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.

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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.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Dollars in thousands)

										Retained			Accumulated
										Earnings			Other			Total
	Common Stock			Treasury Stock				Paid in		(Accumulated			Comprehensive			Stockholders’
	Shares	Amount		Shares	Amount			Capital		Deficit)			Income			Equity

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

See accompanying notes to consolidated financial statements.

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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.

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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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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.

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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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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

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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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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

(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

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)