UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2007

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 033-19694

FirstCity Financial Corporation

(Exact name of registrant as specified in its charter)

Delaware

 

76-0243729

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

6400 Imperial Drive,

 

 

Waco, TX

 

76712

(Address of principal executive offices)

 

(Zip Code)

 

(254) 761-2800

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.   (Check one.)

Large accelerated filer o            Accelerated filer x            Non-accelerated filer o

Indicate by check mark whether the registrant is a 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 July 23, 2007 was 10,789,137.

 




TABLE OF CONTENTS

PART I

Item 1. Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

Exhibit Index

Certification of CEO Pursuant to Section 302

Certification of CFO Pursuant to Section 302

Certification of CEO Pursuant to Section 906

Certification of CFO Pursuant to Section 906

 




Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.  Financial Statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

 

March 31,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

17,211

 

$

18,472

 

Portfolio Assets, net

 

127,750

 

108,696

 

Loans receivable from Acquisition Partnerships held for investment

 

4,876

 

4,755

 

Loans receivable - SBA held for sale

 

11,484

 

 

Loans receivable - SBA held for investment

 

16,538

 

 

Loans receivable - other

 

27,956

 

23,991

 

Equity investments

 

107,991

 

112,357

 

Deferred tax asset, net

 

20,101

 

20,101

 

Service fees receivable ($915 and $917 from affiliates, respectively)

 

1,064

 

928

 

Loan servicing assets - SBA

 

815

 

 

Other assets, net

 

15,739

 

8,363

 

Total Assets

 

$

351,525

 

$

297,663

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Notes payable other

 

$

237,087

 

$

187,811

 

Minority interest

 

1,503

 

1,570

 

Other liabilities

 

9,971

 

4,389

 

Total Liabilities

 

248,561

 

193,770

 

Commitments and contingencies (note 12)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)

 

 

 

Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued: 11,319,437 and 11,316,937, respectively; shares outstanding: 10,789,137 and 10,786,637, respectively)

 

113

 

113

 

Treasury stock, at cost: 530,300 shares and 530,300 shares, respectively

 

(5,571

)

(5,571

)

Paid in capital

 

100,760

 

100,562

 

Retained earnings

 

6,502

 

7,417

 

Accumulated other comprehensive income

 

1,160

 

1,372

 

Total Stockholders’ Equity

 

102,964

 

103,893

 

Total Liabilities and Stockholders’ Equity

 

$

351,525

 

$

297,663

 

 

See accompanying notes to consolidated financial statements.

2




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

Revenues:

 

 

 

 

 

Servicing fees ($2,453 and $2,581 from affiliates, respectively)

 

$

2,605

 

$

2,647

 

Income from Portfolio Assets

 

5,035

 

2,058

 

Gain on sale of SBA loans held for sale, net

 

281

 

 

Interest income from SBA loans

 

308

 

 

Interest income from affiliates

 

126

 

430

 

Interest income from loans receivable - other

 

907

 

 

Other income

 

459

 

580

 

Total revenues

 

9,721

 

5,715

 

Expenses:

 

 

 

 

 

Interest and fees on notes payable — other

 

4,251

 

1,698

 

Interest and fees on notes payable to affiliates

 

 

10

 

Salaries and benefits

 

3,993

 

3,738

 

Provision for loan and impairment losses

 

326

 

109

 

Occupancy, data processing, communication and other

 

3,843

 

1,564

 

Total expenses

 

12,413

 

7,119

 

Equity in earnings of investments

 

1,826

 

3,634

 

Earnings (loss) from continuing operations before income taxes and minority interest

 

(866

)

2,230

 

Income tax expense

 

(157

)

(122

)

Minority interest

 

108

 

(11

)

Earnings (loss) from continuing operations

 

(915

)

2,097

 

Discontinued operations

 

 

 

 

 

Loss from discontinued operations

 

 

(75

)

Income taxes

 

 

 

Net loss from discontinued operations

 

 

(75

)

Net earnings (loss)

 

$

(915

)

$

2,022

 

Basic earnings (loss) per common share are as follows:

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

(0.08

)

$

0.19

 

Discontinued operations

 

$

 

$

(0.01

)

Net earnings (loss) to common stockholders

 

$

(0.08

)

$

0.18

 

Weighted average common shares outstanding

 

10,788

 

11,307

 

Diluted earnings (loss) per common share are as follows:

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

(0.08

)

$

0.18

 

Discontinued operations

 

$

 

$

(0.01

)

Net earnings (loss) to common stockholders

 

$

(0.08

)

$

0.17

 

Weighted average common shares outstanding

 

11,431

 

11,958

 

 

See accompanying notes to consolidated financial statements.

3




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings

 

Other

 

Total

 

 

 

Common Stock

 

Treasury Stock

 

Paid in

 

(Accumulated

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit)

 

Income

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2005

 

11,307,187

 

$

113

 

 

$

 

$

99,843

 

$

(2,058

)

$

1,013

 

$

98,911

 

Cumulative effect of adjustments resulting from the adoption of SAB No. 108

 

 

 

 

 

 

(327

)

 

(327

)

Exercise of common stock options

 

9,750

 

 

 

 

68

 

 

 

68

 

Repurchase of common stock

 

 

 

530,300

 

(5,571

)

 

 

 

(5,571

)

Additional paid-in capital arising from stock option compensation expense

 

 

 

 

 

651

 

 

 

651

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings for 2006

 

 

 

 

 

 

9,802

 

 

9,802

 

Translation adjustments

 

 

 

 

 

 

 

359

 

359

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,161

 

Balances, December 31, 2006

 

11,316,937

 

113

 

530,300

 

(5,571

)

100,562

 

7,417

 

1,372

 

103,893

 

Exercise of common stock options

 

2,500

 

 

 

 

18

 

 

 

18

 

Additional paid-in capital arising from stock option compensation expense

 

 

 

 

 

180

 

 

 

180

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the first three months of 2007

 

 

 

 

 

 

(915

)

 

(915

)

Translation adjustments

 

 

 

 

 

 

 

(212

)

(212

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,127

)

Balances, March 31, 2007 (unaudited)

 

11,319,437

 

$

113

 

530,300

 

$

(5,571

)

$

100,760

 

$

6,502

 

$

1,160

 

$

102,964

 

 

See accompanying notes to consolidated financial statements.

4




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings (loss)

 

$

(915

)

$

2,022

 

Adjustments to reconcile net earnings (loss) to net cash used in operating activities:

 

 

 

 

 

Net loss from discontinued operations

 

 

75

 

Purchase of SBA loans held for sale

 

(18,419

)

 

Payments applied to principal on SBA loans held for sale

 

187

 

 

Proceeds from the sale of SBA loans held for sale, net

 

7,102

 

 

Purchase of Portfolio Assets, net

 

(34,182

)

(7,501

)

Proceeds applied to principal on Portfolio Assets

 

19,698

 

6,722

 

Income from Portfolio Assets

 

(5,035

)

(2,058

)

Capitalized interest and costs on Portfolio Assets and loans receivable

 

(284

)

(457

)

Provision for loan and impairment losses

 

326

 

109

 

Equity in earnings of investments

 

(1,826

)

(3,634

)

Gain on sale of SBA loans held for sale

 

(281

)

 

Depreciation and amortization

 

119

 

157

 

Stock-based compensation expense related to stock options

 

180

 

145

 

Increase in service fees receivable

 

(136

)

(275

)

Decrease (increase) in other assets

 

(8,094

)

174

 

Change in debt imputed value

 

 

(60

)

Increase in other liabilities

 

5,816

 

1,000

 

Net cash used in operating activities

 

(35,744

)

(3,581

)

Cash flows from investing activities:

 

 

 

 

 

Property and equipment, net

 

(214

)

(83

)

Net payments (advances) on loans receivable

 

(3,674

)

263

 

Net increase in SBA loans held for investment

 

(16,603

)

 

Contributions to Acquisition Partnerships and Servicing Entities

 

(7,552

)

(17,529

)

Distributions from Acquisition Partnerships and Servicing Entities

 

13,577

 

11,992

 

Net cash used in investing activities

 

(14,466

)

(5,357

)

Cash flows from financing activities:

 

 

 

 

 

Borrowings under notes payable — other

 

81,547

 

28,885

 

Payments of notes payable — other

 

(32,605

)

(23,591

)

Proceeds from issuance of common stock

 

18

 

 

Net cash provided by financing activities

 

48,960

 

5,294

 

Net cash used in continuing operations

 

(1,250

)

(3,644

)

Cash flows from discontinued operations:

 

 

 

 

 

Net cash used in operating activities

 

(11

)

(9

)

Net cash provided by investing activities

 

 

 

Net cash used in discontinued operations

 

(11

)

(9

)

Net decrease in cash and cash equivalents

 

(1,261

)

(3,653

)

Cash and cash equivalents, beginning of period

 

18,472

 

12,901

 

Cash and cash equivalents, end of period

 

$

17,211

 

$

9,248

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

3,404

 

$

1,475

 

Income taxes, net of refunds received

 

18

 

16

 

 

See accompanying notes to consolidated financial statements.

5




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

(1)  Basis of Presentation and Summary of Significant Accounting Policies

The Company

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

Basis of Presentation

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

Use of Estimates

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

Reclassifications

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform with current consolidated financial statement presentation.  In all reporting prior to December 31, 2006, FirstCity reported loans receivable advances and loans receivable payments in cash flows from operating activities on the Consolidated Statements of Cash Flows.  Beginning in the fourth quarter of 2006, the Company reports these items in cash flows from investing activities.  Prior period amounts reported on the Consolidated Statements of Cash Flows have been adjusted to conform to this treatment which is required under GAAP.  The total amount thus reclassified was $263 for the three months ended March 31, 2006.  Management believes that the changes in the Consolidated Statements of Cash Flows for the three month period ended March 31, 2006 are immaterial relative to the financial statements taken as a whole.  These reclassifications have the following impact on the financial statements:

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Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

 

Three Months Ended

 

 

 

March 31,

 

 

 

2006

 

 

 

 

 

Statement of Cash Flows:

 

 

 

Cash flows from operating activities (as reported)

 

$

(3,318

)

Impact of reclassification on net loans receivable advances and payments

 

(263

)

Cash flows from operating activities (as corrected)

 

$

(3,581

)

 

 

 

 

Cash flows from investing activities (as reported)

 

$

(5,620

)

Impact of reclassification on net loans receivable advances and payments

 

263

 

Cash flows from investing activities (as corrected)

 

$

(5,357

)

 

(2)  New Accounting Pronouncements

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

In September 2006, SFAS No. 157, Fair Value Measurements (“SFAS 157”), was issued.  SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements.  The changes to current practice resulting from the application of SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements.  SFAS 157 is effective for the Company on January 1, 2008.  The Company is currently evaluating the impact SFAS 157 will have on its financial statements.

(3)  Discontinued Operations

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

Mortgage

At March 31, 2007, the only asset remaining from discontinued operations is from mortgage operations, and represents an investment security resulting from the retention of a residual interest in a securitization transaction. This security is in “run-off,” and the Company is contractually obligated to service these assets.  The cash flows are collected over a period of time and are valued using prepayment assumptions of 32% for fixed rate loans and 33% for variable rate loans. Overall loss rates are estimated at 14% of collateral.  The Company recorded provisions (recoveries) of $(11) and $66 in the first three months of 2007 and 2006, respectively, for losses from discontinued mortgage operations.  Discontinued mortgage assets of $114 at March 31, 2007 are included in other assets.

Consumer

Liabilities from discontinued consumer operations of $115 consisted of state taxes payable at March 31, 2007, and are included in other liabilities.

7




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

(4)  Portfolio Assets

Portfolio Assets are summarized as follows:

 

March 31,

 

December 31,

 

 

 

2007

 

2006

 

Loan Portfolios

 

 

 

 

 

Loans Acquired Prior to 2005

 

 

 

 

 

Non-performing Portfolio Assets

 

$

5,459

 

$

6,163

 

Performing Portfolio Assets

 

3,959

 

5,166

 

Loans Acquired After 2004

 

 

 

 

 

Loans acquired with credit deterioration

 

108,101

 

84,550

 

Loans acquired with no credit deterioration

 

4,386

 

6,473

 

Outstanding balance

 

121,905

 

102,352

 

Allowance for loan losses

 

(567

)

(333

)

Carrying amount of loans, net of allowance

 

121,338

 

102,019

 

 

 

 

 

 

 

Real Estate Portfolios

 

4,351

 

4,574

 

Other

 

2,061

 

2,103

 

Portfolio Assets, net

 

$

127,750

 

$

108,696

 

 

Income from Portfolio Assets is summarized as follows:

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

Loan Portfolios

 

 

 

 

 

Loans Acquired Prior to 2005

 

 

 

 

 

Non-performing Portfolio Assets

 

$

742

 

$

966

 

Performing Portfolio Assets

 

349

 

453

 

Loans Acquired After 2004

 

 

 

 

 

Loans acquired with credit deterioration

 

3,066

 

311

 

Loans acquired with no credit deterioration

 

492

 

95

 

Real Estate Portfolios

 

328

 

174

 

Other

 

58

 

59

 

Income from Portfolio Assets

 

$

5,035

 

$

2,058

 

 

Portfolio Assets are pledged to secure notes payable that are non-recourse to FirstCity or any affiliate other than the entity that incurred the debt.  See Note 2 to the Company’s 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission on July 24, 2007 for a description of the Revolving Credit agreement between FH Partners, L.P. and Bank of Scotland, which is guaranteed by FirstCity and the primary wholly-owned subsidiaries of FirstCity.

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

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Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

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

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

Beginning Balance

 

$

(333

)

$

(163

)

Provisions

 

(234

)

(107

)

Charge Offs

 

 

15

 

Ending Balance

 

$

(567

)

$

(255

)

 

Changes in accretable yield for loans acquired with credit deterioration are as follows:

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

Beginning Balance

 

$

32,339

 

$

3,765

 

Additions

 

1,269

 

1,354

 

Accretion

 

(2,714

)

(310

)

Reclassification from (to) nonaccretable difference

 

5,165

 

 

Disposals

 

(352

)

(1

)

Translation adjustments

 

(37

)

 

Ending Balance

 

$

35,670

 

$

4,808

 

 

Loans acquired during each period for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

 Face value at acquisition

 

$

34,897

 

$

11,019

 

 Cash flows expected to be collected at acquisition

 

30,122

 

8,855

 

 Basis in acquired loans at acquisition

 

28,853

 

7,501

 

 

9




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

(5)  Loans Receivable

Loans receivable are summarized as follows:

 

March 31,

 

December 31,

 

 

 

2007

 

2006

 

Loans receivable from Acquisition Partnerships held for investment:

 

 

 

 

 

Latin America

 

$

980

 

$

1,182

 

Europe

 

3,896

 

3,573

 

 

 

4,876

 

4,755

 

Loans receivable - SBA:

 

 

 

 

 

Held for sale

 

11,484

 

 

Held for investment

 

16,538

 

 

 

 

28,022

 

 

Loans receivable - other:

 

 

 

 

 

Canada

 

2,339

 

2,254

 

Domestic

 

25,617

 

21,737

 

 

 

27,956

 

23,991

 

 

 

$

60,854

 

$

28,746

 

 

Loans receivable from Acquisition Partnerships are secured by the assets/loans acquired by the partnerships with purchase money loans provided by affiliates of the investors to the partnerships to purchase the asset pools held in those entities. They are evaluated for impairment by analyzing the expected future cash flows from the underlying assets within each pool to determine that the cash flows were sufficient to repay these notes. The Company applies the asset valuation methodology consistently in all venues and uses the same proprietary asset management system to evaluate impairment on all asset pools. The results of this evaluation indicated that cash flows from the pools will be sufficient to repay the loans and no allowances for impairment are necessary.

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

Loans receivable - SBA held for investment are stated at the unpaid principal balance, net of unearned discounts. Interest is credited to operations primarily based upon the principal amount outstanding. When management believes there is sufficient doubt as to the ultimate collectibility of interest on any loan, interest accruals are discontinued and all past due interest, previously recognized as income, is reversed and charged against current period earnings. These loans are evaluated for impairment by management based upon performance of the loans and other portfolio characteristics, such as industry concentrations and loan collateral, which also impacts management’s estimates of the impairment.  The adequacy of the allowance for loan losses is reviewed by management quarterly and as adjustments become necessary, they will be reflected 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 real estate collateral as well as current economic conditions.

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

(6)  Equity Investments

The Company has investments in Acquisition Partnerships and their general partners and investments in servicing entities that are accounted for under the equity method.  The condensed combined financial position and results of operations of the Acquisition

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Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

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

Condensed Combined Balance Sheets

 

March 31,

 

December 31,

 

 

 

2007

 

2006

 

Assets

 

$

410,885

 

$

457,173

 

Liabilities

 

$

86,514

 

$

100,973

 

Net equity

 

324,371

 

356,200

 

 

 

$

410,885

 

$

457,173

 

 

 

 

 

 

 

Equity investment in Acquisition Partnerships

 

$

97,352

 

$

105,852

 

Equity investment in servicing entities

 

10,639

 

6,505

 

 

 

$

107,991

 

$

112,357

 

 

Condensed Combined Summary of Operations

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

Income from Portfolio Assets

 

$

23,164

 

$

19,014

 

Other income

 

548

 

1,155

 

Revenues

 

23,712

 

20,169

 

Interest expense

 

3,007

 

2,980

 

Average cost (annualized)

 

13.46

%

4.47

%

Service fees

 

4,721

 

3,209

 

Provision (recovery) for loan and impairment losses

 

6,561