Exhibit 99.1

Feldman Financial Advisors, Inc.

1001 Connecticut Avenue, NW • Suite 840
Washington, DC 20036
202-467-6862 • (Fax) 202-467-6963

Feldman Financial Advisors, Inc.

1001 Connecticut Avenue, NW • Suite 840
Washington, DC 20036
202-467-6862 • (Fax) 202-467-6963

October 12, 2010

Board of Directors
Fraternity Federal Savings and Loan Association
764 Washington Boulevard
Baltimore, Maryland 21230

Members of the Board:

     At your request, we have completed and hereby provide an independent appraisal (“Appraisal”) of the estimated pro forma market value of Fraternity Federal Savings and Loan Association (“Fraternity Federal” or the “Association”) in connection with the simultaneous conversion of the Association from the mutual to stock form of ownership, the issuance of the Association’s capital stock to Fraternity Community Bancorp, Inc. (the “Company”), and the offering of shares of common stock of the Company for sale to certain depositors of the Association, employee benefit plans of the Association, and other members of the general public (collectively referred to herein as the “Conversion”). This Appraisal is furnished pursuant to the Association’s regulatory filing of the Application for Conversion (“Form AC”) with the Office of Thrift Supervision (“OTS”).

     Feldman Financial Advisors, Inc. (“Feldman Financial”) is a financial consulting and economic research firm that specializes in financial valuations and analyses of business enterprises and securities in the thrift, banking, and mortgage industries. The background of Feldman Financial is presented in Exhibit I. In preparing the Appraisal, we conducted an analysis of the Association that included discussions with the Association’s management, the Association’s legal counsel, Kilpatrick Stockton LLP, and the Association’s independent auditor, Stegman & Company. In addition, where appropriate, we considered information based on other available published sources that we believe are reliable; however, we cannot guarantee the accuracy and completeness of such information.

     We also reviewed, among other factors, the economy in the Association’s primary market area and compared the Association’s financial condition and operating performance with that of selected publicly traded thrift institutions. We reviewed conditions in the securities markets in general and in the market for thrift institution common stocks in particular.

     The Appraisal is based on the Association’s representation that the information contained in the Application and additional evidence furnished to us by the Association and its independent auditor are truthful, accurate, and complete. We did not independently verify the financial statements and other information provided by the Association and its independent auditor, nor did we independently value the assets or liabilities of the Association. The Appraisal considers the Association only as a going concern and should not be considered as an indication of the liquidation value of the Association.

FELDMAN FINANCIAL ADVISORS, INC.

Board of Directors
Fraternity Federal Savings and Loan Association
October 12, 2010
Page Two

     It is our opinion that, as of October 12, 2010, the estimated aggregate pro forma market value of the Association was within a range (the “Valuation Range”) of $10,200,000 to $13,800,000 with a midpoint of $12,000,000. The Valuation Range was based upon a 15% decrease from the midpoint to determine the minimum and a 15% increase from the midpoint to establish the maximum. Assuming an additional 15% increase above the maximum value would result in an adjusted maximum of $15,870,000. Thus, assuming an offering price of $10.00 per share of common stock, the Company will offer a minimum of 1,020,000 shares, a midpoint of 1,200,000 shares, a maximum of 1,380,000 shares, and an adjusted maximum of 1,587,000 shares.

     Our Appraisal is not intended, and must not be construed, to be a recommendation of any kind as to the advisability of purchasing shares of common stock in the Conversion. Moreover, because the Appraisal is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of stock in the Conversion will thereafter be able to sell such shares at prices related to the foregoing estimate of the Association’s pro forma market value. Feldman Financial is not a seller of securities within the meaning of any federal or state securities laws and any report prepared by Feldman Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities.

     The Valuation Range reported herein will be updated as appropriate. These updates will consider, among other factors, any developments or changes in the Association’s operating performance, financial condition, or management policies, and current conditions in the securities markets for thrift institution common stocks. Should any such new developments or changes be material, in our opinion, to the valuation of the Association, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained in detail at that time.

		Respectfully submitted,
		Feldman Financial Advisors, Inc.
		/s/ Trent R. Feldman
		Trent R. Feldman
		President
		/s/ Peter W. L. Williams
		Peter W. L. Williams
		Principal

FELDMAN FINANCIAL ADVISORS, INC.

TABLE OF CONTENTS

TAB				PAGE
		INTRODUCTION			1
I.		Chapter One – BUSINESS OF FRATERNITY FEDERAL
		General Overview			4
		Financial Condition			9
		Income and Expense Trends			17
		Interest Rate Risk Management			23
		Asset Quality			27
		Subsidiary Activity			29
		Office Facilities			30
		Market Area			31
		Summary Outlook			39
II.		Chapter Two – COMPARISONS WITH PUBLICLY TRADED THRIFTS
		General Overview			40
		Selection Criteria			41
		Recent Financial Comparisons			45
III.		Chapter Three – MARKET VALUE ADJUSTMENTS
		General Overview			59
		Earnings Prospects			60
		Financial Condition			61
		Market Area			63
		Management			63
		Dividend Policy			64
		Liquidity of the Issue			65
		Subscription Interest			66
		Recent Acquisition Activity			67
		Effect of Government Regulations and Regulatory Reform			69
		Stock Market Conditions			69
		New Issue Discount			72
		Adjustments Conclusion			75
		Valuation Approach			75
		Valuation Conclusion			77
IV.		Appendix – EXHIBITS
		I Background of Feldman Financial Advisors, Inc.			I-1
		II-1 Consolidated Balance Sheets		II-1
		II-2 Consolidated Income Statements		II-2
		II-3 Loan Portfolio Composition		II-3
		II-4 Net Loan Activity		II-4
		II-5 Investment Portfolio Composition		II-5
		II-6 Deposit Account Distribution		II-6
		II-7 Borrowed Funds Distribution		II-7
		II-8 Office Facilities		II-8
		III Financial and Market Data for All Public Thrifts		III-1
		IV-1 Pro Forma Assumptions for Conversion Stock Offering		IV-1
		IV-2 Pro Forma Conversion Valuation Range		IV-2
		IV-3 Pro Forma Conversion Analysis at the Maximum Valuation		IV-3
		IV-4 Comparative Valuation Ratio Differential		IV-4

FELDMAN FINANCIAL ADVISORS, INC.

LIST OF TABLES

TAB				PAGE
I.		Chapter One – BUSINESS OF FRATERNITY FEDERAL
		Table 1 Selected Financial Condition Data			9
		Table 2 Relative Balance Sheet Concentrations			10
		Table 3 Income Statement Summary			18
		Table 4 Income Statement Ratios			20
		Table 5 Yield and Cost Summary			22
		Table 6 Interest Rate Risk Analysis			26
		Table 7 Non-performing Assets and Loan Loss Allowance Summary			28
		Table 8 Selected Demographic Data			34
		Table 9 Deposit Market Share in the Baltimore MSA			37
		Table 10 Residential Mortgage Lending Market Share in the Baltimore MSA			38
II.		Chapter Two – COMPARISONS WITH PUBLICLY TRADED THRIFTS
		Table 11 Comparative Group Operating Summary 44 Table 12 Key Financial Comparisons			46
		Table 13 General Operating Characteristics			53
		Table 14 Summary Financial Performance Ratios			54
		Table 15 Income and Expense Analysis			55
		Table 16 Yield-Cost Structure and Growth Rates			56
		Table 17 Balance Sheet Composition			57
		Table 18 Regulatory Capital, Credit Risk, and Loan Composition			58
III.		Chapter Three – MARKET VALUE ADJUSTMENTS
		Table 19 Summary of Recent Maryland Acquisition Activity			68
		Table 20 Comparative Stock Index Performance			70
		Table 21 Summary of Recent Standard Conversion Stock Offerings			74
		Table 22 Comparative Pro Forma Market Valuation Analysis			79

FELDMAN FINANCIAL ADVISORS, INC.

INTRODUCTION

     As requested, we have completed and hereby provide an independent appraisal (“Appraisal”) of the estimated pro forma market value of Fraternity Federal Savings and Loan Association (“Fraternity Federal” or the “Association”) in connection with the simultaneous conversion of the Association from the mutual to stock form of ownership, the issuance of the Association’s capital stock to Fraternity Community Bancorp, Inc. (the “Company”), and the offering of shares of common stock of the Company for sale to certain depositors of the Association, employee benefit plans of the Association, and other members of the general public (collectively referred to herein as the “Conversion”). This appraisal report is furnished pursuant to the Association’s filing of the Application for Conversion (“Form AC”) with the Office of Thrift Supervision (“OTS”). Our estimate of the pro forma market value of the Association is expressed in the form of a range (the “Valuation Range”) based on OTS guidelines.

     In the course of preparing the Appraisal, we reviewed and discussed with the Association’s management and the Association’s independent accountants, Stegman & Company, the audited financial statements of the Association’s operations for the years ended December 31, 2008 and 2009. We also reviewed and discussed with management other financial matters of the Association. Where appropriate, we considered information based upon other available public sources, which we believe to be reliable; however, we cannot guarantee the accuracy or completeness of such information. We visited the Association’s primary market area and examined the prevailing economic conditions. We also examined the competitive environment within which the Association operates and assessed the Association’s relative strengths and weaknesses.

FELDMAN FINANCIAL ADVISORS, INC.

     We examined and compared the Association’s financial performance with selected segments of the thrift industry and selected publicly traded thrift institutions. We reviewed conditions in the securities markets in general and the market for thrift institution common stocks in particular. We included in our analysis an examination of the potential effects of the Conversion on the Association’s operating characteristics and financial performance as they relate to the estimated pro forma market value of the Association.

     In preparing the Appraisal, we have relied upon and assumed the accuracy and completeness of financial and statistical information provided by the Association and its independent accountants. We did not independently verify the financial statements and other information provided by the Association and its independent accountants, nor did we independently value the assets or liabilities of the Association. The Appraisal considers the Association only as a going concern and should not be considered as an indication of the liquidation value of the Association.

     Our Appraisal is not intended, and must not be construed, to be a recommendation of any kind as to the advisability of purchasing shares of common stock in the Conversion. Moreover, because such the Appraisal is necessarily based on estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of common stock in the Conversion will thereafter be able to sell such shares at prices related to the foregoing estimate of the Association’s pro forma market value. Feldman Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by Feldman Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities.

FELDMAN FINANCIAL ADVISORS, INC.

     The Valuation Range reported in this Appraisal will be updated as appropriate. These updates will consider, among other factors, any developments or changes in the Association’s financial performance or management policies, and current conditions in the securities market for thrift institution common stocks. Should any such developments or changes be material, in our opinion, to the valuation of the Association, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained in detail at that time.

FELDMAN FINANCIAL ADVISORS, INC.

I. BUSINESS OF FRATERNITY FEDERAL

General Overview

     Fraternity Federal is a federally chartered mutual savings and loan association headquartered in Baltimore, Maryland. Over the course of its history, Fraternity Federal has operated as a community-oriented institution by offering a variety of loan and deposit products and serving other financial needs of the local community. The Association conducts its business from its main office in Baltimore City and three additional branch offices in Baltimore, Carroll, and Howard counties in Maryland. At June 30, 2010, Fraternity Federal had total assets of $167.9 million, net loans of $118.8 million, total deposits of $125.8 million, and equity capital of $16.6 million or 9.91% of total assets. The Association is regulated by the OTS and its deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Association is a member of the Federal Home Loan Association (“FHLB”) of Atlanta.

     Founded in 1913, Fraternity Federal currently offers a variety of deposit products and provides loans secured by real estate located in its market area. The Association’s real estate loans consist primarily of residential mortgage loans, as well as commercial real estate loans, land loans, home equity lines of credit, and residential construction loans. The Association also offers consumer loans and, to a limited extent, commercial business loans. Fraternity Federal operates out of its corporate headquarters and main office in Baltimore City and full-service branch offices located in Cockeysville (Baltimore County), Ellicott City (Howard County), and Hampstead (Carroll County), Maryland.

     The Association’s business consists primarily of accepting deposits from the general public and investing those deposits, together with borrowings and funds generated from

FELDMAN FINANCIAL ADVISORS, INC.

operations, in one- to four-family residential mortgage loans and various investment securities. At June 30, 2010, one- to four-family residential mortgage loans totaled $89.6 million, or 75.5% of the Association’s loan portfolio. Most of the Association’s residential mortgage loans are owner occupied, but this category also includes loans secured by single-family investment properties. Home equity lines of credit, all of which are secured by one- to four-family residential properties, represented the Association’s second largest category of loans. Home equity lines of credit totaled $13.0 million or 11.0% of total loans at June 30, 2010. Residential construction, commercial real estate, consumer, and commercial business loans have historically composed smaller concentrations of Fraternity Federal’s loan portfolio.

     Fraternity Federal aims to operate as a well-capitalized and profitable community financial institution dedicated to providing quality customer service. The Association’s current business objectives emphasize residential mortgage lending and Fraternity Federal will continue to offer these types of loans. Another principal business objective of the Association is to build on Fraternity Federal’s historic strengths of customer loyalty and asset quality, and gradually grow the balance sheet with assets and liabilities that allow it to increase the net interest margin while reducing the overall exposure risk from interest rate fluctuations.

     The Association believes that its community orientation is attractive to customers and distinguishes it from the larger banks that operate in the local area. Fraternity Federal is presently focused on strengthening and expanding customer relationships to generate additional internal growth from its franchise. The Association’s operating strategies include the initiatives listed on the next page as follows:

FELDMAN FINANCIAL ADVISORS, INC.

	•		Building on its strengths as a community-oriented financial institution. Fraternity Federal has operated continuously as a community-oriented financial institution since it was established in 1913. The Association provides a broad range of consumer and business financial services through its branch network and plans to continue seeking ways to improve convenience, safety and service through its product offerings. Over the years, the Association has developed a core of loyal customers, and its product mix concentrating on time, savings, and checking deposits and residential real estate mortgage loans has allowed it to maintain strong asset quality. Fraternity Federal intends to continue to retain these strengths while gradually growing its balance sheet with assets and liabilities that will contribute to net interest margin expansion.
	•		Improving the net interest margin and earnings and reducing interest rate risk by increasing commercial real estate lending. In recent years, Fraternity Federal has sought to increase the percentage of assets invested in commercial real estate loans, which tend to have higher yields than traditional single-family residential mortgages and which have shorter terms to maturity or adjustable interest rates. The Association intends to continue to emphasize residential lending, while also seeking to expand its commercial real estate lending activities with a focus on serving small businesses and emphasizing relationship banking in its primary market area. With the additional capital raised in the Conversion, the Association intends to pursue larger lending relationship opportunities. Though its current staff is sufficient to facilitate growth, the Association may seek to add further expertise in its commercial loan department. The Association also seeks to attract lower cost business checking deposits from these commercial customers.
	•		Emphasizing lower costing core deposits to reduce funding costs. Operating as a traditional thrift institution, a greater percentage of Fraternity Federal’s deposit base has comprised higher balance, higher costing certificates of deposits. The Association will continue to seek to reduce its dependence on traditional high cost deposits in favor of stable, low cost demand deposits. Fraternity Federal has utilized additional product offerings, technology, and a focus on customer service in working toward this goal. Over time, the Association will also seek to replace maturing, high cost, long-term FHLB advances with core deposits.
	•		Generating higher non-interest income by selling loans in the secondary market. The Association currently sells most of its fixed-rate, one- to four-family residential mortgage loan originations in the secondary market and has recognized gains on such sales in past periods. Fraternity Federal will seek to increase its originations of residential mortgage loans to generate further income from loan sales.
	•		Adding a new branch in its existing market area or a contiguous county. Fraternity Federal opened a new branch office in Hampstead, Maryland in September 2009. The Association intends to add another new branch to its office network within the next three years. The Association plans to explore possible locations in its existing market area or a contiguous county. At the present time, there are no plans or commitments regarding a specific additional branch office or location.

FELDMAN FINANCIAL ADVISORS, INC.

•

Expanding market share within its primary market area. Fraternity Federal intends to increase its market share by enhancing the efforts of its staff in marketing additional products and services to customers. The Association believes that it has a solid infrastructure in place that will allow it to grow assets and liabilities without adding materially to its operating expenses.

     While the Association’s present equity capital level is solid at 9.91% of total assets as of June 30, 2010, the Association believes it must raise additional capital in order to facilitate its growth objectives and loan diversification, and provide a greater cushion in response to the heightened risk profile associated with uncertain economic conditions and unproven expansion opportunities. The Association’s equity position recently declined from $17.0 million or 10.18% of total assets at December 31, 2009 to $16.6 million at June 30, 2010. The decrease in equity was caused by a net operating loss of $411,000 recorded by the Association for the six months ended June 30, 2010, primarily as a result of an increased provision for loan losses due to higher levels of problem loans and loan charge-offs.

     As a stock corporation upon completion of the Conversion, the Association will be organized in the form used by commercial banks, most major corporations, and a majority of savings institutions. The ability to raise new equity capital through the issuance and sale of capital stock will allow the Association the flexibility to increase its equity capital position more rapidly than by accumulating earnings.

     The Association also believes that the ability to attract new capital also will help address the needs of the communities it serves and enhance its ability to expand or to make acquisitions. After the Conversion, the Association will have increased ability to merge with or acquire other financial institutions or business enterprises. Finally, the Association expects to benefit from its employees and directors having stock ownership in its business, since that is viewed as an

FELDMAN FINANCIAL ADVISORS, INC.

effective performance incentive and a means of attracting, retaining, and compensating employees and directors.

     In summary, Fraternity Federal’s primary reasons for implementing the Conversion and undertaking the offering are to:

	•		increase the capital of the Association to support future lending and operational growth and to allow it to make larger loans to borrowers within regulatory limits;
	•		enhance profitability and earnings through reinvesting and leveraging the offering proceeds, primarily through traditional funding and lending activities;
	•		support future branching activities and/or the acquisition of financial services companies; and
	•		implement equity compensation plans to retain and attract qualified directors, officers, and staff and to enhance the current incentive-based compensation programs.

     The remainder of Chapter I examines in more detail the trends addressed in this section, including the impact of changes in the Association’s economic and competitive environment, and recent management initiatives. The discussion is supplemented by the exhibits in the Appendix. Exhibit II-1 summarizes the Association’s consolidated balance sheets as of the years ended December 31, 2008 and 2009 and as of June 30, 2010. Exhibit II-2 presents the Association’s consolidated income statements for the years ended December 31, 2008 and 2009 and the six months ended June 30, 2009 and 2010.

FELDMAN FINANCIAL ADVISORS, INC.

Financial Condition

     Table 1 presents selected data concerning the Association’s financial position as of December 31, 2008 and 2009 and June 30, 2010. Table 2 displays relative balance sheet concentrations for the Association as of similar fiscal year-end periods.

Table 1
Selected Financial Condition Data
As of December 31, 2008 and 2009 and June 30, 2010
(Dollars in Thousands)

		June 30,				December 31,
		2010				2009				2008
Total assets		$	167,928			$	166,976			$	170,688
Cash and cash equivalents			20,135				13,908				11,439
Investment securities available for sale			19,650				24,116				8,526
Investment securities held to maturity			—				—				7,447
Loans receivable, net			118,770				120,092				136,547
Total deposits			125,760				125,960				124,913
Federal Home Loan Bank advances			22,750				22,917				28,417
Total equity			16,647				16,992				16,475

Source: Fraternity Federal, financial statements.

Asset Composition

     The Association’s total assets amounted to $167.9 million at June 30, 2010, reflecting approximately a 1.6% or $2.8 million decrease from total assets of $170.7 million at December 31, 2008. The decline in total assets was primarily attributable to shrinkage of the loan portfolio by 13.0% or $17.8 million since December 31, 2008 as a result of increased volumes of loan sales. Cash and securities increased by $12.4 million between December 31, 2008 and June 30, 2010. The ratio of net loans to total assets decreased from 80.0% at December 31, 2008 to 70.7% at June 30, 2010.

FELDMAN FINANCIAL ADVISORS, INC.

Table 2
Relative Balance Sheet Concentrations
As of December 31, 2008 and 2009 and June 30, 2010
(Percent of Total Assets)

		June 30,				December 31,
		2010				2009				2008
Cash and cash equivalents			11.99				8.33				6.70
Investment securities			11.70				14.44				9.36
Loans receivable, net			70.73				71.92				80.00
Other assets			5.58				5.31				3.94
Total Assets			100.00				100.00				100.00
Total deposits			74.89				75.44				73.18
FHLB advances			13.55				13.72				16.65
Other liabilities			1.65				0.66				0.52
Total Liabilities			90.09				89.82				90.35
Total equity			9.91				10.18				9.65
Total Liabilities and Equity			100.00				100.00				100.00

Source: Fraternity Federal, financial statement data.

     For many years, the Association operated as a traditional thrift institution emphasizing one loan product – long-term, fixed-rate, owner-occupied, single-family residential mortgage loans. While residential mortgages continue to be the predominant loan type within the Association’s portfolio, the Association has begun to diversify its loan mix at a gradual pace. As presented in Exhibit II-3, the Association’s current loan portfolio particularly includes an increased level of home equity lines of credit, residential construction loans, and commercial real estate loans. The Association intends to continue to emphasize residential lending, while also seeking to expand commercial real estate lending activities with a focus on serving small businesses and emphasizing relationship banking in its primary market area. The Association does not offer, and has not offered, subprime, no-documentation, or Alt-A mortgage loans.

FELDMAN FINANCIAL ADVISORS, INC.

     Residential mortgage loans totaled $89.6 million or 75.5%, $89.3 million or 74.4%, and $108.7 million or 79.6%, of the total loan portfolio, at June 30, 2010 and December 31, 2009 and 2008, respectively. The $19.4 million, or 17.8%, decrease in one- to four-family mortgage loans during 2009 was primarily a result of the Association’s decision to sell most newly originated fixed-rate residential mortgage loans due to the low rates prevailing on such loans.

     Home equity lines of credit, all of which are secured by one- to four-family residential properties, totaled $13.0 million, and represented 11.0% of total loans at June 30, 2010, compared to $12.3 million or 10.3% of total loans at December 31, 2009 and $13.2 million or 9.6% of total loans at December 31, 2008. The Association offers home equity lines of credit with adjustable interest rates and terms up to 15 years, although in the past it has offered terms of up to 30 years. The Association does not currently originate home equity loans with loan-to-value ratios exceeding 80%, including any first mortgage loan balance.

     Residential construction loans totaled $8.9 million and represented 7.5% of total loans at June 30, 2010, compared to $10.4 million or 8.7% of total loans at December 31, 2009 and $7.7 million or 5.7% of total loans at December 31, 2008. Fraternity Federal increased its residential construction loans by $2.7 million or 35.1% during the 2009 as it made disbursements on several larger loans for the construction of custom built luxury homes, including speculative construction loans to builders. During the first half of 2010, the Association reduced residential construction loans by $1.5 million or 15.1% as it determined in light of weakened market conditions to discontinue originations of speculative construction loans. Approximately $1.8 million of residential construction loans at June 30, 2010 was categorized as non-performing, compared to $633,000 of residential construction loans at December 31, 2009 and zero at December 31, 2008

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     Commercial real estate loans totaled $4.0 million and represented 3.4% of total loans at June 30, 2010, compared to $4.2 million or 3.5% of total loans at December 31, 2009 and $3.6 million or 2.6% of total loans at December 31, 2008. Fraternity Federal offers a variety of commercial real estate loans to owner occupants and investors. The Association’s commercial real estate loans include loans secured by office buildings, dental offices, small retail buildings, and warehouses. The Association originates a variety of fixed-rate and adjustable-rate commercial real estate loans generally with rates fixed for 10 years and which amortize over terms of from 10 to 25 years. Commercial real estate loan amounts generally do not exceed 75% of the property’s appraised value.

     Land loans totaled $3.9 million or 3.2% of total loans at June 30, 2010, compared to $3.9 million or 3.3% of total loans at December 31, 2009 and $3.5 million or 2.6% of total loans at December 31, 2008. Most of the Association’s land loans represent loans to individuals and developers for the purchase of land that eventually will be used for the construction of owner-occupied residential property. Land loans are generally offered for terms of up to 15 years, with rates that adjust annually after an initial period of up to five years. The loan-to-value ratio on land loans is limited to a maximum of 75%, except where there are exceptional credit circumstances on the loan.

     The Association’s non-real estate loans consist of consumer loans and, to a very limited extent, commercial business loans. While Fraternity Federal offers a variety of consumer loans, it does not emphasize this type of lending and generally makes consumer loans as an accommodation to its existing customers. Consumer loans totaled $54,000 at June 30, 2010, representing less than 0.1% of the loan portfolio, and consisted of automobile loans, unsecured loans, and miscellaneous other loans. At June 30, 2010, commercial business loans consisted of

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two unsecured operating lines of credit. Fraternity Federal generally does not originate loans secured by equipment and receivables. Commercial business loans totaled $28,000, representing less than 0.1% of total loans at June 30, 2010.

     As shown in Exhibit II-4, total loan originations increased from $33.2 million in 2008 to $40.9 million in 2009. However, more recently, lending activity declined as total originations amounted to $12.9 million for the six months ended June 30, 2010 versus $26.8 million for the six months ended June 30, 2009. Loan sales increased from $8.4 million in 2008 to $21.2 million in 2009. In recent periods, the Association has elected to sell almost all newly originated fixed-rate residential mortgage loans and to retain in portfolio shorter-term fixed-rate loans and adjustable-rate loans. Generally, loans are sold to investors on a servicing released basis.

     Exhibit II-5 presents a summary of the Association’s investment portfolio as of December 31, 2008 and 2009 and June 30, 2010. As mentioned previously, the Association’s investment and liquidity holdings have increased in recent years as the volume of loan sales increased and total loans outstanding decreased. Fraternity Federal’s primary investment objectives are: (i) to provide and maintain liquidity within regulatory guidelines, (ii) to fully employ available funds; (iii) to earn an average rate of return on invested funds competitive with comparable institutions; (iv) to manage interest rate risk; and (v) to limit risk.

     At June 30, 2010, the Association’s investment securities amounted to $19.6 million and consisted primarily of U.S. government agency securities and mortgage-backed securities available-for-sale. Most of the U.S. government agency securities and mortgage-backed securities are issued by Freddie Mac or Fannie Mae or guaranteed by Ginnie Mae. The Association also had $1.1 million in private label mortgage-backed securities with unrealized losses totaling $59,000 at June 30, 2010. In addition to its investment portfolio, the Association

FELDMAN FINANCIAL ADVISORS, INC.

held a $1.6 million investment, at cost, in the FHLB of Atlanta common stock at June 30, 2010. The investment securities portfolio declined from $24.2 million at December 31, 2009 to $19.6 million at June 30, 2010 as the Association invested cash flow from securities payments and maturities into liquid assets due to the historically low yields available on mortgage-backed securities.

Liability Composition

     Deposits are the Association’s major external source of funds for lending and other investment purposes. Exhibit II-6 presents a summary of the Association’s deposit composition as of December 31, 2008 and 2009 and June 30, 2010. Total deposits amounted to $125.8 million or 74.9% of total assets and 83.1% of total liabilities at June 30, 2010. Deposits have been held relatively steady over the past two and one-half years, totaling $126.0 million and $124.9 million at December 31, 2009 and 2008, respectively.

     Fraternity Federal generates deposits primarily from within its market area. The Association relies on competitive pricing and customer service to attract and retain deposits. The Association offers a variety of deposit accounts with a range of interest rates and terms. The Association’s current deposit account offerings consist of checking accounts, savings accounts, money market accounts, and certificates of deposit. The Association periodically reviews and establishes interest rates, maturity terms, service fees, and withdrawal penalties for its deposit accounts. Deposit rates and terms are based primarily on current operating strategies, market interest rates, liquidity requirements, interest rates paid by competitors, and deposit growth goals. The Association’s deposit pricing strategy has typically emphasized competitive rates on all types of deposits accounts with periodic offerings of special rates in order to attract deposits

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of a specific type or term. The Association has utilized brokered deposits to a limited extent. Brokered deposits totaled $2.3 million at June 30, 2010.

     Certificates of deposit have traditionally been the largest deposit category at Fraternity Federal and accounted for $107.0 million or 85.1% of total deposits at June 30, 2010. Approximately 54.0% or $57.8 million of certificate accounts had remaining maturities of one year or less. The Association has managed to maintain a relatively stable concentration of savings accounts, which equaled $12.7 million or 10.1% of total deposits at June 30, 2010. Non-interest bearing demand, NOW, and money market deposits amounted to $5.9 million or 4.7% of total deposits and have been targeted for growth by the Association. As of June 30, 2010, the weighted average costs of NOW/money market, savings, certificate, and brokered deposits were 0.24%, 0.54%, 2.71%, and 4.31%, respectively. The weighted average cost of all interest-bearing deposits was 2.42% at June 30, 2010. Balances of non-interest bearing deposits have increased marginally and amounted to $948,000 or 0.8% of total deposits at June 30, 2010.

     The Association utilizes borrowings as a supplemental, cost-effective source of funds when they can be invested at a positive interest rate spread or to meet asset/liability management objectives. The Association’s borrowings consist of FHLB advances. As of June 30, 2010, the Association had $22.8 million in FHLB advances outstanding and the ability to borrow an additional $27.5 million of advances. The weighted average interest rate of outstanding FHLB advances at June 30, 2010 was 3.91%. The average balance of advances outstanding amounted to $25.5 million in 2008, $23.5 million in 2009, and $24.5 million for the first half of 2010.

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Equity Capital

     Fraternity Federal has historically maintained solid capital levels. Over the past five years, the Association has moderated its balance sheet growth and maintained total assets within a range approximating $165 million to $175 million of assets with equity-to-assets ratios of 9.5% to 10.0%. Due to a net operating loss of $411,000 for the six months ended June 30, 2010, the Association’s equity capital declined from $17.0 million or 10.18% of total assets at December 31, 2009 to $16.6 million or 9.91% of total assets at June 30, 2010. Fraternity Federal’s capital level remains strong in comparison to minimum regulatory requirements. The Association’s regulatory capital ratios of Tier 1 Leverage Capital, Tier 1 Risk-based Capital, and Total Risk-based Capital were 9.89%, 17.91%, and 18.83%, respectively, as of June 30, 2010. In comparison, the minimum regulatory requirements under OTS guidelines were 3.00%, 4.00%, and 8.00%, and the threshold requirements for regulatory “well capitalized” levels were 5.00%, 6.00%, and 10.00%, respectively. Based on these regulatory capital ratios and measures, the Association was considered “well capitalized” as of June 30, 2010.

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Income and Expense Trends

     Table 3 displays the main components of Fraternity Federal’s earnings performance for the years ended December 31, 2008 and 2009 and the six months ended June 30, 2009 and 2010. Table 4 displays the Association’s principal income and expense ratios as a percent of average assets. Table 5 displays the Association’s weighted average yields on interest-earning assets and weighted average costs of interest-bearing liabilities for the corresponding periods.

General Overview

     Fraternity Federal has historically exhibited a steady record of low to moderate levels of profitability, reflecting a trend of relatively low net interest margins offset in part by low operating expenses. The Association’s earnings amounted to $8,000 in 2008 and $343,000 in 2009, reflecting a return on average assets (“ROA”) of 0.00% and 0.20%, respectively. The Association’s earnings declined to a loss of $411,000 for the six months ended June 30, 2010, compared to a profit of $214,000 for the six months ended June 30, 2009. The loss for the first half of 2010 was attributable chiefly to an increase in the provision for loan losses from $51,000 to $865,000 over the respective periods due to increases in problem loans and charge-offs.

Six Months Ended June 30, 2009 and 2010

     Net income decreased from $214,000 for the six months ended June 30, 2009 to a loss of $411,000 for the six months ended June 30, 2010. The decline in profitability was attributable to an increase of $814,000 in the provision for loan losses, an increase of $260,000 in total non-interest expense, and a decrease of $67,000 in total non-interest income. Net interest income increased modestly from $1.8 million for the first half of 2009 to $1.9 million for the first half of 2010, and the net interest margin increased from 2.14% to 2.27%.

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Table 3
Income Statement Summary
For the Years Ended December 31, 2008 and 2009
And the Six Months Ended June 30, 2009 and 2010
(Dollars in Thousands)

		Six Months Ended								Year Ended
		June 30								December 31
		2010				2009				2009				2008
Total interest income		$	3,848			$	4,287			$	8,272			$	8,993
Total interest expense			1,957				2,500				4,805				5,856
Net interest income			1,891				1,787				3,467				3,137
Provision for loan losses			865				51				51				5
Net interest income after provision			1,026				1,736				3,416				3,132
Total non-interest income			311				378				692				323
Total non-interest expense			2,065				1,805				3,646				3,600
Income (loss) before taxes			(728	)			309				462				(145	)
Income tax expense (benefit)			(317	)			95				119				(153	)
Net income (loss)		$	(411	)		$	214			$	343			$	8

Source: Fraternity Federal, financial statements.

     Increases in non-accrual loans and loan charge-offs led the Association to increase its provision for loan losses to $865,000 for the first half of 2010. Non-accrual loans increased to $3.3 million at June 30, 2010 from $1.0 million at year-end 2009. Net loan charge-offs increased to $337,000 for the first half of 2010, compared to $4,000 for the first half of 2009. As result, the allowance for loans losses was increased from $277,000 or 0.23% of total loans at year-end 2009 to $805,000 or 0.67% of total loans at June 30, 2010.

     Total non-interest income decreased by $67,000 or 17.7% from $378,000 for the six months ended June 30, 2009 to $311,000 for the six months ended June 30, 2010. The

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annualized ratio of non-interest income to average assets decreased from 0.45% in the 2009 period to 037% for the 2010 period. The decrease primarily reflected a decrease of $143,000 in gain on sale of loans. Gain on sale of investments increased by $52,000 as the Association elected to sell various securities to lock in gains, including mortgage-backed securities on which it anticipated prepayments in a declining interest rate environment. Also contributing to non-interest income was a $29,000 increase in income on bank-owned life insurance (“BOLI”). The Association’s BOLI investment amounted to $4.1 million or 2.4% of assets at June 30, 2010.

     Total non-interest expense increased by $260,000 or 14.4% from $1.8 million for the six months ended June 30, 2009 to $2.1 million for the six months ended June 30, 2010. The annualized ratio of non-interest expense to average assets increased from 2.15% in the 2009 period to 2.45% for the 2010 period. The increase primarily was attributable to increases of $134,000 or 13.6%, $27,000 or 8.9%, and $78,000 or 22.9%, in salaries and employee benefits, occupancy expenses, and other general and administrative expenses, respectively, as a result of the opening of a new branch office in Hampstead, Maryland in September 2009. The Association recorded an income tax benefit of $317,000 during the six months ended June 30, 2010, due to the incurrence of a pre-tax loss during that period.

Years Ended December 31, 2008 and 2009

     Net income increased from $8,000 in 2008 to $343,000 for 2009. The increase in earnings was mainly generated by increases of $330,000 in net interest income and $370,000 in total non-interest income, offset partially by increases of $47,000 in total non-interest expense and $46,000 in the provision for loan losses. The Association’s net interest spread improved from 1.48% in 2008 to 1.74% in 2009 as the cost of interest-bearing liabilities declined by 65 basis points while the yield on interest-earning assets declined by only 37 basis points.

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Table 4
Income Statement Ratios
For the Years Ended December 31, 2008 and 2009
And the Six Months Ended June 30, 2009 and 2010
(Percent of Average Assets)

		Six Months Ended								Year Ended
		June 30,								December 31,
		2010(1)				2009(1)				2009				2008
Total interest income			4.55	%			5.19	%			4.92	%			5.29	%
Total interest expense			2.31				2.97				2.86				3.45
Net interest income			2.24				2.12				2.06				1.84
Provision for loan losses			1.02				0.06				0.03				0.00
Net interest income after provision			1.22				2.06				2.03				1.84
Total non-interest income			0.37				0.45				0.41				0.19
Total non-interest expense			2.44				2.15				2.17				2.12
Income (loss) before taxes			(0.86	)			0.36				0.27				(0.09	)
Income tax expense (benefit)			(0.37	)			0.11				0.07				(0.09	)
Net income (loss)			(0.49	)%			0.25	%			0.20	%			0.00	%

Source: Fraternity Federal; Feldman Financial.

     Net interest income increased by 10.5% from $3.1 million in 2008 to $3.5 million in 2009. The improved net interest margin was driven largely by certificates of deposit rolling over at lower rates in the prevailing market environment. The cost of interest-bearing liabilities declined from 3.87% in 2008 to 3.22% for 2009. The provision for loan losses was increased from $5,000 in 2008 to $51,000 in 2009, as non-accrual loans amounted to $187,000 and $1.0 million at year-end 2008 and 2009, respectively. Also, net loan charge-offs increased from zero in 2008 to $46,000 during 2009.

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     Total non-interest income increased by $370,000 from $323,000 for the year ended December 31, 2008 to $693,000 for the year ended December 31, 2009. The increase primarily reflected increases of $196,000 in gain on sale of loans, $137,000 in gain on sale of investments, and an increase of $45,000 in BOLI income. The ratio of non-interest income to average assets increased from 0.19% in 2008 to 0.41% for 2009.

     Total non-interest expense increased modestly by $47,000 or 1.3% between 2008 and 2009. The ratio of non-interest income to average assets increased from 2.12% in 2008 to 2.17% for 2009. The increase in non-interest expense included increases of $125,000 or 6.6%, $31,000, or 5.4%, and $192,000 or 40.3%, in salaries and employee benefits, occupancy expenses and other general and administrative expenses, respectively, as a result of the opening of a new branch office in Hampstead, Maryland in September 2009. Partly offsetting these increases was the absence in 2009 of a $300,000 expense that the Association incurred in 2008 related to the termination of its pension plan. Excluding this non-recurring item, the Association’s total non-interest expense increased by 10.5% from $3.3 million in 2008 to $3.6 million for 2009.

     Fraternity Federal recorded an income tax benefit of $153,000 during the year ended December 31, 2008 as a result of incurring a pre-tax loss for 2008. The Association had an income tax expense of $119,000 for the year ended December 31, 2009, resulting in an effective tax rate of 25.7% for that year.

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Table 5
Yield and Cost Summary
For the Years Ended December 31, 2008 and 2009
And the Six Months Ended June 30, 2009 and 2010
And as of June 30, 2010

		As of				Six Months Ended								Year Ended
		June 30,				June 30,								December 31,
		2010				2010				2009				2009				2008
Weighted Average Yields
Cash and cash equivalents			0.15	%			0.19	%			0.10	%			0.07	%			2.20	%
Loans receivable(1)			5.65				5.60				5.89				5.83				5.77
Investment securities available for sale			4.57				3.74				4.53				4.27				4.90
Other interest-earning assets			0.94				0.97				1.03				0.92				2.52
Total interest-earning assets			4.66				4.62				5.14				4.97				5.34
Weighted Average Costs
Time deposits			2.71				2.73				3.67				3.48				4.35
NOW and money market deposits			0.24				0.25				0.28				0.27				0.90
Passbook deposits			0.54				0.55				0.71				0.63				1.40
Brokered deposits			4.31				4.27				4.26				4.30				2.96
FHLB advances			3.94				3.66				3.81				3.89				3.63
Total interest-bearing liabilities			2.65				2.64				3.35				3.22				3.87
Net interest spread(2)			1.99				1.98				1.79				1.74				1.48
Net interest margin(3)		NA					2.27				2.14				2.08				1.86

Source: Fraternity Federal, preliminary prospectus.

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Interest Rate Risk Management

     The Association seeks to reduce its earnings vulnerability to changes in market interest rates by managing the mismatch between asset and liability maturities and interest rates. Management actively monitors and manages the Association’s interest rate risk exposure. The principal objective of the Association’s interest rate risk management function is to evaluate the interest rate risk embedded in certain balance sheet accounts, determine the level of risk appropriate given the Association’s business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with guidelines approved by the Board of Directors. The Association strives to maintain an acceptable balance between maximizing net interest spread potential and limiting its exposure to changes in interest rates. The Association relies on its Asset/Liability Management Committee to coordinate, monitor, and control its interest rate risk and asset/liability management objectives.

     Because the net present value of the majority of the Association’s assets and liabilities are sensitive to changes in interest rates, the most significant form of market risk is interest rate risk. The Association is vulnerable to an increase in interest rates to the extent that its interest-bearing liabilities mature or reprice more quickly than its interest-earning assets. To reduce the potential volatility of its earnings, the Association has sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Fraternity Federal’s primary strategy for managing interest rate risk is directed toward diversifying its loan portfolio composition to include more loans with variable rates and adjusting its investment portfolio mix and duration.

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     The Association has implemented a number of balance sheet initiatives in recent years to manage its interest rate risk exposure. The Association has emphasized the origination of fixed-rate residential mortgages with ten-year terms. In addition, at June 30, 2010, the Association had $13.0 million of home equity lines of credit, all of which reprice monthly. In the current interest rate environment, the Association has also increased its holdings of shorter-term liquidity, which amounted to $20.1 million of cash and cash equivalents at June 30, 2010. In the past, the Association has also sold lower yielding loans at a loss in order to reduce its interest rate risk profile and to enhance future earnings through the reinvestment of the proceeds from such loan sales into higher yielding assets. On the liability side of the balance sheet, the Association has experienced some success in the present low interest rate environment of increasing its longer-term certificates of deposit while decreasing its shorter-term certificates of deposit as customers seek increased yields.

     The Association measures its interest rate sensitivity based on the net portfolio value (“NPV”) of market equity as facilitated by the regulatory analytical framework. NPV reflects the simulated equity of the Association as obtained by estimating the economic present value of its assets, liabilities, and off-balance sheet items under different interest rate scenarios. Table 6 summarizes the interest rate sensitivity of the Association’s NPV as of June 30, 2010, assuming instantaneous and sustained parallel shifts in the U.S. Treasury yield curve of 100 to 300 basis points either up or down in various increments. Because of the current level of interest rates, scenarios of down 200-plus basis points have not been considered.

     As shown in Table 6, the Association’s NPV would be negatively impacted by an increase or decrease in interest rates from current levels. An increase in rates would negatively impact the Association’s NPV more significantly as a result of deposit accounts and FHLB

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borrowings repricing more rapidly than loans and securities due to the fixed-rate nature of a large portion of the Association’s loan and investment portfolios. As rates rise, the market value of fixed-rate assets declines due to both the rate increases and slowing prepayments.

     Table 6 indicates that the Association’s NPV was $20.3 million or 11.57% of the present value of portfolio assets as of June 30, 2010. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a $2.8 million decrease in the Association’s NPV and would result in a 124 basis point decrease in the NPV ratio to 10.33%. An immediate 100 basis point increase in market interest rates would result in a $763,000 decrease in the Association’s NPV and a 26 basis point decrease in the NPV ratio to 11.31%. Similarly, an immediate 100 basis point decrease in market interest rates would result in a $310,000 decrease in the Association’s NPV and a 25 basis point decrease in the NPV ratio to 11.32%.

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Table 6
Interest Rate Risk Analysis
Net Portfolio Value
As of June 30, 2010
(Dollars in Thousands)

Change in						Change				Change								Basis Point
Interest Rates(1)		Estimated				from Base				from Base				NPV				Change in
(basis points)		NPV(2)				(000s)				(%)				Ratio(3)				NPV Ratio
+ 300 b.p.		$	14,861			$	(418	)			(26.7	)%			9.02	%			(255	)b.p.
+ 200 b.p.			17,457				(2,822	)			(13.9	)%			10.33	%			(124	)b.p.
+ 100 b.p.			19,516				(763	)			(3.8	)%			11.31	%			(26	)b.p.
0 b.p.			20,279				—				—				11.57	%			—
- 100 b.p.			10,498				(310	)			(1.5	)%			11.32	%			(25	)b.p.

Source: Fraternity Federal, preliminary prospectus.

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Asset Quality

     Table 7 summarizes the Association’s total non-performing assets (“NPAs”) as of December 31, 2008 and 2009 and June 30, 2010. Historically, Fraternity Federal has exhibited an excellent record of asset quality until experiencing an upturn in non-performing loans over the past 12 months. The Association’s ratio of non-performing assets to total assets increased from 0.11% at December 31, 2008 to 1.94% at June 30, 2010. The Association’s ratio of non-performing loans (“NPLs”) to total loans increased from 0.14% at December 31, 2008 to 2.72% at June 30, 2010. Previously, the Association maintained very low levels of non-performing assets due in part to conservative underwriting criteria, its high concentration of residential mortgages, and limited portfolio diversification. In recent years, the increased portfolio diversification – particularly in residential construction lending – contributed to increases in non-performing assets. As of June 30, 2010, the Association’s non-performing assets totaled $3.3 million and comprised $1.8 million in residential construction loans, $960,000 in residential mortgage loans, and $495,000 of land loans.

     In order to reflect the increased risk inherent in the loan portfolio, the Association increased its provision for loan losses from $5,000 in 2008 and $51,000 in 2009 to $865,000 for the six months ended June 30, 2010, reflecting the increased levels of non-accrual loans and loan charge-offs. Total charge-offs increased from zero in 2008 and $46,000 in 2009 to $338,000 for the six months ended June 30, 2010, including $207,000 of home equity lines of credit and $113,000 of residential construction loans in the year-to-date 2010 period. As a result, the allowance for loan losses increased by $532,000 from $272,000 or 0.20% of total loans at December 31, 2008 to approximately $805,000 or 0.67% of total loans at June 30, 2010.

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Table 7
Non-performing Assets and Loan Loss Allowance Summary
As of or For the Years Ended December 31, 2008 and 2009 and
As of or For the Six Months Ended June 30, 2010
(Dollars in Thousands)

		As of or For the
		Six Mos.				Year Ended
		June 30,				December 31,
		2010				2009				2008
Non-performing Assets
Non-accruing loans:
One- to four-family		$	960			$	341			$	—
Lines of credit			—				59				—
Residential construction			1,804				633				—
Land			495				—				—
Consumer			—				—				187
Total non-accruing loans			3,259				1,033				187
Accruing loans 90 days past due:
One- to four-family			—				706				—
Total non-performing loans			3,259				1,739				187
Foreclosed assets			—				—				—
Total non-performing assets		$	3,259			$	1,739			$	187
Total non-performing loans to total loans			2.72	%			1.44	%			0.14	%
Total non-performing assets to total assets			1.94	%			1.04	%			0.11	%
Allowance for Loan Losses
Beginning balance		$	277			$	272			$	267
Charge-offs:
One- to four-family			207				42				—
Residential construction			113				—				—
Land			11				—				—
Consumer			7				4				—
Total charge-offs			338				46				—
Recoveries			1				—				—
Net (charge-offs) recoveries			(337	)			(46	)			—
Provision for loan losses			865				51				5
Ending balance		$	805			$	277			$	272
Net charge-offs to average loans			0.28	%			0.04	%			0.00	%
Allowance for loan losses to total loans			0.67	%			0.23	%			0.20	%

Source: Fraternity Federal, preliminary prospectus.

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Subsidiary Activity

     Fraternity Federal has one active subsidiary, 764 Washington Boulevard, LLC (the “LLC”). The LLC was established in order to hold and manage real estate owned. The LLC had no assets at June 30, 2010. In addition, the Association has an inactive subsidiary, Fraternity Insurance Agency Incorporated, which had been licensed to sell insurance products on an agency basis.

     As a federally chartered thrift institution, Fraternity Federal is permitted by OTS regulations to invest up to 2% of its assets in the stock of, or loans to, service corporation subsidiaries. The Association may invest an additional 1% of its assets in service corporations if the additional funds are used for inner-city or community development purposes, and up to 50% of its total capital in conforming loans to service corporations in which it owns more than 10% of the capital stock. In addition to investments in service corporations, Fraternity Federal may invest an unlimited amount in operating subsidiaries engaged solely in activities in which the Association may engage as a federally chartered thrift institution.

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Office Facilities

     Fraternity Federal currently conducts business from its main office in the city of Baltimore, Maryland. The Association owns its main office and headquarters building, which is located at 764 Washington Boulevard, Baltimore, Maryland 21230. The net book value of the Association’s premises and equipment at 764 Washington Boulevard was $279,000 at June 30, 2010. The Association’s three other branch offices are leased facilities and were opened in 1964 (Ellicott City), 1995 (Cockeysville), and 2009 (Hampstead). Exhibit II-8 provides certain information relating to the Association’s office network as of June 30, 2010.

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Market Area

Overview of Market Area

     Fraternity Federal is headquartered in Baltimore, Maryland and considers its lending market area to consist of the Baltimore metropolitan statistical area (“MSA”), which comprises Baltimore City and Baltimore, Carroll, Howard, Harford, Anne Arundel, and Queen Anne’s counties. The Association’s branch offices are located in Baltimore City, Cockeysville (Baltimore County), Ellicott City (Howard County), and Hampstead (Carroll County), Maryland.

     The economy of the Baltimore MSA constitutes a diverse cross section of employment sectors, with a mix of services, manufacturing, wholesale/retail trade, federal and local government, health care facilities and finance related employment. The largest employers in the Baltimore MSA include the University System of Maryland, John Hopkins University, John Hopkins Hospital and Health System, U.S. Social Security Administration, Fort Meade, and Aberdeen Proving Ground. The area’s diversification helped to mitigate the impact of the economic recession experienced over the last two years. The unemployment rates for Maryland and the Baltimore MSA were 7.6% and 8.2%, respectively, in August 2010, below the national unemployment rate of 9.6%.

     The estimated population of the Baltimore MSA in 2010 was 2.7 million, reflecting an increase of 5.8% over the past decade. The Baltimore City population has declined 2.7% since 2000, while the population in Baltimore and Howard counties increased 4.3% and 14.6%, respectively. Estimated median household income in 2010 was $63,553 for the Baltimore MSA, above the national median of $54,442. The median value of owner occupied housing units was approximately $469,600 in the Baltimore MSA versus the national median of $192,400.

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     The Baltimore MSA consists of the following counties: Baltimore City, Baltimore County, Anne Arundel County, Carroll County, Harford County, Howard County, and Queen Anne’s County. The Baltimore MSA is the 20th most populous metropolitan area in the United States, and together with Washington, DC and Northern Virginia, constitutes the fourth largest combined statistical area in the United States. Located adjacent to major transportation corridors and the Washington, DC MSA, the Baltimore MSA provides a diversified economic base, with employment sectors that include a mix of services, manufacturing, wholesale/retail trade, federal and local government, health care facilities, finance, and defense contractors. In addition, the Association’s market area demonstrates relatively strong population growth trends (except for Baltimore City) resulting from the shift to suburban markets for job opportunities and exhibits above average wealth in terms of income levels. The Baltimore MSA is home to six Fortune 1000 companies, Constellation Energy (utilities), W.R. Grace (chemicals), Black & Decker (industrial and farm equipment), Legg Mason (investments), T. Rowe Price (investments), and McCormick & Company (consumer foods).

     Table 8 presents comparative demographic data for the United States, the state of Maryland, the Baltimore MSA, Baltimore City, Baltimore County, and Howard County. The state of Maryland had an estimated population in 2010 of 5.7 million. Approximately 47% of the state’s residents, or 2.7 million, resided in the Baltimore MSA. Baltimore City and Baltimore County had estimated populations in 2010 of approximately 634,000 and 791,000, respectively. Baltimore City has experienced a net population decline in recent years, while population growth rates in the outlying counties (Carroll, Harford, Howard, and Queen Anne’s) are projected to surpass the national and state growth rates over the net five years.

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     Compared to national demographic trends, the Baltimore MSA reflects a slightly older and wealthier cross-section of residents. The median household net worth for 2010 is estimated at $121,744 in the Baltimore MSA, as compared to the United States median of $93,084. The average household income is estimated at $78,476 in the Baltimore MSA, as compared to the average United States household income of $70,173. The median age of residents in the Baltimore MSA was 38.6, as compared to the United States median age of 37.0. The number of owner occupied housing units is expected to increase by 1.6% in the Baltimore MSA over the next five years, as compared to 2.2% statewide and 4.2% nationally.

     In recent year, the unemployment rates for Maryland, the Baltimore MSA, and Baltimore County have compared favorably to the national unemployment rate. However, the unemployment rate in Baltimore City has exceeded national and state averages. For August 2010, Maryland and the Baltimore MSA exhibited unemployment rates of 7.6% and 8.2%, respectively, compared to the national unemployment rate of 9.6%. The unemployment rate for Baltimore City was positioned higher at 11.7% for August 2010, but lower in Howard County at 5.6%.

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Table 8
Selected Demographic Data

		United				State of				Baltimore				Baltimore				Baltimore				Howard
		States				Maryland				MSA				City				County				County
Total Population
2010 - Current			311,212,863				5,730,892				2,699,667				633,635				791,426				283,917
2015 - Projected			323,209,391				5,841,374				2,735,043				629,820				795,029				296,964
% Change 2000-10			10.59	%			8.20	%			5.75	%			-2.69	%			4.29	%			14.56	%
% Change 2010-15			3.85	%			1.93	%			1.31	%			-0.60	%			0.46	%			4.60	%
Age Distribution, 2010
0 - 14 Age Group			20.08	%			19.67	%			19.40	%			18.93	%			17.58	%			21.95	%
15 - 34 Age Group			27.22	%			25.90	%			25.86	%			29.48	%			26.05	%			23.83	%
35 - 54 Age Group			28.03	%			29.65	%			29.41	%			26.53	%			28.35	%			32.87	%
55- 69 Age Group			15.54	%			16.00	%			16.10	%			15.35	%			16.67	%			15.16	%
70+ Age Group			9.12	%			8.77	%			9.22	%			9.71	%			11.34	%			6.19	%
Median Age (years)			37.0				38.3				38.6				36.3				40.2				37.9
Total Households
2010 - Current			116,761,140				2,138,493				1,025,317				242,595				314,631				102,991
2015 - Projected			121,359,607				2,181,390				1,039,154				240,274				316,159				107,752
% Change 2000-10			10.69	%			7.96	%			5.26	%			-5.97	%			4.92	%			14.38	%
% Change 2010-15			3.94	%			2.01	%			1.35	%			-0.96	%			0.49	%			4.62	%
Median Household Income
2010 - Current		$	54,442			$	66,983			$	63,553			$	36,650			$	63,355			$	100,769
2015 - Projected		$	61,189			$	76,186			$	71,630			$	42,003			$	70,238			$	118,087
% Change 2000-10			29.12	%			26.37	%			27.26	%			21.85	%			24.95	%			35.84	%
% Change 2010-15			12.39	%			13.74	%			12.71	%			14.61	%			10.86	%			17.19	%
Average Household Income
2010 - Current		$	70,173			$	83,182			$	78,476			$	48,101			$	76,039			$	120,182
2015 - Projected		$	79,340			$	94,879			$	89,891			$	55,023			$	86,487			$	138,650
% Change 2000-10			23.88	%			23.32	%			24.48	%			14.28	%			16.88	%			36.29	%
% Change 2010-15			13.06	%			14.06	%			14.55	%			14.39	%			13.74	%			15.37	%
Per Capita Income
2010 - Current		$	26,739			$	31,494			$	30,290			$	19,216			$	30,669			$	43,834
2015 - Projected		$	30,241			$	35,938			$	34,698			$	21,906			$	34,892			$	50,567
% Change 2000-10			23.87	%			22.96	%			24.15	%			13.18	%			17.20	%			35.28	%
% Change 2010-15			13.10	%			14.11	%			14.55	%			14.00	%			13.77	%			15.36	%

FELDMAN FINANCIAL ADVISORS, INC.

Table 8 (continued)
Selected Demographic Data

		United				State of				Baltimore				Baltimore				Baltimore				Howard
		States				Maryland				MSA				City				County				County
Household Net Worth
Median		$	93,084			$	135,762			$	121,744			$	17,984			$	120,262			$	304,660
Average		$	418,865			$	508,396			$	469,568			$	189,144			$	434,778			$	879,920
Current Household Net Worth
$0 - $35,000			34.96	%			29.55	%			31.10	%			57.55	%			29.26	%			17.46	%
$35,000 - $100,000			16.38	%			14.86	%			15.31	%			15.54	%			16.85	%			10.66	%
$100,000 -$250,000			19.13	%			19.38	%			19.84	%			14.11	%			21.59	%			16.32	%
$250,000 -$500,000			12.97	%			14.88	%			14.63	%			6.47	%			14.96	%			17.15	%
$500,000 +			16.56	%			21.34	%			19.32	%			6.32	%			17.33	%			38.40	%
Total Number of Owner Occupied Housing Units
2010 - Current			76,868,769				1,439,313				683,862				119,357				209,202				75,112
2015 - Projected			80,072,859				1,471,361				694,453				118,064				209,985				78,671
% Change 2000-10			10.10	%			7.27	%			4.92	%			-8.09	%			3.27	%			12.99	%
% Change 2010-15			4.17	%			2.23	%			1.55	%			-1.08	%			0.37	%			4.74	%
Value of Owner Occupied Housing Units
2008 - Median		$	192,400			$	340,900			$	469,568			$	154,600			$	271,500			$	303,600
Current Value of Owner Occupied Housing Units
$0 - $100,000			27.39	%			5.35	%			8.01	%			32.48	%			2.64	%			3.03	%
$100,000 -$200,000			34.48	%			19.91	%			29.59	%			50.91	%			37.66	%			10.21	%
$200,000 -$300,000			17.08	%			27.35	%			25.60	%			7.71	%			28.77	%			21.66	%
$300,000 -$500,000			12.49	%			29.02	%			22.66	%			4.88	%			18.07	%			37.64	%
$500,000 +			8.56	%			18.37	%			14.14	%			4.02	%			12.86	%			27.45	%
Unemployment Rates
August 2010			9.6	%			7.6	%			8.2	%			11.7	%			8.2	%			5.6	%
August 2009			9.5	%			7.1	%			7.7	%			11.1	%			7.6	%			5.4	%

Source: SNL Financial, ESRI, and U.S. Census Bureau.

FELDMAN FINANCIAL ADVISORS, INC.

Market Share Analysis

     Table 9 displays branch deposit data for the top 30 financial institutions in the Baltimore MSA as of June 30, 2010 (with deposit data adjusted for completed and pending mergers). Reflecting its small size, the Association ranked 45^th in the Baltimore MSA out of 77 financial institutions with total deposits of $127.6 million as of June 30, 2010 and a market share of 0.08%. Previously, the Association ranked 46^th in the Baltimore MSA with total deposits of $128.0 million as of June 30, 2009. The top five financial institutions (Bank of America, M&T Bank, PNC Bank, Wells Fargo Bank, and BB&T) held $39.9 billion or 68.7% of the deposit market in the Baltimore MSA. The deposit market in the area has been altered by the acquisition of its previously ranked fourth (Wachovia Bank) and fifth (Provident Bank) institutions. Wells Fargo acquired Wachovia in December 2008 and M&T Bank acquired Provident in May 2009. M&T Bank added to its local market share through the acquisition in August 2009 of the failed Bradford Bank.

     Table 10 provides residential mortgage market share data for the top 30 lenders in the Baltimore MSA as ranked by loans funded in calendar 2009. Out-of-market lenders such as Wells Fargo, Bank of America, MetLife Bank, SunTrust Bank, and BB&T ranked among the leading residential lenders in the local market area. Fraternity Federal ranked 95^th with a market share of 0.11% based on total residential mortgage loans funded of $27.7 million in 2009. Previously, the Association ranked 115^th with a market share of 0.10% based on total residential mortgage loans funded of $18.4 million in 2008. Total residential mortgage originations in the Baltimore MSA increased 37.8% from $18.6 billion in 2008 to $25.6 billion in 2009. The average residential mortgage loan funded in the Baltimore MSA was approximately $252,000 in 2009 versus $233,000 in 2008.

FELDMAN FINANCIAL ADVISORS, INC.

Table 9
Deposit Market Share in the Baltimore MSA
Data as of June 30, 2010
(Adjusted for Pending and Completed Mergers)

												Total				Total
								No. of				Market				Funded
								Funded				Share				Loans
Rank				Company		Type		Loans				(%)				($000)
	1			Wells Fargo & Co. (CA)		Bank			15,149				15.11				3,866,927
	2			Bank of America Corp. (NC)		Bank			9,376				9.06				2,319,413
	3			MetLife Bank NA (NJ)		Bank			5,460				5.65				1,446,500
	4			SunTrust Banks Inc. (GA)		Bank			4,255				4.83				1,235,661
	5			BB&T Corp. (NC)		Bank			3,156				2.98				762,499
	6			First Mariner Bancorp (MD)		Bank			2,890				2.78				712,195
	7			First Home Mortgage Corp. (MD)		Mortgage Bank			2,705				2.73				698,334
	8			PNC Financial Services Group (PA)		Bank			2,702				2.64				675,551
	9			JPMorgan Chase & Co. (NY)		Bank			2,380				2.27				580,429
	10			Tower Federal Credit Union (MD)		Credit Union			2,325				2.11				540,413
	11			New York Community Bancorp (NY)		Thrift			1,872				1.91				487,596
	12			Quicken Loans Inc. (MI)		Mortgage Bank			1,788				1.74				445,906
	13			Provident Funding Associates (CA)		Mortgage Bank			1,391				1.45				370,596
	14			PHH Corp. (NJ)		Specialty Lender			1,230				1.30				331,829
	15			Flagstar Bank FSB (MI)		Thrift			1,321				1.27				323,879
	16			M&T Bank Corporation (NY)		Bank			1,451				1.27				323,757
	17			Liberty Mortgage Corp. (NC)		Mortgage Bank			1,072				1.24				317,667
	18			Prosperity Mortgage Co. (VA)		Mortgage Bank			1,258				1.23				316,012
	19			Carrollton Bancorp (MD)		Bank			1,421				1.23				315,038
	20			Navy Federal Credit Union (VA)		Credit Union			1,073				1.12				287,027
	21			USAA Insurance Group (TX)		NA			1,094				1.07				274,105
	22			NVR Inc. (VA)		Homebuilder			870				1.03				264,152
	23			Taylor Bean & Whitaker Mortgage (FL)		Mortgage Bank			1,039				1.03				263,073
	24			Citigroup Inc. (NY)		Bank			1,166				1.01				258,116
	25			Sierra Pacific Mortgage Inc. (CA)		Mortgage Bank			993				0.98				250,136
	26			Cleveland Corp. (MD)		Thrift HC			866				0.95				242,833
	27			Primary Residential Mrtg Inc (UT)		Mortgage Bank			970				0.94				240,844
	28			Equitable Trust Mortgage Corp. (MD)		Mortgage Bank			898				0.83				211,979
	29			State Employees CU of MD Inc (MD)		Credit Union			1,166				0.78				199,100
	30			Capital One Financial Corp. (VA)		Bank			967				0.73				185,736
	95			Fraternity Federal S&LA (MD)		Thrift			94				0.11				27,739
				Total					101,668				100.00				25,592,465

Source: SNL Financial.

FELDMAN FINANCIAL ADVISORS, INC.

Table 10
Residential Mortgage Lending Market Share in the Baltimore MSA
Data for 2009
(Adjusted for Pending and Completed Mergers)

												Total				Total
								No. of				Market				Funded
								Funded				Share				Loans
Rank				Company		Type		Loans				(%)				($000)
	1			Wells Fargo & Co. (CA)		Bank			15,149				15.11				3,866,927
	2			Bank of America Corp. (NC)		Bank			9,376				9.06				2,319,413
	3			MetLife Bank NA (NJ)		Bank			5,460				5.65				1,446,500
	4			SunTrust Banks Inc. (GA)		Bank			4,255				4.83				1,235,661
	5			BB&T Corp. (NC)		Bank			3,156				2.98				762,499
	6			First Mariner Bancorp (MD)		Bank			2,890				2.78				712,195
	7			First Home Mortgage Corp. (MD)		Mortgage Bank			2,705				2.73				698,334
	8			PNC Financial Services Group (PA)		Bank			2,702				2.64				675,551
	9			JPMorgan Chase & Co. (NY)		Bank			2,380				2.27				580,429
	10			Tower Federal Credit Union (MD)		Credit Union			2,325				2.11				540,413
	11			New York Community Bancorp (NY)		Thrift			1,872				1.91				487,596
	12			Quicken Loans Inc. (MI)		Mortgage Bank			1,788				1.74				445,906
	13			Provident Funding Associates (CA)		Mortgage Bank			1,391				1.45				370,596
	14			PHH Corp. (NJ)		Specialty Lender			1,230				1.30				331,829
	15			Flagstar Bank FSB (MI)		Thrift			1,321				1.27				323,879
	16			M&T Bank Corporation (NY)		Bank			1,451				1.27				323,757
	17			Liberty Mortgage Corp. (NC)		Mortgage Bank			1,072				1.24				317,667
	18			Prosperity Mortgage Co. (VA)		Mortgage Bank			1,258				1.23				316,012
	19			Carrollton Bancorp (MD)		Bank			1,421				1.23				315,038
	20			Navy Federal Credit Union (VA)		Credit Union			1,073				1.12				287,027
	21			USAA Insurance Group (TX)		NA			1,094				1.07				274,105
	22			NVR Inc. (VA)		Homebuilder			870				1.03				264,152
	23			Taylor Bean & Whitaker Mortgage (FL)		Mortgage Bank			1,039				1.03				263,073
	24			Citigroup Inc. (NY)		Bank			1,166				1.01				258,116
	25			Sierra Pacific Mortgage Inc. (CA)		Mortgage Bank			993				0.98				250,136
	26			Cleveland Corp. (MD)		Thrift HC			866				0.95				242,833
	27			Primary Residential Mrtg Inc (UT)		Mortgage Bank			970				0.94				240,844
	28			Equitable Trust Mortgage Corp. (MD)		Mortgage Bank			898				0.83				211,979
	29			State Employees CU of MD Inc (MD)		Credit Union			1,166				0.78				199,100
	30			Capital One Financial Corp. (VA)		Bank			967				0.73				185,736
	95			Fraternity Federal S&LA (MD)		Thrift			94				0.11				27,739
				Total					101,668				100.00				25,592,465

Source: SNL Financial.

FELDMAN FINANCIAL ADVISORS, INC.

Summary Outlook

     Fraternity Federal reported improved earnings in 2009 that resulted in net income of $343,000, as compared to $8,000 in 2008. The Association’s ROA advanced from 0.00% in 2008 to 0.20% in 2009. However, the earnings progress was halted in 2010 due to increases in non-performing loans that contributed to a net loss of $411,000 for the first half of 2010 as the provision for loan losses was increased substantially to $865,000.

     The Association’s earnings fundamentals reflect a relatively low net interest margin, coupled with a low level of operating expenses. Excluding gains on sale of loans and investments, the Association generates a modest level of non-interest operating income that is dependent primarily on BOLI income. The Association’s operating expenses have increased noticeably due to the addition of a branch office in September 2009, but remain below industry norms as a percent of average assets.

     The Association’s earnings trends will continue to be dependent on interest rate movements and asset quality. The Association’s net interest margin is very sensitive to interest rate risk exposure because of the sizeable concentration of fixed-rate and intermediate to longer term loans in portfolio. While asset quality has historically been satisfactory, non-performing loans have exhibited signs of increasing in residential construction, residential, and land loan categories. The diversification of the Association’s lending activity will have to be monitored diligently to assure that credit losses do not continue to impair earnings in future periods. Also, as the Association considers the addition of staff for lending expertise and the possible opening of another branch, operating expenses will become an important challenge to manage in sustaining steady profitability at the Association.

FELDMAN FINANCIAL ADVISORS, INC.

II. COMPARISONS WITH PUBLICLY TRADED THRIFTS

General Overview

     The comparative market approach provides a sound basis for determining estimates of going-concern valuations where a regular and active market exists for the stocks of peer institutions. The comparative market approach was utilized in determining the estimated pro forma market value of the Association because: (i) reliable market and financial data are readily available for comparable institutions; (ii) the comparative market method is required by the applicable regulatory guidelines; and (iii) other alternative valuation methods (such as income capitalization, liquidation analysis, or discounted cash flow) are unlikely to produce a valuation relevant to the future trading patterns of the related equity interest. The generally employed valuation method in initial public offerings, where possible, is the comparative market approach, which also can be relied upon to determine pro forma market value in a thrift stock conversion.

     The comparative market approach derives valuation benchmarks from the trading patterns of selected peer institutions which, due to certain factors such as financial performance and operating strategies, enable the appraiser to estimate the potential value of the subject institution in a stock conversion offering. The pricing and trading history of recent initial public offerings of thrifts are also examined to provide evidence of the “new issue discount” that must be considered. In Chapter II, our valuation analysis focuses on the selection and comparison of the Association with a comparable group of publicly traded thrift institutions (the “Comparative Group”). Chapter III will detail any additional discounts or premiums that we believe are appropriate to the Association’s pro forma market value.

FELDMAN FINANCIAL ADVISORS, INC.

Selection Criteria

     Selected market price and financial performance data for all public thrifts listed on major stock exchanges are shown in Exhibit III. The list excludes companies that are subject to being acquired under a pending transaction and companies that have a majority ownership interest controlled by a mutual holding company (“MHC”). Several criteria, discussed below, were used to select the individual members of the Comparative Group from the overall universe of publicly traded thrifts.

•

Operating characteristics – An institution’s operating characteristics are the most important factors because they affect investors’ expected rates of return on a company’s stock under various business/economic scenarios, and they influence the market’s general perception of the quality and attractiveness of a given company. Operating characteristics, which may vary in importance during the business cycle, include financial variables such as profitability, balance sheet growth, capitalization, asset quality, and other factors such as lines of business and management strategies.

•

Degree of marketability and liquidity – Marketability of a stock reflects the relative ease and promptness with which a security may be sold when desired, at a representative current price, without material concession in price merely because of the necessity of sale. Marketability also connotes the existence of buying interest as well as selling interest and is usually indicated by trading volumes and the spread between the bid and asked price for a security. Liquidity of the stock issue refers to the organized market exchange process whereby the security can be converted into cash. We attempted to limit our selection to companies that have access to a regular trading market or price quotations, and therefore only considered companies listed on major stock exchanges. We eliminated from the Comparative Group companies with market prices that were materially influenced by announced acquisitions or other unusual circumstances. However, the expectation of continued industry consolidation is currently embedded in thrift equity valuations.

•

Geographic Location – The region of the country where a company operates is also of importance in selecting the comparative group. The operating environment for thrift institutions varies from region to region with respect to business and economic environments, real estate market conditions, speculative takeover activity, and investment climates. Economic and investor climates can also vary greatly within a region, particularly due to takeover activity.