First Federal of Northern Michigan Bancorp (FFNM) 10-K 2013 FY Annual report

First Federal of Northern Michigan 10-K

EXHIBIT 13

2013 ANNUAL REPORT TO STOCKHOLDERS

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

2013

ANNUAL REPORT

March 19, 2014

Selected Consolidated Financial and Other Data of the Company

Set forth below are selected financial and other data of First Federal of Northern Michigan Bancorp, Inc. (the “Company”). This information is derived in part from and should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto presented elsewhere in this Annual Report. The information at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013 and 2012 is derived in part from the audited consolidated financial statements of the Company that appear in this Annual Report. The information for the years ended December 31, 2011, 2010, and 2009 is derived in part from audited consolidated financial statements that do not appear in this Annual Report.

	At December 31,
Financial condition data:	2013			2012			2011			2010			2009
	(In thousands)
Total assets	$	209,657		$	213,834		$	217,045		$	215,733		$	233,506
Loans receivable, net		136,315			138,912			140,884			157,144			171,219
Loans held for sale		175			79			—			—			52
Investment securities		52,613			53,109			55,484			37,821			37,641
Cash and cash equivalents		2,766			2,752			2,749			1,963			3,099
Deposits		160,029			158,350			150,649			155,466			158,100
FHLB advances		24,813			26,358			34,500			29,000			45,031
Repo Sweep agreements		—			3,183			5,592			6,172			5,408
Stockholders’ equity		23,525			24,435			24,568			23,236			23,052
	For the Years Ended December 31,
Operating data:	2013			2012			2011			2010			2009
	(In thousands)
Interest income	$	8,319		$	9,243		$	10,390		$	11,447		$	12,442
Interest expense		1,150			1,654			2,262			3,447			5,088
Net interest income		7,169			7,589			8,128			8,000			7,354
Provision for loan losses		637			1,367			284			1,101			6,196
Net interest income after provision for loan losses		6,532			6,222			7,844			6,899			1,158
Other income (loss):
Service charges and fees		857			760			730			804			869
Mortgage banking activities		585			1,243			969			1,438			1,414
Net gain on sale of investment securities		—			47			—			546			—
Gain (loss) on sale of real estate		3			(3	)		(51	)		(43	)		20
Other non-interest income		194			80			126			301			102
Insurance & brokerage commissions		126			149			158			159			170
Total other income		1,765			2,276			1,932			3,205			2,575
Other expenses		8,242			8,712			9,034			9,866			9,360
Income (loss) from continuing operations before income tax expense (benefit) .		55			(214	)		742			238			(5,627	)
Income tax expense from continuing operations		—			—			—			—			1,090
Net income (loss) from continuing operations		55			(214	)		742			238			(6,717	)
Loss from discontinued operations, net of tax benefit		—			—			—			—			(46	)
Net income (loss)	$	55		$	(214	)	$	742		$	238		$	(6,763	)
	For the Years Ended December 31,
Performance Ratios:	2013			2012			2011			2010			2009
Return on average assets		0.03	%		-0.10	%		0.34	%		0.10	%		-2.80	%
Return on average equity		0.22	%		-0.85	%		3.07	%		0.99	%		-23.21	%
Average interest rate spread		3.54	%		3.65	%		3.88	%		3.60	%		2.97	%
Dividend payout ratio		105.35	%		0.00	%		0.00	%		0.00	%		0.00	%
Dividends per share	$	0.02		$	0.00		$	0.00		$	0.00		$	0.00
Net interest margin		3.64	%		3.78	%		4.02	%		3.78	%		3.26	%
Efficiency ratio (Bank)		98.00	%		101.55	%		90.06	%		102.76	%		252.19	%
Texas ratio (Bank)		17.02	%		30.83	%		28.28	%		39.66	%		64.29	%
Non-interest expense to average total assets		3.78	%		3.94	%		4.14	%		4.33	%		3.88	%
Average interest-earning assets to average interest-bearing liabilities		118.10	%		115.88	%		112.59	%		111.20	%		113.32	%
	At December 31,
Asset Quality Ratios:	2013			2012			2011			2010			2009
Non-performing assets to total assets		1.95	%		3.42	%		3.11	%		4.37	%		6.58	%
Non-performing loans to total loans		1.68	%		3.50	%		2.34	%		4.13	%		6.73	%
Allowance for loan losses to nonperforming loans		63.65	%		35.50	%		45.47	%		42.85	%		31.05	%
Allowance for loan losses to total loans		1.07	%		1.24	%		1.07	%		1.77	%		2.09	%
Capital Ratios:
Equity to total assets at end of period		11.22	%		11.43	%		11.32	%		10.77	%		9.87	%
Average equity to average assets		11.43	%		11.63	%		11.06	%		10.47	%		12.07	%
Risk-based capital ratio (Bank only)		17.89	%		17.36	%		17.20	%		15.57	%		13.58	%
Other Data:
Number of full service offices		8			8			8			8			8

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

First Federal of Northern Michigan (the “Bank”), the Company’s principal operating subsidiary, is a full-service, community-oriented savings bank whose primary lending activity is the origination of one- to four-family residential real estate mortgages, commercial real estate loans, commercial loans and consumer loans. As of December 31, 2013, $63.8 million, or 46.2%, of our total loan portfolio consisted of one- to four-family residential real estate loans, $51.9 million, or 37.6%, and $12.5 million, or 9.0%, of our total loan portfolio consisted of commercial mortgage loans and commercial loans, respectively, and $9.9 million, or 7.2%, of our total loan portfolio consisted of consumer and other loans. In recent years, commercial mortgage loans and commercial loans have grown as a percentage of our loan portfolio for three reasons. First, we have increased our emphasis on originating these loans, which generally have higher interest rates compared to one- to four-family residential real estate loans. In addition, most of these loans are originated with adjustable interest rates, which assist us in managing interest rate risk. Finally, most of our one- to four-family residential mortgage loan customers prefer fixed-rate loans in the low interest rate environment that has prevailed over the last several years. Since we sell a majority of the fixed-rate one- to four-family residential mortgage loans that we originate, one- to four-family residential real estate loans have decreased as a percentage of our total loan portfolio.

Our results of operations depend primarily on our net interest income, which is the difference between the interest income we receive on our interest-earning assets, such as loans and securities, and the interest expense we pay on our deposits and borrowings. Our results of operations are also affected by non-interest income and non-interest expense, the provision for loan losses and income tax expense. Non-interest income consists primarily of banking fees, service charges, insurance commissions, mortgage banking activities and security transactions. Our non-interest expense consists primarily of salaries and employee benefits, FDIC insurance premiums, occupancy and office expenses, advertising and promotion expense, data processing expenses and expenses related to troubled credits and repossessed properties.

Our results of operations are significantly affected by general economic and competitive conditions, and particularly changes in market interest rates, government policies and actions of regulatory authorities. Numerous factors that are beyond our control can cause market interest rates to increase or decline. In addition, we are unable to predict future changes in government policies and actions of regulatory authorities that could have a material impact on our financial performance. As a result, we believe that changes in market interest rates, government policies and actions of regulatory authorities represent the primary uncertainties in predicting our future performance.

Business Strategy

Operating as a Community Savings Bank. We are committed to meeting the financial needs of the communities in which we operate. Our branch network of eight offices enhances our ability to serve these communities. We provide a broad range of individualized consumer and business financial services. We believe that we can be more effective in servicing our customers than many of our non-local competitors because our employees and senior management are able to respond promptly to customer needs and inquiries. Our ability to provide these services is enhanced by the experience of our senior management, which has an average of 22 years experience in the financial services industry.

On January 23, 2014, we signed a merger agreement with and Alpena Banking Corporation, the parent company of Bank of Alpena. Pursuant to the agreement First Federal and Bank of Alpena will merge. Inconnection with the all-stock transaction, which is based upon the pro rata tangible equity contribution of each company as of September 30, 2013, each share of common stock of Alpena Banking Corporation will be converted into the right to receive 1.549 shares of First Federal Bancorp common stock. The merger is subject to customary closing conditions, including approval by the shareholders of First Federal Bancorp and the shareholders of Alpena Banking Corporation and applicable banking regulatory authorities. It is anticipated the transaction will close late in the second quarter of 2014 or in the third quarter of 2014.

Rebuilding our Balance Sheet.Beginning in 2001, we began to increase our originations of commercial real estate and commercial loans, resulting in significant organic loan growth in the years from 2004 through 2006. In 2007 we began participating, on a limited basis, in commercial opportunities outside of our market areas and, in some cases, outside of Michigan to help mitigate the geographic risk of lending only in Michigan. At December 31, 2005 and 2006, respectively, our total assets were $282.8 million and $281.0 million, the highest levels in our history. Beginning in 2008, due to severely deteriorating economic conditions in our market area, we began to see a decline in loan balances and an increase in loan charge-offs, which began deteriorating our asset base. At December 31, 2013 our total assets were $209.7 million. We are seeing signs of economic recovery in our markets and have devoted staff and resources to begin the process of rebuilding our balance sheet in 2014 and beyond.

Increasing Our Share of Lower-Cost Deposits. In past years our cost of funds has been relatively high as we accepted higher-cost long-term certificates of deposit to fund our long-term assets such as one- to four-family residential mortgage loans. As we have increased our origination of shorter-term commercial real estate and commercial loans, most of which are originated with adjustable interest rates, we have decreased our need for higher-cost long-term certificates of deposit. We intend to continue to lower our cost of funds by increasing our share of lower-cost short-term certificates of deposit and lower-cost money market deposits. We typically are not a market leader in deposit rates, although from time-to-time we do offer higher rates as liquidity needs dictate. We also intend to continue to market our non-interest-bearing checking accounts in conjunction with our focus on commercial business lending. We grew the average balance of core deposits, non-maturity deposit accounts, by $8.3 million in 2013. This growth is attributed to implementing a sales calling program, in which we target area businesses and municipalities to gain core deposit relationships and a reclassification of funds previously maintained in non-core deposit products.

Maintaining High Asset Quality and Capital Strength. We are committed to conservative loan underwriting standards and procedures, and we primarily originate loans secured by real estate. As a result, we have historically experienced low levels of late payments and losses on loans. However, during the economic recession of recent years, we saw delinquency trends increase despite our conservative underwriting practices due to declining economic conditions and increasing unemployment in our market area. In 2013 we continued to see an improvement in delinquency patterns as evidenced by improvements in our asset quality ratios: at December 31, 2013, our ratio of non-performing assets to total assets was 1.95% as compared to 3.42% at December 31, 2012 due to a $3.2 million reduction to our non-performing asset balances as of December 31, 2013. We continue to maintain a strong capital base. At December 31, 2013, our total risk-based capital ratio was 17.9%, an improvement from 17.4% at December 31, 2012 and well in excess of the regulatory requirements to be categorized as “well capitalized.”

Managing Our Interest Rate Risk Exposure by Selling Fixed-Rate Residential Real Estate Loans. Historically, most borrowers have preferred long-term, fixed-rate residential real estate loans when, as now, market interest rates are at relatively low levels. These loans expose us to interest rate risk because our liabilities, consisting primarily of deposits, have relatively short maturities. In order to better match the maturities of our loan portfolio to the maturities of our deposits in the current low interest rate environment, we sell 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. Beginning in late 2012 we began placing certain 15 year fixed residential real estate loans into our portfolio in an effort to rebuild our balance sheet and increase net interest income, however we continue to sell most loans with terms longer than 15 years into the secondary market to minimize interest rate risk.

Comparison of Financial Condition at December 31, 2013 and 2012

Total assets decreased $4.1 million, or 1.9%, to $209.7 million at December 31, 2013 from $213.8 million at December 31, 2012. Net loans decreased $2.6 million, or 1.9% to $136.3 million at December 31, 2013 from $138.9 million at December 31, 2012. Mortgage loan originations decreased $23.6 million to $28.8 million in 2013 from $52.4 million in 2012. During that time period, our mortgage loan portfolio decreased $2.7 million to $63.8 million at December 31, 2013 from $66.5 million as of December 31, 2012, despite placing $3.5 million of high-quality 10- and 15-year fixed rate mortgages into portfolio in 2013. The commercial loan portfolio increased 2.5% to $64.4 million at December 31, 2013 from $62.8 million at December 31, 2012. Cash and cash equivalents remained unchanged at $2.8 million at December 31, 2013 and December 31, 2012. Investment securities decreased $496,000, or 0.9%, to $52.6 million at December 31, 2013 from $53.1 million at December 31, 2012.

Deposits increased $1.7 million, or 1.1%, to $160.0 million at December 31, 2013 from $158.4 million at December 31, 2012. This increase was due in large part to the increase in our interest-bearing commercial checking accounts. Our focus in 2013 continued to be on building deposit relationships rather than attracting higher-cost non-core certificate of deposit accounts. REPO Sweep accounts decreased $3.2 million, or 100% to $0 at December 31, 2013 from $3.2 million at December 31, 2012 as a result of our discontinuation of this product in 2013. Borrowings, consisting primarily of FHLB advances, decreased $1.6 million, or 6.1%, to $24.8 million at December 31, 2013 from $26.4 million at December 31, 2012 as we replaced borrowings with deposits.

Stockholders’ equity decreased $910,000, or 3.7%, to $23.5 million at December 31, 2013 from $24.4 million at December 31, 2012. The decrease was mainly a result of a decrease of $907,000 in net unrealized gain on investment securities and dividends paid of $58,000 with net income for the year of $55,000 partially offsetting these decreases.

Comparison of Operating Results for the Years Ended December 31, 2013 and 2012

General.Net income increased to $55,000 for the year ended December 31, 2013 from a loss of $214,000 for the year ended December 31, 2012. Net interest income before provision for loan losses decreased $420,000 to $1.2 million in 2013 from $1.7 million in 2012, due in large part to a decline in our net interest margin year over year. The provision for loan losses was $730,000 lower in 2013 than in 2012, resulting in net interest income after provision for loan losses being $310,000 higher in 2013 than in 2012. Non-interest income was $511,000 lower in 2013 than in 2012, and non-interest expenses which were $470,000 lower in 2013 than in 2012.

Interest Income. Interest income decreased by $924,000, or 10.0%, to $8.3 million for the year ended December 31, 2013 from $9.2 million for the year ended December 31, 2012. The decrease was primarily due to a decrease in the average balance of our interest bearing assets of $3.7 million, or 1.9%, year over year. The average balance of our one- to four-family residential mortgage loans decreased by $1.9 million, or 2.9%, to $65.3 million for the year ended December 31, 2013 from $67.2 million for the year ended December 31, 2012, while the average yield on such loans decreased to 5.11% from 5.52%. The average balance of our non-mortgage loans, principally commercial loans and consumer loans, decreased by $827,000, or 1.1%, to $74.8 million for the twelve months ended December 31, 2013 from $75.6 million for the twelve months ended December 31, 2012. The average yield on our commercial loans decreased 47 basis points and the average yield on our consumer loans decreased 5 basis points from 2012 to 2013. The average balance of our investment securities, excluding mortgage-backed securities, decreased by $2.0 million, or 8.0%, to $22.4 million for the year ended December 31, 2013 from $24.4 million for the year ended December 31, 2012, while the average yield on these investments decreased to 2.24% from 2.33%.

Interest Expense. Interest expense decreased to $1.2 million for the year ended December 31, 2013 from $1.7 million for the year ended December 31, 2012, due primarily to a $6.4 million, or 3.7%, decrease in the average balance of interest-bearing liabilities. The average balance of interest-bearing deposits increased by $1.2 million from 2013 to 2012, while the average cost of those deposits decreased 16 basis points to 0.60% for 2013 from 0.76% for 2012, reflecting a continued decline in market interest rates during 2013. The average balance of FHLB borrowings decreased $7.2 million from 2013 to 2012 while the cost of those borrowings decreased from 1.92% to 1.30% year over year as we were able to pay off high-cost maturing advances with deposits or replace them with lower-cost advances due to the rate environment. The average balance of REPO Sweep accounts decreased by $465,000, or 10.5% year over year, while the average cost of these accounts decreased 3 basis points from 0.21% for 2012 to 0.18% for 2013. As of December 31, 2013 we have discontinued offering this product to customers.

Net Interest Income. Net interest income decreased to $7.2 million for the year ended December 31, 2013 from $7.6 million for the year ended December 31, 2012. The decrease was primarily due to a decrease of 11 basis points in our average interest rate spread to 3.54% for the year ended December 31, 2013 from 3.65% for the year ended December 31, 2012.

Provision for Loan Losses.We recorded a provision for loan losses of $637,000 for the year ended December 31, 2013 compared to a provision of $1.4 million for the year ended December 31, 2012. We had net charge-offs of $915,000 and $1.1 million during 2013 and 2012, respectively. Included in our net charge-offs for 2013 is a partial charge-off of $589,000, related to a single loan that became troubled at the end of 2012. Our provision is based on management’s review of the components of the overall loan portfolio, the status of non-performing loans and various subjective factors. For 2013, the provision was significantly lower than 2012 due to the following factors: our provision for loan losses is based on a twelve-quarter rolling average of actual net charge-offs adjusted for various environmental factors for each pool of loans in our portfolio. As our charge-off history on commercial loans improved in 2013 as compared to recent prior years, lower loss factors were applied to those pools of loans to establish an adequate reserve. In addition, asset quality metrics improved in 2013. In contrast, in 2012, the Company charged off $1.2 million in loans, including $840,000 of residential mortgage loans which required a comparatively higher provision than the previous year.

Non-Interest Income. Non-interest income decreased to $1.8 million for the year ended December 31, 2013 from $2.3 million for the year ended December 31, 2012. The 2013 results reflected a decrease of $658,000 in mortgage banking activities and a decrease in gain on sale of available for sale securities to $0 for 2013 from $47,000 for 2012. In 2013 we retained in our portfolio approximately $3.5 million of 10- and 15-year fixed residential mortgages in our portfolio, rather than selling them, which reduced mortgage banking activities income.

	For years ended December 31,
						Change from 2013 to
	2013		2012			2012
	(dollars in thousands)
Service charges and other fees	$	857	$	760			12.76%
Net gain on sale of investments		—		47			(100.00%)
Net gain on sale of loans		235		587			(59.97%)
Net gain/(loss) on sale of real estate owned and other repossessed assets		3		(83	)		103.61%
Loan servcing fees		350		656			(46.65%)
Insurance and brokerage commissions		126		149			(15.44%)
Other		194		160			21.25%
	$	1,765	$	2,276			(22.45%)

Non-Interest Expense. Non-interest expense decreased to $8.2 million for the year ended December 31, 2013 from $8.7 million for the year ended December 31, 2012. The year over year decrease related primarily to a reduction in expenses associated with troubled loans and repossessed properties. Compensation and benefits were lower in 2013 as compared to 2012 resulting from decreases in the number of employees, mortgage lender commissions attributable to decreased mortgage loan originations year over year and as a result of self insuring a portion of our health care premiums during the twelve months ended December 31, 2013.

	For years ended December 31,
					Change from 2013 to
	2013		2012		2012
	(dollars in thousands)
Compensation and employee benefits	$	4,654	$	4,913		(5.27%)
FDIC premiums		184		189		(2.65%)
Amortization of intangible assets		119		177		(32.77%)
Advertising		130		156		(16.67%)
Occupancy and equipment		911		959		(5.01%)
Data processing service bureau		301		306		(1.63%)
Professional fees		510		424		20.28%)
Collection activity		153		206		(25.73%)
Real estate and other repossessed assets		245		409		(40.10%)
Other		1,035		973		6.37%)
	$	8,242	$	8,712		(5.39%)

Income Taxes. The Company had no federal income expense for the periods ended December 31, 2013 and 2012 as a result of the valuation allowance against the Company’s deferred tax assets. See Critical Accounting Policies section for discussion on valuation of deferred tax assets.

Average Balance Sheet

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

						Average Consolidated Statements of Condition For Years Ended December 31,							Average Consolidated Statements of Condition For Years Ended December 31,
	As of December 31, 2013					2013							2012							2011
	Balance		Yield / Rate			Average Balance		Interest		Average Yield / Rate			Average Balance		Interest		Average Yield / Rate			Average Balance		Interest		Average Yield / Rate
						(In thousands)							(In thousands)							(In thousands)
Interest-earning assets:
Mortgage loans						$	65,297	$	3,338				$	67,151	$	3,708				$	67,529	$	4,012
Non-mortgage loans							74,813		3,865					75,640		4,220					82,562		4,914
Loans	$	136,490		4.91	%		140,110		7,203		5.14	%		142,791		7,928		5.55	%		150,091		8,926		5.95	%
Mortgage-backed securities		28,709		2.99	%		29,540		480		1.63	%		29,002		621		2.14	%		26,543		784		2.95	%
Other Investment securities		23,904		2.91	%		22,401		502		2.24	%		24,352		566		2.32	%		19,448		573		2.95	%
Investment securities		52,613		2.51	%		51,941		982		1.89	%		53,354		1,187		2.22	%		45,991		1,357		2.95	%
Other investments		3,658		2.80	%		4,759		134		2.83	%		4,412		128		2.90	%		6,433		107		1.66	%
Total interest-earning assets		192,761		4.21	%		196,810		8,319		4.23	%		200,557		9,243		4.62	%		202,515		10,390		5.14	%
Non interest-earning assets		16,896					16,261							16,544							15,947
Total Assets	$	209,657				$	213,071						$	217,101						$	218,462
Interest-bearing liabilities:
Savings Deposits	$	22,037		0.05	%	$	21,630	$	11		0.06	%	$	18,784	$	9		0.06	%	$	17,507	$	9		0.06	%
Money market/NOW accounts		50,222		0.21	%		46,765		97		0.21	%		43,634		94		0.21	%		43,471		158		0.35	%
Certificates of deposit		66,723		0.97	%		70,217		718		1.02	%		74,966		931		1.24	%		81,665		1,382		1.69	%
Total interest-bearing deposits		138,982		0.55	%		138,612	$	826		0.61	%		137,384	$	1,034		0.75	%		142,643	$	1,549		1.09	%
Borrowed funds		24,813		1.07	%		28,035		324		1.14	%		35,694		620		1.74	%		37,233		713		1.91	%
Total interest-bearing liabilities		163,795		0.63	%		166,647		1,150		0.69	%		173,078		1,654		0.96	%		179,876		2,262		1.26	%
Non interest-bearing liabilities		22,337					22,043							18,729							14,417
Total liabilities		186,132					188,690							191,807							194,293
Stockholders’ equity		23,525					24,381							25,294							24,169
Total liabilities & stockholders’ equity	$	209,657				$	213,071						$	217,101						$	218,462
Net interest income								$	7,169						$	7,589						$	8,128
Interest rate spread				3.59	%						3.54	%						3.66	%						3.88	%
Net interest-earning assets						$	30,163						$	27,479						$	22,639
Net interest margin (1)				3.68	%						3.64	%						3.80	%						4.02	%
Average interest-earning assets to average interest-bearing liabilities											118.10	%						115.88	%						112.59	%

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

Rate/Volume Analysis

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

	Year ended December 31, 2013 Compared to Year ended December 31, 2012 Increase (Decrease) Due to:
	Volume			Rate			Total
	(In thousands)
Interest-earning assets:
Loans receivable	$	(154	)	$	(571	)	$	(725	)
Investment securities		(33	)		(172	)	$	(205	)
Other investments		10			(4	)	$	6
Total interest-earning assets		(177	)		(747	)		(924	)
Interest-bearing liabilities:
Savings Deposits		—			2			2
Money Market/NOW accounts		6			(3	)		3
Certificates of Deposit		(66	)		(147	)		(213	)
Deposits		(60	)		(148	)		(208	)
Borrowed funds		(210	)		(86	)		(296	)
Total interest-bearing liabilities		(270	)		(234	)		(504	)
Change in net interest income	$	93		$	(513	)	$	(420	)
	Year ended December 31, 2012 Compared to Year ended December 31, 2011 Increase (Decrease) Due to:
	Volume			Rate			Total
	(In thousands)
Interest-earning assets:
Loans receivable	$	(413	)	$	(585	)	$	(998	)
Investment securities		27			(196	)	$	(169	)
Other investments		(41	)		61		$	20
Total interest-earning assets		(427	)		(720	)		(1,147	)
Interest-bearing liabilities:
Savings Deposits		1			—			1
Money Market/NOW accounts		1			(65	)		(64	)
Certificates of Deposit		(134	)		(318	)		(452	)
Deposits		(132	)		(383	)		(515	)
Borrowed funds		(33	)		(60	)		(93	)
Total interest-bearing liabilities		(165	)		(443	)		(608	)
Change in net interest income	$	(262	)	$	(277	)	$	(539	)

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 December 31, 2013, $124.0 million, or 89.8% of our loan portfolio, consisted of loans that mature or reprice after December 31, 2014. In contrast, as of December 31, 2013, $33.0 million, or 49.4% of our time deposits as of that date, consisted of deposits that mature or reprice in less than one year.

In an effort to manage interest rate risk, we have increased our focus on the origination and retention in our portfolio of adjustable-rate residential mortgage loans. In addition, we have increased the origination and retention in our portfolio of commercial real estate and commercial loans, since most of these loans are originated with adjustable interest rates. In the current low interest rate environment, we generally have sold all of the fixed-rate, longer-term (15 years or more) residential mortgage loans that we originate on a servicing-retained basis. In 2013, we determined to keep in portfolio $3.5 million of 10- and 15-year fixed rate residential mortgage loans. Finally, we have primarily invested in short- and medium-term securities and have maintained high levels of liquid assets, such as cash and cash equivalents. Shortening the average maturity of our interest-earning assets through these strategies helps us to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Maintaining high levels of liquid assets also permits us to invest in higher-yielding securities and loans when market interest rates increase. However, these strategies can be expected to adversely affect net interest income if long-term interest rates remain at low levels. As long-term interest rates rise, as we expect will happen, we will reduce our mortgage-banking operations, and will retain in our portfolio a larger percentage of the one- to four-family loans that we originate.

Quantitative Analysis.The Company uses two primary measurement techniques to identify and manage its interest rate risk:

• Net Interest Income (NII) simulation

• Economic Value of Equity (EVE)

Net Interest Income Simulation Model:The Company uses a NII simulation model to analyze the sensitivity of net interest income to changing interest rates. The model is based on contractual and assumed cash flows and repricing characteristics for all of the Company’s financial instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management’s projections of the future volume and pricing of each of the product lines offered by the Company as well as other pertinent assumptions. Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.

The Company’s interest rate risk exposure is currently evaluated by measuring the anticipated change in net interest income over a 24-month horizon assuming a -100bp, 100bp, 200bp, 300bp and 400bp parallel ramped decrease or increase in interest rates. The Fed Funds interest rate, targeted by the Federal Reserve at a range of 0% to 0.25% is currently set at a level that would be negative in parallel ramped decrease scenarios, therefore those scenarios were omitted from the interest rate risk analysis at December 31, 2013.

At December 31, 2013, the Company’s interest rate risk profile reflects a neutral position. The following table shows the Company’s estimated net interest income sensitivity profile and ALCO policy limits as of December 31, 2013.

Dynamic Balance Sheet - RAMP
Rate Changes:	0 BP	- 100 BP	+ 100 BP	+200 BP	+300 BP	+400 BP
$Change in NII	$14,666	$14,505	$14,919	$15,385	$15,919	$16,454
% Change in NII		-1.10%	1.73%	4.91%	8.55%	12.19%
Policy Limits		+/- 5%	+/- 5%	+/- 10%	+/- 15%	+/- 20%

The 24-months net interest income at risk reported as of December 31, 2013 for all scenarios presented shows that the Company’s overall risk to changes in interest rates is low. Given that the duration of our assets is longer than that of our liabilities, the scenarios shown illustrate that a rising rate environment has a neutral to slightly positive impact on our net interest income. The impact illustrated is well within Board set limits.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in 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 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 net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Economic Value of Equity:The Company also uses EVE as a measurement tool in managing interest rate risk. Whereas the net interest income simulation model highlights exposure over a relatively short time horizon, the EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The EVE of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows less the discounted value of liability cash flows. The sensitivity of EVE to changes in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate the growth assumptions used in the earnings simulation model. As with the earnings simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical in the EVE analysis. Particularly important are assumptions driving prepayments and the expected changes in balances and pricing of transaction deposit portfolios. The following table shows the Company’s EVE sensitivity profile as of December 31, 2013.

Rate Changes:	0 BP	+ 100 BP	+200 BP	+300 BP	+400 BP
$Change in Equity	$33,081	$34,155	$35,058	$35,825	$36,631
% Change in Equity		3.24%	5.98%	8.29%	10.73%
Policy Limits		+/- 10%	+/- 15%	+/- 20%	+/- 25%

The EVE at risk profile shows slight to moderate asset sensitivity from market rate increases.

Cash Flows

Cash flows provided by operations were $2.1 million for 2013 compared to $2.2 million for 2012. Cash flows provided by investing activities were $1.1 million in 2013 as compared to $700,000 in 2012. The change year over year was due in large part to the purchase of bank owned life insurance of $3.0 million and proceeds from the sale of available for sale securities of $1.6 million in 2012. Cash used in financing activities was $3.1 million in 2013 as compared to $2.9 million in 2012, due primarily to the lower growth of deposits and the continued decrease in our outstanding Federal Home Loan Bank (FHLB) advances year over year in 2013.

Liquidity and Capital Resources

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

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

Liquidity represents the amount of our assets that can be quickly and easily converted into cash without significant loss. Our most liquid assets are cash, short-term U.S. Government securities and U.S. Government agency or government-sponsored enterprise securities. We are required to maintain sufficient levels of liquidity as defined by the Office of the Comptroller of the Currency regulations. Current regulations require that we maintain sufficient liquidity to ensure our safe and sound operation. Our current objective is to maintain liquid assets equal to at least 20% of total deposits and Federal Home Loan Bank borrowings due in one year or less. Liquidity as of December 31, 2013 was $53.4 million, or 42.4% of total deposits and Federal Home Loan Bank borrowings due in one year or less, compared to $52.5 million, or 42.5% of this amount at December 31, 2012. The levels of liquidity are dependent on our operating, financing, lending and investing activities during any given period. Our calculation of liquidity includes additional borrowing capacity available with the Federal Home Loan Bank. As of December 31, 2013, we had unused borrowing capacity of $27.2 million.

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, although in 2013 we placed $3.5 million in 10- and 15-year fixed-rate residential mortgage loans in our portfolio. We also originate for retention in our loan portfolio, commercial and commercial real estate loans, including real estate development loans. During the year ended December 31, 2013, we originated $28.8 million of one- to four-family residential mortgage loans, of which $11.7 million were retained in our portfolio and the remainder were. This compares to $52.4 million of one- to four-family originations during the year ended December 31, 2012, of which $15.9 million were retained in our portfolio. At December 31, 2013, we had outstanding loan commitments of $18.9 million. These commitments included $1.6 million for permanent one- to four-family residential mortgage loans, $1.2 million for non-residential loans, $2.3 million of undisbursed loan proceeds for construction of one- to four-family residences, $4.1 million of undisbursed lines of credit on home equity loans, $458,000 of unused credit card lines, $6.7 million of unused commercial lines of credit, and $745,000 for commercial loans, unused bounce protection.of $1.7 million and letters of credit of $59,000.

Deposits are a primary source of funds for use in lending and for other general business purposes. At December 31, 2013, deposits funded 76.3% of our total assets compared to 74.1% at December 31, 2012. Certificates of deposit scheduled to mature in less than one year at December 31, 2013 totaled $33.0 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. As we rebuild our balance sheet in the next few years, the growth in assets may require a more significant in-flow of liquidity than has been necessary over the past few years. As such, we may from time to time be a market leader in rates paid for certain liabilities to fund asset growth.

Borrowings may be used to compensate for seasonal or other reductions in normal sources of funds or for deposit outflows at more than projected levels. Borrowings also may be used on a longer-term basis to support increased lending or investment activities. At December 31, 2013, we had $24.8 million in Federal Home Loan Bank advances and no outstanding advances at the Federal Reserve Discount Window. Total borrowings as a percentage of total assets were 11.8% at December 31, 2013 compared to 12.3% at December 31, 2012.

As of December 31, 2013, management was not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of December 31, 2013, 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.

Total stockholders’ equity of the Company was $23.5 million at December 31, 2013 and $24.4 million at December 31, 2012, a decrease of $910,000 year over year. The Company’s ratio of equity to assets decreased from 11.4% as of December 31, 2012 to 11.2% as of December 31, 2013. Federal bank regulatory agencies have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, and Leverage Capital. These regulatory standards require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of at least 8% to be adequately capitalized. The regulatory agencies consider a bank to be “well capitalized” if its Total Risk Based Capital is at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk Weighted Assets, the Leverage Capital Ratio is at least 5%, and the Bank is not subject to any written agreements or order issued by the FDIC pursuant to Section 8 of the Federal Deposit Insurance Act.

The following table summarizes the capital ratios of the Company:

	At December 31,				Minimum to be
	2013		2012		Well Capitalized
Tier 1 Leverage Ratio	10.79	%	10.33	%	5.00%
Tier 1 Risk-Based Capital	16.79	%	16.11	%	6.00%
Total Risk-Based Capital	17.89	%	17.36	%	10.00%

At December 31, 2013 and December 31, 2012, the Bank exceeded the minimum capital requirements to be considered “well capitalized.” See Note 11 to our financial statements for further information.

Critical Accounting Policies

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

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

We have established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish an allowance for losses on loans. The allowance for losses on loans is based on our current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for losses on loans is established through a provision for loan losses based on our evaluation of the losses inherent in the loan portfolio, and considers all known internal and external factors that affect loan 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.

The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. The principal assumption used in deriving the allowance for loan losses is the estimate of loss content for each risk rating. To illustrate, if recent loss experience dictated that the projected loss ratios would be increased by 10% (of the estimate) across all risk ratings, the allocated allowance as of December 31, 2013 would have changed by approximately $109,000. Actual loan losses may be significantly more than the allowances we have established, which could have a material negative effect on our financial results.

Mortgage Servicing Rights. We sell to investors a portion of our originated one- to four-family residential real estate mortgage loans. When we acquire mortgage servicing rights through the origination of mortgage loans and sale of those loans with servicing rights retained, we allocate a portion of the total cost of the mortgage loans to the mortgage servicing rights based on their relative fair value. As of December 31, 2013, we were servicing loans sold to others totaling $131.7 million. We amortize capitalized mortgage servicing rights as a reduction of servicing fee income in proportion to, and over the period of, estimated net servicing income by use of a method that approximates the level-yield method. We periodically evaluate capitalized mortgage servicing rights for impairment using a model that takes into account several variables including expected prepayment speeds and prevailing interest rates. If we identify impairment, we charge the amount of the impairment to earnings by establishing a valuation allowance against the capitalized mortgage servicing rights asset. The primary risk of material changes to the value of the servicing rights resides in the potential volatility in the economic assumptions used, particularly the prepayment speed. We monitor this risk and adjust the valuation allowance as necessary to adequately record any probable impairment in the portfolio. Management believes the estimation of these variables makes this a critical accounting policy. For purposes of measuring impairment, the mortgage servicing rights are stratified based on financial asset type and interest rates. In addition, we obtain an independent third-party valuation of the mortgage servicing portfolio on a quarterly basis. In general, the value of mortgage servicing rights increases as interest rates rise and decreases as interest rates fall. This is because the estimated life and estimated income from a loan increase as interest rates rise and decrease as interest rates fall. The key economic assumptions made in determining the fair value of the mortgage servicing rights at December 31, 2013 included the following:

Annual constant prepayment speed (CPR):	10.3	%
Weighted average life remaining (in months):	244
Discount rate used:	9.3	%

At the December 31, 2013 valuation we determined that the book value of our mortgage servicing rights asset associated with sold 20-year fixed-rate loans was no longer $19,200 more than the independent valuation; therefore the $19,200 valuation reserve that was established against that tranche of loans as of December 31, 2012 was reversed. There was no need to establish a valuation allowance against the asset related to either the 15- or 30-year fixed-rate sold loan tranches.

Impairment of Intangible Assets.On June 12, 2003, we acquired 100% of the stock of the InsuranCenter of Alpena (ICA). We allocated the excess of the purchase price paid over the fair value of net assets acquired to intangible assets, including goodwill. On February 27, 2009 the Company sold the majority of the assets of ICA. The remaining goodwill on our books of $600,000 related to certain assets of the Company that were not sold in the sale of ICA. We allocated the goodwill between the assets sold and the assets retained and determined a value of the assets that remained of $600,000. Since the $600,000 allocation relates to a finite life asset, we re-characterized the goodwill as an amortizable intangible and began amortizing theasset in March 2009. The balance of the intangible asset was $39,000 at December 31, 2013, and was evaluated for impairment as of that date.

Valuation of Deferred Tax Assets.The Company records a valuation allowance if it believes, based on available evidence, that it is “more likely than not” that the future tax assets recognized will not be realized before their expiration. Realization of the Company’s deferred tax assets is primarily dependent upon the generation of a sufficient level of future taxable income.

At December 31, 2013 and 2012, management did not believe it was more likely than not that all of the deferred tax assets would be realized. Accordingly, at December 31, 2013 and 2012 a valuation allowance of $3.2 million was recorded, respectively. The net deferred tax asset recorded at December 31, 2013 and 2012 was $798,000 and $331,000. See Note 9 for additional information.

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 letters of credit. First Federal of Northern Michigan follows the same credit policies in making off-balance sheet commitments as it does for on-balance-sheet instruments.

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

Unfunded commitments under construction lines of credit for residential and commercial properties and commercial lines of credit are commitments for possible future extensions of credit to existing customers, for which funds have not been advanced by First Federal of Northern Michigan.

At December 31, 2013 and December 31, 2012, First Federal of Northern Michigan had $5.9 million and $9.5 million, respectively, of commitments to grant loans, $12.9 million and $13.1 million, respectively, of unfunded commitments under lines of credit and $59,000 and $4,000, respectively, of letters of credit. See Note 10 of the Notes to the Consolidated Financial Statements.

Safe Harbor Statement

When used in this annual report or future filings by First Federal of Northern Michigan Bancorp, Inc. with the Securities and Exchange Commission, in the Company’s press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Impact of Inflation and Changing Prices

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

STOCKHOLDER INFORMATION

The Annual Meeting of Stockholders will be held at 1:00 p.m., May 14, 2014 at the Thunder Bay National Marine Sanctuary, 500 W. Fletcher St., Alpena, MI 49707.

Stock Listing

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

Price Range of Common Stock

The following sets forth the quarterly high and low closing price per share and cash dividends declared during each of the four quarters in 2013 and 2012.

	Market Price
Quarter Ended	High		Low		Cash Dividend Declared
December 31, 2013	$	5.72	$	4.71	$	0.020
September 30, 2013	$	4.47	$	4.20	$	—
June 30, 2013	$	4.65	$	3.40	$	—
March 31, 2013	$	4.79	$	4.24	$	—
December 31, 2012	$	5.00	$	3.94	$	—
September 30, 2012	$	3.96	$	3.25	$	—
June 30, 2012	$	4.03	$	3.30	$	—
March 31, 2012	$	4.27	$	2.99	$	—

Special Counsel	Independent Auditor
Luse Gorman Pomerenk & Schick, PC	Plante & Moran, PLLC
5335 Wisconsin Avenue, N.W., Suite 780	2601 Cambridge Ct. Suite 500
Washington, D.C. 20015	Auburn Hills, Michigan 48326
Market Maker	Transfer Agent
Raymond James & Associates, Inc.	Registrar and Transfer Company
222 South Riverside Plaza	10 Commerce Drive
7th Floor 60606	Cranford, New Jersey 07016
Chicago, IL	800-346-6084
312-655-3000

Annual Report on Form 10-K

A copy of the Company’s Form 10-K for the year ended December 31, 2013 will be furnished without charge upon written request to: Eileen M. Budnick, VP- Director of Financial Reporting & Accounting.

Treasurer and Corporate Secretary, First Federal of Northern Michigan Bancorp, Inc., 100 S. Second Avenue, Alpena, Michigan 49707. 

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

Directors

Martin A. Thomsonhas been Chairman of the Board of Directors since May 2008. He was President and Chief Executive Officer of the Company and Bank from May 2001. In January 2006, Mr. Thomson relinquished the position of President and in May 2008 relinquished the position of Chief Executive Officer and assumed the role of Chairman of the Board of Directors of the Company and Bank. Mr. Thomson previously held the position of President and Chief Executive Officer of Presque Isle Electric and Gas Co-op., Onaway, Michigan. Mr. Thomson has been a director of the Bank since 1986, and a director of the Company since its formation in November 2000.

Keith D. Wallaceis a senior attorney with the law firm of Isackson, Wallace and Pfiefer, P.C., located in Alpena, Michigan. Mr. Wallace has been a director of the Bank since 1988, and a director of the Company since its formation in November 2000.

Gary C. VanMassenhove is a Certified Public Accountant at Straley, Lamp and Kraenzlein, CPA firm. Mr. VanMassenhove has been a Certified Public Accountant for 43 years. He has been a director of the Company and the Bank since September 2001.

Thomas R. Townsend is the President of the R.A. Townsend Co., a plumbing, heating and air conditioning distributor located in Alpena, Michigan, where he has been employed for the past 36 years. Mr. Townsend has been a director of the Company and the Bank since April 2002.

James E. Kraenzleinis a partner in Straley, Lamp and Kraenzlein CPA firm. Mr. Kraenzlein has been a Certified Public Accountant for 17 years. He has been a director of the Company since June 2013.

Michael W. Mahler was named President and Chief Executive Officer of the Company and the Bank in May 2008. He was named President and Chief Operating Officer of the Company and the Bank in January 2006. Prior to that appointment, since November 2004, Mr. Mahler served as Executive Vice President of the Company and the Bank and had served, since November 2002, as Chief Financial Officer. From September 2000 until November 2002, Mr. Mahler was Corporate Controller at Besser Company, Alpena, Michigan, an international producer of concrete products equipment. From 1990 until 2000, Mr. Mahler was employed at LTV Steel Company, East Chicago, Indiana where he served in financial roles of increasing responsibility and served, from 1997 until 2000, as Controller for a northeast Michigan division. Mr. Mahler has been a Director of the Bank since January 2006 and of the Company since May 2008.

Executive Officers Who Are Not Directors

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

Eileen M. Budnickwas named VP- Director of Financial Reporting & Accounting, Treasurer and Corporate Secretary of the Company and the Bank in May 2013. Mrs. Budnick had served as Controller of the Bank since April 2008 and had served, since February 2007, as Assistant Controller, and prior to that appointment served, since February 2002, as a staff accountant for the Bank. Prior to February 2002, Mrs. Budnick was employed at Alpena Alcona Area Credit Union serving in various banking positions since September 1993.

Executive Management of the Bank

Michael W. Mahler, Jerome W. Tracey, Eileen M. Budnick, Linda K. Sansom

Officers of the Bank

Michael W. Mahler, Jerome W. Tracey, Eileen M. Budnick, Joseph W. Gentry II, Kathleen R. Brown, Linda K. Sansom, Jerome P. Schmidt, Steven T. Mousseau, Tifanie A. Tremble

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

	Contents
Report Letter	2
Consolidated Financial Statements
Balance Sheet	3
Statement of Operations and Comprehensive Income	4
Statement of Changes in Stockholders’ Equity	5
Statement of Cash Flows	6
Notes to Consolidated Financial Statements	7

1

Report of Independent Registered Public Accounting Firm

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

We have audited the consolidated balance sheet of First Federal of Northern Michigan Bancorp, Inc. as of December 31, 2013 and 2012 and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each year in the two-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Federal of Northern Michigan Bancorp, Inc. as of December 31, 2013 and 2012 and the consolidated results of its operations and its cash flows for each year in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ Plante & Moran, PLLC

Auburn Hills, Michigan
March 18, 2014

2

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheet
(000s omitted, except per share data)

	December 31
	2013			2012
Assets
Cash and cash equivalents	$	2,760		$	2,732
Overnight deposits with Federal Home Loan Bank		6			20
Total cash and cash equivalents		2,766			2,752
Securities available for sale, at fair value (Note 2)		50,358			50,764
Securities held to maturity (Note 2)		2,255			2,345
Loans - net (Note 3)		136,315			138,912
Loans held for sale		175			79
Federal Home Loan Bank stock		3,266			3,266
Property and equipment (Note 4)		5,203			5,394
Foreclosed real estate		1,780			2,387
Accrued interest receivable		745			970
Intangible assets (Note 6)		40			158
Deferred tax asset (Note 9)		799			331
Originated mortgage servicing right - net (Note 5)		860			1,016
Bank owned life insurance		4,610			4,475
Other assets		485			985
Total assets	$	209,657		$	213,834
Liabilities and Stockholders’ Equity
Liabilities
Non-interest bearing deposits	$	21,047		$	21,067
Interest-bearing deposits (Note 7)		138,982			137,283
Advances from Federal Home Loan Bank (Note 8)		24,813			26,358
REPO sweep accounts		—			3,183
Accrued expenses and other liabilities (Note 12)		1,290			1,508
Total liabilities		186,132			189,399
Stockholders’ Equity (Note 11)
Common stock ($0.01 par value 20,000,000 shares authorized, 3,191,799 shares issued) - at December 31, 2013 and 2012, respectively		32			32
Additional paid-in capital		23,854			23,854
Retained earnings		2,763			2,766
Treasury stock at cost (307,750 shares) - at December 31, 2013 and 2012, respectively		(2,964	)		(2,964	)
Accumulated other comprehensive (loss) income		(160	)		747
Total stockholders’ equity		23,525			24,435
Total liabilities and stockholders’ equity	$	209,657		$	213,834

See Notes to Consolidated Financial Statements.

3

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Statement of Operations and Comprehensive Income
(000s omitted, except per share data)

	Year Ended December 31
	2013			2012
Interest Income
Loans, including fees	$	7,203		$	7,928
Investments
Taxable		484			540
Tax-exempt		151			154
Mortgage-backed securities		481			621
Total interest income		8,319			9,243
Interest Expense
Deposits (Note 7)		826			1,034
Borrowings		324			620
Total interest expense		1,150			1,654
Net Interest Income - Before provision for loan losses		7,169			7,589
Provision for Loan Losses(Note 3)		637			1,367
Net Interest Income - After provision for loan losses		6,532			6,222
Other Income
Service charges and other fees		857			760
Net gain on sale of investments		—			47
Net gain on sale of loans		235			587
Net gain (loss) on sale of real estate owned and other repossessed assets		3			(83	)
Loan servicing fees		350			656
Insurance and brokerage commissions		126			149
Other		194			160
Total other income		1,765			2,276
Operating Expenses
Compensation and employee benefits (Note 12)		4,654			4,913
FDIC insurance premiums		184			189
Amortization of intangible assets		119			177
Advertising		130			156
Occupancy and equipment		911			959
Data processing service bureau		301			306
Professional fees		510			424
Collection activity		153			206
Real estate owned & other repossessed assets		245			409
Other		1,035			973
Total operating expenses		8,242			8,712
Income (Loss) - before income tax expense		55			(214	)
Income tax expense (Note 9)		—			—
Net income (loss)	$	55		$	(214	)
Other Comprehensive Income (Loss):
Unrealized (loss) gain on investment securities - available for sale securities - net of tax		(907	)		110
Reclassification adjustment for gains realized in earnings - net of tax		—			(31	)
Comprehensive Loss	$	(852	)	$	(135	)
Per Share Data
Net income (loss) per share
Basic	$	0.02		$	(0.07	)
Diluted	$	0.02		$	(0.07	)
Dividends per common share	$	0.02		$	—

See Notes to Consolidated Financial Statements.

4

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity
(000s omitted)

	Shares		Common Stock		Treasury Stock			Additional Paid-in Capital		Unearned Compensation			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance - January 1, 2012		3,192	$	32	$	(2,964	)	$	23,853	$	(1	)	$	2,980		$	668		$	24,568
Net loss		—		—		—			—		—			(214	)		—			(214	)
Other comprehensive income		—		—		—			—		—			—			79			79
Stock options/MRP shares expense		—		—		—			1		1			—			—			2
Balance - December 31, 2012		3,192		32		(2,964	)		23,854		—			2,766			747			24,435
Net income		—		—		—			—		—			55			—			55
Other comprehensive loss		—		—		—			—		—			—			(907	)		(907	)
Common dividend declared, $0.02 per share		—		—		—			—		—			(58	)		—			(58	)
Balance - December 31, 2013		3,192	$	32	$	(2,964	)	$	23,854	$	—		$	2,763		$	(160	)	$	23,525

See Notes to Consolidated Financial Statements.

5

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Consolidated Statement of Cash Flows
(000s omitted, except per share data)

	Year Ended December 31
	2013			2012
Cash Flows from Operating Activities
Net income (loss)	$	55		$	(214	)
Adjustments to reconcile net income (loss) to cash from operating activities:
Depreciation and amortization		401			480
Provision for loan losses		637			1,367
Amortization and accretion on securities		551			527
Gain on sale of investment securities		—			(47	)
Stock options/awards		—			2
Gain on sale of loans held for sale		(235	)		(587	)
(Gain) Loss on sale of property and equipment		(12	)		4
(Gain) Loss on sale of real estate owned and other repossessed assets		(3	)		83
Originations of loans held for sale		(17,383	)		(35,559	)
Proceeds from sale of loans held for sale		17,522			36,067
Net change in:
Accrued interest receivable		225			179
Prepaid FDIC insurance premiums		583			176
Bank owned life insurance		(135	)		(61	)
Other assets		73			(37	)
Accrued expenses and other liabilities		(218	)		(227	)
Deferred income tax benefit - (Note 9)		—			—
		—			—
Net cash provided by operating activities		2,061			2,153
		—			—
Cash Flows from Investing Activities
Net decrease (increase) in loans		474			(1,219	)
Proceeds from maturity of securities		14,441			20,494
Proceeds from sale of securities available-for-sale		—			1,600
Proceeds from sale of property and equipment		59			264
Proceeds from sale of of real estate owned and other repossessed assets		2,097			2,761
Purchase of securities available for sale		(15,872	)		(20,080	)
Purchase of bank owned life insurance		—			(3,000	)
Purchase of premises and equipment		(139	)		(120	)
Net cash provided by investing activities		1,060			700
Cash Flows from Financing Activities
Net increase in deposits		1,679			7,701
Dividends paid on common stock		(58	)		—
Net decrease in Repo Sweep Accts		(3,183	)		(2,409	)
Advances from FHLB		47,005			58,815
Repayments of advances from FHLB		(48,550	)		(66,957	)
Net cash used in financing activities		(3,107	)		(2,850	)
Net Increase in Cash and Cash Equivalents		14			3
Cash and Cash Equivalents- Beginning of year		2,752			2,749
Cash and Cash Equivalents - End of year	$	2,766		$	2,752
Supplemental Cash Flow and Noncash Information
Net cash paid (refunded) for income taxes	$	—		$	(15	)
Cash paid for interest on deposits and borrowings		1,161			1,702
Transfer of loans to real estate owned & other repossessed assets		1,486			1,823

.

6

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notesto Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 1 - Summary of Significant Accounting Policies

Nature of Operations – First Federal of Northern Michigan Bancorp, Inc. (the “Company”) and its subsidiary, First Federal of Northern Michigan (the “Bank”), conduct operations in the northeastern lower peninsula of Michigan. The Company’s primary services include accepting deposits, making commercial, consumer and mortgage loans, and engaging in mortgage banking activities.

Principles of Consolidation - The consolidated financial statements include the accounts of First Federal of Northern Michigan Bancorp, Inc., First Federal of Northern Michigan, and the Bank’s wholly owned subsidiaries, Financial Services & Mortgage Corporation (“FSMC”) and FFNM Agency. FSMC invested in real estate, which includes leasing, selling, developing, and maintaining real estate properties. The main activity of FFNM Agency is to collect the stream of income associated with the sale of the Blue Cross/Blue Shield override business to an outside party and, to a lesser extent, the collection of commissions for the sale of non-insured investment products. All significant intercompany balances and transactions have been eliminated in the consolidation.

Certain reclassifications of prior years’ amounts have been made to conform to current year presentation. Such reclassifications had no effect on prior year net income or shareholders’ equity.

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, the valuation of investment securities, intangible and deferred tax assets, and mortgage servicing rights.

Significant Group Concentrations of Credit Risk -Most of the Company’s activities are with customers located within the northeastern lower peninsula of Michigan. Note 2 discusses the types of securities in which the Company invests. Note 3 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations to any one industry or customer.

Cash and Cash Equivalents- For the purpose of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from depository institutions and federal funds sold and interest bearing deposits in other depository institutions which mature within ninety days when purchased.

7

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 1 - Summary of Significant Accounting Policies (Continued)

Securities – Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income net of applicable income taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. When evaluating investment securities consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether another-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but the entity does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.

8

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 1 - Summary of Significant Accounting Policies (Continued)

Federal Home Loan Bank Stock – Federal Home Loan Bank (FHLB) Stock is carried at cost and is held to allow the Bank to conduct business with the entity. The Federal Home Loan Bank sells and purchases its stock at par; therefore cost approximates fair market value.

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

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

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, also known as rate lock commitments. Rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Fair value is based on fees currently charged to enter into similar agreements. The fair value of rate lock commitments was insignificant at December 31, 2013 and 2012.

The Company uses forward contracts as part of its mortgage banking activities. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. The fair value of forward contracts was insignificant at December 31, 2013 and 2012.

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

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans.

9

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 1 - Summary of Significant Accounting Policies (Continued)

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

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

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

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

The allowance consists of specific and general components. The specific component relates to loans that are classified as 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 than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

10

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 1 - Summary of Significant Accounting Policies (Continued)

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. The Company does not separately identify individual consumer and residential loans for impairment disclosures until a loss is imminent.

Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as a Troubled Debt Restructure (TDR). A loan is a TDR when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying or renewing a loan that the Company would not otherwise consider. To make this determination, the Company must determine whether (a) the borrower is experiencing financial difficulties and (b) the Company granted the borrower a concession. This determination requires consideration of all of the facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties.

11

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 1 - Summary of Significant Accounting Policies (Continued)

Loan Servicing– Servicing assets are recognized as separate assets when rights are acquired through the sale of originated residential mortgage loans. Capitalized servicing rights are reported in other assets and are amortized against non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or on a valuation model that calculates the present value of estimated future net servicing income using market based assumptions. Temporary impairment is recognized through a valuation allowance for an individual stratum to the extent that fair value is less than the capitalized amount for the stratum. If it is later determined that all or a portion of the temporary impairment no longer exists, the valuation allowance is reduced through a recovery of income. An other-than-temporary impairment results in a permanent reduction to the carrying value of the servicing asset. Servicing income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

Foreclosed Assets (Including Other Real Estate Owned) -Foreclosed real estate held for sale is carried at the lower of fair value minus estimated costs to sell, or cost. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. Foreclosed real estate is classified as other real estate owned. The net income from operations of foreclosed real estate held for sale is reported in non-interest income.

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.

Bank Owned Life Insurance -The Bank has purchased life insurance policies on certain key officers. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

12

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 1 - Summary of Significant Accounting Policies (Continued)

Intangible Assets – The Company has in the past purchased a branch or branches from other financial institutions. The analysis of these branch acquisitions led the Company to conclude that in each case, we acquired a business and therefore, the excess of purchase price over fair value of net assets acquired has been allocated to core deposit intangible assets. The conclusion was based on the fact that in each case we acquired employees, customers and branch facilities. The expected life for core deposit intangibles is based on the type of products acquired in an acquisition. The amortization periods range from 10 to 15 years and are based on the expected life of the products. The expected life was determined based on an analysis of the life of similar products within the Company and local competition in the markets where the branches were acquired. The core deposit intangibles are amortized on a straight line basis. The core deposit intangible is analyzed quarterly for impairment.

On June 12, 2003, First Federal of Northern Michigan acquired 100% of the stock of the InsuranCenter of Alpena (ICA).

On February 27, 2009 the Company announced that it had sold the majority of the assets of the InsuranCenter of Alpena.

At the time of the sale, goodwill of $600 continued to be recorded relating to certain assets of the Company that were not sold in the sale of ICA. The assets retained relate to a future stream of commissions. Under an agreement, the Company will receive a portion of the override commission through April, 2014. Management computed an estimated cash flow on this commission using a 6.0% discount rate and determined a fair value of $600. Since the $600 allocation of fair value relates to a finite life asset, the Company re-characterized the goodwill as an amortizable intangible and began amortizing the asset in March, 2009.

Income Taxes - Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company records a valuation allowance if it believes, based on available evidence, that it is “more likely than not” that the future tax assets recognized will not be realized before their expiration. Realization of the Company’s deferred tax assets is primarily dependent upon the generation of a sufficient level of future taxable income.

13

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 1 - Summary of Significant Accounting Policies (Continued)

At December 31, 2013 and 2012, management did not believe it was more likely than not that all of the deferred tax assets would be realized. Accordingly, at December 31, 2013 and 2012 a valuation allowance of $3.2 million was recorded.

The net deferred tax asset recorded at December 31, 2013 and 2012 was $798 and $331. See Note 9 for additional information.

Off Balance Sheet Instruments- In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. For letters of credit, a liability is recorded for the fair value of the obligation undertaken in issuing the guarantee.

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

Stock-Based Compensation – The Company applies the recognition and measurement of stock-based compensation accounting rules for stock-based compensation which is referred to as the fair value method. Compensation cost is based on the fair value of the equity issued to employees. The Company recognizes compensation expense related to stock-based compensation over the period the services are performed.

The Company’s stock based compensation plans are described in detail in Note 12 (Employee Benefit Plans). Compensation expense is recognized for stock options and unvested (restricted) stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common shares at the date of grant is used to estimate the fair value of unvested (restricted) stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the unvested period for nonvested (restricted) stock awards. Certain of the Company’s share-based awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period.

14

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 1 - Summary of Significant Accounting Policies (Continued)

The Company granted no options in 2013 and 2012. Compensation costs related to stock options charged to earnings were $0 and $2 in 2013 and 2012, respectively.

Earnings Per Common Share- Earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period. The Company uses the treasury stock method to compute diluted earnings per share, which assumes that proceeds from the assumed exercise of stock options would be used to purchase common stock at the average market price during the period. As of December 31, 2013, 150,030 options were not considered dilutive, due to the fact that the options are underwater. As of December 31, 2012 there was no dilution due to the net loss for the year.

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

	December 31,
	2013		2012
Net income (loss)	$	55	$	(214	)
Average number of common shares outstanding		2,884,049		2,884,049
Effect of dilutive options		—		—
Average number of common shares outstanding used to calculate diluted earnings per common share		2,884,049		2,884,049

Recent Accounting Pronouncements- In 2013 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02 The Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. The Update does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (AOCI) by component. In addition, an entity is required to present, either on the face of the statement where net income is presented (or in the notes), significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This standard is effective for reporting periods beginning after December 15, 2013 (December 31, 2014)

15

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 1 - Summary of Significant Accounting Policies (Continued)

In 2013 the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The update provides additional guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryfoward. Except for when a net operating loss carryforward, a similar tax loss or tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this update are effective for fiscal years and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. We do not expect the update to have a material effect on our financial statements.

During 2014, the FASB issued ASU N. 2014-04 Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosures occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendment requires interim and annual disclosure of both (1) the amount of

16

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective method. We do not expect the update to have a material effect on our financial statements.

Note 2 - Securities

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

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	7,111	$	36	$	(105	)	$	7,042
Municipal notes		13,694		216		(301	)		13,609
Corporate securities		1,085		12		—			1,097
Mortgage-backed securities		28,708		279		(384	)		28,603
Equity securities		3		4		—			7
Total	$	50,601	$	547	$	(790	)	$	50,358
Securities Held to Maturity
Municipal notes	$	2,255	$	145	$	—		$	2,400

17

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 2 - Securities (Continued)

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	9,181	$	66	$	—		$	9,247
Municipal notes		10,413		368		(23	)		10,758
Corporate securities		1,135		15		—			1,150
Mortgage-backed securities		28,901		736		(29	)		29,608
Equity securities		3		—		(2	)		1
Total	$	49,633	$	1,185	$	(54	)	$	50,764
Securities Held to Maturity
Municipal notes	$	2,345	$	225	$	—		$	2,570

The amortized cost and estimated market value of securities at December 31, 2013, 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.

18

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 2 - Securities (Continued)

	December 31, 2013
	Amortized Cost		Market Value
Available For Sale:
Due in one year or less	$	3,414	$	3,427
Due after one year through five years		10,779		10,854
Due in five year through ten years		6,461		6,201
Due after ten years		1,236		1,266
Subtotal		21,890		21,748
Equity securities		3		7
Mortgage-backed securities		28,708		28,603
Total	$	50,601	$	50,358
Held To Maturity
Due in one year or less	$	90	$	92
Due after one year through five years		490		516
Due in five year through ten years		700		750
Due after ten years		975		1,042
Total	$	2,255	$	2,400

At December 31, 2013 and 2012, securities with a fair value of $36.0 million and $44.1 million, respectively, were pledged to secure REPO Sweep accounts, FHLB advances and borrowings from the Federal Reserve discount window.

Gross proceeds from the sale of available-for-sale securities for the years ended December 31, 2013 and 2012 were $0 and $1.6 million, respectively, resulting in gross gains of $0 and $54, respectively, and gross losses of $0 and $7, respectively. The tax provision applicable to these net realized gains amounted to $0 and $16, respectively.

The following is a summary of securities that had unrealized losses at December 31, 2013 and 2012. The information is presented for securities that have been in an unrealized loss position for less than 12 months and for more than 12 months. At December 31, 2013, the Company held 39 securities with unrealized losses totaling $790. At December 31, 2012 there were 10 securities with unrealized losses totaling $54. There are temporary reasons why securities may be valued at less than amortized cost.

19

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 2 - Securities (Continued)

Temporary reasons are that the current levels of interest rates as compared to the coupons on the securities held by the Company are higher and impairment is not due to credit deterioration. The Company has the intent and the ability to hold these securities until their value recovers, which may be until maturity.

	December 31, 2013										December 31, 2012
			Gross Unrealized Losses					Gross Unrealized Losses					Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		Less than 12 months			Fair Value		12 months or longer			Fair Value		Less than 12 months			Fair Value		12 months or longer
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	—		$	894	$	(105	)	$	—	$	—		$	—	$	—
Corporate and other securities
Municipal notes		7,902		(243	)		1,668		(58	)		1,537		(23	)		—		—
Mortgage-backed securities		14,471		(334	)		2,052		(50	)		2,725		(13	)		1,687		(16	)
Equity securities		—		—			—		—			—		—			1		(2	)
Total Securities available for sale	$	22,373	$	(577	)	$	4,614	$	(213	)	$	4,262	$	(36	)	$	1,688	$	(18	)
Held to Maturity:
Municipal notes		—		—			—		—			—		—			—		—
Total Securities held to maturity	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—

On a quarterly basis, the Company performs a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if other-than-temporary impairment (“OTTI”) exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. For debt securities, an OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the individual security. If the Company does not expect to sell the security, the Company must evaluate the expected cash flows to be received to determine if a credit loss has occurred. If a credit loss is present, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in other comprehensive income.

20

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 2 - Securities (Continued)

The security-level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. The assessments are based on the nature of the securities, the financial condition of the issuer, the extent and duration of the securities, the extent and duration of the loss and the intent and whether Management intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis, which may be maturity. For those securities for which the assessment shows the Company will recover the entire cost basis, Management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are recognized in other comprehensive income, net of tax.

Management does not believe that the investment securities that were in an unrealized loss position as of December 31, 2013 represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

21

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 3 - Loans
	Loans at December 31, 2013 and 2012 are summarized as follows:

	December 31
	2013		2012
Real estate loans - One- to four-family residential	$	63,839	$	66,539
Commercial loans:
Secured by real estate		51,899		54,673
Other		12,451		8,102
Total commercial loans		64,350		62,775
Consumer loans:
Secured by real estate		8,730		10,409
Other		1,165		1,259
Total consumer loans		9,895		11,668
Total gross loans		138,084		140,982
Less:
Net deferred loan fees		297		320
Allowance for loan losses		1,472		1,750
Total loans - net	$	136,315	$	138,912

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

	December 31, 2013
	Less Than One Year		One Year to Five Years		After Five Years		Total
Loans at fixed interest rates	$	7,713	$	28,673	$	49,458	$	85,844
Loans at variable interest rates		6,357		12,280		33,603		52,240
Total	$	14,070	$	40,953	$	83,061	$	138,084

Certain directors and executive officers of the Company were loan customers of the Bank during 2013 and 2012. Such loans were made in the ordinary course of business and do not involve more than a normal risk of collectability. An analysis of aggregate loans outstanding to directors and executive officers for the years ended December 31, 2013 and 2012 are as follows:

22

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 3- Loans (Continued)

	December 31
	2013			2012
Aggregate balance - Beginning of Period	$	3,340		$	3,344
New loans		2,524			1,166
Repayments		(2,491	)		(1,170	)
Net change in directors and officers		(205	)		—
Aggregate balance - End of Period	$	3,168		$	3,340

The following tables illustrate the contractual aging of the recorded investment in past due loans by class of loans as of December 31, 2013 and 2012:

As of December 31, 2013
	30 - 59 Days  Past Due		60 - 89 Days  Past Due		Greater than 90  Days		Total  Past Due		Current		Total Loans		Recorded  Investment > 90  Days and  Accruing
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	173	$	173	$	—	$	173	$	—
Commercial Real Estate - other		—		521		1,441		1,962		49,764		51,726		—
Commercial - non real estate		33		20		—		53		12,398		12,451		—
Consumer:
Consumer - Real Estate		54		55		—		109		8,621		8,730		—
Consumer - Other		—		4		2		6		1,159		1,165		2
Residential:
Residential		1,973		393		353		2,719		61,120		63,839		24
Total	$	2,060	$	993	$	1,969	$	5,022	$	133,062	$	138,084	$	26

23

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 3 - Loans (Continued)

As of December 31, 2012
	30 - 59 Days  Past Due		60 - 89 Days  Past Due		Greater than 90  Days		Total  Past Due		Current		Total Loans		Recorded  Investment > 90  Days and  Accruing
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	173	$	173	$	2,073	$	2,246	$	—
Commercial Real Estate - other		3,210		540		282		4,032		48,395		52,427		—
Commercial - non real estate		113		—		—		113		7,989		8,102		—
Consumer:
Consumer - Real Estate		59		—		13		72		10,337		10,409		—
Consumer - Other		11		5		6		22		1,237		1,259		6
Residential:
Residential		2,047		796		1,198		4,041		62,498		66,539		61
Total	$	5,440	$	1,341	$	1,672	$	8,453	$	132,529	$	140,982	$	67

The Bank uses an eight tier risk rating system to grade its commercial loans. The grade of a loan may change during the life of the loans. The risk ratings are described as follows:

Risk Grade 1 (Excellent) -Prime loans based on liquid collateral, with adequate margin or supported by strong financial statements. Probability of serious financial deterioration is unlikely. High liquidity, minimum risk, strong ratios, and low handling costs are common to these loans. This classification also includes all loans secured by certificates of deposit or cash equivalents.

Risk Grade 2 (Good) -Desirable loans of somewhat less stature than Grade 1, but with strong financial statements. Probability of serious financial deterioration is unlikely. These loans possess a sound repayment source (and/or a secondary source). These loans represent less than the normal degree of risk associated with the type of financing contemplated.

Risk Grade 3 (Satisfactory) - Satisfactory loans of average risk – may have some minor deficiency or vulnerability to changing economic conditions, but still fully collectible. There may be some minor weakness but with offsetting features or other support readily available. These loans present a normal degree of risk associated with the type of financing. Actual and projected indicators and market conditions provide satisfactory assurance that the credit shall perform in accordance with agreed terms.

24

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 3 - Loans (Continued)

Risk Grade 4 (Acceptable) -Loans considered satisfactory, but which are of slightly “below average” credit risk due to financial weaknesses or uncertainty. The loans warrant a somewhat higher than average level of monitoring to insure that weaknesses do not advance. The level of risk is considered acceptable and within normal underwriting guidelines, so long as the loan is given the proper level of management supervision.

Risk Grade 4.5 (Monitored) - Loans are considered “below average” and monitored more closely due to some credit deficiency that poses additional risk but is not considered adverse to the point of being a “classified” credit. Possible reasons for additional monitoring may include characteristics such as temporary negative debt service coverage due to weak economic conditions, borrower may have experienced recent losses from operations, declining equity and/or increasing leverage, or marginal liquidity that may affect long-term sustainability. Loans of this grade have a higher degree of risk and warrant close monitoring to insure against further deterioration.

Risk Grade 5 (Other Assets Especially Mentioned) (OAEM) -Loans which possess some credit deficiency or potential weakness, which deserve close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future.

Risk Grade 6 (Substandard) -Loans are “substandard” whose full, final collectability does not appear to be a matter of serious doubt, but which nevertheless portray some form of well defined weakness that requires close supervision by Bank management. The noted weaknesses involve more than normal banking risk. One or more of the following characteristics may be exhibited in loans classified Substandard: (1) Loans possess a defined credit weakness and the likelihood that the loan shall be paid from the primary source of repayment is uncertain; (2) Loans are not adequately protected by the current net worth and/or paying capacity of the obligor; (3) primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees; (4) distinct possibility that the Bank shall sustain some loss if deficiencies are not corrected; (5) unusual courses of action are needed to maintain a high probability of repayment; (6) the borrower is not generating enough cash flow to repay loan principal, however, continues to make interest payments; (7) the Bank is forced into a subordinated or unsecured position due to flaws in documentation; (8) loans have been restructured so that payment schedules, terms, and collateral represent concessions to the

25

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 3 - Loans (Continued)

borrower when compared to normal loan terms; (9) the Bank is contemplating foreclosure or legal action due to the apparent deterioration in the loan; or (10) there is a significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

Grade 7 (Doubtful) -Loans have all the weaknesses of those classified Substandard. Additionally, however, these weaknesses make collection or liquidation in full, based on existing conditions, improbable. Loans in this category are typically not performing in conformance with established terms and conditions. Full repayment is considered “Doubtful”, but extent of loss is not currently determinable.

Risk Grade 8 (Loss) -Loans are considered uncollectible and of such little value, that continuing to carry them as an asset on the Bank’s financial statements is not feasible.

The following tables present the risk category of loans by class of loans based on the most recent analysis performed as of December 31, 2013 and 2012:

As of December 31, 2013
Loan Grade	Commercial Real Estate  Construction		Commercial Real Estate  Other		Commercial
1-2	$	—	$	—	$	—
3		—		16,187		5,602
4		—		27,789		6,699
5		—		4,835		45
6		173		2,915		105
7		—		—		—
8		—		—		—
Total	$	173	$	51,726	$	12,451

As of December 31, 2012
Loan Grade	Commercial Real Estate  Construction		Commercial Real Estate  Other		Commercial
1-2	$	—	$	—	$	—
3		615		13,895		2,376
4		1,458		27,488		5,489
5		—		2,712		37
6		173		8,332		200
7		—		—		—
8		—		—		—
Total	$	2,246	$	52,427	$	8,102

26

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 3 - Loans (Continued)

For residential real estate and other consumer credit the Company also evaluates credit quality based on the aging status of the loan and by payment activity. Loans 60 or more days past due are monitored by the collection committee.

The following tables present the risk category of loans by class based on the most recent analysis performed as of December 31, 2013 and 2012.

As of December 31, 2013
	Residential
Loan Grade:
Pass	$	63,164
Special Mention		—
Substandard		675
Total	$	63,839
	Consumer - Real Estate		Consumer - Other
Performing	$	8,723	$	1,163
Nonperforming		7		2
Total	$	8,730	$	1,165

As of December 31, 2012
	Residential
Loan Grade:
Pass
Special Mention	$	64,668
Substandard		—
Total		1,871
	$	66,539
	Consumer - Real Estate		Consumer - Other
Performing	$	10,381	$	1,253
Nonperforming		28		6
Total	$	10,409	$	1,259

27

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 3 - Loans (Continued)

The following tables present the recorded investment in non-accrual loans by class as of December 31, 2013 and 2012:

As of December 31
	2013		2012
Commercial Real Estate:
Commercial Real Estate - construction	$	173	$	173
Commercial Real Estate - other		1,454		2,851
Commercial		—		—
Consumer:
Consumer - real estate		7		28
Consumer - other		—		1
Residential:
Residential		651		1,810
Total	$	2,285	$	4,863

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2013 and 2012:

Impaired Loans  As of December 31, 2013							For the Twelve Months Ended  December 31,
							2013
	Unpaid Principal  Balance		Recorded  Investment		Related Allowance		Average  Recorded Investment		Interest  Income Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		1,789		1,788		—		1,894		104
Consumer - Real Estate		8		7		—		7		—
Consumer - Other		—		—		—		—		—
Residential		954		722		—		727		6
With a specific allowance recorded:
Commercial		—		—		—		—		—
Commercial Real Estate - Construction		1,589		173		48		173		—
Commercial Real Estate - Other		3,980		3,391		182		3,397		94
Consumer - Real Estate		—		—		—		—		—
Consumer - Other		—		—		—		—		—
Residential		53		30		5		30		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	48	$	173	$	—
Commercial Real Estate - Other	$	5,769	$	5,179	$	182	$	5,291	$	198
Consumer - Real Estate	$	8	$	7	$	—	$	7	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—
Residential	$	1,007	$	752	$	5	$	757	$	6

28

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 3 - Loans (Continued)

							For the Twelve Months Ended
Impaired Loans							December 31,
As of December 31, 2012							2012
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		1,589		173		—		173		—
Commercial Real Estate - Other		4,869		4,535		—		5,084		138
Consumer - Real Estate		33		28		—		34		—
Consumer - Other		1		1		—		3		—
Residential		1,365		1,194		—		1,359		—
With a specific allowance recorded:
Commercial		—		—		—		—		—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		2,138		2,127		101		2,167		80
Consumer - Real Estate		—		—		—		—		—
Consumer - Other		—		—		��		—		—
Residential		616		616		141		642		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	—	$	173	$	—
Commercial Real Estate - Other	$	7,007	$	6,662	$	101	$	7,251	$	218
Consumer - Real Estate	$	33	$	28	$	—	$	34	$	—
Consumer - Other	$	1	$	1	$	—	$	3	$	—
Residential	$	1,981	$	1,810	$	141	$	2,001	$	—

As of December 31, 2013 no additional funds are committed to be advanced in connection with impaired loans.

A restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The Company adheres to ASC 310-40, Troubled Debt Restructurings by Creditors, to determine whether a TDR applies in a particular instance. Prior to loans being modified and classified as a TDR, specific reserves are generally assessed, as most these loans have been specifically allocated for as part of the Company’s normal loan loss provisioning methodology. The Company allocated $230 and $13 reserves for the TDR loans at December 31, 2013 and December 31, 2012, respectively. The Company classifies all TDR loans as impaired loans in the table above.

29

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 3 - Loans (Continued)

The following table summarizes the loans that were modified as a TDR during the period ended December 31, 2013 and 2012.

	For the Twelve Months Ended December 31, 2013
	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investment		Troubled Debt Restructurings That Subsequently Defaulted
							Number of Contracts		Recorded Investment
Troubled Debt Restructurings
Commercial Real Estate - Construction		—	$	—	$	—		—	$	—
Commercial Real Estate - Other		1		412		412		—		—
Commercial - non real estate		—		—		—		—		—
Residential		2		337		337		—		—
Total		3	$	749	$	749		—	$	—
	For the Twelve Months Ended December 31, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investment		Troubled Debt Restructurings That Subsequently Defaulted
							Number of Contracts		Recorded Investment
Troubled Debt Restructurings
Commerical Real Estate - Construction		—	$	—	$	—		—	$	—
Commercial Real Estate - Other		—		—		—		1		53
Consumer - Real Estate		4		3,542		2,737		—		—
Residential		—		—		—		—		—
Total		4	$	3,542	$	2,737		1	$	53

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.

30

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 3 - Loans (Continued)

Additional collateral, a co-borrower, or a guarantor may be requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.

Loans modified in a TDR may be on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. The allowance for impaired loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows discounted at the loan’s effective interest rate if the loan is performing in accordance with the modified terms. Management exercises significant judgment in developing these estimates.

The regulatory guidance requires loans to be accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged and the borrower has not reaffirmed the debt, regardless of the delinquency status of the loan. The filing of bankruptcy by the borrower is evidence of financial difficulty and the discharge of the obligation by the bankruptcy court is deemed to be a concession granted to the borrower.

At December 31, 2013, there were no additional commitments to lend additional funds to the related debtors whose terms have been modified in a TDR.

The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off, whether a partial or full loan balance. A charge down in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 120 days delinquent, secured consumer loans are charged down to the value of collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. Commercial credits are charged down at 90 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-off may be realized as further unsecured positions are recognized.

The ALLL has a direct impact on the provision expense. An increase in the ALLL is funded through recoveries and provision expense.

31

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 3 – Loans (Continued)

Activity in the allowance for loan and lease losses was as follows for the years ended December 31, 2013 and 2012:

For the Year Ended December 31, 2013
	Commercial Construction			Commercial Real Estate			Commercial			Consumer Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	64		$	579		$	69		$	99		$	33		$	906		$	—	$	1,750
Charge-offs		—			(674	)		—			(40	)		(13	)		(464	)		—		(1,191	)
Recoveries		—			114			—			36			6			120			—		276
Provision		(16	)		425			(6	)		(33	)		(5	)		222			50		637
Ending Balance	$	48		$	444		$	63		$	62		$	21		$	784		$	50	$	1,472
Ending balance: individually evaluated for impairment	$	48		$	182		$	—		$	—		$	—		$	5		$	—	$	235
Ending balance: loans collectively evaluated for impairment	$	—		$	262		$	63		$	62		$	21		$	779		$	50	$	1,237
Loans:
Ending Balance	$	173		$	51,726		$	12,451		$	8,730		$	1,165		$	63,839		$	—	$	138,084
Ending balance: individually evaluated for impairment	$	173		$	5,179		$	—		$	7		$	—		$	752		$	—	$	6,111
Ending balance: loans collectively evaluated for impairment	$	—		$	46,547		$	12,451		$	8,723		$	1,165		$	63,087		$	—	$	131,973

32

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 3 – Loans (Continued)

For the Year Ended December 31, 2012
	Commercial Construction		Commercial Real Estate			Commercial		Consumer Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	10	$	393		$	53	$	146		$	46		$	870		$	—	$	1,518
Charge-offs		—		(265	)		—		(87	)		(44	)		(840	)		—		(1,236	)
Recoveries		—		10			—		16			10			65			—		101
Provision		54		441			16		24			21			811			—		1,367
Ending Balance	$	64	$	579		$	69	$	99		$	33		$	906		$	—	$	1,750
Ending balance: individually evaluated for impairment	$	—	$	101		$	—	$	—		$	—		$	141		$	—	$	242
Ending balance: loans collectively evaluated for impairment	$	64	$	478		$	69	$	99		$	33		$	765		$	—	$	1,508
Loans:
Ending Balance	$	2,246	$	52,427		$	8,102	$	10,409		$	1,259		$	66,539		$	—	$	140,982
Ending balance: individually evaluated for impairment	$	173	$	6,662		$	—	$	28		$	1		$	1,810		$	—	$	8,674
Ending balance: loans collectively evaluated for impairment	$	2,073	$	45,765		$	8,102	$	10,381		$	1,258		$	64,729		$	—	$	132,308

Note 4 - Property and Equipment

A summary of property and equipment is as follows:

	December 31
	2013		2012
Land	$	1,071	$	1,112
Land improvements		182		184
Buildings		6,237		6,249
Equipment		3,523		3,682
Total property and equipment		11,013		11,227
Accumulated depreciation		5,810		5,833
Net property and equipment	$	5,203	$	5,394

Depreciation expense was $283 and $303 for the periods ended December 31, 2013 and 2012, respectively.

33

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 5 - Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of mortgage and other loans serviced for otherswere approximately $131.7 million and $140.7 million at December 31, 2013 and 2012, respectively.

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

	December 31,
	2013			2012
Annual constant prepayment speed (CPR)		10.27	%		17.86	%
Weighted average life (in months)		244			246
Discount rate		9.26	%		8.11	%

The fair value of our mortgage servicing rights was estimated to be $1.1 million and $1.0 million at December 31, 2013 and December 31, 2012, respectively. At December 31, 2012 a valuation allowance of $19 was established against the mortgage servicing rights associated with our 20-year fixed-rate sold loans. Based on decreased prepayment speeds within the 20-year fixed rate tranche, the valuation allowance was removed in 2013.

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

	December 31
	2013			2012
Balance - beginning of period:	$	1,035		$	993
Originated mortgage servicing rights capitalized		151			426
Amortization of mortgage servicing rights		(326	)		(384	)
Balance - end of period		860			1,035
Valuation allowances:
Balance - beginning of period		(19	)		—
Additions		—			(19	)
Reductions		19			—
Write-downs		—			—
Balance - end of period (net of allowances)	$	860		$	1,016

34

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 6 - Intangible Assets

Intangible assets of the Company are summarized as follows:

	December 31, 2013
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets:
Core deposit	$	25	$	24	$	1
Commission residual		600		561		39
Total	$	625	$	585	$	40
	December 31, 2012
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets:
Core deposit	$	3,081	$	3,078	$	3
Commission residual		600		445		155
Total	$	3,681	$	3,523	$	158

Amortization expense was $118 and $177 for the periods ended December 31, 2013 and 2012, respectively.

As discussed in Note 1, on February 27, 2009 the Company announced that it had sold the majority of the assets of the InsuranCenter of Alpena. The Company allocated the goodwill between the assets sold and the assets retained.

The assets retained relate to a future stream of commissions related to the override commission discussed earlier. Under an agreement, the Company will receive a portion of the override commission through April, 2014. Management computed an estimated cash flow on this commission and using a 6.0% discount rate determined a fair value of $600. Since the $600 allocation of fair value relates to a finite life asset, the Company re-characterized the goodwill as an amortizable intangible and began amortizing the asset in March, 2009.

The following table sets forth the amount of remaining amortization for intangibles assets:

35

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 6 - Intangible Assets (Continued)

	For the year ended December 31,
	2014
Core deposit		1
Commission residual		39
Total		40

Note 7 - Deposits

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

	December 31
	2013		2012
Account Type
NOW accounts and MMDA	$	50,222	$	44,218
Regular savings accounts		22,037		19,867
Total		72,259		64,085
Certificate of Deposit Rates
0.50 percent to 0.99 percent		40,259		42,698
1.00 percent to 1.99 percent		17,715		15,962
2.00 percent to 2.99 percent		7,130		10,746
3.00 percent to 3.99 percent		1,486		3,398
4.00 percent to 4.99 percent		133		394
Total certificate of deposits		66,723		73,198
Total interest-bearing deposits	$	138,982	$	137,283

Certificates of deposit $100 or greater at December 31, 2013 and 2012 were $22.9 million and $26.0 million, respectively.

36

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 7 – Deposits (Continued)

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

	December 31, 2013
	Amount Due
Rate	Less than 1 Year		1-2 Years		2-3 Years		3-5 Years		Greater than 5 Years		Total
0.50 percent to 0.99 percent	$	27,892	$	11,193	$	877	$	297	$	—	$	40,259
1.00 percent to 1.99 percent		3,324		953		6,408		3,315		3,715		17,715
2.00 percent to 2.99 percent		1,313		3,861		409		51		1,496		7,130
3.00 percent to 3.99 percent		422		494		—		12		558		1,486
4.00 percent to 4.99 percent		—		46		33		54		—		133
Total	$	32,951	$	16,547	$	7,727	$	3,729	$	5,769	$	66,723

Interest expense on deposits is summarized as follows:

	Year Ended December 31
	2013		2012
NOW and MMDAs	$	98	$	95
Regular savings		11		10
Certificates of deposit		717		929
Total	$	826	$	1,034

Deposits from related parties held by the Bank at December 31, 2013 and 2012 amounted to $632 and $1.3 million, respectively.

Note 8 - Federal Home Loan Bank and Federal Reserve Advances

The Bank has advances from the Federal Home Loan Bank of Indianapolis. Interest rates range from 0.30% to 2.21% with a weighted average interest rate of 1.00%. These advances contain varying maturity dates through January 3, 2023 with a weighted average maturity of approximately 32 months. The advances are collateralized by approximately $49.6 million and $50.0 million of mortgage loans as of December 31, 2013 and 2012, respectively. In addition, at December 31, 2013 and 2012, securities with a carrying value of $20.4 million and $31.7 million, respectively, were pledged as collateral for Federal Home Loan Bank advances. Available borrowings with the Federal Home Loan Bank at December 31, 2013 totaled $52.0 million, of which $24.8 million was outstanding.

37

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 8 - Federal Home Loan Bank and Federal Reserve Advances (Continued)

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

December 31, 2013
Years Ending December 31	Amount		Weighted Average Interest Rate
2014	$	7,715		.44
2015		2,526		.81
2016		6,938		1.15
2017		5,729		1.49
2018		661		1.17
Thereafter		1,244		1.61
Total	$	24,813		1.00

The Bank had $1.5 million and $0 of variable rate advances outstanding as of December 31, 2013 and 2012, respectively.

In 2009, the Bank entered into a discount window loan agreement with the Federal Reserve Bank that allows for advances up to seventy-five percent of the collateral balance. As of December 31, 2013, these advances are secured by investment securities with a fair value of approximately $7.9 million and are generally due within 28 days from the date of the advance. The interest rate on the advances is based on the quoted Federal Reserve discount window rate (effective rate of 0.75 percent as of December 31, 2013). At December 31, 2013 and 2012, the Bank had no outstanding advances.

Note 9 - Federal Income Tax

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. The Company and the Bank file a consolidated Federal income tax return.

38

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 9 - Federal Income Tax (Continued)

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

	Year Ended December 31
	2013			2012
Current provision	$	—		$	—
Deferred benefit		(57	)		(138	)
Change in valuation allowance		57			138
Total	$	—		$	—

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:

	Year Ended December 31
	2013			2012
Tax (benefit) expense at statutory rate	$	19		$	(73	)
Increase (decrease) from:
Change in valuation allowance		57			138
Tax-exempt interest		(52	)		(52	)
Other		(24	)		(13	)
Total income tax expense	$	—		$	—

39

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 9 - Federal Income Tax (Continued)
	The net deferred tax asset was comprised of the following temporary differences:

	December 31
	2013		2012
Deferred tax assets:
Other real estate owned	$	92	$	96
Non-accrual loan interest		49		65
Directors’ benefit plan		272		274
Net operating loss carryforward		3,684		3,536
Investment in subsidiary		784		784
Net deferred loan origination fees		101		109
Unrealized loss on available-for-sale securities		83		—
Other		246		192
Total deferred tax assets		5,311		5,056
Less: valuation allowance		3,223		3,166
Deferred tax liabilities:
Allowance for loan losses		322		158
Mortgage servicing rights		292		345
Partnership losses		124		117
Unrealized gain on available-for-sale securities		—		385
Depreciation		344		343
Other		207		211
Total deferred tax liabilities		1,289		1,559
Net deferred tax asset	$	799	$	331

The Company has net operating loss carryforwards of approximately $10.8 million generated from December 31, 2007 through December 31, 2013 that are available to reduce total taxable income through the years ending December 31, 2033.

For tax years beginning prior to January 1, 1996, a qualified thrift institution was allowed a bad debt deduction for tax purposes based on a percentage of taxable income or on actual experience. The Bank used the percentage of taxable income method through December 31, 1995.

A deferred tax liability has not been recognized for the tax bad debt base year reserves of the Bank. The base year reserves are the balance of reserves as of December 31, 1987. At December 31, 2013 and 2012, the amount of those reserves was approximately $60. The amount of the unrecognized deferred tax liability at December 31, 2013 and 2012 was approximately $20.

40

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 10 – Off-Balance Sheet Risk Commitments and Contingencies
	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. These financial instruments 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 Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
	The following financial instruments were outstanding whose contract amounts represent credit risk:

	December 31
	2013		2012
Commitments to grant loans	$	5,936	$	9,498
Unfunded commitments under lines of credit		12,940		13,074
Commercial and standby letters of credit		59		4

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

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

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. Fees earned on commercial and standby letters of credit are required to be deferred over the contractual life of the letter of credit. The Company determined that the fair value of guarantees on standby letters of credit has an immaterial effect on the financial results at December 31, 2013 and 2012.

41

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 10 - Off Balance Sheet Risk Commitments and Contingencies (Continued)

	To reduce credit risk related to the use of credit-related financial instruments, the Company generally holds collateral supporting those commitments if deemed necessary. The amount and nature of the collateral obtained is based on the Company’s credit evaluation of the customer. Collateral held varies, but may include cash, securities, accounts receivable, inventory, property, plant, equipment, and real estate.
	If the counterparty does not have the right and ability to redeem the collateral or the Company is permitted to sell or repledge the collateral on short notice, the Company records the collateral in its balance sheet at fair value with a corresponding obligation to return it.
	Various legal claims also arise from time to time in the normal course of business, which, in the opinion of management, will have no material effect on the Company’s financial statements.
Note 11 - Stockholders’ Equity
	Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, regulatory limitation on payment of dividends, the Bank’s results of operations and financial condition, tax considerations, and general economic conditions.
	The Bank is subject to various regulatory capital requirements which were administered by the Office of Thrift Supervision (OTS) until July 21, 2011. Effective that date, supervisory responsibility for federal savings associations was transferred to the Office of the Comptroller of the Currency (OCC). 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.

42

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 11 - Stockholders’ Equity (Continued)

During the most recent regulatory examination, the OCC categorized the Bank as “well-capitalized” per definition of 12 CFR Section 565.4(b)(1). To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, tier 1 risk based, and tangible equity ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s categorization. Consolidated data has not been disclosed as the amounts and ratios are not significantly different.

	Actual					For Capital Adequacy Purposes					To be Categorized as Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in Thousands)
December 31, 2013
Total capital (to risk-weighted assets)	$	24,033		17.9	%	$	10,748		8.0	%	$	13,436		10.0	%
Tier 1 capital (to risk-weighted assets)	$	22,563		16.8	%	$	5,374		4.0	%	$	8,061		6.0	%
Tangible capital (to tangible assets)	$	22,563		10.8	%	$	3,137		1.5	%	$	4,183		2.0	%
December 31, 2012
Total capital (to risk-weighted assets)	$	23,723		17.4	%	$	10,930		8.0	%	$	13,663		10.0	%
Tier 1 capital (to risk-weighted assets)	$	22,015		16.1	%	$	5,465		4.0	%	$	8,198		6.0	%
Tangible capital (to tangible assets)	$	22,015		10.3	%	$	3,197		1.5	%	$	4,263		2.0	%

Note 12 - Employee Benefit Plans
	Defined Benefit Pension Plan
	The Bank is a participant in the multiemployer Financial Institutions Retirement Fund (FIRF or the “Plan”), which covers substantially all of its officers and employees. The defined benefit plan covers all employees who have completed one year of service, attained age 21, and worked at least 1,000 hours during the year. Normal retirement age is 65, with reduced benefits available at age 55. The Bank’s contributions are determined by FIRF and generally represent the normal cost of the Plan. Specific Plan assets and accumulated benefit information for the Bank’s portion of the Plan are not available. Under the Employee Retirement Income Security Act of 1974 (ERISA), a contributor to a multiemployer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. Effective July 1, 2005 the plan was frozen as to current participants and any new employees hired after July 1, 2004 were excluded from the plan. The expense of the Plan allocated to the Bank was $72 and $87 for the years ended December 31, 2013 and 2012, respectively.

43

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 12 - Employee Benefit Plans (Continued)

401(k) Savings Plan

The Bank has a 401(k) savings plan covering substantially all of its employees who meet certain age and service requirements. Contributions to the plan by the Bank are discretionary in nature in such amounts determined by the Board of Directors. The expense under the plan for the years ended December 31, 2013 and 2012 was $89 and $94, respectively.

Nonqualified Deferred Compensation Plan

The Bank has a nonqualified deferred compensation plan for certain of its directors. Through 1998, each eligible 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 $801 and $807 at December 31, 2013 and 2012, respectively. The expense under the plan for the years ended December 31, 2013 and 2012 was $78 and $71, 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 from an outside party to purchase 48,000 shares of the Company’s common stock at $10 per share. The ESOP note was payable quarterly with interest at the prime rate and was retired in 1999. All of the 1994 shares were allocated as of December 31, 1999. Compensation expense is measured by the fair value of ESOP shares allocated to participants during a fiscal year.

Pursuant to the 2005 second-step conversion and stock offering, the shareholders of the Company approved the purchase of 8% of shares sold in the stock offering by the ESOP.

44

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 12 - Employee Benefit Plans (Continued)

The Company provided a loan to the ESOP, which was used to purchase 138,709 shares of the Company’s common stock in the stock offering at $10 per share. The loan bore interest at a rate equal to the current prime rate, adjustable on January 1 of each year and provided for repayment of principal over the 15 year term of the loan. Since the Company provided the loan to the ESOP, the note receivable was not included in the Company’s balance sheet. Accordingly, the Company did not recognize interest income on the loan.

The Company made annual contributions to the ESOP sufficient to support the debt service of the loan. The loan was secured by the shares purchased, which were held in a suspense account for allocation among the participants as the loan is paid. Dividends paid on unallocated shares were not considered dividends for financial reporting purposes and were used to pay principal and interest on the ESOP loan. Dividends on allocated shares are charged to retained earnings.

The loan was paid in full as of December 31, 2009.

Compensation expense is recognized for the ESOP equal to the average fair value of shares committed to be released for allocation to participant accounts. Any difference between the average fair value of shares committed to be released for allocation and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital). During the years ended December 31, 2013 and 2012, respectively, 2,793 and 13,687 shares were sold into the open market and 0 and 15 shares were purchased from the open market. Total compensation expense was $0 for both the years ended December 31, 2013 and 2012.

Shares held by the ESOP include the following:

	December 31
	2013		2012
Allocated		116,465		121,608
Unallocated		—		—
Total		116,465		121,608

45

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
December 31, 2013 & 2012
(000s omitted, except per share data)

Note 12 - Employee Benefit Plans (Continued)
	There were 1,.350 and 3,065 shares distributed to ESOP participants in 2013 and 2012, respectively.
	Stock-Based Compensation Plans

The Company’s 1996 Stock Option Plan (the “1996 Plan”), which was approved by shareholders, permits the grant of stock options to its directors and employees for up to 127,491 shares of common stock (retroactively adjusted for the exchange ratio applied in the Company’s 2005 stock offering and related second-step conversion). The Company’s 2006 Stock-Based Incentive Plan (the “2006 Plan”), which was approved by the shareholders on May 17, 2006, permits the award of up to 242,740 shares of common stock of which the maximum number to be granted as Stock Options is 173,386 and the maximum that can be granted as Restricted Stock Awards is 69,354. Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on five years of continual service and have ten year contractual terms. Certain options provide for accelerated vesting if there is a change in control (as defined in the Plans). Shares issued under the Plan and exercised pursuant to the exercise of the stock option plan may be either authorized but unissued shares or reacquired shares held by the Company as treasury stock.

Stock Options - A summary of option activity under the Plans during the years ended December 31, 2013 and 2012 is presented below:

46

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 12 - Employee Benefit Plans (Continued)

Options	Shares			Weighted- Average  Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2012		182,682		$	9.47		4.30		—
Granted		—		$	0.00
Exercised		—		$	0.00
Forfeited or Expired		(15,062	)	$	8.81
Outstanding at December 31, 2012		167,620		$	9.53		3.38		—
Granted		—		$	0.00
Exercised		—		$	0.00
Forfeited or expired		(17,590	)	$	9.60
Oustanding at December 31, 2013		150,030		$	9.52		2.40		—
Options Exercisable at December 31, 2013		150,030		$	9.52		2.40		—

There were 54,656 shares available for future granting of options as of December 31, 2013.

The aggregate intrinsic value of outstanding options shown in the table above represents the total pretax intrinsic value (i.e. the difference between the Company’s closing stock price of $5.40 on December 31, 2013 and the exercise price times the number of shares) that would have been received by the option holder had all option holders exercised their options on December 31, 2013. The amount changes based on the fair market value of the stock. This value was $0.00 at both December 31, 2013 and 2012. The exercise prices for the stock options range from $7.60 to $9.65 per share.

As of December 31, 2013, the total compensation cost of the Plans were fully recognized. The total fair value of shares vested during the year ended December 31, 2013 and 2012 was $0 and $4, respectively. Compensation expense for 2013 and 2012 related to options granted under this plan was $0 and $1, respectively.

All stock options were fully vested at December 31, 2013 and 2012, respectively.

Restricted Stock Awards – The Company did not grant any award shares during the years ended December 31, 2013 and 2012. Compensation expense for 2013 and 2012 related to awards granted under this plan was $0 and $1, respectively.

47

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 12 - Employee Benefit Plans (Continued)

The shares vest over a five year service period. As of December 31, 2013, the total compensation cost of the Plan was fully recognized. In addition, there were no restricted stock awards under the plan that were unvested at December 31, 2013 and 2012, respectively.

There were 5,304 shares available for future grants of award shares at December 31, 2013.

Note 13 - Fair Value Measurements

Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.

The following tables present information about the Company’s assets measured at fair value on a recurring basis at December 31, 2013 and 2012 and the valuation techniques used by the Company to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that the Company has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value measurements are based primarily on management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset.

In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

48

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 13 - Fair Value Measurements (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2013
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2013
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	7,042	$	—	$	7,042
Municipal notes		—		13,609		—		13,609
Corporate securities		—		1,097				1,097
Mortgage-backed securities		—		28,603		—		28,603
Equity securities		—		7		—		7
Total investment securities - available-for-sale	$	—	$	50,358	$	—	$	50,358
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2012
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2012
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	9,247	$	—	$	9,247
Municipal notes		—		10,758		—		10,758
Corporate securities		—		1,150				1,150
Mortgage-backed securities		—		29,608		—		29,608
Equity securities		—		1		—		1
Total investment securities - available-for-sale	$	—	$	50,764	$	—	$	50,764

Fair value measurements of U.S. Government agencies and mortgage backed securities use pricing models that vary and may consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures.

There were no transfers between Levels 1 and 2 of the fair value hierarchy during the years ended December 31, 2013 and 2012. For the available for sale securities, the Company obtains fair value measurements from an independent third-party service.

49

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 13 - Fair Value Measurements (Continued)

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets include impaired loans (see Note 3) and other real estate owned.

The change in fair value of impaired loans is recorded through the allowance for loan losses. The Company estimates the fair value of impaired loans based on Level 3 inputs which include the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).

Other real estate owned assets are reported in the following table at initial recognition of impairment and on an ongoing basis until recovery or charge-off. At the time of foreclosure or repossession, real estate owned and repossessed assets are adjusted to fair value less estimated costs to sell, establishing a new cost basis. At that time, they are reported in the Company’s fair value disclosures in the following nonrecurring tables:

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013
	Balance at December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans accounted for under FASB ASC 310-10	$	5,352	$	—	$	—	$	5,352
Other real estate owned - residential mortgages	$	285	$	—	$	—	$	285
Other real estate owned - commercial	$	472	$	—	$	—	$	472
Other repossessed assets	$	1,023	$	—	$	—	$	1,023
Total assets at fair value on a non-recurring basis							$	7,132

50

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 13 - Fair Value Measurements (Continued)

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2012
	Balance at December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans accounted for under FASB ASC 310-10	$	6,835	$	—	$	—	$	6,835
Other real estate owned - residential mortgages	$	947	$	—	$	—	$	947
Other real estate owned - commercial	$	319	$	—	$	—	$	319
Other repossessed assets	$	1,121	$	—	$	—	$	1,121
Total assets at fair value on a non-recurring basis							$	9,222

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 of securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

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 other 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 of nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

51

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 13 - Fair Value Measurements (Continued)

Federal Home Loan Bank Stock -The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Deposit Liabilities - The fair values disclosed for demand deposits 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.

Federal Home Loan Bank Advances- The estimated fair value of the fixed and variable rate Federal Home Loan Bank advances are estimated by discounting the related cash flows using the rates currently available for similarly structured borrowings with similar maturities.

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

Accrued Interest - The carrying amounts of accrued interest approximate fair value.

Other Financial Instruments - The fair value of other financial instruments, including loan commitments and unfunded letters of credit, based on discounted cash flow analyses, is not material.

52

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 13 - Fair Value Measurements (Continued)

The estimated fair values and related carrying amounts of the Company’s financial instruments as of December 31, 2013 and 2012 are as follows:

December 31, 2013	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	2,766	$	2,766	$	—	$	—	$	2,766
Securities available for sale		50,358		—		50,358		—		50,358
Securities held to maturity		2,255		—		2,400		—		2,400
Loans held for sale		175						178		178
Loans receivable - net		136,315		—		—		135,172		135,172
Federal Home Loan Bank stock		3,266		—		3,266		—		3,266
Accrued interest receivable		745		—		—		745		745
Financial liabilities:
Customer deposits		160,029		—		160,784		—		160,784
Federal Home Loan Bank advances		24,813		—		24,458		—		24,458
Accrued interest payable		89		—		—		89		89
December 31, 2012	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	2,752	$	2,752	$	—	$	—	$	2,752
Securities available for sale		50,764		—	$	50,764		—		50,764
Securities held to maturity		2,345		—		2,570		—		2,570
Loans held for sale		79		—		—		84		84
Loans receivable - net		138,912		—		—		140,877		140,877
Federal Home Loan Bank stock		3,266		—		3,266		—		3,266
Accrued interest receivable		970				—		970		970
Financial liabilities:
Customer deposits		158,350		—		159,335		—		159,335
Federal Home Loan Bank advances		26,358		—		26,493		—		26,493
REPO sweep accounts		3,183		—		3,183		—		3,183
Accrued interest payable		100		—		—		100		100

Note 14 - Restrictions on Dividends

Dividends paid by the Bank are the primary source of funds available to the Company for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the Bank to the Company is subject to restrictions by the Office of the Comptroller of Currency (OCC). These restrictions generally limit dividends to the current and prior two years’ retained earnings. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below the Bank’s regulatory capital requirements and minimum regulatory guidelines. Future dividend payments by the Company will be based on future earnings and the approval of the OCC.

53

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 15 - Parent-Only Financial Statements

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

Condensed parent company financial statements, which include transactions with the subsidiary, are as follows:

Balance Sheets:
	December 31
	2013		2012
Assets
Cash at subsidiary bank	$	510	$	817
Investment in subsidiary		22,701		23,304
Deferred tax asset		318		318
Other assets		1		—
Total assets	$	23,530	$	24,439
Liabilities and Stockholders’ Equity
Liabilities	$	5	$	4
Stockholders’ equity		23,525		24,435
Total liabilities and stockholders’ equity	$	23,530	$	24,439

54

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 15 - Parent-Only Financial Statements (Continued)

Statements of Operations:
	December 31
	2013			2012
Operating income	$	—		$	—
Dividend income		—			500
Operating expense		(249	)		(205	)
Income (Loss) before income taxes and equity in undistributed net income of subsidiary bank		(249	)		295
Income tax benefit		—			—
Income (Loss) before equity in undistributed loss of subsidiary bank		(249	)		295
Equity in undistributed net income (loss) of subsidiary bank		304			(509	)
Net income (loss)	$	55		$	(214	)

Statements of Cash Flows:
	December 31
	2013			2012
Cash Flows from Operating Activities
Net income (loss)	$	55		$	(214	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Stock options/awards		—			2
Equity in undistributed net (income) loss of subsidiary bank		(304	)		509
Net change in other liabilities		1			4
Net change in other assets		(1	)		—
Cash Flows from Financing Activities
Dividends paid		(58	)		—
Net cash provided by (used in) operating activities		(362	)		515
Net (Decrease) Increase in Cash		(307	)		301
Cash- Beginning of year		817			516
Cash- End of year	$	510		$	817

55

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 16 - Quarterly Results of Operations (Unaudited)
	The following tables summarize the Company’s quarterly results for the fiscal years ended December 31, 2013 and 2012:

	For the Three-Month Period Ending
	March 31, 2013			June 30, 2013			September 30, 2013		December 31, 2013
Interest income	$	2,085		$	2,095		$	2,065	$	2,074
Interest expense		321			285			274		270
Net interest income		1,764			1,810			1,791		1,804
Provision for loan losses		144			196			32		265
Other income		440			465			459		401
Other expenses		1,992			2,082			2,036		2,132
Income (Loss) - before income tax expense (benefit)		68			(3	)		182		(192	)
Income tax (benefit) expense		—			—			—		—
Net income (loss)	$	68		$	(3	)	$	182	$	(192	)
Net income (loss) per share
Basic	$	0.02		$	(0.00	)	$	0.06	$	(0.07	)
Diluted	$	0.02		$	(0.00	)	$	0.06	$	(0.07	)
Weighted average number of shares outstanding - basic and dilutive		2,884			2,884			2,884		2,884
Cash dividends declared per common share	$	—		$	—		$	—	$	0.020
	For the Three-Month Period Ending
	March 31, 2012			June 30, 2012			September 30, 2012		December 31, 2012
Interest income	$	2,409		$	2,352		$	2,313	$	2,169
Interest expense		464			427			394		369
Net interest income		1,945			1,925			1,919		1,800
Provision for loan losses		376			578			234		179
Other income		447			390			802		637
Other expenses		2,301			2,143			2,077		2,191
Income - before income tax expense (benefit)		(285	)		(406	)		410		67
Income tax expense		(886	)		(136	)		137		885
Net income	$	601		$	(270	)	$	273	$	(818	)
Net income per share
Basic	$	0.21		$	(0.09	)	$	0.09	$	(0.28	)
Diluted	$	0.21		$	(0.09	)	$	0.09	$	(0.28	)
Weighted average number of shares outstanding - basic and dilutive		2,884			2,884			2,884		2,884
Cash dividends declared per common share	$	—		$	—		$	—	$	—

56

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 & 2012

(000s omitted, except per share data)

Note 17 – Subsequent Events

On January 23, 2014, First Federal of Northern Michigan Bancorp, Inc. (“First Federal Bancorp”) and Alpena Banking Corporation, jointly announced the execution of an agreement and plan of merger that provides for the integration of the two companies and their subsidiary community banking institutions. In connection with the all-stock transaction, which is based upon the pro rata tangible equity contribution of each company as of September 30, 2013, each share of common stock of Alpena Banking Corporation will be converted into the right to receive 1.549 shares of First Federal Bancorp common stock. The merger is subject to customary closing conditions, including approval by the shareholders of First Federal Bancorp and the shareholders of Alpena Banking Corporation and applicable banking regulatory authorities. It is anticipated the transaction will close late in the second quarter of 2014 or in the third quarter of 2014.

57