**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**Form 10-Q**
| **(Mark One)**                                     | ** **                                                                                    |
|----------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **x**                                              | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                               | ** **                                                                                    |
| **For the quarterly period ended  March 31, 2007** |
| ** **                                         | ** **                                                                                    |
| **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**                              |   | **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)           |

 

**(254)761-2800**

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes o     No x

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.   (Check one.)

Large accelerated filer o            Acceleratedfiler x            Non-acceleratedfiler o

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

The number of shares of common stock, par value $.01 per share,outstanding at July 23, 2007 was 10,789,137.

 

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**TABLEOF CONTENTS**
| PART I                                                                                              |
|-----------------------------------------------------------------------------------------------------|
| Item 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 II                                                                                             |
| OTHER  INFORMATION                                                                                  |
| Item 1. Legal Proceedings                                                                           |
| Item 1A. Risk Factors                                                                               |
| 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                                                                                   |
| SIGNATURES                                                                                          |
| Exhibit  Index                                                                                      |
| Certification of CEO Pursuant  to Section 302                                                       |
| Certification of CFO Pursuant  to Section 302                                                       |
| Certification of CEO Pursuant  to Section 906                                                       |
| Certification of CFO Pursuant  to Section 906                                                       |

 

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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)**
| ** **                                                                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                     | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| Cash and cash  equivalents                                                                                                                                                                     |       | $                  | 17,211     |                  | $          | 18,472 |   |
| Portfolio Assets, net                                                                                                                                                                          |       | 127,750            |       | 108,696               |       |
| Loans receivable from  Acquisition Partnerships held for investment                                                                                                                            |       | 4,876              |       | 4,755                 |       |
| Loans receivable - SBA  held for sale                                                                                                                                                          |       | 11,484             |       | —                |       |
| Loans receivable - SBA  held for investment                                                                                                                                                    |       | 16,538             |       | —                |       |
| Loans receivable -  other                                                                                                                                                                      |       | 27,956             |       | 23,991                |       |
| Equity investments                                                                                                                                                                             |       | 107,991            |       | 112,357               |       |
| Deferred tax asset, net                                                                                                                                                                        |       | 20,101             |       | 20,101                |       |
| Service fees receivable  ($915 and $917 from affiliates, respectively)                                                                                                                         |       | 1,064              |       | 928                   |       |
| Loan servicing assets -  SBA                                                                                                                                                                   |       | 815                |       | —                |       |
| Other assets, net                                                                                                                                                                              |       | 15,739             |       | 8,363                 |       |
| Total Assets                                                                                                                                                                                   |       | $                  | 351,525    |                  | $          | 297,663 |   |
|                                                                                                                                                                                           | ** ** | ** **         | ** ** | ** **            | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                 |       |               |       |                  |       |
| Liabilities:                                                                                                                                                                                   |       |               |       |                  |       |
| Notes payable  other                                                                                                                                                                           |       | $                  | 237,087    |                  | $          | 187,811 |   |
| Minority  interest                                                                                                                                                                             |       | 1,503              |       | 1,570                 |       |
| Other  liabilities                                                                                                                                                                             |       | 9,971              |       | 4,389                 |       |
| Total  Liabilities                                                                                                                                                                             |       | 248,561            |       | 193,770               |       |
| Commitments 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:  11,319,437 and 11,316,937, respectively; shares outstanding: 10,789,137 and  10,786,637, respectively) |       | 113                |       | 113                   |       |
| Treasury stock,  at cost: 530,300 shares and 530,300 shares, respectively                                                                                                                      |       | (5,571             | )          | (5,571                | )          |
| Paid in capital                                                                                                                                                                                |       | 100,760            |       | 100,562               |       |
| Retained  earnings                                                                                                                                                                             |       | 6,502              |       | 7,417                 |       |
| Accumulated  other comprehensive income                                                                                                                                                        |       | 1,160              |       | 1,372                 |       |
| Total  Stockholders’ Equity                                                                                                                                                               |       | 102,964            |       | 103,893               |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                                               |       | $                  | 351,525    |                  | $          | 297,663 |   |

 

See accompanying notes to consolidated financial statements.

2

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Table of Contents

**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

**(Unaudited)**
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                            | ** ** | **March 31,**               | ** ** |
| ** **                                                                            | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Revenues:                                                                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Servicing fees ($2,453 and $2,581 from affiliates,  respectively)                     |       | $                                | 2,605      |   | $ | 2,647 |   |
| Income from Portfolio Assets                                                          |       | 5,035                            |       | 2,058 |   |
| Gain on sale of SBA loans held for sale, net                                          |       | 281                              |       | — |   |
| Interest income from SBA loans                                                        |       | 308                              |       | — |   |
| Interest income from affiliates                                                       |       | 126                              |       | 430 |   |
| Interest income from loans receivable - other                                         |       | 907                              |       | — |   |
| Other income                                                                          |       | 459                              |       | 580 |   |
| Total revenues                                                                        |       | 9,721                            |       | 5,715 |   |
| Expenses:                                                                             |       |                             |       |   |   |
| Interest and fees on notes payable — other                                       |       | 4,251                            |       | 1,698 |   |
| Interest and fees on notes payable to affiliates                                      |       | —                           |       | 10 |   |
| Salaries and benefits                                                                 |       | 3,993                            |       | 3,738 |   |
| Provision for loan and impairment losses                                              |       | 326                              |       | 109 |   |
| Occupancy, data processing, communication and other                                   |       | 3,843                            |       | 1,564 |   |
| Total expenses                                                                        |       | 12,413                           |       | 7,119 |   |
| Equity in earnings of investments                                                     |       | 1,826                            |       | 3,634 |   |
| Earnings (loss) from continuing operations before  income taxes and minority interest |       | (866                             | )          | 2,230 |   |
| Income tax expense                                                                    |       | (157                             | )          | (122 | ) |
| Minority interest                                                                     |       | 108                              |       | (11 | ) |
| Earnings (loss) from continuing operations                                            |       | (915                             | )          | 2,097 |   |
| Discontinued operations                                                               |       |                             |       |   |   |
| Loss from discontinued operations                                                     |       | —                           |       | (75 | ) |
| Income taxes                                                                          |       | —                           |       | — |   |
| Net loss from discontinued operations                                                 |       | —                           |       | (75 | ) |
| Net earnings (loss)                                                                   |       | $                                | (915       | ) | $ | 2,022 |   |
| Basic earnings (loss) per common share are as  follows:                               |       |                             |       |   |   |
| Earnings (loss) from continuing operations                                            |       | $                                | (0.08      | ) | $ | 0.19 |   |
| Discontinued operations                                                               |       | $                                | —     |   | $ | (0.01 | ) |
| Net earnings (loss) to common stockholders                                            |       | $                                | (0.08      | ) | $ | 0.18 |   |
| Weighted average common shares outstanding                                            |       | 10,788                           |       | 11,307 |   |
| Diluted earnings (loss) per common share are as  follows:                             |       |                             |       |   |   |
| Earnings (loss) from continuing operations                                            |       | $                                | (0.08      | ) | $ | 0.18 |   |
| Discontinued operations                                                               |       | $                                | —     |   | $ | (0.01 | ) |
| Net earnings (loss) to common stockholders                                            |       | $                                | (0.08      | ) | $ | 0.17 |   |
| Weighted average  common shares outstanding                                           |       | 11,431                           |       | 11,958 |   |

 

See accompanying notes to consolidated financial statements.

3

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Table of Contents

**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVE INCOME**

**(Dollars in thousands)**
| ** **                                                                   | ** ** | ** **            | ** ** | ** **              | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | **Retained**           | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                   | ** ** | ** **            | ** ** | ** **              | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | **Earnings**           | ** ** | **Other**       | ** ** | **Total**  | ** ** |
| ** **                                                                   | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Paid in** | ** ** | **(Accumulated** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                   | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Shares**       | ** ** | **Amount**       | ** ** | **Capital**       | ** ** | **Deficit)**           | ** ** | **Income**      | ** ** | **Equity** | ** ** |
| ** **                                                                   | ** ** | ** **            | ** ** | ** **              | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** | ** ** |
| **Balances, December 31, 2005**                                              |       | 11,307,187            |       | $                       | 113        |             | —     |             | $          | —            |       | $                      | 99,843     |            | $          | (2,058     | )          | $ | 1,013 |   | $ | 98,911 |   |
| Cumulative effect of adjustments resulting from the adoption of SAB  No. 108 |       | —                |       | —                  |       | —           |       | —           |       | —            |       | (327                   | )          | —          |       | (327       | )          |
| Exercise of common stock options                                             |       | 9,750                 |       | —                  |       | —           |       | —           |       | 68                |       | —                 |       | —          |       | 68         |       |
| Repurchase of common stock                                                   |       | —                |       | —                  |       | 530,300          |       | (5,571           | )          | —            |       | —                 |       | —          |       | (5,571     | )          |
| Additional paid-in capital arising from stock option compensation  expense   |       | —                |       | —                  |       | —           |       | —           |       | 651               |       | —                 |       | —          |       | 651        |       |
| Comprehensive income:                                                        |       |                  |       |                    |       |             |       |             |       |              |       |                   |       |            |       |       |       |
| Net earnings for 2006                                                        |       | —                |       | —                  |       | —           |       | —           |       | —            |       | 9,802                  |       | —          |       | 9,802      |       |
| Translation adjustments                                                      |       | —                |       | —                  |       | —           |       | —           |       | —            |       | —                 |       | 359             |       | 359        |       |
| Total comprehensive income                                                   |       |                  |       |                    |       |             |       |             |       |              |       |                   |       |            |       | 10,161     |       |
| **Balances, December 31, 2006**                                              |       | 11,316,937            |       | 113                     |       | 530,300          |       | (5,571           | )          | 100,562           |       | 7,417                  |       | 1,372           |       | 103,893    |       |
| Exercise of common stock options                                             |       | 2,500                 |       | —                  |       | —           |       | —           |       | 18                |       | —                 |       | —          |       | 18         |       |
| Additional paid-in capital arising from stock option compensation  expense   |       | —                |       | —                  |       | —           |       | —           |       | 180               |       | —                 |       | —          |       | 180        |       |
| Comprehensive loss:                                                          |       |                  |       |                    |       |             |       |             |       |              |       |                   |       |            |       |       |       |
| Net loss for the first  three months of 2007                                 |       | —                |       | —                  |       | —           |       | —           |       | —            |       | (915                   | )          | —          |       | (915       | )          |
| Translation adjustments                                                      |       | —                |       | —                  |       | —           |       | —           |       | —            |       | —                 |       | (212            | )          | (212       | )          |
| Total comprehensive loss                                                     |       |                  |       |                    |       |             |       |             |       |              |       |                   |       |            |       | (1,127     | )          |
| **Balances,  March 31, 2007 (unaudited)**                                    |       | 11,319,437            |       | $                       | 113        |             | 530,300    |             | $          | (5,571            | )          | $                      | 100,760    |            | $          | 6,502      |       | $ | 1,160 |   | $ | 102,964 |   |

 

See accompanying notes to consolidated financial statements.

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Table of Contents

**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

**(Unaudited)**
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                              | ** ** | **March 31,**               | ** ** |
| ** **                                                                              | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                                  |       |                             |       |   |   |
| Net earnings (loss)                                                                     |       | $                                | (915       | ) | $ | 2,022 |   |
| Adjustments to reconcile net earnings (loss) to net  cash used in operating activities: |       |                             |       |   |   |
| Net loss from discontinued operations                                                   |       | —                           |       | 75 |   |
| Purchase of SBA loans held for sale                                                     |       | (18,419                          | )          | — |   |
| Payments applied to principal on SBA loans held for  sale                               |       | 187                              |       | — |   |
| Proceeds from the sale of SBA loans held for sale,  net                                 |       | 7,102                            |       | — |   |
| Purchase of Portfolio Assets, net                                                       |       | (34,182                          | )          | (7,501 | ) |
| Proceeds applied to principal on Portfolio Assets                                       |       | 19,698                           |       | 6,722 |   |
| Income from Portfolio Assets                                                            |       | (5,035                           | )          | (2,058 | ) |
| Capitalized interest and costs on Portfolio Assets and  loans receivable                |       | (284                             | )          | (457 | ) |
| Provision for loan and impairment losses                                                |       | 326                              |       | 109 |   |
| Equity in earnings of investments                                                       |       | (1,826                           | )          | (3,634 | ) |
| Gain on sale of SBA loans held for sale                                                 |       | (281                             | )          | — |   |
| Depreciation and amortization                                                           |       | 119                              |       | 157 |   |
| Stock-based compensation expense related to stock  options                              |       | 180                              |       | 145 |   |
| Increase in service fees receivable                                                     |       | (136                             | )          | (275 | ) |
| Decrease (increase) in other assets                                                     |       | (8,094                           | )          | 174 |   |
| Change in debt imputed value                                                            |       | —                           |       | (60 | ) |
| Increase in other liabilities                                                           |       | 5,816                            |       | 1,000 |   |
| Net cash used in operating activities                                                   |       | (35,744                          | )          | (3,581 | ) |
| Cash flows from  investing activities:                                                  |       |                             |       |   |   |
| Property and equipment, net                                                             |       | (214                             | )          | (83 | ) |
| Net payments (advances) on loans receivable                                             |       | (3,674                           | )          | 263 |   |
| Net increase in SBA loans held for investment                                           |       | (16,603                          | )          | — |   |
| Contributions to Acquisition Partnerships and  Servicing Entities                       |       | (7,552                           | )          | (17,529 | ) |
| Distributions from Acquisition Partnerships and  Servicing Entities                     |       | 13,577                           |       | 11,992 |   |
| Net cash used in investing activities                                                   |       | (14,466                          | )          | (5,357 | ) |
| Cash flows from  financing activities:                                                  |       |                             |       |   |   |
| Borrowings under notes payable — other                                             |       | 81,547                           |       | 28,885 |   |
| Payments of notes payable — other                                                  |       | (32,605                          | )          | (23,591 | ) |
| Proceeds from issuance of common stock                                                  |       | 18                               |       | — |   |
| Net cash provided by financing activities                                               |       | 48,960                           |       | 5,294 |   |
| Net cash used in continuing operations                                                  |       | (1,250                           | )          | (3,644 | ) |
| Cash flows from  discontinued operations:                                               |       |                             |       |   |   |
| Net cash used in operating activities                                                   |       | (11                              | )          | (9 | ) |
| Net cash provided by investing activities                                               |       | —                           |       | — |   |
| Net cash used in discontinued operations                                                |       | (11                              | )          | (9 | ) |
| Net decrease in  cash and cash equivalents                                              |       | (1,261                           | )          | (3,653 | ) |
| Cash and cash  equivalents, beginning of period                                         |       | 18,472                           |       | 12,901 |   |
| Cash and cash  equivalents, end of period                                               |       | $                                | 17,211     |   | $ | 9,248 |   |
| Supplemental  disclosure of cash flow information:                                      |       |                             |       |   |   |
| Cash paid during the period for:                                                        |       |                             | ** ** | ** ** | ** ** |
| Interest                                                                                |       | $                                | 3,404      |   | $ | 1,475 |   |
| Income taxes,  net of refunds received                                                  |       | 18                               |       | 16 |   |

 

See accompanying notes to consolidated financial statements.

5

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Table of Contents

**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2007(Dollars in thousands, except per share data)(Unaudited)**

**(1)  Basis of Presentation and Summary ofSignificant Accounting Policies**

***The Company***

FirstCityFinancial Corporation (the “Company” or “FirstCity”) is a financial servicescompany with offices throughout the United States, Mexico and Brazil, with apresence in France, Germany, Argentina and Chile. At March 31, 2007, theCompany was engaged in one principal reportable segment - Portfolio Assetacquisition and resolution.  The portfolio asset acquisition and resolutionbusiness involves acquiring portfolios of loans, real estate and other assetsor single assets and investment in similar assets (collectively referred to as “Portfolios”or “Portfolio Assets”) generally at a discount to their legal principalbalance or appraised value, and servicingand resolving such Portfolios in an effort to maximize the present value of theultimate cash recoveries, and the origination of loans secured by similarassets.

***Basis of Presentation***

The unaudited consolidatedfinancial statements of FirstCity reflect, in the opinion of management, alladjustments, consisting only of normal and recurring adjustments, necessary topresent fairly FirstCity’s consolidated financial position at March 31, 2007,its results of operations for the three month periods ended March 31, 2007 and2006 and cash flows for the three month periods ended March 31, 2007 and2006.  Certain disclosures have beencondensed or omitted from these financial statements. Accordingly, thesefinancial statements should be read with the consolidated financial statementsincluded in the Company’s 2006 Annual Report on Form 10-K.  Certain amounts in the consolidated financialstatements for prior years have been reclassified to conform with currentconsolidated financial statement presentation.

***Use of Estimates***

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Significant estimates include (i) theestimation of future collections on purchased Portfolio Assets used in thecalculation of income from Portfolio Assets, (ii) interest rate environments,(iii) valuation of the deferred tax asset, and (iv) prepayment speeds andcollectibility of loans held in inventory, in securitization trusts and forinvestment. Actual results could differ materially from those estimates.

***Reclassifications***

Certain amounts in the consolidated financialstatements for prior periods have been reclassified to conform with currentconsolidated financial statement presentation. In all reporting prior to December 31, 2006, FirstCity reported loansreceivable advances and loans receivable payments in cash flows from operatingactivities on the Consolidated Statements of Cash Flows.  Beginning in the fourth quarter of 2006, theCompany reports these items in cash flows from investing activities.  Prior period amounts reported on theConsolidated Statements of Cash Flows have been adjusted to conform to thistreatment which is required under GAAP. The total amount thus reclassified was $263 for the three months endedMarch 31, 2006.  Management believes thatthe changes in the Consolidated Statements of Cash Flows for the three monthperiod ended March 31, 2006 are immaterial relative to the financial statementstaken as a whole.  These reclassificationshave the following impact on the financial statements:

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Tableof Contents

**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data)– (continued)**
|                                                                           | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                | ** ** | **March 31,**               | ** ** |
| ** **                                                                | ** ** | **2006**                         | ** ** |
|                                                                      |       |                             |       |
| Statement of  Cash Flows:                                                 |       |                             |       |
| Cash flows from operating activities (as reported)                        |       | $                                | (3,318     | ) |
| Impact of reclassification on net loans receivable advances  and payments |       | (263                             | )          |
| Cash flows from operating activities (as corrected)                       |       | $                                | (3,581     | ) |
|                                                                      |       |                             |       |
| Cash flows from investing activities (as reported)                        |       | $                                | (5,620     | ) |
| Impact of reclassification on net loans receivable advances  and payments |       | 263                              |       |
| Cash flows from  investing activities (as corrected)                      |       | $                                | (5,357     | ) |

 

**(2)  New Accounting Pronouncements**

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No.159,*TheFair Value Option for Financial Assets and Financial Liabilities-Including anamendment of FASB Statement No. 115*(“SFAS 159”)**SFAS 159 permits entities tochoose to measure eligible items at fair value at specified election dates.Unrealized gains and losses on items for which the fair value option has beenelected are reported in earnings at each subsequent reporting date. The fairvalue option (i) may be applied instrument by instrument, with certainexceptions, (ii) is irrevocable (unless a new election date occurs) and (iii)is applied only to entire instruments and not to portions of instruments. SFAS159 is effective for the Company on January 1, 2008.  The Company is currently evaluating theimpact SFAS 159 will have on its financial statements.

In September 2006, SFAS No. 157, *Fair ValueMeasurements* (“SFAS 157”), was issued.  SFAS 157 establishes a framework formeasuring fair value and expands disclosures about fair valuemeasurements.  The changes to currentpractice resulting from the application of SFAS 157 relate to the definition offair value, the methods used to measure fair value, and the expandeddisclosures about fair value measurements. SFAS 157 is effective for the Company on January 1, 2008.  The Company is currently evaluating theimpact SFAS 157 will have on its financial statements.

**(3)  Discontinued Operations**

Discontinued operations are comprised of twocomponents previously reported as the Company’s residential and commercialmortgage banking business (“Mortgage”) and the consumer lending businessconducted through the Company’s minority interest investment in Drive (“Consumer”).  There was no income or loss from discontinuedoperations in the first three months of 2007, and ($75) in the first threemonths of 2006.

*Mortgage*

At March 31, 2007, the only asset remaining from discontinued operationsis from mortgage operations, and represents an investment security resultingfrom the retention of a residual interest in a securitization transaction. Thissecurity is in “run-off,” and the Company is contractually obligated to servicethese assets.  The cash flows are collectedover a period of time and are valued using prepayment assumptions of 32% forfixed rate loans and 33% for variable rate loans. Overall loss rates areestimated at 14% of collateral.  TheCompany recorded provisions (recoveries) of $(11) and $66 in the first threemonths of 2007 and 2006, respectively, for losses from discontinued mortgageoperations.  Discontinued mortgage assetsof $114 at March 31, 2007 are included in other assets.

*Consumer*

Liabilities fromdiscontinued consumer operations of $115 consisted of state taxes payable atMarch 31, 2007, and are included in other liabilities.

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands,except per share data) – (continued)**

**(4)  Portfolio Assets**

Portfolio Assets are summarized as follows:
|                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Loan Portfolios                             | ** ** | ** **         | ** ** | ** **            | ** ** |
| Loans Acquired Prior to 2005                | ** ** | ** **         | ** ** | ** **            | ** ** |
| Non-performing Portfolio Assets             |       | $                  | 5,459      |                  | $          | 6,163 |   |
| Performing Portfolio Assets                 |       | 3,959              |       | 5,166                 |       |
| Loans Acquired After 2004                   | ** ** | ** **         | ** ** | ** **            | ** ** |
| Loans acquired with credit deterioration    |       | 108,101            |       | 84,550                |       |
| Loans acquired with no credit deterioration |       | 4,386              |       | 6,473                 |       |
| Outstanding balance                         |       | 121,905            |       | 102,352               |       |
| Allowance for loan losses                   |       | (567               | )          | (333                  | )          |
| Carrying amount of loans, net of allowance  |       | 121,338            |       | 102,019               |       |
|                                        |       |               |       |                  |       |
| Real Estate  Portfolios                     |       | 4,351              |       | 4,574                 |       |
| Other                                       |       | 2,061              |       | 2,103                 |       |
| Portfolio  Assets, net                      |       | $                  | 127,750    |                  | $          | 108,696 |   |

 

Income from Portfolio Assets is summarized as follows:
|                                             | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** |
| ** **                                  | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Loan Portfolios                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Loans Acquired Prior to 2005                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Non-performing Portfolio Assets             |       | $                                | 742        |   | $ | 966 |   |
| Performing Portfolio Assets                 |       | 349                              |       | 453 |   |
| Loans Acquired After 2004                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Loans acquired with credit deterioration    |       | 3,066                            |       | 311 |   |
| Loans acquired with no credit deterioration |       | 492                              |       | 95 |   |
| Real Estate  Portfolios                     |       | 328                              |       | 174 |   |
| Other                                       |       | 58                               |       | 59 |   |
| Income from  Portfolio Assets               |       | $                                | 5,035      |   | $ | 2,058 |   |

 

Portfolio Assets are pledged to secure notes payable that arenon-recourse to FirstCity or any affiliate other than the entity that incurredthe debt.  See Note 2 to the Company’s2006 Annual Report on Form 10-K filed with the Securities and ExchangeCommission on July 24, 2007 for a description of the Revolving Credit agreementbetween FH Partners, L.P. and Bank of Scotland, which is guaranteed byFirstCity and the primary wholly-owned subsidiaries of FirstCity.

The Company recorded a provision for loan and impairmentlosses on Portfolio Assets of approximately $326 for the three month periodended March 31, 2007, which is comprised of a $92 impairment charge on realestate portfolios and a $234 allowance for loan losses, net of recoveries.  For the three month period ended March 31,2006, the Company recorded a provision for loan and impairment losses onPortfolio Assets of $109, which is comprised of a $2 impairment charge on realestate portfolios and a $107 allowance for loan losses.

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands,except per share data) – (continued)**

The changes in theallowance for loan losses are as follows:
|                    | ** ** | **Three Months Ended** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **March 31,**               | ** ** |
| ** **         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Beginning  Balance |       | $                                | (333       | ) | $ | (163 | ) |
| Provisions         |       | (234                             | )          | (107 | ) |
| Charge Offs        |       | —                           |       | 15 |   |
| Ending Balance     |       | $                                | (567       | ) | $ | (255 | ) |

 

Changes in accretable yield for loans acquired withcredit deterioration are as follows:
|                                                     | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **March 31,**               | ** ** |
| ** **                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Beginning  Balance                                  |       | $                                | 32,339     |   | $ | 3,765 |   |
| Additions                                           |       | 1,269                            |       | 1,354 |   |
| Accretion                                           |       | (2,714                           | )          | (310 | ) |
| Reclassification from (to) nonaccretable difference |       | 5,165                            |       | — |   |
| Disposals                                           |       | (352                             | )          | (1 | ) |
| Translation adjustments                             |       | (37                              | )          | — |   |
| Ending Balance                                      |       | $                                | 35,670     |   | $ | 4,808 |   |

 

Loans acquired duringeach period for which it was probable at acquisition that all contractuallyrequired payments would not be collected are as follows:
|                                                           | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **March 31,**               | ** ** |
| ** **                                                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|  Face value at acquisition                           |       | $                                | 34,897     |   | $ | 11,019 |   |
|  Cash flows expected to be collected at  acquisition |       | 30,122                           |       | 8,855 |   |
|  Basis in acquired loans at acquisition              |       | 28,853                           |       | 7,501 |   |
|                                                           |            |                                  |            |  |  |  |  |

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Dollars in thousands, except per share data) – (continued)**

**(5)  Loans Receivable**

Loans receivable are summarized as follows:
|                                                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Loans receivable  from Acquisition Partnerships held for investment: |       |               |       |                  |       |
| Latin America                                                        |       | $                  | 980        |                  | $          | 1,182 |   |
| Europe                                                               |       | 3,896              |       | 3,573                 |       |
|                                                                 |       | 4,876              |       | 4,755                 |       |
| Loans receivable  - SBA:                                             |       |               |       |                  |       |
| Held for sale                                                        |       | 11,484             |       | —                |       |
| Held for investment                                                  |       | 16,538             |       | —                |       |
|                                                                 |       | 28,022             |       | —                |       |
| Loans receivable  - other:                                           |       |               |       |                  |       |
| Canada                                                               |       | 2,339              |       | 2,254                 |       |
| Domestic                                                             |       | 25,617             |       | 21,737                |       |
|                                                                 |       | 27,956             |       | 23,991                |       |
|                                                                 |       | $                  | 60,854     |                  | $          | 28,746 |   |

 

Loans receivable from Acquisition Partnerships aresecured by the assets/loans acquired by the partnerships with purchase moneyloans provided by affiliates of the investors to the partnerships to purchasethe asset pools held in those entities. They are evaluated for impairment byanalyzing the expected future cash flows from the underlying assets within eachpool to determine that the cash flows were sufficient to repay these notes. TheCompany applies the asset valuation methodology consistently in all venues anduses the same proprietary asset management system to evaluate impairment on allasset pools. The results of this evaluation indicated that cash flows from thepools will be sufficient to repay the loans and no allowances for impairmentare necessary.

Loans receivable - Small Business Administration (“SBA”)held for sale are reflected at the lower of aggregate cost or market value.  The Company generally sells the guaranteed portion ofeach loan to a third party and retains the servicing rights. The premiumreceived on the sale of the guaranteed portion of SBA loans and the presentvalue of future cash flows of the servicing asset are recognized in income. Thenon-guaranteed portion is generally held in the portfolio.

Loans receivable -SBA held for investment are stated at the unpaid principal balance, net ofunearned discounts. Interest is credited to operations primarily based upon theprincipal amount outstanding. When management believes there is sufficientdoubt as to the ultimate collectibility of interest on any loan, interestaccruals are discontinued and all past due interest, previously recognized asincome, is reversed and charged against current period earnings. These loansare evaluated for impairment by management based upon performance of the loansand other portfolio characteristics, such as industry concentrations and loancollateral, which also impacts management’s estimates of the impairment.  The adequacy of the allowance for loan lossesis reviewed by management quarterly and as adjustments become necessary, theywill be reflected in operations during the periods in which they becomeknown.  Considerations in this evaluationinclude past and current loss experience, risks inherent in the currentportfolio and evaluation of commercial and real estate collateral as well ascurrent economic conditions.

Loans receivable - Other are secured by real estate.These loans are evaluated for impairment by analyzing the expected future cashflows from the underlying assets within each investment to determine that thecash flows were sufficient to repay these notes. The Company applies the assetvaluation methodology consistently in all venues and uses the same proprietaryasset management system to evaluate impairment on all asset pools. The resultsof this evaluation indicated that cash flows from the investments will besufficient to repay the loans and no allowances for impairment were necessary.

**(6)  Equity Investments**

The Company has investments in Acquisition Partnerships and their generalpartners and investments in servicing entities that are accounted for under theequity method.  The condensed combinedfinancial position and results of operations of the Acquisition 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands,except per share data) – (continued)**

Partnerships(excluding servicing entities), which include the domestic and foreignAcquisition Partnerships and their general partners, are summarized below:

**Condensed Combined Balance Sheets**
|                                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Assets                                         |       | $                  | 410,885    |                  | $          | 457,173 |   |
| Liabilities                                    |       | $                  | 86,514     |                  | $          | 100,973 |   |
| Net equity                                     |       | 324,371            |       | 356,200               |       |
|                                           |       | $                  | 410,885    |                  | $          | 457,173 |   |
|                                           |       |               |       |                  |       |
| Equity investment  in Acquisition Partnerships |       | $                  | 97,352     |                  | $          | 105,852 |   |
| Equity  investment in servicing entities       |       | 10,639             |       | 6,505                 |       |
|                                           |       | $                  | 107,991    |                  | $          | 112,357 |   |

 

**Condensed Combined Summary of Operations**
|                                                      | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **March 31,**               | ** ** |
| ** **                                           | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Income from  Portfolio Assets                        |       | $                                | 23,164     |   | $ | 19,014 |   |
| Other income                                         |       | 548                              |       | 1,155 |   |
| Revenues                                             |       | 23,712                           |       | 20,169 |   |
| Interest expense                                     |       | 3,007                            |       | 2,980 |   |
| Average cost (annualized)                            |       | 13.46                            | %          | 4.47 | % |
| Service fees                                         |       | 4,721                            |       | 3,209 |   |
| Provision  (recovery) for loan and impairment losses |       | 6,561                            |       | (1,058 | ) |
| Other operating  costs                               |       | 4,107                            |       | 3,747 |   |
| Foreign currency  (gains) losses                     |       | 265                              |       | (1,655 | ) |
| Income taxes                                         |       | 290                              |       | 125 |   |
| Expenses                                             |       | 18,951                           |       | 7,348 |   |
| Net earnings                                         |       | $                                | 4,761      |   | $ | 12,821 |   |
|                                                 |       |                             |       |   |   |
| Equity in  earnings of Acquisition Partnerships      |       | $                                | 1,781      |   | $ | 3,691 |   |
| Equity in  earnings (loss) of servicing entities     |       | 45                               |       | (57 | ) |
|                                                 |       | $                                | 1,826      |   | $ | 3,634 |   |

 

The assets and equity of the Acquisition Partnershipsand equity investments in the Acquisition Partnerships are summarized bygeographic region below. The WAMCO Partnerships represent limited partnershipsand limited liability companies in which the Company has a common ownershipwith Cargill.  MinnTex InvestmentPartners LP is considered to be a significant subsidiary of FirstCity.

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands,except per share data) – (continued)**
|                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Assets:                                         |       |               |       |                  |       |
| Domestic:                                       |       |               |       |                  |       |
| WAMCO Partnerships                              |       | $                  | 108,441    |                  | $          | 116,634 |   |
| MinnTex Investment Partners LP                  |       | 56                 |       | 71                    |       |
| Other                                           |       | 5,384              |       | 4,206                 |       |
| Latin America                                   |       | 150,540            |       | 167,407               |       |
| Europe                                          |       | 146,464            |       | 168,855               |       |
|                                            |       | $                  | 410,885    |                  | $          | 457,173 |   |
|                                            |       |               |       |                  |       |
| Equity:                                         |       |               |       |                  |       |
| Domestic:                                       |       |               |       |                  |       |
| WAMCO Partnerships                              |       | $                  | 66,750     |                  | $          | 69,579 |   |
| MinnTex Investment Partners LP                  |       | 48                 |       | 62                    |       |
| Other                                           |       | 2,829              |       | 2,614                 |       |
| Latin America                                   |       | 119,674            |       | 126,402               |       |
| Europe                                          |       | 135,070            |       | 157,543               |       |
|                                            |       | $                  | 324,371    |                  | $          | 356,200 |   |
| Equity  investment in Acquisition Partnerships: |       |               |       |                  |       |
| Domestic:                                       |       |               |       |                  |       |
| WAMCO Partnerships                              |       | $                  | 32,980     |                  | $          | 34,203 |   |
| MinnTex Investment Partners LP                  |       | 16                 |       | 20                    |       |
| Other                                           |       | 1,724              |       | 1,671                 |       |
| Latin America                                   |       | 18,214             |       | 18,640                |       |
| Europe                                          |       | 44,418             |       | 51,318                |       |
|                                            |       | $                  | 97,352     |                  | $          | 105,852 |   |

 

Revenues and earnings (loss) of the AcquisitionPartnerships and equity in earnings (loss) of the Acquisition Partnerships aresummarized by geographic region below.
|                                                         | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **March 31,**               | ** ** |
| ** **                                              | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Revenues:                                               |       |                             |       |   |   |
| Domestic:                                               |       |                             |       |   |   |
| WAMCO Partnerships                                      |       | $                                | 4,352      |   | $ | 7,377 |   |
| MinnTex Investment Partners LP                          |       | 145                              |       | 566 |   |
| Other                                                   |       | 100                              |       | 292 |   |
| Latin America                                           |       | 9,736                            |       | 5,663 |   |
| Europe                                                  |       | 9,379                            |       | 6,271 |   |
| ** **                                              |       | $                                | 23,712     |   | $ | 20,169 |   |
|                                                    |       |                             |       |   |   |
| Net earnings  (loss):                                   |       |                             |       |   |   |
| Domestic:                                               |       |                             |       |   |   |
| WAMCO Partnerships                                      |       | $                                | 599        |   | $ | 4,023 |   |
| MinnTex Investment Partners LP                          |       | 126                              |       | 510 |   |
| Other                                                   |       | (146                             | )          | 67 |   |
| Latin America                                           |       | (1,409                           | )          | 3,927 |   |
| Europe                                                  |       | 5,591                            |       | 4,294 |   |
|                                                    |       | $                                | 4,761      |   | $ | 12,821 |   |
| Equity in  earnings (loss) of Acquisition Partnerships: |       |                             |       |   |   |
| Domestic:                                               |       |                             |       |   |   |
| WAMCO Partnerships                                      |       | $                                | 269        |   | $ | 2,052 |   |
| MinnTex Investment Partners LP                          |       | 42                               |       | 168 |   |
| Other                                                   |       | (60                              | )          | 49 |   |
| Latin America                                           |       | (10                              | )          | 444 |   |
| Europe                                                  |       | 1,540                            |       | 978 |   |
|                                                    |       | $                                | 1,781      |   | $ | 3,691 |   |

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Dollars in thousands, except per share data) – (continued)**

Combining statements of operations for the WAMCOPartnerships follow. WAMCO 31 and WAMCO 33 are considered to besignificant subsidiaries of FirstCity.

**Three Months Ended March 31, 2007**
|                                                 | ** ** | **WAMCO** | ** ** | **WAMCO** | ** ** | **Other**        | ** ** | ** **   | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|------------------|------------|--------------|------------|
| ** **                                      | ** ** | **31**    | ** ** | **33**    | ** ** | **Partnerships** | ** ** | **Combined** | ** ** |
| Income from  Portfolio Assets                   |       | $         | 239        |      | $          | 1,107            |       | $            | 2,961      |   | $ | 4,307 |   |
| Other income,  net                              |       | 8         |       | 7         |       | 30               |       | 45           |       |
| Revenues                                        |       | 247       |       | 1,114     |       | 2,991            |       | 4,352        |       |
| Interest and  fees expense — other         |       | (92       | )          | (97       | )          | (643             | )          | (832         | )          |
| Provision for  loan and impairment losses       |       | (149      | )          | (47       | )          | (1,283           | )          | (1,479       | )          |
| Service fees —  affiliate                  |       | (29       | )          | (93       | )          | (434             | )          | (556         | )          |
| General,  administrative and operating expenses |       | (67       | )          | (92       | )          | (727             | )          | (886         | )          |
| Expenses                                        |       | (337      | )          | (329      | )          | (3,087           | )          | (3,753       | )          |
| Net earnings  (loss)                            |       | $         | (90        | )         | $          | 785              |       | $            | (96        | ) | $ | 599 |   |

 

**Three Months Ended March 31, 2006**
|                                                | ** ** | **WAMCO** | ** ** | **WAMCO** | ** ** | **Other**        | ** ** | ** **   | ** ** |
|------------------------------------------------|------------|-----------|------------|-----------|------------|------------------|------------|--------------|------------|
| ** **                                     | ** ** | **31**    | ** ** | **33**    | ** ** | **Partnerships** | ** ** | **Combined** | ** ** |
| Income from Portfolio Assets                   |       | $         | 246        |      | $          | 910              |       | $            | 5,128      |   | $ | 6,284 |   |
| Other income, net                              |       | 3         |       | —    |       | 1,090            |       | 1,093        |       |
| Revenues                                       |       | 249       |       | 910       |       | 6,218            |       | 7,377        |       |
| Interest and fees expense — affiliate     |       | —    |       | —    |       | (170             | )          | (170         | )          |
| Interest and fees expense — other         |       | (217      | )          | (316      | )          | —           |       | (533         | )          |
| Provision for loan and impairment losses       |       | —    |       | (182      | )          | (481             | )          | (663         | )          |
| Service fees — affiliate                  |       | (44       | )          | (85       | )          | (662             | )          | (791         | )          |
| General, administrative and operating expenses |       | (34       | )          | (136      | )          | (1,027           | )          | (1,197       | )          |
| Expenses                                       |       | (295      | )          | (719      | )          | (2,340           | )          | (3,354       | )          |
| Net earnings (loss)                            |       | $         | (46        | )         | $          | 191              |       | $            | 3,878      |   | $ | 4,023 |   |

 

Statements of operations for MinnTex Investment Partners LP for the threemonth periods ended March 31, 2007and 2006 follow:
|                                                 | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **March 31,**               | ** ** |
| ** **                                      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Income from  Portfolio Assets                   |       | $                                | 145        |   | $ | 564 |   |
| Other income                                    |       | —                           |       | 2 |   |
| Revenues                                        |       | 145                              |       | 566 |   |
| Service fees —  affiliate                  |       | (15                              | )          | (49 | ) |
| General,  administrative and operating expenses |       | (4                               | )          | (7 | ) |
| Expenses                                        |       | (19                              | )          | (56 | ) |
| Net earnings                                    |       | $                                | 126        |   | $ | 510 |   |

 

FirstCity holds variable interests in certainAcquisition Partnerships, which would be characterized as variable interestentities (“VIE”), as defined in FASB Interpretation No. 46R, *Consolidation of Variable Interest Entities* (“FIN 46R”).However, FirstCity is not deemed to be the primary beneficiary of any of theseentities based on the criteria set forth in FIN 46R. At March 31, 2007,FirstCity’s maximum exposure to loss as a result of its involvement with theVIEs is $51.7 million.

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands,except per share data) – (continued)**

At March 31, 2007, the Company had $40.4 million inEuro-denominated debt for the purpose of hedging a portion of the net equityinvestments in Europe. In general, the type of risk hedged relates to theforeign currency exposure of net investments in Europe caused by movements inEuro exchange rates. The Company designated the hedging relationship such thatchanges in the net investments being hedged are expected to be offset bycorresponding changes in the values of the Euro-denominated debt.

Effectiveness of the hedging relationship is measuredand designated at the beginning of each month by comparing the outstanding balanceof the Euro-denominated debt to the carrying value of the designated net equityinvestments. The net foreign currency translation gain (loss) included inaccumulated other comprehensive income relating to the Euro-denominated debtwas $213 for the three months ended March 31, 2007 and ($660) for the sameperiod in 2006.

**(7)  Loan Servicing Assets – SBA**

On January 1,2007, FirstCity adopted SFAS No. 156, *Accountingfor Servicing of Financial Assets*(“SFAS 156”), which requires servicing rights be initiallymeasured at fair value at the date of sale. Subsequent to the sale, companiesare permitted to measure the carrying value of the servicing assets usingeither the amortization or fair value measurement method. The Company electedto measure the servicing assets, subsequent to the date of sale, by using theamortization method which amortizes servicing assets in proportion to and overthe period of estimated net servicing income and assesses servicing assets forimpairment based on fair value at each reporting date.  The adoption of SFAS 156 by the Company onJanuary 1, 2007 did not have a significant impact on the Company’s consolidatedfinancial position or earnings.

In February 2007, the Company, through its subsidiaryAmerican Business Lending, Inc. (“ABL”), acquired a portfolio of SBA loans for$36.8 million.  Included in the purchaseprice were the rights to service additional loans with an unpaid balance of$33.8 million.  The Company recorded aservicing asset of $758 relating to these servicing rights. The remainingservicing rights capitalized were recorded as a result of loans sold during thequarter.

Servicing rights are recognized as assets when the SBAloans are sold and the rights to service those loans are retained. The Companyrecorded net servicing assets of $815 during the first quarter of 2007 whichincluded amortization of $15 and impairment of $39. ABL retains servicingresponsibilities and receives servicing fees of approximately 1%.

Changes in the Company’s amortized servicing rightsare as follows:
|                                              | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| ** **                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Beginning  Balance                           |       | $                                | —     |   | $ | — |   |
| Servicing Assets capitalized                 |       | 869                              | ** ** | — |   |
| Servicing Assets amortized                   |       | (15                              | )          | — |   |
| Ending Balance                               |       | $                                | 854        |   | $ | — |   |
|                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Reserve for  impairment of servicing assets: | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Beginning  Balance                           |       | $                                | —     |   | $ | — |   |
| Impairments                                  |       | (39                              | )          | — |   |
| Recoveries                                   |       | —                           |       | — |   |
| Charge Offs                                  |       | —                           |       | — |   |
| Ending Balance                               |       | $                                | (39        | ) | $ | — |   |
|                                         |       |                             |       |   |   |
| Ending Balance  (net of reserve)             |       | $                                | 815        |   | $ | — |   |
|                                         |       |                             |       |   |   |
| Fair value of  amortized servicing assets:   |       |                             |       |   |   |
| Beginning of quarter                         |       | $                                | —     |   | $ | — |   |
| End of quarter                               |       | 815                              |       | — |   |

 

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** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, except per share data)– (continued)**

The Company reliesprimarily on a discounted cash flow model to estimate the fair value of itsservicing rights.  This model calculatesestimated fair value of the servicing assets using predominant riskcharacteristics of servicing assets such as discount rate, prepayment speed,weighted average life of the loans sold and the interest rate.  The estimated fair value of servicing assetswas determined using a discount rate of 11.19%, prepayment speed of 15%, aweighted average life of 144 months, and an average interest rate of10.06%.  In the event future prepaymentsare significant or impairments are incurred and future expected cash flows areinadequate to cover the unamortized servicing assets, additional amortizationor impairment charges would be recognized.

**(8)  Segment Reporting**

The Company is engaged in one reportable segment - Portfolio Assetacquisition and resolution.  Thefollowing is a summary of results of operations for the Portfolio Assetacquisition and resolution segment and reconciliation to earnings fromcontinuing operations for the three months ended March 31, 2007 and 2006.
|                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Portfolio Asset Acquisition and  Resolution:**                                   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Revenues:                                                                          |       |                                             |       |   |   |
| Servicing fees                                                                     |       | $                                                | 2,605      |   | $ | 2,647 |   |
| Income from  Portfolio Assets                                                      |       | 5,035                                            |       | 2,058 |   |
| Gain on sale of  SBA loans held for sale, net                                      |       | 281                                              |       | — |   |
| Interest income  from SBA loans                                                    |       | 308                                              |       | — |   |
| Interest income  from affiliates                                                   |       | 126                                              |       | 430 |   |
| Interest income  from loans receivable - other                                     |       | 907                                              |       | — |   |
| Other                                                                              |       | 330                                              |       | 411 |   |
| Total                                                                              |       | 9,592                                            |       | 5,546 |   |
| Expenses:                                                                          |       |                                             |       |   |   |
| Interest and  fees on notes payable                                                |       | 4,251                                            |       | 1,708 |   |
| Salaries and  benefits                                                             |       | 3,114                                            |       | 2,933 |   |
| Provision for  loan and impairment losses                                          |       | 326                                              |       | 109 |   |
| Occupancy, data  processing, communication and other                               |       | 1,902                                            |       | 997 |   |
| Minority  interest                                                                 |       | (108                                             | )          | 11 |   |
| Total                                                                              |       | 9,485                                            |       | 5,758 |   |
| Equity in  earnings of investments                                                 |       | 1,826                                            |       | 3,634 |   |
| Operating  contribution before direct taxes                                        |       | $                                                | 1,933      |   | $ | 3,422 |   |
| Operating  contribution, net of direct taxes                                       |       | $                                                | 1,870      |   | $ | 3,328 |   |
|                                                                               |       |                                             |       |   |   |
| **Corporate Overhead:**                                                            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Salaries and  benefits, occupancy, professional and other income and expenses, net |       | 2,785                                            |       | 1,231 |   |
| Earnings (loss)  from continuing operations                                        |       | $                                                | (915       | ) | $ | 2,097 |   |

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in Thousands, except per share data) – (continued)**

Revenues and equity in earnings of investments from thePortfolio Asset acquisition and resolution segment are attributable to domesticand foreign operations as follows:
|               | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Domestic      |       | $                                                | 6,967      |   | $ | 5,354 |   |
| Latin America |       | 2,532                                            |       | 2,653 |   |
| Europe        |       | 1,830                                            |       | 1,173 |   |
| Other         |       | 89                                               |       | — |   |
| Total         |       | $                                                | 11,418     |   | $ | 9,180 |   |

 

Total assets for the Portfolio Asset acquisition andresolution segment and a reconciliation to total assets are as follows:
|                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Cash                                          |       | $                  | 17,211     |                  | $          | 18,472 |   |
| Portfolio acquisition  and resolution assets: |       |               |       |                  |       |
| Domestic                                      |       | 210,441            |       | 158,147               |       |
| Latin America                                 |       | 31,368             |       | 28,883                |       |
| Europe                                        |       | 54,638             |       | 61,062                |       |
| Other                                         |       | 2,357              |       | 2,272                 |       |
| Deferred tax asset, net                       |       | 20,101             |       | 20,101                |       |
| Other non-earning  assets, net                |       | 15,409             |       | 8,726                 |       |
| Total assets                                  |       | $                  | 351,525    |                  | $          | 297,663 |   |

 

**(9)  Earnings (loss) per Common Share**

Basic net earnings (loss) per common sharecalculations are based upon the weighted average number of common sharesoutstanding. Potentially dilutive common share equivalents include warrants andemployee stock options in the diluted earnings (loss) per common sharecalculations.  Basic and diluted earnings(loss) from continuing operations per share were determined as follows:
|                                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Earnings (loss) from  continuing operations                                       |       | $                                                | (915       | ) | $ | 2,097 |   |
| Weighted average  outstanding shares of common stock                              |       | 10,788                                           |       | 11,307 |   |
| Dilutive effect of:                                                               |       |                                             |       |   |   |
| Warrants                                                                          |       | 334                                              |       | 342 |   |
| Employee stock  options                                                           |       | 309                                              |       | 309 |   |
| Weighted average  outstanding shares of common stock and common stock equivalents |       | 11,431                                           |       | 11,958 |   |
| Earnings (loss) from  continuing operations per share:                            |       |                                             |       |   |   |
| Basic                                                                             |       | $                                                | (0.08      | ) | $ | 0.19 |   |
| Diluted                                                                           |       | $                                                | (0.08      | ) | $ | 0.18 |   |

 

**(10)  Stock-Based Compensation**

The impact on the results of operations of recordingstock-based compensation for the three month periods ended March 31, 2007 and2006 was as follows:

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Dollars in Thousands, except per share data) – (continued)**

 
|                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Amount of compensation  cost recognized in income |       | $                                                | 180        |   | $ | 145 |   |
| Tax benefit recognized  in income                 |       | $                                                | —     |   | $ | — |   |
| Amount capitalized as part of an asset            |       | $                                                | —     |   | $ | — |   |

 

A summary of stock optionactivity as of March 31, 2007 and changes during the period then ended ispresented below:
|                            | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------|------------|------------|------------|----------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1, 2007 |       | 779,100    |       | $                                      | 7.10       |                                                         |       |                            |       |   |
| Granted                         |       | —     |       | —                                 |       |                                                         |       |                            |       |
| Exercised                       |       | (2,500     | )          | 7.25                                   |       |                                                         |       |                            |       |
| Expired                         |       | (37,950    | )          | 27.25                                  |       |                                                         |       |                            |       |
| Forfeited                       |       | —     |       | —                                 |       |                                                         |       |                            |       |
| Outstanding at  March 31, 2007  |       | 738,650    |       | $                                      | 6.06       |                                                         | 6.06       |                            | $          | 3,913 |   |
| Exercisable at  March 31, 2007  |       | 558,163    |       | $                                      | 5.08       |                                                         | 5.48       |                            | $          | 3,511 |   |

 

The total intrinsic value of stock options exercisedduring the three month periods ended March 31, 2007 and 2006 was $9 and zero,respectively.  As of March 31, 2007,there was approximately $.9 million of total unrecognized compensation costrelated to unvested share-based compensation arrangements granted under thestock option plans.  That cost isexpected to be recognized over a weighted average period of 1.9 years.

A summary of the status and changes of FirstCity’snonvested shares as of March 31, 2007, and changes during the three monthsended March 31, 2007 is presented below:
|                          | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| Nonvested at  January 1, 2007 |       | 196,737    |       | $                                                   | 6.67       |   |
| Granted                       |       | —     |       | —                                              |       |
| Vested                        |       | (16,250    | )          | $                                                   | 4.24       |   |
| Forfeited                     |       | —     |       | —                                              |       |
| Nonvested at March 31,  2007  |       | 180,487    |       | $                                                   | 6.89       |   |

 

**(11)  Income Taxes**

Effective January 1, 2007, FirstCity adopted FASBInterpretation No. 48, *Accounting forUncertainty in Income Taxes — An Interpretation of FASB Statement No. 109* (“FIN 48”), which clarifies thefinancial statement recognition and disclosure requirements for uncertain taxpositions taken or expected to be taken in a tax return. Any interest andpenalties related to uncertain tax positions are recorded as interest expenseand general and administrative expense, respectively. At the time of adoptionand as of March 31, 2007, the Company’s unrecognized tax benefits are notconsidered material. In addition, interest or penalties related to income taxreporting recorded in the consolidated income statements or balance sheets arenot material. The Internal Revenue Service is currently in process of

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, except per share data)– (continued)**

examining FirstCity’sfederal income tax return for 2004.  Inaddition, FirstCity currently files tax returns in approximately 35 states and iscurrently being examined in four states for the year 2004.  Tax year 1992 and subsequent years are opento federal examination, and tax year 2002 and subsequent years are open tostate examination.

Federal income taxes are provided at a 35% rate. The Company has substantialnet operating loss carryforwards for federal income tax purposes (“NOLs”),which can be used to offset the tax liability associated with the Company’spre-tax earnings until the earlier of the expiration or utilization of suchNOLs. The Company accounts for the benefit of the NOLs by recording the benefitas an asset and then establishing a valuation allowance to value the netdeferred tax asset at a level, which more likely than not, will be realized.Realization is determined based on management’s expectation of generatingsufficient taxable income in a look forward period over the next four years.The ultimate realization of the resulting net deferred tax asset is dependentupon generating sufficient taxable income from its continuing operations priorto expiration of the NOLs. Although realization is not assured, managementbelieves it is more likely than not that all of the recorded deferred taxasset, net of the allowance, will be realized. The amount of the deferred taxasset considered realizable, however, could be adjusted in the future ifestimates of future taxable income during the carryforward period change. Theability of the Company to realize the deferred tax asset is periodicallyreviewed and the valuation allowance is adjusted accordingly.

**(12)  Commitments and Contingencies**

Periodically, FirstCity, its subsidiaries, itsaffiliates and the Acquisition Partnerships are parties to or otherwiseinvolved in legal proceedings arising in the normal course of business.FirstCity does not believe that there is any proceeding threatened or pendingagainst it, its subsidiaries, its affiliates or the Acquisition Partnershipswhich, if determined adversely, would have a material adverse effect on theconsolidated financial position, results of operations or liquidity ofFirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships.

In August 2000, Consumer Corp. and Funding LPcontributed all of the assets utilized in the operations of the automobilefinance operation to Drive pursuant to the terms of a Contribution andAssumption Agreement by and between Consumer Corp. and Drive, and aContribution and Assumption Agreement by and between Funding LP and Drive(collectively, the “Contribution Agreements”). Drive assumed substantially all ofthe liabilities of the automobile finance operation as set forth in theContribution Agreements. In addition, pursuant to the terms of a SecuritiesPurchase Agreement dated as of August 18, 2000 (the “2000 Securities PurchaseAgreement”), by and among FirstCity, Consumer Corp., FirstCity Funding LP (“FundingLP”), and FirstCity Funding GP Corp. (“Funding GP”), IFA-GP and IFA-LP;FirstCity, Consumer Corp., Funding LP and Funding GP made various warrantiesconcerning (i) their respective organizations, (ii) the automobile financeoperation conducted by Consumer Corp. and Funding LP, and (iii) the assetstransferred by Consumer Corp. and Funding LP to Drive. The Company, ConsumerCorp., Funding LP and Funding GP also agreed to indemnify BoS(USA), IFA-GP and IFA-LPfrom damages resulting from a breach of any representation or warrantycontained in the 2000 Securities Purchase Agreement or otherwise made by theCompany, Consumer Corp. or Funding LP in connection with the transaction. Theindemnity obligation under the 2000 Securities Purchase Agreement survives fora period of seven (7) years from August 25, 2000 (the “2000 Closing Date”) withrespect to tax-related representations and warranties and for thirty monthsfrom the 2000 Closing Date with respect to all other representations andwarranties. Neither the Company, Consumer Corp., Funding LP, or Funding GP isrequired to make any payments as a result of the indemnity provided under the2000 Securities Purchase Agreement until the aggregate amount payable exceeds$.25 million, and then only for the amount in excess of $.25 million in theaggregate; however certain representations and warranties are not subject tothis $.25 million threshold. Pursuant to the terms of the ContributionAgreements, Consumer Corp. and Funding LP have agreed to indemnify Drive fromany damages resulting in a material adverse effect on Drive resulting frombreaches of representations or warranties, failure to perform, pay or dischargeliabilities other than the assumed liabilities, or claims, lawsuits orproceedings resulting from the transactions contemplated by the ContributionAgreements. Pursuant to the terms of the Contribution Agreements, Drive hasagreed to indemnify Consumer Corp. and Funding LP for any breach of any representationor warranty by Drive, the failure of Drive to discharge any assumed liability,or any claims arising out of any failure by Drive to properly servicereceivables after August 1, 2000. Liability for indemnification pursuant to theterms of the Contribution Agreements will not arise until the total of alllosses with respect to such matters exceeds $.25 million and then only for theamount by which such losses exceed $.25 million; however this limitation willnot apply to any breach of which the party had knowledge at the time of theClosing Date or any intentional breach by a party of any covenant or obligationunder the Contribution Agreements. Management of the Company believes thatFirstCity will not have to pay any amounts related to these agreements.

On September 21, 2004, FirstCity, Consumer Corp.,Funding LP and Funding GP entered into the a Securities Purchase Agreement tosell a 31% beneficial ownership interest in Drive and its general partner,Drive GP LLC, to IFA-GP, IFA-LP and MG-

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Dollars in Thousands, except per share data) – (continued)**

LP (the “2004 Securities Purchase Agreement”). In the2004 Securities Purchase Agreement, FirstCity, Consumer Corp., Funding LP andFunding GP made various representations and warranties concerning (i) theirrespective organizations, (ii) their power and authority to enter into the 2004Securities Purchase Agreement and the transactions contemplated therein, (iii)the ownership of the limited partnership interests in Drive by Funding LP, (iv)the ownership of membership interests in Drive-GP by Consumer Corp., and (iv)the capital structure of Funding LP. FirstCity, Consumer Corp., Funding LP andFunding GP also agreed to indemnify BoS (USA), IFA-GP, IFA-LP and MG-LP fromdamages resulting from a breach of any representation or warranty contained inthe 2004 Securities Purchase Agreement or otherwise made by FirstCity, ConsumerCorp. or Funding LP in connection with the transaction. The indemnityobligations under the 2004 Securities Purchase Agreement survive for a maximumperiod of five (5) years from November 1, 2004. Neither FirstCity, ConsumerCorp., Funding LP, or Funding GP is required to make any payments as a resultof the indemnity provided under the 2004 Securities Purchase Agreement untilthe aggregate amount payable exceeds $.25 million, and then only for the amountin excess of $.25 million in the aggregate; however certain representations andwarranties are not subject to this $.25 million threshold. Management of theCompany believes that FirstCity will not have to pay any amounts relating tothese representations and warranties.

On August 8, 2006, an Interest Purchase and SaleAgreement was entered into by and among Bidmex Holding, LLC (“Buyer”), asbuyer, and SMIP and CFSI (collectively, the “Sellers”), as seller, and elevenof the LLCs and the AIG entities as additional parties.  In the InterestPurchase and Sale Agreement, the Sellers and the LLCs made variousrepresentations and warranties concerning (i) the existence and ownership ofthe LLCs and the related Mexican SRLs, (ii) the assets and liabilities of theLLCs, (iii) taxes related to periods prior to August 8, 2006, and (iv) theoperations of the LLCs and SRLs.  The Sellers agreed to indemnify theBuyer and AIG Entities from damages resulting from a breach of anyrepresentation or warranty contained in the Interest Purchase and Sale Agreementon a several and not joint basis according to their respective ownershippercentages in each LLC as to any matter related to a particular LLC, or on thebasis of 80% to CFSI and 20% to SMIP as to any matter that could not beidentified to a particular LLC.  The indemnity obligation under theInterest Purchase and Sale Agreement survives for a period of the statute oflimitations for matters related to taxes, existence and authority,capitalization and good standing of the LLCs and SRLs and for a period of twoyears from August 8, 2006, the closing date with respect to all otherrepresentations and warranties.  The Sellers are not required to make anypayments as a result of the indemnity provisions of the Interest Purchase andSale Agreement until the aggregate amount payable under that agreement and theAsset Purchase Agreement exceeds $.25 million; however, claims related to taxesand fraud are not subject to this $.25 million threshold.  The InterestPurchase and Sale Agreement limits the liability of the Sellers forindemnifiable losses under the Interest Purchase and Sale Agreement and theAsset Purchase Agreement to the Aggregate Purchase Price (without duplicationof amounts recovered pursuant to the terms of the Asset Purchase Agreement).  FirstCity does not believe that the potentialliability would have a material adverse effect on the consolidated financialposition, results of operations or liquidity of FirstCity, its subsidiaries,its affiliates or the Acquisition Partnerships.

Also on August 8, 2006, Bidmex Holding, LLC enteredinto an Agreement for the Onerous Transfer of Loans and Litigious Rights (the “AssetPurchase Agreement”) between and among Residencial Oeste, S. de R.L. de C.V.,as seller (the “Asset Seller”), an affiliate of CFSI and SMIP, ResidencialOeste 2, S. de R.L. de C.V., as purchaser (the “Asset Purchaser”), and CFSI,SMIP, and Bidmex Acquisition, LLC, the parent of the Asset Purchaser, asadditional parties.  The Asset Purchase Agreement provides for the sale ofthe loan portfolio owned by the Seller to the Purchaser for a purchase price of$10.1 million on the closing date, which purchase price is part of theAggregate Purchase Price.  In the Asset Purchase Agreement, the AssetSeller and the Sellers made various representations and warranties concerning(i) the existence and ownership of the Seller, (ii) the ownership of the loanportfolio, (iii) taxes related to periods arising prior to the closing date,and (iv) the existence of the loans comprising the loan portfolio and othermatters related to the loan portfolio.  The Asset Seller agreed toindemnify the Asset Purchaser from damages resulting from a breach of anyrepresentation or warranty.  The indemnity obligation under the AssetPurchase Agreement survives for a period of the statute of limitations formatters related to existence and ownership of the Seller, ownership of theloans, and taxes for periods prior to August 8, 2006, and for a period of twoyears from August 8, 2006, with respect to all other representations andwarranties.  The Seller is not required to make any payments as a resultof the indemnity provisions of the Asset Purchase Agreement until the aggregateamount payable under that Agreement exceeds $25; however, claims related totaxes and fraud are not subject to this $25 threshold.  The InterestPurchase and Sale Agreement limits the liability of the Sellers forindemnifiable losses under the Asset Purchase Agreement to the AggregatePurchase Price. FirstCity does not believe that the potential liability wouldhave a material adverse effect on the consolidated financial position, resultsof operations or liquidity of FirstCity, its subsidiaries, its affiliates orthe Acquisition Partnerships.

In connection withthe Interest Purchase and Sale Agreement, Recuperación de Carteras Mexicanas,S. de R.L. de C.V., as optionor (“RCM”), an affiliate of SMIP and CFSI, granteda put option dated August 8, 2006 to Bidmex Holding, LLC, as optionee, pursuantto the terms of a Put Option Agreement by and among RCM, Bidmex Holding, LLC,and Bidmex 6, LLC, the parent entity

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, except per share data)– (continued)**

of RCM and SMIP. RCM granted a put option to Bidmex Holding, LLC related to the purchase of anyloan of Solución de Activos Residenciales, S. de R.L. de C.V. or Solución deActivos Comerciales, S. de R.L. de C.V., each a Mexican SRL, if any borrowingon a loan made by those entities has filed or files a challenge in a legalproceeding related to any such loan based on, in addition to any other defenseclaims, a claim on grounds related to the Mexican Supreme Court Ruling that hasput into issue the actions required for transfer of loans by Mexican financialinstitutions after August 2003, provided that any such challenge is asserted onor before the earlier of (i) the reversal of the Supreme Court Ruling, or (ii)February 1, 2008.  The purchase price for any loan under the put option isto be the allocated purchase price set by the parties for the loan, pluscertain expenses related to the transfer and collection of the loan, plus anytaxes paid or payable with respect to the cash flow from each loan, reduced byany cash flow received by Bidmex Holding, LLC with respect to the loan.

FirstCity has minority interests in variouslimited-life partnerships with a carrying value of $.6 million at March 31,2007. The estimated amount that would be paid to the minority interest holderif the instruments were to be settled at March 31, 2007 is $2.3 million.

Financial Security Assurance Inc. (“FSA”), in itscapacity as certificate insurer under the Pooling and Servicing Agreement,relating to the FirstCity Capital Home Equity Loan Trust 1998-2 (the “Trust”),dated as of November 1, 1998 by and among FC Capital Corp., in its capacitiesas seller and master servicer, and The Bank of New York, in its capacity astrustee, made demand on FC Capital Corp. to repurchase certain loans that weresubject to repurchase due to fraud of third parties in connection with theorigination of the loans. FC Capital Corp. agreed to provide a letter of creditin the amount of the repurchase price for the loans in lieu of being requiredto purchase the loans from the Trust. FirstCity has obtained and delivered to FSA, for the benefit of FCCapital Corp., an irrevocable letter of credit in the amount of $510 from theBank of Scotland.  Pursuant to theagreement with FSA, FC Capital Corp. will have the option to purchase the loansfor $510 prior to a call under the letter of credit.

On September 22, 2006, FirstCity NPL S.A., a Chileanaffiliate of FirstCity Chile Ltda and FirstCity, entered into a revolving lineof credit with a maximum loan amount in Chilean pesos equivalent to $10.0million U.S. Dollars with CORPBANCA Sociedad Anónima Bancaria (“CB”) to financethe purchase of delinquent and due accounts. The revolving line of credit was structured by Corpbanca AsesoríasFinancieras S.A. (“CAF”).  Pursuant tothe terms of the credit facility, FirstCity NPL S.A. was required to provide astand-by letter of credit from Bank of Scotland that would satisfy the loanbalance upon demand.  At March 31, 2007,FirstCity had a letter of credit in the amount of $5.9 million from Bank ofScotland under the terms of FirstCity’s revolving acquisition facility withBank of Scotland.  In the event that ademand is made under the $5.9 million letter of credit, FirstCity is requiredto reimburse Bank of Scotland by making payment to Bank of Scotland for allamounts disbursed or to be disbursed by Bank of Scotland under the letter ofcredit.

On November 29,2006, FirstCity Mexico SA de CV, a Mexican affiliate of FirstCity, entered intoa revolving line of credit with a maximum loan amount in Mexican pesosequivalent to $13.4 million U.S. Dollars with Banco Santander, S.A. Theproceeds were used to pay down the acquisition facility with the Bankof Scotland.  Pursuant to the terms of the credit facility, FirstCityMexico SA de CV was required to provide a stand-by letter of credit fromBank of Scotland that would satisfy the loan balance upon demand.  AtMarch 31, 2007, FirstCity had a letter of credit in the amount of $14.1 millionfrom Bank of Scotland under the terms of FirstCity’s revolving acquisitionfacility with Bank of Scotland.  In the event that a demand is made underthe $14.1 million letter of credit, FirstCity is required to reimburse Bank ofScotland by making payment to Bank of Scotland for all amounts disbursed or tobe disbursed by Bank of Scotland under the letter of credit.

ABL, a subsidiaryof FirstCity, has a $40 million revolving loan facility with Wells FargoFoothill, Inc. (“WFF”), as amended in February 2007, for the purpose of financing and acquiring SBA loans. Theobligations under this facility are secured by substantially all of the assetsof ABL. In connection with this facility, FirstCity provided WFF with anunconditional guaranty of the obligations under the loan facility on behalf ofABL up to a maximum of $5 million.  This guaranty will remain in effectfor the life of the loan facility.

**(13)  Related Party Transactions**

In February 2007,the Company, through its subsidiary ABL, acquired a portfolio of SBA loans fromProsperity Bank for $36.8 million. FirstCity Directors, Robert E. Garrison II and D. Michael Hunter alsoserve as Directors of Prosperity Bank.

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, except per share data)– (continued)**

During the secondquarter 2007, FirstCity entered into a special situations platform that willbuy or finance distressed debt and companies, originate junior and seniorbridge loans, and execute lower middle market buyouts through its eightypercent investment in FirstCity Denver Investment Corp.   The other 20% interest in FirstCity DenverInvestment Corp. is owned by Crestone Capital LLC, a Colorado limited liabilitycompany owned by Richard W. Horrigan and Stephen C. Schmeltekopf.  Richard W. Horrigan, President of FirstCity DenverInvestment Corp., and Stephen C. Schmeltekopf, Senior Vice President ofFirstCity Denver Investment Corp., are employees of FirstCity Denver InvestmentCorp. and have employment contracts with FirstCity Denver Investment Corp.  Stephen Schmeltekopf is the brother of AndrewSchmeltekopf, Senior Vice President of FirstCity Servicing.

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

**Overview**

FirstCity is a financial services company engaged in one principalreportable segment—Portfolio Asset acquisition and resolution.  The Portfolio Asset acquisition and resolutionbusiness involves acquiring portfolios of loans, real estate and other assetsor single assets and investment in similar assets (collectively referred to as“Portfolios” or “Portfolio Assets”) generally at a discount to theirlegal principal balance or appraised value,and servicing and resolving such Portfolios in an effort to maximize thepresent value of the ultimate cash recoveries, and the origination of loanssecured by similar assets.

During the firstquarter of 2007, the Company recorded a net loss to common stockholders on adiluted basis of $915,000 or $.08 per common share. The operating contributionfrom the Portfolio Asset acquisition and resolution segment was $1.9 millioncompared with $3.3 million for the same period in 2006.  Corporate overhead increased to $2.8 millionduring the first quarter of 2007 compared to $1.2 million during the sameperiod in 2006, primarily due to fees related to an independent investigationauthorized by the audit committee, which is discussed in more detail infollowing paragraphs.  See Results ofOperations for a more detailed review of the first quarter 2007 compared to thefirst quarter 2006.

In February 2007,the Company, through its subsidiary, American Business Lending, Inc. (“ABL”),acquired its first portfolio of Small Business Administration (“SBA”) loans for$36.8 million.  Included in the purchaseprice were the rights to service additional loans with an unpaid balance of$33.8 million.  The Company recorded aservicing asset of $758,000 relating to these servicing rights.  Also inFebruary 2007, the Company was able to secure an increase in its workingcapital line of credit with Wells Fargo Foothill, LLC, up to a maximum of $40million.  The original line of credit was$25 million, and is used to finance SBA loans acquired or originated through ABL.

 The Company invested $69.5 million inportfolio acquisitions during the quarter (including $36.8 million in SBAloans).  FirstCity also invested $4.0million in a Chilean servicing entity as well as $3.8 million in the form ofadvances on loans receivable.  As aresult, earning assets (equity investments, inventory, loans receivable, andinterest receivable) increased to $298.8 million.  The acquisitions for the quarter contributedto a $48.4 million net increase in the primary earning assets base of theCompany.  FirstCity is currentlyevaluating 25 different transactions representing over $1.5 billion in facevalue of assets.

The Company’s financial results are affected by many factors includinglevels of, and fluctuations in, interest rates, fluctuations in the underlyingvalues of real estate and other assets, the timing of, and ability to,liquidate assets, and the availability and prices for loans and assets acquiredin all of the Company’s businesses. The Company’s business and results ofoperations are also affected by the availability of financing with termsacceptable to the Company and the Company’s access to capital markets,including the securitization markets.

As a result of the significant period to period fluctuations in therevenues and earnings and losses of the Company’s Portfolio Asset acquisitionand resolution business, period to period comparisons of the Company’s resultsof continuing operations may not be meaningful.

**Results of Independent Investigation**

As previously announced, the Audit Committee of theBoard of Directors conducted an independent investigation to review (i) whetherFirstCity and its subsidiaries received inadequate compensation or otherimproprieties occurred, with respect to the sale of a loan portfolio to a thirdparty, and (ii) FirstCity’s compliance with laws applicable to its foreignoperations as a result of allegations against an officer of an affiliate ofFirstCity regarding matters that occurred prior to the individual’s becoming anofficer of that affiliate.  The AuditCommittee engaged an outside law firm to act as independent counsel and conductthe investigation.  Independent counselworked with external forensic accountants to conduct its review.  In connection with this investigation, theCompany incurred approximately $1.2 million in legal and accounting fees duringthe first quarter 2007 and an additional $.8 million is reflected in the secondquarter of 2007.

The Independent Investigation found that the loanportfolio sale was initiated by other portfolio investors, who owned a majorityinvestment in the portfolio, and that the portfolio appeared to have been soldfor the best price available at the time. The Independent Investigation found no evidence indicating thatFirstCity or any officer, manager or full-time employee personally benefitedfrom the transactions relating to the portfolio sale.  The Independent Investigation concluded thatthe sales price received by FirstCity and the other portfolio investors wasreasonable based upon the information that was available at the time of thesale.

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The Independent Investigation concluded that it wasunable to complete its review of the issues relating to allegations against theofficer of an affiliate of FirstCity due to its inability to access certaindocumentation outside FirstCity’s custody and control.  FirstCity has reviewed these issues,performed on-site procedures at the affiliate location and has determined thatno adjustment to FirstCity’s financial statements is required in connectionwith this issue.

The Independent Investigation recommended improvementsdesigned to provide additional assurances for accurate financial reporting,particularly with respect to FirstCity’s Latin American operations, and toimprove FirstCity’s internal control structure. The Independent Investigationalso recommended changes in FirstCity’s approach to foreign businessrelationships.  In addition, theIndependent Investigation made a number of recommendations aimed at improvingFirstCity’s compliance practices and procedures.  FirstCity has already begun taking steps toimplement the foregoing recommendations.

FirstCity has not identified any material adjustmentto its financial statements that is required in connection with the results ofthe Independent Investigation.

Components of the results for the three month periods ended March 31,2007 and 2006, respectively, are detailed below (dollars in thousands exceptper share data):
|                                             | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** |
| ** **                                  | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Portfolio Asset  Acquisition and Resolution |       | $                                | 1,870      |   | $ | 3,328 |   |
| Corporate overhead                          |       | (2,785                           | )          | (1,231 | ) |
| Earnings (loss)  from continuing operations |       | (915                             | )          | 2,097 |   |
| Loss from  discontinued operations          |       | —                           |       | (75 | ) |
| Net earnings  (loss) to common stockholders |       | $                                | (915       | ) | $ | 2,022 |   |
| Diluted earnings (loss)  per common share   |       | $                                | (0.08      | ) | $ | 0.17 |   |

 

**Results ofOperations**

The following discussion and analysis is based on the segment reportinginformation presented in note 8 of the Consolidated Financial Statements of theCompany and should be read in conjunction with the Consolidated FinancialStatements (including the Notes thereto) included elsewhere in this QuarterlyReport on Form 10-Q.

***First Quarter 2007 Compared to First Quarter 2006***

The Company reported net losses of $.9 million in the first quarter of2007 compared to net earnings of $2.0 million in the first quarter of 2006. Ona per share basis, diluted net loss to common stockholders were $.08 in thefirst quarter of 2007 compared to $.17 diluted net earnings in the firstquarter of 2006.

*PortfolioAsset Acquisition and Resolution*

The operating contribution from the Portfolio Asset acquisition andresolution segment was $1.9 million in the first quarter of 2007 compared to$3.3 million in the first quarter of 2006. FirstCity invested $69.5 million inPortfolio and SBA acquisitions during the first quarter of 2007, of which $3.8million, $28.9 million and $36.8 million were acquired through AcquisitionsPartnerships, wholly-owned Portfolios and SBA loans acquired by ABL,respectively, compared to $23.3 million in the first quarter of 2006, which wascomprised of $17.5 million through Acquisition Partnerships and $5.8 millionthrough wholly-owned Portfolios.  Thequarter-end investment in Portfolio Assets increased to $127.8 million at March31, 2007, from $52.1 million at March 31, 2006, as a result of acquisitions ofapproximately $105.5 million since the first quarter of 2006. In addition tothe portfolio acquisitions during the first quarter of 2007, FirstCityinvested $4.0 million in a servicing entity as well as $3.8 million in the formof advances on loans receivable.

*Servicing fee revenues. *Servicing fee revenues remained constant at $2.6million in the first quarter of 2007 compared to $2.6 million in the firstquarter of 2006.

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*Income from Portfolio Assets*.  Income from Portfolio Assetsincreased to $5.0 million in the first quarter of 2007 from $2.1 million in thefirst quarter of 2006 due to increased purchases of portfolio assets.  FirstCity’s average investment in whollyowned portfolio assets was $111.2 million and $48.4 million during the first quartersof 2007 and 2006, respectively.

*Gainon sale of SBA loans held for sale. *The Company recorded gains on the sale of SBA loans of $281,000 during the firstquarter of 2007.  The Company’s basis inSBA loans sold was $6,745,000.  Gains onSBA loan sales reflect the participation in the SBA’s guaranteed loan program.Under the SBA 7(a) program, the SBA guarantees up to 85 percent of theprincipal of a qualifying loan. The Company usually sells the guaranteedportion of the loan into the secondary market and retains the unguaranteedportion.

*Interest income from SBA loans. *Interest income from SBA loans was $.3 millionduring the first quarter of 2007 as a result of the SBA portfolio acquisitionin February 2007.

* Interest income fromaffiliates. *Interest income from affiliates decreased to $.1million in the first quarter of 2007 from $.4 million in the first quarter of2006 due to the conversion of loans to equity as part of the restructure ofinvestments in Mexico during the third quarter 2006, which reduced the amountof loans outstanding and the corresponding income.

*Interest income from loans receivable - other. * Interest income from loansreceivable – other was $.9 million in the first quarter of 2007 and relates toloans originated in the latter half of 2006 which included loans to a Canadianreal estate company, and two domestic real estate companies.

*Other income*.Other income decreased to $.3 million in the first quarter of 2007 from $.4million in the first quarter of 2006.

*Expenses. *Operating expenses were $9.5 million and $5.8million in the first quarters of 2007 and 2006, respectively.  Below is a discussion of the majorcomponents.

Interest and fees on notes payable were $4.3 million and $1.7 million inthe first quarters of 2007 and 2006, respectively. The average debt for thequarter increased to $204.5 million in the first quarter of 2007 from $88.6million in the first quarter of 2006, and the average cost of borrowingincreased to 8.3% in 2007 compared to 7.7% in 2006.

Salaries and benefits increased 6.1% to $3.1 million in the first quarterof 2007 from $2.9 million in the first quarter of 2006, primarily due toadditional salaries related to ABL in 2007 of $234,000, as well as severancepay of $82,000 related to closing the Richmond office in 2007, partially offsetby a reduction of $106,000 due to closing FirstCity Servicing of Minnesota inthe second quarter of 2006. The total number of personnel within the PortfolioAsset acquisition and resolution segment were 174 and 177 at March 31, 2007 and2006, respectively.

The provision for loan and impairment losses was $326,000 and $109,000 atMarch 31, 2007 and 2006, respectively.

Occupancy, data processing, communication and other expenses increased to$1.9 million for the first quarter of 2007 from $1.0 million in the firstquarter of 2006 primarily due to increased servicing fees in Chile.  In addition, foreign exchange losses of$216,000 occurred during the first quarter of 2007 compared to $342,000 foreignexchange gains for the same period in 2006.

Minority interest was ($108,000) and $11,000 for the first quarters of2007 and 2006, respectively.  Thedifference between the quarters is primarily as result of the Company’s 60%ownership in a Chilean acquisition partnership, which was acquired in the thirdquarter of 2006, and which is consolidated into the Company’s financialstatements, thus increasing the minority interest by the 40% minorityownership.

*Equity in earnings of investments. *Equity in earningsof investments decreased 49.8% to $1.8 million in the first quarter of 2007compared to $3.6 million in the first quarter of 2006.  Equity earnings in Acquisition Partnershipsdecreased 51.7% to $1.8 million in the first quarter of 2007 from $3.7 millionin the first quarter of 2006. Following is a discussion of equity earnings fromAcquisition Partnerships by geographic region.

·             *Domestic* — Equity in earnings of domestic AcquisitionPartnerships was $251,000 in the first quarter of 2007 compared to $2.3 millionin the first quarter of 2006.  These partnerships reflected net earningsof $579,000 in the first quarter of 2007 compared to $4.6 million in2006. During the first quarter of 2006, revenue of $1.08 million wasgenerated from one partnership which liquidated its investments. In addition,collections on Portfolio Assets decreased to $17.2 million in the first quarterof 2007 from $23.3 million in 2006. This decrease was due in part to incomefrom Portfolio Assets in 2006 being

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generated primarily from loans acquired prior to2005, whereas income in 2007 was generated primarily from loans acquired after2004.  Income from Portfolio Assets acquired after 2004 is less sensitiveto collections than from Portfolio Assets acquired prior to 2005.  ForPortfolios acquired after 2004, income is recognized ratably over the remaininglife of the Portfolio based on an expected yield.  For nonperforming loansacquired prior to 2005, income is recognized to the extent that collectionsexceed a pro rata portion of allocated cost from the pool.  These partnerships also reflected provisions,net of recoveries, of $1.48 million in the first quarter of 2007 compared to$663,000 in the first quarter of 2006.

·             *Latin America* — Equity inearnings (loss) of Acquisition Partnerships located in Latin America was($10,000) in the first quarter of 2007 compared to $444,000 in 2006, primarilydue to provisions for loan losses recorded by certain Mexican partnerships.These partnerships reflected net losses of $1.4 million in the first quarter of2007 compared to net earnings of $3.9 million in 2006. During the first quarterof 2007, the partnerships recorded provisions net of recoveries of allowancefor loan losses of $4.3 million compared to $1.3 million net recoveries duringthe first quarter of 2006.  Provisionsfor the first quarter of 2007 are primarily due to certain portfolios inMexico, where the overall projected cash collections increased, but the netpresent value decreased due to extending the anticipated period of collection.****The partnerships recorded $265,000 of foreign exchangelosses in the first quarter of 2007 compared to $1.7 million of foreignexchange gains in 2006 (of which $37,000 losses and $176,000 gains wereincluded in equity earnings, respectively).

·             *Europe* — Equity inearnings of Acquisition Partnerships located in Europe increased to $1.54million in the first quarter of 2007 compared to $.98 million in 2006 primarilydue to increased earnings as a result of new investments in Europe.  These partnerships recorded $.76 million inprovisions net of recoveries during the first quarter of 2007 compared to netrecoveries of $.41 million during the same period in 2006. FirstCity recorded$242,000 in foreign currency transaction losses and $334,000 in foreigncurrency transaction gains (included in other expenses) relating to investmentsin Europe during the first quarter of 2007 and 2006, respectively.

*Other ItemsAffecting Operations*

The following items affect the Company’s overall results of operationsand are not directly related to the Portfolio Asset acquisition and resolutionbusiness discussed above.

*Corporate overhead.   *Net corporate overhead expenses (excluding taxes)increased to $2.7 million in the first quarter of 2007 compared to $1.2 millionin the first quarter of 2006 primarily due to $1.2 million in expenses incurredduring the first quarter of 2007 relating to the investigation authorized bythe audit committee.

*Income taxes. *Provision for incometaxes was $157,000 and $122,000 in the first quarters of 2007 and 2006,respectively, and related primarily to state income taxes during both periods. Federal income taxes are provided at a 35% rateapplied to taxable income or loss and are offset by NOLs that the Companybelieves are available. The tax benefit of the NOLs is recorded in the periodduring which the benefit is realized. The Company recorded no deferred taxprovision in the first quarters of either 2007 or 2006.

*Discontinued Operations. *There were no additional losses from discontinuedmortgage operations during the first quarter of 2007 compared to $75,000 in thefirst quarter of 2006. At March 31, 2007, the only asset remaining fromdiscontinued mortgage operations is an investment security resulting from theretention of a residual interest in a securitization transaction.

#### **FinancialCondition**

Major changes in FirstCity’s financial condition resulted from thefollowing:

Consolidated assets of $351.5 million at March 31, 2007, were $53.9million higher than that at December 31, 2006 primarily due to increases inPortfolio Assets and SBA loans. Portfolio Assets increased by $19.1 million asa result of acquisitions made during 2007. SBA loans purchased for the period were $28.0 million.

Consolidated liabilities of $248.6 million as of March 31, 2007, were$54.8 million higher than that at December 31, 2006. Total notes payableincreased by $49.3 million and reflected advances of $81.5 million primarilyfor portfolio acquisitions, net of repayments of $32.6 million.

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#### **PortfolioAsset Acquisition and Resolution**

Aggregate acquisitions by the Company are as follows (in thousands):
|                             | ** ** | **Purchase** | ** ** | **FirstCity**  | ** ** |
|-----------------------------|------------|--------------|------------|----------------|------------|
| ** **                  | ** ** | **Price**    | ** ** | **Investment** | ** ** |
| First three  months of 2007 |       | $            | 78,771     |           | $          | 69,455 |   |
| Total 2006                  |       | 296,990      |       | 144,048        |       |
| Total 2005                  |       | 146,581      |       | 71,405         |       |
| Total 2004                  |       | 174,139      |       | 59,762         |       |
| Total 2003                  |       | 129,192      |       | 22,944         |       |
| Total 2002                  |       | 171,769      |       | 16,717         |       |
|                             |            |              |            |                |            |  |  |

 

**Provisionfor Income Taxes**

The Company has substantial NOLs, which can be used to offset the taxliability associated with the Company’s pre-tax earnings until the earlier ofthe expiration or utilization of such NOLs. The Company accounts for thebenefit of the NOLs by recording the benefit as an asset and then establishinga valuation allowance to value the net deferred tax asset at a level, whichmore likely than not, will be realized. Realization is determined based onmanagement’s expectation of generating sufficient taxable income in a lookforward period over the next four years. The ultimate realization of theresulting net deferred tax asset is dependent upon generating sufficienttaxable income from its continuing operations prior to expiration of the NOLs.Although realization is not assured, management believes it is more likely thannot that all of the recorded deferred tax asset, net of the allowance, will berealized. The amount of the deferred tax asset considered realizable, however,could be adjusted in the future if estimates of future taxable income duringthe carryforward period change. The ability of the Company to realize thedeferred tax asset is periodically reviewed and the valuation allowance isadjusted accordingly.

**Liquidityand Capital Resources**

Generally, the Company requires liquidity to fund itsoperations, working capital, payment of debt, repurchase of the Company’scommon stock, equity for acquisition of Portfolio Assets, investments in andadvances to the Acquisition Partnerships, and other investments by the Company.The potential sources of liquidity are funds generated from operations, equitydistributions from the Acquisition Partnerships, interest and principalpayments on subordinated intercompany debt and dividends from the Company’ssubsidiaries, borrowings from revolving lines of credit, proceeds from equitymarket transactions, securitization and other structured finance transactionsand other special purpose short-term borrowings.

FirstCityhas a $175 million revolving acquisition facility with Bank of Scotland as mostrecently amended on June 29, 2007, used to finance the senior debt and equityportion of portfolio and asset purchases made by FirstCity and to provide forthe issuance of letters of credit and working capital loans. The obligations ofFirstCity under this facility are guaranteed by substantially all of thewholly-owned subsidiaries of FirstCity and are secured by security interests insubstantially all of the assets of FirstCity and its wholly-ownedsubsidiaries.  The primary terms and keycovenants of this facility are as follows:

·                  Themaximum outstanding amount of loans and letters of credit issued under the loanfacility that may be outstanding under the loan facility is $175 million;

·                  Theavailable interest rates under the loan facility are LIBOR plus 2.00% to 2.50%per annum;

·                  Themaximum value for assets that can be included in the borrowing base from theacquisition of portfolio assets in certain countries are as follows: Mexico -$30 million, Brazil - $5 million, Chile - $10 million, and Argentina or Uruguay- $6 million;

·                  Thelimit for loans that can be borrowed in Euros under the loan facility is $50million;

·                  Themaximum amount of letters of credit that can be issued under the loan facilityis $40 million;

·                  Themaximum amount of working capital loans that can be outstanding under the loanfacility is $35 million;

·                  Theratio of EBITDA to Interest Coverage should not be not less than 1.50 to 1.00for each twelve month period;

·                  Theratio of Indebtedness to Tangible Net Worth should be equal to or less than 3.5to 1.00 for the last day of the fiscal quarter;

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·                  Theratio of Cumulative Current Recovered and Projected Collections to CumulativeOriginal Projected Collections should not be less than 0.90 to 1.00; and

·                  The maturitydate for the loan facility is November 12, 2010.

FHPartners, L.P., an indirect wholly-owned affiliate of FirstCity, has arevolving loan facility with Bank of Scotland as most recently amended on June29, 2007, that provides for a $50 million revolving Portfolio acquisitionfacility for FH Partners, L.P. to be secured by all of the assets of FHPartners, L.P.  The loan facility will beused to finance Portfolio and asset purchases. The obligations of FH Partners, L.P. under the facility are guaranteedby FirstCity and the primary wholly-owned subsidiaries of FirstCity.  The primary terms and key covenants of thisfacility are as follows:

·                  allows loans tobe made for the acquisition of Portfolio Assets in the United States;

·                  provides thateach loan may be in an amount of up to 70% of the net present value of theassets being acquired with the proceeds of the loan;

·                  provides thatthe aggregate outstanding balances of all loans will not exceed 65% of the netpresent value of the assets securing the loan facility;

·                  provides for aninterest rate of LIBOR plus 2.0%;

·                  provides for anannual commitment fee of 0.20% of the average daily unused balance of therevolving acquisition facility;

·                  provides for autilization fee of 0.75% of the amount of each loan made under the loanfacility;

·                  provides forfacility fees of $100,000, for the period commencing on the effective date andending the day before the first anniversary thereof, $75,000, for the periodcommencing on the first anniversary of the effective date and ending the daybefore the second anniversary thereof, and $50,000, for each subsequentone-year period;

·                  provides thatall other financial covenants will mirror the key covenants of the facilitythat FirstCity has with Bank of Scotland; and

·                  providesfor a maturity date of November 12, 2008.

FirstCity hasobtained consents from the Bank of Scotland to the delivery of its Form 10-Qfor the period ending March 31, 2007, by not later than July 31, 2007. Theextensions were granted under the terms of both FirstCity’s revolving creditfacility and the revolving acquisition facility provided to FH Partners L.P.,to allow FirstCity and FH Partners, L.P. to continue to utilize those loanfacilities in the normal course of business.

#### ABL, a subsidiary of FirstCity, has a $40 million revolving loanfacility with Wells Fargo Foothill, Inc. (“WFF”), as amended in February 2007, for the purpose of financing and acquiringSBA loans. The obligations under this facility are secured bysubstantially all of the assets of ABL.  At March 31, 2007, the balance of this facility was $29.1 million.The primary terms and key covenants of this revolving loan facility are asfollows:

#### ·                  allows advances in the maximum amount of $40 million (the “MaximumCredit Line”) to be made under the facility;

#### ·                  provides for a borrowing base for originating loans by which (a) thesum of (1) up to one hundred percent (100%) of the net eligible SBA guaranteedloans originated by ABL, plus (2) up to eighty percent (80%) of the neteligible non-guaranteed loans originated by ABL, exceeds (b) the sum of (1) anyreserves for obligations of ABL related to the bank products, plus (2) theaggregate amount, if any, of loan reserves then established and outstanding,plus (3) the aggregate amount of any other reserves established by WFF;

#### ·                  provides for aborrowing base for acquiring loans by which (a) the sum of (1) up to onehundred percent (100%) of the net eligible SBA guaranteed performing loansacquired by ABL, (provided, that such percentage shall be reduced by fivepercent (5%) on November 1, 2007 and on the first day of each monththereafter), plus (2) up to eighty percent (80%) of the net eligiblenon-guaranteed performing loans acquired by ABL, exceeds (b) the sum of (1) anyreserves with respect to acquired performing loans related to the bankproducts, plus (2) the aggregate amount, if any, of loan reserves thenestablished and outstanding, plus (3) the aggregate amount of any otherreserves established by WFF;

#### ·                  provides for an interest rate of LIBOR plus2.625% or, alternatively, the greater of (x) the Wells Fargo prime rate or (y)seven and one-half percent (7.50%) per annum;

#### ·                  provides for an unused credit line fee inan amount equal to one-quarter of one percent (0.25%) per annum of the averagedaily difference during the month in question (or portion thereof) between theMaximum Credit Line and the aggregate outstanding principal amount of theadvances outstanding under the facility for such month (or portion thereof);

#### ·                  provides in the event of the termination of the facility by ABL for aprepayment fee of three percent (3.0%) of the Maximum Credit Line if paid priorto December 14, 2007, two percent (2.0%) of the Maximum Credit Line if paidduring

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#### the period beginning December 15, 2007 andending December 14, 2008, and one percent (1.0%) of the Maximum Credit Line ifpaid during the period beginning December 15, 2008 and ending December 13,2009; and

#### ·                  provides for a maturity date of December14, 2009.

In connection withthe February 2007 amendment, FirstCity provided Wells Fargo Foothill, Inc. withan unconditional guaranty of the obligations under the loan facility on behalfof ABL up to a maximum of $5 million.  This guaranty will remain in effectfor the life of the loan facility.

At March 31, 2007, the Company had $40.4 million inEuro-denominated debt for the purpose of hedging a portion of the net equityinvestments in Europe. In general, the type of risk hedged relates to theforeign currency exposure of net investments in Europe caused by movements inEuro exchange rates. The Company designated the hedging relationship such thatchanges in the net investments being hedged are expected to be offset bycorresponding changes in the values of the Euro-denominated debt.  Effectiveness of the hedging relationship ismeasured and designated at the beginning of each month by comparing theoutstanding balance of the Euro-denominated debt to the carrying value of thedesignated net equity investments. The net foreign currency translation gain(loss) included in accumulated other comprehensive income relating to theEuro-denominated debt was $213,000 for the three months ended March 31, 2007and ($660,000) for the same period in 2006.

On September 22, 2006, FirstCity NPL S.A., a Chileanaffiliate of FirstCity Chile Ltda and FirstCity, entered into a revolving lineof credit with a maximum loan amount in Chilean pesos equivalent to $10.0million U.S. Dollars with CORPBANCA Sociedad Anónima Bancaria (“CB”) to financethe purchase of delinquent and due accounts. The revolving line of credit was structured by Corpbanca AsesoríasFinancieras S.A. (“CAF”).  Pursuant tothe terms of the credit facility, FirstCity NPL S.A. was required to provide astand-by letter of credit from Bank of Scotland that would satisfy the loanbalance upon demand.  At March 31, 2007,FirstCity had a letter of credit in the amount of $5.9 million from Bank ofScotland under the terms of FirstCity’s revolving acquisition facility withBank of Scotland.  In the event that ademand is made under the $5.9 million letter of credit, FirstCity is requiredto reimburse Bank of Scotland by making payment to Bank of Scotland for allamounts disbursed or to be disbursed by Bank of Scotland under the letter ofcredit.

On November 29,2006, FirstCity Mexico SA de CV, a Mexican affiliate of FirstCity, entered intoa revolving line of credit with a maximum loan amount in Mexican pesosequivalent to $13.4 million U.S. Dollars with Banco Santander, S.A. Theproceeds were used to pay down the acquisition facility with the Bankof Scotland.  Pursuant to the terms of the credit facility, FirstCityMexico SA de CV was required to provide a stand-by letter of credit fromBank of Scotland that would satisfy the loan balance upon demand.  AtMarch 31, 2007, FirstCity had a letter of credit in the amount of $14.1 millionfrom Bank of Scotland under the terms of FirstCity’s revolving acquisitionfacility with Bank of Scotland.  In the event that a demand is made underthe $14.1 million letter of credit, FirstCity is required to reimburse Bank ofScotland by making payment to Bank of Scotland for all amounts disbursed or tobe disbursed by Bank of Scotland under the letter of credit.

BoS (USA) has a warrant to purchase 425,000 shares ofthe Company’s voting Common Stock at $2.3125 per share. BoS (USA) is entitledto additional warrants in connection with this existing warrant for 425,000shares under certain specific situations to retain its ability to acquireapproximately 4.86% of the Company’s voting Common Stock.  The warrant will expire on August 31, 2010,if it is not exercised prior to that date.

Excluding the term acquisition facilities of theunconsolidated Acquisition Partnerships, the Company and its subsidiariescurrently have credit facilities providing for borrowings in an aggregateprincipal amount of $296 million, and outstanding borrowings of $237 million asof March 31, 2007.

Management believes that the existing loan facilities,the related fees generated from the servicing of assets, equity distributionsfrom existing Acquisition Partnerships and wholly-owned portfolios, sales ofinterests in equity investments, and origination and sales of guaranteedportions of  SBA 7(a) loans, will allowthe Company to meet its obligations as they come due during the next twelvemonths.

The following table summarizes the material terms ofthe credit facilities to which the Company, its major operating subsidiaries andthe Acquisition Partnerships were parties to as of June 30, 2007, and theoutstanding borrowings under such facilities as of March 31, 2007.

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**Credit Facilities**

 
| ** **                                                                                               | ** ** | **Funded and**            | ** ** | ** **      | ** ** | ** **                                                      | ** ** | ** **                                                                                   |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|
| ** **                                                                                               | ** ** | **Unfunded**              | ** ** | **Outstanding** | ** ** | ** **                                                      | ** ** | ** **                                                                                   |
| ** **                                                                                               | ** ** | **Commitment**            | ** ** | **Borrowings**  | ** ** | ** **                                                      | ** ** | ** **                                                                                   |
| ** **                                                                                               | ** ** | **Amount as of**          | ** ** | **as of**       | ** ** | ** **                                                      | ** ** | ** **                                                                                   |
| ** **                                                                                               | ** ** | **June 30,**              | ** ** | **March 31,**   | ** ** | ** **                                                      | ** ** | ** **                                                                                   |
| ** **                                                                                               | ** ** | **2007**                  | ** ** | **2007**        | ** ** | **Interest Rate**                                               | ** ** | **Other Terms and Conditions**                                                               |
| ** **                                                                                               | ** ** | **(Dollars in millions)** | ** ** | ** **      | ** ** | ** **                                                      |
|                                                                                                     |       |                      |       |            |       |                                                            |       |                                                                                         |
| Bank of Scotland  $175 million portfolio acquisition and working capital facility (1)                    |       | $                         | 175        |            | $          | 136                                                             |       | LIBOR + 2.0% - 2.50%                                                                         |   | Secured by equity interests and other assets of  FirstCity, matures November 2010 |
|                                                                                                     |       |                      |       |            |       |                                                            |       |                                                                                         |
| Bank of Scotland  $50 million portfolio acquisition - revolving credit                                   |       | 50                        |       | 50              |       | LIBOR + 2.0%                                                    |       | Secured by assets of FH Partners, L.P. and  guaranteed by the Company, matures November 2008 |
|                                                                                                     |       |                      |       |            |       |                                                            |       |                                                                                         |
| American Bank  term loan for portfolio acquisition by FC Washington                                      |       | 2                         |       | 2               |       | Fixed 5.625%                                                    |       | Secured by assets of FC Washington and guaranteed by  the Company, matures 2008              |
|                                                                                                     |       |                      |       |            |       |                                                            |       |                                                                                         |
| Participation  payable                                                                                   |       | 1                         |       | 1               |       | 33.45% imputed rate                                             |       | Participation agreement on 33% of net cash flows  received on one portfolio                  |
|                                                                                                     |       |                      |       |            |       |                                                            |       |                                                                                         |
| CorpBanca  revolving line of credit for Chilean portfolio acquisition                                    |       | 10                        |       | 6               |       | Rate based on monthly Chilean index rate plus .0625%  per month |       | Secured by Bank of Scotland letter of credit.  Renewable every 30 days.                      |
|                                                                                                     |       |                      |       |            |       |                                                            |       |                                                                                         |
| Banco Santander  line of credit facility                                                                 |       | 13                        |       | 13              |       | Rate based on 28 day Mexican index rate plus 1.5%               |       | Secured by Bank of Scotland letter of credit,  matures November 2008                         |
| ** **                                                                                               |       |                      |       |            |       |                                                            |       |                                                                                         |
| Wells Fargo  Foothill, Inc. $40 million revolving loan facility                                          |       | 40                        |       | 29              |       | LIBOR + 2.625% or greater of Wells Fargo prime or  7.5%         |       | Secured by assets of American Business Lending,  Inc., matures December 2009.                |
| ** **                                                                                               |       |                      |       |            |       |                                                            |       |                                                                                         |
| The First  National Bank of Central Texas term loan for portfolio acquisition by MPortfolio  Corporation |       | 5                         |       | —          |       | LIBOR + 1.75%                                                   |       | Secured by assets of MPortfolio Corporation, matures  June 2010.                             |
|                                                                                                     |       |                      |       |            |       |                                                            |       |                                                                                         |
| Total                                                                                                    |       | $                         | 296        |            | $          | 237                                                             |       |                                                                                         |   |   |

 

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(1)          The Bank of Scotlandfacility allows loans to be made in Euros up to a maximum amount in Euros thatis equivalent to $50 million.  At March31, 2007, the Company had approximately $40.4 million outstanding under theEuro-denominated portion of this facility.

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**Forward-LookingStatements**

Certainstatements contained in this Quarterly Report on Form 10-Q or incorporated byreference from time to time, including, but not limited to, statements relatingto the Company’s strategic objectives and future performance, which are nothistorical facts, may be deemed to be forward-looking statements under thePrivate Securities Litigation Reform Act of 1995. Forward-looking statementsinclude, without limitation, any statement that may project, indicate or implyfuture results, performance or achievements, and may contain the words “expect,”“intend,” “plan,” “estimate,” “believe,” “will be,” “will continue,” “willlikely result,” and similar expressions. Such statements inherently are subjectto a variety of risks and uncertainties that could cause actual results todiffer materially from those projected. There are many important factors thatcould cause the Company’s actual results to differ materially from thoseindicated in the forward-looking statements. Such factors include, but are notlimited to, the performance of the Company’s subsidiaries and affiliates; theavailability of Portfolio Assets; assumptions underlying Portfolio assetperformance; risks associated with foreign operations; currency exchange ratefluctuations; risks associated with start up of new businesses and entry intonew foreign markets; interest rate risk; the degree to which the Company isleveraged; the Company’s continued need for financing; availability of theCompany’s credit facilities;  abilityto obtain additional financing from the Bank of Scotland or any other lender;the impact of certain covenants in loan agreements of the Company and itssubsidiaries; risks of declining value of loans, collateral or assets; theability of the Company to utilize NOLs; uncertainties of any litigation thatmight arise from discontinued operations; general economic conditions; foreignsocial and economic conditions; changes (legislative and otherwise) in the assetsecuritization industry; fluctuations in residential and commercial real estatevalues; capital market conditions, including the markets for asset-backedsecurities; factors more fully discussed and identified in the Company’s AnnualReport on Form 10-K, for the year ended December 31, 2006, filed with theSecurities and Exchange Commission on July 24, 2007 (including those discussedunder “Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations”), as well as in other Securities and Exchange Commissionfilings of the Company. Many of these factors are beyond the Company’s control.In addition, it should be noted that past financial and operational performanceof the Company is not necessarily indicative of future financial andoperational performance. Given these risks and uncertainties, investors shouldnot place undue reliance on forward-looking statements. The forward-lookingstatements in this Quarterly Report on Form 10-Q speak only as of the date ofthis Quarterly Report on Form 10-Q. The Company expressly disclaims anyobligation or undertaking to release publicly any updates or revisions to anyforward-looking statement to reflect any change in the Company’s expectationswith regard thereto or any change in events, conditions or circumstances onwhich any forward-looking statement is based.

**Item 3.  Quantitative andQualitative Disclosures About Market Risk.**

**Interest Rate Risk**

Market risk is the risk of loss from adverse changesin market prices and interest rates. The Company’s operations are materiallyimpacted by net gains on sales of loans and net interest margins. The level ofgains from loan sales the Company achieves is dependent on demand for theproducts originated. Net interest margins are dependent on the Company’sability to maintain the spread or interest differential between the interest itcharges the customer for loans and the interest the Company is charged for thefinancing of those loans. The following describes each component of interestbearing assets held by the Company and how each could be affected by changes ininterest rates.

The Company invests in Portfolio Assets both directlythrough consolidated subsidiaries and indirectly through equity investments inAcquisition Partnerships. Portfolio Assets consist of investments in pools ofnon-homogenous assets that predominantly consist of loan and real estateassets. Earnings from these assets are based on the estimated future cash flowsfrom such assets and recorded when those cash flows occur. The underlying loanswithin these pools bear both fixed and variable rates. Due to thenon-performing nature and history of these loans, changes in prevailingbenchmark rates (such as the prime rate or LIBOR) generally have a nominaleffect on the ultimate future cash flow to be realized from the PortfolioAssets.

Loans receivable consist of investment loans made toAcquisition Partnerships and other unrelated entities, and bear interest atpredominately fixed rates. The collectibility of these loans is directlyrelated to the underlying Portfolio Assets of those Acquisition Partnerships,which are non-performing in nature. Therefore, changes in benchmark rates wouldhave minimal effect on the collectibility of these loans.

SBA loansreceivable were $28.0 million at March 31, 2007 of which $11.5 million wererelated to the guaranteed portion of these loans.  The guaranteed portion is backed by the fullfaith and credit of the US Small Business Administration, and is generally soldinto the secondary market.  Virtually allof the SBA loans have variable interest rates. Assuming that the balance sheet were to remain constant and no actionswere taken to alter the existing interest rate sensitivity, a hypotheticalimmediate change in interest rates would have a

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minimal effect oninterest income from SBA loans for the first quarter of 2007. Althoughmanagement believes that this measure is indicative of our sensitivity tointerest rate changes, it does not adjust for potential changes in creditquality, size and composition of the assets on the balance sheet, and otherbusiness developments that could affect a net increase (decrease) in assets.Accordingly, no assurances can be given that actual results would not differmaterially from the potential outcome simulated by this estimate.

FirstCity had $237.1 million in debt outstanding atMarch 31, 2007. The Company is exposed to interest rate risk primarily throughits variable rate debt, which totaled $234.9 million or 99% of the Company’stotal debt. A 50 basis point change in interest rates would increase ordecrease FirstCity’s interest expense by approximately $1.2 million annually.

**Foreign Currency Risk**

The Company currently has loans and equity investmentsin Europe, Latin America (i.e. Mexico, Argentina, Dominican Republic and Chile)and Canada.

In Europe and in Mexico, the Company’s investments areprimarily in the form of equity and represent a significant portion of theCompany’s total equity investments. As previously discussed, the revolvingacquisition facility with Bank of Scotland for $175 million allows loans to bemade in Euros up to a maximum amount in Euros that is equivalent to $50 millionU.S. dollars. At March 31, 2007, the Company had $40.4 million inEuro-denominated debt for the purpose of hedging a portion of the net equityinvestments in Europe.  In November 2006the Company acquired a line of credit facility with Banco Santander, S.A. thatallows loans to be made in Mexican pesos up to a maximum that is equivalent to$13.4 million U.S. dollars. At March 31, 2007, the Company had $13.4 million inMexican peso-denominated debt. Management of the Company feels that these loan agreements will helpreduce the risk of adverse effects of currency changes on these investments.

A sharp change in the foreign currencies related tothe investments in Europe, Latin America and Canada relative to the U.S. dollarcould materially adversely affect the financial position and results ofoperations of the Company. A 5% and 10% incremental depreciation of thesecurrencies would result in an estimated decline in the valuation of the Company’sforeign investments and are indicated in the following table. These amounts areestimates; consequently, these amounts are not necessarily indicative of theactual effect of such changes with respect to the Company’s consolidatedfinancial position or results of operations.
|               | ** ** | **One U.S.  dollar** | ** ** | **Estimated decline in  valuation of investments resulting from incremental depreciation  of foreign currency of (dollars in thousands)** | ** ** |
|--------------------|------------|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **equals**                | ** ** | **5%**                                                                                                                                                                                           | ** ** | **10%** | ** ** |
|               |       |                      |       |                                                                                                                                                                                             |       |   |   |
| Europe             |       | EUR                       | 0.75       |                                                                                                                                                                                             | $          | 2,610 |   | $ | 4,991 |   |
|               |       |                      |       |                                                                                                                                                                                             |       |   |   |   |
| Mexico             |       | MXN                       | 11.08      |                                                                                                                                                                                             | $          | 1,450 |   | $ | 2,797 |   |
|               |       |                      |       |                                                                                                                                                                                             |       |   |   |   |
| Argentina          |       | ARS                       | 3.10       |                                                                                                                                                                                             | $          | 105 |   | $ | 202 |   |
|               |       |                      |       |                                                                                                                                                                                             |       |   |   |   |
| Dominican Republic |       | DOP                       | 33.89      |                                                                                                                                                                                             | $          | 37 |   | $ | 70 |   |
|               |       |                      |       |                                                                                                                                                                                             |       |   |   |   |
| Chile              |       | CLP                       | 539.28     |                                                                                                                                                                                             | $          | 157 |   | $ | 300 |   |
|               |       |                      |       |                                                                                                                                                                                             |       |   |   |   |
| Canada             |       | CAD                       | 1.16       |                                                                                                                                                                                             | $          | 115 |   | $ | 224 |   |

 

**Item 4.  Controls and Procedures.**

An evaluation was performed under the supervision and with the participationof the Company’s management, including the Company’s Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of

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March31, 2007.  Based on that evaluation, theChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective, in all material respects, toensure that information required to be disclosed in the reports the Companyfiles and submits under the Exchange Act is recorded, processed, summarized andreported as and when required.  TheCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, also evaluated whether any change in the Company’s internalcontrols over financial reporting or in other factors had occurred during thefiscal quarter covered by this report. Based upon that evaluation, management concluded that there had been nosuch changes during the period covered by this report that have materiallyaffected, or is reasonably likely to affect, the registrant’s internal controlover financial reporting.

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**PART II**

**OTHERINFORMATION**

**Item 1.  Legal Proceedings.**

***FCLT Litigation***

On January 19, 2005, Prudential Financial, Inc. (“Prudential”)filed a petition in interpleader seeking to interplead 321,211 shares ofPrudential common stock and any associated dividends arising from thedemutualization of Prudential in December 2000. The shares of Prudential commonstock related to group annuity contracts purchased by First-City National Bankof Houston, as trustee of the First City Bancorporation Employee RetirementTrust (the “Trust”) to fund obligations to participants in the First CityBancorporation Employee Retirement Plan (the “Plan”) in connection withtermination of the Plan and the Trust in 1987. FirstCity, FCLT Loans AssetCorp. (“FCLT”), an alleged assignee of the FirstCity Liquidating Trust, JPMorgan Chase Bank, National Association (“JP Morgan”), and First-City NationalBank of Houston as trustee of the Trust were made defendants in the suit asclaimants to the Prudential common stock and dividends. An agreed order datedJanuary 27, 2005, was entered by the court providing that the Prudential commonstock be transferred to JP Morgan as record owner and that JP Morgan sell thestock. The January 27, 2005 order also provided that the proceeds from the salebe held by JP Morgan pending resolution, by agreement or court order, of allconflicting claims to the proceeds. JP Morgan advised that the Prudentialcommon stock was sold on January 28, 2005 for total proceeds of approximately$17.5 million. JP Morgan also received funds in the amount of approximately$489,000, which were dividend payments related to the Prudential commonstock.  The proceeds are being held by JPMorgan pending resolution of the conflicting claims.  JP Morgan filed a third party action namingMr. Blair as a third party defendant with an alleged interest in thedemutualization proceeds.  On October 1,2005, the court certified a class represented by Mr. Blair.

FirstCity, FCLT and Mr. Blair each filed motions forsummary judgment asserting ownership of the proceeds of the common stock andthe dividends and accrued income.  OnMarch 21, 2006, FirstCity received notice that the 152nd District Court, HarrisCounty, Texas granted FirstCity’s motion for partial summary judgment.  The order granting FirstCity’s motion forpartial summary judgment rendered judgment in favor of FirstCity as to theownership of the demutualization proceeds. The court’s summary judgment order also denied the claims to ownershipof the demutualization proceeds by FCLT and Mr. Blair, individually and asrepresentative of the proposed class of employee beneficiaries.  The motions submitted to the court prior toits order dated March 21, 2006 did not address all matters pending in thelawsuit.  Mr. Blair, as classrepresentative, filed a motion for new trial to set aside the summary judgmentin favor of FirstCity and for reconsideration of granting Mr. Blair’s motionfor summary judgment.  FCLT filed amotion for the court to reconsider its order granting the partial summaryjudgment for FirstCity.  FirstCity movedfor summary judgment on all remaining claims and for entry of a final judgmenton May 12, 2006.  On August 14, 2006, thecourt entered an order (i) finding that FirstCity is the sole owner of the “demutualizationproceeds” being the proceeds from the sale of the 321,211 shares of PrudentialFinancial, Inc. stock, the dividends on such shares and all accrued interestand income arising there from, (2) granting FirstCity’s motion for summaryjudgment against FCLT’s claims for breach of contract and tortiousinterference, (3) providing that JP Morgan continue to hold the demutualizationproceeds until the appellate process has been completed, (4) denying the requestby FirstCity that FCLT or Mr. Blair be required to post bond or other form ofsecurity on appeal, and (5) denying all other claims for relief.  FCLT and Mr. Blair filed notices of appeal tothe First or Fourteenth Court of Appeals of the State of Texas.  The appeal has been assigned to the FirstCourt of Appeals and all parties have filed their briefs with the court.  The parties participated in court orderedmediation on February 13, 2007 which was unsuccessful.  FirstCity cannot give any assurances as tothe time period for the appeal of the final judgment or the timing of receiptor ultimate amount of proceeds to be received, if any.

In the trial court, FCLT filed a counterclaim againstFirstCity claims for damages related to alleged breaches of contract byFirstCity related to failure to assign the proceeds to FCLT and FirstCity’sassertion of a claim to the proceeds and a claim for tortious interference byFirstCity as a result of FirstCity’s claim for the proceeds.  In connection with that claim, FCLT seeks torecover attorney’s fees and other damages related to the assertion by FirstCityof an interest in the shares of Prudential common stock.  No amount has been asserted by FCLT LoansAsset Corp. and the company does not believe that its actions give rise to aclaim by FCLT Loans Asset Corp.  Thetrial court denied these claims of FCLT in its orders resolving claims withrespect to the motions for summary judgment filed by each of the parties.  The appeal by FCLT seeks to overturn thesummary judgment rendered against it with respect to these claims.  FirstCity believes that the claims of FCLTare without merit and that it has valid defenses to these claims.

***Other Litigation***

Periodically, FirstCity, its subsidiaries, itsaffiliates and the Acquisition Partnerships are parties to or otherwiseinvolved in legal proceedings arising in the normal course of business. Whilethe outcome of the ordinary course legal proceedings, and the related 

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activities, are not certain, based on presentassessments, management does not believe that they will have a material adverseeffect on the consolidated financial position, results of operations orliquidity of FirstCity, its subsidiaries, its affiliates or the AcquisitionPartnerships.

**Item 1A.  Risk Factors.**

Therehave been no material changes to the risk factors as previously disclosed underItem 1A in the Company’s Annual Report on Form 10-K for the year ended December31, 2006.

**Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds.**

The Company has a repurchase program approved by the Board of Directorsin August 2006 for the repurchase of up to 1,000,000 shares of the Company’scommon stock over a period of twelve months. There were no repurchases in the first quarter of 2007.

**Item 3.  Defaults Upon SeniorSecurities.**

None

**Item 4.  Submission of Matters to a Vote of Security Holders.**

None

**Item 5.  Other Information.**

On May 2, 2007 the Chief Financial Officer of the Company concluded thata material charge was required for Portfolio Assets with an impact to FirstCityin the amount of $1.9 million in the first quarter of 2007. Charges withrespect to Portfolio Assets owned by Acquisition Partnerships had an impact toFirstCity of $1.6 million ($.7 million in the United States, $.2 million inEurope and $.7 million in Latin America). A material charge was also required for a Portfolio Asset owned by FHPartners, L.P., a wholly-owned subsidiary of the Company in the amount of $.3million.  The Company does not believethat any of the impairment charges will result in future cash expenditures.

**Item 6.  Exhibits.**
| Exhibit  Number | ** ** | ** ** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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  Company’s Current Report on Form 8-K dated July 3, 1995 filed with the  Commission on July 18, 1995). |
|            |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.2             |       | —     |       | Agreement and Plan of Merger, dated as of July 3,  1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk  Corporation (incorporated herein by reference to Exhibit 2.2 of the Company’s  Current Report on Form 8-K dated July 3, 1995 filed with the Commission on  July 18, 1995).                                                                                                                                                               |
|            |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1             |       | —     |       | Amended and Restated Certificate of Incorporation of  the Company (incorporated herein by reference to Exhibit 3.1 of the Company’s  Current Report on Form 8-K dated July 3, 1995 filed with the Commission on  July 18, 1995).                                                                                                                                                                                                                                      |
|            |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2             |       | —     |       | Amended and Restated Bylaws of the Company  (incorporated herein by reference to Exhibit 3.1 of the Company’s Current  Report on Form 8-K dated December 30, 2005 filed with the Commission on  December 30, 2005).                                                                                                                                                                                                                                                   |
|            |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1            |       | —     |       | Revolving Credit Agreement, dated August 26, 2005,  among FH Partners, L.P., as                                                                                                                                                                                                                                                                                                                                                                                            |

 

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|        |       |       |   | Borrower, and the Lenders named therein, as Lenders,  and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit  10.1 of the Company’s Form 8-K dated September 1, 2005).                                                                                                                                                                                                                                                                     |
|--------|------------|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2   |       | —     |   | Guaranty Agreement, dated August 26, 2005, executed  by FirstCity Financial Corporation, FirstCity Commercial Corporation,  FirstCity Europe Corporation, FirstCity Holdings Corporation, FirstCity  International Corporation, FirstCity Mexico, Inc., and FirstCity Servicing  Corporation for the benefit of Bank of Scotland, as agent, and lenders  (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K  dated September 1, 2005). |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3   |       | —     |   | Contribution and Assumption Agreement, dated August  18, 2000, by and between Funding LP and Drive (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).                                                                                                                                                                                                      |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4   |       | —     |   | 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).                                                                                                                                                                                             |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.5   |       | —     |   | 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).                                                                                                                                                                                                                                           |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.6   |       | —     |   | 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)                                                                                 |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7   |       | —     |   | 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)                                                                                                                                                                     |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8   |       | —     |   | 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)                                                                                                                                                                                                                                                                                              |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9   |       | —     |   | 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)                                                                                                                                                                                                                                                                                              |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10  |       | —     |   | 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)                                                                                                                                                                                                                                                                                           |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11  |       | —     |   | Sixth Amendment to Right Of First Refusal Agreement  And Due Diligence Reimbursement Agreement dated effective as of  February 1, 2006 (incorporated herein by reference to Exhibit 10.1 of  the Company’s Form 8-K dated February 6, 2006)                                                                                                                                                                                                                |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.12  |       | —     |   | Asset Purchase Agreement, dated June 30, 2006, by  and among FirstCity Financial Corporation and its subsidiaries, FirstCity  Business Lending Corporation and American Business Lending, Inc.; and AMRESCO  SBA Holdings, Inc. and NCS I, LLC (incorporated herein by reference to  Exhibit 10.1 of the Company’s Form 8-K dated July 7, 2006)                                                                                                                 |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13  |       | —     |   | 2006 Stock Option and Award Plan (incorporated  herein by reference to Appendix A of the Company’s Schedule 14A, Definitive  Proxy Statement, dated June 26, 2006)                                                                                                                                                                                                                                                                                              |
|   |       |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.14  | ** ** | **—** |   | Interest Purchase and Sale Agreement, dated August  8, 2006, by and among Bidmex Holding, LLC, and Strategic Mexican Investment  Partners, L.P. and Cargill Financial Services International, Inc. and certain  other parties (incorporated herein by reference to Exhibit 10.14 of the  Company’s Form 10-Q dated November 9, 2006)                                                                                                                            |

 

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| 10.15      | ** ** | **—** |       | Put Option Agreement dated August 8, 2006, by and  among Bidmex Holding, LLC, Recuperacion de Carteras Mexicanas, S. de R.L. de  C.V., Bidmex 6, LLC, Strategic Mexican Investment Partners 2, L.P. and  Cargill Financial Services International, Inc. (incorporated herein by  reference to Exhibit 10.15 of the Company’s Form 10-Q dated November 9, 2006)                                                                     |
|------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.16      | ** ** | **—** |       | Guarantee dated August 8, 2006, executed by  FirstCity Financial Corporation for the benefit of Bidmex Holding, LLC,  Residencial Oeste 2 S. de R.L. de C.V., National Union Fire Insurance Company  of Pittsburg, P.A., American General Life Insurance Company, and American  General Life and Accident Insurance Company (incorporated herein by reference  to Exhibit 10.15 of the Company’s Form 10-Q dated November 9, 2006) |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.17      |       | —     |       | Amendment No. 4 to Revolving Credit Agreement, dated  as of October 31, 2006, among FirstCity Financial Corporation as Borrower and  the Lenders named therein, as Lenders, and Bank of Scotland, as Agent  (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K  dated November 7, 2006)                                                                                                                   |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.18      |       | —     |       | Management Employment Contract dated November 30,  2006, between FirstCity Business Lending  Corporation, American Business Lending, Inc., and Charles P. Bell, Jr. (incorporated herein by  reference to Exhibit 10.2 of the Company’s Form 8-K dated December 7, 2006)                                                                                                                                                           |
| ** ** | ** ** | ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.19      |       | —     |       | Management Employment Contract dated November 30,  2006, between FirstCity Business Lending  Corporation, American Business Lending, Inc., and Joe N. Smith (incorporated herein by reference to  Exhibit 10.3 of the Company’s Form 8-K dated December 7, 2006)                                                                                                                                                                   |
| ** ** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.20      |       | —     |       | Amendment No. 5 to Revolving Credit Agreement, dated  as of December 14, 2006, among FirstCity Financial Corporation as Borrower and  the Lenders named therein, as Lenders, and Bank of Scotland, as Agent  (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K  dated December 20, 2006)                                                                                                                 |
| ** ** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.21      |       | —     |       | Loan Agreement, dated as of December 15, 2006 by and  between American Business Lending, Inc., as Borrower, and Wells Fargo  Foothill, LLC, as lender (incorporated herein by reference to Exhibit 10.1 of  the Company’s Form 8-K dated December 28, 2006)                                                                                                                                                                        |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.22      |       | —     |       | Amendment No. 1 to Loan Agreement, dated as of  February 27, 2007, by and between American Business Lending, Inc., as  Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by  reference to Exhibit 10.22 of the Company’s Form 10-K dated July 24, 2007)                                                                                                                                                      |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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 March 31, 2007.                                                                                                                                                            |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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 March 31, 2007.                                                                                                                                                              |

 

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* Filed herewith.

36

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                            | FIRSTCITY FINANCIAL  CORPORATION |
|----------------------------|----------------------------------|
|                       |                             |
|                       |                             |
|                       | By:                              | /s/ JAMES T. SARTAIN |
|                       |                             | James T. Sartain |
| * *                   |                             | *President and Chief Executive* |
| * *                   |                             | *Officer and Director* |
| * *                   |                             | *(Duly authorized officer and* |
| * *                   |                             | *principal executive officer of  the* |
| * *                   |                             | *Registrant)* |
| * *                   |                             | * * |
| * *                   |                             | * * |
|                       | By:                              | /s/ J. BRYAN BAKER |
|                       |                             | J. Bryan Baker |
| * *                   |                             | *Senior Vice President and Chief* |
| * *                   |                             | *Financial Officer* |
| * *                   |                             | *(Duly authorized officer and* |
| * *                   |                             | *principal financial and  accounting* |
| * *                   |                             | *officer of the Registrant)* |
| * *                   |                             | * * |
| Dated:  July 31, 2007 |                             | * * |

 

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**Exhibit Index**
| Exhibit Number | ** ** | ** ** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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  Company’s Current Report on Form 8-K dated July 3, 1995 filed with the  Commission on July 18, 1995). |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.2            |       | —     |       | Agreement and Plan of Merger, dated as of July 3,  1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk  Corporation (incorporated herein by reference to Exhibit 2.2 of the Company’s  Current Report on Form 8-K dated July 3, 1995 filed with the Commission on  July 18, 1995).                                                                                                                                                               |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1            |       | —     |       | Amended and Restated Certificate of Incorporation of  the Company (incorporated herein by reference to Exhibit 3.1 of the Company’s  Current Report on Form 8-K dated July 3, 1995 filed with the Commission on  July 18, 1995).                                                                                                                                                                                                                                      |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2            |       | —     |       | Amended and Restated Bylaws of the Company  (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report  on Form 8-K dated December 30, 2005 filed with the Commission on December 30,  2005).                                                                                                                                                                                                                                                   |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1           |       | —     |       | Revolving Credit Agreement, dated August 26, 2005,  among FH Partners, L.P., as Borrower, and the Lenders named therein, as  Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to  Exhibit 10.1 of the Company’s Form 8-K dated September 1, 2005).                                                                                                                                                                                           |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2           |       | —     |       | Guaranty Agreement, dated August 26, 2005, executed  by FirstCity Financial Corporation, FirstCity Commercial Corporation, FirstCity  Europe Corporation, FirstCity Holdings Corporation, FirstCity International  Corporation, FirstCity Mexico, Inc., and FirstCity Servicing Corporation for  the benefit of Bank of Scotland, as agent, and lenders (incorporated herein  by reference to Exhibit 10.2 of the Company’s Form 8-K dated September 1,  2005).       |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3           |       | —     |       | Contribution and Assumption Agreement, dated August  18, 2000, by and between Funding LP and Drive (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).                                                                                                                                                                                                            |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4           |       | —     |       | 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).                                                                                                                                                                                                   |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.5           |       | —     |       | 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).                                                                                                                                                                                                                                                 |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6           |       | —     |       | 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)                                                                                       |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.7           |       | —     |       | 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)                                                                                                                                                                           |
|           |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.8           |       | —     |       | 1995 Stock Option and Award Plan (incorporated  herein by reference to Exhibit A of the                                                                                                                                                                                                                                                                                                                                                                                    |

 

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|            |       |       |       | Company’s Schedule 14A, Definitive Proxy Statement,  dated March 27, 1996)                                                                                                                                                                                                                                                                                                                                                         |
|------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.9       |       | —     |       | 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)                                                                                                                                                                                                                                                                 |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.10      |       | —     |       | 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)                                                                                                                                                                                                                                                              |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.11      |       | —     |       | Sixth Amendment to Right Of First Refusal Agreement  And Due Diligence Reimbursement Agreement dated effective as of  February 1, 2006 (incorporated herein by reference to Exhibit 10.1 of  the Company’s Form 8-K dated February 6, 2006)                                                                                                                                                                                   |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.12      |       | —     |       | Asset Purchase Agreement, dated June 30, 2006, by  and among FirstCity Financial Corporation and its subsidiaries, FirstCity  Business Lending Corporation and American Business Lending, Inc.; and AMRESCO  SBA Holdings, Inc. and NCS I, LLC (incorporated herein by reference to  Exhibit 10.1 of the Company’s Form 8-K dated July 7, 2006)                                                                                    |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.13      |       | —     |       | 2006 Stock Option and Award Plan (incorporated  herein by reference to Appendix A of the Company’s Schedule 14A, Definitive  Proxy Statement, dated June 26, 2006)                                                                                                                                                                                                                                                                 |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.14      | ** ** | **—** |       | Interest Purchase and Sale Agreement, dated August  8, 2006, by and among Bidmex Holding, LLC, and Strategic Mexican Investment  Partners, L.P. and Cargill Financial Services International, Inc. and certain  other parties (incorporated herein by reference to Exhibit 10.14 of the  Company’s Form 10-Q dated November 9, 2006)                                                                                               |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.15      | ** ** | **—** |       | Put Option Agreement dated August 8, 2006, by and  among Bidmex Holding, LLC, Recuperacion de Carteras Mexicanas, S. de R.L. de  C.V., Bidmex 6, LLC, Strategic Mexican Investment Partners 2, L.P. and  Cargill Financial Services International, Inc. (incorporated herein by  reference to Exhibit 10.15 of the Company’s Form 10-Q dated November 9, 2006)                                                                     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.16      | ** ** | **—** |       | Guarantee dated August 8, 2006, executed by  FirstCity Financial Corporation for the benefit of Bidmex Holding, LLC,  Residencial Oeste 2 S. de R.L. de C.V., National Union Fire Insurance Company  of Pittsburg, P.A., American General Life Insurance Company, and American  General Life and Accident Insurance Company (incorporated herein by reference  to Exhibit 10.15 of the Company’s Form 10-Q dated November 9, 2006) |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.17      |       | —     |       | Amendment No. 4 to Revolving Credit Agreement, dated  as of October 31, 2006, among FirstCity Financial Corporation as Borrower and  the Lenders named therein, as Lenders, and Bank of Scotland, as Agent  (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K  dated November 7, 2006)                                                                                                                   |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.18      |       | —     |       | Management Employment Contract dated November 30,  2006, between FirstCity Business Lending  Corporation, American Business Lending, Inc., and Charles P. Bell, Jr. (incorporated herein by  reference to Exhibit 10.2 of the Company’s Form 8-K dated December 7, 2006)                                                                                                                                                           |
| ** ** | ** ** | ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.19      |       | —     |       | Management Employment Contract dated November 30,  2006, between FirstCity Business Lending  Corporation, American Business Lending, Inc., and Joe N. Smith (incorporated herein by reference to  Exhibit 10.3 of the Company’s Form 8-K dated December 7, 2006)                                                                                                                                                                   |
| ** ** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.20      |       | —     |       | Amendment No. 5 to Revolving Credit Agreement, dated  as of December 14, 2006, among FirstCity Financial Corporation as Borrower  and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent  (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K  dated December 20, 2006)                                                                                                                 |
| ** ** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.21      |       | —     |       | Loan Agreement, dated as of December 15, 2006 by and  between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill,  LLC, as lender (incorporated herein by reference to Exhibit 10.1 of the  Company’s Form 8-K dated December 28, 2006)                                                                                                                                                                        |

 

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| 10.22  |   | — |   | Amendment No. 1 to Loan Agreement, dated as of  February 27, 2007, by and between American Business Lending, Inc., as  Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by  reference to Exhibit 10.22 of the Company’s Form 10-K dated July 24, 2007) |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                               |
| 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 March 31, 2007.       |
|   |   |   |   |                                                                                                                                                                                                                                                                               |
| 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 March 31, 2007.         |

 

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