Edgar Filing: ALPENA BANCSHARES INC

SECURITIES AND EXCHANGE COMMISSION
450 FIFTH STREET, N.W.
WASHINGTON, D.C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from__________________ to____________________

Commission File Number 000-31957

ALPENA BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

UNITED STATES 38-3567362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

100 S. SECOND AVENUE, ALPENA, MICHIGAN 49707
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (989) 356-9041

Check whether the issuer has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and has
been subject to such filing requirements for the past 90 days.

Yes [X] No [ ].

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.

Common Stock, Par Value $1.00 Outstanding at July 31, 2004
(Title of Class) 1,659,180 shares

Transitional Small Business Disclosure Format: Yes [ ] No [X].

ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2004

INDEX

PART I - FINANCIAL INFORMATION

Interim Financial Information required by Rule 10-01 of Regulation S-X and Item
303 of Regulation S-K is included in this Form 10-QSB as referenced below:

PAGE
----

ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheet at
June 30, 2004 and December 31, 2003......................................... 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2004 and June 30, 2003....................................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2004...................................... 5
Consolidated Statements of Cash Flow for the Six Months Ended
June 30, 2004 and June 30, 2003............................................. 6
Notes to Consolidated Financial Statements.................................... 7

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 11

ITEM 3 - CONTROLS AND PROCEDURES......................................................... 19

PART II - OTHER INFORMATION

OTHER INFORMATION.......................................................................... 20
SIGNATURES................................................................................. 21

When used in this Form 10-QSB or future filings by Alpena Bancshares, Inc. (the
"Company") with the Securities and Exchange Commission ("SEC"), 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.

PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

June 30, 2004 December 31, 2003
------------- -----------------
(Unaudited)

ASSETS
Cash and cash equivalents:
Cash on hand and due from banks .......................................... $ 3,818,767 $ 3,379,500
Overnight deposits with FHLB ............................................. - 3,325,625
------------- ------------
Total cash and cash equivalents .......................................... 3,818,767 6,705,125
Securities available-for-sale ............................................ 47,289,709 34,669,982
Loans held for sale ...................................................... 533,800 930,525
Loans receivable, net of allowance for loan losses of $1,100,717 and
$1,035,726 as of June 30, 2004 and December 31, 2003, respectively ..... 185,801,298 163,460,594
Foreclosed real estate and other repossessed assets ...................... 31,000 198,672
Real estate held for investment .......................................... 550,539 438,976
Federal Home Loan Bank stock, at cost .................................... 4,566,100 4,459,800
Premises and equipment ................................................... 6,422,293 5,816,698
Accrued interest receivable .............................................. 1,166,462 1,065,924
Intangible assets ........................................................ 3,742,769 3,851,133
Other assets ............................................................. 2,254,482 2,326,782
------------- ------------
Total assets ............................................................. $ 256,177,219 $223,924,211
============= ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ................................................................. $ 169,176,694 $151,702,446
Advances from borrowers for taxes and insurance .......................... 394,763 96,068
Federal Home Loan Bank advances & Note Payable ........................... 63,303,031 47,158,408
Accrued expenses and other liabilities ................................... 1,889,995 2,783,987
Deferred income taxes .................................................... - 232,258
------------- ------------

Total liabilities ........................................................ 234,764,483 201,973,167
------------- ------------

Commitments and contingencies ............................................ - -

Stockholders' equity:
Common stock ($1.00 par value, 20,000,000 shares authorized, 1,659,180
and 1,657,480 shares issued and outstanding at June 30, 2004 and
December 31, 2003, respectively) ....................................... 1,659,180 1,657,480
Additional paid-in capital ............................................... 5,354,194 5,337,882
Retained earnings, restricted ............................................ 4,968,000 4,807,000
Retained earnings ........................................................ 9,748,406 9,853,663
Accumulated other comprehensive income (loss) ............................ (317,044) 295,019
------------- ------------
Total stockholders' equity ............................................... 21,412,736 21,951,044
------------- ------------

Total liabilities and stockholders' equity ............................... $ 256,177,219 $223,924,211
============= ============

See accompanying notes to consolidated financial statements.

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME

For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)

Interest income:
Interest and fees on loans ........................... $2,776,110 $2,760,864 $5,450,389 $5,582,010
Interest and dividends on investments ................ 432,009 485,489 788,676 986,900
Interest on mortgage-backed securities ............... 53,278 64,561 113,502 142,285
---------- ---------- ---------- ----------
Total interest income ................................ 3,261,397 3,310,914 6,352,567 6,711,195
---------- ---------- ---------- ----------

Interest expense:
Interest on deposits ................................. 845,945 958,119 1,659,352 1,988,011
Interest on borrowings ............................... 658,415 694,103 1,289,621 1,366,340
---------- ---------- ---------- ----------
Total interest expense ............................... 1,504,360 1,652,222 2,948,973 3,354,351
---------- ---------- ---------- ----------
Net interest income .................................. 1,757,037 1,658,695 3,403,594 3,356,844
Provision for loan losses ............................ 65,000 64,500 146,000 227,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses .. 1,692,037 1,594,195 3,257,594 3,129,844
---------- ---------- ---------- ----------

Non Interest income:
Service charges and other fees ....................... 245,662 173,802 488,724 334,170
Mortgage banking activities .......................... 106,529 511,436 249,855 887,551
Gain on sale of available-for-sale investments ....... 95,669 93,005 95,669 93,005
Net gain on sale of premises and equipment,
real estate owned and other repossessed assets ..... 162,202 27,916 139,317 30,781
Other (See Note 5) ................................... 29,843 141,464 50,100 184,475
Insurance & Brokerage Commissions .................... 715,126 994,977 1,469,050 994,977
---------- ---------- ---------- ----------
Total other income ................................... 1,355,031 1,942,600 2,492,715 2,643,737
---------- ---------- ---------- ----------

Non interest expenses:
Compensation and employee benefits ................... 1,497,284 1,543,848 2,985,982 2,720,016
SAIF Insurance Premiums .............................. 9,090 6,683 14,962 13,365
Advertising .......................................... 68,574 55,207 124,742 98,942
Occupancy ............................................ 331,061 310,613 657,204 581,132
Amortization of intangible assets .................... 77,824 85,797 155,187 137,049
Service Bureau Charges ............................... 78,845 71,680 162,009 149,736
Insurance & Brokerage Commission Expense ............. 318,852 429,845 634,413 429,845
Professional Services ................................ 43,146 57,737 119,699 134,505
Other (See Note 6) ................................... 323,158 327,629 617,760 611,728
---------- ---------- ---------- ----------
Other expenses ....................................... 2,747,834 2,889,039 5,471,958 4,883,000
---------- ---------- ---------- ----------

Income before income tax expense ..................... 299,234 641,074 278,351 765,121
Income tax expense ................................... 99,784 215,300 93,305 253,770
---------- ---------- ---------- ----------
Net income ........................................... $ 199,450 $ 425,774 $ 185,046 $ 511,351
========== ========== ========== ==========

Per share data:
Basic earnings per share ............................. $ 0.12 $ 0.26 $ 0.11 $ 0.31
Weighted average number of shares outstanding ........ 1,658,929 1,646,453 1,658,742 1,646,400

Diluted earnings per share ........................... $ 0.12 $ 0.26 $ 0.11 $ 0.31
Weighted average number of shares outstanding,
including dilutive stock options ................... 1,672,363 1,658,920 1,671,889 1,658,381

Dividends per common share ........................... $ 0.050 $ 0.125 $ 0.175 $ 0.250
========== ========== ========== ==========

See accompanying notes to consolidated financial statements.

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2004

Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (loss) Total
----- ------- -------- ------------- -----

Balance at December 31, 2003 ......... $1,657,480 $5,337,882 $ 14,660,663 $ 295,019 21,951,044

Stock issued upon exercise of
stock options (1700 shares) ........ 1,700 16,312 - - 18,012

Net loss for the period .............. - - 185,050 - 185,050

Changes in unrealized gain
on available-for-sale securities ... - - - (612,063) (612,063)

Total comprehensive income ........... - - - - (427,013)

Dividends declared ................... - - (129,307) - (129,307)
---------- ---------- ------------ --------- ------------

Balance at June 30, 2004 ............. $1,659,180 $5,354,194 $ 14,716,406 $(317,044) $ 21,412,736
========== ========== ============ ========= ============

See accompanying notes to consolidated financial statements.

ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
2004 2003
------------ ------------
(Unaudited)

Cash flows from operating activities:
Net income ................................................................. $ 185,049 $ 511,351
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and Amortization of Core Deposit Intangible ............. 268,937 230,589
Amortization Intangible Assets ....................................... 108,364 44,306
Provision for loan losses ............................................ 146,000 227,000
Accretion of discounts, amortization of premiums, and other deferred
yield items, net ................................................... 207,552 152,512
Principal amount of loans sold ....................................... 11,628,116 45,622,246
Originations of loans held for sale .................................. (11,231,391) (47,845,646)
(Gain) loss on sale of real estate held for investment ............... - (31,031)
real estate owned and other repossessed assets ..................... - (30,781)
Net Changes:
(Increase) decrease in accrued interest receivable and other assets .. (28,238) (237,311)
Increase (decrease) in accrued interest and other liabilities ........ (810,943) 733,472
Net cash provided by (used in) operating activities ........................ 473,446 (623,293)

Cash flows from investing activities:
(Increase) decrease in net loans receivable ................................ (22,486,704) (1,745,375)
Proceeds from sales or maturity of:
Investment securities available-for-sale ............................... 12,776,041 11,403,437
Real estate held for investment ........................................ - 399,415
Real estate owned, other repossessed assets and premises & equipment ... 167,672 62,529
Purchases of:
Investment securities available-for-sale ............................... (26,530,690) (15,693,425)
Premises and equipment ................................................. (874,532) (1,902,461)
FHLB Stock ............................................................. (106,300) (56,900)
Real estate held for investment ........................................ (111,563) (153,218)
------------ ------------
Net cash provided by (used in) investing activities ........................ (37,166,076) (7,685,998)
------------ ------------

Cash flows from financing activities:
Proceeds from Federal Home Loan Bank advances .............................. - -
Repayments of Federal Home Loan Bank advances .............................. 16,144,623 (1,000,000)
Increase (decrease) in deposits ............................................ 17,474,248 1,230,641
Advances from Borrowers .................................................... 298,695 341,752
Dividend paid on common stock .............................................. (129,307) (182,025)
Issuance of common stock ................................................... 18,013 43,231
------------ ------------
Net cash provided by (used in) financing activities ........................ 33,806,272 433,599
------------ ------------

Net increase (decrease) in cash and cash equivalents ....................... (2,886,358) (7,875,692)
Cash and cash equivalents at beginning of period ........................... 6,705,125 15,098,861
------------ ------------
Cash and cash equivalents at end of period ................................. $ 3,818,767 $ 7,223,169
============ ============

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ............................... $ - $ -
------------ ------------
Cash paid during the period for interest ................................... $ 2,879,942 $ 3,322,998
============ ============

ALPENA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

The accompanying consolidated financial statements have been prepared on an
accrual basis of accounting and include the accounts of Alpena Bancshares, Inc.
(the "Company") and its wholly-owned subsidiary, First Federal of Northern
Michigan (the "Bank") and its wholly owned subsidiaries Financial Service and
Mortgage Corporation ("FSMC") and the InsuranCenter of Alpena ("ICA"). FSMC
invests in real estate that includes leasing, selling, developing, and
maintaining real estate properties. ICA is a licensed insurance agency engaged
in the business of property, casualty and health insurance. All significant
intercompany balances and transactions have been eliminated in the
consolidation.

These interim financial statements are prepared without audit and reflect all
adjustments, which, in the opinion of management, are necessary to present
fairly the consolidated financial position of the Company at June 30, 2004, and
its results of operations and statement of cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
consolidated financial statements do not purport to contain all the necessary
financial disclosures required by generally accepted accounting principles that
might otherwise be necessary and should be read in conjunction with the
consolidated financial statements and notes thereto of the Company included in
the Annual Report for the year ended December 31, 2003. Results for the six
months ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004.

CRITICAL ACCOUNTING POLICIES - The Company's critical accounting policies relate
to the allowance for losses on loans, mortgage servicing rights and impairment
of goodwill.

Allowance for Loan and Lease Losses - The Company has 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 management's 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
management's evaluation of the risk inherent in the loan portfolio, and
considers all known internal and external factors that affect loan
collectability as of the reporting date. Such 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, management's knowledge of inherent risks in the portfolio that are
probable and reasonably estimable and other factors that warrant recognition in
providing an appropriate loan loss allowance. This evaluation involves a high
degree of complexity and requires management to make subjective judgments that
often require assumptions or estimates about uncertain matters.

Mortgage Servicing Rights - In 2000, the Bank began selling to investors a
portion of its originated residential mortgage loans. The mortgage loans
serviced for others are not included in the consolidated statements of financial
condition.

When the Bank acquires mortgage servicing rights through the origination
of mortgage loans and sells those loans with servicing rights retained, it
allocates the total cost of the mortgage loans to the mortgage servicing rights
based on their relative fair value. As of June 30, 2004, the Bank was servicing
loans sold to others totaling $137.5 million. Capitalized mortgage servicing
rights are amortized 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. Capitalized mortgage servicing rights are
periodically evaluated for impairment using a model that takes into account
several variables. If impairment is identified, the amount of impairment is
charged to earnings with the establishment of a valuation allowance against the
capitalized mortgage servicing rights asset. 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 last
evaluation was performed as of

December 31, 2003. The key economic assumptions made in determining the fair
value of the mortgage servicing rights included the following:

Annual Constant Prepayment Speed (CPR): 13.89%
Weighted Average Life Remaining (in months): 253.3
Discount Rate used: 7.36%

At the December 31, 2003 valuation, the mortgage servicing rights value was
calculated, based on the above factors, to be $1,421,175. The book value as of
December 31, 2003 was $993,108. Because the fair value exceeded the book value,
there was no adjustment required. Due to the significant cushion that existed on
December 31, 2003, management elected to not have an independent valuation
performed as of June 30, 2004. The book value of the Mortgage Servicing Rights
on June 30, 2004 was $904,568 which was $88,540 lower than the December 31, 2003
value.

Impairment of Goodwill - In connection with the purchase of the
InsuranCenter of Alpena (ICA), the Company allocated the excess of the purchase
price paid over the fair value of net assets acquired to intangible assets
including goodwill. These intangible assets included the customer list and the
Blue Cross Blue Shield Contract. The unallocated portion of the excess purchase
price became true goodwill. The Company is amortizing the value assigned to the
customer list and the Blue Cross contract over a 20 year period. Additionally,
the Company is testing each of those assets for impairment on an annual basis.
If, through testing, it was determined that there was significant runoff of the
customer list or material changes to the Blue Cross contract, then there might
be a need to further write down the value of those intangible assets. Writing
down the assets would create expense to the Company and negatively impact
earnings. In 2003, there was no impairment based upon the testing. The goodwill,
which is not amortized, must also be tested for impairment on an ongoing basis.
Based upon managements review on June 30, 2004, it was determined that there was
no impairment of the customer list, the Blue Cross contract or to the goodwill.

REAL ESTATE HELD FOR SALE - FSMC is engaged in the development and sale of real
estate. Land held for sale or development is carried at cost, including
development costs, not in excess of fair value less costs to sell determined on
an individual project basis.

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

INCOME TAXES - The provision for income taxes is based upon the effective tax
rate expected to be applicable for the entire year.

EARNINGS PER SHARE - Basic earnings per share is based on the weighted average
number of shares outstanding in each period. Fully diluted earnings per share is
based on weighted average shares outstanding assuming the exercise of the
dilutive stock options, which are the only potential stock of the Company as
defined in Statement of Financial Accounting Standard No. 128, Earnings per
Share. The Company uses the treasury stock method to compute fully diluted
earnings per share, which assumes proceeds from the assumed exercise of stock
options would be used to purchase common stock at the average market price
during the period.

NOTE 2--REORGANIZATION.

The Company was formed as the Bank's holding company on November 14, 2000
pursuant to a plan of reorganization adopted by the Bank and its stockholders.
Pursuant to the reorganization, each share of the Bank's stock held by existing
stockholders of the Bank was exchanged for a share of common stock of the
Company by operation of law. The reorganization had no financial statement
impact and is reflected for all prior periods presented. Approximately 56% of
the Company's capital stock is owned by Alpena Bancshares M.H.C. ("the M.H.C."),
a mutual holding company. The remaining 44% of the Company's stock is owned by
the general public. The activity of the M.H.C. is not included in these
financial statements.

NOTE 3--DIVIDENDS.

Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and depends upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations and general economic conditions. The M.H.C. (the majority
shareholder of the Company) filed a notice with the Office of Thrift Supervision
(the "OTS") requesting approval to waive receipt of cash dividends from the
Company for each quarterly dividend to be paid for the year ending December 31,
2004. In a letter dated February 26, 2004, the OTS did not object to the
dividend waiver request for the four quarters ending December 31, 2004.

On June 15, 2004, the Company declared a cash dividend on its common stock,
payable on or about July 23, 2004, to shareholders of record as of June 30,
2004, equal to $0.05 per share. The dividend on all shares outstanding totaled
$82,939, of which $36,939 was paid to shareholders. Because the OTS has agreed
to allow the M.H.C. to waive receipt of its dividend (amounting to $46,000),
this dividend was not paid.

NOTE 4--1996 STOCK OPTION PLAN AND 1996 RECOGNITION AND RETENTION PLAN

At June 30, 2004 the Company had outstanding stock options for 26,711 shares
with a weighted average exercise price of $10.48 compared to outstanding options
for 29,011 shares at a weighted exercise price of $10.57 at December 31, 2003.
During the six months ended June 30, 2004, the Board of Directors granted no
options. During this same period, options for 1,700 shares were exercised. At
June 30, 2004, options had exercise prices ranging from $9.625 to $13.75 per
share and a weighted average remaining contractual life of 3.47 years.

During the six months ended June 30, 2004 the Company did not awarded any shares
under the Recognition and Retention Plan ("RRP"). Shares issued under the RRP
and exercised pursuant to the exercise of stock option plan may be either
authorized but unissued shares or reacquired shares held by the Company as
treasury stock.

For the six months ended June 30, 2004, options for 1,000 shares vested. The
expense associated with those vested options would have been $1,040 had the
Company elected to adopt FAS 148 (see below).

NOTE 5 - OTHER INCOME

For the six months ended June 30, 2004, other income totaled $50,100. This was
primarily comprised of the recognition of the Directors Benefit Plan Cash Value
Appreciation of $37,225. The balance of other income is comprised of small
immaterial issues.

NOTE 6 - OTHER EXPENSES

For the six months ended June 30, 2004 other expenses totaled $617,760. This was
comprised of several larger expenses including service bureau charges for the
Bank operating system of $162,000, professional services including audit, legal,
and regulatory fees of $120,000, printing, computer and office supplies of
$90,000, and communication costs of $66,000. The balance of the total was
comprised of expenses lower than $50,000.

NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, FASB issued Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires disclosures be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires the recognition of
a liability by a guarantor at the inception of certain guarantees that it has
issued and that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial

measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of FIN 45 did not have a material
effect on the Company's financial statements since the Company does not issue
such guarantees.

In December 2002, the FASB issued Statement No. 148, Accounting for Stock-based
Compensation-transition and Disclosure, which amends FASB 123, Accounting for
Stock-Based Compensation. Statement No.148 is effective for fiscal years ending
after December 15, 2002. Statement No. 148 provides alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation. In addition, Statement No. 148 amends the
disclosure requirements of Statement No. 123. The Company has not adopted the
fair value-based method of accounting for stock-based compensation as of June
30, 2004; therefore, there was no impact to the Company's financial statements.

In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. Statement No. 149 amends SFAS No.
133 for certain decisions made by the Financial Accounting Standards Board as
part of the Derivatives Implementation Group process and to clarify the
definition of a derivative. This statement is effective for contracts entered
into or modified after June 30, 2003, except for certain specific issues already
addressed by the Derivatives Implementation Group and declared effective that
are included in the statement. The adoption of the provisions of this statement
did not have a material impact on the financial statements of the Company.

In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. Statement No.
150 establishes standards for how to classify and measure certain financial
instruments with characteristics of both liabilities and equity. This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of the provisions of this statement
did not have a material impact on the financial statements of the Company.

In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities an Interpretation of ARB No. 51 (FIN 46). FIN 46 addresses
consolidation by business enterprises of variable interest entities. The Company
does not have any variable interest entities as defined by this Interpretation
and therefore, the adoption of the provisions of this FASB Interpretation did
not have a significant effect on the financial position or results of operations
of the Company.

In March 2004, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 105, Application of Accounting Principles to loan Commitments. This
Staff Accounting Bulletin summarizes the views of the staff regarding the
application of accounting principles generally accepted in the United States of
America to loan commitments accounted for as derivative instruments. The
provisions of this Staff Accounting Bulletin are effective after March 31, 2004.
The adoption of this Staff Accounting Bulletin did not have a material impact on
the consolidated financial statements of the Company.

ALPENA BANCSHARES, INC. AND SUBSIDIARIES

PART E - FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion compares the financial condition of the Company
consolidated with its wholly owned direct and indirect subsidiaries at June 30,
2004 and December 31, 2003, and the results of operations for the three and six
month periods ended June 30, 2004 and 2003. This discussion should be read in
conjunction with the interim financial statements and footnotes included herein.

OVERVIEW

For the quarter ended June 30, 2004, the Company's earnings were $199,500
compared to income of $425,800 one year earlier, a decline of $226,300 for the
quarter. The Bank's Return on Average Assets (ROA) for the trailing twelve
months ended June 30, 2004 was 41 basis points compared to 48 basis points for
the same period one year earlier. Management uses ROA as a tool to measure the
performance of the Bank. ROA is reviewed on a trailing twelve-month basis each
month by management and the Board of Directors. The earnings deterioration can
be broken down into two key areas: the decline in Net Interest Margin (N.I.M.)
and the slow down in mortgage banking activities.

NET INTEREST MARGIN - The Company's Net Interest Margin (N.I.M.), which
represents net interest income divided by average interest earning assets,
declined from 3.20% for the quarter ended June 30, 2003 to 3.05% for the quarter
ended June 30, 2004. This represents a 15 basis point decline. The decline can
be explained by the interest rate environment that existed in 2003 during which
many financial institutions experienced significant net interest margin
compression. Many loans that were in portfolio in 2003 were refinanced and
subsequently sold into the secondary market in 2003 and early 2004 thereby
reducing the overall yield of the Bank's loan portfolio. The Bank saw the yield
on interest earning assets decline from 6.40% at June 30, 2003 to 5.73% at June
30, 2004. This represented a 67 basis point decline in the overall yield to the
Bank. This decline can be attributed to the yield on the mortgage portfolio
which fell 109 basis points from 7.69% at June 30, 2003 to 6.60% at June 30,
2004. Through the second quarter of 2004, the Bank was able to reduce the
overall cost of funds from 3.45% as of June 30, 2003 to 2.90% as of June 30,
2004. This represented a reduction in the cost of funds of 55 basis points.
Since the reduction in yield exceeded the reduction in the cost of funds, the
NIM declined when compared to the same period one year earlier. The conversion
of cash, a lower yielding asset, into commercial and consumer loans, which carry
much higher yields when compared to the overnight rates earned by the cash, has
helped to offset some of the pressure on the NIM.

MORTGAGE BANKING - The Company generated lower income from mortgage
banking activity in the first two quarters of 2004 when compared to the same
periods in 2003. In the first quarter of 2003, interest rates began their
descent toward 45 year lows which caused a significant wave of refinance
activity during the first half of 2003. This heavy activity in the first half of
2003 produced income from loan fees and gains once these loans were sold into
the secondary market. Mortgage banking fees declined for the quarter by $404,900
and for the six month period ended June 30, 2004 are down $637,700.

Management has placed a focus on growth of the balance sheet in 2004 to
get back to the levels that existed before the refinance boom began. With the
pressure on margins created by the existing interest rate environment,
management has focused on measured and controlled growth of interest earning
assets to help offset the lower rates and the slowdown of mortgage lending
activity.

FINANCIAL CONDITION

ASSETS: Total assets grew $32.3 million, or 14.4%, to $256.2 million at June 30,
2004 from $223.9 million at December 31, 2003. Cash and cash and equivalents
decreased by $2.9 million or 43.1%, to $3.8 million at June 30, 2004 from $6.7
million at December 31, 2003 as excess cash was invested into bonds which
provide higher yields than the overnight rates earned at the Federal Reserve
Bank. Investment securities available for sale increased $12.6 million, or 36.4%
in the first six months. Net loans receivable increased $22.3 million, or 13.7%,
to $185.8 million at June 30, 2004 from $163.5 million at December 31, 2003. The
growth of net loans was attributable to growth across all lending areas. The
mortgage loan portfolio grew primarily as the result of

the purchase of $9.1 million in mortgage loans from another Michigan bank. All
of the loans purchased were secured by real estate within the state of Michigan
except a single loan that was secured by real estate in Indiana. Growth in both
the commercial and consumer loan portfolios was the result of a concerted effort
to further develop the Bank's penetration into these areas.

LIABILITIES: Deposits increased $17.5 million or 11.5% to $169.2 million as of
June 30, 2004 from $151.7 million at December 31, 2003. This increase was
primarily attributable to the $12.1 million in deposits received in the
acquisition of two branches in May 2004 from North Country Bank and Trust. These
acquired branches are located in Mancelona and Alanson, Michigan. The Bank was
also successful in attracting demand accounts through various promotions which
provided new funds to the Bank. Borrowings in the form of Federal Home Loan Bank
advances increased $16.3 million, or 35.5%, to $62.1 million as of June 30, 2004
from $45.8 million at December 31, 2003. These borrowings were used to fund bond
purchases along with the loan growth in the commercial and consumer loan areas.

EQUITY: Stockholders' equity decreased by $538,308 or 2.5%, to $21.4 million at
June 30, 2004 from $22.0 million at December 31, 2003. The decrease was due to
lower market values on our investment portfolio. Compared to December 31, 2003,
the net unrealized gain/loss on available for sale securities experienced a
$612,063 decline as of June 30, 2004. This decline in the value of the AFS
securities relates to the rise in market interest rates.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

GENERAL: Net income for the quarter decreased by $226,324 or 53.2% to $199,450
for the three months ended June 30, 2004 from $425,774 for the same quarter one
year earlier. The decrease for the three month period was primarily due to the
significant decrease in mortgage lending activity. While net interest income was
slightly better than the same quarter one year earlier, non-interest income was
substantially lower as the volume of mortgage refinance deals slowed
significantly. Mortgage refinancing provides income to the Bank in the form of
fees and, if the loan is sold, a gain on sale plus loan servicing income.
Compared to the second quarter of 2003, the volume of mortgage originations has
significantly declined from $44.1 million for the second quarter 2003, of which
$27 million were sold, to $18.7 million for the second quarter 2004, of which
$5.6 million were sold.

INTEREST INCOME: Interest income was $3.26 million for the three months ended
June 30, 2004, compared to $3.31 million for the comparable period in 2003. The
slight decrease in interest income for the three month period was primarily due
to the decline in market interest rates. The sale of longer term fixed rate
mortgage loans and the subsequent reinvestment of these proceeds into lower
yielding assets (investment securities and shorter duration non-mortgage loans)
caused an overall decline in the yield of the Bank's loan portfolio. While the
portfolio yields have declined, this has been partially offset by overall
increases in the size of the loan portfolios. Overall, the total interest
earning assets grew by $15.2 million to $227.3 million at June 30, 2004 compared
to $212.1 million at June 30, 2003. The mortgage loan portfolio experienced an
increase in the average balance due to the purchase of $9.1 million in loans
acquired in May 2004. Overall the average balance of the mortgage portfolio grew
by $5 million or 5% for the three month period ended June 30, 2004 compared to
the same period one year earlier. Non mortgage loans also experienced increases
in average balances of $20.6 million, or 41.1%. This growth was attributed to an
increase in lending in both the consumer and commercial lending areas of the
Bank. During this same period, there was a decrease in the average balance of
other investments of $10.4 million, or 16.7%, for the three month period ended
June 30, 2004, compared to the same period in the prior year. This decline in
other investments related to cash and investments which were redeployed to fund
the increases in non-mortgage loans during the quarter. The overall effect of
these changes was a slight reduction of interest income when compared to the
quarter ended June 30, 2003. Overall, the composite yield of earning assets was
59 basis points lower than the same period one year earlier. The overall average
yield on earning assets was 5.66% for the quarter ended June 30, 2004 compared
to 6.25% for the quarter ended June 30, 2003. The increase in the average
balances almost fully made up for the declines in the overall yields.

ALPENA BANCSHARES, INC. AND SUBSIDIARIES

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

RESULTS OF OPERATIONS (continued)

INTEREST EXPENSE: Interest expense was $1.5 million for the three month period
ended June 30, 2004 compared to $1.7 million for the same period in 2003. The
8.9% decline in interest expense was attributable to lower interest rates paid
on interest-bearing liabilities although average balances on these liabilities
for the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003
were higher. The average balance of deposits and FHLB borrowings increased in
total from $195.3 million to $209.2 million for the periods ended June 30, 2003
and June 30, 2004, respectively. Of this $13.9 million increase, $3.9 million
related to interest-bearing deposits, which increased from a $147.9 million
average balance for the quarter ended June 30, 2003 to $151.9 million average
balance for the quarter ended June 30, 2004. This increase in the average
balance of interest bearing deposits can be attributed to the branch acquisition
that occurred in May 2004 when the Bank acquired an additional $12.1 million in
liabilities from North Country Bank and Trust. The overall composite cost of
deposits fell to 2.23% at June 30, 2004 from 2.60% at June 30, 2003. This
represented a 37 basis point decrease in the cost of funds to the bank. The FHLB
advances increased $9.9 million on an average basis to $57.3 million for the
quarter ended June 30, 2004 compared to $47.4 million for the same period one
year earlier. These advances were used to fund loans and bond purchases. The
overall cost of the advances at June 30, 2004 was 4.44% compared to 5.79% at
June 30, 2003. The reason for the decline in the overall cost of the advances
related to the repricing of higher cost maturing advances at lower market rates
plus the addition of new borrowings at lower rates during the quarter thereby
bringing down the overall cost of borrowing from the FHLB. Overall the cost of
these borrowings declined 135 basis points when compared to the same quarter one
year earlier.

NET INTEREST INCOME: Net interest income increased slightly by $97,842 or 6.1%
to $1.7 million for the three month period ended June 30, 2004 from $1.6 million
for the three month period ended June 30, 2003. For the three months ended June
30, 2004, average interest-earning assets increased $15.2 million, or 7.2% when
compared to the same period in 2003. Average interest-bearing liabilities
increased $15.2 million, or 7.8% for the same period. The yield on average
interest-earning assets declined 59 basis points to 5.66% for the three month
period ended June 30, 2004 from 6.25% for the three month period ended June 30,
2003. The cost of average interest-bearing liabilities declined 52 basis points
to 2.85% from 3.37% for the three month periods ended June 30, 2004 and June 30,
2003, respectively.

As a result of the decrease in the yield exceeding the reduction in cost of
funds, the NIM declined to 3.02% for the three month period ended June 30, 2004,
from 3.16% for the same period in 2003. In spite of the reduction of the overall
NIM, the Bank was able to more than offset this compression through the growth
of the investment and loan portfolios, thereby creating a favorable net interest
income when compared the same quarter one year earlier.

PROVISION FOR LOAN LOSSES: The allowance for loan losses is established through
a provision for loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.

ALPENA BANCSHARES, INC. AND SUBSIDIARIES

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

RESULTS OF OPERATIONS (continued)

NON INTEREST INCOME: Non interest income was $1.4 million for the three month
period ended June 30, 2004, compared to $1.9 million for the same period in
2003. This represented a decrease of $587,569 or 30.3%. The biggest reason for
the decline was in the mortgage lending area. Mortgage banking activities income
for the quarter was lower by $404,907. This represented a decrease of 79.2% over
the quarter ended June 30, 2003. This decrease related to the reduction in gain
on sale of mortgages sold into the

secondary market. This was a function of the decreased volume of refinance
activity when compared to the same period on year. The InsuranCenter of Alpena
provided $715,126 of revenue generated by insurance and brokerage fee revenues
for the quarter ended June 30, 2004 which was $279,851 less than the same period
last year which included an extra month since the transaction had an effective
date of March 1, 2003. Other Income was $111,621 less for the same time period
last year due to a $100,000 insurance settlement received in June 2003. These
declines were partially offset by a gain on sale of $149,000 associated with the
sale of the Cheboygan branch. The Bank has purchased a new lot in close
proximity to the old location and is beginning the construction phase of a new
branch with an expected completion and move date before year end. Service
charges and other fees were $71,860 higher. The increase was primarily related
to Bounce Protection which generated $68,867 of additional income for the second
quarter of 2004 compared to the same quarter in 2003.

NON INTEREST EXPENSES: Non interest expenses were $2.7 million for the three
month period ended June 30, 2004, compared to $2.9 million for the same period
in 2003. The $141,205 decrease represented a 4.9%, reduction for the period.
Insurance and brokerage commission expense associated with the InsuranCenter of
Alpena totaled $715,126 for the quarter ended June 30, 2004 which was $110,993
lower than the same period last year. This reduction related to one less month
of commissions when compared to the same period one year earlier. Compensation
and employee benefits are lower for the quarter ended June 30, 2004 by $46,564
when compared to the same quarter last year. This reduction was a result of
lower commission expenses associated with mortgage lending activities.

INCOME TAXES: Federal income taxes decreased to $99,784 for the three month
period ended June 30, 2004 compared to $215,000 for the same period in 2003. The
effective tax rate for both time periods was 33.5%. The reduction in income tax
was a reflection of lower earnings for the quarter.

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

GENERAL: Net income decreased 63.8% to $185,046 for the six months ended June
30, 2004 from $511,351 for the same period ended June 30, 2003. The decrease for
the six month period was primarily due to the significant decrease in mortgage
lending activity. While net interest income was slightly higher than the same
period one year earlier, non-interest income was lower by $151,022. Mortgage
banking activities were $637,696 lower for the six months ended June 30, 2004
when compared to the same period last year due to the reduction in the volume of
mortgage refinance activity. This decrease was partially offset by the increase
in insurance and brokerage commissions of $474,073 related to ICA. The increase
was due to the inclusion of a full six months of ICA ownership in 2004 compared
to four months of ownership in 2003.

INTEREST INCOME: Interest income was $6.4 million for the six months ended June
30, 2004, compared to $6.7 million for the comparable period in 2003. The
decrease of $358,000 (or 5.3%) in interest income for the six month period from
the prior year was primarily due to the sale of longer term fixed rate mortgage
loans and the subsequent reinvestment of these proceeds into lower yielding
assets (investment securities and shorter duration non-mortgage loans) which
caused an overall decline in the yield of the Bank's loan portfolio. The
mortgage loan portfolio experienced an increase in the average balance for the
six month

ALPENA BANCSHARES, INC. AND SUBSIDIARIES

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

RESULTS OF OPERATIONS (continued)

period ended June 30, 2004 compared to the same period one year earlier. The
increase was due to the purchase of $9.1 million in mortgage loans in May 2004.
Overall the average mortgage balance increased $1.3 million or 1.3% for the six
month period ended June 30, 2004 when compared to the period ended June 30,
2003. While the average balance increased, the overall average yield of the
mortgage portfolio fell 109 basis points to 6.6% for the six months ended June
30, 2004. The decline in yield was a function of the refinance and subsequent
sale of loans within the mortgage portfolio in 2003. The non mortgage loans
average balance increased during the six month period ended June 30, 2004 by
$18.7 million, or 37.8%. This increase related to commercial and consumer
lending which have both seen increases in loan balances when compared to the
same period one year earlier. The average balance for commercial loans has grown
to $46.1 million compared to $30.1 million for the six months ended June 30,
2003. This represented an increase of $16.0 million or 53%. The yield for
commercial loans over this same period has declined 35 basis points to 5.66%
from 6.01% at June 30, 2003. The consumer loan portfolio has grown by $2.7
million or 14% when compared to the same period one year earlier. The yield of
the consumer loan portfolio has also declined over this same period by 131 basis
points to 7.0% from 8.31% at June 30, 2003. The reason for the decline in yield
of this portfolio can be attributed to the growth which was centered on a home
equity loan promotion which offered a sub prime introductory interest rate. The
growth of these loans with this low rate pulled down the average yield of the
consumer portfolio when compared to the same period one year earlier. Other
investments have decreased by $13 million, or 21.3%, for the six month period
ended June 30, 2004, compared to the same period in the prior year. This
decrease in other investments related to cash which has been redeployed into
higher yielding loans. The overall effect of these changes was a reduction of
$358,628 in interest income when compared to the six month period ended June 30,
2003. Overall, the composite yield of earning assets was 67 basis points lower
than the same period one year earlier. The overall yield was 5.73% for the six
month period ended June 30, 2004 compared to 6.40% for the same period ended
June 30, 2003.

INTEREST EXPENSE: Interest expense was $2.9 million for the six month period
ended June 30, 2004 compared to $3.4 million for the same period in 2003. The
12.1% decline in interest expense was attributable to lower interest rates paid
on interest-bearing liabilities compared to the same 2003 period. The average
balance of deposits and FHLB borrowings increased in total from $195.1 million
to $201.1 million for the period ended June 30, 2003 and June 30, 2004
respectively. Of this $6 million increase, $5.3 million was related to FHLB
borrowings, which increased from a $47.4 million average balance for the period
ended June 30, 2003 to $52.7 million average balance for the period ended June
30, 2004. The reduction in the overall interest expense related to the decrease
in the cost of the liabilities. The average cost of deposits for the six month
period ended June 30, 2004 was 2.24% versus 2.72% for the same period one year
earlier. This represented a 48 basis point reduction. The average cost of FHLB
advances was 4.72% for the period ended June 30, 2004 versus 5.73% for the same
period one year earlier. This 101 basis point reduction in the cost of these
funds was the result of additional shorter term borrowings at lower rates and
the repricing of higher cost advances late in 2003. The overall composite costs
of funds declined 55 basis points from 3.45% at June 30, 2003 to 2.90% at June
30, 2004.

NET INTEREST INCOME: Net interest income increased by $46,750 for the six month
period ended June 30, 2004 compared to the same period in 2003. For the six
months ended June 30, 2004, average interest-earning assets increased $6.9
million, or 3.3% when compared to the same period in 2003. Average
interest-bearing liabilities increased $7.3 million, or 3.7% for the same
period. The yield on average interest-earning assets declined 67 basis points to
5.73% for the six month period ended June 30, 2004 from 6.40% for the six month
period ended June 30, 2003. The cost of average interest-bearing liabilities
declined 55 basis points to 2.90% from 3.45% for the six month periods ended
June 30, 2004 and June 30, 2003, respectively. While the overall net interest
margin declined 15 basis points for the six month period ended June 30, 2004
from 3.20% to 3.05%, the increase in the amount of interest earning assets was
enough to more than compensate for the overall decline in N.I.M. As a result,
net interest income grew by $46,750 when compared to the first six months of
2003.

ALPENA BANCSHARES, INC. AND SUBSIDIARIES

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

RESULTS OF OPERATIONS (continued)

DELINQUENT LOANS AND NONPERFORMING ASSETS. The following table sets forth
information regarding loans delinquent 90 days or more and REO/ORA by the Bank
at the dates indicated. As of the dates indicated, the Bank did not have any
material restructured loans within the meaning of SFAS 15.

JUNE 30, DECEMBER 31,
2004 2003
-------- -----------

Total non-accrual loans (3) ................................. $ 552 $1,291
------ ------

Accrual loans delinquent 90 days or more:
One- to four-family residential ........................... 958 617
Other real estate loans ................................... - 77
Consumer/Commercial ....................................... 346 134
------ ------
Total accrual loans delinquent 90 days or more ......... $1,304 $ 828
------ ------

Total nonperforming loans (1) ............................... 1,856 2,119
Total real estate owned (2) ................................. 31 199
====== ======
Total nonperforming assets .................................. $1,887 $2,318
====== ======

Total nonperforming loans to net loans receivable ........... 1.00% 1.30%
Total nonperforming loans to total assets ................... 0.72% 0.95%
Total nonperforming assets to total assets .................. 0.74% 1.04%

(1) All the Bank's loans delinquent 90 days or more are classified as
nonperforming.

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

(3) For the six months ended June 30, 2004 and the twelve months ended
December 31, 2003, the interest that would have been reported was $ 48,630
and $181,450 respectively were these loans not in non-accrual status.

PROVISION FOR LOAN LOSSES: The allowance for loan losses is established 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 upon management's periodic review of the collectability 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
provision for loan losses amounted to $146,000 for the six month period ended
June 30, 2004 and $227,000 for the comparable period in 2003. The decrease in
the reserve allowance related to the adjustment recorded at March 31, 2003 to
bring the allowance more in line with the portfolio balances. At June 30, 2004,
the percent of nonperforming loans decreased to 100 basis points from 130 basis
points at December 31, 2003. As a percent of total assets, nonperforming loans
decreased to 72 basis points at June 30, 2004 from 95 basis points at December
31, 2003.

NON INTEREST INCOME: Non interest income was $2.5 million for the six month
period ended June 30, 2004, compared to $2.6 million for the same period in
2003. This represented a decrease of $151,022 or 5.7%. When compared to the
first half of 2003, mortgage banking activities income was lower by $637,696.
This represented a decrease of 71.8% over the six months ended June 30, 2003.
This decrease related to the gain on sale of mortgages sold in the secondary
market which was $496,130 lower than the same period one year earlier. The
revenue associated with mortgage servicing rights was also $139,420

ALPENA BANCSHARES, INC. AND SUBSIDIARIES

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

RESULTS OF OPERATIONS (continued)

lower than last year. This reduction stemmed from fewer loans being sold in 2004
compared to the first six months of 2003. These shortages were offset by the
inclusion of the InsuranCenter of Alpena insurance and brokerage commissions of
$1.5 million for the period ended June 30, 2004 compared to the same time period
one year earlier of $994,977, an increase of $474,073 or 46.6%. This increase
for ICA related to six full months of commissions in 2004 compared to only four
months in 2003. That difference related to the purchase agreement for ICA which
had an effective date for the transaction of March 1, 2003.

NON INTEREST EXPENSES: Non interest expenses were $5.5 million for the six month
period ended June 30, 2004, compared to $4.9 million for the same period in
2003. The $588,958 increase represented an increase of 12.1% for the six month
period. The primary issue causing the increase in non interest expenses related
to having an additional two months of expenses associated with ICA. Insurance
and brokerage commission expense associated with the InsuranCenter of Alpena
totaled $634,413 for the six months ended June 30, 2004 compared to $429,845, a
$204,568 increase, for the four months that were included in the 2003 results.
Compensation and employee benefits also increased $265,966 over the same period.
This increase was mainly due to the two additional months of ICA's compensation
expense of $198,930. In addition, the Bank's Financial Institutions Retirement
Fund (FIRF) expense was increased to make up for a shortfall in the pension plan
funding. This added an additional expense of $101,231 for the six month period
ended June 30, 2004 when compared to the same period last year. As of June 30,
2004, the plan was fully funded.

INCOME TAXES: Federal income taxes decreased to $93,305 for the six month period
ended June 30, 2004 compared to $253,770 for the same period in 2003. The
effective tax rate for both time periods was 33.5%. The reduction in income tax
is a reflection of lower earnings year to date.

LIQUIDITY

The Company's primary sources of funds are deposits, FHLB advances, and proceeds
from principal and interest payments and prepayments on loans and
mortgage-backed and investment securities. While maturities and scheduled
amortization of loans and mortgage-backed securities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.

Liquidity represents the amount of an institution's assets that can be quickly
and easily converted into cash without significant loss. The most liquid assets
are cash, short-term U.S. Government securities, U.S. Government agency
securities and certificates of deposit. The Company is required to maintain
sufficient levels of liquidity as defined by the OTS regulations. This
requirement may be varied at the direction of the OTS. Regulations currently in
effect require that the Company must maintain sufficient liquidity to ensure its
safe and sound operation. The Company's objective for liquidity is to be above
20%. Liquidity as of June 30, 2004 was $73.6 million, or 39.4%, compared to
$85.4 million, or 54.4% at December 31, 2003. The levels of these assets are
dependent on the Company's operating, financing, lending and investing
activities during any given period. The liquidity calculated by the Company
includes additional borrowing capacity available with the Federal Home Loan Bank
(FHLB). This borrowing capacity is limited to the lowest of the capacity
limitations based on the Bank's Board Resolution, FHLB stock owned by the Bank,
or the Bank's pledged collateral. As of June 30, 2004, the Bank had unused
borrowing capacity based on collateral of $3.7 million. The Bank can pledge
additional collateral in the form of investment securities to increase the
borrowing capacity up to the level established by Board resolution.

The Company intends to retain for the portfolio certain originated residential
mortgage loans (primarily adjustable rate, balloon and shorter term fixed rate
mortgage loans) and to generally sell the remainder in the secondary market. The
Company will from time to time participate in or originate commercial real
estate loans, including real estate development loans. During the six month
period ended June 30, 2004 the Company originated $30.8 million in residential
mortgage loans, of which $19.6 million were retained

ALPENA BANCSHARES, INC. AND SUBSIDIARIES

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

RESULTS OF OPERATIONS (continued)

in portfolio while the remainder were sold in the secondary market or are being
held for sale. This compares to $76.1 million in originations during the first
six months of 2003 of which $26.2 million were retained in portfolio. The
Company also originated $16.3 million of commercial loans and $9.5 million of
consumer loans in the first six months of 2004 compared to $17.3 million of
commercial loans and $9.0 million of consumer loans for the same period in 2003.
Of total loans receivable, excluding loans held for sale, mortgage loans
comprised 59.3% and 60.9%, commercial loans 28.1% and 26.4% and consumer loans
12.6% and 12.7% at June 30, 2004 and December 31, 2003, respectively. At June
30, 2004, the Company had outstanding loan commitments of $39.1 million. These
commitments included $11.8 million for permanent one-to-four family dwellings,
$8.9 million for non-residential loans, $4.1 million of undisbursed loan
proceeds for construction of one-to-four family dwellings, $7.7 million of
undisbursed lines of credit on home equity loans, $1.1 million of unused credit
card lines and $4.8 million of unused commercial lines of credit, $700,000 of
undisbursed, Commercial construction and $35,000 of unused Letters of credit.

Deposits are a primary source of ; funds for use in lending and for other
general business purposes. At June 30, 2004 deposits funded 66% of the Company's
total assets compared to 67.7% at December 31, 2003. Certificates of deposit
scheduled to mature in less than one year at June 30, 2004 totaled $30.1
million. Management believes that a significant portion of such deposits will
remain with the Company. The Bank monitors the deposit rates offered by
competition in the area and sets rates that take into account the prevailing
market conditions along with the Bank's liquidity position. Moreover, management
believes that the growth in assets is not expected to require significant
in-flows of liquidity. As such, the Bank does not expect to be a market leader
in rates paid for liabilities. Borrowings may be used to compensate for seasonal
or other reductions in normal sources of funds or for deposit outflows at more
than projected levels. Borrowings may also be used on a longer-term basis to
support increased lending or investment activities. At June 30, 2004 the Company
had $62.1 million in FHLB advances. Total borrowings as a percentage of total
assets were 24.7% at June 30, 2004 as compared to 20.4% at December 31, 2003.

CAPITAL RESOURCES

Stockholders' equity at June 30, 2004 was $21.4 million, or 8.36% of total
assets, compared to $22 million, or 9.80% of total assets, at December 31, 2003
(See "Consolidated Statement of Changes in Stockholders' Equity"). The Bank is
subject to certain capital-to-assets levels in accordance with the OTS
regulations. The Bank exceeded all regulatory capital requirements at June 30,
2004. The following table summarizes the Bank's actual capital with the
regulatory capital requirements and with requirements to be "Well Capitalized"
under prompt corrective action provisions, as of June 30, 2004:

Minimum
Regulatory To Be Well
Actual Minimum Capitalized
----------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)

Capital Requirements:
Tangible equity capital $17,230 6.83% $ 3,782 1.50% $ 5,043 2.00%
Tier 1 (Core) capital $17,230 6.83% $10,086 4.00% $12,608 5.00%
Total risk-based capital $18,400 10.66% $13,809 8.00% $17,262 10.00%
Tier 1 risk-based capital $17,230 9.98% $ 6,905 4.00% $10,357 6.00%

ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2004

PART E - FINANCIAL INFORMATION

ITEM 3 - CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including
the Company's Chief Executive Officer and Chief Financial Officer, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d - 15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Company's disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports the Company
files or submits under the Securities Exchange Act of 1934, is recorded,
processed, summarized and reported, within the time periods specified by the
SEC's rules and forms and in timely alerting them to material information
relating to the Company (or its consolidated subsidiaries) required to be
included in its periodic SEC filings.

There has been no change in the Company's internal control over the financial
reporting during the Company's second quarter of fiscal year 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.

ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2004

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings:
Not applicable.

Item 2 - Changes in Securities:
Not applicable.

Item 3 - Defaults upon Senior Securities:
Not applicable.

Item 4 - Submission of Matters to a Vote of Security Holders:

The Company convened its 2004 Annual Meeting of Stockholders
on April 21, 2004. At the meeting the stockholders of the
Company considered a vote on the following proposals:

Ballot No. 1.
The election of Keith Wallace to serve as a director for
a term of three years and until his successor has been
elected and qualified - The results of Ballot No. 1 are
as follows:

For Withheld
--- --------

Number of Votes 1,564,935 2,726

Ballot No. 2.
The ratification of the appointment of Plante Moran, LLP
as auditors of the Company for the fiscal year ending
December 31, 2004 - The results of the Ballot are as
follows:

For Withheld Abstained
--------- ----------- -----------

Number of Votes 1,559,939 6,419 1,303

Percentage of total shares
Voted at the Annual Meeting 99.5% 0.4% 0.1%

Item 5 - Other Information:
Not applicable

Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 31.1 Certification by Chief Executive Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 Certification by Chief Financial Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 Statement of Chief Executive Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 Statement of Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K:
May 24, 2004, The Bank announced that it acquired from
North Country Bank and Trust two branches located in
Mancelona and Alanson Michigan.

ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2004

SIGNATURES

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

ALPENA BANCSHARES, INC.

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

Date: Aug 13, 2004

By: /s/ Michael W. Mahler
--------------------------------------
Michael W. Mahler
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)

Date: Aug 13, 2004

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION

EX- 31.1 Certification of Chief Executive Officer pursuant to Section 302

EX- 31.2 Certification of Chief Financial Officer pursuant to Section 302

EX- 31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX- 31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002