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 September 30, 2006

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 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 November 9, 2006 was 11,316,937.

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)

	September 30,			December 31,
	2006			2005
	(Unaudited)
ASSETS
Cash and cash equivalents	$	13,036		$	12,901
Portfolio Assets, net	78,908			49,346
Loans receivable from Acquisition Partnerships held for investment	7,144			19,606
Loans receivable - other	2,292			—
Equity investments	84,853			83,785
Deferred tax asset, net	20,101			20,101
Service fees receivable from affiliates	1,096			1,103
Other assets, net	5,925			7,870
Discontinued mortgage assets	103			157
Total Assets	$	213,458		$	194,869

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable other	$	105,963		$	89,653
Notes payable to affiliates	—			606
Minority interest	1,800			1,193
Liabilities from discontinued consumer operations	72			121
Other liabilities	3,974			4,385
Total Liabilities	111,809			95,958
Commitments and contingencies (note 11)
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 and outstanding: 11,316,937 and 11,307,187, respectively)	113			113
Treasury stock, at cost: 530,300 shares and zero shares, respectively	(5,571		)	—
Paid in capital	100,378			99,843
Retained earnings (accumulated deficit)	6,194			(2,058		)
Accumulated other comprehensive income	535			1,013
Total Stockholders’ Equity	101,649			98,911
Total Liabilities and Stockholders’ Equity	$	213,458		$	194,869

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					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006			2005
Revenues:
Servicing fees from affiliates	$	4,679	$	2,891		$	10,182		$	8,972
Income from Portfolio Assets	2,547		2,124			7,551			6,269
Interest income from affiliates	294		420			1,189			1,293
Interest income from loans receivable - other	17		—			17			—
Other income	654		269			1,846			1,079
Total revenues	8,191		5,704			20,785			17,613
Expenses:
Interest and fees on notes payable — other	1,797		909			5,433			2,619
Interest and fees on notes payable to affiliates	2		9			22			27
Salaries and benefits	4,094		3,571			11,110			11,413
Provision for loan and impairment losses	50		322			101			436
Occupancy, data processing, communication and other	2,688		1,908			6,165			5,574
Total expenses	8,631		6,719			22,831			20,069
Equity in earnings of investments	3,023		1,783			8,044			8,874
Gain on sale of interest in equity investments	2,378		—			2,405			—
Earnings from continuing operations before income taxes and minority interest	4,961		768			8,403			6,418
Income tax benefit (expense)	4		(79		)	(140		)	(321		)
Minority interest	2		3			64			(36		)
Earnings from continuing operations	4,967		692			8,327			6,061
Discontinued operations
Loss from discontinued operations	—		(281		)	(75		)	(378		)
Income taxes	—		600			—			600
Net earnings (loss) from discontinued operations	—		319			(75		)	222
Net earnings	$	4,967	$	1,011		$	8,252		$	6,283
Basic earnings per common share are as follows:
Earnings from continuing operations	$	0.45	$	0.06		$	0.74		$	0.54
Discontinued operations	$	—	$	0.03		$	(0.01	)	$	0.02
Net earnings to common stockholders	$	0.45	$	0.09		$	0.73		$	0.56
Weighted average common shares outstanding	11,104		11,298			11,239			11,278
Diluted earnings per common share are as follows:
Earnings from continuing operations	$	0.42	$	0.05		$	0.70		$	0.50
Discontinued operations	$	—	$	0.03		$	(0.01	)	$	0.02
Net earnings to common stockholders	$	0.42	$	0.08		$	0.69		$	0.52
Weighted average common shares outstanding	11,711		12,008			11,875			12,012

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, 2004	11,260,687	$	113	—	$	—		$	99,364	$	(10,289	)	$	3,235		$	92,423
Exercise of common stock options	46,500	—		—	—			196		—			—			196
Additional paid-in capital arising from sale of shares by investee	—	—		—	—			283		—			—			283
Comprehensive income:
Net earnings for 2005	—	—		—	—			—		8,231			—			8,231
Translation adjustments	—	—		—	—			—		—			(2,222		)	(2,222		)
Total comprehensive income																6,009
Balances, December 31, 2005	11,307,187	113		—	—			99,843		(2,058		)	1,013			98,911
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	—	—		—	—			467		—			—			467
Comprehensive income:
Net earnings for the first nine months of 2006	—	—		—	—			—		8,252			—			8,252
Translation adjustments	—	—		—	—			—		—			(478		)	(478		)
Total comprehensive income																7,774
Balances, September 30, 2006 (unaudited)	11,316,937	$	113	530,300	$	(5,571	)	$	100,378	$	6,194		$	535		$	101,649

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)

	Nine Months Ended
	September 30,
	2006			2005
Cash flows from operating activities:
Net earnings	$	8,252		$	6,283
Adjustments to reconcile net earnings to net cash used in operating activities:
Net (earnings) loss from discontinued operations	75			(222		)
Purchase and advances of Portfolio Assets and loans receivable, net	(64,759		)	(19,306		)
Proceeds applied to principal on Portfolio Assets and loans receivable	32,432			22,092
Income from Portfolio Assets	(7,551		)	(6,269		)
Capitalized interest and costs on Portfolio Assets and loans receivable	(452		)	(217		)
Provision for loan and impairment losses	101			436
Equity in earnings of investments	(8,044		)	(8,874		)
Gain on sale of interest in equity investments	(2,405		)	—
Depreciation and amortization	391			661
Stock-based compensation expense related to stock options	467			—
Decrease in service fees receivable from affiliates	7			362
Decrease (increase) in other assets	791			(489		)
Change in debt imputed value	(293		)	214
Decrease in other liabilities	(539		)	(1,722		)
Net cash used in operating activities	(41,527		)	(7,051		)
Cash flows from investing activities:
Property and equipment, net	(135		)	(108		)
Proceeds from sale of interest in equity investments	8,689			—
Contributions to Acquisition Partnerships and Servicing Entities	(39,406		)	(18,373		)
Distributions from Acquisition Partnerships and Servicing Entities	63,346			17,907
Net cash provided by (used in) investing activities	32,494			(574		)
Cash flows from financing activities:
Borrowings under notes payable — other	106,569			68,622
Payments of notes payable to affiliates	(312		)	(34		)
Payments of notes payable — other	(91,566		)	(56,427		)
Repurchase of common stock	(5,571		)	—
Proceeds from issuance of common stock	68			162
Net cash provided by financing activities	9,188			12,323
Net cash provided by continuing operations	155			4,698
Cash flows from discontinued operations (Revised - see note 1):
Net cash used in operating activities	(20		)	(8,229		)
Net cash provided by investing activities	—			1,329
Net cash used in discontinued operations	(20		)	(6,900		)
Net increase (decrease) in cash and cash equivalents	135			(2,202		)
Cash and cash equivalents, beginning of period	12,901			9,724
Cash and cash equivalents, end of period	$	13,036		$	7,522
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	4,636		$	1,982
Income taxes, net of refunds received	121			317

See accompanying notes to consolidated financial statements.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(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 and Mexico, with a presence in France, Germany and South America. At September 30, 2006, 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 (collectively referred to as “Portfolios” or “Portfolio Assets”) 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.

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 September 30, 2006, its results of operations for the three and nine month periods ended September 30, 2006 and 2005 and cash flows for the nine month periods ended September 30, 2006 and 2005. 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 2005 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. In the first quarter of 2006, equity in earnings of investments was reclassified outside of revenues, which in prior periods was included with revenues. Also in the first quarter of 2006, the Company has separately disclosed the operating, investing and financing portions of the cash flows attributable to its discontinued operations, which in prior periods were reported on a combined basis as a single amount. In the second quarter of 2006, the Company reclassified gain on resolution of Portfolio Assets and loan interest income as income from Portfolio Assets. These items were reported separately in prior periods.

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.

Stock-Based Compensation

On January 1, 2006, FirstCity adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions, as the Company formerly did, using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in the consolidated statement of operations.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

FirstCity adopted SFAS 123(R) using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. The consolidated financial statements as of and for the nine months ended September 30, 2006, reflect the impact of adopting SFAS 123(R). In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). See Note 9 for further details.

Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the consolidated statement of operations during the three and nine months ended September 30, 2006, included compensation expense for stock-based payment awards that were granted prior to, but were not yet vested, as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 148 and compensation expense for the stock-based payment awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with SFAS 123(R). As stock-based compensation expense recognized in the statement of operations for the three and nine months ended September 30, 2006, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information required under SFAS 148 for the periods prior to 2006, we accounted for forfeitures as they occurred.

(2) New Accounting Pronouncements

In September 2006, Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, was issued. SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. It applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. The provisions of Statement 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007. The effect of adopting SFAS No. 157 has not been determined, but it is not expected to have a significant effect on the Company’s consolidated financial position or earnings.

In September 2006, the SEC staff issued Staff Accounting Bulletin Topic 1N, Financial Statements - Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be evaluated when determining the materiality of misstatements in the current year financial statements. SAB 108 requires materiality to be determined by considering the effect of prior year misstatements on both the current year balance sheet and income statement, with consideration of their carryover and reversing effects. SAB 108 also addresses how to correct material misstatements. The provisions of SAB 108 are effective for financial statements issued for fiscal years ending after November 15, 2006. The effect of adopting SAB 108 has not been determined, but it is not expected to have a significant effect on our reported financial position or earnings.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes . FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating any future effect of this pronouncement.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140 (“SFAS 156”). SFAS 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specified situations. Such servicing assets or liabilities would be initially measured at fair value, if practicable, and subsequently measured at amortized value or fair value based upon an election of the reporting entity. SFAS 156 also specifies certain financial statement presentations and disclosures in connection with servicing assets and liabilities. SFAS 156 is effective for fiscal years beginning after September 15, 2006 and may be adopted earlier but only if the adoption is in the first quarter of the fiscal year. FirstCity did not adopt in 2006 and does not expect that the adoption of SFAS 156 in future periods will have a material effect on its Consolidated Financial Statements.

In November 2005, the FASB issued FASB Staff Position SFAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 115-1”). FSP 115-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impaired loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

unrealized losses that have not been recognized as other-than-temporary impairments. The Company adopted the provisions of FSP 115-1 on January 1, 2006, and did not have a significant impact on the Company’s consolidated 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 (“Consumer”) conducted through the Company’s minority interest investment in Drive Financial Services LP (“Drive”). Earnings (losses) from discontinued operations, net of taxes, are summarized as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006			2005
Mortgage	$	—	$	(252	)	$	(75	)	$	(346	)
Consumer	—		571			—			568
Net earnings (loss) from discontinued operations	$	—	$	319		$	(75	)	$	222

Mortgage

At September 30, 2006, the only asset remaining from discontinued mortgage operations is 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 of $54 and $321 in the first nine months of 2006 and 2005, respectively, for losses from discontinued mortgage operations.

In April 2005, the Company exercised an early purchase option on the 1998-1 securitization. Loans receivable were recorded at $6.1 million in accordance with EITF 02-9, Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold. FirstCity evaluated each loan at the acquisition date to determine whether there was evidence of credit deterioration since origination. At September 30, 2006, the acquired loans are included in Portfolio Assets in the consolidated balance sheet and classified as either “loans acquired with credit deterioration” or “loans acquired with no credit deterioration.”

Consumer

There were no consumer assets held for sale as of September 30, 2006 and December 31, 2005. Liabilities from discontinued consumer operations consisted of state taxes payable at September 30, 2006.

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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:

	September 30,			December 31,
	2006			2005
Loan Portfolios
Loans Acquired Prior to 2005
Non-performing Portfolio Assets	$	7,123		$	10,528
Performing Portfolio Assets	5,612			12,029
Loans Acquired After 2004
Loans acquired with credit deterioration	56,282			12,703
Loans acquired with no credit deterioration	3,076			3,976
Outstanding balance	72,093			39,236
Allowance for loan losses	(192		)	(163		)
Carrying amount of loans, net of allowance	71,901			39,073

Real Estate Portfolios	4,875			8,018
Other	2,132			2,255
Portfolio Assets, net	$	78,908		$	49,346

Income from Portfolio Assets is summarized as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006			2005		2006		2005
Loan Portfolios
Loans Acquired Prior to 2005
Non-performing Portfolio Assets	$	540		$	1,080	$	2,392	$	3,663
Performing Portfolio Assets	412			399		1,293		1,746
Loans Acquired After 2004
Loans acquired with credit deterioration	1,403			250		2,412		361
Loans acquired with no credit deterioration	93			176		277		250
Real Estate Portfolios	123			169		995		199
Other	(24		)	50		182		50
Income from Portfolio Assets	$	2,547		$	2,124	$	7,551	$	6,269

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 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2006 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 $101 for the nine month period ended September 30, 2006, which is comprised of a $24 impairment charge on real estate portfolios and a $77 allowance for loan losses, net of recoveries. For the nine month period ended September 30, 2005, the Company recorded an allowance for impairment on Portfolio Assets of $436, which is comprised of a $17 impairment charge on real estate portfolios and a $419 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						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Beginning Balance	$	(197	)	$	(114	)	$	(163	)	$	—
Provisions	(42		)	(315		)	(183		)	(429		)
Recoveries	14			10			106			10
Charge Offs	33			—			48			—
Ending Balance	$	(192	)	$	(419	)	$	(192	)	$	(419	)

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Beginning Balance	$	9,660		$	2,830		$	3,765		$	—
Additions	9,710			326			16,614			3,267
Accretion	(980		)	(250		)	(1,984		)	(361		)
Reclassification from (to) nonaccretable difference	(111		)	—			(111		)	—
Disposals	(423		)	(206		)	(428		)	(206		)
Ending Balance	$	17,856		$	2,700		$	17,856		$	2,700

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				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Face value at acquisition	$	132,926	$	1,354	$	176,566	$	15,851
Cash flows expected to be collected at acquisition	39,608		1,311		69,572		15,004
Basis in acquired loans at acquisition	29,898		985		52,958		11,737

(5) Loans Receivable

Loans receivable from Acquisition Partnerships held for investment are summarized as follows:

	September 30,		December 31,
	2006		2005
Latin America	$	1,360	$	16,098
Europe	3,411		1,674
Domestic	2,373		1,834
	$	7,144	$	19,606

In August 2006, FirstCity completed a restructuring of its investments in Mexico in a transaction with American International Group, Inc. (“AIG”). As a result, FirstCity eliminated substantially all of its loans receivable from Mexico acquisition partnerships (see Note 6).

There were no provisions recorded on these loans during the first nine months of 2006 and 2005. The 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. These loans 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

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

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.

Equity method losses which were recorded to reduce the loans and interest receivable from certain Mexican partnerships were zero and $.5 million during the first nine months of 2006 and 2005, respectively, in compliance with EITF 98-13, Accounting by an Equity Method Investor for Investee Losses When the Investor Has Loans to and Investments in Other Securities of the Investee, and EITF 99-10, Percentage Used to Determine the Amount of Equity Method Losses.

In September 2006, FirstCity invested $2.3 million in the form of a loan to a Canadian real estate development company.

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

Condensed Combined Balance Sheets

	September 30,		December 31,
	2006		2005
Assets	$	391,925	$	444,825
Liabilities	$	185,266	$	340,881
Net equity	206,659		103,944
	$	391,925	$	444,825

Equity investment in Acquisition Partnerships	$	79,096	$	77,893
Equity investment in servicing entities	5,757		5,892
	$	84,853	$	83,785

Condensed Combined Summary of Operations

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006		2005
Income from Portfolio Assets	$	26,066		$	16,935		$	64,572	$	59,477
Other income	336			252			1,884		621
Revenues	26,402			17,187			66,456		60,098
Interest expense	4,931			3,559			11,239		11,736
Service fees	5,486			5,416			12,681		14,803
Other operating costs	7,914			9,037			17,154		21,752
Foreign currency (gains) losses	(4,660		)	(113		)	8,558		(9,188		)
Income taxes	234			269			596		1,070
Expenses	13,905			18,168			50,228		40,173
Net earnings (loss)	$	12,497		$	(981	)	$	16,228	$	19,925

Equity in earnings of Acquisition Partnerships	$	2,992		$	1,975		$	7,811	$	8,385
Equity in earnings (loss) of servicing entities	31			(192		)	233		489
	$	3,023		$	1,783		$	8,044	$	8,874

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

The assets and equity of the Acquisition Partnerships and equity investments in the Acquisition Partnerships are summarized by geographic region below. The WAMCO Partnerships represent limited partnerships and limited liability companies in which the Company has a common ownership with Cargill. MinnTex Investment Partners LP is considered to be a significant subsidiary of FirstCity.

	September 30,		December 31,
	2006		2005
Assets:
Domestic:
WAMCO Partnerships	$	138,676	$	166,213
MinnTex Investment Partners LP	148		307
Other	10,718		10,410
Latin America	177,301		185,702
Europe	65,082		82,193
	$	391,925	$	444,825

Equity (deficit):
Domestic:
WAMCO Partnerships	$	79,582	$	111,329
MinnTex Investment Partners LP	126		283
Other	5,012		5,485
Latin America	70,189		(79,527		)
Europe	51,750		66,374
	$	206,659	$	103,944
Equity investment in Acquisition Partnerships:
Domestic:
WAMCO Partnerships	$	39,052	$	51,772
MinnTex Investment Partners LP	42		93
Other	2,379		2,825
Latin America	19,251		2,771
Europe	18,372		20,432
	$	79,096	$	77,893

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

Revenues and earnings (loss) of the Acquisition Partnerships and equity in earnings (loss) of the Acquisition Partnerships are summarized by geographic region below.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Revenues:
Domestic:
WAMCO Partnerships	$	6,719		$	4,591		$	21,218		$	21,599
MinnTex Investment Partners LP	353			991			1,242			4,098
Other	27			866			323			932
Latin America	14,382			6,053			27,206			17,267
Europe	4,921			4,686			16,467			16,202
	$	26,402		$	17,187		$	66,456		$	60,098

Net earnings (loss):
Domestic:
WAMCO Partnerships	$	3,233		$	2,079		$	10,538		$	9,706
MinnTex Investment Partners LP	321			900			1,118			3,676
Other	(460		)	614			(590		)	381
Latin America	6,307			(7,522		)	(6,001		)	(4,777		)
Europe	3,096			2,948			11,163			10,939
	$	12,497		$	(981	)	$	16,228		$	19,925
Equity in earnings (loss) of Acquisition
Partnerships:
Domestic:
WAMCO Partnerships	$	1,394		$	1,162		$	5,026		$	4,518
MinnTex Investment Partners LP	106			297			369			1,213
Other	(218		)	325			(259		)	277
Latin America	815			(441		)	(316		)	(250		)
Europe	895			632			2,991			2,627
	$	2,992		$	1,975		$	7,811		$	8,385

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

Combining statements of operations for the WAMCO Partnerships follow. WAMCO 30, WAMCO 31 and WAMCO 33 are considered to be significant subsidiaries of FirstCity.

Three Months Ended September 30, 2006

	WAMCO			WAMCO			WAMCO			Other
	30			31			33			Partnerships			Combined
Income from Portfolio Assets	$	576		$	294		$	1,817		$	3,855		$	6,542
Other income, net	3			18			37			119			177
Revenues	579			312			1,854			3,974			6,719
Interest and fees expense — affiliate	—			—			—			(142		)	(142		)
Interest and fees expense — other	(146		)	(160		)	(199		)	(592		)	(1,097		)
Provision for loan and impairment losses	26			120			126			(869		)	(597		)
Service fees — affiliate	(70		)	(35		)	(234		)	(525		)	(864		)
General, administrative and operating expenses	(79		)	(67		)	(38		)	(602		)	(786		)
Expenses	(269		)	(142		)	(345		)	(2,730		)	(3,486		)
Net earnings	$	310		$	170		$	1,509		$	1,244		$	3,233

Three Months Ended September 30, 2005

	WAMCO			WAMCO			WAMCO			Other
	30			31			33			Partnerships			Combined
Income from Portfolio Assets	$	475		$	407		$	1,900		$	1,775		$	4,557
Other income, net	5			8			—			21			34
Revenues	480			415			1,900			1,796			4,591
Interest and fees expense — affiliate	—			—			—			(225		)	(225		)
Interest and fees expense — other	(15		)	(281		)	(443		)	(10		)	(749		)
Provision for loan and impairment losses	(52		)	—			169			(52		)	65
Service fees — affiliate	(81		)	(76		)	(287		)	(254		)	(698		)
General, administrative and operating expenses	(75		)	(61		)	(192		)	(577		)	(905		)
Expenses	(223		)	(418		)	(753		)	(1,118		)	(2,512		)
Net earnings (loss)	$	257		$	(3	)	$	1,147		$	678		$	2,079

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

Nine Months Ended September 30, 2006

	WAMCO			WAMCO			WAMCO			Other
	30			31			33			Partnerships			Combined
Income from Portfolio Assets	$	1,995		$	1,524		$	4,418		$	11,825		$	19,762
Other income, net	18			30			48			1,360			1,456
Revenues	2,013			1,554			4,466			13,185			21,218
Interest and fees expense — affiliate	—			—			—			(467		)	(467		)
Interest and fees expense — other	(200		)	(584		)	(823		)	(814		)	(2,421		)
Provision for loan and impairment losses	(41		)	—			(60		)	(1,726		)	(1,827		)
Service fees — affiliate	(268		)	(225		)	(677		)	(1,871		)	(3,041		)
General, administrative and operating expenses	(287		)	(133		)	(335		)	(2,169		)	(2,924		)
Expenses	(796		)	(942		)	(1,895		)	(7,047		)	(10,680		)
Net earnings	$	1,217		$	612		$	2,571		$	6,138		$	10,538

Nine Months Ended September 30, 2005

	WAMCO			WAMCO			WAMCO			Other
	30			31			33			Partnerships			Combined
Income from Portfolio Assets	$	1,775		$	3,051		$	5,355		$	11,334		$	21,515
Other income, net	10			22			—			52			84
Revenues	1,785			3,073			5,355			11,386			21,599
Interest and fees expense — affiliates	—			—			(893		)	(652		)	(1,545		)
Interest and fees expense — other	(166		)	(911		)	(592		)	(81		)	(1,750		)
Provision for loan losses	(109		)	—			(506		)	(223		)	(838		)
Service fees — affiliate	(264		)	(435		)	(664		)	(1,134		)	(2,497		)
General, administrative and operating expenses	(320		)	(253		)	(435		)	(4,255		)	(5,263		)
Expenses	(859		)	(1,599		)	(3,090		)	(6,345		)	(11,893		)
Net earnings	$	926		$	1,474		$	2,265		$	5,041		$	9,706

Statements of operations for MinnTex Investment Partners LP for the three and nine month periods ended September 30, 2006 and 2005 follow:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Income from Portfolio Assets	$	353		$	988		$	1,239		$	4,090
Other income	—			3			3			8
Revenues	353			991			1,242			4,098
Service fees — affiliate	(30		)	(86		)	(111		)	(402		)
General, administrative and operating expenses	(2		)	(5		)	(13		)	(20		)
Expenses	(32		)	(91		)	(124		)	(422		)
Net earnings	$	321		$	900		$	1,118		$	3,676

FirstCity holds variable interests in certain Acquisition Partnerships, which would be characterized as variable interest entities (“VIE”), as defined in FIN 46R, Consolidation of Variable Interest Entities (“FIN 46R”). However, FirstCity is not deemed to be the primary beneficiary of any of these entities based on the criteria set forth in FIN 46R. At September 30, 2006, FirstCity’s maximum exposure to loss as a result of its involvement with the VIEs is $24.2 million.

At September 30, 2006, the Company had $16.0 million in Euro-denominated debt for the purpose of hedging a portion of the net equity investments in Europe. In general, the type of risk hedged relates to the foreign currency exposure of net investments in Europe caused by movements in Euro exchange rates. The Company designated the hedging relationship such that changes in the net investments being hedged are expected to be offset by corresponding changes in the values of the Euro-denominated debt.

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

Effectiveness of the hedging relationship is measured and designated at the beginning of each month by comparing the outstanding balance of the Euro-denominated debt to the carrying value of the designated net equity investments. The net foreign currency translation gain (loss) included in accumulated other comprehensive income relating to the Euro-denominated debt was ($1.7) million for the nine months ended September 30, 2006 and $1.2 million for the same period in 2005.

During the third quarter of 2006 FirstCity completed a total restructure of its investments in Mexico in a transaction which aligned FirstCity with American International Group, Inc. FirstCity received a payment of approximately $2 million of consulting fees and recorded a gain on sale of $1.1 million in the third quarter from the sale of certain assets by Cargill Financial Services International, Inc. and FirstCity affiliates as a result of this restructure. The net impact for the quarter from this transaction was $2.2 million net of expenses and intercompany eliminations. Subsequent to this transaction, Bidmex Holding LLC now owns 100% of the related Mexican investments, and FirstCity has a 9% senior and 6% subordinated equity investment in Bidmex Holding LLC. The Company will evaluate the subordinated investment for impairment quarterly.

(7) Segment Reporting

The Company is engaged in one reportable segment - Portfolio Asset acquisition and resolution. The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to face value and servicing and resolving such Portfolios in an effort to maximize the present value of the ultimate cash recoveries. The following is a summary of results of operations for the Portfolio Asset acquisition and resolution segment and reconciliation to earnings from continuing operations for the three and nine months ended September 30, 2006 and 2005.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Portfolio Asset Acquisition and Resolution:
Revenues:
Servicing fees	$	4,679		$	2,891		$	10,182		$	8,972
Income from Portfolio Assets	2,547			2,124			7,551			6,269
Interest income from affiliates	294			420			1,189			1,293
Interest income from loans receivable - other	17			—			17			—
Other	281			141			1,113			718
Total	7,818			5,576			20,052			17,252
Expenses:
Interest and fees on notes payable	1,799			918			5,455			2,646
Salaries and benefits	3,120			2,852			8,557			9,039
Provision (recovery) for loan and impairment losses	50			322			101			436
Occupancy, data processing, communication and other	2,002			1,223			4,194			3,522
Minority interest	(2		)	(3		)	(64		)	36
Total	6,969			5,312			18,243			15,679
Equity in earnings of investments	3,023			1,783			8,044			8,874
Gain on sale of interest in equity investments	2,378			—			2,405			—
Operating contribution before direct taxes	$	6,250		$	2,047		$	12,258		$	10,447
Operating contribution, net of direct taxes	$	6,218		$	2,020		$	12,095		$	10,263

Corporate Overhead:
Salaries and benefits, occupancy, professional and other income and expenses, net	1,251			1,328			3,768			4,202
Earnings from continuing operations	$	4,967		$	692		$	8,327		$	6,061

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

Revenues and equity in earnings of investments from the Portfolio Asset acquisition and resolution segment are attributable to domestic and foreign operations as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Domestic	$	4,953	$	4,692	$	16,344	$	15,418
Canada	17		—		17		—
Latin America	4,761		2,088		7,902		7,458
Europe	1,110		579		3,833		3,250
Total	$	10,841	$	7,359	$	28,096	$	26,126

Total assets for the Portfolio Asset acquisition and resolution segment and a reconciliation to total assets are as follows:

	September 30,		December 31,
	2006		2005
Cash	$	13,036	$	12,901
Portfolio acquisition and resolution assets:
Domestic	115,349		105,938
Latin America	28,220		19,764
Europe	27,463		27,699
Loans receivable and interest receivable - other	2,309		—
Deferred tax asset, net	20,101		20,101
Other non-earning assets, net	6,877		8,309
Discontinued mortgage assets	103		157
Total assets	$	213,458	$	194,869

(8) Earnings per Common Share

Basic net earnings per common share calculations are based upon the weighted average number of common shares outstanding. Potentially dilutive common share equivalents include warrants and employee stock options in the diluted earnings per common share calculations. Basic and diluted earnings from continuing operations per share were determined as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005


Earnings from continuing operations	$	4,967	$	692	$	8,327	$	6,061
Weighted average outstanding shares of common stock	11,104		11,298		11,239		11,278
Dilutive effect of:
Warrants	328		340		336		343
Employee stock options	279		370		300		391
Weighted average outstanding shares of common stock and common stock equivalents	11,711		12,008		11,875		12,012
Earnings from continuing operations per share:
Basic	$	0.45	$	0.06	$	0.74	$	0.54
Diluted	$	0.42	$	0.05	$	0.70	$	0.50

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

(9) Stock-Based Compensation

The Company has stock option and award plans for the benefit of key individuals, including its directors, officers and key employees. The plans are administered by a committee of the Board of Directors and provide for the grant of up to a total of 800,000 shares (net of shares cancelled and forfeited) of Common Stock. The Company previously had a 1995 Stock Option and Award Plan, and a 1996 Stock Option and Award Plan, which provided for a grant of up to 700,000 shares. Both plans expired in 2005 pursuant to their terms, with existing options remaining in accordance with the terms of each grant. Stock option awards are granted with an exercise price equal to the market price of FirstCity’s shares at the date of grant; those stock option awards generally vest 25% each year from the date of grant and have 10-year contractual terms. Certain stock options issued to non-employee directors were exercisable immediately.

FirstCity adopted SFAS 123(R) using the modified prospective transition method beginning January 1, 2006. Accordingly, during the three and nine month periods ended September 30, 2006, the Company recorded stock-based compensation expense for awards granted prior to, but not yet vested as of January 1, 2006, as if the fair value method required for pro forma disclosure under SFAS 123 were in effect for expense recognition purposes, adjusted for estimated forfeitures. For these awards, we recognized compensation expense using the straight-line amortization method. For stock-based awards granted after January 1, 2006, the Company recognizes compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. For these awards, FirstCity recognizes compensation expense using a straight-line amortization method. As SFAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for the three and nine month periods ended September 30, 2006 has been reduced for estimated forfeitures. When estimating forfeitures, FirstCity considers voluntary termination behaviors as well as trends of actual option forfeitures. The impact on the results of operations of recording stock-based compensation for the three and nine month periods ended September 30, 2006 and 2005 was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Amount of compensation cost recognized in income	$	221	$	—	$	467	$	—
Tax benefit recognized in income	$	—	$	—	$	—	$	—
Amount capitalized as part of an asset	$	—	$	—	$	—	$	—

SFAS 123(R) requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. As a result of substantial net operating loss carryforwards, the Company currently does not record deferred tax assets attributable to stock compensation costs nor does it utilize tax deductions for exercised options. Cash received from options exercised during the nine month periods ended September 30, 2006 and 2005 was $68 and $162, respectively.

The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on historical volatility of the Company’s stock. The Company estimated the expected term of unvested options by taking the average of the vesting term remaining and the contractual term of the option, as illustrated in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The following assumptions were used for each respective period:

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Weighted average grant date fair value	$	6.71		$	—		$	6.71		$	—
Volatility	82		%	0		%	82		%	0		%
Risk-free interest rate	4.88		%	0.00		%	4.88		%	0.00		%
Expected life in years	5			0			5			0
Dividend yield	Zero			Zero			Zero			Zero

A summary of stock option activity as of September 30, 2006 and changes during the period then ended is presented below:

					Weighted
					Average
			Weighted		Remaining
			Average		Contractual	Aggregate
			Exercise		Term	Intrinsic
	Shares		Price		(Years)	Value
Outstanding at January 1, 2006	755,850		$	7.02
Granted	35,000		9.84
Exercised	(9,750	)	6.93
Expired	—		—
Forfeited	(2,000	)	27.25
Outstanding at September 30, 2006	779,100		$	7.10	6.26	$	3,538
Exercisable at September 30, 2006	550,450		$	6.23	5.34	$	3,130

The total intrinsic value of stock options exercised during the three and nine month periods ended September 30, 2006 were $16 and $36, respectively. The total intrinsic value of stock options exercised during the three and nine month periods ended September 30, 2005 were $29 and $322, respectively. As of September 30, 2006, there was approximately $1.2 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted average period of 2.3 years.

A summary of the status and changes of FirstCity’s nonvested shares as of September 30, 2006, and changes during the nine months ended September 30, 2006 is presented below:

			Weighted-
			Average
			Grant-Date
	Shares		Fair Value
Nonvested at January 1, 2006	253,525		$	6.58
Granted	35,000		$	6.71
Vested	(59,875	)	$	5.52
Forfeited	—		—
Nonvested at September 30, 2006	228,650		$	6.88

Prior to the adoption of SFAS No. 123(R), FirstCity provided the disclosures required under SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosures. Employee stock-based compensation expense recognized under SFAS 123(R) was not reflected in the results of operations for the three and nine month periods ended September 30,

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

2005 for employee stock option awards, as all options were granted with an exercise price equal to the market value of the underlying common stock on the date of grant. Forfeitures of awards were recognized as they occurred. Previously reported amounts have not been restated.

The pro forma information for the three and nine month periods ended September 30, 2005 was as follows:

	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2005			2005
Net earnings to common stockholders, as reported	$	1,011		$	6,283
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(76		)	(226		)
Pro forma net earnings to common stockholders	$	935		$	6,057
Net earnings per common share:
Basic — as reported	$	0.09		$	0.56
Basic — pro forma	$	0.08		$	0.54
Diluted — as reported	$	0.08		$	0.52
Diluted — pro forma	$	0.08		$	0.50

(10) Income Taxes

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

(11) Commitments and Contingencies

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

In August 2000, FirstCity Consumer Lending Corporation (“Consumer Corp.”) and FirstCity Funding LP (“Funding LP”) contributed all of the assets utilized in the operations of the automobile finance operation to Drive Financial Services LP (“Drive”) pursuant to the terms of a Contribution and Assumption Agreement by and between Consumer Corp. and Drive, and a Contribution and Assumption Agreement by and between Funding LP and Drive (collectively, the “Contribution Agreements”). Drive assumed substantially all of the liabilities of the automobile finance operation as set forth in the Contribution Agreements. In addition, pursuant to the terms of a Securities Purchase Agreement dated as of August 18, 2000 (the “2000 Securities Purchase Agreement”), by and among FirstCity, Consumer Corp., Funding LP, and FirstCity Funding GP Corp. (“Funding GP”), IFA Drive GP Holdings LLC (“IFA-GP”) and IFA Drive LP Holdings LLC (“IFA-LP”); FirstCity, Consumer Corp., Funding LP and Funding GP made various warranties concerning (i) their respective organizations, (ii) the automobile finance operation conducted by Consumer Corp. and Funding LP, and (iii) the assets transferred by Consumer Corp. and Funding LP to Drive. The Company, Consumer Corp., Funding LP and Funding GP also agreed to indemnify BoS (USA), IFA-GP and IFA-LP from damages resulting from a breach of any representation or warranty contained in the 2000 Securities Purchase Agreement or otherwise made by the Company, Consumer Corp. or Funding LP in connection with the transaction. All indemnity obligations under the 2000 Securities Purchase Agreement terminated

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

after thirty (30) months, with the exception of tax-related representations and warranties which survive for a period of seven (7) years from August 25, 2000 (the “2000 Closing Date”). Neither the Company, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the 2000 Securities Purchase Agreement until the aggregate amount payable exceeds $.25 million, and then only for the amount in excess of $.25 million in the aggregate; however certain representations and warranties are not subject to this $.25 million threshold. Management of the Company believes that FirstCity will not have to pay any amounts related to these agreements.

On September 21, 2004, FirstCity, Consumer Corp., Funding LP and Funding GP entered into a Securities Purchase Agreement (the “2004 Securities Purchase Agreement”) to sell a 31% beneficial ownership interest in Drive and its general partner, Drive GP LLC, to IFA GP, IFA LP and Drive Management LP (“MG-LP”). In the 2004 Securities Purchase Agreement, FirstCity, Consumer Corp., Funding LP and Funding GP made various representations and warranties concerning (i) their respective organizations, (ii) their power and authority to enter into the 2004 Securities Purchase Agreement and the transactions contemplated therein, (iii) the ownership of the limited partnership interests in Drive by Funding LP, (iv) the ownership of membership interests in Drive-GP by Consumer Corp., and (iv) the capital structure of Funding LP. FirstCity, Consumer Corp., Funding LP and Funding GP also agreed to indemnify BoS (USA), IFA-GP, IFA-LP and MG-LP from damages resulting from a breach of any representation or warranty contained in the 2004 Securities Purchase Agreement or otherwise made by FirstCity, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligations under the 2004 Securities Purchase Agreement survive for a maximum period of five (5) years from November 1, 2004. Neither FirstCity, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the 2004 Securities Purchase Agreement until the aggregate amount payable exceeds $.25 million, and then only for the amount in excess of $.25 million in the aggregate; however, certain representations and warranties are not subject to this $.25 million threshold. Management of the Company believes that FirstCity will not have to pay any amounts relating to these representations and warranties.

FirstCity has minority interests in various limited-life partnerships with a carrying value of $.8 million at September 30, 2006. The estimated amount that would be paid to the minority interest holder if the instruments were to be settled at September 30, 2006 is $2.6 million.

Financial Security Assurance Inc. (“FSA”), in its capacity as certificate insurer under the Pooling and Servicing Agreement (the “Pooling and Servicing Agreement”), relating to the FirstCity Capital Home Equity Loan Trust 1998-2 (the “Trust”), dated as of November 1, 1998 by and among FC Capital Corp., in its capacities as seller and master servicer, and The Bank of New York, in its capacity as trustee (the “Trustee”), made demand on FC Capital Corp. to repurchase certain loans that were subject to repurchase due to fraud of third parties in connection with the origination of the loans. FC Capital Corp. agreed to provide a letter of credit in the amount of the repurchase price for the loans in lieu of being required to purchase the loans from the Trust. FirstCity has obtained and delivered to FSA, for the benefit of FC Capital Corp., an irrevocable letter of credit in the amount of $510,000 from the Bank of Scotland. Pursuant to the agreement with FSA, FC Capital Corp. will have the option to purchase the loans for $510,000 prior to a call under the letter of credit.

During the period from December 1998 to March 2005, FirstCity Mexico, 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 and commercial non-performing loan portfolios from financial institutions in Mexico (the “Mexican Portfolios”). Each portfolio was acquired by a Mexican limited liability company (each a “Mexican SRL”) that was owned by a Delaware limited 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 Accident Insurance Company, affiliates of AIG Global Asset Management Holdings Corp. (collectively the “AIG Entities”) formed Bidmex Holding, LLP for the purpose of acquiring the Mexican Portfolios by purchasing the interests of Cargill and SMIP in eleven of the Mexican limited liability companies (the “LLCs”) and purchasing the loan portfolio of one of the Mexican limited liability companies (the “Purchased Portfolio”) for an aggregate purchase price of $1,298,820,000 Mexican Pesos, which was the equivalent of $119,258,457 U.S. Dollars as of that date (the “Aggregate Purchase Price”). SMIP acquired 15% of the membership interests in Bidmex Holding, LLC. A 9% interest acquired by SMIP is of equivalent standing to membership interests held by the AIG affiliates representing 85% of the membership interests. The remaining 6% membership interest acquired by SMIP is subordinate to the other owners of interests in Bidmex Holding, LLC, who will receive the return of and a return on their contribution equivalent to an 9% internal rate of return with respect to their interests prior to SMIP receiving the return of and a return on its capital contribution equivalent to a 9% internal rate of return with respect to its 6% interest.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

Also on August 8, 2006, an Interest Purchase and Sale Agreement was entered into by and among Bidmex Holding, LLC (“Buyer”), as buyer, and SMIP and CFSI (collectively, the “Sellers”), as seller, and eleven of the LLCs and the AIG entities as additional parties. In the Interest Purchase and Sale Agreement, the Sellers and the LLCs made various representations and warranties concerning (i) the existence and ownership of the LLCs and the related Mexican SRLs, (ii) the assets and 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 to indemnify the Buyer and AIG Entities from damages resulting from a breach of any representation or warranty contained in the Interest Purchase and Sale Agreement on a several and not joint basis according to their respective ownership percentages in each LLC as to any matter related to a particular LLC, or on the basis of 80% to CFSI and 20% to SMIP as to any matter that could not be identified to a particular LLC. The indemnity obligation under the Interest Purchase and Sale Agreement survives for a period of the statute of limitations for matters related to taxes, existence and authority, capitalization and good standing of the LLCs and SRLs and for a period of two years from August 8, 2006, the closing date with respect to all other representations and warranties. The Sellers are not required to make any payments as a result of the indemnity provisions of the Interest Purchase and Sale Agreement until the aggregate amount payable under that agreement and the Asset Purchase Agreement exceeds $250,000; however, claims related to taxes and fraud are not subject to this $250,000 threshold. The Interest Purchase and Sale Agreement limits the liability of the Sellers for indemnifiable losses under the Interest Purchase and Sale Agreement and the Asset Purchase Agreement to the Aggregate Purchase Price (without duplication of amounts recovered pursuant to the terms of the Asset Purchase Agreement).

Also on August 8, 2006, Bidmex Holding, LLC entered into an Agreement for the Onerous Transfer of Loans and Litigious Rights (the “Asset Purchase Agreement”) between and among Residencial Oeste, S. de R.L. de C.V., as seller (the “Asset Seller”), an affiliate of CFSI and SMIP, Residencial Oeste 2, S. de R.L. de C.V., as purchaser (the “Asset Purchaser”), and CFSI, SMIP, and Bidmex Acquisition, LLC, the parent of the Asset Purchaser, as additional parties. The Asset Purchase Agreement provides for the sale of the loan portfolio owned by the Seller to the Purchaser for a purchase price of $109,514,735 Mexican Pesos, the equivalent of $10,055,711 on the closing date, which purchase price is part of the Aggregate Purchase Price. In the Asset Purchase Agreement, the Asset Seller and the Sellers made various representations and warranties concerning (i) the existence and ownership of the Seller, (ii) the ownership of the loan portfolio, (iii) taxes related to periods arising prior to the closing date, and (iv) the existence of the loans comprising the loan portfolio and other matters related to the loan portfolio. The Asset Seller agreed to indemnify the Asset Purchaser from damages resulting from a breach of any representation or warranty. The indemnity obligation under the Asset Purchase Agreement survives for a period of the statute of limitations for matters related to existence and ownership of the Seller, ownership of the loans, and taxes for periods prior to August 8, 2006, and for a period of two years from August 8, 2006, with respect to all other representations and warranties. The Seller is not required to make any payments as a result of the indemnity provisions of the Asset Purchase Agreement 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 the liability of the Sellers for indemnifiable losses under the Asset Purchase Agreement to the Aggregate Purchase Price.

In connection with the 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, granted a put option dated August 8, 2006 to Bidmex Holding, LLC, as optionee, pursuant to the terms of a Put Option Agreement by and among RCM, Bidmex Holding, LLC, and Bidmex 6, LLC, the parent entity of RCM and SMIP. RCM granted a put option to Bidmex Holding, LLC related to the purchase of any loan of Solución de Activos Residenciales, S. de R.L. de C.V. or Solución de Activos Comerciales, S. de R.L. de C.V., each a Mexican SRL, if any borrowing on a loan made by those entities has filed or files a challenge in a legal proceeding related to any such loan based on, in addition to any other defense claims, a claim on grounds related to the Mexican Supreme Court Ruling that has put into issue the actions required for transfer of loans by Mexican financial institutions after August 2003, provided that any such challenge is asserted on or before the earlier of (i) the reversal of the Supreme Court Ruling, or (ii) February 1, 2008. The purchase price for any loan under the put option is to be the allocated purchase price set by the parties for the loan, plus certain expenses related to the transfer and collection of the loan, plus any taxes paid or payable with respect to the cash flow from each loan, reduced by any cash flow received by Bidmex Holding, LLC with respect to the loan.

Also in connection with the Interest Purchase and Sale Agreement, FirstCity entered executed a Guaranty dated as of August 8, 2006, in favor of Bidmex Holding, LLC, Asset Purchaser, and the AIG Entities, pursuant to which FirstCity guaranteed that FirstCity would cause and enable SMIP to perform its obligations under the Interest Purchase and Sale Agreement and Asset Purchase Agreement, that SMIP would perform and fulfill its obligations under those agreements and also that the payments provided for in those agreements would be promptly paid when due. FirstCity’s obligations under the Guaranty are subject to any beneficiary obtaining judgment against SMIP regarding the performance of any obligation for which such beneficiary is seeking FirstCity’s guaranty.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

On September 22, 2006, FirstCity NPL S.A., a Chilean affiliate of FirstCity Chile Ltda and FirstCity, entered into a revolving line of credit with a maximum loan amount in Chilean pesos equivalent to $10,000,000 U.S. Dollars with CORPBANCA Sociedad Anónima Bancaria (“CB”) to finance the purchase of delinquent and due accounts. The revolving line of credit was structured by Corpbanca Asesorías Financieras S.A. (“CAF”). Pursuant to the terms of the credit facility, FirstCity NPL S.A. was required to provide a stand-by letter of credit from Bank of Scotland that would satisfy the loan balance upon demand. FirstCity obtained a letter of credit in the amount of $8,000,000 from Bank of Scotland under the terms of FirstCity’s revolving acquisition facility with Bank of Scotland. In the event that a demand is made under the $8,000,000 letter of credit, FirstCity is required to reimburse Bank of Scotland by making payment to Bank of Scotland for all amounts disbursed or to be disbursed by Bank of Scotland under the letter of credit.

(12) Equity

On August 14, 2006, FirstCity announced that the Board of Directors authorized a stock repurchase plan providing for the purchase of up to one million shares of the company’s common stock, with purchases to be made over a period of twelve months. In the third quarter of 2006, FirstCity repurchased 530,300 shares of the Company’s common stock on the open market for a total of $5.6 million.

(13) Subsequent Events

On November 1, 2006, FirstCity and Bank of Scotland, as agent for the lenders, entered into an Amendment No. 4 to Revolving Credit Agreement, dated as of October 31, 2006 (the “Amendment”). The Amendment amended the existing $96,000,000 revolving credit facility entered into on November 12, 2004, to increase the revolving credit facility to $175,000,000 that matures on November 12, 2010. The Amendment made the following changes to the existing loan facility that is used to finance the senior debt and equity portion of portfolio and asset purchases made by FirstCity and to provide for the issuance of letters of credit and working capital loans: (i) increased the maximum outstanding amount of loans and letters of credit issued under the loan facility that may be outstanding under the loan facility to $175,000,000; (ii) reduced the available interest rates under the loan facility by 0.5% per annum; (iii) increased the maximum value for assets that can be included in the borrowing base from the acquisition of portfolio assets in certain countries as follows (a) Mexico increased to $30,000,000, (b) Brazil increased to $5,000,000, (c) Chile to $10,000,000, and (d) Argentina or Uruguay to $6,000,000; (iv) increased the limit for Loans that can be borrowed in Euros under the loan facility to $50,000,000; (v) increased the maximum amount of letters of credit that can be issued under the loan facility to $40,000,000; (vi) increased the maximum amount of working capital loans that can be outstanding under the loan facility to $35,000,000; (vii) provided for an additional upfront fee paid to Bank of Scotland in the amount of $830,000; (viii) amended the requirement for the ratio of EBITDA to Interest Coverage to be not less than 1.50 to 1.00 for each twelve month period, and added a new covenant that FirstCity must maintain a ratio of Cumulative Current Recovered and Projected Collections to Cumulative Original Projected Collections of not less than 0.90 to 1.00; and (ix) extended the maturity date for the loan facility to November 12, 2010. The obligations of FirstCity under the Revolving Credit Agreement are guaranteed by substantially all of the wholly-owned subsidiaries of FirstCity and are secured by security interests in substantially all of the assets of FirstCity and its wholly-owned subsidiaries.

In October 2006, FirstCity invested $16.0 million in the form of a loan to a domestic real estate investment partnership, which will be included on the consolidated balance sheets as loans receivable — other.

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

Overview

FirstCity is a financial services company engaged in the acquisition and resolution of portfolios of assets or single assets (collectively referred to as “Portfolio Assets”). The Portfolio Asset acquisition and resolution business involves acquiring Portfolio Assets at a discount to face value and servicing and resolving such portfolios in an effort to maximize the present value of the ultimate cash recoveries.

During the third quarter of 2006, the Company recorded earnings to common stockholders on a diluted basis of $5.0 million or $.42 per common share. The operating contribution from the Portfolio Asset acquisition and resolution segment was $6.2 million compared with $2.0 million for the same period in 2005. During the third quarter of 2006, the Company received $2 million in consulting fees related to the sale of certain assets in Latin America which occurred as a result of the restructure of the Company’s investments in Mexico. In addition, the Company recorded a gain on the sale of equity investments of $2.4 million. This gain consisted of: 1) one domestic equity investment resulting in a gain of $1.3 million and; 2) a partial sale of Latin American equity investments resulting in a gain of $1.1 million.

The Company invested $31.5 million in portfolio acquisitions during the quarter bringing the year to date acquisitions to $73.8 million. In addition to the portfolio acquisitions during this period, FirstCity invested $1.4 million in partnerships as well as $2.3 million in the form of a loan to a Canadian real estate development company. As a result, earning assets (equity investment, inventory, loans receivable, and interest receivable) increased to $173.3 million.

Management remains positive on the outlook of the Company. The acquisitions for the quarter contributed to a $21.1 million net increase in the primary earning assets base of the Company and FirstCity is currently evaluating 33 different transactions representing over $3 billion in face value of assets.

During the third quarter FirstCity completed a total restructure of its investments in Mexico in a transaction which aligned FirstCity with American International Group, Inc. (“AIG”). The details of the restructure are provided in Note 6 to the Consolidated Financial Statements.

Subsequent to quarter end, the Company was able to secure an increase in its revolving line of credit with the Bank of Scotland up to a maximum of $175 million. The original line of credit was $96 million and, in accordance with the terms of the agreement, had been reduced to $90.7 million. As a result of the amended agreement, the net increase in availability of funds through the line of credit is $84.3 million. In addition, the interest rate decreased 50 basis points.

The Company’s financial results are affected by many factors including levels of, and fluctuations in, interest rates, fluctuations in the underlying values of real estate and other assets, the timing of, and ability to, liquidate assets, and the availability and prices for loans and assets acquired in all of the Company’s businesses. The Company’s business and results of operations are also affected by the availability of financing with terms acceptable to the Company and the Company’s access to capital markets, including the securitization markets.

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

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Components of the results for the three and nine month periods ended September 30, 2006 and 2005, respectively, are detailed below (dollars in thousands except per share data):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
	(unaudited)						(unaudited)
Portfolio Asset Acquisition and Resolution	$	6,218		$	2,020		$	12,095		$	10,263
Corporate overhead	(1,251		)	(1,328		)	(3,768		)	(4,202		)
Earnings from continuing operations	4,967			692			8,327			6,061
Earnings (loss) from discontinued operations, net of taxes	—			319			(75		)	222
Net earnings to common stockholders	$	4,967		$	1,011		$	8,252		$	6,283
Diluted earnings per common share	$	0.42		$	0.08		$	0.69		$	0.52

Results of Operations

The following discussion and analysis is based on the segment reporting information presented in note 7 of the Consolidated Financial Statements of the Company and should be read in conjunction with the Consolidated Financial Statements (including the Notes thereto) included elsewhere in this Quarterly Report on Form 10-Q.

Third Quarter 2006 Compared to Third Quarter 2005

The Company reported net earnings of $5.0 million in the third quarter of 2006 compared to $1.0 million in the third quarter of 2005. On a per share basis, diluted net earnings to common stockholders were $.42 in the third quarter of 2006 compared to $.08 in the third quarter of 2005.

Portfolio Asset Acquisition and Resolution

The operating contribution from the Portfolio Asset acquisition and resolution segment was $6.2 million in the third quarter of 2006 compared to $2.0 million in the third quarter of 2005. FirstCity invested $31.5 million in Portfolio acquisitions during the third quarter of 2006, of which $8.2 million and $23.3 million were acquired through Acquisitions Partnerships and wholly-owned Portfolios, respectively, compared to $18.1 million in the third quarter of 2005, which was comprised of $14.7 million through Acquisition Partnerships and $3.4 million through wholly-owned Portfolios. The quarter-end investment in Portfolio Assets increased to $78.9 million at September 30, 2006, from $43.2 million at September 30, 2005, as a result of acquisitions of approximately $56.0 million since the third quarter of 2005. In addition to the portfolio acquisitions during the third quarter of 2006, FirstCity invested $2.3 million in the form of a loan to a Canadian real estate development company.

Servicing fee revenues. Servicing fee revenues increased to $4.7 million in the third quarter of 2006 compared to $2.9 million in the third quarter of 2005 primarily due to a payment of $2.0 million from the sale of a portfolio in Latin America.

Income from Portfolio Assets. Income from Portfolio Assets increased to $2.5 million in the third quarter of 2006 from $2.1 million in the third quarter of 2005 due to increased purchases of portfolio assets and an increase in the resolution of portfolio assets. FirstCity’s average investment in wholly owned domestic portfolio assets was $62 million and $42.8 million during the third quarters of 2006 and 2005, respectively.

Interest income from affiliates. Interest income from affiliates decreased to $.3 million in the third quarter of 2006 from $.42 million in the third quarter of 2005 due to the conversion of loans to equity as part of the restructure of investments in Mexico.

Other income. Other income increased to $.28 million in the third quarter of 2006 from $.1 million in the third quarter of 2005 primarily due to a reduction in the estimated carrying value of loans payable to certain members of management by $.16 million.

Expenses. Operating expenses were $7.0 million and $5.3 million in the third quarters of 2006 and 2005, respectively. Below is a discussion of the major components.

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Interest and fees on notes payable were $1.8 million and $.9 million in the third quarters of 2006 and 2005, respectively. The average debt for the quarter increased to $84.9 million in the third quarter of 2006 from $52.4 million in the third quarter of 2005, and the average cost of borrowing increased to 8.47% in 2006 compared to 7.0% in 2005.

Salaries and benefits increased 9% to $3.1 million in the third quarter of 2006 from $2.9 million in the third quarter of 2005. The total number of personnel within the Portfolio Asset acquisition and resolution segment were 176 and 202 at September 30, 2006 and 2005, respectively.

The provision for loan and impairment losses was $50,000 and $322,000 at September 30, 2006 and 2005, respectively.

Occupancy, data processing, communication and other expenses increased to $2.0 million for the third quarter of 2006 from $1.2 million in the third quarter of 2005 primarily due to increased legal fees related to the restructure of the Mexican Investment Platform.

Minority interest was minimal from period to period.

Equity in earnings of investments. Equity in earnings of investments increased 69.5% to $3.0 million in the third quarter of 2006 compared to $1.8 million in the third quarter of 2005. Equity earnings in Acquisition Partnerships increased 51.5% to $3.0 million in the third quarter of 2006 from $2.0 million in the third quarter of 2005. Following is a discussion of equity earnings from Acquisition Partnerships by geographic region.

· Domestic — Equity in earnings of domestic Acquisition Partnerships was $1.3 million in the third quarter of 2006 compared to $1.8 million in the third quarter of 2005. These partnerships reflected net earnings of $3.1 million in the third quarter of 2006 compared to $3.6 million in 2005. Income from Portfolio Assets in 2005 was generated primarily from loans acquired prior to 2005, whereas income in 2006 was generated primarily from loans acquired after 2004. Although collections on Portfolio Assets increased to $28 million in the third quarter of 2006 from $20 million in 2005, income from Portfolio Assets acquired after 2004 is less sensitive to collections than from Portfolio Assets acquired prior to 2005. For Portfolios acquired after 2004, income is recognized ratably over the remaining life of the Portfolio based on an expected yield. For nonperforming loans acquired prior to 2005, income is recognized to the extent that collections exceed a pro rata portion of allocated cost from the pool.

· Latin America — Equity in earnings of Acquisition Partnerships located in Latin America (primarily Mexico) were $.8 million in the third quarter of 2006 compared to equity in losses of $.4 million in 2005. These partnerships reflected net earnings of $6.3 million in the third quarter of 2006 compared to net losses of $7.5 million in 2005. The partnerships recorded $4.7 million of foreign exchange gains in the third quarter of 2006 compared to $.1 million of foreign exchange gains in 2005 (of which $.8 million gains and $.03 million gains were included in equity earnings, respectively). During the third quarter of 2006, the partnerships recorded provisions net of recoveries of allowance for loan losses of $.35 million compared to $5.2 million during the third quarter of 2005. Interest expense of $3.6 million and $2.5 million were recorded in the third quarter of 2006 and 2005, respectively. This interest is owed to affiliates of the investors of these partnerships, of which FirstCity recorded $.16 million and $.4 million as interest income in the third quarters of 2006 and 2005, respectively. FirstCity eliminated substantially all of its loans receivable from the Mexican acquisition partnerships as a result of the restructure of the Mexican Investment Platform during the third quarter of 2006.

· Europe — Equity in earnings of Acquisition Partnerships located in Europe increased to $.9 million in the third quarter of 2006 compared to $.6 million in 2005 primarily due to collections related to portfolio assets acquired in the fourth quarter of 2005. FirstCity recorded $.12 million and $.2 million in foreign currency transaction gains (included in other expenses) relating to investments in Europe during the third quarter of 2006 and 2005, respectively.

Gain on sale of equity investments. Gain on sale of equity investments of $2.4 million was recorded in the third quarter of 2006. This gain consisted of: 1) the sale of one domestic equity investment resulting in a gain of $1.3 million and; 2) a partial sale of twelve Latin American equity investments to AIG resulting in a gain of $1.1 million in accordance with the restructuring of the investments in Mexico.

Other Items Affecting Operations

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

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Corporate overhead. Corporate overhead expenses remained flat at $1.3 million in the third quarter of 2006 compared to $1.3 million in the third quarter of 2005.

Income taxes. Provision for income taxes was ($4,000) and $79,000 in the third quarters of 2006 and 2005, respectively, and related primarily to state income taxes during both periods. During the third quarter of 2006, the accrual rate for state and federal income taxes was adjusted to reflect lower anticipated payments. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that the Company believes are available. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in the third quarters of either 2006 or 2005.

Discontinued Operations. There were no additional losses from discontinued mortgage operations during the third quarter of 2006 compared to $.3 million in the third quarter of 2005. At September 30, 2006, the only asset remaining from discontinued mortgage operations is an investment security resulting from the retention of a residual interest in a securitization transaction.

Earnings from discontinued consumer operations were $.6 million in the third quarter of 2005, which reflects the reversal of estimated state tax provisions related to the sale of Drive.

First Nine Months of 2006 Compared to First Nine Months of 2005

The Company reported earnings from continuing operations of $8.3 million in the first nine months of 2006 compared to $6.1 for the same period of 2005. Net earnings to common stockholders were $8.3 million in the first nine months of 2006 compared to $6.3 million in the first nine months of 2005. On a per share basis, diluted net earnings to common stockholders were $.69 in the first nine months of 2006 compared to $.52 in the first nine months of 2005.

Portfolio Asset Acquisition and Resolution

The operating contribution in the first nine months of 2006 was $12.1 million compared to $10.3 million for the same period last year. FirstCity purchased $159.1 million of Portfolio Assets during the first nine months of 2006 ($105.0 million through Acquisition Partnerships), compared to $63.9 million in acquisitions in the first nine months of 2005. FirstCity’s investment in these acquisitions was $73.8 million and $36.4 million in the first nine months of 2006 and 2005, respectively. FirstCity’s investment in wholly-owned Portfolio Assets increased to $78.9 million from $43.2 million at September 30, 2006 and 2005, respectively.

Servicing fee revenues. Servicing fee revenues increased 13.5% to $10.2 million in the first nine months of 2006 from $9.0 million in the first nine months of 2005. Service fees from the Mexican partnerships increased by $1.1 million, or 18%, as a result of $2.0 million received from the sale of certain assets in Latin America which occurred as a result of the restructure of the Company’s investments in Mexico, offset by efforts to reduce operating costs in Mexico. For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. Service fees from the domestic Acquisition Partnerships increased slightly to $2.8 million in the first nine months of 2006 compared to $2.7 million in the same period in 2005.

Income from Portfolio Assets. Income from Portfolio Assets increased 20.4% to $7.6 million in the first nine months of 2006 compared to $6.3 million in the first nine months of 2005, primarily due to increased resolution of portfolio assets. FirstCity’s average investment in wholly-owned domestic portfolio assets was $54.1 million and $38.7 million during the first nine months of 2006 and 2005, respectively.

Interest income from affiliates. Interest income from affiliates decreased slightly to $1.2 million in the first nine months of 2006 and $1.3 million in the first nine months of 2005.

Other income. Other income was $1.1 million in the first nine months of 2006 compared to $.7 million in 2005, primarily due to a reduction in the estimated carrying value of loans payable to certain members of management by $.3 million.

Expenses. Operating expenses were $18.2 million in the first nine months of 2006 compared to $15.7 million in the first nine months of 2005. The following is a discussion of the major components.

Interest and fees on notes payable increased to $5.5 million in the first nine months of 2006 from $2.6 million in the first nine months of 2005. The average debt for the period increased to $87.0 million in the first nine months of 2006 from $51.2 million in the first nine months of 2005, and the average cost of borrowing increased to 8.36% in 2006 from 6.9% in 2005.

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Salaries and benefits decreased to $8.6 million in the first nine months of 2006 from $9.0 million in the first nine months of 2005. Total personnel within the Portfolio Asset acquisition and resolution segment were 176 and 202 at September 30, 2006 and 2005, respectively.

The provision for loan and impairment losses was $.10 million in the first nine months of 2006 compared to $.44 million in 2005.

Occupancy, data processing, communication and other expenses increased to $4.2 million in the first nine months of 2006 compared to $3.5 million in the first nine months of 2005 primarily due to increased legal fees related to the restructure of the Mexican Investment Platform.

Equity in earnings of investments. Equity in earnings of investments decreased 9% to $8.0 million in the first nine months of 2006 compared to $8.9 million in the first nine months of 2005. Equity earnings in Acquisition Partnerships decreased 7% to $7.8 million in the first nine months of 2006 from $8.4 million in the first nine months of 2005. Equity in earnings of servicing entities decreased 52% to $.2 million in the first nine months of 2006 from $.5 million in the first nine months of 2005. Following is a discussion of equity earnings in Acquisition Partnerships by geographic region. See note 6 to the consolidated financial statements for a summary of revenues and earnings of the Acquisition Partnerships and equity in earnings of the Acquisition Partnerships.

· Domestic — Equity in earnings of domestic Acquisition Partnerships decreased 14.5% to $5.1 million in the first nine months of 2006 from $6.0 million in the first nine months of 2005 primarily as a result of timing. These partnerships reflected net earnings of $11.1 million in the first nine months of 2006 compared to $13.8 million in the first nine months of 2005. Income from Portfolio Assets in 2005 was generated primarily from loans acquired prior to 2005, whereas income in 2006 was generated primarily from loans acquired after 2004. Although collections on Portfolio Assets increased to $95 million in the first nine months of 2006 from $72 million in the first nine months of 2005, income from Portfolio Assets acquired after 2004 is less sensitive to collections than from Portfolio Assets acquired prior to 2005. For Portfolios acquired after 2004, income is recognized ratably over the remaining life of the Portfolio based on an expected yield. For nonperforming loans acquired prior to 2005, income is recognized to the extent that collections exceed a pro rata portion of allocated cost from the pool.

· Latin America — Equity in losses of Latin American Acquisition Partnerships were $.3 million in the first nine months of 2006 compared to $.3 million in 2005. These partnerships reflected losses of $6.0 million in the first nine months of 2006 compared to losses of $4.8 million in 2005. Although the revenues were higher compared to the previous period, the partnerships recorded foreign exchange losses of $8.6 million in the first nine months of 2006 compared to gains of $9.2 million in 2005 (of which $.30 million losses and $.74 million gains are included in equity earnings, respectively). In addition, provisions net of recoveries of allowance for loan losses of $.9 million were recorded in the first nine months of 2006 compared to $6.6 million for the same period in 2005. Interest expense of $8.0 million and $8.1 million were recorded during the first nine months of 2006 and 2005, respectively. This interest is owed to the investors of these partnerships, of which FirstCity recorded $.8 million in 2006 and $1.1 million in 2005 as interest income. FirstCity eliminated substantially all of its loans receivable from the Mexican acquisition partnerships as a result of the restructure of the Mexican Investment Platform during the third quarter of 2006.

· Europe — Equity in earnings of Acquisition Partnerships located in Europe was $3.0 million in the first nine months of 2006 compared to $2.6 million in 2005 primarily due to collections related to portfolio assets acquired in the fourth quarter of 2005. During the first nine months of 2006 and 2005, FirstCity also recorded $.8 million and $.7 million, respectively, in foreign currency transaction gains (included in other expenses) relating to investments in Europe.

Gain on sale of equity investments. Gain on sale of equity investments was recorded in the first nine months of $2.4 million. This gain primarily consisted of: 1) one domestic equity investment resulting in a gain of $1.3 million and; 2) a partial sale of twelve Latin American equity investments to AIG resulting in a gain of $1.1 million in accordance with the restructuring of the Mexican Investment Platform.

Other Items Affecting Operations

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

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Corporate interest and overhead. Corporate overhead expenses decreased 10.3% to $3.8 million in the first nine months of 2006 from $4.2 million in the first nine months of 2005, primarily due to decreased salaries and legal and accounting fees.

Income taxes. Provision for income taxes was $.14 million in the first nine months of 2006 compared to $.3 million in the first nine months of 2005 and related primarily to state income taxes. Federal income taxes are provided at a 35% rate applied to taxable income or loss and are offset by NOLs that the Company believes are available. The tax benefit of the NOLs is recorded in the period during which the benefit is realized. The Company recorded no deferred tax provision in either of the first nine months of 2006 or 2005.

Discontinued Operations. Discontinued operations include a net loss from mortgage operations of $75,000 in the first nine months of 2006 compared to $.3 million in the first nine months of 2005. At September 30, 2006, the only asset remaining from discontinued mortgage operations is an investment security resulting from the retention of a residual interest in a securitization transaction.

Financial Condition

Major changes in FirstCity’s financial condition resulted from the following:

Consolidated assets of $213.5 million at September 30, 2006, were $18.6 million higher than that at December 31, 2005 primarily due to increases in Portfolio Assets offset by decreases in Loans Receivable. Portfolio Assets increased by $29.6 million as a result of acquisitions made during 2006. Loans Receivable from Acquisition Partnerships held for investment decreased by $12.5 million primarily due to the restructuring of loans receivable from Mexican Acquisition Partnerships to equity investments.

Consolidated liabilities of $111.8 million as of September 30, 2006, were $15.9 million higher than that at December 31, 2005. Total notes payable increased by $15.7 million and reflected advances of $106.6 million primarily for portfolio acquisitions, net of repayments of $91.9 million.

Portfolio Asset Acquisition and Resolution

Aggregate acquisitions by the Company are as follows (in thousands):

	Purchase		FirstCity
	Price		Investment
First nine months of 2006	$	159,073	$	73,781
Total 2005	146,581		71,405
Total 2004	174,139		59,762
Total 2003	129,192		22,944
Total 2002	171,769		16,717
Total 2001	224,927		24,319

The following table presents selected information regarding the revenues and expenses of the Company’s Portfolio Asset acquisition and resolution business (in thousands):

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Analysis of Selected Revenues and Expenses
Portfolio Asset Acquisition and Resolution

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Portfolio Assets and Loans Receivable:
Average investment in Portfolio Assets and loans receivable:
Domestic	$	64,192		$	44,568		$	56,172		$	40,305
Canada	573			—			229			—
Latin America	6,519			17,766			12,774			18,548
Europe	2,645			509			2,158			517
Total	$	73,929		$	62,843		$	71,333		$	59,370
Income from Portfolio Assets and loans receivable:
Domestic	$	2,640		$	2,189		$	7,797		$	6,445
Canada	17			—			17			—
Latin America	155			349			834			1,096
Europe	46			7			109			22
Total	$	2,858		$	2,545		$	8,757		$	7,563
Average return (annualized):
Domestic	16.5		%	19.6		%	18.5		%	21.3		%
Canada	11.9		%	n/a			9.9		%	n/a
Latin America	9.5		%	7.9		%	8.7		%	7.9		%
Europe	7.0		%	5.5		%	6.7		%	5.7		%
Total	15.5		%	16.2		%	16.4		%	17.0		%
Servicing fee revenues:
Domestic partnerships:
Servicing fee revenue	$	825		$	751		$	2,798		$	2,725
Average servicing fee %	3.0		%	3.8		%	2.9		%	3.8		%
Latin American partnerships:
Servicing fee revenue	$	1,883		$	2,039		$	5,243		$	5,935
Average servicing fee %	6.6		%	13.8		%	9.1		%	12.1		%
Incentive service fees	$	1,971		$	101		$	2,141		$	312
Total Service Fees:
Servicing fee revenue	4,679			2,891			10,182			8,972
Average servicing fee %	8.3		%	8.4		%	6.7		%	7.4		%
Collections:
Domestic	$	27,898		$	19,781		$	95,007		$	72,008
Latin America	28,325			14,749			57,529			48,924
Europe	11,049			12,477			40,164			41,463
Subtotal	67,272			47,007			192,700			162,395
Wholly owned	8,823			5,804			30,970			19,735
Total	$	76,095		$	52,811		$	223,670		$	182,130
Personnel:
Personnel expenses	$	3,120		$	2,852		$	8,557		$	9,039
Number of personnel (at period end):
Domestic	58			65
Latin America	118			137
Subtotal	176			202
Corporate	32			33
Total	208			235
Interest expense:
Average debt	$	84,932		$	52,385		$	87,020		$	51,154
Interest expense	1,799			918			5,455			2,646
Average cost (annualized)	8.5		%	7.0		%	8.4		%	6.9		%
Provision (recovery) for impairment on Portfolio Assets:
Non-performing	$	(8	)	$	—		$	9		$	—
Performing	(4		)	282			—			396
Real estate	22			18			24			18
Loans acquired after 2004 with credit deterioration	21			—			29			—
Loans acquired after 2004 with no credit deterioration	19			22			39			22
	$	50		$	322		$	101		$	436

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The following table presents selected information regarding the revenues and expenses of the Acquisition Partnerships (dollars in thousands):

Analysis of Selected Revenues and Expenses
Acquisition Partnerships

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Revenues:
Income from Portfolio Assets	$	26,066		$	16,935		$	64,572		$	59,477
Other income	336			252			1,884			621
Interest expense:
Interest expense	$	4,931		$	3,559		$	11,239		$	11,736
Average cost (annualized)	8.17		%	4.68		%	5.78		%	4.90		%
Other expenses:
Service fees	$	5,486		$	5,416		$	12,681		14,803
Other operating costs	7,914			9,037			17,154			21,752
Foreign currency (gains) losses	(4,660		)	(113		)	8,558			(9,188		)
Income taxes	234			269			596			1,070
Total other expenses	8,974			14,609			38,989			28,437
Net earnings (loss)	$	12,497		$	(981	)	$	16,228		$	19,925
Equity in earnings of Acquisition Partnerships	$	2,992		$	1,975		$	7,811		$	8,385
Equity in earnings of Servicing Entities	31			(192		)	233			489
Equity in earnings of investments	$	3,023		$	1,783		$	8,044		$	8,874

Analysis of Equity Investments
(dollars in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
FirstCity’s Average investment
Domestic	$	38,993		$	37,384		$	47,792		$	36,716
Latin America	16,739			1,598			8,431			1,521
Europe	18,635			11,285			19,123			12,052
Europe-Servicing subsidiaries	5,570			5,537			5,538			5,964
Latin America-Servicing subsidiaries	162			295			205			204
Total	$	80,099		$	56,099		$	81,089		$	56,457

FirstCity share of equity earnings (loss)
Domestic	$	1,282		$	1,784		$	5,136		$	6,008
Latin America	815			(441		)	(316		)	(250		)
Europe	895			632			2,991			2,627
Europe-Servicing subsidiaries	67			(155		)	433			247
Latin America-Servicing subsidiaries	(36		)	(37		)	(200		)	242
Total	$	3,023		$	1,783		$	8,044		$	8,874

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Provision for Income Taxes

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

Liquidity and Capital Resources

Generally, the Company requires liquidity to fund its operations, working capital, payment of debt, repurchase of the Company’s common stock, equity for acquisition of Portfolio Assets, investments in and advances to the Acquisition Partnerships, and other investments by the Company. The potential sources of liquidity are funds generated from operations, equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt and dividends from the Company’s subsidiaries, borrowings from revolving lines of credit, proceeds from equity market transactions, securitization and other structured finance transactions and other special purpose short-term borrowings.

As of September 30, 2006, FirstCity had a $91 million revolving acquisition facility with Bank of Scotland that matures in November 2008. This facility is used to finance the equity portion of distressed asset pool purchases and to provide for the issuance of Letters of Credit and working capital loans. This facility (i) allows loans to be made in Euros up to a maximum amount in Euros that is equivalent to 35 million U.S. dollars, (ii) allows loans to be made for acquisition of Portfolio Assets originated in Latin America of up to $35 million, (iii) provides for an interest rate of LIBOR plus 2.50% to 2.75%, (iv) provides for an annual commitment fee of 0.20% of the average daily unused balance of the revolving acquisition facility, (v) provides that the aggregate borrowings under the facility does not exceed 60% of the net present value of FirstCity’s interest in Portfolio Assets and in Acquisition Partnerships pledged to secure the acquisition facility, and (vi) provides for a reduction in the total loan commitment of $1.3 million per quarter, commencing on December 27, 2005.

In August 2005, FH Partners, L.P., an indirect wholly-owned affiliate of FirstCity, and Bank of Scotland, acting through its New York branch, as agent for itself as lender, entered into a Revolving Credit Agreement that provides for a $50 million revolving Portfolio acquisition facility for FH Partners, L.P. to be secured by all of the assets of FH Partners, L.P. The loan facility will be used to finance Portfolio and asset purchases. The facility (i) allows loans to be made for the acquisition of Portfolio Assets in the United

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States, (ii) provides that each loan may be in an amount of up to 70% of the net present value of the assets being acquired with the proceeds of the loan, (iii) provides that the aggregate outstanding balances of all loans will not exceed 65% of the net present value of the assets securing the loan facility, (iv) provides for an interest rate of LIBOR plus 2.0%, (v) provides for an annual commitment fee of 0.20% of the average daily unused balance of the revolving acquisition facility, (vi) provides for a utilization fee of 0.75% of the amount of each loan made under the loan facility, (vii) provides for an upfront fee of $350,000, (viii) provides for facility fees of $100,000, for the period commencing on the Effective Date and ending the day before the first anniversary thereof, $75,000, for the period commencing on the first anniversary of the Effective Date and ending the day before the second anniversary thereof, and $50,000, for each subsequent one-year period, and (ix) provides for a maturity date of November 12, 2008. The obligations of FH Partners, L.P. under the Revolving Credit Agreement are guaranteed by FirstCity and the primary wholly-owned subsidiaries of FirstCity.

BoS (USA) has a warrant 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 connection with this existing warrant for 425,000 shares under certain specific situations to retain its ability to acquire approximately 4.86% of the Company’s voting Common Stock. The warrant will expire on August 31, 2010, if it is not exercised prior to that date.

Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships, the Company and its subsidiaries currently have credit facilities providing for borrowings in an aggregate principal amount of $239 million, and outstanding borrowings of $106 million as of September 30, 2006.

Management believes that the Bank of Scotland facilities, the related fees generated from the servicing of assets, equity distributions from existing Acquisition Partnerships and wholly-owned portfolios, as well as sales of interests in equity investments, will allow the Company to meet its obligations as they come due during the next twelve months.

The following table summarizes the material terms of the credit facilities to which the Company, its major operating subsidiaries and the Acquisition Partnerships were parties to as of November 9, 2006, and the outstanding borrowings under such facilities as of September 30, 2006.

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Credit Facilities

	Funded and
	Unfunded		Outstanding
	Commitment		Borrowings
	Amount as of		as of
	November 9,		September 30,
	2006		2006		Interest Rate	Other Terms and Conditions
	(Dollars in millions)
Bank of Scotland $175 million portfolio acquisition and working capital facility (1)	$	175	$	62	LIBOR + 2.0% - 2.25%	Secured by equity interests and other assets of FirstCity, matures November 2010

Bank of Scotland $50 million portfolio acquisition - revolving credit	50		33		LIBOR + 2.0%	Secured by assets of FH Partners, L.P. and guaranteed by the Company, matures November 2008

American Bank term loan for portfolio acquisition by FC Washington	3		3		Fixed 5.625%	Secured by assets of FC Washington and guaranteed by the Company, matures 2008

Participation payable	1		1		32.36% imputed rate	Participation agreement on 33% of net cash flows received on one portfolio

CorpBanca revolving line of credit for Chilean portfolio acquisition	10		7		Rate based on monthly Chilean index rate plus .0625% per month	Secured by Bank of Scotland letter of credit. Renewable every 30 days.

Total	$	239	$	106

Unconsolidated Acquisition Partnerships Term Facilities (2)	$	69	$	69	Various rates	Secured by Portfolio Assets, various maturities non-recourse

(1) The Bank of Scotland facility allows loans to be made in Euros up to a maximum amount in Euros that is equivalent to $50 million. At September 30, 2006, the Company had approximately $16.0 million outstanding under the Euro-denominated portion of this facility.

(2) In addition to the term acquisition facilities of the unconsolidated Acquisition Partnerships, the Latin American Acquisition Partnerships also have term debt of approximately $112.1 million outstanding as of September 30, 2006, owed to affiliates of the investor groups. Of this amount, the Company has recorded approximately $1.4 million as Loans Receivable on the Consolidated Balance Sheets.

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Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q or incorporated by reference from time to time, including, but not limited to, statements relating to the Company’s strategic objectives and future performance, which are not historical facts, may be deemed to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. There are many important factors that could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements. Such factors include, but are not limited to, risks associated with foreign operations; currency exchange rate fluctuations; the performance of the Company’s subsidiaries and affiliates; the availability of Portfolio Assets; assumptions underlying Portfolio asset performance; interest rate risk; the degree to which the Company is leveraged; the Company’s continued need for financing; availability of the Company’s credit facilities; the impact of certain covenants in loan agreements of the Company and its subsidiaries; risks of declining value of loans, collateral or assets; the ability of the Company to utilize NOLs; uncertainties of any litigation that might arise from discontinued operations; general economic conditions; foreign social and economic conditions; changes (legislative and otherwise) in the asset securitization industry; fluctuations in residential and commercial real estate values; capital market conditions, including the markets for asset-backed securities; factors more fully discussed and identified in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 16, 2006 (including those discussed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”), as well as in other Securities and Exchange Commission filings of the Company. Many of these factors are beyond the Company’s control. In addition, it should be noted that past financial and operational performance of the Company is not necessarily indicative of future financial and operational performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

The Company invests in Portfolio Assets both directly through consolidated subsidiaries and indirectly through equity investments in Acquisition Partnerships. Portfolio Assets consist of investments in pools of non-homogenous assets that predominantly consist of loan and real estate assets. Earnings from these assets are based on the estimated future cash flows from such assets and recorded when those cash flows occur. The underlying loans within these pools bear both fixed and variable rates. Due to the non-performing nature and history of these loans, changes in prevailing benchmark rates (such as the prime rate or LIBOR) generally have a nominal effect on the ultimate future cash flow to be realized from the loan assets. Furthermore, these pools of assets are held for sale, not for investment; therefore, the disposition strategy is to liquidate these assets as quickly as possible.

Loans receivable consist of investment loans made to Acquisition Partnerships and bear interest at predominately fixed rates. The collectibility of these loans is directly related to the underlying Portfolio Assets of those Acquisition Partnerships, which are non-performing in nature. Therefore, changes in benchmark rates would have minimal effect on the collectibility of these loans.

The Company currently has investments in Europe and Latin America (i.e. Mexico, Argentina, Dominican Republic and Chile). In Europe, the Company’s investments are in the form of equity and represent a significant portion of the Company’s total equity investments. As of September 30, 2006, one U.S. dollar equaled .79 Euros. A sharp change in the Euro relative to the U.S. dollar could materially adversely affect the financial position and results of operations of the Company. A 5% and 10% incremental depreciation of the Euro would result in an estimated decline in the valuation of the Company’s equity investments in Europe of approximately $1.3 million and $2.5 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Euro relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the

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Company’s consolidated financial position or results of operations. As discussed above, the revolving acquisition facility with Bank of Scotland was increased to a maximum of $175 million and allows loans to be made in Euros up to a maximum amount in Euros that is equivalent to $50 million U.S. dollars. At September 30, 2006, the Company held $16.0 million in Euro-denominated debt for the purpose of hedging a portion of the net equity investments in Europe. Management of the Company feels that this loan agreement will help reduce the risk of adverse effects of currency changes on Euro-denominated investments.

FirstCity converted substantially all of its loans receivable from Mexican acquisition partnerships to equity investments as a result of the restructure of investments in Mexico during the third quarter of 2006. The future estimated cash flows of the underlying assets in Mexico could become less valuable as a result of a change in the exchange rate for the Mexican peso, and thus, could affect the overall total returns to the Company on these investments. As of September 30, 2006, one U.S. dollar equaled 11.02 Mexican pesos. A 5% and 10% incremental depreciation of the Mexican peso would result in an estimated decline in the valuation of the Company’s total investments in Mexico of approximately $2.5 million and $4.8 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Mexican peso relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations.

FirstCity has loans and equity investments in South America — primarily in Argentina Acquisition Partnerships. As of September 30, 2006, one U.S. dollar equaled 3.11 Argentine pesos. The Company estimates that a 5% and 10% incremental depreciation of the Argentine peso would result in a decline in the valuation of the Company’s total investments in Argentina of approximately $.11 million and $.20 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Argentine peso relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations.

FirstCity has an equity investment in a Dominican Republic Acquisition Partnership. As of September 30, 2006, one U.S. dollar equaled 34.74 Dominican Republic pesos. The Company estimates that a 5% and 10% incremental depreciation of the Dominican Republic peso would result in a decline in the valuation of the Company’s total investments in Dominican Republic of approximately $.037 million and $.071 million, respectively. These amounts are estimates of the financial impact of a depreciation of the Dominican Republic peso relative to the U.S. dollar. Consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations.

Item 4. Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2006. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, also evaluated whether any change in the Company’s internal controls over financial reporting or in other factors had occurred during the fiscal quarter covered by this report. Based upon that evaluation, management concluded that there had been no such changes during the period covered by this report that have materially affected, or is reasonably likely to affect, the registrant’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

On January 19, 2005, Prudential Financial, Inc. (“Prudential”) filed a petition in interpleader seeking to interplead 321,211 shares of Prudential common stock and any associated dividends arising from the demutualization of Prudential in December 2000. The shares of Prudential common stock related to group annuity contracts purchased by First-City National Bank of Houston, as trustee of the First City Bancorporation Employee Retirement Trust (the “Trust”) to fund obligations to participants in the First City Bancorporation Employee Retirement Plan (the “Plan”) in connection with termination of the Plan and the Trust in 1987. FirstCity, FCLT Loans Asset Corp. (“FCLT”), an alleged assignee of the FirstCity Liquidating Trust, JP Morgan Chase Bank, National Association (“JP Morgan”), and First-City National Bank of Houston as trustee of the Trust were made defendants in the suit as claimants to the Prudential common stock and dividends. An agreed order dated January 27, 2005, was entered by the Court providing that the Prudential common stock be transferred to JP Morgan as record owner and that JP Morgan sell the stock. The January 27, 2005 order also provided that the proceeds from the sale be held by JP Morgan pending resolution, by agreement or court order, of all conflicting claims to the proceeds. JP Morgan advised that the Prudential common stock was sold on January 28, 2005 for total proceeds of approximately $17.5 million. JP Morgan also received funds in the amount of approximately $489,000, which were dividend payments related to the Prudential common stock. The proceeds are being held by JP Morgan pending resolution of the conflicting claims. According to JP Morgan’s report dated as of the close of business June 30, 2006, the demutualization proceeds held by JP Morgan totaled approximately $18 million. JP Morgan filed a third party action naming Mr. Blair as a third party defendant with an alleged interest in the demutualization proceeds. On October 1, 2005, the court certified a class represented by Mr. Blair. FCLT made claims against FirstCity for alleged breach of contract by FirstCity in claiming the demutualization proceeds and alleged tortious interference by FirstCity with FCLT’s alleged right to the demutualization proceeds.

FirstCity, FCLT and Mr. Blair each filed motions for summary judgment asserting ownership of the proceeds of the common stock and the dividends and accrued income. On March 21, 2006, FirstCity received notice that the 152nd District Court, Harris County, Texas granted FirstCity’s motion for partial summary judgment. The order granting FirstCity’s motion for partial summary judgment rendered judgment in favor of FirstCity as to the ownership of the demutualization proceeds. The Court’s summary judgment order also denied the claims to ownership of the demutualization proceeds by FCLT and Mr. Blair, individually and as representative of the proposed class of employee beneficiaries. The motions submitted to the Court prior to its order dated March 21, 2006 did not address all matters pending in the lawsuit. Mr. Blair, as class representative, filed a motion for new trial to set aside the summary judgment in favor of FirstCity and for reconsideration of granting Mr. Blair’s motion for summary judgment. FCLT filed a motion for the Court to reconsider its order granting the partial summary judgment for FirstCity. FirstCity moved for summary judgment on all remaining claims and for entry of a final judgment on May 12, 2006. On August 14, 2006, the Court entered an order (i) finding that FirstCity is the sole owner of the “demutualization proceeds” consisting of the proceeds from the sale of the 321,211 shares of Prudential Financial, Inc. stock, the dividends on such shares and all accrued interest and income arising there from, (2) granting FirstCity’s motion for summary judgment against FCLT’s claims for breach of contract and tortious interference, (3) providing that JP Morgan continue to hold the demutualization proceeds until the appellate process has been completed, (4) denying the request by FirstCity that FCLT or Mr. Blair be required to post bond or other form of security on appeal, and (5) denying all other claims for relief. FCLT and Mr. Blair have filed notices of appeal to the First or Fourteenth Court of Appeals of the State of Texas. FirstCity cannot give any assurances as to the time period for the appeal of the final judgment or the timing of receipt or ultimate amount of proceeds to be received, if any.

Item 1A. Risk Factors.

There have been no material changes to the risk factors as previously disclosed under Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

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

The following summarizes purchases of common stock during the third quarter 2006:

				Total Number	Maximum Number
				of Shares Purchased	of Shares that May
	Total Number	Average		as Part of Publicly	Yet Be Purchased
	of Shares	Price Paid		Announced Plans	Under the Plans
Month	Purchased	Per Share		or Programs (1)	or Programs
August	480,000	$	10.51	480,000
September	50,300	$	10.47	50,300
Total	530,300	$	10.51	530,300	469,700

(1) The Company has a repurchase program approved by the Board of Directors in August 2006 for the repurchase of up to 1,000,000 shares of the Company’s common stock over a period of twelve months.

Item 3. Defaults Upon Senior Securities.

None

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

The Company held its annual meeting of stockholders (the “Annual Meeting”) on August 3, 2006. The following items for business were considered at the Annual Meeting.

(a) Election of Directors

The following were elected as directors to serve as members of the Company’s Board of Directors until the Company’s 2007 annual meeting of stockholders. The number of votes cast for each nominee was as follows:

Nominee	Votes For	Votes Against	Abstained
Richard E. Bean	10,639,707	57,713	—
C. Ivan Wilson	10,118,223	579,197	—
James T. Sartain	10,639,793	57,627	—
Dane Fulmer	10,639,697	57,723	—
Robert E. Garrison II	10,639,707	57,713	—
D. Michael Hunter	10,639,793	57,627	—
Jeffery D. Leu	10,638,707	58,713	—
F. Clayton Miller	10,639,591	57,829	—

(b) Approval of the Company’s 2006 Stock Option and Award Plan

The stockholders approved the Company’s 2006 Stock Option and Award Plan. The number of votes for the proposal: 8,048,274; votes against: 233,160; abstentions: 100,137.

(c) Ratification of Appointment of Auditors

A proposal to ratify the Board of Directors’ appointment of KPMG LLP as the Company’s independent auditors for 2006 was approved by the stockholders. The number of votes for the proposal: 10,690,387; votes against: 3,350; abstentions: 3,683.

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Item 5. Other Information.

On August 11, 2006, the Compensation Committee of the Board of Directors of the Company approved a bonus of $50,000.00 be paid to Richard J. Vander Woude.

On August 3, 2006, the shareholders of the Company approved the FirstCity Financial Corporation 2006 Stock Option and Award Plan (the “Plan”) at the Company’s 2006 annual meeting of shareholders. The Plan was adopted by the Company’s Board of Directors on August 3, 2006.

The Plan permits the grant of awards to employees of the Company and its subsidiaries and awards to non-employee directors of the Company. Awards under the Plan may be made in the form of nonqualified stock options, incentive stock options, performance shares and restricted stock. A total of 500,000 shares of common stock are authorized for issuance pursuant to the Plan. Additional shares subject to outstanding awards granted under other stock incentive plans of the Company may become available for issuance pursuant to the Plan if the awards are terminated without issuance of the shares, settled for cash, or exchanged for non-share awards.

The Plan will be administered by the Company’s Compensation Committee, and will terminate on the day prior to the tenth anniversary of its effective date of August 3, 2006, unless terminated earlier in specified circumstances.

A detailed description of the terms of the Plan is set forth in the Company’s definitive proxy statement for the 2006 annual meeting of shareholders, which was filed with the Securities and Exchange Commission on June 26, 2006. A copy of the Plan is incorporated by reference to exhibit 10.13 to this Report.

Item 6. Exhibits.

Exhibit Number		Description of Exhibit
2.1	—	Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

2.2	—	Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

3.1	—	Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

3.2	—	Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

10.1	—	Revolving Credit Agreement, dated August 26, 2005, among FH Partners, L.P., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 1, 2005).

10.2	—	Guaranty Agreement, dated August 26, 2005, executed by FirstCity Financial Corporation, FirstCity Commercial Corporation, FirstCity Europe Corporation, FirstCity Holdings Corporation, FirstCity International Corporation, FirstCity Mexico, Inc., and FirstCity Servicing Corporation for the benefit of Bank of Scotland, as agent, and lenders (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated September 1, 2005).

10.3	—	Contribution and Assumption Agreement, dated August 18, 2000, by and between Funding LP and Drive (incorporated herein by reference to Exhibit 10.42 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

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10.4	—	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein by reference to Exhibit 10.19 of the Company’s Form 10-Q dated May 14, 2004).

10.5	—	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip (incorporated herein by reference to Exhibit 10.20 of the Company’s Form 10-Q dated May 14, 2004).

10.6	—	Securities Purchase Agreement dated as of September 21, 2004 by and among FirstCity Financial Corporation and certain affiliates of FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP Holdings LLC, Drive Management LP and certain affiliates of those persons. (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 27, 2004)

10.7	—	Revolving Credit Agreement, dated November 12, 2004, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.12 of the Company’s Form 10-Q dated November 15, 2004)

10.8	—	1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit A of the Company’s Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)

10.9	—	1996 Stock Option and Award Plan (incorporated herein by reference to Exhibit C of the Company’s Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)

10.10	—	2004 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company’s Schedule 14A, Definitive Proxy Statement, dated October 21, 2003)

10.11	—	Sixth Amendment to Right Of First Refusal Agreement And Due Diligence Reimbursement Agreement dated effective as of February 1, 2006 (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated February 6, 2006)

10.12	—	Asset Purchase Agreement, dated June 30, 2006, by and among FirstCity Financial Corporation and its subsidiaries, FirstCity Business Lending Corporation and American Business Lending, Inc.; and AMRESCO SBA Holdings, Inc. and NCS I, LLC (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated July 7, 2006)

10.13	—	2006 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company’s Schedule 14A, Definitive Proxy Statement, dated June 26, 2006)

10.14*	—	Interest Purchase and Sale Agreement, dated August 8, 2006, by and among Bidmex Holding, LLC, and Strategic Mexican Investment Partners, L.P. and Cargill Financial Services International, Inc. and certain other parties

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.

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

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)

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31.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

32.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FIRSTCITY FINANCIAL CORPORATION


	By:	/s/ James T. Sartain
		James T. Sartain
		President and Chief Executive
		Officer and Director
		(Duly authorized officer and
		principal executive officer of the
		Registrant)

	By:	/s/ J. Bryan Baker
		J. Bryan Baker
		Senior Vice President and Chief
		Financial Officer
		(Duly authorized officer and
		principal financial and accounting
		officer of the Registrant)
Dated: November 9, 2006

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Exhibit Index

Exhibit Number		Description of Exhibit
2.1	—	Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

2.2	—	Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

3.1	—	Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

3.2	—	Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).

10.1	—	Revolving Credit Agreement, dated August 26, 2005, among FH Partners, L.P., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 1, 2005).

10.2	—	Guaranty Agreement, dated August 26, 2005, executed by FirstCity Financial Corporation, FirstCity Commercial Corporation, FirstCity Europe Corporation, FirstCity Holdings Corporation, FirstCity International Corporation, FirstCity Mexico, Inc., and FirstCity Servicing Corporation for the benefit of Bank of Scotland, as agent, and lenders (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated September 1, 2005).

10.3	—	Contribution and Assumption Agreement, dated August 18, 2000, by and between Funding LP and Drive (incorporated herein by reference to Exhibit 10.42 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).

10.4	—	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein by reference to Exhibit 10.19 of the Company’s Form 10-Q dated May 14, 2004).

10.5	—	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip (incorporated herein by reference to Exhibit 10.20 of the Company’s Form 10-Q dated May 14, 2004).

10.6	—	Securities Purchase Agreement dated as of September 21, 2004 by and among FirstCity Financial Corporation and certain affiliates of FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP Holdings LLC, Drive Management LP and certain affiliates of those persons. (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 27, 2004)

10.7	—	Revolving Credit Agreement, dated November 12, 2004, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.12 of the Company’s Form 10-Q dated November 15, 2004)

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10.8	—	1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit A of the Company’s Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)

10.9	—	1996 Stock Option and Award Plan (incorporated herein by reference to Exhibit C of the Company’s Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)

10.10	—	2004 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company’s Schedule 14A, Definitive Proxy Statement, dated October 21, 2003)

10.11	—	Sixth Amendment to Right Of First Refusal Agreement And Due Diligence Reimbursement Agreement dated effective as of February 1, 2006 (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated February 6, 2006)

10.12	—	Asset Purchase Agreement, dated June 30, 2006, by and among FirstCity Financial Corporation and its subsidiaries, FirstCity Business Lending Corporation and American Business Lending, Inc.; and AMRESCO SBA Holdings, Inc. and NCS I, LLC (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated July 7, 2006)
10.13	—	2006 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company’s Schedule 14A, Definitive Proxy Statement, dated June 26, 2006)

10.14*	—	Interest Purchase and Sale Agreement, dated August 8, 2006, by and among Bidmex Holding, LLC, and Strategic Mexican Investment Partners, L.P. and Cargill Financial Services International, Inc. and certain other parties

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.

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

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)

31.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*	—	Certification of James T. Sartain, Chief Executive Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

32.2*	—	Certification of J. Bryan Baker, Chief Financial Officer of the Company, pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and relating to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

Exhibit 10.14

INTEREST PURCHASE AND SALE AGREEMENT

by and among

BIDMEX HOLDING, LLC,
as Buyer,

and

THE COMPANIES LISTED ON EXHIBIT A,

STRATEGIC MEXICAN INVESTMENT PARTNERS, L.P.,

and

CARGILL FINANCIAL SERVICES
INTERNATIONAL, INC.,
as Sellers,

and

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.,

AMERICAN GENERAL LIFE INSURANCE COMPANY,

and

AMERICAN GENERAL LIFE AND ACCIDENT INSURANCE COMPANY

August 8, 2006

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1.	Purchase and Sale of Membership Interests		1
	1.1	Purchase and Sale of Membership Interests	1
	1.2	Purchase Consideration	1
	1.3	Verification Procedure; Adjustment	2
	1.4	Closing	3
	1.5	Further Assurances	3

2.	Representations and Warranties of Each Company		3
	2.1	Existence; Good Standing; Authority of Each Company	4
	2.2	Existence; Authority of Subsidiaries	4
	2.3	Capitalization of the Company	5
	2.4	Capitalization of Subsidiary	5
	2.5	Assets of Subsidiary	5
	2.6	No Conflict	5
	2.7	Financial Statements	6
	2.8	Absence of Undisclosed Liabilities	6
	2.9	Absence of Certain Changes	6
	2.10	Consents and Approvals	9
	2.11	Litigation	9
	2.12	Taxes	9
	2.13	Employees; Employee Benefit Plan	11
	2.14	Title to and Sufficiency of Assets	11
	2.15	Real Property	12
	2.16	Labor and Employment Matters	12
	2.17	Permits; Compliance with Laws	12
	2.18	Contracts and Commitments of the Company and Subsidiary	12
	2.19	Intellectual Property	15
	2.20	No Illegal Payments	15
	2.21	Transactions with Related Persons	15
	2.22	Solvency	15

3.	Representations and Warranties of Sellers		15
	3.1	Membership Interests	15
	3.2	Authority	16
	3.3	Brokers	16

4.	Representations and Warranties of Buyer		17
	4.1	Investment Intent	17
	4.2	Authority	17
	4.3	Brokers	18

5.	Certain Covenants of Buyer, AIG and SMIP, the Companies and Sellers		18
	5.1	Regulatory and Other Authorizations; Consents	18
	5.2	Further Action	18
	5.3	Press Releases	19
	5.4	No Solicitation	19
	5.5	Preparation of Tax Returns; Payment of Taxes; Refunds.	19
	5.6	Conveyance Taxes; Costs	20

6.	Conditions To Closing		20
	6.1	Conditions to the Buyer’s Obligations	20
	6.2	Conditions to the Sellers’ Obligations	23

7.	Survival of Representations and Warranties; Indemnification		24
	7.1	Survival	24
	7.2	Indemnification by Sellers	24
	7.3	Treatment of Indemnity Payments	26
	7.4	Remedies Not Exclusive	26

8.	General Provisions		26
	8.1	Notices	26
	8.2	Fees and Expenses	28
	8.3	Interpretation	28
	8.4	Counterparts	29
	8.5	Amendments	29
	8.6	Entire Agreement; Severability	29
	8.7	Third Party Beneficiaries	29
	8.8	Governing Law	29
	8.9	Assignment	30
	8.10	Consent to Jurisdiction	30
	8.11	Mutual Drafting	30
	8.12	Acknowledgment	30
	8.13	Remedies	30
	8.14	Waiver	30

9.	Definitions		31
	9.1	Definitions	31
	9.2	Other Definitions	35

EXHIBITS

Exhibit A		Sellers; Membership Interests; Purchase Price Allocation
Exhibit B		Form of Closing Reconciliation
Exhibit C		Comprehensive Transaction Documents
Exhibit D		Contributed Subsidiary Loans
Exhibit E		Refinanced Subsidiary Loans
Exhibit F		Assumed Loans
Exhibit G		Subsidiary Portfolios

SCHEDULES

Schedule 2.2		Subsidiaries
Schedule 2.4		Capitalization of Subsidiary
Schedule 2.5		Assets of Subsidiary
Schedule 2.7		Financial Statements
Schedule 2.8		Absence of Undisclosed Liabilities
Schedule 2.9		Absence of Certain Changes
Schedule 2.10(a)		Government Consents
Schedule 2.10(b)		Third-Party Consents
Schedule 2.12		Taxes
Schedule 2.14		Loans to the Company
Schedule 2.15		Real Property
Schedule 2.17		Permits
Schedule 2.18(a)		Contracts and Commitments of the Company
Schedule 2.18(a)(x)		Subservicing Agreements of the Company
Schedule 2.18(a)(xi)		Pledges/Promissory Notes of the Company
Schedule 2.18(b)		Contracts and Commitments of the Subsidiary
Schedule 2.18(b)(ix)		Subservicing Agreements of the Subsidiary
Schedule 2.19		Intellectual Property
Schedule 2.21		Transactions with Related Persons

iii

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THIS INTEREST PURCHASE AND SALE AGREEMENT (this “Agreement”) is made and entered into as of August 8, 2006, by and among Bidmex Holding, LLC, a Delaware limited liability company (“Buyer”), the Delaware limited liability companies listed on Exhibit A attached hereto (each individually, a “Company,” and, collectively, the “Companies”), Strategic Mexican Investment Partners, L.P., a Texas limited partnership, on its behalf and on behalf of its Affiliates (“SMIP”), and Cargill Financial Services International, Inc., a Delaware corporation (“Cargill” and, together with SMIP, the “Sellers”). The Sellers and the Companies shall be collectively referred to as the “Seller Entities.” National Union Fire Insurance Company of Pittsburgh, Pa., a corporation incorporated under the laws of Pennsylvania, American General Life Insurance Company, a corporation incorporated under the laws of Texas; and American General Life and Accident Insurance Company, a corporation incorporated under the laws of Tennessee (collectively referred to as “AIG”), are each a party to this Agreement.

WHEREAS, the Sellers are the sole members of the Companies and collectively own beneficially and of record 100% of the membership interests in each of the Companies, as set forth on Exhibit A attached hereto (collectively, the “Membership Interests”);

WHEREAS, the Sellers desire to sell to Buyer, and Buyer desires to purchase from the Sellers, 100% of the Membership Interests on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. Purchase and Sale of Membership Interests

1.1 Purchase and Sale of Membership Interests. Subject to the terms and conditions set forth in this Agreement and in reliance on the representations and warranties made by each of the Seller Entities, at the Closing (as defined below), Buyer agrees to purchase from each Seller, and each Seller severally agrees to sell to Buyer, all of such Seller’s Membership Interests (as set forth under such Seller’s name on Exhibit A) for the aggregate consideration, in respect of such Seller’s Membership Interests, equal to the sum of (i) the cash purchase price and (ii) 15% of the membership interests in Buyer, in each case attributable to such Seller’s Membership Interests in each Company set forth opposite such Company’s name on Exhibit A. The sum of the consideration payable to each Seller pursuant to this Section 1.1 shall equal the aggregate consideration set forth in Section 1.2 below.

1.2 Purchase Consideration. In consideration of the sale by Sellers to Buyer of the Membership Interests pursuant to Section 1.1, Buyer (i) will pay or cause to be paid a cash purchase price to Cargill and (ii)(a) will pay or cause to be paid a cash purchase price and (b) immediately prior to the execution of this Agreement, has issued a 15% membership interest in the Buyer, in the case of clauses (ii)(a) and (b) to SMIP. The aggregate cash purchase price payable to Sellers will be equal to $MxPs 1,298.82 million (the “Closing Purchase Price”), as (i) reduced by the AIG Asset Purchase Price and the AIG Escrowed Funds and (ii) further reduced by the SMIP Asset Purchase Price and the value calculated in Mexican Pesos of 15% of the membership interests in the Buyer and (iii) as adjusted, if necessary, pursuant to Section 1.3, to be converted at the Exchange Rate and paid in U.S. Dollars (the “Purchase Price”). The

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Purchase Price will be paid by Buyer at, or within two (2) Business Days of, the Closing in U.S. Dollars by wire transfer of immediately available funds and the release of the AIG Escrowed Funds in accordance with the terms and conditions of the Escrow Agreement. Buyer will deliver to Cargill a portion of the Purchase Price which is equal to the consideration to which such Seller is entitled in respect of the Membership Interests held by such Seller as of the Closing as set forth on Exhibit A to the account designated by Cargill in writing to the Buyer at least two (2) Business Days prior to the Closing. Buyer will deliver to SMIP the remainder of the Purchase Price.

1.3 Verification Procedure; Adjustment.

(a) Within 45 days after the Closing Date, the Buyer and its manager shall prepare and deliver to Cargill and AIG a statement detailing a reconciliation of the cash flows generated by, and distributions (including debt service), if any, made by, the Portfolios during the period from the Valuation Date through the Closing Date on a Portfolio by Portfolio basis measured against the cash balance set forth in the unaudited balance sheets of the Companies and the unaudited balance sheets of the Subsidiaries as of the close of business on the Valuation Date (together, the “Closing Reconciliation”). Each Closing Reconciliation shall be prepared in accordance with the methodology set forth in the form attached as Exhibit B hereto. Unless Cargill delivers the Dispute Notice (as defined below) to Buyer within 15 days after receipt of the Closing Reconciliation, the Closing Reconciliation shall be deemed the “Final Closing Reconciliation,” shall be binding upon all parties and shall not be subject to dispute or review. If Cargill disagrees with the Closing Reconciliation, Cargill may, within 15 days after receipt thereof, notify the Buyer in writing (the “Dispute Notice”), which Dispute Notice shall provide reasonable detail of the nature of each disputed item on the Closing Reconciliation, including all supporting documentation thereto. The Sellers and Buyer shall first use commercially reasonable efforts to resolve such dispute between themselves and, if the parties are able to resolve such dispute, the Closing Reconciliation shall be revised to the extent necessary to reflect such resolution, shall be deemed the “Final Closing Reconciliation” and shall be conclusive and binding upon all parties and shall not be subject to dispute or review. If the parties are unable to resolve the dispute within 30 days after receipt by the Buyer of the Dispute Notice, the parties shall submit the dispute to a mutually acceptable internationally recognized accounting firm at such firm’s New York, New York office (the “Accountants”). The Accountants shall act as experts and not arbiters and shall determine only those items in dispute on the Closing Reconciliation. Promptly, but no later than 30 days after engagement, the Accountants shall deliver a written report to the Sellers and Buyer as to the resolution of the disputed items. The Closing Reconciliation as determined by the Accountants shall be deemed the “Final Closing Reconciliation,” shall be conclusive and binding upon all parties and shall not be subject to dispute or review. The fees and expenses of the Accountants in connection with the resolution of disputes pursuant to this Section 1.3(a) shall be borne equally by Sellers, on the one hand, and Buyer, on the other hand.

(b) As provided in Section 1.2 hereof, the portion of the Closing Purchase Price applicable to the Company or the Companies whose Portfolio was the subject of the dispute, shall be adjusted, dollar for dollar (in U.S. Dollars converted from Mexican Pesos at the Exchange Rate), up or down, as appropriate, to reflect (x) any distributions (including debt

service) made subsequent to the Valuation Date not in respect of pre-Valuation Date cash flows or (y) other necessary corrections of errors or omissions with respect to the Estimated Closing Date Balance Sheet as corrected in the Final Closing Statement. Within five (5) Business Days following the determination of a Final Closing Statement in accordance with Section 1.3(a), (i) if an adjustment is required in Buyer’s favor, each Seller shall pay to Buyer an amount equal to such Seller’s pro rata portion (as set forth under such Seller’s name opposite the applicable Company name in column 4 of Exhibit A) of the amount of the required adjustment and, (ii) if an adjustment is required in Sellers’ favor, Buyer shall pay to each Seller an amount equal to such Seller’s pro rata portion (as set forth under such Seller’s name opposite the applicable Company name in column 4 of Exhibit A) of the amount of the required adjustment, in each case by wire transfer of immediately available funds to the account designated by the receiving party at least two (2) Business Days in advance. If any payment required under this Section 1.3(b) is not made in full within such three (3) Business Day period, such payment will thereafter bear simple interest at an annual rate equal to the prime rate published in the Wall Street Journal plus two percent (2%) until paid in full.

(c) To the extent Buyer, on the one hand, and Sellers, on the other, are each obligated to pay to the other an amount pursuant to this Section 1.3, such amounts may be set off against each other and the remaining balance shall be paid by the applicable party or parties in accordance with this Section 1.3.

1.4 Closing. The closing (the “Closing”) of the purchase and sale of the Membership Interests and the other transactions contemplated by this Agreement shall be held at the offices of Goodwin Procter LLP, 599 Lexington Avenue, New York, New York (or at such other place as the Buyer and the Sellers may mutually determine), on a date mutually determined by the Buyer and the Sellers on or after the date on which the conditions to Closing set forth in Sections 6.1 and 6.2 of this Agreement have been satisfied or waived. The date on which the Closing actually occurs is sometimes referred to herein as the “Closing Date.” It is understood and agreed that if all the transactions contemplated herein do not happen on the Closing Date, including without limitation the transactions contemplated by the Asset Sale and Purchase Agreement, the transactions that were effected will be reversed, the Closing Purchase Price shall be returned to the Buyer and the Membership Interests shall be returned to the Sellers.

1.5 Further Assurances. Sellers shall, from time to time after the Closing at the reasonable request of Buyer, execute and deliver such further instruments of transfer and take such other action as may be reasonably required to more effectively transfer and vest in Buyer the Membership Interests and all rights thereto, and to fully implement the provisions of this Agreement.

2. Representations and Warranties of Each Company. In order to induce Buyer to enter into this Agreement and consummate the transactions contemplated hereby, each Company, severally and only with respect to itself, and each Seller, severally with respect to each and every Company, hereby makes the following representations and warranties to Buyer. For the avoidance of doubt, no Company is making any representation or warranty about any other

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Company and no Seller is making any representation or warranty about any membership interests other than the membership interests which it is selling.

2.1 Existence; Good Standing; Authority of Each Company.

(a) The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite limited liability company power and authority under the Delaware Limited Liability Company Act, as amended from time to time, to conduct the businesses in which it is engaged, to own, operate, lease, encumber and use its properties and assets that it purports to own or use, to perform its obligations and carry on its business as currently conducted. The Company is duly licensed or qualified to do business as a foreign limited liability company under the laws of each other jurisdiction in which the character of its properties or in which the transaction of its business makes such qualification necessary, except where the failure to be so licensed or qualified would not, individually or in the aggregate, have a Material Adverse Effect. Copies of the Company’s Certificate of Formation (the “Company Certificate”) and Limited Liability Company Agreement (the “Company LLC Agreement”), each as amended to date and made available to Buyer’s counsel, are complete and correct and the Company is not in violation of its Company Certificate or Company LLC Agreement.

(b) The Company has the limited liability company power and authority to execute and deliver this Agreement and the other Comprehensive Transaction Documents to which it is a party and to perform its obligations hereunder and thereunder. The execution and delivery of this Agreement and the other Transaction Documents, the performance by the Company of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of the Company. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery of this Agreement by Buyer, this Agreement constitutes a legal, valid and binding obligation of the Company, enforceable against each Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and by general equitable principles.

2.2 Existence; Authority of Subsidiaries. Except for the Person set forth on Schedule 2.2 opposite the name of each Company (in each case, the “Subsidiary” and together with the subsidiaries of each other Company, the “Subsidiaries”), the Company does not own, directly or indirectly, any capital stock of or other equity interest in, or control, directly or indirectly, another Person, and the Company is not, directly or indirectly, a party to, member of or participant in any partnership, joint venture or similar business entity. The Subsidiary is duly organized and validly existing as a limited liability partnership with variable capital (“sociedad de responsabilidad limitada de capital variable”) under the laws of Mexico. The Subsidiary has all requisite limited liability partnership power and authority under the laws of Mexico, as amended from time to time, to conduct the businesses in which it is engaged, to own, operate, lease, encumber and use its properties and assets that it purports to own or use, to perform its obligations and carry on its business as currently conducted. The Subsidiary is duly licensed or qualified to do business as a foreign corporation or foreign limited liability partnership under the

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laws of each other jurisdiction in which the character of its properties or in which the transaction of its business makes such qualification necessary, except where the failure to be so licensed or qualified would not, individually or in the aggregate, have a Material Adverse Effect. Copies of the constituent documents of the Subsidiary, as amended to date and made available to Buyer’s counsel, are complete and correct.

2.3 Capitalization of the Company.

(a) As of the date of this Agreement, the Sellers are the only members of the Company and the Membership Interests owned by the Sellers, as set forth on Exhibit A, constitute all of the outstanding membership interests of such Company. The Company has no outstanding subscriptions, options, warrants, agreements, arrangements or commitments of any kind for or relating to the issuance or sale of, any membership interests of the Company. The Company has no obligation to purchase, redeem, or otherwise acquire any of their membership interests or any interests therein. All of the Membership Interests have been duly and validly authorized and issued.

(b) There are no preemptive rights, rights of first refusal, put or call rights or obligations or anti-dilution rights with respect to the issuance, sale or redemption of the Membership Interests, other than rights waived hereunder. There are no rights to have the Membership Interests registered for sale to the public pursuant to the laws of any jurisdiction, and there are no agreements relating to the voting or restricting the transfer of the Membership Interests.

2.4 Capitalization of Subsidiary. Except for the Subsidiary, the Company does not own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, association or other business entity. Except as set forth on Schedule 2.4, the Company owns beneficially and of record all of the issued and outstanding equity interests of the Subsidiary.

2.5 Assets of Subsidiary. The Subsidiary of each Company has been the sole owner of the Portfolio attributable to such Company as set forth on Schedule 2.5 opposite the Subsidiary’s name since the Valuation Date.

2.6 No Conflict. Neither the execution and delivery by the Company of this Agreement and the other Comprehensive Transaction Documents to which it is a party, nor the consummation by the Company of the transactions in accordance with the terms hereof and thereof, conflicts with or results in a breach of any provisions of the Company LLC Certificate, the Company LLC Agreement or the organizational documents of the Subsidiary. Assuming the consents, approvals and authorizations contemplated by Section 2.11 are obtained, the execution and delivery by the Company of this Agreement and the other Comprehensive Transaction Documents to which it is a party and the consummation by the Company and Sellers of the transactions in accordance with the terms hereof and thereof do not and will not (i) violate, or conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit, require

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any notice to, declaration or filing with, or consent or waiver, constitute a change of control, require the payment of a penalty under or result in the imposition of any encumbrance on the Company’s or it Subsidiary’s assets under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, lease, permit, license, authorization, contract or other agreement to which the Company or its Subsidiary is a party or by which the Company, its Subsidiary or any of their respective properties or assets is bound and (ii) violate, conflict with or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any law, regulation or rule, or any order of, or any restriction imposed by, any court or governmental agency applicable to the Company or its Subsidiary.

2.7 Financial Statements. The Company has delivered to Buyer on the date hereof the following financial statements:

(a) Unaudited balance sheet of the Company and the audited balance sheet of the Subsidiary as of December 31, 2005 (collectively, the “Balance Sheet”) and statements of income, changes in equity, and cash flow for the fiscal year then ended for each of the Company and the Subsidiary, together with the notes thereto and the reports thereon of the Subsidiary’s independent certified public accountants; and

(b) Unaudited balance sheet of the Company and unaudited balance sheet of the Subsidiary (collectively, the “Unaudited Balance Sheet”) as of close of business on February 28, 2006 (the “Valuation Date”) and the related statements of income and cash flow as of such date for each of the Company and the Subsidiary.

The financial statements described in clauses (a) and (b) above, together with the unaudited balance sheet of the Company and the unaudited balance sheet of the Subsidiary as of the last day of each fiscal month ended after the Valuation Date and the related statements of income and cash flow for each such fiscal month for each of the Company and the Subsidiary, are collectively referred herein as the financial statements (the “Financial Statements”) and are hereby delivered as Schedule 2.7.

Subject to the absence of footnotes, narrative disclosures and year-end audit adjustments with respect to any unaudited Financial Statements, the Financial Statements have been prepared in accordance with U.S. GAAP with respect to the Companies and Mexican GAAP with respect to the Subsidiaries consistently applied, and present fairly in all material respects the consolidated financial condition of the Company.

2.8 Absence of Undisclosed Liabilities. Except as may be disclosed on Schedule 2.8 or shown on the Balance Sheet, and except for liabilities incurred in the ordinary course of business, consistent with past practices, since the date of the Balance Sheet, the Company and, to Seller’s Knowledge, the Subsidiaries have no liabilities or obligations of any nature, whether accrued, absolute, contingent, asserted or unasserted, liquidated or unliquidated, matured or unmatured, or otherwise (each, a “Liability”).

2.9 Absence of Certain Changes. Except as contemplated by the Transaction Documents or as set forth on Schedule 2.9, from the Valuation Date to the date of this

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Agreement, the Company has operated only in the ordinary course of business consistent with past practices and there has not been any:

(a) change in the Company’s authorized or issued Membership Interests or the Subsidiary’s authorized and issued equity interests; grant of any option, right to purchase or similar right regarding the Membership Interests of the Company or equity interests of the Subsidiary; purchase, redemption, retirement, or other acquisition by the Company of any such Membership Interests or by the Subsidiary of any such equity interests; declaration or payment of any dividend or other distribution or payment (including debt service) in respect of the Membership Interests of the Company or equity interests of the Subsidiary since the Valuation Date; split, combination or reclassification of any of the Membership Interests of the Company or equity interests of the Subsidiary or issuance or authorization for the issuance of any other securities in respect of, in lieu of, or in substitution for any of the Company’s or the Subsidiary’s other securities, or granted any options, warrants or other rights to purchase or obtain (including upon conversion, exchange or exercise) any of the Company’s Membership Interests or the Subsidiary’s equity interests; or purchase, redemption or other acquisition of any of the Company’s Membership Interests or the Subsidiary’s equity interests or any rights warrants or options to acquire any such Membership Interests or equity interests;

(b) damage to or destruction or loss of any asset or property of the Company whether or not covered by insurance, which has had or could be reasonably likely to, individually or in the aggregate, have a Material Adverse Effect;

(c) incurrence of indebtedness or guarantee of debt or other liability of any third party by the Company, or incurrence of indebtedness or guarantee of debt of any third party by the Subsidiary;

(d) change in the accounting policies, procedures, methods or principles, collection policies, pricing policies or payment policies used by the Company, other than (i) write-downs or write-offs in the value of assets as required by U.S. GAAP, or (ii) such adjustments as may be required by U.S. GAAP as a result of the transactions contemplated by this Agreement, or change in the accounting policies, procedures, methods or principles, collection policies, pricing policies or payment policies used by the Subsidiary, other than (x) write-downs or write-offs in the value of assets as required by Mexican GAAP, or (y) such adjustments as may be required by Mexican GAAP as a result of the transactions contemplated by this Agreement;

(e) change in the assets, liabilities, condition (financial or other), properties, business, operations or prospects of the Company, which change by itself or in conjunction with all other such changes, whether or not arising in the ordinary course of business, has had or could be reasonably likely to, individually or in the aggregate, have a Material Adverse Effect;

(f) mortgage, lien or other encumbrance placed on any of the properties of the Company or, to the Sellers’ knowledge, its Subsidiaries, other than purchase money liens and liens for taxes not yet due and payable;

(g) purchase, sale or other disposition, or any agreement or other arrangement for the purchase, sale or other disposition, of any properties or assets by the Company involving the payment or receipt of more than $50,000, or purchase, sale or other disposition of any properties or assets by the Subsidiaries involving the payment or receipt of any amount, in either case from the Valuation Date through June 30, 2006;

(h) payment or discharge of a lien or liability of the Company which was not shown on the Balance Sheet or incurred in the ordinary course of business thereafter;

(i) contingent liability incurred by the Company as guarantor or otherwise with respect to the obligations of others or any cancellation of any material debt or claim owing to, or waiver of any material right of, the Company, including any write-off or compromise of any accounts receivable other than in the ordinary course of business consistent with past practice;

(j) obligation or liability incurred by the Company or the Subsidiary to any of its directors or the Sellers, or any loans or advances made by the Company or the Subsidiary to any of its directors or the Sellers;

(k) amendment or termination of any material contract or agreement to which the Company is a party or by which it is bound;

(l) change in magnitude or method of determination of the servicing fee under the existing servicing agreements or in the Servicing Costs and Asset Level Expenses, each as defined in the Servicing Agreement;

(m) other transaction entered into by the Company or the Subsidiary other than transactions in the ordinary course of business;

(n) except as provided in this Agreement, any amendment to the Company Certificate or Company LLC Agreement or the Subsidiary’s Deed of Incorporation or Bylaws;

(o) change in collection practices of the Subsidiary with respect to its Portfolio;

(p) made any Tax election with respect to the Company or any Subsidiary, settled or compromised any Tax liability, extended any statute of limitations with respect to Taxes, or otherwise changed in any material respect the tax policies of the Company or any of its Subsidiaries;

(q) prepayment of any loans from its Subsidiary, members, managers, officers, or directors to any Person affiliated with any of the foregoing, (ii) change in its borrowing arrangements, (iii) modification, amendment or termination of any of its or the Subsidiary’s material contracts, except as specifically provided in this Agreement, or (iv) waiver, release or assignment of any material rights or claims; and

(r) entering into any written agreement to do any of the actions described in clauses (a) through (q).

2.10 Consents and Approvals.

(a) Except as set forth on Schedule 2.10(a), the execution, delivery and performance of this Agreement by the Company and Sellers will not, as of the Closing Date, require any consent, approval, authorization or other action by, or filing with or notification to, any federal, state, local, or any foreign government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body (a “Governmental Authority”).

(b) Except as set forth on Schedule 2.10(b), the execution, delivery and performance of this Agreement by the Company and Sellers will not, as of the Closing Date, require any third-party consents, approvals, authorizations or actions.

2.11 Litigation. There is no litigation or governmental or administrative proceeding or investigation pending or, to the Knowledge of the Company, threatened against the Company or affecting the properties or assets of the Company, or, as to matters related to the Company, against any director or member of the Company in their respective capacities in such positions, nor, to the Knowledge of the Company, has there occurred any event nor does there exist any condition on the basis of which any such claim may be asserted, which could reasonably be expected to adversely impact the ability of Sellers to consummate the transactions contemplated in this Agreement and the other Comprehensive Transaction Documents to which each such Seller is a party or cause any representation or warranty made by the Sellers hereunder to be untrue.

2.12 Taxes.

(a) (i) The Companies and their Subsidiaries have paid or caused to be paid all Taxes required to be paid by them. All Taxes required to be withheld by the Companies or any of their Subsidiaries including, but not limited to, Taxes arising as a result of payments to foreign persons or to employees of the Companies or any of their Subsidiaries, have been collected and withheld, and have either been paid to the respective governmental agencies, set aside in accounts for such purpose, or accrued, reserved against, and entered on the books and records of the particular Company or such Subsidiary;

(ii) each Company and each Subsidiary of a Company have, in accordance with applicable law, duly filed with the appropriate federal, state, local, foreign and any other Taxing Authorities all material Tax Returns required to be filed by or with respect to such Company and each of its Subsidiaries (including with respect to the Seller Loans, the Portfolio and all other assets, liabilities, and business of such Company or any of its Subsidiaries), and such Tax Returns are complete and accurate in all material respects. Schedule 2.12(a)(ii) lists all of the income and other material Tax Returns filed with respect to each Company and each of its Subsidiaries for taxable

periods ended on or after January 1, 2001, and said Schedule indicates those Tax Returns that have been audited or currently are the subject of an audit. For each taxable period ending after January 1, 2001, Sellers have delivered to Buyer correct and complete copies of all income and other material Tax Returns filed by, and all material examination reports and material statements of deficiencies, in each case relating to income and other material Taxes, assessed against or agreed to by, each Company or any of its Subsidiaries;

(iii) neither the IRS nor any other Taxing Authority is now asserting or threatening to assert against any Company or any Subsidiary of a Company any deficiency or claim for additional Taxes. No claim has ever been made by a Taxing Authority in a jurisdiction where a Company or any of its Subsidiaries does not file Tax Returns that such Company or any Subsidiary of such Company is or may be subject to taxation by that jurisdiction. There are no security interests on any of the assets of any Company or any Subsidiary of such Company that arose in connection with any failure (or alleged failure) to pay any Taxes. No Company and no Subsidiary of a Company has ever entered into a closing agreement pursuant to Section 7121 of the Code (or any similar provision of foreign, state or local law);

(iv) except as set forth on Schedule 2.12(a)(iv), no Company and no Subsidiary of a Company has received any written notice of deficiency or assessment from any federal, state, local, foreign or any other Taxing Authority with respect to liabilities for Taxes which have not been paid or finally settled;

(v) except as set forth on Schedule 2.12(a)(v), no audit or examination of any Tax Return concerning any Company or any Subsidiary of a Company is pending, being conducted or threatened in writing by a Taxing Authority;

(vi) no extension or waiver of the statute of limitations for the assessment or collection of any Taxes has been granted by any Company or any Subsidiary of a Company;

(vii) no Company and no Subsidiary of a Company has ever been (or has ever had any liability for unpaid Taxes because it once was) a member of an “affiliated group” (as defined in Section 1504(a) of the Code). None of the Companies and their Subsidiaries has ever filed, or has ever been required to file, a consolidated, combined or unitary tax return with any other entity. None of the Companies and their Subsidiaries is a party to, nor has any obligation under, any tax sharing agreement. None of the Companies and their Subsidiaries has any liability for the Taxes of any Person as a transferee or successor, by contract or otherwise;

(viii) except as set forth on Schedule 2.12(a)(viii), for all Tax periods since formation, each Company and each Subsidiary has been properly classified for all federal, state and local income tax purposes as a partnership and not as an association or a publicly traded partnership within the meaning of Section 7704(b) of the Code and the

Treasury Regulations thereunder, and none of the Companies, their Subsidiaries and the Sellers has ever taken any position inconsistent with the such classifications;

(ix) except as set forth on Schedule 2.12(a)(ix), there are no outstanding powers of attorney enabling any Person that is a current or former employee, agent or representative of Cargill or any of its Affiliates to represent any Company or any of the Companies’ Subsidiaries with respect to Tax matters;

(x) For purposes of this Agreement, all references to Sections of the Code shall include any predecessor provisions to such Sections.

(b) For the purposes of this Agreement:

(i) “Tax” or “Taxes” means any federal, state, local or foreign income, gross receipts, capital gains, franchise, alternative or add-on minimum, estimated, sales, use, goods and services, transfer, registration, value added, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, special assessment, personal property, capital stock, social security, unemployment, employment, disability, payroll, license, employee or other withholding, contributions or other tax, of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing.

(ii) “Taxing Authority” shall mean any governmental authority, body or entity (including, without limitation, any administrative and regulatory authority, agency, department, board, commission or instrumentality) having jurisdiction over the assessment, determination, collection or other imposition of any Tax.

(iii) “Tax Returns” means returns, declarations, reports, claims for refund, information returns or other documents (including any related or supporting schedules, statements or information) filed or required to be filed in connection with the determination, assessment or collection of Taxes of any party or the administration of any laws, regulations or administrative requirements relating to any Taxes.

2.13 Employees; Employee Benefit Plan. The Company does not currently have and has never had any employees. The Company does not maintain or contribute to and has never maintained or contributed to, any employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), any fringe benefit, stock option, equity-based compensation, phantom stock, bonus or incentive plan, severance pay policy or agreement, retirement, pension, profit sharing or deferred compensation plan or agreement, or any similar plan or agreement or any plan or arrangement providing compensation to employees or non-employee directors.

2.14 Title to and Sufficiency of Assets. Each Company has good, valid and marketable title to all assets material to its business and to those assets reflected on the Balance Sheet or acquired by it after the date thereof (except for properties disposed of since that date in the ordinary course of business), free and clear of any claims, mortgage, pledge, lien, conditional

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sale agreement, security title, Encumbrance or other charge, except for liens for Taxes not yet due and payable and liens expressly contemplated by the Transaction Documents. All loans set forth on Schedule 2.14 opposite the Company’s name have been contributed to the Company. The assets of the Company are sufficient for the conduct of its business as presently conducted.

2.15 Real Property. The Company does not own or lease any real property. To the Seller’s Knowledge, the real property owned and leased by the Subsidiaries is listed on Schedule 2.15.

2.16 Labor and Employment Matters. Neither the Company nor the Subsidiary is a party to any employment, severance or consulting agreements with any manager, agent, director, officer or consultant, except as set forth on Schedule 2.18(b).

2.17 Permits; Compliance with Laws. Each of the Company and the Subsidiary has all franchises, authorizations, approvals, orders, consents, licenses, certificates, permits, registrations, qualifications or other rights and privileges (collectively “Permits”) necessary to permit it to own its property and to conduct its business as it is presently conducted or proposed to be conducted and all such Permits are valid and in full force and effect, except where the failure to maintain or obtain any such Permit could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. No Permit is subject to termination as a result of the execution of this Agreement or consummation of the transactions contemplated hereby. Schedule 2.17 contains a complete and accurate list of all material Permits held by the Company or the Subsidiary, as the case may be. Each of the Company and the Subsidiary is now and has heretofore been in compliance with all applicable statutes, judgments, decrees, ordinances, orders, rules and regulations promulgated by any U.S. federal, state, municipal, non-U.S. or other governmental authority, which apply to the conduct of its business or by which any property or asset of the Company or the Subsidiary, as the case may be, is bound, except where the failure to be in compliance could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. The Company has never entered into or been subject to any judgment, consent decree, compliance order or administrative order with respect to any aspect of the business, affairs, properties or assets of the Company or received any request for information, notice, demand letter, administrative inquiry or formal or informal complaint or claim from any regulatory agency with respect to any aspect of the business, affairs, properties or assets of the Company.

2.18 Contracts and Commitments of the Company and Subsidiary.

(a) Except as expressly contemplated by the Transaction Documents or as set forth on Schedule 2.18(a) (with true and correct copies of each agreement referred to therein provided to Buyer), the Company is not a party or subject to or bound by:

(i) any contract or agreement involving a potential commitment or payment by the Company in excess of $50,000;

(ii) any contract, lease or agreement which is not cancelable by the Company without penalty on not less than 90 days notice;

(iii) any contract containing covenants directly or explicitly limiting in any respect the freedom of the Company to compete in any line of business or with any person or entity;

(iv) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing or any pledge or security arrangement;

(v) any redemption or purchase agreements or other agreements affecting or relating to the Membership Interests of the Company, other than the limited liability company operating agreement of such Company, including, without limitation, any agreement with any member of the Company which includes anti-dilution rights, registration rights, voting arrangements, operating covenants or similar provisions;

(vi) any royalty, dividend or similar arrangement based on the revenues or profits of the Company or any contract or agreement involving fixed price or fixed volume arrangements;

(vii) any joint venture or partnership agreement or other agreement which involves a sharing of revenues, profits, losses, costs or liabilities by the Company with any other Person;

(viii) any acquisition, merger or similar agreement;

(ix) any contract with any Governmental Authority;

(x) any subservicing agreements other than those set forth on Schedule 2.18(a)(x);

(xi) any pledge or promissory note other than those set forth on Schedule 2.18(a)(xi) with respect to the Assumed Loans;

(xii) any contract not executed in the ordinary course of business; or

(xiii) any other material contract.

All such contracts, agreements, leases and instruments are in full force and effect and constitute legal, valid and binding obligations of the Company and, to the Knowledge of the Company, of the other parties thereto, and are enforceable against the Company in accordance with their respective terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and by general equitable principles). The Company has no Knowledge of any notice or threat to terminate any such contracts, agreements, leases or instruments. Neither the Company nor, to the Knowledge of the Company, any other party is in default in complying with any provisions of any such contract, agreement, lease or instrument, or any other contract, agreement, lease or instrument, and no condition or event or fact exists which, with notice, lapse of time or both, could constitute a default thereunder on the part of the Company, except for any such default,

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condition, event or fact that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

(b) Except as (i) expressly contemplated by the Transaction Documents, (ii) set forth on Schedule 2.18(b) (with true and correct copies of each agreement referred to therein provided to Buyer), or (iii) to any contracts, commitments or any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing or any pledge or security arrangement relating to a specific loan or asset or group of loans, or property derived therefrom, that are included in the Portfolio owned by the Subsidiary, the Subsidiary is not a party or subject to or bound by:

(i) any contract or agreement involving a potential commitment or payment by the Subsidiary in excess of $50,000;

(ii) any contract, lease or agreement which is not cancelable by the Subsidiary without penalty on not less than 90 days notice;

(iii) any contract containing covenants directly or explicitly limiting in any respect the freedom of the Subsidiary to compete in any line of business or with any person or entity;

(iv) any redemption or purchase agreements or other agreements affecting or relating to the equity interests of the Subsidiary, including, without limitation, any agreement which includes anti-dilution rights, registration rights, voting arrangements, operating covenants or similar provisions;

(v) any royalty, dividend or similar arrangement based on the revenues or profits of the Subsidiary or any contract or agreement involving fixed price or fixed volume arrangements;

(vi) any joint venture or partnership agreement or other agreement which involves a sharing of revenues, profits, losses, costs or liabilities by the Subsidiary with any other Person;

(vii) any acquisition, merger or similar agreement;

(viii) any contract with any Governmental Authority;

(ix) any subservicing agreements other than those set forth on Schedule 2.18(b)(ix);

(x) any pledge or promissory note evidencing indebtedness of the Subsidiary;

(xi) any contract not executed in the ordinary course of business; or

(xii) any other material contract.

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All contracts, agreements, leases and instruments listed on Schedule 2.18(b), except as noted thereon, are in full force and effect and constitute legal, valid and binding obligations of the Subsidiary and, to the Knowledge of the Subsidiary, of the other parties thereto, and are enforceable against the Subsidiary in accordance with their respective terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and by general equitable principles). The Subsidiary has no Knowledge of any notice or threat to terminate any such contracts, agreements, leases or instruments. Neither the Subsidiary nor, to the Knowledge of the Subsidiary, any other party is in default in complying with any provisions of any such contract, agreement, lease or instrument, or any other contract, agreement, lease or instrument, and no condition or event or fact exists which, with notice, lapse of time or both, could constitute a default thereunder on the part of the Subsidiary, except for any such default, condition, event or fact that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

2.19 Intellectual Property. Except as set forth on Schedule 2.19, the Company is the owner of, or has an unlimited, royalty-free, sublicenseable right to use, the name of the Subsidiary in Mexico.

2.20 No Illegal Payments. At all times, the Company and the Subsidiary have complied with all applicable anti-money laundering and similar laws including, without limitation, the USA Patriot Act and the Foreign Corrupt Practices Act.

2.21 Transactions with Related Persons. Except as set forth on Schedule 2.21, neither Seller nor any Affiliate of either Seller, or any Person controlled by such Seller or Affiliate (a) owns any interest in any asset used in the business of any Company or any Subsidiary or (b) is a party to any executory contract with any Company or Subsidiary which calls for any portion of the contract performance to occur on or after the Closing Date.

2.22 Solvency. Neither the Company nor the Subsidiary: (a) has made a general assignment for the benefit of creditors; (b) has filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by its creditors; (c) has suffered the appointment of a receiver to take possession of all, or substantially all, of its assets; (d) has suffered the attachment or other judicial seizure of all, or substantially all, of its assets; (e) with respect to the Company, is unable to pay its debts as they come due; or (f) has made an offer of settlement, extension or composition to its creditors generally.

3. Representations and Warranties of Sellers. In order to induce Buyer to enter into this Agreement and consummate the transactions contemplated hereby, each Seller hereby, severally makes to Buyer the following representations and warranties with respect to such Seller.

3.1 Membership Interests. Seller owns of record and beneficially the percentage of Membership Interests set forth under such Seller’s name on Exhibit A attached hereto, which Membership Interests, when combined with the other Seller’s Membership Interests, constitute 100% of the Membership Interests in the Companies. Such Membership Interests are, and when delivered by such Seller to Buyer pursuant to this Agreement will be, free and clear of any and all Encumbrances.

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3.2 Authority.

(a) Seller has full right, power and authority either individually or under its governing documents to execute and deliver this Agreement, the other Comprehensive Transaction Documents to which such Seller is a party and each agreement, document and instrument to be executed and delivered by or on behalf of such Seller pursuant to hereto or thereto and to carry out the transactions contemplated hereby and thereby. This Agreement and the other Comprehensive Transaction Documents to which such Seller is a party and each agreement, document and instrument executed and delivered by such Seller pursuant hereto or thereto constitutes a valid and binding obligation of such Seller, enforceable in accordance with their respective terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and by general equitable principles), and has been duly authorized by all necessary action under each Seller’s charter, by-laws, or governing partnership agreement, as applicable, and such Seller has full power and authority to transfer, sell and deliver the Membership Interests to Buyer pursuant to this Agreement.

(b) Neither the execution and delivery by Seller of this Agreement, the other Comprehensive Transaction Documents to which Seller is a party and the other agreements, documents and instruments contemplated hereby or thereby, nor the consummation by such Seller of the transactions in accordance with the terms hereof and thereof, conflicts with or results in a breach of any provisions of such Seller’s organizational documents. The execution and delivery by Seller of this Agreement, the other Comprehensive Transaction Documents to which such Seller is a party and the other agreements, documents and instruments contemplated hereby and thereby, and the consummation by such Seller of the transactions in accordance with the terms hereof and thereof, will not (i) violate, or conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit, require any notice to, declaration or filing with, or consent or waiver, constitute a change of control, require the payment of a penalty under or result in the imposition of any encumbrance on such Seller under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, lease, permit, license, authorization, contract or other agreement to which such Seller is a party or by which such Seller or any of such Seller’s respective properties or assets is bound or (ii) violate, conflict with or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any law, regulation or rule, or any order of, or any restriction imposed by, any court or governmental agency applicable to such Seller.

3.3 Brokers. Neither the Sellers nor any of their respective Affiliates (including the Companies and the Subsidiaries) have incurred or become liable for any broker’s commission or finder’s fee relating to or in connection with this Agreement or the other Comprehensive Transaction Documents to which any such Seller is a party or the transactions contemplated hereby or thereby other than the fees owed to Stephens Cori Capital, for which fees the Sellers and their Affiliates (but excluding the Companies and the Subsidiaries) are and shall be liable to Stephens Cori Capital.

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4. Representations and Warranties of Buyer. In order to induce each Company and Sellers to enter into this Agreement and consummate the transactions contemplated hereby, Buyer and each of AIG and SMIP, as members of Buyer and in accordance with their respective percentage membership interests in Buyer, hereby makes to Sellers the following representations and warranties.

4.1 Investment Intent. Buyer is acquiring the Membership Interests solely for the purpose of investment and not with a view to, or for offer or sale in connection with, any distribution thereof. Buyer is an “accredited investor” as such term is defined in Rule 501 under the Securities Act of 1933 (the “Securities Act”). Buyer acknowledges that the Membership Interests to be acquired by Buyer pursuant to the transactions contemplated hereby have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and the securities laws of any applicable state or other jurisdiction or an exemption from such registration is available.

4.2 Authority.

(a) Buyer has full right, power and authority either individually or under its governing documents to execute and deliver this Agreement, the other Comprehensive Transaction Documents to which Buyer is a party and each agreement, document and instrument to be executed and delivered by or on behalf of Buyer pursuant hereto and thereto and to carry out the transactions contemplated hereby and thereby. This Agreement, the other Comprehensive Transaction Documents to which Buyer is a party and each agreement, document and instrument executed and delivered by Buyer pursuant to this Agreement constitutes a valid and binding obligation of Buyer, enforceable in accordance with their respective terms (except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and by general equitable principles), and has been duly authorized by all necessary action under Buyer’s governing operating agreement and Buyer has full power and authority to purchase the Membership Interests from Sellers pursuant to this Agreement.

(b) Neither the execution and delivery by Buyer of this Agreement, the other Comprehensive Transaction Documents to which Buyer is a party and the other agreements, documents and instruments contemplated hereby, nor the consummation by Buyer of the transactions in accordance with the terms hereof and thereof, conflicts with or results in a breach of any provisions of Buyer’s organizational documents. The execution and delivery by Buyer of this Agreement, the other Comprehensive Transaction Documents to which Buyer is a party and the other agreements, documents and instruments contemplated hereby, and the consummation by Buyer of the transactions in accordance with the terms hereof and thereof, will not (i) violate, or conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit, require any notice to, declaration or filing with, or consent or waiver, constitute a change of control, require the payment of a penalty under or result in the imposition of any encumbrance on Buyer under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of

trust, lease, permit, license, authorization, contract or other agreement to which Buyer is a party or by which Buyer or any of Buyer’s respective properties or assets is bound and (ii) violate, conflict with or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any law, regulation or rule, or any order of, or any restriction imposed by, any court or governmental agency applicable to Buyer.

4.3 Brokers. Buyer has not incurred or become liable for any broker’s commission or finder’s fee relating to or in connection with this Agreement or the other Comprehensive Transaction Documents to which Buyer is a party and the transactions contemplated hereby and thereby.

5. Certain Covenants of Buyer, AIG and SMIP, the Companies and Sellers

5.1 Regulatory and Other Authorizations; Consents.

(a) The Companies and Buyer shall, and Sellers, on the one hand, and AIG and SMIP on the other hand, shall cause the Companies and Buyer, respectively, to use their good faith commercially reasonable efforts to obtain the authorizations, consents, orders and approvals necessary for their execution and delivery of, and the performance of their obligations pursuant to, this Agreement, including any filings with the Mexican Antitrust Commission, the Mexican National Banking and Securities Commission or the Central Bank of Mexico, as applicable. If required by the Foreign Competition Statutes and if the appropriate filing pursuant to the Foreign Competition Statutes has not been filed prior to the date hereof, each party hereto agrees to make an appropriate filing with respect to the transactions contemplated by this Agreement within five (5) Business Days after the date hereof and to supply promptly any additional information and documentary material that may be requested pursuant to the Foreign Competition Statutes. The parties hereto will not take any action that will have the effect of delaying, impairing or impeding the receipt of any required approvals and shall promptly respond to any requests for additional information from any Governmental Authority or filings in respect thereof. Buyer, on the one hand, and Sellers, on the other, shall share equally all filing and related fees in connection with any such filings which must be made by any of the parties under the Foreign Competition Statutes.

(b) Sellers shall use their good faith reasonable efforts to assist the Companies in obtaining the consents of third parties listed on Schedule 2.10 (a) and with respect to third parties listed on Schedule 2.10(b), including (i) providing to such third parties such financial statements and other financial information as such third parties may reasonably request, and (ii) agreeing to good faith commercially reasonable adjustments to the terms of the agreements with such third parties (provided that neither party hereto shall be required to agree to any increase in the amount payable with respect thereto).

5.2 Further Action. Each of the parties hereto shall use its respective commercially reasonable efforts to take or cause to be taken all appropriate action, do or cause to be done all things necessary, proper or advisable, and execute and deliver such documents and other papers, as may be required to carry out the provisions of this Agreement and consummate and make effective the transactions contemplated by this Agreement.

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5.3 Press Releases. The parties hereto will, and will cause each of their Affiliates and representatives to, maintain the confidentiality of this Agreement and will not, and will cause each of their Affiliates not to, issue or cause the publication of any press release or other public announcement with respect to this Agreement or the transactions contemplated hereby without the prior written consent of the other parties hereto which consent shall not be unreasonably withheld; provided, however, that a party may, without the prior consent of the other parties hereto, issue or cause publication of any such press release or public announcement to the extent that such party reasonably determines, after consultation with outside legal counsel, such action to be required by law or by the rules of any applicable self-regulatory organization, in which event such party will use its commercially reasonable efforts to allow the other parties hereto reasonable time to comment on such press release or public announcement in advance of its issuance.

5.4 No Solicitation. Except as otherwise provided herein, unless and until this Agreement shall have been terminated in accordance with its terms, each Company and Sellers agree and covenant that neither Sellers nor any Company will, directly or indirectly, initiate, solicit or encourage any inquiries or the making or implementation of any proposal or offer with respect to a merger, acquisition, or similar transaction involving the purchase of the Companies, the Subsidiaries or the Portfolios, all or substantially all of the Companies’ or the Subsidiaries’ assets, or the Membership Interests, except for the sale of loans of the Portfolios, or assets derived from such loans, in the ordinary course of business.

5.5 Preparation of Tax Returns; Payment of Taxes; Refunds.

(a) Responsibility for Filing Tax Returns.

(i) Sellers shall prepare or cause to be prepared at their own cost, all federal and state income Tax Returns for the Companies that are required to be filed after the Closing Date with respect to periods that end on or prior to the Closing Date. Sellers shall provide draft versions of such Tax Returns to the Buyer not later than thirty (30) days prior to the extended due date for filing such Tax Returns. The Buyer shall notify Sellers of any proposed changes not later than fifteen (15) days after delivery of such draft Tax Returns pursuant to the preceding sentence. Sellers shall make changes to such draft Tax Returns that are reasonably requested by the Buyer to the extent that such changes (A) are with respect to a position or item that was initially reported on such draft Tax Returns in a manner inconsistent with the past practices of the applicable Company, (B) if accepted, would cause such position or item to be consistent with the past practices of such Company. To the extent that Buyer prepares and files (or causes to be prepared and filed) Tax Returns that include a Pre-Closing Period and which shows or could show an amount of Taxes due on such Tax Return for which Sellers may be liable thereunder, Buyer shall cause such Tax Returns to be prepared in a manner consistent with past practices.

(ii) Sellers (and their Subsidiaries and Affiliates) shall not amend any Tax Returns of any Company or any Subsidiary for any Pre-Closing Period without the prior written consent of Buyer, which shall be withheld only if such amendment could reasonably be

expected to have an adverse effect on the Tax Liability or a Tax position of any of Buyer, the Companies, the Subsidiaries and their Affiliates with respect to a period after the Closing Date.

(b) Tax Refunds. Any refund received by a Company or a Subsidiary (after the Closing) with respect to Taxes of the Company or a Subsidiary for a period other than a Pre-Closing Period shall be paid over to the Buyer. Any refund received by the Company or a Subsidiary with respect to Taxes of a Company or a Subsidiary attributable to a Pre-Closing Period shall be paid over to the Sellers.

(c) Cooperation. Buyer and Sellers shall cooperate fully, as and to the extent reasonably requested by the other parties, in connection with the filing of Tax Returns, any Tax audits, proceedings or other claims, the authorization and execution of any appropriate powers of attorney to accomplish the foregoing, and other Tax related matters. Such cooperation shall include, upon the Buyer’s request, providing records and information that are reasonably relevant to any such matters, making employees available on a mutually convenient basis to provide additional information, and explaining any materials provided pursuant to this Section.

(d) Tax-Sharing Agreements. All tax sharing agreements, tax indemnification agreements, or similar agreements with respect to or involving any Company or any Subsidiaries shall be terminated as of the Closing Date and, after the Closing Date, no Company and no Subsidiary shall be bound thereby or have any liability thereunder.

(e) Statutes of Limitation. Buyer agrees to notify Sellers of any extension of any statute of limitation relating to Tax Returns of a Company or a Subsidiary in respect of periods prior to the Closing Date.

5.6 Conveyance Taxes; Costs. Buyer, on the one hand, and Sellers, on the other, shall be equally liable for any transfer, value added, excise, stock transfer, stamp, recording, registration and any similar taxes that become payable in connection with the acquisition by Buyer of the Membership Interests, and the applicable parties shall file such applications and documents as shall permit any such tax to be assessed and paid on or prior to the Closing Date in accordance with any available pre-sale filing procedure; provided, that Sellers shall pay any such Taxes with respect to the contribution of the Seller Loans.

6. Conditions To Closing

6.1 Conditions to the Buyer’s Obligations. The Buyer’s obligation to perform the actions required to consummate this Agreement contemplated to be performed on or before the Closing Date is subject to satisfaction, or written waiver by the Buyer, of each of the following conditions:

(a) Comprehensive Transaction Documents. Buyer shall have received evidence reasonably satisfactory to Buyer, in its sole discretion exercised in good faith, of the agreement, completion, and delivery, if applicable, of the Comprehensive Transaction Documents.

(b) Amendment and Restatement of LLC Agreements. Buyer shall have received evidence reasonably satisfactory to Buyer, in its sole discretion, of the amendment and restatement of the limited liability company operating agreement of each Company, respectively, effective as of the Closing in form mutually acceptable to Buyer and the Sellers.

(c) SRL Master. SRL Master shall have been formed by the MKM Entities and have constituent documents acceptable to the members of Buyer, in each member’s sole discretion.

(d) Subsidiary Loans. Buyer shall have received evidence reasonably satisfactory to Buyer, in its sole discretion, that, at least one day prior to the Closing Date, each of the Subsidiary loans listed on Exhibit D was contributed to its respective Company and each of the loans listed on Exhibit E was or is to be refinanced (contemporaneously with the Closing) by the Subsidiaries through the issuance of new notes to the SRL Master.

(e) Completion of Due Diligence. Buyer shall have received evidence to its satisfaction, exercised in good faith, that all outstanding due diligence matters have been resolved by each Company, each Subsidiary and the Sellers.

(f) Asset Sale and Purchase Agreement. The satisfaction or waiver by the parties to the Asset Sale and Purchase Agreement of the conditions to the obligations of the Sellers’ and Buyers’ Affiliates to close under the Asset Sale and Purchase Agreement.

(g) Certificates of Sellers. (i) All of the representations and warranties regarding each Company or Subsidiary in Article 2 and each Seller in Article 3 (A) that are qualified as to “materiality” (or as to “Material Adverse Effect”) will be true and correct in all respects as of the date hereof and must be true and correct in all respects as if made on the Closing Date, and (B) that are not qualified as to “materiality” (or as to “Material Adverse Effect”) will be true and correct in all material respects as of the date hereof and must be true and correct in all material respects as if made on the Closing Date; (ii) the Companies, the Subsidiaries and each Seller must have performed and complied in all material respects with all of its covenants and agreements to be performed prior to or at the Closing; and (iii) each Seller must deliver to the Buyer at the Closing a certificate, in form and substance reasonably satisfactory to the Buyer, confirming satisfaction of the conditions in clauses (i) and (ii) above.

(h) Injunctions. No action or proceeding will have been instituted or threatened prior to or on the Closing Date before any Governmental Authority pertaining to the transactions contemplated by this Agreement or the Asset Sale and Purchase Agreement, the result of which would prevent or make illegal the consummation of this Agreement or the Asset Sale and Purchase Agreement. No Governmental Authority will have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, injunction or other order (whether temporary, preliminary or permanent) that is in effect and has the effect of prohibiting the consummation of the transactions contemplated by this Agreement or the Asset Sale and Purchase Agreement.

(i) Governmental Approvals. Each Governmental Authority, including without limitation the Mexican Antitrust Commission, Mexican National Banking and Securities Commission and the Central Bank of Mexico, that is required to consent, authorize or approve under any applicable law, rule, order or regulation the consummation of this Agreement or the Asset Sale and Purchase Agreement will have consented to, authorized, permitted or approved the transactions, and waiting periods (and any extensions thereof) under the Foreign Competition Statutes applicable to the transactions contemplated by this Agreement will have expired or been terminated.

(j) Consents. The Companies will have obtained all Consents set forth on Schedule 2.10.

(k) No Material Adverse Change. There shall not have been any event, fact, circumstance or effect that, individually or in the aggregate, resulted in, caused or would reasonably be expected to cause a Material Adverse Effect, taken as a whole, and servicing costs from March 1, 2006 to the Closing Date shall have been no greater than the pro rata service costs for such period from the prior year.

(l) Opinions of Counsel. The Companies and Sellers will have furnished the Buyer with the opinions of James Dingel, Rick Vander Woude, Haynes and Boone, LLP and Kuri Breña, Sánchez Ugarte, Corcuera y Aznar, S.C., special counsel to the Companies, Sellers and Residencial Oeste, in forms mutually acceptable to Buyer and the Sellers.

(m) FIRPTA Certificate. Sellers will have delivered to the Buyer a certificate meeting the requirements of Treasury Regulations Section 1.1445-2(c)(3).

(n) Assignment of Membership Interests. The Buyer will have received (i) an Assignment of Membership Interests, in form mutually acceptable to Buyer and the Sellers, executed by each Seller, and (ii) a power of attorney from Residencial Oeste, in a form reasonably satisfactory to the Buyer, authorizing Buyer or its designee to act on behalf of Residencial Oeste, and (iii) a power of attorney from Residencial Oeste in a form reasonably satisfactory to Buyer, authorizing Enrique Benedicto Jimenez Moran to act on behalf of Residencial Oeste.

(o) Resignations. The Buyer will have received a written assignment of Cargill’s rights as agents for the lenders of each Company, and resignations from the owner’s representative for each Subsidiary and the sole manager of each Subsidiary, effective as of the Closing Date.

(p) Secretary’s Certificates. The Buyer will have received a certificate executed by the manager of Residencial Oeste and each of the Companies certifying (i) the names of the employees of the manager for such entity authorized to sign this Agreement, the Asset Sale and Purchase Agreement and the other Comprehensive Transaction Documents to which it is a party, together with the true signatures of such employees; (ii) copies of resolutions duly adopted by the manager of such entity authorizing the transactions and the appropriate employees of the manager for such entity to execute and deliver this Agreement and all

agreements, documents and instruments executed by such entity pursuant hereto, and to consummate the transactions; (iii) certificates issued by the Secretary of State of Delaware, dated within ten (10) Business Days of the Closing Date, stating that each such entity has legal existence and is in good standing in the State of Delaware; and (iv) the Buyer will have received satisfactory evidence, issued by the applicable Mexican Public Registry of Commerce, which shall be dated not more than fifteen Business Days prior to the Closing Date, stating that Residencial Oeste and each Subsidiary has legal existence in its jurisdiction of organization.

(q) Guarantee. The Buyer will have received from FirstCity Financial Corporation the unconditional guarantee in favor of the Buyer in form mutually acceptable to Buyer and the Sellers (the “Guarantee”). At all times after the date hereof until satisfaction of all obligations of SMIP hereunder and under the Asset Sale and Purchase Agreement and payment in full of all amounts due hereunder and under the Asset Sale and Purchase Agreement, the Guarantee shall remain in full force and effect.

(r) Entity Classification. Prior to the Closing Date, Sellers shall have filed IRS Forms 8832 to change the classification of each Seller SRL that is classified as an association (and not as a partnership) for U.S. tax purposes and shall have provided a copy of each such form to Buyer. Effective prior to the Closing Date, each Seller SRL shall be classified as a partnership for U.S. tax purposes.

6.2 Conditions to the Sellers’ Obligations. The Sellers’ obligation to perform the actions required to consummate this Agreement contemplated to be performed on or before the Closing Date is subject to satisfaction, or written waiver by the Sellers, of each of the following conditions:

(a) Certificate of Buyer. (i) All of the representations and warranties of the Buyer in Article 4 (A) that are qualified as to “materiality” (or as to “Material Adverse Effect”) will be true and correct in all respects as of the date hereof and must be true and correct in all respects as if made on the Closing Date, and (B) that are not qualified as to “materiality” (or as to “Material Adverse Effect”) will be true and correct in all material respects as of the date hereof and must be true and correct in all material respects as if made on the Closing Date; (ii) the Buyer must have performed and complied in all material respects with all of its covenants and agreements to be performed prior to or at the Closing and (iii) the Buyer must deliver to the Sellers at the Closing a certificate, in form and substance reasonably satisfactory to the Sellers confirming satisfaction of the conditions in clauses (i) and (ii) above.

(b) Payment of Purchase Price. Delivery of the payments required pursuant to Sections 1.2 shall have been made.

(c) Governmental Approvals. Each Governmental Authority, including the Mexican Antitrust Commission, Mexican National Banking and Securities Commission and the Central Bank of Mexico, that is required to consent, authorize or approve under any applicable law, rule, order or regulation the consummation of this Agreement will have consented to, authorized, permitted or approved the transactions, and any waiting periods (and any extensions

thereof) under the Foreign Competition Statutes applicable to the transactions contemplated by this Agreement will have expired or been terminated.

(d) Opinion of Counsel. The Buyer will have furnished the Sellers with the opinions of Goodwin Procter LLP and Mijares, Angoitia, Cortés y Fuentes, S.C., special Mexican counsel to the Buyer, in substantially the form attached hereto as Exhibit H.

(e) Secretary’s Certificate. The Sellers will have received a certificate executed by the manager of the Buyer certifying (i) the names of the employees of manager of the Buyer authorized to sign this Agreement and the other Comprehensive Transaction Documents to which it is a party, together with the true signatures of such employees; (ii) copies of resolutions duly adopted by the manager of Buyer authorizing the transactions contemplated by this Agreement and the appropriate employees of the manager of the Buyer to execute and deliver this Agreement and all agreements, documents and instruments executed by the Buyer pursuant hereto, and to consummate the transactions; and (iii) certificates issued by the Secretary of State of Delaware, dated within ten (10) Business Days of the Closing Date, stating that Buyer has legal existence and is in good standing in the State of Delaware.

7. Survival of Representations and Warranties; Indemnification

7.1 Survival.

(a) Subject to the limitations and other provisions of this Agreement, the representations and warranties of the parties hereto contained herein and in the other Transaction Documents to which it is a party or in any writing or certificate delivered pursuant to or in connection herewith or therewith, as the case may be, shall survive the Closing and shall remain in full force and effect (i) with respect to Sections 2.1, 2.2, 2.3, 2.4 and 2.12 hereof for the period established in the applicable statute of limitations, and (ii) with respect to all other representations and warranties for two (2) years, except that in the case of fraud with respect to any representation or warranty contained herein, clauses (i) and (ii) above shall not apply to any limitation set forth in this Agreement (whether a temporal limitation, a dollar limitation or otherwise).

(b) The covenants of each party set forth in this Agreement shall survive forever.

7.2 Indemnification by Sellers.

(a) Sellers agree, subject to the other terms and conditions of this Agreement, to severally indemnify Buyer and its members, managers, officers and directors (each a “Buyer Indemnified Party”) against and hold them harmless to the extent of any Losses resulting from (i) any and all Tax liabilities for any Pre-Closing Period relating to the Companies, the Subsidiaries, the Portfolios, the Seller Loans and Sellers’ ownership of the Membership Interests, (ii) any breach of any representation or warranty, (iii) the termination fees payable under any subservicing agreement, (iv) any equity transfers in respect of the ownership of the Portfolios,

(v) any breach of any covenant or agreement of the Companies or Sellers contained in this Agreement, and (vi) in respect of any amounts owed by Sellers as contemplated in Section 3.3.

(b) Except in the case of fraud, the indemnification obligations of Sellers pursuant to Section 7.1(a)(ii) shall be limited as follows:

(i) Sellers shall have no obligation to provide any indemnification until the aggregate dollar amount of all Losses that would otherwise be indemnifiable pursuant to Section 7.2(a), together with all Losses that are or would be indemnifiable pursuant to Clause Twelfth of the Asset Sale and Purchase Agreement, exceeds $250,000 (the “Deductible”), and once the Deductible has been reached, the Sellers shall indemnify the Buyer Indemnified Parties for all Losses, including the amount of those Losses below the amount of the Deductible.

(ii) Sellers shall not be obligated to indemnify any Buyer Indemnified Party pursuant to Section 7.2(a) for any amount of indemnifiable Losses in excess of the sum of the Closing Purchase Price and the purchase price of the assets purchased pursuant to the Asset Sale and Purchase Agreement (without duplication of amounts recovered pursuant to Clause Twelfth of the Asset Sale and Purchase Agreement).

(iii) In addition to the limitations set forth in clauses (i) and (ii) above, the indemnification obligation with respect to any Loss suffered by Buyer with respect to a particular Company or Subsidiary shall be apportioned between the Sellers in accordance with the pro rata percentage interests set forth on Exhibit A hereto, provided, that if any Loss suffered by Buyer does not directly relate to a specific Company or Subsidiary and cannot be apportioned between the Sellers in accordance with Exhibit A, the indemnification obligation with respect to such Loss shall be apportioned between the Sellers with Cargill bearing 80% of such indemnification obligation and SMIP bearing 20% of such indemnification obligation.

(c) A Buyer Indemnified Party, with respect to itself only and not any other Buyer Indemnified Party, except that each of National Union Fire Insurance Company of Pittsburgh, Pa., American General Life Insurance Company and American General Life and Accident Insurance Company may act on behalf of each other, shall give the Sellers written notice of any claim, assertion, event or proceeding by or in respect of a third party as to which such Buyer Indemnified Party may request indemnification hereunder or as to which the Deductible may be applied as soon as is practicable and in any event within thirty (30) days of the time that such Buyer Indemnified Party learns of such claim, assertion, event or proceeding; provided, however, that the failure to so notify the Sellers shall not affect rights to indemnification hereunder except to the extent that Sellers (or any indemnifying Seller) are prejudiced by such failure. The Sellers shall have the right to direct, through counsel of its own choosing, the defense or settlement of any such claim or proceeding at the expense of such Sellers. If the Sellers elect to assume the defense of any such claim or proceeding, the Sellers shall consult with the Buyer Indemnified Party for the purpose of allowing the Buyer Indemnified Party to participate in such defense. A Buyer Indemnified Party shall provide and shall cause the Companies to provide, as applicable, the Sellers and counsel with access to its

records and personnel relating to any such claim, assertion, event or proceeding during normal business hours and shall otherwise cooperate with the Sellers in the defense or settlement thereof, and Sellers shall reimburse Buyer Indemnified Party for all its reasonable out-of-pocket expenses in connection therewith in accordance with this Agreement. If the Sellers elect to direct the defense of any such claim or proceeding, Buyer Indemnified Party shall not pay, or permit to be paid, any part of any claim or demand arising from such asserted liability unless the Sellers consent in writing to such payment or unless the Sellers, subject to the last sentence of this Section 7.2(c), withdraw from the defense of such asserted liability or unless a final judgment from which no appeal may be taken by or on behalf of Sellers is entered against Buyer Indemnified Party for such liability. If the Sellers fail to defend or if, after commencing or undertaking any such defense, the Sellers fail to prosecute or withdraw from such defense, Buyer Indemnified Party shall have the right to undertake the defense or settlement thereof, at Sellers’ expense. If the Buyer Indemnified Party assumes the defense of any such claim or proceeding pursuant to this Section 7.2(c) and proposes to settle such claim or proceeding prior to a final judgment thereon or to forego any appeal with respect thereto, then the Buyer Indemnified Party shall give the Sellers prompt written notice thereof, and the Sellers shall have the right to participate in the settlement or assume or reassume the defense of such claim or proceeding. Sellers shall not be entitled to settle or dispose of any third-party claim if such settlement or disposition would reasonably be expected to have an adverse effect on a Buyer Indemnified Party for any period after the Closing Date, without the prior written consent of the Buyer, which consent shall not be unreasonably withheld or delayed.

7.3 Treatment of Indemnity Payments. All payments made by Sellers or Buyer, as the case may be, to or for the benefit of the other parties pursuant to this Article 7 shall be treated as adjustments to the purchase price for tax purposes, and such agreed treatment shall govern for purposes of this Agreement.

7.4 Remedies Not Exclusive. Notwithstanding anything herein or the other Transaction Documents to the contrary, no party hereto or thereto shall have the right to seek rescission of this Agreement or the other Transaction Documents, except in the case of fraud, in which case such remedy shall be available. Subject to the immediately preceding sentence, nothing in this Agreement or the other Transaction Documents, including any indemnification to which Buyer is entitled pursuant to this Article 7, shall be construed to limit any right of Buyer to seek any remedy available at law or in equity, provided, that Buyer only shall be entitled to seek money damages pursuant to the terms of this Article 7 (except in the case of fraud, in which case the Buyer shall continue to have the right to any remedy available at law or in equity).

8. General Provisions

8.1 Notices. All notices, requests, claims, demands and other communications under this Agreement will be in writing and will be deemed given if delivered personally, sent by overnight courier (providing proof of delivery), or via facsimile to the parties at the following addresses (or at such other address for a party as specified by like notice):

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If to each Company, to:

c/o FirstCity Mexico, Inc.
6400 Imperial Drive (Delivery only)
P.O. Box 8216
Waco, Texas 76712-8216
Attn: Legal Department
Facsimile: 254-761-2953

with copy to:

Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: Paul H. Amiel
Facsimile: 214-200-0555

If to SMIP, to:

c/o FirstCity Mexico, Inc.
6400 Imperial Drive (Delivery only)
P.O. Box 8216
Waco, Texas 76712-8216
Attn: Legal Department
Facsimile: 254-761-2953

with copy to:

Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: Paul H. Amiel
Facsimile: 214-200-0555

If to Cargill, to:

Cargill Financial Services International, Inc.
12700 Whitewater Drive
Minnetonka, Minnesota 55343-9439
Attn: Adam Bernier
Facsimile: 952-984-3905

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with a copy to:

Cargill Financial Services International, Inc.
12700 Whitewater Drive
Minnetonka, Minnesota 55343-9439
Attn: James D. Dingel
Facsimile: 952-404-6344

If to Buyer, to:

Bidmex Holding, LLC
c/o FirstCity Mexico, Inc.
6400 Imperial Drive (Delivery only)
P.O. Box 8216
Waco, Texas 76712-8216
Attn: Legal Department
Facsimile: 254-761-2953

with a copy to:

AIG Global Investment Group
599 Lexington Avenue, 25th Floor
New York, New York 10022
Attn: Afsar Farman-Farmaian, Esq.
General Counsel, AIG Capital Recovery Group
Facsimile: 866-729-7836

and

Goodwin Procter LLP
599 Lexington Avenue
New York, NY 10022
Attn: Andrew Weidhaas/Alyssa Grikscheit
Facsimile: 212-355-3333

8.2 Fees and Expenses. Except as provided otherwise herein, in the Commitment Letter or in the Escrow Agreement, each of Buyer, on the one hand, and Sellers, on the other hand, shall bear its own expenses in connection with the negotiation and the consummation of the transactions contemplated by this Agreement.

8.3 Interpretation. When a reference is made in this Agreement to an Article, Section, Schedule or Exhibit, such reference will be to an Article or Section of, or a Schedule or Exhibit to, this Agreement unless otherwise indicated. Any Schedule hereto may be delivered on a CD-ROM disc provided that such disc is in a user-friendly format as agreed by the parties hereto. The table of contents and headings contained in this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of this Agreement.

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Whenever the words “include,” “includes” or “including” are used in this Agreement, they will be deemed to be followed by the words “without limitation.” The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement will refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms used herein with initial capital letters have the meanings ascribed to them herein and all terms defined in this Agreement will have such defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.

8.4 Counterparts. This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement and will become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties.

8.5 Amendments. This Agreement may not be amended or modified, nor may compliance with any condition or covenant set forth herein be waived, except by a writing duly and validly executed by Buyer, each Company and the Sellers, or in the case of a waiver, the party waiving compliance.

8.6 Entire Agreement; Severability. This Agreement (including the exhibits, schedules, documents and instruments referred to herein), the Funds Flow Memorandum, the Put Option Agreement, the Escrow Agreement and Section 4 of the Commitment Letter as incorporated into the Escrow Agreement, constitute the entire agreement, and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement. If any term, condition or other provision of this Agreement is found to be invalid, illegal or incapable of being enforced by virtue of any rule of law, public policy or court determination, all other terms, conditions and provisions of this Agreement shall nevertheless remain in full force and effect.

8.7 Third Party Beneficiaries. Except as expressly provided in this Agreement, each party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any Person other than the parties hereto. Notwithstanding the foregoing, any member of the Buyer that is also a party to this Agreement may enforce any or all of Buyer’s rights hereunder.

8.8 Governing Law. This Agreement will be governed by, and construed in accordance with, the internal laws of the State of New York, United States of America (without giving effect to any choice of law or conflict of law provision or rule that would cause the application of the laws of any other jurisdiction), and any dispute hereunder shall be subject to resolution solely in any court of competent jurisdiction in the State of New York.

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8.9 Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned, in whole or in part, by operation of law or otherwise by the parties hereto without the prior written consent of each Company, the Sellers and the Buyer. Any assignment in violation of the preceding sentence will be void. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns.

8.10 Consent to Jurisdiction. Each of the parties hereby consents to personal jurisdiction, service of process and venue in the federal or state courts of the State of New York, United States for any claim, suit or proceeding arising under this Agreement, or in the case of a third party claim subject to indemnification hereunder, in the court where such claim is brought.

8.11 Mutual Drafting. The parties hereto are sophisticated and have been represented by attorneys throughout the transactions contemplated hereby who have carefully negotiated the provisions hereof. As a consequence, the parties do not intend that the presumptions of laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied to this Agreement or any agreement or instrument executed in connection herewith, and therefore waive their effects.

8.12 Acknowledgment. The parties hereto acknowledge that AIG Equity Sales Corp., an Affiliate of AIG, has been retained as a placement agent for the 4(2) Notes and its fees are payable by SRL Master.

8.13 Remedies. It is specifically understood and agreed that any breach of the provisions of this Agreement or any other agreement executed and delivered pursuant to this Agreement by any party hereto will result in irreparable injury to the other parties hereto, that the remedy at law alone will be an inadequate remedy for such breach, and that, in addition to any other remedies which they may have, such other parties may enforce their respective rights by actions for specific performance (to the extent permitted by Law).

8.14 Waiver.

(a) For and in consideration of the amount to be paid to each Seller under this Agreement (provided the same is paid), and the additional covenants and promises set forth in this Agreement, from and after the Closing Date, each Seller, on behalf of itself and its assigns, heirs, beneficiaries, creditors, representatives, agents and Affiliates involved in the transactions contemplated by this Agreement and the Comprehensive Transaction Documents to which it is a party (collectively, the “Releasing Parties”), hereby fully, finally and irrevocably releases, acquits and forever discharges Buyer, each Company and the managers, officers, directors, partners, general partners, limited partners, managing directors, members, trustees, shareholders, representatives, employees, principals, agents, Affiliates, parents, subsidiaries, joint ventures, predecessors, successors, assigns, beneficiaries, heirs, executors, personal or legal representatives, insurers and attorneys of any of them involved in the transactions contemplated by this Agreement and the Comprehensive Transaction Documents to which it is a party (collectively, the “Released Parties”) from any and all commitments, actions, debts, claims, counterclaims, suits, causes of action, damages, demands, liabilities, obligations, costs, expenses,

and compensation of every kind and nature whatsoever, past, present, or future, at law or in equity, whether known or unknown, contingent or otherwise, which such Releasing Parties, or any of them, had, has, or may have had at any time in the past until and including the date of this Agreement against the Released Parties, or any of them, which relate to or arise out of such Releasing Party’s prior relationship with the Companies or the Subsidiaries or their lenders or its rights or status as a member, officer, employee or director of the Companies and further including any claims of fraud or fraudulent inducement in connection with the negotiation, execution and performance of this Agreement and the other Comprehensive Transaction Documents set forth on Exhibit C hereto to which such Seller is a party in connection with the transactions contemplated by this Agreement (collectively, for the purposes of this Section 8.13 “Causes of Action”).

(b) Each Seller hereby represents to the Released Parties that such Seller (i) has not assigned any Causes of Action or possible Causes of Action against any Released Party, (ii) fully intends to release all Causes of Action against the Released Parties including unknown and contingent Causes of Action, and (iii) has consulted with counsel with respect to the execution and delivery of this general release and has been fully apprised of the consequences hereof. Furthermore, each Seller further agrees not to institute any litigation, lawsuit, claim or action against any Released Party with respect to the released Causes of Action.

(c) Each Seller hereby represents and warrants that it has access to adequate information regarding the terms of this Agreement, the scope and effect of the releases set forth herein, and all other matters encompassed by this Agreement to make an informed and knowledgeable decision with regard to entering into this Agreement. Each Seller further represents and warrants that it has not relied upon any Company, Buyer or any of the Released Parties in deciding to enter into this Agreement and has instead made its own independent analysis and decision to enter into this Agreement.

(d) Each Seller hereby irrevocably waives any rights of first refusal, preemptive rights, rights to purchase or other rights that such Seller may have with respect to any securities of any of the Companies or the Subsidiaries, whether under Law, LLC operating agreements, certificates of formation or other organizational documents, by contract or otherwise.

9. Definitions

9.1 Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below:

“4(2) Notes”: the notes to be issued by SRL Master to Buyer in a private placement pursuant to Section 4(2) of the Securities Act, the terms of which notes shall provide for follow-on issuances of such notes;

An “Affiliate” of any Person means with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such Person; provided, however, that for purposes of this Agreement

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American International Group, Inc. is an independent entity and is not controlled by or under the control of any Person. For purposes of this definition, the term “control” (including the terms “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

“Acquired Assets” means (i) the Portfolio owned by Residencial Oeste as of the close of business on the Valuation Date including all cash flow from such Portfolio arising after the Valuation Date reduced by (x) Asset Level Expenses (as defined in the Servicing Agreement) incurred with respect to the assets comprising that Portfolio, and (y) Servicing Fees (as defined in the Servicing Agreement) related to that Portfolio, in each instance incurred after the Valuation Date;

“AIG Asset Purchase Price” means 85% of the agreed upon value, in Mexican Pesos, of the Acquired Assets to be paid in U.S. Dollars at the Exchange Rate to acquire the Acquired Assets pursuant to the Asset Sale and Purchase Agreement, dated as of the date hereof;

“AIG Escrowed Funds” means US$5,000,000 deposited by AIG Global Asset Management Holdings Corp. with Escrow Agent pursuant to the Escrow Agreement, plus any interest thereon;

“Asset Sale and Purchase Agreement” means the Asset Sale and Purchase Agreement, among Cargill, SMIP, Bidmex Acquisition, LLC, Residencial Oeste 2 and Residencial Oeste, in form mutually acceptable to Buyer and the Sellers;

“Assumed Loans” means each Seller Loan to the Sellers SRLs set forth on Exhibit F hereto;

“Balance Sheet” means the unaudited balance sheet of the Company along with the audited balance sheet of the Subsidiaries as of December 31, 2005;

“Business Day” means any calendar day that is not Saturday, Sunday or a day on which banking institutions in New York, New York, Waco, Texas or, to the extent applicable, Mexico City, Mexico are authorized or obligated by Law or executive order to be closed;

“Cargill Escrowed Funds” means US$3,000,000 deposited by Cargill with the Escrow Agent pursuant to the Escrow Agreement, plus any interest thereon;

“Code” means the Internal Revenue Code of 1986, as amended;

“Commitment Letter” means the letter agreement entered among the Sellers and AIG Global Asset Management Holdings Corp., dated as of May 30, 2006, establishing the terms of this Agreement and the other transaction documents;

“Comprehensive Transaction Documents” means the documents listed on Exhibit C hereto;

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“Contract” means any agreement, arrangement, bond, insurance policy, commitment, franchise, indemnity, indenture, instrument, lease, license, insurance policy or understanding, whether or not in writing;

“Encumbrances” means any and all mortgages, charges (fixed or floating), pledges, liens, options, rights to acquire, assignments by way of security, trust arrangements for the purpose of providing security or any other security interest of any kind;

“Escrow Agent” means Chicago Title Insurance Company;

“Escrow Agreement” mean the escrow agreement entered among the Sellers and AIG, dated as of May 30, 2006, establishing the terms of the Cargill Escrowed Funds and AIG Escrowed Funds;

“Exchange Rate” means the U.S. Dollar/Mexican Peso exchange rate used for payment of obligations denominated in foreign currency payable in Mexico published by Mexican Central Bank (Banco de México) in the Federal Official Gazette (Diario Oficial de la Federación) (or equivalent daily authoritative public source if the Diario Oficial de la Federación should cease publication or cease publishing exchange rate data) on the business day immediately preceding the Closing Date;

“Foreign Competition Statutes” means the Mexican Ley Federal de Competencia Economica;

“Funds Flow Memorandum” means the funds flow memorandum, dated as of the date hereof, detailing the fund transfers in the connection with the transactions contemplated hereby;

“Knowledge” means (i) with respect to the Companies, the actual knowledge after reasonable inquiry of the Sellers and/or the manager or employees of the manager of the Companies, (ii) with respect to the Sellers, the actual knowledge after reasonable inquiry of key employees of the Sellers or its Affiliates and (ii) with respect to the Subsidiaries, the actual knowledge after reasonable inquiry of the manager or employees of the manager of Companies or the manager or employees of the manager of the Subsidiaries, including in each case Buddy Leigh, Terry DeWitt, Rick Vander Woude, Enrique Moran, Joe Greak, Tomas Ennis, Michael Smithers, Ernesto Elorduy, Sergio Rivas and Bryan Baker;

“Law” means any constitutional provision, statute or other law, rule, regulation, ordinance or interpretation of any Governmental Authority and any Order;

“Losses” means any and all losses, liabilities, damages, claims, awards, judgments, costs and expenses (including, without limitation, reasonable attorneys’ fees) actually suffered or incurred by such Person;

“Material Adverse Effect” means a material adverse effect on the assets, liabilities, condition (financial or other), business, results of operations or prospects of the Companies, the Subsidiaries or the Portfolios;

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“Mexican GAAP” means Mexican generally accepted accounting principles, consistently applied;

“MKM Entities” means MKM III Corp. and MKM IV Corp., either of which shall be the owner of 100% of the equity interests in SRL Master;

“Order” means any decree, injunction, judgment, order, ruling, assessment or writ of any Governmental Authority;

“Person” means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity;

“Portfolio” means each of the 11 residential and commercial, Mexican Peso-denominated, non-performing loan portfolios, and any cash and other assets derived from such portfolios (including without limitation real or personal property), purchased by the Seller SRLs owned by SMIP and Cargill from financial institutions in Mexico during the period from December 1998 to March 2005 as listed on Exhibit G;

“Pre-Closing Period” shall mean any taxable year or period that ends on or before the Closing Date and, with respect to any taxable year or period beginning before and ending after the Closing Date, the portion of such taxable year or period ending on and including the Closing Date. For purposes of this Agreement, in the case of any taxable year or period of a Company or a Subsidiary which includes the Closing Date (but does not end on that day), (i) Property Taxes allocable to the Pre-Closing Period shall be equal to the amount of such Property Taxes for the entire taxable year or period multiplied by a fraction, the numerator of which is the number of days during the taxable year or period that are in the Pre-Closing Period and the denominator of which is the number of days in the entire taxable year or period, and (ii) Taxes (other than Property Taxes) of a Company or a Subsidiary for the Pre-Closing Period shall be computed as if such taxable year or period (and the taxable year or period of any entity taxable as a partnership in which the Company or the Subsidiary owns a direct or indirect interest) ended as of the close of business on the Closing Date;

“Property Taxes” means real, personal and intangible ad valorem property Taxes;

“Put Option Agreement” means the Put Option Agreement, dated as of the date hereof, by and among the Buyer, Recuperación de Carteras Mexicanas, S. de R.L. de C.V., Bidmex 6, LLC, Strategic Mexican Investment Partners 2, L.P. and Cargill;

“Residencial Oeste” means Residencial Oeste, S. de R.L. de C.V.;

“Residencial Oeste 2” means Residencial Oeste 2, S. de R.L. de C.V.;

“Seller Loans” means any outstanding indebtedness of any Seller SRL to any Seller or any Company;

“Seller SRL” means each of the Subsidiaries and Residencial Oeste, which hold a Portfolio (collectively, the “Seller SRLs”);

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“Servicing Agreement” means the Servicing Agreement among the Subsidiaries and FirstCity Mexico, S.A. de C.V., in form mutually acceptable to Buyer and the Sellers;

“SMIP Asset Purchase Price” means 15% of the agreed upon value, in Mexican Pesos, of the Acquired Assets to be paid in U.S. Dollars at the Exchange Rate to acquire the Acquired Assets pursuant to the Asset Sale and Purchase Agreement, dated as of the date hereof;

“SRL Master” means Notmex, S. de R.L. de C.V., a sociedad de responsabilidad limitada de capital variable which will issue the 4(2) Notes and the equity interests of which will be approximately 100% owned by the MKM Entities;

“SRL Notes” means the notes evidencing the Seller Loans;

“Transaction Documents” means, including, without limitation, collectively, this Agreement and (i) the Asset Sale and Purchase Agreement among Bidmex Acquisition, LLC, Residencial Oeste 2 and Residencial Oeste, (ii) Buyer’s Limited Liability Company Agreement, (iii) the amendment and restatements to each Company’s LLC Agreement, (iv) the Servicing Agreement among the Subsidiaries and FirstCity Mexico, S.A. de C.V., (v) the Escrow Agreement; (vi) and Section 4 of the Commitment Letter as incorporated into the Escrow Agreement;

“U.S. GAAP” means U.S. generally accepted accounting principles, consistently applied; and

“Valuation Date” means the close of business as of February 28, 2006, the cut off date used to value the cash flows generated by the Portfolios.

9.2 Other Definitions. Each of the following defined terms has the meaning given such term in the Section set forth opposite such defined term:

Term		Section

Accountants		1.3(a)
AIG		Preamble
Agreement		Preamble
Balance Sheet		2.7(a)
Buyer		Preamble
Buyer Indemnified Party		7.2(a)
Cargill		Preamble
Causes of Action		8.13(a)
Closing		1.4
Closing Date		1.4
Closing Purchase Price		1.2
Closing Reconciliation		1.3(a)
Companies		Preamble
Company		Preamble
Company Certificate		2.1(a)

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Term		Section

Company LLC Agreement		2.1(a)
Deductible		7.2(b)
Dispute Notice		1.3(a)
ERISA		2.13
Financial Statements		2.7
Final Closing Reconciliation		1.3(a)
Foreign Competition Statutes		2.10(a)
Governmental Authority		2.10(a)
Guarantee		6.1(q)
Liability		2.8
Membership Interests		Recitals
Permits		2.17
Purchase Price		1.2
Released Parties		8.13(a)
Releasing Parties		8.13(a)
SEC		2.25
Securities Act		4.1
Seller Entities		Preamble
Sellers		Preamble
SMIP		Preamble
Subsidiaries		2.2
Subsidiary		2.2
Tax		2.12
Taxes		2.12
Taxing Authority		2.12
Tax Returns		2.12
Unaudited Balance Sheet		2.7(b)
Valuation Date		2.7(b)

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IN WITNESS WHEREOF, the parties hereto have caused this Interest Purchase and Sale Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above.

		COMPANIES:

		NAMEX, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President


		BIDMEX, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President


		BIDMEX II, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President


		BIDMEX 3, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President

Signature page to Interest Purchase and Sale Agreement

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		BIDMEX 4, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President


		BIDMEX 5, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President


		BIDMEX 7, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President


		BIDMEX 8, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President


		BIDMEX 9, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President

Signature page to Interest Purchase and Sale Agreement

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		BIDMEX 10, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President


		BIDMEX XI, LLC

		By: FirstCity Mexico, Inc., its Manager


		By:
			Name: James T. Sartain
			Title: President

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SELLERS:

CARGILL FINANCIAL SERVICES INTERNATIONAL, INC.


By:
	Name: Richard Luke Toft
	Title: Assistant Vice President


STRATEGIC MEXICAN INVESTMENT PARTNERS, L.P.

By: FirstCity Mexico, Inc., its Manager


By:
		Name: James T. Sartain
		Title: President


BUYER:

BIDMEX HOLDING, LLC

By: FirstCity Mexico, Inc., its Manager


By:
		Name: James T. Sartain
		Title: President

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AIG ENTITIES:

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.

By: AIG Global Investment Corp.,
	its investment adviser


	By:
		Name:
		Title:


AMERICAN GENERAL LIFE INSURANCE COMPANY

By: AIG Global Investment Corp.,
	its investment adviser


	By:
		Name:
		Title:


AMERICAN GENERAL LIFE AND ACCIDENT INSURANCE COMPANY

By: AIG Global Investment Corp.,
	its investment adviser


	By:
		Name:
		Title:

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EXHIBIT A

Sellers; Membership Interests; Purchase Price Allocation

Cargill Financial Services International, Inc.

Name	Membership Interests Owned		Membership Interests To Be Sold		Purchase Price Allocation		Pro Rata Percentage Interest

Namex, LLC	68.055556	%	68.055556	%	$	MxP 3,042,764	68.055556	%

Bidmex, LLC	78.979525	%	78.979525	%	$	MxP 169,931,557	78.979525	%

Bidmex II, LLC	82.643072	%	82.643072	%	$	MxP 125,443,919	82.643072	%

Bidmex 3, LLC	77.478494	%	77.478494	%	$	MxP 102,892,990	77.478494	%

Bidmex 4, LLC	70.000000	%	70.000000	%	$	MxP 72,670,564	70.000000	%

Bidmex 5, LLC	70.000000	%	70.000000	%	$	MxP 40,380,606	70.000000	%

Bidmex 7, LLC	70.000000	%	70.000000	%	$	MxP 28,356,275	70.000000	%

Bidmex 8, LLC	70.000000	%	70.000000	%	$	MxP 29,665,300	70.000000	%

Bidmex 9, LLC	85.000000	%	85.000000	%	$	MxP 318,310,048	85.000000	%

Bidmex 10, LLC	75.000000	%	75.000000	%	$	MxP 31,479,750	75.000000	%

Bidmex XI, LLC	75.000000	%	75.000000	%	$	MxP 18,178,664	75.000000	%

Exhibit A to Interest Purchase and Sale Agreement

Table of Contents

Strategic Mexican Investment Partners, L.P.

	Membership Interests Owned		Membership Interests To Be Sold		Purchase Price Allocation		Pro Rata Percentage Interest

Namex, LLC	31.944444	%	31.944444	%	$	MxP 1,428,236	31.944444	%

Bidmex, LLC	21.020475	%	21.020475	%	$	MxP 45,227,444	21.020475	%

Bidmex II, LLC	17.356928	%	17.356928	%	$	MxP 26,346,081	17.356928	%

Bidmex 3, LLC	22.521506	%	22.521506	%	$	MxP 29,909,010	22.521506	%

Bidmex 4, LLC	30.000000	%	30.000000	%	$	MxP 31,144,528	30.000000	%

Bidmex 5, LLC	30.000000	%	30.000000	%	$	MxP 17,305,974	30.000000	%

Bidmex 7, LLC	30.000000	%	30.000000	%	$	MxP 12,152,689	30.000000	%

Bidmex 8, LLC	30.000000	%	30.000000	%	$	MxP 12,713,700	30.000000	%

Bidmex 9, LLC	15.000000	%	15.000000	%	$	MxP 56,172,361	15.000000	%

Bidmex 10, LLC	25.000000	%	25.000000	%	$	MxP 10,493,250	25.000000	%

Bidmex XI, LLC	25.000000	%	25.000000	%	$	MxP 6,059,555	25.000000	%

Table of Contents

EXHIBIT B

Form of Closing Reconciliation

Exhibit B to Interest Purchase and Sale Agreement

Table of Contents

EXHIBIT C

Comprehensive Transaction Documents

1. The Agreement

2. Asset Sale and Purchase Agreement

3. Put Option Agreement

4. Guarantee

5. Funds Flow Memorandum

6. Limited Liability Company Agreement of Buyer

7. Offering Circular with respect to issuance of 4(2) Notes

8. The 4(2) Notes

9. The SRL Notes

10. The Escrow Agreement (including, by incorporation, Section 4 of the Commitment Letter)

11. Amended and Restated Company LLC Agreements

12. Servicing Agreement between FirstCity Mexico, S.A. de C.V. and the Subsidiaries

13. Termination of all existing servicing agreements among FirstCity Mexico, S.A. de C.V. and the Subsidiaries

14. Powers of Attorney from Residencial Oeste, S. de R.L. de C.V. to Residencial Oeste 2, S. de R.L. de C.V., and from Residencial Oeste 2, S. de R.L. de C.V. to the relevant authorized person

15. Evidence of ownership of shares and loan interests formerly held by Other Investors and lack of encumbrances or liabilities with respect thereto

16. Evidence of contribution of all Seller Loans

17. Evidence of assignment (and release, if any) of the pledges for the promissory notes with respect to the Seller Loans

18. Good standing certificates for the Companies

Exhibit C to Interest Purchase and Sale Agreement

Table of Contents

19. Officers’ certificates required by this Agreement and the Asset Sale and Purchase Agreement

20. Closing opinions

21. Resolutions and consents evidencing AIG, Cargill and SMIP approval for the transactions contemplated by this Agreement and the Asset Sale and Purchase Agreement

22. Document notifying transaction before the Mexican Antitrust Commission

23. Evidence of approval of the registration of the 4(2) Notes with Comisíon Nacional Bancaria y de Valores (National Banking and Securities Commission)

24. Constituent documents of SRL Master, Bidmex Acquisition, LLC and Residencial Oeste 2, S. de R.L. de C.V.

Table of Contents

EXHIBIT D

Contributed Subsidiary Loans

Nafin

Santander

Serfin

Cremi

Bancrecer

Bital

Intervened

Intervened 2

Banamex

Bancomext

Intervened 3

Exhibit D to Interest Purchase and Sale Agreement

Table of Contents

EXHIBIT E

Refinanced Subsidiary Loans

Bancrecer

Bital

Intervened

Intervened 2

Banamex

Bancomext

Intervened 3

Exhibit E to Interest Purchase and Sale Agreement

Table of Contents

EXHIBIT F

Assumed Loans

Nafin

Santander

Serfin

Cremi

Exhibit F to Interest Purchase and Sale Agreement

Table of Contents

EXHIBIT G

Subsidiary Portfolios

Exhibit G to Interest Purchase and Sale Agreement

Exhibit 10.15

PUT OPTION AGREEMENT

executed by and among

BIDMEX HOLDING, LLC,
As Option Grantee,

and

RECUPERACIÓN DE CARTERAS MEXICANAS, S. DE R.L. DE C.V.,
As Option Grantor,

and

BIDMEX 6, LLC,

and

STRATEGIC MEXICAN INVESTMENT PARTNERS 2, L.P.

and

CARGILL FINANCIAL SERVICES INTERNATIONAL, INC.

August , 2006

INDEX

BACKGROUND		1

RECITALS		3
I. Recitals of Option Grantor		3
II. Recitals of Option Grantee		4
III.Recitals of Bidmex 6		6
IV. Recitals of SMIP-2		7
V. Recitals of Cargill		8
VI. Recitals of the Parties		7

CLAUSES		7
Section 1.	Definitions	7

Section 2.	Put Option	10

Section 3.	Exercise of the Put Option	11

Section 4.	Term; Termination.	13

Section 5.	Notices	14

Section 6.	No Third Party Beneficiaries	17

Section 7.	Amendment and Waiver	17

Section 8.	Governing Law.	17

Section 9.	Arbitration	17

Section 10.	Counterparts	19

Section 11.	Severability	19

Section 12.	Captions.	19

Section 13.	Acknowledgment And Indemnity	19

Section 14.	Assignment	20

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PUT OPTION AGREEMENT

This Put Option Agreement (the “Agreement”) dated as of August , 2006 is made and entered into by and among:

i) Bidmex Holding, LLC, a Delaware limited liability company (“Grantee”), as the option grantee/holder,

ii) Recuperación de Carteras Mexicanas, S. de R.L. de C.V., a limited liability partnership with variable capital (sociedad de responsabilidad limitada de capital variable) organized and validly existing under the laws of Mexico (“RCM”), as the option grantor,

iii) Bidmex 6, LLC, a Delaware limited liability company (“Bidmex 6”), as the sole parent of RCM,

iv) Strategic Mexican Investment Partners 2, L.P., a Texas limited partnership (“SMIP-2”), as a member of Bidmex 6, and

v) Cargill Financial Services Internacional, Inc. (“Cargill”), as a member of Bidmex 6,

pursuant to the following background, recitals and clauses:

BACKGROUND

1. On the date hereof, Grantee, as purchaser, and each of Strategic Mexican Investment Partners, L.P., a Texas limited partnership (“SMIP”), and Cargill (collectively with SMIP, the “Sellers”), as sellers, along with Bidmex 9, LLC (“Bidmex 9”) and Bidmex 10, LLC (“Bidmex 10”), both Delaware limited liability companies, and certain other Delaware limited liability companies (collectively with Bidmex 9 and Bidmex 10, the “Companies”) entered into that certain interest purchase and sale agreement (the “Interest Purchase and Sale Agreement”), dated as of the date hereof, pursuant to which Sellers sold to Grantee 100% of the Membership Interests in each of the Companies.

2. Bidmex 9, LLC is the owner of Solución de Activos Residenciales, S. de R.L. de C.V. (“SAR”), a limited liability partnership with variable capital (sociedad de responsabilidad limitada de capital variable) organized and validly existing under the laws of Mexico. SAR is the owner of a residential, Mexican Peso-denominated, non-performing loan portfolio that it purchased from Banco Nacional de

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México, S.A., Integrante del Grupo Financiero Banamex (“Banamex”) on April 19, 2004. SAR purchased the SAR Loans from Banamex under that Agreement of Onerous Assignment of Credits and its Respective Litigation Rights dated as of April 19, 2004. SAR is the owner of the loans described in Schedule “A” hereto(the “SAR Loans”), which are evidenced, mainly, by means of the Loan Agreements, promissory notes and other related documents, and include, without limitation, any and all of the rights arising thereunder, such as the right to collect principal, interest (either ordinary or delinquent interest), any accessories, guaranties, claims, litigation or adjudication rights related thereto and/or anything pertaining to the above, which schedule indicates, for purposes of identification only with respect to each SAR Loan, the relevant debtor’s name, the identification number for the loan used by the Grantee, principal amount due, as well as the put price of each Loan for purpose of the exercise of the Put Option (as defined below).

3. Bidmex 10, LLC is the owner of Solución de Activos Comerciales, S. de R.L. de C.V. (“SAC”), a limited liability partnership with variable capital (sociedad de responsabilidad limitada de capital variable) organized and validly existing under the laws of Mexico. SAC is the owner of a commercial, Mexican Peso-denominated, non-performing loan portfolio that it purchased from Banco Nacional de Comercio Exterior, S.N.C. (“Bancomext”) on July 19, 2004. SAC purchased the SAC Loans from Bancomext under that Agreement of Onerous Assignment of Credits and its Respective Litigation Rights dated as of July 19, 2004. SAC is the owner of the loans described in Schedule “B” hereto(the “SAC Loans” and together with the SAR Loans, the “Loans”), which are evidenced, mainly, by means of the Loan Agreements, promissory notes and other related documents, and include, without limitation, any and all of the rights arising thereunder, such as the right to collect principal, interest (either ordinary or delinquent interest), any accessories, guaranties, claims, litigation or adjudication rights related thereto and/or anything pertaining to the above, which schedule indicates, for purposes of identification only with respect to each SAC Loan, the relevant debtor’s name, the identification number for the loan used by the Grantee, principal amount due, as well as the put price of each Loan for purpose of the exercise of the Put Option (as defined below).

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4. The Mexican Supreme Court ruled on February 2006 the contradiction of Court decision 71/2005-PS, registered under number 19328, First Court (Primera Sala), Volume XXIII that states the following: “CREDIT INSTITUTIONS. CONDITIONS FOR ASSIGNEES TO ACCREDIT ITS ACTIVE LEGITIMATION TO PROMOTE ACTIONS DERIVED FROM AN ASSIGNMENT AGREEMENT, IN ACCORDANCE WITH ARTICLE 93 OF THE RELATED LAW.- In terms of the first paragraph of article 93 of the Credit Institutions Law, the National Banking and Securities Commission has authority to issue rules of general means that must be observed by the credit institutions when they assign or discount their portfolio to entities different from Banco de México, other credit institutions or trusts incorporated by the Federal Government for the economic development. Now then, if it is taken into consideration that within such rules is that providing that the credit institutions shall give notice of the terms and conditions of the transaction to such decentralized organism of the Treasury and Credit Public Ministry, as well as that consistent on obtaining the approval of the assignment or discount of the corresponding portfolio, doubtless that in order for the assignee to be legitimated to promote actions derived from the assignment agreement made in its favor by the credit institution, it does not only has to reliable accredit said agreement, but also the approval of such transaction from said commission” (the “Supreme Court Ruling”). A complete copy of the Supreme Court Ruling is attached hereto as Schedule “C”.

5. Bidmex 6 is the owner of RCM.

6. SMIP-2 and Cargill are the sole members of Bidmex 6.

7. Bidmex 6, SMIP-2 and Cargill are each a party to this Agreement solely for purposes of causing RCM to comply with this Agreement, and in particular (but without limitation) with Sections 2 and 3 of this Agreement, and for purposes of Section 13 of this Agreement.

RECITALS

I. Recitals of Option Grantor. RCM, through its respective representative, hereby represents and warrants to the other parties that:

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(a) RCM is a limited liability partnership with Variable capital (sociedad de responsabilidad limitada de capital variable), duly organized and validly existing under the Laws of Mexico and has the requisite power and authority under the Laws of Mexico to conduct the business in which it is engaged, to own, operate, lease, encumber and use its properties and assets that it purports to own or use, and carry on its business as currently conducted.

(b) The execution of this Agreement, as well as the performance of RCM’s obligations herein contained (i) are contemplated in RCM’s corporate purpose (objeto social), and (ii) will not violate, conflict with or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any Law.

(c) It is RCM’s desire to execute this Agreement, which constitutes a legal, valid and binding obligation of RCM, enforceable against RCM in accordance with its terms.

(d) RCM’s legal representative has full authority in order to subscribe this Agreement on behalf of RCM and to bind it to the terms and conditions herein contained, and that, as of the date hereof, such authority has not been limited or revoked in any way whatsoever.

II. Recitals of Option Grantee. Grantee hereby represents and warrants to the other parties that:

(a) Grantee is a limited liability company, duly organized and validly existing under the Laws of Delaware and has the requisite power and authority under the Laws of Delaware to conduct the business in which it is engaged, to own, operate, lease, encumber and use its properties and assets that it purports to own or use, and carry on its business as currently conducted.

(b) The execution of this Agreement, as well as the performance of Grantee’s obligations herein contained (i) are contemplated in Grantee’s purpose (objeto social), and (ii) will not violate, conflict with or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any Law.

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(c) It is Grantee’s desire to execute this Agreement, which constitutes a legal, valid and binding obligation of Grantee, enforceable against Grantee in accordance with its terms.

(d) Grantee’s legal representative has full authority in order to subscribe this Agreement on behalf of Grantee and to bind it to the terms and conditions herein contained, and that, as of the date hereof, such authority has not been limited or revoked in any way whatsoever.

III. Recitals of Bidmex 6. Bidmex 6 hereby represents and warrants to the other parties that:

(a) Bidmex 6 is a limited liability company, duly organized and validly existing under the Laws of Delaware and has the requisite power and authority under the Laws of Delaware to conduct the business in which it is engaged, to own, operate, lease, encumber and use its properties and assets that it purports to own or use, and carry on its business as currently conducted.

(b) The execution of this Agreement, as well as the performance of Bidmex 6’s obligations herein contained (i) are contemplated in Bidmex 6’s purpose, and (ii) will not violate, conflict with or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any Law.

(c) It is Bidmex’s desire to execute this Agreement, which constitutes a legal, valid and binding obligation of Bidmex 6, enforceable against Bidmex 6 in accordance with its terms.

(d) Bidmex 6’s legal representative has full authority in order to subscribe this Agreement on behalf of Bidmex 6 and to bind it to the terms and conditions herein contained, and that, as of the date hereof, such authority has not been limited or revoked in any way whatsoever.

IV. Recitals of SMIP-2. SMIP-2 hereby represents and warrants to the other parties that:

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(a) SMIP-2 is a limited partnership, duly organized and validly existing under the Laws of Texas and has the requisite power and authority under the Laws of Texas to conduct the business in which it is engaged, to own, operate, lease, encumber and use its properties and assets that it purports to own or use, and carry on its business as currently conducted.

(b) The execution of this Agreement, as well as the performance of SMIP-2’s obligations herein contained (i) are contemplated in SMIP-2’s purpose, and (ii) will not violate, conflict with or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any Law.

(c) It is SMIP-2’s desire to execute this Agreement, which constitutes a legal, valid and binding obligation of SMIP-2, enforceable against SMIP-2 in accordance with its terms.

(d) SMIP-2’s legal representative has full authority in order to subscribe this Agreement on behalf of SMIP-2 and to bind it to the terms and conditions herein contained, and that, as of the date hereof, such authority has not been limited or revoked in any way whatsoever.

V. Recitals of Cargill. Cargill hereby represents and warrants to the other parties that:

(a) Cargill is a corporation, duly incorporated and validly existing under the Laws of Delaware and has the requisite power and authority under the Laws of Delaware to conduct the business in which it is engaged, to own, operate, lease, encumber and use its properties and assets that it purports to own or use, and carry on its business as currently conducted.

(b) The execution of this Agreement, as well as the performance of Cargill’s obligations herein contained (i) are contemplated in Cargill’s corporate purpose, and (ii) will not violate, conflict with or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any applicable Law.

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Cargill, enforceable against Cargill in accordance with its terms.

(d) Cargill’s legal representative has full authority in order to subscribe this Agreement on behalf of Cargill and to bind it to the terms and conditions herein contained, and that, as of the date hereof, such authority has not been limited or revoked in any way whatsoever.

e) Cargill has sufficient liquid and unencumbered assets to satisfy its obligations under this Agreement, and will maintain at least such amount of liquid and unencumbered assets (or the right to maintain such assets) until the termination of this Agreement as provided in Section 4 hereof.

VI. Recitals of the Parties. The parties recite that:

(a) The parties hereby state, through their respective representatives, that they are aware of the content of each and all of the representations and warranties set forth herein. Likewise they state their respective agreement with such representations and warranties and that it is their express will to subscribe to this Agreement.

(b) The parties hereby state, through their respective representatives, that in their capacity as Sellers (or affiliates of the Sellers) of the Companies pursuant to the Interest Purchase and Sale Agreement, Cargill and SMIP-2 have received financial benefits and other good and valuable consideration for entering into this Agreement, the receipt and sufficiency of which are hereby acknowledged by the parties.

By virtue of the foregoing, the parties agree to enter into this Agreement, in accordance with the following:

CLAUSES

Section 1. Definitions. Capitalized terms used herein (and not defined elsewhere in this Agreement) shall have the meanings set forth below:

“Administrative Expenditures” shall mean any fees and expenses (including without limitation any Taxes, any transfer costs or expenses incurred as a result of the

INDEX

transfer of the Loans pursuant to the Put Option and any servicing fees) which SAR or SAC (or any of their affiliates, advisors, agents or representatives) may have incurred (whether or not already paid) from March 1, 2006 to the Put Closing Date, in respect of the corresponding Loans with such fees and expenses being (i) calculated, when applicable as a portion of portfolio fees and expenses, on a pro rata basis with respect to any individual Loan as a fraction of all such Loans for which such fees and expenses were incurred, and (ii) stated in Mexican pesos with any such fees and expenses that may have been incurred in U.S. dollars being converted to Mexican pesos at the Exchange Rate;

“Agreement” has the meaning ascribed thereto in the introductory paragraph hereof;

“Authorized Designee” means the authorized designee of RCM designated by RCM from time to time to be granted authority to act in the name and on behalf of RCM pursuant to the Power of Attorney granted by SAR and/or SAC to such authorized designee pursuant to Section 4, as replaced from time to time upon the instruction of RCM pursuant to Section 4;

“Banking Commission Letter” has the meaning ascribed thereto in Section 4;

“Challenging Proceeding” has the meaning ascribed thereto in Section 2;

“Court” has the meaning ascribed thereto in Section 9(b);

“Dispute” means any controversy, claim, difference or dispute among the parties relating to or associated with this Agreement or arising hereunder other than a Mexican Law Dispute;

“Exchange Rate” means the U.S. dollar/Mexican peso exchange rate used for payment of obligations denominated in foreign currency payable in Mexico published by Mexican Central Bank (Banco de México) in the Federal Official

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Gazette (Diario Oficial de la Federación) (or equivalent daily authoritative public source if the Diario Oficial de la Federación should cease publication or cease publishing exchange rate data) in effect at the close of business on the Business Day immediately preceding the date on which any payment under this Agreement is to be made;

“Exercise Notice” has the meaning ascribed thereto in Section 3;

“Governmental Authority” means any federal, state, local, or any foreign government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body;

“ICC” has the meaning ascribed thereto in Section 9(a);

“ICC Rules” has the meaning ascribed thereto in Section 9(a);

“Law” means any constitutional provision, statute or other law, rule, regulation, ordinance or interpretation of any Governmental Authority and any Order;

“Loan Agreements” means all the agreements, contracts, promissory notes or other negotiable instruments, guarantees, collateral and any other accessory document or instrument by which residential and/or commercial loans or collection rights are evidenced;

“Loans” has the meaning ascribed thereto in paragraphs 2 and 3 of the “Background” section of this Agreement;

“Mexican Law Disputes” has the meaning ascribed thereto in Section 9(a);

“Order” means any decree, injunction, judgment, order, ruling, assessment or writ of any Governmental Authority;

“POAs” has the meaning ascribed thereto in Section 3;

“Proceedings” means any notice, claim, assertion, procedure, action, lawsuit, event or proceeding, service of process or diligence filed in court against the debtors to obtain the payment of Loans, regardless of the stage of any such proceeding and/or the parties to the same;

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“Put Closing Date” has the meaning ascribed thereto in Section 3;

“Put Option” has the meaning ascribed thereto in Section 2;

“Put Option Price” has the meaning ascribed thereto in Section 2;

“Revised Ruling” has the meaning ascribed thereto in Section 4;

“Servicing Agreement” means the Servicing Agreement among the Subsidiaries (as such term is defined in the Interest Purchase and Sale Agreement) and FirstCity Mexico, S.A. de C.V.;

“Supreme Court Ruling” has the meaning ascribed thereto in paragraph 4 of the “Background” section of this Agreement;

“Taxes” means any federal, state, local or foreign income, gross receipts, capital gains, franchise, alternative or add-on minimum, estimated, sales, use, goods and services, transfer, registration, value added, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, special assessment, personal property, capital stock, social security, unemployment, employment, disability, payroll, license, employee or other withholding, contributions or other tax, of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing;

“Termination Date” has the meaning ascribed thereto in Section 4;

Section 2. Put Option. In exchange for Grantee’s payment in the aggregate amount of $MxPs 1,000 to each (in the respective amounts shown in parentheses for each such recipient) of RCM ($MxPs 600), Bidmex 6 ($MxPs 200), SMIP-2 ($MxPs 100), and Cargill ($MxPs 100), as the purchase price for RCM’s grant of the Put Option and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by RCM, RCM hereby grants Grantee a put option as set forth in this Agreement. If any debtor of a Loan has filed or files a challenge to a Proceeding on or before the earlier of (i) the Termination Date, or (ii) February 1, 2008 (a “Challenging Proceeding”) challenging the Loan based, among any other defense claims, on the nullity of

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any of the assignment agreements referred to in paragraphs 2 and 3 of the “Background” section of this Agreement, with respect to the Supreme Court Ruling, Grantee will have the option (“Put Option”) to sell to RCM, and to require RCM to purchase from SAR or SAC, such corresponding challenged Loan during the term of this Agreement so long as the Challenging Proceeding either (i) remains unresolved, or (ii) is not resolved in Grantee’s favor and Grantee has not reached a settlement agreement with the applicable Loan debtor on all matters related to the Loan other than the Challenging Proceeding.

Upon the exercise of a Put Option with respect to any Loan(s), RCM hereby promises to acquire such Loan(s), subject to the terms and conditions hereof, at a price in Mexican pesos (the “Put Option Price”) equal to the put price (in Mexican pesos) indicated for each Loan in Schedule “A” and Schedule “B” hereof plus the Administrative Expenditures related to such Loan, plus any Taxes (other than Taxes constituting part of the Administrative Expenditures) paid or payable with respect to the cash flow from each Loan, less any cash flow received by Grantee in respect of such Loan. The right to assert any Put Option shall become effective upon the consummation of the transactions contemplated in the Interest Purchase and Sale Agreement. Any Put Option must be exercised by Grantee on or before the Termination Date; provided, however, that if the Termination Date is established by reference to the occurrence of February 1, 2008, then the Grantee shall be entitled to deliver an Exercise Notice on or before April 1, 2008 with respect to any Challenging Proceeding arising prior to February 1, 2008. In the event that any Put Option is not exercised by the Grantee on or prior to April 1, 2008, Grantee will not be entitled to exercise a Put Option regarding any such Loan.

Section 3. Exercise of the Put Option.

In order for Grantee to exercise the Put Option pursuant to Section 2, Grantee shall timely issue a written notice to RCM (“Exercise Notice”), as provided in Section 2 hereof, together with evidence of the Challenging Proceeding which is the subject matter of the Put Option.

The closing of the sale by SAR or SAC to RCM of the corresponding Loan shall occur on or prior to the date which is twenty (20) Business Days after the date of receipt by RCM of the Exercise Notice (the “Put Closing Date”). The Put Option Price shall be paid by RCM to Grantee in Mexican pesos by wire transfer of immediately available funds.

Each of the parties hereto shall use its respective best efforts to take or cause to be taken all appropriate action, do or cause to be done all things necessary, proper or

INDEX

advisable, and execute and deliver such documents and other papers, as may be required to carry out any Put Option and consummate and make effective any and all of the Put Options contemplated by this Agreement.

The corresponding Loan must be transferred to RCM, free and clear of any liens whatsoever, (other than liens that were in existence on the date of this Agreement) and RCM will assume, undertake and acquire from SAR or SAC, all and each of their rights with respect to such transferred Loans and all obligations that were in existence on the date of this Agreement.

Each of SAR and SAC must deliver to RCM or its designee all of the documents which SAR or SAC physically possesses in its files with respect to the Loans which are subject to an Exercise Notice.

SAR or SAC shall inform RCM of all and any circumstances of which they have knowledge regarding the Challenging Proceedings of the Loans subject to an Exercise Notice. If the acts in the Challenging Proceeding require the making of any decisions before the Put Closing Date, SAR or SAC shall make any such decisions in accordance with the reasonable written instructions of RCM, provided that such written instructions do not expose SAR, SAC or their respective affiliates to any liability. In order to facilitate the procedures concerning notification, notarization and registration, as the case may be, of the assignment subject to this Put Option, SAR or SAC, as the case may be, agrees that it will issue in favor of RCM and of the persons it may designate, the POAs. The POAs will be valid for the period from the Put Closing Date until the date none of the Loans subject to the Put Option remains outstanding.

SAR or SAC, as the case may be, shall perform all reasonable acts and adopt all reasonable measures necessary for the assignment of Loan(s) to RCM contemplated hereunder becomes effective; provided that the costs of all such acts and measures shall be deemed Administrative Expenditures. SAR or SAC, as the case may be, must perform all reasonable actions necessary in order for the assignment contemplated hereunder to comply with all the applicable requirements of any Governmental Authority; provided that the costs of all such acts and measures shall be deemed Administrative Expenditures.

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In addition, upon the written request of RCM, SAR or SAC, as the case may be, must execute the additional instruments that serve to evidence this assignment of rights in order to facilitate its registration in the corresponding public registries of property and commerce. RCM will be responsible for the preparation of such instruments and of the expenses associated (including the expenses derived from the notarization of the same) with their formalization and registry. The POAs will be limited special and irrevocable powers of attorney in a form reasonably satisfactory to RCM, authorizing RCM or its designee to act in the name and on behalf of SAR or SAC for the purpose of, and to exercise all powers necessary to carry out the intents and purposes of the assignment of the Loans derived from a Put Option (including without limitation actions in respect of real property collateral underlying any such Loan). The powers of attorney referred to in this paragraph shall be referred to in this Agreement as the “POAs”.

SAR and SAC shall, and shall cause their Affiliates to, maintain in effect the POAs during the time that any of the Loans remains outstanding and shall not revoke or revise the terms of either POA without the express written consent of RCM. Within three (3) Business Days of its receipt of any written request of RCM to change the Authorized Designee, SAR and SAC shall grant an amended and restated POA to effect same. Upon the revocation of either of the POAs in accordance with the terms of this Section 3, RCM shall, and shall cause the Authorized Designee to, cease using the name “Solución de Activos Residenciales, S. de R.L. de C.V.” or “Solución de Activos Comerciales, S. de R.L. de C.V.” and shall not take any further action in the name of SAR or SAC.

Therefore, and once a Loan is transferred to RCM, RCM will grant SAR or SAC, as the case may be, or its designees a mandate without representation (mandato sin representación) in order for SAR or SAC or its Authorized Designees to continue handling the corresponding Proceedings in its name but on behalf of RCM, through the POA granted to RCM or its Authorized Designees. The parties agree that SAR and SAC will not receive any remuneration for the exercise of the mandate.

Section 4. Term; Termination. This Agreement shall terminate, without any judicial declaration to such effect upon the earliest of the following dates (the “Termination Date”): (i) February 1, 2008, or (ii) the date that a new

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Supreme Court ruling is released that resolves the issue raised in the Supreme Court Ruling as to the interpretation of Article 93 of the Credit Institutions Law (the “Revised Ruling”); or (iii) the date that the National Banking and Securities Commission resolves the issue raised in the Supreme Court Ruling as to the interpretation of Article 93 of the Credit Institutions Law, by issuing a letter (the “Banking Commission Letter”) confirming and/or ratifying the authorization for Banco Nacional de México, S.A., Integrante del Grupo Financiero Banamex and/or Banco Nacional de Comercio Exterior, S.N.C. to assign the Loans as of the dates of execution of the assignment agreements referred to in paragraphs 2 and 3 of the “Background” section of this Agreement or otherwise. The obligation of RCM to purchase any Loan pursuant to Section 2 shall survive the termination of this Agreement as to any Loan for which an Exercise Notice was submitted by Grantee prior to April 1, 2008.

Section 5. Notices

(a) Notices. Except as expressly otherwise provided herein, all notices, requests, claims, demands and other communications under this Agreement will be in writing and will be deemed given if delivered personally, sent by overnight courier (providing proof of delivery), or via facsimile to the parties at the following addresses (or at such other address for a party as specified by like notice):

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If to RCM, to:

Recuperación de Carteras Mexicanas, S. de R.L. de C.V.

Francisco de Quevedo No. 117 Mezanine

Colonia Arcos Vallarta

44130 Guadalajara, Jalisco

Attention: Enrique Morán

Facsimile:

If to SMIP-2, to:

Strategic Mexican Investment Partners 2, L.P.

c/o FirstCity Mexico, Inc.
6400 Imperial Drive (Delivery only)
P.O. Box 8216
Waco, Texas 76712-8216
Attn: Legal Department
Facsimile: 254-761-2953

with copy to:

Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: Paul H. Amiel
Facsimile: 214-200-0555

If to Cargill, to:

Cargill Financial Services International, Inc.
12700 Whitewater Drive
Minnetonka, Minnesota 55343-9439
Attn: Adam Bernier
Facsimile: 952-984-3905

with a copy to:

Cargill Financial Services International, Inc.
12700 Whitewater Drive
Minnetonka, Minnesota 55343-9439
Attn: James D. Dingel
Facsimile: 952-404-6344

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If to Grantee, to:

Bidmex Holding, LLC
c/o FirstCity Mexico, Inc.
6400 Imperial Drive (Delivery only)
P.O. Box 8216
Waco, Texas 76712-8216
Attn: Legal Department
Facsimile: 254-761-2953

with a copy to:

AIG Global Investment Group
599 Lexington Avenue, 25th Floor
New York, New York 10022
Attn: Afsar Farman-Farmaian, Esq.,
General Counsel, AIG Capital Recovery Group
Facsimile: 866-729-7836

and

Goodwin Procter LLP
599 Lexington Avenue
New York, NY 10022
Attn: Andrew Weidhaas/Alyssa Grikscheit
Facsimile: (212) 355-3333

(a) Change of Domicile. Each of the parties hereby agrees to immediately notify the other parties hereto, regarding any change of address, telephone number, fax and/or the name of its representative, by any of the means referred to in the preceding paragraph. As long as the parties do not notify the change of their respective addresses, all notices (including those personally delivered) and other acts, whether part of a proceeding or not, shall be practiced and shall become effective when duly addressed to the intended recipient, at the addresses set forth in this Section 5.

(b) Exception for Electronic Devices. The Parties agree that the notifications to which this Section 5 refers to, shall not be given through electronic, optical or any other technology devices, except for fax, notwithstanding the fact that such devices may be attributable to the Parties, or that these may be consulted subsequently.

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Section 6. No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties and this Agreement shall not otherwise be deemed to confer upon or give to any other third party any right, claim, cause of action or other interest herein.

Section 7. Amendment and Waiver. This Agreement may only be amended by means of another written agreement executed by all of the parties hereto.

Section 8. Governing Law. Any Mexican Law Dispute arising under this Agreement shall be governed by, and construed in accordance with, the Laws of Mexico, Federal District (disregarding the provisions in connection with conflicts of law) and shall be resolved in accordance with Section 9 of this Agreement. Except as otherwise set forth in the preceding sentence, this Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, United States of America (without giving effect to any choice of law or conflict of law provision or rule that would cause the application of the laws of any other jurisdiction), and any Dispute hereunder shall be subject to resolution in any court of competent jurisdiction in the State of Delaware. The provisions of this Section 8 shall survive the termination of this Agreement pursuant to Section 4 hereof.

Section 9. Arbitration.

(a) Submission to Arbitration. Any controversy, claim, difference or dispute among the parties arising under this Agreement with respect to the validity of the Grantee’s exercise of a Put Option in the context of the applicability of the Revised Ruling or Banking Commission Letter or with respect to the termination Section of this Agreement based on the items (ii) and (iii) of Section 4 collectively, the “Mexican Law Disputes”), which cannot be amicably resolved between the parties hereto shall be finally settled, upon demand by either party hereto, by binding arbitration in Mexico City, the same to be conducted under the auspices of the International Chamber of Commerce (“ICC”) and pursuant to the Rules of Arbitration of the International Chamber of Commerce (“ICC Rules”) in effect as of the date the dispute is brought to the ICC.

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(b) Arbitrators. There shall be one (1) arbitrator if agreed by the parties hereto or a total of three (3) arbitrators. RCM, on the one side, and Grantee, on the other side, each shall select one (1) arbitrator within thirty (30) calendar days after delivery of the demand for arbitration. Such arbitrators shall be freely selected, and the parties shall not be limited in their selection to any prescribed list. A third (3rd) arbitrator, who shall be the chairman of the arbitral tribunal, shall be appointed by mutual agreement of the two (2) arbitrators so selected. In the event of the failure of said arbitrators to agree as to the chairman within twenty (20) calendar days after the appointment of the last of said arbitrators, the chairman shall be appointed by the International Court of Arbitration (the “Court”) within fifteen (15) calendar days thereafter. In the event that RCM, on the one hand, or the Grantee, on the other, as the case may be, fails to nominate an arbitrator pursuant to this Section 9(b), upon request of any other party to the arbitration, such arbitrator shall instead be appointed by the ICC in accordance with Article 9(2) of the ICC Rules within thirty (30) calendar days of receiving such request. Each arbitrator shall be fluent in English and Spanish.

(c) Arbitration Proceedings. The arbitration proceedings shall be conducted in Spanish, provided that the arbitrators may permit any portion of the proceeding to be conducted in English if this will facilitate the conduct of the arbitration. The arbitrators shall apply the ICC Rules, and shall specify the same at the commencement of the arbitration. Documents in English shall be admissible as evidence without need to translate them into Spanish and witnesses who are not native Spanish speakers may render their testimonies in English if they so prefer.

(d) Award. The arbitral award shall be final and binding upon all parties, and not subject to any appeal, to the fullest extent permitted by applicable Law, and shall deal with all matters related to the arbitration proceedings. The losing party in any arbitration shall bear all costs and

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expenses of the arbitration proceedings and the fees of the arbitral panel but each party shall bear its own legal counsel fees and expenses. If the arbitral award is a mixed award that grants an award or partial award to more than one party, the arbitrators may in their discretion award costs, including legal fees, to the prevailing party. Decisions of the arbitrators shall be in writing and shall set forth the reasons therefore and, to the extent applicable, the manner in which the amount of the award was calculated.

(e) Enforceability of the Award. Judgment upon the award rendered by the arbitration may be entered in any court having jurisdiction, or application may be made to such court for a judicial recognition of the award or any order of enforcement thereof.

Section 10. Counterparts. This Agreement is executed in several counterparts, each of which shall be deemed an original and, jointly, shall constitute one sole instrument.

Section 11. Severability. In the case that any of the clauses hereof is declared null or, in any other way, ineffective or non-enforceable in accordance with the applicable Law, such provision shall be deemed null exclusively for the effects of such provision, and such declaration of nullity shall not affect in any manner whatsoever the other provisions herein contained, which shall continue to be fully effective and enforceable.

Section 12. Captions. The captions contained in this Agreement are for reference and convenience purposes only, and shall not, in any manner whatsoever, affect its construction of interpretation.

Section 13. Acknowledgment And Indemnity. Grantee acknowledges that each of Bidmex 6, SMIP-2 and Cargill is a party to this Agreement solely for purposes of allowing or causing RCM to comply with this Agreement, and in particular (but without limitation) with Sections 2 and 3 of this Agreement, and for purposes of this Section 13. If Grantee delivers an Exercise Notice to RCM in accordance with Section 3 and RCM fails to comply with its obligations under this Agreement, Grantee shall have the right to cause Bidmex 6 and/or SMIP-2 and/or Cargill to cause RCM to comply with this Agreement. If RCM shall fail to comply with this Agreement

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or all of Bidmex 6, SMIP-2 and Cargill fail to either (i) cause RCM to comply with this Agreement, or (ii) directly purchase from Grantee, in lieu of RCM, any Loan that is the subject of an Exercise Notice on the same terms and conditions that are set forth in this Agreement for RCM to purchase such Loan from Grantee, then each of Bidmex 6, SMIP-2 and Cargill shall indemnify Grantee and hold Grantee harmless from any and all losses liabilities, damages, claims, awards, judgments, costs and expenses (including without limitation reasonable attorneys’ fees) actually suffered or incurred by such person which Grantee incurs as a result of such breach of this Agreement by RCM, including without limitation the payment of the Put Option Price; provided, however, that with respect to their respective indemnification obligations under this Agreement, each of Bidmex 6, SMIP-2 and Cargill shall have the same benefit of all rights and defenses available to RCM under this Agreement.

Section 14. Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned, in whole or in part, by operation of law or otherwise by the parties hereto without the prior written consent of each party; provided, however that Bidmex Holding, LLC may assign its rights, interests and obligations hereunder in connection with a transfer or sale of its interests in SAR and SAC without the prior written consent of the other parties, and this Agreement shall continue in full force and effect following such assignment; and provided further, however, that Cargill may assign its rights, interests and obligations hereunder to Bidmex 6, RCM, or FirstCity Financial Corporation (“FCFC”) or any of FCFC’s affiliates without the prior written consent of the other parties but such assignment shall not terminate or otherwise limit Cargill’s obligations to Grantee hereunder, and this Agreement shall continue in full force and effect following such assignment by Cargill or Bidmex Holding, LLC. Any assignment in violation of the preceding sentence will be void. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns.

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IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS Put Option Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above.

	GRANTEE:

	BIDMEX HOLDING, LLC

	By FirstCity Mexico, Inc.,
	Its Manager,


	By:
		Name:
		Title:


	RCM / OPTION GRANTOR:

	RECUPERACIÓN DE CARTERAS MEXICANAS, S. DE R.L. DE C.V.


	By:
		Name:
		Title:


	BIDMEX 6, LLC

	By FirstCity Mexico, Inc.,
	Its Manager,


	By:
		Name:
		Title:

Signature Page to Put Option Agreement

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	CARGILL FINANCIAL SERVICES INTERNATIONAL, INC.


	By:
		Name: Richard Luke Toft
		Title: Assistant Vice President


	STRATEGIC MEXICAN INVESTMENT PARTNERS 2, L.P.

	By FirstCity Mexico, Inc.
	Its General Partner,


	By:
		Name:
		Title:

Signature Page to Put Option Agreement

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Schedule “A”

SAR Loans

[NOTE: All monetary amounts on Schedule A are stated in Mexican Pesos.]

DESCRIBE EACH OF THE ASSIGNED LOANS OF SAR BY IDENTIFYING – DEBTOR NAME, GRANTEE’S IDENTIFICATION NUMBER FOR THE LOAN, PRINCIPAL DUE AMOUNT, AND PUT PRICE

Exhibits to Put Option Agreement

INDEX

Schedule “B”

SAC Loans

[NOTE: All monetary amounts on Schedule B are stated in Mexican Pesos.]

DESCRIBE EACH OF THE ASSIGNED LOANS OF SAC BY IDENTIFYING – DEBTOR, GRANTEE’S IDENTIFICATION NUMBER FOR THE LOAN, PRINCIPAL DUE AMOUNT, AND PUT PRICE

Exhibits to Put Option Agreement

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Schedule “C”

SUPREME COURT RULING

Exhibits to Put Option Agreement

Exhibit 10.16

EXECUTION VERSION

GUARANTY

This Guaranty (this “Guaranty”), dated as of August , 2006, is by and among FirstCity Financial Corporation, a Delaware corporation (“FirstCity”), Bidmex Holding, LLC, a Delaware limited liability company (“Buyer”), Residencial Oeste 2, S. de R.L. de C.V., a Mexican limited liability company (“Assignee”), National Union Fire Insurance Company of Pittsburgh, P.A., a Pennsylvania corporation (“National Union”), American General Life Insurance Company, a Texas corporation (“American General”) and American General Life and Accident Insurance Company, a Tennessee corporation (“AGLAIC” and, together with National Union and American General, “AIG”). Buyer, Assignee and AIG shall be referred to herein individually, as a “Beneficiary” and, collectively as the “Beneficiaries.”

RECITALS:

A. Contemporaneously with the execution of this Guaranty, Strategic Mexican Investment Partners, L.P., a Texas limited partnership (“SMIP”), Buyer and AIG have entered into an Interest Purchase and Sale Agreement (the “Interest Purchase Agreement”), dated as of even date herewith, by and among Buyer, the Delaware limited liability companies listed on Exhibit A attached to the Interest Purchase Agreement (each individually, a “Company,” and collectively, the “Companies”), SMIP, Cargill Financial Services International, Inc., a Delaware corporation (“Cargill” and, together with SMIP, the “Sellers”). The Sellers and the Companies shall be collectively referred to as the “Seller Entities.”

B. The Sellers are the sole members of the Companies and collectively own beneficially and of record 100% of the membership interests in each of the Companies, as set forth on Exhibit A attached to the Interest Purchase Agreement (collectively, the “Membership Interests”).

C. The Sellers desire to sell to Buyer, and Buyer desires to purchase from the Sellers, 100% of the Membership Interests on the terms and conditions set forth in the Interest Purchase Agreement.

D. Contemporaneously with the execution of this Agreement and the Interest Purchase Agreement, Buyer has entered into the Agreement for the Onerous Transfer of Loans and Litigious Rights, dated as of even date herewith (the “Transfer of Rights Agreement” and, together with the Interest Purchase Agreement, the “Operative Agreements”) among SMIP, Cargill, Assignee, Residencial Oeste, S. de R.L. de C.V. (“Assignor”), and AIG which provides, among other things, for the purchase by Assignee from Assignor, and the sale, assignment, and transfer by Assignor to Assignee, of an interest in certain Loans, as defined in the Transfer of Rights Agreement; and

E. In order to induce the Buyer and AIG to enter into the Interest Purchase Agreement, in order to induce Assignee and AIG to enter into the Transfer of Rights Agreement, in connection with and as a condition to the closing of the transactions contemplated by the Operative Agreements, and because FirstCity will be an indirect beneficiary of the consummation of such transactions, FirstCity has agreed to enter into this Guaranty.

AGREEMENTS:

NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements of the parties made in this Guaranty and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

EXECUTION VERSION

1. Guaranty. FirstCity hereby agrees with the Beneficiaries to cause and enable SMIP to perform its obligations under the Operative Agreements, and hereby guarantees irrevocably and unconditionally to the Beneficiaries upon the terms of this Agreement that SMIP will well and faithfully perform and fulfill everything required by the Operative Agreements on its part to be performed and fulfilled, at the times and in the manner provided in the Operative Agreements, and also that the payments provided for in the Operative Agreements shall be promptly paid when due. FirstCity agrees that if for any reason whatsoever SMIP shall fail or be unable duly, punctually and fully to perform any such obligation under the Operative Agreements, FirstCity shall perform each and every such obligation, or cause each such obligation to be performed. FirstCity’s obligations shall be subject to any Beneficiary (i) obtaining judgment against SMIP, which judgment may be sought in a legal action pursuant to which both SMIP and FirstCity are co-defendants, regarding the performance of any obligation for which such Beneficiary is seeking FirstCity’s guaranty (the “Judgment”), and (ii) to the extent FirstCity was not party to the relevant lawsuit, providing FirstCity written notice of any failure of such performance obligation and the entry of the Judgment. FirstCity shall cure such default within five (5) business days after receipt of the notice and copy of the Judgment; provided, however, that if FirstCity was a co-defendant in the lawsuit pursuant to which the Judgment was obtained, FirstCity shall cure the default of SMIP immediately upon SMIP’s failure to pay such Judgment within five (5) business days of the date upon which such Judgments was obtained. In addition, FirstCity agrees to reimburse such Beneficiary on demand for any and all reasonable expenses (including reasonable fees and expenses of counsel) incurred by such party in successfully enforcing any rights under this Guaranty. In any case, FirstCity’s obligation for payment related to any failure to perform by SMIP as set forth hereunder shall be limited to the purchase price [or value in Dollars] received by SMIP under the Operative Agreements.

2. Representations and Warranties of Guarantor. FirstCity hereby represents and warrants to each Beneficiary as set forth below:

(a) The execution and delivery of this Guaranty and the performance by FirstCity of its obligations hereunder have been duly and validly authorized by all necessary corporate action, and no other proceedings on the part of FirstCity are necessary to authorize the execution and delivery of this Guaranty and the performance by FirstCity of its obligations hereunder.

(b) This Guaranty has been duly executed and delivered by FirstCity, and constitutes a valid and binding obligation of FirstCity enforceable against FirstCity in accordance with its terms.

(c) None of the execution, delivery or performance of this Guaranty by FirstCity will (i) require any consent or approval that has not been obtained under; (ii) require notice that has not been given under; or (iii) violate, conflict with, breach, constitute a default (or an event which, with notice or lapse of time or both, would violate, conflict with, breach, or constitute a default) under or result in the termination of its charter, bylaws or other constituent documents.

(d) As of the date hereof, FirstCity has sufficient liquidity to satisfy its obligations under this Guaranty, and will maintain at least such amount of liquidity until the termination of this Guaranty as provided in Section 3 hereof.

3. Continuing Guaranty. This Guaranty is a continuing one and shall remain in full force and effect until the indefeasible payment and satisfaction in full of the payment obligations of SMIP under the Operative Documents, and shall be binding upon, inure to the benefit of and be enforceable by, the parties hereto and their respective successors and permitted transferees and assigns.

EXECUTION VERSION

4. Amendments and Waivers.

(a) No amendment or waiver of any provision of this Guaranty shall be valid and binding unless it is in writing and signed, in the case of an amendment, by FirstCity and each of the Beneficiaries, or in the case of waiver, by the party against whom the waiver is sought to be enforced. No waiver by a party of any breach or violation of, or default under, this Guaranty shall be deemed to extend to any prior or subsequent breach, violation or default hereunder or to affect in any way any rights arising by virtue of any such prior or subsequent occurrence. No delay or omission by any party in exercising any right, power or remedy under this Guaranty shall operate as a waiver thereof.

(b) To the fullest extent permitted by law, except as otherwise provided herein, FirstCity waives presentment to, demand of payment from and protest to the Beneficiaries, and also waives notice of acceptance of its guarantee and notice of protest for nonpayment.

5. Counterparts. This Guaranty may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. This Guaranty shall become effective when duly executed by each party hereto.

6. Notices. Any notice required to be given to a party shall be in writing and should be sufficiently given if delivered in person or sent by telecopy or by certified or express mail, postage prepaid, to the following addresses and addressees unless otherwise advised in writing by the relevant party:

If to FirstCity:

FirstCity Financial Corporation

6400 Imperial Drive (Delivery only)

Waco, Texas 76712

P.O. Box 8216

Waco, Texas 76714-8216

Attn: Legal Department

Facsimile: 254-761-2953

with copy to:

Haynes and Boone, LLP

901 Main Street, Suite 3100

Dallas, Texas 75202

Attn: Paul H. Amiel

Facsimile: 214-200-0555

EXECUTION VERSION

If to Buyer, Assignee or AIG:

Bidmex Holding, LLC

c/o FirstCity Mexico, Inc.

6400 Imperial Drive (Delivery only)

Waco, Texas 76712

P.O. Box 8216

Waco, Texas 76714-8216

Attn: Legal Department

Facsimile: 254-761-2953

with a copy to:

AIG Global Investment Group

599 Lexington Avenue, 25th Floor

New York, New York 10022

Attn: Afsar Farman-Farmaian, Esq.,

General Counsel, AIG Capital Recovery Group

Facsimile: 866-729-7836

and

Goodwin Procter LLP

599 Lexington Avenue

New York, NY 10022

Attn: Andrew Weidhaas/Alyssa Grikscheit

Facsimile: (212) 355-3333

The parties agree that all correspondence is conclusively presumed to be received by the other parties on the date actually received as evidenced by a date and time stamp or similar notation made by each receiving party, respectively, unless the sending party has other reasonable proof of the date of receipt by each receiving party, respectively (e.g., fax transmittal confirmation, return receipt, overnight mail receipt).

7. Governing Laws. This Guaranty shall be governed by, and construed in accordance with, the internal laws of the State of New York, United States of America (without giving effect to any choice of law or conflict of law provision or rule that would cause the application of the laws of any other jurisdiction), and any dispute hereunder shall be subject to resolution solely in any court of competent jurisdiction in the States of New York.

8. Jurisdiction and Venue; Service of Process. Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of the courts of the State of New York and any appellate court thereof, in any action or proceeding arising out of or relating to this Guaranty or any of the transactions contemplated hereby or for recognition or enforcement of any judgment relating thereto, and each of the parties hereby irrevocably and unconditionally (a) agrees not to commence any such action except in such court, (b) agrees that any claim in respect of any such action or proceeding may be heard and determined in such New York state court, (c) waives, to the fullest extent it may legally and effectively do so any objection which it may now or hereafter have to venue of any such action or proceeding in any such New York state court, and (d) waives, to the fullest extent permitted by law, the defense of any inconvenient forum to the maintenance

EXECUTION VERSION

of such action or proceeding in any such New York state court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Each of the parties hereto irrevocably consents to service of process in any such action or proceeding in the manner provided for notices in Section 6 hereof; provided, however, that nothing in this Guaranty shall affect the right of any party hereto to serve process in any other manner permitted by law.

9. Severability. Any term or provision of this Guaranty that is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Guaranty or affecting the validity or enforceability of any terms or provisions of this Guaranty in any other jurisdiction so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. No party hereto shall assert, and each party shall cause its respective affiliates not to assert, that this Guaranty or any part hereof is invalid, illegal or unenforceable.

10. No Assignment . This Guaranty may not be assigned by any party without the prior written consent of the other parties hereto.

11. Amendment. This Guaranty may be modified or amended in part or in its entirety only by the signed, written agreement of the parties.

[the remainder of this page is intentionally left blank- signature page follows this page]

EXECUTION VERSION

IN WITNESS WHEREOF, the parties to this Guaranty have caused this Guaranty to be duly executed as of the day and year first above written.

	GUARANTOR:

	FIRSTCITY FINANCIAL CORPORATION


	By:
		Name:
		Title:

This Guaranty is accepted as of the date first above written.

BUYER:

BIDMEX HOLDING, LLC
By: FirstCity Mexico, Inc., its manager


By:
			Name:
			Title:

ASSIGNEE:

RESIDENCIAL OESTE 2, S. DE R.L. DE C.V.
By: FirstCity Mexico, Inc., its manager


By:
			Name:
			Title:

AIG:

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.

By:	AIG Global Investment Corp.,
	its investment adviser

	By:
		Name:
		Title:

EXECUTION VERSION

AMERICAN GENERAL LIFE INSURANCE COMPANY

By:	AIG Global Investment Corp.,
	its investment adviser

	By:
		Name:
		Title:

AMERICAN GENERAL LIFE AND ACCIDENT INSURANCE COMPANY

By:	AIG Global Investment Corp.,
	its investment adviser

	By:
		Name:
		Title:

EXHIBIT 31.1

CERTIFICATIONS

I, James T. Sartain, certify that:

(1) I have reviewed this Quarterly Report on Form 10-Q of FirstCity Financial Corporation;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2006

	/s/ James T. Sartain
	James T. Sartain
	Chief Executive Officer

EXHIBIT 31.2

CERTIFICATIONS

I, J. Bryan Baker, certify that:

(1) I have reviewed this Quarterly Report on Form 10-Q of FirstCity Financial Corporation;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2006

	/s/ J. Bryan Baker
	J. Bryan Baker
	Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of FirstCity Financial Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q.

Date: November 9, 2006	/s/ James T. Sartain
	James T. Sartain
	Chief Executive Officer

The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Date: November 9, 2006	/s/ J. Bryan Baker
	J. Bryan Baker
	Chief Financial Officer