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, 2007
£		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 £

 

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 £    Accelerated filer x    Non-accelerated filer £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes £     No x

 

The number of shares of common stock, par value $.01 per share, outstanding at November 5, 2007 was 10,786,837.

 

 

 

 

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

 

 

 

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,
		2007			2006
		(Unaudited)
ASSETS
Cash and cash equivalents		$	32,909		$	18,472
Portfolio Assets, net		124,850			108,696
Loans receivable from Acquisition Partnerships held for investment		5,515			4,755
Loans receivable - SBA held for sale		2,478			—
Loans receivable - SBA held for investment, net		14,980			—
Loans receivable - other		22,829			23,991
Equity investments		93,258			112,357
Deferred tax asset, net		20,101			20,101
Service fees receivable ($624 and $917 from affiliates, respectively)		658			928
Loan servicing assets - SBA		904			—
Other assets, net		21,034			8,363
Total Assets		$	339,516		$	297,663
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable other		$	222,529		$	187,811
Minority interest		1,140			1,570
Other liabilities		8,353			4,389
Total Liabilities		232,022			193,770
Commitments and contingencies (note 13)
Stockholders’ equity:
Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)		—			—
Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued: 11,326,937 and 11,316,937, respectively; shares outstanding: 10,786,837 and 10,786,637, respectively)		113			113
Treasury stock, at cost: 540,100 shares and 530,300 shares, respectively		(5,653		)	(5,571		)
Paid in capital		101,005			100,562
Retained earnings		10,962			7,417
Accumulated other comprehensive income		1,067			1,372
Total Stockholders’ Equity		107,494			103,893
Total Liabilities and Stockholders’ Equity		$	339,516		$	297,663

 

 

See accompanying notes to consolidated financial statements.

 

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2007			2006			2007			2006
Revenues:
Servicing fees ($2,163 and $4,602 from affiliates for the three month periods, respectively, and $7,344 and $9,954 from affiliates for the nine month periods, respectively)		$	2,426		$	4,679		$	8,008		$	10,182
Income from Portfolio Assets		5,743			2,547			16,463			7,551
Gain on sale of SBA loans held for sale, net		34			—			658			—
Interest income from SBA loans		752			—			1,666			—
Interest income from affiliates		147			294			413			1,189
Interest income from loans receivable - other		1,627			17			3,516			17
Other income		903			654			1,900			1,846
Total revenues		11,632			8,191			32,624			20,785
Expenses:
Interest and fees on notes payable — other		4,747			1,797			13,666			5,433
Interest and fees on notes payable to affiliates		—			2			—			22
Salaries and benefits		4,446			4,094			12,303			11,110
Provision (recovery) for loan and impairment losses		(136		)	50			936			101
Occupancy, data processing, communication and other		2,238			2,688			10,469			6,165
Total expenses		11,295			8,631			37,374			22,831
Equity in earnings of investments		2,157			3,023			8,315			8,044
Gain on sale of subsidiaries and equity investments		207			2,378			207			2,405
Earnings from continuing operations before income taxes and minority interest		2,701			4,961			3,772			8,403
Income tax (expense) benefit		(134		)	4			(437		)	(140		)
Minority interest		87			2			210			64
Earnings from continuing operations		2,654			4,967			3,545			8,327
Discontinued operations
Loss from discontinued operations		—			—			—			(75		)
Income taxes		—			—			—			—
Net loss from discontinued operations		—			—			—			(75		)
Net earnings		$	2,654		$	4,967		$	3,545		$	8,252
Basic earnings per common share are as follows:
Earnings from continuing operations		$	0.25		$	0.45		$	0.33		$	0.74
Discontinued operations		$	—		$	—		$	—		$	(0.01	)
Net earnings to common stockholders		$	0.25		$	0.45		$	0.33		$	0.73
Weighted average common shares outstanding		10,790			11,104			10,789			11,239
Diluted earnings per common share are as follows:
Earnings from continuing operations		$	0.23		$	0.42		$	0.31		$	0.70
Discontinued operations		$	—		$	—		$	—		$	(0.01	)
Net earnings to common stockholders		$	0.23		$	0.42		$	0.31		$	0.69
Weighted average common shares outstanding		11,379			11,711			11,402			11,875

 

 

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)

 

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,
		2007			2006
Cash flows from operating activities:
Net earnings		$	3,545		$	8,252
Adjustments to reconcile net earnings to net cash used in operating activities:
Net loss from discontinued operations		—			75
Purchase of SBA loans held for sale		(19,406		)	—
Payments applied to principal on SBA loans held for sale		693			—
Proceeds from the sale of SBA loans held for sale, net		17,123			—
Purchase of Portfolio Assets, net		(61,249		)	(52,958		)
Proceeds applied to principal on Portfolio Assets		60,814			30,996
Income from Portfolio Assets		(16,463		)	(7,551		)
Capitalized interest and costs on Portfolio Assets and loans receivable		(776		)	(452		)
Provision for loan and impairment losses		936			101
Equity in earnings of investments		(8,315		)	(8,044		)
Gain on sale of SBA loans held for sale		(658		)	—
Gain on sale of subsidiaries and equity investments		(207		)	(2,405		)
Depreciation and amortization		402			391
Discount accretion on loans held for investment		(427		)	—
Stock-based compensation expense related to stock options		408			467
Decrease in service fees receivable		270			7
Decrease (increase) in other assets		(5,938		)	791
Change in debt imputed value		—			(293		)
Increase (decrease) in other liabilities		1,533			(539		)
Net cash used in operating activities		(27,715		)	(31,162		)
Cash flows from investing activities:
Property and equipment, net		(502		)	(135		)
Proceeds from sale of subsidiaries and equity investments		726			8,689
Cash paid for business combination, net of cash acquired		(5,629		)	—
Net payments (advances) on loans receivable		1,837			(10,365		)
Net increase in SBA loans held for investment		(15,104		)	—
Contributions to Acquisition Partnerships and Servicing Entities		(22,352		)	(39,406		)
Distributions from Acquisition Partnerships and Servicing Entities		52,291			63,346
Net cash provided by investing activities		11,267			22,129
Cash flows from financing activities:
Borrowings under notes payable — other		142,549			106,569
Payments of notes payable to affiliates		—			(312		)
Payments of notes payable — other		(111,593		)	(91,566		)
Repurchase of common stock		(82		)	(5,571		)
Proceeds from issuance of common stock		35			68
Net cash provided by financing activities		30,909			9,188
Net cash provided by continuing operations		14,461			155
Cash flows from discontinued operations:
Net cash used in operating activities		(24		)	(20		)
Net cash used in discontinued operations		(24		)	(20		)
Net increase in cash and cash equivalents		14,437			135
Cash and cash equivalents, beginning of period		18,472			12,901
Cash and cash equivalents, end of period		$	32,909		$	13,036
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	11,268		$	4,636
Income taxes, net of refunds received		287			121

 

See accompanying notes to consolidated financial statements.

 

 

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Dollars in thousands, except per share data)

(Unaudited)

 

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

 

The Company

 

FirstCity Financial Corporation and subsidiaries (the “Company” or “FirstCity”) is a financial services company with offices throughout the United States, Mexico and Brazil, with a presence in France, Germany, Argentina and Chile. At September 30, 2007, the Company was engaged in one principal reportable segment - Portfolio Asset acquisition and resolution.  The portfolio asset acquisition and resolution business involves acquiring portfolios of loans, real estate and other assets or single assets and investment in similar assets (collectively referred to as “Portfolios” or “Portfolio Assets”) generally at a discount to their legal principal balance or appraised value, and servicing and resolving such Portfolios in an effort to maximize the present value of the ultimate cash recoveries, and the origination of loans secured by similar assets.

 

Basis of Presentation

 

The unaudited consolidated financial statements of FirstCity reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly FirstCity’s consolidated financial position at September 30, 2007, its results of operations for the three and nine month periods ended September 30, 2007 and 2006 and cash flows for the nine month periods ended September 30, 2007 and 2006.  Certain disclosures have been condensed or omitted from these financial statements. Accordingly, these financial statements should be read with the consolidated financial statements included in the Company’s 2006 Annual Report on Form 10-K.  Certain amounts in the consolidated financial statements for prior years have been reclassified to conform to current consolidated financial statement presentation.

 

Use of Estimates

 

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

 

Reclassifications

 

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to current consolidated financial statement presentation.  In all reporting prior to December 31, 2006, FirstCity reported loans receivable advances and loans receivable payments in cash flows from operating activities on the Consolidated Statements of Cash Flows.  Beginning in the fourth quarter of 2006, the Company reports these items in cash flows from investing activities.  Prior period amounts reported on the Consolidated Statements of Cash Flows have been adjusted to conform to this treatment which is required under GAAP.  The total amount thus reclassified was $10,365 for the nine months ended September 30, 2006.  Management believes that the changes in the Consolidated Statements of Cash Flows for the nine month period ended September 30, 2006 are immaterial relative to the financial statements taken as a whole.  These reclassifications have the following impact on the financial statements:

 

 

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

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

 

 

 

 

 

(2)  New Accounting Pronouncements

 

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

 

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

 

(3)  Discontinued Operations

 

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

 

Mortgage

 

At September 30, 2007, the only asset remaining from discontinued operations is from mortgage operations, and represents an investment security resulting from the retention of a residual interest in a securitization transaction. This security is in “run-off,” and the Company is contractually obligated to service these assets.  The cash flows are collected over a period of time and are valued using prepayment assumptions of 32% for fixed rate loans and 33% for variable rate loans. Overall loss rates are estimated at 14% of collateral.  The Company recorded provisions (recoveries) of ($24) and $54 in the first nine months of 2007 and 2006, respectively, for losses from discontinued mortgage operations.  Discontinued mortgage assets of $127 at September 30, 2007 are included in other assets.

 

Consumer

 

Liabilities from discontinued consumer operations of $320 consisted of state taxes payable at September 30, 2007, and are included in other liabilities.

 

 

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Table of Contents

 

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

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

 

(4)  Portfolio Assets

 

Portfolio Assets are summarized as follows:

 

 

 

Income from Portfolio Assets is summarized as follows:

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2007			2006			2007			2006
Loan Portfolios
Loans Acquired Prior to 2005
Non-performing Portfolio Assets		$	325		$	612		$	1,193		$	2,464
Performing Portfolio Assets		165			412			727			1,293
Loans Acquired After 2004
Loans acquired with credit deterioration		4,300			1,403			12,450			2,412
Loans acquired with no credit deterioration		417			93			1,113			277