##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended June 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 Commission file number 033-19694
 FirstCity Financial Corporation
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    76-0243729(I.R.S. Employer
Identification No.)6400 Imperial Drive,
Waco, TX(Address of principal executive offices)
    
    76712(Zip Code)
 (254) 761-2800
 þ o
 o þ




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TABLE OF CONTENTS  PART IItem 1. Financial Statements.Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.Item 3. Quantitative and Qualitative Disclosures About Market Risk.Item 4. Controls and Procedures.PART IIOTHER INFORMATIONItem 1. Legal Proceedings.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Item 3. Defaults Upon Senior Securities.Item 4. Submission of Matters to a Vote of Security Holders.Item 5. Other Information.Item 6. Exhibits.SIGNATURESExhibit IndexCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906    Table of Contents  
 PART I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 June 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCash and cash equivalents
    
    $
    5,337
    
    
    $
    9,724Portfolio Assets, net
    
    
    43,862
    
    
    
    37,952Loans receivable from Acquisition Partnerships held for investment
    
    
    20,400
    
    
    
    21,255Equity investments
    
    
    53,181
    
    
    
    57,815Deferred tax asset, net
    
    
    20,101
    
    
    
    20,101Service fees receivable from affiliates
    
    
    1,232
    
    
    
    1,631Other assets, net
    
    
    7,196
    
    
    
    8,562Discontinued mortgage assets
    
    
    409
    
    
    
    1,817Total Assets
    
    $
    151,718
    
    
    $
    158,857LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Notes payable to affiliates
    
    $
    545
    
    
    $
    491Notes payable other
    
    
    49,153
    
    
    
    50,812Minority interest
    
    
    1,277
    
    
    
    1,292Liabilities from discontinued consumer operations
    
    
    987
    
    
    
    9,033Liabilities from discontinued mortgage operations
    
    
    
    
    
    
    50Other liabilities
    
    
    3,589
    
    
    
    4,756Total Liabilities
    
    
    55,551
    
    
    
    66,434Commitments
and contingencies (note 12)Stockholders equity:Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no
shares issued
or outstanding)
    
    
    
    
    
    
    Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued and
outstanding: 11,293,437 and 11,260,687, respectively)
    
    
    113
    
    
    
    113Paid in capital
    
    
    99,482
    
    
    
    99,364Accumulated deficit
    
    
    (5,017
    )
    
    
    (10,289
    )Accumulated other comprehensive income
    
    
    1,589
    
    
    
    3,235Total Stockholders Equity
    
    
    96,167
    
    
    
    92,423Total Liabilities and Stockholders Equity
    
    $
    151,718
    
    
    $
    158,857
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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Servicing fees from affiliates
    
    $
    2,909
    
    
    $
    3,716
    
    
    $
    6,081
    
    
    $
    6,748Gain on resolution of Portfolio Assets
    
    
    1,205
    
    
    
    162
    
    
    
    3,067
    
    
    
    237Equity in earnings of investments
    
    
    3,690
    
    
    
    2,639
    
    
    
    7,091
    
    
    
    6,814Interest income from affiliates
    
    
    460
    
    
    
    617
    
    
    
    895
    
    
    
    1,061Loan interest income
    
    
    589
    
    
    
    25
    
    
    
    1,056
    
    
    
    104Other income
    
    
    426
    
    
    
    470
    
    
    
    810
    
    
    
    1,814Total revenues
    
    
    9,279
    
    
    
    7,629
    
    
    
    19,000
    
    
    
    16,778Expenses:Interest and fees on notes payable to affiliates
    
    
    10
    
    
    
    20
    
    
    
    18
    
    
    
    45Interest and fees on notes payable  other
    
    
    838
    
    
    
    1,818
    
    
    
    1,710
    
    
    
    3,506Interest on shares subject to mandatory redemption
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    133Salaries and benefits
    
    
    3,684
    
    
    
    3,477
    
    
    
    7,842
    
    
    
    7,554Provision for loan and impairment losses
    
    
    29
    
    
    
    22
    
    
    
    114
    
    
    
    22Occupancy, data processing, communication and other
    
    
    1,753
    
    
    
    1,784
    
    
    
    3,666
    
    
    
    3,233Total expenses
    
    
    6,314
    
    
    
    7,188
    
    
    
    13,350
    
    
    
    14,493Earnings from continuing operations before income taxes and
minority interest
    
    
    2,965
    
    
    
    441
    
    
    
    5,650
    
    
    
    2,285Income taxes
    
    
    (103
    )
    
    
    (72
    )
    
    
    (242
    )
    
    
    (156
    )Earnings from continuing operations before minority interest
    
    
    2,862
    
    
    
    369
    
    
    
    5,408
    
    
    
    2,129Minority interest
    
    
    (42
    )
    
    
    17
    
    
    
    (39
    )
    
    
    (9
    )Earnings from continuing operations
    
    
    2,820
    
    
    
    386
    
    
    
    5,369
    
    
    
    2,120Discontinued operationsEarnings (loss) from discontinued operations
    
    
    (97
    )
    
    
    3,312
    
    
    
    (97
    )
    
    
    6,455Income taxes
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    (427
    )Net earnings (loss) from discontinued operations
    
    
    (97
    )
    
    
    2,913
    
    
    
    (97
    )
    
    
    6,028Net earnings
    
    $
    2,723
    
    
    $
    3,299
    
    
    $
    5,272
    
    
    $
    8,148Basic earnings per common share are as follows:Earnings from continuing operations
    
    $
    0.25
    
    
    $
    0.03
    
    
    $
    0.48
    
    
    $
    0.19Discontinued operations
    
    $
    (0.01
    )
    
    $
    0.26
    
    
    $
    (0.01
    )
    
    $
    0.54Net earnings to common stockholders
    
    $
    0.24
    
    
    $
    0.29
    
    
    $
    0.47
    
    
    $
    0.73Weighted average common shares outstanding
    
    
    11,274
    
    
    
    11,235
    
    
    
    11,268
    
    
    
    11,216Diluted earnings per common share are as follows:Earnings from continuing operations
    
    $
    0.24
    
    
    $
    0.03
    
    
    $
    0.45
    
    
    $
    0.18Discontinued operations
    
    $
    (0.01
    )
    
    $
    0.25
    
    
    $
    (0.01
    )
    
    $
    0.51Net earnings to common stockholders
    
    $
    0.23
    
    
    $
    0.28
    
    
    $
    0.44
    
    
    $
    0.69Weighted average common shares outstanding
    
    
    12,025
    
    
    
    11,820
    
    
    
    12,016
    
    
    
    11,806
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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 AccumulatedNumber of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Common
    
    
    Paid in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stockholders'Shares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    EquityBalances, December 31, 2003
    
    
    11,193,687
    
    
    $
    112
    
    
    $
    99,168
    
    
    $
    (73,923
    )
    
    $
    3,612
    
    
    $
    28,969Exercise of common stock options
    
    
    67,000
    
    
    
    1
    
    
    
    196
    
    
    
    
    
    
    
    
    
    
    
    197Comprehensive income:Net earnings for 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,634
    
    
    
    
    
    
    
    63,634Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (377
    )
    
    
    (377
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,257Balances, December 31, 2004
    
    
    11,260,687
    
    
    
    113
    
    
    
    99,364
    
    
    
    (10,289
    )
    
    
    3,235
    
    
    
    92,423Exercise of common stock options
    
    
    32,750
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    118Comprehensive income:Net earnings for the first six months of 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,272
    
    
    
    
    
    
    
    5,272Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,646
    )
    
    
    (1,646
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,626Balances, June 30, 2005
    
    
    11,293,437
    
    
    $
    113
    
    
    $
    99,482
    
    
    $
    (5,017
    )
    
    $
    1,589
    
    
    $
    96,167
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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 Six Months EndedJune 30,2005
    
    
    2004Cash flows from operating activities:Net earnings
    
    $
    5,272
    
    
    $
    8,148Adjustments to reconcile net earnings to net cash used in operating activities:Net (earnings) loss from discontinued operations
    
    
    97
    
    
    
    (6,028
    )Purchase of Portfolio Assets and loans receivable, net
    
    
    (15,883
    )
    
    
    (13,372
    )Proceeds applied to principal on Portfolio Assets and loans receivable
    
    
    14,440
    
    
    
    3,892Gain on resolution of Portfolio Assets
    
    
    (3,067
    )
    
    
    (237
    )Capitalized interest and costs on Portfolio Assets and loans receivable
    
    
    (155
    )
    
    
    (92
    )Provision for loan and impairment losses
    
    
    114
    
    
    
    22Equity in earnings of investments
    
    
    (7,091
    )
    
    
    (6,814
    )Depreciation and amortization
    
    
    461
    
    
    
    409Decrease in service fees receivable from affiliate
    
    
    399
    
    
    
    357Decrease (increase) in other assets
    
    
    405
    
    
    
    (2,217
    )Change in debt imputed value
    
    
    58
    
    
    
    (759
    )Increase (decrease) in other liabilities
    
    
    (2,022
    )
    
    
    457Net cash used in operating activities
    
    
    (6,972
    )
    
    
    (16,234
    )Cash flows from investing activities:Property and equipment, net
    
    
    (82
    )
    
    
    (124
    )Contributions to Acquisition Partnerships and Servicing Entities
    
    
    (3,752
    )
    
    
    (8,552
    )Distributions from Acquisition Partnerships and Servicing Entities
    
    
    13,292
    
    
    
    13,248Net cash provided by investing activities
    
    
    9,458
    
    
    
    4,572Cash flows from financing activities:Borrowings under notes payable to affiliates
    
    
    
    
    
    
    Borrowing under notes payable  other
    
    
    29,532
    
    
    
    31,816Payments of notes payable to affiliates
    
    
    (4
    )
    
    
    (3
    )Payments of notes payable  other
    
    
    (29,734
    )
    
    
    (19,565
    )Proceeds from issuance of common stock
    
    
    118
    
    
    
    120Net cash used in financing activities
    
    
    (88
    )
    
    
    12,368Net cash provided by continuing operations
    
    
    2,398
    
    
    
    706Net cash provided by (used in) discontinued operations
    
    
    (6,785
    )
    
    
    372Net increase (decrease) in cash and cash equivalents
    
    
    (4,387
    )
    
    
    1,078Cash and cash equivalents, beginning of period
    
    
    9,724
    
    
    
    2,745Cash and cash equivalents, end of period
    
    $
    5,337
    
    
    $
    3,823Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    1,276
    
    
    $
    2,864Income taxes
    
    
    213
    
    
    
    242Non-cash financing activities:Dividends accumulated and not paid on preferred stock
    
    
    
    
    
    
    133
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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Dollars in thousands, except per share data)
(Unaudited)
 (1) Basis of Presentation
    (2) Liquidity and Capital Resources
   6




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
    (3) New Accounting Pronouncements
 Accounting for Certain Loans or Debt Securities Acquired in a Transfer
 Share-Based Payment .
  Determining Whether a General Partner, or the General Partners as a
Group, Controls a Limited Partnership or Similar Entity when the Limited Partners Have Certain
Rights.
 7




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Accounting for Investments in Real Estate Ventures, Investors Accounting for an Investee When the Investor has a Majority of the
Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights.
 (4) Discontinued Operations
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Mortgage
    
    $
    (94
    )
    
    $
    (250
    )
    
    $
    (94
    )
    
    $
    (250
    )Consumer
    
    
    (3
    )
    
    
    3,163
    
    
    
    (3
    )
    
    
    6,278Net earnings
(loss) from
discontinued
operations
    
    $
    (97
    )
    
    $
    2,913
    
    
    $
    (97
    )
    
    $
    6,028
 Mortgage
  Accounting for Changes
That Result in a Transferor Regaining Control of Financial Assets Sold.
 Consumer
  Accounting for the Impairment or Disposal of Long-Lived Assets
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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Equity in earnings
    
    $
    
    
    
    $
    5,118
    
    
    $
    
    
    
    $
    10,155Interest and fees on notes payable to affiliate
    
    
    
    
    
    
    (532
    )
    
    
    
    
    
    
    (1,417
    )Other expenses
    
    
    (3
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (4
    )Income taxes
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    (427
    )Minority interest
    
    
    
    
    
    
    (1,023
    )
    
    
    
    
    
    
    (2,029
    )Earnings (loss) from discontinued consumer
operations
    
    $
    (3
    )
    
    $
    3,163
    
    
    $
    (3
    )
    
    $
    6,278
 (5) Portfolio Assets
  June 30,
    
    
    December 31,2005
    
    
    2004Loan PortfoliosLoans Acquired Prior to 2005Non-performing Portfolio Assets
    
    $
    13,732
    
    
    $
    19,993Performing Portfolio Assets
    
    
    12,750
    
    
    
    16,039Loans Acquired After 2004Loans acquired with credit deterioration
    
    
    10,668
    
    
    
    Loans acquired with no credit deterioration
    
    
    4,887
    
    
    
    Outstanding balance
    
    
    42,037
    
    
    
    36,032Allowance for loan losses
    
    
    (114
    )
    
    
    Carrying amount of loans, net of allowance
    
    
    41,923
    
    
    
    36,032Real Estate Portfolios
    
    
    1,939
    
    
    
    1,920Portfolio Assets, net
    
    $
    43,862
    
    
    $
    37,952
    9




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Loans Acquired Prior to 2005
 Non-Performing Portfolio Assets
  Performing Portfolio Assets
  Impairment of Loans Acquired Prior to 2005
   Loans Acquired After 2004
 Loans Acquired With Credit Deterioration
   10




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2005Beginning Balance
    
    $
    
    
    
    $
    Additions
    
    
    3,239
    
    
    
    3,239Accretion
    
    
    (111
    )
    
    
    (111
    )Reclassification from (to) nonaccretable difference
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    Ending Balance
    
    $
    3,128
    
    
    $
    3,128
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2005Face value at acquisition
    
    $
    14,497
    
    
    $
    14,497Cash flows expected to be collected at acquisition
    
    
    13,991
    
    
    
    13,991Basis in acquired loans at acquisition
    
    
    10,751
    
    
    
    10,751
 Loans Acquired With No Credit Deterioration
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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Real Estate Portfolios
  (6) Loans Receivable from Acquisition Partnerships Held for Investment
  June 30,
    
    
    December 31,2005
    
    
    2004LatinAmerica
    
    $
    18,212
    
    
    $
    19,170Europe
    
    
    484
    
    
    
    548Domestic
    
    
    1,704
    
    
    
    1,537$
    20,400
    
    
    $
    21,255
  Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee
 (7) Equity Investments
  12




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Condensed Combined Balance Sheets
 June 30,
    
    
    December 31,2005
    
    
    2004Assets
    
    $
    411,448
    
    
    $
    479,776Liabilities
    
    $
    378,329
    
    
    $
    410,469Net equity
    
    
    33,119
    
    
    
    69,307$
    411,448
    
    
    $
    479,776Equity investment in Acquisition Partnerships
    
    $
    47,349
    
    
    $
    52,410Equity investment in servicing entities
    
    
    5,832
    
    
    
    5,405$
    53,181
    
    
    $
    57,815
 Condensed Combined Summary of Operations
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Proceeds from resolution of Portfolio Assets
    
    $
    63,048
    
    
    $
    63,297
    
    
    $
    108,700
    
    
    $
    125,632Gain on resolution of Portfolio Assets
    
    
    25,650
    
    
    
    22,140
    
    
    
    45,814
    
    
    
    42,709Interest income on performing Portfolio Assets
    
    
    2,649
    
    
    
    2,266
    
    
    
    4,755
    
    
    
    5,165Net earnings
    
    $
    11,874
    
    
    $
    811
    
    
    $
    20,906
    
    
    $
    16,855Equity in earnings of Acquisition Partnerships
    
    $
    3,362
    
    
    $
    2,492
    
    
    $
    6,410
    
    
    $
    6,337Equity in earnings of servicing entities
    
    
    328
    
    
    
    147
    
    
    
    681
    
    
    
    477$
    3,690
    
    
    $
    2,639
    
    
    $
    7,091
    
    
    $
    6,814
  June 30,
    
    
    December 31,2005
    
    
    2004Assets:Domestic:WAMCO Partnerships
    
    $
    145,460
    
    
    $
    172,464MinnTex Investment Partners LP
    
    
    523
    
    
    
    840Other
    
    
    10,586
    
    
    
    10,406Latin America
    
    
    195,531
    
    
    
    207,455Europe
    
    
    59,348
    
    
    
    88,611$
    411,448
    
    
    $
    479,776
 13




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 June 30,
    
    
    December 31,2005
    
    
    2004Equity (deficit):Domestic:WAMCO Partnerships
    
    $
    70,629
    
    
    $
    81,233MinnTex Investment Partners LP
    
    
    471
    
    
    
    763Other
    
    
    6,006
    
    
    
    6,012Latin America
    
    
    (85,542
    )
    
    
    (85,789
    )Europe
    
    
    41,555
    
    
    
    67,088$
    33,119
    
    
    $
    69,307Equity investment in Acquisition Partnerships:Domestic:WAMCO Partnerships
    
    $
    31,122
    
    
    $
    34,521MinnTex Investment Partners LP
    
    
    156
    
    
    
    252Other
    
    
    2,875
    
    
    
    2,916Latin America
    
    
    1,579
    
    
    
    1,538Europe
    
    
    11,617
    
    
    
    13,183$
    47,349
    
    
    $
    52,410
 14




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Domestic:WAMCO Partnerships
    
    $
    8,066
    
    
    $
    8,415
    
    
    $
    17,008
    
    
    $
    14,849MinnTex Investment Partners LP
    
    
    1,502
    
    
    
    2,274
    
    
    
    3,107
    
    
    
    4,804Other
    
    
    32
    
    
    
    4
    
    
    
    66
    
    
    
    48Latin America
    
    
    5,815
    
    
    
    6,574
    
    
    
    11,214
    
    
    
    10,812Europe
    
    
    13,020
    
    
    
    7,411
    
    
    
    19,543
    
    
    
    17,877$
    28,435
    
    
    $
    24,678
    
    
    $
    50,938
    
    
    $
    48,390Net earnings (loss):Domestic:WAMCO Partnerships
    
    $
    3,422
    
    
    $
    4,450
    
    
    $
    7,627
    
    
    $
    7,019MinnTex Investment Partners LP
    
    
    1,343
    
    
    
    2,031
    
    
    
    2,776
    
    
    
    4,284Other
    
    
    (126
    )
    
    
    (202
    )
    
    
    (233
    )
    
    
    (384
    )Latin America
    
    
    2,868
    
    
    
    (9,429
    )
    
    
    2,745
    
    
    
    (5,729
    )Europe
    
    
    4,367
    
    
    
    3,961
    
    
    
    7,991
    
    
    
    11,665$
    11,874
    
    
    $
    811
    
    
    $
    20,906
    
    
    $
    16,855Equity in earnings (loss) of Acquisition
Partnerships:Domestic:WAMCO Partnerships
    
    $
    1,499
    
    
    $
    1,980
    
    
    $
    3,356
    
    
    $
    3,247MinnTex Investment Partners LP
    
    
    443
    
    
    
    671
    
    
    
    916
    
    
    
    1,414Other
    
    
    (31
    )
    
    
    (57
    )
    
    
    (48
    )
    
    
    (118
    )Latin America
    
    
    365
    
    
    
    (891
    )
    
    
    191
    
    
    
    (779
    )Europe
    
    
    1,086
    
    
    
    789
    
    
    
    1,995
    
    
    
    2,573$
    3,362
    
    
    $
    2,492
    
    
    $
    6,410
    
    
    $
    6,337
 15




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  Three Months Ended June 30, 2005
 WAMCO
    
    
    WAMCO
    
    
    WAMCO
    
    
    WAMCO
    
    
    OtherXXVIII
    
    
    XXX
    
    
    31
    
    
    33
    
    
    Partnerships
    
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    1,361
    
    
    $
    4,137
    
    
    $
    5,325
    
    
    $
    3,377
    
    
    $
    6,502
    
    
    $
    20,702Cost of Portfolio Assets resolved
    
    
    1,057
    
    
    
    3,098
    
    
    
    3,880
    
    
    
    2,724
    
    
    
    3,278
    
    
    
    14,037Gain on resolution of Portfolio Assets
    
    
    304
    
    
    
    1,039
    
    
    
    1,445
    
    
    
    653
    
    
    
    3,224
    
    
    
    6,665Interest income on performing Portfolio
Assets
    
    
    14
    
    
    
    
    
    
    
    138
    
    
    
    590
    
    
    
    643
    
    
    
    1,385Interest and fees expense  affiliate
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    (367
    )
    
    
    (195
    )
    
    
    (598
    )Interest and fees expense  other
    
    
    
    
    
    
    (59
    )
    
    
    (309
    )
    
    
    (149
    )
    
    
    (26
    )
    
    
    (543
    )Provision for loan and impairment losses
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    (625
    )
    
    
    (129
    )
    
    
    (811
    )Service fees  affiliate
    
    
    (65
    )
    
    
    (137
    )
    
    
    (157
    )
    
    
    (127
    )
    
    
    (306
    )
    
    
    (792
    )General, administrative and operating
expenses
    
    
    (50
    )
    
    
    (160
    )
    
    
    (101
    )
    
    
    (124
    )
    
    
    (1,465
    )
    
    
    (1,900
    )Other income, net
    
    
    2
    
    
    
    3
    
    
    
    8
    
    
    
    
    
    
    
    3
    
    
    
    16Net earnings (loss)
    
    $
    169
    
    
    $
    629
    
    
    $
    1,024
    
    
    $
    (149
    )
    
    $
    1,749
    
    
    $
    3,422
 Three Months Ended June 30, 2004
 WAMCO
    
    WAMCO
    
    WAMCO
    
    WAMCO
    
    OtherXXVIII
    
    XXX
    
    
    31
    
    
    
    33
    
    
    Partnerships
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    4,520
    
    
    $
    2,103
    
    
    $
    3,848
    
    
    $
    2,182
    
    
    $
    12,395
    
    
    $
    25,048Cost of Portfolio Assets resolved
    
    
    3,677
    
    
    
    1,553
    
    
    
    2,962
    
    
    
    1,563
    
    
    
    8,360
    
    
    
    18,115Gain on resolution of Portfolio Assets
    
    
    843
    
    
    
    550
    
    
    
    886
    
    
    
    619
    
    
    
    4,035
    
    
    
    6,933Interest income on performing Portfolio
Assets
    
    
    93
    
    
    
    
    
    
    
    426
    
    
    
    53
    
    
    
    902
    
    
    
    1,474Interest and fees expense  affiliate
    
    
    (114
    )
    
    
    
    
    
    
    
    
    
    
    (196
    )
    
    
    (194
    )
    
    
    (504
    )Interest and fees expense  other
    
    
    (81
    )
    
    
    (111
    )
    
    
    (414
    )
    
    
    
    
    
    
    (47
    )
    
    
    (653
    )Provision for loan and impairment losses
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    (64
    )Service fees  affiliate
    
    
    (171
    )
    
    
    (80
    )
    
    
    (171
    )
    
    
    (75
    )
    
    
    (521
    )
    
    
    (1,018
    )General, administrative and operating
expenses
    
    
    82
    
    
    
    (99
    )
    
    
    (81
    )
    
    
    (142
    )
    
    
    (1,486
    )
    
    
    (1,726
    )Other income, net
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    8Net earnings
    
    $
    618
    
    
    $
    261
    
    
    $
    648
    
    
    $
    259
    
    
    $
    2,664
    
    
    $
    4,450
 16




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Six Months Ended June 30, 2005
 WAMCO
    
    
    WAMCO
    
    
    WAMCO
    
    
    WAMCO
    
    
    OtherXXVIII
    
    
    XXX
    
    
    31
    
    
    33
    
    
    Partnerships
    
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    2,165
    
    
    $
    5,143
    
    
    $
    10,915
    
    
    $
    10,427
    
    
    $
    14,582
    
    
    $
    43,232Cost of Portfolio Assets resolved
    
    
    1,663
    
    
    
    3,843
    
    
    
    8,672
    
    
    
    8,010
    
    
    
    6,687
    
    
    
    28,875Gain on resolution of Portfolio Assets
    
    
    502
    
    
    
    1,300
    
    
    
    2,243
    
    
    
    2,417
    
    
    
    7,895
    
    
    
    14,357Interest income on performing Portfolio
Assets
    
    
    32
    
    
    
    
    
    
    
    401
    
    
    
    1,038
    
    
    
    1,130
    
    
    
    2,601Interest and fees expense  affiliate
    
    
    (77
    )
    
    
    
    
    
    
    
    
    
    
    (893
    )
    
    
    (350
    )
    
    
    (1,320
    )Interest and fees expense  other
    
    
    (6
    )
    
    
    (151
    )
    
    
    (630
    )
    
    
    (149
    )
    
    
    (65
    )
    
    
    (1,001
    )Provision for loan and impairment losses
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    (675
    )
    
    
    (171
    )
    
    
    (903
    )Service fees  affiliate
    
    
    (110
    )
    
    
    (183
    )
    
    
    (359
    )
    
    
    (377
    )
    
    
    (770
    )
    
    
    (1,799
    )General, administrative and operating
expenses
    
    
    (47
    )
    
    
    (245
    )
    
    
    (192
    )
    
    
    (243
    )
    
    
    (3,631
    )
    
    
    (4,358
    )Other income, net
    
    
    6
    
    
    
    5
    
    
    
    14
    
    
    
    
    
    
    
    25
    
    
    
    50Net earnings
    
    $
    300
    
    
    $
    669
    
    
    $
    1,477
    
    
    $
    1,118
    
    
    $
    4,063
    
    
    $
    7,627
 Six Months Ended June 30, 2004
 WAMCO
    
    WAMCO
    
    WAMCO
    
    WAMCO
    
    OtherXXVIII
    
    XXX
    
    
    31
    
    
    
    33
    
    
    Partnerships
    
    CombinedProceeds from resolution of Portfolio Assets
    
    $
    6,572
    
    
    $
    6,453
    
    
    $
    10,108
    
    
    $
    5,063
    
    
    $
    17,265
    
    
    $
    45,461Cost of Portfolio Assets resolved
    
    
    5,190
    
    
    
    4,923
    
    
    
    8,442
    
    
    
    3,875
    
    
    
    11,260
    
    
    
    33,690Gain on resolution of Portfolio Assets
    
    
    1,382
    
    
    
    1,530
    
    
    
    1,666
    
    
    
    1,188
    
    
    
    6,005
    
    
    
    11,771Interest income on performing Portfolio
Assets
    
    
    153
    
    
    
    
    
    
    
    930
    
    
    
    53
    
    
    
    1,925
    
    
    
    3,061Interest and fees expense  affiliates
    
    
    (228
    )
    
    
    
    
    
    
    (133
    )
    
    
    (349
    )
    
    
    (408
    )
    
    
    (1,118
    )Interest and fees expense  other
    
    
    (185
    )
    
    
    (244
    )
    
    
    (752
    )
    
    
    
    
    
    
    (101
    )
    
    
    (1,282
    )Provision for loan losses
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (581
    )
    
    
    (651
    )Service fees  affiliate
    
    
    (263
    )
    
    
    (232
    )
    
    
    (399
    )
    
    
    (171
    )
    
    
    (808
    )
    
    
    (1,873
    )General, administrative and operating
expenses
    
    
    44
    
    
    
    (208
    )
    
    
    (226
    )
    
    
    (177
    )
    
    
    (2,339
    )
    
    
    (2,906
    )Other income, net
    
    
    2
    
    
    
    3
    
    
    
    5
    
    
    
    
    
    
    
    7
    
    
    
    17Net earnings
    
    $
    835
    
    
    $
    849
    
    
    $
    1,091
    
    
    $
    544
    
    
    $
    3,700
    
    
    $
    7,019
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Proceeds from resolution of Portfolio Assets
    
    $
    1,525
    
    
    $
    2,368
    
    
    $
    3,164
    
    
    $
    5,052Cost of Portfolio Assets resolved
    
    
    26
    
    
    
    95
    
    
    
    62
    
    
    
    250Gain on resolution of Portfolio Assets
    
    
    1,499
    
    
    
    2,273
    
    
    
    3,102
    
    
    
    4,802Service fees  affiliate
    
    
    (152
    )
    
    
    (237
    )
    
    
    (316
    )
    
    
    (505
    )General, administrative and operating expenses
    
    
    (7
    )
    
    
    (6
    )
    
    
    (15
    )
    
    
    (15
    )Other income
    
    
    3
    
    
    
    1
    
    
    
    5
    
    
    
    2Net earnings
    
    $
    1,343
    
    
    $
    2,031
    
    
    $
    2,776
    
    
    $
    4,284
 Consolidation of Variable Interest Entities
 (8) Segment Reporting
  17




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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Portfolio Asset Acquisition and Resolution:Revenues:Servicing fees
    
    $
    2,909
    
    
    $
    3,716
    
    
    $
    6,081
    
    
    $
    6,748Gain on resolution of Portfolio Assets
    
    
    1,205
    
    
    
    162
    
    
    
    3,067
    
    
    
    237Equity in earnings of investments
    
    
    3,690
    
    
    
    2,639
    
    
    
    7,091
    
    
    
    6,814Interest income
    
    
    1,082
    
    
    
    667
    
    
    
    2,015
    
    
    
    1,196Other
    
    
    273
    
    
    
    305
    
    
    
    513
    
    
    
    1,439Total
    
    
    9,159
    
    
    
    7,489
    
    
    
    18,767
    
    
    
    16,434Expenses:Interest and fees on notes payable
    
    
    848
    
    
    
    879
    
    
    
    1,728
    
    
    
    1,658Salaries and benefits
    
    
    2,918
    
    
    
    2,938
    
    
    
    6,187
    
    
    
    5,979Provision for loan and impairment losses
    
    
    29
    
    
    
    22
    
    
    
    114
    
    
    
    22Occupancy, data processing, communication and other
    
    
    1,151
    
    
    
    1,226
    
    
    
    2,299
    
    
    
    2,225Minority interest
    
    
    42
    
    
    
    (17
    )
    
    
    39
    
    
    
    9Total
    
    
    4,988
    
    
    
    5,048
    
    
    
    10,367
    
    
    
    9,893Operating contribution before direct taxes
    
    $
    4,171
    
    
    $
    2,441
    
    
    $
    8,400
    
    
    $
    6,541Operating contribution, net of direct taxes
    
    $
    4,128
    
    
    $
    2,443
    
    
    $
    8,243
    
    
    $
    6,489Corporate Overhead:Corporate interest expense
    
    
    
    
    
    
    1,026
    
    
    
    
    
    
    
    2,026Salaries and benefits, occupancy, professional and other
income and expenses, net
    
    
    1,308
    
    
    
    1,031
    
    
    
    2,874
    
    
    
    2,343Earnings from continuing operations
    
    $
    2,820
    
    
    $
    386
    
    
    $
    5,369
    
    
    $
    2,120
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Domestic
    
    $
    4,764
    
    
    $
    4,204
    
    
    $
    10,726
    
    
    $
    8,350Latin America
    
    
    2,973
    
    
    
    2,265
    
    
    
    5,370
    
    
    
    4,862Europe
    
    
    1,422
    
    
    
    1,020
    
    
    
    2,671
    
    
    
    3,222Total
    
    $
    9,159
    
    
    $
    7,489
    
    
    $
    18,767
    
    
    $
    16,434
 18




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  June 30,
    
    
    December 31,2005
    
    
    2004Cash
    
    $
    5,337
    
    
    $
    9,724Portfolio acquisition and resolution assets:Domestic
    
    
    79,735
    
    
    
    77,280Latin America
    
    
    20,283
    
    
    
    20,876Europe
    
    
    17,618
    
    
    
    19,859Deferred tax asset, net
    
    
    20,101
    
    
    
    20,101Other non-earning assets, net
    
    
    8,235
    
    
    
    9,200Discontinued mortgage assets
    
    
    409
    
    
    
    1,817Total assets
    
    $
    151,718
    
    
    $
    158,857
 (9) Earnings per Common Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Earnings from continuing operations
    
    $
    2,820
    
    
    $
    386
    
    
    $
    5,369
    
    
    $
    2,120Weighted average outstanding shares of common stock
    
    
    11,274
    
    
    
    11,235
    
    
    
    11,268
    
    
    
    11,216Dilutive effect of:Warrants
    
    
    346
    
    
    
    297
    
    
    
    344
    
    
    
    295Employee stock options
    
    
    405
    
    
    
    288
    
    
    
    404
    
    
    
    295Weighted average outstanding shares of common
stock and common stock equivalents
    
    
    12,025
    
    
    
    11,820
    
    
    
    12,016
    
    
    
    11,806Earnings from continuing operations per share:Basic
    
    $
    0.25
    
    
    $
    0.03
    
    
    $
    0.48
    
    
    $
    0.19Diluted
    
    $
    0.24
    
    
    $
    0.03
    
    
    $
    0.45
    
    
    $
    0.18
 (10) Stock-Based Compensation
 Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation  Transition and Disclosure, Accounting for Stock-Based Compensation,
 19




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net earnings to common stockholders, as reported
    
    $
    2,723
    
    
    $
    3,299
    
    
    $
    5,272
    
    
    $
    8,148Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (85
    )
    
    
    (109
    )
    
    
    (178
    )
    
    
    (130
    )Pro forma net earnings to common stockholders
    
    $
    2,638
    
    
    $
    3,190
    
    
    $
    5,094
    
    
    $
    8,018Net earnings per common share:Basic  as reported
    
    $
    0.24
    
    
    $
    0.29
    
    
    $
    0.47
    
    
    $
    0.73Basic  pro forma
    
    $
    0.23
    
    
    $
    0.28
    
    
    $
    0.45
    
    
    $
    0.71Diluted  as reported
    
    $
    0.23
    
    
    $
    0.28
    
    
    $
    0.44
    
    
    $
    0.69Diluted  pro forma
    
    $
    0.22
    
    
    $
    0.27
    
    
    $
    0.42
    
    
    $
    0.68
 (11) Income Taxes
  (12) Commitments and Contingencies
   20




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##### Table of Contents



FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
     21




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
      Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Portfolio Asset Acquisition and Resolution
    
    $
    4,128
    
    
    $
    2,443
    
    
    $
    8,243
    
    
    $
    6,489Corporate interest
    
    
    
    
    
    
    (1,026
    )
    
    
    
    
    
    
    (2,026
    )Corporate overhead
    
    
    (1,308
    )
    
    
    (1,031
    )
    
    
    (2,874
    )
    
    
    (2,343
    )Earnings from continuing operations
    
    
    2,820
    
    
    
    386
    
    
    
    5,369
    
    
    
    2,120Earnings (loss) from discontinued operations
    
    
    (97
    )
    
    
    2,913
    
    
    
    (97
    )
    
    
    6,028Net earnings to common stockholders
    
    $
    2,723
    
    
    $
    3,299
    
    
    $
    5,272
    
    
    $
    8,148Diluted earnings per common share
    
    $
    0.23
    
    
    $
    0.28
    
    
    $
    0.44
    
    
    $
    0.69
 Results of Operations
  Second Quarter 2005 Compared to Second Quarter 2004
  22




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##### Table of Contents



Portfolio Asset Acquisition and Resolution
  Servicing fee revenues.
 Gain on resolution of Portfolio Assets.
 Equity in earnings of investments.
 
    
    Domestic Equity in earnings of domestic Acquisition Partnerships decreased from $2.6
million in the second quarter of 2004 to $1.9 million in 2005 primarily as a result of
declines in earnings from older partnerships as the Portfolios liquidate. In addition,
equity investments in new partnerships have declined with greater purchases of wholly-owned
Portfolios.
    
    Latin America Equity in earnings of Acquisition Partnerships located in Latin America
(primarily Mexico) was $.4 million in the second quarter of 2005 compared to losses of $.9
million in 2004. These partnerships reflected net income of $2.9 million in the second
quarter of 2005 compared to losses of $9.4 million in 2004. The partnerships recorded $5.1
million of foreign exchange gains in the second quarter of 2005 compared to $8.5 million of
foreign exchange losses in 2004 (of which $408,000 and $649,000 are included in equity
earnings). Interest expense of $2.5 million and $2.7 million were recorded in the second
quarter of 2005 and 2004, respectively. This interest is owed to affiliates of the investors
of these partnerships, of which FirstCity recorded $.4 million and $.5 million as interest
income in the second quarter of 2005 and 2004, respectively.
    
    Europe Equity in earnings of Acquisition Partnerships located in France increased 38%
to $1.1 million in the second quarter of 2005 from $.8 million in 2004. This increase is
principally due to higher collections received by the partnerships for Portfolio Assets.
FirstCity also recorded $.3 million and $.2 million in foreign currency transactions gains
(included in other expenses) relating to investments in France in the second quarter of 2005
and 2004, respectively.
 Interest income.
 Other income.
 Expenses.
   23




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##### Table of Contents



Accounting for Certain Loans or Debt Securities Acquired in a Transfer
   Other Items Affecting Operations
  Corporate interest and overhead.
 Income taxes.
 Discontinued Operations. Accounting for Changes That Result in a Transferor Regaining Control of
Financial Assets Sold. .
  First Six Months of 2005 Compared to First Six Months of 2004
  Portfolio Asset Acquisition and Resolution
  24




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##### Table of Contents



Servicing fee revenues.
 Gain on resolution of Portfolio Assets.
 Equity in earnings of investments.
 
    
    Domestic Equity in earnings of domestic Acquisition Partnerships decreased 7% to $4.2
million in the first six months of 2005 from $4.5 million in the first six months of 2004
primarily as a result of declines in earnings from older partnerships as the Portfolios
liquidate. In addition, equity investments in new partnerships have declined with greater
purchases of wholly-owned Portfolios.
    
    Latin America Equity in earnings of Latin American Acquisition Partnerships was $.2
million in the first six months of 2005 compared to a loss of $.8 million in 2004. These
partnerships reflected income of $2.7 million in the first six months of 2005 compared to a
loss of $5.7 million in 2004. The partnerships recorded foreign exchange gains of $9.1
million in the first six months of 2005 compared to losses of $2.0 million in 2004 (of which
$716,000 and $193,000 are included in equity earnings). Interest expense of $5.6 million
and $4.8 million were recorded during the first six months of 2005 and 2004, respectively.
This interest is owed to the investors of these partnerships, of which FirstCity recorded
$.7 million and $.9 million, respectively, as interest income. Excluding effects of foreign
currency transactions and interest expense, these partnerships reflected adjusted net loss
of $.7 million in the first six months of 2005 compared to earnings of $1.1 million in 2004.
    
    Europe Equity in earnings of Acquisition Partnerships located in France decreased to
$2.0 million in the first six months of 2005 compared to $2.6 million in 2004. This
decrease is principally due to a decline in collections. In addition, there have been no
equity investments in new Portfolios during 2005. During the first six months of 2005,
FirstCity also recorded $.5 million in foreign currency transaction gains (included in other
expenses) relating to investments in France.
 Interest income.
 Other income.
 Expenses.
    25




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##### Table of Contents



Other Items Affecting Operations
  Corporate interest and overhead.
 Income taxes.
 Discontinued Operations. Accounting for Changes That Result in a Transferor Regaining Control of
Financial Assets Sold. .
  Financial Condition
    Portfolio Asset Acquisition and Resolution
  Purchase
    
    
    FirstCityPrice
    
    
    InvestmentFirst six months of 2005
    
    $
    30,944
    
    
    $
    18,286Total 2004
    
    
    174,139
    
    
    
    59,762Total 2003
    
    
    129,192
    
    
    
    22,944Total 2002
    
    
    171,769
    
    
    
    16,717Total 2001
    
    
    224,927
    
    
    
    24,319Total 2000
    
    
    394,927
    
    
    
    22,140
 26




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Portfolio Assets and Loans Receivable:Average investment in Portfolio Assets and loans receivable:Domestic
    
    $
    39,570
    
    
    $
    10,500
    
    
    $
    38,620
    
    
    $
    8,509Latin America
    
    
    18,909
    
    
    
    16,770
    
    
    
    18,947
    
    
    
    15,284Europe
    
    
    505
    
    
    
    1,426
    
    
    
    517
    
    
    
    1,805Total
    
    $
    58,984
    
    
    $
    28,696
    
    
    $
    58,084
    
    
    $
    25,598Income from Portfolio Assets and loans receivable:Domestic
    
    $
    1,863
    
    
    $
    250
    
    
    $
    4,256
    
    
    $
    446Latin America
    
    
    384
    
    
    
    537
    
    
    
    747
    
    
    
    913Europe
    
    
    7
    
    
    
    17
    
    
    
    15
    
    
    
    43Total
    
    $
    2,254
    
    
    $
    804
    
    
    $
    5,018
    
    
    $
    1,402Average return (annualized):Domestic
    
    
    18.8
    %
    
    
    9.5
    %
    
    
    22.0
    %
    
    
    10.5
    %Latin America
    
    
    8.1
    %
    
    
    12.8
    %
    
    
    7.9
    %
    
    
    11.9
    %Europe
    
    
    5.5
    %
    
    
    4.8
    %
    
    
    5.8
    %
    
    
    4.8
    %Total
    
    
    15.3
    %
    
    
    11.2
    %
    
    
    17.3
    %
    
    
    11.0
    %Servicing fee revenues:Domestic partnerships:$ Collected
    
    $
    24,057
    
    
    $
    31,085
    
    
    $
    51,491
    
    
    $
    57,438Servicing fee revenue
    
    
    833
    
    
    
    1,223
    
    
    
    1,974
    
    
    
    2,261Average servicing fee %
    
    
    3.5
    %
    
    
    3.9
    %
    
    
    3.8
    %
    
    
    3.9
    %Latin American partnerships:$ Collected
    
    $
    23,031
    
    
    $
    20,249
    
    
    $
    33,928
    
    
    $
    35,095Servicing fee revenue
    
    
    1,915
    
    
    
    2,400
    
    
    
    3,896
    
    
    
    4,356Average servicing fee %
    
    
    8.3
    %
    
    
    11.9
    %
    
    
    11.5
    %
    
    
    12.4
    %Incentive service fees
    
    $
    161
    
    
    $
    93
    
    
    $
    211
    
    
    $
    131Total Service Fees:$ Collected
    
    $
    47,088
    
    
    $
    51,334
    
    
    $
    85,419
    
    
    $
    92,533Servicing fee revenue
    
    
    2,909
    
    
    
    3,716
    
    
    
    6,081
    
    
    
    6,748Average servicing fee %
    
    
    6.2
    %
    
    
    7.2
    %
    
    
    7.1
    %
    
    
    7.3
    %Personnel:Personnel expenses
    
    $
    2,918
    
    
    $
    2,938
    
    
    $
    6,187
    
    
    $
    5,979Number of personnel (at period end):Domestic
    
    
    66
    
    
    
    60Mexico
    
    
    128
    
    
    
    144Total
    
    
    194
    
    
    
    204Interest expense:Average debt
    
    $
    49,810
    
    
    $
    39,705
    
    
    $
    50,242
    
    
    $
    35,007Interest expense
    
    
    848
    
    
    
    879
    
    
    
    1,728
    
    
    
    1,658Average cost (annualized)
    
    
    6.8
    %
    
    
    8.9
    %
    
    
    6.9
    %
    
    
    9.5
    %
 27




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##### Table of Contents



Analysis of Selected Revenues and Expenses
Acquisition Partnerships
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Gain on resolution of Portfolio Assets
    
    $
    25,650
    
    
    $
    22,140
    
    
    $
    45,814
    
    
    $
    42,709Gross profit percentage on resolution of Portfolio Assets
    
    
    40.68
    %
    
    
    35.00
    %
    
    
    42.15
    %
    
    
    34.00
    %Interest income
    
    $
    2,649
    
    
    $
    2,266
    
    
    $
    4,755
    
    
    $
    5,165Other income
    
    
    136
    
    
    
    272
    
    
    
    369
    
    
    
    516Interest expense (1):Interest expense
    
    $
    3,773
    
    
    $
    4,460
    
    
    $
    8,177
    
    
    $
    8,203Average cost (annualized)
    
    
    4.68
    %
    
    
    5.10
    %
    
    
    5.00
    %
    
    
    4.70
    %Other expenses:Service fees
    
    $
    4,237
    
    
    $
    4,865
    
    
    
    9,387
    
    
    
    8,798Other operating costs
    
    
    13,277
    
    
    
    5,986
    
    
    
    20,742
    
    
    
    12,358Foreign currency gains
    
    
    (5,066
    )
    
    
    8,547
    
    
    
    (9,075
    )
    
    
    2,009Income taxes
    
    
    340
    
    
    
    9
    
    
    
    801
    
    
    
    167Total other expenses
    
    
    12,788
    
    
    
    19,407
    
    
    
    21,855
    
    
    
    23,332Net earnings
    
    $
    11,874
    
    
    $
    811
    
    
    $
    20,906
    
    
    $
    16,855Equity in earnings of Acquisition Partnerships
    
    $
    3,362
    
    
    $
    2,492
    
    
    $
    6,410
    
    
    $
    6,337Equity in earnings of Servicing Entities
    
    
    328
    
    
    
    147
    
    
    
    681
    
    
    
    477$
    3,690
    
    
    $
    2,639
    
    
    $
    7,091
    
    
    $
    6,814
 
 (1)
    
    Interest expense includes interest on loans to the Acquisition Partnerships located
primarily in Mexico from affiliates of the investor groups. Beginning in 2003, FirstCity
amended seven loan agreements from Mexican Acquisition Partnerships to provide for no
interest to be payable with respect to periods after the effective date of the amendment.
This change had no impact on the consolidated net earnings as the effect is offset through
equity earnings in these Partnerships. Provision for Income Taxes
  Liquidity and Capital Resources
  28




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##### Table of Contents



29




---



##### Table of Contents



Credit Facilities
 Funded andUnfunded
    
    OutstandingCommitment
    
    BorrowingsAmount as of
    
    as ofAugust 5,
    
    June 30,2005
    
    2005
    
    Interest Rate
    
    Other Terms and Conditions(Dollars in millions)Bank of Scotland $96 million
portfolio
acquisition and working capital facility (1)
    
    $
    96
    
    
    $
    44
    
    
    LIBOR + 2.5%  2.75%
    
    Secured by equity interests
and other assets of FirstCity,
matures November 2008Unsecured loans payable to
senior management
    
    
    
    
    
    
    1
    
    
    Rate based Corporate
average cost of funds
    
    Contingent liability related to
acquisition of minority interest, matures December 2011American Bank term loan
for portfolio acquisition by FC Washington
    
    
    5
    
    
    
    5
    
    
    Fixed 5.625%
    
    Secured by assets of FC
Washington and guaranteed
by the Company, 3-year term loan.Total
    
    $
    101
    
    
    $
    50Unconsolidated Acquisition
Partnerships Term Facilities (2)
    
    $
    74
    
    
    $
    74
    
    
    Various rates
    
    Secured by Portfolio
Assets, various maturities
non-recourse
 
 (1)
    
    The Bank of Scotland facility allows loans to be made in Euros up to a maximum amount
in Euros that is equivalent to $35 million U.S. dollars. At June 30, 2005, the Company had
approximately $11.3 million U.S. dollars outstanding under the Euro-denominated portion of
this facility.(2)
    
    In addition to the term acquisition facilities of the unconsolidated Acquisition
Partnerships, the Latin American Acquisition Partnerships also have term debt of
approximately $237 million outstanding as of June 30, 2005, owed to affiliates of the
investor groups. Of this amount, the Company has recorded approximately $18.2 million as
Loans Receivable on the Consolidated Balance Sheets. Critical Accounting Policies
  30




---



##### Table of Contents



Revenue Recognition: Performing, Non-performing and Real Estate Pools.
  Accounting for Certain Loans or Debt Securities Acquired in a Transfer
 Loans Acquired Prior to 2005
 Non-Performing Portfolio Assets
  Performing Portfolio Assets
  Impairment of Loans Acquired Prior to 2005
   31




---



##### Table of Contents



Loans Acquired After 2004
 Loans Acquired With Credit Deterioration
     Loans Acquired With No Credit Deterioration
   Real Estate Portfolios
  32




---



##### Table of Contents



Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
     33




---



##### Table of Contents



Item 4. Controls and Procedures.
  34




---



##### Table of Contents



PART II
 
 OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 ExhibitNumber
    
    
    
    Description of Exhibit2.1
    
    
    
    Joint Plan of Reorganization by First City Bancorporation of Texas,
Inc., Official Committee of Equity Security Holders and J-Hawk
Corporation, with the Participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code,
Case No. 392-39474-HCA-11 (incorporated herein by reference to
Exhibit 2.1 of the Companys Current Report on Form 8-K dated July
3, 1995 filed with the Commission on July 18, 1995).
 35




---



##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibit2.2
    
    
    
    Agreement and Plan of Merger, dated as of July 3, 1995, by and
between First City Bancorporation of Texas, Inc. and J-Hawk
Corporation (incorporated herein by reference to Exhibit 2.2 of the
Companys Current Report on Form 8-K dated July 3, 1995 filed with
the Commission on July 18, 1995).3.1
    
    
    
    Amended and Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 of the Companys
Current Report on Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).3.2
    
    
    
    Bylaws of the Company (incorporated herein by reference to Exhibit
3.2 of the Companys Current Report on Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995).9.1
    
    
    
    Shareholder Voting Agreement, dated as of June 29, 1995, among ATARA
I Ltd., James R. Hawkins, James T. Sartain and Cargill Financial
Services Corporation. (incorporated herein by reference to Exhibit
9.1 of the Companys Form 10-K dated March 24, 1998 filed with the
Commission on March 26, 1998).10.1
    
    
    
    Contribution and Assumption Agreement by and between Funding LP and
Drive dated as of August 18, 2000. (incorporated herein by reference
to Exhibit 10.42 of the Companys Form 8-K dated August 25, 2000,
filed with the Commission on September 11, 2000).10.2
    
    
    
    Amendment to Loan Agreement and extension of Promissory Note, dated
January 12, 2001, by and between FirstCity Holdings Corporation and
CSFC Capital Corp. XXX (incorporated herein by reference to Exhibit
10.45 of the Companys Form 10-K dated April 13, 2001, filed with
the Commission on April 13, 2001).10.3
    
    
    
    Separation Agreement and Release, dated March 31, 2004, by and
between G. Stephen Fillip, FirstCity Servicing Corporation and
FirstCity Financial Corporation (incorporated herein by reference to
Exhibit 10.19 of the Companys Form 10-Q dated May 14, 2004).10.4
    
    
    
    Consultant Agreement, dated April 1, 2004, by and between FirstCity
Servicing Corporation and G. Stephen Fillip (incorporated herein by
reference to Exhibit 10.20 of the Companys Form 10-Q dated May 14,
2004).10.5
    
    
    
    Securities Purchase Agreement dated as of September 21, 2004 by and
among FirstCity Financial Corporation and certain affiliates of
FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP Holdings LLC,
Drive Management LP and certain affiliates of those persons.
(incorporated herein by reference to Exhibit 10.1 of the Companys
Form 8-K dated September 27, 2004)10.6
    
    
    
    Letter agreements dated as of November 1, 2004, between FirstCity,
Consumer Corp. and BoS-UK relating to extension of time for and
waiver related to payment of any fee under Fee Letter. (incorporated
herein by reference to Exhibit 10.1 of the Companys Form 8-K dated
November 5, 2004)10.7
    
    
    
    Letter agreement dated November 1, 2004 between Bank of Scotland,
acting through its New York branch, and FirstCity providing for
deposit of funds in cash collateral account. (incorporated herein by
reference to Exhibit 10.2 of the Companys Form 8-K dated November
5, 2004)10.8
    
    
    
    Revolving Credit Agreement, dated November 12, 2004, among FirstCity
Financial Corporation as Borrower and the Lenders named therein, as
Lenders, and Bank of Scotland, as Agent (incorporated herein by
reference to Exhibit 10.12 of the Companys Form 10-Q dated November
15, 2004)10.9
    
    
    
    1995 Stock Option and Award Plan (incorporated herein by reference
to Exhibit A of the Companys Schedule 14A, Definitive Proxy
Statement, dated March 27, 1996)10.10
    
    
    
    1996 Stock Option and Award Plan (incorporated herein by reference
to Exhibit C of the Companys Schedule 14A, Definitive Proxy
Statement, dated March 27, 1996)
 36




---



##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibit10.11
    
    
    
    2004 Stock Option and Award Plan (incorporated herein by reference
to Appendix A of the Companys Schedule 14A, Definitive Proxy
Statement, dated October 21, 2003)31.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer of the
Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of the
Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer of the
Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.32.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of the
Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
 
 *
    
    Filed herewith. 37




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##### Table of Contents



SIGNATURES
  Firstcity Financial CorporationBy:
    /s/ James T. SartainJames T. SartainPresident and Chief Executive
Officer and Director
(Duly authorized officer of the
Registrant)By:
    /s/      J. Bryan BakerJ. Bryan BakerSenior Vice President and Chief
Financial Officer
(Duly authorized officer and
principal financial and accounting
officer of the Registrant)  38




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    
    
    Description of Exhibit2.1
    
    
    
    Joint Plan of Reorganization by First City Bancorporation of Texas,
Inc., Official Committee of Equity Security Holders and J-Hawk
Corporation, with the Participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code,
Case No. 392-39474-HCA-11 (incorporated herein by reference to
Exhibit 2.1 of the Companys Current Report on Form 8-K dated July
3, 1995 filed with the Commission on July 18, 1995).2.2
    
    
    
    Agreement and Plan of Merger, dated as of July 3, 1995, by and
between First City Bancorporation of Texas, Inc. and J-Hawk
Corporation (incorporated herein by reference to Exhibit 2.2 of the
Companys Current Report on Form 8-K dated July 3, 1995 filed with
the Commission on July 18, 1995).3.1
    
    
    
    Amended and Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 of the Companys
Current Report on Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995).3.2
    
    
    
    Bylaws of the Company (incorporated herein by reference to Exhibit
3.2 of the Companys Current Report on Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995).9.1
    
    
    
    Shareholder Voting Agreement, dated as of June 29, 1995, among ATARA
I Ltd., James R. Hawkins, James T. Sartain and Cargill Financial
Services Corporation. (incorporated herein by reference to Exhibit
9.1 of the Companys Form 10-K dated March 24, 1998 filed with the
Commission on March 26, 1998).10.1
    
    
    
    Contribution and Assumption Agreement by and between Funding LP and
Drive dated as of August 18, 2000. (incorporated herein by reference
to Exhibit 10.42 of the Companys Form 8-K dated August 25, 2000,
filed with the Commission on September 11, 2000).10.2
    
    
    
    Amendment to Loan Agreement and extension of Promissory Note, dated
January 12, 2001, by and between FirstCity Holdings Corporation and
CSFC Capital Corp. XXX (incorporated herein by reference to Exhibit
10.45 of the Companys Form 10-K dated April 13, 2001, filed with
the Commission on April 13, 2001).10.3
    
    
    
    Separation Agreement and Release, dated March 31, 2004, by and
between G. Stephen Fillip, FirstCity Servicing Corporation and
FirstCity Financial Corporation (incorporated herein by reference to
Exhibit 10.19 of the Companys Form 10-Q dated May 14, 2004).10.4
    
    
    
    Consultant Agreement, dated April 1, 2004, by and between FirstCity
Servicing Corporation and G. Stephen Fillip (incorporated herein by
reference to Exhibit 10.20 of the Companys Form 10-Q dated May 14,
2004).10.5
    
    
    
    Securities Purchase Agreement dated as of September 21, 2004 by and
among FirstCity Financial Corporation and certain affiliates of
FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP Holdings LLC,
Drive Management LP and certain affiliates of those persons.
(incorporated herein by reference to Exhibit 10.1 of the Companys
Form 8-K dated September 27, 2004)10.6
    
    
    
    Letter agreements dated as of November 1, 2004, between FirstCity,
Consumer Corp. and BoS-UK relating to extension of time for and
waiver related to payment of any fee under Fee Letter. (incorporated
herein by reference to Exhibit 10.1 of the Companys Form 8-K dated
November 5, 2004)10.7
    
    
    
    Letter agreement dated November 1, 2004 between Bank of Scotland,
acting through its New York branch, and FirstCity providing for
deposit of funds in cash collateral account. (incorporated herein by
reference to Exhibit 10.2 of the Companys Form 8-K dated November
5, 2004)




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibit10.8
    
    
    
    Revolving Credit Agreement, dated November 12, 2004, among FirstCity
Financial Corporation as Borrower and the Lenders named therein, as
Lenders, and Bank of Scotland, as Agent (incorporated herein by
reference to Exhibit 10.12 of the Companys Form 10-Q dated November
15, 2004)10.9
    
    
    
    1995 Stock Option and Award Plan (incorporated herein by reference
to Exhibit A of the Companys Schedule 14A, Definitive Proxy
Statement, dated March 27, 1996)10.10
    
    
    
    1996 Stock Option and Award Plan (incorporated herein by reference
to Exhibit C of the Companys Schedule 14A, Definitive Proxy
Statement, dated March 27, 1996)10.11
    
    
    
    2004 Stock Option and Award Plan (incorporated herein by reference
to Appendix A of the Companys Schedule 14A, Definitive Proxy
Statement, dated October 21, 2003)31.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer of the
Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of the
Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    
    
    Certification of James T. Sartain, Chief Executive Officer of the
Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.32.2*
    
    
    
    Certification of J. Bryan Baker, Chief Financial Officer of the
Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.