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FirstCity Financial 10-Q 2006

 

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

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.

2




Table of Contents

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.

3




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings

 

Other

 

Total

 

 

 

Common Stock

 

Treasury Stock

 

Paid in

 

(Accumulated

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit)

 

Income

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 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.

4




Table of Contents

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.

5




Table of Contents

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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Table of Contents

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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Table of Contents

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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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:

 

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.

9




Table of Contents

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

10




Table of Contents

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

 

 

11




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

 

 

12




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

 

 

13




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

 

 

14




Table of Contents

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

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

)