation" on page 121. 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 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, 96 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 September 30, 2004, First Federal of Northern Michigan's capital exceeded all applicable requirements. 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 September 30, 2004, 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, 97 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 September 30, 2004, First Federal of Northern Michigan maintained approximately 94.1% 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: o 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; o the savings bank would not be at least adequately capitalized following the distribution; o the distribution would violate any applicable statute, regulation, agreement or Office of Thrift Supervision-imposed condition; or o 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: o the savings bank would be undercapitalized following the distribution; o the proposed capital distribution raises safety and soundness concerns; or o 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 98 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 by 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. Alpena Bancshares, 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, 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 99 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: o well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based capital and 10% total risk-based capital); o adequately capitalized (at least 4% leverage capital, 4% tier 1 risk-based capital and 8% total risk-based capital); o undercapitalized (less than 3% leverage capital, 4% tier 1 risk-based capital or 8% total risk-based capital); o significantly undercapitalized (less than 3% leverage capital, 3% tier 1 risk-based capital or 6% total risk-based capital); or o 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. At September 30, 2004, 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. 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 100 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 September 30, 2004, 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 September 30, 2004, 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 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). We have 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 Upon completion of the conversion, First Federal of Northern Michigan Bancorp, Inc. will be a unitary savings and loan holding company, subject to regulation and supervision by the Office of Thrift Supervision. The Office of Thrift Supervision will have enforcement authority over First Federal of 101 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. will not be a grandfathered unitary savings and loan holding company and, therefore, will be 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. SARBANES-OXLEY ACT OF 2002 The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate accountability in connection with recent accounting scandals. 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. Although we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the regulations that have been promulgated to implement the Sarbanes-Oxley Act, management does not expect that such compliance will have a material impact on our results of operations or financial condition. 102 FEDERAL SECURITIES LAWS First Federal of Northern Michigan Bancorp, Inc. has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended, for the registration of the shares of common stock to be issued pursuant to the conversion. Upon completion of the conversion, shares of First Federal of Northern Michigan Bancorp, Inc. common stock will be registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. First Federal of Northern Michigan Bancorp, Inc. will be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934. The registration under the Securities Act of 1933 of shares of common stock to be issued in the offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of First Federal of Northern Michigan Bancorp, Inc. may be resold without registration. Shares purchased by an affiliate of First Federal of Northern Michigan Bancorp, Inc. will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If First Federal of Northern Michigan Bancorp, Inc. meets the current public information reporting requirements of Rule 144 under the Securities Act of 1933, each affiliate of First Federal of Northern Michigan Bancorp, Inc. that complies with the other conditions of Rule 144, including those that require the affiliate's sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of First Federal of Northern Michigan Bancorp, Inc., or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, First Federal of Northern Michigan Bancorp, Inc. may permit affiliates to have their shares registered for sale under the Securities Act of 1933. TAXATION FEDERAL TAXATION GENERAL. Alpena Bancshares, 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 Alpena Bancshares, 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 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 103 distributions from its tax bad debt reserve or cease to maintain a bank charter. At September 30, 2004, 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 five taxable years (for losses incurred in 2001 and 2002) and forward to the succeeding 20 taxable years. This provision applies to losses incurred in taxable years ending in 2001 and 2002. For net operating losses incurred in taxable years ending after 2002, the carryback period is reduced to two years. At September 30, 2004, 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. Alpena Bancshares, Inc.'s federal income tax returns 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 passed 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 2003 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. will be required to file annual returns and pay annual fees and an annual franchise tax to the State of Maryland. MANAGEMENT OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. SHARED MANAGEMENT STRUCTURE The directors of First Federal of Northern Michigan Bancorp, Inc. are those same persons who are the directors of First Federal of Northern Michigan. In addition, each executive officer of First Federal of Northern Michigan Bancorp, Inc. is also an executive officer of First Federal of Northern Michigan. Both First Federal of Northern Michigan Bancorp, Inc. and First Federal of Northern Michigan may choose to appoint additional or different persons as directors and executive officers in the future. We expect that First Federal of Northern Michigan Bancorp, Inc. and First Federal of Northern Michigan will continue to have common executive officers until there is a business reason to establish separate 104 management structures. To date, directors and executive officers have been compensated only for their services to First Federal of Northern Michigan. These individuals may receive additional compensation for their services to First Federal of Northern Michigan Bancorp, Inc. DIRECTORS OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. First Federal of Northern Michigan Bancorp, Inc.'s Board of Directors has five members. Our bylaws provide that approximately one-third of the directors are to be elected annually. Directors of First Federal of Northern Michigan Bancorp, Inc. are generally elected to serve for a three-year period and until their respective successors shall have been elected and shall qualify. The table below sets forth certain information, as of September 30, 2004, regarding current members of our Board of Directors and executive officers who are not directors, including the terms of office of board members.
POSITION(S) HELD WITH FIRST FEDERAL OF NORTHERN NAME(1) MICHIGAN BANCORP, INC. AGE DIRECTOR SINCE(2) CURRENT TERM EXPIRES - ---------------------------- -------------------------------- --------- --------------------- ---------------------- DIRECTORS James C. Rapin Chairman of the Board 64 1985 2005 Martin A. Thomson President, Chief Executive 55 1986 2005 Officer and Director Thomas R. Townsend Director 53 2002 2006 Gary C. VanMassenhove Director 57 2001 2006 Keith D. Wallace Director 62 1988 2007 EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS Michael W. Mahler Executive Vice President 41 N/A N/A Amy E. Essex Chief Financial Officer 41 N/A N/A Jerome W. Tracey Senior Vice President, Senior 45 N/A N/A Lender
- ------------------------------ (1) The mailing address for each person listed is 100 S. Second Avenue, Alpena, Michigan 49707. Each of the persons listed is also a director of First Federal of Northern Michigan, as well as Alpena Bancshares, M.H.C. (2) Includes service with First Federal of Northern Michigan in mutual form. The principal occupation during the past five years of each of our directors and executive officers is set forth below. All directors and executive officers have held their present positions for five years unless otherwise stated. JAMES C. RAPIN was elected as the Chairman of the Board of Directors of Alpena Bancshares, Inc. and First Federal of Northern Michigan in March 2002. He has been a director of First Federal of Northern Michigan since 1985, and a director of Alpena Bancshares, Inc. since its formation in November 2000, and had been Vice Chairman of the Board since April 2001. Mr. Rapin retired as a pharmacist with LeFave Pharmacy, Alpena, Michigan in 2004. MARTIN A. THOMSON was named Acting President and Chief Executive Officer of Alpena Bancshares, Inc. and First Federal of Northern Michigan in May 2001 and later named President and Chief Executive Officer in October 2001. Mr. Thomson previously held the position of President and Chief Executive Officer of Presque Isle Electric and Gas Cooperative, Inc., Onaway, Michigan. Mr. Thomson has been a director of First Federal of Northern Michigan since 1986, and a director of Alpena Bancshares, Inc. since its formation in November 2000. 105 THOMAS R. TOWNSEND is the President of the R.A. Townsend Co., a plumbing, heating and air conditioning distributor located in Alpena, Michigan, where he has been employed for the past 27 years. Mr. Townsend has been a director of Alpena Bancshares, Inc. and First Federal of Northern Michigan since April 2002. GARY C. VANMASSENHOVE is a partner in VanMassenhove, Kearly, Taphouse & Faulman, CPAs. Mr. VanMassenhove has been a Certified Public Accountant for 33 years. He has been a director of Alpena Bancshares, Inc. and First Federal of Northern Michigan since September 2001. KEITH D. WALLACE is the senior partner of the law firm of Isackson and Wallace, P.C., located in Alpena, Michigan and local counsel t o First Federal of Northern Michigan. Mr. Wallace has been a practicing attorney for 37 years. He has been a director of First Federal of Northern Michigan since 1988, and a director of Alpena Bancshares, Inc. since its formation in November 2000. MICHAEL W. MAHLER was named Executive Vice President in November 2004. Prior to this appointment, since November 2002, Mr. Mahler was Alpena Bancshares, Inc.'s Chief Financial Officer. From September 2000 until November 2002, Mr. Mahler was Corporate Controller at Besser Company, Alpena Michigan, an international producer of concrete products equipment. From 1990 until 2000, Mr. Mahler was employed at LTV Steel Company, East Chicago, Indiana where he served in financial roles of increasing responsibility and served, from 1997 until 2000, as Controller for a northeast Michigan division. AMY E. ESSEX was named Chief Financial Officer in November 2004. Prior to this appointment, since March 2003, Ms. Essex was the Internal Auditor and Compliance Officer for Alpena Bancshares, Inc.. Prior to March 2003, Ms. Essex spent eight years as the Director of Tax and Risk for Besser Company, Alpena Michigan, an international producer of concrete products equipment. Ms. Essex is a certified public accountant. JEROME W. TRACEY was named Senior Vice President, Senior Lender of Alpena Bancshares, Inc. and First Federal of Northern Michigan in September 2001, after joining First Federal of Northern Michigan in November 1999 to serve as Vice President of Commercial Services. Prior to joining First Federal of Northern Michigan, Mr. Tracey served as Vice President of Commercial Lending for National City Bank, Alpena, Michigan, a position he held since 1996. Mr. Tracey has been in the banking profession since 1981. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS Regular meetings of the Board of Directors are generally held monthly, and special meetings are held as needed. During the year ended December 31, 2003, the Board of Directors held 12 regular meetings and five special meetings. The Board of Directors has established various committees including Executive, Audit, Personnel and Nominating Committees. The Executive Committee is authorized to act with the same authority as the Board of Directors of Alpena Bancshares, Inc. between meetings of the Board, and is comprised of the full Board. The Executive Committee met four times during 2003. The Audit Committee reviews the records and affairs of Alpena Bancshares, Inc. to determine its financial condition, reviews with management and the independent auditors the systems of internal control, and monitors adherence in accounting and financial reporting to accounting principles generally accepted in the United States of America. Messrs. Rapin, Townsend and VanMassenhove, each of whom is an "independent director" within the meaning of the Nasdaq corporate governance standards and the 106 applicable Securities Exchange Act rules, serve as members of this committee. The Board of Directors of Alpena Bancshares, Inc. has determined that Director VanMassenhove, a certified public accountant, qualifies as an "audit committee financial expert" and is serving as such for the Audit Committee. The Audit Committee met five times during 2003. The Personnel Committee meets periodically to review the performance of officers and to determine compensation of officers to be recommended to the Board. It is comprised of the full Board of Directors. The Personnel Committee met once during 2003. The Nominating Committee nominates individuals for election as directors, and is comprised of Messrs. Rapin, Townsend, VanMassenhove and Wallace. The Nominating Committee met once during 2003. Following the conversion we intend to establish a Compensation Committee which will review compensation matters. The Compensation Committee will replace our current Personnel Committee and will consist of First Federal of Northern Michigan Bancorp, Inc.'s independent directors. DIRECTORS' COMPENSATION DIRECTORS' FEES. Directors of First Federal of Northern Michigan Bancorp, Inc. are not compensated for service on First Federal of Northern Michigan Bancorp, Inc.'s Board of Directors or committees of First Federal of Northern Michigan Bancorp, Inc.'s Board of Directors. In 2003, each director of First Federal of Northern Michigan received a $600 monthly meeting fee, payable only if the director attended the meeting. Each director is paid for one excused absence. The Chairman of the Board received $750 for each regular meeting attended, and each director received $600 for each special Board meeting attended. In addition to the foregoing, during 2003, Messrs. Rapin, Thomson, Wallace, VanMassenhove and Townsend received $1,400, $700, $1,100, $1,300 and $1,300, respectively, for their services as members of First Federal of Northern Michigan's Executive, Personnel and Audit Committees. First Federal of Northern Michigan paid a total of $61,600 in director and committee fees to members of the Board of Directors during the year ended December 31, 2003. RECOGNITION AND RETENTION PLAN. Alpena Bancshares, Inc. maintains a Recognition and Retention Plan (the "Recognition and Retention Plan") first adopted in 1996. At the inception of the Recognition and Retention Plan in 1996, non-employee directors Rapin, Thomson, and Wallace were each granted 2,415 shares of Common Stock, which shares have been earned and issued. Messrs. VanMassenhove and Townsend, who were appointed to the Board of Directors in September 2001 and April 2002, respectively, have not been awarded any shares under the Plan. See "-Benefit Plans - Recognition and Retention Plans." EXECUTIVE COMPENSATION The following table sets forth for the years ended December 31, 2003, 2002 and 2001, certain information as to the total remuneration paid by the Bank or the Company to the Chief Executive Officer of the Bank and the Company (the "Named Executive Officer"). No other executive officer of the Company received total annual compensation in excess of $100,000 during the year ended December 31, 2003. 107
============================================================================================================================ SUMMARY COMPENSATION TABLE ============================================================================================================================ Long-Term Annual Compensation Compensation Awards - ------------------------------------------------------------------------- -------------------------------------------------- Years Other Restricted Ended Annual Stock Options/ All Other Name and December Salary Bonus Compensation Award(s) SARs Compensation Principal Position 31, ($) (1) ($) ($) (2) ($) (#) Payouts ($) (3) - ----------------------- ---------- ---------- ------------ -------------- ------------ ---------- ---------- --------------- Martin A. Thomson 2003 $131,702 $35,067 $11,400 $-- -- $-- $-- President and Chief 2002 128,819 -- 12,700 3,506 1,000 -- 3,809 Executive Officer 2001 65,998 -- 10,200 -- -- -- -- ======================= ========== ========== ============ ============== ============ ========== ========== ===============
(1) Amount shown is gross earnings. (2) Includes fees for services on the Board of Directors and Board Committees of First Federal of Northern Michigan and Alpena Bancshares, Inc. First Federal of Northern Michigan also provides the Chief Executive Officer with the use of an automobile, insurance and other personal benefits that are not included in the Summary Compensation Table because such benefits do not exceed $50,000 or 10% of the officer's cash compensation for the year ended December 31, 2003. (3) Includes a contribution to the 401(k) plan, and director fees for service on the Board of the subsidiary, Financial Service & Mortgage Corporation. BENEFIT PLANS DEFINED BENEFIT PLAN. The Bank maintains a noncontributory defined benefit plan ("Retirement Plan"). All employees age 21 or older, who have worked at First Federal of Northern Michigan for a period of one year and have been credited with 1,000 or more hours of employment with First Federal of Northern Michigan during the year, are eligible to accrue benefits under the Retirement Plan. First Federal of Northern Michigan annually contributes an amount to the Retirement Plan necessary to satisfy the actuarially determined minimum funding requirements in accordance with the Employment Retirement Income Security Act of 1974, as amended ("ERISA"). At the normal retirement age of 65, the Retirement Plan is designed to provide a life annuity. The retirement benefit provided is an amount equal to 2.5% of a participant's average salary based on the average of the five consecutive years during the participant's years of employment which provide the highest average annual salary multiplied by the participant's years of credited service to the normal retirement date. Retirement benefits are also payable upon retirement due to early and late retirement. Benefits are also paid from the Retirement Plan upon a participant's disability or death. A reduced benefit is payable upon early retirement at or after age 55. Upon termination of employment other than as specified above, a participant who was employed by the Bank for a minimum of five years is eligible to receive his or her accrued benefit reduced for early retirement or a deferred retirement benefit commencing on such participant's normal retirement date. Benefits are payable in various annuity forms as well as in the form of a single lump sum payment. For the year ended December 31, 2003 the Bank made contributions to the Retirement Plan of $326,807. The following table indicates the annual retirement benefit that would be payable under the Retirement Plan upon retirement at age 65 in plan year 2003, expressed in the form of a single life annuity for the final average salary and benefit service classification specified below. As of December 31, 2003, Mr. Thomson had three years credited service (i.e., benefit service) with the Bank. 108
====================================================================================================================== YEARS OF BENEFIT SERVICE AT RETIREMENT - ---------------------------------------------------------------------------------------------------------------------- HIGH 5-YEAR AVERAGE SALARY 10 15 20 25 30 - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------ $15,000 $3,750 $5,625 $7,500 $9,375 $11,250 - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------ $25,000 $6,250 $9,375 $12,500 $15,625 $18,750 - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------ $50,000 $12,500 $18,750 $25,000 $31,250 $37,500 - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------ $100,000 $25,000 $37,500 $50,000 $62,500 $75,000 - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------ $150,000 $37,500 $56,250 $75,000 $93,750 $112,500 ===================== ================== =================== ================== =================== ==================
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank has established an Employee Stock Ownership Plan and related Trust for eligible employees. The ESOP is a tax-qualified plan subject to the requirements of ERISA and the Internal Revenue Code of 1986 (the "Code"). Employees with a 12-month period of employment with the Bank during which they worked at least 1,000 hours and who have attained age 21 are eligible to participate. The ESOP borrowed funds from an unrelated third party lender and used the funds to purchase 48,000 shares of the common stock issued in the Bank's initial stock offering in 1994. Collateral for the loan was the common stock purchased by the ESOP. The loan was being repaid principally from the Bank's contributions to the ESOP and was fully paid during 1999. Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan were allocated among participants on the basis of compensation in the year of allocation, up to an annual adjusted maximum level of compensation. Benefits generally become 100% vested after five years of credited service. Forfeitures will be reallocated among remaining participating employees in the same proportion as contributions. Benefits are payable upon death, retirement, early retirement, disability or separation from service. The Bank's contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. The Bank's Board of Directors administers the ESOP. The Bank has appointed First Bankers Trust Company, Quincy, Illinois to serve as trustee of the ESOP. The ESOP Committee may instruct the trustee regarding investment of funds contributed to the ESOP. The ESOP trustee, subject to its fiduciary duty, must vote all allocated shares held in the ESOP in accordance with the instructions of participating employees. Under the ESOP, nondirected shares will be voted in a manner calculated to most accurately reflect the instructions it has received from participants regarding the allocated stock so long as such vote is in accordance with the provisions of ERISA. At September 30, 2004, there were no remaining unallocated shares held in the ESOP. A portion of the net proceeds retained by First Federal of Northern Michigan Bancorp, Inc. will be used for a loan to the ESOP to fund its purchase of shares of common stock (between 110,976 shares and 150,144 shares, or 172,280 shares if the offering is increased by 15%). 401(K) PLAN. The Bank established a 401(k) Plan for Bank employees as of May 1, 1999. The Plan is tax qualified and permits participants to elect to defer up to 50% (as of January 1, 2002) of the participant's eligible annual compensation into the Plan. During 1999, the Bank made a matching contribution of 25% of the participant contribution to the Plan, up to 1% of the participant's eligible annual compensation for 1999. After 1999, the Bank has made matching contributions of 50% of the participant's contribution, with the match being up to 3% of the participant's eligible annual compensation for the year. All current employees at the time of the establishment of the Plan on May 1, 1999 were 100% vested in their contributions and in matching contributions. Subsequently, new employees became 100% vested after five years of credited service in matching contributions. However, beginning January 1, 2002 the vesting schedule changed to be on an equally graduated basis over a five- 109 year period, which includes employees hired after May 1, 1999. Employees are 100% vested in their elective deferral amounts at all times under the Plan. Participants will be credited for years of service with the Bank prior to the effective date of the Plan. Forfeitures of discretionary contributions will be used to reduce the Bank's contributions in succeeding plan years. STOCK OPTION PLAN. Certain employees and non-employee directors of the Bank and the Company are eligible to participate in the Bank's 1996 Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan authorizes the grant of stock options and limited rights to purchase 69,000 shares, or 10% of the shares of common stock issued to minority stockholders in the initial public offering by the Bank. Upon the formation of the Company as the Bank's holding company in November 2000, the shares of common stock subject to the Stock Option Plan became the shares of Common Stock of the Company. Pursuant to the Stock Option Plan, grants may be made of (i) options to purchase Common Stock intended to qualify as incentive stock options under Section 422 of the Code, (ii) options that do not so qualify ("non-statutory options") and (iii) limited rights (described below) that are exercisable only upon a change in control of the Bank or the Company. Non-employee directors are only eligible to receive non-statutory options. The Stock Option Plan is administered by a committee consisting of certain non-employee directors of the Board of Directors (the "Committee"). In granting options, the Committee considers factors such as salary, length of employment with the Bank, and the employee's overall performance. All stock options are exercisable in five equal annual installments of 20% commencing one year from the date of grant; PROVIDED, HOWEVER, that all options will be 100% exercisable in the event the optionee terminates his service due to normal retirement, death or disability, or in the event of a change in control of the Company or the Bank. Options may be exercised within 10 years from the date of grant. Stock options may be exercised up to one year following termination of service or such later period as determined by the Committee. The exercise price of the options will be at least 100% of the fair market value of the underlying Common Stock at the time of the grant. The exercise price may be paid in cash or Common Stock. Incentive stock options will only be granted to employees of the Bank and/or the Company. Non-employee directors will be granted non-statutory stock options. No incentive stock option granted in connection with the Stock Option Plan may be exercisable more than three months after the date on which the optionee ceases to perform services for the Bank and/or the Company, except that in the event of death, disability, normal retirement, or a change in control of the Bank or the Company, incentive stock options may be exercisable for up to one year; PROVIDED, HOWEVER, that if an optionee ceases to perform services for the Bank or the Company due to retirement or following a change in control (as defined in the Stock Option Plan), any incentive stock options exercised more than three months following the date the optionee ceases to perform services shall be treated as a non-statutory stock option as described above. Upon the exercise of "limited rights" in the event of a change in control, the optionee will be entitled to receive a lump sum cash payment, or in certain cases, Common Stock, equal to the difference between the exercise price of the option and the fair market value of the shares of Common Stock subject to the option on the date of exercise of the right in lieu of purchasing the stock underlying the option. In the event of death or disability, the Bank and/or the Company, if requested by the optionee or beneficiary, may elect, in exchange for the option, to pay the optionee, or beneficiary in the event of death, the amount by which the fair market value of the Common Stock exceeds the exercise price of the option on the date of the optionee's termination of service for death or disability. Pursuant to the Stock Option Plan, non-employee directors at the inception of the Plan on April 17, 1996, Rapin, Thomson, and Wallace were each granted options to purchase 6,037 shares of Common Stock. These options were granted at an exercise price of $10.00 per share, which options have all been 110 vested but not exercised. No options have been reserved for future issuance to non-employee directors under the Plan, and therefore Messrs. VanMassenhove and Townsend, who were appointed to the Board of Directors in September 2001 and April 2002, respectively, have not been awarded options under the Plan. No stock options were granted under the Stock Option Plan during the year ended December 31, 2003. Set forth below is certain information concerning options outstanding to the Named Executive Officer at December 31, 2003.
===================================================================================================================== AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES ===================================================================================================================== Number of Unexercised Value of Unexercised In- Options at The-Money Options at Year-End Year-End - --------------------------- ------------ -------------- ---------------------------- -------------------------------- Shares Acquired upon Value Exercisable/Unexercisable Exercisable/Unexercisable Name Exercise Realized (#) ($) =========================== ============ ============== ============================ ================================ Martin A. Thomson ----- $----- 6,237 / 800 $77,212 / $7,000 =========================== ============ ============== ============================ ================================
Generally, the OTS prohibits the repurchase of common stock by an institution within one year of the completion of a conversion, or "second-step" conversion, unless there exist extraordinary circumstances which justify such repurchases. We have been advised by the OTS that stock repurchases in order to fund the exercise of stock options will generally not be considered extraordinary circumstances. Accordingly, to the extent that holders of stock options choose to exercise options within one year of completion of the conversion and offering, we will likely fund any such exercises through the issuance of authorized but unissued common stock, which would have a dilutive effect on existing shareholders. RECOGNITION AND RETENTION PLAN. Certain employees and non-employee directors of the Bank and the Company are eligible to participate in the Bank's Recognition and Retention Plan, which was adopted in 1996 (the "Recognition Plan"). A Committee of the Board of Directors composed of "disinterested" directors (the "Recognition Plan Committee") administers the Recognition Plan and makes awards to executive officers and employees. Participants in the Recognition Plan earn (become vested in) shares of Restricted Stock covered by an award and all restrictions lapse over a period of time commencing from the date of the award; PROVIDED, HOWEVER, that the Recognition Plan Committee may accelerate or extend the earnings rate on any awards made to officers and employees under the Recognition Plan. Awards to non-employee directors vest at the rate of 20% of the amount initially awarded commencing one year from the date of the award. Awards to executive officers and employees become fully vested upon termination of employment or service due to death, disability or normal retirement or following a termination of employment or service in connection with a change in the control of the Bank or the Company. Upon termination of employment or service for another reason, unvested shares are forfeited. Awards to non-employee directors fully vest upon a non-employee director's disability, death, normal retirement, or following termination of service in connection with a change in control of the Bank or the Company. Unvested shares of Restricted Stock will be forfeited by a non-employee director upon failure to seek reelection, failure to be reelected, or resignation from the Board (other than in connection with normal retirement, as defined by the Recognition Plan). See "-Directors' Compensation - Recognition and Retention Plan." 111 Set forth below is information as of December 31, 2003 regarding equity compensation plans categorized by those plans that have been approved by stockholders and those plans that have not been approved by stockholders.
- ---------------------------------- -------------------------------- --------------------- ---------------------------- Plan Number of securities to be Number of securities issued upon exercise of Weighted average remaining available for outstanding options and rights exercise price issuance under plan - ---------------------------------- -------------------------------- --------------------- ---------------------------- Equity compensation plans approved by stockholders 29,011 $10.57 20,109 (1) - ---------------------------------- -------------------------------- --------------------- ---------------------------- Equity compensation plans not approved by stockholders -- -- -- - ---------------------------------- -------------------------------- --------------------- ---------------------------- Total 29,011 20,109 - ---------------------------------- -------------------------------- --------------------- ----------------------------
(1) Consists of 42 shares available for future issuance pursuant to the 1996 Recognition and Retention Plan and 20,067 shares underlying options available for future issuance pursuant to the 1996 Stock Option Plan. CHANGE IN CONTROL AGREEMENTS. First Federal of Northern Michigan intends to enter into change in control agreements with Martin A. Thomson, President and Chief Executive Officer , and Michael W. Mahler, Executive Vice President, which would provide certain benefits in the event of a change in control of First Federal of Northern Michigan or Alpena Bancshares Inc. Each of the change in control agreements provides for a term of up to 36 months. Commencing on each anniversary date, the Board of Directors may extend the change in control agreements for an additional year. The change in control agreements enable First Federal of Northern Michigan to offer to designated officers certain protections against termination without cause in the event of a change in control (as defined in the agreements). These protections against termination without cause in the event of a change in control are frequently offered by other financial institutions, and First Federal of Northern Michigan may be at a competitive disadvantage in attracting and retaining key employees if it does not offer similar protections. Following a change in control of Alpena Bancshares Inc. or First Federal of Northern Michigan, an officer is entitled to a payment under the change in control agreement if the officer's employment is involuntarily terminated during the term of such agreement, other than for cause, as defined, death or disability. Involuntary termination includes the officer's termination of employment during the term of the agreement and following a change in control as the result of a demotion, loss of title, office or significant authority, reduction in the officer's annual compensation or benefits, or relocation of the officer's principal place of employment by more than 25 miles from its location immediately prior to the change in control. In the event that an officer who is a party to a change in control agreement is entitled to receive payments pursuant to the change in control agreement, the officer will receive a cash payment up to a maximum of two times the sum of base salary and highest rate of bonuses awarded to the officer over the prior three years, subject to applicable withholding taxes. Under the proposed change in control agreements, Messrs. Thomson and Mahler would receive an aggregate of $866,000 upon a change in control, based upon current levels of compensation. In addition to the severance payment, each covered officer is entitled to receive life, medical and dental coverage for a period of up to24 months from the date of termination, as well as a lump-sum payment equal to the excess, if any, of (a) the present value of benefits to which the officer would be entitled under First Federal of Northern Michigan, defined benefit plan if the officer had the additional years of service that he would have had if he had continued working for First Federal of Northern Michigan for 24 months following his termination, over (b) the present value of the benefits to which the officer is actually entitled under First Federal of Northern Michigan's defined benefit plan as of the date of his termination. Notwithstanding any provision to the contrary in the change in control agreement, payments under the change in control agreements are limited so that they will not constitute an excess parachute payment under Section 280G of the Internal Revenue Code. 112 TRANSACTIONS WITH CERTAIN RELATED PERSONS In the ordinary course of business, First Federal of Northern Michigan makes loans available to its directors, officers and employees. These loans are made in the ordinary course of business on substantially the same terms (including interest rate), including collateral, as comparable loans to other borrowers. Management believes that these loans neither involve more than the normal risk of collectibility nor present other unfavorable features. Federal regulations permit executive officers and directors to participate in loan programs that are available to other employees, as long as the director or executive officer is not given preferential treatment compared to other participating employees. Loans made to directors or executive officers, including any modification of such loans, must be approved by a majority of disinterested members of the Board of Directors. The interest rate on loans to directors and officers is the same as that offered to other employees. Indemnification of DIRECTORS and Officers The officers, directors, agents and employees of First Federal of Northern Michigan Bancorp, Inc. are indemnified with respect to certain actions pursuant to First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation and Maryland law. Maryland law allows First Federal of Northern Michigan Bancorp, Inc. to indemnify any person for expenses, liabilities, settlements, judgments and fines in suits in which such person has been made a party by reason of the fact that he or she is or was a director, officer or employee of First Federal of Northern Michigan Bancorp, Inc. No such indemnification may be given(i) to the extent that it is proved that the person actually received an improper benefit or profit in money, property or services for the amount of the benefit or profit in money, property or services actually received; (ii) to the extent that a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding; or (iii) to the extent otherwise provided by Maryland law. The right to indemnification includes the right to be paid the expenses incurred in advance of final disposition of a proceeding. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons by our bylaws or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. BENEFITS TO BE CONSIDERED FOLLOWING COMPLETION OF THE CONVERSION STOCK OPTION PLAN. We intend to request stockholder approval of a stock option plan no earlier than six months after the completion of the conversion. If approved by stockholders, the new stock option plan, if implemented within one year of the conversion, would reserve an amount equal to 10% of the shares of common stock sold in the offering (including shares issued to the charitable foundation) for issuance upon exercise of stock options. If the stock option plan is implemented more than one year after the conversion, the number of shares reserved under the plan may exceed ten percent of the shares of common stock sold in the stock offering (including shares issued to the foundation). Ten percent of the shares of common stock issued in the offering (including shares issued to the foundation) would amount to 138,720 shares, 163,200 shares, 187,680 shares and 215,350 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. No options would be granted under the new stock option plan until stockholder approval of the plan is received. In the event that shares underlying options come from authorized but unissued shares of common stock, stockholders would experience dilution of approximately 5.3% of their ownership interest in First Federal of Northern Michigan Bancorp, Inc. at the midpoint of the offering range. 113 The exercise price of the options granted under the new stock option plan will be equal to the fair market value of First Federal of Northern Michigan Bancorp, Inc. common stock on the date of grant of the stock options. If the stock option plan is adopted within one year following the conversion, options may vest no faster than 20% per year beginning 12 months after the date of grant. Options granted under the stock option plan would be adjusted for capital changes such as stock splits and stock dividends. Awards will be 100% vested upon termination of employment due to death, disability or following a change in control, and if the stock option plan is adopted more than one year after the conversion, awards would be 100% vested upon normal retirement. Under Office of Thrift Supervision rules, if the stock option plan is adopted within one year of the conversion, no individual officer may receive more than 25% of the awards under the plan, no non-employee director may receive more than 5% of the awards under the plan, and all non-employee directors as a group may receive in the aggregate no more than 30% of the awards under the plan. The stock option plan would be administered by a committee of non-employee members of First Federal of Northern Michigan Bancorp, Inc.'s Board of Directors. Options granted under the stock option plan to employees may be "incentive" stock options, which are designed to result in a beneficial tax treatment to the employee but no tax deduction to First Federal of Northern Michigan Bancorp, Inc. Non-qualified stock options may also be granted to employees under the stock option plan, and will be granted to the non-employee directors who receive stock options. In the event an option recipient terminated his or her employment or service as an employee or director, the options would terminate during certain specified periods. STOCK RECOGNITION AND RETENTION PLAN. We intend to request stockholder approval of a new stock recognition and retention plan, no earlier than six months after the completion of the conversion. If approved by stockholders, the new stock recognition and retention plan would, if implemented within one year of conversion, reserve an amount equal to 4% of the shares of common stock sold in the offering (including shares issued to the foundation), or 55,488 shares, 65,280 shares, 75,072 shares and 86,140 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. If the stock recognition and retention plan is implemented more than one year after the completion of the conversion, the number of shares reserved under the plan may exceed 4% of the shares of common stock sold in the offering (including shares issued to the charitable foundation). We must recognize an expense for shares of common stock awarded over their vesting period at the fair market value of the shares on the date they are awarded. The recipients will be awarded shares of common stock under the stock recognition and retention plan at no cost to them. No awards would be made under the stock recognition and retention plan until the plan is approved by stockholders. If the shares awarded under the stock recognition and retention plan come from authorized but unissued shares of the common stock totaling 4% of the shares sold in the offering, stockholders would experience dilution of approximately 2.2% in their ownership interest in First Federal of Northern Michigan Bancorp, Inc. at the midpoint of the offering range. Awards granted under the stock recognition and retention plan would be nontransferable and nonassignable. Under Office of Thrift Supervision regulations, if the stock recognition and retention plan is adopted within one year following the conversion, the shares of common stock which are subject to an award may vest no faster than 20% per year beginning 12 months after the date of grant of the award. Awards would be adjusted for capital changes such as stock dividends and stock splits. Awards would be 100% vested upon termination of employment or service due to death, disability, or following a change in control, and if the stock recognition and retention plan is adopted more than one year after the conversion, awards also would be 100% vested upon normal retirement. If employment or service were to terminate for other reasons, the award recipient would forfeit any unvested award. If employment or service were to terminate for cause (as defined), unvested shares would be forfeited. Under Office of Thrift Supervision rules, if the stock recognition and retention plan is adopted within one year of the conversion, 114 no individual officer may receive more than 25% of the awards under the plan, no non-employee director may receive more than 5% of the awards under the plan, and all non-employee directors as a group may receive no more than 30% of the awards under the plan in the aggregate. The recipient of an award will recognize income equal to the fair market value of the stock earned, determined as of the date of vesting, unless the recipient makes an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, to be taxed earlier. The amount of income recognized by the recipient would be a deductible expense for tax purposes for First Federal of Northern Michigan Bancorp, Inc. BENEFICIAL OWNERSHIP OF COMMON STOCK The following table provides the beneficial ownership of our common stock held by our directors and executive officers, individually and as a group, and all individuals known to management to own more than 5% of our common stock as of September 30, 2004. The business address of each director and executive officer is 100 South Second Avenue, Alpena, Michigan 49707.
NUMBER OF SHARES OF COMMON PERCENT OF ALL COMMON NAME OF BENEFICIAL OWNER STOCK BENEFICIALLY OWNED (1) STOCK OUTSTANDING - ------------------------------------------------------ ------------------------------ ------------------------ James C. Rapin 14,401 0.86% Martin A. Thomson 19,058 1.14% Thomas R. Townsend 3,037 0.18% Gary C. VanMassenhove 1,250 0.08% Keith D. Wallace 13,752 0.83% Michael W. Mahler --- 0.0% Amy E. Essex --- 0.0% Jerome W. Tracey 897 0.05% All directors and executive officers as a group (8 persons) 52,395 3.2% Alpena Bancshares, M.H.C. - ----------------------------------------------------- 100 South Second Avenue, Alpena, Michigan 49707 920,000 55.4% Alpena Bancshares, M.H.C. and all directors and executive officers as a group 972,395 58.6% =======
- ------------------------------ * Less than 1%. (1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a person is deemed to be the beneficial owner for purposes of this table of any shares of common stock if he has sole or shared voting or investment power with respect to such security, or has a right to acquire beneficial ownership at any time within 60 days from the date as of which beneficial ownership is being determined. As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares. SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS The table below sets forth, for each of First Federal of Northern Michigan Bancorp, Inc.'s directors and executive officers and for all of the directors and executive officers as a group, the following information: (i) the number of exchange shares to be held upon consummation of the conversion, based upon their beneficial ownership of Alpena Bancshares, Inc. common stock as of September 30, 2004; (ii) the proposed purchases of subscription shares, assuming sufficient shares of common stock are available to satisfy their subscriptions; and 115 (iii) the total amount of First Federal of Northern Michigan Bancorp, Inc. common stock to be held upon consummation of the conversion. In each case, it is assumed that subscription shares are sold at the midpoint of the offering range. See "The Conversion--Limitations on Common Stock Purchases." Regulations of the Office of Thrift Supervision prohibit our directors and officers from selling the shares they purchase in the offering for one year after the date of purchase.
PROPOSED PURCHASES OF STOCK IN THE OFFERING (1) TOTAL COMMON STOCK TO BE HELD ---------------------------- ---------------------------------- NUMBER OF PERCENTAGE OF EXCHANGE SHARES TO NUMBER OF NUMBER OF TOTAL NAME OF BENEFICIAL OWNER BE HELD (2) SHARES AMOUNT SHARES OUTSTANDING (3) - ---------------------------- ------------------ ------------- ------------ --------------- ----------------- James C. Rapin 25,044 1,500 $ 15,000 26,544 * Martin A. Thomson 33,143 10,000 100,000 43,143 1.5 Thomas R. Townsend 5,281 2,500 25,000 7,781 * Gary C. VanMassenhove 2,173 2,500 25,000 4,673 * Keith D. Wallace 23,916 2,500 25,000 26,416 * ------ ----- ---------- ------ Total 89,557 19,000 190,000 108,557 3.7 ------ ------ ---------- ------- --- Michael W. Mahler --- 2,500 25,000 2,500 * Amy E. Essex --- 2,500 25,000 2,500 * Jerome W. Tracey 1,559 6,000 60,000 7,559 * ------ ----- ---------- ------ Total 1,559 11,000 110,000 12,559 * ------ ----- ---------- ------ Total for Directors and Executive Officers 91,116 30,000 $ 300,000 121,116 4.1% ====== ====== ========== ======= ---
- ----------------------------- * Less than 1%. (1) Includes proposed subscriptions, if any, by associates. (2) Based on information presented in "Beneficial Ownership of Common Stock." (3) Based upon total shares outstanding at the midpoint of the offering range (2,917,530 shares). THE CONVERSION The Boards of Directors of Alpena Bancshares, Inc. and Alpena Bancshares, M.H.C. have approved the plan of conversion and reorganization. The plan of conversion and reorganization must also be approved by the members of Alpena Bancshares, M.H.C. (depositors and certain borrowers of First Federal of Northern Michigan) and the stockholders of Alpena Bancshares, Inc. A special meeting of members and a special meeting of stockholders have been called for this purpose. The Office of Thrift Supervision has conditionally approved the plan of conversion and reorganization; however, such approval does not constitute a recommendation or endorsement of the plan of conversion and reorganization by that agency. GENERAL The respective Boards of Directors of Alpena Bancshares, M.H.C. and Alpena Bancshares, Inc. adopted the plan of conversion and reorganization on November 12, 2004. The plan of conversion and reorganization was amended on December 7, 2004. Pursuant to the plan of conversion and reorganization, our organization will convert from the mutual holding company form of organization to the fully stock form. Alpena Bancshares, M.H.C., the mutual holding company parent of Alpena Bancshares, Inc., will be merged into First Federal of Northern Michigan, and Alpena Bancshares, M.H.C. will no longer exist. Alpena Bancshares, Inc. which owns 100% of First Federal of Northern Michigan, will be succeeded by a new Maryland corporation named First Federal of Northern Michigan Bancorp, Inc. As part of the conversion, the ownership interest of Alpena Bancshares, 116 M.H.C. will be offered for sale in the stock offering. When the conversion is completed, all of the outstanding common stock of First Federal of Northern Michigan will be owned by First Federal of Northern Michigan Bancorp, Inc., our newly formed Maryland holding company, and all of the outstanding common stock of First Federal of Northern Michigan Bancorp, Inc. will be owned by public stockholders, including a private charitable foundation which we are establishing in connection with the conversion and to which we will contribute up to 37,500 shares of our common stock and up to $375,000 in cash. A diagram of our corporate structure before and after the conversion is set forth in the Summary of this Prospectus. Under the plan of conversion and reorganization, at the conclusion of the conversion and offering, each share of Alpena Bancshares, Inc. common stock owned by persons other than Alpena Bancshares, M.H.C. will be converted automatically into the right to receive new shares of First Federal of Northern Michigan Bancorp, Inc. common stock determined pursuant to an exchange ratio. The exchange ratio will ensure that immediately after the exchange of existing shares of Alpena Bancshares, Inc. for new shares, the public stockholders of Alpena Bancshares, Inc. common stock will own the same aggregate percentage of shares of common stock of First Federal of Northern Michigan Bancorp, Inc. that they owned immediately prior to the conversion, excluding any shares they purchased in the offering and cash paid in lieu of fractional shares. First Federal of Northern Michigan Bancorp, Inc. intends to retain between $2.5 million and $6.6 million of the net proceeds of the offering and to contribute the balance of the net proceeds to First Federal of Northern Michigan. The conversion will be consummated only upon the issuance of at least the minimum number of shares of our common stock offered pursuant to the plan of conversion and reorganization. The plan of conversion and reorganization provides that we will offer shares of common stock for sale in the subscription offering to eligible account holders, our employee stock ownership plan, supplemental eligible account holders and other members. If all shares are not subscribed for in the subscription offering, we may, at our discretion, offer common stock for sale in a community offering to members of the general public, with a preference given in the following order: (i) Natural persons residing in the Michigan counties of Alpena, Alcona, Antrim, Charlevoix, Cheboygan, Crawford, Emmet, Iosco, Kalkaska, Montmorency, Ogemaw, Oscoda and Presque Isle; and (ii) Alpena Bancshares, Inc.'s public stockholders as of February 3, 2005. We have the right to accept or reject, in whole or in part, any orders to purchase shares of the common stock received in the community offering. The community offering, if any, may begin at the same time as, during, or after the subscription offering and must be completed within 45 days after the completion of the subscription offering unless otherwise extended by the Office of Thrift Supervision. See "--Community Offering." We determined the number of shares of common stock to be offered in the offering based upon an independent valuation appraisal of the estimated pro forma market value of First Federal of Northern Michigan Bancorp, Inc. All shares of common stock to be sold in the offering will be sold at $10.00 per share. Investors will not be charged a commission to purchase shares of common stock. The independent valuation will be updated and the final number of the shares of common stock to be issued in the offering will be determined at the completion of the offering. See "--Stock Pricing and Number of Shares to be Issued" for more information as to the determination of the estimated pro forma market value of the common stock. 117 The following is a brief summary of the conversion and is qualified in its entirety by reference to the provisions of the plan of conversion and reorganization. A copy of the plan of conversion and reorganization is available for inspection at each branch office of First Federal of Northern Michigan and at the Southeast Regional and the Washington, D.C. offices of the Office of Thrift Supervision. The plan of conversion and reorganization is also filed as an exhibit to Alpena Bancshares, M.H.C.'s application to convert from mutual to stock form of which this Prospectus is a part, copies of which may be obtained from the Office of Thrift Supervision. See "Where You Can Find Additional Information." REASONS FOR THE CONVERSION The primary reasons for the conversion and related stock offering are: o to facilitate growth through branch and whole bank acquisitions as opportunities arise; o to support internal growth through lending in the communities we serve; o to enhance existing products and services and support the development of new products and services; o to improve our overall competitive position; and o to improve the liquidity of our shares of common stock and enhance stockholder returns through higher earnings and more flexible capital management strategies. As a fully converted stock holding company, we will have greater flexibility in structuring further mergers and acquisitions, including the form of consideration that we can use to pay for an acquisition. Our current mutual holding company structure and our relatively small asset size limit our ability to offer shares of our common stock as consideration for a merger or acquisition since Alpena Bancshares, M.H.C. is required to own a majority of our shares of common stock. Potential sellers often want stock for at least part of the purchase price. Our new stock holding company structure will enable us to offer stock or cash consideration, or a combination of stock and cash, and will therefore enhance our ability to compete with other bidders when acquisition opportunities arise. We do not currently have any agreement or understanding as to any specific acquisition. APPROVALS REQUIRED The affirmative vote of a majority of the total eligible votes of the members of Alpena Bancshares, M.H.C. is required to approve the plan of conversion and reorganization. By their approval of the plan of conversion and reorganization, the members of Alpena Bancshares, M.H.C. will also be approving the merger of Alpena Bancshares, M.H.C. into First Federal of Northern Michigan. The affirmative vote of the holders of at least two-thirds of the outstanding shares of common stock of Alpena Bancshares, Inc. and the affirmative vote of the holders of a majority of the outstanding shares of common stock of Alpena Bancshares, Inc. held by the public stockholders of Alpena Bancshares, Inc. are also required to approve the plan of conversion and reorganization. The plan of conversion and reorganization also must be approved by the Office of Thrift Supervision, which has given its conditional approval. SHARE EXCHANGE RATIO Office of Thrift Supervision regulations provide that in a conversion of a mutual holding company to fully stock form, the public stockholders will be entitled to exchange their shares for common 118 stock of the new holding company, provided that the mutual holding company demonstrates to the satisfaction of the Office of Thrift Supervision that the basis for the exchange is fair and reasonable. Each publicly held share of Alpena Bancshares, Inc. common stock will, on the effective date of the conversion, be automatically converted into the right to receive a number of new shares of First Federal of Northern Michigan Bancorp, Inc. common stock. The number of new shares of common stock will be determined pursuant to the exchange ratio, which ensures that the public stockholders of Alpena Bancshares, Inc. common stock will own the same percentage of new common stock in First Federal of Northern Michigan Bancorp, Inc. after the conversion as they held in Alpena Bancshares, Inc. immediately prior to the conversion, exclusive of their purchase of additional shares of common stock in the offering and their receipt of cash in lieu of fractional exchange shares. The exchange ratio is not dependent on the market value of First Federal of Northern Michigan Bancorp, Inc. common stock. The exchange ratio is calculated based on the percentage of Alpena Bancshares, Inc. common stock held by the public, the independent valuation of First Federal of Northern Michigan Bancorp, Inc. prepared by RP Financial and the number of shares of common stock issued in the offering. The exchange ratio is expected to range from approximately 1.4783 exchange shares for each publicly held share of Alpena Bancshares, Inc. at the minimum of the offering range to 2.3000 exchange shares for each publicly held share of Alpena Bancshares, Inc. at the adjusted maximum of the offering range. If you are currently a stockholder of Alpena Bancshares, Inc., your existing shares will be canceled and exchanged for new shares of First Federal of Northern Michigan Bancorp, Inc. The number of shares you receive will be based on the final exchange ratio determined as of the closing of the conversion. The following table shows how the exchange ratio will adjust, based on the number of shares of common stock issued in the offering. The table also shows how many shares of First Federal of Northern Michigan Bancorp, Inc. a hypothetical owner of Alpena Bancshares, Inc. common stock would receive in the exchange for 100 shares owned at the consummation of the conversion.
NEW SHARES TO BE EXCHANGED FOR EXISTING TOTAL SHARES OF NEW SHARES TO NEW SHARES TO BE ISSUED IN SHARES OF ALPENA COMMON STOCK TO BE RECEIVED THIS OFFERING(1) BANCSHARES, INC. BE ISSUED IN FOR 100 --------------------------- ------------------------ CONVERSION AND EXCHANGE EXISTING AMOUNT PERCENT AMOUNT PERCENT OFFERING(1) RATIO SHARES -------------- ----------- ---------- ----------- ---------------- ---------- --------------- Minimum.............. 1,360,000 55.4% 1,092,701 44.6% 2,479,901 1.4783 147 Midpoint............. 1,600,000 55.4 1,285,530 44.6 2,917,530 1.7391 173 Maximum.............. 1,840,000 55.4 1,478,360 44.6 3,355,160 2.0000 200 15% above Maximum.... 2,116,000 55.4 1,700,113 44.6 3,853,613 2.3000 230
- --------------------------- (1) Does not include 27,200, 32,000, 36,800 and 37,500 shares to be issued to the charitable foundation at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. EFFECTS OF CONVERSION ON DEPOSITORS, BORROWERS AND MEMBERS CONTINUITY. While the conversion is being accomplished, the normal business of First Federal of Northern Michigan of accepting deposits and making loans will continue without interruption. First Federal of Northern Michigan will continue to be a federally chartered savings bank and will continue to be regulated by the Office of Thrift Supervision. After the conversion, First Federal of Northern Michigan will continue to offer existing services to depositors, borrowers and other customers. The directors serving Alpena Bancshares, Inc. at the time of the conversion will be the directors of First Federal of Northern Michigan Bancorp, Inc. after the conversion. EFFECT ON DEPOSIT ACCOUNTS. Pursuant to the plan of conversion and reorganization, each depositor of First Federal of Northern Michigan at the time of the conversion will automatically continue 119 as a depositor after the conversion, and the deposit balance, interest rate and other terms of such deposit accounts will not change as a result of the conversion. Each such account will be insured by the Federal Deposit Insurance Corporation to the same extent as before the conversion. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts. EFFECT ON LOANS. No loan outstanding from First Federal of Northern Michigan will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as it was contractually fixed prior to the conversion. EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and certain borrowers of First Federal of Northern Michigan are members of, and have voting rights in, Alpena Bancshares, M.H.C. as to all matters requiring membership action. Upon completion of the conversion, depositors and qualifying borrowers will cease to be members of Alpena Bancshares, M.H.C. and will no longer have voting rights. Upon completion of the conversion, all voting rights in First Federal of Northern Michigan will be vested in First Federal of Northern Michigan Bancorp, Inc. as the sole stockholder of First Federal of Northern Michigan. The stockholders of First Federal of Northern Michigan Bancorp, Inc. will possess exclusive voting rights with respect to First Federal of Northern Michigan Bancorp, Inc. common stock. TAX EFFECTS. We will receive an opinion of counsel or tax advisor with regard to federal and state income tax consequences of the conversion to the effect that the conversion will not be taxable for federal or state income tax purposes to Alpena Bancshares, M.H.C., Alpena Bancshares, Inc., the public stockholders of Alpena Bancshares, Inc., members of Alpena Bancshares, M.H.C., eligible account holders, supplemental eligible account holders, or First Federal of Northern Michigan. See "--Material Income Tax Consequences." EFFECT ON LIQUIDATION RIGHTS. Each depositor in First Federal of Northern Michigan has both a deposit account in First Federal of Northern Michigan and a pro rata ownership interest in the net worth of Alpena Bancshares, M.H.C. based upon the deposit balance in his or her account. This ownership interest is tied to the depositor's account and has no tangible market value separate from the deposit account. This interest may only be realized in the event of a complete liquidation of Alpena Bancshares, M.H.C. and First Federal of Northern Michigan. Any depositor who opens a deposit account obtains a pro rata ownership interest in Alpena Bancshares, M.H.C. without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the deposit account but nothing for his or her ownership interest in the net worth of Alpena Bancshares, M.H.C., which is lost to the extent that the balance in the account is reduced or closed. Consequently, depositors in a stock subsidiary of a mutual holding company normally have no way of realizing the value of their ownership interest, which has realizable value only in the unlikely event that Alpena Bancshares, M.H.C. and First Federal of Northern Michigan are liquidated. If this occurs, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of Alpena Bancshares, M.H.C. after other claims, including claims of depositors to the amounts of their deposits, are paid. In the unlikely event that First Federal of Northern Michigan were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the "liquidation account" to depositors as of October 31, 2003 and December 31, 2004 who continue to maintain their deposit accounts as of the date of liquidation, with any assets remaining thereafter distributed to First Federal of Northern Michigan Bancorp, Inc. as the holder of First Federal of Northern Michigan's capital stock. Pursuant to the rules and regulations of the Office of Thrift Supervision, a post-conversion merger, consolidation, sale of bulk assets or similar combination or transaction with another insured savings institution would not be considered a liquidation and, in such a 120 transaction, the liquidation account would be assumed by the surviving institution. See "--Liquidation Rights." STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED The plan of conversion and reorganization and federal regulations require that the aggregate purchase price of the common stock sold in the offering must be based on the appraised pro forma market value of the common stock, as determined by an independent valuation. First Federal of Northern Michigan and Alpena Bancshares, Inc. have retained RP Financial to prepare an independent valuation appraisal. For its services in preparing the initial valuation, RP Financial will receive a fee of $27,500 and $6,500 for expenses. First Federal of Northern Michigan and Alpena Bancshares, Inc. have agreed to indemnify RP Financial and its employees and affiliates against specified losses, including any losses in connection with claims under the federal securities laws, arising out of its services as independent appraiser, except where such liability results from its negligence or bad faith. The independent valuation appraisal considered the pro forma impact of the offering. Consistent with the Office of Thrift Supervision appraisal guidelines, the appraisal applied three primary methodologies: the pro forma price-to-book value approach applied to both reported book value and tangible book value; the pro forma price-to-earnings approach applied to reported and core earnings; and the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based upon the current market valuations of the peer group companies, subject to valuation adjustments applied by RP Financial to account for differences between Alpena Bancshares, Inc. and the peer group. RP Financial placed the greatest emphasis on the price-to-earnings and price-to-book approaches in estimating pro forma market value. The independent valuation was prepared by RP Financial in reliance upon the information contained in this Prospectus, including the consolidated financial statements of Alpena Bancshares, Inc. RP Financial also considered the following factors, among others: o the present results and financial condition of Alpena Bancshares, Inc. and the projected results and financial condition of First Federal of Northern Michigan Bancorp, Inc.; o the economic and demographic conditions in Alpena Bancshares, Inc.'s existing market area; o certain historical, financial and other information relating to Alpena Bancshares, Inc.; o a comparative evaluation of the operating and financial characteristics of Alpena Bancshares, Inc. with those of other similarly situated publicly traded savings institutions located in the State of Michigan, and other states in the Midwest United States; o the aggregate size of the offering of the shares of common stock; o the impact of the conversion and offering on Alpena Bancshares, Inc.'s stockholders' equity and earnings potential; o the proposed dividend policy of First Federal of Northern Michigan Bancorp, Inc.; o the trading market for securities of comparable institutions and general conditions in the market for such securities; and 121 o the contribution of shares to the charitable foundation. Included in RP Financial's independent valuation were certain assumptions as to the pro forma earnings of First Federal of Northern Michigan Bancorp, Inc. after the conversion that were utilized in determining the appraised value. These assumptions included estimated expenses, an assumed after-tax rate of return on the net offering proceeds and purchases in the open market of 4% of the common stock issued in the offering by the recognition and retention plan at the $10.00 per share purchase price. See "Pro Forma Data" for additional information concerning these assumptions. The use of different assumptions may yield different results. The independent valuation states that as of November 26, 2004, the estimated pro forma market value, or valuation range, of First Federal of Northern Michigan Bancorp, Inc. ranged from a minimum of $24,799,010 to a maximum of $33,551,600, with a midpoint of $29,175,300. The Board of Directors of First Federal of Northern Michigan Bancorp, Inc. decided to offer the shares of common stock for a price of $10.00 per share. The aggregate offering price of the shares will be equal to the valuation range multiplied by the percentage of Alpena Bancshares, Inc. common stock owned by Alpena Bancshares, M.H.C. The number of shares offered will be equal to the aggregate offering price of the shares divided by the price per share. Based on the valuation range, the percentage of Alpena Bancshares, Inc. common stock owned by Alpena Bancshares, M.H.C. and the $10.00 price per share, the minimum of the offering range excluding the shares issued to the foundation will be 1,360,000 shares, the midpoint of the offering range will be 1,600,000 shares and the maximum of the offering range will be 1,840,000 shares. The Board of Directors of First Federal of Northern Michigan Bancorp, Inc. reviewed the independent valuation and, in particular, considered the following: o Alpena Bancshares, Inc.'s financial condition and results of operations; o comparison of financial performance ratios of Alpena Bancshares, Inc. to those of other financial institutions of similar size; o market conditions generally and in particular for financial institutions; and o the historical trading price of the publicly held shares of Alpena Bancshares, Inc. common stock. All of these factors are set forth in the independent valuation. The Board of Directors also reviewed the methodology and the assumptions used by RP Financial in preparing the independent valuation and believes that such assumptions were reasonable. The offering range may be amended with the approval of the Office of Thrift Supervision, if required, as a result of subsequent developments in the financial condition of Alpena Bancshares, Inc. or First Federal of Northern Michigan or market conditions generally. In the event the independent valuation is updated to amend the pro forma market value of First Federal of Northern Michigan Bancorp, Inc. to less than $24,799,010 or more than $38,536,130, the appraisal will be filed with the Securities and Exchange Commission by a post-effective amendment to First Federal of Northern Michigan Bancorp, Inc.'s registration statement. THE INDEPENDENT VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING OUR SHARES OF COMMON STOCK. RP FINANCIAL DID NOT INDEPENDENTLY VERIFY OUR CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION THAT WE PROVIDED TO THEM, NOR DID RP FINANCIAL INDEPENDENTLY VALUE OUR ASSETS OR LIABILITIES. THE INDEPENDENT VALUATION CONSIDERS FIRST FEDERAL OF NORTHERN MICHIGAN AS A GOING CONCERN AND 122 SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF FIRST FEDERAL OF NORTHERN MICHIGAN. MOREOVER, BECAUSE THE VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH MAY CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING OUR COMMON STOCK IN THE OFFERING WILL THEREAFTER BE ABLE TO SELL THEIR SHARES AT PRICES AT OR ABOVE THE $10.00 PRICE PER SHARE. Following commencement of the subscription offering, the maximum of the valuation range may be increased by up to 15%, or up to $38,536,130, without resoliciting subscribers, which will result in a corresponding increase of up to 15% in the maximum of the offering range to up to 2,116,000 shares, to reflect changes in the market and financial conditions or demand for the shares. We will not decrease the minimum of the valuation range and the minimum of the offering range without a resolicitation of subscribers. The subscription price of $10.00 per share will remain fixed. See "--Limitations on Common Stock Purchases" as to the method of distribution and allocation of additional shares that may be issued in the event of an increase in the offering range to fill unfilled orders in the offering. If the update to the independent valuation at the conclusion of the offering results in an increase in the maximum of the valuation range to more than $38,536,130 and a corresponding increase in the offering range to more than 2,116,000 shares, or a decrease in the minimum of the valuation range to less than $24,799,010 and a corresponding decrease in the offering range to fewer than 1,360,000 shares, then, after consulting with the Office of Thrift Supervision, we may terminate the plan of conversion and reorganization, cancel deposit account withdrawal authorizations and promptly return by check all funds received with interest at First Federal of Northern Michigan's passbook savings rate of interest. Alternatively, we may hold a new offering, establish a new offering range, extend the offering period and commence a resolicitation of subscribers or take other actions as permitted by the Office of Thrift Supervision in order to complete the conversion and offering. In the event that a resolicitation is commenced, we will promptly cancel deposit account withdrawal authorizations and return all funds received to subscribers as described above. We will notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. Any resolicitation following the conclusion of the subscription and community offerings would not exceed 45 days unless further extended by the Office of Thrift Supervision for periods of up to 90 days. An increase in the number of shares to be issued in the offering would decrease both a subscriber's ownership interest and First Federal of Northern Michigan Bancorp, Inc.'s pro forma earnings and stockholders' equity on a per share basis while increasing pro forma earnings and stockholders' equity on an aggregate basis. A decrease in the number of shares to be issued in the offering would increase both a subscriber's ownership interest and First Federal of Northern Michigan Bancorp, Inc.'s pro forma earnings and stockholders' equity on a per share basis, while decreasing pro forma earnings and stockholders' equity on an aggregate basis. For a presentation of the effects of these changes, see "Pro Forma Data." Copies of the independent valuation appraisal report of RP Financial and the detailed memorandum setting forth the method and assumptions used in the appraisal report are available for inspection at the main office of First Federal of Northern Michigan and as specified under "Where You Can Find Additional Information." EXCHANGE OF STOCK CERTIFICATES The conversion of existing outstanding shares of Alpena Bancshares, Inc. common stock into the right to receive new shares of First Federal of Northern Michigan Bancorp, Inc. common stock will occur automatically on the effective date of the conversion. As soon as practicable after the effective date of the conversion, we, or a bank or trust company or other entity designated by us in the capacity of exchange 123 agent, will send a transmittal form to each public stockholder of Alpena Bancshares, Inc. who holds stock certificates. The transmittal forms are expected to be mailed within five business days after the effective date of the conversion and will contain instructions on how to exchange old stock certificates of Alpena Bancshares, Inc. common stock for new stock certificates of First Federal of Northern Michigan Bancorp, Inc. common stock. We expect that stock certificates evidencing new shares of First Federal of Northern Michigan Bancorp, Inc. common stock will be distributed within five business days after we receive properly executed transmittal forms and other required documents. Shares held by public stockholders in street name will be exchanged automatically upon the effective date of the conversion; no transmittal forms will be mailed relating to these shares. No fractional shares of First Federal of Northern Michigan Bancorp, Inc. common stock will be issued to any public stockholder of Alpena Bancshares, Inc. when the conversion is completed. For each fractional share that would otherwise be issued to a stockholder who holds a stock certificate, we will pay by check an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10.00 offering purchase price per share. Payment for fractional shares will be made as soon as practicable after the receipt by the exchange agent of the transmittal forms and the surrendered Alpena Bancshares, Inc. stock certificates. If your shares of common stock are held in street name, you will automatically receive cash in lieu of fractional shares. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES UNTIL YOU HAVE RECEIVED TRANSMITTAL FORMS, WHICH WILL INCLUDE FORWARDING INSTRUCTIONS. After the conversion, stockholders will not receive new shares of First Federal of Northern Michigan Bancorp, Inc. common stock and will not be paid dividends on the new shares of First Federal of Northern Michigan Bancorp, Inc. common stock until existing certificates representing shares of Alpena Bancshares, Inc. common stock are surrendered for exchange in compliance with the terms of the transmittal form. When stockholders surrender their certificates, any unpaid dividends will be paid without interest. For all other purposes, however, each certificate that represents shares of Alpena Bancshares, Inc. common stock outstanding at the effective date of the conversion will be considered to evidence ownership of new shares of First Federal of Northern Michigan Bancorp, Inc. common stock into which those shares have been converted by virtue of the conversion. If a certificate for Alpena Bancshares, Inc. common stock has been lost, stolen or destroyed, our exchange agent will issue a new stock certificate upon receipt of appropriate evidence as to the loss, theft or destruction of the certificate, appropriate evidence as to the ownership of the certificate by the claimant, and appropriate and customary indemnification, which is normally effected by the purchase of a bond from a surety company at the stockholder's expense. All new shares of First Federal of Northern Michigan Bancorp, Inc. common stock that we issue in exchange for existing shares of Alpena Bancshares, Inc. common stock will be considered to have been issued in full satisfaction of all rights pertaining to such shares of common stock, subject, however, to our obligation to pay any dividends or make any other distributions with a record date prior to the effective date of the conversion that may have been declared by us on or prior to the effective date, and which remain unpaid at the effective date. SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS In accordance with the plan of conversion and reorganization, rights to subscribe for shares of common stock in the subscription offering have been granted in the following descending order of priority. The filling of all subscriptions that we receive will depend on the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and to 124 the maximum, minimum and overall purchase limitations set forth in the plan of conversion and reorganization and as described below under "--Limitations on Common Stock Purchases." PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each First Federal of Northern Michigan depositor with aggregate deposit account balances of $50.00 or more (a "Qualifying Deposit") on October 31, 2003 (an "Eligible Account Holder") will receive, without payment therefor, nontransferable subscription rights to purchase up to $150,000 (15,000 shares) of our common stock, subject to the overall purchase limitations. See "--Limitations on Common Stock Purchases." If there are not sufficient shares available to satisfy all subscriptions, shares will first be allocated so as to permit each Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each Eligible Account Holder whose subscription remains unfilled in the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders, the excess shall be reallocated among those Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated. To ensure proper allocation of our shares of common stock, each Eligible Account Holder must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on October 31, 2003. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. In the event of an oversubscription, the subscription rights of Eligible Account Holders who are also directors or executive officers of Alpena Bancshares, Inc. or their associates will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to increased deposits in the twelve months preceding October 31, 2003. PRIORITY 2: TAX-QUALIFIED PLANS. Our tax-qualified employee plans, including our employee stock ownership plan, will receive, without payment therefor, nontransferable subscription rights to purchase up to 10% of the shares of common stock issued in the offering, although our employee stock ownership plan intends to purchase 8% of the shares of common stock issued in the offering. PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders and our tax-qualified employee stock benefit plans, each First Federal of Northern Michigan depositor with a Qualifying Deposit on December 31, 2004 who is not an Eligible Account Holder ("Supplemental Eligible Account Holder") will receive, without payment therefor, nontransferable subscription rights to purchase up to $150,000 (15,000 shares) of common stock, subject to the overall purchase limitations. See "--Limitations on Common Stock Purchases." If there are not sufficient shares available to satisfy all subscriptions, shares will be allocated so as to permit each Supplemental Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares of common stock or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each Supplemental Eligible Account Holder whose subscription remains unfilled in the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders whose subscriptions remain unfilled. To ensure proper allocation of common stock, each Supplemental Eligible Account Holder must list on the stock order form all deposit accounts in which he or she has an ownership interest at December 31, 2004. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. 125 PRIORITY 4: OTHER MEMBERS. To the extent that there are shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders, our tax-qualified employee stock benefit plans, and Supplemental Eligible Account Holders, each depositor of First Federal of Northern Michigan on the voting record date of January 31, 2005 who is not an Eligible Account Holder or Supplemental Eligible Account Holder and each borrower of First Federal of Northern Michigan as of November 4, 1994 whose borrowings remain outstanding as of January 31, 2005 ("Other Members") will receive, without payment therefor, nontransferable subscription rights to purchase up to $150,000 (15,000 shares) of common stock, subject to the overall purchase limitations. See "--Limitations on Common Stock Purchases." If there are not sufficient shares available to satisfy all subscriptions, available shares will be allocated in the proportion that the amount of the subscription of each Other Member bears to the total amount of the subscriptions of all Other Members whose subscriptions remain unsatisfied. EXPIRATION DATE. The Subscription Offering will expire at 10:00 a.m., Alpena, Michigan time, on March 15, 2005, unless extended by us for up to 45 days or such additional periods with the approval of the Office of Thrift Supervision, if necessary. Subscription rights will expire whether or not each eligible depositor can be located. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received for shares at the minimum, midpoint or maximum of the offering range. Subscription rights which have not been exercised prior to the expiration date will become void. We will not execute orders until at least the minimum number of shares of common stock have been sold in the offering. If at least 1,360,000 shares have not been sold in the offering within 45 days after the expiration date and the Office of Thrift Supervision has not consented to an extension, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest at First Federal of Northern Michigan's passbook savings rate and all deposit account withdrawal authorizations will be canceled. If an extension beyond the 45-day period following the expiration date is granted by the Office of Thrift Supervision, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest at First Federal of Northern Michigan's passbook savings rate and all deposit account withdrawal authorizations will be canceled. We will notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. Extensions may not go beyond March __, 2007, which is two years after the special meeting of members of Alpena Bancshares, M.H.C. to vote on the conversion. COMMUNITY OFFERING To the extent that shares of common stock remain available for purchase after satisfaction of all subscriptions of Eligible Account Holders, our tax-qualified employee stock benefit plans, Supplemental Eligible Account Holders and Other Members, we may offer shares pursuant to the plan of conversion and reorganization to members of the general public in a community offering. Shares may be offered with the following preferences: (i) Natural persons residing in the Michigan counties of Alpena, Alcona, Antrim, Charlevoix, Cheboygan, Crawford, Emmet, Iosco, Kalkaska, Montmorency, Ogemaw, Oscoda, Otsego and Presque Isle; (ii) Alpena Bancshares, Inc.'s public stockholders as of February 3, 2005; and (iii) Other members of the general public. 126 Subscribers in the community offering may purchase up to 15,000 shares of common stock, subject to the overall purchase limitations. See "--Limitations on Common Stock Purchases." The minimum purchase is 25 shares. THE OPPORTUNITY TO PURCHASE SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO OUR RIGHT, IN OUR SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE OF THE OFFERING. If we do not have sufficient shares of common stock available to fill the orders of natural persons residing in the Michigan counties of Alpena, Alcona, Antrim, Charlevoix, Cheboygan, Crawford, Emmet, Iosco, Kalkaska, Montmorency, Ogemaw, Oscoda, Otsego and Presque Isle, we will allocate the available shares among those persons in a manner that permits each of them, to the extent possible, to purchase the lesser of 100 shares or the number of shares subscribed for by such person. Thereafter, unallocated shares will be allocated among natural persons residing in those counties whose orders remain unsatisfied on an equal number of shares basis per order. If oversubscription occurs due to the orders of public stockholders of Alpena Bancshares, Inc. as of February 3, 2005, the allocation procedures described above will apply to the stock orders of such persons. In no event will any purchaser in the Community Offering be permitted to purchase more than two percent (2%) of the shares of common stock offered for sale in the Offering. The term "residing" or "resident" as used in this Prospectus means any person who occupies a dwelling within the Michigan counties of Alpena, Alcona, Antrim, Charlevoix, Cheboygan, Crawford, Emmet, Iosco, Kalkaska, Montmorency, Ogemaw, Oscoda, Otsego and Presque Isle, has a present intent to remain within this community for a period of time, and manifests the genuineness of that intent by establishing an ongoing physical presence within the community, together with an indication that this presence within the community is something other than merely transitory in nature. We may utilize deposit or loan records or other evidence provided to us to decide whether a person is a resident. In all cases, however, the determination shall be in our sole discretion. EXPIRATION DATE. The community offering, if any, may begin during or after the subscription offering, and is currently expected to terminate at the same time as the subscription offering, and must terminate no more than 45 days following the subscription offering. First Federal of Northern Michigan Bancorp, Inc. may decide to extend the community offering for any reason and is not required to give purchasers notice of any such extension unless such period extends beyond April 29, 2005. If 1,360,000 shares have not been sold in the offering by April 29, 2005, all funds delivered to us will be returned promptly to the purchasers with interest at First Federal of Northern Michigan's passbook savings rate and all withdrawal authorizations will be canceled. If an extension is granted by the Office of Thrift Supervision, we will notify purchasers of the extension of time and of the rights of purchasers to place a new stock order for a specified period of time. These extensions may not go beyond March __, 2007, which is two years after the special meeting of members of Alpena Bancshares, M.H.C. to vote on the conversion. SYNDICATED COMMUNITY OFFERING If feasible, our Board of Directors may decide to offer for sale all shares of common stock not subscribed for or purchased in the subscription and community offerings in a syndicated community offering, subject to such terms, conditions and procedures as we may determine, in a manner that will achieve a wide distribution of our shares of common stock. However, we retain the right to accept or reject in whole or in part any orders in the syndicated community offering. In the syndicated community offering, any person may purchase up to $150,000 (15,000 shares) of common stock, subject to the overall maximum purchase limitations. Unless the syndicated community offering begins during the 127 community offering, the syndicated community offering will begin as soon as possible after the completion of the subscription and community offerings. Since all shares of common stock are being offered on a best-efforts basis, broker-dealers offering shares in the syndicated community offering must conform with certain Securities and Exchange Commission rules. The syndicated community offering will be conducted in accordance with certain Securities and Exchange Commission rules applicable to best efforts offerings. Generally under those rules, Ryan Beck & Co., Inc., a broker-dealer, will deposit funds it receives prior to closing from interested investors into a separate noninterest-bearing bank account. If and when all the conditions for the closing are met, funds for common stock sold in the syndicated community offering will be promptly delivered to us. If the offering is consummated, but some or all of an interested investor's funds are not accepted by us, those funds will be returned to the interested investor promptly, without interest. If the offering is not consummated, funds in the account will be promptly returned, without interest, to the potential investor. Normal customer ticketing will be used for order placement. In the syndicated community offering, order forms will not be used. If for any reason we cannot effect a syndicated community offering of shares of common stock not purchased in the subscription and community offerings, or in the event that there is an insignificant number of shares remaining unsold after the subscription, community and syndicated community offerings or in the syndicated community offering, we will try to make other arrangements for the sale of unsubscribed shares, if possible. The Office of Thrift Supervision must approve any such arrangements. LIMITATIONS ON COMMON STOCK PURCHASES The plan of conversion and reorganization includes the following limitations on the number of shares of common stock that may be purchased in the offering: (i) No person may purchase fewer than 25 shares of common stock or more than $150,000 (15,000 shares); (ii) Our employee stock ownership plan may purchase in the aggregate up to 10% of the shares of common stock issued in the offering (including shares issued to the foundation), including shares issued in the event of an increase in the offering range of up to 15%; (iii) Except for the employee stock ownership plan, as described above, no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than $250,000 (25,000 shares) in all categories of the offering combined; (iv) Current stockholders of Alpena Bancshares, Inc. are subject to an ownership limitation. As previously described, current stockholders of Alpena Bancshares, Inc. will receive new shares of First Federal of Northern Michigan Bancorp, Inc. common stock in exchange for their existing shares of Alpena Bancshares, Inc. common stock. The number of shares of common stock that a stockholder may purchase in the offering, together with associates or persons acting in concert with such stockholder, when combined with the shares that the stockholder and his or her associates will receive in exchange for existing Alpena Bancshares, Inc. common stock, may not exceed 5% of the shares of common stock of First Federal of Northern Michigan Bancorp, Inc. to be issued and outstanding at the completion of the conversion; and (v) The maximum number of shares of common stock that may be purchased in all categories of the offering by executive officers and directors of First Federal of Northern Michigan 128 and their associates, in the aggregate, when combined with new shares of common stock issued in exchange for existing shares, may not exceed 30% of the shares issued in the conversion. Depending upon market or financial conditions, our Board of Directors, with the approval of the Office of Thrift Supervision and without further approval of members of Alpena Bancshares, M.H.C., may decrease or increase the purchase and ownership limitations. If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be given, and, in our sole discretion, some other large subscribers who through their subscriptions evidence a desire to purchase the maximum allowable number of shares may be given, the opportunity to increase their subscriptions up to the then applicable limit. The effect of this type of resolicitation will be an increase in the number of shares of common stock owned by subscribers who choose to increase their subscriptions. In the event of an increase in the offering range of up to 15% of the total number of shares of common stock offered in the offering, shares will be allocated in the following order of priority in accordance with the plan of conversion and reorganization: (i) to fill the employee stock ownership plan's subscription for up to 10% of the total number of shares of common stock issued in the offering; (ii) in the event that there is an oversubscription at the Eligible Account Holder, Supplemental Eligible Account Holder or Other Member levels, to fill unfulfilled subscriptions of these subscribers according to their respective priorities; and (iii) to fill unfulfilled subscriptions in the community offering, with preference given first to natural persons residing in the Michigan counties of Alpena, Alcona, Antrim, Charlevoix, Cheboygan, Crawford, Emmet, Iosco, Kalkaska, Montmorency, Ogemaw, Oscoda, Otsego and Presque Isle, and then to Alpena Bancshares, Inc.'s public stockholders as of February 3, 2005. The term "associate" of a person means: (i) any corporation or organization, other than Alpena Bancshares, Inc., First Federal of Northern Michigan or a majority-owned subsidiary of First Federal of Northern Michigan, of which the person is a senior officer, partner or 10% beneficial stockholder; (ii) any trust or other estate in which the person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity; provided, however, it does not include any employee stock benefit plan in which the person has a substantial beneficial interest or serves as trustee or in a similar fiduciary capacity; and (iii) any blood or marriage relative of the person, who either has the same home as the person or who is a director or officer of Alpena Bancshares, Inc. or First Federal of Northern Michigan. The term "acting in concert" means: (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or 129 (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. A person or company which acts in concert with another person or company ("other party") shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee stock benefit plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether common stock held by the trustee and common stock held by the employee stock benefit plan will be aggregated. We have the sole discretion to determine whether prospective purchasers are "associates" or "acting in concert." Persons living at the same address, and persons exercising subscription rights through qualifying deposits registered at the same address, whether or not related, will be deemed to be acting in concert unless we determine otherwise. Our directors are not treated as associates of each other solely because of their membership on the Board of Directors. We have the right to determine whether prospective purchasers are associates or acting in concert. Common stock purchased in the offering will be freely transferable except for shares purchased by executive officers and directors of Alpena Bancshares, Inc. or First Federal of Northern Michigan and except as described below. Any purchases made by any associate of Alpena Bancshares, Inc. or First Federal of Northern Michigan for the explicit purpose of meeting the minimum number of shares of common stock required to be sold in order to complete the offering shall be made for investment purposes only and not with a view toward redistribution. In addition, under NASD guidelines, members of the NASD and their associates are subject to certain restrictions on transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of these securities. For a further discussion of limitations on purchases of our shares of common stock at the time of conversion and thereafter, see "--Certain Restrictions on Purchase or Transfer of Our Shares after Conversion" and "Restrictions on Acquisition of First Federal of Northern Michigan Bancorp, Inc." PLAN OF DISTRIBUTION; SELLING AGENT COMPENSATION To assist in the marketing of our common stock, we have retained Ryan Beck & Co., Inc., which is a broker-dealer registered with the National Association of Securities Dealers, Inc. Ryan Beck & Co., Inc. will assist us on a best efforts basis in the offering by: (i) acting as our financial advisor for the conversion, providing administration services and managing the Stock Information Center; (ii) targeting our sales efforts, including assisting in the preparation of marketing materials; (iii) soliciting orders for common stock; and (iv) assisting in soliciting proxies of our members. For these services, Ryan Beck & Co., Inc. will receive an advisory and administrative fee of $25,000 and a sales fee equal to 1.0% of the dollar amount of shares of common stock sold in the subscription and community offerings. The sales fee will be reduced by the advisory and administrative fee. No sales fee will be payable to Ryan Beck & Co., Inc. with respect to shares purchased by officers, directors and employees or their immediate families, shares purchased by our tax-qualified and non-qualified employee benefit plans, or the shares to be contributed to the charitable foundation. In the event 130 that Ryan Beck sells common stock through a group of broker-dealers in a syndicated community offering, it will be paid a fee equal to 1.0% of the dollar amount of total shares sold in the syndicated community offering, which fee along with the fee payable to selected dealers (which may include Ryan Beck) shall not exceed 6.0% in the aggregate. Ryan Beck & Co., Inc. also will be reimbursed for allocable expenses in an amount not to exceed $25,000, and for attorneys' fees and allocable expenses in an amount not to exceed $40,000. We will indemnify Ryan Beck & Co., Inc. against liabilities and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering materials for the common stock, including liabilities under the Securities Act of 1933, as amended. Some of our directors and executive officers may participate in the solicitation of offers to purchase common stock. These persons will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with the solicitation. Other regular, full-time employees of First Federal of Northern Michigan may assist in the offering, but only in ministerial capacities, and may provide clerical work in effecting a sales transaction. No offers or sales may be made by tellers or at the teller counters. All sales activity will be conducted in a segregated or separately identifiable area of First Federal of Northern Michigan's main office apart from the area accessible to the general public. Other questions of prospective purchasers will be directed to executive officers or registered representatives of Ryan Beck & Co., Inc. Our other employees have been instructed not to solicit offers to purchase shares of common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Securities Exchange Act of 1934, as amended, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of common stock. None of our officers, directors or employees will be compensated in connection with their participation in the offering. PROCEDURE FOR PURCHASING SHARES EXPIRATION DATE. The offering will expire at 10:00 a.m., Alpena, Michigan time, on March 15, 2005, unless we extend it for up to 45 days, with the approval of the Office of Thrift Supervision, if required. This extension may be approved by us, in our sole discretion, without further approval or additional notice to purchasers in the offering. Any extension of the subscription and/or community offering beyond April 29, 2005 would require the Office of Thrift Supervision's approval. All funds delivered to us to purchase shares of common stock in the offering would be returned promptly to the subscribers with interest at First Federal of Northern Michigan's passbook savings rate and all deposit account withdrawal authorizations would be canceled. Potential purchasers would be given the right to place new orders for common stock. If we have not sold the minimum number of shares offered in the offering by the expiration date or any extension thereof, we may terminate the offering and promptly refund all orders for shares of common stock. If the number of shares offered is reduced below the minimum of the offering range, or increased above the adjusted maximum of the offering range, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest at First Federal of Northern Michigan's passbook savings rate and all deposit account withdrawal authorizations will be canceled. Purchasers will be given an opportunity to place new stock orders. To ensure that each purchaser receives a Prospectus at least 48 hours before the expiration date of the offering in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, no Prospectus will be mailed any later than five days prior to the expiration date or hand delivered any later than two days prior to the expiration date. Execution of an order form will confirm receipt of delivery in accordance with Rule 15c2-8. Order forms will be distributed only with a Prospectus. Subscription funds will be 131 maintained in a segregated account at First Federal of Northern Michigan and/or another insured financial institution and will earn interest at our passbook savings rate from the date of receipt. We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal orders and promptly return all funds submitted, with interest at First Federal of Northern Michigan's passbook savings rate from the date of receipt. We have the right to reject any order submitted in the offering by a person who we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan of conversion. USE OF ORDER FORMS. In order to purchase shares of common stock in the subscription offering and community offering, you must complete an order form and remit full payment. Incomplete order forms or order forms that are not signed are not required to be accepted. We will not be required to accept orders submitted on photocopied or facsimiled order forms. All order forms must be received (not postmarked) prior to 10:00 a.m. Alpena, Michigan time, on March 15, 2005. We are not required to accept order forms that are not received by that time, are executed defectively or are received without full payment or without appropriate withdrawal instructions. We are not required to notify subscribers of incomplete or improperly executed order forms, and we have the right to waive or permit the correction of incomplete or improperly executed order forms. We do not represent, however, that we will do so and we have no affirmative duty to notify any prospective subscriber of any such defects. You may submit your order form and payment by mail using the return envelope provided, by bringing your order form to our Stock Information Center or our main office, or by overnight delivery to the indicated address on the order form. Once tendered, an order form cannot be modified or revoked without our consent. We reserve the absolute right, in our sole discretion, to reject orders received in the community offering, in whole or in part, at the time of receipt or at any time prior to completion of the offering. If you are ordering shares, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares. Our interpretation of the terms and conditions of the plan of conversion and reorganization and of the acceptability of the order forms will be final. By signing the order form, you will be acknowledging that the common stock is not a deposit or savings account and is not federally insured or otherwise guaranteed by First Federal of Northern Michigan or the federal government, and that you received a copy of this Prospectus. However, signing the order form will not result in you waiving your rights under the Securities Act of 1933 or the Securities Exchange Act of 1934. PAYMENT FOR SHARES. Payment for all shares of common stock will be required to accompany all completed order forms for the purchase to be valid. Payment for shares may be made by: (i) personal check, bank check or money order, made payable to First Federal of Northern Michigan Bancorp, Inc.; or (ii) authorization of withdrawal from First Federal of Northern Michigan deposit accounts designated on the stock order form. Appropriate means for designating withdrawals from deposit accounts at First Federal of Northern Michigan are provided in the order forms. The funds designated must be available in the account(s) at the time the order form is received. A hold will be placed on these funds, making them 132 unavailable to the depositor. Funds authorized for withdrawal will continue to earn interest within the account at the contract rate until the offering is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of shares of common stock; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will earn interest at the current passbook rate subsequent to the withdrawal. In the case of payments made by check or money order, these funds must be available in the account(s) and will be immediately cashed and placed in a segregated account at First Federal of Northern Michigan and/or another depository institution and will earn interest at First Federal of Northern Michigan's passbook savings rate from the date payment is received until the offering is completed or terminated. You may not remit First Federal of Northern Michigan line of credit checks, and we will not accept third-party checks payable to you and endorsed over to First Federal of Northern Michigan Bancorp, Inc. Additionally, you may not designate a direct withdrawal from First Federal of Northern Michigan accounts with check-writing privileges. Please provide a check instead, because we cannot place holds on checking accounts. If you request that we do so, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account. Once we receive your executed order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by the expiration date, in which event purchasers may be given the opportunity to increase, decrease or rescind their orders for a specified period of time. If you are interested in using your individual retirement account funds to purchase shares of common stock, you must do so through a self-directed individual retirement account such as a brokerage firm individual retirement account. By regulation, First Federal of Northern Michigan's individual retirement accounts are not self-directed, so they cannot be invested in our shares of common stock. Therefore, if you wish to use your funds that are currently in a First Federal of Northern Michigan individual retirement account, you may not designate on the order form that you wish funds to be withdrawn from the account for the purchase of common stock. The funds you wish to use for the purchase of common stock will have to be transferred to a brokerage account. There will be no early withdrawal or Internal Revenue Service interest penalties for these transfers. Depositors interested in using funds in an individual retirement account or any other retirement account to purchase shares of common stock should contact our Stock Information Center as soon as possible, preferably at least two weeks prior to the end of the offering period, because processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds. We shall have the right, in our sole discretion, to permit institutional investors to submit irrevocable orders together with the legally binding commitment for payment and to thereafter pay for the shares of common stock for which they subscribe in the community offering at any time prior to 48 hours before the completion of the conversion. This payment may be made by wire transfer. If our employee stock ownership plan purchases shares in the offering, it will not be required to pay for such shares until consummation of the offering, provided that there is a loan commitment from an unrelated financial institution or First Federal of Northern Michigan Bancorp, Inc. to lend to the employee stock ownership plan the necessary amount to fund the purchase. Regulations prohibit First Federal of Northern Michigan from lending funds or extending credit to any persons to purchase shares of common stock in the offering. 133 DELIVERY OF STOCK CERTIFICATES. Certificates representing shares of common stock issued in the offering and First Federal of Northern Michigan checks representing any applicable refund and/or interest paid on subscriptions made by check or money order will be mailed to the persons entitled thereto at the certificate registration address noted on the order form, as soon as practicable following consummation of the offering and receipt of all necessary regulatory approvals. Any certificates returned as undeliverable will be held by the transfer agent until claimed by persons legally entitled thereto or otherwise disposed of in accordance with applicable law. UNTIL CERTIFICATES FOR THE SHARES OF COMMON STOCK ARE AVAILABLE AND DELIVERED TO PURCHASERS, PURCHASERS MAY NOT BE ABLE TO SELL THE SHARES OF COMMON STOCK WHICH THEY ORDERED, EVEN THOUGH THE COMMON STOCK WILL HAVE BEGUN TRADING. OTHER RESTRICTIONS. Notwithstanding any other provision of the plan of conversion and reorganization, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state "blue sky" regulations, or would violate regulations or policies of the National Association of Securities Dealers, Inc., particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or her purchase and we may refuse to honor any purchase order if an opinion is not timely furnished. In addition, we are not required to offer shares of common stock to any person who resides in a foreign country, or in a State of the United States with respect to which any of the following apply: (a) a small number of persons otherwise eligible to subscribe for shares under the plan of conversion reside in such state; (b) the issuance of subscription rights or the offer or sale of shares of common stock to such persons would require us, under the securities laws of such state, to register as a broker, dealer, salesman or agent or to register or otherwise qualify our securities for sale in such state; and (c) such registration or qualification would be impracticable for reasons of cost or otherwise. RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES OFFICE OF THRIFT SUPERVISION REGULATIONS PROHIBIT ANY PERSON WITH SUBSCRIPTION RIGHTS, INCLUDING THE ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS AND OTHER MEMBERS, FROM TRANSFERRING OR ENTERING INTO ANY AGREEMENT OR UNDERSTANDING TO TRANSFER THE LEGAL OR BENEFICIAL OWNERSHIP OF THE SUBSCRIPTION RIGHTS ISSUED UNDER THE PLAN OF CONVERSION AND REORGANIZATION OR THE SHARES OF COMMON STOCK TO BE ISSUED UPON THEIR EXERCISE. THESE RIGHTS MAY BE EXERCISED ONLY BY THE PERSON TO WHOM THEY ARE GRANTED AND ONLY FOR HIS OR HER ACCOUNT. WHEN REGISTERING YOUR STOCK PURCHASE ON THE ORDER FORM, YOU SHOULD NOT ADD THE NAME(S) OF PERSONS WHO DO NOT HAVE SUBSCRIPTION RIGHTS OR WHO QUALIFY ONLY IN A LOWER PURCHASE PRIORITY THAN YOU DO. DOING SO MAY JEOPARDIZE YOUR SUBSCRIPTION RIGHTS. EACH PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT HE OR SHE IS PURCHASING SHARES SOLELY FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING REGARDING THE SALE OR TRANSFER OF SUCH SHARES. THE REGULATIONS ALSO PROHIBIT ANY PERSON FROM OFFERING OR MAKING AN ANNOUNCEMENT OF AN OFFER OR INTENT TO MAKE AN OFFER TO PURCHASE SUBSCRIPTION RIGHTS OR SHARES OF COMMON STOCK TO BE ISSUED UPON THEIR EXERCISE PRIOR TO COMPLETION OF THE OFFERING. WE WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT WE BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS, AND WE WILL NOT HONOR ORDERS THAT WE BELIEVE INVOLVE THE TRANSFER OF SUBSCRIPTION RIGHTS. STOCK INFORMATION CENTER If you have any questions regarding the offering, please call our Stock Information Center, at ___________, from 9:30 a.m. to 4:00 p.m., Alpena, Michigan time, Monday through Friday. The Stock Information Center is located at First Federal of Northern Michigan's main office, 100 South Second 134 Avenue, Alpena, Michigan. Our branches will not have offering materials and will not accept order forms or proxy cards. The Stock Information Center will be closed weekends and bank holidays. LIQUIDATION RIGHTS In the unlikely event of a complete liquidation of Alpena Bancshares, Inc. prior to the conversion, all claims of creditors of Alpena Bancshares, Inc., including those of depositors of First Federal of Northern Michigan (to the extent of their deposit balances), would be paid first. Thereafter, if there were any assets of Alpena Bancshares, Inc. remaining, these assets would be distributed to stockholders, including Alpena Bancshares, M.H.C. In the unlikely event that Alpena Bancshares, M.H.C. and Alpena Bancshares, Inc. liquidated prior to the conversion, all claims of creditors would be paid first. Then, if there were any assets of Alpena Bancshares, M.H.C. remaining, members of Alpena Bancshares, M.H.C. would receive those remaining assets, pro rata, based upon the deposit balances in their deposit account in First Federal of Northern Michigan immediately prior to liquidation. In the unlikely event that First Federal of Northern Michigan were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the "liquidation account" to certain depositors, with any assets remaining thereafter distributed to First Federal of Northern Michigan Bancorp, Inc. as the holder of First Federal of Northern Michigan capital stock. Pursuant to the rules and regulations of the Office of Thrift Supervision, a post-conversion merger, consolidation, sale of bulk assets or similar combination or transaction with another insured savings institution would not be considered a liquidation and, in these types of transactions, the liquidation account would be assumed by the surviving institution. The plan of conversion and reorganization provides for the establishment, upon the completion of the conversion, of a special "liquidation account" for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the greater of: (i) Alpena Bancshares, M.H.C.'s ownership interest in the retained earnings of Alpena Bancshares, Inc. as of the date of its latest balance sheet contained in this Prospectus; or (ii) the retained earnings of First Federal of Northern Michigan as of the date of the latest financial statements set forth in the Prospectus used by First Federal of Northern Michigan when it reorganized into Alpena Bancshares, M.H.C. on November 4, 1994. The purpose of the liquidation account is to provide Eligible Account Holders and Supplemental Eligible Account Holders who maintain their deposit accounts with First Federal of Northern Michigan after the conversion with a liquidation interest in the unlikely event of the complete liquidation of First Federal of Northern Michigan after the conversion. Each Eligible Account Holder and Supplemental Eligible Account Holder who continues to maintain his or her deposit account at First Federal of Northern Michigan, would be entitled, on a complete liquidation of First Federal of Northern Michigan after the conversion, to an interest in the liquidation account prior to any payment to the stockholders of First Federal of Northern Michigan Bancorp, Inc. Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in the liquidation account for each deposit account, including savings accounts, transaction accounts such as negotiable order of withdrawal accounts, money market deposit accounts, and certificates of deposit, with a balance of $50 or more held in First Federal of Northern Michigan on October 31, 2003, or December 31, 2004. Each Eligible Account Holder and Supplemental Eligible Account Holder would have a pro rata interest in the total liquidation account for each such deposit account, based on the proportion that the balance of each such deposit account on October 31, 2003, or December 31, 2004 bears to the balance of all deposit accounts in First Federal of Northern Michigan on such dates. 135 If, however, on any December 31 annual closing date commencing after the effective date of the conversion, the amount in any such deposit account is less than the amount in the deposit account on October 31, 2003 or December 31, 2004 or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced from time to time by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Payment pursuant to liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders would be separate and apart from the payment of any insured deposit accounts to such depositor. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be distributed to First Federal of Northern Michigan Bancorp, Inc. as the sole stockholder of First Federal of Northern Michigan. MATERIAL INCOME TAX CONSEQUENCES Consummation of the conversion is subject to the prior receipt of an opinion of counsel or tax advisor with respect to federal and state income taxation that the conversion will not be a taxable transaction to Alpena Bancshares, M.H.C., Alpena Bancshares, Inc., First Federal of Northern Michigan, Eligible Account Holders, Supplemental Eligible Account Holders, other members of Alpena Bancshares, M.H.C. and stockholders of Alpena Bancshares, Inc. Unlike private letter rulings, opinions of counsel or tax advisors are not binding on the Internal Revenue Service or any state taxing authority, and such authorities may disagree with such opinions. In the event of such disagreement, there can be no assurance that Alpena Bancshares, Inc. or First Federal of Northern Michigan would prevail in a judicial proceeding. Alpena Bancshares, M.H.C. and Alpena Bancshares, Inc. have received an opinion of counsel, Luse Gorman Pomerenk & Schick, P.C., regarding all of the material federal income tax consequences of the conversion, which includes the following: 1. The conversion of Alpena Bancshares, Inc. to a federally chartered interim stock savings bank will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code, and the merger of Alpena Bancshares, Inc. with and into First Federal of Northern Michigan qualifies as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code. 2. Neither Alpena Bancshares, Inc., First Federal of Northern Michigan, nor the stockholders of Alpena Bancshares, Inc. will recognize any gain or loss upon the transfer of assets of Alpena Bancshares, Inc. to First Federal of Northern Michigan in exchange for shares of common stock of First Federal of Northern Michigan, which will be constructively received by First Federal of Northern Michigan Bancorp, Inc.'s stockholders. (Sections 361 and 1032(a) of the Internal Revenue Code.) 3. The basis of the assets of Alpena Bancshares, Inc. and the holding period of such assets to be received by First Federal of Northern Michigan will be the same as the basis and holding period in such assets in the hands of Alpena Bancshares, Inc. immediately before the exchange. (Sections 362(b) and 1223(2) of the Internal Revenue Code). 4. The conversion of Alpena Bancshares, M.H.C., to a federally chartered interim stock savings bank will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code and the merger of Alpena Bancshares, 136 M.H.C. with and into First Federal of Northern Michigan qualifies as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code. 5. The exchange of Eligible Account Holders' and Supplemental Account Holders' interests in Alpena Bancshares, M.H.C. for interests in a liquidation account established in First Federal of Northern Michigan will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Federal Income Tax Regulations. 6. None of Alpena Bancshares, M.H.C., Alpena Bancshares, Inc., First Federal of Northern Michigan, nor Eligible Account Holders, Supplemental Eligible Account Holders or Other Members, will recognize any gain or loss on the transfer of the assets of Alpena Bancshares, M.H.C. to First Federal of Northern Michigan in exchange for an interest in a liquidation account established in First Federal of Northern Michigan for the benefit of eligible account holders and supplemental eligible account holders who remain depositors of First Federal of Northern Michigan. 7. Current stockholders of Alpena Bancshares, Inc. will not recognize any gain or loss upon their constructive exchange of Alpena Bancshares, Inc. common stock for shares of First Federal of Northern Michigan which will in turn be exchanged for new shares of First Federal of Northern Michigan Bancorp, Inc. common stock. 8. Each stockholder's aggregate basis in new shares of First Federal of Northern Michigan Bancorp, Inc. common stock (including fractional share interests) received in the exchange will be the same as the aggregate basis of Alpena Bancshares, Inc. common stock surrendered in exchange therefor. 9. Each stockholder's holding period in his or her First Federal of Northern Michigan Bancorp, Inc. common stock received in the exchange will include the period during which Alpena Bancshares, Inc. common stock surrendered was held, provided that the Alpena Bancshares, Inc. common stock surrendered is a capital asset in the hands of the stockholder on the date of the exchange. 10. Cash received by any current stockholder of Alpena Bancshares, Inc. in lieu of a fractional share interest in new shares of First Federal of Northern Michigan Bancorp, Inc. common stock will be treated as having been received as a distribution in full payment in exchange for a fractional share interest of new First Federal of Northern Michigan Bancorp, Inc. common stock, which such stockholder would otherwise be entitled to receive. Accordingly, a stockholder will recognize gain or loss equal to the difference between the cash received and the basis of the fractional share. If the common stock is held by the stockholder as a capital asset, the gain or loss will be capital gain or loss. 11. Assuming that nontransferable subscription rights have no economic value, no gain or loss will be recognized by eligible account holders, supplemental eligible account holders or other members upon distribution to them of nontransferable subscription rights to purchase shares of First Federal of Northern Michigan Bancorp, Inc. common stock, provided that the amount to be paid for First Federal of Northern Michigan Bancorp, Inc. common stock is equal to the fair market value of Alpena Bancshares, Inc. common stock. 137 12. The basis of the shares of First Federal of Northern Michigan Bancorp, Inc. common stock purchased in the offering will be the purchase price. The holding period of the First Federal of Northern Michigan Bancorp, Inc. common stock purchased pursuant to the exercise of nontransferable subscription rights will commence on the date on which the right to acquire such stock was exercised. 13. No gain or loss will be recognized by First Federal of Northern Michigan Bancorp, Inc. on the receipt of money in exchange for First Federal of Northern Michigan Bancorp, Inc. common stock sold in the offering. Unlike private letter rulings, an opinion of counsel is not binding on the Internal Revenue Service and the Internal Revenue Service could disagree with the conclusions reached therein. Depending on the conclusion or conclusions with which the Internal Revenue Service disagrees, the Internal Revenue Service may take the position that the transaction is taxable to any one or more of Alpena Bancshares, M.H.C. and/or the members of Alpena Bancshares, M.H.C., Alpena Bancshares, Inc., the public stockholders of Alpena Bancshares, Inc., and/or the Eligible Account Holders and Supplemental Eligible Account Holders who exercise their subscription rights. In the event of a disagreement, there can be no assurance that Alpena Bancshares, Inc. or First Federal of Northern Michigan would prevail in a judicial or administrative proceeding. The federal tax opinion has been filed with the Securities and Exchange Commission as an exhibit to First Federal of Northern Michigan Bancorp, Inc.'s registration statement. Advice regarding the Michigan state income tax consequences consistent with the federal tax opinion has been issued by Plante & Moran, PLLC, tax advisors to Alpena Bancshares, M.H.C. and Alpena Bancshares, Inc. In the view of RP Financial (which is acting as independent appraiser of the value of First Federal of Northern Michigan Bancorp, Inc. common stock in connection with the conversion), which view is not binding on the Internal Revenue Service, the subscription rights do not have any economic value, based on the fact that these rights are acquired by the recipients without cost, are nontransferable and of short duration, and afford the recipients the right only to purchase the common stock at a price equal to its estimated fair market value, which will be the same price as the subscription price for the unsubscribed shares of common stock. The Internal Revenue Service has not in the past opined that nontransferable subscription rights have value. Moreover, the Internal Revenue Service has taken a "no ruling" position on the issue of whether nontransferable subscription rights have value. If the subscription rights granted 138 to eligible account holders and supplemental eligible account holders are deemed to have an ascertainable value, receipt of these rights could result in taxable gain to those eligible account holders and supplemental eligible account holders who exercise the subscription rights in an amount equal to their value, and First Federal of Northern Michigan Bancorp, Inc. could recognize gain on a distribution. Eligible account holders and supplemental eligible account holders are encouraged to consult with their own tax advisors as to the tax consequences in the event that subscription rights are deemed to have an ascertainable value. CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF OUR SHARES AFTER CONVERSION All shares of common stock purchased in the offering by a director or an executive officer of First Federal of Northern Michigan generally may not be sold for a period of one year following the closing of the conversion, except in the event of the death of the director or executive officer. Each certificate for restricted shares will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any certificate or record ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split, or otherwise, with respect to the restricted stock will be similarly restricted. The directors and executive officers of First Federal of Northern Michigan Bancorp, Inc. also will be restricted by the insider trading rules promulgated pursuant to the Securities Exchange Act of 1934. Purchases of shares of our common stock by any of our directors, executive officers and their associates, during the three-year period following the closing of the conversion may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Office of Thrift Supervision. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock or to purchases of our common stock by our stock option plan or any of our tax-qualified employee stock benefit plans or non-tax-qualified employee stock benefit plans, including any recognition and retention plans or restricted stock plans. Office of Thrift Supervision regulations prohibit First Federal of Northern Michigan Bancorp, Inc. from repurchasing its shares of common stock during the first year following conversion unless compelling business reasons exist for such repurchases. After one year, the Office of Thrift Supervision does not impose any repurchase restrictions. FIRST FEDERAL COMMUNITY FOUNDATION GENERAL In furtherance of our commitment to our local community, the plan of conversion and reorganization provides that we will establish the First Federal Community Foundation as a non-stock, nonprofit Delaware corporation in connection with the conversion and offering. The charitable foundation will be funded with shares of First Federal of Northern Michigan Bancorp, Inc. common stock and cash, as further described below. By further enhancing our visibility and reputation in our local community, we believe that the charitable foundation will enhance the long-term value of First Federal of Northern Michigan's community banking franchise. The offering presents us with a unique opportunity to provide a substantial and continuing benefit to our community and to receive the associated tax benefits. 139 PURPOSE OF THE CHARITABLE FOUNDATION In connection with the closing of the offering, First Federal of Northern Michigan Bancorp, Inc. intends to fund First Federal Community Foundation through a contribution of cash in an amount equal to 2% of the shares we sell to purchasers in the offering, PROVIDED the cash does not exceed $375,000 and common stock equal to 2% of the shares we sell to purchasers in the offering, PROVIDED the common stock contribution does not exceed 37,500 shares. The purpose of the charitable foundation is to enhance the relationship between First Federal of Northern Michigan and the communities in which we operate and to enable our communities to share in our long-term growth. First Federal Community Foundation will be dedicated completely to community activities and the promotion of charitable causes, and may be able to support such activities in manners that are not presently available to us. We believe that First Federal Community Foundation will enable us to assist the communities within our market area in capacities beyond community development and lending, and will enhance our current activities under the Community Reinvestment Act. First Federal of Northern Michigan received a "Satisfactory" rating in its most recent Community Reinvestment Act examination by the OTS. We further believe that funding First Federal Community Foundation with shares of First Federal of Northern Michigan Bancorp, Inc. common stock and cash will allow our community to share in the potential growth and success of First Federal of Northern Michigan long after the offering is completed. First Federal Community Foundation will accomplish this goal by establishing continued ties with First Federal of Northern Michigan, thereby forming a partnership within the communities in which First Federal of Northern Michigan operates. STRUCTURE OF THE CHARITABLE FOUNDATION First Federal Community Foundation will be incorporated under Delaware law as a non-stock, nonprofit corporation. The certificate of incorporation of First Federal Community Foundation will provide that the corporation is organized exclusively for charitable purposes as set forth in Section 501(c)(3) of the Internal Revenue Code. The foundation's certificate of incorporation will further provide that no part of the foundation's net earnings will inure to the benefit of, or be distributable to, its directors, officers or members. We have selected Gary C. VanMassenhove, Michael W. Mahler and Amy E. Essex to serve on the initial board of directors of the charitable foundation. As required by Office of Thrift Supervision regulations, we also will select one additional person to serve on the initial board of directors who will not be one of our officers or directors and who will have experience with local charitable organizations and grant making. While there are no plans to change the size of the initial board of directors during the year following the completion of the conversion, following the first anniversary of the conversion, the charitable foundation may alter the size and composition of its board of directors. For five years after the conversion, one seat on the foundation's board of directors will be reserved for a person from our local community who has experience with local community charitable organizations and grant making and who is not one of our officers, directors or employees, and one seat on the charitable foundation's board of directors will be reserved for one of First Federal of Northern Michigan's directors. The business experience of Gary C. VanMassenhove, Michael W. Mahler and Amy E. Essex is described in "Management of First Federal of Northern Michigan Bancorp, Inc." on page 93. The board of directors of First Federal Community Foundation will be responsible for establishing its grant and donation policies, consistent with the purposes for which it was established. As directors of a nonprofit corporation, directors of First Federal Community Foundation will at all times be bound by their fiduciary duty to advance the foundation's charitable goals, to protect its assets and to act 140 in a manner consistent with the charitable purposes for which the foundation is established. The directors of First Federal Community Foundation also will be responsible for directing the activities of the charitable foundation, including the management and voting of the shares of common stock of First Federal of Northern Michigan Bancorp, Inc. held by the charitable foundation. However, as required by Office of Thrift Supervision regulations, all shares of common stock held by the foundation must be voted in the same ratio as all other shares of the common stock on all proposals considered by stockholders of First Federal of Northern Michigan Bancorp, Inc. First Federal Community Foundation's place of business will be located at our administrative offices. The board of directors of the foundation will appoint such officers and employees as may be necessary to manage its operations. To the extent applicable, we will comply with the affiliates restrictions set forth in Sections 23A and 23B of the Federal Reserve Act and the Office of Thrift Supervision regulations governing transactions between First Federal of Northern Michigan and the foundation. First Federal Community Foundation will receive working capital from: (1) any dividends that may be paid on First Federal of Northern Michigan Bancorp, Inc.'s shares of common stock in the future; (2) within the limits of applicable federal and state laws, loans collateralized by the shares of common stock; or (3) the proceeds of the sale of any of the shares of common stock in the open market from time to time. As a private foundation under Section 501(c)(3) of the Internal Revenue Code, the foundation will be required to distribute annually in grants or donations a minimum of 5% of the average fair market value of its net investment assets. Legislation has been introduced that, if enacted, could have the impact of increasing the charitable foundation's required annual distribution in grants or donations. One of the conditions imposed on the gift of common stock is that the amount of common stock that may be sold by the foundation in any one year shall not exceed 5% of the average market value of the assets held by the foundation, except where the board of directors of the charitable foundation determines that the failure to sell an amount of common stock greater than such amount would result in a long-term reduction of the value of its assets and/or would otherwise jeopardize its capacity to carry out its charitable purposes. TAX CONSIDERATIONS Our independent tax advisor, Luse Gorman Pomerenk & Schick, P.C., has advised us that an organization created for the above purposes should qualify as a Section 501(c)(3) exempt organization under the Internal Revenue Code and should be classified as a private foundation. First Federal Community Foundation will submit a timely request to the Internal Revenue Service to be recognized as an exempt organization. As long as the foundation files its application for tax-exempt status within 15 months from the date of its organization, and provided the Internal Revenue Service approves the application, its effective date as a Section 501(c)(3) organization will be the date of its organization. Our independent tax advisor, however, has not rendered any advice on whether the foundation's tax exempt status will be affected by the regulatory requirement that all shares of common stock of First Federal of Northern Michigan Bancorp, Inc. held by it must be voted in the same ratio as all other outstanding shares of common stock of First Federal of Northern Michigan Bancorp, Inc. on all proposals considered by stockholders of First Federal of Northern Michigan Bancorp, Inc. 141 Alpena Bancshares, Inc. and First Federal of Northern Michigan are authorized by federal law to make charitable contributions. We believe that the conversion presents a unique opportunity to establish and fund a charitable foundation given the substantial amount of additional capital being raised. In making such a determination, we considered the dilutive impact to our stockholders of the contribution of shares of common stock to First Federal Community Foundation. We believe that the contribution to the foundation in excess of the 10% annual limitation on charitable deductions described below is justified given First Federal of Northern Michigan's capital position and its earnings, the substantial additional capital being raised in the stock offering and the potential benefits of the First Federal of Northern Michigan Foundation to our community. See "Capitalization," "Historical and Pro Forma Regulatory Capital Compliance, and "Comparison of Valuation and Pro Forma Information With and Without the Foundation." The amount of the contribution will not adversely affect our financial condition, and it does not raise safety and soundness concerns. We therefore believe that the amount of the charitable contribution is reasonable given our pro forma capital position. We have received an opinion from our independent tax advisor that First Federal of Northern Michigan Bancorp, Inc.'s contribution of shares of its common stock to the foundation should not constitute an act of self-dealing and that we should be entitled to a deduction in the amount of the fair market value of the stock at the time of the contribution less the nominal amount that First Federal Community Foundation is required to pay First Federal of Northern Michigan Bancorp, Inc. for such stock. We are permitted to deduct only an amount equal to 10% of our annual taxable income in any one year. We are permitted under the Internal Revenue Code to carry the excess contribution over the five-year period following the contribution to the foundation. We estimate that substantially all of the contribution should be deductible over the six-year period. However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the foundation. Furthermore, even if the contribution is deductible, we may not have sufficient earnings to be able to use the deduction in full. We do not expect to make any further contributions to the foundation within the first five years following the initial contribution, unless such contributions would be deductible under the Internal Revenue Code. Any such decisions would be based on an assessment of, among other factors, our financial condition at that time, the interests of our stockholders and depositors, and the financial condition and operations of the foundation. Although we have received an opinion from our independent tax advisor that we should be entitled to a deduction for the charitable contribution, there can be no assurances that the Internal Revenue Service will recognize the First Federal of Northern Michigan Foundation as a Section 501(c)(3) exempt organization or that the deduction will be permitted. In such event, our contribution to the foundation would be expensed without tax benefit, resulting in a larger reduction in earnings in the year in which the Internal Revenue Service makes such a determination. As a private foundation, earnings and gains, if any, from the sale of common stock or other assets are exempt from federal and state income taxation. However, investment income, such as interest, dividends and capital gains, is generally taxed at a rate of 2.0%. Legislation has been introduced that, if enacted, would reduce this rate to 1.0%. First Federal Community Foundation will be required to file an annual return with the Internal Revenue Service within four and one-half months after the close of its fiscal year. First Federal Community Foundation will be required to make its annual return available for public inspection. The annual return for a private foundation includes, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the foundation's managers and a concise statement of the purpose of each grant. 142 REGULATORY REQUIREMENTS IMPOSED ON THE CHARITABLE FOUNDATION Office of Thrift Supervision regulations impose the following requirements on the establishment of the charitable foundation: o the Office of Thrift Supervision may examine the charitable foundation at the foundation's expense; o the charitable foundation must comply with all supervisory directives imposed by the Office of Thrift Supervision; o the charitable foundation must provide annually to the Office of Thrift Supervision a copy of the annual report that the foundation submits to the Internal Revenue Service; o the charitable foundation must operate according to written policies adopted by its board of directors, including a conflict of interest policy; o the charitable foundation may not engage in self-dealing and must comply with all laws necessary to maintain its tax-exempt status under the Internal Revenue Code; and o the charitable foundation must vote its shares in the same ratio as all of the other shares voted on each proposal considered by the stockholders of First Federal of Northern Michigan Bancorp, Inc. Within six months of completing the offering, the foundation must submit to the Office of Thrift Supervision a three-year operating plan. COMPARISON OF STOCKHOLDERS' RIGHTS FOR EXISTING STOCKHOLDERS OF ALPENA BANCSHARES, INC. GENERAL. As a result of the conversion, existing stockholders of Alpena Bancshares, Inc. will become stockholders of First Federal of Northern Michigan Bancorp, Inc.. There are differences in the rights of stockholders of Alpena Bancshares, Inc. and stockholders of First Federal of Northern Michigan Bancorp, Inc. caused by differences between federal and Maryland law and regulations and differences in Alpena Bancshares, Inc.'s federal stock charter and bylaws and First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation and bylaws. This discussion is not intended to be a complete statement of the differences affecting the rights of stockholders, but rather summarizes the material differences and similarities affecting the rights of stockholders. This discussion is qualified in its entirety by reference to the articles of incorporation and bylaws of First Federal of Northern Michigan Bancorp, Inc. and the Maryland General Corporation Law. See "Where You Can Find Additional Information" for procedures for obtaining a copy of First Federal of Northern Michigan Bancorp, Inc.'s articles of incorporation and bylaws. AUTHORIZED CAPITAL STOCK. Alpena Bancshares, Inc.'s authorized capital stock currently consists of 20,000,000 shares of common stock, par value $1.00 per share, and 10,000,000 shares of preferred stock. After the conversion, First Federal of Northern Michigan Bancorp, Inc.'s authorized capital stock will consist of 20,000,000 shares of common stock, $0.01 par value per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. We authorized more capital stock than that which will be issued in the conversion in order to provide our Board of Directors with flexibility to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and stock option grants. These additional authorized shares may also be used by our Board of Directors, however, consistent with its 143 fiduciary duty, to deter future attempts to gain control of First Federal of Northern Michigan Bancorp, Inc. Our Board of Directors also has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, our Board of Directors has the power, to the extent consistent with its fiduciary duty, to issue a series of preferred stock to persons friendly to management in order to attempt to block a hostile tender offer, merger or other transaction by which a third party seeks control, and thereby assist management to retain its position. We currently have no plans for the issuance of additional shares, other than the issuance of additional shares through our stock benefit plans. ISSUANCE OF CAPITAL STOCK. Pursuant to applicable laws and regulations, Alpena Bancshares, M.H.C. is required to own not less than a majority of the outstanding shares of Alpena Bancshares, Inc. common stock. Alpena Bancshares, M.H.C. will no longer exist following consummation of the conversion. First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation do not contain restrictions on the issuance of shares of capital stock to directors, officers or controlling persons, whereas Alpena Bancshares, Inc.'s federal stock charter restricts such issuances to general public offerings, or to directors for qualifying shares, unless the share issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal stockholders' meeting. Thus, stock-related compensation plans, such as stock option plans and recognition and retention plans, may be adopted by First Federal of Northern Michigan Bancorp, Inc. without stockholder approval and shares of First Federal of Northern Michigan Bancorp, Inc. capital stock may be issued directly to directors or officers without stockholder approval. Stockholder approval of stock-related compensation plans may be sought in certain instances in order to qualify such plans for favorable federal income tax and securities law treatment under current laws and regulations, and is required under Nasdaq listing requirements. VOTING RIGHTS. Neither Alpena Bancshares, Inc.'s federal stock charter or bylaws nor First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation or bylaws provide for cumulative voting for the election of directors. For additional information regarding voting rights, see "--Limitations on Voting Rights of Greater-than-10% Stockholders" below. PAYMENT OF DIVIDENDS. The ability of Alpena Bancshares, Inc. to pay dividends on its capital stock is restricted by Office of Thrift Supervision regulations and by federal income tax considerations related to federal savings banks such as First Federal of Northern Michigan. See "Supervision and Regulation--Federal Banking Regulation--Capital Distributions." Although First Federal of Northern Michigan Bancorp, Inc. is not subject to these restrictions as a Maryland corporation, such restrictions will indirectly affect First Federal of Northern Michigan Bancorp, Inc. because dividends from First Federal of Northern Michigan will be the primary source of funds of First Federal of Northern Michigan Bancorp, Inc. for the payment of dividends to stockholders of First Federal of Northern Michigan Bancorp, Inc. Certain restrictions generally imposed on Maryland corporations may also have an impact on First Federal of Northern Michigan Bancorp, Inc.'s ability to pay dividends. Maryland law generally provides that First Federal of Northern Michigan Bancorp, Inc. is limited to paying dividends in an amount equal to our capital surplus over payments that would be owed upon dissolution to stockholders whose preferential rights upon dissolution are superior to those receiving the dividend, and to an amount that would not make us insolvent. 144 BOARD OF DIRECTORS. Alpena Bancshares, Inc.'s federal stock charter and bylaws and First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation and bylaws each require the Board of Directors to be divided into three classes and that the members of each class shall be elected for a term of three years and until their successors are elected and qualified, with one class being elected annually. Under Alpena Bancshares, Inc.'s federal bylaws, any vacancies on the Board of Directors of Alpena Bancshares, Inc. may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the Board of Directors. Persons elected by the Board of Directors of Alpena Bancshares, Inc. to fill vacancies may only serve until the next annual meeting of stockholders. Under First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation, any vacancy occurring on the Board of Directors, including any vacancy created by reason of an increase in the number of directors, may be filled only by a majority of the remaining directors, and any director so chosen shall hold office for the remainder of the term to which the director has been elected and until his or her successor is elected and qualified. Under Alpena Bancshares, Inc.'s federal bylaws, any director may be removed for cause by the holders of a majority of the outstanding voting shares. First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation provide that any director may be removed for cause by the holders of at least 80% of the outstanding voting shares of First Federal of Northern Michigan Bancorp, Inc. LIMITATIONS ON LIABILITY. The federal stock charter and bylaws of Alpena Bancshares, Inc. do not limit the personal liability of directors. First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation provide that directors will not be personally liable for monetary damages to First Federal of Northern Michigan Bancorp, Inc. for certain actions as directors, except for (i) actions or omissions that are determined to have involved active and deliberate dishonesty, or (ii) receipt of an improper personal benefit from their positions as directors, or (iii) to the extent allowed by Maryland law. These provisions might, in certain instances, discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their duties even though such an action, if successful, might benefit First Federal of Northern Michigan Bancorp, Inc. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. Alpena Bancshares, Inc.'s federal bylaws provide indemnification to directors, officers and employees to the fullest extent allowed by law Under current Office of Thrift Supervision regulations Alpena Bancshares, Inc. shall indemnify its directors, officers and employees for any costs incurred in connection with any litigation involving such person's activities as a director, officer or employee if such person obtains a final judgment on the merits in his or her favor. In addition, indemnification is permitted in the case of a settlement, a final judgment against such person, or final judgment other than on the merits, if a majority of disinterested directors determines that such person was acting in good faith within the scope of his or her employment as he or she could reasonably have perceived it under the circumstances and for a purpose he or she could reasonably have believed under the circumstances was in the best interests of Alpena Bancshares, Inc. or its stockholders. Alpena Bancshares, Inc. also is permitted to pay ongoing expenses incurred by a director, officer or employee if a majority of disinterested directors concludes that such person may ultimately be entitled to indemnification. Before making any indemnification payment, Alpena Bancshares, Inc. is required to notify the Office of Thrift Supervision of its intention and such payment cannot be made if the Office of Thrift Supervision objects to such payment. 145 The officers, directors, agents and employees of First Federal of Northern Michigan Bancorp, Inc. are indemnified with respect to certain actions pursuant to First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation and Maryland law. Maryland law allows First Federal of Northern Michigan Bancorp, Inc. to indemnify any person for expenses, liabilities, settlements, judgments and fines in suits in which such person has been made a party by reason of the fact that he or she is or was a director, officer or employee of First Federal of Northern Michigan Bancorp, Inc. No such indemnification may be given if the acts or omissions of the person are adjudged to be in bad faith and materials to the matter giving rise to the proceeding, if such person is liable to the corporation for an unlawful distribution, or if such person personally received a benefit to which he or she was not entitled. The right to indemnification includes the right to be paid the expenses incurred in advance of final disposition of a proceeding. SPECIAL MEETINGS OF STOCKHOLDERS. Alpena Bancshares, Inc.'s federal bylaws provide that special meetings of Alpena Bancshares, Inc.'s stockholders may be called by the Chairman, the President, a majority of the Board of Directors or the holders of not less than one-tenth of the outstanding capital stock of Alpena Bancshares, Inc. entitled to vote at the meeting. First Federal of Northern Michigan Bancorp, Inc.'s Maryland bylaws provide that special meetings of the stockholders of First Federal of Northern Michigan Bancorp, Inc. may be called by the President, by a majority vote of the total authorized directors, or upon the written request of shareholders entitled to cast at least a majority of all votes entitled to vote at the meeting. STOCKHOLDER NOMINATIONS AND PROPOSALS. Alpena Bancshares, Inc.'s federal bylaws generally provide that stockholders may submit nominations for election of directors at an annual meeting of stockholders and may propose any new business to be taken up at such a meeting by filing the proposal in writing with Alpena Bancshares, Inc. at least five days before the date of any such meeting. First Federal of Northern Michigan Bancorp, Inc.'s Maryland bylaws generally provide that any stockholder desiring to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders must submit written notice to First Federal of Northern Michigan Bancorp, Inc. 90 days prior to the anniversary date of the mailing of proxy materials by First Federal of Northern Michigan Bancorp, Inc. in connection with the immediately preceding annual meeting of stockholders. However, if the date of the annual meeting is advanced more than 20 days prior to or delayed by more than 60 days after the anniversary of the preceding year's annual meeting, stockholders must submit such written notice no earlier than the 120th day, and not later than the 90th day, prior to the annual meeting, or alternatively, not later than the tenth day following the date on which notice of the meeting is mailed to stockholders or such public disclosure was made if such notice occurs less than 100 days prior to the meeting. Failure to comply with these advance notice requirements will preclude such nominations or new business from being considered at the meeting. Management believes that it is in the best interests of First Federal of Northern Michigan Bancorp, Inc. and its stockholders to provide sufficient time to enable management to disclose to stockholders information about a dissident slate of nominations for directors. This advance notice requirement may also give management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations, should management determine that doing so is in the best interests of stockholders generally. Similarly, adequate advance notice of stockholder proposals will give management time to study such proposals and to determine whether to recommend to the stockholders that such proposals be adopted. In certain instances, such provisions could make it more difficult to oppose management's nominees or proposals, even if stockholders believe such nominees or proposals are in their best interests. STOCKHOLDER ACTION WITHOUT A MEETING. The federal bylaws of Alpena Bancshares, Inc. provide that any action to be taken or which may be taken at any annual or special meeting of stockholders may be taken if a consent in writing, setting forth the actions so taken, is given by the holders of all 146 outstanding shares entitled to vote. First Federal of Northern Michigan Bancorp, Inc.'s Maryland bylaws provide similar authority of stockholders to act without a meeting. STOCKHOLDER'S RIGHT TO EXAMINE BOOKS AND RECORDS. A federal regulation, which is applicable to Alpena Bancshares, Inc., provides that stockholders may inspect and copy specified books and records of a federally chartered savings institution after proper written notice for a proper purpose. Maryland law provides that a stockholder may inspect a company's bylaws, stockholder minutes, annual statement of affairs and any voting trust agreements. However, only a shareholder or group of shareholders who together, for at least 6 months hold at least 5% of the company's total shares, have the right to inspect a company's stock ledger, list of stockholders and books of accounts. LIMITATIONS ON VOTING RIGHTS OF GREATER-THAN-10% STOCKHOLDERS. First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation provide that no record or beneficial owner, directly or indirectly, of more than 10% of the outstanding shares of common stock will be permitted to vote any shares in excess of such 10% limit. First Federal of Northern Michigan Bancorp, Inc.'s federal charter has no similar provision. MERGERS, CONSOLIDATIONS AND SALES OF ASSETS. A federal regulation applicable to Alpena Bancshares, Inc. generally requires the approval of two-thirds of the Board of Directors of Alpena Bancshares, Inc. and the holders of two-thirds of the outstanding stock of Alpena Bancshares, Inc. entitled to vote thereon for mergers, consolidations and sales of all or substantially all of Alpena Bancshares, Inc.'s assets. Such regulation permits Alpena Bancshares, Inc. to merge with another corporation without obtaining the approval of its stockholders if: (i) it does not involve an interim savings institution; (ii) Alpena Bancshares, Inc.'s federal stock charter is not changed; (iii) each share of Alpena Bancshares, Inc.'s stock outstanding immediately prior to the effective date of the transaction will be an identical outstanding share or a treasury share of Alpena Bancshares, Inc. after such effective date; and (iv) either: (a) no shares of voting stock of Alpena Bancshares, Inc. and no securities convertible into such stock are to be issued or delivered under the plan of combination; or (b) the authorized but unissued shares or the treasury shares of voting stock of Alpena Bancshares, Inc. to be issued or delivered under the plan of combination, plus those initially issuable upon conversion of any securities to be issued or delivered under such plan, do not exceed 15% of the total shares of voting stock of Alpena Bancshares, Inc. outstanding immediately prior to the effective date of the transaction. First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation require the approval of the holders of at least 80% of First Federal of Northern Michigan Bancorp, Inc.'s outstanding shares of voting stock to approve certain "Business Combinations" involving an "Interested Stockholder" except where: (i) the proposed transaction has been approved by a majority of the members of the Board of Directors who are unaffiliated with the Interested Stockholder and who were directors prior to the time when the Interested Stockholder became an Interested Stockholder; or 147 (ii) certain "fair price" provisions are complied with. (iii) The term "Interested Stockholder" includes any person or entity, other than First Federal of Northern Michigan Bancorp, Inc. or its subsidiary, which owns beneficially or controls, directly or indirectly, 10% or more of the outstanding shares of voting stock of First Federal of Northern Michigan Bancorp, Inc. This provision of the articles of incorporation applies to any "Business Combination," which is defined to include, among other things, any merger or consolidation of First Federal of Northern Michigan Bancorp, Inc. or transfer, or other disposition of 25% or more of the assets of First Federal of Northern Michigan Bancorp, Inc. with an Interested Stockholder; Under Maryland law, absent this provision, business combinations, including mergers, consolidations and sales of substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of a majority of the outstanding shares of common stock of First Federal of Northern Michigan Bancorp, Inc. and any other affected class of stock. One exception under Maryland law to the majority approval requirement applies to stockholders owning 10% or more of the common stock of a corporation for a period of less than five years. Such 10% stockholder, in order to obtain approval of a business combination, must obtain the approval of two-thirds of the outstanding stock, excluding the stock owned by such 10% stockholder, or satisfy other requirements under Maryland law relating to board of director approval of his or her acquisition of the shares of First Federal of Northern Michigan Bancorp, Inc. The increased stockholder vote required to approve a business combination may have the effect of preventing mergers and other business combinations which a majority of stockholders deem desirable and placing the power to prevent such a merger or combination in the hands of a minority of stockholders. First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation provide that the Board of Directors may consider certain factors in addition to the amount of consideration to be paid when evaluating certain business combinations or a tender or exchange offer. These additional factors include the social and economic effects of the transaction on its customers and employees and the communities served by First Federal of Northern Michigan Bancorp, Inc. DISSENTERS' RIGHTS OF APPRAISAL. The following discussion is intended as a brief summary of the material provisions of the OTS regulatory procedures that an Alpena Bancshares, Inc. stockholder must follow in order to dissent from the Conversion and obtain payment of the fair value of his or her shares of Alpena Bancshares, Inc. common stock. This summary is not, however, a complete statement of all applicable requirements and is qualified in its entirety by reference to Section 552.14 of the Rules and Regulations of the OTS (12 C.F.R. ss.552.14). Office of Thrift Supervision regulations generally provide that a stockholder of a federally chartered corporation that engages in a merger, consolidation or sale of all or substantially all of its assets shall have the right to demand from such institution payment of the fair or appraised value of his or her stock in the corporation, subject to specified procedural requirements. A dissenting stockholder must make a written demand for the appraisal and must vote against the Conversion. Within 10 days after the effective date of the Conversion, First Federal of Northern Michigan Bancorp, Inc. will offer, to each dissenting stockholder, to purchase their dissenting shares at a specified price. A dissenting stockholder may choose to accept this offer as the fair value of the shares held, or alternatively, a dissenting stockholder must file a petition with the OTS demanding a determination of the fair value of the shares. Under Maryland law, stockholders of First Federal of Northern Michigan Bancorp, Inc. will not have dissenters' appraisal rights in connection with a plan of merger or consolidation to which First 148 Federal of Northern Michigan Bancorp, Inc. is a party as long as the common stock of First Federal of Northern Michigan Bancorp, Inc. trades on the Nasdaq Stock Market. AMENDMENT OF GOVERNING INSTRUMENTS. No amendment of Alpena Bancshares, Inc.'s federal stock charter may be made unless it is first proposed by the Board of Directors of Alpena Bancshares, Inc., then preliminarily approved by the Office of Thrift Supervision, and thereafter approved by the holders of a majority of the total votes eligible to be cast at a legal meeting. First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation may be amended by the vote of the holders of a majority of the outstanding shares of First Federal of Northern Michigan Bancorp, Inc. common stock, except that the provisions of the articles of incorporation governing the calling of meetings of stockholders and the prohibition of action by written consent of stockholders, stockholder nominations and proposals, limitations on voting rights of 10% stockholders, the number and staggered terms of directors, vacancies on the Board of Directors and removal of directors, approval of certain business combinations, indemnification of officers and directors, and the manner of amending the articles of incorporation and bylaws, may not be repealed, altered, amended or rescinded except by the vote of the holders of at least 80% of the outstanding shares of First Federal of Northern Michigan Bancorp, Inc. The federal bylaws of Alpena Bancshares, Inc. may be amended by a majority vote of the full Board of Directors of Alpena Bancshares, Inc. or by a majority of the votes cast by the stockholders of Alpena Bancshares, Inc. at any legal meeting. First Federal of Northern Michigan Bancorp, Inc.'s Maryland bylaws may only be amended by a majority vote of the Board of Directors of First Federal of Northern Michigan Bancorp, Inc. or by the holders of at least 80% of the outstanding common stock of First Federal of Northern Michigan Bancorp, Inc. RESIDENCY REQUIREMENT FOR DIRECTORS. First Federal of Northern Michigan Bancorp, Inc.'s Maryland bylaws provide that only persons who reside or work in a county in which First Federal of Northern Michigan maintains an office or in a county contiguous to a county in which First Federal of Northern Michigan maintains an office will be qualified to be appointed or elected to the Board of Directors of First Federal of Northern Michigan Bancorp, Inc. Alpena Bancshares, Inc.'s federal bylaws have no similar provision. PURPOSE AND ANTI-TAKEOVER EFFECTS OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.'S MARYLAND ARTICLES OF INCORPORATION AND BYLAWS. Our Board of Directors believes that the provisions described above are prudent and will reduce our vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by our Board of Directors. These provisions also will assist us in the orderly deployment of the offering proceeds into productive assets during the initial period after the conversion. Our Board of Directors believes these provisions are in the best interests of First Federal of Northern Michigan Bancorp, Inc. and its stockholders. Our Board of Directors believes that it will be in the best position to determine the true value of First Federal of Northern Michigan Bancorp, Inc. and to negotiate more effectively for what may be in the best interests of its stockholders. Accordingly, our Board of Directors believes that it is in the best interests of First Federal of Northern Michigan Bancorp, Inc. and its stockholders to encourage potential acquirers to negotiate directly with the Board of Directors of First Federal of Northern Michigan Bancorp, Inc. and that these provisions will encourage such negotiations and discourage hostile takeover attempts. It is also the view of our Board of Directors that these provisions should not discourage persons from proposing a merger or other transaction at a price reflective of the true value of First Federal of Northern Michigan Bancorp, Inc. and that is in the best interests of all stockholders. Takeover attempts that have not been negotiated with and approved by our Board of Directors present the risk of a takeover on terms that may be less favorable than might otherwise be available. A transaction that is negotiated and approved by our Board of Directors, on the other hand, can be carefully 149 planned and undertaken at an opportune time in order to obtain maximum value of First Federal of Northern Michigan Bancorp, Inc. for our stockholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum strategic development of First Federal of Northern Michigan Bancorp, Inc.'s assets. Although a tender offer or other takeover attempt may be made at a price substantially above the current market price, such offers are sometimes made for less than all of the outstanding shares of a target company. As a result, stockholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise that is under different management and whose objectives may not be similar to those of the remaining stockholders. Despite our belief as to the benefits to stockholders of these provisions of First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation and bylaws, these provisions may also have the effect of discouraging a future takeover attempt that would not be approved by our Board of Directors, but pursuant to which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have any opportunity to do so. Such provisions will also make it more difficult to remove our Board of Directors and management. Our Board of Directors, however, has concluded that the potential benefits outweigh the possible disadvantages. Following the conversion, pursuant to applicable law and, if required, following the approval by stockholders, we may adopt additional anti-takeover provisions in our articles of incorporation or other devices regarding the acquisition of our equity securities that would be permitted for a Maryland business corporation. The cumulative effect of the restrictions on acquisition of First Federal of Northern Michigan Bancorp, Inc. contained in the Maryland articles of incorporation and bylaws of First Federal of Northern Michigan Bancorp, Inc. and in Maryland law may be to discourage potential takeover attempts and perpetuate incumbent management, even though certain stockholders of First Federal of Northern Michigan Bancorp, Inc. may deem a potential acquisition to be in their best interests, or deem existing management not to be acting in their best interests. RESTRICTIONS ON ACQUISITION OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. Although the Board of Directors of First Federal of Northern Michigan Bancorp, Inc. is not aware of any effort that might be made to obtain control of First Federal of Northern Michigan Bancorp, Inc. after the conversion, the Board of Directors believes that it is appropriate to include certain provisions as part of First Federal of Northern Michigan Bancorp, Inc.'s articles of incorporation to protect the interests of First Federal of Northern Michigan Bancorp, Inc. and its stockholders from takeovers which the Board of Directors of First Federal of Northern Michigan Bancorp, Inc. might conclude are not in the best interests of First Federal of Northern Michigan, First Federal of Northern Michigan Bancorp, Inc. or First Federal of Northern Michigan Bancorp, Inc.'s stockholders. The following discussion is a general summary of the material provisions of First Federal of Northern Michigan Bancorp, Inc.'s articles of incorporation and bylaws, First Federal of Northern Michigan's charter and bylaws and certain other regulatory provisions that may be deemed to have an "anti-takeover" effect. The following description of certain of these provisions is necessarily general and, with respect to provisions contained in First Federal of Northern Michigan Bancorp, Inc.'s articles of incorporation and bylaws and First Federal of Northern Michigan's stock charter and bylaws, reference 150 should be made in each case to the document in question, each of which is part of Alpena Bancshares, M.H.C.'s application for conversion with the Office of Thrift Supervision and First Federal of Northern Michigan Bancorp, Inc.'s registration statement filed with the Securities and Exchange Commission. See "Where You Can Find Additional Information." FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.'S ARTICLES OF INCORPORATION AND BYLAWS First Federal of Northern Michigan Bancorp, Inc.'s Maryland articles of incorporation and bylaws contain a number of provisions relating to corporate governance and rights of stockholders that might discourage future takeover attempts. As a result, stockholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of the Board of Directors or management of First Federal of Northern Michigan Bancorp, Inc. more difficult. DIRECTORS. The Board of Directors will be divided into three classes. The members of each class will be elected for a term of three years and only one class of directors will be elected annually. Thus, it would take at least two annual elections to replace a majority of First Federal of Northern Michigan Bancorp, Inc.'s Board of Directors. Further, the bylaws impose notice and information requirements in connection with the nomination by stockholders of candidates for election to the Board of Directors or the proposal by stockholders of business to be acted upon at an annual meeting of stockholders. RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The articles of incorporation and bylaws provide that special meetings of stockholders can be called by the President, by a majority of the whole board or upon the upon the written request of shareholders entitled to cast at least a majority of all votes entitled to vote at the meeting . PROHIBITION OF CUMULATIVE VOTING. The articles of incorporation prohibit cumulative voting for the election of directors. LIMITATION OF VOTING RIGHTS. The articles of incorporation provide that in no event will any person who beneficially owns more than 10% of the then-outstanding shares of common stock, be entitled or permitted to vote any of the shares of common stock held in excess of the 10% limit. RESTRICTIONS ON REMOVING DIRECTORS FROM OFFICE. The articles of incorporation provide that directors may only be removed for cause, and only by the affirmative vote of the holders of at least 80% of the voting power of all of our then-outstanding common stock entitled to vote (after giving effect to the limitation on voting rights discussed above in "--Limitation of Voting Rights.") AUTHORIZED BUT UNISSUED SHARES. After the conversion, First Federal of Northern Michigan Bancorp, Inc. will have authorized but unissued shares of common and preferred stock. See "Description of Capital Stock of First Federal of Northern Michigan Bancorp, Inc. Following the Conversion." The articles of incorporation authorize 10,000,000 shares of serial preferred stock. First Federal of Northern Michigan Bancorp, Inc. is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the Board of Directors is authorized to fix the designations, and relative preferences, limitations, voting rights, if any, including without limitation, offering rights of such shares (which could be multiple or as a separate class). In the event of a proposed merger, tender offer or other attempt to gain control of First Federal of Northern Michigan Bancorp, Inc. that the Board of Directors does not approve, it might be possible for the Board of Directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede the completion of the transaction. An effect of the possible issuance of preferred stock therefore may be to deter a future 151 attempt to gain control of First Federal of Northern Michigan Bancorp, Inc. The Board of Directors has no present plan or understanding to issue any preferred stock. AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS. Amendments to the articles of incorporation must be approved by First Federal of Northern Michigan Bancorp, Inc.'s Board of Directors and also by a majority of the outstanding shares of First Federal of Northern Michigan Bancorp, Inc.'s voting stock; provided, however, that approval by at least 80% of the outstanding voting stock is generally required to amend the following provisions: (i) The limitation on voting rights of persons who directly or indirectly beneficially own more than 10% of the outstanding shares of common stock; (ii) The inability of stockholders to act by written consent; (iii) The division of the Board of Directors into three staggered classes; (iv) The ability of the Board of Directors to fill vacancies on the board; (v) The inability to deviate from the manner prescribed in the bylaws by which stockholders nominate directors and bring other business before meetings of stockholders; (vi) The requirement that at least 80% of stockholders must vote to remove directors, and can only remove directors for cause; (vii) The ability of the Board of Directors to amend and repeal the bylaws; and (viii) The ability of the Board of Directors to evaluate a variety of factors in evaluating offers to purchase or otherwise acquire First Federal of Northern Michigan Bancorp, Inc. The bylaws may be amended by the affirmative vote of a majority of the directors of First Federal of Northern Michigan Bancorp, Inc. or the affirmative vote of at least 80% of the total votes eligible to be voted at a duly constituted meeting of stockholders. CONVERSION REGULATIONS Office of Thrift Supervision regulations prohibit any person from making an offer, announcing an intent to make an offer or participating in any other arrangement to purchase stock or acquiring stock or subscription rights in a converting institution or its holding company from another person prior to completion of its conversion. Further, without the prior written approval of the Office of Thrift Supervision, no person may make an offer or announcement of an offer to purchase shares or actually acquire shares of a converted institution or its holding company for a period of three years from the date of the completion of the conversion if, upon the completion of such offer, announcement or acquisition, the person would become the beneficial owner of more than 10% of the outstanding stock of the institution or its holding company. The Office of Thrift Supervision has defined "person" to include any individual, group acting in concert, corporation, partnership, association, joint stock company, trust, unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities of an insured institution. However, offers made exclusively to a bank or its holding company, or an underwriter or member of a selling group acting on the converting institution's or its holding company's behalf for resale to the general public are excepted. The regulation also provides civil penalties for willful violation or assistance in any such violation of the regulation by any person connected with the management of the converting institution or its holding company or who 152 controls more than 10% of the outstanding shares or voting rights of a converted institution or its holding company. CHANGE OF CONTROL REGULATIONS Under the Change in Bank Control Act, no person may acquire control of an insured federal savings bank or its parent holding company unless the Office of Thrift Supervision has been given 60 days' prior written notice and has not issued a notice disapproving the proposed acquisition. In addition, Office of Thrift Supervision regulations provide that no company may acquire control of a savings bank without the prior approval of the Office of Thrift Supervision. Any company that acquires such control becomes a "savings and loan holding company" subject to registration, examination and regulation by the Office of Thrift Supervision. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the savings bank's directors, or a determination by the Office of Thrift Supervision that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings bank's voting stock, if the acquiror is also subject to any one of eight "control factors," constitutes a rebuttable determination of control under the regulations. Such control factors include the acquiror being one of the two largest stockholders. The determination of control may be rebutted by submission to the Office of Thrift Supervision, prior to the acquisition of stock or the occurrence of any other circumstances giving rise to such determination, of a statement setting forth facts and circumstances which would support a finding that no control relationship will exist and containing certain undertakings. The regulations provide that persons or companies which acquire beneficial ownership exceeding 10% or more of any class of a savings bank's stock who do not intend to participate in or seek to exercise control over a savings bank's management or policies may qualify for a safe harbor by filing with the Office of Thrift Supervision a certification form that states, among other things, that the holder is not in control of such institution, is not subject to a rebuttable determination of control and will take no action which would result in a determination or rebuttable determination of control without prior notice to or approval of the Office of Thrift Supervision, as applicable. There are also rebuttable presumptions in the regulations concerning whether a group "acting in concert" exists, including presumed action in concert among members of an "immediate family." The Office of Thrift Supervision may prohibit an acquisition of control if it finds, among other things, that: (i) the acquisition would result in a monopoly or substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the institution; or (iii) the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. 153 DESCRIPTION OF CAPITAL STOCK OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. FOLLOWING THE CONVERSION GENERAL At the effective date, First Federal of Northern Michigan Bancorp, Inc. will be authorized to issue 20,000,000 shares of common stock, par value of $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. First Federal of Northern Michigan Bancorp, Inc. currently expects to issue in the offering up to 1,840,000 shares of common stock (not including the shares to be issued to the foundation), subject to adjustment, and up to 1,478,360 shares, subject to adjustment, in exchange for the publicly held shares of Alpena Bancshares, Inc. First Federal of Northern Michigan Bancorp, Inc. will not issue shares of preferred stock in the conversion. Each share of First Federal of Northern Michigan Bancorp, Inc. common stock will have the same relative rights as, and will be identical in all respects to, each other share of common stock. Upon payment of the subscription price for the common stock, in accordance with the plan of conversion and reorganization, all of the shares of common stock will be duly authorized, fully paid and nonassessable. The shares of common stock of First Federal of Northern Michigan Bancorp, Inc. will represent nonwithdrawable capital, will not be an account of an insurable type, and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. COMMON STOCK DIVIDENDS. First Federal of Northern Michigan Bancorp, Inc. may pay dividends to an amount equal to the excess of our capital surplus over payments that would be owed upon dissolution to stockholders whose preferential rights upon dissolution are superior to those receiving the dividend, and to an amount that would not make us insolvent, as and when declared by its Board of Directors. The payment of dividends by First Federal of Northern Michigan Bancorp, Inc. is subject to limitations that are imposed by law and applicable regulation. The holders of common stock of First Federal of Northern Michigan Bancorp, Inc. will be entitled to receive and share equally in dividends as may be declared by the Board of Directors of First Federal of Northern Michigan Bancorp, Inc. out of funds legally available therefor. If First Federal of Northern Michigan Bancorp, Inc. issues shares of preferred stock, the holders thereof may have a priority over the holders of the common stock with respect to dividends. VOTING RIGHTS. Upon consummation of the conversion, the holders of common stock of First Federal of Northern Michigan Bancorp, Inc. will have exclusive voting rights in First Federal of Northern Michigan Bancorp, Inc. They will elect First Federal of Northern Michigan Bancorp, Inc.'s Board of Directors and act on other matters as are required to be presented to them under Maryland law or as are otherwise presented to them by the Board of Directors. Generally, each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. Any person who beneficially owns more than 10% of the then-outstanding shares of First Federal of Northern Michigan Bancorp, Inc.'s common stock, however, will not be entitled or permitted to vote any shares of common stock held in excess of the 10% limit. If First Federal of Northern Michigan Bancorp, Inc. issues shares of preferred stock, holders of the preferred stock may also possess voting rights. Certain matters require an 80% stockholder vote. As a federal stock savings bank, corporate powers and control of First Federal of Northern Michigan are vested in its Board of Directors, who elect the officers of First Federal of Northern Michigan and who fill any vacancies on the Board of Directors. Voting rights of First Federal of Northern Michigan are vested exclusively in the owners of the shares of capital stock of First Federal of Northern Michigan, which will be First Federal of Northern Michigan Bancorp, Inc., and voted at the direction of 154 First Federal of Northern Michigan Bancorp, Inc.'s Board of Directors. Consequently, the holders of the common stock of First Federal of Northern Michigan Bancorp, Inc. will not have direct control of First Federal of Northern Michigan. LIQUIDATION. In the event of any liquidation, dissolution or winding up of First Federal of Northern Michigan, First Federal of Northern Michigan Bancorp, Inc., as the holder of 100% of First Federal of Northern Michigan's capital stock, would be entitled to receive all assets of First Federal of Northern Michigan available for distribution, after payment or provision for payment of all debts and liabilities of First Federal of Northern Michigan, including all deposit accounts and accrued interest thereon, and after distribution of the balance in the liquidation account to Eligible Account Holders and Supplemental Eligible Account Holders. In the event of liquidation, dissolution or winding up of First Federal of Northern Michigan Bancorp, Inc., the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of First Federal of Northern Michigan Bancorp, Inc. available for distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution. PREEMPTIVE RIGHTS. Holders of the common stock of First Federal of Northern Michigan Bancorp, Inc. will not be entitled to preemptive rights with respect to any shares that may be issued. The common stock is not subject to redemption. PREFERRED STOCK None of the shares of First Federal of Northern Michigan Bancorp, Inc.'s authorized preferred stock will be issued as part of the offering or the conversion. Preferred stock may be issued with preferences and designations as our Board of Directors may from time to time determine. Our Board of Directors may, without stockholder approval, issue shares of preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control. TRANSFER AGENT The transfer agent and registrar for First Federal of Northern Michigan Bancorp, Inc.'s common stock is The Registrar and Transfer Company, Cranford, New Jersey. EXPERTS The consolidated financial statements of Alpena Bancshares, Inc. as of December 31, 2003 and 2002, and for each of the years in the two-year period ended December 31, 2003, appearing elsewhere in this Prospectus have been included herein and in the registration statement in reliance upon the report of Plante & Moran, PLLC, independent certified public accountants, which is included herein and upon the authority of that firm as experts in accounting and auditing. RP Financial has consented to the publication herein of the summary of its report to First Federal of Northern Michigan Bancorp, Inc. setting forth its opinion as to the estimated pro forma market value of the shares of common stock upon completion of the conversion and offering and its letter with respect to subscription rights. LEGAL MATTERS Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., counsel to First Federal of Northern Michigan Bancorp, Inc., Alpena Bancshares, M.H.C. and First Federal of Northern Michigan, will issue 155 to First Federal of Northern Michigan Bancorp, Inc. its opinion regarding the legality of the common stock, the federal income tax consequences of the conversion and the establishment of the charitable foundation. Certain legal matters will be passed upon for Ryan Beck & Co., Inc. by Muldoon Murphy Faucette & Aguggia LLP, Washington, D.C. WHERE YOU CAN FIND ADDITIONAL INFORMATION First Federal of Northern Michigan Bancorp, Inc. has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 with respect to the shares of common stock offered hereby. As permitted by the rules and regulations of the Securities and Exchange Commission, this Prospectus does not contain all the information set forth in the registration statement. Such information, including the appraisal report which is an exhibit to the registration statement, can be examined without charge at the public reference facilities of the Securities and Exchange Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can be obtained from the Securities and Exchange Commission at prescribed rates. The Securities and Exchange Commission telephone number is 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission, including First Federal of Northern Michigan Bancorp, Inc. The statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions of the material terms of, and should be read in conjunction with, such contract or document. Alpena Bancshares, M.H.C. has filed with the Office of Thrift Supervision an Application on Form AC with respect to the conversion. This Prospectus omits certain information contained in the application. The application may be examined at the principal office of the Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552, and at the Southeast Regional Office of the Office of Thrift Supervision, 1475 Peachtree Street, N.E., Atlanta, Georgia 30309. IN CONNECTION WITH THE OFFERING, FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. WILL REGISTER ITS COMMON STOCK UNDER SECTION 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934 AND, UPON SUCH REGISTRATION, FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND THE HOLDERS OF ITS COMMON STOCK WILL BECOME SUBJECT TO THE PROXY SOLICITATION RULES, REPORTING REQUIREMENTS AND RESTRICTIONS ON COMMON STOCK PURCHASES AND SALES BY DIRECTORS, OFFICERS AND GREATER THAN 10% STOCKHOLDERS, THE ANNUAL AND PERIODIC REPORTING AND CERTAIN OTHER REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934. UNDER THE PLAN OF CONVERSION AND REORGANIZATION, FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. HAS UNDERTAKEN THAT IT WILL NOT TERMINATE SUCH REGISTRATION FOR A PERIOD OF AT LEAST THREE YEARS FOLLOWING THE STOCK OFFERING. 156 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONTENTS REPORT LETTER F - 2 CONSOLIDATED FINANCIAL STATEMENTS Statement of Financial Condition F - 3 Statement of Income F - 4 Statement of Changes in Stockholders' Equity F - 5 Statement of Cash Flows F - 7 Notes to Consolidated Financial Statements F - 8 All financial schedules are omitted because the required information either is not applicable or is shown in the financial statements or in the notes thereto. Separate financial statements for First Federal of Northern Michigan Bancorp, Inc. have not been included in this prospectus because First Federal of Northern Michigan Bancorp, Inc., which has engaged only in organizational activities to date, has no significant assets, contingent or other liabilities, revenues or expenses. F - 1 [Letterhead of Plante & Moran, PLLC] Independent Auditor's Report Board of Directors Alpena Bancshares, Inc. and Subsidiaries We have audited the consolidated statement of financial condition of Alpena Bancshares, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each year in the two-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alpena Bancshares, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the consolidated results of their operations and their cash flows for each year in the two-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Plante & Moran, PLLC Auburn Hills, Michigan January 30, 2004 F - 2
ALPENA BANCSHARES, INC. AND SUBSIDIARIES - ---------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (000S OMITTED, EXCEPT PER SHARE DATA) Unaudited September 30, December 31 ------------ -------------------------- 2004 2003 2002 ------------ ------------ ------------ ASSETS Cash and cash equivalents $ 4,727 $ 3,380 $ 3,091 Overnight deposits with Federal Home Loan Bank 97 3,326 12,008 ------------ ------------ ------------ Total cash and cash equivalents 4,824 6,706 15,099 Securities available for sale (Note 2) 41,080 34,670 46,944 Securities held to maturity (Note 2) 1,800 -- -- Loans - Net (Note 3) 187,099 163,460 151,341 Loans held for sale 656 931 542 Foreclosed assets 1 199 128 Real estate held for sale (Note 4) 562 439 490 Federal Home Loan Bank stock 4,617 4,460 4,294 Property and equipment (Note 5) 6,432 5,817 4,761 Accrued interest receivable 1,222 1,066 1,323 Goodwill and other intangible assets (Note 7) 3,668 3,851 1,698 Other assets (Note 6) 2,515 2,324 2,188 ------------ ------------ ------------ Total assets $ 254,476 $ 223,923 $ 228,808 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Non-interest bearing deposits $ 11,664 $ 7,281 $ 5,418 Interest bearing deposits (Note 8) 170,764 144,421 150,674 Advances from borrowers for taxes and insurance 292 96 4 Advances from Federal Home Loan Bank (Note 9) 46,052 45,802 48,414 Note payable (Note 10) 1,251 1,357 -- Accrued expenses and other liabilities (Note 14) 2,181 2,496 1,834 Deferred income taxes (Note 11) 336 519 717 ------------ ------------ ------------ Total liabilities 232,540 201,972 207,061 STOCKHOLDERS' EQUITY (Note 13) Common stock - $1 par value: Authorized - 20,000,000 shares Issued and outstanding - 1,659,180 at September 30, 2004, 1,657,480 shares in 2003 and 1,645,258 shares in 2002 1,659 1,657 1,645 Additional paid-in capital 5,354 5,338 5,216 Retained earnings - Restricted 5,060 4,807 4,347 Retained earnings 9,729 9,854 9,472 Accumulated other comprehensive income 134 295 1,067 ------------ ------------ ------------ Total stockholders' equity 21,936 21,951 21,747 ------------ ------------ ------------ Total liabilities and stockholders' equity $ 254,476 $ 223,923 $ 228,808 ============ ============ ============
See Notes to Consolidated Financial Statements F - 3
ALPENA BANCSHARES, INC. AND SUBSIDIARIES - ---------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME (000S OMITTED, EXCEPT PER SHARE DATA) Unaudited For Nine Months Ended Sepetember 30, Year Ended December 31 -------------------------- -------------------------- 2004 2003 2003 2002 ------------ ------------ ------------ ------------ INTEREST INCOME Loans, including fees $ 8,447 $ 8,408 $ 11,214 $ 12,133 Investments 1,185 1,510 1,866 2,103 Mortgage-backed securities 166 207 270 263 ------------ ------------ ------------ ------------ Total interest income 9,798 10,125 13,350 14,499 INTEREST EXPENSE Deposits (Note 8) 2,620 2,874 3,719 5,466 Other borrowings 1,951 2,057 2,736 2,876 ------------ ------------ ------------ ------------ Total interest expense 4,571 4,931 6,455 8,342 ------------ ------------ ------------ ------------ NET INTEREST INCOME - Before provision for loan losses 5,227 5,194 6,895 6,157 PROVISION FOR LOAN LOSSES (NOTE 3) 214 238 267 415 ------------ ------------ ------------ ------------ NET INTEREST INCOME - After provision for loan losses 5,013 4,956 6,628 5,742 OTHER INCOME (EXPENSES) Service charges and other fees 749 560 801 818 Net gain on sale of loans 273 910 1,138 951 Loan servicing fees 188 382 425 450 Insurance and brokerage commissions 2,233 1,740 2,480 -- Gain on sale of investment securities (Note 2) 103 93 320 65 (Gain) loss on sale of real estate (20) 28 7 (17) Other 73 179 255 118 ------------ ------------ ------------ ------------ Total other income 3,599 3,892 5,426 2,385 OPERATING EXPENSES Compensation and employee benefits (Note 14) 4,460 4,242 6,859 4,016 Amortization of intangible assets 230 214 292 205 Advertising 177 160 215 175 Occupancy and equipment 967 883 1,140 1,033 Data processing service bureau 250 226 304 281 Insurance and brokerage commission 970 771 1,087 -- Other 1,059 1,167 430 1,362 ------------ ------------ ------------ ------------ Total operating expenses 8,113 7,663 10,327 7,072 ------------ ------------ ------------ ------------ INCOME - Before federal income tax 499 1,185 1,727 1,055 FEDERAL INCOME TAX (Note 11) 167 394 518 285 ------------ ------------ ------------ ------------ NET INCOME $ 332 $ 791 $ 1,209 $ 770 ============ ============ ============ ============ PER SHARE DATA Basic earnings per share $ 0.20 $ 0.48 $ 0.73 $ 0.47 Fully diluted earnings per share 0.20 0.48 0.73 0.47 Dividends per common share 0.28 0.38 0.50 0.50
See Notes to Consolidated Financial Statements F - 4
ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (000S OMITTED, EXCEPT PER SHARE DATA) Accumulated Additional Shares Other Total Common Paid-in Retained Acquired Comprehensive Stockholders' Stock Capital Earnings by RRP Income (Loss) Equity ---------- ---------- -------- -------- ------------- ------------- BALANCE - January 1, 2002 $ 1,641 $ 5,179 $ 13,411 $ - $ 366 $ 20,597 Comprehensive income: Net income - - 770 - - 770 Other comprehensive income: Unrealized appreciation on available-for- sale securities - Net of tax of $384 - - - - 744 744 Less reclassification adjustment for realized gains included in net income - Net of tax of $22 - - - - (43) (43) ------------- Total comprehensive income 1,471 Stock options exercised 3 22 - - - 25 RRP stock release 1 15 - - - 16 Dividends paid - - (362) - - (362) ---------- ---------- -------- -------- ------------- ------------- BALANCE - December 31, 2002 1,645 5,216 13,819 - 1,067 21,747
See Notes to Consolidated Financial Statements F - 5
ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED) (000S OMITTED, EXCEPT PER SHARE DATA) Accumulated Additional Shares Other Total Common Paid-in Retained Acquired Comprehensive Stockholders' Stock Capital Earnings by RRP Income (Loss) Equity ---------- ---------- -------- -------- ------------- ------------- BALANCE - December 31, 2002 1,645 5,216 13,819 - 1,067 21,747 Comprehensive income: Net income - - 1,209 - - 1,209 Other comprehensive income: Unrealized appreciation on available-for- sale securities - Net of tax of $289 - - - - (561) (561) Less reclassification adjustment for realized gains included in net income - Net of tax of $108 - - - - (211) (211) ------------- Total comprehensive income 437 Stock options exercised 12 119 - - - 131 RRP stock release - 3 - - - 3 Dividends paid - - (367) - - (367) ---------- ---------- -------- -------- ------------- ------------- BALANCE - December 31, 2003 1,657 5,338 14,661 - 295 21,951 Comprehensive income: Net income - - 332 - - 332 Other comprehensive income: Unrealized appreciation on available-for- sale securities - Net of tax of $48 - - - - (93) (93) Less reclassification adjustment for realized gains included in net income - Net of tax of $35 - - - - (68) (68) ------------- Total comprehensive income 171 Stock options exercised 2 16 - - - 18 Dividends paid - - (204) - - (204) ---------- ---------- -------- -------- ------------- ------------- BALANCE - September 30, 2004 (Unaudited) $ 1,659 $ 5,354 $ 14,789 $ - $ 134 $ 21,936 ========== ========== ======== ======== ============= =============
See Notes to Consolidated Financial Statements F - 6
ALPENA BANCSHARES, INC. AND SUBSIDIARIES - ---------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS (000S OMITTED, EXCEPT PER SHARE DATA) Unaudited For Nine Months Ended Sepetember 30, Year Ended December 31 -------------------------- -------------------------- 2004 2003 2003 2002 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 332 $ 791 $ 1,209 $ 770 Adjustments to reconcile net income to cash from operating activities: Depreciation and amortization 580 464 782 676 Provision for loan losses 197 238 267 415 Amortization and accretion on securities 308 238 339 253 Gain on sale of investment securities (103) (93) (320) (65) Originations of loans held for sale (19,247) (71,530) (81,510) (68,631) Principal amount of loans sold 19,522 71,411 81,121 69,980 Purchase of real estate held for sale (123) - (340) (676) Proceeds from sale of real estate 197 113 398 1,008 Gain (loss) on sale of real estate - (35) (7) 17 Gain (loss) on fixed assets - (28) 5 (2) Change in accrued interest receivable (344) (351) 257 27 Change in other assets - - (288) (313) Change in accrued expenses and other liabilities (317) 1,000 250 91 Change in deferred income taxes (100) - 200 - ------------ ------------ ------------ ------------ Net cash provided by operating activities 902 2,218 2,363 3,550 CASH FLOWS FROM INVESTING ACTIVITIES Net decrease in loans (23,836) (11,686) (12,386) 24,390 Proceeds from maturity of available-for-sale securities 10,143 13,223 16,852 7,820 Proceeds from sale of securities available for sale 19,213 4,113 11,982 4,977 Purchase of securities available for sale (36,216) (15,693) (17,750) (35,654) Purchase of securities held to maturity (1,800) (111) - - Purchase of Federal Home Loan Bank stock (157) (241) (166) - Purchase of InsuranCenter of Alpena - (1,028) (1,028) - Purchase of premises and equipment (1,012) (648) (1,114) (386) ------------ ------------ ------------ ------------ Net cash provided by investing activities (33,665) (12,071) (3,610) 1,147 CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 30,726 (4,249) (4,390) (10,446) Dividends paid on common stock (203) (274) (367) (362) Net increase (decrease) in advances from borrowers 196 - 92 (99) Additions to advances from Federal Home Loan Bank 144 4,000 9,500 - Repayments of advances from Federal Home Loan Bank - - (12,112) (3,706) Proceeds from exercise of stock options 18 121 131 25 ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 30,881 (402) (7,146) (14,588) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,882) (10,255) (8,393) (9,891) CASH AND CASH EQUIVALENTS - Beginning of year 6,705 15,099 15,099 24,990 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS - End of year $ 4,823 $ 4,844 $ 6,706 $ 15,099 ============ ============ ============ ============ SUPPLEMENTAL CASH FLOW AND NONCASH INFORMATION Cash paid for income taxes $ 325 $ 306 $ 556 $ 506 Cash paid for interest on deposits and borrowings 4,452 4,942 6,430 8,239 Stock issued to employees - 3 3 16
See Notes to Consolidated Financial Statements F - 7 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS - Alpena Bancshares, Inc. (the "Company") and its subsidiary, First Federal of Northern Michigan (the "Bank"), conduct operations in the northeastern lower peninsula of Michigan. The Bank is primarily engaged in the business of attracting deposits from the general public in its market area and investing those deposits in one- to four-family residential real estate mortgages and, to a lesser extent, commercial real estate loans and consumer loans. PRINCIPLES OF CONSOLIDATION AND ORGANIZATION - The consolidated financial statements include the accounts of Alpena Bancshares, Inc., First Federal of Northern Michigan, and the Bank's wholly owned subsidiaries, Financial Services & Mortgage Corporation ("FSMC") and InsuraCenter of Alpena. (ICA). FSMC invests in real estate, which includes leasing, selling, developing, and maintaining real estate properties. All significant intercompany balances and transactions have been eliminated in the consolidation. The operating data for the nine months ended September 30, 2004 and 2003 and the as of data for September 30, 2004 is unaudited. No adjustments were made other than normal recurring entries. The 000s have been omitted in tabular columns except for share and per share data. Alpena Bancshares, Inc. was formed on November 14, 2000 pursuant to a plan of reorganization adopted by the Bank and its stockholders. Pursuant to the reorganization, each share of First Federal Savings and Loan Association of Alpena stock held by existing stockholders of the Bank was exchanged for a share of common stock of Alpena Bancshares, Inc., by operation of law. The reorganization had no financial statement impact and is reflected for all prior periods presented. Approximately 56 percent of the Company's capital stock is owned by Alpena Bancshares M.H.C., a mutual holding company. The remaining 44 percent of the Company's stock is owned by the general public, including the Bank's Employee Stock Ownership Plan. On June 12, 2003, First Federal of Northern Michigan acquired 100% of the stock of the InsuranCenter of Alpena (ICA). ICA is a licensed insurance agency engaged in the business of property, casualty, and health insurance. The purchase price was $2,866,400. There is a provision for an earn-out payment for the former owners who remain with the organization, of up to $300,000 per year for three years if specific net sales levels are achieved. For the year ended December 31, 2003, the net sales level was achieved, the earn-out payment was accrued for at year-end and added to the cost of the acquisition and recorded as goodwill. F - 8 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table summarizes the estimated fair value of the assets acquired: Current assets $ 151 Plant, property, and equipment 439 Intangible assets 1,687 Goodwill 657 ----------- Total assets acquired 2,934 Current liabilities 68 ----------- Net assets acquired $ 2,866 =========== After allocating the purchase price to the tangible assets as shown above (e.g., plant, property and equipment) the remainder was allocated to the intangible assets. The primary intangible assets are a customer list and an exclusive contract with BCBS. Using historical cash flows the customer list was assigned a value of $890,000 and the BCBS contract was valued at $597,000. Both assigned values were arrived at based on a discounted cash flow (DCF) analysis that assumed a 20 year life or 5% runoff of revenue each year. The analysis projected net income which was discounted back to present with a discount rate of 12%. Thus far the runoff has been lower than 5% per year. The value placed on the non-compete agreement is $200,000 which will be amortized over a 10 year period. The monthly amortization for this expense equates to $1,700 per month. These amortization expenses will be recorded in non-interest expenses on a monthly basis. The goodwill of $657,100 that was created in the transaction will not be amortized but tested annually for impairment. Any future payments made under the earn-out agreement will be added to goodwill. The purchase was paid for with cash of $1,028,000 plus a note payable (debt) of $1,357,000 and a non-compete liability (balance to be paid over the next nine years) of $180,000. To further expand the Bank's penetration throughout Northern Michigan, the Bank purchased two branches from a local financial institution. The branches were located in Mancelona and Alanson. As part of the transaction, the Bank acquired deposits of $12,100,000, fixed assets including the land, buildings and equipment of $299,000, cash and loans of $114,000. The premium paid and the costs associated with the purchase of the two branches acquired in 2004 were approximately $160,000. Of this amount approximately $121,000 was allocated to property acquired based on a third party appraisal and the remaining $39,000 was recorded as F - 9 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Core Deposit Intangible. The intangible is being amortized on a straight line basis over 10 years. The transaction closed on May 21, 2004. PLAN OF CONVERSION - On November 12, 2004, the respective Boards of Directors of Alpena Bancshares, M.H.C. (the "Mutual Holding Company"), Alpena Bancshares, Inc. and First Federal of Northern Michigan (the "Bank") adopted a plan of conversion to convert from the mutual holding company form of organization to a fully public holding company structure. The Mutual Holding Company will merge into the Bank, and will no longer exist. Alpena Bancshares, Inc. will be succeeded by a new Maryland corporation with the name First Federal of Northern Michigan Bancorp, Inc. Shares of common stock of Alpena Bancshares, Inc. representing the ownership interest of the Mutual Holding Company will be offered for sale in a subscription offering and possibly a community offering, the net proceeds of which will result in additional capital for First Federal of Northern Michigan Bancorp, Inc. Shares of common stock of Alpena Bancshares, Inc. owned by public shareholders (shareholders other than the Mutual Holding Company) will be converted into the right to receive new shares of First Federal of Northern Michigan Bancorp, Inc. common stock determined pursuant to an exchange ratio. On December 7, 2004, the respective Boards of Directors of the Mutual Holding Company, Alpena Bancshares, Inc. and the Bank amended the plan of conversion to establish a charitable foundation in connection with the conversion. Pursuant to the establishment of the foundation, First Federal of Northern Michigan Bancorp, Inc. intends to make an initial contribution to the foundation of up to 37,500 shares of First Federal of Northern Michigan Bancorp, Inc. common stock and up to $375,000 of cash. The charitable foundation is subject to the approval of the majority of the members of the Mutual Holding Company and a majority of the public shareholders of Alpena Bancshares, Inc. Except for the effect of the issuance of shares to the charitable foundation, the exchange ratio will ensure that immediately after the conversion and exchange of existing shares of Alpena Bancshares, Inc. for new shares, the public shareholders will own the same aggregate percentage of First Federal of Northern Michigan Bancorp, Inc. common stock that they owned immediately prior to the conversion, excluding any shares purchased in the offering. F - 10 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The plan of conversion provides for the establishment, upon the completion of the conversion, of a special "liquidation account" for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders (as those terms are defined in the plan of conversion) in an amount equal to the greater of (a) the percentage of the outstanding shares of the common stock of Alpena Bancshares, Inc. owned by the Mutual Holding Company multiplied by Alpena Bancshares, Inc.'s total stockholders' equity as reflected in the latest statement of financial condition contained in the final Prospectus used in the conversion, or (b) the retained earnings of the Bank as of the latest financial statements set forth in the prospectus used in connection with the Bank's initial mutual holding company reorganization and minority stock offering. Each Eligible Account Holder and Supplemental Eligible Account Holder who continues to maintain his or her deposit account at the Bank would be entitled, in the event of a complete liquidation of the Bank after the conversion, to a pro rata interest in the liquidation account prior to any payment to the stockholders of Alpena Bancshares, Inc. The liquidation account will be reduced annually on December 31 to the extent that Eligible Account Holders and Supplemental Eligible Account Holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore such account holder's interest in the liquidation account. Subsequent to the conversion, the Bank may not pay cash dividends or make other capital distributions if the effect thereof would be to reduce its stockholder's equity below the amount of the liquidation account. The conversion and related transactions will be accounted for at historical cost, with no resulting change in the historical carrying amounts of assets and liabilities. Costs related to the conversion and offering will be netted against the gross proceeds from the sale of common stock; if the offering is not completed, the costs would be charged to expense. Costs incurred through September 30, 2004 were $0. CASH AND CASH EQUIVALENTS - For presentation purposes on both the consolidated statement of financial condition and the consolidated statement of cash flows, the Bank considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. SECURITIES - Securities classified as available for sale are reported at quoted market value or market value for comparable securities which represents fair value, with unrealized gains and losses, net of related deferred income taxes, included in equity as a component of accumulated other comprehensive income. Gains or losses on the sale of securities and the amount reclassified out of accumulated other comprehensive income are computed based on the adjusted cost of the specific security sold. Mortgage backed securities are all issued by government sponsored agencies such as Freddie Mac and Fannie Mae. Securities classified as held to F - 11 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) maturity are carried at cost. Federal Home Loan Bank stock is considered restricted investment security and is carried at cost. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - Most of the Company's activities are with customers located within Michigan. Note 2 discusses the types of securities in which the Company invests. Note 3 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations to any one industry or customer. LOANS - The Company grants mortgage, commercial, and consumer loans to customers. Loans are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over the contractual life of the loan. The accrual of interest on loans is discontinued at the time the loan is 90 days' delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected, for loans that are placed on nonaccrual or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based on management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. F - 12 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The allowance consists of specific, general and unallocated components. The specific components relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower that the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. LOANS HELD FOR SALE - The Bank routinely sells to investors its long-term fixed rate residential mortgages. These loans are identified as held for sale and are accounted for at the lower of cost or market on an aggregate basis. The lower of cost or market allowance for loans held for sale was $0 at September 30, 2004 and December 31, 2003 and 2002. F - 13 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FORECLOSED ASSETS - Assets acquired in settlement of loans are recorded at the lower of the loan balance or fair value, minus estimated costs to sell, plus capital improvements made thereafter to facilitate sale. Adjustments are made to reflect declines, if any, in the fair value below the recorded amounts. Costs of holding real estate acquired in settlement of loans are reflected in income currently. REAL ESTATE HELD FOR SALE - Real estate held for sale is comprised of developed vacant residential lots and completed condominiums in a subdivision located in Alpena, Michigan. These assets are carried at cost, including development costs not in excess of fair value, less costs to sell, determined on an individual project basis. PROPERTY AND EQUIPMENT - These assets are recorded at cost, less accumulated depreciation. The Bank uses the straight-line method of recording depreciation for financial reporting. The depreciable lives used by the company are: land improvements 7-10 years, buildings 7-40 years and equipment 3-10 years. Maintenance and repairs are charged to expense and improvements are capitalized. CORE DEPOSIT INTANGIBLE - In connection with the purchase of certain branches, the excess of purchase price over fair value of net assets acquired has been allocated to intangible assets. The amortization period for core deposit intangibles is based on the type of products acquired in an acquisition. The amortization periods range from 10 to 15 years and are based on the expected life of the products. The core deposit intangibles are amortized on a straight line basis. The core deposit intangible is quarterly analyzed for impairment. The estimated amortization expense for each period during the years ended December 31, 2004 through December 31, 2010 is approximately $205,000. INCOME TAXES - The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. INSURANCE AND BROKERAGE COMMISSIONS - Insurance and brokerage commissions received are recognized over the life of the related insurance contracts on a straight-line method. SERVICING - Servicing assets are recognized as separate assets when rights are acquired through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial F - 14 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) assets. Servicing assets are evaluated for impairment quarterly based on the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based on discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. OFF BALANCE SHEET INSTRUMENTS - In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. In November 2002, the FASB issued Interpretation No. 45, (FIN 45) "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation have been applied on a prospective basis to guarantees issued or modified after December 31, 2002. However, the value of such guarantees is immaterial and the adoption of this Standard did not have a material effect on the Corporation's financial statements. OTHER COMPREHENSIVE INCOME - Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component in the equity section of the consolidated statement of financial condition. Such items, along with net income, are components of comprehensive income. USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of goodwill, mortgage servicing rights and other intangible assets. F - 15 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK COMPENSATION PLAN - The Company has a stock-based employee compensation plan, which is described more fully in Note 12. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The pro forma compensation cost related to options is insignificant. The weighted average fair value of options granted in 2002 was $1.04. There were no options granted in 2004 and 2003. The fair value of options granted in 2002 is estimated on the date of grant using the Black-Scholes option-pricing model using the following assumptions: dividend yield of 7.0 percent, expected life of 8.0 years, expected volatility of 19.7 percent and a risk free interest rate of 4.0 percent. The Company's as reported and pro forma information, including stock based compensation expense as if the fair value based method had been applied:
Unaudited September 30, December 31, ----------------------- ----------------------- 2004 2003 2003 2002 --------- --------- --------- --------- As reported net income available to $ 332 $ 791 $ 1,209 $ 70 common shareholders Less: stock-based compensation expense (benefit) determined under fair value method, net of tax 1 1 1 1 --------- --------- --------- --------- Pro forma net income $ 331 $ 790 $ 1,208 $ 69 ========= ========= ========= ========= As reported earnings per share $0.20 $0.48 $0.73 $0.47 Proforma earnings per share $0.20 $0.48 $0.73 $0.47 As reported earnings per diluted share $0.20 $0.48 $0.73 $0.47 Pro forma earnings per diluted share $0.20 $0.48 $0.73 $0.47
EARNINGS PER COMMON SHARE - Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. F - 16 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Earnings per common share have been computed based on the following:
Unaudited September 30, December 31, ------------------------ ------------------------- 2004 2003 2003 2002 ---------- ---------- ---------- ---------- Net income $ 332 $ 791 $ 1,209 $ 770 Average number of common shares outstanding 1,658,889 1,648,516 1,650,919 1,643,966 Effect of dilutive options 12,036 8,214 10,729 10,347 ---------- ---------- ---------- ---------- Average number of common shares outstanding used to calculate diluted earnings per common share 1,670,925 1,656,730 1,661,648 1,654,313 ========== ========== ========== ==========
The number of options outstanding that were not included in the computation of diluted earnings per share, as inclusion of such shares would have been anti-dilutive, was 0 for the nine months ended September 30, 2004 and 2003 and years ended December 31, 2003 and 2002. RECENT ACCOUNTING PRONOUNCEMENTS - In May 2003, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Such instruments may have been previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003. The adoption of this statement did not have a material effect on our reported equity. F - 17 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In December 2003, the FASB issued a revision to Interpretation 46, "Consolidation of Variable Interest Entities," which established standards for identifying a variable interest entity ("VIE") and for determining under what circumstances a VIE should be consolidated with its primary beneficiary. Application of this Interpretation is required in financial statements of public entities that have interests in special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. Small business issuers must apply this Interpretation to all other types of VIEs at the end of the first reporting period ending after December 15, 2004. The adoption of this Interpretation has not and is not expected to have a material effect on our financial position or results of operations. In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 105, Application of Accounting Principles to Loan Commitments, which provides guidance regarding loan commitments that are accounted for as derivative instruments. In this SAB, the Securities and Exchange Commission determined that an interest rate lock commitment should generally be valued at zero at inception. The rate locks will continue to be adjusted for changes in value resulting from changes in market interest rates. This standard will not have a material effect on our financial condition or results of operations. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("Statement No. 123R"), which requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). The cost is recognized as an expense over the period during which the employee is required to provide service in exchange for the award, which is usually the vesting period. The scope of Statement No. 123R includes the recognition and retention plan and the stock option plan we expect to adopt following the stock offering. For shares awarded under the recognition and retention plan, we will recognize the grant-date fair value of the shares as compensation expense on a straight-line basis over the applicable vesting period, which is the same accounting required prior to Statement No. 123R. For options granted under the stock option plan, we will recognize the grant-date fair value of the options as compensation expense on a straight-line basis over the applicable vesting period. This accounting treatment differs significantly from the previous accounting for fixed stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which generally required expense recognition only when the exercise price of the option was less than the market price of the underlying stock on the grant date. As required by F - 18 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Statement No. 123R, we will estimate the fair value of our stock options on each grant date, using an appropriate valuation approach such as the Black-Scholes option pricing model. Statement No. 123R did not change existing accounting principles applicable to employee stock ownership plans. The provisions of this Statement will be effective for the Company beginning with its fiscal year ending 2006. The Company is currently evaluating the impact this new Standard will have on its financial position, results of operations or cash flows. RECLASSIFICATIONS - Certain items from December 2003 and 2002 have been reclassified to conform to the September 30, 2004 presentation. F - 19 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 2 - INVESTMENT SECURITIES Investment securities have been classified according to management's intent. The carrying value and estimated fair value of securities are as follows:
September 30, 2004 (Unaudited) ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ------------ ------------ ------------ SECURITIES AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 27,991 $ 153 $ 43 28,101 Municipal notes 4,432 52 51 4,433 Mortgage-backed securities 8,452 19 91 8,380 Other securities 2 164 - 166 ------------ ------------ ------------ ------------ Total $ 40,877 $ 388 $ 185 $ 41,080 ============ ============ ============ ============ SECURITIES HELD TO MATURITY Municipal notes $ 1,800 $ 28 $ - $ 1,828 ============ ============ ============ ============ December 31, 2003 ------------------------------------------------------ Cost Unrealized Unrealized Value ------------ ------------ ------------ ------------ SECURITIES AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 16,700 $ 367 $ - 17,067 Municipal notes 3,900 60 - 3,960 Corporation securities 6,163 - 16 6,147 Mortgage-backed securities 7,443 - 108 7,335 Other securities 17 144 - 161 ------------ ------------ ------------ ------------ Total $ 34,223 $ 571 $ 124 $ 34,670 ============ ============ ============ ============ December 31, 2002 ------------------------------------------------------ Cost Unrealized Unrealized Value ------------ ------------ ------------ ------------ SECURITIES AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 30,940 $ 1,041 $ - $ 31,981 Municipal notes 3,170 116 - 3,286 Corporation securities 4,488 92 - 4,580 Mortgage-backed securities 6,708 224 1 6,931 Other securities 21 145 - 166 ------------ ------------ ------------ ------------ Total $ 45,327 $ 1,618 $ 1 $ 46,944 ============ ============ ============ ============
F - 20 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 2 - INVESTMENT SECURITIES (CONTINUED) The amortized cost and estimated market value of securities at September 30, 2004 and December 31, 2003, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties:
Unaudited September 30, 2004 December 31, 2003 ------------------------- ------------------------- Amortized Market Amortized Market Cost Value Cost Value ----------- ----------- ----------- ----------- AVAILABLE FOR SALE: Due in one year or less $ 3,789 $ 3,821 $ 6,947 $ 7,219 Due after one year through five years 26,959 27,012 19,503 19,782 Due after five years 1,677 1,867 330 335 ----------- ----------- ----------- ----------- Subtotal 32,425 32,700 26,780 27,336 Mortgage-backed securities 8,452 8,380 7,443 7,334 ----------- ----------- ----------- ----------- Total $ 40,877 $ 41,080 $ 34,223 $ 34,670 =========== =========== =========== =========== HELD TO MATURITY Due after one year through five years $ 1,800 $ 1,828 $ - $ - =========== =========== =========== ===========
At September 30, 2004, December 31, 2003 and 2002, securities with a carrying value of $3,775,000, $3,500,000 and $4,686,000 and fair value of $3,975,000, $3,611,000 and $4,686,000, respectively, were pledged to secure certain deposit accounts. Gross proceeds from the sale of available-for-sale securities for the nine months ended September 30, 2004 and 2003, and the years ended December 31, 2003 and 2002 were $19,213,000, $4,113,000, $11,982,000 and $4,977,000, respectively, resulting in gross gains of $178,000, $93,000, $320,000 and $65,000, respectively and gross losses of $75,000, $0, $0 and $0, respectively. F - 21 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 2 - INVESTMENT SECURITIES (CONTINUED) The following is a summary of temporarily impaired investments that have been impaired for less than twelve months as of September 30, 2004 and December 31, 2003 and 2002:
Unaudited September 30, 2004 December 31, 2003 December 31, 2002 -------------------------- -------------------------- -------------------------- Gross Gross Gross Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses ------------ ------------ ------------ ------------ ------------ ------------ U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 7,965 $ 43 $ - $ - $ - $ - Corporate Securities - - 3,699 41 - - Municipal notes 3,532 51 1,441 13 - - Mortgage-backed securities 7,871 91 5,669 70 194 1 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 19,368 $ 185 $ 10,809 $ 124 $ 194 $ 1 ============ ============ ============ ============ ============ ============
As of September 30, 2004 and December 31, 2003 and 2002, no investment securities had been impaired for more than 12 months. The Company does not believe that the unrealized losses as of September 30, 2004, December 31, 2003 and 2002 represent other-than-temporarily impairment. The unrealized losses reported for the above securities relate primarily to changes in interest rates. Individually, the losses were less than 2.0% or less of their respective amortized cost basis. The Company has both the intent and ability to hold the investment securities contained in the previous table for a time necessary to recover the amortized cost. F - 22 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 3 - LOANS Loans at September 30, 2004, December 31, 2003 and 2002 are summarized as follows:
Unaudited September 30, December 31 -------------- ------------------------------ 2004 2003 2002 -------------- -------------- -------------- Real estate loans - One- to four-family residential $ 108,095 $ 100,895 $ 104,889 Commercial loans: Secured by real estate 26,452 29,452 20,369 Other 29,026 13,495 7,528 -------------- -------------- -------------- Total commercial loans 55,478 42,947 27,897 Consumer loans 25,001 20,895 19,587 -------------- -------------- -------------- Total gross loans 188,574 164,737 152,373 Less net deferred fees (costs) 323 241 110 Less allowance for loan losses 1,152 1,036 922 -------------- -------------- -------------- Total loans - Net $ 187,099 $ 163,460 $ 151,341 ============== ============== ==============
Final loan maturities and rate sensitivity of the loan portfolio are as follows:
September 30, 2004 (Unaudited) ------------------------------ One Year After Less Than to Five Five One Year Years Years Total ---------- --------- --------- --------- Loans at fixed interest rates $ 47,332 $ 59,818 $ 51,078 $ 158,228 Loans at variable interest rates 20,508 6,521 2,994 30,023 ---------- --------- --------- --------- Total $ 67,840 $ 66,339 $ 54,072 $ 188,251 ========== ========= ========= ========= December 31, 2003 ----------------- One Year After Less Than to Five Five One Year Years Years Total ---------- --------- --------- --------- Loans at fixed interest rates $ 31,380 $ 60,596 $ 52,154 $ 144,130 Loans at variable interest rates 14,245 4,930 1,191 20,366 Total $ 45,625 $ 65,526 $ 53,345 $ 164,496 ========== ========= ========= =========
F - 23 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 3 - LOANS (CONTINUED) Certain directors and executive officers of the Company were loan customers during 2004, 2003 and 2002. Such loans were made in the ordinary course of business and do not involve more than a normal risk of collectibility. An analysis of aggregate loans outstanding to directors and executive officers for the nine months ended September 30, 2004 and the years ended December 31, 2003 and 2002 is as follows:
Unaudited September 30, December 31 -------------- ------------------------------ 2004 2003 2002 -------------- -------------- -------------- Aggregate balance - Beginning of Period $ 2,468 $ 981 $ 716 New loans 1,472 4,073 817 Repayments (1,549) (2,586) (552) -------------- -------------- -------------- Aggregate balance - End of Period $ 2,391 $ 2,468 $ 981 ============== ============== ==============
An analysis of the allowance for loan losses is as follows:
Unaudited Nine Months Ended Year Ended Sepetember 30, December 31 ------------------------------ ------------------------------ 2004 2003 2003 2002 -------------- -------------- -------------- -------------- Balance - Beginning of period $ 1,036 $ 922 $ 922 $ 689 Provision for losses 214 238 267 415 Loans - Charged off (135) (180) (215) (234) Recoveries 37 51 62 52 -------------- -------------- -------------- -------------- Balance - End of period $ 1,152 $ 1,031 $ 1,036 $ 922 ============== ============== ============== ==============
F - 24 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 3 - LOANS (CONTINUED) The following is a summary of information pertaining to impaired, non-accrual and delinquent loans:
Unaudited September 30, December 31 -------------- ------------------------------ 2004 2003 2002 -------------- -------------- -------------- Impaired loans without a valuation allowance $ - $ - $ - Impaired loans with a valuation allowance 718 1,040 - -------------- -------------- -------------- Total impaired loans $ 718 $ 1,040 $ - ============== ============== ============== Valuation allowance related to impaired loans $ 66 $ 120 $ - Total non-accrual loans $ 480 $ 1,291 $ 627 Total loans past-due ninety days or more and still accruing $ 1,280 $ 828 $ 807 Unaudited Nine Months Ended Sepetember 30, Year Ended December 31 ------------------------------ ------------------------------ 2004 2003 2003 2002 -------------- -------------- -------------- -------------- Average investment in impaired loans $ 780 $ 835 $ 829 $ - Interest income recognized on impaired loans $ - $ - $ - $ - Interest income recognized on a cash basis on impaired loans $ - $ - $ - $ -
F - 25 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 4 - REAL ESTATE HELD FOR SALE The real estate held for sale is determined to be impaired and is recorded at the lower of cost or fair value. The valuation allowance on this project, which was determined based on recent sales of comparable real estate and existing real estate listings, was approximately $121,000, $121,000 and $102,000 at September 30, 2004, December 31, 2003 and 2002, respectively. NOTE 5 - PROPERTY AND EQUIPMENT A summary of property and equipment is as follows:
Unaudited September 30, December 31 -------------- ------------------------------ 2004 2003 2002 -------------- -------------- -------------- Land $ 1,251 $ 878 $ 838 Land improvements 101 62 21 Buildings 4,483 4,504 3,243 Equipment 3,665 3,187 2,745 -------------- -------------- -------------- Total property and equipment 9,500 8,631 6,847 Less accumulated depreciation 3,068 2,814 2,086 -------------- -------------- -------------- Net property and equipment $ 6,432 $ 5,817 $ 4,761 ============== ============== ==============
F - 26 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 6 - SERVICING Loans serviced for others are not included in the accompanying consolidated statement of financial condition. The unpaid principal balances of mortgage and other loans serviced for others were approximately $140,426,000, $138,596,000, $141,340,000 and $119,651,000 at September 30, 2004 and 2003, December 31, 2003 and 2002, respectively. The balance of capitalized servicing rights, net of valuation allowance, is included in other assets at September 30, 2004, December 31, 2003 and 2002. The key economic assumptions used in determining the fair value of the mortgage servicing rights are as follows:
Unaudited September 30, December 31, -------------- ------------------------------ 2004 2003 2002 -------------- -------------- -------------- Annual constant prepayment speed (CPR) 11.08% 13.89% 17.55% Weighted average life (in months) 54 48 44 Discount rate 7.50% 7.25% 7.25%
F - 27 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 6 - SERVICING (CONTINUED) The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:
Unaudited September 30, December 31 ------------- ----------------------- 2004 2003 2002 ------------- --------- --------- Carrying amount - Beginning of year $ 984 $ 869 $ 630 Originated mortgage servicing rights capitalized 158 656 557 Amortization of mortgage servicing rights (244) (541) (318) ------------- --------- --------- Subtotal 898 984 869 Valuation allowances: Balance at beginning of year - - - Additions - 29 - Reductions - (29) - Write-downs - - - ------------- --------- --------- Balance at end of year $ 898 $ 984 $ 869 ============= ========= =========
F-28 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 7 - GOODWILL AND OTHER INTANGIBLES Intangible assets of the Company are summarized as follows:
September 30, 2004 (Unaudited) ---------------------------------------------- Gross Carrying Accumulated Net Carrying Amount Amortization Amount -------------- ------------ ------------ Amortized intangible assets: Customer list $ 890 $ 70 $ 820 Customer contract 597 47 550 Core deposit 3,081 1,701 1,380 Non-compete covenant 200 31 169 -------------- ------------ ------------ Total 4,768 1,849 2,919 Unamortized intangible assets: Goodwill 749 - 749 -------------- ------------ ------------ Total $ 5,517 $ 1,849 $ 3,668 ============== ============ ============ December 31, 2003 ---------------------------------------------- Gross Carrying Accumulated Net Carrying Amount Amortization Amount -------------- ------------ ------------ Amortized intangible assets: Customer list $ 890 $ 37 $ 853 Customer contract 597 25 572 Core deposit 3,034 1,541 1,493 Non-compete covenant 200 16 184 -------------- ------------ ------------ Total 4,721 1,619 3,102 Unamortized intangible assets: Goodwill 749 - 749 -------------- ------------ ------------ Total $ 5,470 $ 1,619 $ 3,851 ============== ============ ============ December 31, 2002 ---------------------------------------------- Gross Carrying Accumulated Net Carrying Amount Amortization Amount -------------- ------------ ------------ Amortized intangible assets: Core deposit $ 3,034 $ 1,336 $ 1,698
F-29 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 7 - GOODWILL AND OTHER INTANGIBLES (CONTINUED) Amortization periods for the major classes of intangible assets and in total are as follows as of September 30, 2004. Weighted Average Amortization Period Amortizable Intangible (In years) --------------------------------------------------- Customer list 7.5 Customer contract 18.3 Core deposit 18.3 Non-compete covenant 8.3 ------------------- 12.7 ------------------- The amortization expense related to intangibles as of September 30, 2004 is as follows: Year Ended December 31 Annual Amortization -------------------------------------------------- 2005 $ 287 2006 287 2007 281 2008 278 2009 278 F-30 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 8 - DEPOSITS Deposit accounts, by type and range of rates, consist of the following:
Unaudited September 30, December 31 ------------- -------------------------- 2004 2003 2002 ------------- ------------ ------------ Account Type --------------------------------------------------- NOW accounts and MMDA $ 33,866 $ 25,209 $ 23,115 Regular savings accounts 28,082 28,838 32,198 ------------- ------------ ------------ Total 61,948 54,047 55,313 Certificate of Deposit Rates --------------------------------------------------- 0.50 percent to 1.99 percent 28,132 26,192 19,670 2.00 percent to 2.99 percent 21,623 14,384 11,537 3.00 percent to 3.99 percent 29,463 15,349 11,111 4.00 percent to 4.99 percent 12,090 12,498 13,576 5.00 percent to 6.99 percent 14,769 18,768 34,394 7.00 percent to 8.99 percent 2,739 3,183 5,073 ------------- ------------ ------------ Total certificate of deposits 108,816 90,374 95,361 ------------- ------------ ------------ Total deposits $ 170,764 $ 144,421 $ 150,674 ============= ============ ============
Certificates of deposit $100,000 or greater at September 30, 2004, December 31, 2003 and 2002 were $27,338,000, $17,391,000 and $23,562,000 respectively. The amounts is excess of $100,000 are not federally insured. F-31 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 8 - DEPOSITS (CONTINUED) The following table sets forth the amount and maturities of certificates of deposit:
September 30, 2004 (Unaudited) ----------------------------------------------------------------------- Amount Due ----------------------------------------------------------------------- Greater Less than 1-2 2-3 3-5 than Rate 1 Year Years Years Years 5 Years Total ----------------------- ---------- ---------- ---------- ---------- ---------- ----------- 0.50 percent to 1.99 percent $ 22,139 $ 5,883 $ 110 $ - $ - $ 28,132 2.00 percent to 2.99 percent 4,417 15,049 721 1,241 195 21,623 3.00 percent to 3.99 percent 2,037 10,639 9,520 7,088 179 29,463 4.00 percent to 4.99 percent 1,984 7,518 2,247 53 288 12,090 5.00 percent to 6.99 percent 4,886 3,758 645 2,486 2,994 14,769 7.00 percent to 8.99 percent 1,223 100 135 2 1,279 2,739 ---------- ---------- ---------- ---------- ---------- ----------- Total $ 36,686 $ 42,947 $ 13,378 $ 10,870 $ 4,935 $ 108,816 ========== ========== ========== ========== ========== =========== December 31, 2003 ----------------------------------------------------------------------- Amount Due ----------------------------------------------------------------------- Greater Less than 1-2 2-3 3-5 than Rate 1 Year Years Years Years 5 Years Total ----------------------- ---------- ---------- ---------- ---------- ---------- ----------- 0.50 percent to 1.99 percent $ 22,979 $ 1,931 $ 1,224 $ 59 $ - $ 26,193 2.00 percent to 2.99 percent 10,314 1,589 1,501 942 37 14,383 3.00 percent to 3.99 percent 564 5,185 5,764 3,658 178 15,349 4.00 percent to 4.99 percent 2,934 302 7,843 1,109 310 12,498 5.00 percent to 6.99 percent 6,044 3,870 2,822 1,732 4,300 18,768 7.00 percent to 8.99 percent 378 1,306 - 128 1,371 3,183 ---------- ---------- ---------- ---------- ---------- ----------- Total $ 43,213 $ 14,183 $ 19,154 $ 7,628 $ 6,196 $ 90,374 ========== ========== ========== ========== ========== ===========
F-32 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 8 - DEPOSITS (CONTINUED) Interest expense on deposits is summarized as follows:
Unaudited Nine Months Ended Sepetember 30, Year Ended December 31 ------------------------- -------------------------- 2004 2003 2003 2002 ---------- ---------- ----------- ----------- NOW and MMDAs $ 172 $ 144 $ 190 $ 288 Regular savings 46 98 119 363 Certificates of deposit 2,402 2,632 3,410 4,815 ---------- ---------- ----------- ----------- Total $ 2,620 $ 2,874 $ 3,719 $ 5,466 ========== ========== =========== ===========
Deposits from related parties held by the Bank at September 30, 2004, December 31, 2003 and 2002 amounted to $427,000, $558,000 and $170,000 respectively. F-33 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES Advances outstanding from the Federal Home Loan Bank (FHLB) bear interest that is payable monthly. Pursuant to blanket collateral agreements with the FHLB, advances are collateralized by one- to four-family whole mortgage loans, government agency securities, and highly rated private mortgage-backed securities. The FHLB requires eligible collateral to have a market value equal to 145 percent of advances. The carrying value of loans pledged to secure these advances was approximately $86,122,000, $101,365,000 and $102,542,000 at September 30, 2004 and December 31, 2003 and 2002, respectively, The advances are subject to prepayment penalties subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank. Future maturities of the advances are as follows:
September 30, 2004 (Unaudited) December 31, 2003 December 31, 2002 ---------------------------------- ---------------------------------- ---------------------------------- Weighted Weighted Weighted Average Average Average Years Ending Interest Years Ending Interest Years Ending Interest December 31 Amount Rate December 31 Amount Rate December 31 Amount Rate ------------ ---------- -------- ------------ ---------- -------- ------------ ---------- -------- 2004 $ 4,052 4.91 2004 $ 8,052 4.20 2003 $ 12,112 5.31 2005 12,500 5.67 2005 12,250 5.74 2004 4,802 6.02 2006 3,000 2.54 2006 2,000 2.84 2005 11,000 6.15 2008 7,500 4.78 2008 6,500 5.40 2008 4,500 5.62 2009 1,000 3.40 2009 - - 2010 16,000 5.66 ---------- 2010 18,000 5.49 2010 17,000 5.59 Total $ 48,414 5.72 --------- ---------- ========== Total $ 46,052 5.14 Total $ 45,802 5.24 ========= ==========
F-34 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 10 - NOTE PAYABLE In connection with the purchase of ICA, a note payable was issued to an individual, payable in annual installments of $180,000, including interest at 5.5 percent. Future maturities of the note are as follows: September 30, 2004 (Unaudited) ------------------------------ Years Ending December 31 Amount ------------------ --------------- 2004 $ - 2005 111 2006 117 2007 124 2008 130 Thereafter 769 --------- Total $ 1,251 ========= NOTE 11 - FEDERAL INCOME TAX The analysis of the consolidated provision for federal income tax is as follows:
Unaudited Nine Months Ended Sepetember 30, Year Ended December 31 ------------------------ ------------------------ 2004 2003 2003 2002 --------- --------- ---------- --------- Current provision $ 267 $ 394 $ 318 $ 285 Deferred provision (credit) (100) - 200 - --------- --------- ---------- --------- Total $ 167 $ 394 $ 518 $ 285 ========= ========= ========== =========
F-35 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 11 - FEDERAL INCOME TAX (CONTINUED) A reconciliation of the federal income tax expense and the amount computed by applying the statutory federal income tax rate (34 percent) to income before federal income tax is as follows:
Unaudited Nine Months Ended Sepetember 30, Year Ended December 31 ------------------------ ------------------------ 2004 2003 2003 2002 --------- --------- ---------- --------- Tax at statutory rate $ 170 $ 403 $ 587 $ 359 Nontaxable dividend (1) (16) (22) (8) Tax-exempt interest - (15) (20) (24) Other (2) 22 (27) (42) --------- --------- ---------- --------- Federal income tax $ 167 $ 394 $ 518 $ 285 ========= ========= ========== ========= Effective Tax Rate 33.5% 33.2% 30.0% 27.0% ===================================================
F-36 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 11 - FEDERAL INCOME TAX (CONTINUED) The net deferred tax liability was comprised of the following temporary differences:
Unaudited September 30, December 31 ------------- -------------------------- 2004 2003 2002 ------------- ----------- ----------- Deferred tax assets: Allowance for loan losses $ 411 $ 311 $ 282 Valuation allowance for real estate held for sale 41 41 35 Other 45 45 24 Directors' benefit plan 152 152 189 ------------- ----------- ----------- Total deferred tax assets 649 549 530 Valuation allowance for deferred tax assets - - - Deferred tax liabilities: Bad debt recapture - - 24 Mortgage servicing rights 334 334 295 Partnership losses 65 65 58 Depreciation 502 502 306 Other 15 15 14 Unrealized gains on available-for-sale securities 69 152 550 ------------- ----------- ----------- Total deferred tax liabilities 985 1,068 1,247 ------------- ----------- ----------- Net deferred tax liability $ 336 $ 519 $ 717 ============= =========== ===========
For tax years beginning prior to January 1, 1996, a qualified thrift institution was allowed a bad debt deduction for tax purposes based on a percentage of taxable income or on actual experience. The Bank used the percentage of taxable income method through December 31, 1995. The Small Business Job Protection Act of 1996 (the "Act") requires qualified thrift institutions, such as the Bank, to recapture the portion of their tax bad debt reserves at January 1, 1996 that exceeds the December 31, 1987 ("base year") reserve balance. The amount of this excess reserve is $422,000 which will be taken into taxable income ratably over a six-year period beginning in 1998. F-37 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 11 - FEDERAL INCOME TAX (CONTINUED) A deferred tax liability has not been recognized for the tax bad debt base year reserves of the Bank. The base year reserves are the balance of reserves as of December 31, 1987. At September 30, 2004 and December 31, 2003, the amount of those reserves was approximately $60,000. The amount of the unrecognized deferred tax liability at September 30, 2004 and December 31, 2003 was approximately $20,000. NOTE 12 - OFF BALANCE SHEET RISK COMMITMENTS AND CONTINGENCIES CREDIT-RELATED FINANCIAL INSTRUMENTS - The Company is a party to credit-related financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition. The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments. The following financial instruments were outstanding whose contract amounts represent credit risk:
Unaudited September 30, December 31 ------------- ------------------------ 2004 2003 2002 ------------- ----------- ----------- Commitments to grant loans $ 27,613 $ 35,868 $ 33,363 Unfunded commitments under lines of credit 16,228 11,499 10,339 Commercial and standby letters of credit - 35 250
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the customer. F-38 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 12 - OFF BALANCE SHEET RISK COMMITMENTS AND CONTINGENCIES (CONTINUED) Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized and may not be drawn upon to the total extent to which the Company is committed. Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily used to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The Company generally holds collateral supporting those commitments if deemed necessary. COLLATERAL REQUIREMENTS - To reduce credit risk related to the use of credit-related financial instruments, the Company might deem it necessary to obtain collateral. The amount and nature of the collateral obtained is based on the Company's credit evaluation of the customer. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant, and equipment, and real estate. If the counterparty does not have the right and ability to redeem the collateral or if the Company is permitted to sell or repledge the collateral on short notice, the Company records the collateral in its statement of financial condition at fair value with a corresponding obligation to return it. NOTE 13 - STOCKHOLDERS' EQUITY Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, regulatory limitation on payment of dividends, the Bank's results of operations and financial condition, tax considerations, and general economic conditions. The Bank filed a notice with the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Company (FDIC) requesting approval to waive payment of cash dividends to Alpena Bancshares M.H.C. (the "M.H.C.") (majority stockholder of the Company). The OTS and FDIC did not object to the dividend waiver request subject to the following conditions: F-39 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED) (1) For as long as the Company and the Bank are controlled by the M.H.C., the amount of dividends waived by the M.H.C. must be segregated and considered as a restriction on retained earnings of the Company; (2) The amount of the dividend waived by the M.H.C. shall be available for declaration as a dividend solely to the M.H.C.; and (3) The amount of the dividend waived by the M.H.C. must be considered as having been paid by the Company in evaluating any proposed dividend. In addition, the OTS may rescind its non-objection to the waiver of dividends for subsequent periods if, based on subsequent developments, the proposed waivers are determined to be detrimental to the safe and sound operation of the Bank. If management determines that it is probable that the waived dividends will be paid, it will be necessary to record a liability in accordance with Statement of Financial Accounting Standards No. 5. In management's opinion, it is not probable that the waived dividends will be paid; therefore, a liability has not been recorded in the financial statements of the Company. The Bank is subject to various regulatory capital requirements administered by the OTS. Failure to meet certain capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk-weightings, and other factors. F-40 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED) During the most recent regulatory examination, the OTS categorized the Bank as "well-capitalized" per definition of 12 CFR Section 565.4(b)(1). To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, tier 1 risk based, and tangible equity ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's categorization.
To be Categorized as Well-Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio ---------- --------- ---------- --------- ---------- --------- (Dollars in Thousands) September 30, 2004 (Unaudited): Total capital (to risk- weighted assets) $ 18,601 11.24% $ 13,237 8.00% $ 16,546 10.00% Tier 1 capital (to risk- weighted assets) $ 17,376 10.50% $ 6,618 4.00% $ 9,928 6.00% Tangible capital (to tangible assets) $ 17,376 6.95% $ 3,750 1.50% $ 5,000 2.00% December 31, 2003: Total capital (to risk- weighted assets) $ 18,119 11.96% $ 12,116 8.00% $ 15,146 10.00% Tier 1 capital (to risk- weighted assets) $ 17,019 11.24% $ 6,058 4.00% $ 9,087 6.00% Tangible capital (to tangible assets) $ 17,019 7.78% $ 3,283 1.50% $ 4,377 2.00% December 31, 2002: Total capital (to risk- weighted assets) $ 19,137 15.95% $ 9,596 8.00% $ 11,995 10.00% Tier 1 capital (to risk- weighted assets) $ 18,149 15.13% $ 4,798 4.00% $ 7,197 6.00% Tangible capital (to tangible assets) $ 18,149 8.08% $ 3,370 1.50% $ 4,493 2.00%
F-41 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
Reconciliation of GAAP to Regulatory Capital Unaudited ------------------------------------- September 30, December 31 ------------- ---------------------- 2004 2003 2002 ------------- ---------- ---------- GAAP Capital $ 21,936 $ 21,951 $ 21,747 Reconciling items: Investment in and advances to Nonincludable subsidaries 758 786 832 Goodwill and other intangible assets 3,668 3,851 1,698 Unrealized (gain) loss on securities available for sale (134) (295) (1,068) Disallowed mortgage servicing rights - - - ------------- ---------- ---------- Tangible and core capital 17,376 17,019 18,149 Allowable unrealized (gain) loss on securities available for sale 73 64 66 General valuation allowance 1,152 1,036 922 ------------- ---------- ---------- Risk Based Capital $ 18,601 $ 18,119 $ 19,137 ============= ========== ==========
NOTE 14 - EMPLOYEE BENEFIT PLANS RETIREMENT PLANS The Bank is a participant in the multiemployer Financial Institutions Retirement Fund (FIRF or the "Plan"), which covers substantially all of its officers and employees. The defined benefit plan covers all employees who have completed one year of service, attained age 21, and worked at least 1,000 hours during the year. Normal retirement age is 65, with reduced benefits available at age 55. The Bank's contributions are determined by FIRF and generally represent the normal cost of the Plan. Specific Plan assets and accumulated benefit information for the Bank's portion of the Plan are not available. Under the Employee Retirement Income Security Act of 1974 (ERISA), a contributor to a multiemployer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. The Bank was fully funded in the Plan as of September 30, 2004 and December 31, 2003. The expense of the Plan allocated to the Bank for the nine months ended September 30, 2004 and 2003 and for the years ended December 31, 2003 and 2002 was $272,000, $159,000, $263,000 and $212,000, respectively. F-42 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED) The Bank has a Section 401(k) savings plan covering substantially all of its employees who meet certain age and service requirements. Under the plan, the Bank matches 50 percent of participant contributions up to 3 percent of each participant's compensation during the year. This contribution is dependent upon availability of sufficient net earnings from current or prior years. Additional contributions may be made as approved by the Board of Directors. The expense under the plan for the nine months ended September 30, 2004 and 2003 and for the years ended December 31, 2003 and 2002 was $58,000, $61,000, $65,000 and $64,000, respectively. The Bank has a nonqualified deferred compensation plan for its directors. Through 1998, each director could voluntarily defer all or part of his or her director's fees to participate in the program. The plan is currently unfunded and amounts deferred are unsecured and remain subject to claims of the Bank's general creditors. Directors are paid once they reach normal retirement age or sooner for reason of death, total disability, or termination. The Bank may terminate the plan at any time. The amount recorded under the plan totaled approximately $638,000, $617,000 and $550,000 at September 30, 2004, December 31, 2003 and 2002, respectively. The expense under the plan for the nine months ended September 30, 2004 and 2003 and for the years ended December 31, 2003 and 2002 was $49,000, $50,000, $67,000 and $90,000, respectively. EMPLOYEE STOCK OWNERSHIP PLAN Effective January 1, 1994, the Bank implemented an employee stock ownership plan (ESOP). The ESOP covers substantially all employees who have completed one year of service, attained age 21, and worked at least 1,000 hours during the year. To fund the ESOP, the Bank borrowed $480,000 from an outside party to purchase 48,000 shares of the Company's common stock at $10 per share. The ESOP note was payable quarterly with interest at the prime rate and was retired in 1999. All shares were allocated as of December 31, 1999. Compensation expense is measured by the fair value of ESOP shares allocated to participants during a fiscal year. There was no compensation expense for the periods ended September 30, 2004 and 2003, December 31, 2003 and 2002. F-43 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED) STOCK AWARD PLAN The 1996 Recognition and Retention Plan for employees and outside directors authorized the issuance of authorized, but unissued shares of common stock of the Company in an aggregate amount of 27,600 shares of common stock, of which 17,940 shares were available to be awarded to employees and 9,660 shares were available to be awarded to non-employee directors. Restricted stock awards are nontransferable and non-assignable. Awards to non-employee directors vest at the rate of 20 percent of the amount awarded commencing one year from the date of the award, which was April 17, 1996. Awards to executive officers and employees would become fully vested upon termination of employment or service due to death, disability, or normal retirement. Upon termination of employment or service for any other reason, unvested shares are forfeited. The expense under the plan for the nine months ended September 30, 2004 and 2003 and for the years ended December 31, 2003 and 2002 was $0, $3,000, $3,000 and $16,000, respectively. A summary of shares relating to the Recognition and Retention Plan is as follows: Outstanding - January 1, 2002 1,441 Vested in 2002 - Forfeited in 2002 - Re-awarded in 2002 (1,199) -------- Outstanding - December 31, 2002 242 Vested in 2003 - Forfeited in 2003 - Re-awarded in 2003 (200) -------- Outstanding - December 31, 2003 42 Vested in 2004 - Forfeited in 2004 - Rewarded in 2004 - -------- Outstanding - September 30, 2004 (Unaudited) 42 ======== F-44 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED) STOCK OPTION PLAN The 1996 stock option plan for certain employees and nonemployee directors authorized the grant of stock options to purchase 69,000 shares of common stock of the Company. Pursuant to the stock option plan, grants may be made of incentive stock options and nonstatutory stock options. Nonemployee directors are only eligible to receive nonstatutory options. Under the terms of the plan, incentive stock options have been granted at fair market value as of the date of the grant that are exercisable any time prior to 10 years from the grant date. The incentive stock options vest ratably over a five year period. Nonstatutory fully vested stock options have been granted at fair market value on the date the option is granted and are exercisable prior to 10 years from the date of grant. The following is a summary of activity for stock options:
Unaudited September 30, December 31, ---------------------- -------------------------------------------- 2004 2003 2002 ---------------------- ---------------------- --------------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price ---------- ----------- ----------- ---------- ---------- ---------- Options outstanding at beginning of period 29,011 $ 10.57 41,033 $ 10.35 39,513 $ 9.85 Options granted - - - - 7,000 13.75 Options exercised (1,700) 10.84 (12,022) 9.81 (2,480) 10 Options forfeited (600) 13.75 - - (3,000) 12.38 ------ ------ ------ Options outstanding at end of period 26,711 10.47 29,011 10.57 41,033 10.35 ====== ====== ====== Exercisable at end of period 24,711 10.16 25,011 10.06 36,033 9.88
F-45 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 14 - EMPLOYEE BENEFIT PLANS (CONTINUED) Information pertaining to options outstanding is as follows:
September 30, 2004 (Unaudited) --------------------------------------------------------------------------------------- Options Exerciseable Options Outstanding ------------------------------------------ ------------------------------------------- Weighted- Weighted- Average Weighted- Average Weighted- Remaining Average Remaining Average Number Contractual Exercise Number Contractual Exercise Exercise Prices Outstanding Life (in years) Price Exercisable Life (in years) Price --------------- ------------- --------------- ---------- ----------- ----------------- ----------- 9.625 4,600 3.20 $ 9.63 4,600 3.20 $ 9.63 10.00 18,111 3.05 10.00 18,111 3.05 10.00 13.75 4,000 9.00 13.75 1,600 9.00 13.75 ------------ ----------- Total 26,711 3.97 $ 10.57 24,311 3.47 $ 10.06 ============ =========== December 31, 2003 --------------------------------------------------------------------------------------- Options Exerciseable Options Outstanding ------------------------------------------ ------------------------------------------- Weighted- Weighted- Average Weighted- Average Weighted- Remaining Average Remaining Average Number Contractual Exercise Number Contractual Exercise Exercise Prices Outstanding Life (in years) Price Exercisable Life (in years) Price --------------- ------------- --------------- ---------- ----------- ----------------- ----------- 9.625 5,900 2.45 $ 9.63 5,900 2.45 $ 9.63 10.00 18,111 2.30 10.00 18,111 2.30 10.00 13.75 5,000 8.24 13.75 1,000 8.24 13.75 ------------ ----------- Total 29,011 3.35 $ 10.57 25,011 2.57 $ 10.06 ============ ===========
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. F-46 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-term instruments approximate fair values. SECURITIES - Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank. LOANS HELD FOR SALE - Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. LOANS RECEIVABLE - For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one- to four-family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial, and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. DEPOSIT LIABILITIES - The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits LONG-TERM BORROWINGS - The fair values of the Company's long-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. ACCRUED INTEREST - The carrying amounts of accrued interest approximate fair value. F-47 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values and related carrying or notional amounts of the Company's financial instruments are as follows:
Unaudited September 30, 2004 December 31, 2003 December 31, 2002 ------------------ ----------------- ----------------- Carrying Estimated Carrying Estimated Carrying Estimated Amounts Fair Value Amounts Fair Value Amounts Fair Value ------- ---------- ------- ---------- ------- ---------- Financial assets: Cash and cash equivalents $ 4,824 $ 4,824 $ 6,706 $ 6,706 $ 15,099 $ 15,099 Securities 42,880 42,880 34,670 34,670 46,944 46,944 Loans and loans held for sale - Net 187,755 184,466 164,391 165,114 151,883 156,013 Federal Home Loan Bank stock 4,617 4,617 4,460 4,460 4,294 4,294 Accrued interest receivable 1,222 1,222 1,066 1,066 1,323 1,323 Financial liabilities: Customer deposits 182,428 182,340 7,281 153,572 156,092 160,895 Advances from borrowers for taxes and insurance 292 292 96 96 4 4 Federal Home Loan Bank advances 46,052 46,323 45,802 50,925 48,414 53,485 Note payable 1,251 1,249 1,357 1,357 - - Accrued interest payable 447 447 368 368 344 344
NOTE 16 - RESTRICTIONS ON DIVIDENDS OTS regulations impose limitations upon all capital distributions including cash dividends. The total amount of dividends that may be paid is generally limited to the sum of the net profits of the bank for the preceding three years. An application to and the approval of the OTS is required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under OTS regulations. If an application is not required, the institution must still provide prior notice to the OTS of the capital distribution. In the event the Bank's capital falls below its regulatory requirements or the OTS notifies it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. At September 30, 2004 and December 31, 2003, the Bank's retained earnings available for the payment of dividends totaled $1,222,000 and $2,191,000, respectively. F-48 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 17 - PARENT-ONLY FINANCIAL STATEMENTS The following represents the condensed financial statements of Alpena Bancshares, Inc. ("Parent") only. The Parent-only financial information should be read in conjunction with the Company's consolidated financial statements. The condensed balance sheet is as follows:
Unaudited September 30, December 31 ---------- ----------------------- 2004 2003 2002 ---------- ---------- ---------- ASSETS Cash at subsidiary bank $ 103 $ 148 $ 90 Investment in subsidiary 21,671 21,746 21,698 Other assets 162 76 13 ---------- ---------- ---------- Total assets $ 21,936 $ 21,970 $ 21,801 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ - $ 19 $ 54 Stockholders' equity 21,936 21,951 21,747 ---------- ---------- ---------- Total liabilities and stockholders' equity $ 21,936 $ 21,970 $ 21,801 ========== ========== ==========
The condensed statement of operations are as follows:
Unaudited Nine Months Ended September 30, December 31 ------------- ------------------------- 2004 2003 2002 ------------- ----------- ----------- Operating income $ 370 $ 350 $ 459 Operating expense 73 60 64 ------------- ----------- ----------- Income before income taxes and equity in undistributed net income of subsidiary 297 290 395 Income tax benefit 25 18 22 ------------- ----------- ----------- Income before equity in undistributed net income of subsidiary 322 308 417 Equity in undistributed net income of subsidiary 10 901 353 ------------- ----------- ----------- Net income $ 332 $ 1,209 $ 770 ============= =========== ===========
F-49 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 17 - PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED) The condensed statement of cash flows is as follows:
Unaudited Nine Months Ended September 30, December 31 ------------ --------------------------- 2004 2003 2002 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 332 $ 1,209 $ 770 Adjustments to reconcile net income to net cash from operating activities: Equity in undistributed net income of subsidiary (10) (901) (353) Net change in other assets (162) 13 (13) Net change in other liabilities (19) (27) 1 ------------ ------------ ------------ Net cash provided by operating activities 141 294 405 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 18 131 25 Dividends paid (204) (367) (362) ------------ ------------ ------------ Net cash used in financing activities (186) (236) (337) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (45) 58 68 CASH AND CASH EQUIVALENTS - Beginning of year 148 90 22 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS - End of year $ 103 $ 148 $ 90 ============ ============ ============
F-50 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following tables summarize the Company's quarterly results for the nine months ended September 30, 2004 and the fiscal years ended December 31, 2003 and 2002:
For the Three-Month Period Ending ------------------------------------------------------------ March 31, June 30, September 30, December 31, 2004 2004 2004 2004 ------------ ------------ ------------ ------------ Interest income $ 3,091 $ 3,261 $ 3,446 $ - Interest expense 1,445 1,504 1,622 - ------------ ------------ ------------ ------------ Net interest income 1,646 1,757 1,824 - Provision for losses on loans 81 65 68 - Other income 1,138 1,209 1,252 - Other expenses 2,724 2,748 2,641 - ------------ ------------ ------------ ------------ Income - Before income taxes (21) 153 367 - Federal income taxes (7) 51 123 - ------------ ------------ ------------ ------------ Net income $ (14) $ 102 $ 244 $ - ============ ============ ============ ============ Basic earnings per share $ (0.01) $ 0.06 $ 0.15 $ - Fully diluted earnings per share $ (0.01) $ 0.06 $ 0.15 $ - Weighted average number of shares outstanding 1,659 1,659 1,660 - Weighted average number of shares outstanding, including dilutive stock options 1,680 1,672 1,671 - Cash dividends declared per common share $ 0.125 $ 0.050 $ 0.100 $ - For the Three-Month Period Ending ------------------------------------------------------------ March 31, June 30, September 30, December 31, 2003 2003 2003 2003 ------------ ------------ ------------ ------------ Interest income $ 3,400 $ 3,311 $ 3,414 $ 3,225 Interest expense 1,702 1,652 1,576 1,525 ------------ ------------ ------------ ------------ Net interest income 1,698 1,659 1,838 1,700 Provision for losses on loans 162 65 11 29 Other income 582 1,943 1,367 1,534 Other expenses 1,994 2,896 2,774 2,663 ------------ ------------ ------------ ------------ Income - Before income taxes 124 641 420 542 Federal income taxes 38 215 140 125 ------------ ------------ ------------ ------------ Net income $ 86 $ 426 $ 280 $ 417 ============ ============ ============ ============ Basic earnings per share $ 0.05 $ 0.26 $ 0.17 $ 0.25 Fully diluted earnings per share $ 0.05 $ 0.26 $ 0.17 $ 0.25 Weighted average number of shares outstanding 1,646 1,646 1,654 1,645 Weighted average number of shares outstanding, including dilutive stock options 1,657 1,659 1,663 1,654 Cash dividends declared per common share $ 0.125 $ 0.125 $ 0.125 $ 0.125
F-51 ALPENA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, 2002 AND 2001 NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
For the Three-Month Period Ending ------------------------------------------------------------ March 31, June 30, September 30, December 31, 2002 2002 2002 2002 ------------ ------------ ------------ ------------ Interest income $ 3,747 $ 3,691 $ 3,661 $ 3,400 Interest expense 2,300 2,142 2,038 1,862 Net interest income 1,447 1,549 1,623 1,538 Provision for losses on loans 75 75 75 190 Other income 596 376 828 585 Other expenses 1,825 1,622 1,936 1,689 Income - Before income taxes 143 228 440 244 Federal income taxes 52 81 155 (3) Net income $ 91 $ 147 $ 285 $ 247 Basic earnings per share $ 0.06 $ 0.09 $ 0.17 $ 0.15 Fully diluted earnings per share $ 0.06 $ 0.09 $ 0.17 $ 0.15 Weighted average number of shares outstanding 1,642 1,644 1,644 1,645 Weighted average number of shares outstanding, including dilutive stock options 1,653 1,656 1,657 1,654 Cash dividends declared per common share $ 0.125 $ 0.125 $ 0.125 $ 0.125
F-52 - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. OR FIRST FEDERAL OF NORTHERN MICHIGAN. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. OR FIRST FEDERAL OF NORTHERN MICHIGAN SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF. UP TO 2,116,000 SHARES FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. (PROPOSED HOLDING COMPANY FOR FIRST FEDERAL OF NORTHERN MICHIGAN) COMMON STOCK PAR VALUE $0.01 PER SHARE ------------------ PROSPECTUS ------------------ RYAN BECK & CO. FEBRUARY __, 2005 ---------------- THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR GUARANTEED. ---------------- UNTIL __________, 2005 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- PART II: INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Articles 12 and 13 of the Articles of Incorporation of First Federal of Northern Michigan Bancorp, Inc., a Maryland corporation (the "Corporation"), set forth circumstances under which directors, officers, employees and agents of the Corporation may be insured or indemnified against liability which they incur in their capacities as such: ARTICLE 12. INDEMNIFICATION, ETC. OF DIRECTORS AND OFFICERS. A. INDEMNIFICATION. The Corporation shall indemnify (1) its current and former directors and officers, whether serving the Corporation or at its request any other entity, to the fullest extent required or permitted by the MGCL now or hereafter in force, including the advancement of expenses under the procedures and to the fullest extent permitted by law, and (2) other employees and agents to such extent as shall be authorized by the Board of Directors and permitted by law; provided, however, that, except as provided in Section B hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. B. PROCEDURE. If a claim under Section A of this Article 12 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall also be entitled to be reimbursed the expense of prosecuting or defending such suit. It shall be a defense to any action for advancement of expenses that the Corporation has not received both (i) an undertaking as required by law to repay such advances in the event it shall ultimately be determined that the standard of conduct has not been met and (ii) a written affirmation by the indemnitee of his good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard for indemnification set forth in the MGCL. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the MGCL, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article 12 or otherwise shall be on the Corporation. C. NON-EXCLUSIVITY. The rights to indemnification and to the advancement of expenses conferred in this Article 12 shall not be exclusive of any other right which any Person may have or hereafter acquire under any statute, these Articles, the Corporation's Bylaws, any agreement, any vote of stockholders or the Board of Directors, or otherwise. D. INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such Person against such expense, liability or loss under the MGCL. E. MISCELLANEOUS. The Corporation shall not be liable for any payment under this Article 12 in connection with a claim made by any indemnitee to the extent such indemnitee has otherwise actually received payment under any insurance policy, agreement, or otherwise, of the amounts otherwise indemnifiable hereunder. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article 12 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee's heirs, executors and administrators. Any repeal or modification of this Article 12 shall not in any way diminish any rights to indemnification or advancement of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to events occurring, or claims made, while this Article 12 is in force. ARTICLE 13. LIMITATION OF LIABILITY. An officer or director of the Corporation, as such, shall not be liable to the Corporation or its stockholders for money damages, except (A) to the extent that it is proved that the Person actually received an improper benefit or profit in money, property or services for the amount of the benefit or profit in money, property or services actually received; (B) to the extent that a judgment or other final adjudication adverse to the Person is entered in a proceeding based on a finding in the proceeding that the Person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding; or (C) to the extent otherwise provided by the MGCL. If the MGCL is amended to further eliminate or limit the Personal liability of officers and directors, then the liability of officers and directors of the Corporation shall be eliminated or limited to the fullest extent permitted by the MGCL, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Amount ------ * Legal Fees and Expenses............................................ $ 200,000 * Accounting Fees and Expenses....................................... 50,000 * Conversion Agent and Data Processing Fees.......................... 10,000 * Marketing Agent Fees and Expenses, including legal fees (1)........ 206,944 * Appraisal Fees and Expenses........................................ 34,000 * Business Plan Fees and Expenses.................................... 22,000 * Printing, Photocopying, Postage, Mailing........................... 65,000 * Filing Fees (OTS, NASD and SEC).................................... 19,883 * Nasdaq National Market Listing Fees................................ 100,000 * SEC EDGAR Document Conversion...................................... 25,000 * Other.............................................................. 5,337 -------------- * Total ............................................................. $ 738,164 ==============
- ------------------ * Estimated (1) First Federal of Northern Michigan Bancorp, Inc.. has retained Ryan Beck & Co. to assist in the sale of common stock on a best efforts basis in the offerings. Fees are estimated at the midpoint of the offering range. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Not Applicable. ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES: The exhibits filed as part of this registration statement are as follows: (A) LIST OF EXHIBITS
1.1 Engagement Letter between First Federal of Northern Michigan Bancorp, Inc. and Ryan Beck & Co., Inc*. 1.2 Form of Agency Agreement between First Federal of Northern Michigan Bancorp, Inc. and Ryan Beck & Co., Inc. 1.3 Addendum to Engagement Letter between First Federal of Northern Michigan Bancorp, Inc. and Ryan Beck & Co., Inc 2 Plan of Conversion and Reorganization* 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.* 5 Opinion of Luse Gorman Pomerenk & Schick regarding legality of securities being registered* 8 Federal Tax Opinion of Luse Gorman Pomerenk & Schick 10.1 Form of Change in Control Agreements 10.2 Employment Agreement with Ralph Stepaniak*** 10.3 1996 Stock Option Plan* 10.4 1996 Recognition and Retention Plan* 21 Subsidiaries of Registrant* 23.1 Consent of Luse Gorman Pomerenk & Schick (contained in Opinions included as Exhibits 5 and 8)* 23.2 Consent of Plante & Moran PLLC 23.3 Consent of RP Financial LC. 24 Power of Attorney (set forth on signature page) 99.1 Appraisal Agreement between First Federal of Northern Michigan Bancorp, Inc. and RP Financial LC.* 99.2 Business Plan Agreement between First Federal of Northern Michigan Bancorp, Inc. and Keller & Company, Inc. * 99.3 Appraisal Report of RP Financial LC. *,** 99.4 Letter of RP Financial LC. with respect to Subscription Rights* 99.5 Marketing Materials 99.6 Order and Acknowledgment Form
- ------------------------------- * Previously filed. ** Supporting financial schedules filed in paper format only, pursuant to Rule 202 of Regulation S-T. Available for inspection, during business hours, at the principal offices of the SEC in Washington, D.C. *** Incorporated by reference to Form 10-KSB filed on March 30, 2004. ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) Include any additional or changed material information as the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement as the securities offered, and the offering of the securities at that time to be the initial bona fide offering thereof. (3) To file a post-effective amendment to remove from registration any of the securities being registered that remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Alpena, State of Michigan on January 25, 2005. FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. By: /s/ Martin A. Thomson ---------------------------------------- Martin A. Thomson President, Chief Executive Officer and Director (Duly Authorized Representative) POWER OF ATTORNEY We, the undersigned directors and officers of First Federal of Northern Michigan Bancorp, Inc. (the "Company") hereby severally constitute and appoint Martin A. Thomson as our true and lawful attorney and agent, to do any and all things in our names in the capacities indicated below which said Martin A. Thomson may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form SB-2 relating to the offering of the Company's common stock, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby approve, ratify and confirm all that said Martin A. Thomson shall do or cause to be done by virtue thereof. In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /s/ Martin A. Thomas President, Chief Executive January 25, 2005 - ------------------------------------ Officer and Director (Principal Martin A. Thomson Executive Officer) /s/ Amy E. Essex Chief Financial Officer January 25, 2005 - ------------------------------------ (Principal Financial and Amy E. Essex Accounting Officer) /s/ James C. Rapin Chairman of the Board January 25, 2005 - ------------------------------------ James C. Rapin /s/ Thomas R. Townsend Director January 25, 2005 - ------------------------------------ Thomas R. Townsend /s/ Gary C. VanMassenhove Director January 25, 2005 - ------------------------------------ Gary C. VanMassenhove /s/ Keith D. Wallace Director January 25, 2005 - ------------------------------------ Keith D. Wallace
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 2005 REGISTRATION NO. 333-121178 ================================================================================ --------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------------- EXHIBITS TO PRE-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM SB-2 FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. ALPENA, MICHIGAN ================================================================================ EXHIBIT INDEX
1.1 Engagement Letter between First Federal of Northern Michigan Bancorp, Inc. and Ryan Beck & Co., Inc*. 1.2 Form of Agency Agreement between First Federal of Northern Michigan Bancorp, Inc. and Ryan Beck & Co., Inc. 1.3 Addendum to Engagement Letter between First Federal of Northern Michigan Bancorp, Inc. and Ryan Beck & Co., Inc 2 Plan of Conversion and Reorganization* 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.* 5 Opinion of Luse Gorman Pomerenk & Schick regarding legality of securities being registered* 8 Federal Tax Opinion of Luse Gorman Pomerenk & Schick 10.1 Form of Change in Control Agreements 10.2 Employment Agreement with Ralph Stepaniak*** 10.3 1996 Stock Option Plan* 10.4 1996 Recognition and Retention Plan* 21 Subsidiaries of Registrant* 23.1 Consent of Luse Gorman Pomerenk & Schick (contained in Opinions included as Exhibits 5 and 8)* 23.2 Consent of Plante & Moran PLLC 23.3 Consent of RP Financial LC. 24 Power of Attorney (set forth on signature page) 99.1 Appraisal Agreement between First Federal of Northern Michigan Bancorp, Inc. and RP Financial LC.* 99.2 Business Plan Agreement between First Federal of Northern Michigan Bancorp, Inc. and Keller & Company, Inc. * 99.3 Appraisal Report of RP Financial LC. *,** 99.4 Letter of RP Financial LC. with respect to Subscription Rights* 99.5 Marketing Materials 99.6 Order and Acknowledgment Form
- ------------------------------- * Previously filed. ** Supporting financial schedules filed in paper format only, pursuant to Rule 202 of Regulation S-T. Available for inspection, during business hours, at the principal offices of the SEC in Washington, D.C. *** Incorporated by reference to Form 10-KSB filed on March 30, 2004. EX-1.2 2 tex1_2-4648.txt EX-1.2 EXHIBIT 1.2 FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. (a Maryland-chartered Stock Corporation) Up to 1,840,000 Shares (Subject to Increase Up to 2,116,000 Shares) COMMON STOCK ($0.01 Par Value) Subscription Price $10.00 Per Share AGENCY AGREEMENT February ___, 2005 Ryan Beck & Co., Inc. 18 Columbia Turnpike Florham Park, New Jersey 07932 Ladies and Gentlemen: Alpena Bancshares, Inc., a federally-chartered stock corporation (the "Mid-Tier Holding Company"), First Federal of Northern Michigan Bancorp, Inc., a newly formed Maryland-chartered stock corporation organized to be the successor to the Mid-Tier Holding Company (the "Holding Company"), Alpena Bancshares, MHC, a federally-chartered mutual holding company which owns 55.4% of the outstanding common stock of the Mid-Tier Holding Company (the "MHC"), and First Federal of Northern Michigan, a federally-chartered savings association (together with its subsidiaries, the "Bank") whose outstanding common stock is owned in its entirety by the Mid-Tier Holding Company (collectively with the Holding Company, the MHC and the Bank, the "Alpena Parties"), hereby confirm, jointly and severally, their agreement with Ryan Beck & Co., Inc. (the "Agent"), as follows: SECTION 1. THE OFFERING. The MHC, in accordance with the Plan of Conversion and Reorganization adopted November 12, 2004 and amended on December 7, 2004 (the "Plan"), intends to convert from a federally-chartered mutual holding company to a stock holding company (the "Conversion") in accordance with the laws of the United States and the applicable regulations of the Office of Thrift Supervision (the "OTS") (collectively, the "Conversion Regulations"). In connection with the Conversion, the Holding Company, a newly formed Maryland-chartered stock form corporation, will offer shares of Common Stock (as defined below) on a priority basis to (i) Eligible Account Holders; (ii) Employee Plans of the Holding Company; (iii) Supplemental Eligible Account Holders; and (iv) Other Members (all capitalized terms used in this Agreement and not defined in this Agreement shall have the meanings set forth in the Plan). Pursuant to the Plan, the Holding Company is offering a minimum of 1,360,000 and a maximum of 1,840,000 shares of common stock, par value $0.01 per share (the "Common Stock") (subject to an increase up to 2,116,000 shares) (the "Shares"), in the Subscription Offering, and, if necessary, (i) the Community Offering and/or (ii) Syndicated Community Offering. Pursuant to the Plan, the Holding Company will offer and sell the Shares in the Subscription Offering, Community Offering, and/or Syndicated Community Offering (the 1 "Offerings") and issue a minimum of 1,092,701 and a maximum of 1,478,360 shares of its Common Stock (subject to increase up to 1,700,113 shares) (the "Exchange Shares") to existing public shareholders of the Mid-Tier Holding Company in exchange for their existing shares of the Mid-Tier Holding Company (the "Exchange") so that, upon completion of the Offerings and the Exchange, 100% of the outstanding Common Stock of the Holding Company will be publicly held, 100% of the outstanding shares of common stock of the Bank will be held by the Holding Company, and the MHC will cease to exist. The Holding Company will sell the Shares in the Offerings at $10.00 per share (the "Purchase Price"). If the number of Shares is increased or decreased in accordance with the Plan, the term "Shares" shall mean such greater or lesser number, where applicable. Pursuant to the Plan, in the Subscription Offering, the Holding Company will offer the Shares, subject to the allocation procedures and purchase limitations set forth in the Plan, in descending order of priority to: (1) Eligible Account Holders; (2) Employee Plans of the Holding Company or the Bank; (3) Supplemental Eligible Account Holders; and (4) Other Members. The Holding Company may offer Shares, if any, remaining after the Subscription Offering, in the Community Offering on a priority basis to natural persons residing within the Michigan counties of Alpena, Alcona, Antrim, Charlevoix, Cheyboygan, Crawford, Emmet, Iosco, Kalkaska, Montmorency, Ogemaw, Oscoda, Otsego and Presque Isle, then to the Mid-Tier Holding Company's public stockholders at the Voting Record Date, and then to the general public. In the event a Community Offering is held, it may be held at any time during or immediately after the Subscription Offering. Depending on market conditions, Shares available for sale but not subscribed for in the Subscription Offering or purchased in the Community Offering may be offered in the Syndicated Community Offering to the general public on a best efforts basis, as described in subsection 4(b) below. In connection with the Conversion and pursuant to the terms of the Plan as described in the Prospectus (as defined below), immediately following the consummation of the Conversion, subject to the approval of the members of the MHC and the public stockholders of the Company and compliance with certain conditions as may be imposed by regulatory authorities, the Holding Company will contribute up to 37,500 shares of newly issued Common Stock (the "Foundation Shares") and up to $375,000 in cash to First Federal Community Foundation (the "Foundation"). The Holding Company has filed with the U.S. Securities and Exchange Commission (the "Commission") Registration Statement on Form SB-2 (File No. 333-121178) in order to register the Shares, the Exchange Shares and the Foundation Shares under the Securities Act of 1933, as amended (the "1933 Act"), and the regulations promulgated thereunder (the "1933 Act Regulations"), and has filed such amendments thereto as have been required to the date hereof (the "Registration Statement"). The prospectus, as amended, included in the Registration Statement at the time it initially became effective is hereinafter called the "Prospectus," except that if any prospectus is filed by the Holding Company pursuant to Rule 424(b) or (c) of the 1933 Act Regulations differing from the prospectus included in the Registration Statement at the time it initially becomes effective, the term "Prospectus" shall refer to the prospectus filed pursuant to Rule 424(b) or (c) from and after the time said prospectus is filed with the Commission and shall include any supplements and amendments thereto from and after their dates of effectiveness or use, respectively. 2 In connection with the Conversion, the MHC and the Mid-Tier Holding Company each filed with the OTS an application for conversion to a stock company (together with any interim merger applications and any other required ancillary applications and/or notices, the "Conversion Application") and amendments thereto as required by the OTS in accordance with the Home Owners Loan Act, as amended (the "HOLA"), and 12 C.F.R. Parts 575 and 563b (collectively with the HOLA, the Conversion Regulations"). The Holding Company has also filed with the OTS its application on Form H-(e)1-S (together with any interim merger applications and any other required ancillary applications and/or notices, the "Holding Company Application") to become a unitary savings and loan holding company under the HOLA and the regulations promulgated thereunder. Collectively, the Conversion Application and the Holding Company Application may also be termed the "Applications." SECTION 2. APPOINTMENT OF AGENT. Subject to the terms and conditions of this Agreement, the Alpena Parties hereby appoint the Agent to consult with, advise and assist the Alpena Parties with the solicitation of subscriptions and purchase orders for the Shares in connection with the sale of the Shares in the Offerings. On the basis of the representations and warranties of the Alpena Parties contained in, and subject to the terms and conditions of, this Agreement, the Agent accepts such appointment and agrees to use its best efforts to assist the Alpena Parties with the solicitation of subscriptions and purchase orders for the shares and agrees to consult with and advise the Alpena Parties as to the matters set forth in Section 3 of the letter agreement, dated November 1, 2004, between the MHC, the Mid-Tier Holding Company and Agent (the "Letter Agreement") (a copy of which is attached hereto as EXHIBIT A). It is acknowledged by the Alpena Parties that the Agent shall not be obligated to purchase any Shares and shall not be obligated to take any action which is inconsistent with any applicable law, regulation, decision or order. Except as set forth in Section 13 hereof, the appointment of the Agent to provide services hereunder shall terminate upon consummation of the Offerings. If requested by the MHC or the Mid-Tier Holding Company, Agent may also assemble and manage a selling group of broker-dealers that are members of the National Association of Securities Dealers, Inc. ("NASD") to participate in the solicitation on a "best efforts" basis of purchase orders for the Shares (the "Assisting Brokers") under a selected dealer agreement ("Selected Dealer Agreement"), the form of which is set forth as EXHIBIT B to this Agreement. The Agent will distribute the Shares among dealers in the Syndicated Community Offering in a fashion which best meets the distribution objectives of the Bank and the Plan. The Agent will not commence the Syndicated Community Offering without the prior approval of the Alpena Parties. SECTION 3. REFUND OF PURCHASE PRICE. In the event that the Conversion is not consummated for any reason, including but not limited to the inability to sell a minimum of 1,360,000 Shares during the Offerings (including any permitted extension thereof) or such other minimum number of Shares as shall be established consistent with the Plan and the Conversion Regulations, this Agreement shall terminate and any persons who have subscribed for any of the Shares shall have refunds placed in the mail to them promptly of the full amount which has been received from such person, together with interest as provided in the Prospectus. 3 SECTION 4. FEES. In addition to the expenses specified in Section 9 hereof, as compensation for the Agent's services under this Agreement, the Agent has received or will receive the following fees from the Alpena Parties: (a) A reorganization and proxy vote advisory and administrative services fee of $25,000 shall be paid as follows: (i) $12,500 was paid upon execution of the Letter Agreement, and (ii) $12,500 was paid upon the initial filing of the Registration Statement. Fees for sales of the Shares in the Offerings shall be one percent (1.0%) of the dollar amount of the Shares sold in the Offerings, other than for shares sold pursuant to 4(b), which will be paid at Closing. No fee shall be payable for stock sold in the Offerings to officers, directors, employees or immediate family of such persons ("Insiders") and qualified and non-qualified employee benefit plans of the Company or the Insiders. The term "immediate family" includes spouse, siblings, parents and also children who reside within the same household as an officer, director or employee. The $25,000 reorganization and proxy vote advisory and administrative services fee shall be credited against such sales fees. In the event the Conversion and the Offerings are not consummated, the Agent will be entitled only to the reimbursement of its accountable out-of-pocket expenses and payments for certain advisory and administrative services performed, as outlined in Sections 3(a) and 3(b) of the engagement letter, as of the date of termination. Any portion of the $25,000 fee that has been advanced to the Agent and for which services have not been performed as described above shall be returned to the Alpena Parties. (b) If any of the Shares remain unsubscribed after the Subscription Offering and Community Offering, at the request of the Holding Company, the Agent will form a group of approved broker-dealer firms in accordance with Section 2 for purposes of the Syndicated Community Offering. The fees payable by the Holding Company pursuant to this Section 4(b) to the Agent will not exceed six percent (6%) of the aggregate dollar amount of the Shares sold in the Syndicated Community Offering. Of such fee, the Agent will receive one percent (1%) of the aggregate dollar amount of the shares sold pursuant to this Section 4(b) as a management fee, and the Alpena Parties will pay the remainder to the Assisting Brokers, which may include the Agent, in amounts relating to the number of Shares sold by such Assisting Brokers pursuant to this Section 4(b). All such fees payable under this Section 4(b) shall be in addition to all fees payable under Section 4(a) and shall be paid at Closing (as defined below). In the event that the Holding Company is required to resolicit subscribers for Shares in the Subscription Offering and Community Offering and the Agent is required to provide significant additional services in connection with such a resolicitation, the Alpena Parties and the Agent shall mutually agree to the dollar amount of additional compensation due to the Agent and the Alpena Parties shall pay such amount, if any. Until any agreement called for by this paragraph is reached, the Agent shall not incur expenses relating to any resolicitation in an amount that would cause the total expenses incurred by the Agent that are reimbursable by the Bank pursuant to Section 9 hereof to be greater than those permitted without the prior written consent of the Holding Company, which consent shall not be unreasonably withheld. SECTION 5. CLOSING. If the minimum number of Shares permitted to be sold in the Offerings on the basis of the most recently updated Appraisal (as defined in Section 6(g)) are subscribed for at or before the termination date of the Offerings (which may be extended), and the other conditions (including those in Section 10) to the completion of the Conversion are 4 satisfied, the Holding Company agrees to issue the Shares and the Exchange Shares on the Closing Date (as hereinafter defined) against payment therefor by the means authorized by the Plan and to deliver certificates evidencing ownership of the Shares and the Exchange Shares in such authorized denominations and registrations directly to the purchasers thereof or as instructed as promptly as practicable after the Closing Date. The closing (the "Closing") shall be held at the offices of Luse, Gorman, Pomerenk & Schick, P.C., Washington, D.C., or at such other place as shall be agreed upon among the Alpena Parties and the Agent, at 10:00 a.m., Eastern Time, on the business day selected by the Alpena Parties, which business day shall be no less than two business days following the giving of prior notice by the Holding Company to the Agent or at such other time as shall be agreed upon by the Alpena Parties and the Agent. At the Closing, the Alpena Parties shall deliver to the Agent by wire transfer in same-day funds the commissions, fees and expenses owing to the Agent as set forth in Section 4 and Section 9 hereof and the opinions required hereby and other documents deemed reasonably necessary for the Agent shall be executed and delivered to effect the sale of the Shares as contemplated hereby and pursuant to the terms of the Prospectus; provided, however, that all out-of-pocket expenses to which the Agent is entitled under Section 9 hereof shall be due and payable upon receipt by the Holding Company or the Bank of a written accounting therefor setting forth in reasonable detail the expenses incurred by the Agent. The hour and date upon which the Holding Company shall release the Shares for delivery in accordance with the terms hereof is referred to herein as the "Closing Date." SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE ALPENA PARTIES. The Alpena Parties jointly and severally represent and warrant to the Agent that: (a) The MHC, the Mid-Tier Holding Company and the Bank have all such power, authority, authorizations, approvals and orders as may be required to enter into this Agreement, and, as of the Closing Date, the MHC, the Holding Company and the Bank will have all such power, authority, authorizations, approvals and orders as may be required to carry out the provisions and conditions hereof and to issue and sell the Shares and to issue the Exchange Shares and the Foundation Shares as provided herein and as described in the Prospectus. The consummation of the Conversion, the execution, delivery and performance of this Agreement and the Letter Agreement and the consummation of the transactions contemplated herein have been duly and validly authorized by all necessary corporate action on the part of the MHC, the Mid-Tier Holding Company, the Holding Company and the Bank. This Agreement has been validly executed and delivered by the Alpena Parties, and is a valid, legal and binding obligation of the Alpena Parties, in each case enforceable in accordance with its terms, except as the legality, validity, binding nature and enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium, reorganization, conservatorship, receivership or other similar laws relating to or affecting the enforcement of creditors' rights generally, (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law, and (iii) the extent, if any, that the provisions of Sections 11 or 12 hereof may be unenforceable as against public policy. (b) The Registration Statement was declared effective by the Commission on February ___, 2005. No stop order has been issued with respect to the Prospectus. No proceedings related to the Prospectus have been initiated or, to the knowledge of the Alpena Parties, threatened by the Commission. At the time the Registration Statement, including the 5 Prospectus contained therein (including any amendment or supplement thereto), became effective, the Registration Statement complied as to form in all material respects with the 1933 Act and the 1933 Act Regulations and the Registration Statement and the Prospectus did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. At the time any Rule 424(b) or (c) Prospectus was filed with the Commission and at the Closing Date referred to in Section 5, the Registration Statement, including the Prospectus (including any amendment or supplement thereto) and, when taken together with the Prospectus, any Blue Sky Application or Sales Information authorized for use by any of the Alpena Parties in connection with the Offerings, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this Section 6(b) shall not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Alpena Parties by the Agent expressly regarding the Agent for use under the caption " The Conversion - Plan of Distribution; Selling Agent Compensation." (c) The Conversion Application, including the Prospectus, the proxy statement for the solicitation of proxies from the members of the MHC for the special meeting to approve the Plan (the "Members' Proxy Statement") and the proxy statement for the solicitation of proxies from the stockholders of the Mid-Tier Holding Company for the special meeting to approve the Plan (the "Stockholders' Proxy Statement"), has been approved by the OTS and the Prospectus, Members' Proxy Statement and Shareholders' Proxy Statement have been authorized for use by the OTS. At the time the Conversion Application, including the Prospectus, Members' Proxy Statement and Stockholders' Proxy Statement contained therein (including any amendment or supplement thereto), were approved and authorized for use by the OTS and at the Closing Time, the Conversion Application, including the Prospectus, Members' Proxy Statement and Stockholders' Proxy Statement contained therein (including any amendment or supplement thereto), complied, and as of the Closing Time will comply, as to form in all material respects with the Conversion Regulations. The Conversion Application, including the Prospectus, Members' Proxy Statement and Stockholders' Proxy Statement contained therein (including any amendment or supplement thereto), did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this Section 6(c) shall not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Alpena Parties by the Agent expressly regarding the Agent for use under the caption " The Conversion - Plan of Distribution; Selling Agent Compensation." (d) No order has been issued by the Commission preventing or suspending the use of the Registration Statement or the Prospectus and no action by or before any such government entity to revoke any approval, authorization or order of effectiveness related to the Conversion is pending or, to the best knowledge of the Alpena Parties, threatened. (e) The Plan has been duly adopted by the Board of Directors of the MHC. To the best knowledge of the Alpena Parties, no person has sought, or at the Closing Date will 6 have sought, to obtain review of the final action of the OTS in approving the Plan or the Conversion Application or the Holding Company Application, pursuant to the Conversion Regulations. (f) The Holding Company has filed the Holding Company Application with the OTS. As of the Closing Date, the OTS will have approved of the Holding Company's becoming a unitary savings and loan holding company with respect to the Bank. (g) RP Financial, LC., which prepared the appraisal of the aggregate pro forma market value of the Common Stock on which the Offerings were based (the "Appraisal"), has advised the Alpena Parties in writing that it is independent with respect to each of the Alpena Parties and the Alpena Parties believe RP Financial, LC. to be expert in preparing appraisals of savings institutions. (h) Plante & Moran, PLLC, which certified the financial statements filed as part of the Registration Statement and the Conversion Application, has advised the Alpena Parties that it is an independent certified public accountant within the meaning of the Code of Ethics of the AICPA, and Plante & Moran, PLLC is, with respect to each of the Alpena Parties, independent certified public accountants as required by the 1933 Act and the 1933 Act Regulations and the regulations of the Public Company Accounting Oversight Board (the "PCAOB Regulations"). (i) The financial statements and the notes thereto which are included in the Registration Statement and which are a part of the Prospectus present fairly in all material respects the financial condition and retained earnings of the Mid-Tier Holding Company and the Bank as of the dates indicated and the results of operations and cash flows for the periods specified. The financial statements comply in all material respects with the applicable accounting requirements of Title 12 of the Code of Federal Regulations, Regulation S-X of the Commission and generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods presented, except as otherwise noted therein, and present fairly in all material respects the information required to be stated therein. The other financial, statistical and pro forma information and related notes included in the Prospectus present fairly the information shown therein on a basis consistent with the audited and any unaudited financial statements included in the Prospectus, and as to the pro forma adjustments, the adjustments made therein have been consistently applied on the basis described therein. (j) Since the respective dates as of which information is given in the Registration Statement, including the Prospectus: (i) there has not been any material adverse change in the financial condition, results of operation, capital, properties, business affairs or prospects of the Alpena Parties considered as one enterprise, whether or not arising in the ordinary course of business; (ii) there have not been any material transactions entered into by any of the Alpena Parties, other than those in the ordinary course of business; and (iii) the capitalization, liabilities, assets, properties and business of the Alpena Parties conform in all material respects to the descriptions thereof contained in the Prospectus and, none of the Alpena Parties has any material liabilities of any kind, contingent or otherwise, except as disclosed in the Registration Statement or the Prospectus. 7 (k) As of the Closing Date, the Holding Company will be a stock corporation duly organized and in good standing under the laws of the State of Maryland, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus, and will be qualified to transact business and will be in good standing in Maryland and in each jurisdiction in which the conduct of business requires such qualification, unless the failure to qualify in one or more of such jurisdictions would not have a material adverse effect on the financial condition, results of operation, capital, properties, business affairs or prospects of the Alpena Parties taken as a whole (a "Material Adverse Effect"). As of the Closing Date, the Holding Company will have obtained all licenses, permits and other governmental authorizations required for the conduct of its business, except those that individually or in the aggregate would not have a Material Adverse Effect; and as of the Closing Date, all such licenses, permits and governmental authorizations will be in full force and effect, and the Holding Company will be in compliance therewith in all material respects. (l) The Holding Company does not, and as of the Closing Date will not, own any equity securities or any equity interest in any business enterprise except as described in the Prospectus. (m) The Bank is a duly organized and validly existing savings association organized under the laws of the United States, duly authorized to conduct its business as described in the Prospectus; the activities of the Bank are permitted by the applicable rules, regulations and practices of the OTS; the Bank has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business, except those that individually or in the aggregate would not have a Material Adverse Effect; all such licenses, permits and other governmental authorizations are in full force and effect and the Bank is in good standing under the laws of the United States and the Bank is duly qualified as a foreign corporation to transact business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect; all of the issued and outstanding capital stock of the Bank is duly and validly issued to the Mid-Tier Holding Company and is fully paid and nonassessable; and all of the issued and outstanding capital stock of the Bank after the Conversion will be duly and validly issued to the Holding Company and will be fully paid and nonassessable; and the Holding Company will directly own all of the capital stock of the Bank free and clear of any mortgage, pledge, lien, encumbrance, claim or restriction of any kind. The Bank does not own equity securities or any equity interest in any other business enterprise except as otherwise described in the Prospectus or as are immaterial in amount and are not required to be described in the Prospectus. (n) The MHC is a duly organized and validly existing federally-chartered mutual holding company, duly authorized to conduct its business as described in the Prospectus; the activities of the MHC are permitted by the rules, regulations and practices of the OTS; the MHC obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business, except those that, individually or in the aggregate, would not have a Material Adverse Effect; all such licenses, permits and other governmental authorizations are in full force and effect and the MHC is in good standing under the laws of United States and the MHC is duly qualified as a foreign corporation to transact business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect. 8 (o) The Mid-Tier Holding Company is a duly organized and validly existing federal-chartered stock corporation, duly authorized to conduct its business as described in the Prospectus; the activities of the Mid-Tier Holding Company are permitted by the rules, regulations and practices of the OTS; the Mid-Tier Holding Company has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business, except those that, individually or in the aggregate, would not have a Material Adverse Effect; all such licenses, permits and other governmental authorizations are in full force and effect and the Mid-Tier Holding Company is in good standing under the laws of United States and the Mid-Tier Holding Company is duly qualified as a foreign corporation to transact business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect. (p) The Bank is a member of the Federal Home Loan Bank (the "FHLB") of Pittsburgh. The deposit accounts of the Bank are insured by the FDIC up to applicable limits. (q) As of the Closing Date, the Bank will be a wholly-owned subsidiary of the Holding Company. (r) The only subsidiaries of the Bank are Financial Services and Mortgage Corporation ("FSMC") and InsuranCenter of Alpena ("ICA"). FSMC and ICA are each duly organized, validly existing and in good standing under the laws of the State of Michigan, with full power and authority to own its property and conduct its business; FSMC and ICA are each duly qualified as a foreign corporation to transact business in each jurisdiction in which failure to so qualify would have a Material Adverse Effect; FSMC and ICA each hold all licenses, certificates and permits from governmental authorities necessary to conduct its business, except where the failure to hold such licenses, permits or authorizations would not, individually or in the aggregate, have a Material Adverse Effect; and the activities of FSMC and ICA are permitted to be conducted by Michigan corporations and by subsidiaries of a federally-chartered savings association. (s) Upon consummation of the Conversion, the authorized, issued and outstanding capital stock of the Holding Company will be within the range set forth in the Prospectus under the caption "Capitalization" and no shares of Common Stock have been or will be issued and outstanding prior to the Closing Date; the Shares to be subscribed for in the Offerings have been duly and validly authorized for issuance and, when issued and delivered by the Holding Company pursuant to the Plan against payment of the consideration calculated as set forth in the Plan and the Prospectus, will be duly and validly issued and fully paid and nonassessable; the Exchange Shares to be issued in the Exchange and the Foundation Shares have been duly and validly authorized for issuance and, when issued and delivered by the Holding Company pursuant to the Plan and the Prospectus, will be duly and validly issued and fully paid and nonassessable; the issuance of the Shares is not subject to preemptive rights, except for the subscription rights granted pursuant to the Plan; the issuance of the Exchange Shares and the Foundation Shares is not subject to preemptive rights; and the terms and provisions of the shares of Common Stock will conform in all material respects to the description thereof contained in the Prospectus. Upon issuance of the 9 Shares sold, good title to the Shares will be transferred from the Holding Company to the purchasers of Shares against payment therefor in the Offering as set forth in the Plan and the Prospectus. Upon issuance of the Exchange Shares, good title to the Exchange Shares will be transferred from the Holding Company to the recipients thereof in the Exchange as set forth in the Plan and the Prospectus. (t) The Alpena Parties are not in violation of their respective certificates of incorporation or charters or their respective bylaws, or in material default in the performance or observance of any obligation, agreement, covenant, or condition contained in any contract, lease, loan agreement, indenture or other instrument to which they are a party or by which they, or any of their respective properties, may be bound which would result in a Material Adverse Effect. The consummation of the transactions contemplated herein and in the Plan will not (i) conflict with or constitute a breach of, or default under, the certificate of incorporation, charter or bylaws of any of the Alpena Parties, or conflict with or constitute a breach of, or default under, any material contract, lease or other instrument to which any of the Alpena Parties has a beneficial interest, or any applicable law, rule, regulation or order that is material to the financial condition of the Bank; (ii) violate any authorization, approval, judgment, decree, order, statute, rule or regulation applicable to the Alpena Parties except for such violations which would not have a Material Adverse Effect; or (iii) result in the creation of any lien, charge or encumbrance upon any property of the Alpena Parties, except for such liens, changes or encumbrances that would not individually or in the aggregate have a Material Adverse Effect. (u) No default exists, and no event has occurred which with notice or lapse of time, or both, would constitute a default on the part of any of the Alpena Parties, in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, note, bank loan or credit agreement or any other instrument or agreement to which any of the Alpena Parties is a party or by which any of their property is bound or affected in any respect which, in any such case, would have a Material Adverse Effect on the Alpena Parties taken as a whole, and such agreements are in full force and effect; and no other party to any such agreements has instituted or, to the best knowledge of any of the Alpena Parties, threatened any action or proceeding wherein any of the Alpena Parties is alleged to be in default thereunder under circumstances where such action or proceeding, if determined adversely to any of the Alpena Parties, would have a Material Adverse Effect. (v) The Alpena Parties have good and marketable title to all assets which are material to the businesses of the Alpena Parties, free and clear of all liens, charges, encumbrances, restrictions or other claims, except such as are described in the Prospectus or which do not have a Material Adverse Effect; and all of the leases and subleases which are material to the businesses of the Alpena Parties, including those described in the Registration Statement or Prospectus, are in full force and effect. (w) The Alpena Parties are not in violation of any material directive from the OTS, the FDIC, or any other agency to make any material change in the method of conducting their respective businesses; the Alpena Parties have conducted and are conducting their respective businesses so as to comply in all respects with all applicable statutes and regulations (including, without limitation, regulations, decisions, directives and orders of the OTS, the Commission and the FDIC), except where the failure to so comply would not reasonably be expected to result in a Material Adverse Effect, and there is no charge, investigation, action, suit or proceeding before or by any court, regulatory authority or governmental agency or body pending or, to the best knowledge of any of the Alpena Parties, threatened, which would 10 reasonably be expected to materially and adversely affect the Conversion, the performance of this Agreement, or the consummation of the transactions contemplated in the Plan as described in the Registration Statement, or which would reasonably be expected to result in a Material Adverse Effect. (x) Prior to the Closing Date, the Alpena Parties will have received an opinion of their special counsel, Luse, Gorman, Pomerenk & Schick, P.C., with respect to the federal income tax consequences of the Conversion, as described in the Registration Statement and the Prospectus, and an opinion from Plante Moran, PLLC with respect to the tax consequences of the Conversion under the laws of the State of Michigan; and the facts and representations upon which such opinions will be based, will be truthful, accurate and complete, and none of the Alpena Parties will take any action inconsistent therewith. (y) The Alpena Parties have filed all required federal and state tax returns, paid all taxes that have become due and payable, except where permitted to be extended or where the failure to pay such taxes would not have a Material Adverse Effect, and no deficiency has been asserted with respect thereto by any taxing authority. (z) No approval, authorization, consent or other order of any regulatory or supervisory or other public authority is required for the execution and delivery by the Alpena Parties of this Agreement, or the sale and issuance of the Shares and the issuance of the Exchange Shares and the Foundation Shares, except for the approval of the OTS and the Commission and any necessary qualification, notification, or registration or exemption under the securities or blue sky laws of the various states in which the Shares are to be offered for sale and the Exchange Shares and the Foundation Shares are to be issued. (aa) None of the Alpena Parties has: (i) issued any securities within the last 18 months (except for (a) notes to evidence bank loans or other liabilities in the ordinary course of business or as described in the Prospectus, (b) shares of Common Stock issued with respect to the initial capitalization of the Holding Company and (c) shares of common stock of the Mid-Tier Holding Company issued upon the exercise of stock options); (ii) had any dealings with respect to sales of securities within the 12 months prior to the date hereof with any member of the NASD, or any person related to or associated with such member, other than discussions and meetings relating to the Offerings and purchases and sales of U.S. government and agency and other securities in the ordinary course of business; or (iii) engaged any intermediary between the Agent and the Alpena Parties in connection with the Offerings or the offering of shares of the common stock of the Mid-Tier Holding Company, and no person is being compensated in any manner for such services. (bb) The Alpena Parties have not made any payment of funds of the Alpena Parties as a loan to any person for the purchase of Shares, except for the Holding Company's loan to the employee stock ownership plan the proceeds of which will be used to purchase Shares, or has made any other payment or loan of funds prohibited by law, and no funds have been set aside to be used for any payment prohibited by law. 11 (cc) The Bank complies in all material respects with the applicable financial record keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, and the regulations and rules thereunder. (dd) The Alpena Parties have not relied upon Agent or its counsel for any legal, tax or accounting advice in connection with the Conversion. (ee) The records of Eligible Account Holders and Supplemental Eligible Account Holders and Other Members are accurate and complete in all material respects. (ff) The Alpena Parties comply with all laws, rules and regulations relating to environmental protection, and none of them has been notified or is otherwise aware that any of them is potentially liable, or is considered potentially liable, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any other Federal, state or local environmental laws and regulations except to the extent that any non-compliance would not have a Material Adverse Effect; no action, suit, regulatory investigation or other proceeding is pending, or to the knowledge of the Alpena Parties, threatened against the Alpena Parties relating to environmental protection, nor do the Alpena Parties have any reason to believe any such proceedings may be brought against any of them; and, to the knowledge of the Alpena Parties, no disposal, release or discharge of hazardous or toxic substances, pollutants or contaminants, including petroleum and gas products, as any of such terms may be defined under federal, state or local law, has occurred on, in, at or about any facilities or properties owned or leased by any of the Alpena Parties or in which the Bank has a security interest, except to the extent such disposal, release or discharge would not have a Material Adverse Effect. (gg) All of the loans represented as assets on the recent developments or financial information of the Alpena Parties included in the Prospectus meet or are exempt from all requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulations Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not result in a Material Adverse Effect. (hh) None of the Alpena Parties are required to be registered as an investment company under the Investment Company Act of 1940. (ii) The Alpena Parties have taken all actions necessary to obtain at Closing a Blue Sky Memorandum from Luse, Gorman, Pomerenk & Schick, P.C. (jj) The Foundation has been duly organized and is validly existing as a private charitable foundation in good standing under the laws of the State of Delaware with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; the Foundation will not be a savings and loan holding company within the meaning of 12 C.F.R. 574.2(q) as a result of the issuance of the Foundation Shares to it in accordance with the terms of the Plan and in the amounts described in the Prospectus; to the knowledge of the Alpena Parties, all approvals required to establish the Foundation and contribute the Foundation Shares and cash up $375,000 to it have been obtained; except as 12 disclosed in the Members' Proxy Statement and the Stockholders' Proxy Statement, there are no agreements or understandings, written or oral or otherwise, between any of the Alpena Parties and the Foundation with respect to the control, directly or indirectly, over the voting and the acquisition or disposition of the Foundation Shares; the Foundation Shares will have been duly authorized for issuance and, when issued and contributed by the Holding Company pursuant to the Plan, will be duly issued, fully paid and nonassessable. (kk) Any certificates signed by an officer of any of the Alpena Parties and delivered to the Agent or its counsel that refer to this Agreement shall be deemed to be a representation and warranty by the Alpena Parties to the Agent as to the matters covered thereby with the same effect as if such representation and warranty were set forth herein. SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE AGENT. Agent represents and warrants to the Alpena Parties that: (a) Agent is a corporation and is validly existing and in good standing under the laws of the State of New Jersey with full power and authority to provide the services to be furnished to the Alpena Parties hereunder. (b) The execution, delivery and performance of this Agreement and the Letter Agreement and the consummation of the transactions contemplated herein and therein have been duly and validly authorized by all necessary corporate action on the part of Agent, and each of this Agreement and the Letter Agreement is the legal, valid and binding agreement of Agent, enforceable in accordance with its terms, except as the legality, validity, binding nature and enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium, reorganization, conservatorship, receivership or other similar laws relating to or affecting the enforcement of creditors' rights generally, and (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law. (c) Each of Agent and its employees, agents and representatives who shall perform any of the services hereunder shall have, and until the Offerings are consummated or terminated shall maintain, all licenses, approvals and permits necessary to perform such services and shall comply in all material respects with all applicable laws and regulations in connection with the performance of such services. (d) No action, suit, charge or proceeding before the Commission, the NASD, any state securities commission or any court is pending, or to the knowledge of Agent threatened, against Agent which, if determined adversely to Agent, would have a material adverse effect upon the ability of Agent to perform its obligations under this Agreement. (e) Agent is registered as a broker/dealer pursuant to Section 15(b) of the 1934 Act and is a member of the National Association of Securities Dealers, Inc. (the "NASD"). (f) Any funds received in the Offerings by the Agent will be handled by the Agent in accordance with Rule 15c2-4 under the 1934 Act to the extent applicable. 13 SECTION 8. COVENANTS OF THE ALPENA PARTIES. The Alpena Parties hereby jointly and severally covenant with the Agent as follows: (a) The Holding Company will not, at any time after the date the Registration Statement is declared effective, file any amendment or supplement to the Registration Statement without providing the Agent and its counsel an opportunity to review and comment on such amendment or supplement. The Holding Company will furnish promptly to the Agent and its counsel copies of all correspondence from the Commission with respect to the Registration Statement and the Holding Company's responses thereto. (b) The Alpena Parties will not, at any time after the date any Application is approved, file any amendment or supplement to such Application without providing the Agent and its counsel an opportunity to review and comment on such amendment or supplement. The Alpena Parties will furnish promptly to the Agent and its counsel copies of all correspondence from the OTS with respect to the Applications and the Alpena Parties' responses thereto. (c) The Alpena Parties will use their best efforts to cause the OTS to approve the Holding Company's acquisition of the Bank, and will use their best efforts to cause any post-effective amendment to the Registration Statement to be declared effective by the Commission and any post-effective amendment to the Conversion Application to be approved by the OTS, as applicable, and will promptly upon receipt of any information concerning the events listed below notify the Agent (i) when the Registration Statement, as amended, has become effective; (ii) when the Conversion Application as amended, has received the approval of the OTS; (iii) when the Holding Company Application, as amended, has been approved by the OTS; (iv) of the receipt of any comments from the OTS or any other governmental entity with respect to the Conversion or the transactions contemplated by this Agreement; (v) of any request by the Commission, the OTS, or any other governmental entity for any amendment or supplement to the Registration Statement or the Applications or for additional information; (vi) of the issuance by the Commission or the OTS, or any other governmental agency of any order or other action suspending the Offerings or the use of the Registration Statement, the Prospectus, the Members' Proxy Statement, the Stockholders' Proxy Statement or any other filing of the Alpena Parties under the Conversion Regulations or other applicable law, or the threat of any such action; (vii) of the issuance by the Commission or the OTS, or any other state authority of any stop order suspending the effectiveness of the Registration Statement or of the initiation or threat of initiation or threat of any proceedings for that purpose; or (viii) of the occurrence of any event mentioned in subsection (f) below. The Alpena Parties will make every reasonable effort to prevent the issuance by the Commission, the OTS, or any other state authority of any order referred to in (vi) and (vii) above and, if any such order shall at any time be issued, to obtain the lifting thereof at the earliest possible time. (d) The Alpena Parties will deliver to the Agent and to its counsel conformed copies of each of the following documents, with all exhibits: the Applications as originally filed and of each amendment or supplement thereto, and the Registration Statement, as originally filed and each amendment thereto. Further, the Alpena Parties will deliver such additional copies of the foregoing documents to counsel to the Agent as may be required for any NASD filings. In addition, the Alpena Parties will also deliver to the Agent such number of copies of the Prospectus, as amended or supplemented, as the Agent may reasonably request. 14 (e) The Alpena Parties will comply in all material respects with any and all terms, conditions, requirements and provisions with respect to the Conversion and the transactions contemplated thereby imposed by the Commission, by applicable state law and regulations, and by the 1933 Act, the 1933 Act Regulation, the 1934 Act and the 1934 Act Regulations to be complied with prior to the Closing Date; and when the Prospectus is required to be delivered, the Alpena Parties will comply in all material respects, at their own expense, with all requirements imposed upon them by the OTS, the Conversion Regulations (except as modified or waived in writing by the OTS), the Commission, by applicable state law and regulations and by the 1933 Act, the 1934 Act and the rules and regulations of the Commission promulgated under such statutes, in each case as from time to time in force, so far as is necessary to permit the continuance of sales or dealing in shares of Common Stock during such period in accordance with the provisions hereof and the Prospectus. (f) During any period when the Prospectus is required to be delivered, each of the Alpena Parties will inform the Agent of any event or circumstance of which it is or becomes aware as a result of which the Registration Statement and/or Prospectus, as then supplemented or amended, would include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading. If it is necessary, in the reasonable opinion of counsel for the Alpena Parties, to amend or supplement the Registration Statement or the Prospectus in order to correct such untrue statement of a material fact or to make the statements therein not misleading in light of the circumstances existing at the time of their use, the Alpena Parties will, at their expense, prepare, file with the Commission and the OTS, and furnish to the Agent, a reasonable number of copies of an amendment or amendments of, or a supplement or supplements to, the Registration Statement and the Prospectus (after a reasonable time for review by counsel for the Agent) which will amend or supplement the Registration Statement and/or the Prospectus so that as amended or supplemented it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time, not misleading. For the purpose of this subsection, each of the Alpena Parties will furnish such information with respect to itself as the Agent may from time to time reasonably request. (g) Pursuant to the terms of the Plan, the Holding Company will endeavor in good faith, in cooperation with the Agent, to register or to qualify the Shares for offering and sale or to exempt such Shares from registration and to exempt the Holding Company and its officers, directors and employees from registration as broker-dealers, under the applicable securities laws of the jurisdictions in which the Offerings will be conducted; provided, however, that the Holding Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation to do business in any jurisdiction in which it is not so qualified. In each jurisdiction where any of the Shares shall have been registered or qualified as above provided, the Holding Company will make and file such statements and reports as are required by the applicable regulatory authority in connection with such registration or qualification for a period of not less than one year from the effective date of the Registration Statement. (h) Upon consummation of the Conversion, the Bank will establish a liquidation account for the benefit of the Bank's depositors, in accordance with the Plan and the requirements of the Conversion Regulations. 15 (i) The Holding Company will not sell or issue, contract to sell or otherwise dispose of, for a period of 90 days after the date hereof, any shares of Common Stock or securities into or exercisable for shares of Common Stock, without the Agent's prior written consent other than in connection with any plan or arrangement described in the Prospectus. (j) For a period of three years from the date of this Agreement, the Holding Company will furnish to the Agent, as soon as practical after such information is available (i) a copy of each report of the Holding Company furnished to or filed with the Commission under the 1934 Act or any national securities exchange or system on which any class of securities of the Holding Company is listed or quoted, (ii) a copy of each report of the Holding Company mailed to holders of Common Stock, (iii) each press release and material news item and article released by the Holding Company and/or Bank, and (iv) from time-to-time, such other publicly available information concerning the Alpena Parties as the Agent may reasonably request. (k) The Alpena Parties will use the net proceeds from the sale of the Common Stock in the manner set forth in the Prospectus under the caption "Use of Proceeds." (l) The Holding Company and the Bank will distribute the Prospectus or other offering materials in connection with the offering and sale of the Common Stock only in accordance with the Conversion Regulations of the OTS, the 1933 Act and the 1934 Act and the rules and regulations promulgated under such statutes, and the laws of any state in which the shares are qualified for sale. (m) Prior to the Closing Date, the Holding Company shall register its Common Stock under Section 12(g) of the 1934 Act, and will request that such registration statement shall be effective no later than the completion of the Conversion. (n) For so long as the Shares are registered under the 1934 Act, the Holding Company will furnish to its stockholders as soon as practicable after the end of each fiscal year such reports and other information as are required to be furnished to its stockholders under the 1934 Act. (o) The Holding Company will report the use of proceeds of the Offering in accordance with Rule 463 under the 1933 Act Regulations. (p) The Alpena Parties will maintain appropriate arrangements for depositing all funds received from persons mailing subscriptions for or orders to purchase Shares on an interest bearing basis as described in the Prospectus until the Closing Date and satisfaction of all conditions precedent to the release of the Holding Company's obligation to refund payments received from persons subscribing for or ordering Shares in the Offerings, in accordance with the Plan as described in the Prospectus, or until refunds of such funds have been made to the persons entitled thereto or withdrawal authorizations canceled in accordance with the Plan and as described in the Prospectus. The Alpena Parties will maintain such records of all funds received to permit the funds of each subscriber to be separately insured by the FDIC (to the maximum extent allowable) and to enable the Alpena Parties to make the appropriate refunds of such funds in the event that such refunds are required to be made in accordance with the Plan and as described in the Prospectus. 16 (q) The Holding Company will register as a unitary savings and loan holding company under HOLA. (r) The Alpena Parties will take such actions and furnish such information as are reasonably requested by the Agent in order for the Agent to ensure compliance with NASD Rule 2790 (Restrictions on the Purchase and Sale of IPOs of Equity Securities). (s) The Alpena Parties will conduct their businesses in compliance in all material respects with all applicable federal and state laws, rules, regulations, decisions, directives and orders, including all decisions, directives and orders of the Commission, the FDIC and the OTS. (t) The Alpena Parties shall comply with any and all terms, conditions, requirements and provisions with respect to the Conversion and the transactions contemplated thereby imposed by the OTS, the HOLA, the Commission, the 1933 Act, the 1933 Act Regulations, the 1934 Act, the 1934 Act Regulations to be complied with subsequent to the Closing Date. The Holding Company will comply with all provisions of all undertakings contained in the Registration Statement. (u) The Alpena Parties will not amend the Plan without notifying the Agent prior thereto. (v) The Holding Company shall provide the Agent with any information necessary to allow the Agent to manage the allocation process in order to permit the Holding Company to carry out the allocation of the Shares in the event of an oversubscription, and such information shall be accurate and reliable in all material respects. (w) The Holding Company will not deliver the Shares until the Alpena Parties have satisfied or caused to be satisfied each condition set forth in Section 10 hereof, unless such condition is waived in writing by the Agent. (x) Immediately upon completion of the sale by the Holding Company of the Shares, the issuance of the Exchange Shares and the contribution of the Foundation Shares contemplated by the Plan and the Prospectus and the completion of certain transactions necessary to implement the Plan, (i) all of the issued and outstanding shares of capital stock of the Bank shall be owned by the Holding Company, (ii) the Holding Company shall have no direct subsidiaries other than the Bank, and (iii) the Conversion shall have been effected in accordance with all applicable statutes, regulations, decisions and orders; and all terms, conditions, requirements and provisions with respect to the Conversion (except those that are conditions subsequent) imposed by the Commission, the OTS or any other governmental agency, if any, shall have been complied with by the Alpena Parties in all material respects or appropriate waivers shall have been obtained and all notice and waiting periods shall have been satisfied, waived or elapsed. (y) Prior to the Closing Date, the Plan shall have been approved by the voting members of the MHC and the stockholders of the Mid-Tier Holding Company in accordance with the Plan, the Conversion Regulations, the applicable provisions, if any, of the MHC's charter and bylaws and the Members' Proxy Statement and the Stockholders' Proxy Statement. 17 (z) On or before the Closing Date, the Alpena Parties will have used their best efforts to obtain approval for quotation of shares of the Common Stock on the NASDAQ National Market System by the Closing Date and will use its best efforts to maintain such quotation and will have completed all conditions precedent to the Conversion specified in the Plan and the offer and sale of the Shares will have been conducted in all material respects in accordance with the Plan, the Conversion Regulations (except as modified or waived in writing by the OTS) and with all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the Conversion imposed upon any of the Alpena Parties by the OTS, the Commission or any other regulatory authority and in the manner described in the Prospectus. (aa) The Holding Company shall notify the Agent when funds shall have been received for the minimum number of Shares set forth in the Prospectus. (bb) The officers and directors of the Alpena Parties, listed in EXHIBIT C of this Agreement, shall not exercise any stock options providing for the issuance of shares of common stock in the Mid-Tier Holding Company during the Offering or otherwise sell or transfer any shares of Common Stock commencing on the date hereof and continuing for a period of 90 days following the Closing Date (the "Restricted Period"), and each such officer and director shall execute the agreement in the form attached as EXHIBIT D to this Agreement concurrently with the execution of this Agreement. The Alpena Parties shall not honor the exercise of any stock options providing for the issuance of shares of common stock in the Mid-Tier Holding Company by any such officer or director during the Offering, nor shall the Company otherwise assist such officers or directors in connection with the sale or transfer of shares of Common Stock during the Restricted Period. SECTION 9. PAYMENT OF EXPENSES. Whether or not the Conversion is completed or the sale and exchange of the Shares by the Holding Company is consummated, the Alpena Parties will pay for all their expenses incident to the performance of this Agreement, including without limitation: (a) the preparation and filing of the Application and Registration Statement; (b) the preparation, printing, filing, delivery and mailing of the Registration Statement, including the Prospectus, and all documents related to the Offerings and proxy solicitation; (c) all filing fees and expenses in connection with the qualification or registration of the Shares for offer and sale by the Holding Company or the Bank under the securities or "blue sky" laws, including without limitation filing fees, reasonable legal fees and disbursements of counsel in connection therewith, and in connection with the preparation of a blue sky law survey; (d) the filing fees of the NASD related to the Agent's fairness filing under NASD Rule 2710 and the application of the Holding Company to list its shares; (e) fees and expenses related to the preparation of the independent appraisal; (f) fees and expenses related to auditing and accounting services; (g) expenses relating to advertising, temporary personnel, investor meetings and stock information center; (h) transfer agent fees and costs of preparation and distribution of stock certificates; and (i) Nasdaq listing fees. The Alpena Parties also agree to reimburse Agent for reasonable out-of-pocket expenses, including legal fees and expenses, incurred by Agent in connection with the services hereunder. Agent will not incur legal fees (including counsel's out-of-pocket expenses) in excess of $40,000 without the approval of the Mid-Tier Holding Company. The Agent will not incur other out-of-pocket expenses in excess of $25,000 without prior approval of the Mid-Tier Holding Company. In the event that the Agent incurs any expenses on behalf of the Alpena 18 Parties, the Alpena Parties will pay or reimburse the Agent for such expenses regardless of whether the Conversion is successfully completed, and such reimbursements will not be included in the expense limitations set forth in the following paragraph. The Agent will not incur any single expense of more than $1,000 pursuant to this paragraph without the prior approval of the Mid-Tier Holding Company, MHC or the Bank. The Alpena Parties acknowledge, however, that such limitations may be increased by the mutual consent of the Mid-Tier Holding Company and Agent in the event of delay in the Offering requiring the Agent to utilize a Syndicated Community Offering, a delay as a result of circumstances requiring material additional work by Agent or its counsel or an update of the financial information in tabular form contained in the Prospectus for a period later than September 30, 2004, with a "Recent Developments" section as of December 31, 2004. Not later than two days prior to the Closing Date, the Agent will provide the Bank with a detailed accounting of all reimbursable expenses to be paid at the Closing. SECTION 10. CONDITIONS TO THE AGENT'S OBLIGATIONS. The obligations of the Agent hereunder and the occurrence of the Closing and the Conversion are subject to the condition that all representations and warranties of the Alpena Parties herein contained are, at and as of the commencement of the Offerings and at and as of the Closing Date, true and correct, the condition that the Alpena Parties shall have performed, in all material respects, all of their obligations hereunder to be performed on or before such dates and to the following further conditions: (a) The Registration Statement shall have been declared effective by the Commission, the Conversion Application and Holding Company Application shall have been approved by the OTS and no stop order or other action suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or, to the knowledge of the Alpena Parties, threatened by the Commission or any state authority and no order or other action suspending the authorization for use of the Prospectus or the consummation of the Conversion shall have been issued, or proceedings therefor initiated or, to the knowledge of the Alpena Parties, threatened by the OTS, the Commission, or any other governmental body. (b) At the Closing Date, the Agent shall have received: (1) The opinion, dated as of the Closing Date, of Luse, Gorman, Pomerenk & Schick, P.C. and/or local counsel acceptable to the Agent, in form and substance satisfactory to the Agent and counsel for the Agent to the effect that: (i) The Holding Company is a corporation duly organized and validly existing and in good standing under the laws of the State of Maryland, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in Maryland and in each other jurisdiction in which the conduct of its business requires such qualification, except where the failure to qualify would have a Material Adverse Effect. 19 (ii) The MHC is a mutual holding company duly organized and validly existing and in good standing under the laws of the United States, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in each other jurisdiction in which the conduct of its business requires such qualification, except where the failure to qualify would have a Material Adverse Effect. (iii) The Bank is a duly organized and validly existing federally-chartered stock savings association, and upon consummation of the Conversion, the Bank will continue to be a validly existing federally-chartered stock savings association, with full power and authority to own its properties and to conduct its business as described in the Prospectus; the activities of the Bank as described in the Prospectus are permitted by federal law and the rules, regulations and practices of the FDIC and the OTS; the issuance and sale of the capital stock of the Bank to the Holding Company in the Conversion has been duly and validly authorized by all necessary corporate action on the part of the Holding Company and the Bank and, upon payment therefor in accordance with the terms of the Plan, will be validly issued, fully paid and nonassessable and will be owned of record and beneficially by the Holding Company, free and clear of any mortgage, pledge, lien, encumbrance, claim or restriction. FSMC and ICA are validly existing corporations in good standing in the jurisdiction of incorporation and authorized under state and applicable federal law to conduct the businesses in which they now engage. (iv) The activities of the Mid-Tier Holding Company, the MHC and the Bank, as described in the Prospectus, are permitted under applicable federal law. To the best of such counsel's knowledge, each of the MHC, the Mid-Tier Holding Company and the Bank has obtained all licenses, permits, and other governmental authorizations that are material for the conduct of its business, and all such licenses, permits and other governmental authorizations are in full force and effect, and to the best of such counsel's knowledge the Mid-Tier Holding Company and the Bank comply therewith in all material respects. (v) The Bank is a member of the FHLB of Pittsburgh. The Bank is an insured depository institution under the provisions of the Federal Deposit Insurance Act, as amended, and to such counsel's knowledge, no proceedings for the termination or revocation of the federal deposit insurance of the Bank are pending or threatened. (vi) Upon consummation of the Conversion and the contribution of the Foundation Shares to the Foundation, (a) the authorized, issued and outstanding capital stock of the Holding Company will be within the range set forth in the Prospectus under the caption "Capitalization," and no shares of Common Stock have been or will be 20 issued and outstanding prior to the Closing Date (except for the shares issued upon incorporation of the Holding Company to facilitate the Conversion); (b) the Shares to be subscribed for in the Offerings will have been duly and validly authorized for issuance, and when issued and delivered by the Holding Company pursuant to the Plan against payment of the consideration calculated as set forth in the Plan, will be fully paid and nonassessable; (b) the Exchange Shares to be issued in the Exchange will have been duly and validly authorized for issuance, and when issued and delivered by the Holding Company pursuant to the Plan, will be fully paid and nonassessable; (c) the Foundation Shares to be issued to the Foundation will have been duly and validly authorized for issuance, and when issued and contributed by the Holding Company pursuant to the Plan, will be fully paid and nonassessable; and (d) the issuance of the Shares, the Exchange Shares and the Foundation Shares is not subject to preemptive rights under the charter, certificate of incorporation or bylaws of the Holding Company, or arising or outstanding by operation of law or under any contract, indenture, agreement, instrument or other document known to such counsel, except for the subscription rights under the Plan. (vii) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Alpena Parties; and this Agreement constitutes a valid, legal and binding obligation of each of the Alpena Parties, enforceable in accordance with its terms, except as rights to indemnity and contribution thereunder may be limited under applicable law, subject to the qualification that (i) enforcement thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other laws (including the laws of fraudulent conveyance) or judicial decisions affecting the enforceability of creditors' rights generally, the rights of creditors of savings banks or financial institutions, the accounts of which are insured by the FDIC, and (ii) enforcement thereof is subject to general equity principles (regardless of whether such enforceability is considered in a proceeding in equity or at law) and to the effect of certain laws and judicial decisions upon the availability of injunctive relief and enforceability of equitable remedies, including the remedies of specific performance and self-help. (viii) The Plan has been duly adopted by the Board of Directors of the MHC in the manner required by the Conversion Regulations and the MHC's charter and bylaws. (ix) The Conversion Application and the Holding Company Application have been approved by the OTS, and subject to the satisfaction of any conditions set forth in such approvals, no further approval, registration, authorization, consent or other order of any federal or state regulatory agency, public board or body is required in connection with the execution and delivery of this Agreement, the offer, sale and 21 issuance of the Shares, the issuance of the Exchange Shares, the contribution of the Foundation Shares and the consummation of the Conversion, except as may be required under the securities or "blue sky" laws of various jurisdictions as to which no opinion need be rendered. (x) The Registration Statement has become effective under the 1933 Act and to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued, or proceedings for that purpose have been instituted or threatened by the Commission. (xi) The terms and provisions of the shares of Common Stock conform to the description thereof contained in the Registration Statement and the Prospectus, and the form of certificate to be used to evidence the shares of Common Stock are in due and proper form. (xii) At the time the Conversion Application was approved and as of the Closing Date, the Conversion Application (as amended or supplemented), the Prospectus (as amended or supplemented), the Members' Proxy Statement (as amended or supplemented) and the Stockholders' Proxy Statement (as amended or supplemented), complied as to form in all material respects with the requirements of the Conversion Regulations and all applicable laws, rules and regulations and decisions and orders of the OTS, except as modified or waived in writing by the OTS (other than the financial statements, notes to financial statements, financial tables and other financial and statistical data included therein and the appraisal valuation and the business plan as to which counsel need express no opinion). To such counsel's knowledge, no person has sought to obtain regulatory or judicial review of the final action of the OTS in approving the Applications. (xiii) At the time that the Registration Statement became effective and as of the Closing Date, the Registration Statement, including the Prospectus (as amended or supplemented) (other than the financial statements, notes to financial statements, financial tables or other financial and statistical data included therein and the appraisal valuation and the business plan as to which counsel need express no opinion), complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xiv) To such counsel's knowledge, there are no legal or governmental proceedings pending, or threatened (i) asserting the invalidity of this Agreement or (ii) seeking to prevent the Conversion or the offer, sale or issuance of the Shares or the issuance of the Exchange Shares or the Foundation Shares. (xv) The information in the Prospectus under the captions 22 "Regulation," "Taxation," "Restrictions on Acquisition of Alpena Bancshares, Inc.," "Description of Capital Stock of Alpena Bancshares, Inc.," and "The Conversion," to the extent that such information constitutes matters of law, summaries of legal matters, documents or proceedings, or legal conclusions, has been reviewed by such counsel and is accurate in all material respects. (xvi) None of the Alpena Parties are required to be registered as an investment company under the Investment Company Act of 1940. (xvii) None of the Alpena Parties is in violation of its articles of incorporation or its charter, as the case may be, or its bylaws or, to the best of such counsel's knowledge, any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument filed as an exhibit to, or incorporated by reference in, the Registration Statement, which violation would have a Material Adverse Effect. In addition, the execution and delivery of and performance under this Agreement by the Alpena Parties, the incurrence of the obligations set forth herein and the consummation of the transactions contemplated herein will not result in (i) any violation of the provisions of the articles of incorporation or charter, as the case may be, or the bylaws of any of the Alpena Parties, (ii) any violation of any applicable law, act, regulation, or to such counsel's knowledge, order or court order, writ, injunction or decree, and (iii) any violation of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument filed as an exhibit to, or incorporated by reference in, the Registration Statement or otherwise known by such counsel which should have otherwise been filed as an exhibit to the Registration Statement, which violation would have a Material Adverse Effect. (xviii) The Foundation has been duly incorporated and is validly existing as a non-stock corporation in good standing under the laws of the State of Delaware with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; the Foundation is not a savings and loan holding company within the mean of 12 C.F.R. Section 574.2(q) as a result of the issuance of the Foundation Shares to it in accordance with the terms of the Plan and in the amounts as described in the Prospectus; no approvals are required to establish the Foundation and to contribute the Foundation Shares and cash amounts thereto as described in the Prospectus other than those set forth in the OTS' approval order; the Foundation Shares to be issued to the Foundation in accordance with the Plan and as described in the Prospectus will have been duly authorized for issuance and, when issued and contributed by the Company pursuant to the Plan, will be duly and validly issued, fully paid and nonassessable. 23 The Agent's counsel may rely for purposes of its own opinion on the opinion(s) of Luse, Gorman, Pomerenk & Schick, P.C. and/or local counsel, whose opinion(s) shall expressly authorize such reliance. The opinion may be limited to matters governed by the laws of the United States, the corporate laws of the State of Maryland, the non-stock corporation law of the State of Delaware and, in the case of local counsel, the State of Michigan. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the United States, to the extent such counsel deems proper and specified in such opinion, upon the opinion of counsel reasonably acceptable to the Agent, as long as such other opinion indicates that the Agent may rely on the opinion, and (B) as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Alpena Parties and public officials; provided copies of any such opinion(s) or certificates of public officials are delivered to Agent together with the opinion to be rendered hereunder by special counsel to the Alpena Parties. In rendering such opinion, all statements contained therein "to our knowledge" or "to our attention" or "known to us" means the actual knowledge, following reasonable investigation, of the attorneys who have worked on the transactions contemplated herein and, in the case of the opinion rendered in Section 10(b)(1)(xiii), including a docket search in the counties in which the Alpena Parties are located. The opinion of such counsel for the Alpena Parties shall state that it has no reason to believe that the Agent is not reasonably justified in relying thereon. (2) The letter of Luse, Gorman, Pomerenk & Schick, P.C. shall also state that during the preparation of the Registration Statement and the Prospectus, Luse, Gorman, Pomerenk & Schick, P.C. participated in conferences with certain officers of and other representatives of the Alpena Parties, counsel to the Agent, representatives of the independent public accountants for the Alpena Parties and representatives of the Agent at which the contents of the Registration Statement and the Prospectus and related matters were discussed and has considered the matters required to be stated therein and the statements contained therein and, although (without limiting the opinions provided pursuant to Section 10(b)(1)), Luse, Gorman, Pomerenk & Schick, P.C. has not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus, on the basis of the foregoing, nothing has come to the attention of Luse, Gorman, Pomerenk & Schick, P.C. that caused Luse, Gorman, Pomerenk & Schick, P.C. to believe that the Registration Statement at the time it was declared effective by the Commission and as of the Closing Date, contained or contains any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading (it being understood that counsel need express no comment or opinion with respect to statements, notes to financial statements, schedules and other financial and statistical data included, or statistical or appraisal methodology employed, in the Registration Statement or Prospectus, the appraisal valuation or the business plan). (3) The favorable opinion, dated as of the Closing Date, of Muldoon Murphy Faucette & Aguggia LLP, counsel for the Agent, with respect to such matters as the Agent may reasonably require; such opinion may rely, as to matters 24 of fact, upon certificates of officers and directors of the Alpena Parties delivered pursuant hereto or as such counsel may reasonably request. (4) A Blue Sky Memorandum from Luse, Gorman, Pomerenk & Schick, P.C. relating to the offering, including Agent's participation therein, and should be furnished to Agent with a copy thereof addressed to Agent or upon which Luse, Gorman, Pomerenk & Schick, P.C. shall state Agent may rely. The Blue Sky Memorandum will relate to the necessity of obtaining or confirming exemptions, qualifications or the registration of the common stock under applicable state securities law. (c) Concurrently with the execution of this Agreement, the Agent shall receive a letter from Plante & Moran, PLLC, dated the date hereof and addressed to the Agent, such letter (i) confirming that Plante & Moran, PLLC is a firm of independent public accountants within the meaning of the 1933 Act, the 1933 Act Regulations and the PCAOB Regulations, and stating in effect that in Plante & Moran, PLLC's opinion the consolidated financial statements of the Mid-Tier Holding Company included in the Prospectus comply as to form in all material respects with generally accepted accounting principles, the 1933 Act and the 1933 Act Regulations, and the 1934 Act and the 1934 Act Regulations; (ii) stating in effect that, on the basis of certain agreed upon procedures (but not an audit examination in accordance with the auditing standards of the PCAOB) consisting of a review (in accordance with Statement of Auditing Standards No. 100, Interim Financial Information) of the unaudited consolidated interim financial statements of the Mid-Tier Holding Company prepared by the Alpena Parties as of and for the interim period ended September 30, 2004 and quarter ended December 31, 2004, a reading of the minutes of the meetings of the Board of Directors, Executive Committee, Audit Committee and stockholders of the Mid-Tier Holding Company and the Bank and consultations with officers of the Mid-Tier Holding Company and the Bank responsible for financial and accounting matters, nothing came to their attention which caused them to believe that: (A) such unaudited consolidated financial statements and any "Recent Developments" information in the Prospectus are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Prospectus; or (B) during the period from the date of the recent development financial information included in the Prospectus to a specified date not more than five (5) business days prior to the date of the Prospectus, there was any material increase in borrowings (defined as securities sold under agreements to repurchase and any other form of debt other than deposits), or non-performing loans, special mention loans or decrease in the deposits or loan allowance, total assets, stockholders' equity or there was any change in common stock outstanding (other than for stock option plans) at the date of such letter as compared with amounts shown in the September 30, 2004 unaudited statement of condition included in the Prospectus or there was any decrease in net income, non-interest income, provision for loan losses or net income after provision or increase in non-interest expense of the Bank for the period commencing immediately after the recent development date and ended not more than five (5) business days prior to the date of the Prospectus as compared to the corresponding period in the preceding year; and (iii) stating that, in addition to the audit examination referred to in its opinion included in the Prospectus and the performance of the procedures referred to in clause (ii) of this subsection (c), they have compared with the general accounting records of the Mid-Tier Holding Company, which are subject to the internal controls of the accounting system of the Bank and other data 25 prepared by the Alpena Parties from accounting records, to the extent specified in such letter, such amounts and/or percentages set forth in the Prospectus as the Agent may reasonably request, and they have found such amounts and percentages to be in agreement therewith (subject to rounding). (d) At the Closing Date, the Agent shall receive a letter from Plante & Moran, PLLC dated the Closing Date, addressed to the Agent, confirming the statements made by its letter delivered by it pursuant to subsection (c) of this Section 10, the "specified date" referred to in clause (ii)(B) thereof to be a date specified in such letter, which shall not be more than three (3) business days prior to the Closing Date. (e) At the Closing Date, counsel to the Agent shall have been furnished with such documents and opinions as counsel for the Agent may require for the purpose of enabling them to advise the Agent with respect to the issuance and sale of the Common Stock as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations and warranties, or the fulfillment of any of the conditions herein contained. (f) At the Closing Date, the Agent shall receive a certificate of the Chief Executive Officer and Chief Financial Officer of each of the Alpena Parties, dated the Closing Date, to the effect that: (i) they have examined the Registration Statement and at the time the Registration Statement became authorized for final use, the Prospectus did not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading; (ii) there has not been, since the respective dates as of which information is given in the Registration Statement, any Material Adverse Effect otherwise than as set forth or contemplated in the Registration Statement; (iii) the representations and warranties contained in Section 6 of this Agreement are true and correct with the same force and effect as though made at and as of the Closing Date; (iv) the Alpena Parties have complied in all material respects with all material agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date including the conditions contained in this Section 10; (v) no stop order has been issued or, to the best of their knowledge, is threatened, by the Commission or any other governmental body; (vi) no order suspending the Offering, the Conversion, the acquisition of all of the shares of the Bank by the Holding Company, the transactions required under the Plan to consummate the conversion or the effectiveness of the Prospectus has been issued and to the best of their knowledge, no proceedings for any such purpose have been initiated or threatened by the OTS, the Commission, or any other federal or state authority; (vii) to the best of their knowledge, no person has sought to obtain regulatory or judicial review of the action of the OTS in approving the Plan or to enjoin the Conversion, and (viii) that the officers and directors of the Alpena Parties have agreed to abide by the restrictions on the exercise of options and sale of Common Stock set forth in Section 8(aa). (g) At the Closing Date, the Agent shall receive a letter from RP Financial, LC., dated as of the Closing Date, (i) confirming that said firm is independent of the Alpena Parties and is experienced and expert in the area of corporate appraisals, (ii) stating in effect that the Appraisal complies in all material respects with the applicable requirements of the Conversion Regulations, and (iii) further stating that its opinion of the aggregate pro forma market value of the Alpena Parties, as converted, expressed in the appraisal as most recently updated, remains in effect. 26 (h) None of the Alpena Parties shall have sustained, since the date of the latest financial statements included in the Registration Statement and Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth in the Registration Statement and the Prospectus, and since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall not have been any Material Adverse Effect, is in the Agent's reasonable judgment sufficiently material and adverse as to make it impracticable or inadvisable to proceed with the Offering or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus. (i) Prior to and at the Closing Date, in the reasonable opinion of the Agent there shall have been no material adverse change in the financial condition or in the earnings, business affairs or prospects of any of the Alpena Parties independently, or the Alpena Parties taken as a whole, from and as of the latest dates as of which such condition is set forth in the Prospectus, except as referred to therein. (j) At or prior to the Closing Date, the Agent shall receive (i) a copy of the Conversion Application and a copy of the letters from the OTS approving the Conversion Application and authorizing the Prospectus, Members' Proxy Statement and Stockholders' Proxy Statement for use, (ii) a copy of the order from the Commission declaring the Registration Statement effective, (iii) a certified copy of the certificate of incorporation of the Holding Company, (iv) a copy of the letter from the OTS approving the Holding Company Application, (v) a certificate from the FDIC evidencing the Bank's insurance of accounts, and (vi) any other documents that Agent shall reasonably request. (k) Subsequent to the date hereof, there shall not have occurred any of the following: (i) a suspension or limitation in trading in securities generally on the New York Stock Exchange or American Stock Exchange or in the over-the-counter market, or quotations halted generally on the Nasdaq Stock Market, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required by either of such exchanges or the NASD or by order of the Commission or any other governmental authority other than temporary trading halts or limitation (A) imposed as a result of intraday changes in the Dow Jones Industrial Average, (B) lasting no longer than until the regularly scheduled commencement of trading on the next succeeding business-day and (C) which when combined with all other such halts occurring during the previous five (5) business days, total less than two (2); (ii) a general moratorium on the operations of federally-insured financial institutions or a general moratorium on the withdrawal of deposits from commercial banks or other federally-insured financial institutions declared by either federal or state authorities; or (iii) there shall not have occurred any material adverse change in the financial markets in the United States or elsewhere or any outbreak of hostilities or escalation thereof or other calamity or crisis, including, without limitation, terrorist activities after the date hereof, the effect of which, in the judgment of the Agent, is so material and adverse as to make it impracticable to market the Shares or to enforce contracts, including subscriptions or purchase orders, for the sale of the Shares. 27 (l) All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to the Agent and to counsel for the Agent. Any certificate signed by an officer of the Mid-Tier Holding Company, the Holding Company or the Bank and delivered to the Agent or to counsel for the Agent shall be deemed a representation and warranty by the Mid-Tier Holding Company, the Holding Company or the Bank, as the case may be, to the Agent as to the statements made therein. SECTION 11. INDEMNIFICATION. (a) The Alpena Parties jointly and severally agree to indemnify and hold harmless the Agent, its officers, directors, agents, attorneys, servants and employees and each person, if any, who controls the Agent within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act, against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses, subject to the limitation set forth in the last sentence of subsection (c) below), joint or several, that the Agent or any of such officers, directors, agents, attorneys, servants, employees and controlling Persons (collectively, the "Related Persons") may suffer or to which the Agent or the Related Persons may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse the Agent and any Related Persons upon written demand for any reasonable expenses (including reasonable fees and disbursements of counsel and Agent's time spent according to normal hourly rates) incurred by the Agent or any Related Persons in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions: (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), the Applications, or other instrument or document of the Alpena Parties or based upon written information supplied by any of the Alpena Parties filed in any state or jurisdiction to register or qualify any or all of the Shares under the securities laws thereof (collectively, the "Blue Sky Applications"), or any application or other document, advertisement, or communication ("Sales Information") prepared, made or executed by or on behalf of any of the Alpena Parties with its consent or based upon information furnished by or on behalf of any of the Alpena Parties, in order to qualify or register the Shares under the securities laws thereof, (ii) arise out of or are based upon the omission or alleged omission to state in any of the foregoing documents or information, a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) arise from any theory of liability whatsoever relating to or arising from or based upon the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), the Applications, any Blue Sky Applications or Sales Information or other documentation distributed in connection with the Offerings; or (iv) result from any claims made with respect to the accuracy, reliability and completeness of the records of Eligible Account Holders and Supplemental Eligible Account Holders or Other Members or for any denial or reduction of a subscription or order to purchase Common Stock, whether as a result of a properly calculated allocation pursuant to the Plan or otherwise, based upon such records; provided, however, that no indemnification is required under this subsection (a) to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue material statements or alleged untrue material statements in, or material omission or alleged 28 material omission from, the Registration Statement (or any amendment or supplement thereto) or the Prospectus (or any amendment or supplement thereto), the Applications, the Blue Sky Applications or Sales Information or other documentation distributed in connection with the Conversion made in reliance upon and in conformity with information furnished to the Alpena Parties by the Agent or its representatives (including counsel) with respect to the Agent expressly for use in the Registration Statement (or any amendment or supplement thereto) or Prospectus (or any amendment or supplement thereto) under the caption "The Conversion -- Plan of Distribution; Selling Agent Compensation" except for information derived from the Prospectus. Provided further, that the Alpena Parties will not be responsible for any loss, liability, claim, damage or expense to the extent a court of competent jurisdiction finds they result primarily from material oral misstatements by the Agent to a purchaser of Shares which are not based upon information in the Registration Statement or Prospectus, or from actions taken or omitted to be taken by the Agent in bad faith or from the Agent's gross negligence or willful misconduct and the Agent agrees to repay to the Alpena Parties any amounts advanced to it by the Alpena Parties in connection with matters as to which it is found by a court of competent jurisdiction not to be entitled to indemnification hereunder. (b) The Agent agrees to indemnify and hold harmless the Alpena Parties, their directors and officers, agents, servants and employees and each person, if any, who controls any of the Alpena Parties within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses, subject to the limitation set forth in the last sentence of subsection (c) below), joint or several, which they, or any of them, may suffer or to which they, or any of them, may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse the Alpena Parties and any such persons upon written demand for any reasonable expenses (including out-of-pocket expenses, fees and disbursements of counsel) incurred by them in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment or supplement thereto), the Applications or any Blue Sky Applications or Sales Information or are based upon the omission or alleged omission to state in any of the foregoing documents a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Agent's obligations under this Section 11(b) shall exist only if and only to the extent that such untrue statement or alleged untrue statement was made in, or such material fact or alleged material fact was omitted from, the Applications, Registration Statement (or any amendment or supplement thereto) or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with information furnished to the Alpena Parties by the Agent or its representatives (including counsel) expressly for use under the caption "The Conversion - Plan of Distribution; Selling Agent Compensation." (c) Each indemnified party shall give prompt written notice to each indemnifying party of any action, proceeding, claim (whether commenced or threatened), or suit instituted against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have on account of this Section 11, Section 12 or otherwise, unless the failure to give such notice promptly results 29 in material prejudice to the indemnifying party. An indemnifying party may participate at its own expense in the defense of such action. In addition, if it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it reasonably acceptable to the indemnified parties that are defendants in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them that are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action, proceeding or claim, other than reasonable costs of investigation. In no event shall the indemnifying parties be liable for the fees and expenses of more than one separate firm of attorneys (unless an indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or in addition to those of other indemnified parties) for all indemnified parties in connection with any one action, proceeding or claim or separate but similar or related actions, proceedings or claims in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party, shall be liable for any settlement of any action, proceeding or suit, which settlement is effected without its prior written consent. The Alpena Parties shall not, without the written consent of the Agent, settle or compromise any claim against them based upon circumstances giving rise to an indemnification claim against the Alpena Parties hereunder unless such settlement or compromise provides that the Agent and the other indemnified parties shall be unconditionally and irrevocably released from all liability in respect to such claim. (d) The agreements contained in this Section 11 and in Section 12 hereof and the representations and warranties of the Alpena Parties set forth in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of the Agent or its officers, directors, controlling persons, agents, attorneys, servants or employees or by or on behalf of any of the Alpena Parties or any officers, directors, controlling persons, agents, attorneys , servants or employees of any of the Alpena Parties; (ii) delivery of and payment hereunder for the Shares; or (iii) any termination of this Agreement. Notwithstanding the prior sentence, Sections 11 and 12 hereof are subject to and limited by Section 23A of the Federal Reserve Act, as applicable. SECTION 12. CONTRIBUTION. (a) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 11 is due in accordance with its terms but is for any found in a final judgment by a court to be unavailable from the Alpena Parties or the Agent, the Alpena Parties and the Agent shall contribute to the aggregate losses, claims, damages and liabilities of the nature contemplated by such indemnification (including any investigation, legal and other expenses incurred in connection therewith and any amount paid in settlement of any action, suit, or proceeding of any claims asserted, but after deducting any contribution received by the Alpena Parties or the Agent from persons other than the other party thereto, who may also be liable for contribution) in such proportion so that (i) the Agent is responsible for that portion represented by the percentage that the fees paid to the Agent pursuant to Section 4 of this Agreement (not including expenses) ("Agent's Fees"), less any portion of Agent's Fees paid by 30 Agent to Assisting Brokers, bear to the total proceeds received by the Alpena Parties from the sale of the Shares in the Offering, net of all expenses of the Offering, except Agent's fees and (ii) the Alpena Parties shall be responsible for the balance. If, however, the allocation provided above is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 11 above, then each indemnifying party shall contribute to such amount paid or payable to such indemnified party in such proportion as is appropriate to reflect not only such relative fault of the Alpena Parties on the one hand and the Agent on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, proceedings or claims in respect thereof), but also the relative benefits received by the Alpena Parties on the one hand and the Agent on the other from the Offering, as well as any other relevant equitable considerations. The relative benefits received by the Alpena Parties on the one hand and the Agent on the other hand shall be deemed to be in the same proportion as the total proceeds from the Offering, except Agent's fees, net of all expenses of the Offering, received by the Alpena Parties bear, with respect to the Agent, to the total fees (not including expenses) received by the Agent less the portion of such fees paid by the Agent to Assisting Brokers. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Alpena Parties on the one hand or the Agent on the other and the parties relative intent, good faith, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Alpena Parties and the Agent agree that it would not be just and equitable if contribution pursuant to this Section 12 were determined by pro-rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 12. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or action, proceedings or claims in respect thereof) referred to above in this Section 12 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, proceeding or claim. It is expressly agreed that the Agent shall not be liable for any loss, liability, claim, damage or expense or be required to contribute any amount which in the aggregate exceeds the amount paid (excluding reimbursable expenses) to the Agent under this Agreement less the portion of such fees paid by the Agent to Assisting Brokers. It is understood and agreed that the above-stated limitation on the Agent's liability is essential to the Agent and that the Agent would not have entered into this Agreement if such limitation had not been agreed to by the parties to this Agreement. No person found guilty of any fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution with respect to any loss or liability arising from such misrepresentation from any person who was not found guilty of such fraudulent misrepresentation. The duties, obligations and liabilities of the Alpena Parties and the Agent under this Section 12 and under Section 11 shall be in addition to any duties, obligations and liabilities which the Alpena Parties and the Agent may otherwise have. For purposes of this Section 12, each of the Agent's and the Alpena Parties' officers, directors and, controlling persons within the meaning of the 1933 Act and the 1934 Act shall have the same rights to contribution as the Alpena Parties and the Agent. Any party entitled to contribution, promptly after receipt of notice of commencement of any action, suit, claim or proceeding against such party in respect of which a claim for contribution may be made against another party under this Section 12, will notify such party from whom contribution may be sought, but the omission to so 31 notify such party shall not relieve the party from whom contribution may be sought from any other obligation it may have hereunder or otherwise than under this Section 12. SECTION 13. SURVIVAL. (a) All representations, warranties and indemnities and other statements contained in this Agreement (and in Paragraph 11 of the Letter Agreement), or contained in certificates of officers of the Alpena Parties or the Agent submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of the Agent or its controlling persons, or by or on behalf of the Alpena Parties and shall survive the issuance of the Shares, and any legal representative, successor or assign of the Agent, any of the Alpena Parties, and any indemnified person shall be entitled to the benefit of the respective agreements, indemnities, warranties and representations. (b) The provisions of Paragraph 9 of the Letter Agreement, "Availability of `Stars' Program," shall survive the issuance of the Shares (but not any termination or cancellation of this Agreement) for a period of five (5) years, and any legal representative, successor or assign of the Agent, and any of the Alpena Parties shall be entitled during such period to the benefit of the agreements contained therein. SECTION 14. TERMINATION. Agent may terminate this Agreement by giving the notice indicated below in this Section at any time after this Agreement becomes effective as follows: (a) In the event (i) the Plan is abandoned or terminated by the Holding Company; (ii) the Holding Company fails to consummate the sale of the minimum number of Shares prior to December 31, 2005 in accordance with the provisions of the Plan or as required by the Conversion Regulations and applicable law; (iii) the Agent terminates this Agreement because there has been a material adverse change in the financial condition or operations of the Mid-Tier Holding Company since June 30, 2004; or (iv) immediately prior to commencement of the Offering, the Agent terminates this relationship because in its opinion, which shall have been formed in good faith after reasonable determination and consideration of all relevant factors, there has been a failure to satisfactorily disclose all relevant information in the Prospectus or the existence of market conditions which might render the sale of the Shares inadvisable, this Agreement shall terminate and the Alpena Parties shall refund to each person who has subscribed for or ordered any of the Shares the full amount which it may have received from such person, together with interest in accordance with Section 3 hereof and any such termination shall be without liability of any party to any other party except as otherwise provided in Sections 3, 4, 9, 11 and 12 hereof and Paragraph 11 of the Letter Agreement, "Indemnification." (b) If any of the conditions specified in Section 10 hereof shall not have been fulfilled when and as required by this Agreement, or by December 31, 2005, or waived in writing by the Agent, this Agreement and all of the Agent's obligations hereunder may be canceled by the Agent by notifying the Bank of such cancellation in writing at any time at or prior to the Closing Date, and any such cancellation shall be without liability of any party to any other party except as otherwise provided in Sections 3, 4, 9, 11 and 12 hereof and Paragraph 11 of the Letter Agreement, "Indemnification." 32 (c) If Agent elects to terminate this Agreement as provided in this Section, the Alpena Parties shall be notified by the Agent as provided in Section 15 hereof. (d) If this Agreement is terminated in accordance with the provisions of this Agreement, the Agent shall retain the advisory and management fee paid to it pursuant to Section 4 and the Alpena Parties shall reimburse the Agent for any of its other actual, accountable, reasonable out-of-pocket expenses pursuant to Section 9, including without limitation, communication, legal and travel expenses. SECTION 15. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to Agent shall be directed to Ryan Beck & Co., Inc., 18 Columbia Turnpike, Florham Park, New Jersey 07932, Attention: Michael A. Schechter, Vice President (with a copy to Muldoon Murphy Faucette & Aguggia LLP, 5101 Wisconsin Avenue, N.W., Washington, D.C. 20016, Attention: Paul M. Aguggia, Esq.); notices to the Alpena Parties shall be directed to Alpena Bancshares, Inc., 100 South Second Avenue, Alpena, Michigan 49707, Attention: Martin A. Thomson, President and Chief Executive Officer (with a copy to Luse, Gorman, Pomerenk & Schick, P.C., 5535 Wisconsin Avenue, N.W., Washington, D.C. 20005, Attention: Robert B. Pomerenk, Esq.) SECTION 16. PARTIES. This Agreement shall inure to the benefit of and be binding upon the Agent and the Alpena Parties, and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons and officers and directors referred to in Sections 11 and 12 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provisions herein contained. It is understood and agreed that this Agreement is the exclusive agreement among the parties, supersedes any prior Agreement among the parties and may not be varied except by a writing signed by all parties, except for Paragraphs 4, 10, 11 and 17 of the Letter Agreement, which are not hereby superseded. SECTION 17. PARTIAL INVALIDITY. In the event that any term, provision or covenant herein or the application thereof to any circumstances or situation shall be invalid or unenforceable, in whole or in part, the remainder hereof and the application of said term, provision or covenant to any other circumstance or situation shall not be affected thereby, and each term, provision or covenant herein shall be valid and enforceable to the full extent permitted by law. SECTION 18. CONSTRUCTION AND WAIVER OF JURY TRIAL. This Agreement shall be construed in accordance with the laws of the State of New Jersey. EACH OF THE ALPENA PARTIES AND THE AGENT WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) RELATED TO OR ARISING OUT OF THIS AGREEMENT. [THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY] 33 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between you and us in accordance with its terms. Very truly yours, ALPENA BANCSHARES, MHC By: --------------------------------------------- Martin A. Thomson President and Chief Executive Officer ALPENA BANCSHARES, INC. By: --------------------------------------------- Martin A. Thomson President and Chief Executive Officer FIRST FEDERAL OF NOTHERN MICHIGAN BANCORP, INC. (in organization) By: --------------------------------------------- Martin A. Thomson President and Chief Executive Officer FIRST FEDERAL OF NORTHERN MICHIGAN By: --------------------------------------------- Martin A. Thomson President and Chief Executive Officer The foregoing Agency Agreement is hereby confirmed and accepted as of the date first set forth above. RYAN BECK & CO., INC. By: ------------------------------ Michael A. Schechter Vice President 34 EXHIBIT A LETTER AGREEMENT EXHIBIT B SELECTED DEALERS AGREEMENT _____________, 2004 Ryan Beck & Co., Inc. 220 South Orange Avenue Livingston, New Jersey 07039 Gentlemen: (1) GENERAL. We understand that Ryan Beck & Co., Inc. ("Ryan Beck") is entering into this Agreement with us and other firms who may be offered the right to purchase as principal a portion of securities being distributed to the public. The terms and conditions of this Agreement shall be applicable to any public offering of securities ("Securities") pursuant to a registration statement filed under the Securities Act of 1933 (the "Securities Act") or exempt from registration thereunder (other than a public offering of Securities effected wholly outside the United States of America), wherein Ryan Beck (acting for its own account or for the account of any underwriting or similar group or syndicate) is responsible for managing or otherwise implementing the sale of the Securities to selected dealers ("Selected Dealers") and has informed us that such terms and conditions shall be applicable. Any such offering of Securities to us as a Selected Dealer is hereinafter called an "Offering." In the case of any Offering in which you are acting for the account of any underwriting or similar group or syndicate ("Underwriters"), the terms and conditions of this Agreement shall be for the benefit of, and binding upon, such Underwriters, including, in the case of any Offering in which you are acting with others as representatives of Underwriters, such other representatives. The term "preliminary prospectus" means any preliminary prospectus relating to an Offering of Securities or any preliminary prospectus supplement together with a prospectus relating to an Offering of Securities; the term "Prospectus" means the prospectus, together with the final prospectus supplement, if any, relating to an Offering of Securities, filed pursuant to Rule 424(b) or Rule 424(c) under the Securities Act or any successor or similar rules. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof and supersedes any prior oral or written agreements or understanding between the parties hereto or their predecessors with respect to the subject matter hereof. (2) CONDITIONS OF OFFERING, ACCEPTANCE AND PURCHASE. Any Offering will be subject to delivery of the Securities and their acceptance by you and any other Underwriters, may be subject to the approval of all legal matters by counsel and the satisfaction of other conditions, and may be made on the basis of reservation of Securities or an allotment against subscription. You will advise us by telegram, telex, facsimile, e-mail, or other form of written communication ("Written Communication") of the particular method and supplementary terms and conditions (including, without limitation, the information as to prices and offering date referred to in Section 3(c)) of any Offering in which we are invited to participate. To the extent such supplementary terms and conditions are inconsistent with any provision herein, such terms and conditions shall supersede any such provision. Unless otherwise indicated in any such Written Communication, acceptances and other communications by us with respect to any Offering should be sent to Ryan Beck. You may close the subscription books at any time in your sole discretion without notice, and you reserve the right to reject any acceptance in whole or in part. Payment for Securities purchased by us is to be made at such office as you may designate, at the public offering price, or, if you shall so advise us, at such price less the concession to dealers or at the price set forth or indicated in a Written Communication, on such date as you shall determine, on one day's prior notice to us, by wire transfer to a Ryan Beck account, against delivery of certificates or other forms evidencing such Securities. If payment is made for Securities purchased by us at the public offering price, the concession to which we shall be entitled will be paid to us upon termination of the provisions of Section 3(c) with respect to such Securities. Unless we promptly give you written instructions otherwise, if transactions in the Securities may be settled through the facilities of The Depository Trust Company, delivery of Securities purchased by us will be made through such facilities if we are a member, or if we are not a member, settlement may be made through our ordinary correspondent who is a member. (3) REPRESENTATIONS, WARRANTIES, AND AGREEMENTS. (a) REGISTERED OFFERINGS. In the case of any Offering of Securities that are registered under the Securities Act ("Registered Offering"), you shall provide us with such number of copies of each preliminary prospectus, the Prospectus and any supplement thereto relating to each Registered Offering as we may reasonably request for the purposes contemplated by the Securities Act and the Securities Exchange Act of 1934 (the "Exchange Act") and the applicable Rules and regulations of the Securities and Exchange Commission thereunder. We represent that we are familiar with Rule 15c2-8 under the Exchange Act relating to the distribution of preliminary and final prospectuses and agree that we will comply therewith. We agree to keep an accurate record of our distribution (including dates, number of copies, and persons to whom sent) of copies of the Prospectus or any preliminary prospectus (or any amendment or supplement to any thereof), and promptly upon request by you, to bring all subsequent changes to the attention of anyone to whom such material shall have been furnished. We agree to furnish to persons who receive a confirmation of sale a copy of the Prospectus filed pursuant to Rule 424(b) or Rule 424(c) under the Securities Act. We agree that in purchasing Securities in a Registered Offering we will rely upon no statements whatsoever, written or oral, other than the statements in the Prospectus delivered to us by you. We will not be authorized by the issuer or other seller of Securities offered pursuant to a Prospectus or by any Underwriter to give any information or to make any representation not contained in the Prospectus in connection with the sale of such Securities. (b) OFFERINGS PURSUANT TO OFFERING CIRCULAR. In the case of any Offering of Securities, other than a Registered Offering, which is made pursuant to an offering circular or other document comparable to a prospectus in a Registered Offering, including, without limitation, an Offering of "exempted securities" as defined in Section 3(a)(2) of the Securities Act (an "Exempted Securities Offering"), you shall provide us with such number of copies of each preliminary offering circular, the final offering circular and any supplement thereto relating to each Offering as we may reasonably request. We agree that we will comply with the applicable federal and state laws, and the applicable rules and regulations of any regulatory body 2 promulgated thereunder, governing the use and distribution of offering circulars by brokers or dealers. We agree that in purchasing Securities pursuant to an offering circular we will rely upon no statements whatsoever, written or oral, other than the statements in the final offering circular delivered to us by you. We will not be authorized by the issuer or other seller of Securities offered pursuant to an offering circular or by any Underwriter to give any information or to make any representation not contained in the offering circular in connection with the sale of such Securities. (c) OFFER AND SALE TO THE PUBLIC. With respect to any Offering of Securities, you will inform us by a Written Communication of the public offering price, the selling concession, the reallowance (if any) to dealers, and the time when we may commence selling Securities to the public. After such public offering has commenced, you may change the public offering price, the selling concession, and the reallowance to dealers. With respect to each Offering of Securities, until the provisions of this Section 3(c) shall be terminated pursuant to Section 5, we agree to offer Securities to the public only at the public offering price, except that if a reallowance is in effect, a reallowance from the public offering price not in excess of such reallowance may be allowed as consideration for services rendered in distribution to dealers who are actually engaged in the investment banking or securities business, who execute the written agreement prescribed by Rule 2740 of the Rules of Conduct of the National Association of Securities Dealers, Inc. (the "NASD") and who are either members in good standing of the NASD or foreign brokers or dealers not eligible for membership in the NASD who represent to us that they will promptly reoffer such Securities at the public offering price and will abide by the conditions with respect to foreign brokers and dealers set forth in Section 3(f) hereof. (d) STABILIZATION AND OVERALLOTMENT. You may, with respect to any Offering, be authorized to over-allot in arranging sales to Selected Dealers, to purchase and sell Securities, any other securities of the issuer of the Securities of the same class and series and any other securities of such issuer that you may designate for long or short account, and to stabilize or maintain the market price of the Securities. We agree not to purchase and sell Securities for which an order from a client has not been received without your consent in each instance. We agree to advise you from time to time upon request, prior to the termination of the provisions of Section 3(c) with respect to any Offering, of the amount of Securities purchased by us hereunder remaining unsold and we will, upon your request, sell to you, for the accounts of the Underwriters, such amount of Securities as you may designate, at the public offering price thereof less an amount to be determined by you not in excess of the concession to dealers. In the event that prior to the later of (i) the termination of the provisions of Section 3(c) with respect to any Offering, or (ii) the covering by you of any short position created by you in connection with such Offering for your account or the account of one or more Underwriters, you purchase or contract to purchase for the account of any of the Underwriters, in the open market or otherwise, any Securities theretofore delivered to us, you reserve the right to withhold the above-mentioned concession to dealers on such Securities if sold to us at the public offering price, or if such concession has been allowed to us through our purchase at a net price, we agree to repay such concession upon your demand, plus in each case any taxes on redelivery, commissions, accrued interest, and dividends paid in connection with such purchase or contract to purchase. (e) OPEN MARKET TRANSACTIONS. We agree to abide by Regulation M under the Exchange Act and we agree not to bid for, purchase, attempt to purchase, or sell, directly or 3 indirectly, any Securities, any other Reference Securities (as defined in Regulation M) of the issuer, or any other securities of such issuer as you may designate, except as brokers pursuant to unsolicited orders and as otherwise provided in this Agreement. If the Securities are common stock or securities convertible into common stock, we agree not to effect, or attempt to induce others to effect, directly or indirectly, any transactions in or relating to any stock of such issuer, except to the extent permitted by Rule 101 of Regulation M under the Exchange Act. (f) NASD. We represent that we are actually engaged in the investment banking or securities business and we are either (i) a member in good standing of the NASD, (ii) if not such a member, a foreign dealer not eligible for membership, or (iii) solely in connection with an Exempted Securities Offering, a bank, as defined in Section 3(a)(6) of the Exchange Act, that does not otherwise fall within provision (i) or (ii) of this sentence (a "Bank"). If we are a member as described in (i), we agree that in making sales of the Securities we will comply with all applicable interpretative materials and Conduct Rules of the NASD, including, without limitation, Conduct Rules 2740 (relating to Selling Concessions, Discounts and Other Allowances) and 2790 (relating to New Issues). If we are a foreign dealer as described in (ii), we agree not to offer or sell any Securities in the United States of America, its territories or its possessions or to persons who are citizens thereof or residents therein (other than through you), and in making sales of Securities outside the United States of America we agree to comply as though we were a member with Conduct Rules 2730 (relating to Securities Taken in Trade), 2740 (relating to Selling Concessions), 2750 (relating to Transactions with Related Persons) and 2790 (relating to New Issues) as though we were such a member and to comply with Conduct Rule 2420 (relating to Dealing with Non-Members) as it applies to a nonmember broker or dealer in a foreign country. In connection with an Exempted Securities Offering, if we are a Bank, we agree to also comply, as though we were an NASD member, with the provision of Rules 2730, 2740 and 2750 of the Conduct Rules. We further represent, by our participating in an Offering, that we have provided to you all documents and other information required to be filed with respect to us, any related person or any person associated with us or any such related person pursuant to the supplementary requirements of the NASD's interpretation with respect to review of corporate financing as such requirements relate to such Offering. We further agree that, in connection with any purchase of Securities from you that is not otherwise covered by the terms of this Agreement (whether you are acting as manager, as member of an underwriting syndicate or a selling group or otherwise), if a selling concession, discount or other allowance is granted to us, the preceding paragraph will be applicable. (g) RELATIONSHIP AMONG UNDERWRITERS AND SELECTED DEALERS. You may buy Securities from or sell Securities to any Underwriter or Selected Dealer and, with your consent, the Underwriters (if any) and the Selected Dealers may purchase Securities from and sell Securities to each other at the public offering price less all or any part of the concession. We are not authorized to act as agent for you or any Underwriter or the issuer or other seller of any Securities in offering Securities to the public or otherwise. Nothing contained herein or in any Written Communication from you shall constitute the Selected Dealers partners with you or any Underwriter or with one another. If the Selected Dealers, among themselves or with the Underwriters, should be deemed to constitute a partnership for federal income tax purposes, then we elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986 and agree not to take any position inconsistent with that election. 4 We authorize you, in your discretion, to execute and file on our behalf such evidence of that election as may be required by the Internal Revenue Service. Neither you nor any Underwriter shall be under any obligation to us except for obligations assumed hereby or in any Written Communication from you in connection with any Offering. In connection with any Offering, we agree to pay our proportionate share of any tax, claim, demand, or liability asserted against us, and the other Selected Dealers or any of them, or against you or the Underwriters, if any, based on any claim that such Selected Dealers or any of them constitute an association, unincorporated business, or other separate entity, including in each case our proportionate share of any expense incurred in defending against any such tax, claim, demand, or liability. (h) BLUE SKY LAWS. Upon application to you, you will inform us as to the jurisdictions in which you believe the Securities have been qualified for sale or are exempt under the respective securities or "blue sky" laws of such jurisdictions. We understand and agree that compliance with the securities or "blue sky" laws in each jurisdiction in which we shall offer or sell any of the Securities shall be our sole responsibility and that you assume no responsibility or obligations as to the eligibility of the Securities for sale or our right to sell the Securities in any jurisdiction. (i) COMPLIANCE WITH LAW. We agree that in selling Securities pursuant to any Offering (which agreement shall also be for the benefit of the issuer or other seller of such Securities), we will comply with the applicable provisions of the Securities Act and the Exchange Act, the applicable Rules and regulations of the Securities and Exchange Commission thereunder, the applicable Rules and regulations of the NASD, the applicable Rules and regulations of any securities exchange having jurisdiction over the Offering, and the applicable laws, rules and regulations specified in Section 3(c) hereof. Without limiting the foregoing, (a) we agree that, at all times since we were invited to participate in an Offering of Securities, we have complied with the provisions of Regulation M applicable to such Offering, in each case after giving effect to any applicable exemptions and (b) we represent that our incurrence of obligations hereunder in connection with any Offering of Securities will not result in the violation by us of Rule 15c3-1 under the Exchange Act, if such requirements are applicable to us. You shall have full authority to take such action as you may deem advisable in respect of all matters pertaining to any Offering. Neither you nor any Underwriter shall be under any liability to us, except for lack of good faith and for obligations expressly assumed by you in this Agreement; PROVIDED, HOWEVER, that nothing in this sentence shall be deemed to relieve you from any liability imposed by the Securities Act. (j) BEST EFFORTS OFFERINGS. If you communicate to us that a particular offering is being made on a best efforts basis, then the terms in this Section 3(j) apply and other inconsistent terms in this Agreement do not apply. (i) The offering will be a best efforts offering. The offering also will be contingent and involve a closing only after receipt of necessary documentation from the issuer and satisfaction of other conditions, if any, specified in the prospectus or offering circular and the agency or engagement agreement with you and the issuer. The offering is designed to comply with applicable SEC rules, including Rules 15c2-4, 10b-9, and 15c6-1. See NASD Notice to Members 98-4, 87-61 and 84-7. 5 (ii) We represent and agree that we shall take necessary steps to comply with SEC Rules 15c2-4, 10b-9 and 15c6-1, including, but not limited to, depositing funds in a complying special account if funds are received before all closing conditions have been met. We also represent that we are aware that those who purchase in this best efforts offering are subject to the investor purchase limitations described in the prospectus or offering circular. (4) INDEMNIFICATION. We agree to indemnify and hold harmless Ryan Beck, the issuer of the Securities, each person, if any, who controls (within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act) Ryan Beck or the issuer of the Securities, and their respective directors, officers and employees from and against any and all losses, liabilities, costs or claims (or actions in respect thereof) (collectively, "Losses") to which any of them may become subject (including all reasonable costs of investigating, disputing or defending any such claim or action), insofar as such Losses arise out of or are in connection with the breach of any representation, warranty or agreement made by us herein. If any claim, demand, action or proceeding (including any governmental investigation) shall be brought or alleged against an indemnified party in respect of which indemnity is to be sought against an indemnifying party, the indemnified party shall promptly notify the indemnifying party in writing, and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnified party may designate in such proceeding and shall pay the reasonable fees and expenses of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the reasonable fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the indemnifying party has failed within a reasonable time to retain counsel reasonably satisfactory to such indemnified party or (iii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is agreed that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate law firm (in addition to local counsel where necessary) for all such indemnified parties. Such firm shall be designated in writing by the indemnified party. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. The indemnity agreements contained in this Section and the representations and warranties by us in this Agreement shall remain operative and in full force and effect regardless of: (i) any termination of this Agreement, (ii) any investigation made by an indemnified party or 6 on such party's behalf or any person controlling an indemnified party or by or on behalf of the indemnifying party, its directors or officers or any person controlling the indemnifying party, and (iii) acceptance of and payment for any Securities. (5) TERMINATION; SUPPLEMENTS AND AMENDMENTS. This Agreement may be terminated by either party hereto upon five business days' written notice to the other party; provided that with respect to any Offering for which a Written Communication was sent and accepted prior to such notice, this Agreement as it applies to such Offering shall remain in full force and effect and shall terminate with respect to such Offering in accordance with the last sentence of this Section. This Agreement may be supplemented or amended by you by written notice thereof to us, and any such supplement or amendment to this Agreement shall be effective with respect to any Offering to which this Agreement applies after the date of such supplement or amendment. Each reference to "this Agreement" herein shall, as appropriate, be to this Agreement as so amended and supplemented. The terms and conditions set forth in Sections 3(c) and (e) with regard to any offering will terminate at the close of business on the thirtieth day after the date of the initial public offering of the Securities to which such Offering relates, but such terms and conditions, upon notice to us, may be terminated by you at any time. (6) SUCCESSORS AND ASSIGNS. This Agreement shall be binding on, and inure to the benefit of, the parties hereto and other persons specified or indicated in Section 1, and the respective successors and assigns of each of them. (7) GOVERNING LAW. This Agreement and the terms and conditions set forth herein with respect to any Offering together with such supplementary terms and conditions with respect to such Offering as may be contained in any Written Communication from you to us in connection therewith shall be governed by, and construed in accordance with, the laws of the State of New York without regard to conflicts of laws principles. 7 By signing this Agreement we confirm that our subscription to, or our acceptance of any reservation of, any Securities pursuant to an Offering shall constitute (i) acceptance of and agreement to the terms and conditions of this Agreement (as supplemented and amended pursuant to Section 5) together with and subject to any supplementary terms and conditions contained in any Written Communication from you in connection with such Offering, all of which shall constitute a binding agreement between us and you, individually, or as representative of any Underwriters, (ii) in confirmation that our representations and warranties set forth in Section 3 are true and correct at that time and (iii) confirmation that our agreements set forth in Sections 2 and 3 have been and will be fully performed by us to the extent and at the times required thereby. Very truly yours, ---------------------- (Name of Firm) By: ______________________ Confirmed, as of the date first above written. RYAN BECK & CO., INC. By: ____________________________ Lisa J. Schultz Executive Vice - President Execution Date: _______________________ 8 EXHIBIT C OFFICERS AND DIRECTORS OF ALPENA PARTIES James C. Rapin Martin A. Thomson Thomas R. Townsend Gary C. VanMassenhove Keith D. Wallace Michael W. Mahler Amy E. Essex Jerome W. Tracey EXHIBIT D LETTER AGREEMENT WITH OFFICERS AND DIRECTORS LISTED IN EXHIBIT C Ryan Beck & Co., Inc. 18 Columbia Turnpike Florham Park, New Jersey 07932 RE: Second-Step Conversion of Alpena Bancshares, MHC Ladies and Gentlemen: The undersigned is an officer, director and/or trustee of First Federal of Northern Michigan (the "Bank"), Alpena Bancshares, Inc. (the "Holding Company") and/or Alpena Bancshares, MHC (the "MHC"). It has been proposed that the MHC, a federally chartered mutual holding company which owns 55.4% of the common stock of the Holding Company ("Holding Company Common Stock"), undergo a "second-step conversion," whereby First Federal of Northern Michigan Bancorp, Inc. ("Bancorp"), a newly formed Maryland corporation, will offer and sell shares of its common stock ("Bancorp Common Stock") in a subscription offering and, if necessary, a community offering, and/or a syndicated community offering (collectively, the "Offering"), and issue shares of Bancorp Common Stock to existing shareholders of the Holding Company, other than the MHC, in exchange for their existing shares of Holding Company Common Stock (the "Exchange"). The undersigned is aware that you will be acting as financial advisor and marketing agent to the Bank, the Holding Company, the MHC and Bancorp in connection with the conversion, and recognizes that the Offering will benefit these parties by, among other things, raising additional capital for their operations. The undersigned acknowledges that you are relying on the representations and agreements of the undersigned contained herein in carrying out the Offering and in entering into marketing arrangements with respect thereto. In consideration of the foregoing, the undersigned hereby agrees that, without the prior written approval of Ryan Beck & Co., Inc., the undersigned, during the period commencing on the effective date (the "Effective Date") of the Registration Statement on Form S-1 relating to the Offering filed by Bancorp with the Securities and Exchange Commission and terminating on the 91st day following the Effective Date, will not directly or indirectly sell, offer to sell, contract to sell, grant any option for the sale of, transfer, assign, hypothecate, pledge or otherwise encumber or dispose of any shares of Holding Company Common Stock or Bancorp Common Stock, or securities convertible into, exchangeable for or exercisable for shares of Holding Company Common Stock or Bancorp Common Stock, or any rights to purchase or acquire shares of Holding Company Common Stock or Bancorp Common Stock, owned either of record or beneficially by the undersigned. The foregoing restriction shall apply to all shares of Bancorp Common Stock, regardless of whether issued in the Exchange or the Offering. The foregoing restriction is in addition to any and all restrictions to which the undersigned is subject under the regulations of the Office of Thrift Supervision with respect to the sale of shares of Bancorp Common Stock. This agreement shall be binding upon the assigns, heirs and personal representatives of the undersigned. To ensure compliance with the foregoing, the undersigned authorizes the transfer agent with respect to the Bancorp Common Stock to mark appropriate legends on the face of any certificate representing shares of Bancorp Common Stock owned by the undersigned and the placement of a "stop transfer" order with respect to such securities on the Bancorp's stock ledger. Date: _______________, 2005 Signature --------------------------------------- Printed Name: 2 EX-1.3 3 tex1_3-4648.txt EX-1.3 EXHIBIT 1.3 January 25, 2005 Mr. Martin A. Thomson President & CEO Alpena Bancshares, Inc. 100 South Second Avenue Alpena, MI 49707 Mr. Martin A. Thomson President & CEO Alpena Bancshares, MHC 100 South Second Avenue Alpena, MI 49707 CONFIDENTIAL ------------ Re: PROPOSED SECOND STEP STOCK CONVERSION--ADVISORY, ADMINISTRATIVE AND MARKETING SERVICES Dear Mr. Thomson: The National Association of Securities Dealers, Inc. (the "NASD") has requested an amendment to the engagement letter, dated November 1, 2004, setting forth the terms of the proposed engagement between Ryan Beck & Co., Inc. ("RBCO"), Alpena Bancshares, Inc. (the "Institution") and Alpena Bancshares, MHC (the "MHC") in connection with the proposed elimination of the MHC and sale of the portion of the common stock of the Institution currently held by the MHC (the "second step stock offering"). Accordingly, Section 4(b), COMPENSATION, is amended to read as follows (amended language underlined): "b. A sales fee of one percent (1.00%) of the dollar amount of the Common Stock sold in the Offering, other than those shares sold pursuant to subparagraph c. below. No fee shall be payable pursuant to this subsection in connection with the sale of stock to officers, directors, employees or immediate family of such persons ("Insiders") and qualified and non-qualified employee benefit plans of the Institution or the Insiders. The $25,000 fee will be credited against the sales fee. IN THE EVENT THE OFFERING IS NOT CONSUMMATED, RBCO WILL BE ENTITLED ONLY TO THE REIMBURSEMENT OF ITS ACCOUNTABLE OUT-OF-POCKET EXPENSES AND PAYMENTS FOR CERTAIN SERVICES PERFORMED, AS OUTLINED IN SECTIONS 3(A) AND 3(B) OF THIS ENGAGEMENT LETTER, AS OF THE DATE OF TERMINATION. ANY PORTION OF THE $25,000 FEE THAT HAS BEEN ADVANCED TO RBCO AND FOR WHICH SERVICES HAVE NOT BEEN PERFORMED AS DESCRIBED ABOVE SHALL BE RETURNED TO THE INSTITUTION." All other sections and provisions in the engagement letter dated November 1, 2004 shall continue in full force and effect and are incorporated by reference into this amendment. RYAN BECK & CO., INC. BY: /s/ Michael A. Schechter -------------------------------------------- Michael A. Schechter Vice President Accepted and Agreed to This 25th Day of January, 2005 BY: /s/ Martin A. Thomson -------------------------------------------- Martin A. Thomson President and Chief Executive Officer Alpena Bancshares, Inc. BY: /s/ Martin A. Thomson -------------------------------------------- Martin A. Thomson President & Chief Executive Officer Alpena Bancshares, MHC EX-8 4 tex8-4648.txt EX-8 EXHIBIT 8 (202) 274-2000 January 25, 2005 Boards of Directors Alpena Bancshares, Inc. Alpena Bancshares, M.H.C. First Federal of Northern Michigan Ladies and Gentlemen: You have requested this firm's opinion regarding the material federal income tax consequences which will result from the conversion of Alpena Bancshares, M.H.C., a federal mutual holding company (the "Mutual Holding Company") into the capital stock form of organization, as effectuated pursuant to the three integrated transactions described below. In connection therewith, we have made such investigations as we have deemed relevant or necessary for the purpose of this opinion. In our examination, we have assumed the authenticity of original documents, the accuracy of copies and the genuineness of signatures. We have further assumed the absence of adverse facts not apparent from the face of the instruments and documents we examined and have relied upon the accuracy of the factual matters set forth in the Plan of Conversion and Reorganization (the "Plan") and the Registration Statement filed by First Federal of Northern Michigan Bancorp, Inc. (the "Holding Company") with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended, and the Application for Conversion on Form AC filed by the Mutual Holding Company with the Office of Thrift Supervision (the "OTS"). Our opinion is based upon the existing provisions of the Internal Revenue Code of 1986, as amended (the "Code), and regulations thereunder (the "Treasury Regulations"), and upon current Internal Revenue Service ("IRS") published rulings and existing court decisions, any of which could be changed at any time. Any such changes may be retroactive and could significantly modify the statements and opinions expressed herein. Similarly, any change in the facts and assumptions stated below, upon which this opinion is based, could modify the conclusions. This opinion is as of the date hereof, and we disclaim any obligation to advise you of any change in any matter considered herein after the date hereof. We, of course, opine only as to the matters we expressly set forth, and no opinions should be inferred as to any other matters or as to the tax treatment of the transactions that we do not specifically address. We express no opinion as to other federal laws and regulations, or as to Boards of Directors Alpena Bancshares, Inc. Alpena Bancshares, M.H.C. First Federal of Northern Michigan January 25, 2005 Page 2 laws and regulations of other jurisdictions, or as to factual or legal matters other than as set forth herein. For purposes of this opinion, we are relying on the representations as to factual matters provided to us by the Mutual Holding Company, First Federal of Northern Michigan (the "Bank"), and the Holding Company, as set forth in the affidavits of the authorized officers of each of the aforementioned entities, incorporated herein by reference. Capitalized terms used but not defined herein shall have the same meaning as set forth in the Plan. DESCRIPTION OF PROPOSED TRANSACTIONS Based upon our review of the documents described above, and in reliance upon such documents, we understand that the relevant facts are as follows. On November 4, 1994, the Bank (formerly First Federal Savings and Loan Association of Alpena) reorganized from a mutual savings bank to become the majority-owned stock subsidiary of the Mutual Holding Company. On November 14, 2000, the Bank and the Mutual Holding Company organized the Mid-Tier Holding Company. The Mid-Tier Holding Company owns 100% of the outstanding shares of the Bank. On November 12, 2004, the Boards of Directors of the Mutual Holding Company and the Mid-Tier Holding Company adopted the Plan of Conversion and Reorganization, which Plan was subsequently amended on December 7, 2004 ("Plan") providing for the conversion of the Mutual Holding Company from a federally chartered mutual holding company to a Maryland stock corporation, named "First Federal of Northern Michigan Bancorp, Inc." (the Maryland stock corporation shall be referred to as the "Holding Company"). At the present time, three transactions referred to as the "MHC Merger," the "Mid-Tier Merger," and the "Bank Merger" are being undertaken. Pursuant to the Plan, the conversion ("Conversion") will be effected in the following steps, in such order as is necessary to consummate the Conversion: (i) The Bank will establish the Holding Company as a first-tier Maryland-chartered stock holding company subsidiary. (ii) The Holding Company will charter an interim federal savings bank subsidiary ("Interim") as a wholly owned subsidiary. (iii) The Mid-Tier Holding Company will convert to an interim stock savings bank (which shall continue to be referred to as the "Mid-Tier Holding Company") and will merge with and into the Bank, with the Bank as the resulting entity (the "Mid-Tier Merger"), whereby the Mutual Holding Company will receive, and Boards of Directors Alpena Bancshares, Inc. Alpena Bancshares, M.H.C. First Federal of Northern Michigan January 25, 2005 Page 3 Minority Stockholders will constructively receive shares of Bank common stock in exchange for their Mid-Tier Holding Company common stock. (iv) Immediately after the Mid-Tier Merger, the Mutual Holding Company will convert to an interim stock savings bank and will merge with and into the Bank, (the "MHC Merger"), whereby the shares of Bank common stock held by the Mutual Holding Company will be canceled and each Eligible Account Holder and Supplemental Eligible Account Holder will receive an interest in a Liquidation Account of the Bank in exchange for such person's interest in the Mutual Holding Company. (v) Immediately after the MHC Merger and the Mid-Tier Merger, Interim will merge with and into the Bank, with the Bank as the surviving entity (the "Bank Merger"). Constructive shareholders of the Bank (i.e., Minority Stockholders immediately prior to the Conversion) will exchange the shares of Bank common stock that they constructively received in the Mid-Tier Merger for Holding Company Common Stock. (vi) Immediately after the Bank Merger, the Holding Company will offer for sale its Common Stock in the Offering. Following the Conversion, the liquidation account will be maintained by the Bank for the benefit of Eligible Account Holders and Supplemental Account Holders who continue to maintain their deposit accounts with the Bank. Pursuant to Section 19 of the Plan, the liquidation account will be equal to the greater of (a) the percentage of the outstanding shares of the common stock of the Mid-Tier Holding Company owned by the Mutual Holding Company prior to the Mid-Tier Merger multiplied by the Mid-Tier Holding Company's total stockholders' equity as reflected in the latest statement of financial condition contained in the final Prospectus utilized in the Conversion, or (b) the retained earnings of the Bank as of the latest financial statements set forth in the prospectus used in connection with the Bank's initial mutual holding company reorganization and minority stock offering. All of the then-outstanding shares of Bank common stock owned by the Minority Stockholders will be converted into and become shares of Holding Company Common Stock pursuant to the Exchange Ratio that ensures that after the Conversion, Minority Stockholders will own in the aggregate the same percentage of the Holding Company's Common Stock as they held Mid-Tier Holding Company common stock immediately prior to the Conversion, exclusive of Minority Stockholders' purchases of additional shares of Common Stock in the Offering and receipt of cash in lieu of fractional shares. The common stock of Interim owned by the Holding Company prior to the Bank Merger will be converted into and become shares of common stock of the Bank on the Effective Date. The Holding Company Common Stock held by the Bank immediately prior to the Effective Date will be canceled on the Effective Date. Boards of Directors Alpena Bancshares, Inc. Alpena Bancshares, M.H.C. First Federal of Northern Michigan January 25, 2005 Page 4 Immediately following the Bank Merger, additional shares of Holding Company Common Stock will be sold to depositors and former shareholders of the Bank and to members of the public in the Offering. As a result of the Mid-Tier Merger, the MHC Merger and the Bank Merger, the Holding Company will be a publicly held corporation, will register the Holding Company Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and will become subject to the rules and regulations thereunder and file periodic reports and proxy statements with the SEC. The Bank will become a wholly owned subsidiary of the Holding Company and will continue to carry on its business and activities as conducted immediately prior to the Conversion. The stockholders of the Holding Company will be the former Minority Stockholders of the Mid-Tier Holding Company immediately prior to the MHC Merger, plus those persons who purchase shares of Holding Company Common Stock in the Offering. Nontransferable rights to subscribe for the Holding Company Common Stock have been granted, in order of priority, to depositors of the Bank who have account balances of $50.00 or more as of the close of business on October 31, 2003 ("Eligible Account Holders"), the Bank's tax-qualified employee plans ("Employee Plans"), depositors of the Bank who have account balances of $50.00 or more as of the close of business on December 31, 2004 ("Supplemental Eligible Account Holders"), and depositors of the Bank as of the Voting Record Date (other than Eligible Account Holders and Supplemental Eligible Account Holders) and borrowers of the Bank who qualify as Voting Members ("Other Members"). Subscription rights are nontransferable. The Holding Company will also offer shares of Holding Company Common Stock not subscribed for in the subscription offering, if any, for sale in a community offering or syndicated community offering to certain members of the general public. OPINIONS Based on the foregoing description of the MHC Merger, the Mid-Tier Merger and the Bank Merger, and subject to the qualifications and limitations set forth in this letter, we are of the opinion that: 1. The conversion of the Mid-Tier Holding Company to a federally chartered interim stock savings bank (which we shall continue to refer to as "Mid-Tier Holding Company") will constitute a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Code. 2. The Mid-Tier Merger qualifies as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(1)(A) of the Code.) Boards of Directors Alpena Bancshares, Inc. Alpena Bancshares, M.H.C. First Federal of Northern Michigan January 25, 2005 Page 5 3. The Mid-Tier Holding Company will not recognize any gain or loss on the transfer of its assets to the Bank and the Bank's assumption of its liabilities in exchange for shares of common stock in the Bank or on the constructive distribution of such stock to Minority Stockholders and the Mutual Holding Company. (Sections 361(a), 361(c) and 357(a) of the Code.) 4. No gain or loss will be recognized by the Bank upon the receipt of the assets of Mid-Tier Holding Company in the Mid-Tier Merger (Section 1032(a) of the Code). 5. The basis of the assets of the Mid-Tier Holding Company (other than stock in the Bank) to be received by Bank will be the same as the basis of such assets in the hands of Mid-Tier Holding Company immediately prior to the transfer. (Section 362(b) of the Code.) 6. The holding period of the assets of Mid-Tier Holding Company (other than stock in Bank) to be received by Bank will include the holding period of those assets in the hands of Mid-Tier Holding Company immediately prior to the transfer. (Section 1223(2) of the Code.) 7. Mid-Tier Holding Company shareholders will not recognize any gain or loss upon their constructive exchange of Mid-Tier Holding Company common stock for Bank common stock. 8. The conversion of the Mutual Holding Company to a federally chartered stock savings bank (which we shall continue to refer to as "Mutual Holding Company") will constitute a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Code. 9. The MHC Merger qualifies as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(1)(A) of the Code.) 10. The exchange of the members' equity interests in the Mutual Holding Company for interests in a Liquidation Account established in the Bank in the MHC Merger will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Income Tax Regulations (CF. Rev. Rul. 69-3, 1969-1 C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54). 11. The Mutual Holding Company will not recognize any gain or loss on the transfer of its assets to the Bank and the Bank's assumption of its liabilities, if any, in exchange for an interest in a Liquidation Account in the Bank or on the constructive distribution of such Liquidation Account to the Mutual Holding Company's members who remain depositors of the Bank. (Section 361(a), 361(c) and 357(a) of the Code.) Boards of Directors Alpena Bancshares, Inc. Alpena Bancshares, M.H.C. First Federal of Northern Michigan January 25, 2005 Page 6 12. No gain or loss will be recognized by the Bank upon the receipt of the assets of the Mutual Holding Company in the MHC Merger in exchange for the transfer to the members of the Mutual Holding Company of an interest in the Liquidation Account in the Bank. (Section 1032(a) of the Code.) 13. Persons who have an interest in the Mutual Holding Company will recognize no gain or loss upon the receipt of an interest in the Liquidation Account in the Bank in exchange for their voting and liquidation rights in the Mutual Holding Company. (Section 354(a) of the Code). 14. The basis of the assets of Mutual Holding Company (other than stock in the Bank) to be received by Bank will be the same as the basis of such assets in the hands of the Mutual Holding Company immediately prior to the transfer. (Section 362(b) of the Code.) 15. The holding period of the assets of the Mutual Holding Company in the hands of the Bank will include the holding period of those assets in the hands of the Mutual Holding Company. (Section 1223(2) of the Code.) 16. The Bank Merger qualifies as a reorganization within the meaning of Section 368(a)(1)(A) of the Code, pursuant to Section 368(a)(2)(E) of the Code. For these purposes, each of the Bank, the Holding Company and Interim are "a party to the reorganization" within the meaning of Section 368(b) of the Code. 17. Interests in the Liquidation Account established at the Bank, and the shares of Bank common stock held by Mutual Holding Company prior to consummation of the MHC Merger, will be disregarded for the purpose of determining that an amount of stock in the Bank which constitutes "control" of such corporation was acquired by the Holding Company in exchange for shares of common stock of the Holding Company pursuant to the Bank Merger (Code Section 368(c)). 18. The exchange of shares of Bank common stock for the shares of the Holding Company Common Stock in the Bank Merger, following consummation of the Mid-Tier Merger and the MHC Merger, will satisfy the continuity of interest requirement of Income Tax Regulation Section 1.368-1(b) in the Bank Merger. 19. Interim will not recognize any gain or loss on the transfer of its assets to Bank in exchange for Bank common stock and the assumption by Bank of the liabilities, if any, of Interim. (Section 361(a) and 357(a) of the Code.) Boards of Directors Alpena Bancshares, Inc. Alpena Bancshares, M.H.C. First Federal of Northern Michigan January 25, 2005 Page 7 20. The Bank will not recognize any gain or loss upon the receipt of the assets of Interim in the Bank Merger. (Section 1032(a) of the Code.) 21. The Holding Company will not recognize any gain or loss upon its receipt of Bank common stock in exchange for Interim common stock. (Section 354(a) of the Code.) 22. Bank shareholders will not recognize any gain or loss upon their exchange of Bank common stock solely for shares of Holding Company Common Stock. (Section 354(a) of the Code.) 23. The payment of cash to the Minority Stockholders in lieu of fractional shares of Holding Company will be treated as though the fractional shares were distributed as part of the Bank Merger and then redeemed by Holding Company. The cash payments will be treated as distributions in full payment for the fractional shares deemed redeemed under Section 302(a) of the Code, with the result that such shareholders will have short-term or long-term capital gain or loss to the extent that the cash they receive differs from the basis allocable to such fractional shares. (Rev. Rul. 66-365, 1966-2 C.B. 116 and Rev. Proc. 77-41, 1977-2 C.B. 574) 24. It is more likely then not that the fair market value of the nontransferable subscription rights to purchase Holding Company Common Stock is zero. Accordingly, no gain or loss will be recognized by Eligible Account Holders and Supplemental Eligible Account Holders upon distribution to them of nontransferable subscription rights to purchase shares of Holding Company Common Stock. (Section 356(a) of the Code) Eligible Account Holders and Supplemental Eligible Account Holders will not realize any taxable income as the result of the exercise by them of the nontransferable subscriptions rights. (Rev. Rul. 56-572, 1956-2 C.B.182). 25. Each Bank shareholder's aggregate basis in his or her Holding Company Common Stock received in the exchange will be the same as the aggregate basis of the Bank common stock surrendered in exchange therefor. (Section 358(a) of the Code.) It is more likely than not that the basis of the Holding Company Common Stock purchased in the Offering by the exercise of the nontransferable subscription rights will be the purchase price thereof. (Section 1012 of the Code). 26. Each Bank shareholder's holding period in his or her Holding Company Common Stock received in the exchange will include the period during which the Bank common stock surrendered was held, provided that the Bank common stock surrendered is a capital asset in the hands of the Bank shareholder on the date of the exchange. (Section 1223(1) of the Code.) The holding period of the Holding Company Common Stock purchased pursuant to the exercise of Boards of Directors Alpena Bancshares, Inc. Alpena Bancshares, M.H.C. First Federal of Northern Michigan January 25, 2005 Page 8 subscriptions rights shall commence on the date on which the right to acquire such stock was exercised. (Section 1223(6) of the Code.) 27. No gain or loss will be recognized by Holding Company on the receipt of money in exchange for Holding Company Common Stock sold in the Offering. (Section 1032 of the Code.) Our opinion under paragraph 24 above is predicated on the representation that no person shall receive any payment, whether in money or property, in lieu of the issuance of subscription rights. Our opinions under paragraphs 24, 25 and 26 are based on the position that the subscription rights to purchase shares of Common Stock received by Eligible Account Holders, Supplemental Eligible Account Holders and Other Members have a fair market value of zero. We understand that the subscription rights will be granted at no cost to the recipients, will be legally nontransferable and short duration, and will provide the recipient with the right only to purchase shares of Common Stock at the same price to be paid by members of the general public in any Community Offering. We also note that the Internal Revenue Service has not in the past concluded that subscription rights have value. Based on the foregoing, we believe it is more likely than not that the nontransferable subscription rights to purchase Common Stock have no value. If the subscription rights are subsequently found to have a fair market value, income may be recognized by various recipients of the subscription rights (in certain cases, whether or not the rights are exercised) and the Holding Company and/or the Bank may be taxable on the distribution of the subscription rights. CONSENT We hereby consent to the filing of the opinion as an exhibit to the MHC's Application for Approval for Conversion filed with the OTS and to the Holding Company's Registration Statement on Form SB-2 as filed with the SEC. We also consent to the references to our firm in the Prospectus contained in the Application for Approval of Conversion and SB-2 under the captions "The Conversion-Tax Aspects" and "Legal Matters." Very truly yours, /s/ Luse Gorman Pomerenk & Schick LUSE GORMAN POMERENK & SCHICK, A PROFESSIONAL CORPORATION EX-10.1 5 tex10_1-4648.txt EX-10.1 EXHIBIT 10.1 CHANGE IN CONTROL AGREEMENT This AGREEMENT is made effective as of ______________ __, 2005 by and between FIRST FEDERAL OF NORTHERN MICHIGAN, a federally chartered stock savings bank (the "Bank"), and ___________________ ("Executive"). Any reference to "Company" herein shall mean First Federal of Northern Michigan Bancorp, Inc., or any successor thereto. WHEREAS, the Bank recognizes the substantial contribution Executive has made to the Bank and wishes to provide Executive with certain protections and benefits in the event of a Change in Control of the Bank or the Company, as provided in this Agreement; and WHEREAS, Executive has been elected to, and has agreed to serve in the position of _____________________ for the Bank, a position of substantial responsibility; NOW, THEREFORE, in consideration of the contribution of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT The term of this Agreement shall be thirty-six (36) full calendar months from the effective date of this Agreement set forth above. Commencing on the first anniversary date of this Agreement and continuing on each anniversary date thereafter, the Board will conduct a performance evaluation and review of Executive for purposes of determining whether to extend this Agreement, and the results thereof shall be included in the minutes of the Board's meeting. In the event that the Board determines to extend the Agreement, this Agreement shall renew for an additional twelve (12) months, such that the remaining term shall be thirty-six (36) months unless a written notice of non-renewal is provided to Executive at least thirty (30) days and not more than sixty (60) days prior to such anniversary date. In the event this Agreement is not renewed on an anniversary date, the remaining term of this Agreement shall be twenty-four (24) months. If Executive is also a director then he shall abstain from any and all voting with respect to the renewal or extension of the term of this Agreement. 2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL AND TERMINATION This Agreement provides for certain payments and benefits to Executive only in the event of a Change in Control followed by a termination of Executive's services as described in this Agreement. (a) Upon the occurrence of a "Change in Control" of the Bank or the Company followed at any time during the term of this Agreement by the Involuntary Termination of Executive's employment, other than Termination for Cause, death or Disability of Executive, the Bank shall be obligated to pay or provide Executive or in the following event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be: (i) as severance pay, a sum equal to two times the sum of (a) the highest rate of base salary, and (b) highest rate of bonus awarded to Executive during the prior three years. If Executive has been employed by the Bank for less than one year, then the severance pay shall be a sum equal to twenty-four (24) times the highest monthly salary, and two times the highest rate of bonus awarded to Executive. (ii) life, medical and dental coverage (at the expense of the Bank) substantially identical to the coverage maintained by the Bank for Executive prior to his termination. Such coverage and payments shall cease upon expiration of twenty-four (24) months. (iii) within sixty (60) days (or within such shorter period to the extent that information can be reasonably be obtained) following Executive's termination, a lump-sum payment in an amount equal to the excess, if any, of: (a) the present value of the benefits to which Executive would be entitled under the Bank's defined benefit pension plan (and any other defined benefit plan maintained by the Bank) if Executive had the additional years of service that Executive would have had if Executive had continued working for the Bank for a twenty-four (24) month period following his termination earning the base salary paid at the time of termination of employment for the remaining unexpired term of this Agreement, determined as if each such plan had continued in effect without change in accordance with its terms as of the day prior to his actual date of termination and as if such benefits were payable beginning on the first day of the month coincident with or next following his actual date of Executive's termination, over (b) the present value of the benefits to which Executive is actually entitled under the Bank's defined benefit pension plan (and any other defined benefit plan maintained by the Bank) as of the date of his termination, where such present values are to be determined using a discount rate of 6% and the mortality tables prescribed under Section 72 of the Internal Revenue Code of 1986 ("Code"); (b) Upon the occurrence of a Change in Control, Executive will have such rights as specified in any other employee benefit plan with respect to options, stock awards or other stock incentives and such other rights as may have been granted to Executive under such plans. (c) At the election of Executive, which election is to be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Involuntary Termination of Executive, any cash severance payments shall be made in a lump sum, or paid bi-weekly during the remaining term of this Agreement. In the event no such election is made, payment hereunder shall be in a lump sum. (d) Any payments to Executive under this Section 2 should be reduced by applicable withholding taxes. (e) Notwithstanding the preceding paragraphs of this Section 2, in no event shall the aggregate payments or benefits to be made or afforded to Executive under said paragraphs (the "Termination Benefits") constitute an "excess parachute payment" under Section 280G of the Code or any successor thereto, and in order to avoid such a result, Termination Benefits will be 2 reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount", as determined in accordance with said Section 280G. (f) Executive shall not have the right to receive termination benefits pursuant to Section 2 hereof in the event of Executive's Termination for Cause or termination of employment due to Executive's death or Disability. 3. DEFINED TERMS The following capitalized terms used in this Agreement are defined as set forth below: (a) CHANGE IN CONTROL. A "Change in Control" of the Bank or the Company shall mean a change in control of a nature that: (i) would be required to be reported in response to Item 5.01 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Home Owners' Loan Act, as amended, and applicable rules and regulations promulgated thereunder (collectively, the "HOLA") as in effect at the time of the Change in Control; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of Company's outstanding securities, except for any securities purchased by the Bank's employee stock ownership plan or trust; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, PROVIDED that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company or similar transaction in which the Bank or Company is not the surviving institution occurs or is effected; or (d) a proxy statement soliciting proxies from stockholders of the Company is distributed, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more business organizations as a result of which the outstanding shares of the class of securities then subject to the plan are to be exchanged for or converted into cash or property or securities not issued by the Company; or (e) a tender offer is made for 25% or more of the voting securities of the Company and the shareholders owning beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. (b) INVOLUNTARY TERMINATION. "Involuntary Termination" of Executive shall mean either (i) Executive's termination by the Bank, the Company or any successor(s) thereto during 3 the remaining unexpired period of the Agreement and following a Change in Control for any reason other than a Termination for Cause, Disability or death, or (ii) Executive's resignation of employment during the remaining unexpired period of the Agreement and following a Change in Control as a result of any demotion, loss of title, office, significant change in Executive's functions, duties or responsibilities which change would cause Executive's position to become one of lesser importance, responsibility or scope from his position held immediately prior to the Change in Control, reduction in Executive's annual compensation or benefits, relocation of Executive's principal place of employment by more than 25 miles from its location immediately prior to the Change in Control, or material breach of this Agreement by the Bank, the Company or its successor(s) following a Change in Control. (c) TERMINATION FOR CAUSE. "Termination for Cause" shall mean termination because of Executive's intentional failure to perform stated duties, personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, willful violation of any law, rule, regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of any material provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the savings institution industry. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any stock options granted to Executive under any stock option plan of the Bank, the Company or any subsidiary or affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 4 hereof, and shall not be exercisable by Executive at any time subsequent to such Termination for Cause. (d) DISABILITY. "Disability" shall mean Executive's inability to perform duties normally associated with his position on a full-time basis for a period a six consecutive months by reason of illness or other physical or mental disability. The Bank or the Company may require a physician's written confirmation that Executive cannot perform his duties because of Executive's Disability. 4. NOTICE OF TERMINATION (a) Following a Change in Control, any purported termination by the Bank or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. 4 (b) "Date of Termination" shall mean (A) if Executive's employment is terminated for Disability, thirty (30) days after a Notice of Termination is given (provided that Executive shall not have returned to the performance of Executive's duties on a full-time basis during such thirty (30) day period), and (B) if Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall be immediate). Except as set forth below in paragraph (c), in no event shall the Date of Termination exceed 30 days from the date Notice of Termination is given. (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, except upon the occurrence of a Change in Control and Involuntary Termination by Executive, as defined in Section 3(b)(ii) above, in which case the date of termination shall be the date specified in the Notice, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay Executive's full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue Executive's as a participant in all compensation, benefit and insurance plans in which Executive was participating when the notice of dispute was given, until the earlier of 90 days from the date of the Notice of Termination or the date upon which the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. Notwithstanding the foregoing, no compensation or benefits shall be paid to Executive in the event Executive is Terminated for Cause. In the event that such Termination for Cause is found to have been wrongful or such dispute is otherwise decided in Executive's favor, Executive shall be entitled to receive all compensation and benefits to which Executive may be entitled under Sections 2(a)(i) through (iii) and 2(b), reduced by any amount paid hereinabove during the pendency of the dispute.. 5. SOURCE OF PAYMENTS It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive 5 is subject to receiving fewer benefits than those available to him without reference to this Agreement. 7. NO ATTACHMENT (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Bank and their respective successors and assigns. 8. MODIFICATION AND WAIVER (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 9. REQUIRED PROVISIONS (a) The Bank may terminate Executive's employment at any time. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined herein. (b) If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) (12 USC ss. 1818(e)(3)) or 8(g) (12 USC ss. 1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (the "FDI Act"), the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e) (12 USC ss. 1818(e)) or 8(g) (12 USC ss. 1818(g)) of the FDI Act, all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. 6 (d) If the Bank is in default as defined in Section 3(x) (12 USC ss. 1813(x)(1)) of the FDI Act, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Bank, (i) by the Federal Deposit Insurance Corporation ("FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) (12 USC ss. 1823(c)) of the FDI Act; or (ii) when the Bank is determined by the FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 10. SEVERABILITY If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 11. HEADINGS FOR REFERENCE ONLY The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 12. GOVERNING LAW The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Michigan, unless superseded or preempted by Federal law as now or hereafter in effect. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within fifty (50) miles from the location of the Bank, in accordance with the rules of the Judicial Mediation and Arbitration Systems (JAMS) then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that subject to Section 3(c) hereof, Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 13. PAYMENT OF LEGAL FEES All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank if Executive is successful on the merits pursuant to a legal judgment, arbitration or settlement. 7 14. SUCCESSOR TO THE BANK The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. 8 15. SIGNATURES IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by its duly authorized officer, and Executive has signed this Agreement, on the day and date first above written. ATTEST: FIRST FEDERAL OF NORTHERN MICHIGAN By: --------------------------------------------- President ATTEST: FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. By: --------------------------------------------- President WITNESS: EXECUTIVE By: --------------------------------------------- 9 EX-23.2 6 tex23_2-4648.txt EX-23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the use in this Amendment No. 1 to the Registration Statement No. 333-121178 on Form SB-2 filed with the Securities and Exchange Commission and Amendment No. 1 to the Form AC filed with the Office of Thrift Supervision of our report dated January 30, 2004 on the consolidated financial statements of Alpena Bancshares, Inc. We also consent to the references to us under the headings "Experts" in Amendment No. 1 to the Registration Statement on Form SB-2 and Amendment No. 1 to the Form AC. /s/ PLANTE & MORAN, PLLC Auburn Hills, Michigan January 24, 2005 EX-23.3 7 tex23_3-4648.txt EX-23.3 EXHIBIT 23.3 RP FINANCIAL, LC. - --------------------------------------------------- Financial Services Industry Consultants January 25, 2005 Boards of Directors Alpena Bancshares, M.H.C. Alpena Bancshares, Inc. First Federal of Northern Michigan 100 South Second Avenue Alpena, Michigan 49707 Members of the Boards: We hereby consent to the use of our firm's name in the Form AC Application for Conversion and the Registration Statement on Form SB-2 for First Federal of Northern Michigan Bancorp, Inc., and any amendments thereto. We also hereby consent to the inclusion of, summary of and references to our Appraisal and our statement concerning subscription rights in such filings including the prospectus of First Federal of Northern Michigan Bancorp, Inc. Sincerely, RP(R) FINANCIAL, LC. /s/ RP(R) FINANCIAL, LC. - -------------------------------------------------------------------------------- WASHINGTON HEADQUARTERS Telephone: (703) 528-1700 Rosslyn Center Fax No.: (703) 528-1788 1700 North Moore Street, Suite 2210 Toll-Free No.: (866) 723-0594 Arlington, VA 22209 E-Mail: mail@rpfinancial.com www.rpfinancial.com EX-99.5 8 tex99_5-4648.txt EX-99.5 EXHIBIT 99.5 FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP SECOND STEP TRANSACTION MARKETING MATERIALS TABLE OF CONTENTS(1) CORRESPONDENCE - -------------- Letter to Certain Voting Record Date Borrowers and Depositors (eligible to vote and buy) Letter to Closed Deposit Accountholders (eligible to buy, not vote) Letter to Voting Record Date Public Stockholders Potential Investor Letter (Call-In Community Members) Ryan Beck "Broker Dealer" Letter Stock Order Acknowledgment Letter Stock Certificate Mailing Letter Customer Vote Reminder Proxygram for Plan of Conversion Vote - #1 Customer Vote Reminder Proxygram for Plan of Conversion Vote - #2 ADVERTISEMENTS - -------------- Tombstone Newspaper Advertisement (OPTIONAL - REQUIRES A COMMUNITY OFFERING BE UNDERWAY) Lobby Posters: Vote -or- Vote and Offering (optional) Bank Statement Vote Reminder (optional) Stock Information Center Location Poster FORMS - ----- Stock Order Form Stockholder Proxy Card - Not included. Drafted by counsel. Customer Proxy Card - Not included. Drafted by counsel. OTHER - ----- Questions & Answers Brochure Map Envelopes - --------------- (1) DOES NOT INCLUDE 401(K) OFFERING MATERIALS. NOTE: POST-CLOSING, THERE WILL BE A MAILING OF EXCHANGE DOCUMENTS TO ALPENA BANCSHARES, INC. REGISTERED STOCKHOLDERS, REQUESTING THEIR "OLD" STOCK CERTIFICATES BEFORE NEW CERTIFICATES WILL BE MAILED TO THEM BY THE EXCHANGE AGENT. COUNSEL WILL DRAFT THE EXCHANGE DOCUMENTS. STREET NAME SHARES ARE AUTOMATICALLY EXCHANGED UPON THE CLOSING. NO STOCKHOLDER ACTION IS NEEDED. NOTE: COMMUNITY MEETINGS FOR POTENTIAL INVESTORS ARE NOT ANTICIPATED. NOTE: SUBJECT TO CHANGES IN MARKET CONDITIONS BEFORE THE OFFERING COMMENCES, WE WILL NOT DECIDE WHETHER/WHEN TO CONDUCT A COMMUNITY OFFERING UNTIL AFTER THE SUBSCRIPTION OFFERING HAS COMMENCED. THEREFORE, WE WILL RESPOND TO COMMUNITY MEMBER REQUESTS FOR OFFERING MATERIALS ONLY IF/WHEN A COMMUNITY OFFERING HAS STARTED. WE MAY, NONETHELESS, CHOOSE TO MAIL STOCK ORDER FORMS TO REGISTERED STOCKHOLDERS WITH THEIR PROSPECTUS AND PROXY STATEMENT. LETTER TO VOTING CUSTOMERS [FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP LETTERHEAD] Dear Valued Customer: I am pleased to tell you about an opportunity to invest in First Federal of Northern Michigan Bancorp, Inc. and, just as importantly, to request your vote on two proposals. Pursuant to a Plan of Conversion and Reorganization (the "Plan"), First Federal of Northern Michigan Bancorp, Inc. (the "Company") will become the parent company of First Federal of Northern Michigan, and our organization will convert from the partially public to the fully public corporate form, through the sale of shares of common stock of First Federal of Northern Michigan Bancorp, Inc. (the "Conversion"). Upon the conclusion of the Conversion and related stock offering, the Company will be 100% owned by stockholders, including the non-profit charitable foundation we propose to establish and fund with cash and common stock. THE PROXY VOTE - -------------- We have received conditional regulatory approval to implement the Plan and to establish a charitable foundation, as described in the enclosed Proxy Statement. We must also receive the approval of our depositors and eligible borrowers. YOUR VOTE IS IMPORTANT TO US - NOT RETURNING YOUR ENCLOSED PROXY CARD(S) HAS THE SAME EFFECT AS VOTING "AGAINST" THE PROPOSALS. To cast your vote, please sign each Proxy Card enclosed and return the card(s) in the Proxy Reply Envelope provided. Our Board of Directors urges you to vote "FOR" the Plan and "FOR" the establishment and funding of the charitable foundation. PLEASE NOTE: o Voting does not obligate you to purchase shares of common stock in our offering. o There will be no change to account numbers, interest rates orother terms of your deposit accounts or loans at our Bank, and your deposits will continue to be insured by the FDIC, up to the maximum legal limits. o Our management and staff will continue to serve you, and we will continue to operate as an independent, community-oriented bank. THE STOCK OFFERING - ------------------ We are offering shares of common stock for sale at $10.00 per share. There will be no sales commission charged to purchasers in the stock offering. AS AN ELIGIBLE FIRST FEDERAL OF NORTHERN MICHIGAN DEPOSITOR OR BORROWER, YOU HAVE THE RIGHT, BUT NO OBLIGATION, TO BUY SHARES OF THE COMPANY'S COMMON STOCK IN THE STOCK OFFERING, BEFORE THEY ARE OFFERED FOR SALE TO THE PUBLIC. Before making an investment decision, carefully review the information in the enclosed Prospectus, including the section entitled "Risk Factors." If you are interested in submitting a purchase order for shares of common stock, complete the enclosed Stock Order Form and return it, with full payment, in the enclosed Order Reply Envelope. Payment may be in the form of check, money order or authorization to withdraw funds (without early withdrawal penalty) from your deposit accounts at our Bank. If you wish to purchase stock with funds you have in an IRA, call the Stock Information Center promptly, because IRA related procedures require additional processing time. STOCK ORDER FORMS MUST BE RECEIVED (NOT POSTMARKED) NO LATER THAN 10:00 A.M., ALPENA, MICHIGAN TIME, ON _______ __, 2005. If you have questions about the offering, refer to the enclosed Prospectus and Questions & Answers Brochure. For questions regarding voting, refer to the enclosed Proxy Statement. You may also call our Stock Information Center at the number shown below. I invite you to consider this opportunity to share in our future as a stockholder of First Federal of Northern Michigan Bancorp, Inc., and I thank you for your continued support as a customer of our Bank. Sincerely, Martin A. Thomson President and Chief Executive Officer THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. - -------------------------------------------------------------------------------- QUESTIONS? CALL OUR STOCK INFORMATION CENTER AT (___) ___-____ FROM 9:30 A.M. TO 4:00 P.M., ALPENA, MICHIGAN TIME, MONDAY THROUGH FRIDAY LETTER TO CLOSED DEPOSIT ACCOUNTHOLDERS (CAN BUY, NOT VOTE) [FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. LETTERHEAD] Dear Friend: I am pleased to tell you about an investment opportunity. First Federal of Northern Michigan Bancorp, Inc., formed to be the parent company of First Federal of Northern Michigan, is offering shares of its common stock for sale at a price of $10.00 per share. There will be no sales commission charged to purchasers in the offering. OUR RECORDS INDICATE THAT YOU WERE A FIRST FEDERAL OF NORTHERN MICHIGAN DEPOSITOR AT THE CLOSE OF BUSINESS ON OCTOBER 31, 2003 OR DECEMBER 31, 2004 WHO SUBSEQUENTLY CLOSED YOUR ACCOUNT(S). AS SUCH, YOU HAVE THE RIGHT, BUT NO OBLIGATION, TO BUY SHARES OF COMMON STOCK IN THE OFFERING BEFORE THEY ARE OFFERED FOR SALE TO THE GENERAL PUBLIC. Before making an investment decision, carefully review the information in the enclosed Prospectus including the section entitled "Risk Factors." If you are interested in submitting a purchase order for shares of common stock of First Federal of Northern Michigan Bancorp, Inc., complete the enclosed Stock Order Form and return it, with full payment, in the enclosed Order Reply Envelope. If you wish to purchase stock with funds you have in an IRA, call the Stock Information Center promptly, because IRA related procedures require additional processing time. STOCK ORDER FORMS MUST BE RECEIVED (NOT POSTMARKED) NO LATER THAN 10:00 A.M., ALPENA, MICHIGAN TIME, ON _______, 2005. Sincerely, Martin A. Thomson President and Chief Executive Officer THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. - -------------------------------------------------------------------------------- QUESTIONS? CALL OUR STOCK INFORMATION CENTER AT (___) ___-____ FROM 9:30 A.M. TO 4:00 P.M., ALPENA, MICHIGAN TIME, MONDAY THROUGH FRIDAY LETTER TO ALPENA BANCSHARES PUBLIC STOCKHOLDERS (REGISTERED AND STREET NAME) [ALPENA BANCSHARES, INC. LETTERHEAD] Dear Stockholder: We are soliciting stockholder votes regarding (a) the second-step conversion of Alpena Bancshares, M.H.C. from mutual to stock form and (b) the establishment of a non-profit charitable foundation that we propose to fund with cash and shares of common stock. Pursuant to a Plan of Conversion and Reorganization (the "Plan"), First Federal of Northern Michigan Bancorp, Inc. (the "Company") will succeed Alpena Bancshares, Inc. as the parent company of First Federal of Northern Michigan, and our organization will convert from the partially public to the fully public corporate form, through the sale of shares of common stock of the Company. Upon the conclusion of the Conversion and related stock offering, the Company will be 100% owned by stockholders, including the charitable foundation. THE CONVERSION IS AN INTERNAL CORPORATE RESTRUCTURING MEANT TO GIVE US ADDED OPERATING FLEXIBILITY. WE HAVE NEVER BEEN AFFILIATED WITH ANOTHER BANK, AND OUR ORGANIZATION WILL REMAIN INDEPENDENT AFTER THE CONVERSION. WE BELIEVE THE HOLDING COMPANY'S NAME CHANGE FROM ALPENA BANCSHARES, INC. TO FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. BETTER REFLECTS OUR MARKET AREA, WHICH HAS EXPANDED BEYOND OUR LOCAL REGION. THE PROXY VOTE - -------------- We have received conditional regulatory approval to implement the Plan, however we must also receive the approval of our stockholders. Enclosed are a Proxy Statement and a Prospectus describing the proposals before our stockholders. PLEASE PROMPTLY VOTE THE ENCLOSED PROXY CARD. YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PLAN AND "FOR" THE ESTABLISHMENT OF THE CHARITABLE FOUNDATION. THE EXCHANGE - ------------ At the conclusion of the offering, your current shares of Alpena Bancshares, Inc. common stock will be exchanged for new shares of common stock of the Company. The number of new shares of Company common stock that you receive will be based on an exchange ratio that is described in the Prospectus. Shortly after the completion of the Conversion and offering, we will send a transmittal form to each stockholder who holds stock certificates. The transmittal form will explain the procedure to follow to exchange your current shares. PLEASE DO NOT DELIVER YOUR CERTIFICATE(S) BEFORE YOU RECEIVE THE TRANSMITTAL FORM. Shares that are held in street name (in a brokerage account) will be converted automatically at the conclusion of the offering; no action or documentation is required of you. THE STOCK OFFERING - ------------------ We are offering shares of common stock for sale at $10.00 per share. The shares are currently being offered in a Subscription Offering to First Federal of Northern Michigan's eligible depositors and borrowers. If all shares are not subscribed for in the Subscription Offering, we may choose to offer the shares in a Community Offering to Alpena Bancshares, Inc.'s public stockholders and others not eligible to place orders in the Subscription Offering. If you may be interested in purchasing shares of our common stock, contact our Stock Information Center at the number below. The Community Offering, if any, may commence during the Subscription Offering. The stock offering period is expected to end on _____ __, 2005. [NOTE: THIS LETTER ASSUMES NO ORDER FORM IS ENCLOSED. IT IS POSSIBLE TO INCLUDE ORDER FORMS, BUT ONLY FOR REGISTERED HOLDERS. BROKERAGES WILL NOT MAIL ORDER FORMS WITH THE PROXY MATERIAL.] Existing publicly held shares of Alpena Bancshares, Inc.'s common stock trade over the counter on the OTC Bulletin Board under the symbol "ALPN." When the offering concludes, First Federal of Northern Michigan Bancorp, Inc. common stock will trade on the Nasdaq National Market, under the symbol "_____." Sincerely, Martin A. Thomson President and Chief Executive Officer THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS RELATING TO THE STOCK OFFERING. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. - -------------------------------------------------------------------------------- QUESTIONS? CALL OUR STOCK INFORMATION CENTER AT (___) ___-____ FROM 9:30 A.M. TO 4:00 P.M., ALPENA, MICHIGAN TIME, MONDAY THROUGH FRIDAY LETTER TO POTENTIAL INVESTORS (CALL-IN COMMUNITY MEMBERS) [FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. LETTERHEAD] THIS LETTER IS FOR "CALL-INS". WE WILL GRANT REQUESTS FOR OFFERING MATERIALS IF/WHEN WE COMMENCE A COMMUNITY OFFERING. Dear Friend: I am pleased to tell you about an investment opportunity. First Federal of Northern Michigan Bancorp, Inc., formed to be the parent company of First Federal of Northern Michigan, is offering shares of its common stock for sale in an initial public stock offering at a price of $10.00 per share. There will be no sales commission charged to purchasers in the offering. Before making an investment decision, carefully review the information in the enclosed Prospectus including the section entitled "Risk Factors." If you are interested in submitting a purchase order for shares of common stock, complete the enclosed Stock Order Form and return it, with full payment, in the enclosed Order Reply Envelope. STOCK ORDER FORMS MUST BE RECEIVED (NOT POSTMARKED) NO LATER THAN 10:00 A.M., ALPENA, MICHIGAN TIME, ON _______ __, 2005. If you wish to purchase stock with funds you have in an IRA, call the Stock Information Center promptly, because IRA related procedures require additional processing time. Sincerely, Martin A. Thomson President and Chief Executive Officer THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. - -------------------------------------------------------------------------------- QUESTIONS? CALL OUR STOCK INFORMATION CENTER AT (___) ___-____ FROM 9:30 A.M. TO 4:00 P.M., ALPENA, MICHIGAN TIME, MONDAY THROUGH FRIDAY RYAN BECK "BROKER DEALER" LETTER [RYAN BECK LETTERHEAD] Ryan Beck Logo Here (27 PT) Dear Sir/Madam: At the request of First Federal of Northern Michigan Bancorp, Inc., we are enclosing materials regarding the offering of shares of First Federal of Northern Michigan Bancorp, Inc. common stock. Included in this package is a Prospectus and Questions & Answers Brochure describing the stock offering. Ryan Beck & Co., Inc. has been retained by First Federal of Northern Michigan Bancorp, Inc. as selling agent in connection with the stock offering. Sincerely, RYAN BECK & CO. (smaller than 27 PT) THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. - -------------------------------- NOTE: TO ACCOMPANY EACH OF THE FOUR OF THE PRECEDING LETTERS. STOCK ORDER ACKNOWLEDGEMENT LETTER [FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. LETTERHEAD] [imprinted with name & address of subscriber] Date STOCK ORDER ACKNOWLEDGEMENT This letter confirms receipt of your order to purchase shares of First Federal of Northern Michigan Bancorp, Inc. common stock. Please review the following information carefully to verify that we have accurately entered your order information into our system. If any information does not agree with your records, please call our Stock Information Center at (___) ___-____ , from 9:30 a.m. to 4:00 p.m., Alpena, Michigan time, Monday through Friday. Refer to the batch and order number listed below when contacting us. - -------------------------------------------------------------------------------- ORDER INFORMATION: - ------------------ BATCH #: _____ ORDER #: _____ NO. OF SHARES REQUESTED: _________ OFFERING CATEGORY: _________(SUBJECT TO VERIFICATION; SEE DESCRIPTIONS BELOW) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- STOCK REGISTRATION: - ------------------- NAME 1 NAME 2 NAME 3 ADDRESS1 ADDRESS2 CITY, STATE, ZIP OWNERSHIP TYPE: SOCIAL SECURITY #/TAX ID#: ___-__-____ - -------------------------------------------------------------------------------- THIS LETTER ACKNOWLEDGES ONLY THAT YOUR ORDER AND PAYMENT HAVE BEEN RECEIVED. IT DOES NOT GUARANTEE THAT YOUR ORDER WILL BE FILLED, EITHER COMPLETELY OR PARTIALLY. SHARE ALLOCATION PROCEDURES AND PURCHASE LIMITATIONS ARE DESCRIBED IN THE FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. PROSPECTUS DATED __________, 2005, STARTING ON PAGE __. The offering period ends at 10:00 a.m. Alpena, Michigan time, on _______ __, 2005. We are required to receive final regulatory approval before stock certificates can be mailed and the newly issued shares can begin trading. Your patience is appreciated. Thank you for your order, FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. - -------------------------------------------------------------------------------- OFFERING CATEGORY DESCRIPTION: 1. First, to Depositors with accounts at First Federal of Northern Michigan with aggregate balances of at least $50.00 at the close of business on October 31, 2003; 2. Second, to First Federal of Northern Michigan's employee stock ownership plan; 3. Third, to depositors with accounts at First Federal of Northern Michigan with aggregate balances of at least $50.00 at the close of business on December 31, 2004; 4. Fourth, to depositors of First Federal of Northern Michigan at the close of business on _______, 2005 and to borrowers of First Federal of Northern Michigan as of November 4, 1994 whose borrowings remained outstanding at the close of business on _______, 2005; 5. GENERAL PUBLIC - Residents of Alpena, Alcona, Antrim, Charlevoix, Cheboygan, Crawford, Emmet, Iosco, Kalkaska, Montmorency, Ogemaw, Oscoda, Otsego and Presque Isle Counties, MI; 6. GENERAL PUBLIC - Alpena Bancshares, Inc. stockholders at the close of business on January 31, 2005; 7. GENERAL PUBLIC -- Other NOTE: PRINTED AND MAILED IN THE STOCK INFORMATION CENTER AFTER AN ORDER IS PROCESSED. STOCK CERTIFICATE MAILING LETTER Dear Stockholder: I would like to thank you for participating in our stock offering. A total of ___________ shares were purchased by investors at a price of $10.00 per share. Your stock certificate is enclosed. Please review the certificate to make sure the registration name and address are correct. If you find an error or have questions about your certificate, please contact our Transfer Agent: BY MAIL: Registrar & Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 or BY PHONE: (800) 368-5948 If the enclosed stock certificate must be forwarded for reissue, we recommend that it be sent to the Transfer Agent by registered mail. If you change your address, please notify the Transfer Agent immediately, so that you will continue to receive stockholder communications. If you paid for your shares by check or money order, you have received, or soon will receive, a check representing interest earned on your funds. Interest payments were calculated at First Federal of Northern Michigan's passbook savings rate (___ % per annum) from the date your funds were received until ______, 2005. If you paid for your shares by authorizing a withdrawal from a First Federal of Northern Michigan deposit account, that withdrawal has been made. Interest was earned at your account's contractual rate, and was credited to your account to the date of withdrawal, _______, 2005. First Federal of Northern Michigan Bancorp, Inc. common stock trades on the Nasdaq National Market, under the symbol "_____." Sincerely, Martin A. Thomson President and Chief Executive Officer PROXYGRAM LETTER #1 THIS REMINDER NOTE ACCOMPANIES A PROXY CARD AND RETURN ENVELOPE SENT TO HIGH VOTE CUSTOMERS SHORTLY AFTER THE INITIAL MAILING. FOR A SECOND REMINDER, WE MAY USE THE ONE ON THE NEXT PAGE. R E M I N D E R Please vote and return the enclosed Proxy Card! ----------------------------------------------- IF YOU HAVE NOT YET VOTED THE PROXY CARD(S) WE RECENTLY MAILED TO YOU, PLEASE VOTE THE ENCLOSED REPLACEMENT PROXY CARD. FOR YOUR CONVENIENCE, WE HAVE ENCLOSED A REPLY ENVELOPE. NOTE THAT: o VOTING DOES NOT OBLIGATE YOU TO PURCHASE SHARES OF COMMON STOCK DURING OUR OFFERING. o NOT VOTING HAS THE SAME EFFECT AS VOTING "AGAINST" THE TWO PROPOSALS. o YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PLAN AND "FOR" ESTABLISHMENT OF THE CHARITABLE FOUNDATION. IF YOU RECEIVE MORE THAN ONE OF THESE REMINDER MAILINGS, PLEASE VOTE EACH PROXY RECEIVED. NONE ARE DUPLICATES! QUESTIONS? Please call our Stock Information Center at (___) ___-____, Monday through Friday, 9:30 a.m. to 4:00 p.m., Alpena, Michigan time FIRST FEDERAL OF NORTHERN MICHIGAN [LOGO] - --------------- NOTE: THIS IS PRINTED ON 8 1/2" X 11" YELLOW PAPER. PROXYGRAM LETTER #2 PLEASE VOTE AND RETURN THE ENCLOSED PROXY! OUR RECORDS INDICATE WE HAVE NOT RECEIVED THE PROXY CARD(S) WE MAILED TO YOU [EARLIER THIS MONTH]. IF YOU ARE UNSURE WHETHER YOU VOTED THE PROXY CARD(S), PLEASE VOTE THE ENCLOSED REPLACEMENT PROXY CARD. YOUR VOTE CANNOT BE COUNTED TWICE! YOUR BOARD OF DIRECTORS HOPE THAT YOU VOTE "FOR" THE PLAN AND "FOR" ESTABLISHMENT OF THE CHARITABLE FOUNDATION. NOT VOTING HAS THE SAME EFFECT AS VOTING "AGAINST" THE TWO PROPOSALS. VOTING DOES NOT OBLIGATE YOU TO PURCHASE SHARES OF COMMON STOCK DURING OUR OFFERING, NOR DOES IT AFFECT YOUR DEPOSIT ACCOUNTS OR LOANS. IF YOU RECEIVE MORE THAN ONE OF THESE REMINDER MAILINGS, PLEASE VOTE EACH PROXY RECEIVED. NONE ARE DUPLICATES! THANK YOU! QUESTIONS? CALL OUR STOCK INFORMATION CENTER AT (___) ___-____ MONDAY THROUGH FRIDAY, 9:30 A.M. TO 4:00 P.M., ALPENA, MICHIGAN TIME FIRST FEDERAL OF NORTHERN MICHIGAN [LOGO] - ---------- NOTE: THIS IS PRINTED ON 8 1/2" X 11" GREEN PAPER. TOMBSTONE NEWSPAPER ADVERTISEMENT (OPTIONAL - REQUIRES THAT A COMMUNITY OFFERING BE UNDERWAY) FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. [LOGO] (SUCCESSOR TO ALPENA BANCSHARES, INC. AS HOLDING COMPANY FOR FIRST FEDERAL OF NORTHERN MICHIGAN) UP TO 1,840,000 SHARES COMMON STOCK PRICE $10.00 PER SHARE First Federal of Northern Michigan Bancorp, Inc. is conducting an offering of its common stock. Shares may be purchased directly from First Federal of Northern Michigan Bancorp, Inc., without sales commissions or fees, during the offering period. THIS OFFERING EXPIRES AT 10:00 A.M. ON ________, 2005. To receive a copy of the Prospectus, call our Stock Information Center at (___) ___-____, Monday through Friday, 9:30 a.m. to 4:00 p.m. THIS ADVERTISEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. OPTION #1 BRANCH LOBBY POSTER - VOTE NOTE: EITHER THIS NOTICE OR THE FOLLOWING NOTICE SHOULD BE PRINTED BY FIRST FEDERAL OF NORTHERN MICHIGAN AND PLACED IN BRANCHES ON AN EASEL OR ON THE FRONT DOORS OR AT TELLER "WINDOWS". ^ ^ ^ HAVE YOU CAST YOUR VOTE YET? We would like to remind customers to vote on our Plan of Conversion and Reorganization and establishment of the Charitable Foundation. Please vote the Proxy Card(s) we mailed to you. The Plan of Conversion and Reorganization will not result in changes to your account relationships with the Bank. Your deposit accounts will continue to be insured by the FDIC, up to the maximum legal limits. Voting does not obligate you to purchase First Federal of Northern Michigan Bancorp, Inc. common stock during the stock offering. Our directors recommend that you join them in voting "FOR" the Plan and "FOR" establishment of the Charitable Foundation. ^ ^ ^ IF YOU HAVE QUESTIONS, CALL OUR STOCK INFORMATION CENTER AT (___) ___-____ MONDAY THROUGH FRIDAY, 9:30 A.M. TO 4:00 P.M. OUR STOCK INFORMATION CENTER IS LOCATED AT OUR EXECUTIVE OFFICES, 100 SOUTH SECOND AVENUE, ALPENA FIRST FEDERAL OF NORTHERN MICHIGAN [LOGO] THIS NOTICE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. OPTION # 2 BRANCH LOBBY POSTER - BUY & VOTE TIME IS RUNNING OUT! WE ARE CONDUCTING AN OFFERING OF SHARES OF OUR COMMON STOCK UP TO 1,840,000 SHARES COMMON STOCK $10.00 Per Share THIS OFFERING EXPIRES AT 10:00 A.M. ON _______ __, 2005 ^ ^ ^ HAVE YOU CAST YOUR VOTE YET? We would like to remind customers to vote on our Plan of Conversion and Reorganization and on establishment of the Charitable Foundation. Please vote the Proxy Cards we mailed to you. ^ ^ ^ The Plan of Conversion and Reorganization will not result in changes to your account relationships with the Bank. Your deposit accounts will continue to be insured by the FDIC, up to the maximum legal limits. Voting does not obligate you to purchase First Federal of Northern Michigan Bancorp, Inc. common stock during the stock offering. IF YOU HAVE QUESTIONS ABOUT THE STOCK OFFERING OR VOTING, CALL OUR STOCK INFORMATION CENTER AT (___) ___-____ MONDAY THROUGH FRIDAY, 9:30 A.M. TO 4:00 P.M. OUR STOCK INFORMATION CENTER IS LOCATED AT OUR EXECUTIVE OFFICES, 100 SOUTH SECOND AVENUE, ALPENA FIRST FEDERAL OF NORTHERN MICHIGAN [LOGO] THIS NOTICE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. VOTE - BANK STATEMENT REMINDER CLAUSE (OPTIONAL) In early/late [month], you may have received a large envelope containing proxy card(s) to be used to vote on our proposed Plan of Conversion and Reorganization and establishment and funding of a charitable foundation. If you received proxy cards, but have not voted, please do so. If you have questions about voting, please call our Stock Information Center at (___) ___-____, Monday through Friday, 9:30 a.m. to 4:00 p.m., Alpena, Michigan time. Thank you. - --------------- NOTE: THIS OPTIONAL REMINDER CAN BE PRINTED IN A "NOTICE" SECTION OF BANK STATEMENTS. ALTERNATIVELY, THE STATEMENT CAN INCLUDE A SLIP OF PAPER PRINTED WITH THIS REMINDER. HEADQUARTERS LOBBY SIGN LOOKING FOR THE FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. STOCK INFORMATION CENTER? PLEASE CHECK IN WITH ONE OF OUR TELLERS. QUESTIONS & ANSWERS BROCHURE THIS WILL BE INCLUDED IN THE PACKAGE TO CUSTOMERS AND IT WILL BE INCLUDED IN THE STOCKHOLDER PACKAGES, IF ORDER FORMS WILL BE IN THEM. Q&A ABOUT OUR CONVERSION AND STOCK OFFERING THIS PAMPHLET ANSWERS QUESTIONS ABOUT FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.'S STOCK OFFERING. INVESTING IN SHARES OF COMMON STOCK INVOLVES CERTAIN RISKS. BEFORE MAKING AN INVESTMENT DECISION, PLEASE READ THE ENCLOSED PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION. GENERAL -- THE CONVERSION - ------------------------- OUR BOARD OF DIRECTORS HAS DETERMINED THAT OUR CONVERSION TO A FULLY PUBLIC STOCK HOLDING COMPANY (THE "CONVERSION") IS IN THE BEST INTEREST OF OUR STOCKHOLDERS, EMPLOYEES, CUSTOMERS AND THE COMMUNITIES WE SERVE. BACKGROUND -- In 1994, First Federal of Northern Michigan (the "Bank") reorganized into the mutual holding company form of organization. Alpena Bancshares, M.H.C. is a MUTUAL (meaning no stock outstanding) holding company, and Alpena Bancshares, Inc. is a STOCK holding company. A majority (55.4%) of the outstanding shares of Alpena Bancshares, Inc. common stock is owned by Alpena Bancshares, M.H.C. (the "MHC"), while public stockholders own the remainder. Alpena Bancshares, Inc. is the parent company of the Bank. The Conversion is a change in corporate form. Pursuant to the terms of our Plan of Conversion, our organization will convert to the fully public corporate form. On page ___ of the Prospectus, there are charts of our organizational structure before and after the Conversion. In connection with the Conversion, we formed First Federal of Northern Michigan Bancorp, Inc. The 55.4% ownership interest of the MHC is being offered for sale through a common stock offering by First Federal of Northern Michigan Bancorp, Inc. Upon the completion of the Conversion and related stock offering, the MHC will cease to exist. As a result of the sale of shares, First Federal of Northern Michigan Bancorp, Inc. will be fully public, 100% owned by stockholders, and it will succeed Alpena Bancshares, Inc. as the Bank's parent company. In addition to the stock shares to be issued to those who purchase shares in the stock offering, public stockholders of Alpena Bancshares, Inc. at the completion of the Conversion will receive shares of common stock of First Federal of Northern Michigan Bancorp, Inc. in exchange for their existing shares of Alpena Bancshares, Inc. stock. First Federal of Northern Michigan Bancorp, Inc. will also issue common stock to investors in the stock offering and to our proposed charitable foundation. Q. WHAT ARE THE REASONS FOR THE CONVERSION? - ------------------------------------------- A. The funds generated from the sale of stock will support internal growth and the development of products and services. Our stock holding company structure will increase our flexibility in growing our organization through branch and whole bank acquisitions, as opportunities arise. We believe our competitive position will be enhanced. Q. WILL CUSTOMERS NOTICE ANY CHANGE IN FIRST FEDERAL OF NORTHERN MICHIGAN'S - ---------------------------------------------------------------------------\ DAY-TO-DAY ACTIVITIES AS A RESULT OF THE CONVERSION? - ---------------------------------------------------- A. No. It will be business as usual. Our Bank is not affiliating with another bank. The Conversion is an INTERNAL change to our corporate structure. We are not affiliating with an outside company. There will be no change to our Bank's name, management, staff or branches as a result of the Conversion. Q. WILL THE CONVERSION AFFECT CUSTOMERS' DEPOSIT ACCOUNTS OR LOANS? - ------------------------------------------------------------------- A. No. The Conversion will not affect the balance or terms of deposits or loans, and deposits will continue to be federally insured by the Federal Deposit Insurance Corporation ("FDIC") up to the maximum legal limit. DEPOSIT ACCOUNTS ARE NOT BEING CONVERTED TO STOCK. THE STOCK OFFERING AND PURCHASING SHARES - ---------------------------------------- Q. HOW MANY SHARES ARE BEING OFFERED AND AT WHAT PRICE? - ------------------------------------------------------- A. First Federal of Northern Michigan Bancorp, Inc. is offering between 1,360,000 and 1,840,000 shares at $10.00 per share, subject to increase to 2,116,000 shares, depending on market conditions. Q. WHO IS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION OFFERING AND COMMUNITY - ------------------------------------------------------------------------------- OFFERING? - --------- A. By regulation, non-transferable rights to buy shares of common stock in a SUBSCRIPTION OFFERING have been granted in the following descending order of priority: Priority #1 - First, to depositors with accounts at First Federal of Northern Michigan with aggregate balances of at least $50 at the close of business on October 31, 2003. Priority #2 - Second, to First Federal of Northern Michigan's employee stock ownership plan. Priority #3 - Third, to depositors with accounts at First Federal of Northern Michigan with aggregate balances of at least $50 at the close of business on December 31, 2004. Priority #4 - Fourth, to depositors of First Federal of Northern Michigan at the close of business on January 31, 2005 and to borrowers of First Federal of Northern Michigan at the close of business on November 4, 1994, whose borrowing(s) remained outstanding as of January 31, 2005. If all shares are not subscribed for in the Subscription Offering, First Federal of Northern Michigan Bancorp, Inc. may choose to offer the shares to the general public in a Community Offering. The COMMUNITY OFFERING, if any, may commence during the Subscription Offering or just after the Subscription Offering concludes. If a Community Offering is conducted, shares will be offered with a preference given first, to natural persons residing in the Michigan counties of Alpena, Alcona, Antrim, Charlevoix, Cheboygan, Crawford, Emmet, Iosco, Kalkaska, Montmorency, Ogemaw, Oscoda, Otsego and Presque Isle. Second preference will be granted to Alpena Bancshares, Inc. public stockholders at the close of business on January 31, 2005. In the event orders are received for more shares than are available for sale in the stock offering, shares will be allocated, as described below. Q. IS IT POSSIBLE THAT I WILL NOT RECEIVE ANY SHARES? - ----------------------------------------------------- A. Yes. If we receive orders for more shares than we have available to sell, we will be required to allocate shares in the order of priority outlined under the headings "THE CONVERSION - LIMITATIONS ON COMMON STOCK PURCHASES", beginning on page __ of the Prospectus. If we are unable to fill your order, or can only fill your order in part, you will receive a refund of the appropriate amount, with interest. If you paid by check or money order, we will issue you a refund check. If you paid by authorizing withdrawal from your First Federal of Northern Michigan deposit account(s), we will withdraw only the funds necessary to pay for the shares you receive. Unused funds, along with accrued interest, will remain in your account(s). Q. HOW MAY I PURCHASE SHARES IN THE SUBSCRIPTION OFFERING OR COMMUNITY OFFERING? - -------------------------------------------------------------------------------- A. Shares may only be purchased by completing a stock order form and returning it, with full payment or direct deposit account withdrawal authorization, so that it is RECEIVED (not postmarked) by the offering deadline, 10:00 a.m., Alpena, Michigan time, on _______ __, 2005. STOCK ORDER FORMS MAY NOT BE DELIVERED TO FIRST FEDERAL OF NORTHERN MICHIGAN BRANCHES OR OTHER OFFICES. Delivery of a stock order form may only be made by: (1) mail, using the reply envelope provided, (2) overnight delivery to the Stock Information Center address noted on the stock order form, or (3) hand-delivery to the Stock Information Center, located at First Federal of Northern Michigan Bancorp, Inc.'s executive offices. Q. I AM ELIGIBLE TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE SUBSCRIPTION - ---------------------------------------------------------------------------- OFFERING. MAY I REGISTER THE SHARES IN SOMEONE ELSE'S NAME? - ----------------------------------------------------------- A. On your stock order form, you must register the shares only in the name or names of persons who qualify in your eligibility priority. You may not add the name(s) of persons/entities who qualify in a lower purchase priority than yours. Q. HOW MAY I PAY FOR THE SHARES? - -------------------------------- A. Payment for shares can be remitted in two ways: (1) by personal check, bank check or money order made payable directly to First Federal of Northern Michigan. These will be cashed immediately. First Federal of Northern Michigan line of credit checks and third party checks, however, may not be used as payment for shares. (2) authorizing us to withdraw funds from the types of First Federal of Northern Michigan deposit accounts designated on the stock order form section entitled "Method of Payment," which allows you to designate account number(s) and amount(s) to be withdrawn. The amount(s) authorized by you must be available within the designated account(s) at the time you submit the stock order form. A hold will be placed on the dollar amounts authorized, and the funds will not be available to you. First Federal of Northern Michigan will waive early withdrawal penalties for certificate of deposit account funds used to purchase shares. Q. WILL I EARN INTEREST ON MY FUNDS? - ------------------------------------ A. Yes. If you pay by check or money order, you will earn interest at First Federal of Northern Michigan's current passbook savings rate from the day we cash your check or money order until the completion of the offering, when we will issue you a check for interest earned on these funds. If you pay for the shares by authorizing a direct withdrawal from your First Federal of Northern Michigan deposit account(s), your funds will continue earning interest at the contractual rate, and the interest will remain in your account(s). Q. ARE THERE LIMITS ON HOW MANY SHARES I CAN ORDER? - --------------------------------------------------- A. Yes. The minimum order is 25 shares ($250). No individual, or individual exercising subscription rights through a qualifying account held jointly, may purchase more than 15,000 shares ($150,000) of common stock. Further, no person together with associates or persons acting in concert, may purchase an aggregate of more than 25,000 shares ($250,000). More detail on purchase limits, including the definition of "associate" and "acting in concert", can be found beginning on page __ of the Prospectus. Q. MAY I USE MY FIRST FEDERAL OF NORTHERN MICHIGAN LOAN OR LINE OF CREDIT TO PAY - -------------------------------------------------------------------------------- FOR SHARES? - ----------- A. No. First Federal of Northern Michigan, by regulation, may not extend a loan or advance funds under a line of credit for the purchase of stock in the offering. Q. MAY I USE MY FIRST FEDERAL OF NORTHERN MICHIGAN IRA, OR AN IRA HELD - ---------------------------------------------------------------------- ELSEWHERE, TO PURCHASE THE SHARES? - ---------------------------------- A. You MIGHT be able to use IRA funds, however, using them for this type of purchase requires special arrangements and additional processing time. If you are interested in using IRA funds held at First Federal of Northern Michigan or elsewhere, please call the Stock Information Center for assistance as soon as possible - preferably at least two weeks prior to the ______, 2005 offering deadline. Your ability to use retirement funds may depend on timing constraints and, possibly, limitations imposed by the IRA trustee. Q. WILL THE STOCK BE INSURED? - ----------------------------- A. No. Like any other shares of common stock, First Federal of Northern Michigan, Bancorp Inc.'s shares of common stock are not insured. Q. WILL DIVIDENDS BE PAID ON THE STOCK? - --------------------------------------- A. First Federal of Northern Michigan Bancorp, Inc. currently intends to continue to pay quarterly cash dividends. After adjustment for the exchange ratio, we expect the quarterly dividends to equal $0.07, $0.06, $0.05, and $0.04 per share at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. Based on a price of $10.00 per share in the stock offering, this represents an annual dividend yield of 2.8%, 2.4%, 2.0% and 1.6%, at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. No assurances can be given that dividends will be paid, or if paid, will continue. Q. WILL A COMMISSION BE CHARGED FOR THE PURCHASE OF SHARES? - ----------------------------------------------------------- A. All shares will be sold at a purchase price of $10.00 per share. No commission or fee will be charged for the purchase of common stock in the stock offering. After the shares begin to trade, if you purchase or sell shares through a brokerage or other firm offering investment services, the firm may charge fees or commissions. Q. HOW WILL FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP INC.'S SHARES BE TRADED? - ------------------------------------------------------------------------------- A. Upon completion of the Conversion and stock offering, the new shares of common stock of First Federal of Northern Michigan Bancorp, Inc. will replace existing shares of Alpena Bancshares, Inc., and we expect the new shares will be traded on the Nasdaq National Market under the symbol "_____." As soon as possible after completion of the offering, investors will be mailed stock certificates. ALTHOUGH THE SHARES OF COMMON STOCK WILL HAVE BEGUN TRADING, BROKERAGE FIRMS MAY REQUIRE THAT YOU HAVE RECEIVED YOUR CERTIFICATE(S) PRIOR TO SELLING YOUR SHARES. WHERE TO GET MORE INFORMATION - ----------------------------- Q. WHERE CAN I CALL TO GET MORE INFORMATION? - -------------------------------------------- A. A Stock Information Center has been established at First Federal of Northern Michigan Bancorp, Inc. executive offices. For assistance, you may call the Stock Information Center at (___)___ - ____ from 9:30 a.m. to 4:00 p.m., Alpena, Michigan time, Monday through Friday. The Center will be closed on weekends and on bank holidays. THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE SHARES OF COMMON STOCK ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. EX-99.6 9 tex99_6-4648.txt EX-99.6 EXHIBIT 99.6
FIRST FEDERAL OF NORTHERN MICHIGAN REVOCABLE PROXY [X] Please vote by marking one of the boxes as shown. IF SIGNED, THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS PROXY, IF SIGNED 1. To vote FOR or AGAINST a plan of conversion and WILL BE VOTED FOR THE PROPOSITIONS STATED ABOVE. IF ANY reorganization (the "Plan"). OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED BY THE NAMED PROXIES AT THE DIRECTION FOR [ ] AGAINST [ ] A MAJORITY OF THE BOARD OF DIRECTORS. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSIN 2. To vote FOR or AGAINST the contribution by Alpena Bancshares, TO BE PRESENTED AT THE MEETING. M.H.C. to the First Federal Community Foundation (the "Foundation"). VOTES WILL BE CAST IN ACCORDANCE WITH THIS PROXY. SHOULD THE UNDERSIGNED BE PRESENT AND ELECT TO FOR [ ] AGAINST [ ] VOTE AT THE MEETING OR AT ANY ADJOURNMENT THEREOF AND AFTER NOTIFICATION TO THE SECRETARY OF ALPENA BANCSHARES, M.H.C. AT SAID MEETING OF THE MEMBER'S DECISION TO TERMINATE THIS PROXY, THEN THE POWER OF SAID ATTORNEY-IN-FACT OR AGENTS SHALL BE DEEMED TERMINATED AND OF NO FURTHER FORCE AND EFFECT. THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A NOTICE OF SPECIAL MEETING OF DEPOSITORS OF FIRST FEDERAL OF NORTHERN MICHIGAN CALLED FOR __________ ___, 2005 WITH AN ATTACHED PROXY STATEMENT FOR THE SPECIAL MEETING PRIOR TO THE SIGNING OF THIS PROXY CARD. ------------------------------------------------------- Signature Date IMPORTANT: Please sign your name exactly as it appears on this proxy. Only one signature is required in the case of a joint account. When signing as an attorney, administrator, agent, officer, executor, trustee, guardian, etc., please add your full title to your signature. PLEASE COMPLETE, DATE, SIGN, AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED PROXY RETURN ENVELOPE. PLEASE SIGN AND RETURN ALL CARDS THAT YOU RECEIVE. NONE ARE DUPLICATES. - ------------------------------------------------------------------------------------------------------------------------------------ - -------------------------------------------- --------------------------------------------- ^ DETACH HERE ^ FOR INTERNAL USE ONLY STOCK ORDER FORM --------------------------------------------- PLEASE COMPLETE APPLICABLE SHADED AREAS REC'D #___ BATCH #___ --------------------------------------- ORDER #___ CATEGORY #___ LOGO TO COME --------------------------------------------- O____________________ C____________________ - -------------------------------------------- Stock Information Center --------------------------------------------- 100 S. Second Avenue, Alpena, MI 49707 --------------------------------------------- QUESTIONS? Call us at ( ) ___-____ ORDER DEADLINE & DELIVERY: Stock Order Forms, 9:30 a.m. to 4:00 p.m., properly completed and with full payment, Monday through Friday must be received (not postmarked) by 10:00 --------------------------------------- a.m., Alpena, Michigan time, on _____ __, 2005. Stock Order Forms can be delivered by using the enclosed order reply envelope, or by hand or overnight delivery to the Stock Information Center. Please read important instructions on the reverse side as - ----------------------------------------------------------------------------------------------- complete this form. FAXES OR COPIES (1) SHARES REQUESTED 25 SHARE MINIMUM. NUMBER OF SHARES PRICE PER SHARE TOTAL PAYMENT DUE OF THIS FORM CAN BE ACCEPTED OR SEE REVERSE SIDE FOR MAXIMUM --------------- ----------------- REJECTED. Each Stock Order Form PURCHASE LIMITATIONS X $10.00 = $ .00 will generate one stock certificate --------------- ----------------- (subject to stock allocation provisions described in the Prospectus). - ----------------------------------------------------------------------------------------------- ----------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ (3) METHOD OF PAYMENT - (4) METHOD OF PAYMENT - WITHDRAWAL CHECK OR MONEY ORDER The undersigned authorizes withdrawal from the First Federal of Northern Michigan Enclosed is a check or money order made deposit account(s) listed below. There will be no early withdrawal penalty payable to FIRST FEDERAL OF NORTHERN applicable for funds authorized on this form. Funds designated for withdrawal must MICHIGAN in the amount of: be in the account(s) listed at the time this stock order form is received. Please - ----------------------- do not list deposit accounts that have check-writing privileges. Instead, you may $ .00 submit a check written on this type of account. FIRST FEDERAL OF NORTHERN MICHIGAN - ----------------------- IRA ACCOUNTS MAY NOT BE LISTED FOR DIRECT WITHDRAWAL BELOW. NO CASH OR WIRE TRANSFERS WILL BE ACCEPTED. ------------------------------------------------------------------------------ CHECKS WILL BE CASHED UPON RECEIPT. FIRST FOR INTERNAL USE ONLY ACCOUNT NUMBER(S) WITHDRAWAL AMOUNT(S) FEDERAL OF NORTHERN MICHIGAN LINE OF CREDIT ------------------------------------------------------------------------------ CHECKS MAY NOT BE REMITTED AS PAYMENT WITH --------------------------- ----------------------- ------------------------- THIS FORM. $ .00 --------------------------- ----------------------- ------------------------- $ .00 --------------------------- ----------------------- ------------------------- $ .00 --------------------------- ----------------------- ------------------------- TOTAL WITHDRAWAL AMOUNT $ .00 ------------------------- - -------------------------------------------- -------------------------------------------------------------------------------------- (5) PURCHASER INFORMATION ACCOUNT INFORMATION - SUBSCRIPTION OFFERING SUBSCRIPTION OFFERING. Check the one box as of the earliest date to the purchaser(s) listed in Section 7 below. If you checked boxes (a), (b), or (c), please provide the A. [ ] Purchaser(s) listed below had accounts at First Federal of following information as of the eligibility date under which Northern Michigan with aggregate balances of at least $50 you qualify in the subscription offering. at the close of business on October 31, 2003. B. [ ] Purchaser(s) listed below had accounts at First Federal of --------------------------------------- ---------------------- Northern Michigan with aggregate balances of at least $50 ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S) at the close of business on December 31, 2004. --------------------------------------- ---------------------- C. [ ] Purchaser(s) listed below had accounts at First Federal of Northern Michigan at the close of business on January 31, --------------------------------------- ---------------------- 2005 or were borrowers of the Bank at the close of business on November 4, 1994 whose borrowings remained outstanding --------------------------------------- ---------------------- at the close of business on January 31, 2005. COMMUNITY OFFERING. If (a) through (c) above do not apply to the --------------------------------------- ---------------------- purchaser(s) listed in Section 7, check the first box below that Please attach a separate page if additional space is required. applies to this order. Not listing all eligible deposit accounts, or providing D. [ ] You are a resident of Alpena, Alcona, Antrim, Charlevoix, incorrect or incomplete information, could result in the loss Cheboygan, Crawford, Emmet, Iosco, Kalkaska, Montmorency, of all or part of any share allocation. Ogemaw, Oscoda, Otsego and Presque Isle Counties, MI. E. [ ] You are an Alpena Bancshares, Inc. stockholder at the close of business on January 31, 2005. F. [ ] You are placing an order in the Community Offering, and (d) and (e) above do not apply. - ------------------------------------------------------------------------------------------------------------------------------------ (6) MANAGEMENT AND EMPLOYEES (CHECK THE BOX, IF APPLICABLE) [ ] Check if you are a First Federal of Northern Michigan director, officer, or employee or a member of their immediate family as defined on the reverse side of this form. - ------------------------------------------------------------------------------------------------------------------------------------ (7) STOCK REGISTRATION Please PRINT clearly and provide all information requested. Read reverse side of this form carefully for important registration information. Use full First and Last name(s), not initials. If purchasing in the Subscription Offering (i.e., you checked box (a), (b) or (c) in Section 5 of this form) you may not add the names of persons/entities who qualify in a lower purchase priority than yours. - ----------------------------------------------------------------------------------- ------------------------------------------- - ----------------------------------------------------------------------------------- ------------------------------------------- First Name, Middle Initial, Last Name Social Security No./Tax ID No. (to be used for reporting purposes) - ----------------------------------------------------------------------------------- ------------------------------------------- - ----------------------------------------------------------------------------------- ------------------------------------------- First Name, Middle Initial, Last Name Social Security No./Tax ID No. - ----------------------------------------------------------------------------------- ------------------------------------------- - ----------------------------------------------------------------------------------- ------------------------------------------- Street Daytime Phone Number - --------------------------------------------- ------------------ -------------- ------------------------------------------- - --------------------------------------------- ------------------ -------------- ------------------------------------------- City State Zip Evening Phone Number - ------------------------------------------------------------------------------------------------------------------------------------ (8) FORM OF STOCK OWNERSHIP [ ] Individual [ ] Joint Tenants [ ] Tenants in Common FOR SELF-DIRECTED IRAs ONLY (see order form instructions on [ ] Uniform Transfer to Minors Act [ ] Corporation reverse side) [ ] Partnership [ ] Other ___________ [ ] IRA SSN of Beneficial Owner:_____-___-_____ - ------------------------------------------------------------------------------------------------------------------------------------ (9) ACKNOWLEDGMENT AND SIGNATURE Please read the following acknowledgment carefully. I agree that after receipt by First Federal of Northern Michigan Bancorp, Inc., this Stock Order Form may not be modified or withdrawn without First Federal of Northern Michigan Bancorp, Inc.'s consent, and that if withdrawal from a deposit account has been authorized above, the amount will not otherwise be available for withdrawal. Under penalty of perjury, I certify that (1) the Social Security or Tax ID Information and all other information provided hereon are true, correct and complete, (2) I AM PURCHASING SOLELY FOR MY OWN ACCOUNT, AND THERE IS NO AGREEMENT OR UNDERSTANDING REGARDING THE SALE OR TRANSFER OF THE SHARES, OR MY RIGHT TO SUBSCRIBE FOR SHARES, and (3) I am not subject to backup withholding tax. [Cross out (3) if you have been notified by the IRS that you are subject to backup withholding.] I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK ARE NOT A DEPOSIT OR ACCOUNT AND ARE NOT FED-ERALLY INSURED, AND ARE NOT GUARANTEED BY FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. OR BY THE FEDERAL GOVERNMENT. I further certify that, before purchasing the common stock of First Federal of Northern Michigan Bancorp, Inc., I received the Prospectus dated __________ __, ____. The Prospectus that I received contains disclosure concerning the nature of the common stock being offered and describes the risks involved in the investment, including the following Risk Factors discussed beginning on page __ of the Prospectus: Our Commercial Real Estate and Commercial Loans Expose Us There May Be a Limited Market for Our Common Stock, Which to Increased Credit Risks and May Require Us to Increase May Lower Our Stock Price. Our Provisions for Loan Losses. The Issuance of Shares and the Contribution of Cash to the Our Concentration of Loans in Our Primary Market Area May Charitable Foundation Will Dilute Your Ownership Interests Increase Our Risk. and Adversely Affect Net Income in Fiscal 2005. The Size of Our Branch Network Has Increased Our Expenses Our Contribution to the Charitable Foundation May Not be and May Continue to Reduce Our Profitability in the Near Tax Deductible, Which Could Reduce Our Profits. Term. The Implementation of Stock-Based Benefit Plans May Dilute Changes in Market Interest Rates Could Adversely Affect Your Ownership Interest. Our Financial Condition and Results of Operations. Our Recognition and Retention Plan Will Increase Our Strong Competition Within Our Market Area May Limit Our Costs, Which Will Reduce Our Profitability and Growth and Profitability. Stockholders' Equity. The Future Price of the Shares of Common Stock May be Less Various Factors May Make Takeover Attempts More Difficult Than the Purchase Price in the Offering. to Achieve. Our Failure to Utilize Effectively the Net Proceeds of the The Rights of Existing Stockholders of Alpena Bancshares, Offering Could Reduce Our Profitability and Our Return on Inc. Will be Reduced Under First Federal of Northern Stockholders' Equity. Michigan Bancorp, Inc.'s Maryland Articles of Incorporation and Bylaws. The Ownership Interest of Management and Employees Could Enable Insiders to Prevent a Merger That May Provide Stockholders a Premium for Their Shares. SUBSCRIPTION RIGHTS PERTAIN TO THOSE ELIGIBLE TO SUBSCRIBE IN THE SUBSCRIPTION OFFERING.THEY MAY BE EXERCISED ONLY BY THE DELIVERY OF THIS STOCK ORDER FORM, PROPERLY COMPLETED AND EXECUTED, TOGETHER WITH FULL PAYMENT AND/OR DEPOSIT ACCOUNT WITHDRAWAL AUTHORIZATION, FOR THE NUMBER OF SHARES OF COMMON STOCK SUBSCRIBED FOR. SUBSCRIPTION RIGHTS WILL BE VOID UPON THE EXPIRATION DATE OF THE STOCK OFFERING. FEDERAL REGULATIONS PROHIBIT ANY PERSON FROM TRANSFERRING, OR ENTERING INTO AN AGREEMENT, DIRECTLY OR INDIRECTLY, TO TRANSFER THE LEGAL OR BENEFICIAL OWNERSHIP OF SUBSCRIPTION RIGHTS OR THE UNDERLYING SECURITIES TO THE ACCOUNT OF ANOTHER. FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT MANAGEMENT BECOMES AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS. MANAGEMENT WILL NOT HONOR ORDERS KNOWN TO INVOLVE SUCH TRANSFER. -----------------------> ORDER NOT VALID UNLESS SIGNED <----------------------- ONE SIGNATURE REQUIRED, UNLESS SECTION (4) OF THIS FORM INCLUDES ACCOUNTS REQUIRING MORE THAN ONE SIGNATURE TO AUTHORIZE WITHDRAWAL. IF SIGNING AS A CUSTODIAN, CORPORATE OFFICER, ETC. PLEASE INCLUDE YOUR FULL TITLE. - ---------------------------------------------------------------- ---------------------------------------------------------------- - ---------------------------------------------------------------- ---------------------------------------------------------------- Signature (title, if applicable) (Date) Signature (title, if applicable) (Date) QUESTIONS? See the reverse side of this form, or call our Stock Information Center at ( ) ___-____, Monday through Friday from 9:30 a.m. to 4:00 p.m., Alpena, Michigan time. - ------------------------------------------------------------------------------------------------------------------------------------
REVOCABLE PROXY ALPENA BANCSHARES, M.H.C. SPECIAL MEETING OF MEMBERS, MARCH ___, 2005 The undersigned member of Alpena Bancshares, M.H.C. (the "Mutual Holding Company") hereby appoints the full Board of Directors, with full powers of substitution to act as attorneys and proxies for the undersigned to vote such votes as the undersigned may be entitled to vote at the Special Meeting of Members of the Mutual Holding Company (the "Meeting") to be held at the Thunder Bay Recreational Center, 701 Woodward Avenue, Alpena, Michigan, at _:__ p.m. Michigan time, on March ___, 2005, and at any and all adjournments thereof. They are entitled to cast all votes to which the undersigned is entitled as follows: 1. A plan of conversion and reorganization (the "Plan") pursuant to which the Mutual Holding Company will be merged into First Federal of Northern Michigan (the "Bank"), and the Company will be succeeded by First Federal of Northern Michigan Bancorp, Inc., a Maryland corporation that has been established for the purpose of completing the conversion and reorganization. As described in the enclosed material, the rights of stockholders of the new Maryland corporation will be more limited than the rights stockholders currently have. As part of the conversion and reorganization, shares of common stock representing the Mutual Holding Company's ownership interest in the Company will be offered for sale in a stock offering by First Federal of Northern Michigan Bancorp, Inc. Shares of common stock of the Company currently held by public stockholders will be exchanged for new shares pursuant to an exchange ratio that will ensure that stockholders at the time of the exchange will own the same percentage of First Federal of Northern Michigan Bancorp, Inc. after the conversion and reorganization as was held in Alpena Bancshares, Inc. immediately prior thereto, exclusive of any shares purchased by the stockholder in the offering and cash received in lieu of fractional shares, and shares contributed to the Foundation; and 2.The contribution by Alpena Bancshares, M.H.C. to the First Federal Community Foundation (the "Foundation") of (i) cash in an amount equal to the value of 2% of the shares of First Federal of Northern Michigan Bancorp, Inc.'s common stock sold in the offering, PROVIDED the cash contribution does not exceed $375,000, and (ii) First Federal of Northern Michigan Bancorp, Inc. common stock equal to 2% of the shares of common stock sold in the offering, PROVIDED that the common stock contribution does not exceed 37,500 shares. The contribution of shares and cash to the Foundation will dilute the voting interests of stockholders and will result in an expense, and a related reduction in earnings, for the quarter in which the conversion is completed; and such other business as may properly come before the Meeting. Management is not aware of any other business to be considered. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS. IMPORTANT: PLEASE VOTE, DATE AND SIGN ON THE REVERSE SIDE. NOT VOTING WILL HAVE THE SAME EFFECT AS VOTING AGAINST BOTH PROPOSALS. VOTING DOES NOT OBLIGATE YOU TO BUY STOCK. (Continued and to be signed on the other side) .................................................................................................................................... - ------------------------------------------------------------------------------------------------------------------------------------ FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. STOCK ORDER FORM INSTRUCTIONS SECTIONS (1) AND (2) - SHARES REQUESTED AND TOTAL PAYMENT DUE. Fill in the number of shares that you wish to subscribe for and the Total Payment Due. Calculate the Total Payment Due by multiplying the number of shares by the $10.00 price per share. The minimum purchase is 25 shares ($250). No individual, or individual exercising subscription rights through a qualifying account held jointly, may purchase more than 15,000 shares ($150,000) of common stock. Further, no person, together with associates or persons acting in concert, may purchase an aggregate of more than 25,000 shares ($250,000) in all categories of the stock offering combined. See the Prospectus section entitled "The Conversion - Limitations on Common Stock Purchases", for a detailed description of purchase limitations and a definition of "associates" and "acting in concert". By signing this form, you are certifying that your order does not conflict with these purchase limitations. SECTION (3) - PAYMENT BY CHECK OR MONEY ORDER. Payment may be made by check, bank check or money order payable to First Federal of Northern Michigan. These will be cashed upon receipt. Indicate the amount remitted. Your funds will earn interest at First Federal of Northern Michigan's passbook savings rate until the offering is completed. You may not remit a First Federal of Northern Michigan line of credit check or a third party check. SECTION (4) - PAYMENT BY ACCOUNT WITHDRAWAL. Payment may be made by authorizing withdrawal from First Federal of Northern Michigan deposit accounts. Indicate the First Federal of Northern Michigan account number(s) and the amount(s) you want withdrawn. Funds designated for withdrawal must be available within the account(s) at the time this stock order form is received. Funds will not be withdrawn prior to completion of the offering period, but upon receipt of your order, a hold will be placed on the dollar amount(s) designated on this form, making the amount(s) unavailable to you. You will continue to earn interest within the account(s) at the contractual rate. Note that you may not designate First Federal of Northern Michigan IRA accounts for direct withdrawal on this form. For IRA guidance, please contact the Stock Information Center - preferably at least two weeks prior to the _____, 2005 offering deadline. SECTION (5) - PURCHASER INFORMATION. Please check the one box that applies to the purchaser(s) listed in Section 7 of this form. Boxes (a) through (c) apply to orders placed in the Subscription Offering. For Eligible Account Holders and Supplemental Eligible Account Holders, in the spaces at right, identify the deposit account numbers and titles (name(s)) on the accounts as they were reflected on the eligibility date that you checked. Included all deposit accounts in which the purchaser(s) had ownership (individual, joint, IRA, etc.) For borrowers, list the applicable loan accounts at the close of business on January 31, 2005. If purchasing shares for a minor, list only the minor's eligible accounts. If purchasing shares for a corporation or partnership, list only those entities' eligible accounts. Attach a separate page, if necessary. FAILURE TO COMPLETE THIS SECTION, OR PROVIDING INCORRECT OR INCOMPLETE INFORMATION, COULD RESULT IN A LOSS OF PART OR ALL OF YOUR SHARE ALLOCATION IN THE EVENT OF AN OVERSUBSCRIPTION. Boxes (d) through (f) apply to purchases in a community offering, if held. These apply only if you do not qualify in the Subscription Offerings (boxes (a) through (c)). Check the first box that applies to the registrant(s) listed in Section 7. See "The Conversion" section of the Prospectus for further details about the Subscription Offering and Community Offering, and the method for allocating shares in the event of an oversubscription. SECTION (6) - MANAGEMENT AND EMPLOYEES. Check the box if any purchaser is a First Federal of Northern Michigan Bancorp, Inc. or First Federal of Northern Michigan director, officer or employee or a member of their immediate family. Immediate family includes spouse, parents, siblings and also children who live in the same house as the director, officer, or employee. SECTION (7) - STOCK REGISTRATION. Clearly PRINT the name(s) in which you want the shares registered and the mailing address for all correspondence related to this order, including a stock certificate. Each Stock Order Form will generate one stock certificate, subject to the stock allocation provisions described in the Prospectus. IMPORTANT: If you checked boxes (a), (b) or (c) in Section 5 of this form, you may not add the names of persons/entities who qualify in a lower purchase priority than yours. A Social Security or Tax ID Number must be provided. The first number listed will be identified with the stock certificate for tax reporting purposes. Listing at least one phone number is important, in the event we need to contact you about this form. NOTE FOR NASD MEMBERS: If you are a member of the NASD ("National Association of Securities Dealers"), or a person affiliated or associated with an NASD member, you may have additional reporting requirements. Please report this subscription in writing to the applicable NASD member within one day of payment thereof. SECTION (8) - FORM OF STOCK OWNERSHIP. For reasons of clarity and standardization, the stock transfer industry has developed uniform stockholder registrations for issuance of stock certificates. Beneficiaries may not be named on stock registration. If you have any questions on wills, estates, beneficiaries, etc., please consult your legal advisor. When registering stock, do not use two initials - -- use full first name, middle initial, and last name. Omit words that do not affect ownership such as "Dr.", "Mrs.", etc. Check the ONE box that applies. BUYING STOCK INDIVIDUALLY - Used when shares are registered in the name of only one owner. To qualify in the Subscription Offering, the purchaser named in Section 7 of this form must have had an eligibility priority as of the close of business on either October 31, 2003, December 31, 2004 or January 31, 2005. BUYING STOCK JOINTLY: JOINT TENANTS -- Joint Tenancy (with Right of Survivorship) may be specified to identify two or more owners where ownership is intended to pass automatically to the surviving tenant(s). All owners must agree to the transfer or sale of shares. To qualify in the Subscription Offering, all purchasers named in Section 7 of this form must have had an eligibility priority as of the close of business on the same eligibility date (October 31, 2003, December 31, 2004 or January 31, 2005). TENANTS IN COMMON -- May be specified to identify two or more owners where, upon the death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased co-tenant. All owners must agree to the transfer or sale of shares. To qualify in the Subscription Offering, all purchasers named in Section 7 of this form must have had an eligibility priority as of the close of business on the same eligibility date (October 31, 2003, December 31, 2004 or January 31, 2005). BUYING STOCK FOR A MINOR -- Shares may be held in the name of a custodian for a minor under the Uniform Transfer to Minors Act. To qualify in the Subscription Offering, the minor (not the custodian) named in Section 7 of this form must have had an eligibility priority as of the close of business on either October 31, 2003, December 31, 2004 or January 31, 2005. The standard abbreviation for Custodian is CUST, while the Uniform Transfer to Minors Act is UTMA, followed by the state abbreviations. For example, stock held by John Smith as custodian for Susan Smith under the Michigan Uniform Transfer to Minors Act, should be registered as John Smith, CUST Susan Smith UTMA-MI (list only the minor's social security number). BUYING STOCK FOR A CORPORATION/PARTNERSHIP -- On the first name line, indicate the name of the corporation or partnership and indicate that entity's Tax ID Number for reporting purposes. To qualify in the Subscription Offering, the corporation or partnership listed in Section 7 of this form must have had an eligibility priority as of the close of business on either October 31, 2003, December 31, 2004 or January 31, 2005. BUYING STOCK IN A TRUST/FIDUCIARY CAPACITY -- Indicate the name of the fiduciary and the capacity under which they are acting (for example, "Executor"), or the name of the trust, the trustees, and the date of the trust. Indicate the Tax ID Number to be used for reporting purposes. To qualify in the Subscription Offering, the entity listed in Section 7 of this form must have had an eligibility priority as of the close of business on either October 31, 2003, December 31, 2004 or January 31, 2005. BUYING STOCK IN A SELF-DIRECTED IRA [FOR BROKER USE ONLY] -- Registration should reflect the custodian or trustee firm's registration requirements. For example, on the first name line indicate the name of the brokerage firm, followed by CUST or TRUSTEE. On the second name line, indicate the name of the beneficial owner (for example, "FBO JOHN SMITH IRA"). You can indicate an account number or other identifying information, and the firm's address and department to which all correspondence should be mailed, including a stock certificate. Indicate the Tax ID Number under which the firm's IRAs are reported. SECTION (9) - ACKNOWLEDGMENT AND SIGNATURE. Sign and date this form where indicated. Before you sign, please carefully review the information you provided and read the acknowledgment. Only one signature is required, unless any account listed in Section 4 of this form requires more than one signature to authorize a withdrawal. Deliver your completed Stock Order Form, with full payment (or withdrawal authorization), so that it is received (not postmarked) by 10:00 a.m., Alpena, Michigan time, on _____________, 2005. Please review the Prospectus carefully before making an investment decision. We are not required to accept Stock Order Forms that are found to be deficient or incorrect, or that do not include proper payment and required signatures. A POSTAGE-PAID REPLY ENVELOPE IS INCLUDED. IF SENDING VIA OVERNIGHT DELIVERY, OR FOR HAND-DELIVERY: First Federal of Northern Michigan, Attn: Stock Information Center, 100 S. Second Avenue, Alpena, Michigan 49707 QUESTIONS? Call our Stock Information Center at ( ) ___-____, Monday through Friday from 9:30 a.m. to 4:00 p.m., Alpena, Michigan time. - ------------------------------------------------------------------------------------------------------------------------------------
CORRESP 10 filename10.txt [Letterhead of Luse Gorman Pomerenk & Schick] (202) 274-2011 rpomerenk@luselaw.com January 26, 2005 VIA EDGAR - --------- Securities and Exchange Commission Division of Corporation Finance 450 Fifth Street, N.W. Washington, D.C. 20549 Attn.: Barry McCarty, Esq. Senior Counsel RE: FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP INC. (REGISTRATION NO. 333-121178) REGISTRATION STATEMENT ON FORM SB-2 ----------------------------------- Dear Mr. McCarty: On behalf of First Federal of Northern Michigan Bancorp Inc. (the "Company") and in accordance with Rule 101 of Regulation S-T, we are hereby transmitting Pre-effective Amendment No. 1 to the Company's Registration Statement on Form SB-2 (the "Amended SB-2"). Set forth below are the Company's responses to the Staff's comment letter dated January 7, 2005, a copy of which is included in the courtesy copy of the Amended SB-2 forwarded under cover of this letter. In addition to these revisions, the Company's Prospectus has been revised in response to comments received from the Office of Thrift Supervision. The Prospectus also includes a "Recent Developments" section. The Amended SB-2 has been blacklined to reflect changes from the original filing. 1. We have revised the disclosure on the cover page and on page 4 of the Prospectus in response to the comment. 2. We have revised the disclosure in response to the comment to clarify who has priority rights to purchase the common stock. 3. We have revised the disclosure in response to the comment by separating into two paragraphs the simultaneous stock offering transaction and the exchange of existing common stock transaction. Barry McCarty, Esq. Senior Counsel January 26, 2005 Page 2 4. We note the comment and have increased the text size of the footnotes on pages 41, 42, 46 and 47. Also, we have separated the paragraph on page 13 into three paragraphs. Additionally, we have reviewed the Prospectus and broken up certain paragraphs into shorter paragraphs where we believe shorter paragraphs will assist the reader. 5. The legend on page (iv) has been removed, as requested. 6. The summary of the business operations of the Company and its principal subsidiary requested by the comment is presented on the two pages IMMEDIATELY PRECEDING the bullet items that identify the Company's business strategy. We believe this provides the context requested in the comment. With respect to additional explanation and quantification for each bullet point of the business strategy, we have provided a cross-reference to the body of the Prospectus where this information is provided. We have not repeated text from the body of the Prospectus in the Summary because it would defeat the purpose of the Summary and may obscure the salient points presented there. 7. We have supplemented the disclosure on page 5 of the Summary, as requested in the comment. We note also that the information requested is presented in the "Overview" section of the Management's Discussion and Analysis. 8. We have supplemented the disclosure on page 5 of the Summary to discuss how the economics of the Company's operating environment have caused management to increase higher-yielding commercial business lending and decrease its portfolio of single-family loans. The additional disclosure notes the impact of these changes on net interest income and overall operating results. 9. The Company has made three major changes to its operations in recent years: in 2000, the Company began selling into the secondary mortgage market substantially all of its fixed-rate residential mortgage loans; in 2001, the Company began increasing its portfolio of commercial and commercial real estate loans; and in 2003, the Company began to diversify its sources of non-interest income by acquiring a licensed insurance agency. These operational changes, including the years such operational changes were initiated, are discussed and quantified thoroughly on page 56 under the heading "Business Strategy." A briefer reference to these matters is provided in the Summary on page 7 with a cross-reference to the discussion on page 56. 10. As requested in the comment, we have supplemented the disclosure on page 20 to further discuss the population and economies of the Company's market area, as well as trends in these areas. 11. We have supplemented the disclosure on page 4, the first page of the Summary, to include the number of branch locations. We note that this information is also disclosed on page 5 Barry McCarty, Esq. Senior Counsel January 26, 2005 Page 3 under "First Federal of Northern Michigan." We note also that total assets of the Company are quantified at page 4. Since the number of branch locations and total assets are not, per se, elements of the Company's Business Strategy (which begins on page 7), we have chosen not to repeat these facts in that section. 12. We have provided on page 11 of the Summary section, under a separate heading, a brief discussion of dissenting stockholders' rights of appraisal, along with a cross-reference to more extensive disclosure on page 146 which also has been supplemented in response to the comment. We note to the staff that each stockholder will also receive a proxy statement that includes a section entitled "Dissenters' and Appraisal Rights" that discusses this topic in detail. 13. We have disclosed on page 12 that neither the Company nor its affiliates are expected to make further contributions to the foundation after its initial funding. In further response to the comment, we wish to advise the staff that the foundation's proposed operating plan has identified several priority programs for grants, including education, health and human services, and youth programs. Although these categories constitute the fundamental areas in which the Foundation is expected to make grants over the long term, the availability of funds within each area and the size of disbursements in each area are subject to modification as emphases shift from year to year or when major projects are undertaken. While management currently projects that the foundation's individual grants will range in size from $250 to $5,000, and that total annual disbursements will range from $37,500 to $45,000, we do not think a discussion of these matters is particularly relevant to an investment decision in the common stock of the Company. 14. As requested in the comment, we have disclosed on page 12 the Company's charitable contributions in 2004 and 2003. 15. As noted in the Prospectus under the heading "Historical and Pro Forma Regulatory Capital Compliance," the Company's savings bank subsidiary, while currently well-capitalized, is not OVERCAPITALIZED. Consequently, a portion of the net proceeds of the offering will simply increase the capital strength and operating flexibility of the institution. Otherwise, as stated in the Prospectus, the Company will seek expansion opportunities as they arise, including acquisition of additional branches and/or whole banks. Since it is impossible to determine when such opportunities may arise, it is not possible to state definitively when the entirety of the net proceeds will be deployed. As requested in the comment, we have supplemented the Prospectus accordingly on pages 36 and 37. Further, we have added a cross-reference to the risk factor on the reduced return on equity until the net proceeds are fully deployed. 16. We have supplemented the disclosure on page 17 in response to the comment. 17. We have revised the disclosure on page 18 in response to the comment. Barry McCarty, Esq. Senior Counsel January 26, 2005 Page 4 18. We have removed the last sentence of the third paragraph under the heading "Changes in Market Interest Rates Could Adversely Affect Our Financial Condition and Results of Operations" on page 21, as the concept in the sentence was fully addressed in the preceding sentence. 19. We have supplemented the disclosure on page 23, as requested in the comment. 20. We have revised the disclosure on page 23 to quantify the projected ownership levels of management and employees after the offering. Additionally, we have added quantitative disclosure on page 20 under the heading "Our Concentration of Loans in Our Primary Market Area May Increase Our Risk," and on page 23 under the heading "Our Failure to Utilize Effectively the Net Proceeds of the Offering Could Reduce Our Profitability and Our Return on Stockholders' Equity." We note that of the remaining 13 risk factors discussed in the Prospectus, each risk factor, other than those pertaining to non-quantifiable regulatory or market risk, contains quantitative disclosure. 21. The disclosure has been revised on page 28 in response to the comment. Similar disclosure has also been added to the Recent Developments data on page 30 of the Prospectus. 22. We have supplemented the disclosure on page 36 in response to the comment. 23. The Company submits that the first and second reasons given in the paragraph are not inconsistent. However, we have added the phrase "one- to four-family residential loan" on page 53 to the second reason for clarification, as requested in the comment. 24. As discussed with the staff, as an "SB" filer, the Company is not required to present in its Prospectus a discussion of 2002 operating results in comparison to 2001 operating results. For consistency, the Company has removed the 2001 results from its consolidated statements of income, changes in stockholders' equity and cash flows. 25. We compared the "material estimates" disclosed in Note 1 of the Consolidated Financial Statements and the Company's critical accounting policies discussed in MD&A. We also considered the guidance issued by the SEC related to the definition of a critical accounting policy. Based on these factors, the Company confirms that the items listed in the Prospectus are its only critical accounting policies. However, in response to the comment, we have revised the "material estimates" referred to in the "Use of Estimates" paragraph on F-15 to match the critical accounting policies listed in the MD&A discussion. 26. We have reviewed Section V of Release Nos. 33-8350/34-48960 and have supplemented the disclosure on pages 54-57 based on the Release and in response to the comment. Specifically, the section on Critical Accounting Policies has been revised to address: Barry McCarty, Esq. Senior Counsel January 26, 2005 Page 5 (i) why management considers each policy critical; (ii) why each accounting estimate bears the risk of change; and (iii) the relative accuracy of our past assumptions. Regarding the staff's comments in bullet-point 2 (selection of different estimates) and bullet point 5 (other reasonably likely outcomes), we have chosen not to revise the disclosure for the following reasons: o DISCUSS WHY YOU COULD HAVE SELECTED ESTIMATES IN THE CURRENT PERIOD THAT WOULD HAVE HAD A MATERIALLY DIFFERENT IMPACT ON YOUR FINANCIAL PRESENTATION. The underlying assumptions and estimates used by the Company are based on underlying evidential matter. While we could use other estimates that would have a materially different impact on our financial presentation, we believe that the use of any such estimates which are not supportable by evidential matter and which do not factor reasonably likely outcomes, would be a departure from generally accepted accounting principles. o INCLUDE QUANTITATIVE DISCLOSURE OF YOUR SENSITIVITY TO CHANGE BASED ON OTHER OUTCOMES THAT ARE REASONABLY LIKELY TO OCCUR AND THAT WOULD HAVE A MATERIAL EFFECT ON THE COMPANY. The underlying assumptions and estimates used by the Company are based on underlying evidential matter. For example, prevailing economic conditions are used in the determination of the loss factors used in determining the allowance for loan losses. Further, actual run-off rates are used to determine whether intangible assets related to customer lists are impaired. If we believe that historical and current conditions are not indicative of future trends and events, the assumptions and estimates are revised accordingly. Therefore, if other outcomes are reasonably likely to occur, any such reasonably likely outcome would be factored into our analysis and the amount recorded could be materially impacted. We feel that the amounts reported in our financial presentation consider what we believe to be reasonably likely outcomes given actual results and reasonably likely future events. 27. We note that the Company's average interest rate spread IMPROVED for each of the last three fiscal years ending December 31, 2003, and decreased by 12 basis points for the year ended December 31, 2004. Moreover, the Company's average interest rate spread for the twelve months ended September 30, 2004, was 2.91%, which is only marginally lower than the Company's peer institutions (as identified in the independent appraisal) and which is HIGHER than the 2.67% average of Michigan institutions. Accordingly, we believe that the Company is not subject to "underlying interest rate problems." As stated in the Prospectus on page 58, in recent years the Company has maintained high levels of liquid assets expressly for the purpose of REDUCING its interest rate risk, even though that strategy adversely affects net interest income. In an effort to better manage interest-rate risk, the Bank has also emphasized the origination and retention in its portfolio of adjustable-rate residential mortgage loans. In addition, the Bank has Barry McCarty, Esq. Senior Counsel January 26, 2005 Page 6 increased its emphasis on the originations and retention in portfolio of commercial real estate and commercial loans. Most of these loans are originated with adjustable interest rates, which will assist the Bank in managing interest rate risk. Since 2000, the Bank has sold into the secondary mortgage market all of its fixed-rate, longer-term (15 years and greater) residential mortgage loans. The Bank has maintained high levels of liquid assets, such as cash and cash equivalents, which will permit it to invest in higher-yielding securities and higher yielding commercial and commercial real estate loans (as loan opportunities arise) in a rising interest rate environment. The infusion of net proceeds from the offering can be expected to further reduce the Company's interest rate risk because most of the proceeds will be deployed into interest-earning assets and the additional capital will reduce the proportion of interest-rate sensitive liabilities that are funding assets. We have reviewed the current disclosure under the heading "Business Strategy," including the strategy of improving our interest rate spread and earnings by originating commercial and commercial real estate loans, and we believe that the disclosure comprehensively addresses how management wishes to position the Company in the future. 28. We note that "traditional" single-family mortgages still comprise 53.1% of the Company's total loans at September 30, 2004. Such loans are expected to remain the largest part of the Company's loan portfolio in the foreseeable future because of the Company's expertise in this area, because of the profitability of these loans in relation to the credit risk they present, and because the Company's principal federal regulator requires that such loans comprise the largest part of the Company's loan portfolio. Moreover, as long-term interest rates rise, the Company expects to retain a larger proportion of single-family mortgages in its portfolio and reduce its mortgage banking activities. For these reasons, we do not believe it would be appropriate to discuss this type of lending as a separate line of business. However, we have expanded the disclosure on page 5 of the Prospectus as requested in the comment to better describe the evolution of the Company's operations in recent years in response to the very low long-term interest rates. We also have supplemented the disclosure on page 5 to quantify the Company's mortgage banking activities as well as the non-interest income generated by such activities. Finally, we note that the interest rate risks associated with the Company's mortgage banking activities are described under the heading "Changes in Market Interest Rates Could Adversely Affect Our Financial Condition and Results of Operations," in the Risk Factors section. 29. We have supplemented the disclosure on pages 93 and 94 as requested in the comment. In addition, we have revised the Notes to the Consolidated Financial Statements at page F-14 to add a policy note on revenue recognition for the insurance commissions. 30. As discussed with the staff, the Company has not included the cumulative gap analysis in its Prospectus because: (1) as an "SB" filer, the Company is not required to include a cumulative gap analysis; (2) the Company has provided quantitative analysis of its interest rate risk management on page 58 using the "net portfolio value" approach, which the Company has presented in previous SEC 1934 Act filings and which the Company believes better reflects the Barry McCarty, Esq. Senior Counsel January 26, 2005 Page 7 Company's interest rate risk; (3) the Company has not generated a cumulative gap analysis and, in fact, does not manage its interest rate risk using such analysis; and (4) the Company does not present in its Management's Discussion and Analysis data that would typically be shown on a cumulative gap analysis. 31. We have supplemented the disclosure on page 65, as requested in the comment. 32. The sentence including the reference to "imputed interest" has been removed from page 67, as the Company's reference to "imputed interest" when discussing other expenses was incorrect. There was no "imputed" interest related to the acquisition of ICA. There is interest based on a contractual rate on the note payable issued in connection with the purchase of ICA. This interest is properly included in the "Other borrowings" portion of Interest Expense in the Consolidated Statement of Income. No change was required to the Notes to the Consolidated Financial Statements. 33. We have revised the disclosure on page 71 and in Note 1 to the Consolidated Financial Statement on page F-18 in response to the comment. 34. As requested in the comment, we have excluded loans held for sale from the Loan Portfolio Composition table. We have also made conforming changes elsewhere in the Prospectus. 35. We have supplemented the disclosure on page 72, as requested in the comment. 36. We have reconciled the table on loan portfolio maturities and yields and the table on loan portfolio composition. 37. The Company does defer loan origination fees and costs as required by SFAS 91. Net deferred fees and costs have now been separately reported in the table on page 77 and the footnote on F-23, as requested in the comment. A description of the method used to amortize net deferred fees and costs has been added to Note 1 on page F-12 of the Consolidated Financial Statements. 38. We have supplemented the disclosure on pages 75 and 76, as requested in the comment. 39. As stated in Note 1, the Summary of Significant Accounting Policies, all subsidiaries are wholly owned and all significant inter-company balances and transactions have been eliminated in the consolidation. As requested in the comment, we have eliminated from the description of "substandard" assets the reference to the Company's equity investment in its subsidiary, FSMC. However, because FSMC's holdings of land and real estate have themselves been classified as substandard, we have revised the disclosure relating to these substandard assets Barry McCarty, Esq. Senior Counsel January 26, 2005 Page 8 on page 82. It should be noted that the Company's financial statements include a reserve with respect to FSMC's held-for-sale real estate holdings. 40. We have supplemented the disclosure on page 90, as requested in the comment. 41. We have supplemented the disclosure on page 94, as requested in the comment. 42. We have supplemented the disclosure on page 111, as requested in the comment. 43. We note for the staff that the "opinion disclosed in the first partial paragraph on page 126" (page 137 in the amended Prospectus) is not an opinion to be provided by Luse Gorman Pomerenk & Schick. Rather, the disclosure in this paragraph relates to the letter provided by RP Financial, LC, the independent appraiser, and filed as Exhibit 99.4 to the Form SB-2. This "subscription rights" letter is not a reasoned opinion, but rather, a summary of RP Financial's view that the subscription rights to be provided to eligible parties in the transaction have no ascertainable market value. We have reviewed the letter and believe that the disclosure on page 137 accurately and completely reflects the language in the letter. We have moved the placement of this paragraph to the end of the "Material Income Tax Consequences" section of the Prospectus to clarify that the federal tax opinion is to be provided by Luse Gorman Pomerenk & Schick, and that the views of RP Financial are not contained within this federal tax opinion. 44. The Table of Contents of the Consolidated Financial Statements has been revised in response to the comment. 45. Non-interest bearing deposits were separately disclosed in the deposit footnote (Note 8). However, as requested in the comment, we have moved the deposit disclosure to the Statement of Financial Condition on page F-3. 46. In response to the comment, we have moved the activity related to real estate held for sale from the investing activities section to the operating section of the Consolidated Statement of Cash Flows. 47. As discussed with the staff, with the exception of subsidiary InsuranCenter of Alpena ("ICA"), none of the Company's indirect subsidiaries exceed the revenue threshold that would ordinarily require segment reporting under SFAS 131. While ICA exceeds the revenue threshold, the Company has not adopted segment reporting because of SFAS 131's guidance on aggregation. ICA is an insurance agency and derives all of its revenue from commissions earned on the sale of insurance products. The Company notes that the products of First Federal of Northern Michigan (the "Bank") and ICA are financial products, that both the Bank and ICA operate in regulated industries, and that a significant portion of the Bank's and ICA's customers are the same. Further, the Bank has begun offering ICA's insurance products out of its branches. Barry McCarty, Esq. Senior Counsel January 26, 2005 Page 9 As requested in the comment, we have clarified our application of SFAS 131 in Note 1 on page F-8. 48. We have supplemented the disclosure on page F-9, as requested in the comment. 49. We have supplemented the disclosure on page F-9, as requested in the comment. 50. We have supplemented the disclosure on page 54, as requested in the comment. 51. We have supplemented the disclosure on page F-11, as requested in the comment. 52. We have supplemented the disclosure on page F-14, as requested in the comment. 53. We have supplemented the disclosure on page F-14, as requested in the comment. 54. The Company does not currently purchase servicing assets. We have removed the reference to purchased servicing assets from page F-14. 55. The table reflecting the PRO FORMA compensation impact of the Company's options was initially omitted from the Prospectus because the impact on PRO FORMA net income was less than $1,000 (net of tax). However, as requested in the comment, we have added the disclosure on page F-16. 56. We have supplemented the disclosure on page F-17, as requested in the comment. 57. As requested in the comment, we have included the tabular disclosures required under EITF 03-1 on page F-22 (including data at December 31, 2002). However, since there were no securities with impairment in excess of 12 months as of three reporting periods, a statement (as opposed to a table) has been included reflecting this fact. 58. As requested in the comment, we have supplemented the disclosure on page F-14 and on page 82 of the Prospectus with respect to the real estate held for sale. 59. The disclosed estimate of the weighted average life for the Company's servicing assets was incorrect. The disclosure has been corrected on page F-27. The prepayments have been as expected and the Company has not created a valuation allowance with respect to these assets. Since prepayment activity (or lack thereof) is disclosed in the valuation allowance, no further discussion was added with regard to the impact of prepayments on the servicing assets. 60. The Company has engaged a specialist who has completed a formal valuation analysis as of September 30, 2004. As requested in the comment, the results of the valuation and the related assumptions used in the valuation have been added to the footnote on page F-27. Barry McCarty, Esq. Senior Counsel January 26, 2005 Page 10 61. The Company incurred $100,000 of direct acquisition costs related to the ICA acquisition. These costs included approximately $17,700 for professional fees related to computing a purchase price, approximately $52,700 for legal fees to review or complete documents used in the purchase and approximately $29,600 for professional fees to perform due diligence. The Company capitalized these costs in accordance with SFAS 141, paragraph 24. In 2003, the Company amortized approximately $8,000 of the costs against operating income. As discussed with the staff, these costs should have been included in goodwill and not amortized. Accordingly, as discussed with the staff, these costs will not be amortized in 2004 and will be permanently reclassified to goodwill. The misstatement in 2003 resulted in an understatement of approximately $8,000 pre tax. Based on the guidance in SAB Topic:1M, the Company believes this amount is immaterial and 2003 filings will not be amended. The SAB Topic:1M analysis is attached to this letter as Exhibit A. 62. We have supplemented the disclosure on page F-30, as requested in the comment. 63. We have supplemented the disclosure on page F-34, as requested in the comment. 64. We have supplemented the disclosure on page F-45, as requested in the comment. 65. The Stock Option Plan allows for stock options and "limit rights." Since adoption of the plan in the late 1990's, only stock options have been granted from the plan. The Company has no intention of granting "limited rights" under the plan. Accordingly, we are deleting the reference to limited rights in the footnote located on page F-45. 66. We have revised the footnote in the List of Exhibits to clarify how a reader can obtain access to the appraisal report, as requested in the comment. 67. We have filed as Exhibit 8 in this amendment the executed legal opinion. 68. The Amended SB-2 includes the required consent of the independent auditors. 69. We note the updating requirements of Item 310(g). Please note that the Company intends to request acceleration of the effectiveness of the registration statement during the week of February 7, 2005. The staff's efforts to accommodate this schedule would be appreciated. Per the staff's closing comments, the Company will reflect the staff's comments, as applicable, in its next appropriate 1934 Act filing. Barry McCarty, Esq. Senior Counsel January 26, 2005 Page 11 We trust the foregoing is responsive to the staff's comments. Please call the undersigned at (202) 274-2011 or Steve Lanter at (202) 274-2004 should you have any questions. Respectfully, /s/ Robert B. Pomerenk Robert B. Pomerenk Enclosures cc: David Lyon, Esq. Rebekah Moore, CPA Paul Cline, CPA Martin A. Thomson, President and Chief Executive Officer Eric Luse, Esq. Steve Lanter, Esq. EXHIBIT A SAB TOPIC 1: M ANALYSIS As a supplement to comment 61, the following analysis has been prepared. The conclusion is that given the quantitative and qualitative impact of the misstatement, the amount is deemed immaterial. The misstatement in the financial statements for the year ended December 31, 2003 was an understatement of income of $8,000 pre tax or approximately $5,300 net of tax. The misstatement had a $.0031 (or about one-third of a penny) impact on basic earnings per share. However, due to rounding, basic earnings per share would have been $.74 as compared to the $.73 reported. Fully diluted earnings per share would have been the same as reported or $.73. The misstatement is approximately .46 % of pre-tax earnings or less than half of one percent. In addition to the above quantitative analysis, the following qualitative factors were considered:
- ---------------------------------------------------------------- -------------------------------------------- QUALITATIVE FACTOR ANALYSIS/ANSWER - ---------------------------------------------------------------- -------------------------------------------- Does the misstatement arise from an item capable of precise Known error; however, this is the only measurement (known error) or does it arise from an estimate? negative in the qualitative analysis. - ---------------------------------------------------------------- -------------------------------------------- Does the misstatement mask a change in earnings or other trend? No. Earnings of $1.2 million with or without the adjustment. - ---------------------------------------------------------------- -------------------------------------------- Does the misstatement hide a failure to meet analysts No. The stock is not actively monitored consensus expectations for earnings? by analysts and no EPS target is published. - ---------------------------------------------------------------- -------------------------------------------- Does the misstatement change a loss to income or vice versa? No. The restated net income amount would be $1.214 million vs. $1.209 million. - ---------------------------------------------------------------- -------------------------------------------- Does the misstatement concern a segment or other portion of No. the registrant's business that has been identified as playing a significant role in the registrant's operations or profitability? - ---------------------------------------------------------------- -------------------------------------------- Does the misstatement impact the registrant's compliance with No. regulatory requirements? - ---------------------------------------------------------------- -------------------------------------------- Does the misstatement impact the registrant's compliance with No. loan covenants or other contractual requirements? - ---------------------------------------------------------------- -------------------------------------------- Does the misstatement have an effect of increasing No. Income was actually understated. management's compensation - for example, by satisfying requirements for the reward of bonuses or other forms of incentive compensation? - ---------------------------------------------------------------- -------------------------------------------- Does the misstatement involve the concealment of an unlawful No. The issue dealt with the amortization transaction? of goodwill, which is not allowed. - ---------------------------------------------------------------- --------------------------------------------
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