Table of Contents

 

 

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, 2009
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 033-19694

 

FirstCity Financial Corporation

(Exact name of registrant as specified in its charter)

 

 

(254) 761-2800

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

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

 

 

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, 2009 was 9,870,937.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I
Item 1.	Financial Statements	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Stockholders’ Equity	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58
Item 4.	Controls and Procedures	59
PART II OTHER INFORMATION		61
Item 1.	Legal Proceedings	61
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Submission of Matters to a Vote of Security Holders	61
Item 5.	Other Information	61
Item 6.	Exhibits	62
SIGNATURES		63

 

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,
		2009			2008
		(Unaudited)			(See Note 2)
ASSETS
Cash and cash equivalents		$	32,992		$	19,103
Restricted cash		1,039			1,217
Portfolio Assets:
Loan portfolios, net of allowance for loan losses of $62,288 and $76,365, respectively		220,125			121,137
Real estate held for sale		16,639			17,484
Real estate held for investment, net		9,514			9,592
Total Portfolio Assets		246,278			148,213
Loans receivable:
Loans receivable - affiliates		31,211			27,080
Loans receivable - SBA held for sale		1,583			4,901
Loans receivable - SBA held for investment, net of allowance for loan losses of $441 and $34, respectively		15,662			14,405
Loans receivable - other, net of allowance for loan losses of $-0- and $581, respectively		10,883			13,533
Total loans receivable		59,339			59,919
Investment security available for sale		1,755			5,251
Equity investments		73,036			72,987
Service fees receivable ($794 and $553 from affiliates, respectively)		860			626
Servicing assets - SBA loans		985			722
Other assets, net		21,803			20,899
Total Assets		$	438,087		$	328,937
LIABILITIES AND EQUITY
Liabilities:
Notes payable to banks		$	294,805		$	242,889
Note payable to affiliate		8,058			8,658
Other liabilities		17,764			11,515
Total Liabilities		320,627			263,062
Commitments and contingencies (Note 18)
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: 11,368,937 and 11,331,937, respectively ; shares outstanding: 9,868,937 and 9,831,937, respectively)		113			113
Treasury stock, at cost: 1,500,000 shares		(10,923		)	(10,923		)
Paid in capital		103,067			101,875
Accumulated deficit		(26,683		)	(37,073		)
Accumulated other comprehensive loss		(459		)	(3,726		)
FirstCity Stockholders’ Equity		65,115			50,266
Noncontrolling interests		52,345			15,609
Total Equity		117,460			65,875
Total Liabilities and Equity		$	438,087		$	328,937

 

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						Nine Months Ended
		September 30,						September 30,
		2009			2008			2009			2008
Revenues:
Servicing fees ($2,019 and $3,530 from affiliates for the three month periods, respectively, and $6,282 and $8,178 from affiliates for the nine month periods, respectively)		$	2,222		$	3,842		$	7,017		$	8,748
Income from Portfolio Assets		12,134			5,229			35,254			15,786
Gain on sale of SBA loans held for sale, net		301			85			911			227
Interest income from SBA loans		299			368			940			1,210
Interest income from loans receivable - affiliates		1,078			875			2,940			1,508
Interest income from loans receivable - other		99			541			892			1,171
Revenue from railroad operations		776			810			2,228			2,446
Other income		1,822			939			4,891			2,586
Total revenues		18,731			12,689			55,073			33,682
Expenses:
Interest and fees on notes payable to banks		3,072			4,249			9,261			11,690
Interest and fees on notes payable to affiliate		428			322			1,305			322
Salaries and benefits		5,300			5,655			16,386			15,982
Provision for loan and impairment losses		425			1,123			2,208			11,243
Asset-level expenses		1,992			1,105			4,646			4,093
Occupancy, data processing and other		3,093			3,980			8,681			9,738
Total expenses		14,310			16,434			42,487			53,068
Equity in net earnings of subsidiaries		421			2,170			1,473			8,018
Gain on step acquisition		—			—			1,455			—
Earnings (loss) before income taxes		4,842			(1,575		)	15,514			(11,368		)
Income tax benefit (expense)		(1,254		)	44			(1,957		)	(245		)
Net earnings (loss)		3,588			(1,531		)	13,557			(11,613		)
Less: Net income attributable to noncontrolling interests (See Note 2)		1,588			224			3,167			255
Net earnings (loss) attributable to FirstCity		$	2,000		$	(1,755	)	$	10,390		$	(11,868	)
Basic earnings (loss) per share		$	0.20		$	(0.17	)	$	1.06		$	(1.14	)
Diluted earnings (loss) per share		$	0.19		$	(0.17	)	$	1.02		$	(1.14	)

 

See accompanying notes to consolidated financial statements.

 

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

 

		FirstCity Stockholders
											Retained			Accumulated			Non-
											Earnings			Other			controlling
		Common			Treasury			Paid in			(Accumulated			Comprehensive			Interests			Total
		Stock			Stock			Capital			Deficit)			Income (Loss)			(See Note 2)			Equity
Balances, December 31, 2007		$	113		$	(5,978	)	$	101,240		$	9,602		$	1,846		$	3,209		$	110,032
Exercise of common stock options		—			—			12			—			—			—			12
Repurchase of common stock		—			(3,814		)	—			—			—			—			(3,814		)
Stock option compensation expense		—			—			495			—			—			—			495
Investment in majority-owned entities		—			—			—			—			—			14,559			14,559
Distributions to noncontrolling interests		—			—			—			—			—			(1,043		)	(1,043		)
Other activity		—			—			—			—			—			10			10
Comprehensive loss:
Net loss		—			—			—			(11,868		)	—			255			(11,613		)
Foreign currency translation adjustments		—			—			—			—			421			(285		)	136
Total comprehensive loss																				(11,477		)
Balances, September 30, 2008		$	113		$	(9,792	)	$	101,747		$	(2,266	)	$	2,267		$	16,705		$	108,774
Balances, December 31, 2008		$	113		$	(10,923	)	$	101,875		$	(37,073	)	$	(3,726	)	$	15,609		$	65,875
Exercise of common stock options		—			—			113			—			—			—			113
Stock option compensation expense		—			—			438			—			—			—			438
Purchases of subsidiary shares in noncontrolling interests		—			—			641			—			—			(3,458		)	(2,817		)
Investments in majority-owned entities		—			—			—			—			—			46,306			46,306
Distributions to noncontrolling interests		—			—			—			—			—			(9,961		)	(9,961		)
Comprehensive income:
Net earnings		—			—			—			10,390			—			3,167			13,557
Change in net unrealized gain on securities available for sale		—			—			—			—			1,310			326			1,636
Foreign currency translation adjustments		—			—			—			—			1,957			356			2,313
Total comprehensive income																				17,506
Balances, September 30, 2009 (unaudited)		$	113		$	(10,923	)	$	103,067		$	(26,683	)	$	(459	)	$	52,345		$	117,460

 

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,
		2009			2008
		(See Notes 1 and 2)
Cash flows from operating activities:
Net earnings (loss)		$	13,557		$	(11,613	)
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Net principal advances on SBA loans held for sale		(13,491		)	(7,938		)
Proceeds from sales of SBA loans held for sale, net		18,155			5,310
Proceeds applied to income from Portfolio Assets		15,324			11,371
Income from Portfolio Assets		(35,254		)	(15,786		)
Capitalized interest and costs on Portfolio Assets and loans receivable		(955		)	(986		)
Provision for loan and impairment losses		2,208			11,243
Foreign currency transaction (gains) losses, net		(441		)	1,003
Equity in net earnings of non-consolidated subsidiaries		(1,473		)	(8,018		)
Gain on sale of SBA loans held for sale, net		(911		)	(227		)
Gain on sale of railroad property		(920		)	—
Gain on step acquisition		(1,455		)	—
Depreciation and amortization		3,007			2,808
Net premium amortization of loans receivable		(96		)	(231		)
Stock option compensation expense		438			495
Decrease (increase) in restricted cash		178			(615		)
Increase in service fees receivable		(254		)	(198		)
Increase in other assets		(1,756		)	(1,317		)
Increase (decrease) in other liabilities		5,594			676
Net cash provided by (used in) operating activities		1,455			(14,023		)
Cash flows from investing activities:
Purchases of property and equipment, net		(2,071		)	(1,795		)
Proceeds from sale of railroad property		1,350			—
Cash paid for business combination, net of cash acquired		(7,149		)	(300		)
Net principal advances on loans receivable		(1,946		)	(28,338		)
Net principal collections (advances) on SBA loans held for investment		(1,830		)	(156		)
Net principal paydowns on investment security available for sale		3,469			—
Purchases of Portfolio Assets		(171,921		)	(50,121		)
Proceeds applied to principal on Portfolio Assets		109,120			35,573
Contributions to non-consolidated subsidiaries		(3,890		)	(3,037		)
Distributions from non-consolidated subsidiaries		9,297			14,762
Net cash used in investing activities		(65,571		)	(33,412		)
Cash flows from financing activities:
Borrowings under note payable to affiliate		—			8,577
Borrowings under notes payable to banks		160,872			107,525
Principal payments of notes payable to affiliates		(600		)	—
Principal payments of notes payable to banks, net		(110,082		)	(76,658		)
Payments of debt issuance costs and loan fees		(854		)	(1,291		)
Contributions from noncontrolling interests		40,991			4,140
Distributions to noncontrolling interests		(9,961		)	(1,043		)
Repurchase of common stock		—			(3,814		)
Cash paid for subsidiary shares in noncontrolling interests		(2,796		)	—
Proceeds from issuance of common stock		113			12
Net cash provided by financing activities		77,683			37,448
Effect of exchange rate changes on cash and cash equivalents		322			(66		)
Net increase (decrease) in cash and cash equivalents		13,889			(10,053		)
Cash and cash equivalents, beginning of period		19,103			23,037
Cash and cash equivalents, end of period		$	32,992		$	12,984
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	7,279		$	9,607
Income taxes, net of refunds received		222			215

 

See accompanying notes to consolidated financial statements.

 

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

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

 

Nature of Operations

 

FirstCity Financial Corporation and subsidiaries (collectively, “FirstCity,” “Company,” “we,” “us” or “our”) is a financial services company with offices in the United States and Mexico, and a presence in Europe and South America. FirstCity engages in two major business segments — Portfolio Asset Acquisition and Resolution and Special Situations Platform. The Portfolio Asset Acquisition and Resolution business has been the Company’s core business operation since commencing operations in 1986. In the Portfolio Asset Acquisition and Resolution business, the Company acquires portfolios of performing and non-performing commercial and consumer loans and other assets (collectively, “Portfolio Assets” or “Portfolios”), generally at a discount to their legal principal balances or appraised values, and services and resolves such Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. FirstCity acquires the Portfolio Assets for its own account or through investment entities formed with one or more other co-investors (each such entity, an “Acquisition Partnership”). The Company engages in its Special Situations Platform business through its majority ownership interest in FirstCity Denver Investment Corp. (“FirstCity Denver”) — which was formed in April 2007. Through its Special Situations Platform business, the Company provides investment capital to privately-held middle-market companies through flexible capital structuring arrangements to generate an attractive risk-adjusted return. These capital investments primarily take the form of senior and junior financing arrangements, but also include direct equity investments, common equity warrants, distressed debt transactions, and buyouts. Refer to Note 17 for additional information on the Company’s major business segments.

 

Basis of Presentation

 

The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of FirstCity and all other entities in which FirstCity has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies the Company follows conform, in all material respects, to U.S. generally accepted accounting principles and to general practices within the financial services industry.

 

The consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. We have prepared the accompanying unaudited consolidated financial statements in accordance with the accounting policies described in our 2008 Annual Report on Form 10-K, as amended (“2008 Form 10-K”), and with the instructions to Form 10-Q. Accordingly, the accompanying unaudited consolidated financial statements do not include all of the information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles, and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, included in our 2008 Form 10-K. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Certain amounts in the consolidated financial statements and disclosures for prior periods have been reclassified to conform to the current period’s presentation. These reclassifications are not significant and have no impact on earnings, total assets or stockholders’ equity.

 

We have performed a review of subsequent events through November 12, 2009, the date the consolidated financial statements were issued, and concluded there were no events or transactions occurring during the period that required recognition or disclosure in our consolidated financial statements.

 

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

 

On January 1, 2009, the Company adopted the FASB guidance (issued in December 2007) that established new accounting and reporting standards for noncontrolling (minority) interests in a subsidiary. Refer to Note 2 for more information.

 

Correction of an Error in Previously Issued Consolidated Statements of Cash Flows

 

The Company determined that it has incorrectly reported certain amounts related to Portfolio Asset activities as “Cash flows from operating activities” in the Consolidated Statements of Cash Flows for all reporting periods prior to September 30, 2009. Upon subsequent review, the Company determined that applicable Portfolio Asset transactions, primarily purchases and principal collections, should be reported as “Cash flows from investing activities.” In this Form 10-Q for the quarterly period ended September 30, 2009, for reasons described below, the Company is revising its Consolidated Statements of Cash Flows so that applicable Portfolio Asset transactions are reported as “Cash flows from investing activities” instead of “Cash flows from operating activities” for the current and prior reporting period. All financial information contained in this Form 10-Q gives effect to these revisions. The revisions did not result in a change to the Company’s previously-reported revenues, expenses, net earnings (loss), cash and cash equivalents, or stockholders’ equity.

 

Company management considered all of the relevant quantitative and qualitative factors related to the correction of the error under SEC Staff Accounting Bulletin Topic 1N, Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), and determined that the impact on previously-issued and current period consolidated financial statements was not material. Therefore, the Company is revising the prior period Consolidated Statements of Cash Flows for the immaterial error in this Form 10-Q and is not amending previously-filed reports.

 

The following tables reconcile the Company’s Consolidated Statements of Cash Flows from the previously-reported results to the revised results for the nine-month period ended September 30, 2008 and for the years ended December 31, 2008, 2007 and 2006 (which includes, as applicable, the impact of reclassification on change in reporting noncontrolling interests attributable to the Company’s adoption of the FASB guidance that established new accounting and reporting standards for noncontrolling interests — see Note 2):

 

		Nine Months Ended
		September 30,			Years Ended December 31,
		2008			2008			2007			2006
		(Dollars in thousands)			(Dollars in thousands)
Consolidated Statements of Cash Flows:
Cash flows from operating activities (as reported)		$	(25,528	)	$	(49,189	)	$	(16,649	)	$	(63,298	)
Impact of revision on purchases of Portfolio Assets		50,121			78,516			77,188			96,493
Impact of revision on proceeds applied to principal on Portfolio Assets		(35,573		)	(47,735		)	(69,416		)	(42,532		)
Impact of reclassification on change in reporting noncontrolling interests (see Note 2)		(3,097		)	(2,212		)	(1,641		)	(473		)
Other		54			—			—			—
Cash flows from operating activities (as revised)		$	(14,023	)	$	(20,620	)	$	(10,518	)	$	(9,810	)
Cash flows from investing activities (as reported)		$	(18,864	)	$	(18,435	)	$	39,521		$	(19,623	)
Impact of revision on purchases of Portfolio Assets		$	(50,121	)	$	(78,516	)	$	(77,188	)	$	(96,493	)
Impact of revision on proceeds applied to principal on Portfolio Assets		35,573			47,735			69,416			42,532
Cash flows from investing activities (as revised)		$	(33,412	)	$	(49,216	)	$	31,749		$	(73,584	)

 

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