Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 endedMarch 31, 2009**

** **
| 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) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.  Yes x No o

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definition of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated filer o                        |   | Smaller reporting  company x |
| (Do not check if a  smaller reporting company) |   |                         |

 

Indicate by check mark whether the registrant isa shell company (as defined 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 May 4, 2009 was 9,831,937.

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| **PART  I**                   | ** **                                                                                      |
|-------------------------------|-------------------------------------------------------------------------------------------------|
| ** **                    | ** **                                                                                      | ** ** |
| **Item 1.**                   | **Financial Statements**                                                                        | **1** |
| ** **                    | **Consolidated Balance Sheets**                                                                 | **1** |
| ** **                    | **Consolidated Statements of  Operations**                                                      | **2** |
| ** **                    | **Consolidated  Statements of Stockholders’ Equity**                                       | **3** |
| ** **                    | **Consolidated  Statements of Cash Flows**                                                      | **4** |
| ** **                    | **Notes to  Consolidated Financial Statements**                                                 | **5** |
| **Item 2.**                   | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | **33** |
| **Item 3.**                   | **Quantitative  and Qualitative Disclosures About Market Risk**                                 | **44** |
| **Item 4.**                   | **Controls and  Procedures**                                                                    | **45** |
| ** **                    | ** **                                                                                      | ** ** |
| **PART II OTHER INFORMATION** | **47**                                                                                          |
| ** **                    | ** **                                                                                      | ** ** |
| **Item 1.**                   | **Legal Proceedings**                                                                           | **47** |
| **Item 1A.**                  | **Risk Factors**                                                                                | **47** |
| **Item 2.**                   | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                | **47** |
| **Item 3.**                   | **Defaults  Upon Senior Securities**                                                            | **47** |
| **Item 4.**                   | **Submission  of Matters to a Vote of Security Holders**                                        | **47** |
| **Item 5.**                   | **Other Information**                                                                           | **47** |
| **Item 6.**                   | **Exhibits**                                                                                    | **47** |
| **SIGNATURES**                | **52**                                                                                          |

 

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**PART I**

 

**FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements (Unaudited)**

 

**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS**

**(Dollars in thousands, except per share data)**

 
| *** ***                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                                                      | ** ** | **(Unaudited)**    | ** ** | **(See Note 2)**      | ** ** |
| **ASSETS**                                                                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                                                       |       | $                  | 18,905     |                  | $          | 19,103 |   |
| Restricted cash                                                                                                                 |       | 1,277              |       | 1,217                 |       |
| Portfolio Assets:                                                                                                               |       |               |       |                  |       |
| Loan portfolios, net                                                                                                            |       | 171,473            |       | 121,137               |       |
| Real estate held for sale                                                                                                       |       | 13,411             |       | 17,484                |       |
| Real estate held for investment, net                                                                                            |       | 9,523              |       | 9,592                 |       |
| Total Portfolio Assets                                                                                                          |       | 194,407            |       | 148,213               |       |
| Loans receivable:                                                                                                               |       |               |       |                  |       |
| Loans receivable - affiliates                                                                                                   |       | 27,827             |       | 27,080                |       |
| Loans receivable - SBA held for sale                                                                                            |       | 9,720              |       | 4,901                 |       |
| Loans receivable - SBA held for investment, net                                                                                 |       | 15,673             |       | 14,405                |       |
| Loans receivable - other                                                                                                        |       | 13,411             |       | 13,533                |       |
| Total loans receivable                                                                                                          |       | 66,631             |       | 59,919                |       |
| Investment security available for sale, net                                                                                     |       | 4,279              |       | 5,251                 |       |
| Equity investments                                                                                                              |       | 70,631             |       | 72,987                |       |
| Service fees receivable ($831 and $553 from  affiliates, respectively)                                                          |       | 910                |       | 626                   |       |
| Servicing assets - SBA loans                                                                                                    |       | 695                |       | 722                   |       |
| Other assets, net                                                                                                               |       | 20,512             |       | 20,899                |       |
| Total Assets                                                                                                                    |       | $                  | 378,247    |                  | $          | 328,937 |   |
| ** **                                                                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| **LIABILITIES AND EQUITY**                                                                                                      |       |               |       |                  |       |
| Liabilities:                                                                                                                    |       |               |       |                  |       |
| Notes payable to banks                                                                                                          |       | $                  | 284,852    |                  | $          | 242,889 |   |
| Note payable to affiliate                                                                                                       |       | 8,658              |       | 8,658                 |       |
| Other liabilities                                                                                                               |       | 11,731             |       | 11,515                |       |
| Total Liabilities                                                                                                               |       | 305,241            |       | 263,062               |       |
| Commitments and contingencies (Note 15)                                                                                         |       |               |       |                  |       |
| 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; 11,331,937 shares issued; 9,831,937 shares outstanding) |       | 113                |       | 113                   |       |
| Treasury stock, at cost: 1,500,000 shares                                                                                       |       | (10,923            | )          | (10,923               | )          |
| Paid in capital                                                                                                                 |       | 101,980            |       | 101,875               |       |
| Accumulated deficit                                                                                                             |       | (36,429            | )          | (37,073               | )          |
| Accumulated other comprehensive loss                                                                                            |       | (2,649             | )          | (3,726                | )          |
| FirstCity Stockholders’ Equity                                                                                             |       | 52,092             |       | 50,266                |       |
| Noncontrolling interests                                                                                                        |       | 20,914             |       | 15,609                |       |
| Total Equity                                                                                                                    |       | 73,006             |       | 65,875                |       |
| Total Liabilities and Equity                                                                                                    |       | $                  | 378,247    |                  | $          | 328,937 |   |

 

See accompanying notes to consolidated financial statements.

 

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**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Dollars in thousands, except per share data)**

**(Unaudited)**

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                     | ** ** | **March 31,**     | ** ** |
| ** **                                                                     | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Revenues:                                                                      | ** ** | ** **             | ** ** | ** ** | ** ** |
| Servicing fees ($2,127 and $2,164 from affiliates,  respectively)              |       | $                      | 2,392      |   | $ | 2,200 |   |
| Income from Portfolio Assets                                                   |       | 9,043                  |       | 4,935 |   |
| Interest income from SBA loans                                                 |       | 346                    |       | 476 |   |
| Interest income from loans receivable - affiliates                             |       | 923                    |       | 150 |   |
| Interest income from loans receivable - other                                  |       | 429                    |       | 275 |   |
| Revenue from railroad operations                                               |       | 747                    |       | 805 |   |
| Other income                                                                   |       | 1,801                  |       | 663 |   |
| Total revenues                                                                 |       | 15,681                 |       | 9,504 |   |
| Expenses:                                                                      |       |                   |       |   |   |
| Interest and fees on notes payable to banks                                    |       | 3,044                  |       | 3,683 |   |
| Interest and fees on notes payable to affiliate                                |       | 433                    |       | — |   |
| Salaries and benefits                                                          |       | 5,054                  |       | 5,030 |   |
| Provision for loan and impairment losses                                       |       | 1,106                  |       | 3,030 |   |
| Asset-level expenses                                                           |       | 1,237                  |       | 1,561 |   |
| Occupancy, data processing and other                                           |       | 3,406                  |       | 2,455 |   |
| Total expenses                                                                 |       | 14,280                 |       | 15,759 |   |
| Equity in net earnings (loss) of subsidiaries                                  |       | (146                   | )          | 2,840 |   |
| Earnings (loss) before income taxes                                            |       | 1,255                  |       | (3,415 | ) |
| Income tax expense                                                             |       | (263                   | )          | (191 | ) |
| Net earnings (loss)                                                            |       | 992                    |       | (3,606 | ) |
| Less: Net income (loss) attributable to  noncontrolling interests (See Note 2) |       | 348                    |       | (22 | ) |
| Net earnings (loss) attributable to FirstCity                                  |       | $                      | 644        |   | $ | (3,584 | ) |
|                                                                           |       |                   |       |   |   |
| Basic earnings (loss) per share                                                |       | $                      | 0.07       |   | $ | (0.34 | ) |
| Diluted earnings (loss) per share                                              |       | $                      | 0.07       |   | $ | (0.34 | ) |

 

See accompanying notes to consolidated financial statements.

 

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**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVE INCOME (LOSS)**

**(Dollars in thousands)**

 
| ** **                                                    | ** ** | **FirstCity  Stockholders** | ** ** | ** **   | ** ** | ** **  | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|--------------|------------|-------------|------------|
| ** **                                                    | ** ** | ** **                  | ** ** | ** **   | ** ** | ** **  | ** ** | **Retained** | ** ** | **Accumulated** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | ** **                  | ** ** | ** **   | ** ** | ** **  | ** ** | **Earnings** | ** ** | **Other** | ** ** | **controlling** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Common**                  | ** ** | **Treasury** | ** ** | **Paid in** | ** ** | **(Accumulated** | ** ** | **Comprehensive** | ** ** | **Interests** | ** ** | **Total** | ** ** |
| ** **                                                    | ** ** | **Stock**                   | ** ** | **Stock**    | ** ** | **Capital** | ** ** | **Deficit)** | ** ** | **Income  (Loss)** | ** ** | **(See  Note 2)** | ** ** | **Equity** | ** ** |
| ** **                                                    | ** ** | ** **                  | ** ** | ** **   | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balances, December 31, 2007**                          |       | $                           | 113        |         | $          | (5,978      | )          | $ | 101,240 |   | $ | 9,602 |   | $ | 1,846 |   | $ | 3,209 |   | $ | 110,032 |   |
| Repurchase of common stock                                    |       | —                      |       | (2,138       | )          | —      |       | — |   | — |   | — |   | (2,138 | ) |
| Stock option compensation expense                             |       | —                      |       | —       |       | 225         |       | — |   | — |   | — |   | 225 |   |
| Investment in majority-owned entities                         |       | —                      |       | —       |       | —      |       | — |   | — |   | 3 |   | 3 |   |
| Distributions to noncontrolling interests                     |       | —                      |       | —       |       | —      |       | — |   | — |   | (663 | ) | (663 | ) |
| Other activity                                                |       | —                      |       | —       |       | —      |       | — |   | — |   | 10 |   | 10 |   |
| Comprehensive loss:                                           |       |                        |       |         |       |        |       |   |   |   |   |   |   |   |   |
| Net loss                                                      |       | —                      |       | —       |       | —      |       | (3,584 | ) | — |   | (22 | ) | (3,606 | ) |
| Foreign currency translation adjustments                      |       | —                      |       | —       |       | —      |       | — |   | (474 | ) | 72 |   | (402 | ) |
| Total comprehensive loss                                      |       |                        |       |         |       |        |       |   |   |   |   |   |   | (4,008 | ) |
| **Balances, March 31, 2008**                             |       | $                           | 113        |         | $          | (8,116      | )          | $ | 101,465 |   | $ | 6,018 |   | $ | 1,372 |   | $ | 2,609 |   | $ | 103,461 |   |
|                                                          |       |                        |       |         |       |        |       |   |   |   |   |   |   |   |   |
| **Balances, December 31, 2008**                          |       | $                           | 113        |         | $          | (10,923     | )          | $ | 101,875 |   | $ | (37,073 | ) | $ | (3,726 | ) | $ | 15,609 |   | $ | 65,875 |   |
| Stock option compensation expense                             |       | —                      |       | —       |       | 105         |       | — |   | — |   | — |   | 105 |   |
| Investment in majority-owned entities                         |       | —                      |       | —       |       | —      |       | — |   | — |   | 5,743 |   | 5,743 |   |
| Distributions to noncontrolling interests                     |       | —                      |       | —       |       | —      |       | — |   | — |   | (31 | ) | (31 | ) |
| Comprehensive income:                                         |       |                        |       |         |       |        |       |   |   |   |   |   |   |   |   |
| Net earnings                                                  |       | —                      |       | —       |       | —      |       | 644 |   | — |   | 348 |   | 992 |   |
| Change in net unrealized gain on security available  for sale |       | —                      |       | —       |       | —      |       | — |   | (7 | ) | — |   | (7 | ) |
| Foreign currency translation adjustments                      |       | —                      |       | —       |       | —      |       | — |   | 1,084 |   | (755 | ) | 329 |   |
| Total comprehensive income                                    |       |                        |       |         |       |        |       |   |   |   |   |   |   | 1,314 |   |
| **Balances, March 31, 2009**                             |       | $                           | 113        |         | $          | (10,923     | )          | $ | 101,980 |   | $ | (36,429 | ) | $ | (2,649 | ) | $ | 20,914 |   | $ | 73,006 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

**(Unaudited)**

 
| ** **                                                                              | ** ** | **Three Months Ended**     | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                              | ** ** | **March 31,**         | ** ** |
| ** **                                                                              | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                                              | ** ** | **(See Note 2)** | ** ** |
| **Cash flows from operating activities:**                                               |       |                       |       |   |   |
| Net earnings (loss)                                                                     |       | $                          | 992        |   | $ | (3,606 | ) |
| Adjustments to reconcile net earnings (loss) to net  cash used in operating activities: |       |                       |       |   |   |
| Net principal advances on SBA loans held for sale                                       |       | (4,738                     | )          | (1,088 | ) |
| Proceeds from the sale of SBA loans held for sale,  net                                 |       | —                     |       | 197 |   |
| Purchases of Portfolio Assets                                                           |       | (70,324                    | )          | (7,768 | ) |
| Proceeds applied to principal on Portfolio Assets                                       |       | 30,453                     |       | 19,471 |   |
| Income from Portfolio Assets                                                            |       | (9,043                     | )          | (4,935 | ) |
| Capitalized interest and costs on Portfolio Assets  and loans receivable                |       | (191                       | )          | (215 | ) |
| Provision for loan and impairment losses                                                |       | 1,106                      |       | 3,030 |   |
| Foreign currency transaction (gains) losses, net                                        |       | 566                        |       | (200 | ) |
| Equity in net loss (earnings) of subsidiaries                                           |       | 146                        |       | (2,840 | ) |
| Gain on sale of SBA loans held for sale, net                                            |       | —                     |       | (9 | ) |
| Gain on sale of railroad property                                                       |       | (920                       | )          | — |   |
| Depreciation and amortization                                                           |       | 988                        |       | 892 |   |
| Net premium amortization of loans receivable                                            |       | (48                        | )          | (131 | ) |
| Stock option compensation expense                                                       |       | 105                        |       | 225 |   |
| Decrease (increase) in restricted cash                                                  |       | (60                        | )          | 56 |   |
| Increase in service fees receivable                                                     |       | (284                       | )          | (102 | ) |
| Decrease (increase) in other assets                                                     |       | (582                       | )          | 657 |   |
| Increase (decrease) in other liabilities                                                |       | 281                        |       | (1,311 | ) |
| Net cash provided by (used in) operating activities                                     |       | (51,553                    | )          | 2,323 |   |
| **Cash flows from investing activities:**                                               |       |                       |       |   |   |
| Purchases of property and equipment, net                                                |       | (331                       | )          | (346 | ) |
| Proceeds from sale of railroad property                                                 |       | 1,350                      |       | — |   |
| Net principal collections (advances) on loans  receivable                               |       | (881                       | )          | 498 |   |
| Net principal collections (advances) on SBA loans  held for investment                  |       | (1,242                     | )          | 1,249 |   |
| Net principal paydowns on investment security  available for sale                       |       | 965                        |       | — |   |
| Contributions to Acquisition Partnerships                                               |       | (450                       | )          | (2,203 | ) |
| Distributions from Acquisition Partnerships                                             |       | 1,800                      |       | 5,346 |   |
| Net cash provided by investing activities                                               |       | 1,211                      |       | 4,544 |   |
| **Cash flows from financing activities:**                                               |       |                       |       |   |   |
| Borrowings under notes payable to banks                                                 |       | 75,488                     |       | 16,923 |   |
| Principal payments of notes payable to banks, net                                       |       | (30,263                    | )          | (29,806 | ) |
| Payments of debt issuance costs and loan fees                                           |       | (332                       | )          | (330 | ) |
| Contributions from noncontrolling interests                                             |       | 5,743                      |       | 3 |   |
| Distributions to noncontrolling interests                                               |       | (31                        | )          | (663 | ) |
| Repurchase of common stock                                                              |       | —                     |       | (2,138 | ) |
| Net cash provided by (used in) financing activities                                     |       | 50,605                     |       | (16,011 | ) |
| **Effect of exchange rate changes on cash and cash  equivalents**                       |       | (461                       | )          | 49 |   |
| **Net decrease in cash and cash equivalents**                                           |       | (198                       | )          | (9,095 | ) |
| **Cash and cash equivalents, beginning of period**                                      |       | 19,103                     |       | 23,037 |   |
| **Cash and cash equivalents, end of period**                                            |       | $                          | 18,905     |   | $ | 13,942 |   |
| **Supplemental disclosure of cash flow  information:**                                  |       |                       |       |   |   |
| Cash paid during the period for:                                                        | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Interest                                                                                |       | $                          | 2,330      |   | $ | 3,277 |   |
| Income taxes, net of refunds received                                                   |       | 45                         |       | 14 |   |

 

See accompanying notes to consolidated financial statements.

 

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**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**March 31, 2009**

**(Unaudited)**

 

**(1)  Basis of Presentation and Summary of Significant AccountingPolicies**

 

***Nature of Operations***

 

FirstCity Financial Corporation and subsidiaries (collectively, “FirstCity”,“Company”, “we”, “us” or “our”) is a financial services company with offices inthe United States and Mexico, and a presence in Europe and South America.FirstCity engages in two major business segments — Portfolio Asset Acquisitionand Resolution and Special Situations Platform. The Portfolio Asset Acquisitionand Resolution business has been the Company’s core business operation sincecommencing operations in 1986. In the Portfolio Asset Acquisition andResolution business, the Company acquires portfolios of performing andnon-performing commercial and consumer loans and other assets (collectively, “PortfolioAssets” or “Portfolios”), generally at a discount to their legal principalbalances or appraised values, and services and resolves such Portfolio Assetsin an effort to maximize the present value of the ultimate cash recoveries.FirstCity acquires the Portfolio Assets for its own account or throughinvestment entities formed with one or more other co-investors (each suchentity, an “Acquisition Partnership”). The Company engages in its SpecialSituations Platform business through its majority ownership interest inFirstCity Denver Investment Corp. (“FirstCity Denver”) — which was formed in April 2007.Through its Special Situations Platform business, the Company providesinvestment capital to privately-held middle-market companies through flexiblecapital structuring arrangements to generate an attractive risk-adjustedreturn. These capital investments primarily take the form of senior and juniorfinancing arrangements, but also include direct equity investments, commonequity warrants, distressed debt transactions, and buyouts. Refer to Note 14for additional information on the Company’s major business segments.

 

***Basis of Presentation***

 

The consolidated financial statements in this Quarterly Report on Form 10-Qinclude the accounts of FirstCity and all other entities in which FirstCity hasa controlling financial interest. All significant intercompany balances andtransactions have been eliminated in consolidation. The accounting andfinancial reporting policies the Company follows conform, in all materialrespects, to U.S. generally accepted accounting principles and to generalpractices within the financial services industry.

 

The consolidatedfinancial statements in this Quarterly Report on Form 10-Q have not beenaudited by an independent registered public accounting firm, but in the opinionof management, reflect all adjustments necessary for a fair presentation of theCompany’s financial position and results of operations. All such adjustmentswere of a normal and recurring nature. We have prepared the accompanyingunaudited consolidated financial statements in accordance with the accountingpolicies described in our 2008 Annual Report on Form 10-K, as amended (“2008Form 10-K”), and with the instructions to Form 10-Q. Accordingly, theaccompanying unaudited consolidated financial statements do not include all ofthe information and note disclosures normally included in our annual financialstatements prepared in accordance with U.S. generally accepted accountingprinciples, and should be read in conjunction with the Company’s consolidatedfinancial statements, and notes thereto, included in our 2008 Form 10-K.Operating results for the interim periods disclosed herein are not necessarilyindicative of the results that may be expected for a full year or any futureperiod.

 

On January 1,2009, the Company adopted SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51*(“SFAS 160”), which changed the presentation requirements for noncontrolling(minority) interests. Refer to Note 2 for more information. In addition to thechanges prescribed by SFAS 160, certain other amounts in prior period financialstatements have been reclassified to conform to the current periodpresentation. These certain other reclassifications are not significant andhave no impact on earnings, total assets or stockholders’ equity.

 

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**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 

***Use of Estimates***

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Estimates that are particularly susceptible tosignificant change in the near-term relate to the estimation of futurecollections on Portfolio Assets used in the calculation of income fromPortfolio Assets; valuation of deferred tax assets and assumptions used in thecalculation of income taxes; valuation of servicing assets, investmentsecurities, loans receivable (including loans receivable held in securitizationtrusts), and real estate; guarantee obligations; indemnifications; and legalcontingencies. These estimates and assumptions are based on management’s bestestimates and judgment. Management evaluates its estimates and assumptions onan ongoing basis using historical experience and other factors, including thecurrent economic environment. We adjust such estimates and assumptions whenfacts and circumstances dictate. Illiquid credit markets, volatile financial,real estate and foreign currency markets, and declines in business and consumerspending have combined to increase the uncertainty inherent in such estimatesand assumptions. As future events and their effects cannot be determined withprecision, actual results could differ significantly from these estimates.Changes in these estimates resulting from continuing changes in the economicenvironment will be reflected in the financial statements in future periods.

 

***PortfolioAssets***

 

The Companyinvests in performing and non-performing commercial and consumer loans, realestate and certain other assets (“Portfolio Assets” or “Portfolios”), andservices and resolves such Portfolio Assets in an effort to maximize thepresent value of the ultimate cash recoveries. The Portfolio Assets aregenerally non-homogeneous assets, including loans of varying qualities that aresecured by diverse collateral types and real estate. Some Portfolio Assets areloans for which resolution is tied primarily to the real estate securing theloan, while others may be collateralized business loans, the resolution ofwhich may be based on the cash flows of the business or the underlying collateral.

 

On January 1,2005, FirstCity adopted and began accounting for its acquisitions of loanportfolios with credit deterioration in accordance with the provisions of AICPAStatement of Position 03-3, *Accounting for CertainLoans or Debt Securities Acquired in a Transfer* (“SOP 03-3”). SOP03-3 addresses accounting differences between contractual cash flows and cashflows expected to be collected from an investor’s initial investment inacquired loans if those differences are attributable, at least in part, tocredit quality. SOP 03-3 requires acquired loans with credit deterioration tobe initially recorded at fair value and prohibits “carrying over” or thecreation of valuation allowances in the initial accounting of acquired loansthat are within the scope of SOP 03-3. Under SOP 03-3, the excess cash flowsexpected at acquisition over the loan portfolio’s purchase price is recorded asinterest income over the life of the portfolio.

 

Loans Acquired Prior to 2005

 

For PortfolioAssets acquired before January 1, 2005, the Company initially recorded thepurchased assets at cost, and acquisition-date purchase discounts and loan lossallowances of the underlying assets were included as components of the cost andcarrying value of the Portfolio Assets, as applicable. Income recognition forloans acquired prior to 2005 is based on management’s initial designation ofthe purchased Portfolio Assets as non-performing or performing. Suchdesignations were made on the acquisition date and do not subsequently changeeven though the actual performance of the Portfolio Assets may subsequentlychange.

 

Income onnon-performing Portfolio Assets acquired prior to 2005 is recognized only tothe extent that collections exceed a pro-rata portion of allocated cost fromthe pool. Cost allocation is based on a proration of actual collections dividedby total estimated collections of the pool. Interest income is not recognizedseparately on non-performing Portfolio Assets. All collection proceeds, ofwhatever type, are included in the determination of income recognition forthese Portfolio Assets. The Company accounts for these non-performing PortfolioAssets on a pool basis.

 

Income onperforming Portfolio Assets acquired prior to 2005 is recognized using theinterest method, based on the Portfolio’s internal rate of return (“IRR”), andacquisition discounts for the Portfolios as a whole are accreted as anadjustment to yield over the estimated life of the respective Portfolios.Income on performing Portfolio Assets is accrued monthly based on each loanpool’s effective IRR. Significant increases in expected future cash flows maybe recognized prospectively through an upward adjustment of the IRR over aportfolio’s remaining life. Any increase to the IRR then becomes the newbenchmark for impairment testing. Cash flows greater than the interest accrualwill reduce the carrying value of the pool. Likewise, cash flows that are lessthan the accrual 

 

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Table of Contents

 

**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 

will increase thecarrying balance. The IRR is estimated based on the timing and amount of anticipatedcash flows using the Company’s proprietary collection model. Gains arerecognized on performing Portfolio Assets when sufficient funds are received tofully satisfy the obligation on loans included in the pool, either fromcollections received from the borrower or proceeds received from the sale ofthe loan. The gain recognized represents the difference between the proceedsreceived and the allocated carrying value of the individual loan in the pool.The Company accounts for these performing Portfolio Assets on a pool basis.

 

Loans With CreditDeterioration Acquired After 2004

 

A substantial portion of the Company’s loans acquiredafter 2004 have experienced deterioration of credit quality between originationand the Company’s acquisition of the accounts. The amounts paid for the loansreflect the Company’s determination that the loans have experienceddeterioration in credit quality since origination and that it is probable theCompany will be unable to collect all amounts due according to the contractualterms of the underlying loans.

 

Commencing January 1,2005, FirstCity adopted and began accounting for its acquisitions of loanportfolios with credit deterioration in accordance with the provisions of SOP03-3. As permitted by SOP 03-3, the Company generally establishes static poolsfor purchased loan accounts that have common risk characteristics (primarilyloan type and collateral). Each static pool is accounted for as a single unitfor the recognition of income, principal payments and loss provision. Once astatic pool is established, individual accounts are generally not added to orremoved from the pool (unless the Company sells, forecloses or writes-off theloan). At acquisition, FirstCity determines the excess of the loan pool’sscheduled contractual payments over all cash flows expected to be collected asan amount that should not be accreted (“nonaccretable difference”). The excessof the portfolio’s cash flows expected to be collected at acquisition over theinitial investment in the portfolio (“accretableyield”) is generally accreted into interest income over the remaininglife of the portfolio. The discount (i.e. the difference between the cost ofeach static pool and the related aggregate contractual receivable balance) isnot recorded because the Company does not expect to fully collect each staticpool’s contractual receivable balance. As a result, loan portfolios aregenerally recorded at cost (which approximates fair value) at the time ofacquisition.

 

In accordance withSOP 03-3, the Company accounts for its investments in SOP 03-3 loan portfoliosusing either the interest method or the cost-recovery method. Application ofthe interest method is dependent on management’s ability to develop areasonable expectation as to both the timing and amount of cash flows expectedto be collected. In the event the Company cannot develop or establish areasonable expectation as to both the timing and amount of cash flows expectedto be collected, SOP 03-3 permits the use of the cost-recovery method.

 

Under the interestmethod, an effective interest rate, or IRR, is applied to the cost basis of thepool. SOP 03-3 requires that the excess of the contractual cash flows overexpected cash flows not be recognized as an adjustment of income or expense oron the balance sheet. SOP 03-3 requires the IRR that is estimated when the loanaccounts are purchased to remain constant as the basis for subsequentimpairment testing (performed at least quarterly). Significant increases inactual, or expected future cash flows, is used first to reverse any existingvaluation allowance for that loan pool; and any remaining increase may berecognized prospectively through an upward adjustment of the IRR over theportfolio’s remaining life. Any increase to the IRR then becomes the newbenchmark for impairment testing and income recognition. Under SOP 03-3,subsequent decreases in projected cash flows do not change the IRR, but arerecognized as an impairment of the cost basis of the pool (to maintain thethen-current IRR), and are reflected in the consolidated statements ofoperations through provisions charged to operations, with a correspondingvaluation allowance off-setting the loan portfolio in the consolidated balancesheets. FirstCity establishes valuation allowances for loan portfolios acquiredwith credit deterioration to reflect only those losses incurred afteracquisition — that is, the cash flows expected at acquisition that are notexpected to be collected. Income from loan portfolios accounted for under theinterest method is accrued based on each pool’s IRR applied to each pool’sadjusted cost basis. Gross collections in excess of the interest accrual andimpairments will reduce the carrying value of the static pool, while grosscollections less than the interest accrual will increase the carrying value.The IRR is estimated based on the timing and amount of anticipated cash flowsusing the Company’s proprietary collection models. A pool can become fullyamortized (zero-basis carrying balance on the balance sheet) while stillgenerating cash collections. In this case, cash collections are recognized asincome when received.

 

If the amount andtiming of future cash collections on a loan pool are not reasonably estimable,the Company accounts for such portfolios on the cost-recovery method. Under thecost-recovery method, no income is recognized until the Company has fullycollected the cost of the portfolio, or until such time the Company considersthe timing and amount of collections to be reasonably estimable and begins torecognize income based on the interest method as described above. At leastquarterly, the Company performs an evaluation to determine if the remainingamount that is probable of collection is less than the portfolio’s carryingvalue, and if so, 

 

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**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 

recognizes impairmentthrough provisions charged to operations. At March 31, 2009 and December 31,2008, the carrying value of SOP 03-3 loan pools accounted for under thecost-recovery method approximated $34.1 million and $20.7 million,respectively.

 

Real Estate

 

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

 

*Classification and Impairment Evaluation*

 

Real estate held for sale primarily includesreal estate acquired through loan foreclosure. The Company classifies aproperty as held for sale if (1) management commits to a plan to sell theproperty; (2) the Company actively markets the property in its currentcondition for a price that is reasonable in comparison to its fair value; and (3) managementconsiders the sale of such property within one year of the balance sheet dateto be probable. Real estate held for sale is stated at the lower of cost orfair value less estimated disposition costs. Real estate is not depreciatedwhile it is classified as held for sale. Impairment losses are recorded if aproperty’s fair value less estimated disposition costs is less than itscarrying amount, and charged to operations in the period the impairment isidentified.

 

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

 

*Cost Capitalization and Allocation*

 

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

 

Real estate properties acquired through apurchase transaction are initially recorded at the cost of the acquisition. Thecost of acquired property includes the purchase price of the property, legalfees, and certain other acquisition costs. Subsequent to acquisition, theCompany capitalizes capital improvements and expenditures related tosignificant betterments and replacements, including costs related to thedevelopment and improvement of the property for its intended use. Expendituresfor repairs, maintenance, and other holding costs are charged to operations asincurred.

 

**(2)  Recently AdoptedAccounting Standards**

 

Business Combinations and NoncontrollingInterests

 

In December 2007, the FASB issued SFAS No. 141(R),*Business Combinations* (“SFAS 141R”).SFAS 141R establishes principle requirements for how the acquirer of a businessrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any non-controlling interest in theacquiree. SFAS 141R also provides guidance for recognizing and measuring thegoodwill acquired in the business combination, recognizing assets acquired andliabilities assumed arising from contingencies, and determining whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial impact of the business combination. We adopted SFAS141R effective January 1, 2009 and it applies to all business combinationsprospectively from that date. The impact of SFAS 141R on our consolidatedfinancial statements will depend upon the nature, terms and size of theacquisitions that the Company consummates in the future.

 

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**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 

In April 2009,the FASB issued Staff Position No. FSP FAS 141(R)-1, *Accountingfor Assets Acquired and Liabilities Assumed in a Business Combination ThatArise from Contingencies* (“FSP FAS 141R-1”). This FSP amends theaccounting in SFAS 141R for assets and liabilities arising from contingenciesin a business combination. FSP FAS 141R-1 requires that pre-acquisitioncontingencies be recognized at fair value, if fair value can be reasonablydetermined. If fair value cannot be reasonably determined, FSP FAS 141R-1requires measurement based on the best estimate in accordance with SFAS No. 5,*Accounting for Contingencies*. FSP FAS141R-1 is effective as of January 1, 2009 in connection with the adoptionof SFAS 141R.

 

In December 2007,the FASB issued SFAS 160, which defines noncontrolling interest as the portionof equity in a subsidiary not attributable, directly or indirectly, to theparent. SFAS 160 requires the ownership interests in subsidiaries held byparties other than the parent (previously referred to as minority interest) tobe clearly presented in the consolidated balance sheet within equity, butseparate from the parent’s equity. The amount of consolidated net incomeattributable to the parent and to any noncontrolling interest must be clearlypresented on the face of the consolidated statement of operations. Changes inthe parent’s ownership interest while the parent retains its controllingfinancial interest (greater than 50 percent ownership) are to be accountedfor as equity transactions with no remeasurement to fair value. Upon a loss ofcontrol, any gain or loss on the interest sold will be recognized in earnings.Additionally, any ownership interest retained will be re-measured at fair valueon the date control is lost, with any gain or loss recognized in earnings. SFAS160 also requires companies to report a consolidated net income (loss) measurethat includes the amount attributable to such noncontrolling interests. Weadopted SFAS 160 effective January 1, 2009, and it applies tononcontrolling interests prospectively from that date. However, thepresentation and disclosure requirements of SFAS 160 were appliedretrospectively for all periods presented. As a result of this adoption, wereclassified noncontrolling interests in the amount of $15.6 million from totalliabilities to equity in the December 31, 2008 consolidated balance sheet;and net distributions to noncontrolling interests of $0.7 million fromoperating activities to financing activities in the consolidated statement ofcash flows for the three-month period ended March 31, 2008.

 

Fair Value

 

In 2006, the FASBissued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 defines fair value, establishes a market-based frameworkor hierarchy for measuring fair value and expands disclosures about fair valuemeasurements. SFAS 157 is applicable whenever another accounting pronouncementrequires or permits assets and liabilities to be measured at fair value. SFAS157 does not expand or require any new fair value measures, however theapplication of SFAS 157 may change current practice. We adopted SFAS 157 forfinancial assets and liabilities effective January 1, 2008 and fornon-financial assets and liabilities effective January 1, 2009. Theadoption of SFAS 157 did not have a material effect on our financial conditionor results of operations.

 

In April 2009,the FASB issued three FASB Staff Positions (“FSPs”) in order to provideadditional application guidance and enhance disclosures regarding fair valuemeasurements and impairments of securities.

 

·                  FSP FAS 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*(“FSP FAS 157-4”). FSP FAS 157-4 relates to determining fair values when thereis no active market or where the price inputs being used represent distressedsales. It reaffirms the need to use judgment to ascertain if a formerly activemarket has become inactive and in determining fair values when markets havebecome inactive.

·                  FSP FAS 115-2 and FAS 124-2, *Recognitionand Presentation of Other-Than-Temporary Impairments*. This FSP isintended to bring consistency to the timing of impairment recognition, andprovide improved disclosures about the credit and noncredit components ofimpaired debt securities that are not expected to be sold. The measure ofimpairment in comprehensive income remains fair value. The FSP also requiresincreased and more-timely disclosures regarding expected cash flows, creditlosses, and an aging of securities with unrealized losses.

·                  FSP FAS 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments*. This FSPrelates to fair value disclosures for financial instruments that are notcurrently reflected on the balance sheet at fair value. Prior to issuing thisFSP, fair values for these assets and liabilities were only disclosed once ayear. The FSP now requires these disclosures on a quarterly basis, providingqualitative and quantitative information about fair value estimates for allthose financial instruments not measured on the balance sheet at fair value.

 

The FSPs areeffective for periods ending after June 15, 2009, with earlier adoptionpermitted. The Company is currently evaluating the impact of adopting the FSPs,but does not expect the adoption of the provisions of the FSPs to have amaterial effect on our financial condition or results of operations.

 

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**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 

Disclosures aboutDerivative Instruments and Hedging Activities

 

Effective January 1,2009, the Company adopted SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (“SFAS 161”), anamendment to SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*. SFAS 161 applies to all entitiesand requires enhanced disclosures about derivative instruments and hedged itemsthat are accounted for under SFAS No. 133 and related interpretations. TheCompany applied the requirements of SFAS 161 on a prospective basis.Accordingly, disclosures related to interim periods prior to the date ofadoption have not been presented. Since SFAS 161 relates to disclosures only,it had no impact on the Company’s financial position or results of operations.See Note 16 for further detail.

 

Accounting forEquity-Method Investments

 

Effective January 1, 2009, the Company adopted EITFIssue No. 08-6, *Equity-Method Investment Accounting*(“EITF 08-6”). EITF 08-6 addresses a number of matters associated with theimpact that SFAS 141R and SFAS 160 might have on the accounting forequity-method investments. EITF 08-6 clarifies the following: (1) the cost basisof a new equity-method investment should be determined using acost-accumulation mode, which would continue the practice of includingtransaction costs in the cost of investment and would exclude the value ofcontingent consideration; and (2) equity-method investments should continue tobe subject to other-than-temporary impairment analysis pursuant to APB OpinionNo. 18. EITF 08-6 also provides guidance on gain recognition when a portion ofthe investor’s ownership is sold, how changes in classification fromequity-method to cost-method should be treated, and certain other issues. Theadoption of EITF 08-6 did not have a material effect on the Company’s resultsof operations or financial position.

 

**(3)  Portfolio Assets**

 

Portfolio Assets are summarizedas follows:

 
| ** **                                  | ** ** | **March 31,**         | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2009**                   | ** ** | **2008**              | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Loan Portfolios                             | ** ** | ** **                 | ** ** | ** **            | ** ** |
| Loans Acquired Prior to 2005                | ** ** | ** **                 | ** ** | ** **            | ** ** |
| Non-performing Portfolio Assets             |       | $                          | 3,192      |                  | $          | 3,410 |   |
| Performing Portfolio Assets                 |       | 814                        |       | 833                   |       |
| Loans Acquired After 2004                   | ** ** | ** **                 | ** ** | ** **            | ** ** |
| Loans acquired with credit deterioration    |       | 176,475                    |       | 125,108               |       |
| Loans acquired with no credit deterioration |       | 2,661                      |       | 2,757                 |       |
| Other                                       |       | 60,253                     |       | 65,394                |       |
| Outstanding balance                         |       | 243,395                    |       | 197,502               |       |
| Allowance for loan losses                   |       | (71,922                    | )          | (76,365               | )          |
| Carrying amount of loans, net of allowance  |       | 171,473                    |       | 121,137               |       |
|                                        |       |                       |       |                  |       |
| Real estate held for sale                   |       | 13,411                     |       | 17,484                |       |
| Real estate held for investment, net (1)    |       | 9,523                      |       | 9,592                 |       |
| Portfolio Assets, net                       |       | $                          | 194,407    |                  | $          | 148,213 |   |

 

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(1)     Includes lease-related intangible balances (net) ofapproximately $0.9 million and $1.0 million at March 31, 2009 and December 31,2008, respectively.

 

Certain Portfolio Assets are pledged to secure a$100.0 million revolving loan facility between FH Partners LLC, an indirectwholly-owned affiliate of FirstCity, and Bank of Scotland. See Note 2 to theconsolidated financial statements included in the Company’s 2008 Form 10-Kfor a description of this revolving credit agreement. In addition, certainPortfolio Assets are pledged to secure notes payable of certain consolidatedaffiliates of FirstCity that are generally non-recourse to FirstCity or anyaffiliate other than the acquiring entity that incurred the debt.

 

Income from Portfolio Assets issummarized as follows:

 
| ** **                                  | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **March 31,**         | ** ** |
| ** **                                  | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Loan Portfolios                             | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Loans Acquired Prior to 2005                | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Non-performing Portfolio Assets             |       | $                          | 41         |   | $ | 180 |   |
| Performing Portfolio Assets                 |       | 106                        |       | 106 |   |
| Loans Acquired After 2004                   | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Loans acquired with credit deterioration    |       | 8,723                      |       | 3,553 |   |
| Loans acquired with no credit deterioration |       | 79                         |       | 112 |   |
| Real Estate Portfolios                      |       | (180                       | )          | 929 |   |
| Other                                       |       | 274                        |       | 55 |   |
| Income from Portfolio Assets                |       | $                          | 9,043      |   | $ | 4,935 |   |

 

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**FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 

The Companyrecorded a provision for loan and impairment losses on Portfolio Assets ofapproximately $1.1 million for the three month period ended March 31, 2009— which is comprised of a $0.2 million impairment charge on real estateportfolios and a $0.9 million allowance for loan losses, net of recoveries. Forthe three month period ended March 31, 2008, the Company recorded aprovision for loan and impairment losses on Portfolio Assets of $2.9 million —which is comprised of a $0.2 million impairment charge on real estateportfolios and a $2.7 million allowance for loan losses.

 

The changes in the allowance for loan losses onPortfolio Assets are as follows:

 
| ** **              | ** ** | **Three Months Ended**     | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **March 31,**         | ** ** |
| *** ***            | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| *** ***            | ** ** | **(Dollars in thousands)** | ** ** |
| Beginning Balance       |       | $                          | (76,365    | ) | $ | (1,723 | ) |
| Provisions              |       | (1,241                     | )          | (2,867 | ) |
| Recoveries              |       | 312                        |       | 155 |   |
| Charge offs             |       | 1,427                      |       | 22 |   |
| Translation adjustments |       | 3,945                      |       | — |   |
| Ending Balance          |       | $                          | (71,922    | ) | $ | (4,413 | ) |

 

Accretable yieldrepresents the amount of income the Company can expect to generate over theremaining life of its existing loans acquired after 2004 with evidence ofcredit deterioration based on estimated future cash flows. Reclassificationsfrom nonaccretable difference to accretable yield primarily result from theCompany’s increase in its estimates of future cash flows. Reclassifications tononaccretable difference from accretable yield primarily results from allowancecharges that exceed the Company’s increase in its estimates of future cashflows. Changes in accretable yield for loans acquired after 2004 with evidenceof credit deterioration are as follows:

 
| ** **                                          | ** ** | **Three Months Ended**     | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|
| ** **                                          | ** ** | **March 31,**         | ** ** |
| ** **                                          | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Beginning Balance                                   |       | $                          | 58,114     |   | $ | 35,951 |   |
| Additions                                           |       | 10,931                     |       | 3,315 |   |
| Accretion                                           |       | (4,898                     | )          | (3,258 | ) |
| Reclassification from (to) nonaccretable difference |       | 2,481                      |       | (3,838 | ) |
| Disposals                                           |       | (8,444                     | )          | (1,194 | ) |
| Translation adjustments                             |       | (1,544                     | )          | 342 |   |
| Ending Balance                                      |       | $                          | 56,640     |   | $ | 31,318 |   |

 

Loans acquired during each period for which it wasprobable at acquisition that all contractually required payments would not becollected are as follows:

 
| ** **                                                              | ** ** | **Three Months Ended**     | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                              | ** ** | **March 31,**         | ** ** |
| ** **                                                              | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                              | ** ** | **(Dollars in thousands)** | ** ** |
| Face value at acquisition                                               |       | $                          | 140,772    |   | $ | 9,852 |   |
| Cash flows expected to be collected at acquisition, net  of adjustments |       | 81,122                     |       | 10,135 |   |
| Basis in acquired loans at acquisition (1)                              |       | 70,191                     |       | 6,820 |   |
|                                                                         |            |                            |            |  |  |  |  |

 

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(1)   Includes $2.4 million of loan portfolios accounted forunder the cost-recovery accounting method under SOP 03-3 upon acquisition forthe three month period ended March 31, 2009.

 

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**FIRSTCITY FINANCIAL CORPORATIONAND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (continued)**

 

**(4)  Loans Receivable**

 

The following is a composition of the Company’s loansreceivable by loan type and region:

** **
| ** **                           | ** ** | **March 31,**         | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**                   | ** ** | **2008**              | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)** | ** ** |
| Domestic:                            |       |                       |       |                  |       |
| Commercial and industrial:           |       |                       |       |                  |       |
| Affiliates                           |       | $                          | 13,823     |                  | $          | 12,794 |   |
| SBA                                  |       | 25,442                     |       | 19,340                |       |
| Other                                |       | 3,771                      |       | 3,313                 |       |
| Real estate:                         |       |                       |       |                  |       |
| Other                                |       | 10,221                     |       | 10,801                |       |
|                                 |       |                       |       |                  |       |
| Foreign - commercial and industrial: |       |                       |       |                  |       |
| Affiliates                           |       | 14,004                     |       | 14,286                |       |
|                                 |       |                       |       |                  |       |
| Total loans                          |       | 67,261                     |       | 60,534                |       |
| Less: allowance for loan losses      |       | (630                       | )          | (615                  | )          |
| Total loans, net                     |       | $                          | 66,631     |                  | $          | 59,919 |   |

 

***Loansreceivable — affiliates***

 

Loans receivable —affiliates, which are designated by management as held for investment, aresummarized as follows:

 
| ** **                    | ** ** | **March 31,**         | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2009**                   | ** ** | **2008**              | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)** | ** ** |
| Outstanding balance           |       | $                          | 26,413     |                  | $          | 25,747 |   |
| Capitalized interest          |       | 1,414                      |       | 1,333                 |       |
| Carrying amount of loans, net |       | $                          | 27,827     |                  | $          | 27,080 |   |

 

The summary of activity in loans receivable —affiliates is as follows:

 
| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)**             | ** ** |
| Beginning Balance               |       | $                                      | 27,080     |   | $ | 5,447 |   |
| Advances                        |       | 2,300                                  |       | — |   |
| Payments received               |       | (1,277                                 | )          | (468 | ) |
| Capitalized interest            |       | 81                                     |       | 96 |   |
| Foreign exchange gains (losses) |       | (357                                   | )          | 328 |   |
| Ending Balance                  |       | $                                      | 27,827     |   | $ | 5,403 |   |

 

Loans receivable — affiliates represent advances to Acquisition Partnershipsand other affiliated entities to acquire portfolios of performing andnon-performing commercial and consumer loans and other assets; and senior debtfinancing arrangements with equity-method investees to provide capital forbusiness expansion and operations. The loans are reported at their outstandingprincipal balances adjusted for unaccreted discounts, unamortized net loanfees, and the allowance for loan losses. Interest is accrued when earned and,if applicable, capitalized as part of loan principal in accordance with thecontractual terms of the loans. Interest is recognized on an accrual basis atthe applicable interest rate on the principal amount outstanding. Loanorigination fees and direct costs are generally amortized as level-yield adjustmentsover the respective loan terms. Unamortized net fees or costs are recognizedupon early repayment of the loans. Loans receivable — affiliates are generallysecured by the underlying collateral that was acquired

 

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**FIRSTCITY FINANCIAL CORPORATIONAND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(continued)**

 

withthe loan proceeds. Advances to affiliates to acquire loan portfolios aresecured by the underlying collateral of the individual notes within theportfolios, which is generally real estate; whereas advances to affiliates forbusiness expansion and working capital purposes are generally secured bybusiness assets (i.e. accounts, inventory and equipment).

 

Managementevaluates the need for impairment based upon the performance of the loans andvarious other factors. Impairment is evaluated by analyzing expected futurecash flows and evaluating values of the underlying loan collateral. Foradvances secured by loan portfolios, management analyzes the expected cashflows within each pool to determine that the cash flows are sufficient to repaythese notes. For loans secured by business assets, management analyzes theexpected future cash flows from the borrowing entity (discounted for the loan’srisk-adjusted rate), and the values of the underlying collateral, to determinewhether the Company expects to ultimately collect all contractual principal andinterest. The results of management’s evaluations indicated that projected cashflows and underlying collateral are sufficient to repay the loans and noallowances for impairment are necessary. The Company recorded no provisions forimpairment on loans receivable — affiliates for the three months ended March 31,2009 and 2008.

 

***Loansreceivable — SBA held for sale***

 

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

 
| ** **                    | ** ** | **March 31,  2009**   | ** ** | **December 31,  2008** | ** ** |
|-------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **(Dollars in thousands)** | ** ** |
| Outstanding balance           |       | $                          | 9,578      |                        | $          | 4,840 |   |
| Capitalized costs             |       | 142                        |       | 61                          |       |
| Carrying amount of loans, net |       | $                          | 9,720      |                        | $          | 4,901 |   |

 

Changes in loans receivable — SBA held for sale are asfollows:

 
| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)**             | ** ** |
| Beginning Balance                  |       | $                                      | 4,901      |   | $ | 133 |   |
| Originations and advances of loans |       | 4,813                                  |       | 1,090 |   |
| Payments received                  |       | (75                                    | )          | (2 | ) |
| Capitalized costs                  |       | 81                                     |       | 19 |   |
| Loans sold, net                    |       | —                                 |       | (185 | ) |
| Ending Balance                     |       | $                                      | 9,720      |   | $ | 1,055 |   |

 

Loans receivable — SBA held for sale represent U.S. Small BusinessAdministration (“SBA”) loans acquired by the Company in February 2007 andSBA loan originations and advances made since such time. SBA loans held forsale represent the portions of the loans that are guaranteed by the SBA, andare reflected at the lower of aggregate cost or estimated fair value. Netunrealized losses, if any, are recognized through a valuation allowance bycharges to income. The carrying value of SBA loans held for sale is net ofpremiums as well as deferred origination fees and costs. Premiums and netorigination fees and costs are deferred and included in the basis of the loansin calculating gains and losses upon sale. SBA loans are generally secured bythe borrowing entities’ assets such as accounts, property and equipment, andother assets. The Company generally sells the guaranteed portion of each loanto a third party and retains the servicing rights. The difference between theproceeds received and the allocated carrying value of the loans sold arerecognized as net gains on sales of loans. The non-guaranteed portion is generally held in the portfolio andclassified as held for investment. The Company recorded no write-downs of SBAloans held for sale below their cost for the three months ended March 31,2009 and 2008.

 

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**FIRSTCITY FINANCIAL CORPORATIONAND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(continued)**

 

***Loans receivable — SBA held for investment, net***

 

Loans receivable — SBA held for investment aresummarized as follows:

 
| ** **                    | ** ** | **March 31,**         | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2009**                   | ** ** | **2008**              | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)** | ** ** |
| Outstanding balance           |       | $                          | 16,726     |                  | $          | 15,509 |   |
| Allowance for loan losses     |       | (49                        | )          | (34                   | )          |
| Discounts, net                |       | (1,079                     | )          | (1,120                | )          |
| Capitalized costs             |       | 75                         |       | 50                    |       |
| Carrying amount of loans, net |       | $                          | 15,673     |                  | $          | 14,405 |   |

 

Changes in loans receivable — SBA held for investmentare as follows:

 
| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)**             | ** ** |
| Beginning Balance                  |       | $                                      | 14,405     |   | $ | 14,234 |   |
| Originations and advances of loans |       | 1,604                                  |       | 363 |   |
| Payments received                  |       | (388                                   | )          | (1,614 | ) |
| Capitalized costs                  |       | 26                                     |       | 7 |   |
| Provision for SBA loan losses, net |       | (15                                    | )          | 28 |   |
| Discount accretion, net            |       | 41                                     |       | 135 |   |
| Charge offs                        |       | —                                 |       | (165 | ) |
| Ending Balance                     |       | $                                      | 15,673     |   | $ | 12,988 |   |

 

Loans receivable —SBA held for investment represent SBA loans acquired by the Company in February 2007and SBA loan originations and advances made since such time. SBA loans held forinvestment are reported at their outstanding principal balances adjusted forunearned discounts, net deferred loan origination costs and the allowance forloan losses. Interest is recognized on an accrual basis at the applicableinterest rate on the principal amount outstanding. Loan origination fees anddirect costs as well as premiums and discounts are generally amortized as levelyield adjustments over the respective loan terms. Unamortized net fees or costsare recognized upon early repayment of the loans. SBA loans held for investmentare generally secured by the borrowing entities’ assets such as accounts,property and equipment, and other assets. Management evaluates the need forimpairment based upon the performance of the loans and other portfolio characteristics,such as industry concentrations and loan collateral, which also impactsmanagement’s estimates of the impairment. Impairment is evaluated by analyzingthe expected future cash flows from the borrowing entity (discounted for theloans’ risk-adjusted rates), and the values of the underlying collateral, todetermine whether the Company expects to ultimately collect all contractualprincipal and interest. The adequacy of the allowance for loan losses isreviewed by management on a regular basis and adjustments, if necessary, arereflected in operations during the periods in which they become known.Considerations in this evaluation include past and current loss experience,risks inherent in the current portfolio, and evaluation of commercial and realestate collateral as well as current economic conditions.

 

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**FIRSTCITY FINANCIAL CORPORATIONAND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(continued)**

 

Changes in the allowance for loan losses related toloans receivable — SBA held for investment are as follows:

 
| ** **        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------|------------|----------------------------------------|------------|
| ** **        | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **        | ** ** | **(Dollars in thousands)**             | ** ** |
| Beginning Balance |       | $                                      | (34        | ) | $ | (151 | ) |
| Provisions        |       | (21                                    | )          | (124 | ) |
| Recoveries        |       | 6                                      |       | 2 |   |
| Charge Offs       |       | —                                 |       | 150 |   |
| Ending Balance    |       | $                                      | (49        | ) | $ | (123 | ) |

 

***Loansreceivable — other***

 

Loans receivable —other, which are designated by management as held for investment, aresummarized as follows:

 
| ** **                     | ** ** | **March 31,**         | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2009**                   | ** ** | **2008**              | ** ** |
| ** **                     | ** ** | **(Dollars in thousands)** | ** ** |
| Outstanding balance            |       | $                          | 13,782     |                  | $          | 13,929 |   |
| Allowance for loan losses      |       | (581                       | )          | (581                  | )          |
| Discounts, net                 |       | (13                        | )          | (20                   | )          |
| Capitalized interest and costs |       | 223                        |       | 205                   |       |
| Carrying amount of loans, net  |       | $                          | 13,411     |                  | $          | 13,533 |   |

 

Changes in loans receivable — other are as follows:

 
| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)**             | ** ** |
| Beginning Balance               |       | $                                      | 13,533     |   | $ | 5,995 |   |
| Advances                        |       | 1,987                                  |       | (8 | ) |
| Payments received               |       | (2,129                                 | )          | (23 | ) |
| Capitalized interest and costs  |       | 18                                     |       | 9 |   |
| Discount accretion, net         |       | 7                                      |       | 6 |   |
| Foreign exchange gains (losses) |       | (5                                     | )          | (14 | ) |
| Ending Balance                  |       | $                                      | 13,411     |   | $ | 5,965 |   |

 

Loans receivable — other include loans made to non-affiliated entitiesand are secured by the borrowing entities’ assets such as accounts receivable,inventory, property and equipment, and various other assets. The loans arereported at their outstanding principal balances adjusted for unearneddiscounts, loan origination fees, and the allowance for loan losses. Interestis accrued when earned in accordance with the contractual terms of the loans.Interest is recognized on an accrual basis at the applicable interest rate onthe principal amount outstanding. Loan origination fees and direct costs aregenerally amortized as level-yield adjustments over the respective loan terms.Unamortized net fees or costs are recognized upon early repayment of the loans.Management evaluates the need for impairment based upon the performance of theloans and various other factors. Impairment is evaluated by analyzing theexpected future cash flows from the borrowing entity (discounted for the loans’risk-adjusted rates), and the values of the underlying collateral, to determinewhether the Company expects to ultimately collect all contractual principal andinterest. The results of this evaluation indicated that projected cash flowsand underlying collateral are sufficient to repay the loans and no allowancesfor impairment were necessary. The Company recorded no provisions forimpairment on loans receivable — other for the three months ended March 31,2009 and 2008.

 

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**FIRSTCITY FINANCIAL CORPORATIONAND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(continued)**

 

**(5)  Equity Investments**

 

The Company has investments in Acquisition Partnerships, and investments in servicing and operatingentities, that are accounted for under the equity method of accounting.The condensed combined financial position and results of operations of theAcquisition Partnerships (which include the domestic and foreign AcquisitionPartnerships and their general partners), and the servicing and operatingentities are summarized as follows:

 

**Condensed Combined Balance Sheets**

 
| ** **                                             | ** ** | **March 31,  2009**   | ** **    | **December 31,  2008** | ** ** |
|--------------------------------------------------------|------------|----------------------------|---------------|-----------------------------|------------|
| ** **                                             | ** ** | **(Dollars in thousands)** | ** **    |
| **Acquisition Partnerships:**                          | ** ** | ** **                 | ** **    |
| Assets                                                 |       | $                          | 281,263       |                        | $          | 297,805 |   |
| Liabilities                                            |       | $                          | 96,330        |                        | $          | 92,654 |   |
| Net equity                                             |       | 184,933                    |          | 205,151                     |       |
|                                                   |       | $                          |  281,263 |                        | $          | 297,805 |   |
| **Servicing and operating entities:**                  |       |                       |          |                        |       |
| Assets                                                 |       | $                          | 101,790       |                        | $          | 113,008 |   |
| Liabilities                                            |       | $                          | 54,183        |                        | $          | 64,053 |   |
| Net equity                                             |       | 47,607                     |          | 48,955                      |       |
|                                                   |       | $                          |  101,790 |                        | $          | 113,008 |   |
| **Total:**                                             |       |                       |          |                        |       |
| Assets                                                 |       | $                          | 383,053       |                        | $          | 410,813 |   |
| Liabilities                                            |       | $                          | 150,513       |                        | $          | 156,707 |   |
| Net equity                                             |       | 232,540                    |          | 254,106                     |       |
|                                                   |       | $                          |  383,053 |                        | $          | 410,813 |   |
|                                                   |       |                       |          |                        |       |
| Equity investment in Acquisition Partnerships          |       | $                          | 44,051        |                        | $          | 46,084 |   |
| Equity investment in servicing and operating  entities |       | 26,580                     |          | 26,903                      |       |
|                                                   |       | $                          |  70,631  |                        | $          | 72,987 |   |

 

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**FIRSTCITY FINANCIAL CORPORATIONAND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (continued)**

 

**Condensed Combined Summary of Operations**

 
| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                              | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands)**             | ** ** |
| **Acquisition Partnerships:**                           | ** ** | ** **                             | ** ** |
| Income from Portfolio Assets                            |       | $                                      | 10,476     |   | $ | 24,291 |   |
| Other income                                            |       | (66                                    | )          | 329 |   |
| Revenues                                                |       | 10,410                                 |       | 24,620 |   |
| Interest expense                                        |       | 1,374                                  |       | 1,876 |   |
| Service fees                                            |       | 3,206                                  |       | 4,948 |   |
| Provision for loan and impairment losses                |       | 1,606                                  |       | 5,358 |   |
| Asset-level expenses                                    |       | 1,881                                  |       | 1,894 |   |
| Other operating costs                                   |       | 723                                    |       | 3,922 |   |
| Foreign currency (gains) losses                         |       | 11,145                                 |       | (2,945 | ) |
| Income tax and other taxes                              |       | (54                                    | )          | 1,032 |   |
| Expenses                                                |       | 19,881                                 |       | 16,085 |   |
| Equity in earnings of investments                       |       | —                                 |       | 777 |   |
| Net earnings (loss)                                     |       | $                                      | (9,471     | ) | $ | 9,312 |   |
|                                                    |       |                                   |       |   |   |
| **Servicing and operating entities:**                   |       |                                   |       |   |   |
| Income from Portfolio Assets                            |       | $                                      | 6,269      |   | $ | 7,679 |   |
| Servicing fees                                          |       | 4,967                                  |       | 7,311 |   |
| Other income, net                                       |       | 12,890                                 |       | 2,301 |   |
| Total revenues                                          |       | 24,126                                 |       | 17,291 |   |
| Expenses                                                |       | 22,381                                 |       | 13,759 |   |
| Net earnings                                            |       | $                                      | 1,745      |   | $ | 3,532 |   |
|                                                    |       |                                   |       |   |   |
| Equity in earnings (loss) of Acquisition  Partnerships  |       | $                                      | (891       | ) | $ | 2,321 |   |
| Equity in earnings of servicing and operating  entities |       | 745                                    |       | 519 |   |
|                                                    |       | $                                      |  (146 | ) | $ | 2,840 |   |

 

Portfolio Assets held by certain AcquisitionPartnerships are pledged to secure notes payable that are generallynon-recourse to FirstCity or any affiliate other than the partnership entitythat incurred the debt.

 

The combinedassets and equity (deficit) of the underlying Acquisition Partnerships and theservicing and operating entities, and the Company’s equity investments in thoseentities, are summarized by geographic region below. The WAMCO Partnershipsrepresent domestic Texas limited partnerships and limited liability companiesin which the Company has a common ownership with Cargill.

 

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**FIRSTCITY FINANCIAL CORPORATIONAND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (continued)**

 
| ** **                                                                            | ** ** | **March 31,  2009**   | ** **    | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------|---------------|-----------------------------|------------|
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** **    |
| Assets:                                                                               |       |                       |          |                        |       |
| Domestic:                                                                             |       |                       |          |                        |       |
| WAMCO Acquisition Partnerships                                                        |       | $                          | 51,391        |                        | $          | 54,621 |   |
| Other Acquisition Partnerships                                                        |       | 7,629                      |          | 7,628                       |       |
| CAPP Resources, LLC (operating entity)                                                |       | 17,539                     |          | 17,097                      |       |
| Other operating entities                                                              |       | 2,299                      |          | 2,690                       |       |
| Latin America:                                                                        |       |                       |          |                        |       |
| Bidmex Holding, LLC (Acquisition Partnership)                                         |       | 61,543                     |          | 72,967                      |       |
| Other Acquisition Partnerships                                                        |       | 74,444                     |          | 69,373                      |       |
| Servicios Integrales de Cobranza SA (servicing  entity)                               |       | 279                        |          | 993                         |       |
| Europe:                                                                               |       |                       |          |                        |       |
| HMCS-GEN Limited                                                                      |       | 49,387                     |          | 52,401                      |       |
| Other Acquisition Partnerships                                                        |       | 36,869                     |          | 40,815                      |       |
| Servicing entities                                                                    |       | 81,673                     |          | 92,228                      |       |
|                                                                                  |       | $                          |  383,053 |                        | $          | 410,813 |   |
|                                                                                  |       |                       |          |                        |       |
| Equity:                                                                               |       |                       |          |                        |       |
| Domestic:                                                                             |       |                       |          |                        |       |
| WAMCO Acquisition Partnerships                                                        |       | $                          | 25,647        |                        | $          | 25,437 |   |
| Other Acquisition Partnerships                                                        |       | 4,172                      |          | 4,177                       |       |
| CAPP Resources, LLC (operating entity)                                                |       | 4,948                      |          | 3,403                       |       |
| Other operating entities                                                              |       | 181                        |          | 306                         |       |
| Latin America:                                                                        |       |                       |          |                        |       |
| Bidmex Holding, LLC (Acquisition Partnership)                                         |       | 62,212                     |          | 71,657                      |       |
| Other Acquisition Partnerships                                                        |       | 51,055                     |          | 56,759                      |       |
| Servicios Integrales de Cobranza SA (servicing  entity)                               |       | 1,642                      |          | 1,972                       |       |
| Europe:                                                                               |       |                       |          |                        |       |
| HMCS-GEN Limited                                                                      |       | 12,195                     |          | 11,350                      |       |
| Other Acquisition Partnerships                                                        |       | 29,652                     |          | 35,771                      |       |
| Servicing entities                                                                    |       | 40,836                     |          | 43,274                      |       |
|                                                                                  |       | $                          |  232,540 |                        | $          | 254,106 |   |
|                                                                                  |       |                       |          |                        |       |
| Equity investment in Acquisition Partnerships, and  Servicing and Operating entities: |       |                       |          |                        |       |
| Domestic:                                                                             |       |                       |          |                        |       |
| WAMCO Acquisition Partnerships                                                        |       | $                          | 12,699        |                        | $          | 12,598 |   |
| Other Acquisition Partnerships                                                        |       | 1,935                      |          | 1,944                       |       |
| CAPP Resources, LLC (operating entity)                                                |       | 1,559                      |          | 949                         |       |
| Other operating entities                                                              |       | 311                        |          | 4                           |       |
| Latin America:                                                                        |       |                       |          |                        |       |
| Bidmex Holding, LLC (Acquisition Partnership)                                         |       | 11,382                     |          | 12,773                      |       |
| Other Acquisition Partnerships                                                        |       | 5,478                      |          | 5,884                       |       |
| Servicios Integrales de Cobranza SA (servicing  entity)                               |       | 2,922                      |          | 2,876                       |       |
| Europe:                                                                               |       |                       |          |                        |       |
| HMCS-GEN Limited                                                                      |       | 3,659                      |          | 3,406                       |       |
| Other Acquisition Partnerships                                                        |       | 8,898                      |          | 9,479                       |       |
| Servicing entities                                                                    |       | 21,788                     |          | 23,074                      |       |
|                                                                                  |       | $                          |  70,631  |                        | $          | 72,987 |   |

 

Revenues andearnings (loss) of the underlying Acquisition Partnerships and the servicingand operating entities, and the Company’s share of equity in earnings (loss) ofthose entities are summarized by geographic region below.

 

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**FIRSTCITY FINANCIAL CORPORATIONAND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (continued)**

 
| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** **   |
|---------------------------------------------------------|------------|----------------------------------------|--------------|
| ** **                                              | ** ** | **2009**                               | ** **   | **2008** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands)**             | ** **   |
| Revenues:                                               |       |                                   |         |   |   |
| Domestic:                                               |       |                                   |         |   |   |
| WAMCO Acquisition Partnerships                          |       | $                                      | 1,526        |   | $ | 2,921 |   |
| Other Acquisition Partnerships                          |       | 114                                    |         | 194 |   |
| CAPP Resources, LLC (operating entity)                  |       | 11,707                                 |         | — |   |
| Other operating entities                                |       | 1,145                                  |         | — |   |
| Latin America:                                          |       |                                   |         |   |   |
| Bidmex Holding, LLC (Acquisition Partnership)           |       | 1,093                                  |         | 3,978 |   |
| Other Acquisition Partnerships                          |       | 1,432                                  |         | 7,253 |   |
| Servicios Integrales de Cobranza SA (servicing  entity) |       | 1,835                                  |         | 4,368 |   |
| Europe:                                                 |       |                                   |         |   |   |
| UBN, SA (Acquisition Partnership)                       |       | —                                 |         | 297 |   |
| HMCS-GEN Limited                                        |       | 1,553                                  |         | 2,287 |   |
| Other Acquisition Partnerships                          |       | 4,692                                  |         | 7,690 |   |
| Servicing entities                                      |       | 9,439                                  |         | 12,923 |   |
|                                                    |       | $                                      |  34,536 |   | $ | 41,911 |   |
|                                                    |       |                                   |         |   |   |
| Net earnings (loss):                                    |       |                                   |         |   |   |
| Domestic:                                               |       |                                   |         |   |   |
| WAMCO Acquisition Partnerships                          |       | $                                      | 180          |   | $ | 794 |   |
| Other Acquisition Partnerships                          |       | (76                                    | )            | (241 | ) |
| CAPP Resources, LLC (operating entity)                  |       | 2,105                                  |         | — |   |
| Other operating entities                                |       | (126                                   | )            | — |   |
| Latin America:                                          |       |                                   |         |   |   |
| Bidmex Holding, LLC (Acquisition Partnership)           |       | (9,796                                 | )            | 619 |   |
| Other Acquisition Partnerships                          |       | (2,577                                 | )            | 2,364 |   |
| Servicios Integrales de Cobranza SA (servicing entity)  |       | (526                                   | )            | 415 |   |
| Europe:                                                 |       |                                   |         |   |   |
| UBN, SA (Acquisition Partnership)                       |       | —                                 |         | 1,178 |   |
| HMCS-GEN Limited                                        |       | 854                                    |         | 124 |   |
| Other Acquisition Partnerships                          |       | 1,944                                  |         | 4,474 |   |
| Servicing entities                                      |       | 292                                    |         | 3,117 |   |
|                                                    |       | $                                      |  (7,726 | ) | $ | 12,844 |   |
| Equity in earnings (loss) of Acquisition                |       |                                   |         |   |   |
| Partnerships, and Servicing and Operating entities:     |       |                                   |         |   |   |
| Domestic:                                               |       |                                   |         |   |   |
| WAMCO Acquisition Partnerships                          |       | $                                      | 35           |   | $ | 380 |   |
| Other Acquisition Partnerships                          |       | (34                                    | )            | (114 | ) |
| CAPP Resources, LLC (operating entity)                  |       | 831                                    |         | — |   |
| Other operating entities                                |       | 8                                      |         | — |   |
| Latin America:                                          |       |                                   |         |   |   |
| Bidmex Holding, LLC (Acquisition Partnership)           |       | (1,455                                 | )            | 92 |   |
| Other Acquisition Partnerships                          |       | (189                                   | )            | 277 |   |
| Servicios Integrales de Cobranza SA (servicing  entity) |       | (263                                   | )            | 203 |   |
| Europe:                                                 |       |                                   |         |   |   |
| UBN, SA (Acquisition Partnership)                       |       | —                                 |         | 487 |   |
| HMCS-GEN Limited                                        |       | 256                                    |         | 37 |   |
| Other Acquisition Partnerships                          |       | 496                                    |         | 1,162 |   |
| Servicing entities                                      |       | 169                                    |         | 316 |   |
|                                                    |       | $                                      |  (146   | ) | $ | 2,840 |   |

 

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**FIRSTCITY FINANCIAL CORPORATIONAND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (continued)**

 

Combining statements ofoperations for the WAMCO Partnerships follow. WAMCO 30 is considered tobe a significant subsidiary of FirstCity.

 

**Three Months Ended March 31, 2009**

 
| ** **                                      | ** ** | **WAMCO**                  | ** ** | **Other**        | ** ** | ** **   | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|------------------|------------|--------------|------------|
| ** **                                      | ** ** | **30**                     | ** ** | **Partnerships** | ** ** | **Combined** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Income from Portfolio Assets                    |       | $                          | 1,139      |             | $          | 387          |       | $ | 1,526 |   |
| Other income, net                               |       | —                     |       | —           |       | —       |       |
| Revenues                                        |       | 1,139                      |       | 387              |       | 1,526        |       |
| Interest and fees on notes payable — other |       | (182                       | )          | (13              | )          | (195         | )          |
| Provision for loan and impairment losses        |       | (57                        | )          | (252             | )          | (309         | )          |
| Asset-level expenses                            |       | (166                       | )          | (436             | )          | (602         | )          |
| Servicing fees — affiliate                 |       | (111                       | )          | (79              | )          | (190         | )          |
| General, administrative and operating expenses  |       | (19                        | )          | (31              | )          | (50          | )          |
| Expenses                                        |       | (535                       | )          | (811             | )          | (1,346       | )          |
| Net earnings (loss)                             |       | $                          | 604        |             | $          | (424         | )          | $ | 180 |   |

 

**Three Months Ended March 31, 2008**

 
| ** **                                      | ** ** | **WAMCO**                  | ** ** | **Other**        | ** ** | ** **   | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|------------------|------------|--------------|------------|
| ** **                                      | ** ** | **30**                     | ** ** | **Partnerships** | ** ** | **Combined** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Income from Portfolio Assets                    |       | $                          | 1,543      |             | $          | 1,368        |       | $ | 2,911 |   |
| Other income, net                               |       | 9                          |       | 1                |       | 10           |       |
| Revenues                                        |       | 1,552                      |       | 1,369            |       | 2,921        |       |
| Interest and fees on notes payable — other |       | (473                       | )          | (58              | )          | (531         | )          |
| Provision for loan and impairment losses        |       | (223                       | )          | (400             | )          | (623         | )          |
| Asset-level expenses                            |       | (421                       | )          | (45              | )          | (466         | )          |
| Servicing fees — affiliate                 |       | (114                       | )          | (310             | )          | (424         | )          |
| General, administrative and operating expenses  |       | (52                        | )          | (31              | )          | (83          | )          |
| Expenses                                        |       | (1,283                     | )          | (844             | )          | (2,127       | )          |
| Net earnings                                    |       | $                          | 269        |             | $          | 525          |       | $ | 794 |   |

 

At March 31,2009, the Company had $28.4 million in Euro-denominated debt that was designatedas a hedge to partially off-set the Company’s business exposure to foreigncurrency exchange risk attributable to our net equity investments in Europe.Refer to Note 16 for additionalinformation.

 

**(6)  Servicing Assets — SBALoans**

 

In accordance with SFAS No. 156, *Accountingfor Servicing of Financial Assets*(“SFAS 156”), servicing rights purchased or resulting from thesale of loans are initially recognized at fair value at the date of acquisitionor transfer. Subsequent to the date of purchase or sale, the Company elected tomeasure the carrying value of the servicing assets by using the amortizationmethod — which amortizes the servicing assets in proportion to and over theperiod of estimated net servicing income, and evaluates servicing assets for impairmentbased on fair value at each reporting date. The Company evaluates the possibleimpairment of servicing assets based on the difference between the carryingamount and current fair value of the servicing assets. Impairment is charged toservicing fees in the period recognized.

 

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

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)**             | ** ** |
| Beginning Balance                           |       | $                                      | 785        |   | $ | 885 |   |
| Servicing Assets capitalized                |       | —                                 |       | 2 |   |
| Servicing Assets amortized                  |       | (46                                    | )          | (48 | ) |
| Ending Balance                              |       | $                                      | 739        |   | $ | 839 |   |
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Reserve for impairment of servicing assets: | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Beginning Balance                           |       | $                                      | (63        | ) | $ | (42 | ) |
| Impairments                                 |       | —                                 |       | (68 | ) |
| Recoveries                                  |       | 19                                     |       | — |   |
| Charge Offs                                 |       | —                                 |       | — |   |
| Ending Balance                              |       | $                                      | (44        | ) | $ | (110 | ) |
|                                        |       |                                   |       |   |   |
| Ending Balance (net of reserve)             |       | $                                      | 695        |   | $ | 729 |   |
| ** **                                  | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Fair value of amortized servicing assets:   |       |                                   |       |   |   |
| Beginning balance                           |       | $                                      | 722        |   | $ | 843 |   |
| Ending balance                              |       | $                                      | 695        |   | $ | 729 |   |

 

The Company relies primarily on a discounted cash flow model toestimate the fair value of its servicing assets. The model calculates estimatedfair value of the servicing assets using predominant risk characteristics ofservicing assets such as discount rate, prepayment speed, weighted average lifeof the loans sold and the interest rate. The estimated fair value of servicingassets was determined using discount rates ranging from 5.5% to 11.2%,prepayment speeds of 14.0% to 15.0% (depending on certain characteristics ofthe related loans), and weighted average lives of the underlying assets rangingfrom 55 to 283 months and a combined weighted average life of 155 months. In the event future prepayments aresignificant or impairments are incurred, and future expected cash flows areinadequate to cover the unamortized servicing assets, additional amortizationor impairment charges would be recognized.

 

**(7)  Income Taxes**

 

The Company has substantial net operating loss carryforwards for federalincome tax purposes (“NOLs”), which can be used to off-set the tax liabilityassociated with the Company’s pre-tax earnings until the earlier of theexpiration or utilization of such NOLs. The Company accounts for the benefit ofthe NOLs and other income tax items under the asset and liability methodin accordance with SFAS No. 109, *Accounting for IncomeTaxes*(“SFAS 109”). Deferred tax assets and liabilities arerecognized based on the future tax consequences attributable to temporarydifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. SFAS 109requires a reduction of the carrying amounts of deferred tax assets by avaluation allowance if, based on the available evidence, it is more likely thannot that such assets will not be realized. Accordingly, the need to establishvaluation allowances for deferred tax assets is assessed periodically by theCompany based on the SFAS 109 more-likely-than-not realization thresholdcriterion. In the assessment, appropriate consideration is given to allpositive and negative evidence related to the realization of the deferred taxassets. This assessment considers, among other factors, the nature, frequencyand severity of current and cumulative losses, forecasts of futureprofitability, excess of appreciated asset value over the tax basis of netassets, the duration of statutory carryforward periods, the Company’sexperience with utilizing available operating loss and tax creditcarryforwards, and tax planning strategies. In making such assessments,significant weight is given to evidence that can be objectively verified. At March 31,2009 and December 31, 2008, the Company established a full valuationallowance for its deferred tax assets due to the lack of sufficient objectiveevidence regarding the realization of these assets in the foreseeable future.

 

Pursuant to theprovisions of FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109* (“FIN 48”), the Company recognizesthe effect of income tax positions only if those positions are more likely thannot of being sustained. Recognized income tax positions are measured at thelargest amount that is greater than 50% likely

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 

of being realized. Changesin recognition or measurement are reflected in the period in which the changein judgment occurs. The difference between the benefit recognized for aposition in accordance with this FIN 48 model and the tax benefit claimed on atax return is referred to as an unrecognized tax benefit (“UTB”). The grossamount of UTBs on uncertain tax positions as of March 31, 2009 totaled$336,000, which if recognized, would impact the Company’s effective income taxrate.

 

Over the next twelve months, due to the expiration of the statute oflimitations related to certain UTBs, the Company anticipates that it isreasonably possible that the amount of UTBs could be reduced by approximately$50,000, which would impact the Company’s effective tax rate. The Companyrecords interest and penalties related to income tax uncertainties in theprovision for income taxes. At March 31, 2009, interest and penalties of$82,000 are included in “Other liabilities” as income taxes payable.

 

In a letter dated March 26, 2008, the Internal Revenue Servicenotified FirstCity of the completion of its examination on the Company’s 2004federal income tax return. The examination results were that no changes weremade to FirstCity’s original tax return as filed. FirstCity currently files taxreturns in approximately 35 states and is currently being examined in threestates for the year 2004. Tax year 1994 and subsequent years are open tofederal examination, and tax year 2004 and subsequent years are open to stateexamination.

 

**(8)  Earnings (Loss) per Common Share**

 

Basic net earnings(loss) per common share calculations are based upon the weighted average numberof common shares outstanding during the period. The dilutive effect of commonshare equivalents is included in the calculation of diluted earnings (loss) pershare only when the effect of their inclusion would be dilutive. Thecalculations of basic and dilutive earnings (loss) per share were determined asfollows:

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                        | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **(Dollars in thousands)**             | ** ** |
| ** **                                                                        | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net earnings (loss)                                                               |       | $                                      | 992        |   | $ | (3,606 | ) |
| Less: net income attributable to the noncontrolling  interest                     |       | 348                                    |       | (22 | ) |
| Net earnings (loss) attributable to FirstCity                                     |       | $                                      | 644        |   | $ | (3,584 | ) |
|                                                                              |       |                                   |       |   |   |
| Weighted average outstanding shares of common stock  (in thousands)               |       | 9,832                                  |       | 10,584 |   |
| Dilutive effect of:                                                               |       |                                   |       |   |   |
| Warrants                                                                          |       | —                                 |       | — |   |
| Employee stock options                                                            |       | 1                                      |       | — |   |
| Weighted average outstanding shares of common stock  and common stock equivalents |       | 9,833                                  |       | 10,584 |   |
|                                                                              |       |                                   |       |   |   |
| Net earnings (loss) per share:                                                    |       |                                   |       |   |   |
| Basic                                                                             |       | $                                      | 0.07       |   | $ | (0.34 | ) |
| Diluted                                                                           |       | $                                      | 0.07       |   | $ | (0.34 | ) |
|                                                                              |       |                                   |       |   |   |
| Dilutive shares excluded from above (in thousands):                               |       |                                   |       |   |   |
| Warrants                                                                          |       | —                                 |       | 300 |   |
| Employee stock options                                                            |       | —                                 |       | 246 |   |

 

**(9)  Stock-BasedCompensation**

 

The impact on theresults of operations of recording stock-based compensation for the three monthperiod ended March 31, 2009 and 2008 follows:

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 
| ** **                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                                         | ** ** | **(Dollars in thousands)**             | ** ** |
| Amount of compensation cost recognized in expenses |       | $                                      | 105        |   | $ | 225 |   |
| Tax benefit recognized in income                   |       | $                                      | —     |   | $ | — |   |
| Amount capitalized as part of an asset             |       | $                                      | —     |   | $ | — |   |

 

A summary of stock option activity as of March 31,2009 and changes during the period then ended is presented below:

 
| ** **           | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **         | ** ** |
|----------------------|------------|------------|------------|--------------|------------|-----------------|------------|--------------------|------------|
| ** **           | ** ** | ** ** | ** ** | ** **   | ** ** | **Average**     | ** ** | ** **         | ** ** |
| ** **           | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining**   | ** ** | ** **         | ** ** |
| ** **           | ** ** | ** ** | ** ** | **Average**  | ** ** | **Contractual** | ** ** | **Aggregate**      | ** ** |
| ** **           | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Term**        | ** ** | **Intrinsic**      | ** ** |
| ** **           | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(Years)**     | ** ** | **Value**          | ** ** |
| ** **           | ** ** | ** ** | ** ** | ** **   | ** ** | ** **      | ** ** | **(in thousands)** | ** ** |
| Outstanding at       |       |       |       |         |       |            |       |               |       |
| January 1, 2009 |       | 811,150    |       | $            | 6.24       |            |       |               |       |   |
| Granted              |       | —     |       | —       |       |            |       |               |       |
| Exercised            |       | —     |       | —       |       |            |       |               |       |
| Expired              |       | —     |       | —       |       |            |       |               |       |
| Forfeited            |       | (2,500     | )          | 9.85         |       |            |       |               |       |
| Outstanding at       |       |       |       |         |       |            |       |               |       |
| March 31, 2009  |       | 808,650    |       | $            | 6.23       |            | 4.94       |               | $          | — |   |
| Exercisable at       |       |       |       |         |       |            |       |               |       |
| March 31, 2009  |       | 710,112    |       | $            | 5.68       |            | 4.50       |               | $          | — |   |

 

The totalintrinsic value of stock options exercised during the three month periods endedMarch 31, 2009 and 2008 was zero for both periods. As of March 31,2009, there was approximately $569,000 of total unrecognized compensation costrelated to unvested share-based compensation arrangements granted under thestock option plans. That cost is expected to be recognized over a weightedaverage period of 1.1 years.

 

A summary of thestatus and changes of FirstCity’s non-vested shares as of March 31, 2009,and changes during the three months ended March 31, 2009 is presentedbelow:

 
| ** **                         | ** ** | ** ** | ** ** | **Weighted-**  | ** ** |
|------------------------------------|------------|------------|------------|----------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Average**    | ** ** |
| ** **                         | ** ** | ** ** | ** ** | **Grant-Date** | ** ** |
| ** **                         | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Non-vested at January 1, 2009 |       | 107,913    |       | $              | 7.06       |   |
| Granted                            |       | —     |       | $              | —     |   |
| Vested                             |       | (7,500     | )          | $              | 3.05       |   |
| Forfeited                          |       | (1,875     | )          | $              | 9.85       |   |
| Non-vested at March 31, 2009  |       | 98,538     |       | $              | 7.37       |   |

 

**(10)  Accumulated OtherComprehensive Loss**

 

Accumulated other comprehensive loss is comprisedof the following as of March 31, 2009 and December 31, 2008:

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 
| ** **                                          | ** ** | **March 31,  2009**   | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Cumulative foreign currency translation adjustments |       | $                          | (2,682     | )                           | $          | (3,766 | ) |
| Other unrealized gain                               |       | 33                         |       | 40                          |       |
| Total accumulated other comprehensive loss          |       | $                          | (2,649     | )                           | $          | (3,726 | ) |

 

**(11)  Fair Value**

 

The fair value of an asset or liability is the price that would bereceived to sell that asset or paid to transfer that liability in an orderlytransaction occurring in the principal market (or most advantageous market inthe absence of a principal market) for such asset or liability. In estimatingfair value, the Company utilizes valuation techniques that are consistent withthe market approach, the income approach and/or the cost approach. Suchvaluation techniques are consistently applied. Inputs to valuation techniquesinclude the assumptions that market participants would use in pricing an assetor liability. SFAS 157, *Fair Value Measurements*,**establishes a fair value hierarchy that prioritizes theinputs to valuation techniques to measure fair value. The hierarchy gives thehighest priority to unadjusted quoted prices in active markets for identicalassets or liabilities (Level 1 measurements) and the lowest priority tomeasurements involving significant unobservable inputs (Level 3 measurements).The three levels of he fair value hierarchy are described below:

 

·                  Level 1 — Valuations are based uponquoted prices (unadjusted) in active exchange markets involving identicalassets and liabilities that the Company has the ability to access at themeasurement date.

 

·                  Level 2 — Observable inputs otherthan Level 1 prices, such as quoted prices for similar instruments in activemarkets; quoted prices and valuations for identical or similar instruments inmarkets that are not active; and model-based valuation techniques withsignificant assumptions and inputs that are observable in the market or can bederived principally from or corroborated by observable market data.

 

·                  Level 3 — Valuations are derived frommodel-based techniques that use inputs and significant assumptions that aresupported by little or no observable market data. Valuation techniques includethe use of pricing models, discounted cash flow models and similarmethodologies.

 

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

 

*Asset Measured at Fair Value on a Recurring Basis*

 

At March 31, 2009, the only financial or non-financial item thatthe Company measures at fair value on a recurring basis was its investmentsecurity available for sale (represents a beneficial interest attributable toloans sold through a securitization transaction that the Company purchased in2008). The Company measures fair value for this investment security using adiscounted cash flow model based on assumptions and inputs that arecorroborated by little or no observable market data (Level 3 measurement). TheCompany uses this measurement technique because pricing information andmarket-participant assumptions for purchased beneficial interests in similarsecuritization transactions are not readily accessible and frequently released tothe public. The changes to this Level 3 asset that is measured at fair value ona recurring basis are summarized as follows:

 
| Balance, December 31, 2008                                                         |   | $      | 5,251  |   |
|-----------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Total net gains (losses) for three-month period  ended March 31, 2009 included in: |   |   |   |
| Net income (loss)                                                                       |   | — |   |
| Other comprehensive income (loss)                                                       |   | (7     | )      |
| Purchases, sales, issuances and settlements, net                                        |   | (965   | )      |
| Net transfers into Level 3                                                              |   | — |   |
| Balance, March 31, 2009                                                            |   | $      | 4,279  |   |

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 

*Assets Measured at Fair Value on a Non-RecurringBasis*

 

The Company may be required, from time to time, to measure certainfinancial and non-financial assets at fair value on a non-recurring basis.These adjustments to fair value generally result from write-downs of financialand non-financial assets as a result of impairment or application oflower-of-cost or fair value accounting. For assets measured at fair value on anon-recurring basis and carried at fair value on the balance sheet at March 31,2009, the following table provides the valuation levels used to determine thefair value of the financial assets:

 
| ** **                    | ** ** | ** **                                | ** ** | ** **        | ** ** | ** **  | ** ** | ** **  | ** ** | **Total Losses in**     | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|-------------------|------------|-------------|------------|-------------|------------|-------------------------|------------|
| ** **                    | ** ** | **Carrying Value at March 31, 2009** | ** ** | **Quarter Ended** | ** ** |
| **(Dollars in thousands)**    | ** ** | **Total**                                 | ** ** | **Level 1**       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **March 31, 2009** | ** ** |
| Portfolio Assets - loans (1)  |       | $                                         | 1,530      |              | $          | —      |       | $           | —     |                    | $          | 1,530 |   | $ | (505 | ) |
| Real estate held for sale (2) |       | 4,348                                     |       | —            |       | 4,348       |       | —      |       | (163                    | )          |
|                          |       |                                      |       |              |       |        |       |        |       | $                       |  (668 | ) |
|                               |            |                                           |            |                   |            |             |            |             |            |                         |            |  |  |  |  |  |

 

----

(1)          Represents the carryingvalue of impaired loans that were measured for impairment using the estimatedfair value of the collateral for collateral-dependent loans. The carrying valueof loans fully charged-off is zero.

(2)          Represents the carryingvalue and related losses of foreclosed real estate properties that weremeasured at fair value upon their initial recognition as real estate held forsale or subsequent impairment.

 

The carrying values and related write-downs of “Portfolio Assets —loans” in the table above are based on collateral valuations using observableand unobservable inputs, adjusted for various considerations such as marketconditions, economic and competitive environment, and other assets with similarcharacteristics (i.e. type, location, etc.) that, in management’s opinion,reflect elements a market participant would consider. The Company classifiesits fair value measurement techniques for these assets as Level 3 inputs forthe following reasons: (1) distressed asset transactions generally occurin inactive markets for which observable market prices are not readilyavailable (i.e. price quotations vary substantially over time and amongmarket-makers, and pricing information is generally not released to thepublic); and (2) the Company’s valuation techniques that aremost-significant to the fair value measurements are principally derived fromassumptions and inputs that are corroborated by little or no observable marketdata. The carrying values and related write-downs of “Real estate held for sale”in the table above are generally based on collateral valuations usingobservable inputs.

 

Under SFAS 157, we attempt to base our fair values on the price that wouldbe received to sell an asset in an orderly transaction between marketparticipants at the measurement date. It is our policy to maximize the use ofobservable inputs, when reasonably available and without undue cost, andminimize the use of unobservable inputs when developing fair value measurementsin accordance with the fair value hierarchy in SFAS 157. Fair valuemeasurements for assets where there exists limited or no observable market dataand, therefore, are based principally on our own estimates and assumptions, areoften calculated based on collateral valuations adjusted for the economic andcompetitive environment, the characteristics of the asset, and other suchfactors. Additionally, there may be inherent weaknesses in any valuationtechnique, and changes in the underlying assumptions used, including discountrates and estimates of future cash flows, that could significantly affect theresults of current or future values.

 

**(12) Variable Interest Entities**

 

In the normalcourse of business, the Company enters into various types of on and off-balancesheet transactions with entities that involve variable interests. Variableinterests are generally defined as contractual, ownership or other economicinterests in an entity that change with fluctuations in the entity’s net assetvalue. If certain characteristics are present in these transactions, the entityis subject to a variable interests consolidation analysis, and consolidation isbased on variable interests, and not solely on ownership of the entity’soutstanding voting stock. If an entity is determined to be a variable interestentity (“VIE”), we determine if our variable interest causes us to beconsidered the primary beneficiary. We are the primary beneficiary and arerequired to consolidate the entity if we absorb a majority of expected lossesor receive a majority of residual returns (if the losses or returns occur), orboth. In making the determination as to whether we are the primary beneficiary,we evaluate the design of the entity, including the risks that causevariability, the purpose for which the entity was created, and the variabilitythat the entity was designed to create and pass along to its interest holders.When the primary beneficiary cannot be identified through qualitative analysis,we use internal cash flow models to compute and allocate expected losses orresidual returns to each variable interest holder. The allocation of expectedcash flows is based upon the relative contractual rights and preferences ofeach interest holder in the VIE’s capital structure.

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 

In order todetermine if we are considered to be the primary beneficiary of a VIE, we firstperform a qualitative analysis, which requires certain subjective decisionsregarding our assessments, including, but not limited to, the design of theentity, the variability that the entity was designed to create and pass alongto its interest holders, the rights of the parties, and the purpose of thearrangement. If we cannot conclude after qualitative analysis whether we arethe primary beneficiary, we perform a quantitative analysis. Quantifying thevariability of a VIE’s assets is complex and subjective, requiring analysis ofa significant number of possible future outcomes as well as probability of eachoutcome occurring. The result of each possible outcome is allocated to theparties holding interests in the VIE and, based on the allocation, acalculation is performed to determine which party, if any, is the primarybeneficiary.

 

The followingprovides a summary for which the Company has entered into significanttransactions with different types of VIEs:

 

AcquisitionPartnership VIEs —The Company is involved with certain Acquisition Partnerships that were formedwith one or more investors to invest in Portfolio Assets. These AcquisitionPartnership VIEs are typically financed through debt and/or equity provided bythe investors (including FirstCity). The investors and third-party creditorsgenerally have recourse only to the extent of the assets held by these VIEs.The Acquisition Partnerships included in this disclosure are VIEs becausegenerally they do not have sufficient equity to finance their activitieswithout additional subordinated financial support, or the investors do not havethe ability to make significant decisions about the Acquisition Partnership’sactivities. The Company is not the primary beneficiary of the AcquisitionPartnership VIEs as the majority of the variable interests are expected toaccrue to the other investors. The Company does not generally provide financialsupport to any Acquisition Partnership VIE beyond that which is contractually required.

 

Operating EntityVIEs — TheCompany has significant variable interests with certain operating entities(including a loan servicing entity). FirstCity provided financing in the formof debt or equity to help finance the activities of the Operating Entity VIEs.The voting interests of the Operating Entity VIEs are either wholly-owned ormajority-owned by non-affiliated investors. The investors and creditors,including FirstCity, generally have recourse only to the extent of the assetsheld by these VIEs. The Operating Entities included in this disclosure are VIEsbecause generally they do not have sufficient equity to finance theiractivities without additional subordinated financial support. The Company isnot the primary beneficiary of the Operating Entity VIEs as the majority of thevariable interests are expected to accrue to other non-affiliated investors.The Company does not generally provide financial support to any OperatingEntity VIE beyond that which is contractually required.

 

The following table summarizes the carrying amounts ofthe assets and liabilities and the maximum loss exposure as of March 31,2009 related to the Company’s variable interests in non-consolidated VIEs. TheCompany does not have any consolidated VIEs for which it holds a minorityvoting interest in the entity.

 
| ** **                   | ** ** | **Assets on FirstCity’s**       | ** ** | **FirstCity’s** | ** ** |
|------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| ** **                   | ** ** | **Balance Sheet**                    | ** ** | **Maximum**          | ** ** |
| ** **                   | ** ** | **Loans**                            | ** ** | **Equity**           | ** ** | **Exposure** | ** ** |
| **Type of VIE**              | ** ** | **Receivable**                       | ** ** | **Investment**       | ** ** | **to Loss (1)** | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Acquisition Partnership VIEs |       | $                                    | 2,044      |                 | $          | 19,271 |   | $ | 22,494 |   |
|                         |       |                                 |       |                 |       |   |   |
| Operating Entity VIEs        |       | 20,749                               |       | 1,324                |       | 22,073 |   |
|                         |       |                                 |       |                 |       |   |   |
| Net assets acquired          |       | $                                    | 22,793     |                 | $          | 20,595 |   | $ | 44,567 |   |

 

----

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

 

**(13)  Other Related PartyTransactions**

 

The Company hascontracted with the Acquisition Partnerships and related parties as a thirdparty loan servicer. Servicing fees and due diligence fees (included in otherincome) derived from such affiliates totaled $2.1 million and $2.2 million forthe three month periods ended March 31, 2009 and 2008, respectively.

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (continued)**

 

FirstCityServicing Corporation (“FCSC”), an indirect wholly-owned affiliate of theCompany, and MCS et Associates (“MCS”), in which FCSC is an 11.89% shareholderas of December 31, 2008, are parties to Consulting, License andConfidentiality Agreements dated June 30, 1999 pursuant to which FCSCprovides consultation services and personnel to be employed by MCS to assist indeveloping and managing due diligence and servicing systems. Pursuant to thoseagreements, MCS provides the supplied personnel with compensation, taxequalization payments, housing allowances, transportation allowance, and taxpreparation. MCS also pays consulting fees to FCSC and reimburses FCSC fortravel, hotel, airfare, and meal expenses incurred related to the provision ofthe services. FirstCity recorded $98,000 and $113,000 during the three monthperiods ended March 31, 2009 and 2008, respectively, from MCS as feesincluded in other income.

 

**(14)  Segment Reporting**

 

The Company isengaged in two major business segments — Portfolio Asset Acquisition andResolution and Special Situations Platform.

 

In the PortfolioAsset Acquisition and Resolution business, the Company acquires and resolvesportfolios of performing and non-performing loans and other assets(collectively, “Portfolio Assets” or “Portfolios”), which are generallyacquired at a discount to their legal principal balance or appraised value.Purchases may be in the form of pools of assets or single assets. The PortfolioAssets are generally aggregated, including loans of varying qualities that aresecured or unsecured by diverse collateral types and real estate. SomePortfolio Assets are loans for which resolution is linked primarily to the realestate securing the loan, while others may be collateralized business loans forwhich resolution may be based either on real estate, business assets or othercollateral cash flow. Portfolio Assets are acquired on behalf of the Company orits consolidated subsidiaries, and on behalf of domestic and foreignpartnerships and other entities (“Acquisition Partnerships”) in which apartially-owned affiliate of the Company is the general partner and the Companyand other investors are limited partners. The Company services, manages andultimately resolves or otherwise disposes of substantially all Portfolio Assetsacquired by the Company, its Acquisition Partnerships, or other relatedentities. The Company services such assets until they are collected or sold.

 

The Companyengages in its Special Situations Platform business through its majorityownership interest in FirstCity Denver — which was formed in April 2007.Through its Special Situations Platform business, the Company providesinvestment capital to privately-held middle-market companies through flexiblecapital structuring arrangements. The nature of the capital investmentsprimarily take the form of senior and junior financing arrangements, but alsoinclude direct equity investments, common equity warrants, distressed debttransactions, and leveraged buyouts. FirstCity Denver’s primary investmentobjective is to generate both current income and capital appreciation throughdebt and equity investments, and to generally structure the investments to berepaid or exited in twelve to thirty-six months.

 

Operating segment revenues andprofitability, and a reconciliation to net earnings (loss) before deduction ofnet income attributable to noncontrolling interests for the three months ended March 31,2009 and 2008 are as follows:

 

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** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (continued)**

 
| ** **                                                                                   | ** ** | **Three Months Ended**     | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,**         | ** ** |
| ** **                                                                                   | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                                                   | ** ** | **(Dollars in thousands)** | ** ** |
| **Portfolio Asset Acquisition and Resolution:**                                              |       |                       |       |   |   |
| Total revenues                                                                               |       | $                          | 13,297     |   | $ | 8,233 |   |
| Operating contribution, net of taxes                                                         |       | $                          | 833        |   | $ | (2,094 | ) |
|                                                                                         |       |                       |       |   |   |
| **Special Situations Platform:**                                                             |       |                       |       |   |   |
| Total revenues                                                                               |       | $                          | 2,338      |   | $ | 1,089 |   |
| Operating contribution, net of taxes                                                         |       | $                          | 1,821      |   | $ | 272 |   |
|                                                                                         |       |                       |       |   |   |
| **Corporate Overhead:**                                                                      |       |                       |       |   |   |
| Salaries and benefits, occupancy, professional and  other income and expenses, net           |       | 1,622                      |       | 1,670 |   |
| Income taxes                                                                                 |       | 40                         |       | 114 |   |
| Net earnings (loss) before deduction of net income  attributable to noncontrolling interests |       | $                          | 992        |   | $ | (3,606 | ) |

 

Revenues and equity in earnings of investments fromthe Special Situations Platform segment are all attributable to domesticoperations. Revenues and equity in earningsof investments from the Portfolio Asset Acquisition and Resolution segment areattributable to domestic and foreign operations as follows:

 
| ** **    | ** ** | **Three Months Ended**     | ** ** |
|---------------|------------|----------------------------|------------|
| ** **    | ** ** | **March 31,**         | ** ** |
| ** **    | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **    | ** ** | **(Dollars in thousands)** | ** ** |
| Domestic      |       | $                          | 9,733      |   | $ | 5,630 |   |
| Latin America |       | 919                        |       | 3,035 |   |
| Europe        |       | 1,652                      |       | 2,395 |   |
| Other         |       | 8                          |       | 13 |   |
| Total         |       | $                          | 12,312     |   | $ | 11,073 |   |

 

Total assets for each of thesegments and a reconciliation to total assets follows:

 
| ** **                                   | ** ** | **March 31,**         | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2009**                   | ** ** | **2008**              | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Cash and cash equivalents                    |       | $                          | 18,905     |                  | $          | 19,103 |   |
| Restricted cash                              |       | 1,277                      |       | 1,217                 |       |
| Portfolio acquisition and resolution assets: |       |                       |       |                  |       |
| Domestic                                     |       | 220,292                    |       | 167,211               |       |
| Latin America                                |       | 39,685                     |       | 42,426                |       |
| Europe                                       |       | 45,910                     |       | 48,612                |       |
| Other                                        |       | 224                        |       | 228                   |       |
| Special situations platform assets           |       | 40,052                     |       | 37,786                |       |
| Other non-earning assets, net                |       | 11,902                     |       | 12,354                |       |
| Total assets                                 |       | $                          | 378,247    |                  | $          | 328,937 |   |

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS – (continued)**

 

**(15)  Commitments and Contingencies**

 

*LegalProceedings*

 

There have been no material developments with regard to any mattersdisclosed under Part I, Item 3 “Legal Proceedings” in our 2008 Form 10-K.

 

*Indemnification Obligation Commitments*

 

On September 21,2004, FirstCity, FirstCity Consumer Corporation (“Consumer Corp.”), FirstCityFunding LP (“Funding LP”) and FirstCity Funding GP (“Funding GP”) entered intothe a Securities Purchase Agreement to sell a 31% beneficial ownership interestin Drive and its general partner, Drive GP LLC, to IFA-GP, IFA-LP and MG-LP(the “2004 Securities Purchase Agreement”). In the 2004 Securities PurchaseAgreement, FirstCity, Consumer Corp., Funding LP and Funding GP made variousrepresentations and warranties concerning (i) their respectiveorganizations, (ii) their power and authority to enter into the 2004Securities Purchase Agreement and the transactions contemplated therein, (iii) theownership of the limited partnership interests in Drive by Funding LP, (iv) theownership of membership interests in Drive-GP by Consumer Corp., and (iv) thecapital 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,Consumer Corp., Funding LP, nor Funding GP is required to make any payments asa result of the indemnity provided under the 2004 Securities Purchase Agreementuntil the aggregate amount payable exceeds $250,000, and then only for theamount in excess of $250,000 in the aggregate; however certain representationsand warranties are not subject to this $250,000 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 Sale Agreement was entered into by and amongBidmex Holding, LLC (“Buyer”), as buyer, and Strategic Mexican InvestmentPartners, L.P. (“SMIP”), an affiliate of the Company and Cargill FinancialServices International, Inc. (“CFSI”), (collectively, the “Sellers”), asseller, and eleven U.S. limited liability companies (“LLCs”) which invested inMexican portfolio acquisition entities (“SRLs”) and the AIG entities asadditional parties.  In the Interest Purchase and Sale Agreement, theSellers and the LLCs made various representations and warranties concerning (i) theexistence and ownership of the LLCs and the related SRLs, (ii) the assetsand liabilities of the LLCs, (iii) taxes related to periods prior to August 8,2006, and (iv) the operations of the LLCs and SRLs. The Sellers agreed toindemnify the Buyer and AIG Entities from damages resulting from a breach ofany representation 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 $250,000; however, claims related to taxes andfraud are not subject to this $250,000 threshold.  The Interest Purchaseand Sale Agreement limits the liability of the Sellers for indemnifiable lossesunder the Interest Purchase and Sale Agreement and the Asset Purchase Agreementto the Aggregate Purchase Price (without duplication of amounts recoveredpursuant to the terms of the Asset Purchase Agreement). FirstCity does notbelieve that the potential liability would have a material adverse effect onthe consolidated financial position, results of operations or liquidity ofFirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships.

 

Also on August 8,2006, Bidmex Holding, LLC entered into an Agreement for the Onerous Transfer ofLoans and Litigious Rights (the “Asset Purchase Agreement”) between and amongResidencial Oeste, S. de R.L. de C.V., as seller (the “Asset Seller”), anaffiliate of CFSI and SMIP, Residencial Oeste 2, S. de R.L. de C.V., aspurchaser (the “Asset Purchaser”), and CFSI, SMIP, and Bidmex Acquisition, LLC,the parent of the Asset Purchaser, as additional parties. The Asset PurchaseAgreement provides for the sale of the loan portfolio owned by the Seller tothe Purchaser for a purchase price of $10.1 million on the closing date, whichpurchase price is part of the Aggregate Purchase Price.  In the AssetPurchase Agreement, the Asset Seller and the Sellers made various representationsand warranties concerning (i) the existence and ownership of the Seller, (ii) theownership of the loan portfolio, (iii) taxes related to periods arisingprior to the closing date, and (iv) the existence of the loans comprisingthe loan portfolio and other matters related to the loan portfolio. TheAsset Seller agreed to indemnify the Asset Purchaser from damages resultingfrom a breach of any representation or warranty.  The indemnity obligationunder the Asset Purchase Agreement survives for a period of the statute oflimitations for matters related to existence and ownership of the Seller,ownership of the loans, and taxes for periods prior to August 8, 2006, andfor a period of two years from August 8, 2006, with respect to all otherrepresentations and warranties. The Seller is not

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS – (continued)**

 

required to make anypayments as a result of the indemnity provisions of the Asset PurchaseAgreement until the aggregate amount payable under that Agreement exceeds$25,000; however, claims related to taxes and fraud are not subject to this$25,000 threshold. The Interest Purchase and Sale Agreement limits theliability of the Sellers for indemnifiable losses under the Asset PurchaseAgreement to the Aggregate Purchase Price. FirstCity does not believe that thepotential liability would have a material adverse effect on the consolidatedfinancial position, results of operations or liquidity of FirstCity, itssubsidiaries, its affiliates or the Acquisition Partnerships.

 

*Subordinated Equity Investment*

 

During the period from December 1998 to March 2005, FirstCityMexico, Inc. and Strategic Mexican Investment Partners, L.P. (“SMIP”),each affiliates of FirstCity and Cargill Financial Services International, Inc.(“CFSI”) and, in some instances, other investors, acquired 12 residential andcommercial non-performing loan portfolios from financial institutions in Mexico(the “Mexican Portfolios”). Each portfolio was acquired by a Mexicanlimited liability company (each a “Mexican SRL”) that was owned by a Delawarelimited liability company formed by each investor group.  On August 8,2006, SMIP and National Union Fire Insurance Company of Pittsburgh, Pa.,American General Life Insurance Company and American General Life and AccidentInsurance Company, affiliates of AIG Global Asset Management Holdings Corp.(collectively the “AIG Entities”) formed Bidmex Holding, LLP for the purpose ofacquiring the Mexican Portfolios by purchasing the interests of Cargill andSMIP in eleven of the Mexican limited liability companies (the “LLCs”) and purchasingthe loan portfolio of one of the Mexican limited liability companies (the “PurchasedPortfolio”) for an aggregate purchase price of $119.3 million U.S. Dollars asof that date (the “Aggregate Purchase Price”). SMIP acquired 15% of themembership interests in Bidmex Holding, LLC. A 9% interest acquired bySMIP is of equivalent standing to membership interests held by the AIGaffiliates representing 85% of the membership interests. The remaining 6%membership interest acquired by SMIP is subordinate to the other owners ofinterests in Bidmex Holding, LLC, who will receive the return of and a returnon their contribution equivalent to an 9% internal rate of return with respectto their interests prior to SMIP receiving the return of and a return on its capitalcontribution equivalent to a 9% internal rate of return with respect to its 6%interest.

 

*Commitments to Repurchase Loans*

 

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 to Bidmex Holding LLC, as optionee, pursuant to the terms of a PutOption Agreement dated August 8, 2006 by and among RCM, Bidmex HoldingLLC, Bidmex 6 LLC (the parent entity of RCM), CFSI and SMIP. RCM granted aput option to Bidmex Holding LLC related to the purchase of any loan ofSolución de Activos Residenciales, S. de R.L. de C.V. or Solución de ActivosComerciales, S. de R.L. de C.V., each a Mexican SRL, pursuant to certain terms andconditions. Pursuant to the put option agreement, Bidmex Holding LLC delivereda notice to exercise the put option on March 31, 2008 for qualifying loanswith a purchase price of approximately $635,000. In January 2009, RCM,Bidmex Holding LLC, Bidmex 6 LLC, CFSI and SMIP entered into an agreement toterminate the put option agreement. Under terms of the termination agreement,Residencial Oeste, S. de R.L. de C.V., an affiliate of SMIP and CFSI, purchasedcertain loans for approximately 1.4 million Mexican pesos (approximately$99,000) from Bidmex Holding LLC in settlement of the put option claims andtermination of the put option agreement.

 

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 itscapacities as seller and master servicer, and The Bank of New York, in itscapacity as trustee, made demand on FC Capital Corp. to repurchase certainloans that were subject to repurchase due to fraud of third parties inconnection with the origination of the loans. FC Capital Corp. agreed toprovide a letter of credit in the amount of the repurchase price for the loansin lieu of being required to purchase the loans from the Trust. FirstCity hasobtained and delivered to FSA, for the benefit of FC Capital Corp., anirrevocable letter of credit in the amount of $0.5 million from the Bank ofScotland. Pursuant to the agreement with FSA, FC Capital Corp. will have theoption to purchase the loans for $0.5 million prior to a call under the letterof credit.

 

*Letters of Credit and Other Guarantees*

 

Fondo de Inversion Privado NPL Fund One (“PIF1”), an equity-method investmentof FirstCity, has a credit facility with Banco Santander Chile, S.A. with anunpaid principal balance of $10.5 million at March 31, 2009. PIF1 uses thecredit facility to finance the purchases of loan portfolios. Pursuant to termsof the credit facility, FirstCity was required to provide a stand-by letter ofcredit from Bank of Scotland that would satisfy the current loan balance upondemand. At March 31, 2009, FirstCity had a letter of credit in the amount of$10.5 million from Bank of Scotland under the terms of FirstCity’s revolvingacquisition facility with Bank of Scotland, with Banco Santander Chile, S.A. asthe letter of credit beneficiary. In the event that a demand is made under the$10.5 million letter of credit, FirstCity would be required to reimburse Bankof Scotland by making payment to Bank of Scotland for all amounts disbursed orto be disbursed by Bank of Scotland under the letter of credit.

 

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**FIRSTCITYFINANCIAL CORPORATION AND SUBSIDIARIES**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS – (continued)**

 

On November 29, 2006, FirstCity Mexico SA de CV, a Mexicanaffiliate of FirstCity, entered into a loan agreement with Banco Santander,S.A. that allows loans to be made in Mexican pesos. At March 31, 2009, theCompany had 142,240,000 in Mexican peso-denominated debt, which was equivalentto $9.5 million U.S. dollars. The proceeds were used to pay down theacquisition facility with the Bank of Scotland. Pursuant to the terms of the credit facility, FirstCity Mexico SA de CVwas required to provide a stand-by letter of credit from Bank of Scotland thatwould satisfy the loan balance upon demand.  At March 31, 2009,FirstCity had a letter of credit in the amount of $12.6 million from Bank ofScotland under the terms of FirstCity’s revolving acquisition facility withBank of Scotland.  In the event that a demand is made under the $12.6million letter of credit, FirstCity is required to reimburse Bank of Scotlandby making payment to Bank of Scotland for all amounts disbursed or to bedisbursed by Bank of Scotland under the letter of credit.

 

AmericanBusiness Lending, Inc. (“ABL”), a majority-owned subsidiary of FirstCity,has a $25.0 million revolving loan facility with Wells Fargo Foothill, LLC (“WFF”),as recently amended in February 2009, for the purpose of financing andacquiring SBA loans. The obligations under this facility are secured bysubstantially all of the assets of ABL. At March 31, 2009, the balance ofthis facility was $19.6 million. In connection with this loan facility, asamended, FirstCity provides WFF with an unconditional guaranty on all of ABL’sobligations up to a maximum of $5.0 million plus enforcement cost.

 

FirstCity CommercialCorp. (“FirstCity Commercial”), a wholly-owned affiliate of FirstCity, providesvarious financial institutions with guarantees of the debt obligations ofcertain Acquisition Partnerships. The underlying debt financing arrangements ofthese Acquisitions Partnerships have various maturities ranging from April 2009to May 2011, and are secured primarily by certain real estate propertiesheld by the Acquisition Partnerships. At March 31, 2009, FirstCity Commercial’smaximum commitments under these guaranty arrangements totaled $2.2 million, andthe total unpaid debt obligations of these Acquisition Partnerships attributedto FirstCity Commercial’s underlying guaranty approximated $1.9 million.

 

*EnvironmentalMatters*

 

The Company generally retains environmental consultants to conduct orupdate environmental assessments in connection with the Company’s foreclosedand acquired real estate properties. These environmental assessments have notrevealed environmental conditions that the Company believes will have amaterial adverse effect on its business, assets, financial condition, resultsof operations or liquidity, and the Company is not otherwise aware ofenvironmental conditions with respect to properties that the Company believeswould have such a material adverse effect. However, from time to time,environmental conditions at the Company’s properties have required and may inthe future require environmental testing and/or regulatory filings, as well asremedial action. Liabilities for future remediation costs arerecorded when environmental assessments and/or remedial efforts are probableand the costs can be reasonably estimated. Other than for assessments, thetiming and magnitude of these accruals generally are based on the completion ofinvestigations or other studies or a commitment to a formal plan of action.

 

*Limited-LifePartnerships*

 

SFAS No. 150, *Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*(“SFAS 150”), establishes standards on how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. Certain provisions of SFAS 150 would have required us to classifynon-controlling interests in consolidated limited-life subsidiaries asliabilities adjusted to their settlement values in our consolidated financialstatements. However, the FASB indefinitely deferred application of themeasurement and recognition provisions, but not the disclosure requirements, ofSFAS 150 with respect to these non-controlling interests. At March 31,2009, the estimated settlement value of non-controlling interests in theCompany’s consolidated limited-life partnerships was $1.2 million. The minorityinterest amount recognized on the consolidated balance sheet related to thesenon-controlling interests approximated ($392,000) at March 31, 2009.

 

**(16)  Foreign Currency ExchangeRisk Management**

 

We use debt as anon-derivative financial instrument to partially off-set the Company’s businessexposure to foreign currency exchange risk attributable to our net equityinvestments in Europe. Our focus is to manage the economic risks associatedwith our

 

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** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS – (continued)**

 

European subsidiaries,which are the foreign currency exchange risks that will ultimately be realizedwhen we exchange one currency for another. To help protect the Company’s netinvestment in certain of its European subsidiary operations from adversechanges in foreign currency exchange rates, we denominate a portion of our debtin the same functional currency used by the European subsidiaries. At March 31,2009, the Company carried $28.4 million in Euro-denominated debt and designatedthe debt as a non-derivative hedge of its net investment in certain Europeansubsidiaries. The Company designated the hedging relationship such that changesin the net investments being hedged are expected to be naturally off-set bycorresponding changes in the value of the Euro-denominated debt. We considerour investments in European subsidiaries to be denominated in a relativelystable currency and of a long-term nature.

 

The effectiveportion of the net foreign investment hedge is reported in accumulated othercomprehensive income (loss) as part of the cumulative translation adjustment.Any ineffective portion of the net foreign investment hedge is recognized inearnings as other income (expense) during the period of change. Effectivenessof the hedging relationship is measured and designated at the beginning of eachmonth by comparing the outstanding balance of the Euro-denominated debt to thecarrying value of the designated net equity investments.

 

At March 31,2009, the carrying value and line item caption of the Company’s non-derivativeinstrument was reported on the consolidated balance sheet as follows (in thousands):

 

| **Non-Derivative Instrument** | ** ** | ** **             | ** ** | ** **   | ** ** |
|-------------------------------|------------|------------------------|------------|--------------|------------|
| **in Net Investment**         | ** ** | **Balance Sheet**      | ** ** | **Carrying** | ** ** |
| **Hedging Relationship**      | ** ** | **Location**           | ** ** | **Value**    | ** ** |
|                          |       |                   |       |         |       |
| Euro-denominated debt         |       | Notes payable to banks |       | $            | 28,445     |   |
|                               |            |                        |            |              |            |  |

 

The effect of thenon-derivative instrument qualifying and designated as a hedging instrument innet foreign investment hedges on the consolidated financial statements for thethree-month period ended March 31, 2009 was as follows (in thousands):

 
| ** **                    | ** ** | ** **                | ** ** | ** **                  | ** **             | **Amount of Gain (Loss)**    | ** ** |
|-------------------------------|------------|---------------------------|------------|-----------------------------|------------------------|------------------------------|------------|
| ** **                    | ** ** | ** **                | ** ** | ** **                  | ** **             | **Recognized in Income**     | ** ** |
| ** **                    | ** ** | **Amount of Gain (Loss)** | ** ** | ** **                  | ** **             | **(Ineffective Portion and** | ** ** |
| ** **                    | ** ** | **Recognized in AOCL**    | ** ** | **Location of Gain (Loss)** | ** **             | **Amount Excluded from**     | ** ** |
| **Non-Derivative Instrument** | ** ** | **(Effective Portion)**   | ** ** | **Reclassified from**       | ** **             | **Effectiveness Testing)**   | ** ** |
| **in Net Investment**         | ** ** | **Three Months Ended**    | ** ** | **AOCL into Income**        | ** **             | **Three Months Ended**       | ** ** |
| **Hedging Relationship**      | ** ** | **March 31, 2009**   | ** ** | **(Effective Portion)**     | ** **             | **March 31, 2009**      | ** ** |
|                          |       |                      |       |                        |                   |                         |       |
| Euro-denominated debt         |       | $                         | 2,012      |                        | Other income (expense) |                         | $          | — |   |
|                               |            |                           |            |                             |                        |                              |            |  |  |

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

**Overview**

 

FirstCityFinancial is a financial services company that engages in two major businesssegments — Portfolio Asset Acquisition and Resolution and Special SituationsPlatform. In the Portfolio Asset Acquisition and Resolution business, theCompany acquires portfolios of performing and non-performing loans and otherassets (collectively, “Portfolio Assets” or “Portfolios”), generally at adiscount to their legal principal balances or appraised values, and servicesand resolves such Portfolio Assets in an effort to maximize the present valueof the ultimate cash recoveries. The Company engages in its Special SituationsPlatform business through its majority ownership in a subsidiary that wasformed in April 2007. Through its Special Situations Platform business,the Company provides investment capital to privately-held middle-marketcompanies through flexible capital structuring arrangements to generate anattractive risk-adjusted return. These capital investments primarily take theform of senior and junior financing arrangements, but also include directequity investments, common equity warrants, distressed debt transactions, andleveraged buyouts.

 

Duringthe first quarter of 2009, the Company recorded net earnings to commonstockholders on a diluted basis of $0.6 million or $0.07 per common share.Revenue streams generated by the Company’s earnings assets and servicingplatform positively impacted earnings in the first quarter of 2009 — asrevenues in the first quarter of 2009 increased to $15.7 million compared to$9.5 million in the first quarter of 2008. The Company’s earnings in first quarter2009 include $9.0 million of income and gains from Portfolio Assets; $1.7million of interest income from loans receivable; $2.4 million of fee incomeattributable to our loan servicing platform, and $1.7 million of revenue andgains attributable to our majority-owned railroad operations. These positiveearnings determinants were partially off-set by $1.7 million of net impairmentprovisions attributable primarily to our domestic loan portfolios and assetsheld by our European Acquisition Partnerships, and $1.8 million of foreigncurrency transaction losses attributable primarily to our asset holdings inMexico and Europe. The impact of net impairment provisions and foreign currencytransaction losses to our earnings in the first quarter of 2009 are furtherexplained below. In addition, see **Results of Operations**below for a detailed review of the Company’s operations for the first quarterof 2009 compared to the first quarter of 2008.

 

In the firstquarter of 2009, the Company was involved in acquiring $70.2 million ofPortfolio Asset investments with a face value of approximately $140.8 million —of which FirstCity’s investment share was $64.9 million. All of FirstCity’sPortfolio Asset investments in 2009 were comprised of domestic loan portfolioacquisitions. In addition to its Portfolio Asset acquisitions in first quarter2009, FirstCity invested $6.4 million in the form of SBA loan originations andadvances; and $2.4 million in the form of debt investments under its SpecialSituations Platform (“FirstCity Denver”). At March 31, 2009, FirstCity’searning assets (Portfolio Assets, equity investments, loans receivable andentity-level earning assets) totaled $346.2 million. FirstCity’s globaldistribution of earning assets (at carrying value) at March 31, 2009included $260.6 million in the United States; $45.9 million in Europe; and$39.7 million in Latin America.

 

*NetImpairment Provisions*

 

 The Company recorded $1.7 million of netimpairment provisions in first quarter 2009 — comprised of $1.1 million of netprovisions recorded to our consolidated portfolios, and $0.6 million as ourshare of net impairment provisions recorded to portfolio assets held in ourunconsolidated Acquisition Partnerships. The global distribution of the $1.7million of net impairment provisions recorded by the Company in first quarter2009 includes $1.4 million in the United States, $0.2 million in Europe, and$0.1 million in Latin America. The impairment provisions in first quarter 2009were attributed primarily to declines in values of loan collateral and realestate assets in our domestic portfolios, and additional delays in the timingof collections of expected cash flows on domestic loan portfolios. Managementbelieves that declines in real estate values and delayed collections are theresulting adverse effects from a general decline in global economic conditions,and volatility and disruptions in the financial markets — which adverselyimpacts our business due to rising loan defaults and foreclosures on loancollateral because borrowers cannot refinance their loans and/or continue tomake payments, and significant declines in real estate values due to excessbuilding inventories. The impairment provisions were identified in connectionwith management’s quarterly evaluation of the collectability of the Company’sPortfolio Assets and loans receivable. Theprocess for evaluating and measuring impairment is critical to our financialresults, as it requires subjective and complex judgments, as a result of theneed to make estimates about the impact of matters that are uncertain. Itremains unclear what impact the illiquid markets, real estate value declinesand the overall economic slowdown will ultimately have on our financialresults. Therefore, we cannot provide assurance that, in any particular period,we will not incur additional impairment provisions in the future.

 

In spite of thesubstantial losses reported in the financial services sector over the past twoyears and downward pressure on economic growth due to a decline in generaleconomic conditions, management remains positive on the outlook of the Company.Management believes that current market conditions should not hinder FirstCity’sability to expand its business, and that asset 

 

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acquisition opportunitiesat attractive margins are available. As mentioned above, FirstCity was involvedin acquiring $70.2 million of portfolio investments with a face value ofapproximately $140.8 million in the first quarter 2009 — of which FirstCity’sinvestment share was $64.9 million, and the Company invested an additional $8.8million in the form of loan investments. In addition, subsequent to March 31,2009, the Company was involved in acquiring $31.6 million of Portfolio Assetswith a Face Value of approximately $55.0 million — of which FirstCity’sinvestment share was $29.4 million.

 

In addition, in light of tightened credit standards in the marketplace,management believes that the volatility and disruptions in the financialmarkets will not impact FirstCity’s ability to finance its operations.Currently, FirstCity has (1) $350.0million of credit facility commitments available to (i) finance the seniordebt and equity portions of portfolio and asset purchases; (ii) financeequity investments in new ventures; and (iii) provide for the issuance ofletters of credit working capital loans; and (2) a $25.0 million creditfacility commitment to finance SBA loan originations and advances.

 

*ForeignCurrency Transaction Losses*

 

The combinedimpact of foreign currency transactions from the Company’s consolidated andnon-consolidated foreign operations resulted in a $1.8 million foreign currencyexchange loss in first quarter 2009 (compared to a combined impact of $0.6million in foreign currency transaction gains in first quarter 2008). Theglobal distribution of the Company’s combined foreign currency exchange loss infirst quarter 2009 was comprised of $0.4 million from European operations and$1.4 million from Latin American operations.

 

As a result ofsignificant period-to-period fluctuations in our revenues and earnings,period-to-period comparisons of the results of our operations may not bemeaningful. The Company’s financial results are affected by many factorsincluding, but not limited to, general economic conditions; fluctuations ininterest rates; fluctuations in the underlying values of real estate and otherassets; the timing and ability to collect and liquidate assets; increasedcompetition from other market players in the industries in which we operate;and the availability, prices and terms for loan portfolios and otherinvestments in all of the Company’s businesses. The Company’s business and resultsof operations are also affected by the availability of financing with termsacceptable to the Company, and our access to capital markets. Such factors,individually or combined with other factors, may result in significantfluctuations in our reported operations and in the trading price of our commonstock.

 

Components of the results of operations for thethree month periods ended March 31, 2009 and 2008, respectively, aredetailed below (dollars in thousands except per share data):

 
| ** **                                                       | ** ** | **Three Months Ended**     | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | **March 31,**         | ** ** |
| ** **                                                       | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                       | ** ** | **(Dollars in thousands)** | ** ** |
| Portfolio Asset Acquisition and Resolution                       |       | $                          | 833        |   | $ | (2,094 | ) |
| Special Situations Platform                                      |       | 1,821                      |       | 272 |   |
| Operating contribution (loss)                                    |       | 2,654                      |       | (1,822 | ) |
| Corporate overhead                                               |       | (1,662                     | )          | (1,784 | ) |
| Net earnings (loss)                                              |       | 992                        |       | (3,606 | ) |
| Less: net income (loss) attributable to  noncontrolling interest |       | 348                        |       | (22 | ) |
| Net earnings (loss) attributable to FirstCity                    |       | $                          | 644        |   | $ | (3,584 | ) |
| Diluted earnings (loss) per common share                         |       | $                          | 0.07       |   | $ | (0.34 | ) |

 

**Results of Operations**

 

The following discussion and analysis is based onthe segment reporting information presented in Note 14 to the ConsolidatedFinancial Statements of the Company included in Item 1 of this Form 10-Q,and should be read in conjunction with the Consolidated Financial Statements(including the Notes thereto) included elsewhere in this Form 10-Q.

 

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***First Quarter 2009 Compared to First Quarter 2008***

 

The Company reported net earnings of $0.6 millionin the first quarter 2009 compared to net losses of $3.6 million in the firstquarter 2008. Diluted net earnings to common stockholders were $0.07 per commonshare in the first quarter of 2009 compared to $0.34 of diluted net losses percommon share in the first quarter of 2008.

 

*Portfolio Asset Acquisition and Resolution*

 

The operating contribution from the PortfolioAsset Acquisition and Resolution segment resulted in a $0.8 million operatinggain in the first quarter of 2009 compared to a $2.1 million operating loss inthe first quarter of 2008. FirstCity was involved in acquiring $70.2 million ofPortfolio Assets in first quarter 2009 with an approximate face value of $140.8million, compared to its involvement in acquiring $19.9 million of PortfolioAssets in first quarter 2008 with an approximate face value of $546.1 million.In first quarter 2009, FirstCity’s investment share in the Portfolio Assetacquisitions was $64.9 million — all acquired through consolidated Portfolios.In first quarter 2008, the Company’s investment share in the Portfolio Assetacquisitions was $8.4 million — comprised of $6.7 million acquired throughconsolidated Portfolios and $1.7 million through Acquisition Partnerships.

 

FirstCity invested an additional $6.4 million infirst quarter 2009 in the form of****SBA loanoriginations and advances, compared to $1.5million in first quarter 2008.

 

The following is a summary of the results ofoperations for the Company’s Portfolio Asset Acquisition and Resolutionbusiness segment for the three months ended March 31, 2009 and 2008:

 
| ** **                                                    | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                    | ** ** | **March 31,**         | ** ** |
| ** **                                                    | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| **Portfolio Asset Acquisition and Resolution:**               |       |                       |       |   |   |
| Revenues:                                                     |       |                       |       |   |   |
| Servicing fees                                                |       | $                          | 2,392      |   | $ | 2,200 |   |
| Income from Portfolio Assets                                  |       | 9,043                      |       | 4,935 |   |
| Interest income from SBA loans                                |       | 346                        |       | 476 |   |
| Interest income from loans receivable - affiliates            |       | 536                        |       | 150 |   |
| Interest income from loans receivable - other                 |       | 207                        |       | 13 |   |
| Other income                                                  |       | 773                        |       | 459 |   |
| Total revenues                                                |       | 13,297                     |       | 8,233 |   |
|                                                          |       |                       |       |   |   |
| Expenses:                                                     |       |                       |       |   |   |
| Interest and fees on notes payable                            |       | 3,324                      |       | 3,676 |   |
| Salaries and benefits                                         |       | 3,569                      |       | 3,559 |   |
| Provision for loan and impairment losses                      |       | 1,106                      |       | 3,030 |   |
| Asset-level expenses                                          |       | 1,106                      |       | 1,556 |   |
| Occupancy, data processing and other                          |       | 2,259                      |       | 1,272 |   |
| Total expenses                                                |       | 11,364                     |       | 13,093 |   |
| Equity in net earnings (loss) of unconsolidated  subsidiaries |       | (985                       | )          | 2,840 |   |
| Operating contribution before taxes                           |       | $                          | 948        |   | $ | (2,020 | ) |
| Operating contribution, net of taxes                          |       | $                          | 833        |   | $ | (2,094 | ) |

 

*Servicing fee revenues. *Servicing fee revenues increasedslightly to $2.4 million in the first quarter of 2009 from $2.2 million in thefirst quarter of 2008. Servicing fees from domestic Acquisition Partnershipstotaled $0.7 million in first quarter 2009 compared to $0.4 million in firstquarter 2008, while servicing fees from Latin American Acquisition Partnershipstotaled $1.7 million in first quarter 2009 compared to $1.8 million in firstquarter 2008. The overall increase in servicing fees is attributed primarily to(1) recognition of performance-based service fees on certain domesticpartnerships achieving performance thresholds in first quarter 2009; and (2) servicefees earned on new domestic and Latin American arrangements that were createdsince first quarter 2008. Servicing fees from domestic Acquisition Partnershipsare generally based on a percentage of the collections received from theportfolios held by these non-consolidated partnerships; whereas servicing feesfrom Latin American Acquisition Partnerships are generally based on the cost ofservicing plus a profit margin.

 

*Income from Portfolio Assets*.  Income from Portfolio Assets increased to$9.0 million in the first quarter of 2009 compared to $4.9 million in the firstquarter of 2008. FirstCity’s average investment in consolidated PortfolioAssets increased significantly to $157.8

 

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million for the first quarter of 2009 from $117.3 million for the firstquarter of 2008. The significant increase in income from Portfolio Assets isattributed primarily to an increase in collections to $30.5 million in firstquarter 2009 compared to $19.5 million in first quarter 2008; $3.7 million ofgains recorded on loan pay-offs in first quarter 2009 compared to $1.4 millionof pay-off gains recorded in first quarter 2008; and increased income accretionrecorded by the Company as a result of its rising investment level in PortfolioAssets. Refer to Note 5 to the Consolidated Financial Statements included inItem 1 of this Form 10-Q for a summary of income from Portfolio Assets.

 

*Interest income from SBAloans. *Interest income from SBA loansdecreased slightly to $0.3 million during the first quarter of 2009 compared to$0.5 million during the first quarter of 2008. Even though FirstCity’s averageinvestment in SBA loans increased to $22.7 million for first quarter 2009 from$14.1 million for first quarter 2008, the decline in interest income isattributable to a steady decline in market interest rates since first quarter2008 (the Company’s SBA loans are priced at variable interest rates).

 

* Interest income from loans receivable — affiliates. *Interest income from affiliatedloans receivable increased to $0.5 million in first quarter 2009 compared to$0.2 million in first quarter 2008. The increased income is attributed toFirstCity’s average investment level in loans receivable from affiliates risingto $14.5 million for first quarter 2009 from $5.4 million for first quarter2008.

 

*Interest income from loansreceivable — other. * Interest income from loans receivable — otherincreased by $0.2 million in the first quarter of 2009 compared to the firstquarter of 2008. The increase is attributed to the Company’s increasedinvestment level in loans to non-affiliated entities. FirstCity’s averageinvestment in loans receivable — other was $7.5 million and $0.3 million forthe first quarters of 2009 and 2008, respectively.

 

*Other income*.  Other income for the first quarter of 2009increased by $0.3 million in comparison to the first quarter of 2008 primarilydue to interest income earned on the Company’s investment security (purchasedin October 2008) and additional revenue generated by certainincome-producing foreclosure properties in first quarter 2009.

 

*Expenses. *Operating expenses approximated$11.4 million and $13.1 million in the first quarters of 2009 and 2008,respectively. The following is a discussion of the major components ofoperating expenses.

 

Interest expense and fees on notes payabletotaled $3.3 million and $3.7 million in the first quarters of 2009 and 2008,respectively. FirstCity’s average outstanding debt increased to $259.2 millionin first quarter 2009 from $169.1 million in the first quarter of 2008 as aresult of its increased investment activity; however, the Company’s averagecost of borrowings decreased to 5.1% in the first quarter of 2009 compared to8.7% in 2008.

 

Salaries and benefits remained steady at $3.6million in the first quarters of 2009 and 2008. The total number of personnelwithin the Portfolio Asset Acquisition and Resolution segment was 210 and 197at March 31, 2009 and 2008, respectively.

 

Net provisions for loan and impairment losses totaled $1.1 million infirst quarter 2009 compared to $3.0 million in first quarter 2008. In 2009, theCompany recorded net impairment provisions of $1.3 million to consolidateddomestic loan portfolios; partially off-set by $0.2 million of net recoveriesfrom consolidated European loan portfolios. The impairment provisions in the first quarters of 2009 and 2008 wereattributable primarily to declines in values of loan collateral and real estateassets in our domestic portfolios, and additional delays in the timing ofcollections of expected cash flows on domestic loan portfolios. Managementbelieves that declines in real estate values and delayed collections are theresulting adverse effects from a decline in general economic conditions, andvolatility and disruptions in the financial markets in the United States —which adversely impacts our business due to rising loan defaults andforeclosures on loan collateral because borrowers cannot refinance their loansand/or continue to make payments, and significant declines in real estatevalues due to excess building inventories. The impairment provisions wereidentified in connection with management’s regular evaluation of thecollectibility of the Company’s Portfolio Assets and loans receivable. The process for evaluating and measuringimpairment is critical to our financial results, as it requires subjective andcomplex judgments, as a result of the need to make estimates about the impactof matters that are uncertain. It remains unclear what impact the illiquidmarkets, real estate value declines and the overall economic slowdown willultimately have on our financial results. Therefore, we cannot provideassurance that, in any particular period, we will not incur additional impairmentprovisions in the future.

 

Asset-level expenses, which generally representcosts incurred by FirstCity to support foreclosed properties and to protect itssecurity interests in loan collateral, decreased to $1.1 million in first quarter 2009 compared to $1.6 million in first quarter 2008. The decrease is attributed primarily to adecline in the Company’s holdings of foreclosure properties in 2009 compared to2008. The Company’s investment in foreclosed properties decreased by $4.0million to $13.4 million during the first quarter of 2009, whereas the Company’sholdings in foreclosed properties remained steady and averaged $15.3 millionduring first quarter 2008.

 

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Occupancy, data processing and other expensesincreased to $2.3 million for the first quarter of 2009 from $1.3 million inthe first quarter of 2008. The increase is primarily attributed to $0.6 millionof foreign currency exchange losses recorded in first quarter 2009 compared to$0.2 million of gains in first quarter 2008.

 

*Equity in net earnings ofunconsolidated subsidiaries. *Equity in earningsof investments sharply decreased to a $1.0 million loss in the first quarter of2009 compared to $2.8 million of earnings in the first quarter of 2008. Equityin earnings of Acquisition Partnerships decreased to $0.9 million loss in 2009from $2.3 million of earnings in 2008, and equity in earnings of servicingentities decreased to a $0.1 million loss in 2009 compared to $0.5 million ofearnings in 2008. The following is a discussion of equity in earnings fromFirstCity’s Acquisition Partnerships by geographic region. Refer to Note 5 ofthe Consolidated Financial Statements included in Item 1 on this Form 10-Qfor a summary of revenues, earnings and equity in earnings of FirstCity’sequity investments by region.

 

·             *Domestic* — Total revenues reported by domestic AcquisitionPartnerships decreased to $1.6 million in first quarter 2009 from $3.1 millionin 2008. Total net earnings reported bydomestic partnerships decreased to $0.1 million in first quarter 2009 comparedto $0.6 million in first quarter 2008. The decrease in total partnershiprevenues and earnings was attributed primarily to a decrease in portfolio assetholdings (i.e. earning assets) to $55.5 million in 2009 from $79.3 million in2008, and a decrease in collections to $4.4 million in first quarter 2009 from $11.2million in first quarter 2008**.** Thecollective activity described above translated to a $0.3 million decrease inFirstCity’s share of domestic partnership earnings in first quarter 2009compared to first quarter 2008.

 

FirstCity’s average investment in domestic partnerships decreased to$14.8 million in first quarter 2009 from $23.7 million in 2008. As a result,FirstCity’s share of domestic partnership revenues experienced a correspondingdecrease as discussed above. Since amajority of FirstCity’s domestic portfolio acquisitions over the past two yearswere acquired through consolidated Portfolios instead of equity investments inAcquisition Partnerships, the Company expects income from consolidatedPortfolios to off-set the decline in equity in earnings from the domesticpartnerships.

 

·             *Latin America* — Total revenues reported by Latin American Acquisition Partnershipsdecreased to $2.5 million in first quarter 2009 from $11.2 million in firstquarter 2008. Latin American partnershipsreported a total net loss of $12.4 million in first quarter 2009 compared to$3.0 million of earnings in first quarter 2008. The decrease in total revenuesand earnings reported by Latin American partnerships was attributed primarilyto the following: (1) foreign currency transaction losses of $11.1 millionin first quarter 2009 compared to $2.9 million of currency transactiongains in first quarter 2008 — a $14.0million negative impact; (2) decrease in portfolio asset holdings(i.e. earning assets) to $131.7 million in 2009 from $222.5 million in 2008;and (3) decrease in collections to $6.1 million in first quarter 2009 from$11.8 million in first quarter 2008. The negative impact of these factors tototal net earnings by Latin American partnerships was partially off-set by adecrease in net impairment provisions to $0.4 million in first quarter 2009compared to $3.7 million in first quarter 2008.  The collective activitydescribed above translated to a decrease in FirstCity’s share of net earningsin Latin American partnerships to a $1.6 million loss for first quarter 2009from $0.4 million in earnings for first quarter 2008.

 

·             *Europe*—****Total revenues reported by European AcquisitionPartnerships decreased to $6.2 million in first quarter 2009 from $10.3 millionin first quarter 2008. Total net earningsreported by European partnerships decreased to $2.8 million in first quarter2009 compared to $5.8 million in first quarter 2008. The decrease intotal partnership revenues and earnings was attributed primarily to a decreasein portfolio asset holdings (i.e. earning assets) to $78.1 million in 2009 from$128.6 million in 2008; and a decrease in collections to $9.1 million in firstquarter 2009 from $12.8 million in first quarter 2008. The negative impact ofthese factors to total net earnings was partially off-set by a $1.8 milliondecrease in operating and interest expenses in first quarter 2009 compared tofirst quarter 2008. The collective activity described above translated to adecrease in FirstCity’s share of European partnership earnings to $0.8 million forfirst quarter 2009 from $1.7 million for first quarter 2008.

 

***Special Situations Platform Business Segment***

 

The operating contribution from the Special Situations Platformbusiness segment (“FirstCity Denver”) totaled $1.8 million in first quarter2009 compared to $0.3 million in firstquarter 2008. In first quarter 2009, FirstCity Denver provided $2.4million of investment capital to privately-held middle-market companies in theform of debt investments. Since its inception in April 2007, FirstCity Denverhas been involved in middle-market transactions with total investment valuesapproximating $53.5 million, and has provided $33.8 million of investmentcapital in connection with these investments.

 

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The following is a summary of the results of operations for the Company’sSpecial Situations Platform business segment for the three months ended March 31, 2009 and 2008:

 
| ** **                                             | ** ** | **Three Months Ended   March 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | **(Dollars in thousands)**              | ** ** |
| **Special Situations Platform:**                       |       |                                    |       |   |   |
| Revenues:                                              |       |                                    |       |   |   |
| Interest income from loans receivable                  |       | $                                       | 608        |   | $ | 262 |   |
| Revenue from railroad operations                       |       | 747                                     |       | 805 |   |
| Other income                                           |       | 983                                     |       | 22 |   |
| Total revenues                                         |       | 2,338                                   |       | 1,089 |   |
| Expenses:                                              |       |                                    |       |   |   |
| Interest and fees on notes payable                     |       | 150                                     |       | 7 |   |
| Salaries and benefits                                  |       | 436                                     |       | 402 |   |
| Other                                                  |       | 662                                     |       | 405 |   |
| Total expenses                                         |       | 1,248                                   |       | 814 |   |
| Equity in net earnings of unconsolidated  subsidiaries |       | 839                                     |       | — |   |
| Operating contribution before taxes                    |       | $                                       | 1,929      |   | $ | 275 |   |
| Operating contribution, net of taxes                   |       | $                                       | 1,821      |   | $ | 272 |   |

 

*Interest income from loansreceivable. * Interest income from loans receivableincreased to $0.6 million in first quarter 2009 from $0.3million in first quarter 2008. The increased income is attributable toFirstCity Denver’s increased holdings in loan investments since first quarter2008. FirstCity Denver’s average investment in loans receivable increased to$18.3 million for first quarter 2009 from $5.6 million for first quarter 2008.

 

*Other income*.  Other income for first quarter 2009increased by $1.0 million in comparison to first quarter 2008 primarily due toa $0.9 million gain recognized by FirstCity Denver’s majority-owned railroadoperation in first quarter 2009 in connection with a property sale.

 

*Expenses. *Operating expenses approximated $1.2million in first quarter 2009 compared to $0.8 million in first quarter 2008.  Theincrease is attributable primarily to $0.2 million of additional expenses incurredin first quarter 2009 in connection with FirstCity Denver’s investment in aretail/office building in June 2008.

 

*Equity in net earnings ofunconsolidated subsidiaries. *Equity in earningsof investments totaled $0.8 million in first quarter 2009— which is comprised primarily of FirstCity Denver’s equity earnings in itsequity-method investment in a coal mine operation. FirstCity Denver did nothave any equity-method investments in first quarter 2008.

 

#### **FinancialCondition**

#### ** **

Significant changes in FirstCity’s financialcondition during the first three months of 2009 resulted from the following:

 

Consolidated assets of $378.2 million at March 31,2009 were $49.3 million higher than consolidated assets at December 31,2008. The increase in consolidated assets is attributed primarily to a $52.9million net increase in Portfolio Assets and loan investments related toFirstCity’s investment activities.

 

Consolidated liabilities of $305.2 million as of March 31,2009 were $42.2 million higher than consolidated liabilities at December 31,2008. Total notes payable increased by $42.0 million primarily to finance theCompany’s investment activities during the first three months of 2009.

 

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#### **PortfolioAsset Acquisitions — Portfolio Asset Acquisition and Resolution BusinessSegment**

#### ** **

Aggregate Portfolio Asset acquisitions by theCompany for the three months ended March 31, 2009 and the last five fullfiscal years are as follows (in thousands):

 
| ** **                 | ** ** | **Purchase**               | ** ** | **FirstCity**  | ** ** |
|----------------------------|------------|----------------------------|------------|----------------|------------|
| ** **                 | ** ** | **Price**                  | ** ** | **Investment** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** |
| First three months of 2009 |       | $                          | 70,238     |           | $          | 64,907 |   |
| Total 2008                 |       | 89,314                     |       | 72,307         |       |
| Total 2007                 |       | 214,333                    |       | 126,714        |       |
| Total 2006                 |       | 296,990                    |       | 144,048        |       |
| Total 2005                 |       | 146,581                    |       | 71,405         |       |
| Total 2004                 |       | 174,139                    |       | 59,762         |       |
|                            |            |                            |            |                |            |  |  |

 

Subsequent to March 31,2009, the Company was involved in acquiring $31.6 million of Portfolio Assetswith a Face Value of approximately $55.0 million — of which FirstCity’sinvestment share was $29.4 million.

 

Revenues withrespect to the Company’s Portfolio Asset Acquisition and Resolution businesssegment consist primarily of (i) servicing fees from AcquisitionPartnerships for the servicing activities performed related to the assets heldin the Acquisition Partnerships; (ii) interest income on performingPortfolio Assets and loans receivable; and (iii) gains on disposition ofassets. The Company also records equity in earnings of non-consolidatedAcquisition Partnerships and servicing entities accounted for under theequity-method of accounting.

 

**Middle-MarketCompany Capital Investments — Special Situations Platform Business Segment**

 

Investments by FirstCity Denver since its inception inApril 2007 are summarized below:

** **
| ** **                 | ** ** | **Total**                  | ** ** | **FirstCity Denver’s Investment** | ** ** |
|----------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **Investment**             | ** ** | **Debt**                               | ** ** | **Equity** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** |
| First three months of 2009 |       | $                          | 2,400      |                                   | $          | 2,400 |   | $ | — |   | $ | 2,400 |   |
| Total 2008                 |       | 28,750                     |       | 16,650                                 |       | 3,256 |   | 19,906 |   |
| Total 2007                 |       | 22,314                     |       | 5,630                                  |       | 5,900 |   | 11,530 |   |
|                            |            |                            |            |                                        |            |  |  |  |  |  |  |  |  |

 

Subsequent to March 31, 2009, FirstCity Denver was involved inmiddle-market transactions with a total investment value of $2.4 million, andprovided $1.6 million of investment capital in connection with the investments.

 

Revenues with respect to the Company’s Special Situations Platformbusiness segment consist primarily of (i) interest and fee income fromloan investments; (ii) revenues from majority-owned operating entities;and (iii) equity in earnings of non-consolidated investments accounted forunder the equity-method of accounting.

 

**Provision for Income Taxes**

 

The Company has substantial NOLs which can beused to off-set the tax liability associated with the Company’s pre-taxearnings until the earlier of the expiration or utilization of such NOLs. TheCompany accounts for the benefit of the NOLs and other income tax items under the asset and liability method inaccordance with SFAS 109. Deferred tax assets and liabilities are recognizedbased on the future tax consequences attributable to temporary differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases and operating loss and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. SFAS 109requires a reduction of the carrying amounts of deferred tax assets by avaluation allowance if, based on the available evidence, it is more likely thannot that such assets will not be realized. Accordingly, the need to establishvaluation allowances for deferred tax assets is assessed periodically by theCompany based on the SFAS 109 more-likely-than-not realization threshold criterion.In the assessment, appropriate consideration is given to all positive andnegative evidence related to the realization of the deferred tax assets. Thisassessment considers, among other factors, the nature, frequency and severityof current and 

 

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cumulative losses,forecasts of future profitability, excess of appreciated asset value over thetax basis of net assets, the duration of statutory carryforward periods, theCompany’s experience with utilizing available operating loss and tax creditcarryforwards, and tax planning strategies. In making such assessments,significant weight is given to evidence that can be objectively verified. At March 31,2009, the Company established a full valuation allowance for its deferred taxassets due to the lack of sufficient objective evidence regarding therealization of these assets in the foreseeable future.

 

**Liquidity and Capital Resources**

 

The Companyrequires liquidity to fund its operations, Portfolio Asset acquisitions,investments in and advances to entities formed to acquire Portfolios (“AcquisitionPartnerships”), capital investments in privately-held middle-market companies,other investments, repayments of bank borrowings and other debt, and workingcapital to support our growth. Historically, our primary sources of liquidityhave been funds generated from operations (primarily loan collections andservice fees), equity distributions from the Acquisition Partnerships and othersubsidiaries, interest and principal payments on subordinated intercompanydebt, dividends from the Company’s subsidiaries, borrowings from revolvinglines of credit and other credit facilities, proceeds from equity markettransactions, securitization and other structured finance transactions, andother special purpose short-term borrowings.

 

The following is asummary of FirstCity’s primary external lending facilities that it uses toprovide liquidity for equity and loan investments, Portfolio Assetacquisitions, Acquisition Partnership investments, capital investments, andworking capital:

 

*$225.0 Million Revolving Loan Facility — Bank ofScotland plc*

 

FirstCity has a $225.0 million revolving acquisitionfacility with Bank of Scotland plc (“Bank of Scotland”) that matures in November 2010.The revolving loan facility is used to finance the senior debt and equityportion of portfolio and asset purchases made by FirstCity and to provide for theissuance 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-owned subsidiaries.The primary terms and key covenants of this loan facility are described in our2008 Form 10-K. At March 31, 2009, the Company was in compliance withall covenants or other requirements set forth in the credit agreement or otheragreements with Bank of Scotland.

 

On March 30, 2009, FirstCity and Bank of Scotland entered into anamendment to the $225.0 million revolving loan facility to amend thedefinitions of “indebtedness” and “tangible net worth” such that in thedetermination of “tangible net worth” and the computation of the ratio of “indebtednessto tangible net worth” for the fiscal quarters ending December 31, 2008and thereafter, “tangible net worth” and “indebtedness” would be adjusted bydeducting non-controlling interests (i.e. minority interests) in subsidiariesfrom liabilities and adding non-controlling interests in subsidiaries to equityas will be provided under GAAP (pursuant to SFAS 160).

 

FirstCity has$28.4 million in Euro-denominated debt on the $225.0 million revolving loanfacility that was designated as a hedge to partially off-set the Company’sbusiness exposure to foreign currency exchange risk attributable to our netequity investments in Europe. Refer to Note16 to our Consolidated Financial Statements included in Item 1 of this Form 10-Q.

 

*$100.0 Million Revolving LoanFacility — Bank of Scotland*

 

FH Partners LLC (“FH Partners”), an indirectwholly-owned affiliate of FirstCity, has a $100.0 million revolving loanfacility with Bank of Scotland that provides financing for Portfolio and assetpurchases by FH Partners. This revolving loan facility matures in November 2010,and is secured by all assets of FH Partners and a guaranty by FirstCity andcertain of its wholly-owned subsidiaries. The primary terms and key covenantsof this loan facility are described in our 2008 Form 10-K. At March 31,2009, the Company was in compliance with all covenants or other requirementsset forth in the credit agreement or other agreements with Bank of Scotland.

 

On March 30, 2009, FH Partners and Bank ofScotland entered into an amendment to the $100.0 million revolving loanfacility to amend the definitions of “indebtedness” and “tangible net worth”such that in the determination of “tangible net worth” and the computation ofthe ratio of “indebtedness to tangible net worth” for the fiscal quartersending December 31, 2008 and thereafter,

 

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“tangible net worth” and “indebtedness” would be adjusted by deductingnon-controlling interests (i.e. minority interests) in subsidiaries fromliabilities and adding non-controlling interests in subsidiaries to equity as willbe provided under GAAP (pursuant to SFAS 160).

 

*$25.0 Million Subordinated Credit Agreement —BoS(USA), Inc.*

 

FirstCityhas a $25.0 million subordinated credit agreement with BoS(USA), Inc. (“BoS(USA)”),a subsidiary of Bank of Scotland, which may be used to finance equityinvestments in new ventures, equity investments made in connection withportfolio and asset purchases and loans made by FirstCity and its subsidiariesto acquisition entities, provide for the issuance of letters of credit, and forworking capital loans. This credit facility matures in November 2010 andis guaranteed by substantially all of FirstCity’s wholly-owned subsidiaries andsecured by substantially all of the assets of FirstCity and its wholly-ownedsubsidiaries.****The primary terms and keycovenants of this loan facility are described in our 2008 Form 10-K. At March 31,2009, the Company was in compliance with all covenants or other requirementsset forth in the credit agreement or other agreements with BoS(USA).

 

On March 30, 2009, FirstCity and BoS(USA) enteredinto an amendment to the $25.0 million subordinated credit agreement to amendthe definitions of “indebtedness” and “tangible net worth” such that in thedetermination of “tangible net worth” and the computation of the ratio of “indebtednessto tangible net worth” for the fiscal quarters ending December 31, 2008and thereafter, “tangible net worth” and “indebtedness” would be adjusted bydeducting non-controlling interests (i.e. minority interests) in subsidiariesfrom liabilities and adding non-controlling interests in subsidiaries to equityas will be provided under GAAP (pursuant to SFAS 160).

 

BoS(USA) has awarrant to purchase 425,000 shares of the Company’s voting common stock at$2.3125 per share. BoS(USA) is entitled to additional warrants in connectionwith this existing warrant for 425,000 shares under certain specific situationsto retain its ability to acquire approximately 4.86% of the Company’s votingcommon stock.  The warrant expires on August 31,2010, if it is not exercised prior to that date.

 

*BancoSantander, S.A.*

 

FirstCity MexicoSA de CV, a Mexican affiliate of FirstCity, has a term note with BancoSantander, S.A. with an unpaid principal balance of 142,240,000 Mexican pesosat March 31, 2009, which was equivalent to $9.5 million U.S. dollars onthat date. The loan proceeds are used to pay down the acquisition facility withthe Bank of Scotland. Pursuant to the terms of the credit facility, FirstCityMexico SA de CV was required to provide a stand-by letter of credit from Bankof Scotland that would satisfy the loan balance upon demand. At March 31,2009, FirstCity had a letter of credit in the amount of $12.6 million from Bankof Scotland under the terms of FirstCity’s revolving acquisition facility withBank of Scotland. In the event that a demand is made under the $12.6million letter of credit, FirstCity would be 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.

 

*Wells Fargo Foothill, LLC*

 

At March 31,2009, ABL had a $25.0 million revolving loan facility with WFF for the purposeof financing and acquiring SBA loans. This credit facility matures in January 2010and is secured by substantially all of the assets of ABL. In addition,FirstCity provides WFF with an unconditional guaranty for all of ABL’sobligations up to a maximum of $5.0 million plus enforcement costs.

 

In February 2009,ABL and WFF entered into an agreement to amend the revolving credit facility byreducing the maximum credit line to $25.0 million from $40.0 million. Inconnection with this amendment, FirstCity provided WFF with an unconditionalguaranty for all of ABL’s obligations up to a maximum of $5.0 million plus enforcementcosts. The primary terms and key covenants of the $25.0 million revolving loanfacility, as amended, are described in Part II, Item 5 of this Form 10-Qand our 2008 Form 10-K. At March 31, 2009, ABL was in compliance withall covenants or other requirements set forth in the credit agreement or otheragreements with WFF.

 

Excluding the termacquisition facilities of the Company’s Acquisition Partnerships and otherunconsolidated subsidiaries, as of March 31, 2009, the Company and itsconsolidated subsidiaries had credit facilities providing for borrowings in anaggregate principal amount of $408 million and outstanding borrowings of $294million.

 

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The followingtable summarizes the material terms of the credit facilities to which theCompany, its major operating subsidiaries and the Acquisition Partnerships wereparties to as of April 30, 2009, and the outstanding borrowings under suchfacilities as of March 31, 2009.

 

**Credit Facilities**

 
| ** **                                                                                  | ** ** | **Funded and**            | ** ** | ** **         | ** ** | ** **                                                                                                 | ** ** | ** **                                                                                                       | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------|------------|--------------------|------------|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Unfunded**              | ** ** | **Outstanding**    | ** ** | ** **                                                                                                 | ** ** | ** **                                                                                                       | ** ** |
| ** **                                                                                  | ** ** | **Commitment**            | ** ** | **Borrowings**     | ** ** | ** **                                                                                                 | ** ** | ** **                                                                                                       | ** ** |
| ** **                                                                                  | ** ** | **Amount as of**          | ** ** | **as of**          | ** ** | ** **                                                                                                 | ** ** | ** **                                                                                                       | ** ** |
| ** **                                                                                  | ** ** | **April 30,**        | ** ** | **March 31,** | ** ** | ** **                                                                                                 | ** ** | ** **                                                                                                       | ** ** |
| ** **                                                                                  | ** ** | **2009**                  | ** ** | **2009**           | ** ** | **Interest Rate**                                                                                          | ** ** | **Other Terms and Conditions**                                                                                   | ** ** |
| ** **                                                                                  | ** ** | **(Dollars in millions)** | ** ** | ** **         | ** ** | ** **                                                                                                 | ** ** |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Bank of Scotland $225 million portfolio acquisition  and working capital facility (1)  |       | $                         | 225   |               | $          | 146                                                                                                   |       | LIBOR+ 2.0% - 2.50%                                                                                         |       | Secured by equity  interests and other assets of FirstCity,   matures November 2010 |   |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Bank of Scotland $100 million portfolio acquisition  - revolving credit                     |       | 100                       |       | 86                 |       | LIBOR+ 2.0%                                                                                                |       | Secured by assets of FH  Partners, L.P. and guaranteed by the Company, matures November 2010                |       |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Bank of Scotland $25 million subordinated delayed  draw credit                              |       | 25                        |       | 11                 |       | LIBOR+ 5.0%                                                                                                |       | Secured by security  interests in assets of FirstCity and wholly-owned subsidiaries, matures  November 2010 |       |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| American Bank term loan for portfolio acquisition by  FC Washington                         |       | 1                         |       | 1                  |       | Fixed 5.0%                                                                                                 |       | Secured by assets of FC  Washington and guaranteed by the Company, matures May 2011                         |       |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Participation payable                                                                       |       | 1                         |       | 1                  |       | 11.62% imputed rate                                                                                        |       | Participation agreement  on 33% of net cash flows received on one portfolio                                      |       |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Banco Santander term loan denominated in Mexican  pesos                                     |       | 10                        |       | 9                  |       | Rate based on 28 day Mexican  index rate (TIIE) plus 2.0%                                                  |       | Secured by Bank of  Scotland letter of credit, matures November 2009, commitment amount  142,240,000 MXN    |       |
| ** **                                                                                  |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Wells Fargo Foothill, Inc. $25 million revolving  loan facility                        |       | 25                        |       | 20                 |       | Greater of 3.625% or 90-day  LIBOR plus 2.625%                                                             |       | Secured by assets of  American Business Lending, Inc., matures January 2010                            |       |
| ** **                                                                                  |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Bank of America term loan                                                                   |       | 3                         |       | 3                  |       | LIBOR+ 2.25%                                                                                               |       | Secured by assets of  East Penn Railroad LLC, matures March 2011                                            |       |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Bank of America revolving loan facility                                                |       | 1                    |       | —        |       | Option of Base Rate (greater  of prime or Federal Funds Rate+ .5%) plus margin,  or LIBOR plus margin |       | Secured by assets of  East Penn Railroad LLC, matures March 2011                                       |       |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Merrill Lynch Mortgage Trust term loan                                                      |       | 8                         |       | 8                  |       | Fixed 6.07%                                                                                                |       | Secured by assets of  Oregon Short Line Building LLC, matures April 2016                                    |       |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Notes payable to banks                                                                      |       | 399                       |       | 285                |       |                                                                                                       |       |                                                                                                             |       |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| MCS Trust SA de CV term loan                                                                |       | 9                         |       | 9                  |       | Fixed 20%                                                                                                  |       | Secured by assets of FC  Acquisitions, SRL de CV, matures June 2020                                         |       |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Note payable to affiliate                                                                   |       | 9                         |       | 9                  |       |                                                                                                       |       |                                                                                                             |       |
|                                                                                        |       |                      |       |               |       |                                                                                                       |       |                                                                                                             |       |
| Total                                                                                       |       | $                         | 408        |               | $          | 294                                                                                                        |       |                                                                                                             |       |   |   |

 

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(1)          The Bank of Scotland facility allows loans to be madein Euros up to a maximum amount in Euros that is equivalent to $50.0 million.At March 31, 2009, the Company had approximately $28.4 million outstandingunder the Euro-denominated portion of this facility.

 

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**Forward-Looking Statements**

 

This QuarterlyReport on Form 10-Q includes forward-looking statements as defined in thePrivate Securities Litigation Reform Act of 1995. In addition, we may makeother written and oral communications from time to time that contain suchstatements. All statements regarding our expected financial position,strategies and growth prospects, anticipated events or trends, and generaleconomic conditions that we expect to exist in the future, are forward-lookingstatements. The words, “anticipates,” “believes,” “feels,” “expects,”“estimates,” “seeks,” “strives,” “plans,” “intends,” “outlook,” “forecast,”“position,” “target,” “mission,” “assume,” “achievable,” “potential,”“strategy,” “goal,” “aspiration,” “outcome,” “continue,” “remain,” “maintain,”“trend,” “objective” and variations of such words and similar expressions, orfuture or conditional verbs such as “will,” “would,” “should,” “could,”“might,” “can,” “may” or similar expressions, as they relate to our business,operations and management, are intended to identify forward-looking statementsand are not historical facts.

 

You are cautionedthat forward-looking statements are subject to numerous assumptions, risks anduncertainties which change over time. As such, our forward-looking statementscould be wrong in light of these and other risks, uncertainties andassumptions. For a discussion on the risks, uncertainties and assumptions thatcould affect our future events, developments or results, you should carefullyreview Item 1A. “Risk Factors” and Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” of our 2008 Form 10-K.

 

Forward-lookingstatements speak only as of the date the statement is made, and we have noobligation to publicly update or revise our forward-looking statements toreflect facts, circumstances, assumptions or events that occur after the datethe forward-looking statements are made. Actual results could differ materiallyfrom those anticipated in forward-looking statements, and future results coulddiffer materially from historical performance.

 

**Item 3.  Quantitative and Qualitative Disclosures About Market Risk.**

 

**Interest Rate Risk**

 

Market risk is therisk of loss from adverse changes in market prices and interest rates. TheCompany’s operations are materially impacted by net gains on sales of loans andnet interest margins. The level of gains from loan sales the Company achievesis dependent on demand for the products originated. Net interest margins aredependent on the Company’s ability to maintain the spread or interestdifferential between the interest it charges the customer for loans and theinterest the Company is charged for the financing of those loans. The followingdescribes each component of interest bearing assets held by the Company and howeach could be affected by changes in interest rates.

 

The Companyinvests in Portfolio Assets both directly through consolidated subsidiaries andindirectly through equity investments in Acquisition Partnerships. PortfolioAssets consist of investments in pools of non-homogenous assets thatpredominantly consist of loan and real estate assets. Earnings from theseassets are based on the estimated future cash flows from such assets andrecorded when those cash flows occur. The underlying loans within these poolsbear both fixed and variable rates. Due to the non-performing nature andhistory of these loans, changes in prevailing benchmark rates (such as theprime rate or LIBOR) generally have a nominal effect on the ultimate futurecash flow to be realized from the Portfolio Assets.

 

Loans receivableconsist primarily of loans made to affiliated entities (including AcquisitionPartnerships) and non-affiliated entities, and generally bear interest at fixedrates. The repayment of the loans is generally dependent upon future cash flowsof the borrowers, future cash flows of the underlying collateral, anddistributions from affiliated entities. Since these loans are predominantlyfixed-rate financial instruments, changes in market interest rates would nothave a significant impact on the collectibility of these loans.

 

SBA loans receivable were $25.4 million at March 31, 2009, ofwhich $9.7 million were related to the guaranteed portion of these loans. Theguaranteed portion is backed by the full faith and credit of the U.S. SmallBusiness Administration, and is generally sold into the secondary market.Virtually all of the SBA loans have variable interest rates. Assuming that thebalance sheet were to remain constant and no actions were taken to modify theexisting interest rate sensitivity, a hypothetical immediate change in interestrates would have a minimal effect on interest income from SBA loans for thefirst quarter of 2009. Although management believes that this measure isindicative of our sensitivity to interest rate changes, it does not adjust forpotential changes in credit quality, size and composition of the assets on the balancesheet, and other business developments that could affect a net increase(decrease) in assets. Accordingly, no assurances can be given that actualresults would not differ materially from the potential outcome simulated bythis estimate.

 

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FirstCity had$293.5 million in debt outstanding at March 31, 2009. The Company isexposed to interest rate risk primarily through its variable rate debt, whichtotaled $276.7 million or 94.3% of the Company’s total debt. A 50 basispoint change in interest rates would increase or decrease FirstCity’s annualinterest expense by approximately $1.4 million.

 

**Foreign Currency Risk**

 

The Companycurrently has loans and equity investments in Europe and Latin America (i.e.Mexico, Argentina, Brazil and Chile). The Company’s investments in theseregions are primarily in the form of equity and represent a significant portionof the Company’s total equity investments. As previously discussed, therevolving acquisition facility with Bank of Scotland for $225.0 millionprovides that the Company may borrow up to a maximum amount in Euros that isequivalent to U.S. $50 million. At March 31, 2009, the Company had U.S.$28.4 million in Euro-denominated debt for the purpose of hedging a portion ofthe net equity investments in Europe. In November 2006, the Companyacquired a line of credit facility with Banco Santander, S.A. that provides thatthe Company may borrow up to a current maximum of 142,240,000 Mexican pesos. AtMarch 31, 2009, the Company had 142,240,000 in Mexican peso-denominateddebt, which was equivalent to U.S. $9.5 million. Management of the Companyfeels that these loan agreements will help reduce the risk of adverse effectsof currency changes on these investments.

 

A sharp change inthe foreign currencies related to the investments in Europe, Latin America andCanada relative to the U.S. dollar could materially adversely affect thefinancial position and results of operations of the Company. A 5% and 10%incremental depreciation of these currencies would result in an estimateddecline in the valuation of the Company’s foreign investments and are indicatedin the following table. These amounts are estimates; consequently, theseamounts are not necessarily indicative of the actual effect of such changeswith respect to the Company’s consolidated financial position or results ofoperations.

 
| ** ** | ** ** | ** ** | ** ** | **One U.S.  dollar  equals** | ** ** | **Estimated decline in  valuation of investments  resulting from  incremental  depreciation  of foreign  currency of  (dollars in thousands)** | ** ** |
|------------|------------|------------|------------|------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** **                   | ** ** | **5%**                                                                                                                                                   | ** ** | **10%** | ** ** |
|       |       |       |       |                         |       |                                                                                                                                                     |       |   |   |
| Europe     |       | EUR        |       | 0.76                         |       | $                                                                                                                                                        | 1,698      |   | $ | 3,253 |   |
|       |       |       |       |                         |       |                                                                                                                                                     |       |   |   |
| Mexico     |       | MXN        |       | 14.33                        |       | $                                                                                                                                                        | 1,879      |   | $ | 3,631 |   |
|       |       |       |       |                         |       |                                                                                                                                                     |       |   |   |
| Chile      |       | CLP        |       | 586.36                       |       | $                                                                                                                                                        | 160        |   | $ | 305 |   |
|       |       |       |       |                         |       |                                                                                                                                                     |       |   |   |
| Brazil     |       | BRL        |       | 2.31                         |       | $                                                                                                                                                        | 20         |   | $ | 38 |   |
|       |       |       |       |                         |       |                                                                                                                                                     |       |   |   |
| Argentina  |       | ARS        |       | 3.72                         |       | $                                                                                                                                                        | 34         |   | $ | 66 |   |

 

**Item 4.  Controls and Procedures.**

 

*Evaluation of Disclosure Controlsand Procedures*

 

The Company’s management evaluated, with the participation of ourprincipal executive officer and principal financial officer, or personsperforming similar functions, the effectiveness of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as of the end of the period covered bythis report. Based on this evaluation, our principal executive officer andprincipal financial officer have concluded that, as of the end of the periodcovered by this report, our disclosure controls and procedures were effectiveto ensure that information we are required to disclose in the reports that wefile or submit under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms relating to FirstCity, including ourconsolidated subsidiaries, and was accumulated and communicated to theCompany’s management, including the principal executive officer and principalfinancial officer, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

 

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*Changes in Internal Controls*

 

Inconnection with the evaluation required by paragraph (d) of Rule 13a-15under the Exchange Act, there was no change identified in our internal controlover financial reporting that occurred during the last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II**

 

**OTHER INFORMATION**

** **

**Item 1.  Legal Proceedings.**

 

There have been no material developments withregard to any matters disclosed under Part I, Item 3 “Legal Proceedings”in our 2008 Form 10-K.

 

**Item 1A.  Risk Factors.**

 

There have been nomaterial changes to the risk factors as previously disclosed under Item 1A inour 2008 Form 10-K.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

 

None.

 

**Item 3.  Defaults Upon Senior Securities.**

 

None.

 

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

 

None.

 

**Item 5.  OtherInformation.**

 

ABL****has a revolving loan facilitywith Wells Fargo Foothill, LLC (“WFF”) for the purpose of financing andacquiring SBA loans. The obligations under this facility are secured bysubstantially all of the assets of ABL. In connection with the first amendmentto this facility on February 27, 2007, the maximum credit line on the loanfacility was increased to $40.0 million; and FirstCity provided WFF with anunconditional guaranty, up to a maximum of $5.0 million plus enforcement cost,of the obligations of ABL under the loan facility that relates to fundsadvanced to ABL for the acquisition of a SBA loan portfolio in February 2007.The guaranty was to remain in effect until the obligations incurred in connectionwith the advance to finance the SBA loan portfolio acquisition were paid infull.

 

On February 18, 2009, ABL and WFF entered into a Third Amendment(the “Amendment”), to be effective February 1, 2009, which amended certainterms in the loan facility. Additionally, FirstCity executed an Amended andRestated General Continuing Limited Guaranty dated as of February 18, 2009in favor of WFF which extended the guaranty to include all of ABL’s debtobligations under the loan facility, up to a maximum of $5.0 million plusenforcement costs, and provides that the guaranty will remain in place untilall indebtedness under the loan facility is paid in full.

 

The Amendment made the following changes to the existing loan facilityeffective as of February 1, 2009: (i) reduced the maximum outstandingamount of the credit line from $40.0 million to $25.0 million, (ii) providedfor the guaranty by FirstCity of all indebtedness under the loan facility up toa maximum of $5.0 million plus enforcement cost; (iii) revised theinterest rates applicable to base rate loans; (iv) extended the maturitydate to January 31, 2010; (v) reduced the minimum tangible net worthrequirement for the fiscal quarter ending March 31, 2009, and for eachquarter thereafter to $5.5 million, plus 100% of the positive amounts of ABL’snet income for each fiscal quarter after March 31, 2009; (vi) revisedthe facility fee of one-quarter of one percent (0.25%) per annum to be chargedfor non-use of the available maximum credit line to be calculated using $25million as the amount of the maximum credit line on or after February 1,2009; and (vii) revised the borrowing base for originating loans to be changedto an amount equal to 70% of the net eligible non-guaranteed loans originatedby ABL that are borrower originated mixed collateral loans.

 

**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 |

 

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|   |   |   | 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   |   | — | Contribution and  Assumption Agreement by and between Funding LP and Drive dated as of  August 18, 2000. (incorporated herein by reference to Exhibit 10.42  of the Company’s Form 8-K dated August 25, 2000, filed with the  Commission on September 11, 2000)                                                                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.2   |   | — | 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)                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.3   |   | — | 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)                                                                                                                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.4   |   | — | Securities Purchase  Agreement dated as of September 21, 2004 by and among FirstCity  Financial Corporation and certain affiliates of FirstCity and IFA Drive GP  Holdings LLC, IFA Drive LP Holdings LLC, Drive Management LP and certain  affiliates of those persons. (incorporated herein by reference to  Exhibit 10.1 of the Company’s Form 8-K dated September 27,  2004)                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5   |   | — | Revolving Credit  Agreement, dated November 12, 2004, among FirstCity Financial  Corporation as Borrower and the Lenders named therein, as Lenders, and Bank  of Scotland, as Agent (incorporated herein by reference to Exhibit 10.12  of the Company’s Form 10-Q dated November 15, 2004)                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.6   |   | — | 1995 Stock Option and  Award Plan (incorporated herein by reference to Exhibit A of the  Company’s Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)                                                                                                                                                                                                                                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.7   |   | — | 1996 Stock Option and  Award Plan (incorporated herein by reference to Exhibit C of the  Company’s Schedule 14A, Definitive Proxy Statement, dated March 27,  1996)                                                                                                                                                                                                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.8   |   | — | 2004 Stock Option and  Award Plan (incorporated herein by reference to Appendix A of the Company’s  Schedule 14A, Definitive Proxy Statement, dated October 21, 2003)                                                                                                                                                                                                                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.9   |   | — | Revolving Credit  Agreement, dated August 26, 2005, among FH Partners, L.P., as Borrower,  and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent  (incorporated herein by reference to Exhibit 10.1 of the Company’s  Form 8-K dated September 1, 2005)                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.10  |   | — | Guaranty Agreement,  dated August 26, 2005, executed by FirstCity Financial Corporation,  FirstCity Commercial Corporation, FirstCity Europe Corporation, FirstCity  Holdings Corporation, FirstCity International Corporation, FirstCity  Mexico, Inc., and FirstCity Servicing Corporation for the benefit of  Bank of Scotland, as agent, and lenders (incorporated herein by reference to  Exhibit 10.2 of the Company’s Form 8-K dated September 1,  2005) |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.11  |   | — | 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)                                                                                                           |

 

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| 10.13      |       | —     | 2006 Stock Option and  Award Plan (incorporated herein by reference to Appendix A of the Company’s  Schedule 14A, Definitive Proxy Statement, dated June 26, 2006)                                                                                                                                                                                                                                                                                 |
|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.14      | ** ** | **—** | Interest Purchase and  Sale Agreement, dated August 8, 2006, by and among Bidmex Holding, LLC,  and Strategic Mexican Investment Partners, L.P. and Cargill Financial  Services International, Inc. and certain other parties (incorporated  herein by reference to Exhibit 10.14 of the Company’s Form 10-Q  dated November 9, 2006)                                                                                          |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.15      | ** ** | **—** | Put Option Agreement  dated August 8, 2006, by and among Bidmex Holding, LLC, Recuperacion de  Carteras Mexicanas, S. de R.L. de C.V., Bidmex 6, LLC, Strategic Mexican  Investment Partners 2, L.P. and Cargill Financial Services  International, Inc. (incorporated herein by reference to  Exhibit 10.15 of the Company’s Form 10-Q dated November 9,  2006)                                                               |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.16      | ** ** | **—** | Guarantee dated  August 8, 2006, executed by FirstCity Financial Corporation for the  benefit of Bidmex Holding, LLC, Residencial Oeste 2 S. de R.L. de C.V.,  National Union Fire Insurance Company of Pittsburg, P.A., American General  Life Insurance Company, and American General Life and Accident Insurance  Company (incorporated herein by reference to Exhibit 10.15 of the  Company’s Form 10-Q dated November 9, 2006) |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.17      |       | —     | Amendment No. 4 to  Revolving Credit Agreement, dated as of October 31, 2006, among  FirstCity Financial Corporation as Borrower and the Lenders named therein, as  Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to  Exhibit 10.1 of the Company’s Form 8-K dated November 7, 2006)                                                                                                               |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.18      |       | —     | Management Employment  Contract dated November 30, 2006, between FirstCity Business Lending  Corporation, American Business Lending, Inc.**,**and Charles P. Bell, Jr. (incorporated herein by  reference to Exhibit 10.2 of the Company’s Form 8-K dated  December 7, 2006)                                                                                                                                              |
| ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.20      |       | —     | Amendment No. 5 to  Revolving Credit Agreement, dated as of December 14, 2006, among  FirstCity Financial Corporation as Borrower and the Lenders named therein, as  Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to  Exhibit 10.1 of the Company’s Form 8-K dated December 20,  2006)                                                                                                            |
| ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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)                                                                                                                                            |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.23      |       | —     | Amendment No. 9 to  Revolving Credit Agreement, dated as of June 29, 2007, among FirstCity  Financial Corporation as Borrower and the Lenders named therein, as Lenders,  and Bank of Scotland, as Agent (incorporated herein by reference to  Exhibit 10.23 of the Company’s Form 10-Q dated August 10,  2007)                                                                                                                |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.24      |       | —     | Amendment No. 1 to  Revolving Credit Agreement, dated June 29, 2007, among FH Partners,  L.P., as Borrower, and the Lenders named therein, as Lenders, and Bank of  Scotland, as Agent (incorporated herein by reference to Exhibit 10.24 of  the Company’s Form 10-Q dated August 10, 2007)                                                                                                                                   |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.25      |       | —     | Amendment  No. 2 to Loan Agreement, dated as of July 30, 2007, by and between  American Business Lending, Inc., as Borrower, and Wells Fargo Foothill,  LLC, as lender (incorporated herein by reference to Exhibit 10.1 of the  Company’s Form 8-K dated August 3, 2007)                                                                                                                                                 |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.26      |       | —     | Amendment No. 10  to Revolving Credit Agreement, dated as of August 22, 2007, among  FirstCity Financial Corporation as Borrower and the Lenders named therein, as  Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to  Exhibit 10.1 of the Company’s Form 8-K dated August 28, 2007)                                                                                                                |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.27      |       | —     | Amendment No. 3  and Consent to Revolving Credit Agreement, dated August 22, 2007, among  FH Partners, L.L.C., as Borrower, and the Lenders named therein, as Lenders,  and Bank of Scotland, as Agent (incorporated herein by reference to  Exhibit 10.2 of the Company’s Form 8-K dated August 28, 2007)                                                                                                                     |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.28      |       | —     | Subordinated Delayed  Draw Credit Agreement, dated as of September 5, 2007, among FirstCity  Financial                                                                                                                                                                                                                                                                                                                                                  |

 

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|   |   |   | Corporation, as  Borrower, and the Lenders named therein, as Lenders, and BoS(USA), Inc.,  as agent (incorporated herein by reference to Exhibit 10.1 of the  Company’s Form 8-K dated September 10, 2007)                                                                                                                                                      |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.29  |   | — | Letter agreement  between FirstCity Financial Corporation and Bank of Scotland extending time  period for closing of subordinate credit facility to be provided by BoS  (USA,) Inc. to October 2, 2007 (incorporated herein by reference to  Exhibit 10.2 of the Company’s Form 8-K dated September 10,  2007)                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.30  |   | — | Letter agreement between  FirstCity Financial Corporation and BoS(USA), Inc. extending time period  for closing of subordinate credit facility to be provided by  BoS(USA), Inc. to October 31, 2007 (incorporated herein by  reference to Exhibit 10.1 of the Company’s Form 8-K dated  October 5, 2007)                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.31  |   | — | Letter agreement  between FirstCity Financial Corporation and Bank of Scotland extending time  period for closing of subordinate credit facility to be provided by  BoS(USA), Inc. to October 31, 2007 (incorporated herein by reference  to Exhibit 10.2 of the Company’s Form 8-K dated October 5,  2007)                                                |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.32  |   | — | Letter agreement  between FirstCity Financial Corporation and BoS(USA), Inc. extending  time period for closing of subordinate credit facility to be provided by  BoS(USA), Inc. to November 16, 2007 (incorporated herein by  reference to Exhibit 10.1 of the Company’s Form 8-K dated  November 8, 2007)                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.33  |   | — | Letter agreement  between FirstCity Financial Corporation and Bank of Scotland which amended  the Revolving Credit Agreement to extend time period for closing of  subordinate credit facility to be provided by BoS(USA), Inc. to  November 16, 2007 (incorporated herein by reference to Exhibit 10.2  of the Company’s Form 8-K dated November 8, 2007) |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.34  |   | — | Amendment and Consent  No. 25 to Revolving Credit Agreement, dated as of July 14, 2008,  among FirstCity Financial Corporation as Borrower and the Lenders named  therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by  reference to Exhibit 10.1 of the Company’s Form 8-K dated  July 18, 2008)                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.35  |   | — | Amendment and Consent  No. 12 to Subordinated Delayed Draw Credit Agreement, dated as of  July 14, 2008, among FirstCity Financial Corporation as Borrower and the  Lenders named therein, as Lenders, and BoS(USA), Inc., as Agent  (incorporated herein by reference to Exhibit 10.2 of the Company’s  Form 8-K dated July 18, 2008)                |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.36  |   | — | Amendment and Consent  No. 6 to Revolving Credit Agreement, dated as of July 14, 2008,  among FH Partners, LLC, as Borrower, and the Lenders named therein, as  Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to  Exhibit 10.3 of the Company’s Form 8-K dated July 18, 2008)                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.37  |   | — | Conditional Waiver  Agreement Regarding Event of Default dated effective September 30,  2008, between American Business Lending, Inc., an affiliate of  FirstCity, as borrower, and Wells Fargo Foothill, LLC, as lender  (incorporated herein by reference to Exhibit 10.40 of the Company’s  Form 10-Q dated November 10, 2008)                |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.38  |   | — | Conditional Waiver  Under Loan Agreement dated November 10, 2008, between American Business  Lending, Inc., an affiliate of FirstCity, as borrower, and Wells Fargo  Foothill, LLC, as lender (incorporated herein by reference to  Exhibit 10.41 of the Company’s Form 10-Q dated November 10,  2008)                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.39  |   | — | Amendment and Consent  No. 27 to Revolving Credit Agreement, dated as of December 12,  2008, among FirstCity Financial Corporation as Borrower and the Lenders named  therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by  reference to Exhibit 10.1 of the Company’s Form 8-K dated  December 15, 2008)                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.40  |   | — | Amendment and Consent  No. 14 to Subordinated Delayed Draw Credit Agreement, dated as of  December 12, 2008, among FirstCity Financial Corporation as Borrower and  the Lenders named therein, as Lenders, and BoS(USA), Inc., as Agent  (incorporated herein by reference to Exhibit 10.2 of the Company’s  Form 8-K dated December 15, 2008)        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.41  |   | — | Amendment and Consent  No. 7 to Revolving Credit Agreement, dated as of December 12, 2008,  among FH Partners, LLC, as Borrower, and the Lenders named therein, as  Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to  Exhibit 10.3 of the Company’s Form 8-K dated December 15,  2008)                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.42  |   | — | Mediator’s  Proposal, dated November 20, 2008, among Michael S. Wilk, as mediator  appointed by the Court of                                                                                                                                                                                                                                                                   |

 

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|   |   |   | Appeals for the First  District for the State of Texas, and agreed to by the FCLT Loans Asset  Corporation*,*FirstCity  Financial Corporation*,*Timothy  J. Blair, Class Representative of former employees of FirstCity  Bancorporation of Texas, Inc.*,*and  JP Morgan Chase Bank, N.A., successor trustee (incorporated herein by  reference to Exhibit 10.4 of the Company’s Form 8-K dated  December 15, 2008) |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.43  |   | — | Conditional Waiver  Agreement Regarding Event of Default, dated and effective as of  December 31, 2008, between American Business Lending, Inc., an  affiliate of FirstCity, as borrower, and Wells Fargo Foothill, Inc., as  lender (incorporated herein by reference to Exhibit 10.1 of the  Company’s Form 8-K dated February 4, 2009)                                                                      |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.44* |   | — | Amendment No. 3  to Loan Agreement, dated February 18, 2009, by and between American  Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC,  as Lender                                                                                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.45* |   | — | Amended and Restated  General Continuing Limited Guaranty, dated February 18, 2009, by  FirstCity Financial Corporation, as Guarantor, and Wells Fargo  Foothill, LLC, as Lender                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 31.1*  |   | — | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 31.2*  |   | — | Certification of the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 32.1*  |   | — | Certification of the  Chief Executive Officer pursuant to 18 U.S.C Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 32.2*  |   | — | Certification of the  Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                   |

 

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* Filed herewith.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                     | FIRSTCITY FINANCIAL CORPORATION |
|--------------------------|---------------------------------|
| Dated: May 12, 2009 |                            |   |
|                     |                            |   |
|                     |                            |   |
|                     | By:                             | /s/ JAMES T. SARTAIN |
|                     |                            | James T. Sartain |
| * *                 | * *                        | *President and Chief  Executive* |
| * *                 | * *                        | *Officer and Director* |
| * *                 | * *                        | *(Duly authorized officer  and* |
| * *                 | * *                        | *Principal Executive  Officer)* |
| * *                 | * *                        | * * |
| * *                 | * *                        | * * |
|                     | By:                             | /s/ J. BRYAN BAKER |
|                     |                            | J. Bryan Baker |
| * *                 | * *                        | *Senior Vice President and  Chief* |
| * *                 | * *                        | *Financial Officer* |
| * *                 | * *                        | *(Duly authorized officer  and* |
| * *                 | * *                        | *Principal Financial  Officer)* |

 

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