================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                FORM 10-K/A NO. 3

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________

                          COMMISSION FILE NUMBER 1-7614

                         FIRSTCITY FINANCIAL CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)

         DELAWARE                                              76-0243729
     (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)

     6400 IMPERIAL DRIVE, WACO, TX                               76712
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                 (ZIP CODE)

                                 (817) 751-1750
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                               Title of Each Class
                          Common Stock, par value $.01
                     Special Preferred Stock, par value $.01

         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 [X] NO [_]

         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. [_]

         INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS
AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13, OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES [X] NO [_]

         THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 3, 1997 WAS
4,932,390. AS OF SUCH DATE, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD
BY NON-AFFILIATES, BASED UPON THE CLOSING PRICE OF THESE SHARES ON THE NASDAQ
NATIONAL MARKET SYSTEM, WAS APPROXIMATELY $70,239,000.

================================================================================
<PAGE>



FORWARD LOOKING INFORMATION

         The statements included in this Annual Report on Form 10-K regarding
future financial performance and results and the other statements that are not
historical facts are forward-looking statements. The words "expect," "project,"
"estimate," "predict," "anticipate," "believes" and similar expressions are also
intended to identify forward-looking statements. Such statements are subject to
numerous risks, uncertainties and assumptions, including but not limited to, the
uncertainties relating to industry and market conditions, natural disasters and
other catastrophes, and other risks and uncertainties described in this Annual
Report on Form 10-K and in FirstCity Financial Corporation's other filings with
the Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.


                                     PART I

ITEM 1. BUSINESS.

         FirstCity Financial Corporation ("FirstCity" or the "Company") is a
specialty financial services company that acquires, manages, services and
resolves portfolios of performing loans, non-performing loans, other real estate
and other financial assets (collectively, "purchased asset pools"). The Company
acquires purchased asset pools, by itself and through its equity interests in
affiliated partnerships (the "acquisition partnerships"), by means of privately
negotiated transactions and competitive bidding. Such purchased asset pools are
acquired primarily from financial institutions and other traditional lenders at
substantial discounts from their legal balances, and consist principally of
commercial and consumer assets that may be performing, under performing or
non-performing. The Company manages, services and resolves all of the purchased
asset pools acquired by the Company or the acquisition partnerships, as well as
the assets owned by FirstCity Liquidating Trust (the "Trust") and certain
affiliated entities. The Company generates a significant amount of revenue from
servicing the assets of the acquisition partnerships, the Trust and affiliated
entities, and believes the experience and expertise of its servicing operations
is one of the Company's main strengths and competitive advantages. The Company
also performs a minimal amount of servicing for non-affiliated third parties. In
the ordinary course of business, the Company sells assets to commercial banks,
investment banks, finance companies and other investment partnerships.
Additionally, the Company has expanded into speciality finance markets with the
acquisition of National Auto Funding Corporation and NAF Auto Loan Trust
(collectively, "NAF") and the creation of ETAFirst Funding, Inc. ("ETA"). See
"Business Strategy" below.

         Asset Acquisition and Resolution Business. The asset acquisition and
resolution business is relatively new, developing in the mid-1980s. In the early
1990s, large quantities of distressed assets were available for acquisition from
the Resolution Trust Corporation ("RTC") and the Federal Deposit Insurance
Corporation ("FDIC"). Many new competitors entered the market for the
acquisition of distressed assets during this period. Since 1993, most sellers of
distressed assets have been private sellers, rather than government agencies.
Often these sellers are healthy financial institutions which, as a result of
state and federal regulations regarding the allocation of regulatory capital,
are motivated to dispose of, rather than manage, under performing and
non-performing assets.

         The evolution of the distressed asset acquisition market has resulted
in a number of significant changes in the Company's core business. The increased
experience level of competing acquirors of assets with the capabilities to both
acquire and, more significantly, manage, service and resolve such assets permits
both acquirors and sellers of such assets to more accurately value and price
such assets. The private sellers of assets, often healthy financial
institutions, which now comprise a significant majority of sellers of assets
into the market, generally have significantly better quality information
regarding the distressed assets they make available for sale than did the RTC
and FDIC. With better quality information available, a portion of the
uncertainty with respect to the ultimate resolution of pools of assets is
removed, permitting sellers and buyers to more accurately value

<PAGE>



and price portfolios. Private sellers also sell assets more frequently in
negotiated transactions rather than pursuant to bids which the RTC and FDIC
frequently utilized, thereby permitting such sellers to negotiate with potential
acquirors, like the Company, that have the proven ability to consummate such
transactions. In addition, the distressed asset acquisition business has become
significantly more competitive in the last five years with many new entrants
into the business. The effect of more competitive pricing on economic returns to
the Company, however, has been significantly mitigated by changes in the market
for financing available to purchasers of distressed assets. Greater lender
familiarity with the risks inherent in the market, combined with increased
competition as more lenders compete for business, have resulted in purchasers of
distressed assets being able to finance greater portions of the purchase price
at lower rates, enabling purchasers like the Company to maintain levels of
returns on investments.

         The following table sets forth the annual dollar amount and percentage
of purchased asset pools acquired by the Company or the acquisition partnerships
from the FDIC and the RTC on a combined basis, and from private sources for the
periods indicated.


                      PURCHASED ASSET POOLS -- SELLER TYPE
                             (Dollars in thousands)



                                           SELLER
                 ----------------------------------------------------------
                     FDIC/RTC COMBINED                    PRIVATE
                 -------------------------      ---------------------------
1992                   $66,908       81%               $16,206      19%
1993                   104,835       46                124,091      54
1994                     1,752        1                228,878      99
1995                     1,882        1                211,305      99
1996                    13,902        7                191,622      93


         Purchased asset pools are comprised of non-homogeneous assets,
including loans of varying qualities which are secured by varying collateral
types and foreclosed properties. Some commercial loans 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 business or real estate or other collateral cash flow. Consumer loans may be
secured (by real or personal property) or unsecured. Assets comprising purchased
asset pools may be performing, under-performing or non-performing. Performing
assets are those which debt service payments are being made in accordance with
the original or restructured terms of such assets. Under-performing assets are
those which debt service payments are being made, but not in accordance with the
original or restructured terms of such assets. Non-performing assets are those
which no debt service payments are being made.

         The Company has substantial experience acquiring, managing, servicing
and resolving a wide variety of asset types and classes. It therefore does not
limit itself as to the types of purchased asset pools it will evaluate and
purchase. As a result, the main factors determining the Company's willingness to
acquire a purchased asset pool include the information which is available
regarding the assets within such pool, the price at which such pool can be
acquired and the expected net cash flows which might be received from the
resolution of such assets.

         Asset Analysis and Servicing. The Company receives information about
opportunities to acquire purchased asset pools from a variety of sources. Prior
to purchasing any purchased asset pool, the Company performs extensive due
diligence on the assets comprising such pool. The Company generally reviews all
significant assets in a prospective purchased asset pool, including an analysis
of each such asset's projected cash flow and sources of repayment, including the
availability of financial guarantees from third parties. After an asset is
acquired, the

                                        3
<PAGE>



Company assigns it to an account servicing officer either at its headquarters in
Waco, Texas or in one of the Company's other offices. The Company generally
establishes servicing operations in locations other than its headquarters with
respect to purchased asset pools comprised of assets (which are typically
commercial) that are more readily serviced locally because of such pool's
significant geographic concentrations. All such offices are temporary and are
closed after the assets in the geographic region are substantially resolved. The
assigned account officer develops a business plan and budget for each asset
based upon a review of the cash flow projections developed during the Company's
investment evaluation, a physical inspection of such asset or the collateral
underlying the related loan, local market conditions and discussions with the
relevant borrower, which is periodically reviewed and revised as necessary.

         The Company manages assets it acquires directly, and generates
significant revenue from servicing assets owned by the acquisition partnerships,
the Trust and related entities. Management believes that its present computer
hardware and software systems are sufficient to manage all presently
contemplated growth plans of the Company. The Company also performs a minimal
amount of servicing for non-affiliated third parties.

         Location of Purchased Asset Pools. The Company purchases all types of
performing, under performing and non-performing loans and assets, including
various types of real estate, in all geographical areas within the United
States. The Company believes that its willingness to purchase non-homogeneous
purchased asset pools in any geographical area within the United States provides
it with an advantage over certain competitors which limit themselves to either a
specific type of distressed asset or a particular geographical area. Although
the Company has no constraints on geographic locations of assets in purchased
asset pools; to date, the majority of assets acquired by the Company and the
acquisition partnerships have been located in the Northeastern and Southern
areas of the United States.


                                        4
<PAGE>



         The following table sets forth, as of the dates indicated, the
geographical location of the purchased asset pool assets owned by the Company
and the acquisition partnerships, shown as a percentage of all such assets.


                   PURCHASED ASSET POOLS -- ASSET LOCATIONS
               As a Percentage of Total Purchased Asset Pools
                                                                   AS OF
                                                                DECEMBER 31,

LOCATION                                                      1996       1995
--------                                                      ----       ----
Northeast:
    Connecticut.....................................           12.1%      13.7%
    Massachusetts...................................            8.1       16.7
    New Jersey......................................            6.4        6.8
    New York........................................           10.6        9.8
    Pennsylvania....................................            3.7        6.3
    Vermont.........................................            1.1        1.4
    New Hampshire...................................            3.1        3.5
    Maryland........................................            3.0         .6
                                                            -------    -------
        Subtotal....................................           48.1       58.8
South/Southeast:
    Florida.........................................            9.4        7.5
    Georgia.........................................            1.9        2.1
    North Carolina..................................            1.1         .6
    South Carolina..................................            5.8        1.9
    Texas...........................................           17.8       11.7
    Virginia........................................            2.3        2.3
    Louisiana.......................................            1.5        1.9
                                                            -------     ------
        Subtotal....................................           39.8       28.0
West:
    California......................................            3.0        2.0
Midwest:
    Illinois........................................             .8        1.2
    Missouri........................................             .8        1.2
                                                             ------    -------
        Subtotal....................................            1.6        2.4
Other...............................................            7.5        8.8
                                                             ------    -------
        TOTAL.......................................          100.0%     100.0%
                                                              =====      ===== 


         Structure and Financing of Asset Acquisitions. The Company acquires
purchased asset pools both directly and through its equity interests in the
acquisition partnerships. Purchased asset pools owned directly by the Company
are financed with a combination of senior debt and equity contributed by the
Company.

         Each acquisition partnership is a separate legal entity, formed as a
limited partnership. The Company and an investor, such as Cargill Financial
Services Corporation ("Cargill"- see below), typically form a corporation to
serve as the corporate general partner of each acquisition partnership.
Typically, the Company and an investor each own 50% of the general partner and a
49% limited partnership interest in the acquisition partnership (the general
partner owns the other 2% limited partnership interest). The Company believes
that such legal structure insulates the Company and the other acquisition
partnerships from certain potential risks, while permitting the Company to share
in the economic benefits of each acquisition partnership.

         The acquisition partnerships generally are financed by debt secured
only by the assets of such acquisition partnership and nonrecourse to the
Company, the investor and the other acquisition partnerships.

         Relationship with Cargill. Cargill provides substantial debt and equity
financing to the acquisition partnerships. In addition, the Company believes its
relationship with Cargill significantly enhances the Company's competitiveness
as an acquiror of purchased asset pools, and that Cargill's prominence in the
financial services industry will help the Company as it seeks to expand the
scope of its business lines. Cargill is a

                                        5
<PAGE>



diversified financial services company and a wholly-owned subsidiary of Cargill,
Incorporated, regarded as one of the world's largest privately-held
corporations.

         Cargill began investing in acquisition partnerships in 1992. Since
1992, J-Hawk Corporation ("J-Hawk") (and since the Merger, the Company - see
below) and Cargill have been parties to a Right of First Refusal Agreement
pursuant to which Cargill has the right to participate as an equity investor in
certain purchased asset pools. Cargill also provides a $35 million dollar
revolving credit facility to the Company. Such facility expires in June 1997.
During the third quarter of 1996, thirteen partnerships refinanced the existing
senior and subordinated debt with Cargill totaling approximately $80 million.

         Business Strategy. The Company's core business continues to be the
acquisition, management, servicing and resolution of purchased asset pools.
However, in order to capitalize on its substantial experience in acquiring,
managing, servicing and resolving distressed consumer assets, the Company has
made a strategic decision to expand the scope of its business lines to take
advantage of opportunities in certain additional specialty consumer and finance
markets.

         Key elements in the Company's overall business strategy include:

                  o        Increasing the Company's investments in purchased
                           asset pools, both separately and through the
                           acquisition partnerships.

                  o        Identifying and acquiring, through non-traditional
                           niche sources, distressed assets that meet the
                           Company's investment criteria, which may involve the
                           utilization of special acquisition structures.

                  o        Identifying and acquiring additional businesses in
                           the specialty finance markets that meet the Company's
                           investment criteria.

                  o        Acquiring, managing, servicing and resolving assets
                           in certain international markets, both separately or
                           in partnership with others, including Cargill.

         On September 21, 1995, FirstCity acquired the capital stock of
Diversified Financial Systems, Inc. and Diversified Performing Assets, Inc.
(collectively,"Diversified") for $12.9 million in cash and notes. Diversified
also specializes in the acquisition and disposition of distressed loans and
loan-related assets. The acquisition, accounted for as a purchase, increased
FirstCity's assets by approximately $79 million, including $4.8 million
attributable to servicing rights held by Diversified and $ 4.6 million of
goodwill.

         During the second and third quarters of 1996, FirstCity commenced
efforts to expand its business lines into certain sectors of the consumer
finance business with the acquisition of National Auto Funding Corporation and
NAF Auto Loan Trust (collectively, "NAF") and the creation of ETAFirst Funding,
Inc. ("ETA"). NAF underwrites and finances installment contracts generated by
third party financial institutions and automobile dealerships in several
locations in the United States. These contracts are serviced by Milco Loan
Servicing, a wholly-owned subsidiary of the Company acquired in October of 1996.
NAF targets certain borrowers with limited credit histories, lower incomes or
past credit problems. ETA purchases certain education loans originated by
various proprietary training schools, generally at substantial discounts from
face value.

         On January 9, 1997, FirstCity executed a letter of intent to merge with
Harbor Financial Group, Inc. ("Harbor"). FirstCity and Harbor executed the
definitive Agreement and Plan of Merger on March 26, 1997, pursuant to which
FirstCity will issue 1,581,000 shares of common stock in exchange for 100% of
Harbor's outstanding capital stock. Harbor originates and services residential
loans, home improvement loans and commercial mortgages. Harbor has approximately
$11 million in equity, assets of over $200 million and 625 employees. The
transaction is subject to the approval of both companies' shareholders, and
various regulatory approvals.

                                        6
<PAGE>



         Formation of the Company. The Company was formed July 3, 1995 by the
merger (the "Merger") of J-Hawk, which was engaged in the asset acquisition,
management and resolution business, with and into FirstCity Bancorporation of
Texas, Inc. ("FCBOT"), a former bank holding company which had been engaged in a
proceeding under Chapter 11 of the Bankruptcy Code since November 1992,
following the closure of its banks by regulatory agencies.

         As a result of the Merger, the former holders of common stock of J-Hawk
received, in the aggregate, approximately 49.9% of the Company's outstanding
common stock in exchange for their shares of J-Hawk common stock and
approximately 50.1% of the Company's outstanding common stock was distributed
among former security holders of FCBOT. The Company also issued, to certain
former security holders of FCBOT, senior subordinated notes (all of which have
been redeemed), special preferred stock and warrants, and all of the debt and
equity securities of FCBOT outstanding immediately prior to the consummation of
the Merger were canceled.

         Pursuant to the Joint Plan of Reorganization ("Plan of
Reorganization"), substantially all of the legal and beneficial interest in the
assets of FCBOT, other than $20 million in cash, were transferred to the
newly-formed Trust, or to subsidiaries of the Trust. Such assets will be
liquidated over the life of the Trust pursuant to the terms thereof. FirstCity,
as the sole holder of the Class "A" Certificate under the Trust, will receive
from the Trust amounts sufficient to pay certain expenses and its obligations
under the 9% senior subordinated notes and the special preferred stock. Any
amounts in excess of such sums shall be paid to certain of the former security
holders of FCBOT pursuant to the terms of the Class "B" and Class "C"
certificates of beneficial interests in the Trust. The liquidation of the assets
transferred to the Trust will be managed by FirstCity pursuant to an Investment
Management Agreement between the Trust and FirstCity. Subsequent to 1996,
FirstCity and the Trust entered into an agreement terminating the Investment
Management Agreement, pursuant to which FirstCity received approximately $6.8
million.

         After giving effect to certain transactions consummated by J-Hawk and
FCBOT immediately prior to the Merger, upon the Merger, the assets of the
Company substantially consisted of J-Hawk's interests in the acquisition
partnerships, all of J-Hawk's leasehold improvements and equipment, $20 million
in cash from FCBOT and the Class "A" Certificate issued by the Trust, which
acquired substantially all of FCBOT's other assets upon the Merger.

         As a result of the structure of the Merger and certain related
transactions, the Company believes that at the merger date approximately $600
million of net operating loss carry forwards ("NOLs") were available to offset
future taxable earnings of the Company, although there can be no assurances that
the availability of such NOLs will not be successfully challenged by the IRS.

         Prior to the Merger, the securities of FCBOT were publicly traded and
FCBOT was a reporting company under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Following the Merger, the Company continued to be
a reporting company under the Exchange Act with its securities publicly traded.
In November 1995, the common stock and special preferred stock were approved for
quotation on the Nasdaq National Market.



                                       7
<PAGE>

EMPLOYEES

         FirstCity had 183 employees as of December 31, 1996. No employee is a
member of a labor union or party to a collective bargaining agreement. The
Company believes that its employee relations are generally good.

EXECUTIVE OFFICERS OF THE REGISTRANT

         James R. Hawkins, 61, has been Chairman of the Board and Chief
Executive Officer of FirstCity since July 3, 1995, and of J-Hawk since 1976.

         James T. Sartain, 48, has been President and Chief Operating Officer of
FirstCity since July 3, 1995, and of J-Hawk since 1988.

         Rick R. Hagelstein, 50, has been Executive Vice President and Managing
Director of Asset Management of FirstCity since November 1996. Prior thereto,
Mr. Hagelstein served as Executive Vice President and Chief Credit Officer of
FirstCity since July 3, 1995, and of J-Hawk since 1990. From 1988 to 1990, Mr.
Hagelstein was Executive Vice President of ASK Corporation, a manufacturer of
solar energy devices.

         Matt A. Landry, Jr., 54, has been Executive Vice President, Senior
Financial Officer and Managing Director of Mergers and Acquisitions since
November 1996. Prior thereto, Mr. Landry served as Executive Vice President and
Chief Financial Officer of FirstCity since July 3, 1995, and of J-Hawk since
1992. From 1988 to 1992, Mr. Landry was President and Chief Operating Officer
and a Director of AmWest Savings Association, a savings and loan association.

         Terry R. DeWitt, 39, has been Senior Vice President responsible for Due
Diligence and Investment Evaluation of FirstCity since July 3, 1995, and of
J-Hawk since 1992. From 1991 to 1992, Mr. DeWitt was Senior Vice President of
the First National Bank of Central Texas, a national banking association, and
from 1989 to 1991, he was President of the First National Bank of Goldthwaite, a
national banking association.

         Steve Fillip, 45, has been Senior Vice President and Chief Credit
Officer since November 1996 and Senior Vice President of FirstCity since July 3,
1995, and of J-Hawk since 1991. From 1989 to 1991, Mr. Fillip was Executive Vice
President and Chief Credit Officer of BancOne, Texas, N.A. (Waco), a national
banking association.

         Joe S. Greak, 48, has been Senior Vice President, Tax Director and
Secretary of FirstCity since July 3, 1995, and has been the Tax Manager of FCBOT
since 1993. From 1992 to 1993, Mr. Greak was the Tax Manager of New First City -
Houston, N.A. Prior thereto, he was Senior Vice President and Tax Director of
First City, Texas - Houston, N.A.

         James C. Holmes, 40, has been Senior Vice President and Manager of
Finance, Budget and Information Services of FirstCity since July 3, 1995, and of
J-Hawk since 1991. From 1988 to 1991, Mr. Holmes was a Vice President of MBank,
Waco, a national banking association.

         Kathy McNair, 47, has been Senior Vice President of FirstCity since
July 3, 1995, and of J-Hawk since 1992. Ms. McNair is currently Manager of
Credit Administration of FirstCity; prior thereto, she was Credit Administration
Manager of a wholly owned subsidiary of J-Hawk. From 1990 to 1992, Ms. McNair
was a Vice President of Investors Savings Bank, a savings and loan association,
and from 1988 to 1990, Ms. McNair was a Vice President of Old Kent Bank
Southwest, a state chartered bank.

                                        8
<PAGE>

         Gary H. Miller, 37, has been Senior Vice President and Chief Financial
Officer since November 1996. Prior thereto, Mr. Miller served as Senior Vice
President and Controller of FirstCity since July 3, 1995, and of J-Hawk since
1994. From 1990 to 1994, Mr. Miller was a senior manager of Jaynes, Reitmeier,
Boyd & Therrell, P.C., an independent public accounting firm. From 1988 to 1990,
Mr. Miller was a Vice President of NCNB Texas National Bank, a national banking
association.

         Jim W. Moore, 46, has been Senior Vice President and Manager of
Subsidiary Activities since November 1996. Prior thereto, Mr. Moore served as
Senior Vice President and Manager of Assets of FirstCity since July 3, 1995, and
of J-Hawk since 1992. From 1990 to 1992, Mr. Moore was a management consultant
for MBank, Waco, a national banking association, and from 1988 to 1990, Mr.
Moore was President and a Director of Central Texas Savings and Loan, a savings
and loan association.

COMPETITION

         The Company's competition varies by geographic location and type of
asset being purchased. Generally, competition within each of the markets in
which the Company competes is fragmented with national, regional and local
competitors, none of which dominates a particular market. The Company's
competitors include investment partnerships created for the primary purpose of
acquiring distressed assets, commercial banks, investment banks, public and
private financial services companies generally similar to the Company and
various other legal entities. Certain of the Company's competitors are larger,
have greater financial resources than the Company or have lower required
financial rates of return on investments than the Company.

ITEM 2.  PROPERTIES.

         FirstCity maintains offices in Waco, Irving, Richardson, and Houston,
TX, Irvine, CA, Philadelphia, PA, Richmond, VA, Hartford, CT, Fort Wayne, IN and
Franklin, MA. FirstCity leases all its offices, and other than its current
headquarters in Waco, Texas, considers all its offices to be temporary.
FirstCity leases its current headquarters building from a related party under a
noncancellable operating lease which expires December 2001.
All leases of the other offices of FirstCity expire prior to March, 2000.

ITEM 3.  LEGAL PROCEEDINGS.

         Periodically, FirstCity and the acquisition partnerships are parties to
or otherwise involved in legal proceedings arising in the normal course of
business. FirstCity does not believe that there is any proceeding threatened or
pending against it or the acquisition partnerships which, if determined
adversely, would have a material adverse effect on the financial position,
results of operations or liquidity of FirstCity or the acquisition partnerships.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1996.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         FirstCity's common (FCFC) and special preferred (FCFCP) shares were
listed on the Nasdaq National Market System effective November 3, 1995, and were
traded over the counter beginning July 3, 1995. The number of common
stockholders of record on December 31, 1996, was approximately 650.


                                        9
<PAGE>



         High and low stock prices and dividends in 1996 and 1995 are displayed
in the following table:
<TABLE>
<CAPTION>

                                                           1996                1996                  1995
                                                          ------            -----------              -----
QUARTER ENDED                                          MARKET PRICE       CASH DIVIDENDS          MARKET PRICE
Common Stock:                                       High          Low          Paid            High          Low
                                                   ------        -----        ------          ------         ----
<S>                                                <C>         <C>           <C>             <C>          <C>   
         March 31.........................         $ 22.88     $ 18.25       $ -             $    -       $    -
         June 30..........................           29.00       18.75         -                  -            -
         September 30(1)..................           29.50       24.63         -                18.50        12.00
         December 31......................           31.88       27.75         -                22.38        15.13

Special Preferred Stock:

         March 31.........................        $  24.75     $ 23.13       $ -             $   -        $   -
         June 30..........................           25.75       24.13         -                 -            -
         September 30 (1).................           26.50       25.31         -               22.38        19.75
         December 31......................           26.50       22.00       3.92 (2)          23.83        21.31
<FN>
(1) Beginning July 3, 1995, the date of the Merger.
(2) Accrued dividend from July 3, 1995 through September 30, 1996.
</FN>
</TABLE>

         Prior to the Merger of J-Hawk and FCBOT on July 3, 1995, FCBOT's common
stock (FBT) was traded over the counter. High and low stock prices for 1995 are
displayed in the following table:


                                                                    1995
STOCK PRICES                                                    MARKET PRICE
QUARTER ENDED                                                  High       Low

March 31.................................................     $0.87      $0.25
June 30..................................................      0.75       0.37
September 30 (1).........................................      0.63       0.25

(1) Through July 3, 1995, the date of the Merger.

         Certain information concerning the common stock of FirstCity is
included elsewhere herein under the heading "Management's Discussion and
Analysis - Common and Preferred Stock Data," and under Notes 2 and 7 to the
Consolidated Financial Statements, included elsewhere herein.

ITEM 6.  SELECTED FINANCIAL DATA.

         Selected Financial Data is presented elsewhere herein under the heading
"Selected Financial Data" in Item 8 - Financial Statements and Supplementary
Data. The Selected Financial Data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this Report and with the related Consolidated
Financial Statements and Notes thereto under Item 8 of this Report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

         Net earnings for FirstCity Financial Corporation ("FirstCity" or the
"Company") were $35.4 million in 1996. After dividends on special preferred
stock, earnings attributable to common equity were $27.7 million. These results
include $14.6 million associated with the initial revaluation of tax benefits in
the second quarter of 1996. Net of tax benefits from this initial revaluation,
1996 earnings applicable to common shareholders were $13.1 million, compared to
$10.9 million in 1995. Per share earnings were $5.63 ($2.66 excluding the
previously mentioned deferred tax benefit), versus $2.98 per share in 1995.

         Earnings for 1996 were significantly increased by the recognition of
certain tax benefits resulting from the Company's reassessment of its valuation
allowance (reserve) related to its net operating loss carry forward ("NOL")
asset. Realization of the asset is dependent upon generating sufficient taxable
earnings to utilize the 

                                       10
<PAGE>


NOL. Although realization is not assured, management believes it is more likely
than not that FirstCity will generate sufficient taxable income in future
periods to utilize the tax benefit recognized. Prior to the second quarter of
1996, the deferred tax asset resulting from the Company's NOL was entirely
offset by this valuation reserve. In the second quarter of 1996, the valuation
reserve was reduced based on estimates of future income. The amount of tax
benefits recognized will be adjusted in future periods should the estimates of
future taxable income change. To the extent that there are changes in the
estimated reserve, net earnings will be impacted accordingly.

         FirstCity's asset acquisition business remained strong in 1996 with the
Company investing in excess of $200 million in asset purchases for the fourth
consecutive year. Major acquisitions included:

        -   A $92 million portfolio purchased from a major banking organization.
        -   A $28 million portfolio of automobile finance receivables.
        -   A $44 million portfolio purchased in France, marking the
            commencement of FirstCity's international investment activities.
        -   A $23 million real-estate portfolio.

         In May 1996, FirstCity initiated its sub-prime auto finance lending
activity through the acquisition of National Auto Funding Corporation and NAF
Auto Loan Trust (collectively, "NAF"), Irving, Texas. NAF owned $33.6 million of
loans at year-end, including $17.6 million originated in 1996. FirstCity
augmented the allowance for loan losses associated with the NAF portfolio by
providing a $2 million provision during 1996.

         The following is an aging of the loans held by NAF at December 31,
1996:


                                              Amount                   %
                                         ----------------       ----------------
Current through 89 days past due         $         31,503                  93.81
90 - 119 days past due                                830                   2.47
Over 120 days past due                              1,250                   3.72
                                         ----------------       ----------------
                                         $         33,583                 100.00

         The results for 1996 reflect $2 million of servicing fees which the
Company recognized in conjunction with the $75 million securitization of
acquisition partnership performing loans completed in August. The securitization
facilitated a refinancing of a majority of the debt of the acquisition
partnerships that was completed in September. This refinancing resulted in a $7
million equity distribution to FirstCity as well as a reduction in the overall
cost of funds for the acquisition partnerships.

         During 1996, FirstCity redeemed all $106.7 million of senior
subordinated notes issued in conjunction with the Merger, reducing the Class A
Certificate of the FirstCity Liquidating Trust by a like amount.

         On January 9, 1997, FirstCity executed a letter of intent to merge with
Harbor Financial Group, Inc. ("Harbor"), a mortgage banking company
headquartered in Houston, Texas. FirstCity and Harbor executed the definitive
Agreement and Plan of Merger on March 26, 1997, pursuant to which FirstCity will
issue 1,581,000 shares of common stock in exchange for 100% of Harbor's
outstanding capital stock. Harbor originates and services conventional and niche
residential loans, home improvement loans and commercial mortgages. Harbor has
approximately $11 million in equity, assets of over $200 million and 625
employees. The transaction remains subject to the approval of both companies'
shareholders, and various regulatory approvals.

         On July 3, 1995, FirstCity was formed by the merger of J-Hawk
Corporation ("J-Hawk") and First City Bancorporation of Texas, Inc. ("FCBOT").
For accounting purposes, the merger transaction was treated as an acquisition of
FCBOT by J-Hawk. Accordingly, financial information prior to the merger date
reflects the historical financial position and results of operations of J-Hawk.

                                       11
<PAGE>

                              RESULTS OF OPERATIONS

         The following table summarizes FirstCity's performance since 1994.
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------

                          CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS

                                                              YEAR ENDED DECEMBER 31,
                                                    -----------------------------------------
                                                       1996           1995           1994
                                                    -----------    -----------    -----------
                                                    (Amounts in thousands, except per share data)
<S>                                               <C>             <C>           <C>
Income:
Net gain on purchased asset pools...............  $      19,510   $     11,984  $       7,636
Servicing fees..................................         12,456         10,903          8,080
Interest income on Class "A"  Certificate.......         11,601          8,597              -
Other interest income...........................          7,707          1,572             69
Rental income on purchased real estate pools ...          3,033          1,277              -
Other income....................................          1,037          1,356            921
                                                    -----------    -----------    -----------
                  Subtotal......................         55,344         35,689         16,706
                                                    -----------    -----------    -----------
Expenses:
Interest on senior subordinated notes payable...          3,892          4,721              -
Interest on other notes payable.................          9,980          4,284          1,812
Provision for loan losses.......................          2,029              -              -
Salaries and benefits...........................         10,822          8,094          7,252
Amortization....................................          3,113          1,534              -
Travel..........................................          1,372            797          1,007
Occupancy.......................................          2,433          1,336          1,289
Legal and accounting............................          2,323            400          1,212
Other general and administrative expense........          6,113          2,688          2,483
                                                    -----------    -----------    -----------
                  Subtotal......................         42,077         23,854         15,055
                                                    -----------    -----------    -----------
Equity earnings of acquisition partnerships               6,125          3,834          7,497
Earnings before income taxes....................         19,392         15,669          9,148
                                                    -----------    -----------    -----------
Provision (benefit) for income taxes............       (16,013)            936          3,121
Net earnings....................................  $      35,405   $     14,733  $       6,027
                                                    ===========    ===========    ===========
Special preferred dividends.....................          7,709          3,876              -
Net earnings to common..........................  $      27,696   $     10,857  $       6,027
                                                    ===========    ===========    ===========
Net earnings per share..........................  $        5.63   $       2.98  $        2.37
                                                    ===========    ===========    ===========
Average shares outstanding......................          4,923          3,642          2,544
                                                    ===========    ===========    ===========
Return on average equity .......................           45.9%          34.5%          33.7%
</TABLE>


                                       12
<PAGE>



         The following table analyzes the composition of FirstCity's major
revenue sources:
<TABLE>
<CAPTION>

                           ANALYSIS OF REVENUE SOURCES


                                                                  YEAR ENDED DECEMBER 31,
                                                      ------------------------------------------------
                                                          1996              1995              1994
                                                      ------------      ------------      ------------
                                                                (Dollars in thousands)
<S>                                                 <C>               <C>               <C>
RESULTS DERIVED FROM PURCHASED OR
  ORIGINATED ASSET POOLS
NON-PERFORMING ASSET POOLS:
    Asset portfolios purchased...................   $    33,151       $   111,561       $    27,869
    $ collected..................................        70,940            44,760            18,341
    Net gain on collections......................        19,510            11,984             7,636
    Profit margin on purchased asset pools.......         27.50%            26.77%            41.63%
PERFORMING ASSET POOLS:
    Asset portfolios purchased...................   $    25,525       $         -       $         -
    Loans originated.............................        18,146                 -                 -
    Interest income..............................         6,178                 -                 -

SERVICE FEE REVENUES
ACQUISITION PARTNERSHIPS
    $ collected..................................   $   174,012       $   188,934       $   206,627
    Service fee revenue..........................         6,468             6,834             7,940
    Average service fee %........................          3.72%             3.62%             3.84%

TRUST
    $ collected:
       FDIC receivable...........................   $    35,316       $    30,000       $         -
       Other trust assets........................       123,007            77,371                 -
    Service fee revenue..........................         4,241             3,110                 -
    Average service fee %........................          2.68%             2.90%                -

OTHER AFFILIATED ENTITIES
    $ collected..................................   $    28,636       $    18,218       $     3,741
    Service fee revenue..........................         1,747               959               140
    Average service fee %........................          6.10%             5.26%             3.74%

TOTAL SERVICE FEES
    $ collected..................................   $   360,971       $   314,523       $   210,368
    Service fee revenue..........................        12,456            10,903             8,080
    Average service fee %........................          3.45%             3.47%             3.84%

EQUITY EARNINGS IN
  ACQUISITION PARTNERSHIPS
Asset portfolios purchased.......................   $   146,848       $   101,626       $   202,761
Average FirstCity investment.....................        25,784            14,429            15,180
Equity earnings in investments...................         6,125             3,834             7,497

</TABLE>


                                       13
<PAGE>



         The following table analyzes operations of FirstCity's acquisition
partnerships:
<TABLE>
<CAPTION>

                      ANALYSIS OF ACQUISITION PARTNERSHIPS


                                                                      YEAR ENDED DECEMBER 31,
                                                       ------------------------------------------------------
                                                            1996              1995                 1994
                                                       --------------    ---------------     ----------------
                                                                       (Dollars in thousands)
<S>                                                  <C>               <C>                  <C>
GAINS ON DISPOSITION OF ASSET POOLS
         Gross collections.........................  $       174,012   $       188,934      $        206,627
         Cost of collections.......................          134,507           137,564               143,188
                                                       --------------    ---------------     ----------------
         Total gain on disposition of asset pools..  $        39,505   $        51,370      $         63,439
                                                       ==============    ===============     ================
         Variance from previous year due to:.......
                  Collection levels................  $      (4,057)    $       (5,432)      $         30,187
                  Gross profit margins.............         (8,477)            (7,258)                (3,567)
                  Mix..............................             669                621                (2,724)
                                                       --------------    ---------------     ----------------
         Total variance from previous year.........  $     (11,865)    $      (12,069)      $         23,896
                                                       ==============    ===============     ================

INTEREST INCOME
         Performing asset pools....................  $         7,870   $              -     $              -
         Other.....................................              862                  -                    -

COST OF BORROWING
         Interest expense..........................  $        22,065   $         26,482     $         22,544
         Average borrowings........................          188,231            223,028              204,863
         Average rate..............................            11.72%             11.87%               11.00%

OTHER EXPENSES
         Service fee expense.......................  $         6,809   $          6,834     $          7,940
         Legal.....................................            2,266              2,109                3,864
         Property protection.......................            5,712              3,797                6,523
         Other.....................................              693              2,606                3,342
         Total other expenses......................  $        15,480   $         15,346     $         21,669
                                                       ==============    ===============     ================
NET INCOME.........................................  $        10,692   $          9,542     $         19,226
                                                       ==============    ===============     ================

</TABLE>
                              1996 Compared to 1995

         Net earnings for 1996 were $35.4 million, including a $14.6 million
deferred tax benefit, compared to $14.7 million in 1995. Net earnings to common
shareholders in 1996 were $27.7 million ($13.1 million excluding the tax
benefit) up $16.8 million or 155% from $10.9 million in 1995. On a per share
basis, earnings attributable to common equity were $5.63 ($2.66 excluding the
tax benefit) for 1996 compared to $2.98 per share for 1995, an 89% increase.

         NET GAIN ON PURCHASED ASSET POOLS. The net gain on purchased asset
pools increased 63% to $19.5 million in 1996 from $12.0 million in 1995. The
average investment in purchased asset pools in 1996 of $104.2 million exceeded
the average investment levels for such period in 1995 of $47.0 million, with the
resulting gain on disposition of purchased asset pools higher in 1996 due to
increased levels of collections on larger asset pools. In the second quarter of
1995, gains of approximately $3 million resulted from a sale of approximately
$12 million in loans to a partnership owned by certain executive officers of
J-Hawk, as a part of the spin off

                                       14
<PAGE>



transaction completed in conjunction with the Merger. The profit margin on
collections in 1996 was 28% as compared to 27% in 1995.

         SERVICING FEES. Servicing fees grew to $12.5 million in 1996 from $10.9
million in 1995, an increase of 14%. In connection with the $75 million
securitization of performing loans from the acquisition partnerships completed
in August 1996, FirstCity recognized $2.0 million of servicing fees as a result
of the sale of assets by the Acquisition Partnerships. Neither FirstCity or the
Acquisition Partnerships have any future obligation related to the assets sold.
Excluding fees from collection of Trust assets, servicing fees increased $.4
million from 1995. Subsequent to 1996, FirstCity and the Trust entered into a
tentative agreement which proposes the dissolution of the Investment Management
Agreement (asset servicing agreement between FirstCity and the Trust), whereby
FirstCity will receive approximately $6.8 million as a result of the
dissolution.

         INTEREST INCOME AND EXPENSE. Interest income on the Trust Class A
Certificate was recorded for only the two post merger quarters in 1995 and all
four quarters of 1996. Interest income on the Trust Class A Certificate
represents reimbursement to FirstCity (by the Trust) of interest expense of $3.9
million on the senior subordinated notes (all of which were redeemed by July,
1996) and accrual of dividends of $7.7 million on special preferred stock. The
Company realized other interest income primarily from performing loans acquired
beginning in the third quarter of 1995. Interest expense on other notes payable
rose in proportion to higher volumes of debt associated with the purchase of
asset pools and equity interest in acquisition partnerships and operating
subsidiaries.

         OTHER INCOME AND EXPENSE. Rental income on purchased real estate pools
resulted from a third quarter 1995 acquisition of a pool consisting entirely of
real estate assets. On this and other real estate purchases, the net operating
income derived from such assets is recognized as other income, while gains on
sales are recognized upon disposition of the asset. FirstCity augmented the
allowance for loan losses associated with the NAF portfolio by providing a $2.0
million provision in 1996.

         GENERAL AND ADMINISTRATIVE EXPENSE. Salaries and benefits, amortization
and other general and administrative expenses (including travel, legal and
accounting fees, occupancy and other expenses) increased $11.3 million,
reflecting higher costs since acquiring Diversified in 1995, increased property
expenses and amortization of goodwill and servicing rights in 1996 (such
expenses were incurred only in a portion of 1995). Also, other general and
administrative expenses in 1995 included a recovery of $.7 million of prior year
expenses related to the Merger (which expenses were reimbursed by FCBOT).

         EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS. Equity in earnings of
acquisition partnerships in 1996 increased $2.3 million from 1995, partially as
a result of the securitization and refinancing described above. Collections in
the acquisition partnerships decreased $14.9 million, or 7.9%, and caused a
decrease in gross profit of $4.1 million. Lower gross profit margins reduced
earnings by $8.5 million. However, this decrease was more than offset by
interest income on newly-acquired performing asset pools ($7.9 million) and a
more favorable method of income allocation and a lower cost of funding on
certain new partnerships.

         INCOME TAXES. Federal income taxes are provided at a 35% rate applied
to taxable income. The Company believes NOLs are available to it after July 3,
1995, and are recognized as an offset to the provision in the period during
which the benefit is realized. A deferred tax benefit of $14.6 million was
recorded in the second quarter of 1996, and an additional $1.9 million was
recorded in the fourth quarter. Realization of the resulting net deferred tax
asset is dependent upon generating sufficient taxable income prior to expiration
of the NOLs. Although realization is not assured, management believes it is more
likely than not that all of the recorded deferred tax asset will be realized.
The amount of the deferred tax asset considered realizable, however, could be
adjusted in the future if estimates of future taxable income during the carry
forward period change.


                                       15
<PAGE>



                              1995 COMPARED TO 1994

         Net earnings in 1995 were $14.7 million, up 144% from $6.0 million in
1994. Net earnings to common shareholders in 1995 were $10.9 million, up 80%
from $6.0 million in 1994. On a per share basis, earnings attributable to common
equity were $2.98 for 1995 compared to $2.37 per share for 1994, a 26% increase.

         NET GAIN ON PURCHASED ASSET POOLS. The net gain on purchased asset
pools increased 57% to $12.0 million in 1995 from $7.6 million in 1994. The 1995
gain includes approximately $3 million from the sale of $12 million in loans to
a partnership owned by certain executive officers of J-Hawk, as part of the spin
off transaction completed in conjunction with the merger. Even with the spin off
of $12 million in asset pools in connection with the merger in June 1995, the
average investment in purchased asset pools in 1995 of $47.0 million exceeded
the average investment levels for 1994 of $16.7 million, with the resulting gain
on disposition of purchased asset pools higher in 1995 due to increased levels
of collections on larger asset pools. The profit margin on collections in 1995
was 26.77% as compared to 41.63% in 1994.

         SERVICING FEES. Servicing fees grew to $10.9 million in 1995 from $8.1
million in 1994, an increase of 35%. Excluding $3.1 million in fees from
collection of Trust assets, servicing fees were relatively flat as compared with
1994 ($7.8 million in 1995 as compared to $8.1 million in 1994) because of 
similar collection levels achieved in the remaining serviced asset pools.

         INTEREST INCOME AND EXPENSE. As a result of the merger, interest income
on the Class A Certificate was recorded in 1995, representing reimbursement to
FirstCity (by the Trust) of interest expense of $4.7 million on the senior
subordinated notes and accrual of dividends of $3.9 million on special preferred
stock. Other interest income resulted primarily from loans acquired in the
Diversified transaction. Interest expense on other notes payable rose in
proportion to higher volumes of debt associated with purchased asset pools owned
by the Company.

         OTHER INCOME. Rental income on purchased real estate pools resulted
from a 1995 acquisition of a pool consisting entirely of real estate assets. For
such assets, rental income and expenses are recognized when earned and incurred,
respectively.

         GENERAL AND ADMINISTRATIVE EXPENSE. Salaries and benefits, amortization
and other general and administrative expenses (including travel, legal and
accounting fees, occupancy and other expenses) increased 12%, reflecting higher
staffing costs since acquiring Diversified and amortization of goodwill and
servicing rights in 1995 (none in 1994).

         EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS. Equity earnings of
acquisition partnerships in 1995 decreased $3.7 million from 1994. Collections
in the acquisition partnerships decreased $18 million, or 9%, and caused a
reduction in gross profit of $5.4 million. The gross profit margin declined 3.5%
from 30.7% in 1994 to 27.2% in 1995 and reduced gross profit by $7.3 million.
This reduction in gross profit margin is due to collections from lower profit
margin pools that comprised a larger percentage of overall collections of
acquisition partnerships in 1995 as compared to 1994. These lower profit margin
pools are pools acquired more recently and have lower margins as a result of the
purchase of higher quality assets and increased competition for the purchases of
such pools.

         FEDERAL INCOME TAXES. Federal income taxes are provided at 35% of
taxable income in 1995. FirstCity believes net operating loss carry forwards are
available to FirstCity after July 3, 1995, and are recognized as an offset to
the provision in the period during which the benefit is realized.




                                       16
<PAGE>



                         LIQUIDITY AND CAPITAL RESOURCES

         The following table analyzes the components of portfolio and corporate
debt, capital positions at the Company and in the acquisition partnerships and
associated leverage ratios of FirstCity and the acquisition partnerships:

<TABLE>
<CAPTION>
                      ANALYSIS OF COMBINED DEBT AND EQUITY

                                                                            1996               1995
                                                                          --------            ------
                                                                             (Dollars in thousands)
<S>                                                                   <C>              <C>
AVERAGE DEBT OUTSTANDING:
    Borrowing by acquisition partnerships, non-recourse               $       188,231  $         223,028
    Borrowings secured by purchased asset pools, non-recourse                  58,898             36,348
    Borrowings secured by automobile receivables, non-recourse                 14,885                  -
    Senior subordinated notes, with recourse                                   43,288             52,614
    Other secured corporate borrowings, with recourse                          26,773              3,851
                                                                       --------------   ----------------
    Total average debt outstanding                                    $       332,075  $         315,841

COMBINED EQUITY AT YEAR END:
    FirstCity Financial Corporation                                   $        74,213  $          46,251
    Minority interest in
        acquisition partnerships                                               18,447             20,462
                                                                       --------------   ----------------
    Total equity                                                      $        92,660  $          66,713

LEVERAGE RATIOS:
    Average debt to combined equity                                            3.58:1             4.73:1
    Average debt (excluding senior
        subordinated debt) to combined equity                                  3.12:1             3.95:1

AVERAGE COST OF FUNDS:
    Borrowing by acquisition partnerships, non-recourse                          11.7%              11.9%
    Borrowings secured by purchased asset pools, non-recourse                    10.0               10.8
    Borrowings secured by automobile receivables, non-recourse                    8.5                 -
    Senior subordinated notes, with recourse                                      9.0                9.0
    Other secured corporate borrowings, with recourse                            10.1                9.2

</TABLE>


         Generally, the liquidity needs of FirstCity are for operations, payment
of debt, equity for acquisitions of purchased asset pools, investments in and
advances to acquisition partnerships and other investments by the Company. The
sources of liquidity are funds generated from operations, distributions from the
Trust to the Company as the sole holder of the Trust Class A Certificate, equity
distributions from acquisition partnerships and short term borrowings from
revolving lines of credit and other specific purpose short term borrowings.

         FirstCity contributed equity to acquisition partnerships totaling $30.7
million to facilitate the purchase of $146.8 million in portfolios of assets
during 1996 and also acquired $58.7 million in purchased asset pools. In 1996,
FirstCity borrowed $35 million and repaid $21 million under a credit facility
provided by Cargill, increasing the balance under that facility to $19.4 million
at year end. Such facility matures on June 30, 1997, and is secured by
substantially all of the unencumbered equity interest in subsidiaries and
acquisition partnerships and certain other assets of the Company.

         In 1996, NAF borrowed $25 million under a $50 million Warehouse Credit
Agreement with ContiTrade Services L.L.C. to purchase and originate auto loans
through NAF. As the origination of auto loans increases, NAF can borrow under
this facility and repay with the proceeds of securitizations. Increases in loan
originations may require additional equity infusions into NAF to comply with the
borrowing base terms of the Warehouse Credit Agreement.

         On March 29, 1996, FirstCity redeemed early $53.3 million of its senior
subordinated notes by means of a distribution from the Trust. During the second
quarter of 1996, $1 million of notes held by the Trust were

                                       17
<PAGE>



redeemed. On July 26, 1996, the remaining $52.3 million of notes were redeemed
via another distribution from the Trust. In the fourth quarter of 1996,
FirstCity paid (via Trust distribution) $9.6 million accrued dividends (through
September 30, 1996) on special preferred stock. On January 15, 1997, FirstCity
paid the accrued dividend of $1.9 million for the fourth quarter of 1996.
Subsequent to December 31, 1996, the Company purchased approximately $6.4
million of special preferred stock with a distribution from the Trust. Each of
these transactions resulted in a corresponding reduction in the Trust Class A
Certificate.

         In the future, FirstCity anticipates being able to raise capital
through public debt or equity offerings, thus enhancing the investment and
growth opportunities of the Company. The Company believes that these and other
sources of liquidity, including refinancing the Cargill credit facility to the
extent necessary, securitizations, and funding from senior lenders providing
funding for acquisition partnership formation and direct portfolio and business
acquisitions, should prove adequate to continue to fund the Company's
contemplated investment activities. At December 31, 1996, total common equity
was $74.2 million and is considered by management adequate to support the
current capital requirements and planned growth of the Company.

                         COMMON AND PREFERRED STOCK DATA

         FirstCity's common (FCFC) and special preferred (FCFCP) shares were
listed on the Nasdaq National Market System effective November 3, 1995, and were
traded over the counter beginning July 3, 1995. The number of common
stockholders of record on December 31, 1996, was approximately 650. High and low
stock prices and dividends in 1996 and 1995 are displayed in the following
table:
<TABLE>
<CAPTION>

                                                           1996                  1996                    1995
                                                          ------              -----------               ------
QUARTER ENDED                                          MARKET PRICE         CASH DIVIDENDS           MARKET PRICE
Common Stock:                                       High          Low            Paid             High          Low
                                                    ----          ---            ----             ----          ---
<S>                                                <C>         <C>           <C>              <C>          <C>     
         March 31.........................         $ 22.88     $ 18.25       $     -          $     -      $      -
         June 30..........................           29.00       18.75             -                -             -
         September 30(1)..................           29.50       24.63             -             18.50         12.00
         December 31......................           31.88       27.75             -             22.38         15.13

Special Preferred Stock:
         March 31.........................        $  24.75     $ 23.13       $     -          $     -      $      -
         June 30..........................           25.75       24.13             -                -             -
         September 30 (1).................           26.50       25.31             -             22.38         19.75
         December 31......................           26.50       22.00           3.92 (2)        23.83         21.31

<FN>
(1)      Beginning July 3, 1995, the date of the Merger.
(2)      Accrued dividend from July 3, 1995 through September 30, 1996.
</FN>
</TABLE>

         The Company believes that the best use of its available cash is
investment in purchased asset pools, acquisition partnerships or other
investment opportunities; therefore, no dividends have been paid on common stock
and none are expected to be paid in the foreseeable future. A dividend of $.7875
per share on special preferred stock for the fourth quarter of 1996 was paid on
January 15, 1997.

                                 FOURTH QUARTER

         Net earnings for the fourth quarter of 1996 were $7.0 million,
including a $1.9 million deferred tax benefit. After dividends on the Company's
special preferred stock, earnings attributable to common equity were $5.1
million, or $1.03 per share. These results represent an annualized return on
average equity of 28.3%. Earnings for the fourth quarter of 1995 were $5.6
million. After dividends on the Company's special preferred stock, earnings
attributable to common equity were $3.7 million in 1995, or $.75 per share,
representing 33.1% annualized return on average equity. The following table
presents a summary of operations for the fourth quarters of 1996 and 1995.

                                       18
<PAGE>

<TABLE>
<CAPTION>

                  CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS


                                                        1996                   1995
                                                       Fourth                 Fourth
                                                       Quarter                Quarter
                                               (Dollars in thousands, except per share data)
<S>                                                 <C>                  <C>         
Income...........................................   $     13,644         $     16,639
Expenses.........................................         10,656               12,694
Equity earnings of acquisition partnerships......          1,872                1,665
Earnings before income taxes.....................          4,860                5,610
Provision (benefit) for income taxes.............        (2,142)                    -
                                                     -----------          -----------
Net earnings.....................................   $      7,002         $      5,610
                                                     ===========         
Special preferred dividends......................          1,937                1,938
Net earnings to common...........................   $      5,065         $      3,672
                                                     ===========         
Net earnings per share...........................   $       1.03         $       0.75

</TABLE>

         The reductions in income and expenses from the fourth quarter of 1995
to that of 1996 were caused primarily by the absence of $2.4 million of interest
on senior subordinated notes (and corresponding interest income on Class "A"
Certificate) that were redeemed earlier in 1996. Equity in earnings of
acquisition partnerships was relatively flat. A deferred tax benefit of $1.9
million was recognized in the fourth quarter of 1996.

                       EFFECT OF NEW ACCOUNTING STANDARDS

         Effective January 1, 1996, FirstCity adopted the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
and No. 123, "Accounting for Stock-Based Compensation". Neither of these
standards had a material impact on the financial condition or results of
operations of FirstCity.

         In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. The adoption of SFAS No. 125 did not have a material impact on the
Company's consolidated financial position, results of operations or liquidity.

                                  RISK FACTORS

         FirstCity's future results of operations are dependent upon a number of
factors: (1) differences between projected and actual cash flows of purchased
asset pools, (2) continued availability of potential asset pool acquisitions,
(3) availability of net operating loss carry forwards, (4) changes in interest
rates, (5) continuation of current business affiliation with Cargill, (6)
sources of financing and (7) general economic conditions.

         DIFFERENCES BETWEEN PROJECTED AND ACTUAL CASH FLOWS OF PURCHASED ASSET
POOLS. Many of the assumptions upon which the future collections in purchased
asset pools are based are subject to significant uncertainties; some assumptions
will inevitably be incorrect. Additionally, unanticipated events and
circumstances

                                       19
<PAGE>



may occur. There will always be differences between projected and actual results
because of these unanticipated events and circumstances.

         CONTINUED AVAILABILITY OF POTENTIAL ASSET POOL ACQUISITIONS. FirstCity
believes that financial institutions and other lenders will continue to offer
asset pools as a result of their continuing consolidation and investor and
regulatory pressure to dispose of non-performing and under-performing assets.
However, changes in the regulatory environment could cause the increased asset
pool sales to decline in the future.

         AVAILABILITY OF NET OPERATING LOSS CARRY FORWARDS. Although FirstCity
believes that the net operating loss carry forwards are available to offset
future taxable earnings of FirstCity, there is no authority governing many of
the tax aspects of the Merger primarily because some determinations may be
questions of fact. Additionally, no ruling has been obtained from the Internal
Revenue Service regarding the availability of the net operating loss carry
forwards to FirstCity, therefore there can be no assurances that the tax aspects
of the Merger and the availability of the net operating loss carry forwards will
not be challenged by the Internal Revenue Service.

         CHANGES IN INTEREST RATES. Most of the indebtedness incurred by
FirstCity and its acquisition partnerships is floating rate debt, the rates of
which change when certain short term benchmark rates increase. If these
benchmark rates increase beyond what FirstCity had originally projected, the
profitability of FirstCity and the acquisition partnerships will be adversely
affected.

         CONTINUATION OF THE CURRENT BUSINESS AFFILIATION WITH CARGILL.
FirstCity attributes a significant portion of its recent financial success to
its affiliation with Cargill. Participation by Cargill in a transaction provides
assurances to any potential seller of a portfolio of distressed assets that
FirstCity will have the financial ability to consummate the targeted portfolio
acquisition. In addition, FirstCity believes that Cargill's general reputation
in the financial markets provides FirstCity with more opportunities to acquire
portfolios than FirstCity would otherwise have acting alone. Discontinuation of
this arrangement with Cargill could have a negative economic impact upon the
continued results of operations of FirstCity.

         SOURCES OF FINANCING. FirstCity's continued success in its distressed
asset acquisition business is dependent upon the availability of senior debt
financing for the acquisition partnerships. Although FirstCity continues to
enjoy good relationships with its current lenders and to develop new sources of
senior debt financing, there can be no assurances that these and other sources
of senior debt financing will be available in the future.

         GENERAL ECONOMIC CONDITIONS. When FirstCity acquires an asset pool,
cash flows and sale prices are projected based upon the economic conditions then
prevailing and projected in the United States and in the economic region in
which the asset is situated. If such economic conditions substantially
deteriorate, FirstCity's earnings from its then existing asset portfolios may be
adversely affected, but additional opportunities to acquire new asset portfolios
will be expected to be available.

                                       20
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


                                                                                  December 31,
                                                                                  ------------
                                                                           1996                  1995
                                                                           ----                  ----
                                                                       (Dollars in thousands, except per
                                                                                  share data)
<S>                                                                <C>                   <C>
Assets
Cash and cash equivalents......................................    $             11,441  $             8,370
Purchased asset pools and loan receivables, net................                 107,637               95,939
Equity investments in and advances to acquisition
    partnerships...............................................                  21,761               26,187
Class "A" Certificate of FirstCity Liquidating Trust...........                  53,617              162,245
Deferred tax benefit...........................................                  16,500                    -
Other assets, net..............................................                  16,257               16,148
                                                                    -------------------   ------------------
        Total Assets...........................................    $            227,213  $           308,889
                                                                    ===================   ==================

Liabilities, Special Preferred Stock and Shareholders' Equity
Liabilities:
    Notes payable, secured.....................................    $             91,924  $            85,518
    Senior subordinated notes payable..........................                       -              106,690
    Notes payable to others....................................                   4,747                8,988
    Other liabilities..........................................                   2,712                5,887
                                                                    -------------------   ------------------
        Total Liabilities......................................                  99,383              207,083
                                                                    -------------------   ------------------
Commitments and contingencies..................................                       -                    -
Special preferred stock, including dividends of $1,938
    and $3,876, respectively (nominal stated value of
    $21 per share; 2,500,000 shares authorized;
    2,460,911 issued and outstanding)..........................                  53,617               55,555
Shareholders' equity:
    Optional preferred stock (par value $.01 per share;
        100,000,000 shares authorized; no shares issued
        or outstanding)........................................                       -                    -
    Common stock (par value $.01 per share;
        100,000,000  shares authorized; issued and
        outstanding: 4,932,360 and 4,921,422 shares,
        respectively)..........................................                      49                   49
    Paid in capital............................................                  23,182               22,916
    Retained earnings..........................................                  50,982               23,286
                                                                    -------------------   ------------------

        Total Shareholders' Equity.............................                  74,213               46,251
                                                                    -------------------   ------------------
        Total Liabilities, Special Preferred Stock and         
           Shareholders' Equity................................    $            227,213  $           308,889
                                                                    ===================   ==================

</TABLE>

See accompanying notes to consolidated financial statements.

                                       21
<PAGE>

<TABLE>
<CAPTION>

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME



                                                                Year Ended December 31,
                                                                -----------------------
                                                     1996               1995              1994
                                                     ----               ----              ----
                                                   (Amounts in thousands, except per share data)
<S>                                             <C>               <C>               <C>
Proceeds from disposition and
    payments received on purchased
    asset pools.............................    $       70,940    $        44,760   $        18,341
Cost of purchased asset pools...............            51,430             32,776            10,705
                                                 -------------      -------------     -------------
    Net gain on purchased asset pools.......            19,510             11,984             7,636
Other income:
    Servicing fees..........................            12,456             10,903             8,080
    Interest income on Class"A"
        Certificate.........................            11,601              8,597                 -
    Other interest income...................             7,707              1,572                69
    Rental income on purchased real
        estate pools........................             3,033              1,277                 -
    Other...................................             1,037              1,356               921
                                                 -------------      -------------     -------------
                                                        55,344             35,689            16,706
                                                 -------------      -------------     -------------
Expenses:
    Interest on senior subordinated
        notes payable.......................             3,892              4,721                 -
    Interest on other notes payable.........             9,980              4,284             1,812
    Provision for loan losses...............             2,029                  -                 -
    Salaries and benefits...................            10,822              8,094             7,252
    Amortization............................             3,113              1,534                 -
    Other general and administrative........            12,241              5,221             5,991
                                                 -------------      -------------     -------------
                                                        42,077             23,854            15,055
                                                 -------------      -------------     -------------

Equity in earnings of acquisition
    partnerships............................             6,125              3,834             7,497
                                                 -------------      -------------     -------------
    Earnings from operations before
        income taxes........................            19,392             15,669             9,148

                                                 -------------      -------------     -------------
Provision (benefit) for income taxes........          (16,013)                936             3,121
                                                 -------------      -------------     -------------

        Net earnings........................    $       35,405    $        14,733   $         6,027
                                                 =============      =============     =============
Special preferred dividends.................             7,709              3,876                 -
                                                 -------------      -------------     -------------
Net earnings to common shareholders.........    $       27,696    $        10,857   $         6,027
                                                 =============      =============     =============
Net earnings per share......................    $         5.63    $          2.98   $          2.37
                                                 =============      =============     =============
Weighted average shares outstanding.........             4,923              3,642             2,544
                                                 =============      =============     =============

</TABLE>

                                       22
<PAGE>


<TABLE>
<CAPTION>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


                                      Number of                                                            Total
                                        Common          Common         Paid in         Retained        Shareholders'
                                        Shares          Stock          Capital         Earnings            Equity
                                    --------------   ------------    ------------    -------------     --------------
                                                                        (Dollars in thousands)

<S>                                 <C>             <C>             <C>             <C>               <C>            
Balances, January 1, 1994...........        78,708  $         787   $       1,812   $       12,541    $        15,140
Net earnings for 1994...............             -              -               -            6,027              6,027
Stock dividend......................        78,708            787               -            (787)                  -
                                    --------------   ------------    ------------    -------------     --------------

Balances, December 31, 1994.........       157,416          1,574           1,812           17,781             21,167

Common stock issued.................         5,935             59             720                -                779
Common stock retired................      (11,080)          (111)         (1,089)                -            (1,200)
Net assets spun off to Combined
   Financial Corporation............             -              -               -          (5,352)            (5,352)
Merger with First City
   Bancorporation of Texas, Inc
   (note 2).........................     4,769,151        (1,473)          21,473                -             20,000
Net earnings for 1995...............             -              -               -           14,733             14,733
Preferred stock dividends...........             -              -               -          (3,876)            (3,876)
                                    --------------   ------------    ------------    -------------     --------------
Balances, December 31, 1995.........     4,921,422             49          22,916           23,286             46,251

Exercise of warrants, options and
   employee stock purchase plan.....        10,938              -             266                -                266
Net earnings for 1996...............             -              -               -           35,405             35,405
Preferred stock dividends...........             -              -               -          (7,709)            (7,709)
                                    --------------   ------------    ------------    -------------     --------------

Balances, December 31, 1996.........     4,932,360  $          49   $      23,182   $       50,982    $        74,213
                                    ==============   ============    ============    =============     ==============
</TABLE>




                                       23
<PAGE>
<TABLE>
<CAPTION>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                          Year Ended December 31,
                                                                          -----------------------
                                                                  1996              1995              1994
                                                                --------          --------          --------
                                                                           (Dollars in thousands)
<S>                                                        <C>                <C>               <C>
Cash flows from operating activities:
    Net earnings........................................   $         35,405   $       14,733    $         6,027
    Adjustments to reconcile net earnings to net cash 
       used in operating activities, net of effect of
       acquisitions:
         Cost of collections............................             51,430           32,776             10,705
         Purchase of asset pools........................           (77,964)         (42,727)           (27,869)
         Provision for loan losses......................              2,029                -                  -
         Equity in earnings of acquisition partnerships.            (6,125)          (3,834)            (7,497)
         Collections on performing asset pools..........             11,646            1,293                  -
         Deferred income tax expense (benefit)..........           (16,500)             (64)              1,481
         Depreciation and amortization..................              4,047            1,886                299
         (Increase) decrease in other assets............            (9,255)         (10,881)                270
         Increase (decrease) in other liabilities.......            (3,300)             (25)                278
                                                             --------------     ------------      -------------
         Net cash used in operating activities..........            (8,587)          (6,843)           (16,306)
                                                             --------------     ------------      -------------

Cash flows from investing activities, net of effect
     of acquisitions:
     Advances to acquisition partnerships and affiliates            (1,256)          (9,755)                  -
     Payments on advances to acquisition partnerships and
       affiliates.......................................              9,821              169                  -
     Acquisition of subsidiaries........................              (302)          (7,753)                  -
     Principal and special preferred dividend payments on
       Class "A" Certificate............................            115,337                -                  -
     Property and equipment, net........................            (1,026)          (1,385)              (435)
     Contributions to acquisition partnerships..........           (30,704)          (3,583)            (4,431)
     Distributions from acquisition partnerships........             31,279            5,206             12,327
                                                             --------------     ------------      -------------
         Net cash provided by (used in) investing activities        123,149         (17,101)              7,461
                                                             --------------     ------------      -------------

Cash flows from financing activities, net of effect 
     of acquisitions:
     Borrowings under notes payable.....................            103,619           49,224             23,763
     Payments of notes payable .........................          (100,039)         (40,726)           (11,888)
     Payment of senior subordinated notes payable ......          (105,690)                -                  -
     Additions to notes payable to stockholders and officers              -            1,930              1,695
       Reduction of notes payable to stockholders and officers            -          (1,843)            (3,456)
     Capital contribution of First City Bancorporation of
       Texas, Inc.......................................                  -           20,000                  -
     Proceeds from issuing common stock.................                266              779                  -
     Dividends paid.....................................            (9,647)                -                  -
     Retirement of common stock.........................                  -          (1,200)                  -
                                                             --------------     ------------      -------------
         Net cash provided by (used in) financing activities      (111,491)           28,164             10,114
                                                             --------------     ------------      -------------

Net increase in cash....................................   $          3,071   $        4,220    $         1,269
Cash, beginning of year.................................              8,370            4,150              2,881
                                                             --------------     ------------      -------------

Cash, end of year.......................................   $         11,441   $        8,370    $         4,150
                                                             ==============     ============      =============
Supplemental disclosure of cash flow information: 
     Cash paid during the year for:
       Interest.........................................   $         13,822   $        8,683    $         1,794
                                                             ==============     ============      =============
       Income taxes.....................................   $            116   $        1,000    $         4,690
                                                             ==============     ============      =============

</TABLE>


See accompanying notes to consolidated financial statements.


                                       24
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1996, 1995 and 1994
                             (Dollars in thousands)

         (1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (A) BASIS OF PRESENTATION

         As more fully discussed in Note 2, on July 3, 1995, FirstCity Financial
Corporation (the "Company" or "FirstCity") was formed by the merger of J-Hawk
Corporation and First City Bancorporation of Texas, Inc. Historical financial
statements prior to the merger date reflect the financial position and results
of operations of J-Hawk Corporation.

         The preparation of financial statements in conformity with 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include the estimation of future
collections on purchased asset pools used in the calculation of net gain on
purchased asset pools. Actual results could differ materially from those
estimates.

         (B) DESCRIPTION OF BUSINESS

         The Company is a specialized financial services company which
evaluates, acquires, manages, services and disposes of portfolios of performing
loans, non-performing loans, other real estate and other financial assets
(collectively, purchased asset pools). A significant amount of loans are secured
by real estate located throughout the United States. The Company purchases these
asset pools at substantial discounts from their original legal principal amounts
from financial institutions, other lenders and regulatory agencies of the United
States. Purchased asset pools are acquired in privately negotiated transactions,
in sealed bid sales limited to a small number of invited participants, and in
public sealed bid sales. Purchased asset pools are acquired on behalf of the
Company or its wholly-owned subsidiaries, and on behalf of legally independent
partnerships (acquisition partnerships) in which an affiliate of the Company is
the general partner and the Company and other investors are limited partners.

         The Company also services, manages and disposes of all of the assets
it, its affiliated acquisition partnerships, or other related entities acquire.
The Company services all such assets until they are collected or sold and does
not manage assets for non-affiliated third parties; however, minimal servicing
for non-affiliated third parties is provided. In the ordinary course of
business, the Company sells assets to commercial banks, investment banks,
finance companies and other investment partnerships. The Company has also
expanded its business lines into certain sectors of the consumer finance
business of originating and servicing niche consumer receivables.

         (C) PRINCIPLES OF CONSOLIDATION

         The accompanying consolidated financial statements include the accounts
of the Company. Investments in 20 percent to 50 percent owned affiliates are
accounted for on the equity method. All significant intercompany transactions
and balances have been eliminated in consolidation.

         (D) CASH EQUIVALENTS

         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, at December 31, 1996 and
periodically throughout the year, has maintained balances in various operating
and money market accounts in excess of federally insured limits.

                                       25
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

         (E)  PURCHASED ASSET POOLS AND LOAN RECEIVABLES

         Purchased asset pools and loan receivables are reflected in the
accompanying financial statements as non-performing asset pools, performing
asset pools, automobile finance receivables or purchased real estate pools. The
following is a description of each such classification and the related
accounting policy accorded to each asset type:

         Non-performing Asset Pools

         Non-performing asset pools consist primarily of distressed loans and
    loan related assets, such as foreclosed upon collateral. Non-performing
    asset pools are designated as such if the preponderance of loans in the pool
    are not being repaid in accordance with the contractual terms of the
    underlying loan agreements. Such pools are acquired on the basis of an
    evaluation by the Company of the timing and amount of cash flow expected to
    be derived from borrower payments or disposition of the underlying
    collateral securing the loan.

         All non-performing asset pools are purchased at substantial discounts
    from their outstanding legal principal amount and the total of the aggregate
    of expected future sales prices and the total payments to be received from
    obligors. Subsequent to acquisition, the amortized cost of non-performing
    asset pools is evaluated for impairment on a quarterly basis. A valuation
    allowance is established for any impairment indentified subsequent to
    acquisition. Such allowance is charged to earnings in the period identified,
    however, no impairment has been identified during any of the periods
    presented.

         Gross profit from dispositions and payments received on non-performing
    asset pools is recognized as income to the extent that proceeds collected on
    the asset pool exceed a pro-rata portion of allocated cost from the
    purchased asset pool. Cost allocation is based on a proration of actual
    collections divided by total estimated collections of the pool. No interest
    income is recognized separately on non-performing asset pools. Such amounts
    are included in proceeds from dispostion and payments received on purchased
    asset pools as realized. Accounting for these pools is on a pool basis as
    opposed to an individual asset by asset basis.

         Performing Asset Pools

         Performing asset pools consist primarily of pools of consumer and
    commercial loans acquired from the originator of such loans at a discount
    from the aggregate amount of the borrowers' obligation. Pools are classified
    as performing if the preponderance of the loans are being repaid in
    accordance with the current terms of the notes.

         Performing asset pools are carried at the unpaid principal balance of
    the underlying loans, net of acquisition discounts. Interest is recognized
    when earned in accordance with the contractual terms of the loans. The
    recognition of interest is discontinued once a loan becomes past due 90 days
    or more. Acquisition discounts for the pool as a whole are amortized as an
    adjustment to yield over the estimated life of the pool. Accounting for
    these pools is on a pool basis as opposed to an individual basis.

         Performing asset pools are evaluated for impairment on a quarterly
    basis. Impairment is measured based on the present value of expected future
    cash flows of the pool discounted at the loans' effective interest rate, or
    the fair value of the collateral less estimated selling costs, if the loan
    is collateral dependent and foreclosure is probable. Any impairment
    identified is recorded as a provision for possible loss and charged to
    earnings

                                       26
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

    in the period identified, however, no impairment has been identified
    for any periods presented.

         Automobile Finance Receivables

         Automobile finance receivables consist of sub-prime automobile finance
    receivables, which are acquired from third party dealers, purchased at a
    non-refundable discount from the contractual principal amount. This discount
    is allocated between discount available for loan losses and discount
    available for accretion to interest income. Discounts allocated to discounts
    available for accretion are deferred and accreted to income using the
    interest method. To date all acquired discounts have been allocated as
    discounts available for loan losses. To the extent the discount is
    considered insufficient to absorb anticipated losses on acquired portfolios,
    additions to the allowance are made through a provision for loan losses (see
    note 3). The evaluation of the allowance considers portfolio performance,
    historical losses, delinquency statistics, collateral valuations and current
    economic conditions. Such evaluation is made on an individual loan basis
    using a static pool analysis. Interest on automobile finance receivables is
    accrued in accordnace with the contractual terms of the loans. The
    recognition of interest is discontinued once a loan becomes ninety days or
    more past due.

         Purchased Real Estate Pools

         Purchased real estate pools consist of real estate assets acquired in
    pool purchses from a variety of sellers. Such pools are carried at the lower
    of cost or fair value less estimated costs to sell. Costs relating to the
    development and improvement of real estate are capitalized, whereas those
    relating to holding assets are charged to expense. Rental income, net of
    expenses, on purchased real estate pools is recognized when received.

         The Company has adopted Statement of Financial Accounting Standards
    (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", as
    amended by SFAS No. 118, for its performing assets pools and automobile
    finance receivables which requires creditors to evaluate the collectibility
    of both contractual interest and principal of loans when assessing the need
    for a loss accrual. Impairment is measured based on the present value of the
    expected future cash flows discounted at the loan's effective interest rate,
    or the fair value of the collateral, less estimated selling costs, if the
    loan is collateral dependent and foreclosure is probable. The adoption of
    SFAS No. 114 had no impact on the financial statements of the Company.

         (F)  PROPERTY AND EQUIPMENT

         Property and equipment are carried at cost, less accumulated
depreciation. Depreciation is provided using accelerated methods over the
estimated useful lives of the assets.

         (G)  INTANGIBLES

         Intangible assets represent the excess of cost over fair value of
assets acquired in connection with purchase transactions as well as the purchase
price of future service fee revenues. These intangible assets, goodwill and
servicing rights, are amortized over periods estimated to coincide with the
expected life of the underlying asset pool owned or serviced by the acquired
subsidiary. The Company periodically evaluates the existence of intangible asset
impairment on the basis of whether such intangibles are fully recoverable from
the projected, undiscounted net cash flows of the related assets acquired.


                                       27
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

         (H)  FEDERAL INCOME TAXES

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

         Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities and
operating loss and tax credit carry forwards. 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 effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets, if any, is reduced by the
amount of any tax benefits that, based on available evidence, are not expected
to be realized.

         (I)  NET EARNINGS PER SHARE

         Net earnings per common share calculations are based upon the weighted
average number of common shares outstanding restated to reflect the equivalent
number of FirstCity common shares which were issued to the J-Hawk shareholders
in connection with the Merger discussed in Note 2. Earnings included in the
earnings per share calculation are reduced by special preferred stock dividends.
All share and per share data have been restated to give effect to a stock
dividend in 1994. Potentially dilutive common stock equivalents include warrants
and stock options.

         (J) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF

         The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment 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 an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
consolidated financial position, results of operations or liquidity.

         (K)  RECLASSIFICATIONS

         Certain amounts in the financial statements for prior years have been
reclassified to conform with current financial statement presentation.

    (2)  MERGERS AND ACQUISITIONS

    A Joint Plan of Reorganization by First City Bancorporation of Texas, Inc.
("FCBOT" or the "Debtor"), Official Committee of Equity Security Holders, and
J-Hawk Corporation ("J-Hawk"), with the Participation of Cargill Financial
Services Corporation, Under Chapter 11 of the United States Bankruptcy Code,
(the "Plan of Reorganization"), became effective on July 3, 1995. Pursuant to
the Plan of Reorganization and an Agreement and Plan of Merger (collectively
referred to as the "Plan") between the Debtor and J-Hawk, on July 3, 1995,
J-Hawk was merged (the "Merger") with and into FCBOT. Pursuant to the Merger,
(i) the former holders of

                                       28
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

common stock of J-Hawk received, in the aggregate, approximately 49.9% of the
outstanding common stock of the surviving entity, in exchange for their shares
of J-Hawk common stock, (ii) 2,460,911 shares or approximately 50.1% of the
outstanding common stock of the surviving entity was distributed among former
security holders of the Debtor pursuant to the Plan, and (iii) the name of the
corporation was changed to FirstCity Financial Corporation. As a result of the
implementation of the Plan and the consummation of the Merger, FirstCity also
issued (i) 9% senior subordinated notes (all of which have been redeemed), (ii)
warrants to purchase 500,000 shares of its common stock at an exercise price of
$25 per share, and (iii) special preferred stock to certain former security
holders of the Debtor.

    J-Hawk contributed substantially all of its interests in its acquisition
partnerships, all of its servicing operations, substantially all of its
leasehold improvements and equipment and its entire management team to
FirstCity. All remaining assets and liabilities of J-Hawk were spun out to
Combined Financial Corporation (owned by the former J-Hawk shareholders) in June
1995. The common stock of J-Hawk was converted into 2,460,511 shares of
FirstCity common stock. The Debtor contributed $20 million in cash to FirstCity.
While the transaction was legally structured as a merger, substantively, the
transaction is treated for accounting purposes as a purchase of the Debtor by
J-Hawk. The net assets of J-Hawk spun out to Combined Financial Corporation were
as follows:

<TABLE>

<S>                                            <C>         
Cash and equivalents                           $        232
Purchased asset pools                                12,375
Other assets                                          2,839
Notes payable                                       (8,187)
Payable to stockholders and officers                (1,669)
Other liabilities                                     (238)
                                                  ---------
    Net assets spun out                        $      5,352
                                                  =========
</TABLE>

    Pursuant to the Plan, substantially all of the legal and beneficial interest
in the assets of the Debtor, other than the $20 million in cash contributed to
FirstCity, were transferred to the newly-formed FirstCity Liquidating Trust (the
"Trust"), or to subsidiaries of the Trust. Such assets are being liquidated over
the life of the Trust pursuant to the terms thereof. FirstCity, as the sole
holder of the Class "A" Certificate under the Trust, received from the Trust
amounts sufficient to pay certain expenses and its obligations under the 9%
senior subordinated notes and the special preferred stock during 1996 and 1995.
The Company anticipates receiving sufficient amounts in future periods to
satisfy remaining obligations associated with the special preferred stock. Any
amounts in excess of such sums shall be paid to certain of the former security
holders of the Debtor pursuant to the terms of the Class "B" and Class "C"
certificates of beneficial interests in the Trust. To date, no value has been
attributed to the Class "C" certificate. The liquidation of the assets
transferred to the Trust are managed by FirstCity pursuant to an Investment
Management Agreement between the Trust and FirstCity. Subsequent to 1996,
FirstCity and the Trust entered into a tentative agreement which proposes the
dissolution of the Investment Management Agreement, whereby FirstCity will
receive approximately $6.8 million as a result of the dissolution. Should the
dissolution occur, it is anticipated to be effective in the first half of 1997.

    On September 21, 1995, FirstCity acquired the capital stock of Diversified
Financial Systems, Inc. and Diversified Performing Assets, Inc.
(collectively,"Diversified") for $12.9 million in cash and notes. Under the
terms of the Diversified purchase agreement, there is additional contingent
consideration payable in the form of "cash flow" notes. At December 31, 1996 and
1995, the Company reflected a liability of $3.1 million and $2.8 million,
respectively, to a former shareholder related to such cash flow notes.
Additionally, the Company had a note receivable from the same shareholder in the
amount of $1 million at December 31, 1996. Subsequent to December 31, 1996, the
Company entered into a modified note agreement with the former shareholder which
provided for an amended note payable in the amount of $5.4 million. The modified
note agreement extinguishes the Company's liability for any amounts due related
to the cash flow notes and acts to off-set the note receivable

                                       29
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

from the former shareholder. The additional net liability resulting from this
modification will be reflected as an adjustment to goodwill in the Company's
1997 consolidated balance sheet.

    Diversified specializes in the acquisition and disposition of distressed
loans and loan-related assets. The acquisition was accounted for as a purchase.

    The aggregate purchase price was allocated to the net assets of Diversified
based upon fair value at acquisition date as follows:

<TABLE>

<S>                                      <C>                
Purchased asset pools                    $            68,834
Intangibles                                            9,379
Other assets                                             414
Notes payable                                       (63,515)
Other liabilities                                    (2,196)
                                              --------------
Purchase price, net of cash received     $            12,916
                                              ==============
</TABLE>


    During the second and third quarters of 1996, FirstCity commenced efforts to
expand its business lines into certain sectors of the consumer finance business
with the acquisition of National Auto Funding Corporation and NAF Auto Loan
Trust (collectively, "NAF") and the creation of ETAFirst Funding, Inc. ("ETA").
NAF underwrites and finances installment contracts generated by third party
financial institutions and automobile dealerships in several locations in the
United States. These contracts are serviced by Milco Loan Servicing, a
wholly-owned subsidiary of the Company acquired in October of 1996. NAF targets
certain borrowers with limited credit histories, lower incomes or past credit
problems. ETA purchases certain education loans originated by various
proprietary training schools, generally at substantial discounts from face
value. The assets acquired and liabilities assumed in connection with these
transactions were not material to the Company's consolidated financial
statements.

    On January 9, 1997, FirstCity executed a letter of intent to merge with
Harbor Financial Group, Inc., ("Harbor"). FirstCity and Harbor executed the
definitive Agreement and Plan of Merger on March 26, 1997, pursuant to which
FirstCity will issue 1,581,000 shares of common stock in exchange for 100% of
Harbor's outstanding capital stock. Harbor originates and services residential
loans, home improvement loans and commercial mortgages. Harbor has approximately
$11 million in equity, assets of over $200 million and 625 employees. The
transaction is subject to approval of both companies' shareholders and various
regulatory approvals.

    The following table presents the unaudited pro forma results of operations
of FirstCity assuming the proposed merger with Harbor, which is expected to be
accounted for as a pooling of interests, occurred on January 1, 1994. The
unaudited pro forma results of operations do not purport to be indicative of the
results of operations which would have actually resulted had the above described
transaction occurred on January 1, 1994, or future results of operations to be
achieved by FirstCity, after its merger with Harbor.

<TABLE>
<CAPTION>

                                                               Year ended December 31,
                                                ------------------------------------------------------
                                                    1996                1995                 1994
                                                ------------      ----------------      --------------

<S>                                             <C>                   <C>                 <C>    
Net revenues (including equity earnings)......       $99,089               $59,965             $40,865
Net earnings to common........................        31,420                11,368               5,445
Net earnings per share........................          4.82                  2.17                1.31
</TABLE>



                                       30
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

(3) PURCHASED ASSET POOLS AND LOAN RECEIVABLES

         The purchased asset pools are summarized as follows:
<TABLE>
<CAPTION>


                                                                        December 31,
                                                       ----------------------------------------------
                                                               1996                        1995
                                                       --------------------          ----------------
<S>                                                    <C>                           <C>
Non-performing asset pools (as defined in note 1(e)):
    Loans                                              $           294,244           $       394,802
    Real estate assets                                               7,995                    10,052
                                                       --------------------          ----------------
                                                                   302,239                   404,854

Performing asset pools (as defined in note 1(e))                    14,944                    16,714

Automobile finance receivables (as defined in note 1(e))            33,583                         -
Allowance for losses                                                (2,693)                        -
                                                       --------------------          ----------------
                                                                     30,890                        -

Purchased real estate pool (as defined in note 1(e))                 25,303                    35,179
                                                       --------------------          ----------------
    Total purchased asset pools                                    373,376                   456,747

Discount required to reflect purchased asset pools
    at carrying value                                             (265,739)                 (360,808)
                                                       --------------------          ----------------
    Purchased asset pools, net                         $           107,637           $        95,939
                                                       ====================          ================
</TABLE>

         The purchased asset pools are pledged to secure non-recourse notes
payable.

         The activity in the allowance for loan losses is summarized as follows:

<TABLE>
<CAPTION>

                                                   Year ended December 31,
                                            -----------------------------------
                                                 1996                1995
                                            --------------      ---------------
<S>                                       <C>                 <C>
Balances, beginning of year               $              -    $               -
    Provision for loan losses                        2,029                    -
    Discounts acquired                               5,989                    -
    Reduction in contingent liabilities              1,415                    -
    Charge off activity:
        Principal balances charged off             (7,390)                    -
        Recoveries                                     650                    -
                                            --------------      ---------------
            Net charge offs                        (6,740)                    -
                                            --------------      ---------------
Balances, end of year                     $          2,693    $               -
                                            ==============      ===============
</TABLE>

        During 1996, a note recorded at the time of original purchase of the
        initial automobile finance receivables pool and contingent on the
        ultimate performance of the pool was adjusted to reflect a reduction in
        anticipated payments under that liability obligation. The reduction in
        this recorded liability increased the amount of allowance for losses.

(4)     ACQUISITION PARTNERSHIPS

         The Company has investments in partnerships and related general
partners that are accounted for on the equity method. These partnerships invest
in asset pools in a manner similar to the Company, as described in Note 1. The
condensed combined financial position and results of operations of the
acquisition partnerships and general partners are summarized below:




                                       31
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

                        CONDENSED COMBINED BALANCE SHEETS


                                               December 31,
                                    ----------------------------------
                                         1996               1995
                                    --------------     ---------------
Assets                             $       196,533    $        235,820
                                    ==============     ===============
Liabilities                                144,094             180,659
Net equity                                  52,439              55,161
                                    --------------     ---------------
                                   $       196,533    $        235,820
                                    ==============     ===============
Company's equity in
acquisition partnerships           $        21,761    $         16,601
                                    ==============     ===============
Advances to acquisition
         partnerships              $             -    $          9,586
                                    ==============     ===============

<TABLE>
<CAPTION>

                     CONDENSED COMBINED STATEMENTS OF INCOME


                                                       Year Ended December 31,
                                            ----------------------------------------------
                                                1996             1995             1994
                                            -------------    -------------    ------------
<S>                                        <C>              <C>              <C>          
Collections                                $      174,012   $      188,934   $     206,627
Gross margin                                       39,505           51,370          63,439
Interest income on performing asset pools           7,870                -               -
Net income                                         10,692            9,542          19,226
                                            =============    =============    ============
Company's equity in net income of
         acquisition partnerships          $        6,125   $        3,834   $       7,497
                                            =============    =============    ============

</TABLE>

       In the third quarter of 1996, FirstCity recognized $2.0 million in
servicing fees in connection with the sale and securitization of $75 million of
performing loans from acquisition partnerships. During the third quarter of
1996, a majority of the debt of the acquisition partnerships was refinanced,
resulting in a $7 million equity distribution to FirstCity.

(5)    CLASS "A" CERTIFICATE OF FIRSTCITY LIQUIDATING TRUST ("TRUST")

       FirstCity is the sole holder of the Class "A" Certificate of the Trust.
Redemptions by the Trust of the balance due on the Class "A" Certificate were
used to retire the senior subordinated notes payable, and will be used to redeem
the special preferred stock. On March 29, 1996, $53.3 million of the senior
subordinated notes were redeemed, reducing the "A" Certificate by a like amount.
During the three months ended June 30, 1996, $1 million of senior subordinated
notes (purchased by the Trust) were redeemed. On July 26, 1996, the remaining
senior subordinated notes were redeemed with a corresponding reduction in the
"A" Certificate.

       Under the terms of the special preferred stock, FirstCity is only
required to redeem such stock and to declare dividends thereon to the extent it
receives sufficient funds from the Trust under the Class "A" Certificate to make
such payments (see Note 7). Interest income on the Class "A" Certificate
consists of reimbursement to FirstCity (by the Trust) of interest expense on
senior subordinated notes and of accrued dividends on the special preferred
stock. In the opinion of management, sufficient funds will be available from the
Trust to redeem the special preferred stock at its stated redemption price and
accrued dividends on the redemption date of September 30, 1998.




                                       32
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)


(6)    NOTES PAYABLE

       Notes payable at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>

                                                                         1996               1995
                                                                      ----------         ----------
<S>                                                               <C>                <C>   
Collateralized loans, secured by acquired asset pools:
    Prime (8.25% at December 31, 1996) plus 2%, due 1997          $         37,491   $        53,204
    LIBOR (5.5% at December 31, 1996) plus 3.25% to 5.25%,
       due 1997-1998                                                        33,276            25,580
    Other                                                                        -               543
 Borrowings under revolving line of credit, secured and with
    recourse to FirstCity                                                   19,384             5,216
Other secured borrowings                                                     1,773               975
                                                                    --------------      ------------
    Notes payable, secured                                        $         91,924   $        85,518
                                                                    ==============      ============
Prime + 2%, due to Trust                                          $              -   $         2,000
Diversified shareholder debt                                                 4,747             6,988
                                                                    --------------      ------------
    Notes payable to others                                       $          4,747   $         8,988
                                                                    ==============      ============
</TABLE>

         Collateralized loans are typically payable based solely on proceeds
from disposition and payments received on the purchased asset pools. $37 million
of the collateralized loans represent borrowings under two separate master
credit facilities totaling $75 million. Such facilities can be used to finance
the purchase of new purchased loan portfolios.

         FirstCity has a $35 million revolving line of credit with Cargill
Financial Services. The line bears interest at LIBOR plus 5% and expires on June
30, 1997. The line is secured by substantially all of FirstCity's unencumbered
assets.

         In November 1995, the Trust advanced FirstCity $2 million under a note
payable that was repaid in February 1996.

         A portion ($1.7 million) of the Diversified shareholder debt generally
bears interest, payable monthly at 6% per annum with various principal payments
due through February 1999. The remaining Diversified shareholder debt represents
the estimated net present value of the anticipated future contingent
consideration payments (see Note 2).

         Under terms of certain of the above 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. The Company was in compliance with these covenants at December
31, 1996. At December 31, 1996, cash restricted due to notes payable covenants
totaled $1.4 million. The aggregate maturities of notes payable for the five
years ending December 31, 2001 are as follows: $78,476 in 1997, $13,629 in 1998,
$162 in 1999, $89 in 2000 and $722 in 2001.

         FirstCity redeemed the 9% senior subordinated notes payable ($106.7
million outstanding at December 31, 1995) during 1996.

(7)      SPECIAL PREFERRED STOCK AND SHAREHOLDER'S EQUITY

         The authorized capital stock of the Company consists of 202.5 million
shares divided into three classes as follows: (1) 2.5 million shares of special
preferred stock, par value $.01 per share, with a nominal stated value of $21.00
per share; (2) 100 million shares of optional preferred stock, par value $.01
per share; and (3) 100 million shares of common stock, par value $.01 per share.
Additionally, on July 3, 1995, under the Plan, the Company authorized the
issuance of up to 500,000 warrants to purchase common stock to certain of the
Debtor's shareholders. In connection with the Merger, 4,921,422 shares of common
stock, 2,460,911 shares of special preferred stock and 500,000 warrants were
issued.

         The holders of shares of common stock are entitled to one vote for each
share on all matters submitted to a vote of common shareholders. In order to
preserve certain tax benefits available to the Company,

                                       33
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

transactions involving shareholders holding or proposing to acquire more than
4.75% of outstanding common shares are prohibited unless the prior approval of
the Board of Directors is obtained.

         Subject to availability of funds from the Trust after payment of all
obligations senior to the special preferred stock, the holders of special
preferred stock are entitled to receive the nominal stated value on September
30, 1998, and cumulative quarterly cash dividends at the annual rate of $3.15
per share. Accrued dividends through September 30, 1996 of $9.6 million, or
$3.92 per share, were paid in 1996. At December 31, 1996, accrued dividends
totaled $1.9 million, or $.7875 per share, and were paid on January 15, 1997.
Subsequent to December 31, 1996, the Company purchased approximately $6.4
million of special preferred stock with a distribution from the Trust. The
special preferred stock carries no voting rights, except in the event of
non-payment of declared dividends.

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

         Each warrant entitles the holder to purchase one share of common stock
at an exercise price of $25.00 per share, subject to adjustment in certain
circumstances, and expires July 3, 1999. FirstCity may repurchase the warrants
for $1.00 per warrant should the quoted market price of FirstCity common stock
exceed $31.25 for any 10 out of 15 consecutive trading days. During 1996, 2,625
warrants were exercised leaving 497,375 warrants outstanding at December 31,
1996.

         The Company has incentive stock option plans for the benefit of key
individuals, including its directors, officers and key employees. The plans are
administered by a committee of the Board of Directors and provide for the grant
of up to 730,000 shares of common stock.

         The per share weighted-average fair value of stock options granted
during 1996 and 1995 was $13.19 and $14.28, respectively, on the grant date
using the Black-Scholes option pricing model with the following assumptions:
1996 - $0 expected dividend yield, risk-free interest rate of 5.75%, expected
volatily of 30%, and an expected life of 9.7 years; 1995 -$0 expected dividend
yield, risk-free interest rate of 5.75%, expected volatily of 30%, and an
expected life of 9.8 years.

         The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its plan and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:


                                                   1996         1995
                                                   ----         ----
Net earnings to common shareholders:
As reported................................      $27,696      $10,857
Pro forma..................................       26,983       10,740

Net earnings per share:
As reported................................        $5.63        $2.98
Pro forma..................................         5.48         2.95





                                       34
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

         Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>

                                                          1996                                 1995
                                            --------------------------------      -------------------------------
                                                                 Weighted                             Weighted
                                                                 Average                               Average
                                                                 Exercise                             Exercise
                                               Shares             Price              Shares             Price
                                            ------------      --------------      ------------      -------------
<S>                                         <C>             <C>                   <C>             <C>
Outstanding at beginning of year                 229,600    $          20.20                 -    $             -
Granted                                           18,000               30.75           229,600              20.20
Exercised                                        (4,500)               20.00                 -                  -
Forfeited                                       (20,000)               20.00                 -                  -
                                            ------------                          ------------
Outstanding at end of year                       223,100               21.07           229,600              20.20
                                            ============                          ============
</TABLE>

         At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $20.00 - $30.75 and 8.4
years, respectively.

         At December 31, 1996, there were 46,605 options exercisable with a
weighted-average exercise price of $20.19. There were no options exercisable at
December 31, 1995.

         The Company has an employee stock purchase plan which allows employees
to acquire common stock of the Company at 85% of the fair value at the end of
each quarter. The value of the shares purchased under this plan is limited to
the lesser of 10% of compensation or $10,000 per year. Under this plan, 3,813
shares were issued during 1996, leaving 96,187 unissued at December 31, 1996.

(8)      INCOME TAXES

         Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>

                                               1996               1995              1994
                                           -------------      ------------      -------------
<S>                                     <C>                <C>                <C>            
Federal and state current expense       $            487   $         1,000    $         1,640
Federal deferred expense (benefit)              (16,500)              (64)              1,481
                                           -------------      ------------      -------------
                Total                   $       (16,013)   $           936    $         3,121
                                           =============      ============      =============
</TABLE>

         The actual income tax expense (benefit) attributable to earnings from
operations differs from the expected tax expense (computed by applying the U.S.
Federal corporate tax rate of 35% for 1996 and 1995 and 34% for 1994 to earnings
from operations before income taxes) as follows:
<TABLE>
<CAPTION>

 
                                                 1996             1995           1994
                                              -----------      ----------     ----------
<S>                                         <C>             <C>             <C>         
Computed expected tax expense               $       6,787   $       5,484   $      3,110
Increase (reduction) in income
taxes resulting from:
Tax effect of "A" Certificate                     (4,060)         (3,009)              -
Change in valuation allowance                    (18,776)         (1,522)              -
Other                                                  36            (17)             11
                                              -----------      ----------     ----------
                                            $    (16,013)   $        936          $3,121
                                              ===========      ==========     ==========
</TABLE>

         The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1996 and 1995, are as
follows:



                                       35
<PAGE>

<TABLE>
<CAPTION>

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)


                                                                       1996               1995
                                                                   ------------       ------------
<S>                                                           <C>                  <C>
Deferred tax assets:
  Investments in partnerships, principally due to
      differences in basis for tax and financial
      reporting purposes                                      $             403    $         1,103
  Intangibles, principally due to differences in
  amortization                                                            1,138                403
  Accrued expenses not deductible for tax purposes                            -                437
  U.S. net operating loss carry forward                                 207,050            208,924
  Valuation allowance                                                 (192,091)          (210,867)
                                                                   ------------       ------------
      Total deferred tax assets, net                          $          16,500    $             -
                                                                   ============       ============
</TABLE>

         As a result of the Merger described in Note 2, the Company has net
operating loss carry forwards for federal income tax purposes of approximately
$592 million at December 31, 1996, available to offset future federal taxable
income, if any, through the year 2010. A valuation allowance is provided to
reduce the deferred tax assets to a level which, more likely than not, will be
realized. During the second quarter of 1996, FirstCity adjusted the previously
established valuation allowance to recognize a deferred tax benefit of $14.6
million, and recognized an additional $1.9 million in the fourth quarter. The
ultimate realization of the resulting net deferred tax asset is dependent upon
generating sufficient taxable income prior to expiration of the net operating
loss carry forwards. Although realization is not assured, management believes it
is more likely than not that all of the recorded deferred tax asset, net of the
allowance, will be realized. The amount of the deferred tax asset considered
realizable, however, could be adjusted in the future if estimates of future
taxable income during the carry forward period change. The change in valuation
allowance represents primarily an increase in the estimate of the future taxable
income during the carry forward period since the prior year end and the
utilization of net operating loss carry forwards since the Merger. The ability
of the Company to realize the deferred tax asset is periodically reviewed and
the valuation allowance is adjusted accordingly.

(9)      EMPLOYEE BENEFIT PLAN

         The Company has a defined contribution 401(k) employee profit sharing
plan in which the Company matches employee contributions at a stated percentage
of employee contributions to a defined maximum. The Company's contributions to
the 401(k) plan were $196 in 1996, $77 in 1995 and $44 in 1994.

(10)     LEASES

         The Company leases its current headquarters from a related party under
a noncancellable operating lease. The lease calls for monthly payments of $7.5
through its expiration in December, 2001 and includes an option to renew for two
additional five-year periods. Rental expense for 1996, 1995 and 1994 under this
lease was $90 each year.

         The Company also leases office space and equipment from unrelated
parties under operating leases expiring in various years through 2002. Rental
expense under these leases for 1996, 1995 and 1994 was $634, $328 and $202,
respectively. As of December 31, 1996, the future minimum lease payments under
all noncancellable operating leases are: $439 in 1997, $282 in 1998, $218 in
1999, $141 in 2000, $97 in 2001 and $2 in 2002 and beyond.

(11)     OTHER RELATED PARTY TRANSACTIONS

         During 1996, the Company acquired a portfolio of sub-prime automobile
finance receivables from an acquisition partnership for approximately $23.6
million. This acquisition was at the carrying value of the

                                       36
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

portfolio in the partnership, thus resulting in no gain or loss on the
transaction to the partnership.

         In December, 1994, the Company purchased individual loans from several
of the acquisition partnerships for $9.6 million. These loans were spun off to
Combined Financial Corporation in June 1995 (see Note 2).

         In January, 1995, the Company entered into an agreement with a
shareholder to repurchase 11,080 shares of J-Hawk common stock for $1.2 million.
The Company paid the former shareholder $.4 million in cash and issued a $.8
million note, which was assumed by Combined Financial Corporation in the spin
out transaction in June 1995.

         In 1995, the Company sold approximately $12 million (allocated cost) of
loans to a partnership owned by certain executive officers of J-Hawk. The
Company recognized approximately $3 million in gain from the transaction.
Additionally, the Company entered into a servicing arrangement with the
partnership to service the sold assets for a fee based on collections. This
transaction was part of the overall spin out transaction completed prior to the
Merger on July 3, 1995.

         The Company has contracted with FirstCity Liquidating Trust, the
acquisition partnerships and related parties as a third party loan servicer. All
servicing fees and due diligence fees (included in other income) reflected in
the Consolidated Statements of Income were derived from such affiliates.

(12)     COMMITMENTS AND CONTINGENCIES

         FirstCity has pledged a portion of its interest in the future
distributions of certain acquisition partnerships, after FirstCity's initial
investment has been returned, to Cargill, the subordinated debt lender to the
partnerships, under a Residual Share Agreement (the Agreement). Under the
Agreement, this pledge is limited to twice FirstCity's original investment in
the respective partnerships. In the opinion of management, this pledge does not
currently represent a material contingent claim on the future distributions from
the acquisition partnerships to FirstCity.

         The Company is involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the consolidated financial condition,
results of operations or liquidity of the Company.

(13)     FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values of its financial instruments. Fair value estimates,
methods and assumptions are set forth below.

(A) CASH AND EQUIVALENTS AND CLASS "A" CERTIFICATE OF FIRSTCITY LIQUIDATING
TRUST

         The carrying amount of cash and equivalents and Class "A" Certificate
of FirstCity Liquidating Trust approximates fair value at December 31, 1996 and
1995.

(B) PURCHASED ASSET POOLS

         The purchased asset pools are carried at the lower of cost or estimated
fair value. The estimated fair value is calculated by discounting projected cash
flows on an asset by asset basis using estimated market discount rates that
reflect the credit and interest rate risk inherent in the assets. The carrying
value of the purchased asset


                                       37
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)

pools is $107.6 million and $95.9 million, respectively, at December 31, 1996
and 1995. The estimated fair value of the purchased asset pools is approximately
$124.3 million and $104 million, respectively, at December 31, 1996 and 1995.

(C)      NOTES PAYABLE

         Management believes that the repayment terms for a similar floating
rate financial instrument with similar credit risks and the stated interest
rates at December 31, 1996 and 1995 approximate the market terms for similar
credit instruments. Accordingly, the carrying amount of notes payable is
believed to approximate fair value.


                                       38
<PAGE>


                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
            Notes to Consolidated Financial Statements - (continued)
                             (Dollars in thousands)


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
FirstCity Financial Corporation:

         We have audited the accompanying consolidated balance sheets of
FirstCity Financial Corporation and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the two-year period ended December 31,
1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the
results of theiroperations and their cash flows for each of the years in the
two-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.



                                                          KPMG Peat Marwick LLP
Fort Worth, Texas
February 14, 1997

                                       39
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
FirstCity Financial Corporation:


         We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of J-Hawk Corporation and subsidiaries, the
predecessor entity to FirstCity Financial Corporation and subsidiaries, for the
year ended December 31, 1994. 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 audit.

         We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 audit provides a reasonable basis
for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of J-Hawk Corporation and subsidiaries, the predecesor entity to FirstCity
Financial Corporation and subsidiaries, for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.



                                        JAYNES, REITMEIER, BOYD & THERRELL, P.C.

Waco, Texas
February 8, 1995

                                       40
<PAGE>

<TABLE>
<CAPTION>
                                             FIRSTCITY FINANCIAL CORPORATION
                                                 SELECTED FINANCIAL DATA

                                          (Dollars in thousands, except per share data)

                                                   1996         1995          1994         1993        1992
                                                   ----         ----          ----         ----        ----
<S>                                               <C>          <C>          <C>          <C>           <C>    
Income.........................................   $55,344      $35,689      $16,706      $15,215       $17,818
Expenses.......................................    42,077       23,854       15,055       14,054        16,686
Equity in earnings of acquisition partnerships.     6,125        3,834        7,497        8,058         4,382
Earnings from operations before income taxes...    19,392       15,669        9,148        9,219         5,514
Net earnings (1)...............................    35,405       14,733        6,027        6,184         3,510
Special preferred dividends....................     7,709        3,876            -            -             -
Net earnings to common (1).....................    27,696       10,857        6,027        6,184         3,510
Net earnings per share (1).....................      5.63         2.98         2.37         2.43          1.38
Dividends per common share.....................         -            -            -            -             -
At year end:
         Total assets..........................   227,213      308,889       52,282       35,798        27,405
         Total notes payable...................    96,671      201,196       27,098       16,985        17,370
         Special preferred stock...............    53,617       55,555            -            -             -
         Total common equity...................    74,213       46,251       21,167       15,140         8,956
</TABLE>

(1) Includes $16.5 million of deferred tax benefit in 1996

                                       41
<PAGE>

<TABLE>
<CAPTION>

                        SELECTED QUARTERLY FINANCIAL DATA

                                                   1996                                      1995
                                 ----------------------------------------- ----------------------------------------
                                                   (Dollars in thousands, except per share data)
                                  First     Second     Third     Fourth     First     Second    Third     Fourth
                                  Quarter   Quarter    Quarter   Quarter    Quarter   Quarter   Quarter   Quarter
                                  -------   -------    -------   -------    -------   -------   -------   -------
<S>                               <C>       <C>        <C>       <C>         <C>       <C>       <C>      <C>    
Income.........................   $13,329   $13,906    $14,465   $13,644     $3,340    $6,781    $8,929   $16,639
Expenses.......................    10,513    10,287     10,621    10,656      2,529     3,409     5,222    12,694
Equity earnings of
  acquisition partnerships.....       714       916      2,623     1,872        628       731       810     1,665
Net earnings(1)................     3,390    18,905      6,108     7,002        949     3,657     4,517     5,610
Special preferred dividends....     1,938     1,938      1,896     1,937          -         -     1,938     1,938
Net earnings to common(1)......     1,452    16,967      4,212     5,065        949     3,657     2,579     3,672
Net earnings per share(1)......      0.30      3.45       0.86      1.03       0.42      1.54      0.52      0.75
-------------------------------------------------------------------------------------------------------------------
<FN>
------------
(1) Includes $14.6 million and $1.9 million deferred tax benefit in second and fourth quarters, respectively, of 1996
</FN>
</TABLE>

                                       42
<PAGE>
<TABLE>
<CAPTION>

                            ACQUISITION PARTNERSHIPS
                             COMBINED BALANCE SHEETS

                           DECEMBER 31, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


                                                                                         1996                    1995
                                                                                         ----                    ----
<S>                                                                             <C>                     <C>
Assets:
-------
Cash............................................................................               $8,812                  $8,332
Purchased asset pools, net......................................................              177,480                 221,508
Investments in trust certificates...............................................                5,195                       -
Receivable from affiliates......................................................                  234                     108
Restricted cash.................................................................                  795                   2,751
Other assets....................................................................                3,150                   2,442
                                                                                 --------------------     -------------------
                                                                                             $195,666                $235,141
                                                                                 ====================     ===================

Liabilities and Partners' Capital:
----------------------------------

Accounts payable (including $574 and $724 to affiliates in
  1996 and 1995, respectively)..................................................               $1,756                    $724
Accrued liabilities.............................................................                1,738                   8,550
Long-term debt (including $74,341 and $87,611 to affiliates in
  1996 and 1995, respectively)..................................................              141,054                 171,448
                                                                                 --------------------     -------------------
              Total liabilities.................................................              144,548                 180,722
Contingencies...................................................................                    -                       -

Partners' capital...............................................................               51,118                  54,419
                                                                                 --------------------     -------------------
                                                                                             $195,666                $235,141
                                                                                 ====================     ===================

</TABLE>

See accompanying notes to combined financial statements.

                                       43
<PAGE>
<TABLE>
<CAPTION>

                            ACQUISITION PARTNERSHIPS
                        COMBINED STATEMENTS OF OPERATIONS

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN THOUSANDS)


                                                                     1996                   1995                      1994
                                                                ---------------       -----------------        -------------------
<S>                                                            <C>                     <C>                        <C>
Proceeds from disposition of and payments received
      on purchased asset pools................................         $174,012                $188,934                   $204,057
Cost of purchased asset pools.................................        (134,507)               (137,564)                  (140,779)
                                                                ---------------       -----------------        -------------------
      Net gain on purchased asset pools.......................           39,505                  51,370                     63,278
Interest income on performing asset pools.....................            7,870                       -                          -
Interest expense (including $14,571, $13,333
  and $10,197 to affiliates in 1996, 1995
  and 1994, respectively).....................................         (22,065)                (27,034)                   (22,544)
General, administrative and operating   expenses..............         (14,777)                (14,870)                   (20,996)
Other income (expense), net...................................              210                     121                      (428)
                                                                ---------------       -----------------        -------------------
      Net income..............................................          $10,743                  $9,587                    $19,310
                                                                ===============       =================        ===================

</TABLE>



See accompanying notes to combined financial statements.


                                       44
<PAGE>
<TABLE>
<CAPTION>

                            ACQUISITION PARTNERSHIPS
               COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN THOUSANDS)



                                                                       Class B
                                          Class A Equity               Equity
                                   ---------------------------    ------------- 
                                     General        Limited          Limited        General          Limited
                                    Partners        Partners        Partners       Partners          Partners            Total
                                   -----------    ------------    -------------   -----------      ------------      --------------
<S>                                <C>          <C>              <C>               <C>              <C>              <C>    
Balance at December 31,   1993            $540         $26,481          $22,509           $16              $796             $50,342
Contributions....................          169           8,262                -             6               283               8,720
Distributions....................         (444)        (21,769)          (3,974)          (30)           (1,453)            (27,670)
Net income.......................          269          13,219            2,634            64             3,124              19,310
                                  ------------    ------------   --------------   -----------      ------------      --------------
Balance at December 31, 1994.....          534          26,193           21,169            56             2,750              50,702
Contributions....................           82           4,027                -            60             2,946               7,115
Distributions....................         (197)         (9,645)          (1,585)          (31)           (1,527)            (12,985)
Net income.......................          154           7,511            1,648             6               268               9,587
                                  ------------    ------------   --------------   -----------      ------------      --------------
Balance at December 31, 1995.....          573          28,086           21,232            91             4,437              54,419
Contributions....................           54           2,621                -           986            48,303              51,964
Distributions....................         (400)        (19,598)          (3,082)         (860)          (42,068)            (66,008)
Net income.......................           47           2,301              556           156             7,683              10,743
                                  ------------    ------------   --------------   -----------      ------------      --------------
Balance at December 31, 1996.....    $     274       $  13,410       $   18,706    $      373       $    18,355         $    51,118
                                  ============    ============   ==============   ===========      ============      ==============


</TABLE>

See accompanying notes to combined financial statements.


                                       45
<PAGE>


<TABLE>
<CAPTION>

                            ACQUISITION PARTNERSHIPS
                        COMBINED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN THOUSANDS)



                                                                    1996                 1995               1994
                                                                 ----------           ----------         ----------
<S>                                                            <C>                  <C>               <C>
Cash flows from operating activities:
     Net income                                                       $10,743              $9,587            $19,310
       Adjustments to reconcile net income to net cash
         provided by (used in) operating
         activities:
         Amortization of loan origination and
           commitment fees                                              1,483               2,415              2,542
         Provision for losses                                             585                   -                  -
         Net gain on purchased asset pools                           (39,505)            (51,370)           (63,278)
         Purchase of asset pools                                    (102,695)           (101,626)          (200,350)
         Capitalized costs on purchased asset pools                   (3,330)             (1,643)               (99)
         Proceeds from disposition and payments
           received on purchased asset pools                          188,002             188,934            204,057
         (Increase) decrease in receivable from affiliates              (126)                  49                232
         (Increase) decrease in restricted cash                         1,956                 765            (2,166)
         Increase in other assets                                     (2,191)             (1,186)            (3,774)
         Increase (decrease) in accounts payable                        1,032               (135)                281
         Increase (decrease) in accrued liabilities                   (6,812)               1,730              5,325
                                                               --------------        ------------       ------------
           Net cash provided by (used in) operating
                  activities                                           49,142              47,520           (37,920)

Cash flows from investing activities:
     Purchase of trust certificates                                   (4,224)                   -                  -
                                                               --------------        ------------       ------------
       Net cash used in operating activities                          (4,224)                   -                  -

Cash flows from financing activities:
     Borrowing on acquisition debt                                          -              12,840             10,262
     Repayment of acquisition debt                                   (28,967)            (12,840)           (10,262)
     Borrowing on long-term debt                                      263,614             112,050            251,601
     Repayment of long-term debt                                    (265,041)           (154,312)          (189,574)
     Capital contributions                                             38,180               7,115              8,720
     Capital distributions                                           (52,224)            (12,985)           (27,670)
                                                               --------------        ------------       ------------
           Net cash provided by (used in)
           financing activities                                      (44,438)            (48,132)             43,077
                                                               --------------        ------------       ------------
Net increase (decrease) in cash                                           480               (612)              5,157
Cash at beginning of year                                               8,332               8,944              3,787
                                                               --------------        ------------       ------------
Cash at end of year                                                    $8,812              $8,332             $8,944
                                                               ==============        ============       ============

</TABLE>

Supplemental disclosure of cash flow information (note 5):

Cash paid for interest was approximately $27,652, $23,074 and
     $19,128 and for 1996, 1995 and 1994, respectively.
WAMCO V and WAMCO XVII contributed $1,243 and $324 of
     purchased loans, respectively, in exchange for an investment in
     trust certificates in 1996.

See accompanying notes to combined financial statements.

                                       46
<PAGE>

(1)   ORGANIZATION AND PARTNERSHIP AGREEMENTS

      The combined financial statements include the accounts of WAMCO III, Ltd.,
WAMCO V, Ltd., WAMCO IX, Ltd., WAMCO XVII, Ltd., WAMCO XXI, Ltd., WAMCO XXII,
Ltd., WAMCO XXIII, Ltd. WAMCO XXIV, Ltd., DAP City Partners, L.P., First
Paradee, L.P., Imperial Fund I, L.P., VOJ Partners, L.P. and Whitewater
Acquisition Co. One L.P., all of which are Texas limited partnerships
(Acquisition Partnerships or Partnerships). The Acquisition Partnerships were
referred to as the WAMCO Partnerships in previous reports. FirstCity Financial
Corporation (FirstCity) or its wholly owned subsidiary, J-Hawk Corporation
(J-Hawk), own limited partner interests in all of the Acquisition Partnerships.
During September 1996, WAMCO VI, Ltd., WAMCO VIII, Ltd., WAMCO XI, Ltd., WAMCO
XII, Ltd., WAMCO XIV, Ltd., WAMCO XV, Ltd., WAMCO XVI, Ltd. and WAMCO XX, Ltd.
were merged with and into WAMCO III, Ltd. Also, WAMCO XVIII, Ltd. and WAMCO XIX,
Ltd. were merged with and into WAMCO XVII, Ltd. The merger of the acquisition
partnerships has no effect on the comparability of the combined financial
statements. All significant intercompany balances have been eliminated.

      The Partnerships were formed to acquire, hold and dispose of loan pools
purchased from the Federal Deposit Insurance Corporation, Resolution Trust
Corporation and other nongovernmental agency sellers, pursuant to certain
purchase agreements or assignments of such purchase agreements. In accordance
with the purchase agreements, the Partnerships retain certain rights of return
regarding the assets related to defective title, past due real estate taxes,
environmental contamination, structural damage and other limited legal
representations and warranties.

      Generally, the partnership agreements of the Partnerships provide for
certain preferences as to the distribution of cash flows. Proceeds from
disposition of and payments received on the purchased loan pools are allocated
based on the partnership and other agreements which ordinarily provide for the
payment of interest and mandatory principal installments on outstanding debt
before payment of intercompany servicing fees and return of capital and
restricted distributions to partners.

      Additionally, WAMCO III, Ltd., WAMCO V, Ltd., WAMCO XVII, Ltd., WAMCO XXI,
Ltd. and Whitewater Acquisition Co. One L.P. provide for Class A and Class B
Equity partners in their individual partnership agreements. The Class B Equity
limited partners are allocated 20 percent of cumulative net income recognized by
the respective partnerships prior to allocation to the Class A Equity limited
partners and the general partners.

(2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A)   PURCHASED ASSET POOLS

      Purchased asset pools and loan receivables are reflected in the
accompanying financial statements as non-performing asset pools, performing
asset pools, automobile finance receivables or purchased real estate pools. The
following is a description of each such classification and the related
accounting policy accorded to each asset type:

      Non-performing Asset Pools

      Non-performing asset pools consist primarily of distressed loans and loan
related assets, such as foreclosed upon collateral. Non-performing asset pools
are designated as such if the preponderance of loans in the pool are not being
repaid in accordance with the contractual terms of the underlying loan
agreements. Such pools are acquired on the basis of an evaluation by the Company
of the timing and amount of cash flow expected to be derived from borrower
payments or disposition of the underlying collateral securing the loan.


                                       47
<PAGE>



      All non-performing asset pools are purchased at substantial discounts from
their outstanding legal principal amount and the total of the aggregate of
expected future sales prices and the total payments to be received from
obligors. Subsequent to acquisition, the amortized cost of non-performing asset
pools is evaluated for impairment on a quarterly basis. A valuation allowance is
established for any impairment indentified subsequent to acquisition. Such
allowance is charged to earnings in the period identified, however, no
impairment has been identified during any of the periods presented.

      Gross profit from dispositions and payments received on non-performing
asset pools is recognized as income to the extent that proceeds collected on the
asset pool exceed a pro-rata portion of allocated cost from the purchased asset
pool. Cost allocation is based on a proration of actual collections divided by
total estimated collections of the pool. No interest income is recognized
separately on non-performing asset pools. Such amounts are included in proceeds
from dispostion and payments received on purchased asset pools as realized.
Accounting for these pools is on a pool basis as opposed to an individual asset
basis.

      Performing Asset Pools

      Performing asset pools consist primarily of pools of consumer and
commercial loans acquired from the originator of such loans at a discount from
the aggregate amount of the borrowers' obligation. Pools are classified as
performing if the preponderance of the loans are being repaid in accordance with
the current terms of the notes.

      Performing asset pools are carried at the unpaid principal balance of the
underlying loans, net of acquisition discounts. Interest is recognized when
earned in accordance with the contractual terms of the loans. The recognition of
interest is discontinued once a loan becomes past due 90 days or more.
Acquisition discounts for the pool as a whole are amortized as an adjustment to
yield over the estimated life of the pool. Accounting for these pools is on a
pool basis as opposed to an individual asset basis.

      Performing asset pools are evaluated for impairment on a quarterly basis.
Impairment is measured based on the present value of expected future cash flows
of the pool discounted at the loans' effective interest rate, or the fair value
of the collateral less estimated selling costs, if the loan is collateral
dependent and foreclosure is probable. Any impairment identified is recorded as
a provision for possible loss and charged to earnings in the period identified,
however, no impairment has been identified for any periods presented.

      The Acquisition Partnerships has adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS No. 118, for its performing assets pools which requires
creditors to evaluate the collectibility of both contractual interest and
principal of loans when assessing the need for a loss accrual. Impairment is
measured based on the present value of the expected future cash flows discounted
at the loan's effective interest rate, or the fair value of the collateral, less
estimated selling costs, if the loan is collateral dependent and foreclosure is
probable. The adoption of SFAS No. 114 had no impact on the financial statements
of the Acquisition Partnerships.

(B)   INVESTMENTS IN TRUST CERTIFICATES

      Investments in trust certificates represent unrated beneficial interests
in a securitized trust. Such investment is carried at amortized cost as the
Partnerships intend to hold such investments until maturity.

(C)   INCOME TAXES

      Under current Federal laws, partnerships are not subject to income taxes;
therefore, no provision has been made for such taxes in the accompanying
combined financial statements. For tax purposes, income or loss is included in
the individual tax returns of the partners.


                                       48
<PAGE>



(D)   USE OF ESTIMATES

      The preparation of financial statements in conformity with 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(3)   PURCHASED LOAN POOLS

      The purchased loan pools at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>


                                                                               1996                     1995
                                                                        -------------------       -----------------
<S>                                                                     <C>                       <C> 
      Loans                                                             $          279,973        $        370,437
      Foreclosed assets                                                              44,367                  49,822
                                                                        -------------------       -----------------
                                                                                    324,340                 420,259
      Discount required to reflect purchased asset pools at
         amortized cost                                                           (146,860)               (198,751)
                                                                        -------------------       -----------------
      Purchased loan pools, net                                                    $177,480                $221,508
                                                                        ===================       =================

</TABLE>

(4)   NOTES PAYABLE

      Notes payable at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>


                                                                                   1996                  1995
                                                                                ----------            ---------
<S>                                                                          <C>                    <C> 
Senior collateralized loans, secured by acquired asset pools:
      Prime (8.25% at December 31, 1996) plus 1.5% to 2.5%                   $        39,283             27,737
      LIBOR (5.5% at December 31, 1996) plus 3.25% to 6.5%                            92,455             61,140
      New York inter-bank offering rate (6.5% at December 31, 1996)
         plus 3%                                                                       4,457             27,513
Subordinated collateralized loans, secured by acquired asset pools
      Prime (8.25% at December 31, 1996) plus 2% to 7%                                 4,859             55,058
                                                                               -------------       ------------
                                                                             $       141,054            171,448
                                                                               =============       ============

</TABLE>

      Collateralized loans are typically payable based on proceeds from
disposition and payments received on the purchased asset pools.

      Contractual maturities (excluding principal and interest payments payable
from proceeds from dispositions and payments received on the purchased loan
pools) of long term debt are as follows:

Year ending December 31:


      1997                                   $26,469
      1998                                     1,855
      1999                                    71,764
      2000                                         -
      2001                                    40,966
                                    ----------------
                                            $141,054
                                    ================

      Additionally, the loan agreements and master note purchase agreements,
under which these notes payable were incurred, contain various covenants
including limitations on other indebtedness, maintenance of service agreements
and restrictions on use of proceeds from disposition of and payments received on
the purchased loan pools. As of December 31, 1996, the Partnerships were in
compliance with the aforementioned convenants.

                                       49
<PAGE>

      In connection with the long term debt, the Partnerships incurred
origination and committment fees. These fees are amortized proportionate to the
principal reductions on the related notes and are included in general,
administrative and operating expenses. At December 31, 1996 and 1995,
approximately $2,712 and $2,048, respectively, of origination and committment
fees are included in other assets.

      WAMCO V paid a premium of $278 to enter into an interest rate cap
agreement with NationsBank of North Carolina, N.A. (the Bank). In the event the
London Interbank Offering Rate (the floating rate) exceeds 7.75% (the fixed
rate), the Bank will pay WAMCO V an amount equal to such excess multiplied times
a notional amount which corresponds to the outstanding balance of the
collateralized promissory note payable. Until such time as the floating rate
exceeds the fixed rate, no payments will be made between the parties and WAMCO V
will amortize the premium to general, administrative and operating expenses on a
pro rata basis corresponding to principal reductions on the collateralized
promissory note payable. At December 31, 1995 approximately $183 of the premium
is included in other assets.
      Additionally, certain loan agreements contain provisions requiring the
Partnerships to maintain minimum balances in a restricted cash account as
additional security for certain notes. Approximately $552 and $2,120 of
restricted cash was held in such accounts as of December 31, 1996 and 1995,
respectively.

(5)   TRANSACTIONS WITH AFFILIATES

      Under the terms of the various servicing agreements, FirstCity, a limited
partner, receives a servicing fee based on proceeds from disposition of and
payments received on the purchased loan pools for processing transactions on the
purchased loan pools and for conducting settlement and sale negotiations.
Included in general, administrative and operating expenses in the accompanying
combined statements of operations is approximately $6,468, $6,834 and $7,940 in
servicing fees incurred by the Partnerships in 1996, 1995 and 1994,
respectively.

      During December 1994, WAMCO III and WAMCO V sold loans to an affiliate.
Included in proceeds from disposition of and payments received on the purchased
loan pools in the accompanying combined statements of operations for 1994 is
approximately $9,616 in proceeds received from the affiliated entity.

      Under the terms of the Partnership Agreement of Whitewater, the Class B
Equity limited partners are to receive interest on their Class B equity interest
at prime plus 7% (15.25% at December 31, 1996) calculated on a monthly basis.
Whitewater has accrued $0, $6,235 and $2,748 in 1996, 1995 and 1994,
respectively, included in accrued liabilities and expensed $3,435, $3,486 and
$2,619 in 1996, 1995 and 1994, respectively, included in interest expense in the
accompanying combined financial statements, under this partnership agreement.
The interest will be paid to the Class B Equity limited partners upon final
disposition of the purchased loan pools or in accordance with the Master Note
Purchase Agreement.

      Under the terms of a Master Note Purchase Agreement with Varde, Varde II-A
and OPCO, Varde, Varde II-A and OPCO are to receive 5 percent, 5 percent and 10
percent, respectively, of cumulative income before recognition of profit
participation expense recognized by VOJ. VOJ has accrued $103, $85 and $17 in
1996, 1995 and 1994, respectively, included in receivable from affiliates and
recognized $18, $68 and $17 in 1996, 1995 and 1994, respectively, included in
other income (expense), net, in the accompanying combined financial statements,
under this profit participation agreement. The profit participation will be paid
to Varde, Varde II-A and OPCO upon final disposition of the purchased loan pool
or in accordance with the Master Note Purchase Agreement.

      Under the terms of a Master Note Purchase Agreement with Cargill and
Peoria, Cargill and Peoria are to each receive 10 percent of cumulative income
before recognition of profit participation expense recognized by Imperial.
Imperial has accrued $236, $371 and $646 in 1996, 1995 and 1994, respectively,
included in accounts payable and expensed $40, $114 and $813 in 1996, 1995 and
1994, respectively, included in other

                                       50
<PAGE>



income (expense), net, in the accompanying combined financial statements, under
this profit participation agreement. The profit participation will be paid to
Cargill and Peoria upon final disposition of the purchased loan pool or in
accordance with the Master Note Purchase Agreement.

      During 1996 in conjunction with a refinancing transaction, WAMCO XXII
transferred $42,047 in assets and $28,967 in liabilities to First Paradee in
return for a partnership interest in First Paradee. Subsequent to the transfer,
WAMCO XXII distributed its interest in First Paradee to its partners.

      During 1996, WAMCO III distributed $704 in assets to its partners which
was subsequently contributed to WAMCO IX.

(6)   FAIR VALUE OF FINANCIAL INSTRUMENTS

      Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Partnerships disclose
estimated fair values of their financial instruments. Fair value estimates,
methods and assumptions are set forth below.


(A) CASH, RESTRICTED CASH, RECEIVABLE FROM AFFILIATES, ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES

      The carrying amount of cash, restricted cash, receivable from affiliates,
accounts payable and accrued liabilities approximates fair value at December 31,
1996 and 1995 due to the short-term nature of such accounts.

(B) PURCHASED LOAN POOLS

      The purchased loan pools are carried at the lower of cost or estimated
fair value. The estimated fair value is calculated by discounting projected cash
flows on a loan by loan basis using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loans. The carrying value of
the purchased loan pools is $177,480 and $221,508 at December 31, 1996 and 1995,
respectively. The estimated fair value of the purchased loan pools is
approximately $221,352 and $282,091 at December 31, 1996 and 1995, respectively.

(C) INVESTMENTS

      Investments in trust certificates are carried at the lower of cost or
estimated fair value. Management estimates that the cost of the investments
approximate fair value at December 31, 1996.

(D) LONG-TERM DEBT

      Management believes that for similar floating rate financial instruments
with similar credit risk, that the stated interest rates at December 31, 1996
and 1995 approximates market rates. Accordingly, the carrying amount of
long-term debt is believed to approximate fair value.

(7) CONTINGENCIES

      The Partnerships are involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the combined financial condition,
results of operations or liquidity.




                                       51
<PAGE>

                          INDEPENDENT AUDITORS' REPORT



The Partners
Acquisition Partnerships:

         We have audited the accompanying combined balance sheets of Acquisition
Partnerships as of December 31, 1996 and 1995, and the related combined
statements of operations, changes in partners' capital, and cash flows for each
of the years in the three-year period ended December 31, 1996. These combined
financial statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. 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 combined financial statements referred to above
present fairly, in all material respects, the financial position of Acquisition
Partnerships as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.




                                                         KPMG Peat Marwick LLP


Fort Worth, Texas
February 14, 1997


                                       52
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

         On October 27, 1995, FirstCity engaged KPMG Peat Marwick LLP ("KPMG")
to serve as its independent accountants, such engagement to be effective as of
and for the year ending December 31, 1995. The engagement of KPMG was
recommended by the Audit Committee of FirstCity's Board of Directors and was
approved by such Board on October 27, 1995. Shareholders approved a proposal to
appoint KPMG as independent accountants for 1996.

         During the Debtor's two most recent fiscal years prior to the Merger,
no audited financial statements of the Debtor were prepared, and therefore no
report on such financial statements was prepared. Prior thereto, Arthur Andersen
& Co. LLP served as the Debtor's independent accountants.

         Prior to the Merger, Jaynes, Reitmeier, Boyd & Therrell, P.C. ("Jaynes
Reitmeier") served as J-Hawk's independent accountants. Jaynes Reitmeier's
accountants' report with respect to the annual financial statements for 1994 did
not contain an adverse opinion, disclaimer or qualification. During such period,
Jaynes Reitmeier and J-Hawk had no disagreements regarding any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure of the type referred to in items 304(a)(1)(iv) of Regulation
S-K, and no reportable event described in Item 304(a)(1)(v) of Regulation S-K
occurred.

         In connection with the Merger, representatives of J-Hawk consulted with
KPMG regarding the appropriate financial statements and accounting disclosures
with respect to the Merger and for FirstCity following the Merger. After
discussions with KPMG and the Securities and Exchange Commission, FirstCity
determined that its historical financial statements prior to the date of the
Merger should reflect the financial position and results of operations of
J-Hawk.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information with respect to the Company's executive officers is set
forth in Part I of this Annual Report on Form 10-K under the caption "Executive
Officers of the Registrant."

         The Company's current Board of Directors consists of ten members, each
of whom initially became a director of FirstCity on July 3, 1995. Further
information concerning the Board members, including their business experience
during the past five years, appears below.

         James R. Hawkins, 61, has been Chairman of the Board and Chief
Executive Officer of FirstCity since July 3, 1995, and was Chairman of the Board
and Chief Executive Officer of J-Hawk from 1976 until the Merger.

         C. Ivan Wilson, 69, has been Vice Chairman of FirstCity since July 3,
1995, and is currently Chairman, President and Chief Executive Officer of
Mercantile Bank, N.A., Corpus Christi, Texas, a national baking organization.
Mr. Wilson was Chairman of the Board and Chief Executive Officer of FCBOT from
1991 to July 3, 1995. Prior to 1991, Mr. Wilson was the Chief Executive Officer
of FirstCity, Texas -- Corpus Christi, one of FCBOT's banking subsidiaries.

         James T. Sartain, 48, has been President and Chief Operating Officer of
FirstCity since July 3, 1995, and was President and Chief Operating Officer of
J-Hawk from 1988 until the Merger.


                                       53
<PAGE>



         Rick R. Hagelstein, 50, has been Executive Vice President and Managing
Director of Asset Management of FirstCity since November 1996. From July 3, 1995
until November 1996 Mr. Hagelstein was Executive Vice President and Chief Credit
Officer of FirstCity, and was Executive Vice President and Chief Credit Officer
of J-Hawk from 1990 until the Merger. From 1988 to 1990, Mr. Hagelstein was
Executive Vice President of ASK Corporation, a manufacturer of solar energy
devices. Mr. Hagelstein has also been a member of the Portfolio Committee of the
Trust since July 3, 1995, which committee administers the Trust.

         Matt A. Landry, Jr., 54, has been Executive Vice President and Senior
Financial Officer and Managing Director of Mergers and Acquisitions since
November 1996 and was Executive Vice President and Chief Financial Officer of
FirstCity from July 3, 1995 until November 1996. Mr. Landry was Executive Vice
President and Chief Financial Officer of J-Hawk from 1992 until the Merger. From
1988 to 1992, Mr. Landry was President and Chief Operating Officer and a
director of AmWest Savings Association, a savings and loan association (and a
predecessor to First American Bank, S.S.B., a state savings bank). From 1989 to
1992, Mr. Landry was also a director of First American Bank, a state chartered
commercial bank.

         Richard E. Bean, 53, has been Executive Vice President and Chief
Financial Officer of Pearce Industries, Inc. since 1976, which company, through
its subsidiaries, markets a variety of oilfield equipment and machinery. Mr.
Bean has also been a member of the Portfolio Committee of the Trust since July
3, 1995 which committee administers the Trust. Prior to July 3, 1995, Mr. Bean
was Chairman of the FCBOT's Official Committee of Equity Security Holders. Mr.
Bean is a director of TransAmerican Waste Industries, Inc.

         Bart A. Brown, Jr., 65, has been President and Chief Executive Officer
of Main Street and Main Incorporated since December of 1996. Main Street is the
largest franchise of T.G.I. Friday's restaurant chain with 47 locations. From
April of 1996 until December of 1996, Mr. Brown was a consultant with Investcorp
International, N.A. From August of 1995 until joining Investcorp, Mr. Brown was
Chairman and Chief Executive Officer of Color Tile, Inc., an Investcorp-owned
company. Prior to joining Color Tile, Mr. Brown was Chief Executive Officer of
The Circle K Corporation from 1991 to 1993, and served as Chairman of that
company from June of 1990 until August of 1995. Mr. Brown is a director of
Factory Card Outlet Corp., Edison Brothers Stores, Inc. and Main Street and Main
Incorporated.

         Donald J. Douglass, 65, has been Chairman and Chief Executive Officer
of Alamo Group, Inc. since 1969, which company, through its subsidiaries,
designs and markets a variety of mowing equipment, replacement parts and other
products. Prior to July 3, 1995, Mr. Douglass was a member of FCBOT's Official
Committee of Equity Security Holders.

         David W. MacLennan, 37, has been with subsidiaries of Cargill,
Incorporated, regarded as one of the world's largest, privately-held
corporations, since 1991. From 1993 to February 1996, Mr. MacLennan was a Vice
President of Cargill Financial Services Corporation, a wholly-owned subsidiary
of Cargill, Incorporated engaged primarily in the investment of proprietary
funds and in the proprietary trading of financial instruments and assets. Since
February 1996, Mr. MacLennan has been Managing Director of Cargill Financial
Markets, PLC in London.

         David Palmer, 54, has been a private investor for the past 25 years.
Mr. Palmer has been a member of the Portfolio Committee of the Trust since July
3, 1995 which committee administers the Trust. Prior to July 3, 1995, Mr. Palmer
was a member of FCBOT's Official Committee of Equity Security Holders. From 1970
to 1995, Mr. Palmer was a Professor of Philosophy at the State University of New
York -- Fredonia, New York.

         James R. Hawkins, Chairman of the Board and Chief Executive Officer of
FirstCity, James T. Sartain, President and Chief Operating Officer of FirstCity,
and ATARA are parties to a Shareholder Voting Agreement (the "Shareholder Voting
Agreement"), dated as of June 29, 1995, with Cargill Financial Services
Corporation, a Delaware corporation ("Cargill"). The sole general partner of
ATARA is ATARA Corp., a Texas corporation, the Chairman of the Board and
President of which is Rick R. Hagelstein, the Executive Vice President and
Managing Director of Asset Management of FirstCity. Under the terms of the
Shareholder Voting Agreement, Messrs. Hawkins and Sartain, and ATARA, are
required to vote their shares of FirstCity common stockto elect one designee

                                       54
<PAGE>



of Cargill as a director of FirstCity, and Cargill is required to vote its
shares of FirstCity common stock to elect one or more of the designees of
Messrs. Hawkins and Sartain, and ATARA, as directors of FirstCity. Information
pertaining to the number of shares of the Common Stock of FirstCity owned on
February 28, 1997 by each of Messrs. Hawkins and Sartain, and ATARA and Cargill,
is set forth under Item 12 - "Security Ownership of Certain Beneficial Owners
and Management."

         Section 16(a) of the Exchange Act requires FirstCity's directors and
executive officers, and persons who own more than 10 percent of the FirstCity
Common Stock, to file with the Securities and Exchange Commission certain
reports of beneficial ownership of the FirstCity Common Stock. Based solely on
copies of such reports furnished to FirstCity and written representations that
no other reports were required, FirstCity believes that all applicable such
Section 16(a) filing requirements were complied with by its directors, officers
and 10 percent stockholders during the last fiscal year.



                                       55
<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION.

DIRECTOR COMPENSATION

         Directors of FirstCity who are not employees of FirstCity or any of its
subsidiaries receive a retainer of $3,000 per quarter for their services as
directors (from January 1, 1996 through December 31, 1996, each such director
received an aggregate of $12,000 for such director's services as director for
such period). Such directors also receive $1,000 plus expenses for each regular
and special Board meeting attended, and $1,000 plus expenses for each meeting of
any committee of the Board attended, in each case other than telephonic
meetings. Directors who are employees of FirstCity do not receive directors'
fees.

EXECUTIVE COMPENSATION

         The following table sets forth certain information concerning
compensation for services during each of the last three years to (1) FirstCity's
Chief Executive Officer during 1996, (2) FirstCity's other four most highly
compensated executive officers during 1996 serving as such at the end of 1996
and (3) one additional executive officer of FirstCity during 1996 who would have
been one of such four most highly compensated executive officers but who was not
serving as an executive officer at the end of 1996:

<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE


                                                                                                     LONG TERM        ALL OTHER
                                                                                                 COMPENSATION        COMPENSA-
                                                            ANNUAL COMPENSATION (1)                    AWARDS        TION (6)($)
                                               ------------------------------------------------- ------------------ ------------
NAME AND PRINCIPAL POSITION          YEAR             SALARY ($)                BONUS ($)          OPTION (5) (#)
------------------------------- -------------- ------------------------  ----------------------- ------------------
<S>                             <C>            <C>                       <C>                     <C>                <C>
James R. Hawkins,..............     1996                        300,000          82,500 (2)             2,845 (7)         11,374
     Chairman of the Board and      1995:
     Chief Executive Officer     07/03-12/31                    155,769         225,000                22,500              3,086
                                 01/01-07/02                    150,000              --                    --              3,086
                                  Total 1995                    305,769         225,000                22,500              6,172
                                     1994                       245,000         580,000                    --              7,202
C. Ivan Wilson,................      1996                       103,962         452,422 (3)                --              5,941
     Vice Chairman of the Board     1995:
                                 07/03-12/31                    125,000              --                13,000             14,984
                                 01/01-07/02                    125,000         500,000 (4)                --             19,169
                                  Total 1995                    250,000         500,000 (4)            13,000             34,153
                                     1994                       250,000              --                    --             31,372
James T. Sartain,..............      1996                       300,000          82,500 (2)             2,845 (7)          7,927
     President and Chief            1995:
     Operating Officer           07/03-12/31                    155,769         225,000                24,800              2,529
                                 01/01-07/02                    150,000              --                    --              2,529
                                  Total 1995                    305,769         225,000                24,800              5,058
                                     1994                       245,000         531,000                    --              5,491
Rick R. Hagelstein,............      1996                       300,000          82,500 (2)             2,845 (7)          9,913
     Executive Vice President       1995:
     and Managing Director of    07/03-12/31                    155,769         225,000                24,800              2,991
     Asset Management            01/01-07/02                    150,000              --                    --              2,991
                                  Total 1995                    305,769         225,000                24,800              5,982
                                     1994                       245,000         420,000                    --              5,491
Matt A. Landry, Jr.,...........      1996                       250,000          82,500 (2)             2,845 (7)          7,899
     Executive Vice President,      1995:
        Senior Financial Officer 07/03-12/31                    129,808         185,000                21,300              3,003
        and Managing Director of 01/01-07/02                    125,000              --                    --              3,003
        Mergers and Acquisitions  Total 1995                    254,808         185,000                21,300              6,006
                                     1994                       119,231         225,000                    --              5,929
G. Stephen Fillip..............      1996                       135,000          38,500 (2)             1,328 (7)          6,402
     Senior Vice President          1995:
                                 07/03-12/31                     70,096          75,000                21,300              1,442
                                 01/01-07/02                     67,500              --                    --              1,443
                                  Total 1995                    137,596          75,000                11,500              2,885
                                     1994                        74,616         133,500                    --                867


                                       56
<PAGE>

<FN>


-----------------------------
(1)  With respect to Messrs. Hawkins, Sartain, Hagelstein, Landry and Fillip,
     all amounts shown for (a) the year 1996, and the period July 3, 1995
     through December 31, 1995, were for services in all capacities to FirstCity
     and its subsidiaries, (b) the period January 1, 1995 through July 2, 1995,
     and the year 1994, were for services in all capacities to J-Hawk and its
     subsidiaries. With respect to Mr. Wilson, all amounts shown for (a) the
     year 1996, and the period July 3, 1995 through December 31, 1995, were for
     services in all capacities to FirstCity and its subsidiaries (unless
     otherwise indicated, with respect to Mr. Wilson, 50 percent of which
     amounts were paid by FirstCity and 50 percent of which were paid by the
     Trust pursuant to the terms of the employment agreement as described below
     under the caption "Employment Agreements and Severance and
     Change-in-Control Arrangements") and (b) the period January 1, 1995 through
     July 2, 1995, and the year 1994, were for services in all capacities to
     FCBOT and its subsidiaries.

(2)  Such bonus amount was awarded under FirstCity's 1996 Performance Bonus
     Plan.

(3)  See "Employment Agreements and Severance and Change-in-Control
     Arrangements."

(4)  Such bonus was paid on July 3, 1995 pursuant to the Plan of Reorganization
     from funds of FCBOT.

(5)  Expressed in terms of the numbers of shares of FirstCity's Common Stock
     underlying options and awards granted during the year indicated. All such
     options granted in 1995 were granted under the 1995 Stock Option and Award
     Plan. All such awards granted in 1996 were granted under FirstCity's 1996
     Performance Bonus Plan.

(6)  With respect to Messrs. Hawkins, Sartain, Hagelstein, Landry and Fillip,
     the total amounts indicated under "All Other Compensation" for 1996 consist
     of (a) amounts contributed to match a portion of such employee's
     contributions under the 401(k) Plan ("401(k) Match"), (b) excess premiums
     paid on supplemental life insurance policies ("Supplement Life"), (c)
     premiums paid on long term disability insurance policies ("LTD Premiums")
     and (d) personal use of a business vehicle ("Auto"). The following table
     details the amounts paid during 1996 for each of the categories:


                                            401(K)        SUPPLEMENT          LTD
               EXECUTIVE                     MATCH           LIFE           PREMIUMS         AUTO          TOTAL
---------------------------------------  -------------  ---------------  --------------  ------------- --------------
James R. Hawkins.......................  $       4,500  $         4,353  $        1,830  $         691 $      11,374
James T. Sartain.......................          4,500            1,079           1,830            518         7,927
Rick R. Hagelstein.....................          4,500            1,786           1,830          1,797         9,913
Matt A. Landry, Jr.....................          4,500            1,511           1,525            363         7,899
G. Stephen Fillip......................          4,500            1,079             823              -         6,402

(7)  These awards are contingent upon meeting certain performance targets in
     1997 and 1998, with one-half vesting based on 1997 earnings, and
     one-half vesting based on 1998 earnings. See "Bonuses."
</FN>
</TABLE>


STOCK OPTION PLANS AND 401(K) PLAN

     At FirstCity's annual shareholders' meeting, held on April 24, 1996,
FirstCity's shareholders approved (1) the Company's 1995 Stock Option and Award
Plan (the "1995 Stock Option and Award Plan"), which provides for the grant of
up to 230,000 options to purchase FirstCity Common Stock to plan participants
(229,600 of which have been granted), (2) the Company's 1996 Stock Option and
Award Plan (the "1996 Stock Option and Award Plan"), which provides for the
grant of up to 500,000 options to purchase FirstCity Common Stock to plan
participants (18,000 of which were granted during 1996), and (3) the Company's
1995 Employee Stock Purchase Plan (the "1995 Employee Stock Purchase Plan"),
under which up to 100,000 shares of FirstCity Common Stock may be made available
for purchase by plan participants. During 1996, 3,813 shares were issued under
the 1995 Employee Stock Purchase Plan. The 1996 Stock Option and Award Plan also
provides for the grant of up to 50,000 performance shares to employees of
FirstCity, to be awarded in the discretion of the Stock Option Subcommittee of
the Compensation Committee of the Company's Board of Directors. The performance
measure to be used for the purposes of granting the performance shares will be
the extent to which performance goals are met, in addition to the factors of
total shareholder return, return on equity, earnings per share and the ratio of
operating overhead to operating revenue.

     Beginning January 1, 1994, FirstCity also initiated a defined contribution
401(k) employee profit sharing plan (the "401(k) Plan") in which FirstCity
matches employee contributions at a stated percentage of employee contributions
to a defined maximum. FirstCity contributed $196,440 in 1996, $76,866 in 1995,
and $44,498 in 1994 to the 401(k) Plan.

                                       57
<PAGE>

OPTION GRANTS

     No stock options were granted during or in respect of 1996 to any executive
officers of FirstCity.

OPTION EXERCISES AND YEAR-END VALUES

     The following table sets forth, for FirstCity's Chief Executive Officer and
each of the other executive officers of FirstCity named in the Summary
Compensation Table under the caption "Executive Compensation," the number of
shares of FirstCity Common Stock underlying both exercisable and non-exercisable
stock options held by such persons as of December 31, 1996, and the year-end
values for unexercised "in-the-money" options, which represent the positive
spread between the exercise price of any such options and the year-end market
price of the FirstCity common stock. All such options were granted under the
1995 Stock Option and Award Plan.
<TABLE>
<CAPTION>

                        AGGREGATED 1996 OPTION EXERCISES
                           AND YEAR-END OPTION VALUES


                                                 NUMBER OF SHARES                        VALUE OF UNEXERCISED
                                              UNDERLYING UNEXERCISED                   IN-THE-MONEY OPTIONS AT
                                           OPTIONS AT DECEMBER 31, 1996                DECEMBER 31, 1996 ($)(1)
                                     ----------------------------------------  --------------------------------
NAME(2)                                  EXERCISABLE         UNEXERCISABLE         EXERCISABLE         UNEXERCISABLE
-------                              ------------------  --------------------  ------------------- -----------------
<S>                                  <C>                  <C>                  <C>                 <C>    
James R. Hawkins...................        4,500                18,000               31,500              126,000
James T. Sartain...................        6,200                18,600               55,800              167,400
Rick R. Hagelstein.................        6,200                18,600               55,800              167,400
Matt A. Landry, Jr.................        5,325                15,975               47,925              143,775
George S. Fillip...................        2,875                8,625                25,875               77,625
<FN>
-----------------------------
(1)  Aggregate market value (based on December 31, 1996 stock price of $29 per
     share of the shares of FirstCity common stock underlying such options, less
     the aggregate exercise price payable.

(2)  All stock options held by C. Ivan Wilson were cancelled in connection with
     the settlement of his employment agreement. See "Employment Agreements and
     Severance and Change-in-Control Arrangements."
</FN>
</TABLE>

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

         The following report concerning the specific factors, criteria and
goals underlying decisions on payments and awards of compensation to each of the
executive officers of FirstCity for fiscal year 1996 is provided by the
Compensation Committee of FirstCity's Board of Directors.

GENERAL

         Recommendations regarding compensation of FirstCity's executive
officers are prepared by the Compensation Committee of the Board of Directors
and are subject to the review, modification and approval of the Board, except
that (1) the Chief Executive Officer does not participate in the preparation of
recommendations, or the review, modification or approval thereof, with respect
to his compensation, and (2) all such recommendations, reviews, modifications
and approvals with respect to awards under the 1996 Stock Option and Award Plan
are made solely by the Stock Option Subcommittee of the Compensation Committee.

         FirstCity's compensation program is designed to enable FirstCity to
attract, motivate and retain high-quality senior management by providing a
competitive total compensation opportunity based on performance. Toward this
end, FirstCity provides for competitive base salaries, annual variable
performance incentives payable in cash for the achievement of financial
performance goals, and long-term, stock-based incentives which strengthen the
mutuality of interests between senior management and FirstCity's stockholders.

                                       58
<PAGE>



         Section 162(m) ("Section 162(m)") of the Internal Revenue Code of 1986,
as amended (the "Code"), provides that no deduction for federal income tax
purposes shall be allowed to a publicly held corporation for applicable employee
remuneration with respect to any covered employee of the corporation to the
extent that the amount of such remuneration for the taxable year with respect to
such employee exceeds $1.0 million. For purposes of this limitation, the term
"covered employee" generally includes the chief executive officer of the
corporation and the four highest compensated officers of the corporation (other
than the chief executive officer). The term "applicable employee remuneration"
generally means, with respect to any covered taxable year for remuneration for
services performed by such employee (whether or not during the taxable year);
provided, however, that applicable employee remuneration does not include, among
other items, certain remuneration payable solely on account of the attainment of
one or more performance goals ("performance-based compensation"). It is
FirstCity's general intention that the remuneration paid to its covered
employees not exceed the deductibility limitation established by Section 162(m).
Nevertheless, due to the fact that not all remuneration paid to covered
employees may qualify as performance-based compensation, it is possible that
FirstCity's deduction for remuneration paid to any covered employee during a
taxable year may be limited by Section 162(m).

SALARIES

         Salaries for the year 1996 for each of FirstCity's executive officers,
including its Chief Executive Officer, were determined based upon such officer's
level of responsibility, time with FirstCity, contribution to FirstCity and
individual performance. The evaluation of these factors was subjective, and no
fixed, relative weights were assigned thereto.

BONUSES

         Under FirstCity's 1996 Performance Bonus Plan ("1996 Performance Bonus
Plan"), all executive officers who were employed by FirstCity or its
subsidiaries during calendar year 1996 and who remained so employed on March 18,
1997 received, as a bonus, for services rendered to FirstCity or such subsidiary
during 1996, a prescribed portion of $1,100,000 (which is an amount equal to
fifty percent of FirstCity's net profits after a twenty-five percent return on
stockholders' equity (after payment or accrual of preferred dividends) for
1996). Each of the executive officers of FirstCity named in the Summary
Compensation Table under the caption "Executive Compensation" received such a
bonus for the year 1996 pursuant to the 1996 Performance Bonus Plan.

         Bonuses earned pursuant to FirstCity's 1996 Performance Bonus Plan are
paid one-half in cash in the year the bonus is granted and the remainder in
shares of FirstCity common stock having a fair market value at the time the
bonus is granted equal to half of the respective bonus. One-half of the shares
of FirstCity common stock granted as part of a bonus vest, contingent upon
meeting certain performance bonus targets, in the first year succeeding the year
in which the bonus was granted. The other half of such shares vest, contingent
upon meeting certain performance bonus targets, in the second year succeeding
the year in which the bonus was granted.

STOCK OPTIONS

         The Stock Option Subcommittee of the Compensation Committee believes
that stock options are critical in motivating and rewarding the creation of
long-term shareholder value, and the subcommittee has established a policy of
awarding stock options each year based on the continuing progress of FirstCity
as well as on individual performance.

         In 1996, the Stock Option Subcommittee recommended, and the Board of
Directors approved, the grant of stock options for 18,000 shares of FirstCity
common stock under the 1996 Stock Option and Award Plan (none of which were
granted to FirstCity's executive officers). The exercise price with respect to
all such grants was

                                       59
<PAGE>



equal to or greater than the fair market value of the underlying FirstCity
common stock at the date of grant so that the holders of such options will
benefit from such options only when, and to the extent, the price of the
FirstCity common stock increases after such grant. The performance of key
employees was considered by the Stock Option Subcommittee in allocating such
grants, taking into account FirstCity's performance, each individual's
contributions thereto and specific accomplishments in each individual's area of
responsibility.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

         Recommendations regarding compensation of FirstCity's Chief Executive
Officer are prepared by those members of the Compensation Committee, and are
subject to the review, modification and approval of those members of the Board,
other than the Chief Executive Officer. Such recommendations, reviews,
modifications and approvals for 1996 were based on the Chief Executive Officer's
level of responsibility, time with FirstCity, individual performance and
significant contributions to the successful implementation of several important
decisions that are expected to benefit FirstCity in future years, including the
acquisition of various purchased asset portfolios.

                  THE COMPENSATION COMMITTEE
                  James R. Hawkins, Chairman
                  David W. MacLennan
                  Bart A. Brown, Jr.

CUMULATIVE TOTAL SHAREHOLDER RETURN

                  The following performance graph (the "Performance Graph")
compares the cumulative total shareholder return on FirstCity's Common Stock,
based on the market price thereof, with the cumulative total return of the CRSP
Total Return Index for the Nasdaq Stock Market (US) prepared for Nasdaq by the
Center for Research in Security Prices ("CRSP," and such index, the "Nasdaq
Market Index") and the CRSP Financial Stocks Index prepared for Nasdaq by CRSP
(the "Nasdaq Industry Index") for the period beginning on July 3, 1995 (the date
FirstCity's Common Stock commenced trading on Nasdaq) and ending on December 31,
1996. Cumulative total shareholder return is based on an annual total return,
which assumes the reinvestment of all dividends for the period shown and assumes
that $100 was invested on July 3, 1995 in each of FirstCity's Common Stock, the
Nasdaq Market Index and the Nasdaq Industry Index. FirstCity has not declared
any dividends during the period covered by the Performance Graph. The results
shown in the Performance Graph are not necessarily indicative of future
performance.

                                       60
<PAGE>
[PURSUANT TO RULE 304 OF REGULATION S-T, THE PERFORMANCE GRAPH IS DESCRIBED 
IN TABULAR DATA FORM BELOW]

<TABLE>
<CAPTION>

                        FIRSTCITY FINANCIAL CORPORATION
                      TOTAL RETURN PERFORMANCE CALCULATION

                         07/03/95  07/31/95  08/31/95  09/29/95  10/31/95  11/30/95  12/29/95  01/31/96  02/29/96  03/29/96  
                         --------  --------  --------  --------  --------  --------  --------  --------  --------  --------  
<S>                      <C>       <C>       <C>       <C>       <C>        <C>      <C>       <C>       <C>       <C>       
NASDAQ MARKET                 100  107.2795  109.4537  111.9705  111.3309  113.943   113.3365  113.8968  118.2376  118.6307  
NASDAQ FINANCIAL STOCKS       100  104.7506  110.1941  113.9217  114.4259  119.0101  122.2146  122.8014  124.6018  127.1491
FIRSTCITY FINANCIAL           100  133.3333  141.6667  133.3333  166.6667  176.0417  171.875   190.625   165.625   167.7083

<CAPTION>

                         04/30/96  05/31/96  06/28/96  07/31/96  08/30/96  09/30/96  10/31/96  11/29/96  12/31/96
                         --------  --------  --------  --------  --------  --------  --------  --------  --------
<S>                      <C>       <C>       <C>       <C>       <C>        <C>      <C>       <C>       <C>
NASDAQ MARKET            128.4706  134.3693  128.3139  116.8863  123.4357  132.8832  131.427   139.572   139.4133
NASDAQ FINANCIAL STOCKS  127.5291  129.8958  130.1639  126.824   135.0816  141.189   145.6519  154.9834  156.6915
FIRSTCITY FINANCIAL      193.75    206.25    231.25    227.0833  230.2083  237.5     260.4167  231.25    243.75

</TABLE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Messrs. Hawkins (Chairman), MacLennan and Bart A. Brown, Jr. served as
members of the Compensation Committee of the Board of Directors during 1996.
Messrs. MacLennan and Brown served as members of the Stock Option Subcommittee
of the Compensation Committee during 1996. Mr. Hawkins was Chairman of the Board
and Chief Executive Officer of FirstCity, and Chairman of the Board and Chief
Executive Officer of each of the corporate general partners of each of the
affiliated acquisition partnerships through which FirstCity acquires interests
in various financial asset pools, during 1996. See Item 13 - "Certain
Relationships and Related Transactions." Neither of Messrs. MacLennan or Brown
was an officer or employee of FirstCity or any of its subsidiaries during 1996
or any prior year. FirstCity leases the office space for its principal executive
offices from a trust created for the benefit of the children of Mr. Hawkins. See
Item 13 - "Certain Relationships and Related Transactions."

EMPLOYMENT AGREEMENTS AND SEVERANCE AND CHANGE-IN-CONTROL ARRANGEMENTS

         FirstCity entered into an employment agreement with C. Ivan Wilson in
connection with the consummation of the Plan of Reorganization. Under the terms
of such agreement, Mr. Wilson was to serve as Vice-Chairman of FirstCity's Board
of Directors for a term of three years, beginning on July 3, 1995. Under such
terms, Mr. Wilson (1) was paid $500,000 on July 3, 1995 (from funds of FCBOT),
(2) was to be paid an annual salary of $250,000 (50 percent of which was to be
paid by FirstCity and 50 percent of which was to be paid by the Trust so as to
reflect Mr. Wilson's obligations thereunder to assist in the administration of
the Trust assets) and (3) if certain conditions with respect to the payment of
certain claims and interests under the Plan of Reorganization (as prescribed by
such agreement) were satisfied, such determination to be made by the Portfolio
Committee of the Trust (which committee administers the Trust), was to be paid
additional, separate conditional bonuses in an aggregate amount up to $500,000
plus 1.67 percent of specified additional payments made to the holders of the
Trust's Class B and Class C Certificates.

         During the second quarter of 1996, Mr. Wilson advised the Board of his
desire to retire from an active management role in FirstCity and the Trust.
Under the terms of Mr. Wilson's employment contract as approved in the Plan of
Reorganization, Mr. Wilson was to receive his annual salary and any bonus as
described above. In response to Mr. Wilson's request to be considered for
retirement, the Board of FirstCity and the management of the Trust jointly
determined that a fair settlement of Mr. Wilson's contract would be to discount
the total

                                       61
<PAGE>



amount of future payments to be received as salary. The resulting amount
totaling approximately $445,000 was paid one-half by the Trust and one-half by
FirstCity. Additionally, if there are any bonus payments accrued under the
provisions of subpart (3) of the preceding paragraph, Mr. Wilson will receive
such payments when, as, and if accrued. Such payments are the obligation of the
Trust and not FirstCity. Subsequent to his retirement, Mr. Wilson received
$8,000 in directors fees from FirstCity.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth certain information regarding the
FirstCity Common Stock owned on February 28, 1997 by: (1) each person who is
known by FirstCity to be the beneficial owner of more than 5 percent of the
FirstCity Common Stock as of such date, (2) each of FirstCity's directors named
herein, (3) each of the executive officers of FirstCity named in the Summary
Compensation Table under the caption "Executive Compensation" and (4) all
directors and executive officers of FirstCity as a group. Except as otherwise
indicated, all shares of FirstCity Common Stock shown in the table are held with
sole voting and investment power. The "Percent of Class" column represents the
percentage that the named person or group would beneficially own if such person
or group, and only such person or group, exercised all currently exercisable
warrants to purchase FirstCity Common Stock held by such person or group.
<TABLE>
<CAPTION>


                                                                                         SHARES             PERCENT
                                                                                      BENEFICIALLY             OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)                                                  OWNED              CLASS
----------------------------------------                                              -------------        ---------
<S>                                                                                   <C>                   <C> 
James R. Hawkins..........................................................               974,500(2)            17.8
C. Ivan Wilson............................................................                 2,664(3)               *
James T. Sartain..........................................................               377,360(2)             6.9
Rick R. Hagelstein........................................................               377,360(4)             6.9
Matt A. Landry, Jr........................................................                57,685(5)             1.1
Richard E. Bean...........................................................                78,633(6)             1.4
Bart A. Brown, Jr.........................................................                    --                 --
Donald J. Douglass........................................................                19,130(7)             0.3
David W. MacLennan........................................................                    --(8)              --
David Palmer..............................................................                99,677                1.8
All directors and executive officers as a group (17 persons)..............             2,344,663               42.8
ATARA I, LTD..............................................................               372,400(2)             6.8
         P.O. Box 8216
         Waco, Texas 76714
ATARA Corp................................................................               372,400(9)             6.8
         P.O. Box 8216
         Waco, Texas 76714
<FN>
-----------------------------
*  Less than 1%

(1)      The business mailing address of each of such persons (except for ATARA
         I, LTD. and ATARA Corp.) is 6400 Imperial Drive, Waco, Texas 76712.
(2)      Includes 506 shares that may be acquired within sixty days of February
         28, 1997 through the exercise of warrants of FirstCity to purchase
         FirstCity Common Stock . Each of Messrs. Hawkins and Sartain, and ATARA
         I, LTD., a Texas limited partnership ("ATARA"), acquired warrants to
         purchase 506 shares of FirstCity Common Stock pursuant to the exchange
         under the Plan of Reorganization of shares of Common Stock of FCBOT
         owned by such persons. Messrs. Hawkins and Sartain, and ATARA, are
         parties to a Shareholder Voting Agreement with Cargill regarding the
         FirstCity Common Stock. Each of Messrs. Hawkins and Sartain, and ATARA,
         disclaims beneficial ownership of the shares of FirstCity

                                       62
<PAGE>



         Common Stock owned by Cargill. With regard to Messrs. Hawkins and
         Sartain, 4,500 and 4,960, respectively, of such shares are subject to
         options granted on October 27, 1995 pursuant to FirstCity's 1995 Stock
         Option and Award Plan, which are vested but unexercised.
(3)      Includes 676 shares that may be acquired within sixty days of February
         28, 1997 through the exercise of warrants of FirstCity to purchase
         FirstCity Common Stock (which warrants were acquired pursuant to the
         exchange under the Plan of Reorganization of shares of common stock of
         FCBOT owned by Mr. Wilson).
(4)      371,894 of such shares of FirstCity Common Stock are held of record by
         ATARA. 506 of such shares are subject to warrants of FirstCity to
         purchase FirstCity Common Stock held of record by ATARA. See note (2)
         to this table. ATARA is principally engaged in the investment in
         FirstCity's Common Stock. The sole general partner of ATARA is ATARA
         Corp., a Texas corporation ("ATARA Corp."), which is also principally
         engaged in the investment in FirstCity's Common Stock. Mr. Hagelstein
         may be deemed to beneficially own all such 372,400 shares by virtue of
         being the Chairman of the Board and President of ATARA Corp., and by
         reason of the fact that his wife is the only other officer or director
         of ATARA Corp. and owns 33.33 percent of the outstanding shares of
         common stock of ATARA Corp. 4,960 of such shares are subject to options
         granted on October 27, 1995 pursuant to FirstCity's 1995 Stock Option
         and Award Plan, which are vested but unexercised.
(5)      53,065 of such shares of FirstCity Common Stock are held of record by
         Enovest Associates, Ltd., a Texas limited partnership ("Associates"),
         which is principally engaged in the business of investments, including
         its investment in FirstCity's Common Stock. The sole general partner of
         Associates is Enovest Investments, Inc., a Texas corporation
         ("Investments"). Mr. Landry may be deemed to beneficially own all such
         53,065 shares by virtue of being a Vice President of Investments and a
         limited partner of Associates. 4,620 of such shares are subject to
         options granted on October 27, 1995 to Mr. Landry pursuant to
         FirstCity's 1995 Stock Option and Award Plan, which are vested but
         unexercised.
(6)      Includes 9,964 shares that may be acquired within sixty days of
         February 28, 1997 through the exercise of warrants of FirstCity to
         purchase FirstCity Common Stock (which warrants were acquired pursuant
         to the exchange under the Plan of Reorganization of shares of common
         stock of FCBOT owned by Mr. Bean).
(7)      Includes 2,424 shares that may be acquired within sixty days of
         February 28, 1997 through the exercise of warrants of FirstCity to
         purchase FirstCity Common Stock (which warrants were acquired pursuant
         to the exchange under the Plan of Reorganization of shares of common
         stock of FCBOT owned by Mr.Douglass).
(8)      Mr. MacLennan is an officer of certain affiliates of Cargill, which, as
         of February 28, 1997, was the record owner of 241,137 shares of
         FirstCity Common Stock. Mr. MacLennan disclaims beneficial ownership of
         such shares; however, the shares are included in the total shares for
         the percentage of class calculation. Cargill is party to a Shareholder
         Voting Agreement with Messrs. Hawkins and Sartain, and ATARA, regarding
         the FirstCity Common Stock.
(9)      371,894 of such shares of FirstCity Common Stock are held of record by
         ATARA. 506 of such shares are subject to warrants of FirstCity to
         purchase FirstCity Common Stock held of record by ATARA. See note (2)
         to this table. ATARA Corp. may be deemed to beneficially own all such
         372,400 shares by virtue of being the sole general partner of ATARA.
</FN>
</TABLE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

          FirstCity owns equity interests in various purchased asset portfolios
through the acquisition partnerships in which a corporate affiliate of FirstCity
is the sole general partner and FirstCity and other nonaffiliated investors are
limited partners. Certain directors and executive officers of FirstCity may also
serve as directors and/or executive officers of such general partners, but
receive no additional compensation from or on behalf of such general partners
for serving in such capacities. FirstCity provides asset servicing to such
acquisition partnerships pursuant to servicing agreements between FirstCity and
such Acquisition Partnerships.

         FirstCity has entered into certain agreements with Cargill under which
Cargill provides FirstCity a fixed monthly payment to defray overhead expenses
and to reimburse one-half of all approved due diligence expenses

                                       63
<PAGE>



incurred by FirstCity in connection with evaluating prospective acquisitions of
purchased asset portfolios. Under such agreements, Cargill has the right to
participate as an equity investor in such acquisitions. Cargill also provides
FirstCity with a $35 million revolving credit facility, expiring on June 30,
1997, to fund FirstCity's purchased asset portfolio acquisitions and for certain
other working capital purposes. Borrowings under such facility bear interest at
LIBOR plus 5% and are secured by substantially all of FirstCity's unencumbered
assets. As of March 21, 1997, outstanding borrowings under such facility were
$23.9 million. David W. MacLennan, a director of FirstCity, is an officer of
certain affiliates of Cargill.

         Pursuant to a noncancellable operating lease, FirstCity leases the
office space for its principal executive offices in Waco, Texas from a trust
created for the benefit of the children of James R. Hawkins, the Chairman of the
Board and Chief Executive Officer of FirstCity. Such lease expires in December
of 2001 and contains an option in favor of FirstCity pursuant to which FirstCity
may renew such lease for two additional five-year periods, with escalating lease
payments. Rental expenses under such lease for calendar year 1996 were $90,000.
As of December 31, 1996, the future minimum lease payments for each of the next
four years under such lease are $90,000 per year. FirstCity believes that the
terms of such lease are generally as favorable to FirstCity as the terms it
would receive from an independent third party.

         Pursuant to the Plan of Reorganization, substantially all of FCBOT's
assets were transferred to the Trust or subsidiaries of the Trust, to be
liquidated pursuant to a liquidating trust agreement. Under the terms of such
agreement, FirstCity, as the sole holder of the Trust's Class A Certificate,
will receive certain amounts from the Trust. Additionally pursuant to the Plan
of Reorganization , the liquidation of FCBOT's assets transferred to the Trust
is serviced by FirstCity pursuant to an Investment Management Agreement between
the Trust and FirstCity (the "Investment Management Agreement"). Under the terms
thereof, FirstCity will receive an incentive fee equal to (1) three percent of
all cash proceeds derived from the assets owned by the Trust and its
subsidiaries (including assets acquired pursuant to a loss-sharing settlement in
connection with the Plan of Reorganization) ("Net Cash Proceeds") plus (2) five
percent of the Net Cash Proceeds (excluding net proceeds realized from certain
contingent asset claims under the Plan of Reorganization) realized above
$248,600,000 (the "Estimated Threshold Collection Amount") up to an amount equal
to $25 million in excess of the Estimated Threshold Collection Amount; ten
percent of the Net Cash Proceeds (excluding net proceeds realized from such
contingent asset claims) realized above $25 million in excess of the Estimated
Threshold Collection Amount up to an amount equal to $50 million in excess of
the Estimated Threshold Collection Amount; and fifteen percent of the Net Cash
Proceeds (excluding net proceeds realized from such contingent asset claims)
realized above $50 million in excess of the Estimated Threshold Collection
Amount. Under an agreement executed March 24, 1997, the Investment Management
Agreement was mutually terminated by FirstCity and the Trust, provided that
those provisions thereof specifically relating to indemnification between the
parties survive such termination. The termination was negotiated between the
parties on an arm's length basis with the proposal being unanimously approved by
the Board of FirstCity, with the members of the Portfolio Committee who also
serve as Board Members abstaining from the vote. Such termination requires the
Trust to pay, and the Trust has paid, $6,800,000 as a final servicing fee to
FirstCity, representing the present value of the servicing fees stemming from
all currently estimated collections to be derived from the trust's assets.

         In connection with the consummation of the Plan of Reorganization ,
J-Hawk formed a new corporation, Combined Financial Corporation, a Texas
corporation ("CFC"), and, prior to the Merger, transferred certain of its assets
and indebtedness to CFC (which assumed such indebtedness) (such transfer and
assumption, the "Spin-off"), the stockholders of J-Hawk receiving the same
proportionate common stock interests in CFC as they had in J-Hawk. As a result
of the Spin-off, certain directors and executive officers of J-Hawk, who are
also directors and executive officers of FirstCity, became directors and/or
executive officers of CFC, as well as stockholders of CFC. FirstCity has entered
into a servicing agreement with CFC under which FirstCity provides asset
servicing to CFC for a fee based on a percentage of assets serviced. The fee
paid by CFC to FirstCity in 1996 was approximately $168,000.

         In connection with the Spin-off, J-Hawk sold approximately $12 million
(allocated cost) of loans to a limited partnership owned by James R. Hawkins,
James T. Sartain and Rick R. Hagelstein, respectively the

                                       64
<PAGE>



Chairman of the Board and Chief Executive Officer, the President and Chief
Operating Officer and a director, and the Executive Vice President and Chief
Credit Officer and a director, of FirstCity. FirstCity recognized approximately
$3 million in gain from such sale. FirstCity has entered into a servicing
agreement with such partnership under which FirstCity provides asset servicing
to such partnership for a fee based on a percentage of collection of assets
serviced. The servicing fee paid by such partnership to FirstCity in 1996 was
approximately $82,000.

         In addition to the partnership agreements governing the acquisition
partnerships in which FirstCity and Cargill or their respective affiliates are
limited partners, FirstCity and Cargill or their respective affiliates are
parties to certain other agreements. FirstCity has a $35.0 million revolving
credit facility with Cargill which expires June 30, 1997. At March 21, 1997 the
principal balance outstanding under such facility was $23.9 million. Such
facility is secured by substantially all of the unencumbered equity interests in
subsidiaries and Acquisition Partnerships held by FirstCity and by certain other
assets of FirstCity.

         Under a Right of First Refusal Agreement dated June 9, 1994, as amended
by letter agreement dated March 11, 1996 (the "Right of First Refusal
Agreement"), between FirstCity, James R. Hawkins (FirstCity's Chairman of the
Board and Chief Executive Officer), James T. Sartain (FirstCity's President and
Chief Operating Officer) and Rick R. Hagelstein (FirstCity's Executive Vice
President and Managing Director of Asset Management), Cargill and CFSC Capital
Corp II, a Delaware corporation, if FirstCity or its senior officers receives an
invitation to bid on or otherwise obtains an opportunity to acquire interests in
loans and receivables with respect to which the aggregate amount to be bid
exceeds $3 million, FirstCity or such senior officers, as the case may be, must
follow a prescribed notice procedure pursuant to which Cargill has the option to
participate in the proposed purchase by requiring that such purchase or
acquisition be effected through a business entity (such as the Affiliated
Partnerships) formed by FirstCity and Cargill or an affiliate thereof. In
connection with the Right of First Refusal Agreement, FirstCity and Cargill are
parties to a Due Diligence Expense Reimbursement Agreement dated June 9, 1994,
as amended by letter agreement dated March 11, 1996 (the "Due Diligence Expense
Reimbursement Agreement"), pursuant to which Cargill provides FirstCity a fixed
monthly payment to defray overhead expenses and to reimburse one-half of all
approved due diligence expenses incurred by FirstCity in connection with
evaluating prospective acquisitions of purchased asset pools. Both the Right of
First Refusal Agreement and the Due Diligence Expense Reimbursement Agreement
terminated on March 31, 1997. FirstCity and Cargill currently are negotiating
the terms of an extension and modification to such agreements but there can be
no assurance that an agreement with respect thereto will be reached or with
respect to the terms thereof.

         FirstCity (as successor by merger to J-Hawk) and Cargill are party to a
Residual Share Allocation Agreement dated May 12, 1994, as amended by the First
Amendment thereto dated June 28, 1994 (as so amended, the "Residual Share
Allocation Agreement"). The Residual Share Allocation Agreement requires
FirstCity to pay Cargill a prescribed portion of amounts (which may be all such
amounts) FirstCity receives or becomes entitled to receive that constitute a
return on (and not of) its cash contributions (such amounts, "Residual Equity
Distributions") to any Acquisition Partnership subject to such agreement or a
general partner thereof in any period (a "Deficiency Period") during which an
event of default has occurred and is continuing under any loan or partnership
agreement subject to such Residual Share Allocation Agreement (such agreements,
"Collateral Agreements"), or during which FirstCity has notified Cargill or
Cargill has notified FirstCity that the purchased assets securing certain of the
obligations under any Collateral Agreement to Cargill or certain affiliates
thereof may not be sufficient to pay and perform all such obligations. Such
amounts to be paid to Cargill are based upon amounts reasonably determined by
Cargill to represent the difference between (1) the total obligations owed by
any borrower under any Collateral Agreement as to which a Deficiency Period
exists less (2) the amounts reasonably believed by Cargill to be recoverable
from the purchased assets securing such obligations. The Acquisition Partnership
borrowers and related Collateral Agreements as to which the Residual Share
Allocation Agreement applies are WAMCO III (Amended and Restated Limited
Partnership Agreement of WAMCO III), WAMCO V (Master Note Purchase Agreement
between Clearwater Portfolio L.P. and WAMCO V), WAMCO VI (Master Note Purchase
Agreement between Cargill and WAMCO VI), WAMCO VIII (Master Note Purchase
Agreement between Cargill and WAMCO VIII), WAMCO XI (Master Note Purchase
Agreement between Cargill

                                       65
<PAGE>



and WAMCO XI), Imperial Fund (Master Note Purchase Agreement between Cargill and
Peoria Mortgage Acquisition Corporation, as Lenders, Peoria Mortgage Acquisition
Corporation, as Agent, and Imperial Fund), and Whitewater Acquisition (Amended
and Restated Limited Partnership Agreement of Whitewater Acquisition).

         James R. Hawkins, Chairman of the Board and Chief Executive Officer of
FirstCity, James T. Sartain, President and Chief Operating Officer of FirstCity,
and ATARA are parties to a Shareholder Voting Agreement (the "Shareholder Voting
Agreement"), dated as of June 29, 1995, with Cargill. The sole general partner
of ATARA is ATARA Corp., the Chairman of the Board and President of which is
Rick R. Hagelstein, the Executive Vice President and Chief Credit Officer of
FirstCity. Under the terms of the Shareholder Voting Agreement, Messrs. Hawkins
and Sartain, and ATARA, are required to vote their shares of FirstCity common
stock to elect one designee of Cargill as a director of FirstCity, and Cargill
is required to vote its shares of FirstCity common stock to elect one or more of
the designees of Messrs. Hawkins and Sartain, and ATARA, as directors of
FirstCity. David W. MacLennan, a director of FirstCity and Cargill's designee,
is also an officer of certain affiliates of Cargill.

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

     (a) 1.   Financial Statements

              The consolidated financial statements of FirstCity and combined
              financial statements of Acquisition Partnerships are incorporated
              herein by reference to Item 8 "Financial Statements and
              Supplementary Data" of this Report.

         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
------     -----------
2.1        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 Registrant's 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 Registrant's Form 8-K dated July 3, 1995 filed with the
           Commission on July 18, 1995).


                                       66
<PAGE>



EXHIBIT
NUMBER     DESCRIPTION
------     -----------
2.3        Agreement and Plan of Merger, dated as of March 26, 1997, by
           and among FirstCity Financial Corporation, HFGI Acquisition
           Corp. and Harbor Financial Group, Inc. (incorporated herein by
           reference to Exhibit 2.1 of the Registrant's Form 8-K dated
           March 26, 1997 filed with the Commission on April 2, 1997).
3.1        Amended and Restated Certificate of Incorporation of the
           Registrant (incorporated herein by reference to Exhibit 3.1 of the
           Registrant's Form 8-K dated July 3, 1995 filed with the
           Commission on July 18, 1995).
3.2        Bylaws of the Registrant (incorporated herein by reference to
           Exhibit 3.2 of the Registrant's Form 8-K dated July 3, 1995 filed
           with the Commission on July 18, 1995).
4.1        Indenture, dated July 3, 1995, by and between the Registrant and
           Shawmut Bank, N.A., as Trustee (incorporated herein by
           reference to Exhibit 4.1 of the Registrant's Form 8-K dated
           July 3, 1995 filed with the Commission on July 18, 1995).
4.2        Warrant Agreement, dated July 3, 1995, by and between the
           Registrant and American Stock Transfer & Trust Company, as
           Warrant Agent (incorporated herein by reference to Exhibit 4.2
           of the Registrant's Form 8-K dated July 3, 1995 filed with the
           Commission on July 18, 1995).
10.1       Trust Agreement of FirstCity Liquidating Trust, dated July 3,
           1995 (incorporated herein by reference to Exhibit 10.1 of the
           Registrant's Form 8-K dated July 3, 1995 filed with the
           Commission on July 18, 1995).
10.2       Investment Management Agreement, dated July 3, 1995, between
           the Registrant and FirstCity Liquidating Trust (incorporated
           herein by reference to Exhibit 10.2 of the Registrant's Form 8-K
           dated July 3, 1995 filed with the Commission on July 18, 1995).
10.3       Lock-Box Agreement dated July 11, 1995 among the Registrant,
           NationsBank of Texas, N.A., as lock-box agent, FirstCity
           Liquidating Trust, FCLT Loans, L.P., and the other Trust-
           Owned Affiliates signatory thereto, and each of NationsBank of
           Texas, N.A. and Fleet National Bank, as co-lenders
           (incorporated herein by reference to Exhibit 10.3 of the
           Registrant's Form 8-A/A dated August 25, 1995 filed with the
           Commission on August 25, 1995).
10.4       Custodial Agreement dated July 11, 1995 among Fleet National
           Bank, as custodian, Fleet National Bank, as agent, FCLT Loans,
           L.P., FirstCity Liquidating Trust, and the Registrant
           (incorporated herein by reference to Exhibit 10.4 of the
           Registrant's Form 8-A/A dated August 25, 1995 filed with the
           Commission on August 25, 1995).


                                       67
<PAGE>



EXHIBIT
NUMBER     DESCRIPTION
------     -----------
10.5       Tier 3 Custodial Agreement dated July 11, 1995 among the
           Registrant, as custodian, Fleet National Bank, as agent, FCLT
           Loans, L.P., FirstCity Liquidating Trust, and the Registrant, as
           servicer (incorporated herein by reference to Exhibit 10.5 of the
           Registrant's Form 8-A/A dated August 25, 1995 filed with the
           Commission on August 25, 1995).
23.1       Consent of KPMG Peat Marwick LLP.*
23.2       Consent of KPMG Peat Marwick LLP.*
23.3       Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.*
27.1       Financial Data Schedule. (Exhibit 27.1 has been previously
           submitted as an exhibit only in the electronic format of
           this Annual Report on Form 10-K being submitted to the
           Securities and Exchange Commission. Exhibit 27.1 shall not
           be deemed filed for purposes of Section 11 of the
           Securities Act of 1933, Section 18 of the Securities Act
           of 1934, as amended, or Section 323 of the Trust Indenture
           Act of 1939, as amended, or otherwise be subject to the
           liabilities of such sections, nor shall it be deemed a
           part of any registration statement to which it relates.)**

  * Filed herewith
  ** Previously filed

(b)      Registrant did not file a Report on Form 8-K during, or dated during,
         the fourth quarter of 1996.


                                       68
<PAGE>

                                   SIGNATURES

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

                                          FIRSTCITY FINANCIAL CORPORATION


                                          By  /s/ JAMES R. HAWKINS
                                             ----------------------
                                             James R. Hawkins
                                             Chairman of the Board

May 27, 1997

              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.
<TABLE>
<CAPTION>

                Signature                           Date          Title
                ---------                           ----          -----
<S>                                            <C>                <C> 


          /s/ JAMES R. HAWKINS                 May 27, 1997       Chairman of the Board, Chief
-----------------------------------------                         Executive Officer and Director
            James R. Hawkins                                      (Principle Executive Officer) 

                                                                  Vice Chairman and Director
-----------------------------------------
             C. Ivan Wilson

          /s/ JAMES T. SARTAIN                 May 27, 1997       President, Chief Operating Officer
-----------------------------------------                         and Director    
            James T. Sartain             

         /s/ MATT A. LANDRY, JR.               May 27, 1997       Executive Vice President, Senior
-----------------------------------------                         Financial Officer, Managing        
           Matt A. Landry, Jr.                                    Director - Mergers and Acquisitions
                                                                  and Director                       
                                                                  (Principal Financial Officer)      

         /s/ RICK R. HAGELSTEIN                May 27, 1997       Executive Vice President,
-----------------------------------------                         Managing Director and Director
           Rick R. Hagelstein            

           /s/ GARY H. MILLER                  May 27, 1997       Senior Vice President, Chief
-----------------------------------------                         Financial Officer (Principal
             Gary H. Miller                                       Accounting Officer)


          /s/ RICHARD E. BEAN                  May 27, 1997       Director
-----------------------------------------
             Richard E. Bean



                                       69
<PAGE>







                                                                  Director
-----------------------------------------
           Bart A. Brown, Jr.


                                                                  Director
-----------------------------------------
           Donald J. Douglass


            /s/ DAVID PALMER                   May 27, 1997       Director
-----------------------------------------
              David Palmer


                                                                  Director
-----------------------------------------
           David W. MacLennan

</TABLE>


                                       70
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT
NUMBER              DESCRIPTION

2.1      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 Registrant's 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 Registrant's
         Form 8-K dated July 3, 1995 filed with the Commission on July 18,
         1995).

2.3      Agreement and Plan of Merger, dated as of March 26, 1997, by and among
         FirstCity Financial Corporation, HFGI Acquisition Corp. and Harbor
         Financial Group, Inc. (incorporated herein by reference to the
         Registrant's Form 8-K dated March 26, 1997 filed with the Commission on
         April 2, 1997.

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

3.2      Bylaws of the Registrant (incorporated herein by reference to Exhibit
         3.2 of the Registrant's Form 8-K dated July 3, 1995 filed with the
         Commission on July 18, 1995).

4.1      Indenture, dated July 3, 1995, by and between the Registrant and
         Shawmut Bank, N.A., as Trustee (incorporated herein by reference to
         Exhibit 4.1 of the Registrant's Form 8-K dated July 3, 1995 filed with
         the Commission on July 18, 1995).

4.2      Warrant Agreement, dated July 3, 1995, by and between the Registrant
         and American Stock Transfer & Trust Company, as Warrant Agent
         (incorporated herein by reference to Exhibit 4.2 of the Registrant's
         Form 8-K dated July 3, 1995 filed with the Commission on July 18,
         1995).

10.1     Trust Agreement of FirstCity Liquidating Trust, dated July 3, 1995
         (incorporated herein by reference to Exhibit 10.1 of the Form 8-K dated
         July 3, 1995 filed with the Commission on Registrant's July 18, 1995).

10.2     Investment Management Agreement, dated July 3, 1995, between the
         Registrant and FirstCity Liquidating Trust (incorporated herein by
         reference to Exhibit 10.2 of the Registrant's Form 8-K dated July 3,
         1995 filed with the Commission on July 18, 1995).

10.3     Lock-Box Agreement dated July 11, 1995 among the Registrant,
         NationsBank of Texas, N.A., as Lock-box agent, FirstCity Liquidating
         Trust, FCLT Loans, L.P., and the other Trust-Owned Affiliates signatory
         thereto, and each of NationsBank of Texas, N.A. and Fleet

                                       71
<PAGE>



         National Bank, as co-Lenders (incorporated herein by reference to
         Exhibit 10.3 of the Registrant's Form 8-A/A dated August 25, 1995 filed
         with the Commission on August 25, 1995).


10.4     Custodial Agreement dated July 11, 1995 among Fleet National Bank, as
         custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity
         Liquidating Trust, and the Registrant (incorporated herein by reference
         to Exhibit 10.4 of the Registrant's Form 8-A/A dated August 25, 1995
         filed with the Commission on August 25, 1995).

10.5     Tier 3 Custodial Agreement dated July 11, 1995 among the Registrant, as
         custodian, Fleet National Bank, as agent, FCLT Loans, L.P., FirstCity
         Liquidating Trust, and the Registrant, as servicer (incorporated herein
         by reference to Exhibit 10.5 of the Registrant's Form 8-A/A dated
         August 25, 1995 filed with the Commission on August 25, 1995).

23.1     Consent of KPMG Peat Marwick LLP.*

23.2     Consent of KPMG Peat Marwick LLP.*

23.3     Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.*

27.1     Financial Data Schedule.* (Exhibit 27.1 has been previously submitted
         as an exhibit only in the electronic format of this Annual Report on
         Form 10-K being submitted to the Securities and Exchange Commission.
         Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of
         the Securities Act of 1933, Section 18 of the Securities Act of 1934,
         as amended, or Section 323 of the Trust Indenture Act of 1939, as
         amended, or otherwise be subject to the liabilities of such sections,
         nor shall it be deemed a part of any registration statement to which it
         relates.) **

-----------------
*Filed herewith
**Previously filed


                                       72