EXHIBIT 99.2
KELLER & COMPANY, INC.
Financial Institution Consultants
Investment and Financial Advisors
555 Metro Place North 614-766-1426
Suite 524 614-766-1459 (fax)
Dublin, Ohio 43017
November 5, 2004
The Board of Directors
First Federal of Northern Michigan
100 South Second Avenue
Alpena, Michigan 49707
Re: Business Plan Proposal
Attention: Martin A. Thomson, Chief Executive Officer
Keller & Company proposes to prepare a Business Plan ("Plan") for First Federal
of Northern Michigan ("First Federal" or the "Association") to fulfill all the
requirements of the Office of Thrift Supervision ("OTS"). The Plan will focus on
First Federal's new three-year pro formas, the impact on the Association of new
strategies, products and services, the recognition of the planned second stage
conversion of Alpena Bancshares, Inc. and the resulting proceeds, and other key
factors including interest rate trends and growth expectations.
Keller & Company is experienced in preparing business plans for filing with all
regulatory agencies. We prepared thirty two in 2001, thirty three in 2002, and
twenty eight in 2003 and twenty to date in 2004, and all were approved. Your
Plan will be based on the format shown in the attached Exhibit A. We will
prepare the three-year pro formas and each discussion section in accordance with
regulatory requirements. Our objective is to ensure that your Plan is both a
meaningful planning tool for the future and is in compliance with all applicable
requirements, with management and directors knowledgeable of and comfortable
with the assumptions, commitments and projections contained in the Plan.
Exhibit B provides a sample set of typical pro formas. Our procedure is to
request key financial information from the Association, including TFR and CMR
Reports, investment portfolio mix, recent lending and savings activity, costs
and yields and other data. Based on a review of that information, I will meet
with management to discuss your objectives and expectations for 2005, 2006 and
2007, focusing on such items as anticipated deposit growth and loan origination,
loan sales and purchases, new products and services, asset quality trends and
expectations, changes in allowance for loan losses, branching, capital
improvements, increases in fixed assets, investment strategy, and changes in
board fees, staffing and total compensation.
We will then prepare financial projections tying the beginning figures to your
September 30, 2004, balances, incorporating your current yields on
interest-earning assets and your current costs of interest-bearing liabilities.
Assets and liabilities will then be repriced during the three year projection
period based on their maturities and projected specific interest rate indices
and trends. With each set of pro formas, we will send you a detailed discussion
summary of the assumptions for easy review, comment
Board of Directors
November 5, 2004
Page 2
and adjustment (Exhibit C). Since our modeling software is both detailed and
flexible, we can introduce numerous scenarios for internal use as part of the
preparation of the Plan to show the impact of alternative strategies. When the
Association's regulatory pro formas are complete to your satisfaction, they will
be incorporated into the Plan.
In conjunction with the pro formas, we will prepare each text section of the
Plan in draft form for your review, and revise the text in response to your
comments. In the Plan, we will specifically and in detail address the issue of
interest rate risk, which could be a key issue in the future, to demonstrate
ongoing compliance with the Association's Interest Rate Risk Policy. During the
drafting process, at your request we will also send a copy to your counsel for
their input and comments. When complete, the Plan will be in full compliance
with all regulatory requirements.
We will also prepare a quarterly comparison chart each quarter at no charge for
your presentation to the board, showing the quarterly variance in actual
performance relative to projections and provide comments on the variance. Such
quarterly comparison is normally included in the board minutes. We will also
prepare a presentation outline for management's required business plan meeting
with the regional office of OTS in Atlanta. Such a presentation outline has been
used by clients for meetings in Atlanta, Chicago, Dallas, Boston and San
Francisco and has proven to be very useful.
Our fee for the preparation of the Business Plan, including the text, all sets
of pro formas and the outline for any meetings with the Atlanta Regional Office
of OTS, is $20,000, plus reimbursement for out-of-pocket expenses not to exceed
$2,000.
I will be pleased to answer any questions or provide additional information.
Sincerely, KELLER & COMPANY, INC.
/s/ Michael R. Keller
Michael R. Keller President
Accepted this 16th day of November, 2004.
/s/ Martin A. Thomson
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Martin A. Thomson
Chief Executive Officer