FAIR VALUES OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2011

FAIR VALUES OF FINANCIAL INSTRUMENTS [Abstract]

FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS

FASB ASC 820 – Fair Value Measurements, defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

· Level 1 – Quoted prices in active markets for identical assets or liabilities.

· Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Recurring Fair Value Measurements

The following table presents, for each of the levels within the fair value hierarchy, the Company's assets and liabilities that are measured at fair value on a recurring basis:

(Dollars in thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
As of June 30, 2011:
Assets:
Investment securities, available for sale	$	1,965	$	304	$	-	$	2,269
Liabilities:
Common stock warrant liability	$	-	$	-	$	5,027	$	5,027
As of December 31, 2010:
Assets:
Investment securities, available for sale	$	1,880	$	304	$	-	$	2,184
Liabilities:
Common stock warrant liability	$	-	$	-	$	5,700	$	5,700

The following table presents the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

(Dollars in thousands)	Beginning Balance		Amounts Realized in Earnings			Transfers In/Out of Level 3		Purchases		Issuances		Settlements		Ending Balance
Three months ended June 30, 2011:
Common stock warrant liability	$	4,899	$	128		$	-	$	-	$	-	$	-	$	5,027
Three months ended June 30, 2010:
Common stock warrant liability	$	-	$	(179	)	$	-	$	-	$	5,105	$	-	$	4,926
Six months ended June 30, 2011:
Common stock warrant liability	$	5,700	$	(673	)	$	-	$	-	$	-	$	-	$	5,027
Six months ended June 30, 2010:
Common stock warrant liability	$	-	$	(179	)	$	-	$	-	$	5,105	$	-	$	4,926

Nonrecurring Fair Value Measurements

From time to time, the Company is required to measure certain assets and liabilities at estimated fair value.  These fair value measurements typically result from the application of specific accounting guidance under GAAP and are considered nonrecurring fair value measurements under FASB ASC 820-10.  The following table presents financial and non-financial assets and liabilities measured using nonrecurring fair value measurements:

(Dollars in thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
As of June 30, 2011:
Assets:
Real estate owned, net (1)	$	-	$	-	$	1,614	$	1,614
Loans held for sale, net		-		-		37,750		37,750
Commercial real estate investments		-		-		707		707
Total	$	-	$	-	$	40,071	$	40,071
As of December 31, 2010:
Assets:
Real estate owned, net (1)	$	-	$	-	$	2,571	$	2,571
Loans held for sale, net		-		-		38,938		38,938
Total	$	-	$	-	$	41,509	$	41,509

(1) Amounts represent the Company's real estate owned (“REO”) that resulted in gains (losses) recorded on a non-recurring basis during the period.

The following table summarizes the total gains (losses) on assets and liabilities measured using estimated fair values on a nonrecurring basis for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Real estate owned, net	$	(26	)	$	(826	)	$	(275	)	$	(841	)
Loans held for sale, net		82			1,734			645			4,228
Commercial real estate investments		(445	)		-			(445	)		-
Discontinued lease liability		-			(17	)		-			(32	)
Total	$	(389	)	$	891		$	(75	)	$	3,355

FASB ASC Topic 825 – Financial Instruments requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. The following table presents the carrying values and fair value estimates of financial instruments as of:

	June 30, 2011				December 31, 2010
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
ASSETS
Continuing Operations:
Cash and cash equivalents	$	61,856	$	61,856	$	70,424	$	70,424
Investment securities, available for sale		2,269		2,269		2,184		2,184
Loans receivable, net		6,150		6,150		1,967		1,967
Discontinued Operations:
Cash and cash equivalents		117		117		568		568
FHLB stock		2,051		2,051		2,051		2,051
Loans held for sale, net		37,750		37,750		38,938		38,938
Commercial real estate investments		1,176		1,176		5,484		5,484
Note receivable		1,750		1,750		1,639		1,639
LIABILITIES
Continuing Operations:
Lines of credit	$	335	$	335	$	-	$	-
Notes payable		39,000		35,100		39,000		35,685
Common stock warrant liability		5,027		5,027		5,700		5,700

The Company used the following methods and assumptions to estimate the fair value of each class of financial instrument at June 30, 2011 and December 31, 2010:

Cash and cash equivalents

Cash and cash equivalents are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and market interest rates.

Investment securities, available for sale

Fair values for investment securities, available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments with similar credit, maturity, and interest rate characteristics.

Loans receivable, net

Loans receivable, net, consists of commercial real estate loans, commercial lines of credit and purchased credit-impaired commercial term loans.  The fair value of commercial real estate loans and commercial lines of credit considers estimated credit losses and variable interest rates, which approximate market interest rates.  The fair value of purchased credit-impaired commercial term loans is based on a discounted cash flow analysis utilizing assumptions, including interest rates that approximate market rates and the amount and timing of expected cash flows and other recoveries.

FHLB stock

Federal Home Loan Bank (“FHLB”) stock is recorded at cost. Fremont's former primary operating subsidiary, Fremont Investment & Loan ("FIL"), was previously a member of the FHLB of San Francisco. Ownership of these securities is restricted to member banks and purchases and sales of these securities are at par value with the issuer. The fair value of investments in FHLB stock is equal to the carrying amount.

Loans held for sale, net

The fair value of loans held for sale, net is based on several factors, including current bids and market indications for similar assets, recent sales, discounted cash flow analyses, estimated values of underlying collateral and actual loss severity experience in portfolios backed by similar assets.

Commercial real estate investments

The fair value of commercial real estate investments is based on various factors including current bids and market indications of similar assets, recent sales and discounted cash flow analyses.

Note receivable

The note receivable is a short-term note received in connection with the sale of commercial real estate investments.  The fair value of the note receivable considers the short-term nature of the instrument, as well as the estimated credit worthiness of the counterparty.

Lines of credit

Lines of credit are short-term in nature and carrying value is considered to approximate fair value.

Notes payable

The fair value of notes payable is based on quoted market prices.

Common stock warrant liability

The fair value of the common stock warrant liability is based on a lattice option pricing model that utilizes various assumptions, including expected term, volatility, risk-free interest rate, share issuance frequency and exercise price.