Table of Contents



UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                        to


Commission file number 033-19694



FirstCity Financial Corporation(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

76-0243729(I.R.S. Employer
Identification No.)6400 Imperial Drive, Waco, TX(Address of Principal Executive Offices)

76712(Zip Code)


(254) 761-2800(Registrant's Telephone Number, Including Area Code)

Securities
registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, par value $.01

The NASDAQ Global Select Market


Securities
registered pursuant to Section 12(g) of the Act:None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company ý


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2010 was $58,991,383 based on the closing
price of the common stock of $6.66 per share on such date as reported on the NASDAQ Global Select Market.

The
number of shares of the registrant's common stock outstanding at March 25, 2011 was 10,279,464.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates certain information by reference to the earlier filed of (i) an
amendment to this Annual Report on Form 10-K or (ii) the definitive proxy statement for the 2011 Annual Meeting of Stockholders.



---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION
TABLE OF CONTENTS



PagePART IItem 1.

Business

5Item 1A.

Risk Factors

19Item 1B.

Unresolved Staff Comments

19Item 2.

Properties

19Item 3.

Legal Proceedings

19Item 4.

Reserved

21PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities

22Item 6.

Selected Financial Data

23Item 7.

Management's Discussion and Analysis of Financial Condition and Results of
Operations

23Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

55Item 8.

Financial Statements and Supplementary Data

56Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure

137Item 9A.

Controls and Procedures

137Item 9B.

Other Information

137PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

138Item 11.

Executive Compensation

138Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

138Item 13.

Certain Relationships and Related Transactions, and Director
Independence

138Item 14.

Principal Accounting Fees and Services

138PART IVItem 15.

Exhibits and Financial Statement Schedules

139Signatures

145


2

---





Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. All statements, other than statements of historical fact, are
forward-looking statements, including statements regarding our expected financial position, future financial performance, overall trends, liquidity and capital needs, and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. In this context, words such as
"anticipates," "believes," "expects," "estimates," "plans," "intends," "could," "should," "will," "may" and similar words or expressions are intended to identify forward-looking statements and are not
historical facts.

These
forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those
expressed or implied by such forward-looking statements. Risks, uncertainties and assumptions that affect our business, operating results and financial condition include, but are not limited
to:



3

---



Table of Contents



We
are also subject to other risks detailed herein or detailed from time-to-time in our filings with the Securities and Exchange Commission. These listed risks
are not intended to be exhaustive and the order in which the risks appear is not intended as an indication of their relative weight or importance. We operate in continually changing business
environments, and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the impact, if any, of these new risk factors on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.

You
are cautioned that our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions, which change over time. Actual results,
developments and outcomes may differ materially from those expressed in, or implied by, our forward-looking statements. The forward-looking statements speak only as of the date the statement is made,
and we have no obligation to publicly update or revise our forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements
are made.

4

---





Table of Contents

PART I

Item 1.Business.

General

FirstCity Financial Corporation, a Delaware corporation, is a specialty financial services company headquartered in Waco, Texas with
offices throughout the United States and Mexico and a presence in Europe and South America. When we refer to "FirstCity," "the Company," "we," "our" or "us" in this Form 10-K, we
mean FirstCity Financial Corporation and subsidiaries (consolidated). The Company engages in two major business segmentsPortfolio Asset Acquisition and Resolution business segment and
Special Situations Platform business segment.

The
Portfolio Asset Acquisition and Resolution business has been the Company's core business segment since it commenced operations in 1986. In the Portfolio Asset Acquisition and
Resolution business, the Company acquires portfolios of performing and non-performing loans and other assets, generally at a discount to their legal principal balances or appraised values,
and services and resolves these assets in an effort to maximize the present value of the ultimate cash recoveries.

The
Company engages in its Special Situations Platform business through its majority ownership in a special-purpose investment entity that was formed in April 2007. Through its Special
Situations Platform business, the Company provides investment capital to privately-held middle-market companies through flexible capital structuring arrangements to generate an attractive
risk-adjusted return. These capital investments primarily take the form of senior and junior financing arrangements, but also include direct equity investments and common equity warrants.
The Company also engages in other investment activities, including leveraged buyouts and distressed debt transactions, through its Special Situations Platform business.

The
Company became a publicly-held institution in July 1995 through its acquisition by merger of First City Bancorporation of Texas, Inc. ("FCBOT"), a former bank
holding company that had been engaged in a proceeding under Chapter 11 of the U.S. Bankruptcy Code since November 1992. As a result of the merger, the Company's common stock, $.01 par value per
share, became publicly held.

Access to Public Filings and Additional Information

FirstCity maintains an internet website at www.fcfc.com. Information contained on our website is not part of this Annual Report on
Form 10-K. Stockholders of the Company and the public may access our periodic and current reports (including annual, quarterly and current reports on Form 10-K,
Form 10-Q and Form 8-K, respectively, and any amendments to those reports) as filed with or furnished
to the Securities and Exchange Commission ("SEC"). We make this information available through the "Investors" section of our website as soon as reasonably practicable after we electronically file the
information with or furnish it to the SEC. This information may be reviewed, downloaded and printed, free of charge, from our website at any time. The SEC also maintains a website that contains
reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC at www.sec.gov.

FirstCity
also provides public access to our Code of Business Conduct and Ethics, and the charters of the following committees of our Board of Directors: the Audit Committee, the
Compensation Committee, and the Nominating and Corporate Governance Committee. The Code of Business Conduct and Ethics and committee charters may be viewed free of charge through the "Investors" link
of our website at www.fcfc.com.

Stockholders
of the Company and the public may obtain copies of any of these reports and documents free of charge by writing to: FirstCity Financial Corp., Attn: Investor Relations, 6400
Imperial Dr., Waco, Texas 76712.

5

---



Table of Contents

Overall Business Strategy

The Company has strategically aligned its operations into two major business segmentsthe Portfolio Asset Acquisition and
Resolution business and Special Situations Platform business. In the Portfolio Asset Acquisition and Resolution business, the Company acquires portfolios of performing and non-performing
loans and other assets (collectively, "Portfolio Assets" or "Portfolios"), generally at a discount to their legal principal balances or appraised values, and services and resolves
(i.e. liquidates) such Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. FirstCity's entry into its Special Situations Platform business began in
April 2007 with the formation of FirstCity Denver Investment Corp. ("Special Situations" or "FirstCity Denver")a majority-owned special-purpose investment entity which was designed to
provide the Company with another investment platform to leverage the skills and expertise of management and other business partners by seeking out additional investment opportunities involving
corporate restructurings and distressed debt, and negotiating and structuring such investments to manage our risk while providing attractive risk-adjusted returns. In the Special
Situations Platform business, FirstCity provides investment capital to privately-held middle-market companies through flexible capital structuring arrangements and focuses on
restructurings, turnarounds, businesses with robust market positions, and other special situations.

Although
we are operating in a challenging economic environment, both domestically and internationally, our primary objective remains to utilize the skills, experience and expertise of
our management and business partners by identifying, evaluating, pricing, acquiring, servicing and resolving Portfolio Assets to maximize ultimate cash collections; and to identify and invest capital
in middle-market investment opportunities to provide attractive risk-adjusted returns. To enhance our position in the specialty financial services industry, FirstCity's business strategies
include the following:



6

---



Table of Contents



Portfolio Asset Acquisition and Resolution Business Segment

In the Portfolio Asset Acquisition and Resolution ("PAA&R") business, the Company acquires Portfolio Assets, generally at a discount to
their legal principal balances or appraised values ("Face Value"), and services and resolves such Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. The
amounts paid for the Portfolio Assets reflect FirstCity's determination that it is probable the Company will be unable to collect all amounts due according to their underlying contractual terms.

The
Company began operating in the financial services sector in 1986 as an acquirer of distressed assets from the Federal Deposit Insurance Corporation and the Resolution Trust
Corporation. From its original office in Waco, Texas, with a staff of four professionals, the Company's asset acquisition and resolution business expanded to become an active participant in the
financial services sector, an industry fueled by challenges experienced throughout the world. Through the years, the Company also began acquiring assets from healthy financial institutions interested
in eliminating non-performing assets from their portfolios.

FirstCity
acquires Portfolio Assets for its own account or through investment entities formed with one or more co-investors (each such entity, referred to as an "Acquisition
Partnership"). Since inception, FirstCity and the Acquisition Partnerships have acquired over $11.7 billion in Face Value of Portfolio Assets, with FirstCity's equity investment approximating
$947.9 million. Information related to FirstCity's Portfolio Asset investments in 2010 and 2009 is included under the heading "Portfolio Asset
AcquisitionsPortfolio Asset Acquisition and Resolution Business Segment" in Part II, Item 7 of this Annual Report on Form 10-K.



The purchase and resolution of underperforming and non-performing assets is an industry that is driven by several factors
including:



7

---



Table of Contents

Deteriorating
economic conditions in recent years have augmented the trend of financial institutions, government agencies and other sellers to package and sell asset portfolios to
investors (generally at a discount) as a means of disposing of non-performing loans or other surplus or non-strategic assets. Financial institutions are also selling
underperforming and non-performing assets to improve their regulatory capital positions (pursuant to state and federal regulations, commercial banks and insurance companies are generally
required to allocate more regulatory capital to underperforming and non-performing assets). Sales of such assets improve the seller's balance sheet (i.e. asset quality and capital
positions), reduce overhead costs, reduce staffing requirements, and avoid management and personnel distractions associated with the intensive and time-consuming task of resolving loans
and disposing of real estate.

More
recently, however, marketplace and legislative responses to the continued financial turmoil affecting the global banking systems and financial markets have resulted in a rise in the
number of financial institution consolidations and a supply constraint caused by the sellers' reluctance to trade distressed assetswhich reduces the supply of distressed assets for sale
in the marketplace. We believe, however, that as a result of the difficulty in servicing and resolving these underperforming and non-performing assets, and the desire of financial
institutions,
government entities and other entities to shed these assets for reasons described above, the supply of Portfolio Assets available for purchase will gradually increase over the coming years.



FirstCity acquires and manages Portfolio Assets, which are generally purchased at a discount to Face Value by FirstCity or through
Acquisition Partnerships. The Portfolio Assets are generally non-homogeneous assets, including loans of varying qualities that are unsecured or secured by diverse collateral types and real
estate. Some of the secured Portfolio Assets are loans for which resolution is tied primarily to the real estate securing the loan, while others may be collateralized business loans, the resolution of
which may be based either on real estate, business assets or other collateral cash flow.

FirstCity
seeks to resolve Portfolio Assets through (i) a negotiated settlement with the borrower in which the borrower pays all or a discounted amount of the loan,
(ii) conversion of the loan into a performing asset through servicing efforts followed by either a sale of the loan to a third party or retention of the loan by FirstCity or the Acquisition
Partnerships, or (iii) foreclosure and sale of the collateral securing the loan. FirstCity typically resolves its Portfolio Assets within 12 to 60 months of acquisition, with a majority
of such assets liquidated within the first 36 months.

FirstCity
has substantial experience acquiring, managing and resolving a wide variety of asset types and classes. As a result, it does not limit itself as to the types of Portfolio
Assets it will evaluate and purchase. FirstCity's willingness to acquire Portfolio Assets is generally determined by factors including the information that is available regarding the assets in a
Portfolio, the price at which the Portfolio can be acquired and the expected net cash flows from the resolution of such assets. FirstCity and the Acquisition Partnerships have acquired Portfolio
Assets in virtually all states throughout the U.S., and various countries in Europe and Latin America. FirstCity believes that its willingness to acquire non-homogeneous Portfolio Assets
without regard to geographic location provides it with an advantage over certain competitors that limit their activities to either a specific asset type or geographic location.

FirstCity
also seeks to capitalize on emerging opportunities in foreign countries, on a limited and selective basis, in which the market for non-performing loans of the type
generally purchased by FirstCity is less efficient than the market for such assets in the United States. FirstCity has equity interests in European and Latin American servicing companies, and in
conjunction with these servicing entities, the Company pursues opportunities, on a selective basis, with the servicing entities' investors to purchase pools of Portfolio Assets in these regions.

8

---



Table of Contents



FirstCity develops its Portfolio Asset opportunities through a variety of sources. Since the activities or contemplated activities of
expected sellers are generally publicized in industry publications and through other similar sources, FirstCity monitors such publications and similar sources. FirstCity also maintains relationships
with a variety of parties involved as sellers or as brokers or agents for sellers. Many of the brokers and agents concentrate by asset type and have become familiar with FirstCity's acquisition
criteria and periodically approach FirstCity with identified opportunities. In addition, business referrals from other investors in Acquisition Partnerships, repeat business from previous sellers,
focused marketing by FirstCity and the nationwide presence of FirstCity are important sources of business.

FirstCity
identifies investment opportunities in foreign markets in much the same manner as in the United States. In varying degrees of volume and efficiency, the markets in Europe and
Latin America all include sellers of non-performing assets. FirstCity's established presence in Latin America and Europe provides a strong base for the identification, valuation, and
acquisition of assets in those countries, as well as in adjacent markets. FirstCity identifies partners who have contacts within various foreign markets and/or can assist in locating Portfolio Asset
investment opportunities with FirstCity. FirstCity's identification of investment opportunities in foreign markets is more-selective and limited than the pursuit of such investment
opportunities in U.S. markets.



Prior to making an offer to acquire Portfolio Assets, FirstCity performs an evaluation of the underlying assets that comprise the
Portfolio. For non-homogeneous Portfolio Assets, FirstCity evaluates all individual assets determined to be significant to the total of the proposed purchase. If the Portfolio Assets are
homogenous in nature, a sample of the assets comprising the Portfolio may be selected for evaluation. The evaluation of individual assets generally includes analyzing the credit and collateral file or
other due diligence information supplied by the seller. Based upon such seller-provided information, FirstCity undertakes additional evaluations of the asset, that, to the extent permitted by the
seller, may include site visits to, and environmental reviews of, the property securing the loan or the asset proposed to be purchased. FirstCity also analyzes relevant local economic
and market conditions based on information obtained from its prior experience in the market or from other sources, such as local appraisers, real estate principals, realtors and brokers.

The
evaluation includes an analysis of an asset's projected cash flow and sources of repayment, including the availability of third party guarantees. FirstCity values loans (and other
assets included in a portfolio) on the basis of its estimate of the present value of estimated cash flow to be derived in the resolution process. Once the cash flow estimates for a proposed purchase
and the financing and partnership structure, if any, are finalized, FirstCity can complete the determination of its proposed purchase price for the targeted Portfolio Assets. Portfolio Asset
acquisitions are subject to purchase and sale agreements between the seller and the purchasing affiliate of FirstCity.

The
analysis and underwriting procedure in foreign markets follows the same due diligence process and philosophy as that employed by the Company domestically. Additional risks are
evaluated in foreign markets, including economic factors (inflation or deflation), currency strength, short and long-term market stability and political concerns. These risks are evaluated
and priced into the cost of the acquisition.

9

---



Table of Contents



After a Portfolio is acquired, FirstCity assigns the Portfolio Assets to account servicing officers who are independent of the
personnel that performed the due diligence evaluation in connection with the purchase of the Portfolio. Portfolio Assets are serviced either at the Company's headquarters or in one of FirstCity's
other offices. FirstCity may establish servicing operations in locations in close proximity to significant concentrations of Portfolio Assets. Such offices are reviewed for closing after the assets in
the geographic region surrounding the office are substantially resolved. The assigned account servicing officer develops a business plan and budget for each asset based upon an independent review of
the cash flow projections developed during the investment evaluation, physical inspections of assets or collateral underlying the related loans,
evaluation of local market conditions and discussions with the relevant borrower. Budgets are periodically reviewed and revised as necessary. FirstCity employs loan-tracking software and
other operational systems that are generally similar to systems used by commercial banks, but which have been enhanced to track both the collected and the projected cash flows from Portfolio Assets.

The
Company generally does not capitalize and carry on its balance sheet the servicing rights related to its Portfolio Assets because servicing is not contractually separated from the
underlying assets by sale or securitization of the assets with servicing retained (or separate purchase or assumption of the servicing), and FirstCity does not have the risks and rewards of ownership
of the servicing rights. FirstCity services, in all material respects, the Portfolio Assets owned for its own account, the Portfolio Assets owned by the Acquisition Partnerships and, to a very limited
extent, certain Portfolio Assets owned by third parties. In connection with the Acquisition Partnerships in the United States, FirstCity generally earns a servicing fee, which is based on a percentage
of gross cash collections generated (rather than a management fee based on the Face Value of the asset being serviced). The rate of servicing fee charged is generally a function of the average Face
Value of the assets within each pool being serviced (the larger the average Face Value of the assets in a Portfolio, the lower the fee percentage within the prescribed range), the type of assets and
the level of servicing required on each asset. Many of the servicing arrangements with U.S. Acquisition Partnerships also entitle FirstCity to additional compensation in the form of an incentive
servicing fee after certain economic thresholds are met (refer to FirstCity's investment agreement with a co-investor under the heading "Relationships with Other
Investors in Acquisition Partnerships" below). For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. The
Company also has certain consulting contracts with its Mexican investment entities pursuant to which the Company is entitled to additional compensation for servicing once a specified return to the
investors has been achieved. The Acquisition Partnerships in Europe and South America are serviced by various entities in which the Company maintains an equity interest in the servicing entities. In
all cases, service fees are recognized as they are earned in accordance with the servicing agreements.



Portfolio Assets are either acquired for the account of a FirstCity subsidiary or through the Acquisition Partnerships. Portfolio
Assets acquired directly by a FirstCity subsidiary may be funded with equity financing provided by a third party lender, loans made by FirstCity to its subsidiaries, and/or other secured debt that is
recourse only to the FirstCity subsidiary acquiring the Portfolio Assets. Portfolio Assets owned directly by an Acquisition Partnership may be funded with equity contributions, loans made by a
co-investor and/or FirstCity or one of its subsidiaries, financing provided by third parties, and/or other secured debt that is recourse only to the Acquisition Partnership.

10

---



Table of Contents

Each domestic Acquisition Partnership is a separate legal entity, (generally a limited liability company, but may also take the form of a limited partnership,
trust, corporation or other type of legal business structure). FirstCity and an investor typically form a new special-purpose investment entity that owns the Acquisition Partnership. FirstCity
generally has an effective ownership interest ranging from 15-50% in a majority of the domestic Acquisition Partnerships. Värde Investment Partners, L.P. and its
affiliates are the co-investors in a substantial majority of our domestic Acquisition Partnerships currently in existence. In addition, in 2010, a majority of FirstCity's investments in
Portfolio Assets through domestic Acquisition Partnerships was transacted under the terms of an investment agreement with Värde Investment Partners, L.P. (see additional
discussion under the heading "Relationships with Other Investors in Acquisition Partnerships" below).

In
foreign markets, FirstCity evaluates the establishment of the Acquisition Partnership ownership structures and in conjunction with its co-investors, performs significant
due diligence and planning on the tax, licensing, and other ownership issues of the particular country. As in the United States, each foreign Acquisition Partnership is a separate legal entity,
generally formed as the equivalent of a limited liability company or a liquidating trust. For the European and Latin American Acquisition Partnerships, FirstCity generally has an effective ownership
interest in the underlying entities ranging from 10-50%.

When
Acquisition Partnerships are funded with acquisition financing, the debt is usually secured only by the assets of the individual entity, and are non-recourse to the
Company, its co-investors and the other Acquisition Partnerships. FirstCity believes that this legal
structure insulates the Company and the other Acquisition Partnerships from certain potential risks, while permitting FirstCity to share in the economic benefits of each Acquisition Partnership.

A
substantial majority of FirstCity's domestic and international Portfolio Asset investments (and related equity investments) transacted prior to July 2010, for its own account and
through Acquisition Partnerships, were funded by senior-secured acquisition financing that was provided by Bank of Scotland. These senior acquisition loan facilities provided by Bank of Scotland were
combined and refinanced in June 2010 into a single term-loan facility, which provides for repayment to Bank of Scotland over time as cash flows from the underlying assets securing this
term-loan facility are realized. This term-loan facility capped FirstCity's financing arrangements with Bank of Scotland, and as such, Bank of Scotland had no further
obligation to provide financing to fund FirstCity's investments in Portfolio Assets, for its own account or through Acquisition Partnerships, after June 2010. Additional information regarding this
loan facility is included under the heading "Relationship with Bank of Scotland" below.

Subsequent
to June 2010, FirstCity funded (and intends to continue funding) its share of investments in Portfolio Assets, for its own account and through Acquisition Partnerships, with
holdings in unencumbered cash and with cash flows generated by various investments (originated subsequent to June 2010) and servicing platforms that are not pledged to secure Bank of Scotland's
term-loan facility. In addition, FirstCity intends to use portions of cash generated by the assets pledged to Bank of Scotland to fund future investment activity (under terms of the
term-loan facility agreement discussed under the heading "Relationship with Bank of Scotland" below). For Portfolio Assets acquired by
FirstCity for its own account subsequent to June 2010, the Company seeks to leverage its equity investments with non-recourse debt financing provided by third-party lenders. Such financing
arrangements may be obtained at variable interest rates with negotiated spreads to the base rates, and secured by cash flows from the Portfolio Assets. In addition, the financing arrangements may
allow, under certain conditions, distributions to FirstCity before the debt is repaid in full. By subsequently leveraging its equity investments in Portfolio Assets for its own account, FirstCity will
have the ability to use the borrowed monies to fund additional investment opportunities.

11

---



Table of Contents

While
management intends to continue utilizing the aforementioned financing arrangements, cash flow sources and investment agreements to provide FirstCity with the necessary financing
and funding to support its current and future investment activities, FirstCity continues to actively seek additional sources of liquidity and alternative funding sources. Discussions related to
FirstCity's liquidity are included under the heading "Liquidity and Capital Resources" in Part II, Item 7 of this Annual Report on
Form 10-K.



Värde Investment Partners, L.P. ("Värde"), a private investor in distressed securities and assets,
and certain of its affiliates, are investors in a substantial majority of our domestic Acquisition Partnerships (see additional discussion below). In addition, American International
Group, Inc., a publicly-held international insurance organization, and certain of its affiliates, are investors in a substantial majority of our Latin American Acquisition
Partnerships. Although management believes that our relationship with each of these investors is excellent, there can be no assurance that such relationships will continue in the future. The
termination or disruption of our investing relationship with either of these investors could adversely impact the results of our Acquisition Partnerships. The consequences of a disturbance in our
relationships with these investors could be exacerbated due to the significant influence that they respectively exert as majority-owners in a substantial majority of our domestic and Latin American
Acquisition Partnerships. If our current relationship with either investor deteriorates, or if we are unable to find another suitable investor for our domestic or Latin American Acquisition
Partnerships in the event an investing relationship is terminated, our results of operations and financial condition could be materially adversely affected.

FirstCity
and Värde are parties to an investment agreement, effective April 1, 2010, whereby Värde may invest up to $750 million, at its
discretion, alongside FirstCity in distressed loan portfolios and similar investment opportunities, subject to the terms and conditions contained in the agreement. The primary terms of the Investment
Agreement are as follows:



The
cash flows from the assets and equity interests from the Company's investments made in connection with the investment agreement with Värde, which are held by FC
Investment Holdings Corporation ("FC Investment Holdings") (a wholly-owned subsidiary of FirstCity) and its subsidiaries, are not subject to the security interest requirements of Bank of Scotland's
term-loan facility described below.



FirstCity has had a significant relationship with Bank of Scotland plc and its subsidiaries (including BoS(USA), Inc.)
(collectively, "Bank of Scotland") since 1997. Bank of Scotland has provided various loan facilities to FirstCity and its subsidiaries since such time to finance the Company's senior debt and

12

---



Table of Contents

equity
portion of Portfolio Asset purchases, to finance equity investments in new ventures and special situations investments, to provide for the issuance of letters of credit, and for working capital
loans.

In
June 2010, FirstCity refinanced its then-existing acquisition loan facilities with Bank of Scotland and closed on a $268.6 million Reducing Note Facility Agreement
("Reducing Note Facility") that provides for repayment to Bank of Scotland over time as cash flows from the underlying assets securing the term-loan facility are realized. The Company's
outstanding indebtedness and letter of credit obligations under its then-existing loan facilities with Bank of Scotland were refinanced into the Reducing Note Facility. This
term-loan facility capped FirstCity's financing arrangements with Bank of Scotland, and as such, Bank of Scotland had no further obligation to provide financing to fund FirstCity's
investment activities and operations after June 2010.

The
Reducing Note Facility is secured by substantially all of the assets of FirstCity's subsidiaries that were subject to the obligations of the former loan facilities with Bank of
Scotland. FC Investment Holdings and its subsidiaries, which hold investments made in connection with FirstCity's investment agreement with Värde (discussed above), and various other
investments that FirstCity originated subsequent to June 2010, are not subject to the security interest requirements of the Reducing Note Facility. Among other material terms of the Reducing Note
Facility, FirstCity will receive unencumbered cash of 20% of the monthly net cash flows (i.e. cash "leak-through") up to $25.0 million after (a) payment to Bank of
Scotland of interest and fees; and (b) payment of a scheduled overhead allowance to FirstCity Servicing Corporation ("FC Servicing"), a wholly-owned subsidiary of FirstCity, of
$38.9 million over 3 years ($1.5 million per month for the first year, $1.03 million per month for the second year, and $0.7 million per month for the third year).
FirstCity intends to use the cash flows from the cash leak-through to fund future investment opportunities. Refer to Notes 2 and 9 of the Company's 2010 consolidated financial
statements included in Part II, Item 8 of this Annual Report on Form 10-K ("2010 consolidated financial statements") for additional information related to the primary
details and terms underlying the Reducing Note Facility.



Historically, FirstCity has leveraged its expertise in asset resolution and servicing by investing in a wide variety of asset types
across a broad geographic scope. FirstCity continues to follow this investment strategy and seeks expansion opportunities into new asset classes and geographic areas when it believes it can achieve
attractive risk adjusted returns. The following items are significant elements of FirstCity's business strategy in its PAA&R business:



13

---



Table of Contents



Special Situations Platform Business Segment

FirstCity's entry into its Special Situations Platform ("Special Situations" or "FirstCity Denver") business began in 2007 with the
formation of FirstCity Denvera majority-owned special-purpose investment entity which was designed to provide the Company with another investment platform to leverage the skills and
expertise of management and other business partners by seeking out additional investment opportunities involving corporate restructurings and distressed debt, and negotiating and structuring such
investments to manage our risk while providing attractive risk-adjusted returns. Through its Special Situations business, FirstCity provides investment capital to
privately-held middle-market companies through flexible capital structuring arrangements. FirstCity's primary investment objective is to generate both current income and capital
appreciation through debt and equity investments, and to generally structure the investments to be repaid or exited in 12 to 60 months. We invest primarily in U.S. middle-market companies,
where we believe the supply of primary capital is limited and the investment opportunities are most attractive.

Our
investment opportunities in middle-market companies target restructurings, turnarounds, businesses with robust market positions, and other special situations. The nature of our
capital investments primarily takes the form of senior and junior financing arrangements, but also includes direct equity investments and common equity warrants. FirstCity also engages in other
investment activities, including leveraged buyouts and distressed debt transactions, through its Special Situations business. The composition of our investments will change over time given our views
on, among other factors, the economic and credit environments that impact our operations.

Since
inception, FirstCity has been involved in middle-market transactions, through its Special Situations business, with total investment values approximating $84.9 million. In
connection with these investments, FirstCity provided $57.0 million of investment capital to privately-held middle-market companies$43.1 million in the form of
debt investments and $13.9 million as equity investments. Information related to FirstCity's Portfolio Asset investments in 2010 and 2009 is included under the heading
"Portfolio Asset AcquisitionsPortfolio Asset Acquisition and Resolution Business Segment" in Part II, Item 7 of this Annual
Report on Form 10-K.



We believe the environment for investing in middle-market companies is attractive for the following reasons:



14

---



Table of Contents



FirstCity has established an extensive referral network comprised of investment bankers, private equity firms, trade organizations,
commercial bankers, attorneys, businesses and financial brokers. Our origination efforts include calling on and visiting these contacts and other middle-market intermediaries to generate deal flow. In
addition, we maintain an extensive database of middle-market professionals and participants, which enables us to monitor and evaluate the middle-market investing environment. This database is used to
help us assess whether we are penetrating our target markets and to accurately track terms and pricing. We expect that our ability to leverage these relationships and transaction information will
continue to result in the referral of investment opportunities to us.



FirstCity Denver chooses investments based on the investment experience of its professionals and a detailed investment analysis for
each investment opportunity. We selectively narrow prospective investment opportunities through a process designed to identify the most attractive opportunities. We follow a rigorous process based
on:



We
seek to identify companies that exhibit superior fundamental risk-reward profiles and strong defensible business franchises while focusing on the relative value of the
security in the company's capital structure.



If an investment opportunity merits pursuit, FirstCity Denver engages in an intensive due diligence process that involves research into
the target company, its management, its industry, its growth prospects, and its ability to withstand adverse conditions. Though each transaction involves a somewhat different approach, the due
diligence steps that we generally undertake include:



15

---



Table of Contents

After
completion of the due diligence process, the investment team involved in the transaction prepares a written investment analysis. Senior management involved in the transaction
reviews the analysis, and if they are in favor of making the potential investment, the analysis is then presented to the investment committee for consideration. After an investment has been approved
by the investment committee, a more-extensive due diligence process is employed by the transaction team. Additional due diligence with respect to any investment may be conducted on our
behalf by attorneys, independent accountants, and other third-party consultants and research firms prior to the closing of the investment, as appropriate on a case-by-case
basis.



FirstCity Denver's investments in middle-market companies primarily take the form of first- and second-lien loans and
mezzanine debt. We tailor the terms of our debt investments to the facts and circumstances of the transaction and the prospective company, negotiating a structure that aims to protect our rights and
manage our risk while creating incentives for the company to achieve its business plan and improve its profitability.

For
first- and second-lien senior loans, we generally obtain security interests in the company's assets that will serve as collateral in support of repayment of loans. This
collateral may take the form of first- or second-priority liens on the assets of the company.

We
generally structure our mezzanine investments as subordinated loans that provide for relatively high, fixed interest rates that provide us with significant current income. These loans
typically have interest-only payments in the early months, with amortization of principal deferred to the later term of the loans. In addition, our mezzanine investments will generally be
collateralized by a subordinate lien on some or all of the assets of the company.

In
some cases, our debt investments may provide for a portion of the interest payable to be payment-in-kind interest. To the extent interest is
payment-in-kind, it will be payable through the increase of the principal amount of the loan by the amount of interest due on the then-outstanding aggregate
principal amount of the loan.

In
general, our debt investments include financial covenants and terms that require the company to reduce leverage over time, thereby enhancing credit quality. These methods may include,
among other things: (i) maintenance leverage covenants; (ii) maintenance cash flow covenants; and (iii) indebtedness incurrence prohibitions. In addition, limitations on asset
sales and capital expenditures prevent a company from changing the nature of its business or capitalization without our consent.

Our
debt investments may include equity features, such as carried interests and warrants to obtain or buy a minority interest in the company. Carried equity interests and warrants that
we receive in connection with our debt investments may require only a nominal cost to obtain or exercise, and thus, as the middle-market company appreciates in value, we may achieve additional
investment returns from these equity interests.

When
we provide financing, we may obtain equity interests in the company. We generally seek to structure our equity investments as non-control investments to provide us with
minority
rights and event-driven or time-driven economic incentives. On occasion, our equity investments may take the form of direct control-oriented investments in connection with buyout
transactions.



A substantial portion of FirstCity Denver's investment activities prior to July 2010 was funded under a senior-secured loan facility
that was provided by Bank of Scotland. This senior loan facility and other outstanding loan facilities provided to FirstCity by Bank of Scotland were combined and refinanced in June 2010 into a single
term-loan facility, which provides for repayment to Bank of

16

---



Table of Contents

Scotland
over time as cash flows from the underlying assets securing this term-loan facility are realized. This term-loan facility capped FirstCity's financing arrangements
with Bank of Scotland, and as such, ended FirstCity's ability to fund FirstCity Denver's investment activities through Bank of Scotland's loan facility after June 2010. Additional information
regarding this loan facility is included under the heading "Relationship with Bank of Scotland" above.

Subsequent
to June 2010, FirstCity Denver supported (and intends to continue supporting) its investment activities with holdings in unencumbered cash and cash flows generated by its
portfolio companies. In addition, FirstCity intends to use portions of cash generated by the assets pledged to Bank of Scotland to fund future investment activity in its Special Situations business
(under terms of the term-loan facility agreement discussed under the heading "Relationship with Bank of Scotland" above). Furthermore,
FirstCity Denver typically seeks to refinance its loan facilities provided to portfolio companies in which it also holds an equity interest with non-recourse debt financing provided by
third-party lenders. By subsequently seeking-out a third-party lender to take-out its debt investments to these portfolio companies, FirstCity Denver will receive debt
repayment proceeds and possibly equity distributions, and use the monies to fund other investment opportunities.

While
management intends to continue utilizing the aforementioned financing arrangements and cash flow sources to provide FirstCity Denver with the necessary financing and funding to
support its current and future investment activities, FirstCity continues to actively seek additional sources of liquidity and alternative funding sources. Discussions related to FirstCity's liquidity
are included under the heading "Liquidity and Capital Resources" in Part II, Item 7 of this Annual Report on Form 10-K.

Government Regulation

The Company does not have a primarily regulatory or supervisory agency that governs and supervises the operations and activities
conducted by its PAA&R and Special Situations business segments. However, certain aspects of the Company's business are subject to regulation under various domestic federal, state and local statutes
and regulations and various foreign laws and regulations that impose requirements and restrictions affecting, among other things, disclosures to obligors, the terms of secured transactions,
collection, repossession and claims handling procedures, multiple qualification and licensing requirements for conducting business in various jurisdictions, and other trade practices. Furthermore, our
small business lending platform is licensed by and subject to regulation and examination by the U.S. Small Business Administration. Additional laws and regulations, or amendments to existing
laws and regulations, may be enacted that could impose additional restrictions on our investment, lending and servicing activitieswhich in turn could adversely impact our results of
operations.

On
July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act ("Dodd-Frank Act") was enacted. There are significant corporate governance and
executive compensation-related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as corporate governance, "say on pay" and
proxy access. Our efforts to comply with these requirements are likely to result in an increase in expenses and a diversion of management's time from other business activities. We are subject to
changing rules and regulations of federal and state governments as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight
Board, the SEC and the NASDAQ Global Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to
develop additional regulations and requirements in response to laws enacted by Congress.

17

---





Table of Contents

Competition



The Portfolio Asset Acquisition and Resolution business is highly competitive. Some of the Company's principal competitors are
substantially larger and have considerably greater financial resources than the Company. As such, some competitors may have a lower cost of funds and access to funding sources that are not available
to us. In addition, some competitors may be better-suited than the Company to acquire Portfolio Assets, to pursue new business opportunities, or to survive periods of industry consolidation.
Generally, there are three aspects of the distressed asset acquisition and resolution business: due diligence, asset management, and servicing. The Company is a major participant in all three arenas.
In comparison, certain of our competitors have historically competed primarily as portfolio purchasers and have customarily engaged other parties to conduct due diligence on potential purchases and to
service acquired assets, and certain other competitors have historically competed primarily as servicing companies.

The
Company believes that its ability to acquire, service and resolve Portfolio Assets for its own account and through Acquisition Partnerships will be a significant component of the
Company's overall future growth. Portfolio Asset acquisitions are often based on competitive biddingwhich involves the risks of bidding too low (which generates no business) or bidding
too high (which could result in the purchase of a Portfolio at an economically unattractive price).



The Company's primary competition to provide financing to middle-market companies includes public and private funds, commercial and
investment banks, commercial financing companies, insurance companies and, to the extent they provide an alternative form of financing, private equity funds. Many of our existing and potential
competitors are substantially larger and have considerably greater financial and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding
sources that are not available to us. In addition, some competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and
establish more relationships than us. We use industry information available to our investment management team to assess investment risks and determine appropriate pricing for our investments in
middle-market companies. Furthermore, we believe the relationships of our professionals enable us to learn about, and compete effectively for, investment opportunities with attractive middle-market
companies in the industries in which we seek to invest.

Employees

The Company had 264 employees as of December 31, 2010. The Company had 365 employees at December 31, 2009, including 97
employees attributable to a manufacturing company that FirstCity Denver acquired and consolidated in December 2009, but later de-consolidated in 2010 when it ceased having a controlling
interest. FirstCity believes that it has been successful in attracting quality employees and that employee relations are good.

Foreign Operations

We have investments in various Acquisition Partnerships and servicing entities in Europe and Latin America. Revenues outside of the
U.S. are a material part of our business,
as they accounted for more than 16% of our consolidated revenues and equity in earnings of subsidiaries for each of the fiscal years ended December 31, 2010 and 2009. See Note 18 of the
Company's 2010 consolidated financial statements for summarized information relating to the Company's foreign revenues.

18

---



Table of Contents

The
Company has determined that the local currency is the functional currency for its operations outside the United States (primarily Europe and Latin America). We translate the results
for our foreign subsidiaries and affiliates from the designated functional currency to the U.S. dollar using average exchange rates during the relevant period, while we translate assets and
liabilities at the exchange rate in effect at the reporting date. Since our revenues in foreign operations are denominated in non-U.S. currencies, fluctuations in exchange rates relative
to the U.S. dollar could have a material adverse effect on our earnings and assets. In addition, changes in exchange rates associated with U.S. dollar-denominated assets and liabilities result in
foreign currency transaction gains and losses.

Since
we report our results of operations in U.S. dollars, changes in relative foreign currency valuations from our foreign operations may result in reductions in our reported revenues,
operating income and earnings, as well as a reduction in the carrying value of our foreign-related assets. Accordingly, if the values of local currencies in foreign countries in which certain of our
subsidiaries and affiliates conduct business depreciate relative to the U.S. dollar, we would expect our operating results in future periods, and the value of our assets held in local currencies, to
be adversely impacted.

Refer
to Note 18 of the Company's 2010 consolidated financial statements for financial information on our revenues and assets by geographic area.

Item 1A.Risk Factors.

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to
provide information required by this Item.

Item 1B.Unresolved Staff Comments.

None.

Item 2.Properties.

The Company occupies approximately 66,000 square feet of office space, all of which is leased. The following is a list as of
December 31, 2010 of the principal physical properties that are used by our significant business segments.

Location

Purpose

Business SegmentWaco, Texas

Corporate and Servicing Offices

Corporate and Portfolio Asset Acquisition and ResolutionGuadalajara, Mexico

Servicing Offices

Portfolio Asset Acquisition and ResolutionMexico City, Mexico

Servicing Offices

Portfolio Asset Acquisition and ResolutionDallas, Texas

Servicing Offices

Portfolio Asset Acquisition and ResolutionSao Paulo, Brazil

Servicing Offices

Portfolio Asset Acquisition and ResolutionGreenwood Village, Colorado

Servicing Offices

Special Situations Platform


The Company leases its principal executive offices and primary domestic servicing offices under a non-cancellable operating lease,
which expires October 31, 2020. All other office and facility leases of the Company and its consolidated subsidiaries expire in various years through 2013. We believe that these facilities are
suitable and adequate for the business that we currently conduct. However, we periodically review our space requirements and may acquire new space to meet the needs of our business, or consolidate and
dispose of facilities that are no longer required.

Item 3.Legal Proceedings.

FirstCity and certain of its subsidiaries and affiliates (including Acquisition Partnerships) are involved in various claims and legal
proceedings which are incidental to the ordinary course of our business. We initiate lawsuits against borrowers and are occasionally countersued by them in such

19

---



Table of Contents

actions.
From time to time, other types of lawsuits are brought against us. In view of the inherent difficulty of predicting the outcome of pending legal actions and proceedings, the Company cannot
state with certainty the eventual outcome of any such proceedings. Based on current knowledge, management does not believe that liabilities, if any, arising from any ordinary course proceeding will
have a material adverse effect on the consolidated financial condition, operations, results of operations or liquidity of the Company.



On March 20, 2007, Superior Funding, Inc., Wave Tec Pools, Inc. and Nations Pool Supply, Inc.
(collectively, the "Obligors") filed a petition adding FH Partners (formerly FH Partners, L.P.), FC Servicing, and FirstCity Financial Corporation as defendants in a suit filed by the Obligors
against State Bank and Cole Harmonson. FirstCity was subsequently served with notice of non-suit without prejudice in the suit in April 2007. The Obligors' claims related to alleged
breaches by FH Partners and FC Servicing in connection with an agreement related to a loan from State Bank to Obligors that was purchased by FH Partners from State Bank in December 2006. The Obligors
alleged that they entered into a line-of-credit with State Bank, and that due to an error by State Bank, the Obligors borrowed more on the
line-of-credit than was allowed under the borrowing base under that agreement. Obligors alleged that State Bank agreed that the default would be cured if the Obligors pledged
additional property to secure the loans. Obligors alleged that State Bank refused to honor its agreement concerning the pledge of the additional property and cure of the payment default. Obligors
additionally asserted that FH Partners and FC Servicing were aware of State Bank's wrongful conduct and continued that conduct by failing to honor the agreement, and that FH Partners and FC Servicing
were obligated to mitigate their damages. Obligors alleged that they sustained actual damages of $165 million as a result of the joint actions of State Bank, Cole Harmonson, FH Partners and FC
Servicing. In October 2007, FH Partners filed a collection suit against the Obligors to recover the balance of the debt owed under the loans and loan agreement and to foreclose the security interests
securing the loans. In September 2009, the Obligors filed a non-suit without prejudice of FH Partners and FC Servicing in the original suit filed against State Bank and other parties. The
claims of the Obligors in the original suit have been raised as counterclaims in the collection suit initiated by FH Partners. The Obligors proceeded to trial in the original suit as to their claims
against Prosperity Bank, the successor to State Bank, and Harmonson. The suit went to trial in October 2009, and the trial court ruled in favor of the defendants, finding that the Obligors' loan was
in default prior to the sale of the loan to FH Partners. Prosperity Bank settled with the Obligors in exchange for their agreement to not appeal the court's ruling. FH Partners filed a motion for
summary judgment to deny Obligor's claims for reformation and conspiracy in the collection suit, which was granted by the court in August 2010. However, the court denied FH Partners' additional motion
to strike the jury demand filed by the Obligors (as the loan agreement contains an enforceable jury-waiver provision), which prompted FH Partners to file a writ of mandamus to
compel the trial court to grant the motion. In its ruling on the mandamus appeal, the court of appeals ruled that FH Partners, as State Bank's assignee, owns the right to enforce the
jury-waiver provision in the loan agreement. FirstCity does not have sufficient information to estimate any potential liability or probability of liability, but is unaware of any factual
or legal basis for liability. Given the magnitude of the Obligors' wrongdoing and the lack of any evidence of any wrongdoing on the part of FC Servicing or FH Partners, management believes that an
unfavorable outcome in the lawsuit seems remote, and FH Partners intends to pursue collection of the loan.



FirstCity, FCLT Loans Asset Corp. ("FCLT"), First-City National Bank of Houston, and JP Morgan Chase Bank were defendants
in an interpleader suit filed by Prudential Financial, Inc. ("Prudential") in 2005. The suit disputed the ownership of approximately $18.6 million of proceeds

20

---



Table of Contents

from
the sale of Prudential stock and dividends from the demutualization of Prudential in December 2000. The shares of Prudential stock related to group annuity contracts purchased by
First-City National Bank of Houston, as trustee of the First City Bancorporation Employee Retirement Trust, to fund obligations to participants in the First City Bancorporation Employee
Retirement Plan n connection with termination of the Plan and the Trust in 1987. Timothy J. Blair was subsequently added as a third party defendant, as representative of a class of former employee
beneficiaries, with an alleged interest in the demutualization proceeds.

Following
various court rulings and mediation proceedings, FirstCity, FCLT and Mr. Blair, individually and as representative of a class of former employee beneficiaries, entered
into an agreement in 2009 which provided for the settlement of the pending lawsuit and provided for each party to receive one-third of the demutualization proceeds, which totaled
approximately $18.6 million at the time of settlement, net of $0.3 million retained by JP Morgan to pay certain fees and expenses. In December 2009, FirstCity received approximately
$6.1 million as its share of the settlement proceeds. The final settlement is non-appealable, and each party released the other parties from all claims related to the lawsuit.

Item 4.Reserved.

21

---





Table of Contents

PART II

Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company's common stock is traded on the NASDAQ Global Select Market under the symbol FCFC. The number of holders of record of
common stock on March 26, 2011 was approximately 674, as provided by American Stock Transfer and Trust Company, the Company's transfer agent. The following table displays the high and low sales
prices for the Company's common stock for the periods indicated:

2010

2009Market Price

Market PriceQuarter Ended

High

Low

High

LowMarch 31

$
7.35

$
5.23

$
5.92

$
0.88June 30


7.65


5.45


5.25


1.94September 30


8.24


6.15


8.75


4.44December 31


8.69


7.37


9.00


6.36


The
Company has never declared or paid a dividend on the common stock. The Company currently intends to retain future earnings to finance its growth and development and therefore does
not anticipate that it will declare or pay any dividends on the common stock in the foreseeable future. Any future determination as to payment of dividends will be made at the discretion of the Board
of Directors of the Company and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors that the Board of
Directors deems relevant. Certain loan facilities to which the Company and its subsidiaries are parties contain restrictions relating to the payment of dividends and other distributions.

The
following table presents information about our purchases of our common shares during the fiscal quarter ended December 31, 2010:

Month

Total Number
of Shares
Purchased(1)

Average
Price Paid
Per Share

Total Number
of Shares Purchased
as Part of Publicly
Announced Plans
or Programs

Maximum Approximate
Dollar Value
of Shares that May
Yet Be Purchased
Under the Plans
or ProgramsOctober




$





$
November


26,250

$
8.00





December




$






Total


26,250

$
8.00




$



(1)Represents
the acquisition of 26,250 shares of common stock that were already owned and tendered by Company employees to satisfy the prices attributable to
stock option exercises under FirstCity's equity compensation plans.


22

---



Table of Contents




The
following table provides information as of December 31, 2010 with respect to the shares of our common stock that may be issued under the Company's equity compensation plans:

Plan Category

Number of Shares
to be Issued Upon
Exercise of Outstanding
Exercisable Options

Weighted Average
Exercise Price of
Exercisable Options

Number of Shares
Remaining Available
for Future IssuanceEquity compensation plans approved by stockholders


520,150

$
8.32


397,610
(1)Equity compensation plans not approved by stockholders








Total


520,150

$
8.32


397,610


(1)Issuable
shares of our common stock available under the Company's 2004 Stock Option and Award Plan, the 2006 Stock Option and Award Plan, and the 2010 Stock
Option and Award Plan.


Item 6.Selected Financial Data.

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to
provide information required by this Item.

Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the Company' consolidated financial statements and related
footnotes.

Overview

FirstCity is a multi-national specialty financial services company headquartered in Waco, Texas with offices throughout the United
States and Mexico and a presence in Europe and South America. FirstCity, as an opportunistic investor, focuses on distressed asset investment opportunities in both domestic and, to a lesser extent,
international markets, and distressed transaction and special situations investment opportunities in domestic middle-market companies. The Company has strategically aligned its operations into two
major business segmentsPortfolio Asset Acquisition and Resolution and Special Situations Platform.

The
Portfolio Asset Acquisition and Resolution business has been the Company's core business segment since it commenced operations in 1986. In the Portfolio Asset Acquisition and
Resolution business, the Company acquires portfolios of performing and non-performing loans and other assets (collectively, "Portfolio Assets" or "Portfolios"), generally at a discount to
their legal principal balances or appraised values, and services and resolves (i.e. liquidates) such Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries.
FirstCity acquires the Portfolio Assets for its own account or through investment entities formed with co-investors (each such entity, an "Acquisition Partnership").

Through
its Special Situations Platform business, the Company provides investment capital to privately-held middle-market companies through flexible capital structuring
arrangements to generate an attractive risk-adjusted return. These capital investments primarily take the form of senior and junior financing arrangements, but also include direct equity
investments and common equity warrants. The Company also engages in other investment activities, including leveraged buyouts and distressed debt transactions, through its Special Situations Platform
business.

23

---



Table of Contents



The decline in global economic conditions that began in 2008 continued through 2010. Despite the challenging economic environment,
FirstCity recorded net earnings of $12.5 million, or $1.23 per common share on a fully diluted basis, in 2010 (compared to net earnings of $18.7 million, or $1.83 per common share on a
fully diluted basis, in 2009). Components of FirstCity's results of operations for the fiscal years ended 2010 and 2009 are presented in the tables below.

Year Ended December 31, 2010Portfolio Asset
Acquisition
and Resolution

Special Situations
Platform

Corporate
and Other

Total(Dollars in thousands)Revenues

$
66,387

$
19,043

$
134

$
85,564Costs and expenses


(52,750
)

(19,832
)

(7,968
)

(80,550
)Other income


2,902


16,302





19,204Income tax expense


(1,501
)

(660
)

(91
)

(2,252
)Net income attributable to noncontrolling interests


(10,282
)

(3,143
)




(13,425
)Earnings (loss) from continuing operations


4,756


11,710


(7,925
)

8,541Income (loss) from discontinued operations





3,962





3,962Net earnings (loss)

$
4,756

$
15,672

$
(7,925
)
$
12,503




Year Ended December 31, 2009Portfolio Asset
Acquisition
and Resolution

Special Situations
Platform

Corporate
and Other

Total(Dollars in thousands)Revenues

$
71,760

$
7,683

$
345

$
79,788Costs and expenses


(46,004
)

(7,173
)

(8,246
)

(61,423
)Other income


251


1,750


6,119


8,120Income tax (expense) benefit


(2,574
)

(118
)

510


(2,182
)Net income attributable to noncontrolling interests


(5,173
)

(386
)




(5,559
)Net earnings (loss)

$
18,260

$
1,756

$
(1,272
)
$
18,744


As
an opportunistic investor in the distressed asset and special situations markets, FirstCity's mix of revenues and earnings in its business segments will significantly fluctuate from
period-to-period. Refer to the heading "Results of Operations" below for a detailed review of the Company's operations for the
comparative periods presented in the table above.

Portfolio Asset Acquisition and Resolution.The Company's earnings related to its Portfolio Asset Acquisition and Resolution business
segment
decreased to $4.8 million in 2010 from $18.3 million in 2009. The decrease in earnings in 2010 compared to 2009 was primarily due to a $7.9 million decrease in Portfolio Assets
income (due primarily to a shift in the income-recognition methods used by management for certain of the Company's Portfolio Assets to non-accrual income methods (cost-recovery
or cash basis) from the interest-accrual income method over the past 12-18 months), a $2.0 million increase in net impairment provisions recorded to consolidated loan and
real estate assets, a $5.1 million increase in net income attributable to noncontrolling interests, a $2.0 million increase in interest and fees on notes payable, and a
$1.3 million increase in asset-level expenses, off-set partially by $3.1 million of additional business combination gains recognized in 2010 compared to 2009, and a

24

---



Table of Contents

$3.3 million
gain that was recorded in 2010 on the sale of an investment security. Refer to the heading "Results of Operations" below for a
detailed review of the Company's operations in this business segment for the comparative periods presented in the table above.

Special Situations Platform.The Company's earnings related to its Special Situations Platform business segment increased to
$15.7 million in
2010 from $1.8 million in 2009. The increase in earnings in 2010 compared to 2009 was primarily due to a $15.4 million increase in equity in earnings of unconsolidated subsidiaries
(attributed primarily to a significant increase in revenues reported by an equity-method investee that manufactures prefabricated buildings) and a $4.8 million business combination gain that
was recorded in 2010 (reported as discontinued operationssee below), off-set partially by a $2.0 million increase in net impairment provisions recorded to consolidated
loans and a $2.8 million increase in net income attributable to noncontrolling interests.

In
December 2010, the Company disposed of its consolidated coal mine operation (a controlled-oriented investment in our Special Situations Platform business). Accordingly, the results of
operations from our coal mine subsidiary are reported as discontinued operations within our Special Situations Platform business segment for the nine-month period ended December 31,
2010 (we acquired a controlling interest in this subsidiary in April 2010). Refer to the heading "Results of Operations" below for additional discussion
on the discontinued operations and a detailed review of the Company's operations in this business segment for the comparative periods presented in the table above.

Corporate and Other.Costs and expenses not allocable to our Portfolio Asset Acquisition and Resolution and Special Situations Platform
business
segments, consisting primarily of certain corporate salaries and benefits, accounting fees and legal expenses, decreased to $8.0 million in 2010 from $8.2 million in 2009. Also, 2009
included $6.1 million of income related to a lawsuit settlement (none in 2010).



In 2010, FirstCity and its investment partners acquired $225.8 million of domestic Portfolio Asset investments with a face value
of approximately $420.4 millionof which FirstCity's investment acquisition share was $67.7 million. In addition to its Portfolio Asset acquisitions in 2010, FirstCity
invested $56.0 million in non-Portfolio Asset investments, consisting of $20.6 million in the form of SBA loan originations and advances; $17.6 million of equity
investments (U.S. and European Acquisition Partnerships); $13.2 million in the form of equity and debt investments under its Special Situations Platform; and $4.5 million of other
investments. In 2009, FirstCity and its investment partners acquired $200.6 million of domestic Portfolio Asset investment with a face value of approximately
$410.1 millionof which FirstCity's investment acquisition share was $147.7 million. In addition to the Portfolio Asset acquisitions in 2009, FirstCity invested
$46.3 million in non-Portfolio Asset investments, consisting of $21.6 million in the form of SBA loan originations and advances; $11.2 million in the form of equity
investments in European Acquisition Partnerships; $12.4 million in the form of equity and debt investments under its Special Situations Platform; and $1.1 million of other investments.

At
December 31, 2010, the carrying value of FirstCity's earning assets (primarily Portfolio Assets, equity investments, loans receivable, and entity-level earning assets)
approximated $400.5 millioncompared to $366.2 million a year ago. The global distribution of FirstCity's earning assets (at carrying value) at December 31, 2010
included $292.4 million in the United States; $68.6 million in Europe; and $39.5 million in Latin America.

Refer
to the headings "Portfolio Asset AcquisitionsPortfolio Asset Acquisition and Resolution Business Segment" and
"Middle-Market Company Capital
InvestmentsSpecial Situations Platform Business Segment" below for additional information related to our investment activities and composition.

25

---



Table of Contents

Management's Outlook

Our revenues consist primarily of (1) income from our Portfolio Assets, loan investments and Acquisition Partnerships;
(2) servicing fee income and incentive income based on the performance of the portfolio assets that we manage; and (3) income generated by our debt and equity investments (consolidated
and unconsolidated) in privately-held middle-market companies. Our ability to maintain and grow revenues depends on our ability to secure investment opportunities, obtain financing for
transactions, and to consummate investments and deliver attractive risk-adjusted returns. Our ability to execute this strategy depends upon a number of market
conditionsincluding the strength and liquidity of U.S. and global economies and financial markets.

While
we are seeing signs of improvement and stabilization in U.S. and global economic conditions and financial markets, these conditions and markets remain challenging and their
recovery has been imbalanced. Despite substantial losses reported in the financial services sector in recent years, and continued volatility and uncertainty in U.S. and global economies and financial
markets, management remains positive on the outlook of the Company and believes that current market conditions should not hinder FirstCity's ability to expand its business. While disruptions and
uncertainty in the markets may adversely affect our existing positions, we believe such conditions generally present significant new investment opportunities for distressed asset acquisition and
special situations transactions. Currently, however, we believe that challenging market conditions and government-implemented programs and regulations have reduced transaction flow in the marketplace,
and that distressed asset prices have yet to fall to levels commensurate with expectations of market participants. Due to the difficulty and challenges related to servicing and resolving these
underperforming and non-performing assets, we believe that financial institutions and other entities will actively seek to shed these assets over time as economic conditions and financial
markets stabilize and government-imposed restrictions lapse. Sales of such assets improve the sellers' financial position (i.e. asset quality and capital positions), reduce overhead costs and
staffing requirements, and reduce management and personnel distractions associated with the intensive and time-consuming task of resolving loans and disposing of real estate.

Market
commentators and analysts have expressed the belief that it will take some time for the U.S. and global economies and financial markets to fully recover, but it is not clear if
adverse conditions will again intensify. As a result, the continued challenging economic conditions could still materially and
adversely impact (i) our ability to price and fund new distressed asset and middle-market capital investment opportunities on attractive terms; (ii) the ability of our borrowers to repay
or refinance their debt obligations to us; (iii) the value of the underlying real estate properties and other assets securing our purchased and originated loan investments; and/or
(iv) the financial condition, operations and liquidity of the underlying servicing and operating entities in which we have an equity investment. There can be no assurance that the value of our
Portfolio Assets, loan investments and other investment assets, or the performance of our equity-method investees and consolidated subsidiaries, will not be negatively impacted by challenging economic
conditions which could have a negative impact on our future results.

In
addition to various other debt and equity investment opportunities, we continue to seek distressed asset investment opportunities under our investment agreement with
Värde (see Note 2 of the Company's 2010 consolidated financial statements for additional information). The Company's involvement in these investments will come in the form of
minority ownership (ranging from 5% to 25% at FirstCity's determination) of an acquisition entity formed by FirstCity and Värde. FirstCity will also be the servicer for the acquisition
entities formed with Värde. FirstCity's increased holdings in the minority-owned, unconsolidated acquisition entities under this investment agreement represent a shift in the Company's
portfolio asset acquisition history over the past 2-3 yearswhich primarily consisted of consolidated portfolio assets. As such, in the context of the Company's
Portfolio Asset Acquisition and Resolution business segment, management expects to see a gradual shift in the composition of FirstCity's income attributed to distressed asset investments to "Equity in
earnings of unconsolidated

26

---



Table of Contents

subsidiaries"
(unconsolidated equity-method investments) from "Income from Portfolio Assets" (consolidated portfolio assets). Management also expects to see a gradual increase in service fee income
over time related to the performance of our servicing responsibilities related to these unconsolidated acquisition entities. Refer to the heading "Results of
Operations" below for additional information related to our Portfolio Asset Acquisition and Resolution operations.

Our
ability to make new investments is dependent on (1) the cash leak-through and overhead allowance provisions included in our term-loan facility with
Bank of Scotland (see Note 9 of the Company's 2010 consolidated financial statements for additional information); (2) residual cash flows from the pledged assets and equity investments
after full repayment of the Bank of Scotland debt; (3) our current holdings of unencumbered cash and portfolio assets; and (4) our investment agreement in place with Värde
(see Note 2 of the Company's 2010 consolidated financial statements for additional information). While management believes that these cash flow sources will provide FirstCity with funding and
liquidity to support its operations and investment activities, FirstCity continues to actively seek additional sources of liquidity and alternative funding sources.

Results of Operations

The following discussion and analysis is based on the segment reporting information presented in Note 18 to the Company's 2010
consolidated financial statements, and should be read in conjunction with the consolidated financial statements (including the notes thereto) included elsewhere in this Form 10-K.

As
a result of significant period-to-period fluctuations in our revenues and earnings, period-to-period comparisons of the results of our
operations may not be meaningful. The Company's financial results are impacted by many factors including, but not limited to, general economic conditions; fluctuations in interest rates and foreign
currency exchange rates; fluctuations in the underlying values of real estate and other assets; the timing and ability to collect and liquidate assets; increased competition from other market players
in the industries in which we operate; and the availability, pricing and terms for Portfolio Assets, middle-market transactions and other investments in all of the Company's businesses. The Company's
business and results of operations are also impacted by the availability of liquidity to fund our investment activity and operations, and our access to capital markets. Such factors, individually or
combined with other factors, may result in significant fluctuations in our reported operations and in the trading price of our common stock.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

FirstCity's net earnings to common stockholders totaled $12.5 million in 2010 compared to $18.7 million in 2009. On a per
share basis, diluted net earnings to common stockholders were $1.23 in 2010 compared to $1.83 in 2009.

Portfolio
Asset Acquisition and Resolution Business Segment

Through
our Portfolio Asset Acquisition and Resolution ("PAA&R") business segment, FirstCity and its investment partners acquired $225.8 million of
Portfolio Assets in 2010 with an approximate face value of $420.4 million, compared to the Company's involvement in acquiring $200.6 million of Portfolio Assets in 2009 with an
approximate face value of $410.1 million. In 2010, FirstCity's investment acquisition share in the Portfolio Asset acquisitions was $67.7 millionconsisting of
$31.6 million acquired through consolidated Portfolios and $36.1 million acquired through unconsolidated Portfolios. In 2009, FirstCity's investment acquisition share in Portfolio Asset
acquisitions was $147.7 millionconsisting of $144.7 million acquired through consolidated Portfolios and $3.0 million acquired through unconsolidated Portfolios.
Generally speaking, income recognized from our investments in consolidated Portfolio Assets is reported as "Income from Portfolio Assets" on

27

---



Table of Contents

our
consolidated statements of operations, whereas income from our investments in unconsolidated subsidiaries that acquire Portfolio Assets is reported as "Equity in earnings of unconsolidated
subsidiaries." Furthermore, since we function as the servicer for the vast majority of our domestic and Latin American unconsolidated Portfolio Assets, we also recognize fee income related to the
performance of our servicing responsibilities. This fee income is reported as "Servicing fees" on our consolidated statements of operations. We also generate service fee income from our domestic and
Latin American consolidated Portfolio Assets that we service; however, this income is eliminated in consolidation and, as such, is not included on our consolidated statements of operations.

In
2010, FirstCity invested an additional $42.8 million in non-Portfolio Asset investments in the form of SBA loan originations and advances, direct equity
investments, and other loan investments, compared to $33.9 million of additional non-Portfolio Asset investments in the form of SBA loan originations and advances, direct equity
investments, and other investments in 2009. Refer to the heading "Portfolio Asset AcquisitionsPortfolio Asset Acquisition and Resolution Business
Segment" below for additional information related to our investment activities and composition in our PAA&R segment.

Our
PAA&R business segment reported $4.8 million of earnings in 2010 compared to $18.3 million of earnings in 2009. The following is a summary of the results of operations
for the Company's PAA&R business segment for 2010 and 2009:

Year Ended December 31,2010

2009(Dollars in thousands)Portfolio Asset Acquisition and Resolution:Revenues:Servicing fees

$
8,658

$
9,130Income from Portfolio Assets


45,971


53,835Gain on sale of SBA loans held for sale, net


654


1,327Gain on sale of investment securities


3,250


Interest income from SBA loans


1,212


1,251Interest income from loans receivableaffiliates


1,768


2,053Interest income from loans receivableother





414Other income


4,874


3,750Total revenues


66,387


71,760Costs and expenses:Interest and fees on notes payable


15,687


13,639Salaries and benefits


15,595


14,794Provision for loan and impairment losses, net of recoveries


6,271


4,232Asset-level expenses


7,300


5,944Other


7,897


7,395Total costs and expenses


52,750


46,004Equity in losses of unconsolidated subsidiaries


(1,693
)

(1,204
)Gain on business combinations


4,595


1,455Income tax expense


(1,501
)

(2,574
)Net income attributable to noncontrolling interests


(10,282
)

(5,173
)Net earnings

$
4,756

$
18,260


28

---



Table of Contents

Servicing fee revenues.Servicing fee revenues decreased to $8.7 million in 2010 from $9.1 million in 2009. Servicing fees
from
domestic Acquisition Partnerships totaled $2.5 million in 2010 compared to $2.3 million in 2009, while servicing fees from Latin American Acquisition Partnerships totaled
$6.2 million in 2010 and $6.9 million in 2009. Servicing fees from domestic Acquisition Partnerships are generally based on a percentage of the collections received from Portfolio Assets
held by these unconsolidated partnerships; whereas servicing fees from Latin American Acquisition Partnerships are generally based on the cost of servicing plus a profit margin. The increase in
servicing fees from domestic Acquisition Partnerships was due primarily to the impact of an increase in collections from unconsolidated domestic partnerships to $61.4 million for 2010 from
$30.1 million for 2009; off-set partially by $0.6 million of additional performance-based servicing fees recognized in 2009 compared to 2010. The decline in servicing fees
from the Latin American Acquisition Partnerships was attributable to a decrease in the servicing costs related to those unconsolidated partnerships in 2010 compared to 2009 (i.e. the lower the
servicing costs incurred by these partnerships, the lower the service fee income recognized by the Company).

Income from Portfolio Assets.Income from Portfolio Assets decreased to $46.0 million in 2010 compared to $53.8 million in
2009. The
net decrease in income from Portfolio Assets was attributed primarily to a shift in the income-recognition methods used by management for certain of the Company's existing and newly-acquired Portfolio
Assets to non-accrual income methods (cost-recovery or cash basis) from the interest-accrual income method over the past
12-18 months. We apply non-accrual income-recognition methods to Portfolio Assets, as applicable, due to uncertainties related to estimating the timing and/or amount of
collections as a result of the current economic environment. As such, income accretion from Portfolio Assets decreased by $13.4 million in 2010 compared to 2009. This income decrease was
off-set partially by $5.5 million of additional Portfolio Asset liquidation income and gains recognized in 2010 compared to 2009. Collections from consolidated Portfolio Assets
decreased to $125.7 million in 2010 from $177.6 million in 2009 (including a $60.6 million decrease in domestic Portfolio Asset collections). However, FirstCity was able to
recognize significantly-higher margins on its consolidated European Portfolio Asset liquidations in 2010 compared to 2009, due primarily to $8.6 million of additional collections from these
Portfolio Assets in 2010 compared to 2009. Refer to Note 1 of the Company's 2010 consolidated financial statements for a summary of our income-recognition accounting policies related to
Portfolio Assets, and Note 5 of the consolidated financial statements for a summary of income from Portfolio Assets.

Gain on sale of SBA loans held for sale.The Company recorded $0.7 million of gains on the sales of SBA loans in 2010 with a
$7.9 million net basis in the loans sold, compared to $1.3 million of gains recorded in 2009 with a $22.5 million net basis in the loans sold. Gains on SBA loan sales reflect the
Company's participation in the SBA guaranteed loan program. Under the SBA 7(a) program, the SBA guarantees up to 90 percent of the principal on a qualifying loan. The Company generally sells
the guaranteed portions of originated loans into the secondary market and retains the unguaranteed portion for investment. At December 31, 2010, the Company had approximately
$0.4 million of deferred gains on SBA loans sales (with a $3.9 million net basis) that were accounted for as secured borrowings on such date (pursuant to the Company's adoption,
effective January 1, 2010, of the FASB's guidance on accounting for transfers of financial assetsrefer to Note 1 of the Company's 2010 consolidated financial statements).
The Company did not have any deferred gains on SBA loan sales at December 31, 2009.

Gain on sale of investment securities.In 2010, the Company recognized a $3.3 million gain related to the sale of its investment
security that
represented a beneficial interest in securitized financial assets. No such sales were recorded in 2009.

29

---



Table of Contents

Interest income from SBA loans.Interest income from SBA loans remained relatively constant at $1.2 million in 2010 compared to
$1.3 million in 2009. FirstCity's average investment level in SBA loans held-for-investment approximated $15.2 million for 2010 compared to $15.6 million
for 2009.

Interest income from loans receivableaffiliates.Interest income from loans receivableaffiliates decreased to
$1.8 million for 2010 compared to $2.1 million for 2009. The interest income decline is attributed primarily to a decline in FirstCity's average investment level in loans
receivableaffiliates in its PAA&R segment to $11.5 million for 2010 compared to $13.9 million for 2009.

Interest income from loans receivableother.Interest income from loans receivableother decreased by $0.4 million for
2010 compared to 2009. The Company did not recognize interest income from loans receivableother in 2010 from its non-affiliated loan investments because management accounted
for such loans under the non-accrual method of accounting during the entire period. FirstCity's average investment in loans receivableother in its PAA&R segment was
$4.8 million in 2010 (accounted for under the non-accrual method), compared to its average investment in such loans of $6.7 million in 2009 (included $3.1 million
accounted for under the non-accrual method).

Other income.Other income for 2010 increased by $1.1 million in comparison to 2009 primarily due to $1.8 million of due
diligence fee
income recognized by FirstCity in 2010 under its investment agreement with Värde (effective April 2010see Note 2 of the Company's 2010 consolidated financial
statements for additional information) and $0.3 million of additional other due diligence income recorded in 2010 compared to 2009 (attributable to increased bidding and investment activity in
2010 compared to 2009), off-set partially by a $0.4 million decrease in interest income in 2010 compared to 2009 as a result of the Company selling its beneficial interest in
securitized financial assets in 2010.

Costs and expenses.Operating costs and expenses approximated $52.8 million in 2010 compared to $46.0 million in 2009. The
following is
a discussion of the major components of the Company's operating costs and expenses in its PAA&R business segment:

Interest
expense and fees on notes payable totaled $15.7 million for 2010 and $13.6 million for 2009. FirstCity's average outstanding debt in its PAA&R segment increased to
$290.1 million in 2010 from $284.6 million in 2009primarily to finance its increased investment activity and to provide working capital to support future growth. The
Company's average cost of borrowings increased to 5.4% in 2010 compared to 4.8% in 2009, primarily due to the higher interest and fees charged on our Reducing Note Facility with Bank of Scotland
(closed in June 2010) compared to the interest rates and fees under the loan facilities we had in place with Bank of Scotland last year.

Salaries
and benefits increased to $15.6 million in 2010 from $14.8 million in 2009, due primarily to increased costs related to base salaries, payroll taxes, employee
benefits and bonuses in the PAA&R segment in 2010 compared to 2009. The total number of personnel within the PAA&R segment was 205 and 210 at December 31, 2010 and 2009, respectively.

Net
provisions for loan and impairment losses on our consolidated Portfolio Assets and loans receivable in our PAA&R segment totaled $6.3 million in 2010 and $4.2 million
in 2009. The $6.3 million of net impairment provisions in 2010 were attributed primarily to declines in values of real estate properties and loan collateral related to our domestic Portfolio
Assets and loans. The impairment provisions were identified in connection with management's quarterly evaluation of the collectibility of the Company's Portfolio Assets and loans receivable. The
process for evaluating and measuring impairment is critical to our financial results, as it requires subjective and complex judgments due to the need to make estimates about the impact of matters that
are uncertain. This process also requires estimates that are susceptible to significant revision as more information becomes available. It remains unclear what impact the continuance of challenging
economic conditions and disruptions in the financial, capital and real estate markets will ultimately have on our financial results. These conditions could adversely impact our business if commercial
real estate properties experience a

30

---



Table of Contents

significant
and prolonged decline in value or if borrowers cannot refinance their loans and/or continue to make payments (which in turn could lead to rising loan defaults and foreclosures on loan
collateral). Therefore, we cannot provide assurance that, in any particular future period, we will not incur additional impairment provisions.

Asset-level
expenses, which generally represent costs incurred by FirstCity to manage consolidated Portfolio Assets in its PAA&R business segment, support foreclosed properties and to
protect its security interests in loan collateral, increased to $7.3 million in 2010 from $5.9 million in 2009. The increased level of expenses is attributed primarily to the Company's
increased holdings in foreclosed real estate properties, which totaled $36.1 million at December 31, 2010 compared to $17.1 million a year ago, and an increase in the Company's
average investment level in consolidated Portfolio Assets to $209.9 million for 2010 from $202.3 million for 2009.

Other
costs and expenses in the Company's PAA&R segment increased to $7.9 million for 2010 from $7.4 million for 2009, primarily due to $0.9 million of additional
foreign currency exchange losses attributed to our consolidated foreign operations in 2010 compared to 2009 (attributed to our consolidated European and Latin American operations).

Equity in losses of unconsolidated subsidiaries.Equity in losses of unconsolidated subsidiaries (Acquisition Partnership and servicing
entities)
from our PAA&R segment increased by $0.5 million in 2010
compared to 2009. Equity in losses of our unconsolidated Acquisition Partnerships totaled $5.7 million in 2010 compared to $0.2 million in 2009, whereas equity in earnings of our
unconsolidated servicing entities increased to $4.0 million of earnings in 2010 compared to $1.0 million of losses in 2009. Our share of equity in earnings and losses from these
equity-method investees will vary period-to-period depending on the profitability of the underlying entities and the composition of FirstCity's ownership mix in the respective
entities that report earnings or losses in a period. The following is a discussion of equity in earnings from FirstCity's Acquisition Partnerships (by geographic region) and servicing entities. Refer
to Note 7 of the Company's 2010 consolidated financial statements for a summary of revenues, earnings and equity in earnings (loss) of FirstCity's equity investments by region.



31

---



Table of Contents



32

---



Table of Contents



Gain on business combinations.In 2010, the Company recognized $4.6 million of business combination gains (including
$3.7 million in Q4
2010) attributable to step-acquisition transactions in which the Company acquired controlling interests in three U.S. Acquisition Partnerships (March 2010) and eight European Acquisition
Partnerships (December 2010). The Company owned noncontrolling equity interests in these entities prior to the transactions. Under business combination accounting guidance, the Company's
previously-held noncontrolling interests in these entities were re-measured to fair value on the respective acquisition dateswhich resulted in the Company's
recognition of a $0.9 million gain related to the domestic Acquisition Partnerships transaction and a $3.7 million gain related to the European Acquisition Partnerships transaction. In
2009, the Company recorded a $1.5 million gain attributable to a step-acquisition transaction in which the Company acquired a controlling financial interest in certain French
Acquisition Partnerships. The Company owned a noncontrolling equity interest in these entities prior to the transaction. Under business combination accounting guidance, the Company's
previously-held noncontrolling interests in the French entities were re-measured to fair value on the acquisition date (May 2009)which
resulted in the Company's recognition of the $1.5 million gain. Refer to Note 3 of the Company's 2010 consolidated financial statements for additional information on these transactions.

33

---



Table of Contents

Net income attributable to noncontrolling interests.Net income attributable to noncontrolling interests represents the portions of net
earnings that
are attributable to our co-investors in our consolidated Acquisition Partnerships (FirstCity's ownership in these consolidated partnerships ranges from 50%-90%). The amount of
net income attributable to noncontrolling interests in these consolidated Acquisition Partnerships increased to $10.3 million for 2010 from $5.2 million for 2009. This increase is
attributed to an increase in net earnings from these consolidated Acquisition Partnerships in 2010 compared to 2009 (i.e. an increase in the amount of net earnings reported by these
majority-owned entities translates to an increase in the amount of net earnings apportioned to the noncontrolling investors), especially the consolidated European Acquisition Partnerships.

Special
Situations Platform Business Segment

Our
Special Situations Platform business segment ("Special Situations" or "FirstCity Denver") reported significantly higher net earnings of
$15.7 million in 2010 compared to $1.8 million of net earnings in 2009. In 2010, FirstCity Denver provided $13.2 million of investment capital to privately-held
middle-market companies in the form of debt and direct equity investments ($4.6 million financed through an investee entity's debt), compared to $12.4 million of investment capital
provided to such companies in the form of debt and equity in 2009. Since its inception in April 2007, FirstCity Denver has been involved in middle-market transactions with total investment values of
$84.9 million, and has provided $57.1 million of investment capital in connection with these investments.

34

---



Table of Contents

The following is summary of the results of operations (continuing and discontinued operations) for the Company's Special Situations Platform business segment for
2010 and 2009:

Year Ended
December 31,2010

2009(Dollars in
thousands)Special Situations Platform:Revenues:Interest income from loans receivable

$
2,354

$
2,102Operating revenuerailroad


4,615


3,121Operating revenuemanufacturing


10,466


540Other income


1,608


1,920Total revenues


19,043


7,683Costs and expensesrailroad operations:Interest and fees on notes payable


147


150Salaries and benefits


1,179


1,019Other


1,413


995Total railroad costs and expenses


2,739


2,164Costs and expensesmanufacturing operations:Salaries and benefits


2,396


195Cost of sales


6,011


Other


2,381


274Total manufacturing costs and expenses


10,788


469Costs and expensesother:Interest and fees on notes payable


479


464Salaries and benefits


912


1,032Provision for loan and impairment losses


3,023


1,034Other


1,891


2,010Total other expenses


6,305


4,540Total costs and expenses


19,832


7,173Equity in earnings of unconsolidated subsidiaries


16,302


940Gain on business combinations





810Income tax expense


(660
)

(118
)Net income attributable to noncontrolling interests


(3,143
)

(386
)Earnings (loss) from continuing operations


11,710


1,756Income from discontinued operations


3,962


Net earnings

$
15,672

$
1,756


Interest income from loans receivable.Interest income from loans receivable increased to $2.4 million in 2010 from
$2.1 million in
2009. FirstCity Denver's average investment in loans receivable was $18.6 million for 2010including $2.3 million accounted for under the cost recovery method. For 2009,
FirstCity Denver's average investment in loans receivable was $20.0 millionincluding $2.5 million accounted for under the cost recovery method.

Revenue, costs and expenses from railroad operations.Revenue, costs and expenses from railroad operations represents the results of
operations
recorded by FirstCity Denver's majority-owned railroad

35

---



Table of Contents

companies
(engaged primarily in interchanging rail cars with connecting carriers and providing rail freight services for on-line customers). Revenue from railroad operations increased by
$1.5 million in 2010 compared to 2009 due to an increase in rail car movement services performed in 2010 compared to 2009. Total costs and expenses attributable to the railroad operations
increased by $0.6 million in 2010 compared to 2009 due to the growth in the railroad operations in the periods compared.

Revenue, costs and expenses from manufacturing operations.Revenue, costs and expenses from manufacturing operations represents the
consolidated
results of operations recorded by FirstCity Denver's manufacturing company (engaged principally in the design, production and sale of wireless communications transmission equipment and software
solutions) through June 30, 2010. FirstCity acquired a controlling interest in this company in December 2009; however, on June 30, 2010, FirstCity Denver ceased to have a controlling
interest, but retained a noncontrolling interest and elevated economic interests, in this manufacturing subsidiary. As such, on June 30, 2010, FirstCity Denver deconsolidated this subsidiary
and began accounting for its retained investment in the manufacturing entity using the equity-method of accounting. Consequently, subsequent to June 30, 2010, FirstCity Denver no longer
reported the individual revenue and expense line-items of the manufacturing entity's operations in its consolidated statement of operations (rather, FirstCity Denver recorded its share of
the subsidiary's net earnings and losses as "Equity in earnings of unconsolidated subsidiaries"). Refer to Note 3 of the Company's 2010 consolidated financial statements for additional
information on this transaction. The subsidiary's sales in 2010 (through June 30, 2010) were composed of $6.7 million related to equipment and $3.8 million related to software
solutions. In 2010, 32% of the subsidiary's sales were made to international customers.

Other income.Other income in 2010 decreased modestly by $0.3 million in comparison to 2009, primarily due to $1.2 million of
gains
recognized by FirstCity Denver's consolidated subsidiaries in 2009 (mainly railroad operations) in connection with property and equipment sales compared to $0.3 million of such gains recorded
in 2010. The decrease in other income in 2010 was off-set partially by an increase in ancillary income generated by FirstCity Denver's consolidated subsidiaries in 2010 compared to 2009.

ExpensesOther.Other expenses increased by $1.8 million in 2010 compared to 2009 primarily due to $2.0 million of
additional net impairment provisions recorded on real estate properties and loan investments in 2010 compared to 2009. The impairment provisions were identified in connection with management's regular
evaluation of the collectibility of FirstCity Denver's investments. The process for evaluating and measuring impairment is critical to our financial results, as it requires subjective and complex
judgments due to the need to make estimates about the impact of matters that are uncertain. This process also requires estimates that are susceptible to significant revision as more information
becomes available. It remains unclear what impact the continuance of challenging economic conditions and disruptions in the financial, capital and real estate markets will ultimately have on our
financial results. These conditions could adversely impact our business if borrowers cannot continue to make payments, or if the values of our underlying loan collateral and real estate properties
continue to decline. Therefore, we cannot provide assurance that, in any particular future period, we will not incur additional impairment provisions.

Equity in earnings of unconsolidated subsidiaries.Equity in earnings of unconsolidated subsidiaries significantly increased to
$16.3 million
in 2010 from $0.9 million in 2009. The increase in 2010 was due primarily to $16.4 million of additional equity in earnings recorded by FirstCity Denver in 2010 compared to 2009
(including an additional $2.2 million in Q4 2010 compared to Q4 2009) for its share of net earnings from an equity-method investee engaged in the business of manufacturing prefabricated
buildings. This manufacturing entity reported significantly-higher net earnings in 2010 related to building orders and a short-term lease agreement with a single customer. The entity's
business dealings with this customer were completed in Q4 2010 and do not extend beyond such time.

36

---



Table of Contents

The
increase in equity in earnings for 2010 was also due in part to $0.4 million of additional equity in earnings recorded by FirstCity Denver in 2010 compared to 2009 for its
share of net earnings from its former equity-method investment in the coal mine operation (FirstCity Denver consolidated this subsidiary effective April 1, 2010refer to discussion
above) and newly-obtained direct equity-method investment in a coal mine equipment subsidiary (refer to Note 3 of the Company's 2010 consolidated financial statements for additional information
on this transaction). The increase in equity in earnings for 2010 was off-set partially by $1.5 million of additional equity in losses recorded by FirstCity Denver in 2010 compared
to 2009 for its share of net losses from equity-method investments in a restaurant management entity and multiple manufacturing concerns (including a new equity-method investment effective in the
third quarter of 2010 in a wireless communications equipment and software solutions entity that was formerly accounted for as a consolidated subsidiary until FirstCity Denver ceased having a
controlling interest in the entity effective June 30, 2010refer to Note 3 of the Company's 2010 consolidated financial statements for additional information). The increased
losses reported by these entities in 2010 were due primarily to lower-than-expected sales volumes during the period.

Gain on business combinations.In December 2009, FirstCity Denver acquired an 87.45% equity interest in a business involved in the
radio broadcast
equipment industry. The fair value of the acquired net assets of the business exceeded FirstCity Denver's purchase price by $0.8 millionwhich was recognized as a bargain purchase
gain under business combination accounting standards. Refer to Note 3 of the Company's 2010 consolidated financial statements for additional information on this transaction. As discussed below,
FirstCity Denver also recognized a $4.8 million business combination gain when it obtained control of a coal mine subsidiary (formerly an equity-method investment) in April 2010. FirstCity
Denver disposed of this subsidiary in December 2010, and as such, this gain was reclassified to discontinued operations (see discussions below).

Net income attributable to noncontrolling interests.The amount of net income attributable to noncontrolling interests related to
FirstCity Denver,
an 80%-owned subsidiary of FirstCity, increased to $3.1 million for 2010 compared to $0.4 million for 2009. The increase in 2010 was due primarily to additional net earnings reported by
FirstCity Denver in 2010 compared to 2009 (mainly related to an increase in equity in earnings from unconsolidated subsidiaries and a business combination gain as discussed below).

Discontinued operations.The results of discontinued operations consist of activities related to FirstCity Denver's consolidated coal
mine operation.
Effective April 2010, FirstCity Denver obtained control of the coal mine operation (which was an equity-method investment of FirstCity Denver at the time) when the controlling ownership interest held
by the then-majority shareholder was redeemed (which increased FirstCity Denver's ownership in the entity to 88.8% from 39.5%). Under business combination accounting guidance, FirstCity
Denver's previously-held noncontrolling interest in the coal mine operation was re-measured to fair value on the date control was obtainedwhich resulted in
FirstCity Denver's recognition of a $4.8 million business combination gain Refer to Note 3 of the Company's 2010 consolidated financial statements for additional information on this
transaction.

The
coal mine entity generated revenue under a short-term coal sales contract with a major utility company. In December 2010, the coal mine operation completed performance on
its coal sales contract. The coal mine operations ceased as a result of the contract termination since it did not have other coal sales contracts. As a result, FirstCity Denver dissolved the coal mine
subsidiary in December 2010. The results of operations from our coal mine subsidiary were reclassified to discontinued operations for the nine-month period ended December 31, 2010
(the period when FirstCity Denver held a controlling interest). Earnings attributed to these discontinued operations, which totaled $4.0 million for the nine-month period ended
December 31, 2010 were comprised of $42.4 million of operating revenues, $43.2 million of operating costs, and the $4.8 million business combination gain.

37

---



Table of Contents

Other
Significant Items Affecting Operations

The
following items affect the Company's overall results of operations and are not directly allocated to the Portfolio Asset Acquisition and Resolution or the
Special Situations Platform business segments discussed above.

Income from lawsuit settlement.In December 2009, FirstCity recorded $6.1 million of other income in connection with the
settlement of a
lawsuit. Refer to Note 21 of the Company's 2010 consolidated financial statements for additional information.

Corporate.Corporate and administrative costs and expenses, consisting primarily of certain salaries and benefits, accounting fees and
legal
expenses, decreased to $8.0 million in 2010 from $8.2 million in 2009.

Income taxes.Provision for income taxes remained steady at $2.3 million in 2010 compared to $2.2 million in 2009. Refer to
Note 14 of the Company's 2010 consolidated financial statements for additional information on income taxes.

Portfolio Asset AcquisitionsPortfolio Asset Acquisition and Resolution Business Segment

Revenues with respect to the Company's PAA&R business segment consist primarily of (i) income from Portfolio Assets and loans
receivable; (ii) gains on the disposition and settlement of Portfolio Assets and other assets; and (iii) servicing fees from Acquisition Partnerships for the performance of servicing
activities related to the assets held in unconsolidated Acquisition Partnerships. The Company also records equity in earnings of unconsolidated Acquisition Partnerships and servicing entities
accounted for under the equity-method of accounting. Generally speaking, income recognized from our investments in consolidated portfolio assets is reported as "Income from Portfolio Assets" on our
consolidated statements of operations, whereas income from our investments in unconsolidated subsidiaries that acquire portfolio assets is reported as "Equity in earnings of unconsolidated
subsidiaries." Furthermore, since we function as the servicer for the vast majority of our domestic and Latin American unconsolidated portfolio assets, we also recognize fee income related to the
performance of our servicing responsibilities. This fee income is reported as "Servicing fees" on our consolidated statements of operations. We also generate service fee income from our domestic and
Latin American consolidated portfolio assets that we service; however, this income is eliminated in consolidation and, as such, is not included on our consolidated statements of operations.

The
following table includes information related to Portfolio Assets acquired by the Company in 2010 and 2009.

Year Ended
December 31, 2010Wholly-Owned
Consolidated

Majority-Owned
Consolidated

Unconsolidated

Total(Dollars in thousands)Face Value

$
36,053

$
31,487

$
352,838

$
420,378Total purchase price

$
18,753

$
17,650

$
189,361

$
225,764Total equity invested by all investors

$
18,753

$
17,429

$
190,989

$
227,171Total equity invested by FirstCity

$
18,753

$
12,848

$
36,112

$
67,713Total number of Portfolio Assets


11


31


292


334


38

---



Table of Contents



Year Ended
December 31, 2009Wholly-Owned
Consolidated

Majority-Owned
Consolidated

Unconsolidated

Total(Dollars in thousands)Face Value

$
205,655

$
137,004

$
67,440

$
410,099Total purchase price

$
102,537

$
83,549

$
14,504

$
200,590Total equity invested by all investors

$
102,538

$
84,292

$
14,851

$
201,681Total equity invested by FirstCity

$
102,538

$
42,146

$
2,970

$
147,654Total number of Portfolio Assets


210


467


99


776


Subsequent
to December 31, 2010, the Company was involved in acquiring $11.1 million of Portfolio Assets with a face value of approximately $17.2 millionof which
FirstCity's investment share was $4.8 million.

The
table below provides a summary of our Portfolio Assets as of December 31, 2010 and 2009, respectively. Our Purchased Credit-Impaired Loans are categorized based on the common
risk characteristics that management generally uses for pooling purposes (when management elects to pool groups of purchased loans).

December 31,
2010

December 31,
2009(Dollars in thousands)Loan Portfolios:Purchased Credit-Impaired LoansDomestic:Commercial real estate

$
117,534

$
138,485Business assets


17,796


26,983Other


4,889


3,906Latin America:Commercial real estate


4,013


4,368Residential real estate


6,144


6,177Europecommercial real estate


18,046


13,001UBN loan portfoliobusiness assets:Non-performing loans


45,328


60,929Performing loans


1,125


1,555Other


3,263


8,367Outstanding balance


218,138


263,771Allowance for loan losses


(45,162
)

(65,825
)Total Loan Portfolios, net


172,976


197,946Real Estate Portfolios:Real estate held for sale, net


36,126


17,051Real estate held for investment, net


6,959


9,387Total Real Estate Portfolios, net


43,085


26,438Total Portfolio Assets, net

$
216,061

$
224,384


39

---



Table of Contents

The
following table provides a summary of the changes in the allowance for loan losses related to our loan Portfolio Assets for the year ended December 31, 2010:

Purchased Credit-Impaired Loans



OtherDomestic

Latin America(dollars in thousands)

Commercial
Real Estate

Business
Assets

Other

Commercial
Real Estate

Europe

UBN

Other

TotalBeginning balance,January 1, 2010

$
5,914

$
394

$
390

$
100

$
128

$
58,624

$
275

$
65,825Provisions


2,116


480


166


149


1,042





126


4,079Recoveries


(124
)

(1
)

(7
)







(788
)

(31
)

(951
)Charge offs


(7,552
)

(621
)

(459
)




(273
)

(7,543
)

(321
)

(16,769
)Translation adjustments











11


(31
)

(7,002
)




(7,022
)Ending balance,December 31, 2010

$
354

$
252

$
90

$
260

$
866

$
43,291

$
49

$
45,162


Due to uncertainties related primarily to estimating the timing and/or amount of collections on Purchased Credit-Impaired Loans as a result of the
current economic environment, the Company's levels of such loans and loan pools accounted for on a non-accrual method of accounting (cost-recovery or cash basis) increased to
$163.2 million at December 31, 2010 from $138.4 million at December 31, 2009. Under U.S. GAAP, the interest method (i.e. accrual method) of accounting is not
appropriate if management does not have the ability to develop a reasonable expectation of both the timing and amount of future cash flows to be collected. Refer to Note 1 of the Company's 2010
consolidated financial statements for additional information and accounting policies related to our Purchased Credit-Impaired Loans. The following tables provide a summary of the
Company's Purchased Credit-Impaired Loans by income-recognition method as of December 31, 2010 and 2009 (dollars in thousands):

December 31, 2010Income-Accruing
Loans

Non-Accrual LoansPurchased Credit-Impaired LoansOtherPurchased
Credit-
Impaired
LoansOther

Cash basis

Cost recovery
basis

Cash basis

Cost recovery
basis

TotalUnited States

$
3,420

$
1,640

$
94,144

$
41,959

$
1,574

$


$
142,737France





1,125


2,499








2,037


5,661Germany








2,022


12,659








14,681Mexico











9,897








9,897Total

$
3,420

$
2,765

$
98,665

$
64,515

$
1,574

$
2,037

$
172,976




December 31, 2009Income-Accruing Loans

Non-Accrual LoansPurchased Credit-
Impaired LoansOtherPurchased
Credit-
Impaired
LoansOther

Cash basis

Cost recovery
basis

Cash basis

Cost recovery
basis

TotalUnited States

$
42,385

$
5,323

$
42,125

$
78,165

$
2,770

$


$
170,768France





1,555





7,648





2,305


11,508Germany


5,225

















5,225Mexico











10,445








10,445Total

$
47,610

$
6,878

$
42,125

$
96,258

$
2,770

$
2,305

$
197,946


40

---



Table of Contents

Middle-Market Company Capital InvestmentsSpecial Situations Platform Business Segment

Revenues with respect to the Company's Special Situations Platform business segment consist primarily of (i) interest and fee
income from loan investments; (ii) revenues from majority-owned operating entities; and (iii) equity in earnings of unconsolidated investments accounted for under the equity-method of
accounting.

In
2010, FirstCity Denver was involved in middle-market capital transactions with total investment values approximating $13.7 million. Investments by FirstCity Denver since its
inception in April 2007 are summarized below:

FirstCity Denver's InvestmentTotal
Investment(Dollars in thousands)

Debt

Equity

TotalTotal 2010

$
13,739

$
8,825

$
4,395

$
13,220Total 2009


20,058


12,023


392


12,415Total 2008


28,750


16,650


3,256


19,906Total 2007


22,314


5,630


5,900


11,530


Liquidity and Capital Resources



The Company requires liquidity to fund its operations, Portfolio Asset acquisitions, investments in and advances to Acquisition
Partnerships, capital investments in privately-held middle-market companies, other debt and equity investments, repayments of bank borrowings and other debt, and working capital to support
our growth. Historically, our primary sources of liquidity have been funds generated from operations (primarily loan and real estate collections and service fees), equity distributions from the
Acquisition Partnerships and other subsidiaries, interest and principal payments on subordinated intercompany debt, dividends from the Company's subsidiaries, borrowings from credit facilities with
external lenders, and other special-purpose short-term borrowings.

Our
ability to fund operations and new investments is dependent on (1) the cash leak-through and overhead allowance provisions included in our loan facility with Bank
of Scotland (as discussed below); (2) residual cash flows from the pledged assets and equity investments after full repayment of the Bank of Scotland debt (as discussed below); (3) our
current holdings of unencumbered cash and portfolio assets; and (4) our investment agreement with Värde (see discussions below and Note 2 of the Company's 2010
consolidated financial statements for additional information). Many factors, including general economic conditions, are essential to our ability to generate cash flows. Fluctuations in our
collections, investment income, credit availability, and adverse changes in other factors could have a negative impact on our ability to generate sufficient cash flows to support our business. Despite
recent credit market conditions, we have continued to have access to liquidity in both our PAA&R and Special Situations business segments through our unencumbered cash and Portfolio Assets, credit
facility commitments with external lenders, and the investment agreement in place with Värde. While management believes that these cash flow sources will provide FirstCity with
sufficient funding and liquidity to support the Company's operations and investment activities over the next 12 months, FirstCity continues to actively seek additional sources of liquidity and
alternative funding sources.



In June 2010, FirstCity combined and refinanced its acquisition loan facilities with Bank of Scotland and closed on a
$268.6 million Reducing Note Facility Agreement ("Reducing Note Facility") that provides for repayment to Bank of Scotland over time as cash flows from the underlying assets securing the loan
facility are realized. The Company's outstanding indebtedness and letter of credit obligations under its then-existing loan facilities with Bank of Scotland were refinanced into the

41

---



Table of Contents

Reducing
Note Facility. This term-loan facility capped FirstCity's financing arrangements with Bank of Scotland, and as such, Bank of Scotland had no further obligation to provide
financing to fund FirstCity's investment activities and operations after June 2010. Refer to the heading "Credit Facilities" below for the primary terms
of this term-loan facility.



FirstCity and Värde are parties to an investment agreement, effective April 1, 2010, whereby Värde
may invest up to $750 million, at its discretion, alongside FirstCity in distressed loan portfolios and similar investment opportunities, subject to the terms and conditions contained in the
agreement. The primary terms of the Investment Agreement are as follows:



The
cash flows from the assets and equity interests from the Company's investments made in connection with the investment agreement with Värde, which are held by FC
Investment Holdings Corporation and its subsidiaries, are not subject to the security interest requirements of Bank of Scotland's Reducing Note Facility described above.



The following table summarizes the consolidated cash flow activity from our continuing operations for the years ended
December 31, 2010 and 2009 (in thousands):

Year Ended
December 31,2010

2009Net cash provided by (used in) operating activities


(35,642
)

2,760Net cash provided by (used in) investing activities


55,344


(21,854
)Net cash provided by (used in) financing activities


(59,623
)

80,086Effect of exchange rate changes on cash and cash equivalents


122


273Net increase (decrease) in cash and cash equivalents of continuing operations

$
(39,799
)
$
61,265


Our
operating activities from continuing operations used cash of $35.6 million in 2010 and provided cash of $2.8 million 2009. Net cash used by operations in 2010 was
attributable primarily to $18.3 million of net principal advances on SBA loans held for sale; $46.0 million of non-cash reductions for income accretion and gains on Portfolio
Assets; $14.6 million of non-cash deductions for equity earnings from our unconsolidated subsidiaries (i.e. equity-method investments); and $8.5 million of
non-cash deductions attributed to gains recognized on SBA loan sales, business combination

42

---



Table of Contents

transactions,
and the sale of an investment securityoffset partially by $22.0 million of net earnings (excluding income from discontinued operations); $8.6 million of
proceeds from SBA loan sales; $3.5 million of proceeds applied to income from Portfolio Assets; and $13.8 million of non-cash add-backs related to provisions for
loan and impairment losses, depreciation and amortization. Net cash provided by operations in 2009 was attributable primarily to $24.3 million of net earnings; $23.8 million of proceeds
from SBA loan sales; $16.8 million of proceeds applied to income from Portfolio Assets; and $9.4 million of non-cash add-backs related to depreciation,
amortization, and provisions for loan and impairment lossesoffset partially by $17.8 million of net principal advances on SBA loans held for sale; $53.8 million of
non-cash reductions for income accretion and gains on Portfolio Assets; and $4.5 million of non-cash deductions attributed to gains recognized on SBA loan sales,
property sales and business combination transactions. The remaining changes in the periods were due primarily to net changes in other accounts related to our operating activities.

Our
investing activities from continuing operations provided cash of $55.3 million in 2010 and used cash of $21.9 million in 2009. Net cash provided by investing activities
in 2010 was attributable primarily to $85.8 million of Portfolio Asset principal collections (net of purchases); $3.1 million of net principal collections on loan investments;
$17.1 million of distributions from our unconsolidated subsidiaries; and $3.3 million of proceeds from the sale of an investment securityoffset partially by
$2.0 million paid for business combinations; $3.2 million of property and equipment purchases; $45.6 million of contributions to our unconsolidated subsidiaries; $2.5 of
investment security purchases (net of principal pay-downs); and a $0.9 million reduction in cash attributed to the deconsolidation of our manufacturing subsidiary. Net cash used in
2009 for investing activities was attributable primarily to Portfolio Asset purchases of $25.6 million (net of principal collections); $8.6 million paid for business combinations;
$2.6 million of property and equipment purchases; and $5.7 million of contributions to unconsolidated subsidiariesoffset partially by $1.9 million of net principal
collections on loan investments; $12.9 million of distributions from unconsolidated subsidiaries; $4.5 million of principal pay-downs on an investment security; and
$1.4 million of proceeds from property sales. The remaining changes in all periods were due primarily to net changes in other accounts related to our investing activities.

Our
financing activities from continuing operations used cash of $59.6 million in 2010 and provided cash of $80.1 million in 2009. In 2010, net cash used by financing
activities was attributable primarily to $26.8 million of cash distributions to noncontrolling interests and $43.1 million of net principal payments on notes payable (net of borrowings)
and loan fee paymentsoffset partially by $5.3 million of contributions from noncontrolling interests primarily to acquire Portfolio Assets through consolidated subsidiaries. In
2009, net cash provided by financing activities was attributable primarily to $59.3 million of net borrowings primarily to finance our Portfolio Asset acquisitions and other
investments; and $42.6 million of contributions from noncontrolling interests primarily to acquire Portfolio Assets through consolidated subsidiariesoffset partially by
$19.3 million of cash distributions to noncontrolling interests and $2.8 million of cash paid to acquire additional equity in noncontrolling interests. The remaining changes in all
periods were due primarily to net changes in other accounts related to our financing activities.

Cash
paid for interest expense approximated $11.7 million and $9.8 million in 2010 and 2009, respectively. Substantially all of our interest expense was paid on our credit
facilities and other borrowings. FirstCity's average outstanding debt increased to $301.0 million for 2010 from $295.6 million for 2009, while the average cost of borrowings increased to
5.4% in 2010 compared to 4.8% in 2009. The increase in the Company's debt level since 2009 is a result of increased net borrowings to finance the Company's growth and investment transactions. The
increase in the Company's average cost of borrowings was due primarily to the higher interest and fees charged on our Reducing Note Facility with Bank of Scotland (closed in June 2010) compared to the
interest rates and fees under the loan facilities that we had in place with Bank of Scotland last year.

43

---



Table of Contents



The following is an analysis of the cash flows related to FirstCity's majority-owned railroad operation for 2010 and 2009. The cash
flow effects described below are included in the Company's analysis of its consolidated cash flows from continuing operations for 2010 and 2009, as applicable, as discussed above. All significant
intercompany balances and transactions have been eliminated in consolidation.

The
operating activities of the railroad subsidiary provided cash of $4.4 million for the year ended December 31, 2010attributable primarily to
$1.9 million of net earnings, a $2.8 million increase in operating liabilities, and $0.4 million of non-cash add-backs related to depreciation and
amortization; off-set partially by a $0.7 million increase in operating assets. The railroad subsidiary's investing activities used cash of $2.9 million in 2010, comprised
primarily of $3.0 million of property and equipment purchases. The railroad subsidiary's financing activities used cash of $0.8 million for 2010attributable to
$0.3 million of net principal payments on notes payable to a bank, and $0.5 million in the form of capital distributions to the equity owners and FirstCity (parent company) through
principal repayments on a capital note (eliminated in consolidation).

The
operating activities of the railroad subsidiary provided cash of $2.3 million for the year ended December 31, 2009attributable primarily to
$1.9 million of net earnings and a $1.7 million increase in other liabilities; offset partially by $1.2 million of gains on sales of property and equipment. The railroad
subsidiary's investing activities used cash of $0.8 million for 2010. Net cash used by investing activities included $2.0 million of property and equipment purchases; offset by
$1.6 million of proceeds from property and equipment sales. The railroad subsidiary's financing activities used cash of $1.6 million for 2010attributable primarily to
providing $1.6 million of capital distributions to the equity owners and FirstCity (parent company) through principal repayments on a capital note (eliminated in consolidation).



Cash flows from discontinued operations consist of the Company's consolidated coal mine operations. In December 2010, the Company
disposed of its consolidated coal mine operation. Accordingly, cash flows from our consolidated coal mine subsidiary are reported as discontinued operations for the nine-month period ended
December 31, 2010 (we acquired a controlling interest in this subsidiary in April 2010refer to Note 3 of the Company's 2010 consolidated financial statements for additional
information). Our discontinued operations provided cash of $6.0 million for the nine-month period ended December 31, 2010attributable primarily to net cash
inflows generated from its coal contracts, off-set partially by $4.6 million of principal repayments on a note payable and $0.4 million of payments to noncontrolling equity
owners.



On June 25, 2010, FirstCity Commercial Corporation ("FC Commercial") and FH Partners LLC ("FH Partners"), as borrowers,
and FLBG Corporation ("FLBG Corp."), as guarantor, all of which are wholly-owned subsidiaries of FirstCity, and Bank of Scotland and BoS(USA), Inc. (collectively, "Bank of Scotland"), as
lenders, entered into a Reducing Note Facility Agreement ("Reducing Note Facility"). In addition, on June 25, 2010, FirstCity executed a Limited Guaranty Agreement guarantying payment of the
indebtedness under the Reducing Note Facility to a maximum amount of $75.0 million.

The
Reducing Note Facility amended and restated the following loan facilities previously provided by Bank of Scotland to FirstCity and FH Partners: (a) Revolving Credit Agreement
dated November 12, 2004, as amended, to FirstCity ($225.0 million loan facility); (b) Revolving Credit

44

---



Table of Contents

Agreement
dated August 26, 2005, as amended, to FH Partners ($100.0 million loan facility); and (c) Subordinated Delayed Draw Credit Agreement dated September 5, 2007, as
amended, to FirstCity ($25.0 million loan facility) (collectively, "Prior Credit Agreements"). The Prior Credit Agreements were guaranteed by substantially all of the wholly-owned subsidiaries
of FirstCity and secured by substantially all of the assets of FirstCity and its wholly-owned subsidiaries. The outstanding indebtedness and letter of credit obligations under the Prior Credit
Agreements in the amount of $268.6 million were refinanced into the Reducing Note Facility, which provides for a scheduled amortization through the maturity date (June 25, 2013). Fees
paid to Bank of Scotland in connection with the Reducing Note Facility approximated $2.0 million.

The
material terms of the Reducing Note Facility and related agreements are as follows:



The
Reducing Note Facility is guaranteed by FLBG Corp. and all of its subsidiaries ("Covered Entities"), which represent the entities that were subject to the obligations of the Prior
Credit Facilities other than FirstCity and FC Servicing. The Reducing Note Facility is secured by substantially all of the assets of the Covered Entities. FC Investment Holdings Corporation (a
newly-formed wholly-owned subsidiary of FirstCity) and its current and future subsidiaries, or other entities in which such subsidiaries own any equity interest ("Non-Covered Entities"),
are not subject to, do not guarantee and do not provide security interests in their assets to secure the Reducing Note Facility. FC Servicing only provides a non-recourse security interest
in certain equity interests owned by it and in most of the servicing fees from previously-existing agreements which secured the Prior Credit Facilities. FC Servicing does not provide a security
interest in servicing agreements entered into with the Non-Covered Entities or in any of its other assets and does not guarantee the Reducing Note Facility.

In
October 2010, a letter of credit under the Reducing Note Facility was funded in the amount of $11.9 million, and the proceeds were used to pay-off a bank note
payable that was owed by an affiliated Mexican entity of the Company (see Note 21 of the Company's 2010 consolidated financial statements). The entire amount of the funded letter of credit was
added to the unpaid principal obligation under the terms and conditions of the Reducing Note Facility.

45

---



Table of Contents

At
December 31, 2010, the unpaid principal balance on the Reducing Note Facility was $228.1 million, which included $23.2 million in Euro-denominated
debt that FirstCity uses to partially off-set its business exposure to foreign currency exchange risk attributable to its net equity investments in Europe (see Note 12 of the
Company's 2010 consolidated financial statements). Under terms of the Reducing Note Facility, the Company is required to make principal repayments to reduce the unpaid principal balance outstanding on
this term-loan facility to $185.0 million at December 31, 2011, $100.0 million at December 31, 2012, and the remaining balance due at maturity (June 2013).

The
Reducing Note Facility contains covenants, representations and warranties on the part of FLBG Corp., FC Commercial and FH Partners that are typical for transactions of this type. In
addition, the Reducing Note Facility contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or
default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of
Scotland may accelerate the indebtedness under the Reducing Note Facility. At December 31, 2010, FirstCity was in compliance with all covenants or other requirements set forth in the Reducing
Note Facility.



At December 31, 2010, American Business Lending, Inc. ("ABL"), a wholly-owned subsidiary of FirstCity, had
a $25.0 million revolving loan facility with Wells Fargo Capital Finance ("WFCF") for the purpose of financing and acquiring SBA loans. The unpaid principal balance on this loan facility at
December 31, 2010 was $18.5 million. This credit facility matures in January 2012 and is secured by substantially all of the assets of ABL. In addition, FirstCity provides WFCF with an
unconditional guaranty for all of ABL's obligations up to a maximum of $5.0 million plus enforcement costs. The primary terms and key covenants of the $25.0 million
revolving loan facility, as amended, are as follows.



46

---



Table of Contents



At
December 31, 2010, ABL was in compliance with all covenants or other requirements set forth in the credit agreement or other agreements with WFCF, except for the covenant
related to the maximum loan loss ratio. At the end of each quarter, ABL's ratio of loan losses for the twelve-month period should not exceed 3.0% (ABL's measure under
this condition was 3.5% at December 31, 2010). WFCF waived this covenant requirement of the agreement as of December 31, 2010.

Discussion of Critical Accounting Policies

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of
operations and financial position in the preparation of its consolidated financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ
significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are
those that are most important to the portrayal of the Company's consolidated financial position and results and require management's most difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently uncertain.



A
substantial majority of the Company's Portfolio Assets include acquired loans and loan portfolios with evidence of credit deterioration ("Purchased
Credit-Impaired Loans"). The Company accounts for Purchased Credit-Impaired Loans at fair value on the acquisition date. The amounts paid for Purchased Credit-Impaired Loans reflect the Company's
determination that the loans have experienced deterioration in credit quality since origination and that it is probable the Company will be unable to collect all amounts due according to the
contractual terms of the underlying loans. At acquisition, the Company reviews each individual loan to determine whether there is evidence of deterioration of credit quality since origination and if
it is probable that the Company will be unable to collect all amounts due according to the loan's contractual terms. If both conditions exist, the Company determines whether each such loan is to be
accounted for individually or whether such loans will be assembled into static pools based on common risk characteristics (primarily loan type and collateral). Static pools of individual loan accounts
may be established and accounted for as a single economic unit for the recognition of income, principal payments and loss provision. Once a static loan pool is established, individual accounts are
generally not added to or removed from the pool (unless the
Company sells, forecloses or writes-off the loan). At acquisition, the Company determines the excess of the scheduled contractual payments over all cash flows expected to be collected for
the loan or loan pool as an amount that should not be accreted ("nonaccretable difference"). The excess of the cash flows from the loan or loan pool expected to be collected at acquisition over the
initial investment ("accretable difference") is recognized as interest income over the remaining life of the loan or loan pool on a level-yield basis ("accretable yield"). The discount
(i.e. the difference between the cost of each loan or loan pool and the related aggregate contractual receivable balance) is not recorded because the Company does not expect to fully collect
each contractual receivable balance. As a result, these loans and loan pools are recorded at cost (which approximates fair value) at the time of acquisition.

The
Company accounts for Purchased Credit-Impaired Loans using either the interest method or a non-accrual method (through application of the cost-recovery or
cash basis method of accounting). Application of the interest method is dependent on management's ability to develop a reasonable expectation as to both the timing and amount of cash flows expected to
be collected. In the event the

47

---



Table of Contents

Company
cannot develop or establish a reasonable expectation as to both the timing and amount of cash flows expected to be collected, the Company uses the cost-recovery or cash basis
method of accounting.

Interest method of accounting.Under the interest method, an effective interest rate, or IRR, is applied to the cost basis of the loan
or loan pool.
The excess of the contractual cash flows over expected cash flows cannot be recognized as an adjustment of income or expense or on the balance sheet. The IRR that is calculated when the loan is
purchased remains constant as the basis for subsequent impairment testing (performed at least quarterly) and income recognition. Significant increases in actual, or expected future cash flows, are
used first to reverse any existing valuation allowance for that loan or loan pool; and any remaining increase may be recognized prospectively through an upward adjustment of the IRR over the remaining
life of the loan or loan pool. Any increase to the IRR then becomes the new benchmark for impairment testing and income recognition. Subsequent decreases in projected cash flows do not change the IRR,
but are recognized as an impairment of the cost basis of the loan or loan pool (to maintain the then-current IRR), and are reflected in the consolidated statements of operations through
provisions charged to operations, with a corresponding valuation allowance offsetting the loan or loan pool in the consolidated balance sheets. FirstCity establishes valuation allowances for loans and
loan pools acquired with credit deterioration to reflect only those losses incurred after acquisitionthat is, the cash flows expected at acquisition that are no longer expected to be
collected. Income from loans and loan pools accounted for under the interest method is accrued based on the IRR of each loan or loan pool applied to their respective adjusted cost basis. Gross
collections in excess of the interest accrual and impairments will reduce the carrying value of the loan or loan pool, while gross collections less than the interest accrual will increase the carrying
value. The IRR is calculated based on the timing and amount of anticipated cash flows using the Company's proprietary collection models.

Cost-recovery method of accounting.If the amount and timing of future cash collections on a loan are not reasonably estimable, the
Company accounts for such asset on the cost-recovery method. Under the cost-recovery method, no income is recognized until the Company has fully collected the cost of the loan,
or until such time as the Company considers the timing and amount of collections to be reasonably estimable and begins to recognize income based on the interest method as described above. At least
quarterly, the Company performs an evaluation to determine if the remaining amount that is probable of collection is less than the carrying value of the loan or loan pool, and if so, recognizes
impairment through provisions charged to operations, with a corresponding valuation allowance offsetting the loan or loan pool in the consolidated balance sheets. The carrying value of Purchased
Credit-Impaired Loans accounted for under the cost-recovery method approximated $64.5 million at December 31, 2010, and $96.3 million (including $12.7 million
of loans pending management's post-purchase evaluation) at December 31, 2009.

Cash basis method of accounting.If only the amount of future cash collections on a loan is reasonably estimable, the Company accounts
for such asset
on an individual loan basis under the cash basis method of accounting. Under the cash basis method, no income is recognized unless collections are received during the period, or until such time as the
Company considers the timing of collections to be reasonably estimable and begins to recognize income based on the interest method as described above. Income is recognized for the difference between
the collections and a pro-rata portion of cost on a loan. Cost allocation is based on a proration of actual collections divided by total projected collections on the loan. Significant
increases in future cash flows may be recognized prospectively as income over the remaining life of the loan through increased amounts allocated to income when collections are subsequently received.
Subsequent decreases in projected cash flows are recognized as impairment of the loan's cost basis to maintain a constant cost allocation based on initial projections. The Company evaluates the
projected cash flows for these loans and loan pools at least quarterly to determine if impairment exists, and if so, recognizes the impairment through provisions charged to

48

---



Table of Contents

operations,
with a corresponding valuation allowance offsetting the loan or loan pool in the consolidated balance sheets. Management implemented the cash basis method of accounting for such eligible
loans in 2009 as a result of increased uncertainty in the timing of future collections (attributable primarily to the borrowers' inability to obtain financing to refinance the loans). The carrying
value of Purchased Credit-Impaired Loans accounted for under the cash basis method approximated $98.7 million at December 31, 2010, and $42.1 million at December 31, 2009.



Real
estate Portfolio Assets consist of real estate properties purchased from a variety of sellers or acquired through loan foreclosure. Rental income, net of
expenses, is generally recognized when received. The Company accounts for its real estate properties on an individual-asset basis as opposed to a pool basis.

Real
estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of cost (i.e. the underlying loan's carrying value) or estimated fair
value less disposition costs at the date of foreclosureestablishing a new cost basis. The amount, if any, by which the carrying value of the underlying loan exceeds the property's fair
value less estimated disposition costs at the foreclosure date is charged as a loss against operations. Expenditures for repairs, maintenance, and other holding costs are charged to operations as
incurred. Real estate properties acquired through loan foreclosure are classified as held for sale, and carried on the Company's consolidated balance sheet at the lower of cost or fair value less
estimated disposition costs. Real estate is not depreciated while it is classified as held for sale. Impairment losses are recorded if a property's fair value less estimated disposition costs is less
than its carrying amount, and charged to operations in the period the impairment is identified.

Real
estate properties acquired through a purchase transaction are initially recorded at the cost of the acquisition. The cost of acquired property includes the purchase price of the
property, legal fees, and certain other acquisition costs. Subsequent to acquisition, the Company capitalizes capital improvements and expenditures related to significant betterments and replacements,
including costs related to the development and improvement of the property for its intended use. Expenditures for repairs, maintenance, and other holding costs are charged to operations as incurred.
Real estate held for investment is carried on the Company's consolidated balance sheet at cost less depreciation and amortization, as applicable. The Company periodically reviews its property held for
investment for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Recoverability of property held for investment is measured by
comparison of the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the property. If the property is considered impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the property exceeds its fair value. Fair value is determined by discounted cash flows or market comparisons.



The portions of U.S. Small Business Administration ("SBA") loans that are guaranteed by the SBA are classified by management as loans
held for sale. These loans are recorded at the lower of aggregate cost or estimated fair value. The fair value of SBA loans held for sale is based primarily on what secondary markets are currently
offering for loans with similar characteristics, or the contractual price for loan sales already consummated but which cannot be recognized as accounting sales until the expiration of a recourse
period. Net unrealized losses, if any, are recognized through a valuation allowance through a charge to income. The carrying value of SBA loans held for sale is net of premiums as well as deferred
origination fees and costs. Premiums and net origination fees and costs

49

---



Table of Contents

are
deferred and included in the basis of the loans in calculating gains and losses upon sale. SBA loans are generally secured by the borrowing entities' assets such as accounts receivable, property
and equipment, and other business assets. The Company generally sells the guaranteed portion of each loan to a third-party investor and retains the servicing rights. The non-guaranteed
portion of SBA loans is classified as held for investment (discussed below). As discussed under the heading "Effects of Newly Adopted Accounting
Standards"below, effective January 1, 2010, the Company adopted new accounting guidance that requires SBA loan transactions subject to the SBA's premium recourse
provision to be accounted for initially as secured borrowings rather than asset sales. After the premium recourse provisions have elapsed, the transaction will be recorded as a sale and the resulting
net gain on sale will be recognizedwhich is based on the difference between the proceeds received and the allocated carrying value of the loan sold. It should be noted that effective
January 31, 2011, the SBA removed the recourse provisions contained in its loan sales agreements for guaranteed portions of SBA loans. As a result, SBA loan sales transacted by the Company
under these revised agreements will be accounted for initially as a sale, with the corresponding gain or loss recognized at the time of sale.



Loans receivable consisting of loans made to affiliated entities (including Acquisition Partnerships and other equity-method investees)
and non-affiliated entities, and the non-guaranteed portions of SBA loans, are classified by management as held for investment. These loans are reported at their outstanding
principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans. Loan
origination fees and costs, as well as purchase premiums and discounts, are amortized as level-yield adjustments over the respective loan terms. Unamortized net fees, costs, premiums or discounts are
recognized upon early repayment or sale of the loan. Repayment of the loans is generally dependent upon future cash flows of the borrowers, future cash flows of the underlying collateral, and
distributions made from affiliated entities. Interest is
accrued when earned in accordance with the contractual terms of the loans. Interest is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding.

The
Company has established an allowance for loan losses to absorb probable, estimable losses inherent in its portfolio of loans receivable held for investment. This allowance for loan
losses includes specific allowances, based on individual evaluations of certain loans and loan relationships, and allowances for pools of loans with similar risk characteristics. Management's
determination of the adequacy of the allowance is a quarterly process and is based on evaluating the collectibility of the loans in light of various factors, as applicable, such as quality and
composition of the loan portfolio segments, estimated future cash receipts of the borrower's operations or underlying collateral, historical experience, estimated value of underlying collateral,
prevailing economic conditions, industry concentrations and conditions, and other relevant factors. This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. Actual losses experienced in the future may vary from management's estimates. Management attributes portions of the allowance to loans that
it evaluates and determines to be impaired and to groups of loans that it evaluates collectively.

In
determining the appropriate level of allowance, management uses information to stratify its portfolio of loans receivable held for investment into loan pools with common risk
characteristics. Classes in the affiliated and non-affiliated portfolio asset and commercial loan portfolio segments are generally disaggregated by accrual status (which is generally based
on management's assessment on the probability of default). Classes in the non-guaranteed SBA commercial loan portfolio segment are disaggregated based upon underlying credit quality.
Certain portions of the allowance are attributed to loan pools based on various factors and analyses, including but not limited to, current and historical loss experience trends, collateral, region,
current economic conditions, and industry concentrations and

50

---



Table of Contents

conditions.
Loans deemed to be impaired, including loans with an increased probability of default as determined by management, are evaluated individually rather than on a pool basis as described
above. We consider a loan to be impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan's
contractual terms (including scheduled interest payments). When management identifies a loan as impaired, we measure the impairment based on discounted future cash flows, except when foreclosure is
probable or the source of repayment is the operation or liquidation of the collateral. In these cases, we use the current fair value of the collateral, less estimated selling costs, instead of
discounted cash flows. When a loan is determined to be impaired, we cease to accrue interest on the note and interest previously accrued but not collected becomes part of our recorded investment in
the loan and is collectively reviewed for impairment. When ultimate collectibility of the impaired note is in doubt, all collections are applied to reduce the principal amount of such notes until the
principal has been recovered, and collections thereafter are recognized as interest income. We return a loan to accrual status when we determine that the collectibility of principal and interest is
reasonably assured. Impairment losses are charged against an allowance account through provisions charged to operations in the period impairment is identified. Loans are written-off
against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered remote.



The
Company recognizes deferred tax assets and liabilities in both U.S. and foreign jurisdictions based on the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce the
carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to
establish valuation allowances for deferred tax assets is assessed periodically by the Company based on the more-likely-than-not realization threshold criterion. In
the assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other factors, the
nature, frequency and severity of current and cumulative losses, forecasts of future profitability, excess of appreciated asset value over the tax basis of net assets, the duration of statutory
carryforward periods, the Company's experience with utilizing available operating loss and tax credit carryforwards, and tax planning strategies. This process involves significant management judgment
about assumptions that are subject to change from period to period based on changes in tax laws between our projected operating performance, our actual results and other factors.

For
purposes of evaluating the need for a deferred tax valuation allowance, significant weight is given to evidence that can be objectively verified. At December 31, 2010 and
2009, the Company established a full valuation allowance for its U.S. deferred tax assets due to the lack of sufficient objective evidence regarding the realization of these assets in the foreseeable
future. Regardless of the deferred tax valuation allowance established at December 31, 2010, the Company continues to retain net operating loss carryforwards for federal income tax purposes of
approximately $55.4 million available to offset future federal taxable income, if any, through the year 2027. To the extent that the Company generates taxable income in the future to utilize
the tax benefits of the related deferred tax assets, subject to certain potential limitations, it may be able to reduce its effective tax rate by reducing the valuation allowance.

51

---





Table of Contents

We believe that the accounting estimate for the valuation of deferred tax assets is a critical accounting estimate because judgment is required in assessing the
likely future tax consequences of events that have been recognized in our financial statements or tax returns. We base our estimate of deferred tax assets and liabilities on current tax laws and rates
and, in certain cases, business plans and other expectations about future outcomes. Changes in existing tax laws or rates could affect actual tax results and future business results, including further
market deterioration, may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Changes that are not anticipated in our current estimates could have a
material period-to-period impact on our financial position or results of operations.



The
Company uses estimates to determine future cash receipts from Portfolio Assets. These estimates of future cash receipts from Portfolio Assets are utilized
in four primary ways:



The
Company uses proprietary programs and collection models to manage the Portfolio Assets it owns and services. Each asset within a pool is analyzed by an account manager who is
responsible for analyzing the characteristics of each asset within a pool. The account manager projects future cash receipts and expenses related to each asset, the sum of which provides the total
estimated future cash receipts related to a particular purchased asset pool. These estimates are routinely monitored by the Company to determine reasonableness of the estimates provided.



The
Company's consolidated financial statements include the accounts of FirstCity, its wholly-owned and majority-owned subsidiaries, and certain variable
interest entities where we are the primary beneficiary as prescribed by the Financial Accounting Standards Board's (the "FASB") accounting guidance on variable interest entities. If we determine that
we have a controlling financial interest in an entity, then we must consolidate the assets, liabilities and noncontrolling interests of the entity in our consolidated financial statements. A
controlling financial interest typically arises as a result of ownership of a majority of the voting interests of an entity. However, we may also have a controlling financial interest in an entity
through an arrangement that does not involve voting interests, such as a variable interest entity ("VIE"). In general, a VIE is an entity that has one or more of the following characteristics
(1) the entity has total equity at risk that is not sufficient to finance its principal activities without additional subordinated financial support from other entities; (2) the group of
equity owners does not have the ability to make significant decisions about the entity's activities; (3) the group of equity owners does not have the obligation to absorb losses or the right to
receive residual returns generated by its operations, or both; or (4) the voting rights of some investors are not proportional to their obligations to absorb the losses or the right to receive
residual returns of the entity, or both, and substantially all of the entity's activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. If any
of these characteristics is present, the entity is subject to a variable interests consolidation analysis, and consolidation is based on variable interests, and not solely on ownership of the entity's
outstanding voting stock. Variable interests are generally defined as contractual, ownership or other economic interests in an entity that change with fluctuations in the entity's net asset value. The
Company consolidates any VIE of which it is the primary beneficiary. The

52

---



Table of Contents

primary
beneficiary of a VIE is the party that has the power to direct the activities that most-significantly impact the economic performance of the entity and the obligation to absorb
losses or the right to receive benefits that could potentially be significant to the entity. The assessment of the party that has the power to direct the activities of the VIE may require significant
management judgment when more than one party has power, or more than one party is involved in the design of the VIE but no party has the power to direct the ongoing activities that could be
significant. Refer to Note 19 of the Company's 2010 consolidated financial statements for further information regarding the Company's investments in VIEs.

The
Company does not consolidate equity investments in 20%- to 50%-owned entities that are not VIEs where the Company does not have an effective controlling interest, or equity
investments in 20%-to 50%-owned entities that are VIEs where the Company is not the primary beneficiary. Rather, such investments are accounted for under the equity method of accounting since the
Company has the ability to exercise significant influence over the investees' operating and financial policies. The Company also accounts for its unconsolidated equity investments in less than
20%-owned entities under the equity method of accounting. FirstCity has the ability to exercise significant influence over the operating and financial policies of these entities, despite its
comparatively smaller ownership percentage, due primarily to its active participation in the policy-making process as well as its involvement in the daily management activities. These entities are
formed generally to share in the risks and rewards in developing new markets as well as to pool resources. Under the equity method of
accounting, the Company's investment in these unconsolidated entities is carried at the cost of acquisition, plus the Company's share of equity in undistributed earnings or losses since acquisition.

Effects of Newly Adopted Accounting Standards



Effective
January 1, 2010, the Company adopted the FASB's accounting guidance on the consolidation of VIEs (issued in June 2009). This new guidance
eliminates the exemption for QSPEs; revises previous guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial
interest in a VIE with a qualitative approach focused on identifying which enterprise has both the power to direct the activities of the VIE that most-significantly impacts the entity's
economic performance and has the obligation to absorb losses or the right to receive benefits that could be significant to the entity; requires reconsideration of whether an entity is a VIE when any
changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the
activities of the entity that most significantly impact the entity's economic performance; and requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE and additional
disclosures about an enterprise's involvement in VIEs. The adoption of this guidance did not have a material impact on our consolidated financial statements.



Effective
January 1, 2010, the Company adopted the FASB's guidance on accounting for transfers of financial assets (issued in June 2009). This guidance
amends previous guidance which, among other changes, eliminates the concept of a QSPE, changes the requirements for de-recognizing financial assets, defines the term "participating
interest" to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale, and requires additional disclosures. The recognition and measurement provisions are
effective for transfers occurring on or after January 1, 2010. The new accounting guidance delays the Company's recognition of the sale of guaranteed portions of SBA loans until expiration of
the premium recourse provisions, and requires such transactions to be accounted for initially as a secured borrowing. As such, the Company did not recognize any gains related to SBA loan sales for the
first three months of 2010. Once the premium recourse provisions have elapsed, the

53

---



Table of Contents

transaction
will be recorded as a sale with the guaranteed portion of the SBA loan and the secured borrowing removed from the balance sheet and the resulting gain on sale recorded.

It
should be noted that effective January 31, 2011, the SBA removed the recourse provisions contained in its loan sales agreements for guaranteed portions of SBA loans. As a
result, SBA loan sales transacted by the Company under these revised agreements will be accounted for initially as a sale, with the corresponding gain or loss recognized at the time of sale.



In
January 2010, the FASB issued new accounting guidance that amended existing guidance for fair value disclosures. This guidance requires separate disclosures
of significant transfers of items in and out of Levels 1 and 2 in the fair value hierarchy, and to describe the reasons for the transfers. The updated guidance also clarifies, among other
things, that fair value measurement disclosures should be provided for each class of assets and liabilities, and that disclosures of inputs and valuation techniques should be provided for both
recurring and non-recurring Level 2 and Level 3 fair value measurements. We adopted this new guidance for the quarterly period ended March 31, 2010. Since this
guidance is disclosure-only in nature, our adoption of the guidance did not significantly impact the Company's consolidated financial statements.



In
July 2010, the FASB issued accounting guidance related to disclosures about the credit quality of financing receivables and the allowance for credit losses.
The amended guidance applies to all financing receivables except for short-term trade receivables and receivables measured at either fair value or the lower of cost or fair value. The
objective of the amendment is disclosure of information that enables financial statement users to understand the nature of inherent credit risks, the entity's method of analysis and assessment of
credit risk in estimating the allowance for credit losses, and the reasons for changes in both the receivables and allowances when examining a creditor's portfolio of financing receivables and its
allowance for losses. Under the new guidance, the disaggregation of financing receivables will be disclosed by portfolio segment or by class of financing receivable. The Company adopted the
period-end disclosure requirements of this guidance related to an entity's credit quality of financing receivables and the related allowance for loan losses in the consolidated financial
statements for the year ended December 31, 2010. The Company will adopt the activity-related provisions of this guidance in the first quarter of 2011. The disclosure requirements regarding
troubled debt restructurings have been delayed by the FASB. While the provisions of this guidance require significant expansion of the Company's disclosures on the credit quality of financing
receivables and the allowance for loan losses, the period-end provisions did not have an impact on the Company's financial condition and results of operations, and the Company does not
expect the adoption of the remaining disclosure provisions to have a material effect on the Company's financial condition and results of operations.



In
April 2010, the FASB issued guidance that clarifies the accounting for loan modifications when the loan is part of a pool that is accounted for as a single
asset. The new guidance provides that modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans
would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash
flows for the pool change. This guidance does not affect the accounting for loans that are not accounted for within pools. Loans accounted for individually continue to be subject to the troubled debt
restructuring accounting provisions. The new guidance also allows entities to make a one-time election to terminate accounting for loans in a pool, which may be

54

---



Table of Contents

made
on a pool-by-pool basis, upon adoption of this new guidance. We early-adopted the provisions of this new guidance, as permitted, effective April 1, 2010. The
adoption of this guidance did not have a material impact on our consolidated financial statements.

Effect of Newly Issued Accounting Standards

In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity
to disclose separately, a reconciliation for fair value measurements using significant unobservable inputs (Level 3) information about purchases, sales, issuances and settlements (that is, on a
gross basis rather than one net number). The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2010 and for interim periods within the
fiscal year. Since this guidance is disclosure-only in nature, management does not expect the adoption of this updated guidance to have a material impact on our financial condition and
results of operations.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to
provide information required by this Item.

55

---





Table of Contents

Item 8.Financial Statements and Supplementary Data.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (Dollars in thousands, except share data)

December 31,
2010

December 31,
2009ASSETSCash and cash equivalents

$
46,597

$
80,368Restricted cash


1,207


1,364Portfolio Assets:Loan portfolios, net of allowance for loan losses of $45,162 and $65,825, respectively


172,976


197,946Real estate held for sale


36,126


17,051Real estate held for investment, net


6,959


9,387Total Portfolio Assets


216,061


224,384Loans receivable:Loans receivableaffiliates, net of allowance for loan losses of $-0- and $67, respectively


16,781


26,122Loans receivableSBA held for sale


11,608


821Loans receivableSBA held for investment, net of allowance for loan losses of $365 and $490, respectively


15,415


15,445Loans receivableother, net of allowance for loan losses of $1,083 and $-0-, respectively


13,011


10,233Total loans receivable, net


56,815


52,621Investment securities available for sale


3,711


1,836Equity investments


107,209


71,491Service fees receivable ($805 and $809 from affiliates, respectively)


897


850Servicing assetsSBA loans


836


1,056Other assets, net


27,071


31,104Total Assets(1)

$
460,404

$
465,074LIABILITIES AND EQUITYLiabilities:Notes payable to banks and other

$
293,034

$
305,888Notes payable to affiliates


11,805


7,838Other liabilities


30,825


26,077Total Liabilities


335,664


339,803Commitments and contingencies (Note 21)Stockholders' equity:Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)





Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued: 11,779,464 and 11,483,824, respectively; shares outstanding: 10,279,464
and 9,983,824, respectively)


118


115Treasury stock, at cost: 1,500,000 shares


(10,923
)

(10,923
)Paid in capital


105,038


103,326Accumulated deficit


(5,826
)

(18,329
)Accumulated other comprehensive income (loss)


(65
)

3,460FirstCity Stockholders' Equity


88,342


77,649Noncontrolling interests


36,398


47,622Total Equity


124,740


125,271Total Liabilities and Equity

$
460,404

$
465,074


---

See accompanying notes to consolidated financial statements.

56

---





Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (Dollars in thousands, except per share data)

Year Ended
December 31,2010

2009Revenues:Finance and Servicing:Servicing fees ($7,990 and $8,216 from affiliates, respectively)

$
8,658

$
9,130Income from Portfolio Assets


45,971


53,835Gain on sale of SBA loans held for sale, net


654


1,327Gain on sale of investment securities


3,250


Interest income from SBA loans


1,212


1,251Interest income from loans receivableaffiliates


3,315


4,180Interest income from loans receivableother


807


389Other income


6,511


4,81870,378


74,930Manufacturing and Railroad:Operating revenuesmanufacturing


10,466


540Operating revenuesrailroad


4,615


3,121Other


105


1,19615,186


4,857Total revenues


85,564


79,787Costs and expenses:Finance and Servicing:Interest and fees on notes payable to banks and other


14,594


12,400Interest and fees on notes payable to affiliates


1,572


1,709Salaries and benefits


21,284


21,096Provision for loan and impairment losses


9,294


5,266Asset-level expenses


7,852


6,499Other


12,427


11,82067,023


58,790Manufacturing and Railroad:Cost of revenues and operating costsmanufacturing


10,788


469Cost of revenues and operating costsrailroad


2,739


2,16413,527


2,633Total costs and expenses


80,550


61,423Earnings from continuing operations before other income and income taxes


5,014


18,364Equity in earnings (loss) of unconsolidated subsidiaries


14,609


(264
)Gain on business combinations


4,595


2,266Income from lawsuit settlement





6,119Earnings from continuing operations before income taxes


24,218


26,485Income tax expense


2,252


2,182Earnings from continuing operations, net of tax


21,966


24,303Income from discontinued operations


3,962


Net earnings


25,928


24,303Less: Net income attributable to noncontrolling interests


13,425


5,559Net earnings attributable to FirstCity

$
12,503

$
18,744Basic earnings per share of common stock:Earnings from continuing operations

$
0.85

$
1.90Discontinued operations

$
0.39


Net earnings

$
1.24

$
1.90Diluted earnings per share of common stock:Earnings from continuing operations

$
0.84

$
1.83Discontinued operations

$
0.39


Net earnings

$
1.23

$
1.83


See accompanying notes to consolidated financial statements.

57

---





Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        (Dollars in thousands)

Year Ended
December 31,2010

2009Net earnings

$
25,928

$
24,303Other comprehensive income (loss):Net unrealized gain (loss) on securities available for sale, net of tax


(612
)

2,803Reclassification adjustment for unrealized gain on security available for sale included in net earnings


(1,352
)

Foreign currency translation adjustments


(3,073
)

5,634Total other comprehensive income (loss)


(5,037
)

8,437Total comprehensive income


20,891


32,740Less comprehensive (income) loss attributable to noncontrolling interests:Net income


(13,425
)

(5,559
)Net unrealized loss (gain) on securities available for sale, net of tax


135


(339
)Foreign currency translation adjustments


1,377


(912
)Comprehensive income attributable to FirstCity

$
8,978

$
25,930


See
accompanying notes to consolidated financial statements.

58

---





Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (Dollars in thousands)

FirstCity StockholdersCommon
Stock

Treasury
Stock

Paid in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Non-controlling
Interests

Total
EquityBalances, December 31, 2008

$
113

$
(10,923
)
$
101,875

$
(37,073
)
$
(3,726
)
$
15,609

$
65,875Net earnings











18,744





5,559


24,303Change in net unrealized gain on securities available for sale














2,464


339


2,803Foreign currency translation adjustments














4,722


912


5,634Exercise of common stock options


2





307











309Stock-based compensation expense








556











556Purchases of subsidiary shares in noncontrolling interests








588








(3,419
)

(2,831
)Investments in majority-owned entities

















47,866


47,866Distributions to noncontrolling interests

















(19,261
)

(19,261
)Other increases in noncontrolling interests

















17


17Balances, December 31, 2009


115


(10,923
)

103,326


(18,329
)

3,460


47,622


125,271Net earnings











12,503





13,425


25,928Change in net unrealized gain on securities available for sale, net of tax














(1,829
)

(135
)

(1,964
)Foreign currency translation adjustments














(1,696
)

(1,377
)

(3,073
)Exercise of common stock options


1





75











76Issuance of common stock


2





888











890Stock-based compensation expense








665











665Purchases of subsidiary shares in noncontrolling interests








(206
)







(1,644
)

(1,850
)Other activity








290








(312
)

(22
)Investments in majority-owned entities

















6,019


6,019Distributions to noncontrolling interests

















(27,200
)

(27,200
)Balances, December 31, 2010

$
118

$
(10,923
)
$
105,038

$
(5,826
)
$
(65
)
$
36,398

$
124,740


See accompanying notes to consolidated financial statements.

59

---





Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (Dollars in thousands)

Year Ended
December 31,2010

2009Cash flows from operating activities:Net earnings

$
25,928

$
24,303Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:Income from discontinued operations


(3,962
)

Net principal advances on SBA loans held for sale


(18,329
)

(17,826
)Proceeds from sales of SBA loans held for sale, net


8,615


23,835Proceeds applied to income from Portfolio Assets


3,493


16,752Income from Portfolio Assets


(45,971
)

(53,835
)Capitalized interest and costs on Portfolio Assets and loans receivable


(630
)

(1,151
)Provision for loan and impairment losses, net


9,294


5,266Foreign currency transaction losses, net


991


112Equity in (earnings) loss of unconsolidated subsidiaries


(14,609
)

264Gain on sale of SBA loans held for sale, net


(654
)

(1,327
)Gain on sale of railroad property





(920
)Gain on business combinations


(4,595
)

(2,266
)Gain on sale of investment security


(3,250
)

Depreciation and amortization


4,490


4,112Net premium amortization of loans receivable


(285
)

(173
)Stock-based compensation expense


665


556Increase in restricted cash


(145
)

(147
)Increase in service fees receivable


(75
)

(245
)Increase in other assets


(2,978
)

(1,947
)Increase in other liabilities


6,365


7,397Net cash provided by (used in) operating activities


(35,642
)

2,760Cash flows from investing activities:Purchases of property and equipment, net


(3,219
)

(2,616
)Proceeds from sale of railroad property





1,350Proceeds from sale of subsidiaries and equity investments


125


Cash paid for business combinations, net of cash acquired


(1,999
)

(8,583
)Decrease in cash from deconsolidation of subsidiary


(875
)

Net principal payments on loans receivable


3,458


3,726Net principal advances on SBA loans held for investment


(325
)

(1,794
)Purchases of investment securities available for sale


(3,627
)

Net principal payments on investment securities available for sale


1,164


4,490Proceeds from sale of investment security


3,250


Purchases of Portfolio Assets


(35,939
)

(186,487
)Proceeds applied to principal on Portfolio Assets


121,782


160,874Contributions to unconsolidated subsidiaries


(45,574
)

(5,748
)Distributions from unconsolidated subsidiaries


17,123


12,934Net cash provided by (used in) investing activities


55,344


(21,854
)Cash flows from financing activities:Borrowings under notes payable to banks and other


73,273


199,824Principal payments of notes payable to affiliates


(209
)

(815
)Principal payments of notes payable to banks and other


(112,603
)

(138,046
)Payments of debt issuance costs and loan fees


(3,535
)

(1,684
)Proceeds from secured borrowings, net


4,302


Contributions from noncontrolling interests


5,264


42,552Distributions to noncontrolling interests


(26,756
)

(19,261
)Cash paid for subsidiary shares in noncontrolling interests


(325
)

(2,793
)Proceeds from issuance of common stock


966


309Net cash provided by (used in) financing activities


(59,623
)

80,086Effect of exchange rate changes on cash and cash equivalents


122


273Net cash provided by (used in) continuing operations


(39,799
)

61,265Cash flows from discontinued operations:Net cash provided by operating activities


11,087


Net cash used in investing activities


(5,059
)

Net cash provided by discontinued operations


6,028


Net increase (decrease) in cash and cash equivalents


(33,771
)

61,265Cash and cash equivalents, beginning of period


80,368


19,103Cash and cash equivalents, end of period

$
46,597

$
80,368Supplemental disclosure of cash flow information:Cash paid during the period for:Interest

$
11,652

$
9,788Income taxes, net of refunds


205


259


See accompanying notes to consolidated financial statements.

60

---





Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        December 31, 2010 and 2009

1. Summary of Significant Accounting Policies



FirstCity Financial Corporation, a Delaware corporation, is a financial services company headquartered in Waco, Texas with offices
throughout the United States and Mexico and a presence in Europe and South America. When we refer to "FirstCity," "the Company," "we," "our" or "us" in this Form 10-K, we mean
FirstCity Financial Corporation and subsidiaries (consolidated).

The
Company engages in two major business segmentsPortfolio Asset Acquisition and Resolution and Special Situations Platform. The Portfolio Asset Acquisition and Resolution
business has been the Company's core business segment since it commenced operations in 1986. In the Portfolio
Asset Acquisition and Resolution business, the Company acquires portfolios of performing and non-performing loans and other assets (collectively, "Portfolio Assets" or "Portfolios"),
generally at a discount to their legal principal balances or appraised values, and services and resolves such Portfolio Assets in an effort to maximize the present value of the ultimate cash
recoveries. FirstCity acquires the Portfolio Assets for its own account or through investment entities formed with one or more other co-investors (each such entity, an "Acquisition
Partnership"). The Company engages in its Special Situations Platform business through its majority ownership in a subsidiary that was formed in April 2007. Through its Special Situations Platform,
the Company provides investment capital to privately-held middle-market companies through flexible capital structuring arrangements to generate an attractive risk-adjusted
return. These capital investments primarily take the form of senior and junior financing arrangements, but also include direct equity investments, common equity warrants. In addition, our Special
Situations Platform business engages in distressed debt transactions and leveraged buyouts. Refer to Note 18 for additional information on the Company's major business segments.



The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Estimates that are particularly susceptible to significant change in the near-term relate to the estimation of future
collections on Portfolio Assets used in the calculation of income from Portfolio Assets; valuation of deferred tax assets and assumptions used in the calculation of income taxes; valuation of
servicing assets, investment securities, loans receivable (including loans receivable held in securitization trusts), and real estate; valuation of assets, liabilities, non-controlling
interests and contingencies attributable to business combinations; guarantee obligations and indemnifications; and legal contingencies. These estimates and assumptions are based on management's best
estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We adjust such
estimates and assumptions when facts and circumstances dictate. The continuance of challenging economic conditions and disruptions in the financial, capital, real estate and foreign currency markets,
have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly
from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

61

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)



The accompanying consolidated financial statements include the accounts of FirstCity, its wholly-owned and majority-owned subsidiaries,
and certain variable interest entities where we are the primary beneficiary as prescribed by the Financial Accounting Standards Board's (the "FASB") accounting guidance on variable interest entities
(see below). All significant intercompany transactions and balances have been eliminated in consolidation. Certain amounts in prior-year financial statements have been reclassified to
conform to the current year presentation. These reclassifications are not significant and have no impact on FirstCity's net earnings, total assets or stockholders' equity.

If
we determine that we have a controlling financial interest in an entity, then we must consolidate the assets, liabilities and noncontrolling interests of the entity in our
consolidated financial statements. A controlling financial interest typically arises as a result of ownership of a majority of the voting interests of an entity. However, we may also have a
controlling financial interest in an entity through an arrangement that does not involve voting interests, such as a variable interest entity ("VIE"). In general, a VIE is an entity that has one or
more of the following characteristics (1) the entity has total equity at risk that is not sufficient to finance its principal activities without additional subordinated financial support from
other entities; (2) the group of equity owners does not have the ability to make significant decisions about the entity's activities; (3) the group of equity owners does not have the
obligation to absorb losses or the right to receive residual returns generated by its operations, or both; or (4) the voting rights of some investors are not proportional to their obligations
to absorb the losses or the right to receive residual returns of the entity, or both, and substantially all of the entity's activities either involve or are conducted on behalf of an investor that has
disproportionately few voting rights. If any of these characteristics is present, the entity is subject to a variable interests consolidation analysis, and consolidation is based on variable
interests, and not solely on ownership of the entity's outstanding voting stock. Variable interests are generally defined as contractual, ownership or other economic interests in an entity that change
with fluctuations in the entity's net asset value. The Company consolidates any VIE of which it is the primary beneficiary. The primary beneficiary of a VIE is the party that has the power to direct
the activities that most-significantly impact the economic performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be
significant to the entity. The assessment of the party that has the power to direct the activities of the VIE may require significant management judgment when more than one party has power, or more
than one party is involved in the design of the VIE but no party has the power to direct the ongoing activities that could be significant.

Generally,
if we are the primary beneficiary of a VIE, then we initially record the assets, liabilities and noncontrolling interests of the VIE in our consolidated financial statements
at fair value. Refer to Note 19 for further information regarding the Company's investments in VIEs.

The
Company does not consolidate equity investments in 20%- to 50%-owned entities that are not VIEs where the Company does not have an effective controlling interest, or equity
investments in 20%-to 50%-owned entities that are VIEs where the Company is not the primary beneficiary. Rather, such investments are accounted for under the equity method of accounting since the
Company has the ability to exercise significant influence over the investees' operating and financial policies. The Company also accounts for its unconsolidated equity investments in less than
20%-owned entities under the equity method of accounting. FirstCity has the ability to exercise significant influence over the

62

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

operating
and financial policies of these entities, despite its comparatively smaller ownership percentage, due primarily to its active participation in the policy-making process as well as its
involvement in the daily management activities. These entities are formed generally to share in the risks and rewards in developing new markets as well as to pool resources. Under the equity method of
accounting, the Company's investment in these unconsolidated entities is carried at the cost of acquisition, plus the Company's share of equity in undistributed earnings or losses since acquisition.

The
Company's ownership of unconsolidated equity investments at December 31, 2010 is summarized below:

Ownership
InterestAcquisition Partnerships:Domestic

15.0% - 50.0%Latin America

8.0% - 50.0%Europe

22.5% - 50.0%Operating and Servicing Entities:Domestic

39.5% - 49.5%Latin America

50.00%Europe

11.9% - 16.3%


The
Company's equity in earnings and losses from its unconsolidated foreign equity investments, except for certain of its unconsolidated European equity-method investments, are recorded
on a one-month delay due to the timing of FirstCity's receipt of those financial statements.

The
Company has loans receivable from certain Acquisition Partnerships and other unconsolidated equity investmentssee Note 6. In situations where the Company is not
required to advance additional funds to the Acquisition Partnership and previous losses have reduced the equity investment to zero, the Company continues to report its share of equity method losses in
its consolidated statements of operations to the extent of and as an adjustment to the adjusted basis of the related loan receivable.

In
December 2010, the Company disposed of its consolidated coal mine operation. Accordingly, the results of operations from our coal mine subsidiary are reported as discontinued
operations within our Special Situations Platform business segment for the nine-month period ended December 31, 2010 (we acquired a controlling interest in this subsidiary in April
2010). In addition, its revenue, expenses and cash flows have been excluded from the respective captions in our consolidated
statements of operations and cash flows, and have been reported as discontinued operations. See Notes 3 and 4 for additional information.



In the first quarter of 2010, upon the determination that deferred tax items related to our foreign jurisdictions had been misstated by
$1.5 million as of December 31, 2009, the Company recorded a $1.0 million adjustment to deferred tax benefit and a $0.5 million adjustment to equity in earnings of
unconsolidated subsidiaries in order to properly state the net deferred tax asset. In addition, in the first quarter of 2010, the Company recorded certain loan impairments that included
$1.2 million in

63

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

impairments
that should have been recorded during the year ended December 31, 2009. These out-of-period adjustments were not material to our consolidated financial
statements for the quarterly period ended March 31, 2010 or the years ended December 31, 2010 and 2009.



For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. The Company maintains cash balances in various depository institutions that periodically exceed federally insured limits. Management
periodically evaluates the creditworthiness of such institutions.



Restricted cash primarily includes monies due on loan-related remittances received by the Company and due to third parties.



The Company invests in Portfolio Assets and services and resolves such Portfolio Assets in an effort to maximize the present value of
the ultimate cash recoveries. The Portfolio Assets are generally non-homogeneous assets, including loans of varying qualities that are secured by diverse collateral types and real estate.
Some Portfolio Assets are loans for which resolution is tied primarily to the real estate securing the loan, while others may be collateralized business loans, the resolution of which may be based on
the cash flows of the business or the underlying collateral.

The
following is a description of the classifications and related accounting policies for the Company's significant classes of Portfolio Assets:



The
Company accounts for acquired loans and loan portfolios with evidence of credit deterioration since origination ("Purchased Credit-Impaired Loans") at fair
value on the acquisition date. The amounts paid for Purchased Credit-Impaired Loans reflect the Company's determination that the loans have experienced deterioration in credit quality since
origination and that it is probable the Company will be unable to collect all amounts due according to the contractual terms of the underlying loans. At acquisition, the Company reviews each
individual loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according
to the loan's contractual terms. If both conditions exist, the Company determines whether each such loan is to be accounted for individually or whether such loans will be assembled into static pools
based on common risk characteristics (primarily loan type and collateral). Static pools of individual loan accounts may be established and accounted for as a single economic unit for the recognition
of income, principal payments and loss provision. Once a static loan pool is established, individual accounts are generally not added to or removed from the pool (unless the Company sells, forecloses
or writes-off the loan). At acquisition, the Company determines the excess of the scheduled contractual payments over all cash flows expected to be collected for the loan or loan pool as
an amount that should not be accreted ("nonaccretable difference"). The excess of the cash

64

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

flows
from the loan or loan pool expected to be collected at acquisition over the initial investment ("accretable difference") is recognized as interest income over the remaining life of the loan or
loan pool on a level-yield basis ("accretable yield"). The discount (i.e. the difference between the cost of each loan or loan pool and the related aggregate contractual receivable balance) is
not recorded because the Company does not expect to fully collect each contractual receivable balance. As a result,
these loans and loan pools are recorded at cost (which approximates fair value) at the time of acquisition.

The
Company accounts for Purchased Credit-Impaired Loans using either the interest method or a non-accrual method (through application of the cost-recovery or
cash basis method of accounting). Application of the interest method is dependent on management's ability to develop a reasonable expectation as to both the timing and amount of cash flows expected to
be collected. In the event the Company cannot develop or establish a reasonable expectation as to both the timing and amount of cash flows expected to be collected, the Company uses the
cost-recovery or cash basis method of accounting.

Interest method of accounting.Under the interest method, an effective interest rate, or IRR, is applied to the cost basis of the loan
or loan pool.
The excess of the contractual cash flows over expected cash flows cannot be recognized as an adjustment of income or expense or on the balance sheet. The IRR that is calculated when the loan is
purchased remains constant as the basis for subsequent impairment testing (performed at least quarterly) and income recognition. Significant increases in actual, or expected future cash flows, are
used first to reverse any existing valuation allowance for that loan or loan pool; and any remaining increase may be recognized prospectively through an upward adjustment of the IRR over the remaining
life of the loan or loan pool. Any increase to the IRR then becomes the new benchmark for impairment testing and income recognition. Subsequent decreases in projected cash flows do not change the IRR,
but are recognized as an impairment of the cost basis of the loan or loan pool (to maintain the then-current IRR), and are reflected in the consolidated statements of operations through
provisions charged to operations, with a corresponding valuation allowance offsetting the loan or loan pool in the consolidated balance sheets. FirstCity establishes valuation allowances for loans and
loan pools acquired with credit deterioration to reflect only those losses incurred after acquisitionthat is, the cash flows expected at acquisition that are no longer expected to be
collected. Income from loans and loan pools accounted for under the interest method is accrued based on the IRR of each loan or loan pool applied to their respective adjusted cost basis. Gross
collections in excess of the interest accrual and impairments will reduce the carrying value of the loan or loan pool, while gross collections less than the interest accrual will increase the carrying
value. The IRR is calculated based on the timing and amount of anticipated cash flows using the Company's proprietary collection models.

Cost-recovery method of accounting.If the amount and timing of future cash collections on a loan are not reasonably estimable, the
Company accounts for such asset on the cost-recovery method. Under the cost-recovery method, no income is recognized until the Company has fully collected the cost of the loan,
or until such time as the Company considers the timing and amount of collections to be reasonably estimable and begins to recognize income based on the interest method as described above. At least
quarterly, the Company performs an evaluation to determine if the remaining amount that is probable of collection is less than the carrying value of the loan or loan pool, and if so, recognizes

65

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

impairment
through provisions charged to operations, with a corresponding valuation allowance offsetting the loan or loan pool in the consolidated balance sheets. The carrying value of Purchased
Credit-Impaired Loans accounted for under the cost-recovery method approximated $64.5 million at December 31, 2010, and $96.3 million (including $12.7 million
of loans pending management's post-purchase evaluation) at December 31, 2009.

Cash basis method of accounting.If only the amount of future cash collections on a loan is reasonably estimable, the Company accounts
for such asset
on an individual loan basis under the cash basis method of accounting. Under the cash basis method, no income is recognized unless collections are received during the period, or until such time as the
Company considers the timing of collections to be reasonably estimable and begins to recognize income based on the interest method as described above. Income is recognized for the difference between
the collections and a pro-rata portion of cost on a loan. Cost allocation is based on a proration of actual collections divided by total projected collections on the loan. Significant
increases in future cash flows may be recognized prospectively as income over the remaining life of the loan through increased amounts allocated to income when collections are subsequently received.
Subsequent decreases in projected cash flows are recognized as impairment of the loan's cost basis to maintain a constant cost allocation based on initial projections. The Company evaluates the
projected cash flows for these loans and loan pools at least quarterly to determine if impairment exists, and if so, recognizes the impairment through provisions charged to operations, with a
corresponding valuation allowance offsetting the loan or loan pool in the consolidated balance sheets. Management implemented the cash basis method of accounting for such eligible loans in 2009 as a
result of increased uncertainty in the timing of future collections (attributable primarily to the borrowers' inability to obtain financing to refinance the loans). The carrying value of Purchased
Credit-Impaired Loans accounted for under the cash basis method approximated $98.7 million at December 31, 2010, and $42.1 million at December 31, 2009.



In
September 2008, the Company, through a wholly-owned subsidiary, acquired an additional ownership interest in UBN, SA ("UBN") in a transaction that
was accounted for
as a step acquisition under FASB's business combination accounting guidance. As a result of the transaction, UBN became a consolidated subsidiary of the Company. As such, FirstCity added UBN's loan
portfolio to its consolidated balance sheet in September 2008. On the date of the acquisition, the amount of loans and allowance for loan losses related to UBN's loan portfolio approximated
$69.1 million (including $67.3 million of non-performing loans) and $66.6 million, respectively.

The
allowance for loan losses on the UBN loan portfolio represents management's estimate of credit losses inherent in the loan portfolio at the balance sheet date. Management establishes
an allowance for loan losses through a provision charged to operations when a loan is determined to be impaired. A loan is considered to be impaired when, based on current information and events, it
is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Loans are charged-off against the allowance when all possible
means of collection have been exhausted and the remaining balance due is deemed uncollectible. At least quarterly, management evaluates the need for an allowance on an individual-loan
basis for the UBN loan portfolio by considering information about specific borrower situations, legal collection proceedings,

66

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

estimated
collateral values, general economic conditions, and other factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more
information becomes available.



Real
estate Portfolio Assets consist of real estate properties purchased from a variety of sellers or acquired through loan foreclosure. Rental income, net of
expenses, is generally recognized when received. The Company accounts for its real estate properties on an individual-asset basis as opposed to a pool basis. The following is a description of the
classifications and related accounting policies for the Company's various classes of real estate Portfolio Assets:



Real estate held for sale primarily includes real estate acquired through loan foreclosure. The Company classifies a property as held
for sale if (1) management commits to a plan to sell the property; (2) the Company actively markets the property in its current condition for a price that is reasonable in comparison to
its fair value; and (3) management considers the sale of such property within one year of the balance sheet date to be probable. Real estate held for sale is stated at
the lower of cost or fair value less estimated disposition costs. Real estate is not depreciated while it is classified as held for sale. Impairment losses are recorded if a property's fair value less
estimated disposition costs is less than its carrying amount, and charged to operations in the period the impairment is identified.

Real
estate held for investment generally includes acquired properties and is carried at cost less depreciation and amortization, as applicable. The Company classifies a property as held
for investment if the property is still under development and/or management does not expect the property to be sold within one year of the balance sheet date. The Company periodically reviews its
property held for investment for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Recoverability of property held for investment
is measured by comparison of the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the property. If the property is considered impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the property exceeds its fair value. Fair value is determined by discounted cash flows or market comparisons.



Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of cost (i.e. the
underlying loan's carrying value) or estimated fair value less disposition costs at the date of foreclosureestablishing a new cost basis. The amount, if any, by which the carrying value
of the underlying loan exceeds the property's fair value less estimated disposition costs at the foreclosure date is charged as a loss against operations. Expenditures for repairs, maintenance, and
other holding costs are charged to operations as incurred.

Real
estate properties acquired through a purchase transaction are initially recorded at the cost of the acquisition. The cost of acquired property includes the purchase price of the
property, legal fees,

67

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

and
certain other acquisition costs. Subsequent to acquisition, the Company capitalizes capital improvements and expenditures related to significant betterments and replacements, including costs
related to the development and improvement of the property for its intended use. Expenditures for repairs, maintenance, and other holding costs are charged to operations as incurred.

When
acquiring real estate with an existing building through a purchase transaction, the Company generally allocates the purchase price between land, land improvements, building, tenant
improvements, and intangible assets related to in-place leases based on their relative fair values. The fair values of acquired land and buildings are generally determined based on an
estimated discounted future cash flow model with lease-up assumptions as if the building was vacant upon
acquisition, third-party valuations, and other relevant data. The fair value of in-place leases includes the value of net lease intangibles for above- and below-market rents and tenant
origination costs, determined on a lease-by-lease basis. Amounts allocated to building and improvements are depreciated over their estimated remaining lives. Amounts allocated
to tenant improvements, in-place lease assets and other lease-related intangibles are amortized over the remaining life of the underlying leases. At December 31, 2010 and 2009,
accumulated depreciation and amortization was not significant.



Gains on disposition of real estate are recognized upon the sale of the underlying property if the transaction qualifies for gain
recognition under the full accrual method, as prescribed by the FASB's accounting guidance on real estate sales transactions. If the transaction does not meet the criteria for the full accrual method
of profit recognition based on our assessment, we account for the sale based on an appropriate deferral method determined by the nature and extent of the buyer's investment and our continuing
involvement.



The portions of U.S. Small Business Administration ("SBA") loans that are guaranteed by the SBA are classified by management as loans
held for sale. These loans are recorded at the lower of aggregate cost or estimated fair value. The fair value of SBA loans held for sale is based primarily on what secondary markets are currently
offering for loans with similar characteristics, or the contractual price for loan sales already consummated but which cannot be recognized as accounting sales until the expiration of a recourse
period. Net unrealized losses, if any, are recognized through a valuation allowance through a charge to income. The carrying value of SBA loans held for sale is net of premiums as well as deferred
origination fees and costs. Premiums and net origination fees and costs are deferred and included in the basis of the loans in calculating gains and losses upon sale. SBA loans are generally secured
by the borrowing entities' assets such as accounts receivable, property and equipment, and other business assets. The Company generally sells the guaranteed portion of each loan to a third-party
investor and retains the servicing rights. The non-guaranteed portion of SBA loans is classified as held for investment (discussed below). As described in Note 1(t), effective
January 1, 2010, the Company adopted new accounting guidance that requires SBA loan transactions subject to the SBA's premium recourse provision to be accounted for initially as secured
borrowings rather than asset sales. After the premium recourse provisions have elapsed, the transaction will be recorded as a sale

68

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

and
the resulting net gain on sale will be recognizedwhich is based on the difference between the proceeds received and the allocated carrying value of the loan sold. However, it should
be noted that effective January 31, 2011, the SBA removed the recourse provisions contained in its loan sales agreements for guaranteed portions of SBA loans. As a result, SBA loan sales
transacted by the Company under these revised agreements will be accounted for initially as a sale, with the corresponding gain or loss recognized at the time of sale.



Loans receivable consisting of loans made to affiliated entities (including Acquisition Partnerships and other equity-method investees)
and non-affiliated entities, and the non-guaranteed portions of SBA loans, are classified by management as held for investment. These loans are reported at their outstanding
principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans. Loan
origination fees and costs, as well as purchase premiums and discounts, are amortized as level-yield adjustments over the respective loan terms. Unamortized net fees, costs, premiums or discounts are
recognized upon early repayment or sale of the loan. Repayment of the loans is generally dependent upon future cash flows of the borrowers, future cash flows of the underlying collateral, and
distributions made from affiliated entities. Interest is
accrued when earned in accordance with the contractual terms of the loans. Interest is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding.

The
Company has established an allowance for loan losses to absorb probable, estimable losses inherent in its portfolio of loans receivable held for investment. This allowance for loan
losses includes specific allowances, based on individual evaluations of certain loans and loan relationships, and allowances for pools of loans with similar risk characteristics. Management's
determination of the adequacy of the allowance is a quarterly process and is based on evaluating the collectibility of the loans in light of various factors, as applicable, such as quality and
composition of the loan portfolio segments, estimated future cash receipts of the borrower's operations or underlying collateral, historical experience, estimated value of underlying collateral,
prevailing economic conditions, industry concentrations and conditions, and other relevant factors. This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. Actual losses experienced in the future may vary from management's estimates. Management attributes portions of the allowance to loans that
it evaluates and determines to be impaired and to groups of loans that it evaluates collectively.

In
determining the appropriate level of allowance, management uses information to stratify its portfolio of loans receivable held for investment into loan pools with common risk
characteristics. Classes in the affiliated and non-affiliated portfolio asset and commercial loan portfolio segments are generally disaggregated by accrual status (which is generally based
on management's assessment on the probability of default). Classes in the non-guaranteed SBA commercial loan portfolio segment are disaggregated based upon underlying credit quality.
Certain portions of the allowance are attributed to loan pools based on various factors and analyses, including but not limited to, current and historical loss experience trends, collateral, region,
current economic conditions, and industry concentrations and conditions. Loans deemed to be impaired, including loans with an increased probability of default as

69

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

determined
by management, are evaluated individually rather than on a pool basis as described above. We consider a loan to be impaired when, based on current information and events, we determine it is
probable that we will not be able to collect all amounts due according to the loan's contractual terms (including scheduled interest payments). When management identifies a loan as impaired, we
measure the impairment based on discounted future cash flows, except when foreclosure is probable or the source of repayment is the operation or liquidation of the collateral. In these cases, we use
the current fair value of the collateral, less estimated selling costs, instead of discounted cash flows. When a loan is determined to be impaired, we cease to accrue interest on the note and interest
previously accrued but not collected becomes part of our recorded investment in the loan and is collectively reviewed for impairment. When ultimate collectibility of the impaired note is in doubt, all
collections are applied to reduce the principal amount of such notes until the principal has been recovered, and collections thereafter are recognized as interest income. We return a loan to accrual
status when we determine that the collectibility of principal and interest is reasonably assured. Impairment losses are charged against an allowance account through provisions charged to operations in
the period impairment is identified. Loans are written-off against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered
remote.



The Company has investment securities that consist of a marketable equity security and purchased beneficial interests in securitized
financial assets. We classify and account for these securities as available-for-sale and, accordingly, we measure the securities at fair value on the consolidated balance
sheet, with unrealized gains and losses included in "Accumulated other comprehensive income." Fair value of the equity security is measured using quoted market prices in an active exchange market for
the identical asset. Fair value of the purchased beneficial interests are estimated based on the present value of expected collections on the underlying receivables using an internal valuation model,
incorporating market-based assumptions when such information is available. Additional information on the fair value measurement is included in Note 17.

The
excess of all cash flows attributable to the beneficial interest estimated at the acquisition date over the initial investment amount (i.e. the accretable yield) is recognized
as interest income over the life of the beneficial interest using the interest method. The Company continues to estimate the projected cash flows over the life of the beneficial interest for the
purposes of both recognizing interest income and evaluating impairment. Other-than-temporary is considered to have occurred when the fair value of the security has declined
below its amortized cost basis and if (1) we have the intent to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of its
amortized cost basis; or (3) we do not expect to recover the entire amortized cost basis of the security.

70

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)



Property, equipment and leasehold improvements (reported in "Other assets" in the consolidated balance sheets) are carried at cost less
accumulated depreciation and amortization. Property and equipment are depreciated over their estimated useful lives using the straight-line method of depreciation. Leasehold improvements
are amortized using the straight-line method over the estimated useful lives of the improvements (or the terms of the underlying leases, if shorter). Generally, buildings and building
improvements are depreciated over 25 to 30 years; office equipment is depreciated over 3 to 10 years; depreciable rail property is depreciated over 25 years; machinery and
equipment are depreciated over 5 to 15 years; and leasehold improvements are amortized over 2 to 10 years. Maintenance and repairs are charged to expense in the period incurred.
Expenditures for improvements and significant betterments that increase productive capacity or extend useful life are capitalized and depreciated over the useful lives of such assets. When property or
equipment is sold or retired, the cost and related accumulated depreciation are removed from the consolidated balance sheet and any gain or loss is included in income.



The Company generally services Portfolio Assets acquired through its investment in an Acquisition Partnership. The Company does not
recognize capitalized servicing rights related to its Portfolio Assets owned by the Acquisition Partnerships because (1) servicing is not contractually separated from the underlying assets by
sale or securitization of the assets with servicing retained or separate purchase or assumption of the servicing; (2) consideration is not exchanged between the Company and the Acquisition
Partnerships for the servicing rights of the acquired Portfolio Assets; (3) the Company has ownership interests in the Acquisition Partnerships that own the Portfolio Assets it services; and
(4) the Company does not have the risks and rewards of ownership of servicing rights. The Company services, in all material respects, the Portfolio Assets owned for its own account, the
Portfolio Assets owned by the Acquisition Partnerships and, to a very limited extent, certain Portfolio Assets owned by third parties. In connection with the Acquisition Partnerships in the United
States, the Company generally earns a servicing fee, which is based on a percentage of gross cash collections generated from the Portfolio Assets. The rate of servicing fee charged is generally a
function of the average face value of the assets within each pool being serviced (the larger the average face value of the assets in a Portfolio, the lower the fee percentage within the prescribed
range), the type of assets and the level of servicing required for each asset. For the Mexican Acquisition Partnerships, the Company earns a servicing fee based on costs of servicing plus a profit
margin. The Acquisition Partnerships in Europe and South America are serviced by various entities in which the Company maintains an equity interest. In all cases, service fees are recognized when they
are earned in accordance with the servicing agreements.

In
connection with the Company's SBA lending activities, the Company recognizes servicing assets through the sale of originated or purchased loans when servicing rights are retained. The
Company initially recognizes and measures at fair value purchased servicing rights and servicing rights obtained from the sale of SBA loans. The Company subsequently measures the servicing assets by
using the amortization method, which amortizes servicing assets in proportion to, and over the period of, estimated net servicing income. The amortization of the servicing assets is analyzed
periodically and is

71

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

adjusted
to reflect changes in prepayment rates and other estimates. See Note 8 for more information on servicing rights related to SBA loans.



The Company has servicing contracts with certain of its Acquisition Partnerships that entitle the Company to receive additional
compensation for servicing after a specified return to the investors has been achieved. The Company recognizes revenue related to these contracts when the investors receive the required level of
returns specified in the contracts and the Acquisition Partnerships receive cash in an amount greater than the required returns. There is no guarantee that the required level of returns to the
investors will be achieved or that any additional compensation to the Company related to the contracts will be realized. The Acquisition Partnerships record an accrued expense for these contingent
fees provided that these fees are probable and reasonably estimable.



The Company's consolidated railroad subsidiary, which interchanges rail cars with connecting carriers and provides rail freight
services for on-line customers, recognizes freight revenue at the time the shipment is either delivered to or received from the connecting carrier at the point of interchange. Industrial
switching and other service revenues are recognized as such services are provided.

The
Company's consolidated coal mine subsidiary, which engages primarily in the purchase and sale of coal and coal-related products, generates revenue under a
short-term coal sales contract with a major utility company (the contract was completed in December 2010). Revenue is recognized when coal is delivered to the customer at an
agreed-upon destination as specified in the related contract (at which point title and risk of loss passes to the customer). The
Company consolidated the coal mine subsidiary effective April 1, 2010 after it obtained control of the entity at such time. In December 2010, the Company disposed of its coal mine subsidiary.
Refer to Notes 3 and 4 for additional information.

The
Company's manufacturing subsidiary, which engages principally in the design, production and sale of wireless transmission equipment and software solutions, recognizes revenue derived
from the sale of equipment upon shipment of the product. Revenue associated with software solutions is recognized ratably over the period of the underlying agreements. Effective June 30, 2010,
the Company began accounting for its investment in this manufacturing subsidiary as an equity-method investment (instead of a controlled, consolidated subsidiary)refer to Note 3
for additional information.



The Company has determined that the local currency is the functional currency for its operations outside the United States (primarily
Europe and Latin America). We translate the results for our foreign subsidiaries and affiliates from the designated functional currency to the U.S. dollar using average exchange rates during the
relevant period, while we translate assets and liabilities at the exchange rate in effect at the reporting date. We report the resulting gains or losses from translating foreign currency financial
statements as a separate component of stockholders' equity in accumulated

72

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

other
comprehensive income or loss. An analysis of the changes in the cumulative adjustments for 2010 and 2009 follows (dollars in thousands):

Balance, December 31, 2008

$
(3,766
)Aggregate adjustment for the year resulting from translation adjustmentsand gains and losses on certain hedge transactions


4,722Balance, December 31, 2009


956Aggregate adjustment for the year resulting from translation adjustmentsand gains and losses on certain hedge transactions


(1,696
)Balance, December 31, 2010

$
(740
)


Increases
or decreases in expected functional currency cash flows upon settlement of a foreign currency transaction are recorded as foreign currency transaction gains or losses and
included in the Company's operations in the period in which the transaction is settled. Aggregate foreign currency transaction losses included in the consolidated statements of operations as other
expense for 2010 and 2009 were $1.0 million and $0.1 million, respectively.

In
general, monetary assets and liabilities designated in U.S. dollars give rise to foreign currency realized and unrealized transaction gains and losses, which we record in the
consolidated statement of operations as foreign currency transaction gains, net. However, we report the effects of changes in exchange rates associated with certain U.S. dollar-denominated
intercompany loans and advances to certain of our Latin American subsidiaries that are of a long-term investment nature (that is, settlement is not planned or anticipated in the
foreseeable future) as other comprehensive income or loss in our consolidated financial statements. We have determined that certain U.S. dollar-denominated intercompany loans and advances to our Latin
American subsidiaries are of a long-term investment nature.

The
net foreign currency translation gain included in accumulated other comprehensive income (loss) relating to the Company's Euro-denominated debt (see Notes 2 and
12) was $1.4 million for 2010 and $4,000 for 2009.



The Company files a consolidated federal income tax return with its 80% or greater owned subsidiaries. The Company records all
of the allocated federal income tax provision of the consolidated group in the parent corporation.

The
Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates, if any, would be recognized in earnings in the period that includes the enactment date. We reduce the carrying amounts of deferred tax
assets through a valuation

73

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

allowance
if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is
assessed periodically by the Company based on the more-likely-than-not realization threshold criterion. In this assessment, appropriate consideration is given to
all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other factors, the nature, frequency and severity of current and cumulative
losses, forecasts of future profitability, excess of appreciated asset value over the tax basis of net assets, the duration of statutory carryforward periods, the Company's experience with utilizing
available operating loss and tax credit carryforwards, and tax planning strategies. In making such assessments, significant weight is given to evidence that can be objectively verified.

The
Company accounts for income tax uncertainty using a two-step approach whereby we recognize an income tax benefit if, based on the technical merits of a tax position, it
is more likely than not (a probability of greater than 50%) that the tax position would be sustained upon examination by the taxing authority. We then recognize a tax benefit equal to the largest
amount of tax benefit that is greater than 50% likely to be realized upon settlement with the taxing authority, considering all information available at the reporting date. Once a financial statement
benefit for a tax position is recorded, we adjust it only when there is more information available or when an event occurs necessitating a change. Interest and penalties are recognized as a component
of income tax expense.



Earnings per share ("EPS") is presented for both basic EPS and diluted EPS. We compute basic EPS by dividing net earnings available to
common stockholders by the weighted-average number of common shares outstanding during the year. Diluted EPS is computed by dividing net earnings available to common stockholders by the
weighted-average number of common shares outstanding during the year, plus the dilutive effect of common stock equivalents such as stock options and warrants. We exclude these common stock equivalents
from the computation of diluted EPS when the effect of inclusion would be anti-dilutive.

74

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

The
components of basic and diluted net earnings per common share are as follows:

Year Ended
December 31,2010

2009(Dollars in thousands,
except per share data)Earnings from continuing operations

$
21,966

$
24,303Income from discontinued operations


3,962


Net earnings


25,928


24,303Less: net income attributable to the noncontrolling interest


13,425


5,559Net earnings attributable to FirstCity

$
12,503

$
18,744Weighted average outstanding shares of common stock (in thousands)


10,092


9,851Dilutive effect of:Warrants





231Dilutive effect of stock options


105


157Weighted average outstanding shares of common stock and common stock equivalents


10,197


10,239Earnings from continuing operations per share of common stock:Basic

$
0.85

$
1.90Diluted

$
0.84

$
1.83Income from discontinued operations per share of common stock:Basic

$
0.39

$
Diluted

$
0.39

$
Net earnings per share of common stock:Basic

$
1.24

$
1.90Diluted

$
1.23

$
1.83


Employee
stock options to purchase approximately 680,000 and 741,000 shares of common stock as of December 31, 2010 and 2009, respectively, were outstanding
but not included in the computation of diluted EPS because their inclusion would have been anti-dilutive.



The Company assesses the impairment of long-lived assets and certain identifiable intangible assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the
asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an
impairment is recognized to the extent that the carrying value of the asset exceeds its fair value. Fair

75

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

value
is determined through various valuation techniques including discounted cash flow models, quoted market prices and third-party independent appraisals, as considered necessary.



The Company measures the compensation cost of stock-based awards using the estimated fair value of those awards on the grant date. We
recognize the compensation cost as expense over the vesting period of the awards. See Note 13 for additional disclosure of the Company's stock-based compensation.



The Company applies the provisions of FASB's accounting guidance for fair value measurements of financial and non-financial
assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring or non-recurring basis, as applicable. This guidance defines fair value as
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price).
This guidance also establishes a framework for measuring fair value and expands disclosures about fair value measurements. See Note 17 for additional information.



Effective
January 1, 2010, the Company adopted the FASB's accounting guidance on the consolidation of VIEs (issued in June 2009). This new guidance
eliminates the exemption for QSPEs; revises previous guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial
interest in a VIE with a qualitative approach focused on identifying which enterprise has both the power to direct the activities of the VIE that most-significantly impacts the entity's
economic performance and has the obligation to absorb losses or the right to receive benefits that could be significant to the entity; requires reconsideration of whether an entity is a VIE when any
changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the
activities of the entity that most significantly impact the entity's economic performance; and requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE and additional
disclosures about an enterprise's involvement in VIEs. The adoption of this guidance did not have a material impact on our consolidated financial statements. Refer to Note 19 for additional
information about the Company's involvement with VIEs.



Effective
January 1, 2010, the Company adopted the FASB's guidance on accounting for transfers of financial assets (issued in June 2009). This guidance
amends previous guidance which, among other changes, eliminates the concept of a QSPE, changes the requirements for de-recognizing financial assets, defines the term "participating
interest" to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale, and requires additional disclosures. The recognition and measurement provisions are
effective for transfers occurring on or after January 1, 2010. The new

76

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)

accounting
guidance delays the Company's recognition of the sale of guaranteed portions of SBA loans until expiration of the premium recourse provisions, and requires such transactions to be accounted
for initially as a secured borrowing. As such, the Company did not recognize any gains related to SBA loan sales for the first three months of 2010. Once the premium recourse provisions have elapsed,
the transaction will be recorded as a sale with the guaranteed portion of the SBA loan and the secured
borrowing removed from the balance sheet and the resulting gain on sale recorded. Refer to Notes 1(h) and 6 for additional information.

It
should be noted that effective January 31, 2011, the SBA removed the recourse provisions contained in its loan sales agreements for guaranteed portions of SBA loans. As a
result, SBA loan sales transacted by the Company under these revised agreements will be accounted for initially as a sale, with the corresponding gain or loss recognized at the time of sale.



In
January 2010, the FASB issued new accounting guidance that amended existing guidance for fair value disclosures. This guidance requires separate disclosures
of significant transfers of items in and out of Levels 1 and 2 in the fair value hierarchy, and to describe the reasons for the transfers. The updated guidance also clarifies, among other
things, that fair value measurement disclosures should be provided for each class of assets and liabilities, and that disclosures of inputs and valuation techniques should be provided for both
recurring and non-recurring Level 2 and Level 3 fair value measurements. We adopted this new guidance for the quarterly period ended March 31, 2010. Since this
guidance is disclosure-only in nature, our adoption of the guidance did not significantly impact the Company's consolidated financial statements. Refer to Note 17 for additional
information.



In
July 2010, the FASB issued accounting guidance related to disclosures about the credit quality of financing receivables and the allowance for credit losses.
The amended guidance applies to all financing receivables except for short-term trade receivables and receivables measured at either fair value or the lower of cost or fair value. The
objective of the amendment is disclosure of information that enables financial statement users to understand the nature of inherent credit risks, the entity's method of analysis and assessment of
credit risk in estimating the allowance for credit losses, and the reasons for changes in both the receivables and allowances when examining a creditor's portfolio of financing receivables and its
allowance for losses. Under the new guidance, the disaggregation of financing receivables is disclosed by portfolio segment or by class of financing receivable. The Company adopted the
period-end disclosure requirements of this guidance related to an entity's credit quality of financing receivables and the related allowance for loan losses in the consolidated financial
statements for the year ended December 31, 2010. The Company will adopt the activity-related provisions of this guidance in the first quarter of 2011. The disclosure requirements regarding
troubled debt restructurings have been delayed by the FASB. While the provisions of this guidance require significant expansion of the Company's disclosures on the credit quality of financing
receivables and the allowance for loan losses, the period-end provisions did not have an impact on the Company's financial condition and results of operations, and the Company does not
expect the adoption of the remaining disclosure provisions to have a material
effect on the Company's financial condition and results of operations. Refer to Notes 1(h), 5 and 6 for additional information.

77

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

1. Summary of Significant Accounting Policies (Continued)



In
April 2010, the FASB issued guidance that clarifies the accounting for loan modifications when the loan is part of a pool that is accounted for as a single
asset. The new guidance provides that modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans
would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash
flows for the pool change. This guidance does not affect the accounting for loans that are not accounted for within pools. Loans accounted for individually continue to be subject to the troubled debt
restructuring accounting provisions. The new guidance also allows entities to make a one-time election to terminate accounting for loans in a pool, which may be made on a
pool-by-pool basis, upon adoption of this new guidance. We early-adopted the provisions of this new guidance, as permitted, effective April 1, 2010. The adoption of this
guidance did not have a material impact on our consolidated financial statements.



In
January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately,
a reconciliation for fair value measurements using significant unobservable inputs (Level 3) information about purchases, sales, issuances and settlements (that is, on a gross basis rather than
one net number). The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2010 and for interim periods within the fiscal year. Since this
guidance is disclosure-only in nature, management does not expect the adoption of this updated guidance to have a material impact on our financial condition and results of operations.

2. Liquidity and Capital Resources

The Company requires liquidity to fund its operations, Portfolio Asset acquisitions, investments in and advances to Acquisition Partnerships, capital investments in
privately-held middle-market companies, other debt and equity investments, repayments of bank borrowings and other debt, and working capital to support our growth. Historically, our
primary sources of liquidity have been funds generated from operations (primarily loan and real estate collections and service fees), equity distributions from the Acquisition Partnerships and other
subsidiaries, interest and principal payments on subordinated intercompany debt, dividends from the Company's subsidiaries, and borrowings from credit facilities with external lenders.

Our
ability to fund operations and make new investments is dependent on (1) the cash leak-through and overhead allowance provisions included in our loan facility with
Bank of Scotland (as discussed below); (2) residual cash flows from the pledged assets and equity investments after full repayment of the Bank of Scotland debt (as discussed below);
(3) our current holdings of unencumbered cash and portfolio assets; and (4) our investment agreement with Värde Investment Partners, L.P. (as discussed below). Many
factors, including general economic conditions, are essential to our ability to generate cash flows. Fluctuations in our collections, investment income, credit

78

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

2. Liquidity and Capital Resources (Continued)

availability,
and adverse changes in other factors could have a negative impact on our ability to generate sufficient cash flows to support our business. Despite the deterioration in general economic
and credit market conditions over the past two years, we have continued to have access to liquidity in both our Portfolio Asset Acquisition and Resolution business segment and Special Situations
Platform business segments through our unencumbered cash and portfolio assets, credit facility commitments with external lenders, and/or an investment agreement in place(as discussed below). While
management believes that these cash flow sources will provide FirstCity with funding and liquidity to supports its operations and investment activities, FirstCity continues to actively seek additional
sources of liquidity and alternative funding sources.

The
following is a summary of FirstCity's investment agreement and primary external lending facilities that it uses to finance and provide liquidity for equity and loan investments,
Portfolio Asset acquisitions, Acquisition Partnership investments, capital investments, and working capital:



FirstCity, through its wholly-owned subsidiaries FC Diversified Holdings LLC ("FC Diversified") and FirstCity Servicing
Corporation ("FC Servicing"), and Värde are parties to an investment agreement, effective April 1, 2010, whereby Värde may invest up to $750 million, at its
discretion, alongside FirstCity in distressed loan portfolios and similar investment opportunities, subject to the terms and conditions contained in the agreement. The primary terms of the agreement
are as follows:



The
investment agreement has a termination date of June 30, 2015, which is subject to consecutive automatic one-year extensions without any action by FirstCity and
Värde. FC Servicing will be the servicer for all of the acquisition entities formed by FC Diversified and Värde. The parties may terminate the Investment Agreement prior
to June 30, 2015 under certain conditions.

The
cash flows from the assets and equity interests from the Company's investments made in connection with the investment agreement with Värde, which are held by FC
Investment Holdings Corporation (a wholly-owned subsidiary of FirstCity) and its subsidiaries, are not subject to the security interest requirements of Bank of Scotland's Reducing Note Facility
described below.

79

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

2. Liquidity and Capital Resources (Continued)



On June 25, 2010, FirstCity Commercial Corporation ("FC Commercial") and FH Partners LLC ("FH Partners"), as borrowers,
and FLBG Corporation ("FLBG Corp."), as guarantor, all of which are wholly-owned subsidiaries of FirstCity, and Bank of Scotland and BoS(USA), Inc. (collectively, "Bank of Scotland"), as
lenders, entered into a Reducing Note Facility Agreement ("Reducing Note Facility"). In addition, on June 25, 2010, FirstCity executed a Limited Guaranty Agreement guarantying payment of the
indebtedness under the Reducing Note Facility to a maximum amount of $75.0 million.

The
Reducing Note Facility amended and restated the following loan facilities previously provided by Bank of Scotland to FirstCity and FH Partners: (a) Revolving Credit Agreement
dated November 12, 2004, as amended, to FirstCity ($225.0 million loan facility); (b) Revolving Credit Agreement dated August 26, 2005, as amended, to FH Partners
($100.0 million loan facility); and (c) Subordinated Delayed Draw Credit Agreement dated September 5, 2007, as amended, to FirstCity ($25.0 million loan facility)
(collectively, "Prior Credit Agreements"). The Prior Credit Agreements were guaranteed by substantially all of the wholly-owned subsidiaries of FirstCity and secured by substantially all of the assets
of FirstCity and its wholly-owned subsidiaries. The outstanding indebtedness and letter of credit obligations under the Prior Credit Agreements in the amount of $268.6 million were refinanced
into the Reducing Note Facility, which provides for a scheduled amortization through the maturity date (June 25,
2013). Fees paid to Bank of Scotland in connection with the Reducing Note Facility approximated $2.0 million.

The
material terms of the Reducing Note Facility and related agreements are as follows:



80

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

2. Liquidity and Capital Resources (Continued)



The
Reducing Note Facility is guaranteed by FLBG Corp. and all of its subsidiaries ("Covered Entities"), which represent the entities that were subject to the obligations of the Prior
Credit Facilities other than FirstCity and FC Servicing. The Reducing Note Facility is secured by substantially all of the assets of the Covered Entities. FC Investment Holdings Corporation (a
newly-formed wholly-owned subsidiary of FirstCity) and its current and future subsidiaries, or other entities in which such subsidiaries own any equity interest ("Non-Covered Entities"),
are not subject to, do not guarantee and do not provide security interests in their assets to secure the Reducing Note Facility. FC Servicing only provides a non-recourse security interest
in certain equity interests owned by it and in most of the servicing fees from previously-existing agreements which secured the Prior Credit Facilities. FC Servicing does not provide a security
interest in servicing agreements entered into with the Non-Covered Entities or in any of its other assets and does not guarantee the Reducing Note Facility.

In
October 2010, a letter of credit under the Reducing Note Facility was funded in the amount of $11.9 million, and the proceeds were used to pay-off a bank note
payable that was owed by an affiliated Mexican entity of the Company (see Note 21). The entire amount of the funded letter of credit was added to the unpaid principal obligation under the terms
and conditions of the Reducing Note Facility.

At
December 31, 2010, the unpaid principal balance on the Reducing Note Facility was $228.1 million, which included $23.2 million in Euro-denominated
debt that FirstCity uses to partially off-set its business exposure to foreign currency exchange risk attributable to its net equity investments in Europe (see Note 12). Under terms
of the Reducing Note Facility, the Company is required to make principal payments to reduce the unpaid principal balance outstanding on this term-loan facility to $185.0 million at
December 31, 2011, $100.0 million at December 31, 2012, and the remainder due at maturity (June 2013).

The
Reducing Note Facility contains covenants, representations and warranties on the part of FLBG Corp., FC Commercial and FH Partners that are typical for transactions of this type. In
addition, the Reducing Note Facility contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or
default under,
certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of Scotland may
accelerate the indebtedness under the Reducing Note Facility. At December 31, 2010, FirstCity was in compliance with all covenants or other requirements set forth in the Reducing Note Facility.



At December 31, 2010, American Business Lending, Inc. ("ABL"), a wholly-owned subsidiary of FirstCity, had
a $25.0 million revolving loan facility with Wells Fargo Capital Finance ("WFCF") for the purpose of financing and acquiring SBA loans. The unpaid principal balance on this loan facility at
December 31, 2010 was $18.5 million. This credit facility matures in January 2012 and is secured by substantially all of the assets of ABL. In addition, FirstCity provides WFCF with an
unconditional guaranty for all of ABL's obligations up to a maximum of $5.0 million plus enforcement costs. The primary terms and key covenants of the $25.0 million
revolving loan facility, as amended, are as follows.

81

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

2. Liquidity and Capital Resources (Continued)



At
December 31, 2010, ABL was in compliance with all covenants or other requirements set forth in the credit agreement or other agreements with WFCF, except for the covenant
related to the maximum loan loss ratio. At the end of each quarter, ABL's ratio of loan losses for the twelve-month period should not exceed 3.0% (ABL's measure under
this condition was 3.5% at December 31, 2010). WFCF waived this covenant requirement of the agreement as of December 31, 2010.

3. Business Combinations, Business Deconsolidation and Noncontrolling Interest Acquisitions



In December 2010, the Company, through a wholly-owned subsidiary, acquired the remaining ownership and beneficial interests (ranging
from 55% to 70%) in nine German Acquisition Partnerships for $5.9 million. The stakeholders that sold their interests in these German entities to FirstCity included two European entities that
are equity-method investees of FirstCity. The purchase price consideration given by FirstCity included $1.8 million in cash and $4.1 million of notes payable (financed by the affiliated
equity-method investees). As a result of this transaction, the Company's

82

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

3. Business Combinations, Business Deconsolidation and Noncontrolling Interest Acquisitions (Continued)

ownership
in each of the German entities increased to 100%resulting in eight of these entities becoming consolidated subsidiaries of the Company. Prior to this transaction, the Company,
through a wholly-owned subsidiary, owned a noncontrolling interest in eight of the German entities (i.e. equity-method investees), and held a controlling interest through its combined direct
and indirect majority ownership in the other German entity (i.e. consolidated subsidiary).

The
portion of the transaction related to the Company's acquisition of the controlling interests in eight German entities ($4.6 million purchase price) was accounted for as a
business combination, and accordingly, all of the assets and liabilities of these German entities were measured at fair value on the acquisition date and included in the Company's consolidated balance
sheet. The recognized amounts of the identified assets acquired and liabilities assumed, at fair value, on the acquisition date included $1.4 million in cash, $22.0 million in Portfolio
Assets, a $13.5 million note payable to Bank of Scotland
(held by the German entity, HMCS-GEN Ltd), and $0.3 million of other liabilities. Pursuant to accounting provisions applicable to business combinations, the Company's
carrying values of its previously-held equity-method investments in these eight German Acquisition Partnerships were re-measured to fair value at the acquisition date. The fair
value of the Company's previously-held equity interests exceeded the aggregate carrying values by approximately $3.7 million, which the Company recognized as "Gain on business
combinations" in its consolidated statement of operations for 2010.

The
portion of the transaction related to the Company's acquisition of the noncontrolling interests in the other German entity ($1.3 million purchase price) was accounted for as
an equity transaction under accounting provisions applicable to noncontrolling interest transactions. The Company's carrying value of the purchased noncontrolling interests was $0.2 million
lower than the purchase price, and accordingly, the Company recognized this difference as a decrease to the Company's consolidated paid-in capital.

In
February 2011, the Company sold a substantial majority of its interests in the Portfolio Assets held by eight of the German entities and its wholly-owned equity interest in a German
entity to a European Acquisition Partnership for approximately $22.5 million. FirstCity, through a wholly-owned subsidiary, has a noncontrolling 13% beneficial interest in the European
Acquisition Partnership that purchased the Portfolio Assets and German entity (the remaining 87% beneficial interest is owned by an affiliate of Värde).



On December 11, 2009, the Company, through a majority-owned Special Situations Platform subsidiary, acquired 87.45% of the
common stock of BEI Holding Corporation ("BEI"). BEI engages principally in the design, production and sale of wireless communications equipment and software solutions. BEI is headquartered in
Illinois and has sales throughout North America, as well as Latin America, Europe, Asia and Africa. The results of BEI's operations have been included in the Company's consolidated financial
statements since the acquisition date (until the date of deconsolidation as discussed below), and are included in our Special Situations Platform business segment (see Note 18).

83

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

3. Business Combinations, Business Deconsolidation and Noncontrolling Interest Acquisitions (Continued)

The
following table summarizes the consideration transferred to acquire BEI and the amounts of identified assets acquired and liabilities assumed, based on their fair values (amounts in
thousands):

At December 11, 2009 (acquisition date):Fair value of consideration transferred:Cash




$
6Recognized amounts of identified assets acquired and liabilities assumed:Cash

$
1,571Accounts receivable


2,565Inventory


3,323Property, plant and equipment


704Other tangible assets


196Intangible assets:Proprietary technology


1,030Trade name and trademarks


878Other


121Trade and other payables


(6,572
)Borrowings


(3,000
)Total identifiable net assets





816Bargain purchase gain




$
810


The
excess of the purchase price over the net identifiable assets was recognized as a bargain purchase gain and is included in "Gain on business combinations" on the
Company's statement of operations for 2009. The gain was largely driven by depressed market conditions in the wireless communications industry, which allowed for an attractive acquisition price.

Effective
June 30, 2010, the Company and the noncontrolling owners consented to certain amendments to the subsidiary's operating agreement that resulted in the Company ceasing to
have a controlling interest, but retaining a noncontrolling interest and elevated economic interests, in the manufacturing subsidiary. Accordingly, the Company deconsolidated and removed the carrying
values of the manufacturing subsidiary's assets ($9.9 million) and liabilities ($9.6 million) and the carrying value of the noncontrolling interest ($39,000) attributed to the subsidiary
from its consolidated balance sheet on June 30, 2010. The Company also recorded its retained noncontrolling interest in the manufacturing entity at estimated fair value of approximately
$0.3 million at June 30, 2010. No gain or loss was recognized by the Company as a result of deconsolidating this subsidiary. On June 30, 2010, the Company started to account for
its retained investment in the manufacturing entity using the equity-method of accounting. Consequently, the Company no longer reports the individual revenue and expense
line-items of the manufacturing entity's operations in its
consolidated statements of operations (rather, the Company began recording its share of the subsidiary's net earnings as "Equity in earnings of unconsolidated subsidiaries" beginning July 1,
2010).

84

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

3. Business Combinations, Business Deconsolidation and Noncontrolling Interest Acquisitions (Continued)



The Company, through a majority-owned Special Situations Platform subsidiary, obtained control of an equity-method investee (coal mine
operation), effective April 1, 2010, after the investee acquired and redeemed the 55.5% ownership interest held by the then-majority shareholder in exchange for a
$4.6 million note payable. As a result of the equity interest redemption, the Company's ownership interest in the investee increased to 88.8% from 39.5% and the coal mine operation became a
consolidated subsidiary of the Company. The transfer of a controlling interest in the investee to the Company was accounted for as a business combination, and accordingly, all of the assets and
liabilities of the coal mine operation were measured at fair value on the date control was obtained and included in the Company's consolidated balance sheet, net of intercompany account balances that
were eliminated in consolidation. The following table reflects the estimated fair value of the coal mine operation's identifiable assets and liabilities, and the estimated fair value of the
noncontrolling interest, that were included in the Company's consolidated balance sheet at April 1, 2010 (in thousands):

Cash

$
1,597Coal supply agreement(1)


13,092Accounts receivable and other assets(1)


3,699Total assets

$
18,388Note payable

$
4,615Coal purchase agreement(2)


2,394Intercompany liability(3)


4,086Accounts payable and other liabilities(2)


2,415Total liabilities

$
13,510Noncontrolling interest

$
548


(1)Included
in "Other assets" on the Company's consolidated balance sheet.(2)Included
in "Other liabilities" on the Company's consolidated balance sheet.(3)Eliminated
in consolidation with the Company's consolidated financial statements.


In
addition to measuring the subsidiary's assets and liabilities at fair value at the date control was obtained on April 1, 2010, the Company's carrying value of its
previously-held equity-method investment in the coal mine subsidiary was re-measured to fair value under accounting guidance applicable to business combinations. The fair value
of the Company's total interest in the subsidiary after the business combination exceeded the carrying value of its previously-held equity interest by approximately $4.8 million,
which the Company recognized as "Gain on business combinations" in its consolidated statement of operations for 2010. The Company's carrying value of its previously-held equity investment
in the coal mine subsidiary included the effects of the investee's distribution of a wholly-owned equipment subsidiary (i.e. spin-off transaction), effective April 1, 2010,
to the owners in proportion to their then-existing ownership percentages. The spin-off transaction effected by the investee was recorded at carrying value and the Company's
proportionate share of equity in the

85

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

3. Business Combinations, Business Deconsolidation and Noncontrolling Interest Acquisitions (Continued)

distributed
entity approximated $2.7 millionwhich it continued to record as an equity-method investment after the spin-off.

The
Company's application of business combination accounting in connection with obtaining control of the coal mine subsidiary resulted in the Company's recognition of an asset for an
above-market-price coal supply agreement and a liability for an above-market-price coal purchase agreement. The fair values of the coal supply and coal purchase agreements were based on discounted
cash flow calculations of the difference between the expected contract revenues and costs based on the stated contractual terms and the estimated net contract revenues and costs derived from applying
forward-market commodity prices as of April 1, 2010. The discount rate used for the calculations was obtained from independent pricing reflecting broker market quotes. The coal supply asset and
coal purchase liability were amortized over the actual amount of tons shipped under each contract (which both expired in December 2010), The Company disposed of its coal mine subsidiary in December
2010 (see Note 4).



On March 31, 2010, the Company acquired the remaining 50% ownership interest in three domestic Acquisition Partnerships for
$4.4 million. As a result of this transaction, the Company's ownership interest in each of these entities increased to 100% and the Company obtained control of such entities, resulting in these
Acquisition Partnerships becoming consolidated subsidiaries of the Company. The transaction was accounted for as a business combination, and accordingly, all of the assets and liabilities of these
Acquisition Partnerships were measured at fair value on the acquisition date and included in the Company's consolidated balance sheet. The following table reflects the estimated fair value of the
Acquisition Partnerships' assets and liabilities that were included in the Company's consolidated balance sheet on the acquisition date (in thousands):

Cash

$
1,427Portfolio Assets


21,765Other assets


82Total assets

$
23,274Notes payable to banks

$
13,811Other liabilities


235Total liabilities

$
14,046


Pursuant
to accounting provisions applicable to business combinations, the Company's carrying value of its previously-held equity-method investments in these Acquisition
Partnerships was re-measured to fair value at the acquisition date. The fair value of the Company's previously-held equity interests exceeded the aggregate carrying values by
approximately $0.9 million. As such, the Company recognized a $0.9 million gain attributable to the re-measurement of its previously-held equity interests on the
acquisition date (included in "Gain on business combinations" in the Company's consolidated statement of operations for 2010).

86

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

3. Business Combinations, Business Deconsolidation and Noncontrolling Interest Acquisitions (Continued)



In May 2009, the Company, through a majority-owned subsidiary (UBN, SA), acquired additional ownership interests (ranging from
55.0% to 95.0%) in sixteen French Acquisition Partnerships for $7.8 million in cash. As a result of the transaction, the Company acquired a majority ownership interest (i.e. controlling
financial interest) in each of the sixteen French entitiesresulting in the entities becoming consolidated subsidiaries of the Company. Prior to this transaction, the Company, through a
wholly-owned subsidiary, owned a direct equity-method investment in nine of the French entities (the aggregate carrying value of the Company's equity-method investments in these nine French entities
approximated $0.5 million at the time of the transaction). In addition, prior to this transaction, the Company, through an equity-method investee, owned an indirect equity-method investment in
all of the French entities.

The
transaction was accounted for as a business combination, and accordingly, the French entities' assets (primarily non-performing loans) and liabilities and the related
noncontrolling interests were measured at fair value on the acquisition date and included in the Company's consolidated balance sheet. The fair value of the Portfolio Assets was measured using a
discounted cash flow model based on the projected future cash flows of the underlying loan portfolios. The following table reflects the estimated fair value of the French entities' assets and
liabilities, and the estimated value of the noncontrolling interests, that were included in the Company's consolidated balance sheet on the acquisition date (in thousands):

Cash

$
766Portfolio Assets


12,912Other liabilities


766Noncontrolling interests (component of FirstCity's equity)


3,080


In
addition, pursuant to accounting provisions applicable to business combinations, the Company's previously-held direct equity-method investments in nine of the French
entities were re-measured to fair value at the acquisition date. The fair value of the Company's previously-held equity interests exceeded the aggregate carrying value of
$0.5 million by approximately $1.5 million. As such, the Company recognized a $1.5 million gain attributable to the remeasurement of its previously-held equity
interests on the acquisition date (included in "Business combination gains" on the Company's consolidated statement of operations for 2009).

87

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

3. Business Combinations, Business Deconsolidation and Noncontrolling Interest Acquisitions (Continued)



In May 2009, the Company purchased noncontrolling interests in two majority-owned subsidiaries (UBN and WAMCO 80) already
included in the Company's consolidated financial statements. The Company paid $2.8 million in cash for the purchased noncontrolling interests. On the respective acquisition dates, the Company's
carrying values of the purchased noncontrolling interests approximated $3.6 million. Under accounting provisions applicable to noncontrolling interest transactions, the Company accounted for
the purchased noncontrolling interests as equity transactions, and recognized the $0.8 million difference between the purchase prices and the carrying values of the noncontrolling interests
acquired as an increase to the Company's consolidated paid-in capital.

4. Discontinued Operations

In December 2010, the Company's consolidated coal mine operation completed performance on its coal supply and purchase agreements (which both expired in December 2010). The coal mine
operations ceased as a result of these contract terminations since it did not have other coal contracts. As a result, the Company dissolved the coal mine subsidiary in December 2010. The results of
operations from our coal mine subsidiary are reported as discontinued operations within our Special Situations Platform business segment for the nine-month period ended December 31,
2010 (we acquired a controlling interest in this subsidiary in April 2010see Note 3). Earnings attributed to these discontinued operations, which totaled $4.0 million for
the nine-month period ended December 31, 2010 (included in our consolidated statement of operations), were comprised of $42.4 million of operating revenues,
$43.2 million of operating costs, and a $4.8 million business combination gain.

88

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

5. Portfolio Assets

Portfolio Assets are summarized as follows:

December 31, 2010
(Dollars in thousands)Carrying
Value

Allowance for
Loan Losses

Carrying
Value, netLoan Portfolios:Purchased Credit-Impaired LoansDomestic:Commercial real estate

$
117,534

$
354

$
117,180Business assets


17,796


252


17,544Other


4,889


90


4,799Latin America:Commercial real estate


4,013


260


3,753Residential real estate


6,144





6,144Europecommercial real estate


18,046


866


17,180UBN loan portfoliobusiness assets:Non-performing loans


45,328


43,291


2,037Performing loans


1,125





1,125Other


3,263


49


3,214Total Loan Portfolios

$
218,138

$
45,162


172,976Real Estate Portfolios:Real estate held for sale, net








36,126Real estate held for investment, net








6,959Total Real Estate Portfolios








43,085Total Portfolio Assets







$
216,061


89

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

5. Portfolio Assets (Continued)



December 31, 2009
(Dollars in thousands)Carrying
Value

Allowance for
Loan Losses

Carrying
Value, netLoan Portfolios:Purchased Credit-Impaired LoansDomestic:Commercial real estate

$
138,485

$
5,914

$
132,571Business assets


26,983


394


26,589Other


3,906


390


3,516Latin America:Commercial real estate


4,368


100


4,268Residential real estate


6,177





6,177Europecommercial real estate


13,001


128


12,873UBN loan portfoliobusiness assets:Non-performing loans


60,929


58,624


2,305Performing loans


1,555





1,555Other


8,367


275


8,092Total Loan Portfolios

$
263,771

$
65,825


197,946Real Estate Portfolios:Real estate held for sale, net








17,051Real estate held for investment, net








9,387Total Real Estate Portfolios








26,438Total Portfolio Assets







$
224,384


Certain
Portfolio Assets are pledged to secure a loan facility with Bank of Scotland (see Note 2). In addition, certain Portfolio Assets are pledged to secure notes payable of
certain consolidated affiliates of FirstCity that are generally non-recourse to FirstCity or any affiliate other than the entity that incurred the debt.

Income
from Portfolio Assets is summarized as follows:

Year Ended
December 31,2010

2009(Dollars in thousands)Loan Portfolios:Purchased Credit-Impaired Loans

$
39,164

$
50,750Purchased performing loans


419


299UBN


984


1,030Other


1,703


610Real Estate Portfolios


3,701


1,146Income from Portfolio Assets

$
45,971

$
53,835


90

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

5. Portfolio Assets (Continued)

Accretable
yield represents the amount of income the Company can expect to generate over the remaining life of its existing Purchased Credit-Impaired Loans based on estimated future cash
flows as of December 31, 2010 and 2009. Reclassifications from nonaccretable difference to accretable yield primarily result from the Company's increase in its estimates of future cash flows.
Reclassifications to
nonaccretable difference from accretable yield primarily results from the Company's decrease in its estimates of future cash flows. Changes in accretable yield related to the Company's Purchased
Credit-Impaired Loans for the years ended December 31, 2010 and 2009 are as follows:

Year Ended
December 31,2010

2009(Dollars in thousands)Beginning Balance

$
12,923

$
58,114Additions





23,077Accretion


(3,485
)

(16,752
)Reclassification to nonaccretable difference


(2,111
)

(3,316
)Disposals


(2,703
)

(11,304
)Transfer to non-accrual


(3,039
)

(37,131
)Translation adjustments


(205
)

235Ending Balance

$
1,380

$
12,923


Acquisitions
of Purchased Credit-Impaired Loans for 2010 and 2009 are summarized in the table below:

Year Ended
December 31,2010

2009(Dollars in thousands)Face value at acquisition

$
65,947

$
342,658Cash flows expected to be collected at acquisition


54,118


256,460Basis in acquired loans at acquisition


34,810


184,231


During
2010, the Company recorded provisions for loan and impairment losses, net of recoveries, by a charge to income of $7.4 millionwhich was comprised of
$4.3 million of impairment charges on real estate portfolios and $3.1 million of provision for loan losses, net of recoveries. During 2009, the Company recorded provisions for loan and
impairment losses, net of recoveries, by a charge to income of $3.7 millionwhich was comprised of $1.9 million of impairment charges on real estate portfolios and
$1.8 million of provision for loan losses, net of recoveries.

91

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

5. Portfolio Assets (Continued)

Changes
in the allowance for loan losses related to our loan Portfolio Assets are as follows:

Purchased Credit-Impaired Loans

OtherDomestic

Latin America(dollars in thousands)

Commercial
Real Estate

Business
Assets

Other

Commercial
Real Estate

Europe

UBN

Other

TotalBeginning balance,January 1, 2009

$
10,440

$
2,811

$
538

$
120

$


$
62,150

$
306

$
76,365Provisions


4,191


902


191


113


127





97


5,621Recoveries


(152
)

(236
)

(5
)







(3,367
)

(16
)

(3,776
)Charge offs


(8,565
)

(3,083
)

(334
)

(138
)




(3,587
)

(112
)

(15,819
)Translation adjustments











5


1


3,428





3,434Ending balance,December 31, 2009

$
5,914

$
394

$
390

$
100

$
128

$
58,624

$
275

$
65,825Provisions


2,116


480


166


149


1,042





126


4,079Recoveries


(124
)

(1
)

(7
)







(788
)

(31
)

(951
)Charge offs


(7,552
)

(621
)

(459
)




(273
)

(7,543
)

(321
)

(16,769
)Translation adjustments











11


(31
)

(7,002
)




(7,022
)Ending balance,December 31, 2010

$
354

$
252

$
90

$
260

$
866

$
43,291

$
49

$
45,162


The following table presents our recorded investment in loan Portfolio Assets by credit quality indicator. Our loan Portfolio Assets, which are
primarily comprised of Purchased Credit-Impaired Loans, are categorized by credit quality indicators based on the common risk characteristics that management generally uses for pooling purposes (when
management elects to pool groups of purchased loans).

December 31,
2010(Dollars in thousands)Commercial real estate

$
138,113Business assets


20,706Residential real estate


6,144Other commercial


8,013$
172,976


92

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

6. Loans Receivable

The following is a composition of the Company's loans receivable by loan type and region:

December 31,
2010

December 31,
2009(Dollars in thousands)Domestic:Commercial loans:Affiliates, net of allowance for loan losses of $-0- and $67, respectively

$
6,914

$
13,177SBA, net of allowance for loan losses of $365 and $490, respectively


27,023


16,266Other, net of allowance for loan losses of $1,083 and $-0-, respectively


13,011


10,233ForeignPortfolio asset loans:Affiliates


9,867


12,945Total loans, net

$
56,815

$
52,621


Loans receivableSBA held for sale

Loans receivableSBA held for sale are summarized as follows:

December 31,
2010

December 31,
2009(Dollars in thousands)Outstanding balance

$
11,470

$
821Capitalized costs, net of fees


138


Carrying amount of loans, net

$
11,608

$
821


Changes
in loans receivableSBA held for sale are as follows:

Year Ended
December 31,2010

2009(Dollars in thousands)Beginning Balance

$
821

$
4,901Originations and advances of loans


18,394


18,063Payments received


(65
)

(237
)Capitalized costs


140


342Loans sold, net


(7,682
)

(22,248
)Ending Balance

$
11,608

$
821


93

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

6. Loans Receivable (Continued)

Loans receivableSBA held for sale represent the portion of SBA loans acquired and originated by the Company that are guaranteed by the SBA. These loans are generally secured
by assets such as accounts receivable, property and equipment, and other business assets. The Company recorded no write-downs of SBA loans held for sale below their cost in 2010 and 2009.

At
December 31, 2010, SBA loans held for sale included $3.9 million in guaranteed portions of SBA loans sold and subject to premium recourse provisions. In accordance with
FASB's accounting guidance on transfers of financial assets (issued in June 2009) that became effective in the first quarter of 2010, an off-setting secured borrowing of
$4.3 million (including deferred premiums) has been recorded and is included in "Other liabilities" in the Company's consolidated balance sheet. After the premium recourse provisions have
elapsed, the Company will recognize the gain related to the sale, and remove the guaranteed portion of the SBA loan (i.e. the pledged asset) and the secured borrowing from the balance sheet.
Refer to Note 1(h) for additional information.

Loans receivableaffiliates

Loans receivableaffiliates, which are designated by management as held for investment, are summarized as follows:

December 31,
2010

December 31,
2009(Dollars in thousands)Outstanding balance

$
15,552

$
24,757Allowance for loan losses





(67
)Discounts, net


(148
)

(237
)Capitalized interest


1,377


1,669Carrying amount of loans, net

$
16,781

$
26,122


94

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

6. Loans Receivable (Continued)

A
summary of activity in loans receivableaffiliates follows:

Year Ended December 31,2010

2009(Dollars in thousands)Beginning Balance

$
26,122

$
27,080Advances


749


9,008Payments received


(7,749
)

(10,336
)Capitalized costs


197


336Change in allowance for loan losses


67


(67
)Discount accretion, net


89


37Charge-offs


(432
)

Other noncash adjustments(1)


(1,877
)

Foreign exchange gains (losses)


(385
)

64Ending Balance

$
16,781

$
26,122


(1)Represents
the removal of a $4.1 million loan to a former equity-method investee (coal mine subsidiary) upon consolidation of the entity effective
April 1, 2010 (refer to Note 3), the addition of a $3.1 million loan to a former consolidated entity (manufacturing subsidiary) upon the deconsolidation of the entity effective
June 30, 2010 (refer to Note 3), and the removal of a $0.9 million loan to an equity-method Acquisition Partnership upon conversion to equity in December 2010.


Loans
receivableaffiliates represent (1) advances to Acquisition Partnerships and other affiliates to acquire portfolios of performing and non-performing
commercial and consumer loans and other assets; and (2) senior debt financing arrangements with equity-method investees to provide capital for business expansion and operations. Loans
receivableaffiliates are generally secured by the underlying collateral that was acquired with the loan proceeds. Advances to affiliates to acquire loan portfolios are secured by the
underlying collateral of the individual notes within the portfolios, which is generally real estate; whereas advances to affiliates for capital investments and working capital are generally secured by
business assets (i.e. accounts receivable, inventory and equipment). The Company recorded net impairment provisions on loans receivableaffiliates of $0.4 million in 2010 and
$0.1 million in 2009. Information related to the credit quality and loan loss allowances related to loans receivableaffiliates is presented under the heading "Credit Quality and
Allowance for Loan LossesLoans Held for Investment" below.

95

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

6. Loans Receivable (Continued)

Loans receivableSBA held for investment, net

Loans receivableSBA held for investment are summarized as follows:

December 31,
2010

December 31,
2009(Dollars in thousands)Outstanding balance

$
16,719

$
17,072Allowance for loan losses


(365
)

(490
)Discounts, net


(1,075
)

(1,245
)Capitalized costs


136


108Carrying amount of loans, net

$
15,415

$
15,445


Changes
in loans receivableSBA held for investment are as follows:

Year Ended December 31,2010

2009(Dollars in thousands)Beginning Balance

$
15,445

$
14,405Originations and advances of loans


2,241


3,575Payments received


(1,953
)

(1,848
)Capitalized costs


27


59Change in allowance for loan losses


125


(456
)Discount accretion, net


92


(137
)Charge-offs


(477
)

(43
)Transfers to other real estate owned


(85
)

(110
)Ending Balance

$
15,415

$
15,445


Loans
receivableSBA held for investment represent the non-guaranteed portion of SBA loans purchased or originated by the Company. These loans are secured by
assets such as accounts, property, equipment, and other business assets. The Company recorded net impairment provisions on SBA loans held for investment of $0.4 million in 2010 and
$0.5 million in 2009. Information related to the credit quality and loan loss allowances related to SBA loans held for investment is presented under the heading "Credit Quality and Allowance
for Loan LossesLoans Held for Investment" below.

96

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

6. Loans Receivable (Continued)

Loans receivableother

Loans receivableother, which are designated by management as held for investment, are summarized as follows:

December 31,
2010

December 31,
2009(Dollars in thousands)Outstanding balance

$
13,863

$
9,992Allowance for loan losses


(1,083
)

Discounts, net


(15
)

(7
)Capitalized interest and costs


246


248Carrying amount of loans, net

$
13,011

$
10,233


Changes
in loans receivableother are as follows:

Year Ended December 31,2010

2009(Dollars in thousands)Beginning Balance

$
10,233

$
13,533Advances


15,120


7,570Payments received


(11,750
)

(9,969
)Capitalized interest and costs


453


43Change in allowance for loan losses


(1,083
)

581Discount accretion, net


38


13Charge-offs





(1,548
)Foreign exchange gains





10Ending Balance

$
13,011

$
10,233


Loans
receivableother include loans made to non-affiliated entities and are secured by assets such as accounts receivable, inventory, property and equipment,
real estate and various other assets. The Company recorded net impairment provisions on loans receivableother of $1.1 million in 2010 and $1.0 million in 2009. Information
related to the credit quality and loan loss allowances related to loans receivableother is presented under the heading "Credit Quality and Allowance for Loan LossesLoans Held
for Investment" below.

Credit Quality and Allowance for Loan LossesLoans Held for Investment

The Company has established an allowance for loan losses to absorb probable, estimable losses inherent in its portfolio of loans
receivable held for investment. This allowance for loan losses includes specific allowances, based on individual evaluations of certain loans and loan relationships, and allowances for pools of loans
with similar risk characteristics. In determining the appropriate level of allowance, management uses information to stratify its portfolio of loans receivable held for investment into loan pools with
common risk characteristics. Certain portions of the allowance are attributed to

97

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

6. Loans Receivable (Continued)

loan
pools based on various factors and analyses. Loans deemed to be impaired, including loans with an increased probability of default as determined by management, are evaluated individually rather
than on a pool basis. Management's determination of the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information
becomes available. Actual losses experienced in the future may vary from management's estimates. Management attributes portions of the allowance to loans that it evaluates and determines to be
impaired and to groups of loans that it evaluates collectively.

The
following table summarizes the activity in the allowance for loan losses by our portfolio of loans held for investment:

Allowance for Loan Losses:(Dollars in thousands)

SBA held for
investment

Affiliates

Other

TotalBalance, January 1, 2009

$
34

$


$
581

$
615Provisions


623


67


967


1,657Recoveries


(124
)







(124
)Charge-offs


(43
)




(1,548
)

(1,591
)Balance, December 31, 2009


490


67





557Provisions


486


365


1,083


1,934Recoveries


(132
)







(132
)Charge-offs


(479
)

(432
)




(911
)Balance, December 31, 2010

$
365

$


$
1,083

$
1,448


The
following table presents an analysis of the allowance for loan losses and recorded investment in loans (excluding loans held for sale):

December 31, 2010Commercial Loans:Affiliated
Portfolio Asset
Loans



December 31,
2009(Dollars in thousands)

SBA

Affiliates

Other

TotalLoans individually evaluated for impairment

$
619

$


$
7,042

$


$
7,661

$
9,916Loans collectively evaluated for impairment


15,161


6,914


7,052


9,867


38,994


42,441Total loans evaluated for impairment (excluding loans held for sale)

$
15,780

$
6,914

$
14,094

$
9,867

$
46,655

$
52,357Allowance for loans individually evaluated for impairment

$
336

$


$
1,083

$


$
1,419

$
423Allowance for loans collectively evaluated for impairment


29











29


134Total allowance for loan losses

$
365

$


$
1,083

$


$
1,448

$
557


98

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

6. Loans Receivable (Continued)

The
following table presents our recorded investment in loans (excluding loans held for sale) by credit quality indicator. SBA commercial loans are detailed by categories related to
underlying credit quality and are defined below:



Classes
in the affiliated and non-affiliated portfolio asset and commercial loan portfolios are disaggregated by accrual status (which is generally based on management's
assessment on the probability of default).

December 31, 2010(Dollars in thousands)

Pass

Special
Mention

Substandard

Non-Accrual

TotalSBAcommercial loans

$
14,366

$
575

$
220

$
619

$
15,780


Accrual



Non-Accrual



TotalAffiliatescommercial loans

$
6,914




$





$
6,914Affiliatesportfolio asset loans


9,867











9,867Othercommercial loans


7,052





7,042





14,094$
23,833




$
7,042




$
30,875Total loans (excluding loans held for sale)













$
46,655


99

---





Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

6. Loans Receivable (Continued)

The following table includes an aging analysis of our recorded investment in loans held for investment:

December 31, 2010Loans Past Due
and Still Accruing(Dollars in thousands)

31-60
Days

61-90
Days

Total

Non-Accrual
Loans

Current
Loans

Total
LoansCommercial loans:SBA

$
855

$
96

$
951

$
619

$
14,210

$
15,780Affiliates














6,914


6,914Other











7,042


7,052


14,094855


96


951


7,661


28,176


36,788Portfolio asset loans:Affiliates














9,867


9,867Total loans (excluding loans held for sale)

$
855

$
96

$
951

$
7,661

$
38,043

$
46,655


The
following table presents additional information regarding the Company's impaired loans:

Recorded Investment In:(Dollars in thousands)

Impaired
Loans
Without a
Related
Allowance

Impaired
Loans
With a
Related
Allowance

Total
Impaired
Loans

Unpaid
Principal
Balance

Related
Valuation
Allowance

Average
Impaired
Loans for
the YearCommercial loans:SBA

$


$
619

$
619

$
656

$
336

$
478Affiliates

















432Other


4,042


1,917


5,959


8,124


1,083


7,0064,042


2,536


6,578


8,780


1,419


7,916Portfolio asset loans:Affiliates

















Total loans (excluding loans held for sale)

$
4,042

$
2,536

$
6,578

$
8,780

$
1,419

$
7,916


The
Company's recorded investment in impaired and non-accrual loans was $9.9 million at December 31, 2009. The allowance allocated to these loans totaled
$0.4 million at December 31, 2009. The average recorded investment in impaired and non-accrual loans approximated $6.0 million at December 31, 2009.

7. Equity Investments

The Company has non-marketable equity investments in Acquisition Partnerships and their general partners, and non-marketable equity investments in various
servicing and operating entities, that are accounted for under the equity method of accountingrefer to Note 1(c). The condensed combined financial position and results of
operations of the Acquisition Partnerships (which include the domestic

100

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

7. Equity Investments (Continued)

and
foreign Acquisition Partnerships and their general partners) and the servicing and operating entities (collectively, the "Equity Investees"), are summarized as follows:

Condensed Combined Balance Sheets

December 31,
2010

December 31,
2009(Dollars in thousands)Acquisition Partnerships:Assets

$
329,690

$
282,999Liabilities

$
28,319

$
97,135Net equity


301,371


185,864$
329,690

$
282,999Servicing and operating entities:Assets

$
161,631

$
134,384Liabilities

$
80,687

$
79,375Net equity


80,944


55,009$
161,631

$
134,384Total:Assets

$
491,321

$
417,383Liabilities

$
109,006

$
176,510Net equity


382,315


240,873$
491,321

$
417,383Equity investment in Acquisition Partnerships

$
54,477

$
41,029Equity investment in servicing and operating entities


52,732


30,462$
107,209

$
71,491


101

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

7. Equity Investments (Continued)

Condensed Combined Summary of Operations

Year Ended
December 31,2010

2009(Dollars in thousands)Acquisition Partnerships:Revenues

$
38,306

$
38,026Costs and expenses


49,905


43,015Net loss

$
(11,599
)
$
(4,989
)Servicing and operating entities:Revenues

$
113,176

$
78,028Costs and expenses


77,066


78,202Net earnings (loss)

$
36,110

$
(174
)Equity in loss of Acquisition Partnerships

$
(5,741
)
$
(193
)Equity in earnings (loss) of servicing and operating entities


20,350


(71
)$
14,609

$
(264
)


In
2010, the Company acquired controlling interests in eight German Acquisition Partnerships (December 2010), three domestic Acquisition Partnerships (March 2010), and a coal mine
subsidiary (April 2010)all of which it previously held a noncontrolling equity-method interest. As a result of these transactions, the Acquisition Partnerships and coal mine subsidiary
converted from equity-method investments to consolidated subsidiaries of the Company. As such, the assets, liabilities and equity of these entities are not included in the applicable balance sheet
tables above and below at December 31, 2010; and their results of operations since the respective transaction dates are not included in the applicable earnings tables above and below for 2010.
Furthermore, in connection with the activity related to the coal mine subsidiary, the Company obtained a direct noncontrolling interest in an equipment subsidiary that was previously wholly-owned and
consolidated by the coal mine subsidiary (obtained through a spin-off transaction effected by the coal mine subsidiary in April 2010). As such, the assets, liabilities and equity of this
equipment subsidiary are included in the applicable balance sheet tables above and below at December 31, 2010; and its results of operations since the transaction date are included in the
applicable earnings tables above and below for 2010. Refer to Note 3 for additional information related to these transactions.

On
June 30, 2010, the Company entered into an arrangement with a then-consolidated manufacturing subsidiary that resulted in the Company ceasing to have a controlling
interest, but retaining a noncontrolling interest, in the entity. As a result, the manufacturing subsidiary converted to an equity-method investment from a consolidated subsidiary of the Company. As
such, the assets, liabilities and equity of this manufacturing subsidiary are included in the applicable balance sheet tables above and below at December 31, 2010, and its results of operations
since the transaction date are included in the applicable earnings tables above and below for 2010. Refer to Note 3 for additional information related to this transaction.

102

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

7. Equity Investments (Continued)

At
December 31, 2010 and 2009, the Acquisition Partnerships held Purchased Credit-Impaired loans accounted for under non-accrual methods of accounting
(i.e. cost-recovery or cash basis method) with approximate carrying values of $274.6 million and $180.0 million, respectively.

The
combined assets and equity (deficit) of the underlying Acquisition Partnerships and the servicing and operating entities, and the Company's equity investments in those unconsolidated
entities are summarized by geographic region below.

December 31,2010

2009(Dollars in thousands)Combined assets of the Equity Investees:Domestic:Acquisition Partnerships

$
195,434

$
58,190Operating entities


55,587


31,481Latin America:Acquisition Partnerships


127,707


139,214Servicing entities


1,961


13,328Europe:Acquisition Partnerships


6,549


85,595Servicing entities


104,083


89,575$
491,321

$
417,383


103

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

7. Equity Investments (Continued)



December 31,2010

2009(Dollars in thousands)Combined equity of the Equity Investees:Domestic:Acquisition Partnerships

$
191,859

$
36,696Operating entities


23,494


5,574Latin America:Acquisition Partnerships


110,854


115,768Servicing entities


598


427Europe:Acquisition Partnerships


(1,342
)

33,400Servicing entities


56,852


49,008$
382,315

$
240,873Company's carrying value of its equity investments in the Equity Investees:Domestic:Acquisition Partnerships

$
39,804

$
13,575Operating entities


15,427


1,659Latin America:Acquisition Partnerships


14,943


17,532Servicing entities


2,840


2,677Europe:Acquisition Partnerships


(270
)

9,922Servicing entities


34,465


26,126$
107,209

$
71,491


Revenues
and earnings (losses) of the Equity Investees, and the Company's share of equity in earnings (losses) of those entities, are summarized by geographic region below. The tables
below include individual entities that are considered to be significant Equity Investees of FirstCity at December 31, 2010.

104

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

7. Equity Investments (Continued)

Year Ended
December 31,2010

2009(Dollars in thousands)Revenues of the Equity Investees:Domestic:Acquisition Partnerships

$
15,262

$
9,624FC Crestone Oak LLC (operating entity)(1)


28,693


707Other operating entities


26,424


29,388Latin America:Acquisition Partnerships


18,387


11,908Servicing entity


9,462


10,064Europe:Acquisition Partnerships


4,657


16,494MCS et Associes (servicing entity)


44,854


32,455Other servicing entities


3,743


5,414$
151,482

$
116,054Net earnings (loss) of the Equity Investees:Domestic:Acquisition Partnerships

$
5,438

$
2,758FC Crestone Oak LLC (operating entity)(1)


23,969


(787
)Other operating entities


1,395


2,650Latin America:Acquisition Partnerships


(1,429
)

(6,196
)Servicing entity


(1,469
)

(2,082
)Europe:Acquisition Partnerships


(15,608
)

(1,551
)MCS et Associes (servicing entity)


12,849


119Other servicing entities


(634
)

(74
)$
24,511

$
(5,163
)


105

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

7. Equity Investments (Continued)

Year Ended
December 31,2010

2009(Dollars in thousands)Company's equity in earnings (loss) of the Equity Investees:Domestic:Acquisition Partnerships

$
(195
)
$
1,233FC Crestone Oak LLC (operating entity)(1)


16,228


(219
)Other operating entities


74


1,159Latin America:Acquisition Partnerships


(662
)

(828
)Servicing entity


(735
)

(1,041
)Europe:Acquisition Partnerships


(4,884
)

(598
)MCS et Associes (servicing entity)


4,886


42Other servicing entities


(103
)

(12
)$
14,609

$
(264
)


(1)FC
Crestone Oak LLC operates in the prefabricated building manufacturing industry.


At
December 31, 2010, the Company had $23.2 million in Euro-denominated debt for the purpose of hedging a portion of the Company's net equity investments in
Europe. Refer to Note 12 for additional information.

8. Servicing AssetsSBA Loans

The Company recognizes servicing assets through the sale of originated SBA loans when the rights to service those loans are retained. Servicing rights resulting from the sale of loans
are initially recognized at fair value at the date of transfer. The Company subsequently measures the carrying value of the servicing assets by using the amortization method, which amortizes the
servicing assets in proportion to and over the period of estimated net servicing income, and evaluates servicing assets for impairment based on fair value at each reporting date. The Company evaluates
the possible impairment of servicing assets based on the difference between the carrying amount and current fair value of the servicing assets. Impairment is charged to servicing fees in the period
recognized.

106

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

8. Servicing AssetsSBA Loans (Continued)

Changes
in the Company's amortized servicing assets are as follows:

Year Ended
December 31,2010

2009(Dollars in thousands)Beginning Balance

$
1,115

$
785Servicing Assets capitalized


144


543Servicing Assets amortized


(305
)

(213
)Ending Balance

$
954

$
1,115Reserve for impairment of servicing assets:Beginning Balance

$
(59
)
$
(63
)Impairments


(64
)

(49
)Recoveries


5


53Ending Balance

$
(118
)
$
(59
)Ending Balance (net of reserve)

$
836

$
1,056Fair value of amortized servicing assets:Beginning balance

$
1,162

$
773Ending balance

$
921

$
1,162


The
Company relies primarily on a discounted cash flow model to estimate the fair value of its servicing assets. This model calculates estimated fair value of the servicing assets using
significant assumptions including a discount rate of 15.0% and prepayment speeds of 14.0% to 15.0% (depending on certain characteristics of the related loans). These assumptions are subject to change
based on management's judgments and estimates of changes in future cash flows, among other things.

107

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

9. Notes Payable

Notes payable consisted of the following:

Notes payable to banks and other:

Interest Rate

Other Terms and Conditions

Outstanding
Borrowings
as of
December 31,
2010

Outstanding
Borrowings
as of
December 31,
2009(Dollars in thousands)Bank of Scotland reducing note facility (includes $23.2 million denominated in Euros at December 31, 2010)

Election of (a) greater of (i) one-month LIBOR plus 3.5% (subject to LIBOR floor of 1.0%) or (ii) 4.5%, or (b) Bank of Scotland's prime rate of 3.0%

Secured by substantially all assets and equity investments of FirstCity Commercial Corp. and FH Partners LLC and guaranteed by FirstCity up to $75.0 million, matures June 2013

$
228,107

$
Bank of Scotland $225 million revolving loan facility (included $24.8 million denominated in Euros at December 31,
2009)

LIBOR-indexed plus 2.5%

Secured by substantially all assets of FirstCity and certain subsidiaries and guaranteed by by substantially all of FirstCity's
consolidated subsidiaries, refinanced June 2010





182,324Bank of Scotland $100 million revolving loan facility

LIBOR-indexed plus 2.0%

Secured by all assets of FH Partners LLC and guaranteed by FirstCity and certain of its consolidated subsidiaries, refinanced
June 2010





58,506BoS(USA) $25 million subordinated credit agreement

LIBOR + 5.0%

Secured by substantially all assets of FirstCity and certain subsidiaries and guaranteed by substantially all of FirstCity's
consolidated subsidiaries, refinanced June 2010





25,000Bank of Scotland (in Euros)[1]

EURIBOR + 1.75%

Secured by assets of HMCS-GEN Ltd, matures January 2011


13,528


WFCF $25 million revolving loan facility

Alternate interest rates based on Wells Fargo base rate plus margin, LIBOR plus margin, or 7.5%

Secured by assets of ABL and guaranteed by FirstCity up to $5.0 million, matures January 2012


18,486


10,694Banco Santander term loan[2] (denominated in Mexican pesos)

28-day Mexican index rate (TIIE) plus 2.0%

Secured by Bank of Scotland letter of credit, matured November 2010, commitment amount 142.2 million MXN





10,986Bank of America term loan[3]

Greater of (prime or federal funds rate plus 0.5%) plus margin, or LIBOR plus margin

Secured by assets of FirstCity's consolidated railroad subsidiaries, matures March 2011


2,737


3,086Bank of America $1 million revolving loan facility[3]

Greater of (prime or federal funds rate + 0.5%) plus margin, or LIBOR plus margin

Secured by assets of FirstCity's consolidated railroad subsidiaries, matures March 2011


395


395Bank of America term note

LIBOR plus 1.65%

Secured by all assets of Wamco 30, Ltd., matures November 2011


10,497


First National Bank of Central Texas

5.0% fixed through October 2013, then greater of prime plus 0.25% or 4.50%

Secured by assets of MPortfolio 2 LLC, matures October 2015


5,158


Merrill Lynch Mortgage Trust term loan

6.07% fixed

Secured by assets of Oregon Short Line Building, matures April 2016


7,361


7,452B.E.S.V. term loans denominated in Euros

Various rates at 1-month Eurobor + 3.5% or 3-month Eurobor + 3.0%

Secured by assets of UBN, various maturities ranging from May 2012 to May 2013


5,016


5,433Other notes and participations payable






1,749


2,012293,034


305,888Notes payable to affiliates:MCS Trust SA de CV term loan

20.0% fixed

Secured by assets of FC Acquisitions, SRL de CV, matures June 2020


7,631


7,838HMCS Portfolio GmbH (in Euros)[4]

2.5% fixed

Unsecured, matures January 2011


662


MCS Et Associes, S. A. (in Euros)[4]

2.5% fixed

Unsecured, matures January 2011


3,512


11,805


7,838Total notes payable





$
304,839

$
313,726


[1]This note payable was assumed by a wholly-owned subsidiary of FirstCity in connection
with its acquisition of a controlling equity interest in HMCS-GEN (a former equity-method German acquisition partnership) and certain other German acquisition partnership entities in
December 2010 (refer to Note 3). In January 2011, FirstCity purchased this debt from Bank of Scotland for $13.6 million.


108

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

9. Notes Payable (Continued)

[2]In October 2010, a letter of credit under the Company's Reducing Note Facility with
Bank of Scotland was funded in the amount of $11.9 million, and the proceeds were used to pay-off this term note payable to Banco Santander. The entire amount of the funded letter
of credit was added to the unpaid principal obligation of FirstCity's Reducing Note Facility with Bank of Scotland.[3]In March 2011, this debt was refinanced under substantially the same terms and
extended to March 2016 (for the term loan) and March 2014 (for the revolving loan facility). In connection with the refinancing arrangement, FirstCity's consolidated railroad subsidiaries secured an
additional $5.0 million loan commitment to finance capital acquisitions. This new acquisition loan facility matures in March 2013.[4]A wholly-owned subsidiary of FirstCity incurred this debt with these respective
affiliated entities (equity-method investees of FirstCity) in December 2010 to finance a portion of its equity interest acquisitions in various German acquisition partnership entities (refer to
Note 3). FirstCity repaid these affiliated notes payable in January 2011.


Refer to Note 2 for a description of the terms related to the Company's Reducing Note Facility at December 31, 2010, and other
matters concerning the Company's financings and liquidity.

Under
terms of certain borrowings, the Company and its subsidiaries are required to maintain certain tangible net worth levels and debt to equity and debt service coverage ratios. The
terms also restrict future levels of debt. At December 31, 2010, the Company was in compliance with these covenants. The aggregate principal maturities of the Company's notes payable for each
of the five years subsequent to December 31, 2010 are as follows: $75.4 million in 2011, $108.5 million in 2012, $100.6 million in 2013, $5.2 million in 2015, and
$15.1 million thereafter.

10. Stockholders' Equity

The Company's common stock shareholders are entitled to one vote for each share on all matters submitted to a vote of common stockholders. In order to preserve certain tax benefits
available to the Company, transactions involving stockholders holding or proposing to acquire more than 4.75% of outstanding common shares are prohibited unless the prior approval is obtained from the
Company's Board of Directors.

The
Company's Board of Directors may issue an additional series of optional preferred stock and designate the relative rights and preferences of the optional preferred stock when and if
issued. Such rights and preferences can include liquidation preferences, redemption rights, voting rights and dividends and shares can be issued in multiple series with different rights and
preferences. The Company has no current plans for the issuance of an additional series of optional preferred stock.

In
connection with a previous financing arrangement, FirstCity issued a warrant to BoS(USA) to purchase 425,000 shares of the Company's voting common stock at $2.3125 per share. This
warrant also entitled BoS(USA) with additional warrants under certain specific situations to retain its ability to own approximately 4.86% of the Company's voting common stock. The warrant expired on
December 31, 2009 without being exercised.

On
June 29, 2010, the Company issued and sold 150,000 shares of its common stock to an accredited investor pursuant to a securities purchase agreement at a price of $5.93 per
share, resulting in aggregate proceeds of $0.9 million.

109

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

11. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is comprised of the following as of December 31, 2010 and 2009:

December 31,
2010

December 31,
2009(Dollars in thousands)Cumulative foreign currency translation adjustments

$
(740
)
$
956Net unrealized gains on securities available for sale(1)(2)


675


2,504Total accumulated other comprehensive income (loss)

$
(65
)
$
3,460


(1)Includes
$0.7 million at December 31, 2010 and $1.4 million at December 31, 2009 attributable to FirstCity's proportionate share
of net unrealized gains recorded by an investee accounted for under the equity method of accounting.(2)Net
of deferred foreign tax liabilities of $0.3 million at December 31, 2010.


12. Foreign Currency Exchange Risk Management

We use Euro-denominated debt as a non-derivative financial instrument to partially offset the Company's business exposure to foreign currency exchange risk
attributable to our net investments in Europe. Our focus is to manage the economic risks associated with our European subsidiaries, which are the foreign currency exchange risks that will ultimately
be realized when we exchange one currency for another. To help protect the Company's net investment in certain of its European subsidiary operations from adverse changes in foreign currency exchange
rates, management denominates a portion of the Euro-denominated debt in the same functional currency used by the European subsidiaries. At December 31, 2010, the Company carried
$23.2 million in Euro-denominated debt and designated the debt as a non-derivative hedge of its net investment in certain European subsidiaries. The Company designated
the hedging relationship such that changes in the net investments being hedged are expected to be naturally offset by corresponding changes in the value of the Euro-denominated debt. We
consider our investments in European subsidiaries to be denominated in a relatively stable currency and of a long-term nature.

The
effective portion of the net foreign investment hedge is reported in accumulated other comprehensive income (loss) ("AOCI") as part of the cumulative translation adjustment. Any
ineffective portion of the net foreign investment hedge is recognized in earnings as other income (expense) during the period of change. Effectiveness of the hedging relationship is measured and
designated at the beginning of each month by comparing the outstanding balance of the Euro-denominated debt to the carrying value of the designated net equity investments.

At
December 31, 2010, the carrying value and line item caption of the Company's non-derivative instrument was reported on the consolidated balance sheet as follows (in
thousands):

Carrying Value at:Non-Derivative
Instrument in
Net Investment
Hedging Relationship

Balance Sheet
Location

December 31, 2010

December 31, 2009Euro-denominated debt

Notes payable to banks

$
23,239

$
24,824


110

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

12. Foreign Currency Exchange Risk Management (Continued)

The effect of the non-derivative instrument qualifying and designated as a hedging instrument in net foreign investment hedges on the consolidated financial statements for
the years ended December 31, 2010 and 2009 was as follows (in thousands):

Amount of Gain (Loss)
Recognized in AOCI
(Effective Portion)



Amount of Gain (Loss)
Recognized in Income
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)Year Ended
December 31,



Year Ended
December 31,Location of Gain (Loss)
Reclassified from
AOCI into Income
(Effective Portion)Non-Derivative
Instrument in
Net Investment
Hedging Relationship2010

2009

2010

2009Euro-denominated debt

$
1,387

$
4

Other income (expense)

$


$



13. Stock-Based Compensation

The Company has three stock option and award plans for the primary benefit of its non-management directors and key employeesthe 2004 Stock Option and Award Plan,
the 2006 Stock Option and Award Plan and the 2010 Stock Option and Award Plan. These plans are administered by the Compensation Committee of the Board of Directors and enable the Company to make stock
awards up to a total of 1.1 million common shares (net of shares cancelled and forfeited) in various forms and combinations including incentive stock options, nonqualified stock options,
performance-based awards and restricted stock. Shares subject to options granted under these plans that terminate without being exercised will become available for grant. At December 31, 2010,
the Company had approximately 398,000 shares that were available to grant under these plans.

Accounting
for stock-based compensation requires that the cost resulting from all stock-based payments be recognized in the financial statements based on the grant-date fair
value of the award. The Company's stock-based compensation expense consists of stock options and restricted stock awards (2010 only). Accounting guidance on share-based payments requires companies to
estimate the fair value of stock option awards on the date of the grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model to determine fair value of its stock
option awards. The Company determines fair value for restricted stock grants based on the grant-date fair value of our common stock. All stock option and restricted stock grants are
amortized ratably over the requisite service periods of the underlying awards, which are generally the vesting periods. The Company recognizes share-based compensation expense only for those shares
that are expected to vest, based on the Company's historical experience and future expectations. The Company recorded stock-based compensation expense of $0.7 million and $0.6 million
for the years ended December 31, 2010 and 2009, respectively.



The Company's stock option awards are granted with an exercise price equal to the market price of FirstCity's common stock at the date
of issuance. These stock option
awards generally vest based on four years of continuous service from the date of grant and have ten-year contractual terms. Certain stock options issued to non-employee
directors are exercisable immediately.

111

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

13. Stock-Based Compensation (Continued)

The
Company uses the Black-Scholes option-pricing model to estimate the fair value of stock option awards on the grant date. The Company uses assumptions relating to expected life of
options granted, expected volatility and risk-free interest rate to determine the fair value of stock option awards. The expected life of options granted represents the period of time for
which the options are expected to be outstanding, taking into account the percentage of option exercises, the percentage of options that expire unexercised and the percentage of options outstanding.
The expected volatility is based on the historical volatility of the Company's common stock over the estimated expected life of the options. The risk-free interest rate is derived from the
U.S. Treasury rate with a maturity date corresponding to the stock options' expected life. The Company does not currently anticipate paying any cash dividends on its common stock. Consequently, the
Company uses an expected dividend yield of zero in the options-pricing model. The Company also estimates option forfeitures at the time of grant and revises those estimates in subsequent periods if
actual forfeitures significantly differ from those estimates. To determine an expected forfeiture rate, the Company uses historical experience as a proxy for forfeitures.

The
following table sets forth the grant-date fair value of stock options awarded in 2009 using the Black-Scholes option-pricing model and the Company's underlying weighted
average assumptions.

Year Ended
December 31,
2009Weighted average grant date fair value


$5.21 - $6.04Volatility


78% - 92%Risk-free interest rate


2.5%Expected life in years


7.8 - 10Dividend yield


Zero


112

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

13. Stock-Based Compensation (Continued)

A
summary of the Company's stock option activity for the years ended December 31, 2010 and 2009 is presented below:

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term
(Years)

Aggregate
Intrinsic
Value(in thousands)Options outstanding at January 1, 2009


811,150

$
6.24Granted


300,000


6.93Exercised


(187,250
)

3.05Expired





Forfeited


(2,500
)

9.85Options outstanding at January 1, 2010


921,400

$
7.10Granted





Exercised


(143,000
)

2.00Expired


(31,000
)

9.09Forfeited





Options outstanding at December 31, 2010


747,400

$
7.99


6.49

$
632Options exercisable at December 31, 2009


601,900

$
6.95Options exercisable at December 31, 2010


520,150

$
8.32


5.65

$
395


The
total intrinsic value of stock options exercised during 2010 and 2009 was $0.8 million and $0.8 million, respectively. As of December 31, 2010, there was
approximately $1.0 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the stock option plans. That cost is expected to be
recognized over a weighted average period of 2.4 years.

A
summary of the status and changes of FirstCity's non-vested shares as of December 31, 2010, and changes during 2010 is presented below:

Shares

Weighted-
Average
Grant-Date
Fair ValueNon-vested at January 1, 2010


319,500

$
5.89Granted




$
Vested


(92,250
)
$
7.71Forfeited




$
Non-vested at December 31, 2010


227,250

$
5.88


113

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

13. Stock-Based Compensation (Continued)



In February 2010, the Company granted 28,890 restricted stock awards that vest in one installment on the first anniversary of the date
of grant. The grant-date fair value of each award was $5.97which was based on the grant-date fair value of our common stock. Holders of the restricted stock awards
have voting rights, and vesting of
the grants is based on their continued service. Sales of the restricted stock are prohibited until the awards vest. At December 31, 2010, the Company had 28,890 outstanding, unvested restricted
stock awards with total unrecognized compensation cost of $14,000 to be recognized over a weighted average period of 0.1 years.

14. Income Taxes

The Company's provision for income taxes from continuing operations for 2010 and 2009 consisted of the following:

Year Ended
December 31,2010

2009(Dollars in thousands)State current income tax expense

$
682

$
623Federal current income tax benefit





(525
)Foreign current income tax expense


1,419


1,905Foreign deferred income tax expense


151


179Total

$
2,252

$
2,182


The
following table reconciles the Company's provision for income taxes to the expected income tax expense at the U.S. federal statutory income tax rate (computed by applying the U.S.
federal income tax rate of 35% to earnings before income taxes and non-controlling interest):

Year Ended
December 31,2010

2009(Dollars in thousands)Computed expected tax based on federal statutory rate

$
5,164

$
7,103Increase (decrease) in taxes resulting from:Expired net operating loss carryforward


14,653


29,963Change in valuation allowance


(20,567
)

(37,066
)Inclusion of income attributable to noncontrolling interest in an 80%-owned subsidiary


1,226


Other


(476
)

State and foreign income tax, net of federal income tax benefit


2,252


2,182$
2,252

$
2,182


114

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

14. Income Taxes (Continued)

The
following table displays the significant components of our U.S. deferred tax assets, deferred tax liabilities, and valuation allowance as of December 31, 2010 and 2009:

December 31,2010

2009(Dollars in thousands)Deferred tax assets (liabilities):Basis difference in Acquisition Partnership investments

$
20,257

$
15,889Intangibles, principally due to differences in amortization


291


324Basis difference in fixed assets


208


123Foreign non-repatriated earnings


(5,603
)

(4,434
)Other


(2,317
)

(2,462
)Capital loss carryforwards


16,013


16,013Federal net operating loss carryforwards


19,394


43,520Total deferred tax assets, net


48,243


68,973Valuation allowance


(48,243
)

(68,973
)Net deferred tax assets

$


$



At
December 31, 2010 and 2009, the Company also had deferred foreign tax liabilities of $0.3 million and $0.2 million, respectively, included in "other liabilities"
in its consolidated balance sheets.

The
Company recognizes deferred tax assets and liabilities in both U.S. and foreign jurisdictions based on the future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce the carrying amounts of deferred tax
assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for
deferred tax assets is assessed periodically by the Company based on the more-likely-than-not realization threshold criterion. In the assessment, appropriate
consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other factors, the nature, frequency and severity
of current and cumulative losses, forecasts of future profitability, excess of appreciated asset value over the tax basis of net assets, the duration of statutory carryforward periods, the Company's
experience with utilizing available operating loss and tax credit carryforwards, and tax planning strategies. This process involves significant management judgment about assumptions that are subject
to change from period to period based on changes in tax laws between our projected operating performance, our actual results and other factors.

For
purposes of evaluating the need for a deferred tax valuation allowance, significant weight is given to evidence that can be objectively verified. At December 31, 2010 and
2009, the Company established a full valuation allowance for its U.S. deferred tax assets due to the lack of sufficient objective evidence regarding the realization of these assets in the foreseeable
future. Regardless of the

115

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

14. Income Taxes (Continued)

deferred
tax valuation allowance established at December 31, 2010, the Company continues to retain net operating loss carryforwards for federal income tax purposes of approximately
$55.4 million available to offset future federal taxable income, if any, through the year 2027. To the extent that the Company generates taxable income in the future to utilize the tax benefits
of the related deferred tax assets, subject to certain potential limitations, it may be able to reduce its effective tax rate by reducing the valuation allowance. At December 31, 2010, the
expiration dates of the Company's net operating loss carryforwards are as follows: $0.2 million in 2011; $5.8 million in 2012; and $49.4 million from 2018 through 2027. In
addition, the Company's capital loss carryforwards of $16.0 million expire in 2011.

The
Company accounts for income tax uncertainty using a two-step approach whereby we recognize an income tax benefit if, based on the technical merits of a tax position, it
is more likely than not (a probability of greater than 50%) that the tax position would be sustained upon examination by the taxing authority. We then recognize a tax benefit equal to the largest
amount of tax benefit that is greater than 50% likely to be realized upon settlement with the taxing authority, considering all information available at the reporting date. Once a financial statement
benefit for a tax position is recorded, we adjust it only when there is more information available or when an event occurs necessitating a change. The difference between the benefit recognized for a
position in accordance with this accounting model and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit ("UTB").

The
gross amount of UTBs on uncertain tax positions as of December 31, 2010 approximated $299,000, which if recognized, would impact the Company's effective income tax rate. A
reconciliation of unrecognized tax benefits for 2010 follows:

Balance at December 31, 2008

$
349Payments and settlements


(50
)Lapse of statute of limitations


Balance at December 31, 2009


299Payments and settlements


Lapse of statute of limitations


Balance at December 31, 2010

$
299


The
Company records interest and penalties related to income tax uncertainties in the provision for income taxes. At December 31, 2010, interest and penalties of $108,000 are
included in "Other liabilities" as income taxes payable.

FirstCity
currently files tax returns in approximately 35 states, and one of its consolidated subsidiaries is currently being examined in two states for the year 2004. Tax year 1995 and
subsequent years are open to federal examination, and tax year 2006 and subsequent years are open to state examination.

15. Employee Benefit Plan

The Company has a defined contribution 401(k) employee profit sharing plan pursuant to which the Company matches employee contributions at a stated percentage of employee contributions
to a

116

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

15. Employee Benefit Plan (Continued)

defined
maximum. The Company's contributions to the 401(k) plan were $226,000 in 2010 and $193,000 in 2009.

16. Leases

The Company leases its corporate headquarters under a non-cancellable operating lease. The lease calls for monthly payments of $16,000 through October 31, 2015, then
monthly payments of $17,250 from November 1, 2015 through its expiration in October 2020. Rental expense under this lease was $152,000 for 2010 and $144,000 for 2009. The Company also leases
office space and equipment under operating leases expiring in various years prior to 2016. Rental expense under these leases for 2010 and 2009 was $682,000 and $769,000, respectively. As of
December 31, 2010, the future minimum
lease payments under all non-cancellable operating leases are as follows: $690,000 in 2011; $415,000 in 2012; $270,000 in 2013; $197,000 in 2014; $199,000 in 2015; and $1,000,000
thereafter.

17. Fair Value



The
fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction
occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques
that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions
that market participants would use in pricing an asset or liability. The accounting guidance on fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:



117

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

17. Fair Value (Continued)

The
level of fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is most-significant to the fair value
measurement in its entirety.



The table below presents the Company's balances of assets measured at fair value on a recurring basis at December 31, 2010 and
December 31, 2009. The Company did not have any liabilities that were measured at fair value on a recurring basis at December 31, 2010 and December 31, 2009. There were no
transfers of assets recorded at fair value on a recurring basis into or out of Level 1 and Level 2 fair value measurements during the years ended December 31, 2010 and 2009.

At December 31, 2010(Dollars in thousands)

Level 1

Level 2

Level 3

TotalInvestment securities available for sale:Marketable equity security

$
1,106







$
1,106Asset-backed security








2,605


2,605$
1,106





2,605

$
3,711




At December 31, 2009(Dollars in thousands)

Level 1

Level 2

Level 3

TotalInvestment security available for sale:Asset-backed security

$






1,836

$
1,836


The
Company measures fair value for its marketable equity investment using quoted market prices in an active exchange market for identical assets (Level 1 measurement). The
Company measures fair value for its asset-backed securities using discounted cash flow models based on assumptions and inputs that are corroborated by little or no observable market data
(Level 3 measurement). The Company uses this measurement technique for these assets because pricing information and market-participant assumptions for its asset-backed securities are not
readily accessible and frequently released to the public. At December 31, 2010, the carrying value of the Company's marketable equity security (at fair value) approximated $1.1 million.
At December 31, 2010 and 2009, the carrying values of the Company's asset-backed securities (at fair value) approximated $2.6 million and $1.8 million, respectively.

118

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

17. Fair Value (Continued)

The table below summarizes the changes to the Company's Level 3 assets measured at fair value on a recurring basis for the years ended December 31, 2010 and 2009:

Year Ended December 31,(Dollars in thousands)

2010

2009Balance, beginning of period

$
1,836

$
5,251Total net gains (losses) for the period included in:Net income


3,283


Other comprehensive income (loss)


(654
)

1,075Purchases, sales, issuances and settlements, net


(1,902
)

(4,490
)Foreign currency translation adjustments


42


Net transfers into Level 3





Balance, end of period

$
2,605

$
1,836


There
were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 3 fair value measurements during the years ended
December 31, 2010 and 2009.



The Company may be required, from time to time, to measure certain financial and non-financial assets at fair value on a
non-recurring basis. These adjustments to fair value generally result from write-downs of financial and non-financial assets as a result of impairment or application of
lower-of-cost or fair value accounting. For assets measured at fair value on a non-recurring basis that were still on the Company's consolidated balance sheet at
December 31, 2010 and 2009, the following table provides the fair value hierarchy and the carrying value of the related individual assets at each respective period end:

Carrying Value at December 31, 2010(Dollars in thousands)

Level 1

Level 2

Level 3

TotalPortfolio Assetsloans(1)

$


$


$
354

$
354Loans receivableSBA held for investment(1)








699


699Loans receivableother(1)








1,917


1,917Real estate held for sale(2)





11,048





11,048Real estate held for investment(3)





6,959





6,959




Carrying Value at December 31, 2009(Dollars in thousands)

Level 1

Level 2

Level 3

TotalPortfolio Assetsloans(1)

$


$


$
12,460

$
12,460Loans receivableSBA held for investment(1)








829


829Real estate held for sale(2)





7,231





7,231


(1)Represents
the carrying value of impaired loans that were measured for impairment using the estimated fair value of the collateral for collateral-dependent
loans.


119

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

17. Fair Value (Continued)

(2)Represents
the carrying value of foreclosed real estate properties that were impaired and measured at fair value subsequent to their initial classification
as foreclosed assets.(3)Represents
the carrying value of a real estate property held for investment that was impaired and measured at fair value subsequent to acquisition.


The
following table presents the decrease in value of certain assets held at the respective period end that were measured at fair value on a non-recurring basis for which a
fair value adjustment was included in the Company's results of operations during the respective period:

Year Ended December 31,(Dollars in thousands)

2010

2009Portfolio Assetsloans(1)

$
(846
)
$
(1,301
)Loans receivableSBA held for investment(1)


(354
)

(499
)Loans receivableother(1)


(1,168
)

Real estate held for sale(2)


(1,973
)

(1,858
)Real estate held for investment(3)


(1,922
)

Total

$
(6,263
)
$
(3,658
)


(1)Represents
write-downs of loans based on the estimated fair value of the collateral for collateral-dependent loans.(2)Represents
losses on foreclosed real estate properties that were measured at fair value subsequent to their initial classification as foreclosed assets.(3)Represents
the carrying value of a real estate property held for investment that was impaired and measured at fair value subsequent to acquisition.


The
fair values of "Portfolio Assetsloans," "Loans receivableSBA held for investment" and "Loans receivableother," as measured on a
non-recurring basis, are based on collateral valuations using observable and unobservable inputs, adjusted for various considerations such as market conditions, economic and competitive
environment, and other assets with similar characteristics (i.e. type, location, etc.) that, in management's opinion, reflect elements a market participant would consider. The Company
classifies its fair value measurement techniques for these assets as Level 3 inputs for the following reasons: (1) distressed asset transactions generally occur in inactive markets for
which observable market prices are not readily available (i.e. price quotations vary substantially over time and among market-makers, and pricing information is generally not released to the
public); and (2) the Company's valuation techniques that are most-significant to the fair value measurements are principally derived from assumptions and inputs that are
corroborated by little or no observable market data.

The
fair values of "Real estate held for sale" and "Real estate held for investment," as measured on a non-recurring basis, are generally based on collateral valuations using
observable inputs.

We
attempt to base our fair values on the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. It is our policy to
maximize

120

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

17. Fair Value (Continued)

the
use of observable inputs, when reasonably available and without undue cost, and minimize the use of unobservable inputs when developing fair value measurements in accordance with the fair value
hierarchy. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based principally on our own estimates and assumptions, are often calculated
based on collateral valuations adjusted for the economic and competitive environment, the characteristics of the asset, and other such factors. Additionally, there may be inherent weaknesses in any
valuation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future
values.



In
addition to the methods and assumptions we use to measure the fair value of financial instruments as discussed in the section above, we used the following
methods and assumptions to estimate the fair value of our financial instruments that are not recorded at fair value in their entirety on a recurring basis in the Company's consolidated balance sheets.
The fair value estimates were based on pertinent information that was available to management as of the respective dates. The fair value estimates have not been revalued for purposes of these
financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented. The amounts provided herein are estimates of the exchange
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e. not a forced transaction, such as liquidation or distressed sale). Because active
markets do not exist for a significant portion of the Company's financial instruments, management used present value techniques and other valuation models to estimate the fair values of its financial
instruments. These valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the
estimates provided herein do not necessarily indicate amounts which could be realized in a current exchange. The Company believes the imprecision of an estimate could be significant.

The
carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company's consolidated balance sheets at
December 31, 2010 and 2009 are as follows:

Cash and Cash Equivalents:The carrying amount of cash and cash equivalents approximated fair value at December 31, 2010 and
2009.

Loans Receivable Held-for-Sale:Loans receivable held-for-sale (primarily SBA loans
held-for-sale) are carried on the Company's consolidated balance sheet at the lower of cost or fair value. The fair value of loans held-for-sale is
generally based on what secondary markets are currently offering for loans with similar characteristics, or prices of the Company's SBA loan transactions that were previously consummated and pending
sales accounting treatment. At December 31, 2010 and 2009, the carrying amount of loans held-for-sale approximated $11.6 million and $0.8 million,
respectively, and the estimated fair values approximated $12.8 million and $0.9 million, respectively.

Loan Portfolio Assets and Loans Receivable:Estimated fair values of loan Portfolio Assets and fixed-rate loans receivable are
generally
determined using a discounted cash flow model, adjusted by an

121

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

17. Fair Value (Continued)

amount
for estimated losses, that employs market discount rates and other adjustments that would be expected to be made by a market participant. The estimated fair value for variable-rate
loans that re-price frequently is based on carrying values adjusted for estimated credit losses and other adjustments that would be expected to be made by a market participant. The
estimated fair value for impaired loans is generally based on collateral valuations using observable and unobservable inputs, adjusted for various considerations that would be expected to be made by a
market participant; or discounted cash flow models that employ market discount rates and other adjustments that would be expected to be made by a market participant. Management's estimates and
assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market and specific borrower information. At December 31, 2010 and 2009, the
carrying amounts of Portfolio Assetsloans and loans receivable (including accrued interest) approximated $222.6 million and $253.0 million, respectively, and the estimated
fair values approximated $331.1 million and $371.1 million, respectively.

Servicing Assets:The fair value of servicing assets is based on a combination of a discounted cash flow model of future net
servicing income and
analysis of current market data to estimate the fair value of our servicing assets. The key assumptions used to calculate estimated fair value of the servicing assets include prepayment speeds and
discount rate. The fair value estimate excludes the value of servicing rights for loans sold with premium recourse provisions in which the servicing rights have not been capitalized. See Note 8
for the carrying amount and estimated fair values of servicing assets as of December 31, 2010 and 2009.

Notes Payable to Banks and Other:Management believes the interest rates and terms on its debt obligations approximate the rates,
 market spreads and
terms currently offered by other lenders for similar debt instruments of comparable terms. As such, management believes that the carrying amount of notes payable approximates fair value at
December 31, 2010 and 2009.

Notes Payable to Affiliates:Estimated fair value of the Company's notes payable to affiliates (including related interest
payable) is determined at
the present value of future projected cash flows using a discount rate that reflects the risks inherent in those cash flows. At December 31, 2010 and 2009, the carrying amounts of notes and
interest payable to affiliates were $15.8 million and $10.3 million, respectively, and the estimated fair values approximated $11.5 million and $6.5 million, respectively.

18. Segment Reporting

At December 31, 2010 and 2009, the Company was engaged in two major business segmentsPortfolio Asset Acquisition and Resolution business and Special Situations
Platform business.

In
the Portfolio Asset Acquisition and Resolution business, the Company acquires and resolves portfolios of performing and non-performing loans and other assets
(collectively, "Portfolio Assets" or "Portfolios"), which are generally acquired at a discount to their legal principal balance or appraised value. Purchases may be in the form of pools of assets or
single assets. The Portfolio Assets are generally aggregated, including loans of varying qualities that are secured or unsecured by diverse collateral types and real estate. Some Portfolio Assets are
loans for which resolution is linked primarily to the real estate securing the loan, while others may be collateralized business loans for which

122

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

18. Segment Reporting (Continued)

resolution
may be based either on real estate, business assets or other collateral cash flow. Portfolio Assets are acquired on behalf of the Company or its consolidated subsidiaries, and on behalf of
domestic and foreign investment entities formed with co-investors ("Acquisition Partnerships"). The Company services, manages and ultimately resolves or otherwise disposes of substantially all
Portfolio Assets acquired by the Company, its Acquisition Partnerships, or other related entities. The Company services such assets until they are collected or sold.

The
Company engages in its Special Situations Platform business through its majority ownership interest in FirstCity Denver Investment Corp. ("FirstCity Denver"), which was formed in
April 2007. Through its Special Situations Platform business, the Company provides investment capital to privately-held middle-market companies through flexible capital structuring
arrangements. The nature of the capital investments primarily takes the form of senior and junior financing arrangements, but also include direct equity investments and common equity warrants. In
addition, our Special Situations Platform business engages in other types of investment activity including distressed debt transactions and leveraged buyouts. FirstCity Denver's primary investment
objective is to generate both current income and capital appreciation through debt and equity investments, and to generally structure the investments to be repaid or exited in 12 to 60 months.

We
evaluate the performance of our Portfolio Asset Acquisition and Resolution and Special Situations Platform business segments based primarily on the results of the segments without
allocating certain corporate and administrative expenses and other items. "Corporate and Other" in the tables below represent the portions of our expenses (primarily salaries and benefits, accounting
fees and legal expenses) and certain other items that are not allocable to our business segments.

The
following tables set forth summarized information by segment for the years ended December 31, 2010 and 2009:

Year Ended December 31, 2010Portfolio Asset
Acquisition
and Resolution

Special Situations
Platform

Corporate
and Other

Total(Dollars in thousands)Revenues

$
66,387

$
19,043

$
134

$
85,564Costs and expenses


(52,750
)

(19,832
)

(7,968
)

(80,550
)Equity in earnings (loss) of unconsolidated subsidiaries


(1,693
)

16,302





14,609Gain on business combinations


4,595








4,595Income tax expense


(1,501
)

(660
)

(91
)

(2,252
)Net income attributable to noncontrolling interests


(10,282
)

(3,143
)




(13,425
)Earnings (loss) from continuing operations


4,756


11,710


(7,925
)

8,541Income from discontinued operations





3,962





3,962Net earnings (loss)

$
4,756

$
15,672

$
(7,925
)
$
12,503


123

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

18. Segment Reporting (Continued)



Year Ended December 31, 2009Portfolio Asset
Acquisition
and Resolution

Special Situations
Platform

Corporate
and Other

Total(Dollars in thousands)Revenues

$
71,760

$
7,683

$
345

$
79,788Costs and expenses


(46,004
)

(7,173
)

(8,246
)

(61,423
)Equity in earnings (loss) of unconsolidated subsidiaries


(1,204
)

940





(264
)Gain on business combinations


1,455


810





2,265Income from lawsuit settlement








6,119


6,119Income tax (expense) benefit


(2,574
)

(118
)

510


(2,182
)Net income attributable to noncontrolling interests


(5,173
)

(386
)




(5,559
)Net earnings (loss)

$
18,260

$
1,756

$
(1,272
)
$
18,744


Revenues
and equity in earnings of investments from the Special Situations Platform segment are all attributable to domestic operations. Revenues, equity in earnings of unconsolidated
subsidiaries and other income from the Portfolio Asset Acquisition and Resolution segment are attributable to domestic and foreign operations as summarized as follows:

Year Ended
December 31,2010

2009(Dollars in thousands)Domestic

$
42,432

$
57,542Latin America


9,576


10,445Europe


12,686


2,553Other





16Total

$
64,694

$
70,556


124

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

18. Segment Reporting (Continued)

Total
assets for each segment and a reconciliation to total assets are as follows:

December 31,
2010

December 31,
2009(Dollars in thousands)Cash and cash equivalents

$
46,597

$
80,368Restricted cash


1,207


1,364Portfolio acquisition and resolution assets:Domestic


241,589


225,406Latin America


39,476


41,248Europe


68,642


57,888Special situations platform assets


50,765


41,688Other non-earning assets, net


12,128


17,112Total assets

$
460,404

$
465,074


19. Variable Interest Entities

In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with entities that involve variable interests.
Variable interests are generally defined as contractual, ownership or other economic interests in an entity that change with fluctuations in the entity's net asset value. If certain characteristics
are present in these transactions, the entity is subject to a variable interests consolidation analysis, and consolidation is based on variable interests, and not solely on ownership of the entity's
outstanding voting stock. In making the determination as to whether an entity is considered to be a variable interest entity ("VIE"), we first perform a qualitative analysis, which requires certain
subjective decisions regarding our assessments, including, but not limited to, the design of the entity, the variability that the entity was designed to create and pass along to its interest holders,
the rights of the parties, and the purpose of the arrangement. If we cannot conclude after a qualitative analysis whether an entity is a VIE, we perform a quantitative analysis.

If
an entity is determined to be a VIE, we determine if our variable interest causes us to be considered the primary beneficiary. We are the primary beneficiary and are required to
consolidate the entity if we have the power to direct the activities of the VIE that most-significantly impact the entity's economic performance and we have the obligation to absorb losses
or the right to receive returns that could be significant to the entity. The assessment of the party that has the power to direct the activities of the VIE may require significant management judgment
when more than one party has power, or more than one party is involved in the design of the VIE but no party has the power to direct the ongoing activities that could be significant. We are required
to continually assess whether we are the primary beneficiary and, therefore, may consolidate a VIE through the duration of our involvement. Examples of certain events that may change whether or not we
consolidate the VIE include a change in the design of the entity or a change in our ownership. If we cease to be deemed the primary beneficiary of a consolidated VIE, then we deconsolidate the VIE.

125

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

19. Variable Interest Entities (Continued)

The
following provides a summary for which the Company has entered into significant transactions with different types of VIEs:

Acquisition Partnership VIEsThe Company is involved with Acquisition Partnerships that were formed with one or more
investors to invest in Portfolio Assets. These Acquisition Partnerships are typically financed through debt and/or equity provided by the investors (including FirstCity). Certain of these Acquisition
Partnerships are VIEs primarily because they do not have sufficient equity to finance their activities without additional subordinated financial support, or the investors do not have the ability to
make certain significant decisions about the Acquisition Partnership's activities. The voting interests for all but three of the Acquisition Partnership VIEs are either wholly-owned or majority-owned
by non-affiliated investors, and the Company determined that it was not the primary beneficiary of these minority-owned Acquisition Partnership VIEs. However, the Company is deemed to be
the primary beneficiary for three Acquisition Partnership VIEs in which the Company and respective non-affiliated investors each hold equal ownership and voting interests. The investors
and third-party creditors, including FirstCity, generally have recourse only to the extent of the assets held by the Acquisition Partnership VIEs. Certain third-party creditors have recourse to both
FirstCity and the non-affiliated investors where we jointly provide a guaranty to the Acquisition Partnership VIE. The Company does not generally provide financial support to any
Acquisition Partnership VIE beyond that which is contractually required, but may provide additional liquidity alongside the non-affiliated investors to fund additional investments.

Operating Entity VIEsThe Company has variable interests with various commercial enterprise entities (attributable
primarily to certain equity and debt investments made by our Special Situations Platform business). FirstCity provided financing in the form of debt and/or equity to help finance the activities of the
Operating Entity VIEs. These Operating Entities are VIEs primarily because they do not have sufficient equity to finance their activities without additional subordinated financial support. The voting
interests for all of the Operating Entity VIEs are either wholly-owned or majority-owned by non-affiliated investors, and the Company determined that it was not the primary beneficiary of
these minority-owned Operating Entity VIEs. The investors and creditors, including FirstCity, generally have recourse only to the extent of the assets held by the Operating Entity VIEs. The Company
does not generally provide financial support to any Operating Entity VIE beyond that which is contractually required.

Special-Purpose Investment Entity VIEsThe Company has significant variable interests with special-purpose investment
entities that were created to invest in Portfolio Assets, debt and equity investments, and various other types of investments. Certain of these special-purpose investment entities are VIEs because
they do not have sufficient equity to finance their activities without additional subordinated financial support. The Company owns all of the voting and equity interests in these Special-Purpose
Investment Entity VIEs, and the Company was determined to be the primary beneficiary of these entities. A third-party creditor has recourse to FirstCity up to $75.0 million under a
limited guaranty provision related to the debt of these entities, which is collateralized by their assets, only to the extent that such pledged assets of the Special-Purpose Investment Entity VIEs do
not generate sufficient cash to service and repay the debt (see Note 8). The Company does not generally provide financial support to the Special-Purpose Investment Entity VIEs beyond that which
is contractually required.

126

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

19. Variable Interest Entities (Continued)

The
following table displays the carrying amount and classification of assets and liabilities of the Company's consolidated VIEs, for which the Company does not hold a majority voting
interest, that are included in its consolidated balance sheet as of December 31, 2010. We record third-party ownership in these consolidated VIEs in "Noncontrolling interests" in our
consolidated balance sheet.

Acquisition Partnership VIEs(Dollars in
thousands)Cash

$
6,006Portfolio Assets, net


32,614Other assets


25Total assets of consolidated VIEs

$
38,645Total liabilities of consolidated VIEs

$
469


The
following table summarizes the carrying amounts of the assets and liabilities and the maximum loss exposure as of December 31, 2010 related to the Company's variable interests
in unconsolidated VIEs.

Assets on FirstCity's
Consolidated
Balance SheetFirstCity's
Maximum
Exposure
to Loss(1)Type of VIE

Loans
Receivable

Equity
Investment(Dollars in thousands)Acquisition Partnership VIEs

$
1,488

$
(741
)
$
2,576Operating Entity VIEs


8,366


(241
)

8,125Total

$
9,854

$
(982
)
$
10,701


(1)Includes
maximum exposure to loss attributable to FirstCity's debt guarantees provided for certain Acquisition Partnership VIEs.


20. Other Related Party Transactions

The Company has contracted with the Acquisition Partnerships and certain other related parties as a third-party loan servicer. Servicing fees and due diligence fees (included in other
income) derived from these affiliates approximated $8.0 million in 2010 and $8.2 million in 2009.

FC
Servicing and MCS et Associates ("MCS"), an equity-method investee of FirstCity in which FC Servicing has a direct 11.89% ownership interest, are parties to certain agreements in
which FC Servicing provides consultation services and personnel to be employed by MCS to assist in developing and managing due diligence and servicing systems. Under these agreements, MCS provides the
supplied personnel with compensation, tax equalization payments, housing allowances, transportation allowance, and tax preparation services. MCS also pays consulting fees to FC Servicing and
reimburses FC Servicing for travel, hotel, airfare, and meal expenses incurred related to the provision of the services. FirstCity recorded fees from MCS in other income of $0.4 million in 2010
and 2009 each.

127

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

20. Other Related Party Transactions (Continued)

Through a series of related-party transactions in 2008, FC Acquisitions SRL de CV ("FC Acquisitions"), a majority-owned Mexican subsidiary of FirstCity, acquired a loan portfolio in
Mexico. The final funding for this transaction resulted in a note payable to MCS Trust SA de CV ("MCS Trust") by FC Acquisitions, and a note receivable from MCS Trust held by BMX Holding
III LLC ("BMX Holding III"), a majority-owned subsidiary of FirstCity. The accounts of MCS Trust are consolidated by BMX Holding II, a FirstCity equity-method investee in which it has an 8.0%
ownership interest. At December 31, 2010 and December 31, 2009, the note receivable held by BMX Holding III had a carrying amount of $7.6 million and $7.8 million,
respectively (included in "Loans receivableaffiliates" on the Company's consolidated balance sheet), and accrued interest of $4.0 million and $2.5 million, respectively
(included in "Other assets, net" on the Company's consolidated balance sheet). At December 31, 2010 and December 31, 2009, the note payable to MCS Trust had a carrying amount of
$7.6 million and $7.8 million, respectively (reported as "Notes payable to affiliates" on the Company's consolidated balance sheet), and accrued interest of $4.0 million and
$2.5 million, respectively (included in "Other liabilities" on the Company's consolidated balance sheet). Should the note payable be forgiven at some future date, the corresponding note
receivable would be forgiven as well.

The
Company owns 80% of FirstCity Denvera special situations investment platform that was formed for the purpose of investing primarily in middle-market private companies
through flexible capital structuring arrangements. The other 20% interest in FirstCity Denver is owned by Crestone Capital LLC, a Colorado limited liability company that is owned by Richard
Horrigan and Stephen Schmeltekopf. Mr. Horrigan, President of FirstCity Denver, and Mr. Schmeltekopf, Senior Vice President of FirstCity Denver, are also employees of FirstCity Denver
and have employment contracts with FirstCity Denver.

21. Commitments and Contingencies



FirstCity and certain of its subsidiaries and affiliates (including Acquisition Partnerships) are involved in various claims and legal
proceedings which are incidental to the ordinary course of our business. We initiate lawsuits against borrowers and are occasionally countersued by them in such actions. From time to time, other types
of lawsuits are brought against us. In view of the inherent difficulty of predicting the outcome of pending legal actions and proceedings, the Company cannot state with certainty the eventual outcome
of any such proceedings. Based on current knowledge, management does not believe that liabilities, if any, arising from any ordinary course proceeding will have a material adverse effect on the
consolidated financial condition, operations, results of operations or liquidity of the Company.



On March 20, 2007, Superior Funding, Inc., Wave Tec Pools, Inc. and Nations Pool Supply, Inc.
(collectively, the "Obligors") filed a petition adding FH Partners (formerly FH Partners, L.P.), FC Servicing, and FirstCity Financial Corporation as defendants in a suit filed by the Obligors
against State Bank and Cole Harmonson. FirstCity was subsequently served with notice of non-suit without prejudice in the suit in April 2007. The Obligors' claims related to alleged
breaches by FH Partners and FC

128

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

21. Commitments and Contingencies (Continued)

Servicing
in connection with an agreement related to a loan from State Bank to Obligors that was purchased by FH Partners from State Bank in December 2006. The Obligors alleged that they entered into
a line-of-credit with State Bank, and that due to an error by State Bank, the Obligors borrowed more on the line-of-credit than was allowed under the
borrowing base under that agreement. Obligors alleged that State Bank agreed that the default would be cured if the Obligors pledged additional property to secure the loans. Obligors alleged that
State Bank refused to honor its agreement concerning the pledge of the additional property and cure of the payment default. Obligors additionally asserted that FH Partners and FC Servicing were aware
of State Bank's wrongful conduct and continued that conduct by failing to honor the agreement, and that FH Partners and FC Servicing were obligated to mitigate their damages. Obligors alleged that
they sustained actual damages of $165 million as a result of the joint actions of State Bank, Cole Harmonson, FH Partners and FC Servicing. In October 2007, FH Partners filed a collection suit
against the Obligors to recover the balance of the debt owed under the loans and loan agreement and to foreclose the security interests securing the loans. In September 2009, the Obligors filed a
non-suit without prejudice of FH Partners and FC Servicing in the original suit filed against State Bank and other parties. The claims of the Obligors in the original suit have been raised
as counterclaims in the collection suit initiated by FH Partners. The Obligors proceeded to trial in the original suit as to their claims against Prosperity Bank, the successor to State Bank, and
Harmonson. The suit went to trial in October 2009, and the trial court ruled in favor of the defendants, finding that
the Obligors' loan was in default prior to the sale of the loan to FH Partners. Prosperity Bank settled with the Obligors in exchange for their agreement to not appeal the court's ruling. FH Partners
filed a motion for summary judgment to deny Obligor's claims for reformation and conspiracy in the collection suit, which was granted by the court in August 2010. However, the court denied FH
Partners' additional motion to strike the jury demand filed by the Obligors (as the loan agreement contains an enforceable jury-waiver provision), which prompted FH Partners to
file a writ of mandamus to compel the trial court to grant the motion. In its ruling on the mandamus appeal, the court of appeals ruled that FH Partners, as State Bank's assignee, owns the
right to enforce the jury-waiver provision in the loan agreement. FirstCity does not have sufficient information to estimate any potential liability or probability of liability, but is
unaware of any factual or legal basis for liability. Given the magnitude of the Obligors' wrongdoing and the lack of any evidence of any wrongdoing on the part of FC Servicing or FH Partners,
management believes that an unfavorable outcome in the lawsuit seems remote, and FH Partners intends to pursue collection of the loan.



FirstCity, FCLT Loans Asset Corp. ("FCLT"), First-City National Bank of Houston, and JP Morgan Chase Bank were defendants
in an interpleader suit filed by Prudential Financial, Inc. ("Prudential") in 2005. The suit disputed the ownership of approximately $18.6 million of proceeds from the sale of Prudential
stock and dividends from the demutualization of Prudential in December 2000. The shares of Prudential stock related to group annuity contracts purchased by First-City National Bank of
Houston, as trustee of the First City Bancorporation Employee Retirement Trust, to fund obligations to participants in the First City Bancorporation Employee Retirement Plan n connection with
termination of the Plan and the Trust in 1987. Timothy J. Blair was subsequently added

129

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

21. Commitments and Contingencies (Continued)

as
a third party defendant, as representative of a class of former employee beneficiaries, with an alleged interest in the demutualization proceeds.

Following
various court rulings and mediation proceedings, FirstCity, FCLT and Mr. Blair, individually and as representative of a class of former employee beneficiaries, entered
into an agreement in 2009 which provided for the settlement of the pending lawsuit and provided for each party to receive one-third of the demutualization proceeds, which totaled
approximately $18.6 million at the time of settlement, net of $0.3 million retained by JP Morgan to pay certain fees and expenses. In December 2009, FirstCity received approximately
$6.1 million as its share of the settlement proceeds. The final settlement is non-appealable, and each party released the other parties from all claims related to the lawsuit.



Effective April 1, 2010, FC Diversified and FC Servicing, wholly-owned subsidiaries of FirstCity, and Värde,
entered into an Investment Agreement that provides, among other things, a "right of first refusal" provision. Pursuant to the Investment Agreement, FC Diversified and FC Servicing granted
Värde a right of first refusal to participate in distressed asset investment opportunities in which the aggregate amount of the proposed investment is to exceed $3.0 million. FC
Diversified and FC Servicing are required to follow a prescribed notice procedure pursuant to which Värde has the option to participate in a proposed investment, whether in the form of
a direct purchase, equity investment or loan, by requiring that the purchase, acquisition or loan be effected through an acquisition entity formed by FC Diversified (or its affiliate) and
Värde (or its affiliate). An affiliate of FC Diversified will own from 5% to 25% of the acquisition entity at FC Diversified's determination. The Investment Agreement has a termination
date of June 30, 2015, which is subject to consecutive automatic one-year extensions without any action by FC Diversified, FC Servicing and Värde. FC Servicing will
be the servicer for all of the acquisition entities formed by FC Diversified and Värde. The parties may terminate the Investment Agreement prior to June 30, 2015 under certain
conditions.



Strategic Mexican Investment Partners L.P. ("SMIP"), a wholly-owned subsidiary of FirstCity, Cargill Financial Services
International Inc. ("CFSI"), and a Mexican acquisition partnership that is collectively owned by SMIP and CFSI (collectively, the "Sellers"), are parties to indemnification arrangements that
originated in 2006 in connection with their respective sales of eleven Mexican portfolio entities to Bidmex Holding LLC ("Bidmex Holding") and a loan portfolio to a Bidmex Holding subsidiary.
Bidmex Holding is a Mexican acquisition partnership that was formed by certain subsidiaries of American International Group, Inc. ("AIG Entities"), as the 85%-majority owner, and SMIP, as the
15%-minority owner, to acquire the interests of the portfolio entities and loan portfolio from the Sellers. In connection with these sales transactions, the Sellers made various representations and
warranties concerning (i) the existence and ownership of the portfolio entities, (ii) the assets and liabilities of the portfolio entities, (iii) taxes related to periods prior to
the sales transaction date, (iv) the operations of the portfolio entities, and (v) the ownership of the loan portfolio and existence of the underlying loans. The Sellers agreed to
indemnify Bidmex Holding and AIG Entities from damages resulting from a breach of these representation and warranty conditions on basis according to their

130

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

21. Commitments and Contingencies (Continued)

respective
ownership percentages in each Mexican portfolio entity, or on the basis of 80% to CFSI and 20% to SMIP as to any matter that was not related to a particular portfolio entity. The indemnity
obligation survives for a period of the statute of limitations for matters related to taxes, existence and authority, capitalization and good standing of the Mexican portfolio entities. The Sellers
are not
required to make any payments as a result of the indemnity provisions until the aggregate amount payable exceeds certain thresholds (ranging from $25,000 for the loan portfolio transaction to $250,000
for the Mexican portfolio entities transaction). However, claims related to taxes and fraud are not subject to these thresholds. At this time, management does not believe that this potential
obligation will have a material adverse impact on the Company's consolidated results of operations, financial position or liquidity.



Bidmex Holding is a Mexican acquisition partnership that is 85%-owned by AIG Entities and 15%-owned by SMIP (see discussion above). A
portion of SMIP's ownership interest (9%) in Bidmex Holding has the same priority and standing as AIG Entities' ownership interest (85%). However, SMIP's remaining 6% ownership interest is subordinate
to the other 94% ownership interests in Bidmex Holding, which are entitled to receive the return of and a return on their contribution equivalent to a 9% internal rate of return with respect to their
interests prior to SMIP receiving the return of and a return on its capital contribution equivalent to a 9% internal rate of return with respect to its 6% interest. At December 31, 2010, the
carrying value of SMIP's ownership interest in Bidmex Holding that is included in the Company's consolidated balance sheet as an equity-method investment approximated $10.8 million
($10.0 million for its 9% ownership interest tranche and $0.8 million for its 6% ownership interest tranche).



FC Commercial and FH Partners, as borrowers, have a term loan with Bank of Scotland. FirstCity provides a limited guaranty for the
repayment of the indebtedness under this loan to a maximum amount of $75.0 million, plus costs of enforcement and certain contingent indemnities. At December 31, 2010, the unpaid
principal balance on this loan was $228.1 million. Refer to Note 2 for additional information.

ABL
has a $25.0 million revolving loan facility with WFCF (see Note 2). The obligations under this facility are secured by substantially all of the assets of ABL, and
FirstCity provides WFCF with an unconditional guaranty on ABL's obligations under the loan facility up to a maximum of $5.0 million plus enforcement cost. At December 31,
2010, the unpaid principal balance on this loan facility was $18.5 million.

FC
Commercial provides guarantees to various financial institutions related to their financing arrangements with certain Acquisition Partnerships. The underlying financing arrangements
of these Acquisitions Partnerships have various maturities ranging from May 2011 to July 2013, and are secured
primarily by certain real estate properties held by the Acquisition Partnerships. At December 31, 2010, the unpaid debt obligations of these Acquisition Partnerships attributed to FC
Commercial's underlying guaranties approximated $1.3 million.

131

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

21. Commitments and Contingencies (Continued)

Fondo
de Inversion Privado NPL Fund One ("PIF1"), an equity-method investment of FirstCity, has a credit facility with Banco Santander Chile, S.A. with an unpaid principal balance
of $9.1 million at December 31, 2010. PIF1 uses the credit facility to finance the purchases of loan portfolios. Pursuant to terms of the credit facility, FirstCity was required to
provide a stand-by letter of credit from Bank of Scotland that would satisfy the current loan balance upon demand. At December 31, 2010, FirstCity had a letter of credit in the
amount of $9.5 million from Bank of Scotland under the terms of FirstCity's loan facility with Bank of Scotland, with Banco Santander Chile, S.A. as the letter of credit beneficiary. In
the event that a demand is made under the $9.5 million letter of credit, FirstCity would be required to reimburse Bank of Scotland by making payment to Bank of Scotland for all amounts
disbursed or to be disbursed by Bank of Scotland under the letter of credit.

At
December 31, 2009, FirstCity Mexico SA de CV ("FirstCity Mexico SA"), a wholly-owned Mexican affiliate of FirstCity, had a loan facility with Banco
Santander, S.A. that allowed loans to be made in Mexican pesos. Pursuant to the terms of the loan facility, FirstCity Mexico SA was required to provide a stand-by letter of
credit from Bank of Scotland that would satisfy the loan balance upon demand. In October 2010, the letter of credit was funded in the amount of $11.9 million, and the proceeds were used to
pay-off FirstCity Mexico SA's note payable to Banco Santander, S.A. The entire amount of the funded letter of credit was added to the unpaid principal obligation of FirstCity's
Reducing Note Facility with Bank of Scotland (see Note 2).



The Company generally retains environmental consultants to conduct or update environmental assessments in connection with the Company's
foreclosed and acquired real estate properties. These environmental assessments have not revealed environmental conditions that the Company believes will have a material adverse effect on its
business, assets, financial condition, results of operations or liquidity, and the Company is not otherwise aware of environmental conditions with respect to properties that the Company believes would
have such a material adverse effect. However, from time to time, environmental conditions at the Company's properties have required and may in the future require environmental testing and/or
regulatory filings, as well as remedial action. Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be
reasonably estimated. Other than for assessments, the timing and
magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action.



At December 31, 2010, the estimated settlement value of the Company's non-controlling interests in consolidated
limited-life subsidiaries approximated $1.9 million. The Company's carrying value of the non-controlling interests recognized on the consolidated balance sheet related
to these limited-life subsidiaries approximated $0.3 million at December 31, 2010.



We are subject to income taxes in both the United States and the non-U.S. jurisdictions in which we operate. Certain of our
entities are under examination by the relevant taxing authorities for various

132

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

21. Commitments and Contingencies (Continued)

tax
years. We regularly assess the potential outcome of current and future examinations in each of the taxing jurisdictions when determining the adequacy of the provision for income taxes. We have
only recorded financial statement benefits for tax positions which we believe reflect the "more-likely-than-not" criteria incorporated in the FASB's authoritative
guidance on accounting for uncertainty in income taxes, and we have established income tax reserves in accordance with this authoritative guidance where necessary. Once a financial statement benefit
for a tax position is recorded or a tax reserve is established, we adjust it only when there is more information available or when an event occurs necessitating a change. While we believe that the
amount of the recorded financial statement benefits and tax reserves reflect the more-likely-than-not criteria, it is possible that the ultimate outcome of current
or future examinations may result in a reduction to the tax benefits previously recorded on the financial statements or may exceed the current income tax reserves in amounts that could be material.

133

---



Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010 and 2009

22. Selected Quarterly Financial Data (Unaudited)

The following are summarized quarterly financial data for the years ended December 31, 2010 and 2009:

2010

2009First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(Dollars in thousands, except per share data)Revenues

$
21,575

$
29,961

$
14,909

$
19,119

$
15,681

$
20,661

$
18,731

$
24,714Expenses


20,466


24,348


18,739


16,997


14,280


13,897


14,310


18,936Equity in earnings (loss) of unconsolidated subsidiaries


2,229


1,816


9,962


602


(146
)

1,198


421


(1,737
)Gain on business combinations


891








3,704





1,455





811Income from lawsuit settlement























6,119Income tax expense (benefit)


(486
)

1,205


473


1,060


263


440


1,254


225Earnings from continuing operations


4,715


6,224


5,659


5,368


992


8,977


3,588


10,746Income (loss) from discontinued operations





4,643


(333
)

(348
)










Net earnings


4,715


10,867


5,326


5,020


992


8,977


3,588


10,746Less: Net income attributable to noncontrolling interests


4,614


2,802


2,767


3,242


348


1,231


1,588


2,392Net earnings to common stockholders


101


8,065


2,559


1,778


644


7,746


2,000


8,354Basic earnings per share of common stock:Earnings from continuing operations

$
0.01

$
0.35

$
0.28

$
0.20

$
0.07

$
0.79

$
0.20

$
0.84Discontinued operations

$


$
0.46

$
(0.03
)
$
(0.03
)
$


$


$


$
Net earnings

$
0.01

$
0.81

$
0.25

$
0.17

$
0.07

$
0.79

$
0.20

$
0.84Diluted earnings per share of common stock:Earnings from continuing operations

$
0.01

$
0.34

$
0.28

$
0.20

$
0.07

$
0.76

$
0.19

$
0.80Discontinued operations

$


$
0.46

$
(0.03
)
$
(0.03
)
$


$


$


$
Net earnings

$
0.01

$
0.80

$
0.25

$
0.17

$
0.07

$
0.76

$
0.19

$
0.80


134

---



Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders
FirstCity Financial Corporation:

We
have audited the accompanying consolidated balance sheets of FirstCity Financial Corporation and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related
consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2010. These
consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FirstCity Financial Corporation and
subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2010,
in conformity with U.S. generally accepted accounting principles.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FirstCity Financial Corporation's internal control over financial
reporting as of December 31, 2010, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 31, 2011, expressed an unqualified opinion on the effectiveness of the Company's internal control over
financial reporting.

KPMG LLP

Dallas,
Texas
March 31, 2011

135

---





Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders
FirstCity Financial Corporation:

We
have audited FirstCity Financial Corporation's (the Company) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). FirstCity
Financial Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial
reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion FirstCity Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria
established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of FirstCity Financial
Corporation and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each
of the years in the two-year period ended December 31, 2010, and our report dated March 31, 2011, expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

Dallas,
Texas
March 31, 2011

136

---





Table of Contents

Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.We maintain disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

We
conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer have concluded that, as of
December 31, 2010, our disclosure controls and procedures were effective.

Management's Report on Internal Control Over Financial Reporting.We are responsible for establishing and maintaining adequate internal
control over
financial reporting. Internal control over financial reporting is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) as a process designed by, or under the
supervision of, the company's principal executive and principal financial officers and effected by the company's board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements.

Under
the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried out an evaluation of the
effectiveness of our internal control over financial reporting based on the framework inInternal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. Based on its assessment, management has determined that, as of December 31, 2010, its internal control over financial
reporting was effective based on the criteria set forth in the COSO framework. The Company's independent registered public accounting firm, KPMG LLP, has issued an attestation report on the
effectiveness of our internal control over financial reporting, as of December 31, 2010, which is included in Part II, Item 8 of this Annual Report on
Form 10-K.

Changes in Internal Control Over Financial Reporting.There was no change in our internal control over
financial reporting that occurred during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.

Item 9B.Other Information.

None.

137

---



Table of Contents

PART III

Item 10.Directors, Executive Officers and Corporate Governance.

The information required by Item 10 of Form 10-K is hereby incorporated by reference from the earlier filed
of (i) an amendment to this annual report on Form 10-K or (ii) the Company's definitive proxy statement for the 2011 Annual Meeting of Stockholders, which will be
filed within 120 days after the Company's year end for the year covered by this report.

Item 11.Executive Compensation.

The information required by Item 11 of Form 10-K is hereby incorporated by reference from the earlier filed
of (i) an amendment to this annual report on Form 10-K or (ii) the Company's definitive proxy statement for the 2011 Annual Meeting of Stockholders, which will be
filed within 120 days after the Company's year end for the year covered by this report.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by Item 12 of Form 10-K is hereby incorporated by reference from the earlier filed
of (i) an amendment to this annual report on Form 10-K or (ii) the Company's definitive proxy statement for the 2011 Annual Meeting of Stockholders, which will be
filed within 120 days after the Company's year end for the year covered by this report.

Item 13.Certain Relationships and Related Transactions, and Director Independence.

The information required by Item 13 of Form 10-K is hereby incorporated by reference from the earlier filed
of (i) an amendment to this annual report on Form 10-K or (ii) the Company's definitive proxy statement for the 2011 Annual Meeting of Stockholders, which will be
filed within 120 days after the Company's year end for the year covered by this report.

Item 14.Principal Accounting Fees and Services.

The information required by Item 14 of Form 10-K is hereby incorporated by reference from the earlier filed
of (i) an amendment to this annual report on Form 10-K or (ii) the Company's definitive proxy statement for the 2011 Annual Meeting of Stockholders, which will be
filed within 120 days after the Company's year end for the year covered by this report.

138

---





Table of Contents

PART IV

Item 15.Exhibits and Financial Statement Schedules.



1.Financial Statements

The
consolidated financial statements of FirstCity are incorporated herein by reference to Item 8, "Financial Statements and Supplementary Data," of this Annual Report on
Form 10-K.

2.Financial Statement Schedules

Financial
statement schedules have been omitted because the information is either not required, not applicable, or is included in Item 8, "Financial Statements and Supplementary
Data."

3.Exhibits

Exhibit
Number



Description of Exhibit2.1



Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under
Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission on
July 18, 1995)2.2



Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company's
Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995)3.1



Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated July 3, 1995 filed with the Commission
on July 18, 1995)3.2



Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K dated December 30, 2005 filed with the Commission on
December 30, 2005)10.4



Securities Purchase Agreement dated as of September 21, 2004 by and among FirstCity Financial Corporation and certain affiliates of FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP
Holdings LLC, Drive Management LP and certain affiliates of those persons. (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated September 27, 2004)10.5



Revolving Credit Agreement, dated November 12, 2004, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference
to Exhibit 10.12 of the Company's Form 10-Q dated November 15, 2004)10.6



1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit A of the Company's Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)10.7



1996 Stock Option and Award Plan (incorporated herein by reference to Exhibit C of the Company's Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)10.8



2004 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company's Schedule 14A, Definitive Proxy Statement, dated October 21, 2003)


139

---



Table of Contents

Exhibit
Number



Description of Exhibit10.9



Revolving Credit Agreement, dated August 26, 2005, among FH Partners, L.P., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to
Exhibit 10.1 of the Company's Form 8-K dated September 1, 2005)10.10



Guaranty Agreement, dated August 26, 2005, executed by FirstCity Financial Corporation, FirstCity Commercial Corporation, FirstCity Europe Corporation, FirstCity Holdings Corporation, FirstCity International
Corporation, FirstCity Mexico, Inc., and FirstCity Servicing Corporation for the benefit of Bank of Scotland, as agent, and lenders (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated September 1,
2005)10.12



Asset Purchase Agreement, dated June 30, 2006, by and among FirstCity Financial Corporation and its subsidiaries, FirstCity Business Lending Corporation and American Business Lending, Inc.; and AMRESCO SBA
Holdings, Inc. and NCS I, LLC (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated July 7, 2006)10.13



2006 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company's Schedule 14A, Definitive Proxy Statement, dated June 26, 2006)10.14



Interest Purchase and Sale Agreement, dated August 8, 2006, by and among Bidmex Holding, LLC, and Strategic Mexican Investment Partners, L.P. and Cargill Financial Services International, Inc. and
certain other parties (incorporated herein by reference to Exhibit 10.14 of the Company's Form 10-Q dated November 9, 2006)10.15



Put Option Agreement dated August 8, 2006, by and among Bidmex Holding, LLC, Recuperacion de Carteras Mexicanas, S. de R.L. de C.V., Bidmex 6, LLC, Strategic Mexican Investment Partners 2, L.P. and
Cargill Financial Services International, Inc. (incorporated herein by reference to Exhibit 10.15 of the Company's Form 10-Q dated November 9, 2006)10.16



Guarantee dated August 8, 2006, executed by FirstCity Financial Corporation for the benefit of Bidmex Holding, LLC, Residencial Oeste 2 S. de R.L. de C.V., National Union Fire Insurance Company of Pittsburg,
P.A., American General Life Insurance Company, and American General Life and Accident Insurance Company (incorporated herein by reference to Exhibit 10.15 of the Company's Form 10-Q dated November 9, 2006)10.17



Amendment No. 4 to Revolving Credit Agreement, dated as of October 31, 2006, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent
(incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated November 7, 2006)10.18



Management Employment Contract dated November 30, 2006, between FirstCity Business Lending Corporation, American Business Lending, Inc.,and Charles P. Bell, Jr.
(incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated December 7, 2006)10.20



Amendment No. 5 to Revolving Credit Agreement, dated as of December 14, 2006, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent
(incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated December 20, 2006)


140

---



Table of Contents

Exhibit
Number



Description of Exhibit10.21



Loan Agreement, dated as of December 15, 2006 by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by reference to Exhibit 10.1 of
the Company's Form 8-K dated December 28, 2006)10.22



Amendment No. 1 to Loan Agreement, dated as of February 27, 2007, by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by
reference to Exhibit 10.22 of the Company's Form 10-K dated July 24, 2007)10.23



Amendment No. 9 to Revolving Credit Agreement, dated as of June 29, 2007, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent
(incorporated herein by reference to Exhibit 10.23 of the Company's Form 10-Q dated August 10, 2007)10.24



Amendment No. 1 to Revolving Credit Agreement, dated June 29, 2007, among FH Partners, L.P., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein
by reference to Exhibit 10.24 of the Company's Form 10-Q dated August 10, 2007)10.25



Amendment No. 2 to Loan Agreement, dated as of July 30, 2007, by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by reference
to Exhibit 10.1 of the Company's Form 8-K dated August 3, 2007)10.26



Amendment No. 10 to Revolving Credit Agreement, dated as of August 22, 2007, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent
(incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated August 28, 2007)10.27



Amendment No. 3 and Consent to Revolving Credit Agreement, dated August 22, 2007, among FH Partners, L.L.C., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent
(incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated August 28, 2007)10.28



Subordinated Delayed Draw Credit Agreement, dated as of September 5, 2007, among FirstCity Financial Corporation, as Borrower, and the Lenders named therein, as Lenders, and BoS(USA), Inc., as agent
(incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated September 10, 2007)10.34



Amendment and Consent No. 25 to Revolving Credit Agreement, dated as of July 14, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as
Agent (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated July 18, 2008)10.35



Amendment and Consent No. 12 to Subordinated Delayed Draw Credit Agreement, dated as of July 14, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and
BoS(USA), Inc., as Agent (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated July 18, 2008)10.36



Amendment and Consent No. 6 to Revolving Credit Agreement, dated as of July 14, 2008, among FH Partners, LLC, as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent
(incorporated herein by reference to Exhibit 10.3 of the Company's Form 8-K dated July 18, 2008)


141

---



Table of Contents

Exhibit
Number



Description of Exhibit10.37



Conditional Waiver Agreement Regarding Event of Default dated effective September 30, 2008, between American Business Lending, Inc., an affiliate of FirstCity, as borrower, and Wells Fargo Foothill, LLC, as
lender (incorporated herein by reference to Exhibit 10.40 of the Company's Form 10-Q dated November 10, 2008)10.38



Conditional Waiver Under Loan Agreement dated November 10, 2008, between American Business Lending, Inc., an affiliate of FirstCity, as borrower, and Wells Fargo Foothill, LLC, as lender (incorporated
herein by reference to Exhibit 10.41 of the Company's Form 10-Q dated November 10, 2008)10.39



Amendment and Consent No. 27 to Revolving Credit Agreement, dated as of December 12, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland,
as Agent (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated December 15, 2008)10.40



Amendment and Consent No. 14 to Subordinated Delayed Draw Credit Agreement, dated as of December 12, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and
BoS(USA), Inc., as Agent (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K dated December 15, 2008)10.41



Amendment and Consent No. 7 to Revolving Credit Agreement, dated as of December 12, 2008, among FH Partners, LLC, as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent
(incorporated herein by reference to Exhibit 10.3 of the Company's Form 8-K dated December 15, 2008)10.42



Mediator's Proposal, dated November 20, 2008, among Michael S. Wilk, as mediator appointed by the Court of Appeals for the First District for the State of Texas, and agreed to by the FCLT Loans Asset Corporation,
FirstCity Financial Corporation, Timothy J. Blair, Class Representative of former employees of FirstCity Bancorporation of Texas, Inc., and JP Morgan Chase Bank, N.A., successor trustee (incorporated herein by reference to Exhibit 10.4 of
the Company's Form 8-K dated December 15, 2008)10.43



Conditional Waiver Agreement Regarding Event of Default, dated and effective as of December 31, 2008, between American Business Lending, Inc., an affiliate of FirstCity, as borrower, and Wells Fargo Foothill,
 Inc., as lender (incorporated herein by reference to Exhibit 10.1 of the Company's Form 8-K dated February 4, 2009)10.44



Amendment No. 3 to Loan Agreement, dated February 18, 2009, by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as Lender (incorporated herein by reference
to Exhibit 10.44 of the Company's Form 10-Q dated May 12, 2009)10.45



Amended and Restated General Continuing Limited Guaranty, dated February 18, 2009, by FirstCity Financial Corporation, as Guarantor, and Wells Fargo Foothill, LLC, as Lender (incorporated herein by reference
to Exhibit 10.45 of the Company's Form 10-Q dated May 12, 2009)10.46



Separation Agreement, Release and Amendment to Award Agreements dated June 4, 2009, by and between Richard J. Vander Woude, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein
by reference to Exhibit 10.1 of the Company's Form 8-K dated June 5, 2009)


142

---



Table of Contents

Exhibit
Number



Description of Exhibit10.47



Retainer Agreement, dated June 4, 2009, by and between Richard J. Vander Woude, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein by reference to Exhibit 10.2 of the
Company's Form 8-K dated June 5, 2009)10.48



Recommendation of Compensation Committee for a 2009 bonus plan for certain executive officers and two other employees (incorporated herein by reference to the Company's Form 8-K dated August 19,
2009)10.49



Agreement and Stipulation of Settlement, dated September 25, 2009, between FCLT Loans Asset Corporation, FirstCity Financial Corporation, and Timothy J. Blair, Class Representative of former employee
beneficiaries (incorporated herein by reference to Exhibit 99.1 of the Company's Form 8-K dated September 30, 2009)10.50



2010 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company's Schedule 14A, Definitive Proxy Statement, dated October 1, 2009, as amended by supplemental
Schedule 14A, Definitive Additional Materials, dated November 5, 2009)10.51



Amendment No. 4 to Loan Agreement, dated November 2, 2009, by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as Lender (incorporated herein by reference to
Exhibit 10.1 of the Company's Form 8-K dated November 10, 2009)10.52



Press release dated December 22, 2009, pursuant to Item 7.01, announcing the Company's receipt of final settlement proceeds pursuant to the Agreement and Stipulation of Settlement described in its release
dated September 30, 2009 and in Form 8-K filed on September 30, 2009 (incorporated herein by reference to Exhibit 99.1 of the Company's Form 8-K dated December 22, 2009)10.53



Approval by the Company's Board of Directors of the Compensation Committee's recommendation for a 2010 bonus plan for certain executive officers of the Company (incorporated herein by reference to the Company's
Form 8-K dated February 16, 2010)10.54



Amendment and Consent No. 33 to Revolving Credit Agreement, dated as of March 26, 2010, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of
Scotland plc, as Agent (incorporated herein by reference to the Company's Form 8-K dated March 29, 2010)10.55



Amendment and Consent No. 20 to Subordinated Delayed Draw Credit Agreement, dated as of March 26, 2010, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and
BoS(USA), Inc., as Agent (incorporated herein by reference to the Company's Form 8-K dated March 29, 2010)10.56



Amendment and Consent No. 9 to Revolving Credit Agreement, dated as of March 26, 2010, among FH Partners LLC, as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland plc, as
Agent (incorporated herein by reference to the Company's Form 8-K dated March 29, 2010)10.57



Reducing Note Facility Agreement, dated June 25, 2010, among FirstCity Financial Corporation and FH Partners LLC, as Borrowers, FLBG Corporation, as Guarantor, Bank of Scotland plc and BoS(USA),
 Inc., as Lenders, and Bank of Scotland plc, acting through its New Your Branch, as Agent and Collateral Agent (incorporated herein by reference to Exhibit 10.57 of the Company's Form 10-Q dated August 16, 2010)


143

---



Table of Contents

Exhibit
Number



Description of Exhibit10.58



Limited Guaranty Agreement, dated June 25, 2010, by FirstCity Financial Corporation, as Guarantor, in favor of Bank of Scotland plc, acting through its New York Branch, as Agent, for the benefit of Bank of
Scotland plc and BoS(USA), Inc., as Lenders and parties to the Reducing Note Facility Agreement dated June 25, 2010 (incorporated herein by reference to Exhibit 10.58 of the Company's Form 10-Q dated August 16,
2010)10.59



Form of Investment Agreement, dated June 29, 2010, by and between FC Diversified Holdings LLC and FirstCity Servicing Corporation and Värde Investment Partners, L.P. (confidential treatment has
been requested for this exhibit and confidential portions have been filed with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.59 of the Company's Form 10-Q dated August 16, 2010)10.60



Securities Purchase Agreement, dated June 29, 2010, by and among FirstCity Financial Corporation and Värde Investment Partners, L.P. (incorporated herein by reference to Exhibit 10.60 of the
Company's Form 10-Q dated August 16, 2010)10.61



Form of Restricted Stock Award Agreement under the FirstCity Financial Corporation 2010 Stock Option and Award Plan (incorporated herein by reference to Exhibit 10.61 of the Company's Form 10-Q dated
August 16, 2010)21.1*



Subsidiaries of the Registrant23.1*



Consent of KPMG LLP31.1*



Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*



Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*



Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*



Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


---

144

---





Table of Contents

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.

FIRSTCITY FINANCIAL CORPORATIONBy:

/s/ JAMES T. SARTAIN James T. Sartain President and Chief Executive Officer


March 31,
2011

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Signature

Title

Date/s/ RICHARD E. BEAN Richard E. Bean

Chairman of the Board and Director

March 31, 2011/s/ JAMES T. SARTAIN James T. Sartain

President, Chief Executive Officer and
Director (Principal Executive Officer)

March 31, 2011/s/ J. BRYAN BAKER J. Bryan Baker

Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)

March 31, 2011/s/ C. IVAN WILSON C. Ivan Wilson

Vice Chairman of the Board and Director

March 31, 2011/s/ DANE FULMER Dane Fulmer

Director

March 31, 2011/s/ ROBERT E. GARRISON, II Robert E. Garrison, II

Director

March 31, 2011/s/ D. MICHAEL HUNTER D. Michael Hunter

Director

March 31, 2011/s/ F. CLAY MILLER F. Clay Miller

Director

March 31, 2011/s/ W. P. HENDRY William P. Hendry

Director

March 31, 2011


145

---