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 June 30, 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)

 

(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 x     No o

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 August 7, 2007 was 10,794,137.

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)

		June 30,			December 31,
		2007			2006
		(Unaudited)
ASSETS
Cash and cash equivalents		$	18,380		$	18,472
Portfolio Assets, net		122,628			108,696
Loans receivable from Acquisition Partnerships held for investment		5,084			4,755
Loans receivable - SBA held for sale		3,830			—
Loans receivable - SBA held for investment, net		15,480			—
Loans receivable - other		29,223			23,991
Equity investments		115,275			112,357
Deferred tax asset, net		20,101			20,101
Service fees receivable ($1,219 and $917 from affiliates, respectively)		1,303			928
Loan servicing assets - SBA		891			—
Other assets, net		9,418			8,363
Total Assets		$	341,613		$	297,663
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable other		$	228,365		$	187,811
Minority interest		1,312			1,570
Other liabilities		6,254			4,389
Total Liabilities		235,931			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		100,869			100,562
Retained earnings		8,308			7,417
Accumulated other comprehensive income		1,963			1,372
Total Stockholders’ Equity		105,682			103,893
Total Liabilities and Stockholders’ Equity		$	341,613		$	297,663

 

See accompanying notes to consolidated financial statements.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2007			2006			2007			2006
Revenues:
Servicing fees ($2,728 and $2,771 from affiliates for the three month periods, respectively, and $5,181 and $5,352 from affiliates for the six month month periods, respectively)		$	2,977		$	2,856		$	5,582		$	5,503
Income from Portfolio Assets		5,685			2,946			10,720			5,004
Gain on sale of SBA loans held for sale, net		343			—			624			—
Interest income from SBA loans		606			—			914			—
Interest income from affiliates		140			465			266			895
Interest income from loans receivable - other		982			—			1,889			—
Other income		538			612			997			1,192
Total revenues		11,271			6,879			20,992			12,594
Expenses:
Interest and fees on notes payable — other		4,668			1,938			8,919			3,636
Interest and fees on notes payable to affiliates		—			10			—			20
Salaries and benefits		3,864			3,278			7,857			7,016
Provision (recovery) for loan and impairment losses		746			(58		)	1,072			51
Occupancy, data processing, communication and other		4,388			1,913			8,231			3,477
Total expenses		13,666			7,081			26,079			14,200
Equity in earnings of investments		4,332			1,387			6,158			5,021
Gain on sale of interest in equity investments		—			27			—			27
Earnings from continuing operations before income taxes and minority interest		1,937			1,212			1,071			3,442
Income tax expense		(146		)	(22		)	(303		)	(144		)
Minority interest		15			73			123			62
Earnings from continuing operations		1,806			1,263			891			3,360
Discontinued operations
Loss from discontinued operations		—			—			—			(75		)
Income taxes		—			—			—			—
Net loss from discontinued operations		—			—			—			(75		)
Net earnings		$	1,806		$	1,263		$	891		$	3,285
Basic earnings per common share are as follows:
Earnings from continuing operations		$	0.17		$	0.11		$	0.08		$	0.30
Discontinued operations		$	—		$	—		$	—		$	(0.01	)
Net earnings to common stockholders		$	0.17		$	0.11		$	0.08		$	0.29
Weighted average common shares outstanding		10,789			11,308			10,789			11,308
Diluted earnings per common share are as follows:
Earnings from continuing operations		$	0.16		$	0.11		$	0.08		$	0.28
Discontinued operations		$	—		$	—		$	—		$	(0.01	)
Net earnings to common stockholders		$	0.16		$	0.11		$	0.08		$	0.27
Weighted average common shares outstanding		11,397			11,959			11,414			11,958

 

See accompanying notes to consolidated financial statements.

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Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME

(Dollars in thousands)

 

															Retained			Accumulated
															Earnings			Other			Total
		Common Stock					Treasury Stock					Paid in			(Accumulated			Comprehensive			Stockholders’
		Shares		Amount			Shares		Amount			Capital			Deficit)			Income			Equity
Balances, December 31, 2005		11,307,187		$	113		—		$	—		$	99,843		$	(2,058	)	$	1,013		$	98,911
Cumulative effect of adjustments resulting from the adoption of SAB No. 108		—		—			—		—			—			(327		)	—			(327		)
Exercise of common stock options		9,750		—			—		—			68			—			—			68
Repurchase of common stock		—		—			530,300		(5,571		)	—			—			—			(5,571		)
Additional paid-in capital arising from stock option compensation expense		—		—			—		—			651			—			—			651
Comprehensive income:
Net earnings for 2006		—		—			—		—			—			9,802			—			9,802
Translation adjustments		—		—			—		—			—			—			359			359
Total comprehensive income																					10,161
Balances, December 31, 2006		11,316,937		113			530,300		(5,571		)	100,562			7,417			1,372			103,893
Exercise of common stock options		2,500		—			—		—			18			—			—			18
Additional paid-in capital arising from stock option compensation expense		—		—			—		—			289			—			—			289
Comprehensive income:
Net earnings for the first six months of 2007		—		—			—		—			—			891			—			891
Translation adjustments		—		—			—		—			—			—			591			591
Total comprehensive income																					1,482
Balances, June 30, 2007 (unaudited)		11,319,437		$	113		530,300		$	(5,571	)	$	100,869		$	8,308		$	1,963		$	105,682

 

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)

		Six Months Ended
		June 30,
		2007			2006
Cash flows from operating activities:
Net earnings		$	891		$	3,285
Adjustments to reconcile net earnings to net cash used in operating activities:
Net loss from discontinued operations		—			75
Purchase of SBA loans held for sale		(19,179		)	—
Payments applied to principal on SBA loans held for sale		411			—
Proceeds from the sale of SBA loans held for sale, net		15,772			—
Purchase of Portfolio Assets, net		(44,437		)	(25,777		)
Proceeds applied to principal on Portfolio Assets		40,280			22,158
Income from Portfolio Assets		(10,720		)	(5,004		)
Capitalized interest and costs on Portfolio Assets and loans receivable		(685		)	(246		)
Provision for loan and impairment losses		1,072			51
Equity in earnings of investments		(6,158		)	(5,021		)
Gain on sale of SBA loans held for sale		(624		)	—
Depreciation and amortization		221			274
Stock-based compensation expense related to stock options		289			246
Increase in service fees receivable		(375		)	(124		)
Decrease (increase) in other assets		(1,776		)	139
Change in debt imputed value		—			(129		)
Increase (decrease) in other liabilities		2,210			(712		)
Net cash used in operating activities		(22,808		)	(10,785		)
Cash flows from investing activities:
Property and equipment, net		(422		)	(115		)
Net payments (advances) on loans receivable		(4,499		)	(5,972		)
Net increase in SBA loans held for investment		(15,706		)	—
Contributions to Acquisition Partnerships and Servicing Entities		(21,146		)	(21,518		)
Distributions from Acquisition Partnerships and Servicing Entities		25,205			44,937
Net cash provided by (used in) investing activities		(16,568		)	17,332
Cash flows from financing activities:
Borrowings under notes payable — other		116,973			57,265
Payments of notes payable to affiliates		—			(3		)
Payments of notes payable — other		(77,689		)	(66,386		)
Proceeds from issuance of common stock		18			5
Net cash provided by (used in) financing activities		39,302			(9,119		)
Net cash used in continuing operations		(74		)	(2,572		)
Cash flows from discontinued operations:
Net cash used in operating activities		(18		)	(17		)
Net cash provided by investing activities		—			—
Net cash used in discontinued operations		(18		)	(17		)
Net decrease in cash and cash equivalents		(92		)	(2,589		)
Cash and cash equivalents, beginning of period		18,472			12,901
Cash and cash equivalents, end of period		$	18,380		$	10,312
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	7,741		$	3,144
Income taxes, net of refunds received		48			(34		)

 

See accompanying notes to consolidated financial statements.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 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 June 30, 2007, its results of operations for the three and six month periods ended June 30, 2007 and 2006 and cash flows for the six month periods ended June 30, 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 $5,972 for the six months ended June 30, 2006.  Management believes that the changes in the Consolidated Statements of Cash Flows for the six month period ended June 30, 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)

 

(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 six months of 2007, and ($75) in the first six months of 2006.

Mortgage

At June 30, 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 $(18) and $58 in the first six months of 2007 and 2006, respectively, for losses from discontinued mortgage operations.  Discontinued mortgage assets of $121 at June 30, 2007 are included in other assets.

Consumer

Liabilities from discontinued consumer operations of $116 consisted of state taxes payable at June 30, 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:

 

Income from Portfolio Assets is summarized as follows:

 

Portfolio Assets are pledged to secure notes payable that are generally 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 $1,003 for the six month period ended June 30, 2007, which is comprised of a $92 impairment charge on real estate portfolios and a $911 allowance for loan losses, net of recoveries.  For the six month period ended June 30, 2006, the Company recorded a provision for loan and impairment losses on Portfolio Assets of $51, which is comprised of a $2 impairment charge on real estate portfolios and a $49 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 on Portfolio Assets are as follows:

 

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