UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
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.) |
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6400 Imperial Drive, |
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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 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 x 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.)
Large accelerated filer o |
| Accelerated filer o |
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Non-accelerated filer o |
| Smaller reporting company x |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of common stock, par value $.01 per share, outstanding at August 8, 2012 was 10,556,197.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 50 | |
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FINANCIAL INFORMATION
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
(Dollars in thousands, except share data)
|
| June 30, |
| December 31, |
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| 2012 |
| 2011 |
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| (Unaudited) |
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ASSETS |
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Cash and cash equivalents |
| $ | 33,039 |
| $ | 34,802 |
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Restricted cash |
| 1,250 |
| 1,229 |
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Portfolio Assets: |
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Loan portfolios, net of allowance for loan losses of $617 and $781 |
| 68,353 |
| 97,090 |
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Real estate held for sale, net |
| 14,320 |
| 26,856 |
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Total Portfolio Assets |
| 82,673 |
| 123,946 |
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Loans receivable: |
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Loans receivable - affiliates |
| 6,757 |
| 6,719 |
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Loans receivable - SBA held for sale |
| 4,808 |
| 7,614 |
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Loans receivable - SBA held for investment, net of allowance for loan losses of $425 and $333 |
| 20,226 |
| 19,151 |
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Loans receivable - other, net of allowance for loan losses of $1,083 |
| 7,545 |
| 12,212 |
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Total loans receivable, net |
| 39,336 |
| 45,696 |
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Investment securities available for sale |
| 3,529 |
| 3,798 |
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Investments in unconsolidated subsidiaries |
| 103,864 |
| 109,393 |
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Service fees receivable ($1,023 and $834 from affiliates) |
| 1,106 |
| 913 |
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Servicing assets - SBA loans |
| 1,145 |
| 1,090 |
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Assets held for sale |
| 9,948 |
| 9,886 |
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Other assets |
| 27,502 |
| 25,593 |
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Total Assets (1) |
| $ | 303,392 |
| $ | 356,346 |
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LIABILITIES AND EQUITY |
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Liabilities: |
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Notes payable to banks and other |
| $ | 139,873 |
| $ | 189,936 |
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Liabilities associated with assets held for sale |
| 5,189 |
| 5,317 |
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Other liabilities |
| 22,306 |
| 23,690 |
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Total Liabilities (2) |
| 167,368 |
| 218,943 |
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Commitments and contingencies (Note 18) |
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Stockholders’ equity: |
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Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding) |
| — |
| — |
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Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued: 12,056,197 and 11,890,590, respectively; shares outstanding: 10,556,197 and 10,390,590, respectively) |
| 121 |
| 119 |
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Treasury stock, at cost: 1,500,000 shares |
| (10,923 | ) | (10,923 | ) | ||
Paid in capital |
| 106,822 |
| 106,330 |
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Retained earnings |
| 28,243 |
| 18,391 |
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Accumulated other comprehensive loss |
| (1,969 | ) | (1,941 | ) | ||
FirstCity Stockholders’ Equity |
| 122,294 |
| 111,976 |
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Noncontrolling interests |
| 13,730 |
| 25,427 |
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Total Equity |
| 136,024 |
| 137,403 |
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Total Liabilities and Equity |
| $ | 303,392 |
| $ | 356,346 |
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(1) Our consolidated assets at June 30, 2012 and December 31, 2011 include the following assets of certain variable interest entities (“VIEs”) that can only be used to settle the liabilities of those VIEs: Cash and cash equivalents, $18.5 million and $20.4 million; Portfolio Assets, $68.9 million and $98.4 million; Loans receivable, $39.3 million and $45.7 million; Equity investments, $41.5 million and $51.7 million; various other assets, $37.8 million and $35.9 million; and Total assets, $206.0 million and $252.2 million, respectively.
(2) Our consolidated liabilities at June 30, 2012 and December 31, 2011 include the following VIE liabilities for which the VIE creditors do not have recourse to FirstCity: Notes payable, $43.9 million and $70.2 million; Other liabilities, $17.3 million and $19.0 million; and Total liabilities, $61.2 million and $89.2 million, respectively.
See accompanying notes to consolidated financial statements.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(Dollars in thousands, except per share data)
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| Three Months Ended |
| Six Months Ended |
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| June 30, |
| June 30, |
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| 2012 |
| 2011 |
| 2012 |
| 2011 |
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Revenues: |
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Servicing fees ($3,170 and $2,303 from affiliates for the three-month periods, respectively, and $8,675 and $4,530 from affiliates for the six-month periods, respectively) |
| $ | 3,397 |
| $ | 2,480 |
| $ | 9,141 |
| $ | 4,905 |
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Income from Portfolio Assets |
| 5,865 |
| 9,098 |
| 14,370 |
| 21,938 |
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Gain on sale of SBA loans held for sale, net |
| 284 |
| 646 |
| 856 |
| 1,530 |
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Interest income from SBA loans |
| 382 |
| 325 |
| 737 |
| 674 |
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Interest income from loans receivable - affiliates |
| 290 |
| 773 |
| 570 |
| 1,511 |
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Interest income from loans receivable - other |
| 91 |
| 112 |
| 192 |
| 300 |
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Revenue from railroad operations |
| 1,951 |
| 1,430 |
| 3,636 |
| 2,860 |
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Other income |
| 2,034 |
| 2,054 |
| 4,579 |
| 3,977 |
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Total revenues |
| 14,294 |
| 16,918 |
| 34,081 |
| 37,695 |
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Costs and expenses: |
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Interest and fees on notes payable to banks and other |
| 1,334 |
| 3,378 |
| 3,072 |
| 6,961 |
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Interest and fees on notes payable to affiliates |
| — |
| 386 |
| — |
| 766 |
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Salaries and benefits |
| 5,318 |
| 5,525 |
| 11,446 |
| 10,674 |
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Provision for loan and impairment losses |
| 769 |
| 178 |
| 1,239 |
| 817 |
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Asset-level expenses |
| 912 |
| 1,730 |
| 1,975 |
| 3,144 |
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Costs and expenses from railroad operations |
| 1,471 |
| 882 |
| 2,699 |
| 1,767 |
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Other costs and expenses |
| 4,449 |
| 2,706 |
| 7,770 |
| 4,867 |
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Total costs and expenses |
| 14,253 |
| 14,785 |
| 28,201 |
| 28,996 |
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Earnings before other revenue and income taxes |
| 41 |
| 2,133 |
| 5,880 |
| 8,699 |
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Equity income from unconsolidated subsidiaries |
| 2,081 |
| 3,283 |
| 6,548 |
| 5,154 |
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Gain on business combinations |
| 935 |
| 278 |
| 935 |
| 278 |
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Gain on sale of subsidiaries |
| — |
| — |
| — |
| 5 |
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Earnings before income taxes |
| 3,057 |
| 5,694 |
| 13,363 |
| 14,136 |
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Income tax expense |
| 5 |
| 1,024 |
| 838 |
| 1,626 |
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Net earnings |
| 3,052 |
| 4,670 |
| 12,525 |
| 12,510 |
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Less: Net income attributable to noncontrolling interests |
| 1,565 |
| 2,242 |
| 2,673 |
| 6,357 |
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Net earnings attributable to FirstCity |
| $ | 1,487 |
| $ | 2,428 |
| $ | 9,852 |
| $ | 6,153 |
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Basic earnings per share of common stock |
| $ | 0.14 |
| $ | 0.24 |
| $ | 0.94 |
| $ | 0.60 |
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Diluted earnings per share of common stock |
| $ | 0.14 |
| $ | 0.24 |
| $ | 0.93 |
| $ | 0.60 |
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See accompanying notes to consolidated financial statements.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
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| Three Months Ended |
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| June 30, |
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| 2012 |
| 2011 |
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Net earnings |
| $ | 3,052 |
| $ | 4,670 |
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Other comprehensive income (loss), net of tax: |
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Net unrealized gain on securities available for sale |
| 53 |
| 126 |
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Foreign currency translation adjustments |
| (2,373 | ) | 1,329 |
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Total other comprehensive income (loss), net of tax |
| (2,320 | ) | 1,455 |
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Total comprehensive income |
| 732 |
| 6,125 |
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Less comprehensive income attributable to noncontrolling interests: |
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Net income |
| (1,565 | ) | (2,242 | ) | ||
Net unrealized (gain) loss on securities available for sale, net of tax |
| (2 | ) | 66 |
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Foreign currency translation adjustments |
| 557 |
| (286 | ) | ||
Comprehensive income (loss) attributable to FirstCity |
| $ | (278 | ) | $ | 3,663 |
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| Six Months Ended |
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| June 30, |
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| 2012 |
| 2011 |
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Net earnings |
| $ | 12,525 |
| $ | 12,510 |
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Other comprehensive income (loss), net of tax: |
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Net unrealized gain on securities available for sale |
| 513 |
| 69 |
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Foreign currency translation adjustments |
| (766 | ) | 2,020 |
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Total other comprehensive income (loss), net of tax |
| (253 | ) | 2,089 |
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Total comprehensive income |
| 12,272 |
| 14,599 |
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Less comprehensive income attributable to noncontrolling interests: |
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Net income |
| (2,673 | ) | (6,357 | ) | ||
Net unrealized (gain) loss on securities available for sale, net of tax |
| (15 | ) | 46 |
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Foreign currency translation adjustments |
| 240 |
| (657 | ) | ||
Comprehensive income attributable to FirstCity |
| $ | 9,824 |
| $ | 7,631 |
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See accompanying notes to consolidated financial statements.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands)
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| FirstCity Stockholders |
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| Retained |
| Accumulated |
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| Earnings |
| Other |
| Non- |
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| Treasury |
| Paid in |
| (Accumulated |
| Comprehensive |
| controlling |
| Total |
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| Stock |
| Stock |
| Capital |
| Deficit) |
| Income (Loss) |
| Interests |
| Equity |
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Balances, December 31, 2010 |
| $ | 118 |
| $ | (10,923 | ) | $ | 105,038 |
| $ | (5,826 | ) | $ | (65 | ) | $ | 36,398 |
| $ | 124,740 |
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Net earnings |
| — |
| — |
| — |
| 6,153 |
| — |
| 6,357 |
| 12,510 |
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Change in net unrealized gain on securities available for sale, net of tax |
| — |
| — |
| — |
| — |
| 115 |
| (46 | ) | 69 |
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Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| 1,363 |
| 657 |
| 2,020 |
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Stock-based compensation expense |
| — |
| — |
| 371 |
| — |
| — |
| — |
| 371 |
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Sales of subsidiary shares in noncontrolling interests |
| — |
| — |
| 484 |
| — |
| — |
| 207 |
| 691 |
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Investments in majority-owned entities |
| — |
| — |
| — |
| — |
| — |
| 524 |
| 524 |
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Distributions to noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| (10,729 | ) | (10,729 | ) | |||||||
Balances, June 30, 2011 |
| $ | 118 |
| $ | (10,923 | ) | $ | 105,893 |
| $ | 327 |
| $ | 1,413 |
| $ | 33,368 |
| $ | 130,196 |
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Balances, December 31, 2011 |
| $ | 119 |
| $ | (10,923 | ) | $ | 106,330 |
| $ | 18,391 |
| $ | (1,941 | ) | $ | 25,427 |
| $ | 137,403 |
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Net earnings |
| — |
| — |
| — |
| 9,852 |
| — |
| 2,673 |
| 12,525 |
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Change in net unrealized gain on securities available for sale, net of tax |
| — |
| — |
| — |
| — |
| 498 |
| 15 |
| 513 |
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Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| (526 | ) | (240 | ) | (766 | ) | |||||||
Issuance of common stock under stock- based compensation plans |
| 2 |
| — |
| (2 | ) | — |
| — |
| — |
| — |
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Stock-based compensation expense |
| — |
| — |
| 494 |
| — |
| — |
| — |
| 494 |
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Deconsolidation of majority-owned entity (see Note 3) |
| — |
| — |
| — |
| — |
| — |
| (8,473 | ) | (8,473 | ) | |||||||
Investments in majority-owned entities |
| — |
| — |
| — |
| — |
| — |
| 10 |
| 10 |
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Distributions to noncontrolling interests |
| — |
| — |
| — |
| — |
| — |
| (5,682 | ) | (5,682 | ) | |||||||
Balances, June 30, 2012 |
| $ | 121 |
| $ | (10,923 | ) | $ | 106,822 |
| $ | 28,243 |
| $ | (1,969 | ) | $ | 13,730 |
| $ | 136,024 |
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See accompanying notes to consolidated financial statements.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
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| Six Months Ended |
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| June 30, |
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| 2012 |
| 2011 |
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Cash flows from operating activities: |
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Net earnings |
| $ | 12,525 |
| $ | 12,510 |
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Adjustments to reconcile net earnings to net cash used in operating activities: |
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Net principal advances on SBA loans held for sale |
| (7,715 | ) | (10,809 | ) | ||
Proceeds from sales of SBA loans held for sale, net |
| 11,880 |
| 19,429 |
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Proceeds applied to income from Portfolio Assets |
| 576 |
| 2,816 |
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Income from Portfolio Assets |
| (14,370 | ) | (21,938 | ) | ||
Provision for loan and impairment losses |
| 1,239 |
| 817 |
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Foreign currency transaction losses (gains), net |
| 130 |
| (1,530 | ) | ||
Equity income from unconsolidated subsidiaries |
| (6,548 | ) | (5,154 | ) | ||
Gain on sale of SBA loans held for sale, net |
| (856 | ) | (1,530 | ) | ||
Gain on business combinations |
| (935 | ) | (278 | ) | ||
Depreciation and amortization, net |
| 1,774 |
| 1,346 |
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Decrease (increase) in other assets |
| 145 |
| (1,812 | ) | ||
Increase (decrease) in other liabilities |
| (588 | ) | 461 |
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Other, net |
| (127 | ) | (404 | ) | ||
Net cash used in operating activities |
| (2,870 | ) | (6,076 | ) | ||
Cash flows from investing activities: |
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Purchases of property and equipment, net |
| (766 | ) | (1,137 | ) | ||
Cash paid for business combinations, net of cash acquired |
| 16 |
| (498 | ) | ||
Decrease in cash from deconsolidation of subsidiary |
| (2,855 | ) | — |
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Net principal payments on loans receivable |
| 2,295 |
| 352 |
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Purchases of SBA loans held for investment |
| — |
| (696 | ) | ||
Net principal advances on SBA loans held for investment |
| (1,635 | ) | (1,468 | ) | ||
Purchase of investment securities available for sale |
| — |
| (3,485 | ) | ||
Net principal payments on investment securities available for sale |
| 796 |
| 1,093 |
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Purchases of Portfolio Assets |
| (1,444 | ) | (5,375 | ) | ||
Proceeds applied to principal on Portfolio Assets |
| 48,847 |
| 80,962 |
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Contributions to unconsolidated subsidiaries |
| (18,443 | ) | (22,751 | ) | ||
Distributions from unconsolidated subsidiaries |
| 23,599 |
| 20,011 |
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Net cash provided by investing activities |
| 50,410 |
| 67,008 |
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Cash flows from financing activities: |
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Borrowings under notes payable to affiliates |
| — |
| 696 |
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Borrowings under notes payable to banks and other |
| 15,942 |
| 21,882 |
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Principal payments of notes payable to affiliates |
| — |
| (2,202 | ) | ||
Principal payments of notes payable to banks and other |
| (59,231 | ) | (81,417 | ) | ||
Proceeds from secured borrowings, net |
| — |
| (4,302 | ) | ||
Distributions to noncontrolling interests |
| (5,682 | ) | (10,729 | ) | ||
Other, net |
| (282 | ) | (273 | ) | ||
Net cash used in financing activities |
| (49,253 | ) | (76,345 | ) | ||
Effect of exchange rate changes on cash and cash equivalents |
| (50 | ) | 738 |
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Net decrease in cash and cash equivalents |
| (1,763 | ) | (14,675 | ) | ||
Cash and cash equivalents, beginning of period |
| 34,802 |
| 46,597 |
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Cash and cash equivalents, end of period |
| $ | 33,039 |
| $ | 31,922 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest |
| $ | 1,674 |
| $ | 5,878 |
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Cash paid during the period for income taxes, net of refunds |
| 1,400 |
| 634 |
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See accompanying notes to consolidated financial statements.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
FirstCity Financial Corporation, a Delaware corporation, is a multi-national specialty financial services company headquartered in Waco, Texas with offices throughout the United States and Mexico and a presence in Europe and South America. When we refer to “FirstCity,” “the Company,” “we,” “our” or “us” in this Quarterly Report on Form 10-Q, we mean FirstCity Financial Corporation and subsidiaries (consolidated).
The Company 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 segment since it commenced operations in 1986. In the Portfolio Asset Acquisition and Resolution business, the Company acquires portfolios of under-performing and non-performing loans, and to a lesser extent, performing 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 in a subsidiary that was formed in April 2007. Through its Special Situations Platform, 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 and common equity warrants. In addition, our Special Situations Platform business engages in distressed debt transactions and leveraged buyouts. Refer to Note 17 for additional information on the Company’s major business segments.
Basis of Presentation
The accompanying unaudited consolidated financial statements in this Form 10-Q were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations. The interim results of operations disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. These interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2011, as amended (“2011 Form 10-K”).
The accompanying consolidated financial statements in this Form 10-Q include the accounts of FirstCity, its wholly-owned and majority-owned subsidiaries, and certain variable interest entities where we are the primary beneficiary as prescribed by the Financial Accounting Standards Board’s (the “FASB”) accounting guidance on variable interest entities (see discussion below). All significant intercompany transactions and balances have been eliminated in consolidation. Certain amounts in the consolidated financial statements and disclosures for prior periods were reclassified to conform to the current period presentation. These reclassifications were not significant and have no impact on FirstCity’s net earnings, total assets or stockholders’ equity.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Subsidiaries
If we determine that we have a controlling financial interest in an entity, then we must consolidate the assets, liabilities and noncontrolling interests of the entity in our consolidated financial statements. A controlling financial interest typically arises as a result of ownership of a majority of the voting interests of an entity. However, we may also have a controlling financial interest in an entity through an arrangement that does not involve voting interests, such as a variable interest entity (“VIE”). We consolidate all VIEs where we are the primary beneficiary as prescribed by the FASB’s accounting guidance on the consolidation of VIEs. The primary beneficiary of a VIE is the party that has the power to direct the activities that most-significantly impact the economic performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. Refer to Note 15 for more information regarding the Company’s involvement with VIEs.
Unconsolidated Subsidiaries
The Company does not consolidate investments in entities that are not VIEs where the Company does not have an effective controlling interest, or investments in entities that are VIEs where the Company is not the primary beneficiary. Rather, such investments, which represent equity investments in non-publicly-traded entities, are accounted for under the equity method of accounting since the Company has the ability to exercise significant influence (but not control) over operating and financial policies of such subsidiaries (including certain entities where we have less than 20% ownership). FirstCity has the ability to exercise significant influence over the operating and financial policies of its less-than-20%-owned entities, despite its comparatively smaller ownership percentage, due primarily to its active participation in the policy-making process as well as its involvement in the daily management activities of the entities.
Under the equity method of accounting, the Company’s investments in these unconsolidated entities are carried at the cost of acquisition, plus the Company’s share of equity in undistributed earnings or losses since acquisition. We eliminate transactions with our equity-method subsidiaries to the extent of our ownership in such subsidiaries. Accordingly, our share of the income or losses of these equity-method subsidiaries is included in our consolidated net income.
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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates that are particularly susceptible to significant change in the near-term relate to (1) the estimation of future collections on Portfolio Assets used in the calculation of income from Portfolio Assets; (2) valuation of deferred tax assets and assumptions used in the calculation of income taxes; (3) valuation of servicing assets, investment securities, loans receivable (including loans receivable held in securitization entities) and related allowances for loan losses, real estate, and investments in unconsolidated subsidiaries; (4) guarantee obligations and indemnifications; and (5) legal contingencies. In addition, management has made significant estimates with respect to the valuation of assets, liabilities, non-controlling interests and contingencies attributable to business combinations. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. The continuance of challenging economic conditions and disruptions in the financial, capital, real estate and foreign currency markets, have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Portfolio Assets
The Company invests in Portfolio Assets and services and resolves such Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. The Portfolio Assets are generally non-homogeneous assets, including loans of varying qualities that are secured by diverse collateral types and real estate. Some Portfolio Assets are loans for which resolution is tied primarily to the real estate securing the loan, while others may be collateralized business loans, the resolution of which may be based on the cash flows of the business or the underlying collateral.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following is a description of the classifications and related accounting policies for the Company’s significant classes of Portfolio Assets:
Purchased Credit-Impaired Loans
The Company accounts for acquired loans and loan portfolios with evidence of credit deterioration since origination (“Purchased Credit-Impaired Loans”) at fair value on the acquisition date. The amounts paid for Purchased Credit-Impaired Loans reflect the Company’s determination that the loans have experienced deterioration in credit quality since origination and that it is probable the Company will be unable to collect all amounts due according to the contractual terms of the underlying loans. At acquisition, the Company reviews each individual loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, the Company determines whether each such loan is to be accounted for individually or whether such loans will be assembled into static pools based on common risk characteristics (primarily loan type and collateral). Static pools of individual loan accounts may be established and accounted for as a single economic unit for the recognition of income, principal payments and loss provision. Once a static loan pool is established, individual accounts are generally not added to or removed from the pool (unless the Company sells, forecloses or writes-off the loan). At acquisition, the Company determines the excess of the scheduled contractual payments over all cash flows expected to be collected for the loan or loan pool as an amount that should not be accreted (“nonaccretable difference”). The excess of the cash flows from the loan or loan pool expected to be collected at acquisition over the initial investment (“accretable difference”) is recognized as interest income over the remaining life of the loan or loan pool on a level-yield basis (“accretable yield”). The discount (i.e. the difference between the cost of each loan or loan pool and the related aggregate contractual receivable balance) is not recorded because the Company does not expect to fully collect each contractual receivable balance. As a result, these loans and loan pools are recorded at cost (which approximates fair value) at the time of acquisition.
The Company accounts for Purchased Credit-Impaired Loans using either the interest method or a non-accrual method (through application of the cost-recovery or cash basis method of accounting). Application of the interest method is dependent on management’s ability to develop a reasonable expectation as to both the timing and amount of cash flows expected to be collected. In the event the Company cannot develop or establish a reasonable expectation as to both the timing and amount of cash flows expected to be collected, the Company uses the cost-recovery or cash basis method of accounting.
Interest method of accounting. Under the interest method, an effective interest rate, or IRR, is applied to the cost basis of the loan or loan pool. The excess of the contractual cash flows over expected cash flows cannot be recognized as an adjustment of income or expense or on the balance sheet. The IRR that is calculated when the loan is purchased remains constant as the basis for subsequent impairment testing (performed at least quarterly) and income recognition. Significant increases in actual, or expected future cash flows, are used first to reverse any existing valuation allowance for that loan or loan pool; and any remaining increase may be recognized prospectively through an upward adjustment of the IRR over the remaining life of the loan or loan pool. Any increase to the IRR then becomes the new benchmark for impairment testing and income recognition. Subsequent decreases in projected cash flows do not change the IRR, but are recognized as an impairment of the cost basis of the loan or loan pool (to maintain the then-current IRR), and are reflected in the consolidated statements of earnings through provisions charged to operations, with a corresponding valuation allowance offsetting the loan or loan pool in the consolidated balance sheets. FirstCity establishes valuation allowances for loans and loan pools acquired with credit deterioration to reflect only those losses incurred after acquisition — that is, the cash flows expected at acquisition that are no longer expected to be collected. Income from loans and loan pools accounted for under the interest method is accrued based on the IRR of each loan or loan pool applied to their respective adjusted cost basis. Gross collections in excess of the interest accrual and impairments will reduce the carrying value of the loan or loan pool, while gross collections less than the interest accrual will increase the carrying value. The IRR is calculated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models.
Cost-recovery method of accounting. If the amount and timing of future cash collections on a loan are not reasonably estimable, the Company accounts for such asset on the cost-recovery method. Under the cost-recovery method, no income is recognized until the Company has fully collected the cost of the loan, or until such time as the Company considers the timing and amount of collections to be reasonably estimable and begins to recognize income based on the interest method as described above. At least quarterly, the Company performs an evaluation to determine if the remaining amount that is probable of collection is less than the carrying value of the loan or loan pool, and if so, recognizes impairment through provisions charged to operations, with a corresponding valuation allowance offsetting the loan or loan pool in the consolidated balance sheets. The carrying value of Purchased Credit-Impaired Loans accounted for under the cost-recovery method approximated $25.4 million at June 30, 2012 (including $1.3 million of loans pending management’s post-purchase evaluation) and $27.9 million at December 31, 2011.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Cash basis method of accounting. If only the amount of future cash collections on a loan is reasonably estimable, the Company accounts for such asset on an individual loan basis under the cash basis method of accounting. Under the cash basis method, no income is recognized unless collections are received during the period, or until such time as the Company considers the timing of collections to be reasonably estimable and begins to recognize income based on the interest method as described above. Income is recognized for the difference between the collections and a pro-rata portion of cost on a loan. Cost allocation is based on a proration of actual collections divided by total projected collections on the loan. Significant increases in future cash flows may be recognized prospectively as income over the remaining life of the loan through increased amounts allocated to income when collections are subsequently received. Subsequent decreases in projected cash flows are recognized as impairment of the loan’s cost basis to maintain a constant cost allocation based on initial projections. The Company evaluates the projected cash flows for these loans and loan pools at least quarterly to determine if impairment exists, and if so, recognizes the impairment through provisions charged to operations, with a corresponding valuation allowance offsetting the loan or loan pool in the consolidated balance sheets. Management uses the cash basis method of accounting for such eligible loans primarily due to the increased uncertainty in the timing of future collections (attributable primarily to the borrowers’ inability to obtain financing to refinance the loans). The carrying value of Purchased Credit-Impaired Loans accounted for under the cash basis method approximated $37.5 million and $53.8 million at June 30, 2012 and December 31, 2011, respectively.
Troubled debt restructurings (TDRs): Modified Purchased Credit-Impaired Loans are not removed from a loan pool even if those loans would otherwise be deemed TDRs. Modified Purchased Credit-Impaired Loans that are accounted for on an individual basis are considered TDRs if there has been a concession granted to the borrower and the Company does not expect to recover its recorded investment in the loan. Purchased Credit-Impaired Loans that are classified as TDRs are measured for impairment. See Troubled debt restructurings (TDRs) below for accounting guidance on loan modifications that result in classification as TDRs.
Real Estate
Real estate Portfolio Assets consist of real estate properties purchased from a variety of sellers or acquired through loan foreclosure. Rental income, net of expenses, is generally recognized when received. The Company accounts for its real estate properties on an individual-asset basis as opposed to a pool basis. The Company classifies a property as held for sale if (1) management commits to a plan to sell the property; (2) the Company actively markets the property in its current condition for a price that is reasonable in comparison to its fair value; and (3) management considers the sale of such property within one year of the balance sheet date to be probable. Real estate held for sale is stated at the lower of cost or fair value less estimated disposition costs. Real estate is not depreciated while it is classified as held for sale. Impairment losses are recorded if a property’s fair value less estimated disposition costs is less than its carrying amount, and charged to operations in the period the impairment is identified.
Real estate properties acquired through loan foreclosure are initially recorded at the lower of cost (i.e. the underlying loan’s carrying value) or estimated fair value less disposition costs at the date of foreclosure — establishing a new cost basis. The amount, if any, by which the carrying value of the underlying loan exceeds the property’s fair value less estimated disposition costs at the foreclosure date is charged as a loss against operations. Expenditures for repairs, maintenance, and other holding costs are charged to operations as incurred.
Gains on disposition of real estate are recognized upon the sale of the underlying property if the transaction qualifies for gain recognition under the full accrual method, as prescribed by the FASB’s accounting guidance on real estate sales transactions. If the transaction does not meet the criteria for the full accrual method of profit recognition based on our assessment, we account for the sale based on an appropriate deferral method determined by the nature and extent of the buyer’s investment and our continuing involvement.
Loans Receivable
Loans Held for Sale
The portions of U.S. Small Business Administration (“SBA”) loans that are guaranteed by the SBA are classified by management as loans held for sale. These loans are recorded at the lower of aggregate cost or estimated fair value. The fair value of SBA loans held for sale is based primarily on prices that secondary markets are currently offering for loans with similar characteristics. Net unrealized losses, if any, are recognized through a valuation allowance through a charge to income. The carrying value of SBA loans held for sale is net of premiums as well as deferred origination fees and costs. Premiums and net origination fees and costs are deferred and
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
included in the basis of the loans in calculating gains and losses upon sale. SBA loans are generally secured by the borrowing entities’ assets such as accounts receivable, property and equipment, and other business assets. The Company generally sells the guaranteed portion of each loan to a third-party investor and retains the servicing rights. The Company recognizes gains or losses on these loan sales based on the difference between the sales proceeds received and the allocated carrying value of the loans sold (which included deferred premiums and net origination fees and costs). The non-guaranteed portion of SBA loans is classified as held for investment (discussed below).
Loans Held for Investment
Loans receivable consisting of loans made to affiliated entities (including Acquisition Partnerships and other equity-method investees) and non-affiliated entities, and the non-guaranteed portions of SBA loans, are classified by management as held for investment. These loans are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans. Loan origination fees and costs, as well as purchase premiums and discounts, are amortized as level-yield adjustments over the respective loan terms. Unamortized net fees, costs, premiums or discounts are recognized upon early repayment or sale of the loan. Repayment of the loans is generally dependent upon future cash flows of the borrowers, future cash flows of the underlying collateral, and distributions made from affiliated entities. Interest is accrued when earned in accordance with the contractual terms of the loans, except for loans on non-accrual status. Interest is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding.
The Company has established an allowance for loan losses to absorb probable, estimable losses inherent in its portfolio of loans receivable held for investment. This allowance for loan losses includes specific allowances, based on individual evaluations of certain loans and loan relationships, and allowances for pools of loans with similar risk characteristics. Management’s determination of the adequacy of the allowance is a quarterly process and is based on evaluating the collectibility of the loans in light of various factors, as applicable, such as quality and composition of the loan portfolio segments, estimated future cash receipts of the borrower’s operations or underlying collateral, historical experience, estimated value of underlying collateral, prevailing economic conditions, industry concentrations and conditions, and other relevant factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Actual losses experienced in the future may vary from management’s estimates. Management attributes portions of the allowance to loans that it evaluates and determines to be impaired and to groups of loans that it evaluates collectively.
In determining the appropriate level of allowance, management uses information to stratify its portfolio of loans receivable held for investment into loan pools with common risk characteristics. Classes in the affiliated and non-affiliated portfolio asset and commercial loan portfolio segments are generally disaggregated by accrual status (which is generally based on management’s assessment on the probability of default). Classes in the non-guaranteed SBA commercial loan portfolio segment are disaggregated based upon underlying credit quality. Certain portions of the allowance are attributed to loan pools based on various factors and analyses, including but not limited to, current and historical loss experience trends, collateral, region, current economic conditions, and industry concentrations and conditions. Loans deemed to be impaired, including loans with an increased probability of default as determined by management, are evaluated individually rather than on a pool basis as described above. We consider a loan to be impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan’s contractual terms (including scheduled interest payments). When management identifies a loan as impaired, we measure the impairment based on discounted future cash flows, except when foreclosure is probable or the source of repayment is the operation or liquidation of the collateral. In these cases, we use the current fair value of the collateral, less estimated selling costs, instead of discounted cash flows. When a loan is determined to be impaired, we cease to accrue interest on the note and interest previously accrued but not collected becomes part of our recorded investment in the loan and is collectively reviewed for impairment. When ultimate collectibility of the impaired note is in doubt, all collections are applied to reduce the principal amount of such notes until the principal has been recovered, and collections thereafter are recognized as interest income. We return a loan to accrual status when we determine that the collectibility of principal and interest is reasonably assured. Impairment losses are charged against an allowance account through provisions charged to operations in the period impairment is identified. Loans are written-off against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered remote.
Troubled debt restructurings (TDRs): In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Modification of loan terms that may be considered a concession to the borrower may include rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize our
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
economic loss and to avoid foreclosure or repossession of the collateral. For modifications where we may forgive loan principal, the entire amount of such principal forgiveness is immediately charged-off. Loans classified as TDRs are considered impaired loans.
Accounting for Transfers and Servicing of Financial Assets
The Company accounts for transfers of financial assets as sales when control over the transferred assets is surrendered. Control is generally considered to have been surrendered when (1) the transferred assets are legally isolated from the Company or its consolidated affiliates; (2) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Company; and (3) the Company does not maintain the obligation or unilateral ability to reclaim or repurchase the assets. If these sale criteria are met, the transferred assets are removed from the Company’s balance sheet and a gain or loss on sale is recognized. If not met, the transfer is recorded as a secured borrowing, and the assets remain on the Company’s balance sheet, the proceeds from the transaction are recognized as a liability, and gain or loss on sale is deferred until the sale criterion are achieved.
The Company generally services Portfolio Assets acquired through its investments in Acquisition Partnerships. The Company does not recognize capitalized servicing rights related to its Portfolio Assets owned by the Acquisition Partnerships because (1) servicing is not contractually separated from the underlying assets by sale or securitization of the assets with servicing retained or separate purchase or assumption of the servicing; (2) consideration is not exchanged between the Company and the Acquisition Partnerships for the servicing rights of the acquired Portfolio Assets; (3) the Company has ownership interests in the Acquisition Partnerships that own the Portfolio Assets it services; and (4) the Company does not have the risks and rewards of ownership of servicing rights. The Company services, in all material respects, the Portfolio Assets owned for its own account, the Portfolio Assets owned by the Acquisition Partnerships and, to a very limited extent, certain Portfolio Assets owned by third parties. In connection with the Acquisition Partnerships in the United States, the Company generally earns a servicing fee, which is based on a percentage of gross cash collections generated from the Portfolio Assets. The rate of servicing fee charged is generally a function of the average face value of the assets within each pool being serviced (the larger the average face value of the assets in a Portfolio, the lower the fee percentage within the prescribed range), the type of assets and the level of servicing required for each asset. For the Mexican Acquisition Partnerships, the Company earns a servicing fee based on costs of servicing plus a profit margin. The Acquisition Partnerships in Europe and South America are serviced by various entities in which the Company maintains non-controlling equity interests. In all cases, service fees are recognized when they are earned in accordance with the servicing agreements.
The Company has servicing contracts with certain of its Acquisition Partnerships that entitle the Company to receive additional compensation for servicing after a specified return to the investors has been achieved. The Company recognizes revenue related to these contracts when the required level of returns specified in the investor contracts are attained. There is no guarantee that the required level of returns to the investors will be achieved or that any additional compensation to the Company related to the contracts will be realized. The Acquisition Partnerships accrue a liability for these contingent fees provided that payment of the fees is probable and reasonably estimable.
In connection with the Company’s SBA lending activities, the Company recognizes servicing assets through the sale of originated or purchased loans when servicing rights are retained. The Company initially recognizes and measures at fair value servicing rights obtained from SBA loan sales and purchased servicing rights. The Company subsequently measures these servicing assets by using the amortization method, which amortizes servicing assets in proportion to, and over the period of, estimated net servicing income. The amortization of the servicing assets is analyzed periodically and is adjusted to reflect changes in prepayment rates and other estimates.
(2) Recently Adopted Accounting Guidance
Comprehensive Income Presentation
In June 2011, the FASB issued guidance on the presentation of other comprehensive income. This guidance requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity was eliminated. In December 2011, the FASB issued updated guidance that defers indefinitely certain requirements from its June 2011 guidance that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. We adopted this guidance for the quarterly period ended March 31, 2012. The adoption of this guidance did not have a material impact on our consolidated financial statements.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Fair Value Measurements Disclosures
In May 2011, the FASB issued guidance clarifying how to measure and disclose fair value. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. This guidance also requires new and enhanced disclosures on the quantification and valuation processes for significant unobservable inputs, transfers between Levels 1 and 2, and the categorization of all fair value measurements into the fair value hierarchy, even where those measurements are only for disclosure purposes. We adopted this guidance for the quarterly period ended March 31, 2012. Since this guidance was disclosure-only in nature, and since the Company’s Level 3 fair value measurements were not significant for the quarterly period ended March 31, 2012, the adoption of this updated guidance did not have a material impact on our financial condition and results of operations. Refer to Note 14 for additional information.
(3) Business Combinations, Deconsolidation of Subsidiary, and Disposal Groups Held for Sale
European Acquisition Partnership and European Servicing Entity — Capital and Ownership Restructure
In June 2012, the capital and ownership structures of two European entities under common control of FirstCity and a non-affiliated investor group were modified (as agreed-upon by FirstCity and the non-affiliated investor group). The entities involved included UBN, SAS (“UBN,” an Acquisition Partnership) and MCS et Associés (“MCS,” a servicing entity). At the time of restructure, FirstCity had a direct 70% controlling ownership interest in UBN and a combined direct and indirect 37% noncontrolling ownership interest in MCS. FirstCity’s indirect ownership interest in MCS resulted from its ownership in UBN, which had a direct 35% noncontrolling ownership interest in MCS. Under terms of the restructure, FirstCity and the non-affiliated investor group contributed their MCS ownership interests to UBN in exchange for modified ownership interests in UBN that approximated their respective economic interests in these entities (on a combined basis) prior to the restructure. As a result, UBN now has a 100% controlling interest in MCS, and FirstCity’s ownership interest in UBN decreased to 38% (the controlling 62% interest in UBN is now held by the non-affiliated investor group). As such, the form of FirstCity’s investment in UBN changed from a consolidated subsidiary to an unconsolidated subsidiary (now treated as an equity-method investment), and FirstCity no longer has any direct investment in MCS.
The restructure resulted in FirstCity’s deconsolidation of UBN (since FirstCity now has a noncontrolling interest in UBN) and the exchange of an equity-method investment in MCS with an equity-method investment in UBN. FirstCity accounted for this activity as a non-monetary exchange transaction between entities with a high degree of common ownership, and accounted for the restructure at historical cost (i.e. there was no impact to FirstCity’s consolidated earnings). The net impact to FirstCity’s consolidated balance sheet from recording this activity on the restructure date consisted primarily of the following: (1) $2.9 million decrease in cash (remove cash held by UBN upon deconsolidation); (2) $0.5 million non-cash decrease in other liabilities (remove obligations of UBN upon deconsolidation); (3) $8.5 million non-cash decrease in noncontrolling interest (remove the noncontrolling equity interest in UBN attributable to the non-affiliated investor group upon deconsolidation); and (4) $6.1 million non-cash decrease to investments in unconsolidated subsidiaries (upon FirstCity’s exchange of an equity-method investment in MCS with an equity-method investment in UBN).
Railroad Operation — Business Combination
In June 2012, FirstCity, through its majority-owned Special Situations Platform subsidiary, acquired certain assets from a company that operated a rail-served debris transfer station, as partial payment of the company’s debt obligation to FirstCity. The Company’s acquisition of the operating assets was accounted for as a business combination, and accordingly, all of the assets acquired and liabilities assumed were measured at fair value on the acquisition date and included in the Company’s consolidated balance sheet. The estimated fair value of the identifiable assets acquired included $2.8 million of property and equipment, $0.5 million of trade receivables, and $0.2 million of various other assets. The estimated fair value of the identifiable liabilities assumed by the Company was not significant. The fair value of the net asset acquired by the Company exceeded its $2.5 million purchase price by approximately $0.9 million, which the Company recognized as “Gain on business combination” in its consolidated statement of earnings for the three- and six-month periods ended June 30, 2012.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Mexican Acquisition Partnerships — Disposal Groups Held for Sale
In the fourth quarter of 2011, the Company determined that it expected to sell or otherwise dispose of its three consolidated Mexican Acquisition Partnerships over the next twelve months. The Company wholly-owns two of these subsidiaries, and holds a majority ownership interest in the other subsidiary. In connection with the Company’s disposal plan and expectations, each subsidiary was determined to be a separate disposal group, and the assets and liabilities of each subsidiary are measured at the lower of their respective carrying amount or estimated fair value (less costs to sell) and classified as “held for sale” on the Company’s consolidated balance sheet.
The consolidated assets and liabilities for these Mexican subsidiaries, as measured at the lower of their respective carrying amount or estimated fair value (less costs to sell), have been respectively classified as “Assets held for sale” and “Liabilities associated with assets held for sale” on our consolidated balance sheets. At June 30, 2012 and December 31, 2011, the assets included primarily Portfolio Assets ($4.9 million and $4.8 million, respectively) and an affiliated loan receivable ($5.1 million), and the liabilities included primarily an affiliated note payable ($5.1 million). See Note 16 for additional information related to the affiliated loan receivable and affiliated note payable.
In July 2012, the Company sold its interests in two of these Mexican subsidiaries for $5.5 million. The Company recognized a gain of approximately $1.3 million on this transaction, which included recognition of $0.5 million of previously-deferred income attributed to one of the subsidiaries.
European Acquisition Partnership — Business Combination
In June 2011, the Company acquired a controlling interest in a European Acquisition Partnership from a foreign equity-method investee for $0.6 million. The Company owned a noncontrolling equity interest in this entity prior to the transaction. As a result of this transaction, the Company’s ownership interest in the Acquisition Partnership increased to 100% and the Company obtained control of such entity, resulting in the Acquisition Partnership becoming a consolidated subsidiary of the Company. The transaction was accounted for as a business combination, and accordingly, all of the assets and liabilities of the Acquisition Partnership were measured at fair value on the acquisition date and included in the Company’s consolidated balance sheet. The estimated fair value of the Acquisition Partnership’s identifiable assets and liabilities that were added to the Company’s consolidated balance sheet on the acquisition date included $2.7 million of Portfolio Assets and $1.7 million of notes payable and accrued liabilities (including $0.9 million of intercompany notes payable that were eliminated in consolidation with the Company’s consolidated financial statements).
Under business combination accounting guidance, the Company’s carrying value of its previously-held equity-method investment in the Acquisition Partnership was re-measured to fair value at the acquisition date. The fair value of the Company’s previously-held equity interest exceeded the aggregate carrying value by approximately $0.3 million, which the Company recognized as “Gain on business combination” in its consolidated statement of operations for the six-month period ended June 30, 2011.
(4) Portfolio Assets
Portfolio Assets are summarized as follows:
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| June 30, 2012 |
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| (Dollars in thousands) |
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| Carrying |
| Allowance for |
| Carrying |
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| Value |
| Loan Losses |
| Value, net |
| |||
Loan Portfolios: |
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| |||
Purchased Credit-Impaired Loans |
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Domestic: |
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|
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|
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| |||
Commercial real estate |
| $ | 47,211 |
| $ | 415 |
| $ | 46,796 |
|
Business assets |
| 9,229 |
| 170 |
| 9,059 |
| |||
Other |
| 3,253 |
| 12 |
| 3,241 |
| |||
Europe - commercial real estate |
| 3,820 |
| — |
| 3,820 |
| |||
Other |
| 5,457 |
| 20 |
| 5,437 |
| |||
Total Loan Portfolios |
| $ | 68,970 |
| $ | 617 |
| 68,353 |
| |
Real estate held for sale, net |
|
|
|
|
| 14,320 |
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|
|
| |||
Total Portfolio Assets |
|
|
|
|
| $ | 82,673 |
|
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
| December 31, 2011 |
| |||||||
|
| (Dollars in thousands) |
| |||||||
|
| Carrying |
| Allowance for |
| Carrying |
| |||
|
| Value |
| Loan Losses |
| Value, net |
| |||
Loan Portfolios: |
|
|
|
|
|
|
| |||
Purchased Credit-Impaired Loans |
|
|
|
|
|
|
| |||
Domestic: |
|
|
|
|
|
|
| |||
Commercial real estate |
| $ | 73,154 |
| $ | 553 |
| $ | 72,601 |
|
Business assets |
| 10,742 |
| 185 |
| 10,557 |
| |||
Other |
| 3,754 |
| 38 |
| 3,716 |
| |||
Latin America - commercial real estate |
| 50 |
| — |
| 50 |
| |||
Europe - commercial real estate |
| 4,267 |
| — |
| 4,267 |
| |||
Other |
| 5,904 |
| 5 |
| 5,899 |
| |||
Total Loan Portfolios |
| $ | 97,871 |
| $ | 781 |
| 97,090 |
| |
Real estate held for sale, net |
|
|
|
|
| 26,856 |
| |||
|
|
|
|
|
|
|
| |||
Total Portfolio Assets |
|
|
|
|
| $ | 123,946 |
|
Certain Portfolio Assets are pledged to secure a loan facility with Bank of Scotland and Bank of America (see Note 8). In addition, certain Portfolio Assets are pledged to secure notes payable of certain consolidated affiliates of FirstCity that are generally non-recourse to FirstCity or any affiliate other than the entity that incurred the debt.
In March 2012, a real estate property with a carrying value of $6.9 million (owned by a subsidiary under the Company’s Special Situations Platform business segment) was acquired by the creditor holding the mortgage secured by this property in a foreclosure transaction. The Company had the legal right to bring the account into good standing by paying all past due payments; however, the Company believed it would be unable to facilitate a positive cash flow on the property for an extended period of time based on local economic conditions. Management further believed that the property’s liquidation value was less than the debt obligation securing the property. Upon acquisition of the real estate property by the creditor and legal release from the obligation, the Company de-recognized the related non-recourse debt obligation from its consolidated balance sheet (see Note 8). This non-cash activity did not have a material impact on the Company’s results of operations for the six-month period ended June 30, 2012.
Income from Portfolio Assets is summarized as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Loan Portfolios: |
|
|
|
|
|
|
|
|
| ||||
Purchased Credit-Impaired Loans |
| $ | 5,500 |
| $ | 7,850 |
| $ | 13,075 |
| $ | 20,177 |
|
Purchased performing loans |
| 68 |
| 194 |
| 139 |
| 286 |
| ||||
UBN |
| — |
| 455 |
| — |
| 542 |
| ||||
Other |
| 10 |
| 89 |
| 45 |
| 143 |
| ||||
Real Estate Portfolios |
| 287 |
| 510 |
| 1,111 |
| 790 |
| ||||
Income from Portfolio Assets |
| $ | 5,865 |
| $ | 9,098 |
| $ | 14,370 |
| $ | 21,938 |
|
Accretable yield represents the amount of income the Company can expect to generate over the remaining life of its existing income-accruing Purchased Credit-Impaired Loans based on estimated future cash flows as of June 30, 2012 and 2011, respectively. Reclassifications from nonaccretable difference to accretable yield primarily result from the Company’s increase in its estimates of future cash flows on Purchased Credit-Impaired Loans, whereas reclassifications to nonaccretable difference from accretable yield primarily result from the Company’s decrease in its estimates of future cash flows on these loans. Transfers from (to) non-accrual primarily result from adjustments to the income-recognition method applied to Purchased Credit-Impaired Loans based on management’s ability to reasonably estimate both the timing and amount of future cash flows (see Note 1). Changes in accretable
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
yield related to the Company’s Purchased Credit-Impaired Loans for the three- and six-month periods ended June 30, 2012 and 2011 are as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Beginning Balance |
| $ | 4,378 |
| $ | 19,980 |
| $ | 4,732 |
| $ | 1,380 |
|
Accretion |
| (229 | ) | (1,137 | ) | (576 | ) | (2,668 | ) | ||||
Reclassification from (to) nonaccretable difference |
| (2,103 | ) | 2,669 |
| (2,085 | ) | 2,895 |
| ||||
Disposals |
| (2,046 | ) | (1,920 | ) | (2,071 | ) | (3,302 | ) | ||||
Transfer from non-accrual |
| — |
| 8,052 |
| — |
| 29,325 |
| ||||
Translation adjustments |
| — |
| 7 |
| — |
| 21 |
| ||||
Ending Balance |
| $ | — |
| $ | 27,651 |
| $ | — |
| $ | 27,651 |
|
Acquisitions of Purchased Credit-Impaired Loans for the three- and six-month month periods ended June 30, 2012 and 2011, respectively, are summarized in the table below:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Face value at acquisition |
| $ | 2,380 |
| $ | 1,574 |
| $ | 7,585 |
| $ | 5,711 |
|
Cash flows expected to be collected at acquisition, net of adjustments |
| 1,663 |
| 1,270 |
| 3,362 |
| 5,480 |
| ||||
Basis in acquired loans at acquisition |
| 1,314 |
| 976 |
| 1,696 |
| 4,080 |
| ||||
During the six-month period ended June 30, 2012, the Company sold loan Portfolio Assets with an aggregate carrying value of $18.7 million. The Company sold loan Portfolio Assets with an aggregate carrying value of $39.9 million during the six-month period ended June 30, 2011 — which included $21.9 million of loans (plus real estate and certain other assets) that were sold to a European securitization entity (formed by an affiliate of Värde) in February 2011. FirstCity has a non-controlling beneficial interest in this securitization entity, and accounts for this investment as an available-for-sale security.
For the six-month period ended June 30, 2012, the Company recorded provisions for loan and impairment losses, net of recoveries, through a charge to income of $0.9 million — which was comprised of a $0.5 million provision for loan losses, net of recoveries, and a $0.4 million impairment charge on real estate portfolios. For the six-month period ended June 30, 2011, the Company recorded provisions for loan and impairment losses, net of recoveries, by a charge to income of $0.6 million — which was comprised of a $0.3 million provision for loan losses, net of recoveries, and a $0.3 million impairment charge on real estate portfolios.
Changes in the allowance for loan losses related to our loan Portfolio Assets for the three- and six-month month periods ended June 30, 2012, are as follows:
|
| Purchased Credit-Impaired Loans |
| Other |
|
|
| ||||||||||||||||||
|
| Domestic |
| Latin America |
| Europe |
|
|
|
|
|
|
| ||||||||||||
|
| Commercial |
| Business |
|
|
| Commercial |
| Commercial |
|
|
|
|
| ||||||||||
(dollars in thousands) |
| Real Estate |
| Assets |
| Other |
| Real Estate |
| Real Estate |
| UBN (1) |
| Other |
| Total |
| ||||||||
Beginning balance, April 1, 2012 |
| $ | 510 |
| $ | 200 |
| $ | 38 |
| $ | — |
| $ | — |
| $ | — |
| $ | 5 |
| $ | 753 |
|
Provisions |
| 277 |
| 35 |
| — |
| — |
| — |
| — |
| 25 |
| 337 |
| ||||||||
Recoveries |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||
Charge offs |
| (372 | ) | (65 | ) | (26 | ) | — |
| — |
| — |
| (10 | ) | (473 | ) | ||||||||
Ending balance, June 30, 2012 |
| $ | 415 |
| $ | 170 |
| $ | 12 |
| $ | — |
| $ | — |
| $ | — |
| $ | 20 |
| $ | 617 |
|
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
| Purchased Credit-Impaired Loans |
| Other |
|
|
| ||||||||||||||||||
|
| Domestic |
| Latin America |
| Europe |
|
|
|
|
|
|
| ||||||||||||
|
| Commercial |
| Business |
|
|
| Commercial |
| Commercial |
|
|
|
|
|
|
| ||||||||
(dollars in thousands) |
| Real Estate |
| Assets |
| Other |
| Real Estate |
| Real Estate |
| UBN (1) |
| Other |
| Total |
| ||||||||
Beginning balance, January 1, 2012 |
| $ | 553 |
| $ | 185 |
| $ | 38 |
| $ | — |
| $ | — |
| $ | — |
| $ | 5 |
| $ | 781 |
|
Provisions |
| 405 |
| 97 |
| 5 |
| — |
| — |
| — |
| 25 |
| 532 |
| ||||||||
Recoveries |
| — |
| (44 | ) | — |
| — |
| — |
| — |
| — |
| (44 | ) | ||||||||
Charge offs |
| (543 | ) | (68 | ) | (31 | ) | — |
| — |
| — |
| (10 | ) | (652 | ) | ||||||||
Ending balance, June 30, 2012 |
| $ | 415 |
| $ | 170 |
| $ | 12 |
| $ | — |
| $ | — |
| $ | — |
| $ | 20 |
| $ | 617 |
|
(1) The Company sold the underlying UBN loan portfolio in November 2011.
Changes in the allowance for loan losses related to our loan Portfolio Assets for the three- and six-month month period ended June 30, 2011, are as follows:
|
| Purchased Credit-Impaired Loans |
| Other |
|
|
| ||||||||||||||||||
|
| Domestic |
| Latin America |
| Europe |
|
|
|
|
|
|
| ||||||||||||
|
| Commercial |
| Business |
|
|
| Commercial |
| Commercial |
|
|
|
|
|
|
| ||||||||
(dollars in thousands) |
| Real Estate |
| Assets |
| Other |
| Real Estate |
| Real Estate |
| UBN |
| Other |
| Total |
| ||||||||
Beginning balance, April 1, 2011 |
| $ | 422 |
| $ | 244 |
| $ | 90 |
| $ | 287 |
| $ | 50 |
| $ | 45,084 |
| $ | 49 |
| $ | 46,226 |
|
Provisions |
| 371 |
| 205 |
| 18 |
| 32 |
| — |
| — |
| 16 |
| 642 |
| ||||||||
Recoveries |
| (19 | ) | (7 | ) | — |
| — |
| — |
| (607 | ) | (19 | ) | (652 | ) | ||||||||
Charge offs |
| (228 | ) | (259 | ) | (9 | ) | — |
| — |
| — |
| (34 | ) | (530 | ) | ||||||||
Translation adjustments |
| — |
| — |
| — |
| 20 |
| 2 |
| 1,756 |
| — |
| 1,778 |
| ||||||||
Ending balance, June 30, 2011 |
| $ | 546 |
| $ | 183 |
| $ | 99 |
| $ | 339 |
| $ | 52 |
| $ | 46,233 |
| $ | 12 |
| $ | 47,464 |
|
|
| Purchased Credit-Impaired Loans |
| Other |
|
|
| ||||||||||||||||||
|
| Domestic |
| Latin America |
| Europe |
|
|
|
|
|
|
| ||||||||||||
|
| Commercial |
| Business |
|
|
| Commercial |
| Commercial |
|
|
|
|
|
|
| ||||||||
(dollars in thousands) |
| Real Estate |
| Assets |
| Other |
| Real Estate |
| Real Estate |
| UBN |
| Other |
| Total |
| ||||||||
Beginning balance, January 1, 2011 |
| $ | 354 |
| $ | 252 |
| $ | 90 |
| $ | 260 |
| $ | 866 |
| $ | 43,291 |
| $ | 49 |
| $ | 45,162 |
|
Provisions |
| 607 |
| 352 |
| 18 |
| 49 |
| — |
| — |
| 16 |
| 1,042 |
| ||||||||
Recoveries |
| (32 | ) | (7 | ) | — |
| — |
| — |
| (641 | ) | (19 | ) | (699 | ) | ||||||||
Charge offs |
| (383 | ) | (414 | ) | (9 | ) | — |
| (856 | ) | — |
| (34 | ) | (1,696 | ) | ||||||||
Translation adjustments |
| — |
| — |
| — |
| 30 |
| 42 |
| 3,583 |
| — |
| 3,655 |
| ||||||||
Ending balance, June 30, 2011 |
| $ | 546 |
| $ | 183 |
| $ | 99 |
| $ | 339 |
| $ | 52 |
| $ | 46,233 |
| $ | 12 |
| $ | 47,464 |
|
The following table presents our recorded investment in loan Portfolio Assets by credit quality indicator. Our loan Portfolio Assets, which are primarily comprised of Purchased Credit-Impaired Loans, are categorized by credit quality indicators based on the common risk characteristics that management generally uses for pooling purposes (when management elects to pool purchased loans).
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Commercial real estate |
| $ | 50,616 |
| $ | 76,918 |
|
Business assets |
| 9,059 |
| 10,557 |
| ||
Other commercial |
| 8,678 |
| 9,615 |
| ||
|
| $ | 68,353 |
| $ | 97,090 |
|
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(5) Loans Receivable
The following is a composition of the Company’s loans receivable by loan type and region:
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Domestic: |
|
|
|
|
| ||
Commercial loans: |
|
|
|
|
| ||
Affiliates |
| $ | 6,757 |
| $ | 6,719 |
|
SBA, net of allowance for loan losses of $425 and $333, respectively |
| 25,034 |
| 26,765 |
| ||
Other, net of allowance for loan losses of $1,083 |
| 7,545 |
| 12,212 |
| ||
|
|
|
|
|
| ||
Total loans, net |
| $ | 39,336 |
| $ | 45,696 |
|
Loans receivable — SBA held for sale
Loans receivable — SBA held for sale are summarized as follows:
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Outstanding balance |
| $ | 4,747 |
| $ | 7,483 |
|
Capitalized costs, net of fees |
| 61 |
| 131 |
| ||
Carrying amount of loans, net |
| $ | 4,808 |
| $ | 7,614 |
|
Changes in loans receivable — SBA held for sale are as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Beginning Balance |
| $ | 3,260 |
| $ | 7,769 |
| $ | 7,614 |
| $ | 11,608 |
|
Originations and advances of loans |
| 4,929 |
| 4,933 |
| 7,754 |
| 10,872 |
| ||||
Payments received |
| (18 | ) | (36 | ) | (39 | ) | (63 | ) | ||||
Capitalized costs, net |
| 13 |
| (76 | ) | (69 | ) | (125 | ) | ||||
Loans sold and transferred |
| (3,376 | ) | (7,518 | ) | (10,452 | ) | (17,220 | ) | ||||
Ending Balance |
| $ | 4,808 |
| $ | 5,072 |
| $ | 4,808 |
| $ | 5,072 |
|
Loans receivable — SBA held for sale represent the portions of SBA loans originated or acquired by the Company that are guaranteed by the SBA. These loans are generally secured by assets such as accounts receivable, property and equipment, and other business assets. The Company did not record any write-downs of SBA loans held for sale below their cost for the six-month periods ended June 30, 2012 and 2011.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Loans receivable — affiliates
Loans receivable — affiliates, which are designated by management as held for investment, are summarized as follows:
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Outstanding balance |
| $ | 6,391 |
| $ | 6,518 |
|
Discounts, net |
| (15 | ) | (59 | ) | ||
Capitalized interest |
| 381 |
| 260 |
| ||
Carrying amount of loans, net |
| $ | 6,757 |
| $ | 6,719 |
|
A summary of activity in loans receivable — affiliates follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Beginning Balance |
| $ | 6,677 |
| $ | 15,636 |
| $ | 6,719 |
| $ | 16,781 |
|
Advances |
| — |
| — |
| — |
| 700 |
| ||||
Payments received |
| — |
| (287 | ) | (128 | ) | (717 | ) | ||||
Capitalized costs, net |
| 58 |
| 140 |
| 122 |
| 8 |
| ||||
Discount accretion, net |
| 22 |
| 22 |
| 44 |
| 44 |
| ||||
Loan transfer (1) |
| — |
| — |
| — |
| (1,402 | ) | ||||
Other noncash adjustments |
| — |
| (492 | ) | — |
| (492 | ) | ||||
Foreign exchange gains |
| — |
| 10 |
| — |
| 107 |
| ||||
Ending Balance |
| $ | 6,757 |
| $ | 15,029 |
| $ | 6,757 |
| $ | 15,029 |
|
(1) Represents the sale and transfer of a loan to an affiliated entity as partial consideration for the repayment of a note payable to that affiliated entity.
Loans receivable — affiliates represent advances to Acquisition Partnerships and other affiliates to acquire portfolios of under-performing and non-performing commercial and consumer loans and other assets; and senior debt financing arrangements with equity-method investees to provide capital for business expansion and operations. Advances to affiliates to acquire loan portfolios are secured by the underlying collateral of the individual notes within the portfolios, which is generally real estate; whereas advances to affiliates for capital investments and working capital are generally secured by business assets (i.e. accounts receivable, inventory and equipment).
The Company did not record any provisions for impairment during the six-month periods ended June 30, 2012 and 2011. During the six-month period ended June 30, 2011, the Company sold an affiliated loan with a carrying value of $1.4 million. The Company did not sell any affiliated loans during the six-month period ended June 30, 2012. Information related to the credit quality and loan loss allowances related to loans receivable — affiliates is presented under the heading “Credit Quality and Allowance for Loan Losses — Loans Held for Investment” below.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Loans receivable — SBA held for investment, net
Loans receivable — SBA held for investment are summarized as follows:
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Outstanding balance |
| $ | 21,758 |
| $ | 20,503 |
|
Allowance for loan losses |
| (425 | ) | (333 | ) | ||
Discounts, net |
| (1,447 | ) | (1,292 | ) | ||
Capitalized costs |
| 340 |
| 273 |
| ||
Carrying amount of loans, net |
| $ | 20,226 |
| $ | 19,151 |
|
Changes in loans receivable — SBA held for investment are as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Beginning Balance |
| $ | 19,389 |
| $ | 15,574 |
| $ | 19,151 |
| $ | 15,415 |
|
Purchases of loans |
| — |
| 696 |
| — |
| 696 |
| ||||
Originations and advances of loans |
| 1,643 |
| 1,368 |
| 2,585 |
| 2,048 |
| ||||
Payments received |
| (675 | ) | (303 | ) | (1,033 | ) | (636 | ) | ||||
Capitalized costs |
| 30 |
| 26 |
| 67 |
| 50 |
| ||||
Change in allowance for loan losses |
| 16 |
| 26 |
| (92 | ) | (32 | ) | ||||
Discount accretion, net |
| (33 | ) | (82 | ) | (171 | ) | (150 | ) | ||||
Charge-offs |
| (144 | ) | (27 | ) | (281 | ) | (113 | ) | ||||
Ending Balance |
| $ | 20,226 |
| $ | 17,278 |
| $ | 20,226 |
| $ | 17,278 |
|
Loans receivable — SBA held for investment represent the non-guaranteed portion of SBA loans purchased or originated by the Company. These loans are secured primarily by business assets such as accounts receivable, property and equipment, real estate and inventory. The Company recorded net impairment provisions on SBA loans held for investment of $0.4 million for the six-month period ended June 30, 2012. The impairment provision recorded by the Company for the six-month period ended June 30, 2011 was $0.1 million. Information related to the credit quality and loan loss allowances related to SBA loans held for investment is presented under the heading “Credit Quality and Allowance for Loan Losses — Loans Held for Investment” below.
Loans receivable — other
Loans receivable — other, which are designated by management as held for investment, are summarized as follows:
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Outstanding balance |
| $ | 8,874 |
| $ | 13,541 |
|
Allowance for loan losses |
| (1,083 | ) | (1,083 | ) | ||
Capitalized interest and costs |
| (246 | ) | (246 | ) | ||
Carrying amount of loans, net |
| $ | 7,545 |
| $ | 12,212 |
|
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Changes in loans receivable — other are as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Beginning Balance |
| $ | 10,129 |
| $ | 13,003 |
| $ | 12,212 |
| $ | 13,011 |
|
Advances |
| 350 |
| 1,040 |
| 729 |
| 1,719 |
| ||||
Payments received |
| (434 | ) | (1,306 | ) | (2,896 | ) | (2,054 | ) | ||||
Noncash consideration (1) |
| (2,500 | ) | — |
| (2,500 | ) | — |
| ||||
Capitalized interest and costs |
| — |
| — |
| — |
| 50 |
| ||||
Discount accretion, net |
| — |
| 4 |
| — |
| 15 |
| ||||
Ending Balance |
| $ | 7,545 |
| $ | 12,741 |
| $ | 7,545 |
| $ | 12,741 |
|
(1) Represents a principal reduction on a loan receivable upon FirstCity’s acquisition of certain underlying loan collateral from the borrower as partial consideration for repayment. See Note 3 for additional information.
Loans receivable — other include loans made to non-affiliated entities and are secured primarily by business assets such as accounts receivable, inventory, property and equipment, and real estate. The Company did not record any provisions for impairment for the six-month periods ended June 30, 2012 and 2011. Information related to the credit quality and loan loss allowances related to loans receivable — other is presented under the heading “Credit Quality and Allowance for Loan Losses — Loans Held for Investment” below.
Credit Quality and Allowance for Loan Losses — Loans Held for Investment
The Company has established an allowance for loan losses to absorb probable, estimable losses inherent in its portfolio of loans receivable held for investment. This allowance for loan losses includes specific allowances, based on individual evaluations of certain loans and loan relationships, and allowances for pools of loans with similar risk characteristics. In determining the appropriate level of allowance, management uses information to stratify its portfolio of loans receivable held for investment into loan pools with common risk characteristics. Certain portions of the allowance are attributed to loan pools based on various factors and analyses. Loans deemed to be impaired, including loans with an increased probability of default as determined by management, are evaluated individually rather than on a pool basis. Management’s determination of the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Actual losses experienced in the future may vary from management’s estimates. Management attributes portions of the allowance to loans that it evaluates and determines to be impaired and to groups of loans that it evaluates collectively.
The following tables summarizes the activity in the allowance for loan losses by our portfolio of loans held for investment for the three- and six-month month periods ended June 30, 2012 and 2011:
|
| Allowance for Loan Losses: |
| ||||||||||
(Dollars in thousands) |
| SBA held for |
| Affiliates |
| Other |
| Total |
| ||||
Balance, April 1, 2012 |
| $ | 441 |
| $ | — |
| $ | 1,083 |
| $ | 1,524 |
|
Provisions |
| 132 |
| — |
| — |
| 132 |
| ||||
Recoveries |
| (3 | ) | — |
| — |
| (3 | ) | ||||
Charge-offs |
| (145 | ) | — |
| — |
| (145 | ) | ||||
Balance, June 30, 2012 |
| $ | 425 |
| $ | — |
| $ | 1,083 |
| $ | 1,508 |
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, April 1, 2011 |
| $ | 423 |
| $ | — |
| $ | 1,083 |
| $ | 1,506 |
|
Provisions |
| 32 |
| — |
| — |
| 32 |
| ||||
Recoveries |
| (31 | ) | — |
| — |
| (31 | ) | ||||
Charge-offs |
| (27 | ) | — |
| — |
| (27 | ) | ||||
Balance, June 30, 2011 |
| $ | 397 |
| $ | — |
| $ | 1,083 |
| $ | 1,480 |
|
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
| Allowance for Loan Losses: |
| ||||||||||
(Dollars in thousands) |
| SBA held for |
| Affiliates |
| Other |
| Total |
| ||||
Balance, January 1, 2012 |
| $ | 333 |
| $ | — |
| $ | 1,083 |
| $ | 1,416 |
|
Provisions |
| 383 |
| — |
| — |
| 383 |
| ||||
Recoveries |
| (8 | ) | — |
| — |
| (8 | ) | ||||
Charge-offs |
| (283 | ) | — |
| — |
| (283 | ) | ||||
Balance, June 30, 2012 |
| $ | 425 |
| $ | — |
| $ | 1,083 |
| $ | 1,508 |
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, January 1, 2011 |
| $ | 365 |
| $ | — |
| $ | 1,083 |
| $ | 1,448 |
|
Provisions |
| 185 |
| — |
| — |
| 185 |
| ||||
Recoveries |
| (40 | ) | — |
| — |
| (40 | ) | ||||
Charge-offs |
| (113 | ) | — |
| — |
| (113 | ) | ||||
Balance, June 30, 2011 |
| $ | 397 |
| $ | — |
| $ | 1,083 |
| $ | 1,480 |
|
The following table presents an analysis of the allowance for loan losses and recorded investment in loans (excluding loans held for sale):
|
| Commercial Loans: |
|
|
| ||||||||
(Dollars in thousands) |
| SBA |
| Affiliates |
| Other |
| Total |
| ||||
June 30, 2012: |
|
|
|
|
|
|
|
|
| ||||
Loans individually evaluated for impairment |
| $ | 606 |
| $ | 6,757 |
| $ | 8,628 |
| $ | 15,991 |
|
Loans collectively evaluated for impairment |
| 20,045 |
| — |
| — |
| 20,045 |
| ||||
Total loans evaluated for impairment (excluding loans held for sale) |
| $ | 20,651 |
| $ | 6,757 |
| $ | 8,628 |
| $ | 36,036 |
|
|
|
|
|
|
|
|
|
|
| ||||
Allowance for loans individually evaluated for impairment |
| $ | 235 |
| $ | — |
| $ | 1,083 |
| $ | 1,318 |
|
Allowance for loans collectively evaluated for impairment |
| 190 |
| — |
| — |
| 190 |
| ||||
Total allowance for loan losses |
| $ | 425 |
| $ | — |
| $ | 1,083 |
| $ | 1,508 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2011: |
|
|
|
|
|
|
|
|
| ||||
Loans individually evaluated for impairment |
| $ | 404 |
| $ | 6,719 |
| $ | 13,295 |
| $ | 20,418 |
|
Loans collectively evaluated for impairment |
| 19,080 |
| — |
| — |
| 19,080 |
| ||||
Total loans evaluated for impairment (excluding loans held for sale) |
| $ | 19,484 |
| $ | 6,719 |
| $ | 13,295 |
| $ | 39,498 |
|
|
|
|
|
|
|
|
|
|
| ||||
Allowance for loans individually evaluated for impairment |
| $ | 308 |
| $ | — |
| $ | 1,083 |
| $ | 1,391 |
|
Allowance for loans collectively evaluated for impairment |
| 25 |
| — |
| — |
| 25 |
| ||||
Total allowance for loan losses |
| $ | 333 |
| $ | — |
| $ | 1,083 |
| $ | 1,416 |
|
The following tables present our recorded investment in loans (excluding loans held for sale) by credit quality indicator as of June 30, 2012 and December 31, 2011. SBA commercial loans are detailed by categories related to underlying credit quality and are defined below:
· Pass — Includes all loans not included in categories of special mention, substandard or doubtful.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
· Special Mention — Loans that have potential weaknesses which may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. Loans in this category may also be subject to economic or market conditions which may, in the future, have an adverse effect on the borrower’s debt service ability.
· Substandard — Loans that exhibit a well-defined weakness, or weaknesses, which presently jeopardizes debt repayment, even though they may be currently performing. These loans are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected.
· Doubtful — Loans for which management has determined that full collection of principal or interest is in doubt.
Classes in the affiliated and non-affiliated portfolio asset and commercial loan portfolios are disaggregated by accrual status (which is generally based on management’s assessment on the probability of default).
|
|
|
| Special |
|
|
|
|
|
|
| |||||
(Dollars in thousands) |
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| |||||
June 30, 2012: |
|
|
|
|
|
|
|
|
|
|
| |||||
SBA - commercial loans |
| $ | 15,361 |
| $ | 4,515 |
| $ | 453 |
| $ | 322 |
| $ | 20,651 |
|
|
| Accrual |
| Non-Accrual |
| Total |
| |||
Affiliates - commercial loans |
| $ | 6,757 |
| $ | — |
| $ | 6,757 |
|
Other - commercial loans |
| 2,752 |
| 5,876 |
| 8,628 |
| |||
|
| $ | 9,509 |
| $ | 5,876 |
| $ | 15,385 |
|
|
|
|
|
|
|
|
| |||
Total loans (excluding loans held for sale) |
|
|
|
|
| $ | 36,036 |
|
|
|
|
| Special |
|
|
|
|
|
|
| |||||
|
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total |
| |||||
December 31, 2011: |
|
|
|
|
|
|
|
|
|
|
| |||||
SBA - commercial loans |
| $ | 15,325 |
| $ | 3,648 |
| $ | 107 |
| $ | 404 |
| $ | 19,484 |
|
|
| Accrual |
| Non-Accrual |
| Total |
| |||
Affiliates - commercial loans |
| $ | 6,719 |
| $ | — |
| $ | 6,719 |
|
Other - commercial loans |
| 4,398 |
| 8,897 |
| 13,295 |
| |||
|
| $ | 11,117 |
| $ | 8,897 |
| $ | 20,014 |
|
|
|
|
|
|
|
|
| |||
Total loans (excluding loans held for sale) |
|
|
|
|
| $ | 39,498 |
|
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following tables include an aging analysis of our recorded investment in loans held for investment as of June 30, 2012 and December 31, 2011:
|
| Loans Past Due and Still Accruing |
|
|
|
|
|
|
| |||||||||||||
|
| 31-60 |
| 61-90 |
| Over |
|
|
| Non-Accrual |
| Current |
| Total |
| |||||||
(Dollars in thousands) |
| Days |
| Days |
| 90 Days |
| Total |
| Loans |
| Loans |
| Loans |
| |||||||
June 30, 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
SBA |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 606 |
| $ | 20,045 |
| $ | 20,651 |
|
Affiliates |
| — |
| — |
|
| 3,261 |
| 3,261 |
| — |
| 3,496 |
| 6,757 |
| ||||||
Other |
| — |
| — |
|
| — |
| — |
| 5,876 |
| 2,752 |
| 8,628 |
| ||||||
Total loans (excluding loans held for sale) |
| $ | — |
| $ | — |
| $ | 3,261 |
| $ | 3,261 |
| $ | 6,482 |
| $ | 26,293 |
| $ | 36,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
December 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
SBA |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 404 |
| $ | 19,080 |
| $ | 19,484 |
|
Affiliates |
| — |
| — |
|
| — |
| — |
| — |
| 6,719 |
| 6,719 |
| ||||||
Other |
| — |
| — |
|
| — |
| — |
| 8,897 |
| 4,398 |
| 13,295 |
| ||||||
Total loans (excluding loans held for sale) |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 9,301 |
| $ | 30,197 |
| $ | 39,498 |
|
The following table presents additional information regarding the Company’s impaired loans as of June 30, 2012 and December 31, 2011:
|
| Recorded Investment In: |
|
|
|
|
|
|
|
|
| |||||||||||
|
| Impaired |
| Impaired |
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Loans |
| Loans |
|
|
|
|
|
|
| Average |
| Average |
| |||||||
|
| Without a |
| With a |
| Total |
| Unpaid |
| Related |
| Impaired |
| Impaired |
| |||||||
|
| Related |
| Related |
| Impaired |
| Principal |
| Valuation |
| Loans for |
| Loans for |
| |||||||
(Dollars in thousands) |
| Allowance |
| Allowance |
| Loans |
| Balance |
| Allowance |
| the Period |
| the Quarter |
| |||||||
June 30, 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
SBA |
| $ | — |
| $ | 606 |
| $ | 606 |
| $ | 635 |
| $ | 235 |
| $ | 709 |
| $ | 622 |
|
Affiliates |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||
Other |
| 2,906 |
| 2,970 |
| 5,876 |
| 7,599 |
| 1,083 |
| 8,305 |
| 7,919 |
| |||||||
Total loans (excluding loans held for sale) |
| $ | 2,906 |
| $ | 3,576 |
| $ | 6,482 |
| $ | 8,234 |
| $ | 1,318 |
| $ | 9,014 |
| $ | 8,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
December 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
SBA |
| $ | — |
| $ | 404 |
| $ | 404 |
| $ | 425 |
| $ | 308 |
| $ | 652 |
|
|
| |
Affiliates |
| — |
| — |
| — |
| — |
| — |
| — |
|
|
| |||||||
Other |
| 5,897 |
| 3,000 |
| 8,897 |
| 10,569 |
| 1,083 |
| 9,648 |
|
|
| |||||||
Total loans (excluding loans held for sale) |
| $ | 5,897 |
| $ | 3,404 |
| $ | 9,301 |
| $ | 10,994 |
| $ | 1,391 |
| $ | 10,300 |
|
|
|
The Company did not recognize any significant amounts of interest income on impaired loans during the six-month periods ended June 30, 2012 and 2011.
(6) Investments in Unconsolidated Subsidiaries
The Company has investments in Acquisition Partnerships and various servicing and operating entities that are accounted for under the equity method of accounting (refer to Note 1). The condensed combined financial position and results of operations of the Acquisition Partnerships (which include our U.S. and foreign Acquisition Partnerships) and the servicing and operating entities (collectively, the “Equity Investees”), are summarized as follows:
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Combined Balance Sheets
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Acquisition Partnerships: |
|
|
|
|
| ||
Assets |
| $ | 494,389 |
| $ | 450,189 |
|
Liabilities |
| $ | 33,626 |
| $ | 39,401 |
|
Net equity |
| 460,763 |
| 410,788 |
| ||
|
| $ | 494,389 |
| $ | 450,189 |
|
Servicing and operating entities: |
|
|
|
|
| ||
Assets |
| $ | 174,856 |
| $ | 163,647 |
|
Liabilities |
| $ | 100,719 |
| $ | 86,269 |
|
Net equity |
| 74,137 |
| 77,378 |
| ||
|
| $ | 174,856 |
| $ | 163,647 |
|
Total: |
|
|
|
|
| ||
Assets |
| $ | 669,245 |
| $ | 613,836 |
|
Liabilities |
| $ | 134,345 |
| $ | 125,670 |
|
Net equity |
| 534,900 |
| 488,166 |
| ||
|
| $ | 669,245 |
| $ | 613,836 |
|
|
|
|
|
|
| ||
Equity investment in Acquisition Partnerships |
| $ | 62,898 |
| $ | 59,952 |
|
Equity investment in servicing and operating entities |
| 40,966 |
| 49,441 |
| ||
|
| $ | 103,864 |
| $ | 109,393 |
|
Condensed Combined Summary of Operations
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Acquisition Partnerships: |
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 18,398 |
| $ | 12,092 |
| $ | 45,352 |
| $ | 25,360 |
|
Costs and expenses |
| 19,808 |
| 7,336 |
| 25,511 |
| 13,146 |
| ||||
Net earnings (loss) |
| $ | (1,410 | ) | $ | 4,756 |
| $ | 19,841 |
| $ | 12,214 |
|
|
|
|
|
|
|
|
|
|
| ||||
Servicing and operating entities: |
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 23,634 |
| $ | 27,410 |
| $ | 49,693 |
| $ | 49,423 |
|
Costs and expenses |
| 21,466 |
| 20,568 |
| 42,779 |
| 40,476 |
| ||||
Net earnings |
| $ | 2,168 |
| $ | 6,842 |
| $ | 6,914 |
| $ | 8,947 |
|
|
|
|
|
|
|
|
|
|
| ||||
Equity income (loss) from Acquisition Partnerships |
| $ | 861 |
| $ | (7 | ) | $ | 3,189 |
| $ | 577 |
|
Equity income from servicing and operating entities |
| 1,220 |
| 3,290 |
| 3,359 |
| 4,577 |
| ||||
|
| $ | 2,081 |
| $ | 3,283 |
| $ | 6,548 |
| $ | 5,154 |
|
At June 30, 2012 and December 31, 2011, the Acquisition Partnerships’ total carrying value of loans accounted for under non-accrual methods of accounting (i.e. cost-recovery or cash basis method) approximated $413.0 million and $377.7 million, respectively.
The combined assets and equity of the Equity Investees, and the Company’s carrying value of its equity investments in the Equity Investees, are summarized by geographic region below.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Combined assets of the Equity Investees: |
|
|
|
|
| ||
Domestic: |
|
|
|
|
| ||
Acquisition Partnerships |
| $ | 398,082 |
| $ | 349,529 |
|
Operating entities |
| 58,113 |
| 53,256 |
| ||
Latin America: |
|
|
|
|
| ||
Acquisition Partnerships |
| 96,307 |
| 100,660 |
| ||
Servicing entities |
| 1,889 |
| 1,857 |
| ||
Europe - servicing entities |
| 114,854 |
| 108,534 |
| ||
|
| $ | 669,245 |
| $ | 613,836 |
|
|
|
|
|
|
| ||
Combined equity of the Equity Investees: |
|
|
|
|
| ||
Domestic: |
|
|
|
|
| ||
Acquisition Partnerships |
| $ | 375,631 |
| $ | 325,557 |
|
Operating entities |
| 18,336 |
| 20,515 |
| ||
Latin America: |
|
|
|
|
| ||
Acquisition Partnerships |
| 85,132 |
| 85,231 |
| ||
Servicing entities |
| 711 |
| 763 |
| ||
Europe - servicing entities |
| 55,090 |
| 56,100 |
| ||
|
| $ | 534,900 |
| $ | 488,166 |
|
|
|
|
|
|
| ||
Company’s carrying value of its investments in the Equity Investees: |
|
|
|
|
| ||
Domestic: |
|
|
|
|
| ||
Acquisition Partnerships |
| $ | 58,489 |
| $ | 55,612 |
|
Operating entities |
| 11,832 |
| 12,508 |
| ||
Latin America: |
|
|
|
|
| ||
Acquisition Partnerships |
| 4,409 |
| 4,340 |
| ||
Servicing entities |
| 2,760 |
| 2,758 |
| ||
Europe - servicing entities (1) |
| 26,374 |
| 34,175 |
| ||
|
| $ | 103,864 |
| $ | 109,393 |
|
(1) Includes a $6.1 million non-cash reduction to the carrying value of FirstCity’s equity-method investment in a European servicing entity in June 2012 (see Note 3 for additional information).
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Revenues and net earnings (losses) of the Equity Investees, and the Company’s share of equity income (loss) of those entities, are summarized by geographic region below. The tables below include individual entities and combined entities under common management that are considered to be significant Equity Investees of FirstCity at June 30, 2012.
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Revenues of the Equity Investees: |
|
|
|
|
|
|
|
|
| ||||
Domestic: |
|
|
|
|
|
|
|
|
| ||||
Combined Värde Acquisition Partnerships |
| $ | 15,071 |
| $ | 7,813 |
| $ | 37,668 |
| $ | 16,068 |
|
Other Acquisition Partnerships |
| 46 |
| 211 |
| 75 |
| 295 |
| ||||
Other operating entities |
| 7,807 |
| 11,040 |
| 15,236 |
| 19,435 |
| ||||
Latin America: |
|
|
|
|
|
|
|
|
| ||||
Acquisition Partnerships |
| 3,281 |
| 3,910 |
| 7,609 |
| 8,706 |
| ||||
Servicing entity |
| 2,523 |
| 2,863 |
| 4,796 |
| 5,473 |
| ||||
Europe: |
|
|
|
|
|
|
|
|
| ||||
Acquisition Partnerships |
| — |
| 158 |
| — |
| 291 |
| ||||
MCS et Associes (servicing entity) |
| 12,241 |
| 12,356 |
| 27,358 |
| 22,370 |
| ||||
Other servicing entities |
| 1,063 |
| 1,151 |
| 2,303 |
| 2,145 |
| ||||
|
| $ | 42,032 |
| $ | 39,502 |
| $ | 95,045 |
| $ | 74,783 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net earnings (loss) of the Equity Investees: |
|
|
|
|
|
|
|
|
| ||||
Domestic: |
|
|
|
|
|
|
|
|
| ||||
Combined Värde Acquisition Partnerships |
| $ | 8,294 |
| $ | 466 |
| $ | 21,922 |
| $ | 6,395 |
|
Other Acquisition Partnerships |
| (172 | ) | (334 | ) | (999 | ) | (461 | ) | ||||
Other operating entities |
| 559 |
| 3,327 |
| 564 |
| 3,637 |
| ||||
Latin America: |
|
|
|
|
|
|
|
|
| ||||
Acquisition Partnerships |
| (9,532 | ) | 4,581 |
| (1,082 | ) | 6,244 |
| ||||
Servicing entity |
| 307 |
| 539 |
| 482 |
| 859 |
| ||||
Europe: |
|
|
|
|
|
|
|
|
| ||||
Acquisition Partnerships |
| — |
| 43 |
| — |
| 36 |
| ||||
MCS et Associes (servicing entity) |
| 1,237 |
| 2,932 |
| 5,607 |
| 4,345 |
| ||||
Other servicing entities |
| 65 |
| 44 |
| 261 |
| 106 |
| ||||
|
| $ | 758 |
| $ | 11,598 |
| $ | 26,755 |
| $ | 21,161 |
|
|
|
|
|
|
|
|
|
|
| ||||
Company’s equity income (loss) from the Equity Investees: |
|
|
|
|
|
|
|
|
| ||||
Domestic: |
|
|
|
|
|
|
|
|
| ||||
Combined Värde Acquisition Partnerships |
| $ | 1,239 |
| $ | 46 |
| $ | 3,763 |
| $ | 1,028 |
|
Other Acquisition Partnerships |
| (78 | ) | (158 | ) | (483 | ) | (208 | ) | ||||
Other operating entities |
| 291 |
| 1,622 |
| 226 |
| 1,774 |
| ||||
Latin America: |
|
|
|
|
|
|
|
|
| ||||
Acquisition Partnerships |
| (300 | ) | 84 |
| (91 | ) | (272 | ) | ||||
Servicing entity |
| 154 |
| 270 |
| 241 |
| 430 |
| ||||
Europe: |
|
|
|
|
|
|
|
|
| ||||
Acquisition Partnerships |
| — |
| 21 |
| — |
| 29 |
| ||||
MCS et Associes (servicing entity) |
| 759 |
| 1,387 |
| 2,828 |
| 2,347 |
| ||||
Other servicing entities |
| 16 |
| 11 |
| 64 |
| 26 |
| ||||
|
| $ | 2,081 |
| $ | 3,283 |
| $ | 6,548 |
| $ | 5,154 |
|
At June 30, 2012, the Company had $10.6 million in Euro-denominated debt for the purpose of hedging a portion of the Company’s net equity investments in Europe. Refer to Note 10 for additional information.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(7) Servicing Assets — SBA Loans
The Company recognizes servicing assets through the sale of originated SBA loans when the rights to service those loans are retained. Servicing rights resulting from the sale of loans are initially recognized at fair value at the date of transfer. The Company subsequently measures the carrying value of the servicing assets by using the amortization method, which amortizes the servicing assets in proportion to and over the period of estimated net servicing income, and evaluates servicing assets for impairment based on fair value at each reporting date. The Company evaluates the possible impairment of servicing assets based on the difference between the carrying amount and current fair value of the servicing assets. Impairment is charged to servicing fees in the period recognized.
Changes in the Company’s amortized servicing assets are as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Beginning Balance |
| $ | 1,268 |
| $ | 1,082 |
| $ | 1,193 |
| $ | 954 |
|
Servicing Assets capitalized |
| 65 |
| 124 |
| 201 |
| 301 |
| ||||
Servicing Assets amortized |
| (62 | ) | (54 | ) | (123 | ) | (103 | ) | ||||
Ending Balance |
| $ | 1,271 |
| $ | 1,152 |
| $ | 1,271 |
| $ | 1,152 |
|
|
|
|
|
|
|
|
|
|
| ||||
Reserve for impairment of servicing assets: |
|
|
|
|
|
|
|
|
| ||||
Beginning Balance |
| $ | (115 | ) | $ | (143 | ) | $ | (103 | ) | $ | (118 | ) |
Impairments |
| (12 | ) | (44 | ) | (26 | ) | (75 | ) | ||||
Recoveries |
| 1 |
| 2 |
| 3 |
| 8 |
| ||||
Ending Balance |
| $ | (126 | ) | $ | (185 | ) | $ | (126 | ) | $ | (185 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Ending Balance (net of reserve) |
| $ | 1,145 |
| $ | 967 |
| $ | 1,145 |
| $ | 967 |
|
|
|
|
|
|
|
|
|
|
| ||||
Fair value of amortized servicing assets: |
|
|
|
|
|
|
|
|
| ||||
Beginning balance |
| $ | 1,376 |
| $ | 1,019 |
| $ | 1,326 |
| $ | 921 |
|
Ending balance |
| $ | 1,389 |
| $ | 1,019 |
| $ | 1,389 |
| $ | 1,019 |
|
The Company relies primarily on a discounted cash flow model to estimate the fair value of its servicing assets. This model calculates estimated fair value of the servicing assets using significant assumptions including a discount rate of 13.7% and prepayment speeds of 14.0% to 15.0% (depending on certain characteristics of the related loans). These assumptions are subject to change based on management’s judgments and estimates of changes in future cash flows, among other things.
(8) Notes Payable to Banks and Other Debt Obligations
The Company’s notes payable and other debt obligations at June 30, 2012 and December 31, 2011 consisted of the following (dollars in thousands):
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
|
| June 30, |
| December 31, |
| ||
Description |
| Terms and Conditions |
| 2012 |
| 2011 |
| ||
|
|
|
|
|
|
|
| ||
Bank of Scotland reducing note facility, net of unamortized discount (1) (2) |
| Secured by substantially all assets and subsidiaries of FC Commercial (excluding FH Partners) and guaranteed by FirstCity, matures December 2014 |
| $ | 69,867 |
| $ | 86,579 |
|
|
|
|
|
|
|
|
| ||
BOS (USA) reducing note facility ($25.0 million term note) (1) |
| Secured by all assets of FLBG2, matures December 2014 |
| — |
| — |
| ||
|
|
|
|
|
|
|
| ||
Bank of America term note (1) |
| Secured by all assets of FH Partners, matures December 2014 |
| 31,971 |
| 49,228 |
| ||
|
|
|
|
|
|
|
| ||
WFCF $25.0 million revolving loan facility (3) |
| Secured by assets of ABL and guaranteed by FirstCity up to $5.0 million, matures January 2015 |
| 19,428 |
| 21,405 |
| ||
|
|
|
|
|
|
|
| ||
FNBCT $15.0 million revolving loan facility (4) |
| Secured by assets of FC Investment and its subsidiaries, and guaranteed by FirstCity, matures August 2013 |
| 2,000 |
| — |
| ||
|
|
|
|
|
|
|
| ||
Non-recourse bank notes payable of various U.S. Portfolio Entities |
| Secured by assets (primarily Portfolio Assets) of the underlying entities, various maturities through October 2015 |
| 7,492 |
| 18,113 |
| ||
|
|
|
|
|
|
|
| ||
Non-recourse bank notes payable of consolidated railroad subsidiaries |
| Secured by assets of the subsidiaries, various maturities through March 2016 |
| 7,231 |
| 5,156 |
| ||
|
|
|
|
|
|
|
| ||
Non-recourse bank note payable of real estate investment entity (5) |
| Secured by real estate property owned by the entity |
| — |
| 7,361 |
| ||
|
|
|
|
|
|
|
| ||
Other notes and debt obligations |
|
|
| 1,884 |
| 2,094 |
| ||
|
|
|
|
|
|
|
| ||
Total notes payable and other debt obligations |
|
|
| $ | 139,873 |
| $ | 189,936 |
|
(1) In December 2011, FirstCity entered into a debt refinancing arrangement with Bank of Scotland that resulted in the amendment and restatement of the Reducing Note Facility (“BoS Facility A”) and a new loan agreement with BOS (USA) (“BoS Facility B”). In connection with this debt refinancing arrangement, FirstCity also obtained a new credit facility with Bank of America. This debt refinancing transaction was accounted for as a debt extinguishment and, as such, BoS Facility A and BoS Facility B were initially recorded at their estimated fair values of $91.6 million and $-0-, respectively, in December 2011.
(2) The unamortized discount on this loan facility at June 30, 2012 and December 31, 2011 was $2.0 million and $3.1 million, respectively. Also, the carrying value of this loan facility included $10.6 million and $13.2 million denominated in Euros at June 30, 2012 and December 31, 2011, respectively (see Note 10).
(3) This revolving loan facility was amended and restated on January 31, 2012 (see discussion below).
(4) FC Investment, a FirstCity wholly-owned subsidiary, obtained this revolving loan facility in May 2012 (see discussion below).
(5) FirstCity de-recognized this note payable from its consolidated balance sheet in March 2012 upon the acquisition of the underlying real estate property by the creditor in a foreclosure transaction (see Note 4 for additional information). This non-cash activity did not have a material impact on the Company’s results of operations for the six-month period ended June 30, 2012.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FC Investment Holdings Corporation
On May 21, 2012, FC Investment Holdings Corporation (“FC Investment”), a FirstCity wholly-owned subsidiary, as borrower, and FirstCity, as guarantor, and First National Bank of Central Texas (“FNBCT”), as lender, entered into a loan agreement dated May 16, 2012 (the “FNBCT Loan Facility”). In addition, on May 21, 2012, FirstCity executed a guaranty agreement that provided for its unlimited guaranty for repayment of the indebtedness of FC Investment including, without limitation, under the FNBCT Loan Facility. The FNBCT Loan Facility is a $15.0 million revolving loan facility that provides funding for FC Investment and its subsidiaries to finance the purchase of loans and other assets, to make investments in equity interests in or capital contributions to affiliates which are owned with other investors, and for working capital. The primary terms and conditions of the FNBCT Loan Facility are as follows:
· Provides maximum outstanding borrowings up to $15.0 million;
· The loan facility is secured by security interests in substantially all of the assets of FC Investment and its subsidiaries (the “Covered Entities”). FirstCity Servicing Corporation (“FC Servicing”), a FirstCity wholly-owned subsidiary, provides a security interest in servicing fees payable to it by the Covered Entities and the non-wholly owned portfolio entities owned by the Covered Entities. FC Servicing does not provide a security interest in servicing agreements entered into with the Covered Entities, or in any of its other assets and does not guaranty the obligations under this loan facility;
· Provides that no advance will be made that causes the outstanding balance of the loan facility to exceed an amount equal to 25.0% of the net present value of the equity interests and loans and other assets owned by the Covered Entities which are pledged to secure the loan facility reduced by any reserves established by FNBCT related to the pledged loans and other assets and the pledged equity interests (“Net Present Collateral Value”);
· Provides for a fluctuating interest rate equal to the greater of (i) the rate of interest published in the Wall Street Journal as the prime rate of commercial banks, or (ii) 4.0%;
· Provides for a maturity date of August 15, 2013;
· Provides that all net cash flow from the pledged assets be deposited into a pledged account with FNBCT on a monthly basis, and for funds to be distributed out of the pledged account and applied in the following manner and priority: (i) to interest due under the loan facility, (ii) to fees and expenses due under the loan facility, (iii) payment of principal outstanding under the loan facility in an amount required to reduce the outstanding principal balance of the loan as is required so that the principal balance of the loan is equal to 25.0% of the Net Present Collateral Value, (iv) payment of principal if an event of default has occurred, (v) payment of the principal in such additional amount as may be determined by FNBCT in its discretion, and (vi) any remaining balance to FC Investment;
· Provides that FNBCT is only required to fund up to $7.5 million, with the balance of the commitment under the revolving loan facility to be funded by a participating bank in the loan facility;
· Provides for (i) an administration fee of $25,000 for the period through the maturity date, which fee was paid at closing, (ii) a facility fee in the amount of $93,750 for the period through the maturity date, which fee was paid at closing, and (iii) a non-utilization fee payable following each calendar quarter equal to 0.50% of the average daily amount by which the outstanding principal amount of the revolving loan during the preceding calendar quarter is less than $15.0 million, provided, in the event the financial institution participating in the revolving loan fails to advance its pro-rata share of any advance in a circumstance in which FNBCT is funding the advance, the non-utilization fee shall be calculated based on the average daily amount by which the total amount funded by FNBCT from its own funds during the preceding calendar quarter is less than $7.5 million;
· FC Investment must maintain a minimum interest coverage ratio, based on net cash flows from the pledged assets, of 2.0 to 1.0 (on a consolidated basis);
· FC Investment must maintain a minimum tangible net worth (defined) of $75.0 million (on a consolidated basis); and
· The FNBCT Loan Facility and other loan documents do not create any security interest in the property of, or impose any contractual limitations upon, FirstCity Commercial Corporation, FH Partners LLC, FLBG Corporation or any of their subsidiaries, which are FirstCity subsidiaries and are parties to, or provide guaranties or security interests with respect to, FirstCity’s loan facility with Bank of Scotland.
In addition to the foregoing, the FNBCT Loan Facility contains representations, warranties and certain other covenants on the part of FC Investment, FirstCity and the other Covered Entities that are typical for a loan facility of this type. Furthermore, the FNBCT Loan Facility and related loan documents contain customary events of default, including, failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, FNBCT may
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
accelerate the indebtedness under this loan facility. At June 30, 2012, FC Investment was in compliance with all covenants or other requirements set forth in this loan facility.
Wells Fargo Capital Finance (American Business Lending, Inc.)
On January 31, 2012, American Business Lending, Inc. (“ABL”), a FirstCity wholly-owned subsidiary, and Wells Fargo Capital Finance (“WFCF”) entered into an Amended and Restated Loan Agreement (“WFCF Credit Facility”) that amended and restated the existing $25.0 million loan facility agreement, as amended. The WFCF Credit Facility is a $25 million revolving loan facility that provides funding for ABL to finance and acquire SBA 7(a) loans, and is secured by substantially all of ABL’s assets. The primary terms and conditions of the WFCF Credit Facility are as follows:
· Provides for maximum outstanding borrowings of up to $25.0 million (Maximum Credit Line);
· Provides for a borrowing base for originating loans based on the amount by which the sum of (i) ABL-originated SBA guaranteed loans (up to 100%) and non-guaranteed loans (60%-80%) plus (ii) certain previously-purchased performing loans (up to 80%), exceeds the aggregate amount, if any, of loan reserves established by ABL and/or WFCF on the borrowing base loans;
· Outstanding borrowings bear interest at alternate annual rates equal to (i) LIBOR rate plus 3.50% for LIBOR rate loans; (ii) base rate (higher of LIBOR rate or Wells Fargo prime rate) plus 0.75% for base rate loans; or (iii) base rate plus 0.75% otherwise;
· Provides for a prepayment fee in the event of ABL’s termination of the Credit Agreement equal to 3.0% of the Maximum Credit Line if prepayment is made on or before January 31, 2013, or 2.0% of the Maximum Credit Line if prepayment is made between January 31, 2013 and January 30, 2015; and
· Provides for an initial maturity date of January 31, 2015 (which may be extended upon agreement by WFCF and ABL).
In connection with the WFCF Credit Facility, FirstCity reaffirmed its limited guaranty in favor of WFCF with respect to ABL’s obligations. As such, FirstCity continues to provide WFCF with an unconditional limited guaranty for all of ABL’s obligations under the WFCF Credit Facility up to a maximum amount of $5.0 million plus enforcement costs.
The WFCF Credit Facility includes covenants that are customary for a loan facility of this type, including maximum capital expenditure levels and financial covenants related to minimum tangible net worth levels, maximum indebtedness to tangible net worth ratio, maximum delinquent and defaulted loan levels, maximum loan charge-off levels, and minimum net interest coverage levels.
In addition, the WFCF Credit Facility contains representations and warranties of ABL that are typical for a loan facility of this type. The WFCF Credit Facility also contains customary events of default, including but not limited to, failure to make required payments; failure to comply with certain agreements or covenants; change of control; certain events of bankruptcy and insolvency; and failure to pay certain judgments. In the event that an event of default occurs and is continuing, WFCF may accelerate the indebtedness under this loan facility. At June 30, 2012, ABL was in compliance with all covenants or other requirements set forth in the WFCF Credit Facility.
(9) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is composed of the following as of June 30, 2012 and December 31, 2011:
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Cumulative foreign currency translation adjustments |
| $ | (2,380 | ) | $ | (1,854 | ) |
Net unrealized gain (loss) on securities available for sale, net of tax |
| 411 |
| (87 | ) | ||
Total accumulated other comprehensive loss |
| $ | (1,969 | ) | $ | (1,941 | ) |
(10) Foreign Currency Exchange Risk Management
We use Euro-denominated debt as a non-derivative financial instrument to partially offset the Company’s business exposure to foreign currency exchange risk attributable to our net investments in Europe. Our focus is to manage the economic risks associated with our European subsidiaries, which are the foreign currency exchange risks that will ultimately be realized when we exchange one
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
currency for another. To help protect the Company’s net investment in certain of its European subsidiary operations from adverse changes in foreign currency exchange rates, management denominates a portion of the Euro-denominated debt in the same functional currency used by the European subsidiaries. At June 30, 2012, the Company carried $10.6 million in Euro-denominated debt and designated the debt as a non-derivative hedge of its net investment in certain European subsidiaries. The Company designated the hedging relationship such that changes in the net investments being hedged are expected to be naturally offset by corresponding changes in the value of the Euro-denominated debt. We consider our investments in European subsidiaries to be denominated in a relatively stable currency and of a long-term nature.
The effective portion of the net foreign investment hedge is reported in accumulated other comprehensive income (loss) (“AOCI”) as part of the cumulative translation adjustment. Any ineffective portion of the net foreign investment hedge is recognized in earnings as other income (expense) during the period of change. 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.
At June 30, 2012 and December 31, 2011, the carrying value and line item caption of the Company’s non-derivative instrument was reported on the consolidated balance sheets as follows (in thousands):
Non-Derivative |
|
|
|
|
|
|
| ||
Instrument in |
|
|
|
|
|
|
| ||
Net Investment |
| Balance Sheet |
| Carrying Value at: |
| ||||
Hedging Relationship |
| Location |
| June 30, 2012 |
| December 31, 2011 |
| ||
|
|
|
|
|
|
|
| ||
Euro-denominated debt |
| Notes payable to banks |
| $ | 10,635 |
| $ | 13,240 |
|
The effect of the non-derivative instrument qualifying and designated as a hedging instrument in net foreign investment hedges on the consolidated financial statements for the three- and six-month month periods ended June 30, 2012 and 2011 was as follows (in thousands):
|
|
|
|
|
|
|
| Amount of Gain (Loss) |
| ||||||
|
|
|
|
|
|
|
| Recognized in Income |
| ||||||
|
| Amount of Gain (Loss) |
|
|
| (Ineffective Portion and |
| ||||||||
|
| Recognized in AOCI |
|
|
| Amount Excluded from |
| ||||||||
Non-Derivative |
| (Effective Portion) |
| Location of Gain (Loss) |
| Effectiveness Testing) |
| ||||||||
Instrument in |
| Three Months Ended |
| Reclassified from |
| Three Months Ended |
| ||||||||
Net Investment |
| June 30, |
| AOCI into Income |
| June 30, |
| ||||||||
Hedging Relationship |
| 2012 |
| 2011 |
| (Effective Portion) |
| 2012 |
| 2011 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Euro-denominated debt |
| $ | 569 |
| $ | (329 | ) | Other income (expense) |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
| Amount of Gain (Loss) |
| ||||||
|
|
|
|
|
|
|
| Recognized in Income |
| ||||||
|
| Amount of Gain (Loss) |
|
|
| (Ineffective Portion and |
| ||||||||
|
| Recognized in AOCI |
|
|
| Amount Excluded from |
| ||||||||
Non-Derivative |
| (Effective Portion) |
| Location of Gain (Loss) |
| Effectiveness Testing) |
| ||||||||
Instrument in |
| Six Months Ended |
| Reclassified from |
| Six Months Ended |
| ||||||||
Net Investment |
| June 30, |
| AOCI into Income |
| June 30, |
| ||||||||
Hedging Relationship |
| 2012 |
| 2011 |
| (Effective Portion) |
| 2012 |
| 2011 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Euro-denominated debt |
| $ | 171 |
| $ | (1,621 | ) | Other income (expense) |
| $ | — |
| $ | — |
|
(11) Income Taxes
We are subject to income taxes in both the United States and the non-U.S. jurisdictions in which we operate. Income tax expense (benefit) for the three- and six-month month periods ended June 30, 2012 and 2011 consisted of the following:
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
U.S. state current income tax expense (benefit) |
| $ | 125 |
| $ | 70 |
| $ | 303 |
| $ | (297 | ) |
Federal current income tax benefit |
| — |
| 137 |
| — |
| 137 |
| ||||
Foreign current income tax expense |
| 251 |
| 1,412 |
| 340 |
| 1,938 |
| ||||
Foreign deferred income tax expense (benefit) |
| (371 | ) | (595 | ) | 195 |
| (152 | ) | ||||
Total |
| $ | 5 |
| $ | 1,024 |
| $ | 838 |
| $ | 1,626 |
|
The Company recognizes deferred tax assets and liabilities in both the U.S. and foreign jurisdictions based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss and tax credit carryforwards. At June 30, 2012 and December 31, 2011, the Company had $0.5 million and $0.1 million of deferred foreign income tax liabilities attributable primarily to our consolidated foreign operations.
The Company also has a substantial amount of U.S. deferred tax assets attributable primarily to net operating loss carryforwards for U.S. federal income tax purposes, and differences between the carrying amounts and the tax bases of Acquisition Partnership investments. At June 30, 2012 and December 31, 2011, the Company established a full valuation allowance for its U.S. deferred tax assets due to the lack of sufficient objective evidence regarding the realization of these assets in the foreseeable future. We will continue to evaluate the deferred tax asset valuation allowance balances in all of our U.S. and foreign subsidiaries throughout 2012 to determine the appropriate level of valuation allowances.
(12) Stock-Based Compensation
Accounting for stock-based compensation requires that the cost resulting from all stock-based payments be recognized in the financial statements based on the grant-date fair value of the award. The Company’s stock-based compensation expense consists of stock options and restricted stock awards. All stock option and restricted stock grants are amortized ratably over the requisite service periods of the underlying awards, which are generally the vesting periods. The Company recognizes share-based compensation expense only for those shares that are expected to vest, based on the Company’s historical experience and future expectations. We recognized stock-based compensation cost of approximately $0.3 million and $0.5 million for the three- and six-month month periods ended June 30, 2012, respectively, and $0.2 million and $0.4 million for the three- and six-month month periods ended June 30, 2011, respectively.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Stock Options
A summary of the Company’s stock options and related activity as of and for the six months ended June 30, 2012 is presented below:
|
|
|
|
|
| Weighted |
|
|
| ||
|
|
|
|
|
| Average |
|
|
| ||
|
|
|
| Weighted |
| Remaining |
|
|
| ||
|
|
|
| Average |
| Contractual |
| Aggregate |
| ||
|
|
|
| Exercise |
| Term |
| Intrinsic |
| ||
|
| Shares |
| Price |
| (Years) |
| Value |
| ||
|
|
|
|
|
|
|
| (in thousands) |
| ||
Options outstanding at January 1, 2012 |
| 722,400 |
| $ | 8.06 |
|
|
|
|
| |
Granted |
| — |
| — |
|
|
|
|
| ||
Exercised |
| — |
| — |
|
|
|
|
| ||
Expired |
| — |
| — |
|
|
|
|
| ||
Forfeited |
| — |
| — |
|
|
|
|
| ||
Options outstanding at June 30, 2012 |
| 722,400 |
| $ | 8.06 |
| 4.96 |
| $ | 849 |
|
|
|
|
|
|
|
|
|
|
| ||
Options exercisable at June 30, 2012 |
| 589,900 |
| $ | 8.31 |
| 4.47 |
| $ | 621 |
|
As of June 30, 2012, there was approximately $0.4 million of total unrecognized compensation cost related to unvested stock options to be recognized over a weighted average period of 1.1 years.
Restricted Stock Awards
A summary of the Company’s restricted stock awards and related activity as of and for the six months ended June 30, 2012 is presented below:
|
| Number of |
|
|
| Shares |
|
Shares outstanding at December 31, 2011 |
| 96,126 |
|
Shares granted |
| 165,607 |
|
Shares vested |
| (50,212 | ) |
Shares outstanding at June 30, 2012 |
| 211,521 |
|
In March 2011, the Company granted (i) 27,258 shares of restricted stock awards to non-employee directors that cliff-vest one year from the grant date; and (ii) 68,868 shares of restricted stock awards to executive management that time-vest over a three-year period. The weighted-average grant-date fair value of the awards was $6.58 — which was based on the fair value of our common stock on the respective grant dates. In March 2012, the Company granted (i) 26,250 shares of restricted stock awards to non-employee directors that cliff-vest one year from the grant date; and (ii) 139,357 shares of restricted stock awards to executive management that time-vest over a three-year period. The weighted-average grant-date fair value of the awards was $8.78 — which was based on the fair value of our common stock on the respective grant dates. Holders of the restricted stock awards have voting rights, and vesting of the grants is based on their continued service. Sales of the restricted stock are prohibited until the awards vest. As of June 30, 2012, there was approximately $1.5 million of total unrecognized compensation cost related to unvested restricted stock awards to be recognized over a weighted average period of 2.4 years.
(13) Earnings per Common Share
The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of unvested restricted stock awards that contain a non-forfeitable right to receive dividends and, therefore, are considered to participate in undistributed earnings with common stockholders.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of stock-based awards. We exclude potentially dilutive securities from the computation of diluted earnings per share when the effect of their inclusion would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per common share for the three- and six-month month periods ended June 30, 2012 and 2011:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
(In thousands, except per share data) |
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings |
| $ | 3,052 |
| $ | 4,670 |
| 12,525 |
| 12,510 |
| ||
Less: Net income attributable to noncontrolling interests |
| 1,565 |
| 2,242 |
| 2,673 |
| 6,357 |
| ||||
Net earnings attributable to FirstCity |
| $ | 1,487 |
| $ | 2,428 |
| $ | 9,852 |
| $ | 6,153 |
|
Less: Net earnings allocable to participating securities |
| 29 |
| — |
| 147 |
| — |
| ||||
Net earnings allocable to common shares |
| $ | 1,458 |
| $ | 2,428 |
| $ | 9,705 |
| $ | 6,153 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average common shares outstanding - basic |
| 10,345 |
| 10,279 |
| 10,322 |
| 10,273 |
| ||||
Dilutive effect of restricted stock shares |
| 24 |
| — |
| 33 |
| — |
| ||||
Dilutive effect of stock options |
| 44 |
| 25 |
| 44 |
| 21 |
| ||||
Weighted-average common shares outstanding - diluted |
| 10,413 |
| 10,304 |
| 10,399 |
| 10,294 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.14 |
| $ | 0.24 |
| $ | 0.94 |
| $ | 0.60 |
|
Diluted |
| $ | 0.14 |
| $ | 0.24 |
| $ | 0.93 |
| $ | 0.60 |
|
For the three-month periods ended June 30, 2012 and 2011, potentially dilutive securities representing approximately 418,000 and 705,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive.
For the six-month periods ended June 30, 2012 and 2011, potentially dilutive securities representing approximately 654,000 and 675,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive.
(14) Fair Value
We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value for applicable fair value disclosures. Investment securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value certain other assets and liabilities on a non-recurring basis, Portfolio Assets, loans receivable, real estate investments, servicing assets, investments in unconsolidated subsidiaries, and various other assets held for sale (including liabilities related to the assets held for sale). These non-recurring fair value adjustments typically involve lower-of-cost-or-market accounting or write-downs of individual assets.
Fair Value Hierarchy
The accounting guidance on fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
inputs (Level 3 measurements). We group our assets and liabilities measured at fair value in three levels of the fair value hierarchy, based on the fair value measurement technique, as described below:
· Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets and liabilities in active exchange markets that the Company has the ability to access at the measurement date.
· Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques with significant assumptions and inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
· Level 3 — Valuation is derived from model-based techniques that use inputs and significant assumptions that are supported by little or no observable market data. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.
The level of fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is most-significant to the fair value measurement in its entirety. In the determination of the classification of assets and liabilities in Level 2 or Level 3 of the fair value hierarchy, we consider all available information, including observable market data, indications of market conditions, and our understanding of the valuation techniques and significant inputs used. Based upon the specific facts and circumstances, judgments are made regarding the significance of the Level 3 inputs to the fair value measurements of the respective assets and liabilities in their entirety. If the valuation techniques that are most-significant to the fair value measurements are principally derived from assumptions, inputs and qualitative considerations that are corroborated by little or no observable market data, the asset or liability is classified as Level 3.
Determination of Fair Value
We attempt to base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs, when reasonably available, and minimize the use of unobservable inputs when developing fair value measurements. However, active market pricing information and other observable market data are not available for a portion of the Company’s financial instruments (primarily investments in unconsolidated subsidiaries, non-public debt instruments and, on occasion, distressed assets). In instances where there is limited or no observable market data, fair value measurements are based principally upon our own valuation models and estimates, or combination of our own valuation models and estimates plus independent vendor or broker pricing, and the measurements are often calculated, as applicable, based on current pricing adjusted for the economic and competitive environment, the characteristics of the asset or liability, and other such factors that, in management’s opinion, reflect elements a market participant would consider. As with any valuation technique used to estimate fair value, changes in underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. Accordingly, these fair value estimates may not be realized in an actual sale or immediate settlement of the asset or liability. The Company believes the imprecision of an estimate could significantly impact the fair value measurement.
Following are descriptions of the valuation methodologies used for assets and liabilities recorded at fair value on a recurring or non-recurring basis, and for estimating fair value for financial instruments not reported at fair value on our consolidated balance sheet for disclosure purposes.
Cash and Cash Equivalents and Restricted Cash: Cash and cash equivalents and restricted cash are carried at historical cost. The carrying amount approximates fair value due to the short-term nature of these instruments.
Portfolio Assets — Loans: See Note 1 for information on the carrying value of loan Portfolio Assets. The Company does not carry its loan Portfolio Assets at fair value on a recurring basis. However, periodically, we may record non-recurring adjustments to the carrying value of impaired loans to reflect partial write-downs, which are reported as non-recurring fair value measurements when the adjustment is based on the observable market price of the loan or the fair value of collateral. The fair values of impaired loans are generally based on appraised value of collateral. Non-recurring fair value adjustments to loans that are based on observable market prices and collateral valuations using observable inputs are classified as Level 2 measurements. When management determines that the fair value of the collateral requires additional adjustments, such as a result of non-current appraisal value or when there is no observable market price, the Company generally employs internal valuation processes consisting primarily of market comparable
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
pricing and discounted cash flow techniques. These internal valuation techniques include various significant unobservable inputs, such as market discount rates, liquidity discounts, comparability adjustments, loss severity, and market/collateral condition adjustments. The Company classifies its fair value measurements using internal valuation techniques for these assets as Level 3 for non-recurring fair value adjustments, because these valuation techniques are principally derived from assumptions, inputs and qualitative considerations that are corroborated by little or no observable market data.
Additionally, for disclosure purposes, the Company is required to provide fair value estimates for its loan Portfolio Assets that are not recorded at fair value on a recurring or non-recurring basis. The Company estimates fair value for this disclosure using a discounted cash flow model that employs market discount rates that reflect the Company’s current pricing for loans with similar characteristics, adjusted for various considerations such as market conditions and credit risk. This fair value measurement technique is a Level 3 measurement, because it is principally derived from assumptions, inputs and qualitative considerations that are corroborated by little or no observable market data.
Portfolio Assets — Real Estate: See Note 1 for information on the carrying value of our real estate investments held for sale and held for investment. Fair value measurements for our real estate investments are generally based on collateral valuations using observable inputs and, accordingly, we classify these assets as Level 2 for non-recurring fair value adjustments.
Loans Receivable Held for Investment: See Note 1 for information on the carrying value of loans receivable held for investment. The Company does not carry its loans receivable held for investment at fair value on a recurring basis. However, periodically, we may record non-recurring adjustments to the carrying value of impaired loans to reflect partial write-downs, which are reported as non-recurring fair value measurements when the adjustment is based on the observable market price of the loan or the fair value of collateral. The fair values of impaired loans are generally based on appraised value of collateral. Non-recurring fair value adjustments to loans that are based on observable market prices and collateral valuations using observable inputs are classified as Level 2 measurements. When management determines that the fair value of the collateral requires additional adjustments, such as a result of non-current appraisal value or when there is no observable market price, the Company generally employs internal valuation processes consisting primarily of market comparable pricing and discounted cash flow techniques. These internal valuation techniques include various significant unobservable inputs, such as market discount rates, liquidity discounts, comparability adjustments, loss severity, and market/collateral condition adjustments. The Company classifies its fair value measurements using internal valuation techniques for these assets as Level 3 for non-recurring fair value adjustments, because these valuation techniques are principally derived from assumptions, inputs and qualitative considerations that are corroborated by little or no observable market data.
Additionally, for disclosure purposes, the Company is required to provide fair value estimates for its loans receivable held for investment that are not recorded at fair value on a recurring basis. For this disclosure, estimated fair values of fixed-rate loans receivable, including affiliated loans, are generally determined using a discounted cash flow model, adjusted by an amount for estimated losses, that employs market discount rates and other adjustments that would be expected to be made by a market participant. Estimated fair values of variable-rate loans that re-price frequently at market interest rates are based on carrying values adjusted for estimated credit losses and other adjustments that would be expected to be made by a market participant. The estimated fair value for impaired loans is generally based on collateral valuations using observable inputs, adjusted for various considerations that would be expected to be made by a market participant; or discounted cash flow models that employ market discount rates and other adjustments that would be expected to be made by a market participant. These fair value measurement techniques are classified as Level 3 measurements, because they are principally derived from assumptions, inputs and qualitative considerations that are corroborated by little or no observable market data.
SBA Loans Held for Sale: SBA loans receivable held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is generally based on prices that secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subject to non-recurring fair value adjustments as Level 2.
Investment Securities Available for Sale: Investment securities available for sale are carried at fair value on our consolidated balance sheet. The Company measures fair value for its marketable equity investment using quoted market prices in an active exchange market for identical assets (Level 1). The Company measures fair value for its asset-backed securities using discounted cash flow models based on assumptions and inputs that are corroborated by little or no observable market data (Level 3). The Company uses this measurement technique for these assets because pricing information and market-participant assumptions for its asset-backed securities are not readily accessible and frequently released to the public.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Investments in Unconsolidated Subsidiaries: Investments in unconsolidated subsidiaries are generally recorded under the equity method of accounting (see Note 1). Estimated fair values of these investments are based on a discounted cash flow approach using a price quotation for similar investments, adjusted for various considerations that, in management’s opinion, reflect elements a market participant would consider. The Company classifies its fair value measurement techniques for these non-marketable equity investments as Level 3 for non-recurring fair value adjustments, because pricing information for similar assets is generally not released to the public, and the Company’s valuation techniques that are most-significant to the fair value measurements are principally derived from assumptions, inputs and qualitative considerations that are corroborated by little or no observable market data.
Assets Held for Sale, Net of Related Liabilities: Assets held for sale, net of related liabilities, represent the net assets of certain Company subsidiaries that management expects to sell or otherwise dispose, and are carried at the lower-of-cost or market (see Note 3). The composition of these assets and liabilities comprises primarily Portfolio Assets, an affiliated loan receivable, and an affiliated note payable. The estimated fair values of the net assets related to these subsidiaries were based primarily on a contractual sales price (adjusted for costs to sell) and a price quotation from a prospective buyer and, accordingly, we classify these assets and liabilities as Level 2 for non-recurring fair value adjustments.
Notes Payable and Other Debt Obligations: Notes payable and other debt obligations are carried at amortized cost, net of unamortized discounts. For disclosure purposes, we are required to estimate the fair value of our notes payable and debt obligations. For our debt instruments, quoted market prices or interest rates for similar debt with comparable terms (or when traded by market participants as an asset) are not readily observable in active trading markets. As such, we estimated the fair value of our debt obligations with Bank of Scotland by discounting the future cash flows of each debt instrument at rates currently offered to us for loan facilities with other creditors that include similar terms and maturities (these discount rates include our current spread levels). Given that our debt obligations with Bank of Scotland were measured at fair value in December 2011 in connection with our debt refinancing transaction, the carrying value approximates fair value for our Bank of Scotland debt obligations. For the remainder of our non-affiliated notes payable and debt obligations, management believes that carrying value approximates fair value since the interest rates and terms on these debt instruments approximate the interest rates, market spreads and terms currently offered by other lenders for similar debt instruments of comparable terms.
Assets Measured at Fair Value on a Recurring Basis
The table below presents the Company’s balances of assets measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011. The Company did not have any liabilities that were measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011.
|
| At June 30, 2012 |
| ||||||||||
(Dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Investment securities available for sale: |
|
|
|
|
|
|
|
|
| ||||
Marketable equity security |
| $ | 1,446 |
| $ | — |
| $ | — |
| $ | 1,446 |
|
Asset-backed securities |
| — |
| — |
| 2,083 |
| 2,083 |
| ||||
|
| $ | 1,446 |
| $ | — |
| $ | 2,083 |
| $ | 3,529 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
| At December 31, 2011 |
| ||||||||||
(Dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Investment securities available for sale: |
|
|
|
|
|
|
|
|
| ||||
Marketable equity security |
| $ | 1,000 |
| $ | — |
| $ | — |
| $ | 1,000 |
|
Asset-backed security |
| — |
| — |
| 2,798 |
| 2,798 |
| ||||
|
| $ | 1,000 |
| $ | — |
| $ | 2,798 |
| $ | 3,798 |
|
At June 30, 2012 and December 31, 2011, the amortized cost of the Company’s marketable equity security approximated $1.1 million and $1.1 million, respectively. At June 30, 2012 and December 31, 2011, the amortized cost of the Company’s asset-backed securities approximated $2.1 million and $2.8 million, respectively. The Company used a discounted cash flow model (valuation technique), with a 20% discount rate (significant unobservable input), to measure the estimated fair value of its asset-backed security (Level 3 asset) at June 30, 2012.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the three- and six-month month periods ended June 30, 2012 and 2011, there were no transfers of assets recorded at fair value on a recurring basis in or out of the Level 1, 2 or 3 fair value measurement levels.
The table below summarizes the changes to the Company’s Level 3 assets measured at fair value on a recurring basis for the three- and six-month month periods ended June 30, 2012 and 2011:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
(Dollars in thousands) |
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
Balance, beginning of period |
| $ | 2,494 |
| $ | 5,646 |
| $ | 2,798 |
| $ | 2,605 |
|
Total realized and unrealized gains for the period included in: |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| (68 | ) | 197 |
| 91 |
| 364 |
| ||||
Other comprehensive income |
| 41 |
| 244 |
| (10 | ) | 292 |
| ||||
Purchases |
| — |
| 224 |
| — |
| 3,485 |
| ||||
Sales |
| — |
| — |
| — |
| — |
| ||||
Issuances |
| — |
| — |
| — |
| — |
| ||||
Settlements |
| (384 | ) | (551 | ) | (796 | ) | (1,093 | ) | ||||
Foreign currency translation adjustments |
| — |
| 98 |
| — |
| 205 |
| ||||
Net transfers into Level 3 |
| — |
| — |
| — |
| — |
| ||||
Balance, end of period |
| $ | 2,083 |
| $ | 5,858 |
| $ | 2,083 |
| $ | 5,858 |
|
Assets Measured at Fair Value on a Non-Recurring Basis
The Company may be required, from time to time, to measure certain financial and non-financial assets at fair value on a non-recurring basis. These adjustments to fair value generally result from write-downs of financial and non-financial assets as a result of impairment or application of lower-of-cost or fair value accounting. The following table provides the fair value hierarchy and the carrying value of assets on the Company’s consolidated balance sheet at June 30, 2012 and December 31, 2011 that were measured at fair value on a non-recurring basis during the respective six- and twelve-month periods then ended:
|
| Carrying Value at June 30, 2012 |
| ||||||||||
(Dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Portfolio Assets - loans (1) |
| $ | — |
| $ | 1,196 |
| $ | — |
| $ | 1,196 |
|
Loans receivable - SBA held for investment (1) |
| — |
| 239 |
| 133 |
| 372 |
| ||||
Real estate held for sale (2) |
| — |
| 1,803 |
| — |
| 1,803 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
| Carrying Value at December 31, 2011 |
| ||||||||||
(Dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Portfolio Assets - loans (1) |
| $ | — |
| $ | — |
| $ | 1,923 |
| $ | 1,923 |
|
Loans receivable - SBA held for investment (1) |
| — |
| — |
| 559 |
| 559 |
| ||||
Real estate held for sale (2) |
| — |
| 6,297 |
| — |
| 6,297 |
| ||||
Investments in unconsolidated subsidiaries |
| — |
| — |
| 4,567 |
| 4,567 |
| ||||
Assets held for sale, net of related liabilities |
| — |
| 2,011 |
| — |
| 2,011 |
|
(1) Represents the carrying value of impaired loans for which adjustments were based on the collateral value.
(2) Represents the carrying value of foreclosed real estate properties that were impaired and measured at fair value subsequent to their initial classification as foreclosed assets.
The following table presents the decrease in value of certain assets held at the respective period end that were measured at fair value on a non-recurring basis for which a fair value adjustment was included in the Company’s results of operations during the respective period:
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
| Six Months Ended |
| ||||
|
| June 30, |
| ||||
(Dollars in thousands) |
| 2012 |
| 2011 |
| ||
Portfolio Assets - loans (1) |
| $ | (138 | ) | $ | (127 | ) |
Loans receivable - SBA held for investment (1) |
| (210 | ) | (145 | ) | ||
Real estate held for sale (2) |
| (543 | ) | (295 | ) | ||
Total |
| $ | (891 | ) | $ | (567 | ) |
(1) Represents write-downs of loans based on the estimated fair value of the collateral for collateral-dependent loans.
(2) Represents losses on foreclosed real estate properties that were measured at fair value subsequent to their initial classification as foreclosed assets.
The fair value adjustment reductions in the table above for the six-month periods ended June 30, 2012 and 2011 involved assets held in our Portfolio Asset Acquisition and Resolution business segment.
Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis
The table below presents the carrying amount and estimated fair value of the Company’s financial instruments, including accrued interest (where applicable), that are not recorded at fair value in their entirety on a recurring basis on the Company’s consolidated balance sheets at June 30, 2012 and December 31, 2011. These fair value estimates are generally based on pertinent information that was available to management as of the respective measurement dates. The fair value estimates have not been revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented. We have not included assets that are not financial instruments in our disclosure, such as the value of our servicing assets and investments in unconsolidated subsidiaries.
|
| June 30, 2012 |
| December 31, 2011 |
| |||||||||||||||||
|
| Carrying |
| Estimated Fair Value |
| Carrying |
| Estimated |
| |||||||||||||
(Dollars in thousands) |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Amount |
| Fair Value |
| |||||||
Cash, cash equivalents and restricted cash |
| $ | 34,289 |
| $ | 34,289 |
| $ | — |
| $ | — |
| $ | 34,289 |
| $ | 36,031 |
| $ | 36,031 |
|
Loan Portfolio Assets and loans receivable held for investment |
| 103,318 |
| — |
| — |
| 138,045 |
| 138,045 |
| 135,423 |
| 173,616 |
| |||||||
SBA loans held for sale |
| 4,808 |
| — |
| 5,326 |
| — |
| 5,326 |
| 7,614 |
| 8,353 |
| |||||||
Assets held for sale, net of related liabilities (1) |
| 4,759 |
| — |
| 5,505 |
| — |
| 5,505 |
| 4,569 |
| 6,634 |
| |||||||
Notes payable and other debt obligations |
| 139,873 |
| — |
| — |
| 139,873 |
| 139,873 |
| 189,936 |
| 189,936 |
| |||||||
(1) Comprised of Portfolio Assets, an affiliated loan receivable and an affiliated note payable (see Note 3).
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(15) Variable Interest Entities
In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with entities that involve variable interests. Variable interests are generally defined as contractual, ownership or other economic interests in an entity that change with fluctuations in the entity’s net asset value. If certain characteristics are present in these transactions, the entity is subject to a variable interests consolidation analysis, and consolidation is based on variable interests, and not solely on ownership of the entity’s outstanding voting stock. In making the determination as to whether an entity is considered to be a variable interest entity (“VIE”), we first perform a qualitative analysis, which requires certain subjective decisions regarding our assessments, including, but not limited to, the design of the entity, the variability that the entity was designed to create and pass along to its interest holders, the rights of the parties, and the purpose of the arrangement. If we cannot conclude after a qualitative analysis whether an entity is a VIE, we perform a quantitative analysis.
In general, a VIE is an entity that has one or more of the following characteristics (1) the entity has total equity at risk that is not sufficient to finance its principal activities without additional subordinated financial support from other entities; (2) the group of equity owners does not have the ability to make significant decisions about the entity’s activities; (3) the group of equity owners does not have the obligation to absorb losses or the right to receive residual returns generated by its operations, or both; or (4) the voting rights of some investors are not proportional to their obligations to absorb the losses or the right to receive residual returns of the entity, or both, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. If any of these characteristics is present, the entity is subject to a variable interests consolidation analysis, and consolidation is based on variable interests, and not solely on ownership of the entity’s outstanding voting stock.
If an entity is determined to be a VIE, we determine if our variable interest causes us to be considered the primary beneficiary. We are the primary beneficiary and are required to consolidate the entity if we have the power to direct the activities of the VIE that most-significantly impact the entity’s economic performance and we have the obligation to absorb losses or the right to receive returns that could be significant to the entity. The assessment of the party that has the power to direct the activities of the VIE may require significant management judgment when more than one party has power, or more than one party is involved in the design of the VIE but no party has the power to direct the ongoing activities that could be significant. We are required to continually assess whether we are the primary beneficiary and, therefore, may consolidate a VIE through the duration of our involvement. Examples of certain events that may change whether or not we consolidate the VIE include a change in the design of the entity or a change in our ownership. Generally, if we are the primary beneficiary of a VIE, then we initially record the assets, liabilities and noncontrolling interests of the VIE in our consolidated financial statements at fair value. If we cease to be deemed the primary beneficiary of a consolidated VIE, then we deconsolidate the VIE.
The following provides a summary of different types of VIEs with which the Company has entered into significant transactions:
Acquisition Partnership VIEs — The Company is involved with Acquisition Partnerships that were formed with one or more investors to invest in Portfolio Assets. These Acquisition Partnerships are typically financed through debt and/or equity provided by the investors (including FirstCity). Certain of these Acquisition Partnerships are VIEs primarily because they do not have sufficient equity to finance their activities without additional subordinated financial support, or the investors do not have the ability to make certain significant decisions about the Acquisition Partnership’s activities. The voting interests for all but four of the Acquisition Partnership VIEs are either wholly-owned or majority-owned by non-affiliated investors, and the Company determined that it was not the primary beneficiary of these minority-owned Acquisition Partnership VIEs. However, the Company is deemed to be the primary beneficiary for four Acquisition Partnership VIEs in which the Company and respective non-affiliated investors each hold equal ownership and voting interests (these four Acquisition Partnership VIEs are consolidated by our Special-Purpose Investment Entity VIEs described below). The investors and third-party creditors, including FirstCity, generally have recourse only to the extent of the assets held by the Acquisition Partnership VIEs. Certain third-party creditors have recourse to both FirstCity and the non-affiliated investors where we jointly provide a guaranty to the Acquisition Partnership VIE. The Company does not generally provide financial support to any Acquisition Partnership VIE beyond that which is contractually required, but may provide additional liquidity alongside the non-affiliated investors to fund additional investments.
Operating Entity VIEs — The Company has variable interests with various commercial enterprise entities (attributable primarily to certain equity and debt investments made by our Special Situations Platform business). FirstCity provided financing in the form of debt and/or equity to help finance the activities of the Operating Entity VIEs. These Operating Entities are VIEs primarily because they do not have sufficient equity to finance their activities without additional subordinated financial support. The voting interests for all of the Operating Entity VIEs are either wholly-owned or majority-owned by non-affiliated investors, and the Company determined
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
that it was not the primary beneficiary of these minority-owned Operating Entity VIEs. The investors and creditors, including FirstCity, generally have recourse only to the extent of the assets held by the Operating Entity VIEs. The Company does not generally provide financial support to any Operating Entity VIE beyond that which is contractually required.
Special-Purpose Investment Entity VIEs — The Company has significant variable interests with special-purpose investment entities that were created to invest in Portfolio Assets, debt and equity investments, and various other types of investments. Certain of these special-purpose investment entities are VIEs because they do not have sufficient equity to finance their activities without additional subordinated financial support. The Company owns all of the voting and equity interests in these Special-Purpose Investment Entity VIEs, and the Company was determined to be the primary beneficiary of these entities. Third-party creditors have recourse to FirstCity up to $78.1 million under guaranty provisions related to certain debt obligations of these Special-Purpose Investment Entity VIEs and certain of their unconsolidated subsidiaries, which are collateralized by their assets, only to the extent that such pledged assets of the respective entities do not generate sufficient cash to service and repay their debt obligations (see Note 18). The Company does not generally provide financial support to the Special-Purpose Investment Entity VIEs beyond that which is contractually required.
The following table displays the carrying amount and classification of assets and liabilities of the Company’s consolidated Special-Purpose Investment Entity VIEs (which include the accounts of the four consolidated Acquisition Partnership VIEs described above) that are included in its consolidated balance sheet as of June 30, 2012. In general, third-party creditors have recourse only to the assets of the Special-Purpose Investment Entity VIEs and do not have recourse to FirstCity, except where we provided a guaranty to the entity. We record third-party ownership in these consolidated VIEs in “Noncontrolling interests” in our consolidated balance sheet.
|
| Special-Purpose |
| |
(Dollars in thousands) |
| Investment VIEs |
| |
Cash |
| $ | 18,536 |
|
Portfolio Assets, net |
| 68,884 |
| |
Loans receivable |
| 39,336 |
| |
Equity investments |
| 41,465 |
| |
Other assets |
| 37,745 |
| |
Total assets of consolidated VIEs (1) |
| $ | 205,966 |
|
|
|
|
| |
Notes payable (2) |
| 133,221 |
| |
Other liabilites (2) |
| 17,397 |
| |
Total liabilities of consolidated VIEs |
| $ | 150,618 |
|
(1) These assets can only be used to settle the liabilities of these consolidated VIEs.
(2) Includes $43.9 million of notes payable and $17.3 million of other liabilities for which creditors do not have recourse to FirstCity.
The following table summarizes the carrying amounts of the assets included in the Company’s consolidated balance sheet and the maximum loss exposure as of June 30, 2012 related to the Company’s variable interests in unconsolidated VIEs.
|
| Assets on FirstCity’s |
| FirstCity’s |
| |||||
|
| Loans |
| Equity |
| Exposure |
| |||
Type of VIE |
| Receivable |
| Investment |
| to Loss (1) |
| |||
|
| (Dollars in thousands) |
| |||||||
Acquisition Partnership VIEs |
| $ | — |
| $ | (811 | ) | $ | 1,018 |
|
Operating Entity VIEs |
| 7,765 |
| (91 | ) | 7,674 |
| |||
Total |
| $ | 7,765 |
| $ | (902 | ) | $ | 8,692 |
|
(1) Includes maximum exposure to loss attributable to FirstCity’s debt guarantees provided for certain Acquisition Partnership VIEs.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(16) Other Related Party Transactions
The Company has contracted with the Acquisition Partnerships and related parties as a third-party loan servicer. Servicing fees and due diligence fees (included in other income) derived from such affiliates totaled $3.2 million and $2.3 million for the three-month periods ended June 30, 2012 and 2011, respectively, and $8.7 million and $4.5 million for the six-month periods ended June 30, 2012 and 2011, respectively.
Through a series of related party transactions in 2008, FirstCity (through a majority-owned Mexican subsidiary) acquired a loan portfolio in Mexico. The final funding for this transaction involved two FirstCity majority-owned Mexican subsidiaries and an unconsolidated Mexican affiliated entity, and resulted in an affiliated note payable and an affiliated loan receivable being recorded to the Company’s consolidated balance sheet. At June 30, 2012 and December 31, 2011, the carrying values of this affiliated loan receivable and affiliated note payable both approximated $5.1 million (including accrued interest), and are respectively included in “Assets held for sale” and “Liabilities associated with assets held for sale” on our consolidated balance sheet (see Note 3). Should the note payable be forgiven at some future date (prior to the Company’s disposition of this debt instrument), the corresponding loan receivable would be forgiven as well.
(17) Segment Reporting
At June 30, 2012 and 2011, the Company was engaged in two major business segments — Portfolio Asset Acquisition and Resolution business and Special Situations Platform business.
In the Portfolio Asset Acquisition and Resolution business, the Company acquires and resolves portfolios of under-performing and non-performing loans, and to a lesser extent, performing loans and other assets (collectively, “Portfolio Assets” or “Portfolios”), which are generally acquired at a discount to their legal principal balance or appraised value. Purchases may be in the form of pools of assets or single assets. The Portfolio Assets are generally aggregated, including loans of varying qualities that are secured or unsecured by diverse collateral types and real estate. Some Portfolio Assets are loans for which resolution is linked primarily to the real estate securing the loan, while others may be collateralized business loans for which resolution may be based either on real estate, business assets or other collateral cash flow. Portfolio Assets are acquired on behalf of the Company or its consolidated subsidiaries, and on behalf of U.S. and foreign investment entities formed with co-investors (“Acquisition Partnerships”). The Company services, manages and ultimately resolves or otherwise disposes of substantially all Portfolio Assets acquired by the Company, its Acquisition Partnerships, or other related entities. The Company services such assets until they are collected or sold.
The Company engages in its Special Situations Platform business through its majority ownership interest in FirstCity Denver Investment Corp. (“FirstCity Denver”). Through its Special Situations Platform business, the Company provides investment capital to privately-held middle-market companies through flexible capital structuring arrangements. The nature of the capital investments primarily takes the form of senior and junior financing arrangements, but also includes direct equity investments and common equity warrants. In addition, our Special Situations Platform business engages in other types of investment activity including distressed debt transactions and leveraged buyouts. FirstCity Denver’s primary investment objective is to generate both current income and capital appreciation through debt and equity investments, and to generally structure the investments to be repaid or exited in 12 to 60 months.
We evaluate the performance of our Portfolio Asset Acquisition and Resolution and Special Situations Platform business segments based primarily on the results of the segments without allocating certain corporate and administrative expenses and other items. “Corporate and Other” in the tables below represent the portions of our expenses (primarily salaries and benefits, accounting fees and legal expenses) and certain other items that are not allocable to our business segments.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following tables set forth summarized information by segment for the three- and six-month month periods ended June 30, 2012 and 2011:
|
| Three Months Ended |
| ||||||||||
|
| June 30, 2012 |
| ||||||||||
|
| (Dollars in thousands) |
| ||||||||||
|
| Portfolio Asset |
| Special |
|
|
|
|
| ||||
|
| Acquisition |
| Situations |
| Corporate |
|
|
| ||||
|
| and Resolution |
| Platform |
| and Other |
| Total |
| ||||
Revenues |
| $ | 11,862 |
| $ | 2,332 |
| $ | 100 |
| $ | 14,294 |
|
Costs and expenses |
| (9,430 | ) | (2,556 | ) | (2,267 | ) | (14,253 | ) | ||||
Equity income from unconsolidated subsidiaries |
| 1,790 |
| 291 |
| — |
| 2,081 |
| ||||
Gain on business combinations |
| — |
| 935 |
| — |
| 935 |
| ||||
Income tax (expense) benefit |
| 54 |
| (9 | ) | (50 | ) | (5 | ) | ||||
Net income attributable to noncontrolling interests |
| (1,184 | ) | (381 | ) | — |
| (1,565 | ) | ||||
Net earnings (loss) |
| $ | 3,092 |
| $ | 612 |
| $ | (2,217 | ) | $ | 1,487 |
|
|
| Three Months Ended |
| ||||||||||
|
| June 30, 2011 |
| ||||||||||
|
| (Dollars in thousands) |
| ||||||||||
|
| Portfolio Asset |
| Special |
|
|
|
|
| ||||
|
| Acquisition |
| Situations |
| Corporate |
|
|
| ||||
|
| and Resolution |
| Platform |
| and Other |
| Total |
| ||||
Revenues |
| $ | 14,547 |
| $ | 2,323 |
| $ | 48 |
| $ | 16,918 |
|
Costs and expenses |
| (10,879 | ) | (1,836 | ) | (2,070 | ) | (14,785 | ) | ||||
Equity income from unconsolidated subsidiaries |
| 1,661 |
| 1,622 |
| — |
| 3,283 |
| ||||
Gain on business combinations |
| 278 |
| — |
| — |
| 278 |
| ||||
Income tax (expense) benefit |
| (1,216 | ) | (34 | ) | 226 |
| (1,024 | ) | ||||
Net income attributable to noncontrolling interests |
| (1,787 | ) | (455 | ) | — |
| (2,242 | ) | ||||
Net earnings (loss) |
| $ | 2,604 |
| $ | 1,620 |
| $ | (1,796 | ) | $ | 2,428 |
|
|
| Six Months Ended |
| ||||||||||
|
| June 30, 2012 |
| ||||||||||
|
| (Dollars in thousands) |
| ||||||||||
|
| Portfolio Asset |
| Special |
|
|
|
|
| ||||
|
| Acquisition |
| Situations |
| Corporate |
|
|
| ||||
|
| and Resolution |
| Platform |
| and Other |
| Total |
| ||||
Revenues |
| $ | 29,036 |
| $ | 4,860 |
| $ | 185 |
| $ | 34,081 |
|
Costs and expenses |
| (18,592 | ) | (4,429 | ) | (5,180 | ) | (28,201 | ) | ||||
Equity income from unconsolidated subsidiaries |
| 6,322 |
| 226 |
| — |
| 6,548 |
| ||||
Gain on business combinations |
| — |
| 935 |
| — |
| 935 |
| ||||
Income tax expense |
| (708 | ) | (29 | ) | (101 | ) | (838 | ) | ||||
Net income attributable to noncontrolling interests |
| (2,137 | ) | (536 | ) | — |
| (2,673 | ) | ||||
Net earnings (loss) |
| $ | 13,921 |
| $ | 1,027 |
| $ | (5,096 | ) | $ | 9,852 |
|
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
| Six Months Ended |
| ||||||||||
|
| June 30, 2011 |
| ||||||||||
|
| (Dollars in thousands) |
| ||||||||||
|
| Portfolio Asset |
| Special |
|
|
|
|
| ||||
|
| Acquisition |
| Situations |
| Corporate |
|
|
| ||||
|
| and Resolution |
| Platform |
| and Other |
| Total |
| ||||
Revenues |
| $ | 33,096 |
| $ | 4,519 |
| $ | 80 |
| $ | 37,695 |
|
Costs and expenses |
| (21,568 | ) | (3,630 | ) | (3,798 | ) | (28,996 | ) | ||||
Equity income from unconsolidated subsidiaries |
| 3,380 |
| 1,774 |
| — |
| 5,154 |
| ||||
Gain on business combinations |
| 278 |
| — |
| — |
| 278 |
| ||||
Gain on sale of subsidiaries |
| 5 |
| — |
| — |
| 5 |
| ||||
Income tax (expense) benefit |
| (1,782 | ) | (33 | ) | 189 |
| (1,626 | ) | ||||
Net income attributable to noncontrolling interests |
| (5,820 | ) | (537 | ) | — |
| (6,357 | ) | ||||
Net earnings (loss) |
| $ | 7,589 |
| $ | 2,093 |
| $ | (3,529 | ) | $ | 6,153 |
|
Revenues and equity income (loss) from investments in unconsolidated subsidiaries from the Special Situations Platform segment are all attributable to U.S. operations. Revenues, equity income (loss) of unconsolidated subsidiaries and other income from the Portfolio Asset Acquisition and Resolution segment are attributable to U.S. and foreign operations as summarized as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Domestic |
| $ | 10,605 |
| $ | 9,836 |
| $ | 27,520 |
| $ | 20,288 |
|
Latin America |
| 1,670 |
| 3,364 |
| 3,755 |
| 5,715 |
| ||||
Europe |
| 1,377 |
| 3,008 |
| 4,083 |
| 10,473 |
| ||||
Total |
| $ | 13,652 |
| $ | 16,208 |
| $ | 35,358 |
| $ | 36,476 |
|
Total assets for each segment and a reconciliation to total assets are as follows:
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Cash and cash equivalents |
| $ | 33,039 |
| $ | 34,802 |
|
Restricted cash |
| 1,250 |
| 1,229 |
| ||
Portfolio acquisition and resolution assets: |
|
|
|
|
| ||
Domestic |
| 166,253 |
| 199,093 |
| ||
Latin America |
| 17,130 |
| 17,048 |
| ||
Europe |
| 32,479 |
| 41,447 |
| ||
Special situations platform assets |
| 42,477 |
| 51,099 |
| ||
Other non-earning assets, net |
| 10,764 |
| 11,628 |
| ||
Total assets |
| $ | 303,392 |
| $ | 356,346 |
|
(18) Commitments and Contingencies
Legal Proceedings
There have been no material developments regarding any matters disclosed under Part I, Item 3 “Legal Proceedings” in our 2011 Form 10-K.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Investment Agreement with Värde Investment Partners, L.P. (“Värde”)
FirstCity Diversified Holdings (“FC Diversified”) and FC Servicing, wholly-owned subsidiaries of FirstCity, and Värde, are parties to an investment agreement that provides, among other things, a “right of first refusal” provision to Värde. Pursuant to the investment agreement, FC Diversified and FC Servicing granted Värde a right of first refusal to participate in distressed asset investment opportunities in which the aggregate amount of the proposed investment is to exceed $3.0 million. FC Diversified and FC Servicing are required to follow a prescribed notice procedure pursuant to which Värde has the option to participate in a proposed investment, whether in the form of a direct purchase, equity investment or loan, by requiring that the purchase, acquisition or loan be effected through an acquisition entity formed by FC Diversified (or its affiliate) and Värde (or its affiliate). An affiliate of FC Diversified will own from 5% to 25% of the acquisition entity at FC Diversified’s determination. The investment agreement has a termination date of June 30, 2015, which is subject to consecutive automatic one-year extensions without any action by FC Diversified, FC Servicing and Värde. FC Servicing will be the servicer for all of the acquisition entities formed by FC Diversified and Värde (subject to removal by Värde on a pool-level basis under certain conditions). The parties may terminate the investment agreement prior to June 30, 2015 under certain conditions.
Indemnification Obligation Commitments
Strategic Mexican Investment Partners L.P. (“SMIP”), a wholly-owned subsidiary of FirstCity, Cargill Financial Services International Inc. (“CFSI”), and a Mexican acquisition partnership that is collectively owned by SMIP and CFSI (collectively, the “Sellers”), are parties to indemnification arrangements that originated in 2006 in connection with their respective sales of eleven Mexican portfolio entities to Bidmex Holding LLC (“Bidmex Holding”) and a loan portfolio to a Bidmex Holding subsidiary. Bidmex Holding is a Mexican acquisition partnership that was formed by certain subsidiaries of American International Group, Inc. (“AIG Entities”), as the 85%-majority owner, and SMIP, as the 15%-minority owner, to acquire the interests of the portfolio entities and loan portfolio from the Sellers. In connection with these sales transactions, the Sellers made various representations and warranties concerning (i) the existence and ownership of the portfolio entities, (ii) the assets and liabilities of the portfolio entities, (iii) taxes related to periods prior to the sales transaction date, (iv) the operations of the portfolio entities, and (v) the ownership of the loan portfolio and existence of the underlying loans. The Sellers agreed to indemnify Bidmex Holding and AIG Entities from damages resulting from a breach of these representation and warranty conditions on basis according to their respective ownership percentages in each Mexican portfolio entity, or on the basis of 80% to CFSI and 20% to SMIP as to any matter that was not related to a particular portfolio entity. The indemnity obligation survives for a period of the statute of limitations for matters related to taxes, existence and authority, capitalization and good standing of the Mexican portfolio entities. The Sellers are not required to make any payments as a result of the indemnity provisions until the aggregate amount payable exceeds certain thresholds (ranging from $25,000 for the loan portfolio transaction to $250,000 for the Mexican portfolio entities transaction). However, claims related to taxes and fraud are not subject to these thresholds. At this time, management does not believe that this potential obligation will have a material adverse impact on the Company’s consolidated results of operations, financial position or liquidity.
Guarantees and Letters of Credit
FC Commercial has a term loan facility with Bank of Scotland. The obligations under this loan facility are secured by substantially all assets and subsidiaries of FC Commercial (excluding FH Partners). FirstCity provides an unlimited guaranty for the repayment of the indebtedness under this loan facility. At June 30, 2012, the unpaid principal balance on this loan was $71.9 million. Refer to Note 8 for additional information.
ABL has a $25.0 million revolving loan facility with WFCF. The obligations under this facility are secured by substantially all of the assets of ABL, and FirstCity provides WFCF with an unconditional guaranty on ABL’s obligations under the loan facility up to a maximum of $5.0 million plus enforcement cost. At June 30, 2012, the unpaid principal balance on this loan facility was $19.4 million. Refer to Note 8 for additional information.
FC Investment has a $15.0 million revolving loan facility with FNBCT. The obligations under this facility are secured by substantially all of the assets of FC Investment and its subsidiaries. FirstCity provides an unlimited guaranty for the repayment of the indebtedness under this revolving loan facility. At June 30, 2012, the unpaid principal balance on this loan facility was $2.0 million. Refer to Note 8 for additional information.
FC Commercial provides guarantees to various financial institutions related to their financing arrangements with certain Acquisition Partnerships. The underlying financing arrangements of these Acquisitions Partnerships mature at various dates through
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
October 2013, and are secured primarily by certain real estate properties held by the Acquisition Partnerships. At June 30, 2012, the unpaid debt obligations of these Acquisition Partnerships attributed to FC Commercial’s underlying guarantees approximated $1.2 million.
Fondo de Inversion Privado NPL Fund One (“PIF1”), an equity-method investment of FirstCity, has a credit facility with Banco Santander Chile, S.A. with an unpaid principal balance of $7.2 million at June 30, 2012. PIF1 uses the credit facility to finance the purchases of loan portfolios. Pursuant to terms of the credit facility, FirstCity was required to provide a stand-by letter of credit from Bank of Scotland that would satisfy the current loan balance upon demand. At June 30, 2012, FirstCity had a letter of credit in the amount of $7.2 million from Bank of Scotland under the terms of FirstCity’s loan facility with Bank of Scotland (see Note 8), with Banco Santander Chile, S.A. as the letter of credit beneficiary. In the event that a demand is made under the $7.2 million letter of credit, FirstCity would be 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.
Environmental Matters
The Company generally retains environmental consultants to conduct or update environmental assessments in connection with the Company’s foreclosed and acquired real estate properties. These environmental assessments have not revealed environmental conditions that the Company believes will have a material adverse effect on its business, assets, financial condition, results of operations or liquidity, and the Company is not otherwise aware of environmental conditions with respect to properties that the Company believes would have such a material adverse effect. However, from time to time, environmental conditions at the Company’s properties have required and may in the future require environmental testing and/or regulatory filings, as well as remedial action. Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action.
Income Taxes
We are subject to income taxes in both the United States and the non-U.S. jurisdictions in which we operate. Certain of our entities are under examination by the relevant taxing authorities for various tax years. We regularly assess the potential outcome of current and future examinations in each of the taxing jurisdictions when determining the adequacy of the provision for income taxes. We have only recorded financial statement benefits for tax positions which we believe reflect the “more-likely-than-not” criteria incorporated in the FASB’s authoritative guidance on accounting for uncertainty in income taxes, and we have established income tax reserves in accordance with this authoritative guidance where necessary. Once a financial statement benefit for a tax position is recorded or a tax reserve is established, we adjust it only when there is more information available or when an event occurs necessitating a change. While we believe that the amount of the recorded financial statement benefits and tax reserves reflect the more-likely-than-not criteria, it is possible that the ultimate outcome of current or future examinations may result in a reduction to the tax benefits previously recorded on the financial statements or may exceed the current income tax reserves in amounts that could be material.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
FirstCity is a multi-national specialty financial services company headquartered in Waco, Texas with offices throughout the United States and Mexico and a presence in Europe and South America. FirstCity, as an opportunistic investor, focuses on distressed asset investment opportunities in both the United States and, to a lesser extent, international markets, and distressed transaction and special situations investment opportunities in U.S. lower middle-market companies. The Company has strategically aligned its operations into 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 segment since it commenced operations in 1986. In the Portfolio Asset Acquisition and Resolution business, the Company acquires portfolios of performing and non-performing 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 (i.e. liquidates) 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 co-investors (each such entity, an “Acquisition Partnership”).
Through its Special Situations Platform business, the Company provides investment capital to privately-held lower 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 and common equity warrants. The Company also engages in other investment activities, including leveraged buyouts and distressed debt transactions, through its Special Situations Platform business.
Our revenues consist primarily of (1) income and gains from our Portfolio Assets and loan investments (including SBA lending activities); (2) equity income from our Acquisition Partnerships; (3) servicing fee income and incentive fee income from Acquisition Partnerships based on the performance of our servicing activities on the assets held by these unconsolidated partnerships; and (4) income generated by our debt and equity investments (consolidated and unconsolidated) in privately-held lower middle-market companies.
Summary Financial Results
FirstCity recorded net earnings of $1.5 million, or $0.14 per common share on a fully diluted basis, for the three-month period ended June 30, 2012 (“Q2 2012”), compared to net earnings of $2.4 million, or $0.24 per common share on a fully diluted basis, for the three-month period ended June 30, 2011 (“Q2 2011”). FirstCity recorded net earnings of $9.9 million, or $0.93 per common share diluted, for the six-month period ended June 30, 2012 (“YTD 2012”), compared to $6.2 million, or $0.60 per common share diluted, for the six-month period ended June 30, 2011 (“YTD 2011”). Components of FirstCity’s results of operations for the three- and six-month periods ended June 30, 2012 and 2011 are presented in the tables below.
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| Three Months Ended |
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| June 30, 2012 |
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| (Dollars in thousands) |
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| Portfolio Asset |
| Special |
|
|
|
|
| ||||
|
| Acquisition |
| Situations |
| Corporate |
|
|
| ||||
|
| and Resolution |
| Platform |
| and Other |
| Total |
| ||||
Revenues |
| $ | 11,862 |
| $ | 2,332 |
| $ | 100 |
| $ | 14,294 |
|
Costs and expenses |
| (9,430 | ) | (2,556 | ) | (2,267 | ) | (14,253 | ) | ||||
Equity income from unconsolidated subsidiaries |
| 1,790 |
| 291 |
| — |
| 2,081 |
| ||||
Gain on business combinations |
| — |
| 935 |
| — |
| 935 |
| ||||
Income tax (expense) benefit |
| 54 |
| (9 | ) | (50 | ) | (5 | ) | ||||
Net income attributable to noncontrolling interests |
| (1,184 | ) | (381 | ) | — |
| (1,565 | ) | ||||
Net earnings (loss) |
| $ | 3,092 |
| $ | 612 |
| $ | (2,217 | ) | $ | 1,487 |
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|
| Three Months Ended |
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|
| June 30, 2011 |
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| (Dollars in thousands) |
| ||||||||||
|
| Portfolio Asset |
| Special |
|
|
|
|
| ||||
|
| Acquisition |
| Situations |
| Corporate |
|
|
| ||||
|
| and Resolution |
| Platform |
| and Other |
| Total |
| ||||
Revenues |
| $ | 14,547 |
| $ | 2,323 |
| $ | 48 |
| $ | 16,918 |
|
Costs and expenses |
| (10,879 | ) | (1,836 | ) | (2,070 | ) | (14,785 | ) | ||||
Equity income from unconsolidated subsidiaries |
| 1,661 |
| 1,622 |
| — |
| 3,283 |
| ||||
Gain on business combinations |
| 278 |
| — |
| — |
| 278 |
| ||||
Income tax (expense) benefit |
| (1,216 | ) | (34 | ) | 226 |
| (1,024 | ) | ||||
Net income attributable to noncontrolling interests |
| (1,787 | ) | (455 | ) | — |
| (2,242 | ) | ||||
Net earnings (loss) |
| $ | 2,604 |
| $ | 1,620 |
| $ | (1,796 | ) | $ | 2,428 |
|
|
| Six Months Ended |
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|
| June 30, 2012 |
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| (Dollars in thousands) |
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|
| Portfolio Asset |
| Special |
|
|
|
|
| ||||
|
| Acquisition |
| Situations |
| Corporate |
|
|
| ||||
|
| and Resolution |
| Platform |
| and Other |
| Total |
| ||||
Revenues |
| $ | 29,036 |
| $ | 4,860 |
| $ | 185 |
| $ | 34,081 |
|
Costs and expenses |
| (18,592 | ) | (4,429 | ) | (5,180 | ) | (28,201 | ) | ||||
Equity income from unconsolidated subsidiaries |
| 6,322 |
| 226 |
| — |
| 6,548 |
| ||||
Gain on business combinations |
| — |
| 935 |
| — |
| 935 |
| ||||
Income tax expense |
| (708 | ) | (29 | ) | (101 | ) | (838 | ) | ||||
Net income attributable to noncontrolling interests |
| (2,137 | ) | (536 | ) | — |
| (2,673 | ) | ||||
Net earnings (loss) |
| $ | 13,921 |
| $ | 1,027 |
| $ | (5,096 | ) | $ | 9,852 |
|
|
| Six Months Ended |
| ||||||||||
|
| June 30, 2011 |
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|
| (Dollars in thousands) |
| ||||||||||
|
| Portfolio Asset |
| Special |
|
|
|
|
| ||||
|
| Acquisition |
| Situations |
| Corporate |
|
|
| ||||
|
| and Resolution |
| Platform |
| and Other |
| Total |
| ||||
Revenues |
| $ | 33,096 |
| $ | 4,519 |
| $ | 80 |
| $ | 37,695 |
|
Costs and expenses |
| (21,568 | ) | (3,630 | ) | (3,798 | ) | (28,996 | ) | ||||
Equity income from unconsolidated subsidiaries |
| 3,380 |
| 1,774 |
| — |
| 5,154 |
| ||||
Gain on business combinations |
| 278 |
| — |
| — |
| 278 |
| ||||
Gain on sale of subsidiaries |
| 5 |
| — |
| — |
| 5 |
| ||||
Income tax (expense) benefit |
| (1,782 | ) | (33 | ) | 189 |
| (1,626 | ) | ||||
Net income attributable to noncontrolling interests |
| (5,820 | ) | (537 | ) | — |
| (6,357 | ) | ||||
Net earnings (loss) |
| $ | 7,589 |
| $ | 2,093 |
| $ | (3,529 | ) | $ | 6,153 |
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As an opportunistic investor in the distressed asset and special situations markets, FirstCity’s mix of revenues and earnings in its business segments will significantly fluctuate from period-to-period. Refer to the heading “Results of Operations” below for a detailed review of the Company’s operations for the comparative periods presented in the table above.
Portfolio Asset Acquisition and Resolution. The Company’s net earnings related to its Portfolio Asset Acquisition and Resolution business segment improved to $3.1 million in Q2 2012 from $2.6 million in Q2 2011. The increase in net earnings in Q2 2012 compared to Q2 2011 was attributed primarily to a $2.3 million decrease in interest expense, a $1.3 million decrease in income tax expense, a $0.9 million increase in servicing fee income, and a $0.7 million decline in asset-level expenses; off-set partially by a $3.2 million decrease in Portfolio Assets income, and a combined negative impact of $1.5 million due to unfavorable foreign currency exchange rate fluctuations attributed to our consolidated and unconsolidated foreign operations.
Refer to the heading “Results of Operations” below for a detailed discussion of the Company’s operations in this business segment for the comparative periods presented in the table above.
Special Situations Platform. The Company’s net earnings from its Special Situations Platform business segment decreased to $0.6 million in Q2 2012 compared to $1.6 million in Q2 2011. The decrease in net earnings in Q2 2012 compared to Q2 2011 was attributed primarily to a $1.3 million decrease in equity income from unconsolidated subsidiaries, off-set partially by a $0.9 million business combination gain in Q2 2012. Refer to the heading “Results of Operations” below for a detailed discussion of the Company’s operations in this business segment for the comparative periods presented in the table above.
Corporate and Other. Net costs and expenses not allocable to our Portfolio Asset Acquisition and Resolution and Special Situations Platform business segments, consisting primarily of certain corporate salaries and benefits, legal and other professional expenses, and accounting fees, increased to $2.2 million for Q2 2012 compared to $1.8 million for Q2 2011.
Summary Investment Activity
In Q2 2012, FirstCity and its investment partners acquired $48.3 million of U.S. Portfolio Asset investments with an aggregate face value of approximately $88.7 million — of which FirstCity’s investment acquisition share was $10.3 million. In addition to its Portfolio Asset acquisitions in Q2 2012, FirstCity invested $6.8 million in non-portfolio investments, including $6.6 million in the form of SBA loan originations and advances, and $0.2 million in the form of equity investments. In Q2 2011, FirstCity and its investment partners acquired $81.7 million of U.S. Portfolio Asset investments with a face value of approximately $163.4 million — of which FirstCity’s investment acquisition share was $22.2 million. In addition to its Portfolio Asset acquisitions in Q2 2011, FirstCity invested $7.4 million in non-portfolio investments, consisting of $6.3 million in the form of SBA loan originations and advances, $0.9 million in the form of equity investments, and $0.2 million in the form of investment securities.
At June 30, 2012, the carrying value of FirstCity’s earning assets (primarily Portfolio Assets, equity investments, loans receivable and entity-level earning assets) approximated $258.3 million — compared to $308.7 million at December 31, 2011 and $355.3 million at June 30, 2011. The global distribution of FirstCity’s earning assets (at carrying value) at June 30, 2012 included $208.7 million in the United States; $32.5 million in Europe; and $17.1 million in Latin America. Since mid-2010, a significant majority of our Portfolio Asset investments have been acquired through minority-owned, unconsolidated U.S. Acquisition Partnerships (instead of majority-owned, consolidated Portfolio Asset investments) under terms of an investment agreement with Värde Investment Partners, L.P. (“Värde”). As such, total footings of our consolidated earning assets have experienced a corresponding decrease, resulting primarily from a decline in our holdings of consolidated Portfolio Assets.
Refer to the headings “Portfolio Asset Acquisitions — Portfolio Asset Acquisition and Resolution Business Segment” and “Lower Middle-Market Company Capital Investments — Special Situations Platform Business Segment” below for additional information related to our investment activities and composition.
Management’s Outlook
Our revenues consist primarily of (1) income and gains from our Portfolio Assets and loan investments (including SBA lending activities); (2) equity income from our Acquisition Partnerships; (3) servicing fee income and incentive fee income from Acquisition Partnerships based on the performance of our servicing activities on the assets held by these unconsolidated partnerships; and (4) income generated by our debt and equity investments (consolidated and unconsolidated) in privately-held lower middle-market companies. Our ability to maintain and grow revenues depends on our ability to secure investment opportunities, obtain financing for transactions, and to consummate investments and deliver attractive risk-adjusted returns. Our ability to execute this strategy depends upon a number of market conditions — including the strength and liquidity of U.S. and global economies and financial markets.
While we continue to see signs of improvement and stabilization in U.S. and global economic conditions and financial markets, these conditions and markets remain challenging and their recovery has been imbalanced. More recently, U.S. debt ceiling and fiscal policy concerns, together with uncertainty related to sovereign debt conditions in Europe, have increased volatility and uncertainty that could adversely affect the U.S. and global financial markets and economic conditions. The recent economic recession in general, combined with the disruptions in the financial and capital markets in particular, have negatively impacted market liquidity and increased the cost of debt and equity capital.
Market commentators and analysts have expressed the belief that it will take some time for the U.S. and global economies and financial markets to fully recover, but it is not clear if adverse conditions will again intensify. As a result, the continued challenging
economic conditions could still materially and adversely impact (i) our ability to price and fund new distressed asset and lower middle-market capital investment opportunities on attractive terms; (ii) the ability of our borrowers to repay or refinance their debt obligations to us; (iii) the value of the underlying real estate properties and other assets securing our purchased and originated loan investments; and/or (iv) the financial condition, operations and liquidity of the underlying servicing and operating entities in which we have an equity investment. There can be no assurance that the value of our Portfolio Assets, loan investments and other investment assets, or the performance of our equity-method investees and consolidated subsidiaries, will not be negatively impacted by challenging economic conditions which could have a negative impact on our future results.
Despite substantial losses reported in the financial services sector in recent years, and continued volatility and uncertainty in U.S. and global economies and financial markets, management remains positive on the outlook of the Company and believes that current market conditions should not hinder FirstCity’s ability to expand its business. While disruptions and uncertainty in the markets may adversely affect our existing positions, we believe such conditions generally present significant new investment opportunities for distressed asset acquisition and special situations transactions.
In addition to various other debt and equity investment opportunities, we continue to seek distressed asset investment opportunities under our investment agreement with Värde (see Note 18 of the consolidated financial statements included in Item 1 of this Form 10-Q). The Company’s involvement in these investments will come in the form of minority ownership (ranging from 5% to 25% at FirstCity’s determination) of an acquisition entity formed by FirstCity and Värde. FirstCity will also be the servicer for the acquisition entities formed with Värde. FirstCity’s increased holdings in minority-owned, unconsolidated acquisition entities under this investment agreement since mid-2010 represent a shift in the Company’s portfolio asset acquisition history — which primarily consisted of consolidated portfolio assets prior to such time. As such, in the context of the Company’s Portfolio Asset Acquisition and Resolution business segment, management expects to see a gradual shift in the composition of FirstCity’s income attributed to distressed asset investments to “Equity income from unconsolidated subsidiaries” (unconsolidated equity-method investments) from “Income from Portfolio Assets” (consolidated portfolio assets). Management also expects to see a gradual increase in service fee income over time related to the performance of our servicing responsibilities related to these unconsolidated acquisition entities. Refer to the heading “Results of Operations” below for additional information related to our Portfolio Asset Acquisition and Resolution operations.
Our ability to make new investments and fund operations is dependent on (1) anticipated cash flows from unencumbered Portfolio Assets and equity investments; (2) our current holdings of unencumbered cash; (3) residual cash flows from the pledged assets and equity investments after full repayment of our term loan facilities with Bank of Scotland and Bank of America (see Note 8 of the consolidated financial statements); (4) cash leak-through provisions included in our term loan facilities with Bank of Scotland and Bank of America; and (5) our investment agreement with Värde. While management believes that these cash flow sources will provide FirstCity with funding and liquidity to support its operations and investment activities, FirstCity continues to actively seek additional sources of liquidity and alternative funding sources. We remain cognizant about the uncertainty and volatility in U.S. financial markets that currently present challenges for businesses in accessing liquidity and capital, and the resulting impact on our liquidity considerations and operations.
Results of Operations
The following discussion and analysis is based on the segment reporting information presented in Note 17 to the consolidated financial statements of the Company included in Item 1 of this Form 10-Q, and should be read in conjunction with the consolidated financial statements (including the notes thereto) included elsewhere in this Form 10-Q.
As a result of significant period-to-period fluctuations in our revenues and earnings, period-to-period comparisons of the results of our operations may not be meaningful. The Company’s financial results are impacted by many factors including, but not limited to, general economic, political and industry conditions; volatility and disruptions in the functioning of financial markets; fluctuations in interest rates and foreign currency exchange rates; fluctuations in the underlying values of real estate and other collateral securing our loan portfolios; the timing and ability to collect and liquidate assets; changes in the performance and creditworthiness of our borrowers and other counterparties; increased competition from other market participants in the industries in which we operate; the availability, pricing and terms of Portfolio Assets, lower middle-market transactions and other investment opportunities in all of the Company’s businesses; and changes in government regulations, statutes and tax or fiscal policies. The Company’s business and results of operations are also impacted by the availability of liquidity to fund its investment activity and operations, and our access to credit and capital markets. Such factors, individually or combined with other factors, may result in significant fluctuations in our reported operations and in the trading price of our common stock.
Q2 2012 Compared to Q2 2011
FirstCity’s net earnings to common stockholders totaled $1.5 million in Q2 2012 compared to net earnings of $2.4 million in Q2 2011. On a per share basis, diluted net earnings to common stockholders were $0.14 in Q2 2012 compared to $0.24 in Q2 2011.
Portfolio Asset Acquisition and Resolution
Through our Portfolio Asset Acquisition and Resolution (“PAA&R”) business segment, FirstCity and its investment partners acquired $48.3 million of Portfolio Assets in Q2 2012 with an approximate face value of $88.7 million, compared to the Company’s involvement in acquiring $81.7 million of Portfolio Assets in Q2 2011 with an approximate face value of $163.4 million. In Q2 2012, FirstCity’s investment acquisition share in the Portfolio Asset acquisitions was $10.3 million — consisting of $1.4 million acquired through consolidated portfolio entities and $8.9 million acquired through unconsolidated Acquisition Partnerships. In Q2 2011, FirstCity’s investment acquisition share in the Portfolio Asset acquisitions was $22.2 million — consisting of $1.9 million acquired through consolidated portfolio entities and $20.3 million acquired through unconsolidated Acquisition Partnerships. Generally speaking, income recognized from our investments in consolidated Portfolio Assets is reported as “Income from Portfolio Assets” on our consolidated statements of earnings, whereas income from our investments in unconsolidated subsidiaries that acquire Portfolio Assets is reported as “Equity income from unconsolidated subsidiaries.” Furthermore, since we perform as the servicer for the vast majority of our U.S. and Latin American unconsolidated Portfolio Assets, we also recognize fee income related to the performance of our servicing responsibilities. This fee income is reported as “Servicing fees” on our consolidated statements of earnings. We also generate service fee income from our U.S. and Latin American consolidated Portfolio Assets that we service; however, this income is eliminated in consolidation and, as such, is not included on our consolidated statements of earnings.
In Q2 2012, FirstCity invested an additional $6.8 million in non-portfolio investments in the form of SBA loan originations and advances and other investments, compared to $7.4 million in non-portfolio investments in the form of SBA loan originations and advances and other investments in Q2 2011. Refer to the heading “Portfolio Asset Acquisitions — Portfolio Asset Acquisition and Resolution Business Segment” below for additional information related to our investment activities and composition in our PAA&R segment.
Our PAA&R business segment reported $3.1 million of net earnings in Q2 2012 compared to $2.6 million of net earnings in Q2 2011. The following is a summary of the results of operations for the Company’s PAA&R business segment for Q2 2012 and Q2 2011:
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| Three Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Portfolio Asset Acquisition and Resolution: |
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|
|
|
| ||
Revenues: |
|
|
|
|
| ||
Servicing fees |
| $ | 3,397 |
| $ | 2,480 |
|
Income from Portfolio Assets |
| 5,865 |
| 9,098 |
| ||
Gain on sale of SBA loans held for sale, net |
| 284 |
| 646 |
| ||
Interest income from SBA loans |
| 382 |
| 325 |
| ||
Interest income from loans receivable - affiliates |
| — |
| 396 |
| ||
Other income |
| 1,934 |
| 1,602 |
| ||
Total revenues |
| 11,862 |
| 14,547 |
| ||
Costs and expenses: |
|
|
|
|
| ||
Interest and fees on notes payable to banks and other |
| 1,315 |
| 3,630 |
| ||
Salaries and benefits |
| 3,988 |
| 4,105 |
| ||
Provision for loan and impairment losses, net of recoveries |
| 769 |
| 178 |
| ||
Asset-level expenses |
| 832 |
| 1,553 |
| ||
Other costs and expenses |
| 2,526 |
| 1,413 |
| ||
Total expenses |
| 9,430 |
| 10,879 |
| ||
Equity income of unconsolidated subsidiaries |
| 1,790 |
| 1,661 |
| ||
Gain on business combination |
| — |
| 278 |
| ||
Income tax (expense) benefit |
| 54 |
| (1,216 | ) | ||
Net income attributable to noncontrolling interests |
| (1,184 | ) | (1,787 | ) | ||
Net earnings |
| $ | 3,092 |
| $ | 2,604 |
|
Servicing fee revenues. Servicing fee revenues increased to $3.4 million in Q2 2012 from $2.5 million in Q2 2011. Servicing fees from U.S. Acquisition Partnerships totaled $1.9 million in Q2 2012 compared to $1.0 million in Q2 2011, while servicing fees from Latin American Acquisition Partnerships totaled $1.3 million in Q2 2012 and $1.4 million in Q2 2011. Servicing fees from U.S. Acquisition Partnerships are generally based on a percentage of the collections received from Portfolio Assets held by these unconsolidated partnerships; whereas servicing fees from Latin American Acquisition Partnerships are generally based on the cost of servicing plus a profit margin. The increase in servicing fees from U.S. Acquisition Partnerships in Q2 2012 compared to Q2 2011 was attributable to an increase in collections from unconsolidated U.S. partnerships to $57.1 million in Q2 2012 from $29.8 million in Q2 2011, which resulted in a $1.0 million increase in service fee income.
Since mid-2010, a majority of the Company’s U.S. Portfolio Asset investments have been acquired through equity-method investments in unconsolidated Acquisition Partnerships under the Värde investment agreement instead of consolidated Portfolio Assets. As such, the Company expects service fee income from its unconsolidated U.S. Acquisition Partnerships to gradually increase over time. Refer to the heading “Equity income from unconsolidated subsidiaries” below for information on our unconsolidated U.S. Acquisition Partnership activities.
Income from Portfolio Assets. Income from Portfolio Assets, comprised primarily of liquidation income and gains and accretion income from Portfolio Assets, decreased to $5.9 million in Q2 2012 from $9.1 million in Q2 2011.
Collections from our consolidated Portfolio Assets decreased to $23.5 million in Q2 2012 from $34.5 million in Q2 2011, which contributed to a $1.7 million decrease in liquidation income and gains in these comparative periods. Liquidation income and gains from our consolidated U.S. Portfolio Assets decreased by $0.4 million in Q2 2012 compared to Q2 2011, due primarily to a decrease in collections from our consolidated U.S. Portfolio Assets to $22.7 million in Q2 2012 from $31.2 million in Q2 2011. Q2 2012 included $2.5 million of gains based on $12.8 million of collection proceeds from sales of consolidated U.S. Portfolio Asset loans, compared to $3.6 million of gains based on $19.0 million of collection proceeds from sales in Q2 2011. Liquidation income and gains from our consolidated European Portfolio Assets decreased by $0.6 million in Q2 2012 compared to Q2 2011, due primarily to a significant decline in our consolidated European Portfolio Asset holdings since February 2011 (see discussion below) that resulted in a corresponding decrease in collections from these Portfolio Assets to $0.5 million in Q2 2012 from $2.1 million. Liquidation income and gains from our consolidated Latin American Portfolio Assets decreased by $0.7 million in Q2 2012 compared to Q2 2011, due primarily to a decline in collections from these Portfolio Assets in the periods compared.
Accretion income from our income-accruing Portfolio Assets decreased by $0.9 million in Q2 2012 compared to Q2 2011, due primarily to a shift in the income recognition method of accounting applied to our existing Portfolio Assets from an interest-accrual income method to a non-accrual income method (cost-recovery or cash basis) over the past year. Our average holdings in income-accruing Portfolio Assets decreased to $4.4 million for Q2 2012 from $30.0 million for Q2 2011. We apply the interest-accrual income method to Portfolio Assets, as applicable, only when management has the ability to reasonably estimate both the timing and amount of collections. Refer to Note 1 of the consolidated financial statements for a summary of our income-recognition accounting policies related to Portfolio Assets, and Note 4 of the consolidated financial statements for a summary of income from Portfolio Assets.
FirstCity’s average investment holdings in consolidated Portfolio Assets for Q2 2012 approximated $90.3 million (U.S. - $85.9 million; Europe - $4.4 million; and Latin America - $5.1 million reported as “Assets held for sale” on our consolidated balance sheet during the period). Our average Portfolio Asset investment holdings for Q2 2011 approximated $165.5 million (U.S. - $149.5 million; Europe - $5.8 million; and Latin America - $10.2 million). The decline in our consolidated U.S. Portfolio Asset holdings since Q2 2011 was due to the majority of our U.S. Portfolio Asset investments since mid-2010 being acquired through equity-method investments in unconsolidated U.S. Acquisition Partnerships under the Värde investment agreement. The decline in our consolidated European Portfolio Asset holdings since Q2 2011 was due primarily to the sale of Portfolio Assets held by our consolidated German Acquisition Partnerships in February 2011, and the sale of our controlling interests in French Acquisition Partnerships in November 2011. The decline in our consolidated Latin American Portfolio Asset holdings since Q2 2011 was due primarily to diminishing collections from the underlying Portfolio Assets (without new investment acquisitions), combined with a $3.1 million write-down on our net investment in a majority-owned Mexican portfolio entity in the fourth quarter of 2011. At June 30, 2012, our consolidated Latin American Portfolio Assets were reported as a disposal group and classified as held for sale (refer to Note 3 of the consolidated financial statements for additional information).
In light of FirstCity’s increased holdings in U.S. Portfolio Assets acquired through equity-method investments in unconsolidated Acquisition Partnerships instead of consolidated Portfolio Assets since mid-2010, the Company expects equity income from U.S. Acquisition Partnerships and service fee income to gradually increase over time in comparison to income and gains recognized from consolidated Portfolio Assets. Refer to the heading “Equity income from unconsolidated subsidiaries” below for information on our unconsolidated U.S. Acquisition Partnership activities.
Gain on sale of SBA loans held for sale, net. The Company recognized $0.3 million of gains on the sales of SBA loans with a $3.6 million net basis in the loans sold in Q2 2012, compared to $0.6 million of gains on the sales of SBA loans with a $7.8 million net basis in the loans sold in Q2 2011. Gains on SBA loan sales reflect the Company’s participation in the SBA guaranteed loan program. Under the SBA 7(a) program, the SBA guarantees up to 90% of the principal on a qualifying loan. The Company generally sells the guaranteed portions of originated SBA loans into the secondary market and retains the unguaranteed portion for investment.
Interest income from SBA loans. Interest income from SBA loans was $0.4 million and $0.3 million for Q2 2012 and Q2 2011, respectively. FirstCity’s average investment level in SBA loans held-for-investment approximated $20.0 million for Q2 2012 compared to $16.4 million for Q2 2011.
Interest income from loans receivable — affiliates. Interest income from loans receivable — affiliates was $0.4 million for Q2 2011. FirstCity’s average investment in loans receivable — affiliates in its PAA&R segment approximated $8.0 million for Q2 2011. The Company did not recognize interest income from loans receivable — affiliates in Q2 2012, since the Company’s only remaining affiliated loan was classified as “held for sale” on the Company’s consolidated balance sheet and carried at the lower of carrying amount or estimated fair value during the period (see Note 3 of the consolidated financial statements).
Interest income from loans receivable — other. The Company did not recognize interest income from loans receivable — other in Q2 2012 or Q2 2011 from its non-affiliated loan investments because management accounted for such loans under the non-accrual income method of accounting during both periods. FirstCity’s average investment in loans receivable — other in its PAA&R segment was $2.7 million for Q2 2012 compared to $3.6 million for Q2 2011.
Other income. Other income increased moderately to $1.9 million for Q2 2012 compared to $1.6 million for Q2 2011, due partially to $0.3 million of additional due diligence fee income recognized in Q2 2012 compared to Q2 2011 as a result of increased Portfolio Asset investment activity under the Company’s investment agreement with Värde in the periods compared.
Costs and expenses. Operating costs and expenses approximated $9.4 million in Q2 2012 compared to $10.9 million in Q2 2011. The following is a discussion of the major components of operating costs and expenses in its PAA&R business segment:
Interest expense and fees on notes payable and other debt obligations decreased to $1.3 million in Q2 2012 from $3.6 million in Q2 2011, due primarily to the Bank of Scotland loan facilities that were refinanced in December 2011 (see Note 8 of the consolidated financial statements). The Company recorded $0.6 million of interest, loan fee and discount amortization expense on its Bank of Scotland loan facilities in Q2 2012 (based on average debt holdings of $74.0 million) compared to $2.8 million of interest and loan fee expense in Q2 2011 (based on average debt holdings of $203.2 million). Excluding the Company’s debt obligations with Bank of Scotland, the average non-affiliated debt outstanding in its PAA&R segment was $67.6 million in Q2 2012 (with a 3.4% average cost of funds) compared to $35.4 million in Q2 2011 (with a 4.4% average cost of funds).
Salaries and benefits expense in our PAA&R segment remained relatively constant at $4.0 million in Q2 2012 and $4.1 million in Q2 2011. The total number of personnel within the PAA&R segment was 217 at June 30, 2012 and 207 at June 30, 2011.
Net provisions for loan and impairment losses on consolidated Portfolio Assets and loans receivable in our PAA&R segment totaled $0.8 million in Q2 2012 compared to $0.2 million in Q2 2011. Net impairment provisions in Q2 2012 were attributed primarily to declines in values of loan collateral and real estate properties related to our U.S. Portfolio Assets investments. The net impairment provisions were identified in connection with management’s quarterly evaluation of the collectibility of the Company’s Portfolio Assets and loans receivable. The process for evaluating and measuring impairment is critical to our financial results, as it requires subjective and complex judgments due to the need to make estimates about the impact of matters that are uncertain. This process also requires estimates that are susceptible to significant revision as more information becomes available. It remains unclear what impact the continuance of challenging economic conditions and disruptions in the financial, capital and real estate markets will ultimately have on our financial results. These conditions could adversely impact our business if commercial real estate properties experience a significant and prolonged decline in value, or if borrowers cannot refinance their loans and/or continue to make payments (which in turn could lead to rising loan defaults and foreclosures on loan collateral). Therefore, we cannot provide assurance that, in any particular future period, we will not incur additional impairment provisions.
Asset-level expenses, which generally represent costs incurred by FirstCity to manage consolidated Portfolio Assets, support foreclosed properties, and protect its security interests in loan collateral, decreased to $0.8 million in Q2 2012 from $1.6 million in Q2 2011. The decline in asset-level expenses was attributed primarily to a decline in the Company’s average holdings in consolidated Portfolio Assets in its PAA&R segment to $90.3 million for Q2 2012 from $165.5 million for Q2 2011 (a majority of FirstCity’s Portfolio Asset investments have been acquired through unconsolidated Acquisition Partnerships since mid-2010).
Other costs and expenses in the Company’s PAA&R segment increased by $1.1 million in Q2 2012 compared to Q2 2011, due primarily to the recognition of $0.3 million of foreign currency exchange losses attributed to our consolidated foreign operations in Q2 2012 compared to $0.6 million of foreign currency exchange gains recognized in Q2 2011 — a $0.9 million unfavorable swing ($0.6 million of the decrease in gains was attributed to consolidated European operations and $0.3 million of the decrease related to our consolidated Latin American operations). This unfavorable swing in foreign currency exchange gains was attributed to the U.S. dollar appreciating in value relative to the Euro and Mexican peso in Q2 2012, compared to the U.S. dollar depreciating in value relative to these currencies in Q2 2011. Due to the constantly changing currency exposures impacting our foreign operations and the volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon future operating results, which may fluctuate significantly due to our exposure to exchange rate changes. Further contributing to the increase in other costs and expenses was a $0.2 million increase in asset valuation costs in Q2 2012 compared to Q2 2011 (due primarily from increased Portfolio Asset investment activity).
Equity income from unconsolidated subsidiaries. Equity income from unconsolidated subsidiaries (Acquisition Partnerships and servicing entities) from our PAA&R segment increased by $0.1 million in Q2 2012 compared to Q2 2011. Equity income from our unconsolidated Acquisition Partnerships improved by $0.9 million in Q2 2012 compared to Q2 2011, whereas equity income from our unconsolidated servicing entities decreased by $0.7 million in Q2 2012 compared to Q2 2011. Our share of equity income and losses from these equity-method investees will vary period-to-period depending on the profitability of the underlying entities and the composition of FirstCity’s ownership mix in the respective entities that report earnings or losses in a period. The following is a discussion of equity income from FirstCity’s Acquisition Partnerships (by geographic region) and servicing entities. Refer to Note 6 of the consolidated financial statements for a summary of revenues, earnings and equity income (loss) of FirstCity’s equity-method investments by region.
· United States — Total combined revenues reported by our U.S. Acquisition Partnerships (FirstCity share 10%-50%) increased to $15.1 million in Q2 2012 from $8.0 million in Q2 2011. In addition, total combined net earnings reported by our U.S. partnerships improved to $8.1 million in Q2 2012 from $0.1 million in Q2 2011. The increase in total revenues and net earnings in Q2 2012 compared to Q2 2011 was attributable primarily to an increase in Portfolio Asset collections to $57.1
million in Q2 2012 from $29.8 million in Q2 2011, and a $3.1 million decrease in impairment provisions, off-set partially by increases of $0.9 million in service fee expense and $0.6 million in asset-level expenses reported by these U.S. partnerships in Q2 2012 compared to Q2 2011 (due to an increase in Portfolio Asset holdings and investment activities reported by these partnerships). The collective activity described above translated to an increase in FirstCity’s share of U.S. partnership net earnings (i.e. equity income) to $1.2 million for Q2 2012 compared to $0.1 million in equity losses for Q2 2011.
FirstCity’s average investment in U.S. Acquisition Partnerships increased to $55.8 million for Q2 2012 from $39.9 million for Q2 2011, due primarily to increased investment activity in newly-formed U.S. Acquisition Partnerships under FirstCity’s investment agreement with Värde. In light of FirstCity’s increased holdings in U.S. Portfolio Assets acquired through equity-method investments in unconsolidated Acquisition Partnerships instead of consolidated Portfolio Assets, the Company expects equity income from U.S. Acquisition Partnerships (and service fee income) to gradually increase over time in comparison to income from consolidated Portfolio Assets.
· Latin America — Total combined revenues reported by our Latin American Acquisition Partnerships (FirstCity’s share 8%-50%) decreased to $3.3 million in Q2 2012 from $3.9 million in Q2 2011. Total combined net earnings reported by our Latin American partnerships decreased to $9.5 million in losses for Q2 2012 compared to $4.6 million in earnings for Q2 2011. The decrease in revenues reported by these partnerships in Q2 2012 compared to Q2 2011 was attributable primarily to a decrease in Portfolio Asset collections to $4.6 million in Q2 2012 compared to $5.9 million in Q2 2011. The decrease in net earnings reported by these partnerships in Q2 2012 compared to Q2 2011 was attributable primarily to $14.4 million of additional foreign currency exchange losses reported by these partnerships in Q2 2012 compared to Q2 2011. The increase in foreign currency exchange losses recorded in Q2 2012 stemmed from the translation impact to the U.S. dollar-denominated debt held by certain Latin American partnerships (due to the depreciation in value of the Mexican peso relative to the U.S. dollar in Q2 2012, compared to the appreciation in value of the Mexican peso relative to the U.S. dollar in Q2 2011). The collective activity described above resulted in the Company recording $0.3 million of equity losses for its share of Latin American partnership net losses in Q2 2012, compared to recording $0.1 million of equity income in Q2 2011 for its share of net earnings reported by these partnerships.
The Company’s equity losses from its Latin America partnerships in Q2 2012 included $0.6 million of foreign currency transaction losses, whereas its equity income from these partnerships in Q2 2011 included $0.2 million of foreign currency transaction gains — a $0.8 million unfavorable swing. Our financial position and results of operations may fluctuate significantly due to the impact of currency exchange rate fluctuations on our Latin American Acquisition Partnerships. Due to the constantly changing currency exposures impacting these partnerships and the volatility of currency exchange rates, we cannot provide assurance that, in any particular period, we will not incur foreign currency transaction losses.
FirstCity’s average investment in Latin American Acquisition Partnerships was $4.5 million for Q2 2012 compared to $14.3 million for Q2 2011. The decline in our average investment in these partnerships since Q2 2011 was due primarily to the Company’s recognition of a $7.4 million impairment charge on certain Latin American (Mexico) Acquisition Partnerships in the fourth quarter of 2011.
· Europe — The Company did not carry any equity-method investments in European Acquisition Partnerships during Q2 2012, and its holdings and activity related to European Acquisition Partnerships were minimal in Q2 2011.
· Servicing Entities — Total combined revenues (mainly service fee income and investment income) reported by our foreign unconsolidated servicing entities (FirstCity’s share 37%-50%) decreased to $15.8 million in Q2 2012 from $16.4 million in Q2 2011. In addition, total combined net earnings available to common stockholders reported by these entities decreased to $1.6 million in Q2 2012 from $3.5 million in Q2 2011. The decrease in total net earnings available to common stockholders reported by these servicing entities was attributed primarily to a $0.5 million reduction in investment income (due primarily to gains from investment security sales recorded in Q2 2011 that were not recognized in Q2 2012), and $1.9 million of preferred stock dividends reported by a European servicing entity in Q2 2012. The collective activity described above translated to a decrease in FirstCity’s share of net earnings (i.e. equity income) from its foreign servicing entities to $0.9 million in Q2 2012 from $1.7 million in Q2 2011.
Gain on business combination. In Q2 2011, the Company recognized a $0.3 million business combination gain attributable to a step-acquisition transaction in which the Company acquired a controlling interest in a European Acquisition Partnership from a foreign equity-method investee. The Company owned a noncontrolling equity interest in this entity prior to the transaction. Under business combination accounting guidance, the Company’s previously-held noncontrolling interest in the entity was re-measured to fair value on the acquisition date — which resulted in the Company’s recognition of the gain. The Company’s PAA&R segment did not consummate any business combination transactions in Q2 2012. Refer to Note 3 of the consolidated financial statements for additional information.
Income tax expense. Our PAA&R segment reported a $0.1 million income tax benefit in Q2 2012 compared to an income tax provision of $1.2 million in Q2 2011 (comprised primarily of foreign income tax provisions). Refer to Note 11 of the consolidated financial statements for additional information on income taxes.
Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portions of net earnings in our consolidated, less-than-wholly-owned Acquisition Partnerships (FirstCity’s ownership in these consolidated partnerships ranges from 50%-90%) that are attributable to the noncontrolling equity interests held by co-investors. The amount of net income attributable to noncontrolling interests in these consolidated Acquisition Partnerships decreased to $1.2 million for Q2 2012 from $1.8 million for Q2 2011. This decrease was attributed primarily to a decrease in net earnings from these consolidated Acquisition Partnerships in Q2 2012 compared to Q2 2011 (i.e. a decrease in the amount of net earnings reported by these consolidated entities translates to a decrease in the amount of net earnings apportioned to the noncontrolling investors), as a majority of these consolidated Acquisition Partnerships have not purchased any additional Portfolio Asset investments over the past 12 months. Also, Q2 2011 included $0.5 million of net income attributable to noncontrolling interests in our French Acquisition Partnerships compared to $-0- in Q2 2012, as we sold our controlling interests in the entities in November 2011.
Special Situations Platform Business Segment
Our Special Situations Platform business segment (“FirstCity Denver”) reported net earnings of $0.6 million in Q2 2012 compared to $1.6 million of net earnings in Q2 2011. FirstCity Denver reported no investments in this segment in Q2 2012 and Q2 2011. Since its inception in 2007, FirstCity Denver has been involved in lower middle-market transactions with total investment values of $89.2 million, and has provided $61.4 million of investment capital and other financings in connection with these investments.
The following is a summary of the results of operations for the Company’s Special Situations Platform business segment for Q2 2012 and Q2 2011:
|
| Three Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Special Situations Platform: |
|
|
|
|
| ||
Revenues: |
|
|
|
|
| ||
Interest income from loans receivable |
| $ | 381 |
| $ | 489 |
|
Revenue from railroad operations |
| 1,951 |
| 1,430 |
| ||
Other income |
| — |
| 404 |
| ||
Total revenues |
| 2,332 |
| 2,323 |
| ||
Costs and expenses - railroad operations: |
|
|
|
|
| ||
Interest and fees on notes payable |
| 56 |
| 59 |
| ||
Salaries and benefits |
| 503 |
| 329 |
| ||
Other |
| 912 |
| 494 |
| ||
Total railroad costs and expenses |
| 1,471 |
| 882 |
| ||
Costs and expenses - other: |
|
|
|
|
| ||
Interest and fees on notes payable |
| 19 |
| 134 |
| ||
Salaries and benefits |
| 193 |
| 209 |
| ||
Other costs and expenses |
| 873 |
| 611 |
| ||
Total other expenses |
| 1,085 |
| 954 |
| ||
Total expenses |
| 2,556 |
| 1,836 |
| ||
Equity income from unconsolidated subsidiaries |
| 291 |
| 1,622 |
| ||
Gain on business combination |
| 935 |
| — |
| ||
Income tax expense |
| (9 | ) | (34 | ) | ||
Net income attributable to noncontrolling interests |
| (381 | ) | (455 | ) | ||
Net earnings |
| $ | 612 |
| $ | 1,620 |
|
Interest income from loans receivable. Interest income from loans receivable decreased to $0.4 million in Q2 2012 from $0.5 million in Q2 2011. FirstCity Denver’s average investment in loans receivable was $13.5 million for Q2 2012 — including $5.2 million accounted for under the non-accrual method of accounting. For Q2 2011, FirstCity Denver’s average investment in loans receivable was $16.6 million — including $6.1 million accounted for under the non-accrual method of accounting.
Revenue, costs and expenses from railroad operations. Revenue, costs and expenses from railroad operations represent the results of operations recorded by FirstCity Denver’s majority-owned railroad companies (engaged primarily in interchanging rail cars with connecting carriers, providing rail freight services for on-line customers, operating a transload facility, and operating a rail-served debris transfer station). Revenue from railroad operations increased to $2.0 million in Q2 2012 from $1.4 million in Q2 2011. Total costs and expenses attributable to the railroad operations approximated $1.5 million in Q2 2012 compared to $0.9 million in Q2 2011. The additional revenue, costs and expenses recorded by our majority-owned railroad operations were due primarily to activities from its railroad and transload facility operations that FirstCity Denver acquired in August 2011, as well as from its rail-served debris transfer station acquired in June 2012 (refer to Note 3 of the consolidated financial statements).
Other income. Other income, which relates primarily to income generated by FirstCity Denver’s consolidated commercial real estate property and other ancillary activities, decreased by $0.4 million in Q2 2012 compared to Q2 2011. In March 2012, FirstCity Denver removed the commercial real estate property from its balance sheet after the property was acquired by the creditor holding the mortgage secured by this property (refer to Note 4 of the consolidated financial statements).
Costs and expenses — other. Other costs and expenses increased by $0.3 million in Q2 2012 compared to Q2 2011, due primarily to a $0.4 million increase in service fee promote costs in the periods compared.
Equity income from unconsolidated subsidiaries. FirstCity Denver recorded $0.3 million of equity income from unconsolidated subsidiaries in Q2 2012 compared to $1.6 million in Q2 2011. This decrease was due primarily to a $1.1 million decline in equity income recorded by FirstCity Denver in Q2 2012 compared to Q2 2011 from its equity-method investment in a manufacturing concern involved in the prefabricated building industry, due to a higher mix of customer orders being executed through leasing arrangements (i.e. revenue recognized over the lease term) as opposed to sales arrangements (i.e. revenue recognized upon delivery) in Q2 2012 compared to Q2 2011. Also contributing to the decrease in FirstCity Denver’s equity income was a $0.3 million decline in equity income recorded in Q2 2012 ($-0-) compared to Q2 2011 ($0.3 million) from its equity-method investee engaged in designing, sourcing and selling household products (due primarily to lower sales volume).
Gain on business combination. In Q2 2012, FirstCity Denver acquired certain assets from a company that operated a rail-served debris transfer station, as partial payment of the company’s debt obligation to FirstCity Denver. The acquisition of the operating assets by FirstCity Denver was accounted for as a business combination, and accordingly, all of the assets acquired and liabilities assumed were measured at fair value on the acquisition date and included in the Company’s consolidated balance sheet. The estimated fair value of the net assets acquired exceeded the $2.5 million purchase price by approximately $0.9 million, which FirstCity Denver recognized as “Gain on business combination” in its consolidated statement of earnings in Q2 2012. Refer to Note 3 of the consolidated financial statements for additional information.
Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portions of net earnings related to FirstCity Denver (a FirstCity 80%-owned subsidiary) and its consolidated, less-than-wholly-owned subsidiaries (FirstCity Denver’s ownership in these consolidated entities ranges from 80%-90%) that are attributable to the noncontrolling equity interests held by co-investors. The amount of net income attributable to noncontrolling interests under our Special Situations platform was $0.4 million in Q2 2012 compared to $0.5 million in Q2 2011.
Corporate and Other
Costs and expenses not allocable to our PAA&R and Special Situations business segments consist primarily of certain corporate salaries and benefits, legal and other professional expenses, and accounting fees. These costs and expenses increased to $2.2 million for Q2 2012 compared to $1.8 million for Q2 2011, due primarily to a $0.3 million increase in legal and other professional expenses in the periods compared.
YTD 2012 Compared to YTD 2011
FirstCity’s net earnings to common stockholders totaled $9.9 million in YTD 2012 compared to net earnings of $6.2 million in YTD 2011. On a per share basis, diluted net earnings to common stockholders were $0.93 in YTD 2012 compared to $0.60 in YTD 2011.
Portfolio Asset Acquisition and Resolution
Through our Portfolio Asset Acquisition and Resolution (“PAA&R”) business segment, FirstCity and its investment partners acquired $139.2 million of U.S. Portfolio Asset investments and $0.4 million of European Portfolio Asset investments in YTD 2012 with an aggregate face value of approximately $298.8 million, compared to the Company’s involvement in acquiring $92.7 million of U.S. Portfolio Assets in YTD 2011 with an approximate face value of $180.6 million. In YTD 2012, FirstCity’s investment acquisition share in the Portfolio Asset acquisitions was $19.8 million — consisting of $1.7 million acquired through consolidated Portfolios and $18.1 million acquired through unconsolidated Portfolios. In YTD 2011, FirstCity’s investment acquisition share in Portfolio Asset acquisitions was $27.0 million — consisting of $4.7 million acquired through consolidated Portfolios and $22.3 million acquired through unconsolidated Portfolios. Generally speaking, income recognized from our investments in consolidated Portfolio Assets is reported as “Income from Portfolio Assets” on our consolidated statements of earnings, whereas income from our investments in unconsolidated subsidiaries that acquire Portfolio Assets is reported as “Equity income from unconsolidated subsidiaries.” Furthermore, since we function as the servicer for the significant majority of our U.S. and Latin American unconsolidated Portfolio Assets, we also recognize fee income related to the performance of our servicing responsibilities. This fee income is reported as “Servicing fees” on our consolidated statements of earnings. We also generate service fee income from our U.S. and Latin American consolidated Portfolio Assets that we service; however, this income is eliminated in consolidation and, as such, is not included on our consolidated statements of earnings.
In YTD 2012, FirstCity invested an additional $10.7 million in non-portfolio investments in the form of SBA loan originations and advances, direct equity investments, and other loan investments, compared to $17.3 million of additional non-portfolio investments in the form of SBA loan originations and advances, direct equity investments, and other investments in YTD 2011. Refer to the heading “Portfolio Asset Acquisitions — Portfolio Asset Acquisition and Resolution Business Segment” below for additional information related to our investment activities and composition in our PAA&R segment.
Our PAA&R business segment reported $13.9 million of net earnings in YTD 2012 compared to $7.6 million of net earnings in YTD 2011. The following is a summary of the results of operations for the Company’s PAA&R business segment for YTD 2012 and YTD 2011:
|
| Six Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Portfolio Asset Acquisition and Resolution: |
|
|
|
|
| ||
Revenues: |
|
|
|
|
| ||
Servicing fees |
| $ | 9,141 |
| $ | 4,905 |
|
Income from Portfolio Assets |
| 14,370 |
| 21,938 |
| ||
Gain on sale of SBA loans held for sale, net |
| 856 |
| 1,530 |
| ||
Interest income from SBA loans |
| 737 |
| 674 |
| ||
Interest income from loans receivable - affiliates |
| — |
| 791 |
| ||
Other income |
| 3,932 |
| 3,258 |
| ||
Total revenues |
| 29,036 |
| 33,096 |
| ||
Costs and expenses: |
|
|
|
|
| ||
Interest and fees on notes payable to banks and other |
| 2,910 |
| 7,463 |
| ||
Salaries and benefits |
| 8,370 |
| 7,950 |
| ||
Provision for loan and impairment losses, net of recoveries |
| 1,239 |
| 817 |
| ||
Asset-level expenses |
| 1,754 |
| 2,826 |
| ||
Other costs and expenses |
| 4,319 |
| 2,512 |
| ||
Total expenses |
| 18,592 |
| 21,568 |
| ||
Equity income from unconsolidated subsidiaries |
| 6,322 |
| 3,380 |
| ||
Gain on business combination |
| — |
| 278 |
| ||
Gain on sale of subsidiaries |
| — |
| 5 |
| ||
Income tax expense |
| (708 | ) | (1,782 | ) | ||
Net income attributable to noncontrolling interests |
| (2,137 | ) | (5,820 | ) | ||
Net earnings |
| $ | 13,921 |
| $ | 7,589 |
|
Servicing fee revenues. Servicing fee revenues increased to $9.1 million in YTD 2012 from $4.9 million in YTD 2011. Servicing fees from U.S. Acquisition Partnerships totaled $4.1 million in YTD 2012 compared to $1.9 million in YTD 2011, while servicing fees from Latin American Acquisition Partnerships totaled $2.8 million in both YTD 2012 and YTD 2011. Servicing fees from U.S. Acquisition Partnerships are generally based on a percentage of the collections received from Portfolio Assets held by these unconsolidated partnerships; whereas servicing fees from Latin American Acquisition Partnerships are generally based on the cost of servicing plus a profit margin. The increase in servicing fees from U.S. Acquisition Partnerships was due primarily to the impact of an increase in collections from unconsolidated U.S. partnerships to $129.1 million for YTD 2012 from $57.8 million for YTD 2011, which resulted in a $2.3 million increase in service fee income. In addition, FirstCity recognized $1.9 million of additional compensation in the form of incentive fee income in YTD 2012 (compared to $-0- in Q1 2011) resulting from the achievement of an investor return threshold from a U.S. Acquisition Partnership.
Since mid-2010, a majority of the Company’s U.S. Portfolio Asset investments have been acquired through equity-method investments in unconsolidated Acquisition Partnerships under the Värde investment agreement instead of consolidated Portfolio Assets. As such, the Company expects service fee income from its unconsolidated U.S. Acquisition Partnerships to gradually increase over time. Refer to the heading “Equity income from unconsolidated subsidiaries” below for information on our unconsolidated U.S. Acquisition Partnership activities.
Income from Portfolio Assets. Income from Portfolio Assets, comprised primarily of liquidation income and gains and accretion income from Portfolio Assets, decreased to $14.4 million in YTD 2012 compared to $21.9 million in YTD 2011.
Collections from our consolidated Portfolio Assets decreased to $49.5 million in YTD 2012 from $74.5 million in YTD 2011, which contributed to a $4.8 million decrease in liquidation income and gains in these comparative periods. Liquidation income and gains from our consolidated U.S. Portfolio Assets improved by $2.5 million in YTD 2012 compared to YTD 2011, while collections from our consolidated U.S. Portfolio Assets decreased to $47.9 million in YTD 2012 from $48.5 million in YTD 2011. The Company was able to recognize higher margins on its sales of U.S. Portfolio Asset loans in YTD 2012 ($6.9 million of loan sales gains based on $25.6 million of sales collection proceeds) compared to YTD 2011 ($5.4 million of loan sales gains based on $23.4 million of sales collection proceeds). Liquidation income and gains from our consolidated European Portfolio Assets decreased by $6.2 million in YTD 2012 compared to YTD 2011, due primarily to a significant decline in our consolidated European Portfolio Asset holdings since YTD 2011 (see discussion below) that resulted in a corresponding decrease in collections from these Portfolio Assets to $1.1 million in YTD 2012 from $24.0 million in YTD 2011. Liquidation income and gains from our consolidated Latin American Portfolio Assets decreased by $1.1 million in YTD 2012 compared to YTD 2011 due primarily to a decrease in collections from these Portfolio Assets in YTD 2012 ($0.5 million) compared to YTD 2011 ($1.9 million).
Accretion income from our income-accruing Portfolio Assets decreased by $2.1 million in YTD 2012 compared to YTD 2011, due primarily to a shift in the income recognition method of accounting applied to our existing Portfolio Assets from an interest-accrual income method to a non-accrual income method (cost-recovery or cash basis) over the past year. Our average holdings in income-accruing Portfolio Assets decreased to $6.5 million for YTD 2012 from $18.3 million for YTD 2011. We apply the interest-accrual income method to Portfolio Assets, as applicable, only when management has the ability to reasonably estimate both the timing and amount of collections. Refer to Note 1 of the consolidated financial statements for a summary of our income-recognition accounting policies related to Portfolio Assets, and Note 4 of the consolidated financial statements for a summary of income from Portfolio Assets.
FirstCity’s average investment holdings in consolidated Portfolio Assets for YTD 2012 approximated $101.0 million (U.S. - $96.4 million; Europe - $4.6 million; and Latin America - $5.0 million reported as “Assets held for sale” on our consolidated balance sheet during the period), compared to average Portfolio Asset investment holdings for YTD 2011 of approximately $180.3 million (U.S. - $157.7 million; Europe - $12.5 million; and Latin America - $10.1 million). The decline in our consolidated U.S. Portfolio Asset holdings in YTD 2012 was due to the majority of our U.S. Portfolio Asset investments since mid-2010 being acquired through equity-method investments in unconsolidated U.S. Acquisition Partnerships under the Värde investment agreement. The decline in our consolidated European Portfolio Asset holdings in YTD 2012 was due primarily to the sale of Portfolio Assets held by our consolidated German Acquisition Partnerships in February 2011, and the sale of our controlling interests in French Acquisition Partnerships in November 2011. The decline in our consolidated Latin American Portfolio Asset holdings in YTD 2012 was due primarily to diminishing collections from the underlying Portfolio Assets (without new investment acquisitions), combined with a $3.1 million write-down on our net investment in a majority-owned Mexican portfolio entity in the fourth quarter of 2011. At June 30, 2012, our consolidated Latin American Portfolio Assets were reported as a disposal group and classified as held for sale (refer to Note 3 of the consolidated financial statements for additional information).
In light of FirstCity’s increased holdings in U.S. Portfolio Assets acquired through equity-method investments in unconsolidated Acquisition Partnerships instead of consolidated Portfolio Assets since mid-2010, the Company expects equity income from U.S. Acquisition Partnerships (and service fee income) to gradually increase over time in comparison to income from consolidated Portfolio Assets. Refer to the heading “Equity income from unconsolidated subsidiaries” below for information on our unconsolidated U.S. Acquisition Partnership activities.
Gain on sale of SBA loans held for sale, net. The Company recorded $0.9 million of gains on the sales of SBA loans with an $11.0 million net basis in YTD 2012, compared to $1.5 million of gains recorded on loans sold with a $17.9 million net basis in YTD 2011. Gains on SBA loan sales reflect the Company’s participation in the SBA guaranteed loan program. Under the SBA 7(a) program, the SBA guarantees up to 90 percent of the principal on a qualifying loan. The Company generally sells the guaranteed portions of originated loans into the secondary market and retains the unguaranteed portion for investment.
The amount of SBA loan sales gains recognized by the Company in YTD 2012 was lower in comparison to YTD 2011, due partly to the Company’s recognition of $0.4 million of deferred gains in YTD 2011 that related to prior period loan sales. In 2010, the Company adopted accounting guidance that required SBA loan transactions subject to the SBA’s premium recourse provision to be accounted for initially as secured borrowings rather than asset sales. Under this accounting guidance, loan sales transacted by the Company and the resulting net gain on the sale were recognized after the premium recourse provisions lapsed (generally 90 days). However, effective January 31, 2011, the SBA removed the recourse provisions contained in its loan sales agreements for the guaranteed portions of SBA loans. As a result, SBA loan sales transacted by the Company under these revised agreements subsequent to January 31, 2011 were accounted for initially as a sale (instead of a secured borrowing), with the corresponding gain recognized at the time of sale. As such, YTD 2011 included the Company’s recognition of gains on nine months of SBA loan sales, which included loans that were sold from October 2010 through January 2011 (as the 90-day premium recourse provisions had lapsed in YTD 2011), and for the last five months of YTD 2011 (as these sales did not include premium recourse provisions). YTD 2012 included the Company’s recognition of gains on six months of SBA loan sales.
Interest income from SBA loans. Interest income from SBA loans remained constant at $0.7 million for both YTD 2012 and YTD 2011. FirstCity’s average investment level in SBA loans held-for-investment approximated $19.7 million for YTD 2012 compared to $16.0 million for YTD 2011.
Interest income from loans receivable — affiliates. Interest income from loans receivable — affiliates was $0.8 million for YTD 2011. FirstCity’s average investment in loans receivable — affiliates in its PAA&R segment approximated $8.6 million for YTD 2011. The Company did not recognize interest income from loans receivable — affiliates in YTD 2012, since the Company’s only remaining affiliated loan was classified as “held for sale” on the Company’s consolidated balance sheet and carried at the lower of carrying amount or estimated fair value during the period (see Note 3 of the consolidated financial statements).
Interest income from loans receivable — other. The Company did not recognize interest income from loans receivable — other in YTD 2012 or YTD 2011 because management accounted for these loans under the non-accrual method of accounting during both periods. FirstCity’s average investment in loans receivable — other in its PAA&R segment was $2.8 million in YTD 2012 compared to $3.8 million in YTD 2011.
Other income. Other income for YTD 2012 increased by $0.7 million in comparison to YTD 2011 due primarily to $0.5 million of additional due diligence and credit administration fee income recognized in YTD 2012 compared to YTD 2011 as a result of increased Portfolio Asset investment activity under the Company’s investment agreement with Värde in the periods compared.
Costs and expenses. Operating costs and expenses approximated $18.6 million in YTD 2012 compared to $21.6 million in YTD 2011. The following is a discussion of the major components of the Company’s operating costs and expenses in its PAA&R business segment:
Interest expense and fees on notes payable and other debt obligations decreased to $2.9 million in YTD 2012 from $7.5 million in YTD 2011, due to YTD 2012 being the Company’s first full six months under the terms of the Bank of Scotland loan facilities that were refinanced in December 2011 (see Note 8 of the consolidated financial statements). The Company recorded $1.3 million of interest, loan fee and discount amortization expense on its Bank of Scotland loan facilities in YTD 2012 (based on average debt holdings of $78.5 million) compared to $5.8 million of interest and fee expense in YTD 2011 (based on average debt holdings of $211.6 million). Excluding the Company’s debt obligations with Bank of Scotland, the average non-affiliated debt outstanding in its PAA&R segment was $74.6 million in YTD 2012 (with a 3.5% average cost of funds) compared to $39.6 million in Q2 2011 (with a 4.0% average cost of funds).
Salaries and benefits expense in our PAA&R segment increased to $8.4 million in YTD 2012 from $8.0 million in YTD 2011, due primarily to additional compensation recognized in YTD 2012 compared to YTD 2011 under the Company’s executive management compensation plans. The total number of personnel within the PAA&R segment was 217 and 207 at June 30, 2012 and 2011, respectively.
Net provisions for loan and impairment losses on our consolidated Portfolio Assets and loans receivable in our PAA&R segment totaled $1.2 million in YTD 2012 compared to $0.8 million in YTD 2011. Net impairment provisions in YTD 2012 were attributed primarily to declines in values of loan collateral and real estate properties related to our U.S. Portfolio Assets investments. The net impairment provisions were identified in connection with management’s quarterly evaluation of the collectibility of the Company’s Portfolio Assets and loans receivable. The process for evaluating and measuring impairment is critical to our financial results, as it requires subjective and complex judgments due to the need to make estimates about the impact of matters that are uncertain. This process also requires estimates that are susceptible to significant revision as more information becomes available. It remains unclear what impact the continuance of challenging economic conditions and disruptions in the financial, capital and real estate markets will ultimately have on our financial results. These conditions could adversely impact our business if commercial real estate properties experience a significant and prolonged decline in value, or if borrowers cannot refinance their loans and/or continue to make payments (which in turn could lead to rising loan defaults and foreclosures on loan collateral). Therefore, we cannot provide assurance that, in any particular future period, we will not incur additional impairment provisions.
Asset-level expenses, which generally represent costs incurred by FirstCity to manage consolidated Portfolio Assets, support foreclosed properties, and protect its security interests in loan collateral, decreased to $1.8 million in YTD 2012 from $2.8 million in YTD 2011. The decline in asset-level expenses was attributed primarily to a decline in the Company’s average holdings in consolidated Portfolio Assets in its PAA&R segment to $101.0 million for YTD 2012 from $180.3 million for YTD 2011 (a majority of FirstCity’s Portfolio Asset investments have been acquired through unconsolidated Acquisition Partnerships since mid-2010).
Other costs and expenses in the Company’s PAA&R segment increased by $1.8 million in YTD 2012 compared to YTD 2011, due primarily to the recognition of $0.1 million of foreign currency exchange losses attributed to our consolidated foreign operations in YTD 2012 compared to $1.5 million of foreign currency exchange gains recognized in YTD 2011 — a $1.6 million unfavorable swing ($1.2 million of the decrease in gains was attributed to consolidated European operations and $0.4 million of the decrease related to our consolidated Latin American operations). This unfavorable swing in foreign currency exchange gains was attributed to the U.S. dollar appreciating in value relative to the Euro and Mexican peso in YTD 2012, compared to the U.S. dollar depreciating in value relative to these currencies in YTD 2011. Due to the constantly changing currency exposures impacting our foreign operations and the volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon future operating results, which may fluctuate significantly due to our exposure to exchange rate changes. Further contributing to the increase in other costs and expenses was a $0.5 million increase in asset valuation costs in YTD 2012 compared to YTD 2011 (due primarily from increased Portfolio Asset investment activity).
Equity income from unconsolidated subsidiaries. Equity income from unconsolidated subsidiaries (Acquisition Partnership and servicing entities) from our PAA&R segment increased by $2.9 million in YTD 2012 compared to YTD 2011. Equity income from our unconsolidated Acquisition Partnerships improved to $3.2 million in YTD 2012 from $0.6 million in YTD 2011, and equity income from our unconsolidated servicing entities increased to $3.1 million in YTD 2012 from $2.8 million in YTD 2011. Our share of equity income and losses from these equity-method investees will vary period-to-period depending on the profitability of the underlying entities and the composition of FirstCity’s ownership mix in the respective entities that report earnings or losses in a period. The following is a discussion of equity income from FirstCity’s Acquisition Partnerships (by geographic region) and servicing entities. Refer to Note 6 of the consolidated financial statements for a summary of revenues, earnings and equity income (loss) of FirstCity’s equity-method investments by region.
· United States — Total combined revenues reported by our U.S. Acquisition Partnerships (FirstCity share 10%-50%) increased to $37.7 million in YTD 2012 compared to $16.4 million in YTD 2011. In addition, total combined net earnings reported by our U.S. partnerships increased to $20.9 million in YTD 2012 compared to $5.9 million in YTD 2011. The increase in total revenues and net earnings in YTD 2012 compared to YTD 2011 was attributable primarily to an increase in Portfolio Asset collections to $129.1 million in YTD 2012 from $57.8 million in YTD 2011, off-set partially by increases of $2.5 million in asset-level expenses and $4.2 million in service fee expense in YTD 2012 compared to YTD 2011 (due to an increase in Portfolio Asset holdings and investment activities reported by these partnerships). The collective activity described above translated to an increase in FirstCity’s share of U.S. partnership net earnings (i.e. equity income) to $3.3 million in YTD 2012 from $0.8 million in YTD 2011.
FirstCity’s average investment in U.S. Acquisition Partnerships increased to $55.8 million for YTD 2012 from $39.3 million for YTD 2011, due primarily to increased investment activity in newly-formed U.S. Acquisition Partnerships under FirstCity’s
investment agreement with Värde. In light of FirstCity’s increased holdings in U.S. Portfolio Assets acquired through equity-method investments in unconsolidated Acquisition Partnerships instead of consolidated Portfolio Assets, the Company expects equity income from U.S. Acquisition Partnerships (and service fee income) to gradually increase over time in comparison to income from consolidated Portfolio Assets.
· Latin America — Total combined revenues reported by our Latin American Acquisition Partnerships (FirstCity’s share 8%-50%) decreased to $7.6 million in YTD 2012 compared to $8.7 million in YTD 2011. The decrease in revenues reported by these partnerships was attributable primarily to a decline in Portfolio Asset collections to $11.0 million in YTD 2012 compared to $13.3 million in YTD 2011. In addition, our Latin American partnerships reported combined net losses of $1.1 million in YTD 2012 compared to $6.2 million of combined net earnings in YTD 2011. The decrease in net earnings reported by these partnerships in YTD 2012 compared to YTD 2011 was attributable primarily to $9.6 million of additional foreign currency exchange losses recorded in YTD 2012 compared to YTD 2011, off-set partially by decreases of $1.5 million in impairment provisions and $1.1 million of tax expense reported by these partnerships in YTD 2012 compared to YTD 2011. The increase in foreign currency exchange losses recorded in YTD 2012 stemmed from the translation impact to the U.S. dollar-denominated debt held by certain Latin American partnerships (due to the depreciation in value of the Mexican peso relative to the U.S. dollar in YTD 2012, compared to the appreciation in value of the Mexican peso relative to the U.S. dollar in YTD 2011). The collective activity described above translated to a decrease in FirstCity’s share of Latin American partnership net losses (i.e. equity losses) to $0.1 million in YTD 2012 from $0.3 million in YTD 2011. Although YTD 2011 total net earnings reported by our Latin American Acquisition Partnerships was $6.2 million, FirstCity’s share of Latin American partnership net earnings for YTD 2011 was $0.3 million in losses. This variation was attributed to the composition of FirstCity’s ownership and income allocation mix in the Latin American Acquisition Partnerships that reported net earnings and losses in YTD 2011.
The Company’s equity losses from its Latin America partnerships in YTD 2012 included $0.1 million of foreign currency transaction gains, whereas its equity losses from these partnerships in YTD 2011 included $0.3 million of foreign currency transaction gains — a $0.2 million unfavorable decline. Our financial position and results of operations may fluctuate significantly due to the impact of currency exchange rate fluctuations on our Latin American Acquisition Partnerships. Due to the constantly changing currency exposures impacting these partnerships and the volatility of currency exchange rates, we cannot provide assurance that, in any particular period, we will not incur foreign currency transaction losses.
FirstCity’s average investment in Latin American Acquisition Partnerships was $4.4 million for YTD 2012 compared to $14.6 million for YTD 2011. The decline in our average investment in these partnerships since June 2011 was due primarily to the Company’s recognition of a $7.4 million impairment charge on certain Latin American (Mexico) Acquisition Partnerships in the fourth quarter of 2011.
· Europe — The Company did not carry any equity-method investments in European Acquisition Partnerships during YTD 2012, and its holdings and activity related to European Acquisition Partnerships were minimal in YTD 2011.
· Servicing Entities — Total combined revenues (mainly service fee income and investment income) reported by our foreign unconsolidated servicing entities (FirstCity’s share 37%-50%) increased to $34.5 million in YTD 2012 from $30.0 million in YTD 2011, and total combined net earnings available to common stockholders reported by these entities improved to $6.4 million in YTD 2012 from $5.3 million in YTD 2011. The increase in total net earnings reported by the underlying servicing entities was attributed primarily to additional service fee income (due to increased collections) and investment income (due to increased investment holdings) reported by these entities in YTD 2012 compared to YTD 2011; off-set partially by a $2.1 million increase in tax expense reported by these entities in YTD 2012 compared to YTD 2011, and $1.9 million of preferred stock dividends reported by a European servicing entity in YTD 2012. The collective activity described above translated to an increase in FirstCity’s share of net earnings (i.e. equity income) from its foreign servicing entities to $3.1 million in YTD 2012 from $2.8 million in YTD 2011.
Gain on business combinations. In YTD 2011, the Company recognized a $0.3 million business combination gain attributable to a step-acquisition transaction in which the Company acquired a controlling interest in a European Acquisition Partnership from a foreign equity-method investee. The Company owned a noncontrolling equity interest in this entity prior to the transaction. Under business combination accounting guidance, the Company’s previously-held noncontrolling interest in the entity was re-measured to fair value on the acquisition date — which resulted in the Company’s recognition of the gain. The Company’s PAA&R segment did not consummate any business combination transactions in YTD 2012. Refer to Note 3 of the consolidated financial statements for additional information.
Income tax expense. Our PAA&R segment reported an income tax provision of $0.7 million in YTD 2012 (comprised primarily of foreign income tax provisions) compared to an income tax provision of $1.8 million in YTD 2011 (comprised primarily of foreign income tax provisions). Refer to Note 11 of the consolidated financial statements for additional information.
Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portions of net earnings in our consolidated, less-than-wholly-owned Acquisition Partnerships (FirstCity’s ownership in these consolidated partnerships ranges from 50%-90%) that are attributable to the noncontrolling equity interests held by co-investors. The amount of net
income attributable to noncontrolling interests in these consolidated Acquisition Partnerships decreased to $2.1 million for YTD 2012 from $5.8 million for YTD 2011. This decrease was attributed primarily to a decline in net earnings from these consolidated Acquisition Partnerships in YTD 2012 compared to YTD 2011 (i.e. a decrease in the amount of net earnings reported by these majority-owned entities translates to a decrease in the amount of net earnings apportioned to the noncontrolling investors), as a majority of these consolidated Acquisition Partnerships have not purchased any additional Portfolio Asset investments over the past 12-24 months. Also, YTD 2011 included $3.6 million of net income attributable to noncontrolling interests in our French Acquisition Partnerships compared to $-0- in YTD 2012, as we sold our controlling interests in the entities in November 2011.
Special Situations Platform Business Segment
Our Special Situations Platform business segment (“FirstCity Denver”) reported net earnings of $1.0 million in YTD 2012 compared to $2.1 million in YTD 2011. In YTD 2012, FirstCity Denver invested $1.0 million in the form of debt investments, compared to $0.7 million of investments in the form of loan and direct equity investments in YTD 2011. Since its inception in April 2007, FirstCity Denver has been involved in U.S. middle-market transactions with total investment values of $89.2 million, and has provided $61.4 million of investment capital and other financings in connection with these investments.
The following is summary of the results of operations for the Company’s Special Situations Platform business segment for YTD 2012 and YTD 2011:
|
| Six Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Special Situations Platform: |
|
|
|
|
| ||
Revenues: |
|
|
|
|
| ||
Interest income from loans receivable |
| $ | 762 |
| $ | 1,020 |
|
Revenue from railroad operations |
| 3,636 |
| 2,860 |
| ||
Other income |
| 462 |
| 639 |
| ||
Total revenues |
| 4,860 |
| 4,519 |
| ||
Costs and expenses - railroad operations: |
|
|
|
|
| ||
Interest and fees on notes payable |
| 108 |
| 87 |
| ||
Salaries and benefits |
| 1,002 |
| 685 |
| ||
Other |
| 1,589 |
| 995 |
| ||
Total railroad costs and expenses |
| 2,699 |
| 1,767 |
| ||
Costs and expenses - other: |
|
|
|
|
| ||
Interest and fees on notes payable |
| 162 |
| 264 |
| ||
Salaries and benefits |
| 408 |
| 408 |
| ||
Other costs and expenses |
| 1,160 |
| 1,191 |
| ||
Total other expenses |
| 1,730 |
| 1,863 |
| ||
Total expenses |
| 4,429 |
| 3,630 |
| ||
Equity income from unconsolidated subsidiaries |
| 226 |
| 1,774 |
| ||
Gain on business combination |
| 935 |
| — |
| ||
Income tax expense |
| (29 | ) | (33 | ) | ||
Net income attributable to noncontrolling interests |
| (536 | ) | (537 | ) | ||
Net earnings |
| $ | 1,027 |
| $ | 2,093 |
|
Interest income from loans receivable. Interest income from loans receivable decreased to $0.8 million in YTD 2012 from $1.0 million in YTD 2011. FirstCity Denver’s average investment in loans receivable was $14.3 million for YTD 2012 — including $5.5 million accounted for under the non-accrual method of accounting. For YTD 2011, FirstCity Denver’s average investment in loans receivable was $16.3 million — including $6.2 million accounted for under the non-accrual method of accounting.
Revenue, costs and expenses from railroad operations. Revenue, costs and expenses from railroad operations represent the results of operations recorded by FirstCity Denver’s majority-owned railroad companies (engaged primarily in interchanging rail cars with connecting carriers, providing rail freight services for on-line customers, operating a transload facility, and operating a rail-served debris transfer station). Revenue from railroad operations increased to $3.6 million in YTD 2012 from $2.9 million in YTD 2011.
Total costs and expenses attributable to the railroad operations approximated $2.7 million in YTD 2012 compared to $1.8 million in YTD 2011. The additional revenue, costs and expenses recorded by our majority-owned railroad operations were due primarily to activities from its railroad and transload facility operations that FirstCity Denver acquired in August 2011, as well as from its rail-served debris transfer station acquired in June 2012 (refer to Note 3 of the consolidated financial statements).
Other income. Other income, which relates primarily to income generated by FirstCity Denver’s consolidated commercial real estate property and other ancillary activities, decreased by $0.2 million in YTD 2012 compared to YTD 2011. In March 2012, FirstCity Denver removed the commercial real estate property from its balance sheet after the property was acquired by the creditor holding the mortgage secured by this property (refer to Note 4 of the consolidated financial statements).
Costs and expenses — other. Other costs and expenses decreased by $0.1 million in YTD 2012 compared to YTD 2011.
Equity income from unconsolidated subsidiaries. FirstCity Denver recorded $0.2 million of equity income from unconsolidated subsidiaries in YTD 2012 compared to $1.8 million in YTD 2011. This decrease was due primarily to a $1.4 million decline in equity income recorded by FirstCity Denver in YTD 2012 compared to YTD 2011 from its equity-method investment in a manufacturing concern involved in the prefabricated building industry, due to a higher mix of customer orders being executed through leasing arrangements (i.e. revenue recognized over the lease term) as opposed to sales arrangements (i.e. revenue recognized upon delivery) in YTD 2012 compared to YTD 2011.
Gain on business combination. In YTD 2012, FirstCity Denver acquired certain assets from a company that operated a rail-served debris transfer station, as partial payment of the company’s debt obligation to FirstCity Denver. The acquisition of the operating assets by FirstCity Denver was accounted for as a business combination, and accordingly, all of the assets acquired and liabilities assumed were measured at fair value on the acquisition date and included in the Company’s consolidated balance sheet. The estimated fair value of the net assets acquired exceeded the $2.5 million purchase price by approximately $0.9 million, which FirstCity Denver recognized as “Gain on business combination” in its consolidated statement of earnings in YTD 2012. Refer to Note 3 of the consolidated financial statements for additional information.
Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portions of net earnings related to FirstCity Denver (a FirstCity 80%-owned subsidiary) and its consolidated, less-than-wholly-owned subsidiaries (FirstCity Denver’s ownership in these consolidated entities ranges from 80%-90%) that are attributable to the noncontrolling equity interests held by co-investors. The amount of net income attributable to noncontrolling interests under our Special Situations platform remained constant in YTD 2012 compared to YTD 2011.
Corporate and Other
Costs and expenses not allocable to our PAA&R and Special Situations business segments consist primarily of certain corporate salaries and benefits, accounting fees and legal expenses. These costs and expenses increased to $5.1 million in YTD 2012 compared to $3.5 million in YTD 2011, due primarily to a $0.9 million increase in accounting, legal and other profession expenses and a $0.4 million increase in salary and benefit costs in the periods compared.
Financial Condition
Significant changes in FirstCity’s financial condition during YTD 2012 resulted from the following:
FirstCity’s consolidated assets of $303.4 million at June 30, 2012 were $53.0 million lower than its consolidated assets at December 31, 2011. The decrease in consolidated assets was attributed primarily to $34.4 million of net decreases in the Company’s consolidated Portfolio Assets in YTD 2012 attributable primarily to net principal collections out-pacing consolidated Portfolio Asset purchases, combined with a $6.9 million non-cash reduction upon the transfer of a Portfolio Asset real estate property to the creditor that financed the Company’s previous acquisition in this property (see Note 4 of the consolidated financial statements for additional information). Also contributing to the net decrease in the Company’s consolidated assets was a $6.4 million net reduction to our loans receivable (see Note 5 of the consolidated financial statements for additional information) and a $5.5 million net reduction to our investments in unconsolidated subsidiaries (see Notes 3 and 6 of the consolidated financial statements for additional information).
FirstCity’s consolidated liabilities of $167.4 million as of June 30, 2012 were $51.6 million lower than its consolidated liabilities at December 31, 2011. The decrease in consolidated liabilities was attributed primarily to a $42.7 million net decrease in notes payable in YTD 2012 primarily from net principal repayments on notes payable to banks, combined with a $7.4 million non-cash reduction
upon the Company’s de-recognition of a note payable that financed the transferred Portfolio Asset real estate property described above (see Note 8 of the consolidated financial statements for additional information).
Portfolio Asset Acquisitions — Portfolio Asset Acquisition and Resolution Business Segment
Revenues with respect to the Company’s PAA&R business segment consist primarily of (1) income and gains from our Portfolio Assets and loan investments (including SBA lending activities); (2) equity income from our Acquisition Partnerships; and (3) servicing fee income and incentive fee income from Acquisition Partnerships based on the performance of our servicing activities on the assets held by these unconsolidated partnerships. Generally speaking, income recognized from our investments in consolidated Portfolio Assets is reported as “Income from Portfolio Assets” on our consolidated statements of earnings, whereas income from our investments in unconsolidated subsidiaries that acquire Portfolio Assets is reported as “Equity income from unconsolidated subsidiaries.” Furthermore, since we operate as the servicer for the vast majority of our U.S. and Latin American unconsolidated Portfolio Assets, we also recognize fee income related to the performance of our servicing responsibilities. This fee income is reported as “Servicing fees” on our consolidated statements of earnings. We also generate service fee income from our U.S. and Latin American consolidated Portfolio Assets that we service; however, this income is eliminated in consolidation and, as such, is not included on our consolidated statements of earnings.
The following table includes information related to Portfolio Assets acquired by the Company in YTD 2012 and YTD 2011.
|
| Six Months Ended |
| ||||||||||
|
| June 30, 2012 |
| ||||||||||
|
| Wholly-Owned |
| Majority-Owned |
|
|
|
|
| ||||
|
| Consolidated |
| Consolidated |
| Unconsolidated |
| Total |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Face Value |
| $ | 7,586 |
| $ | — |
| $ | 291,170 |
| $ | 298,756 |
|
Total purchase price |
| $ | 1,696 |
| $ | — |
| $ | 137,877 |
| $ | 139,573 |
|
Total equity invested by all investors |
| $ | 1,721 |
| $ | — |
| $ | 138,952 |
| $ | 140,673 |
|
Total equity invested by FirstCity |
| $ | 1,721 |
| $ | — |
| $ | 18,090 |
| $ | 19,811 |
|
Total number of Portfolio Assets |
| 140 |
| — |
| 519 |
| 659 |
|
|
| Six Months Ended |
| ||||||||||
|
| June 30, 2011 |
| ||||||||||
|
| Wholly-Owned |
| Majority-Owned |
|
|
|
|
| ||||
|
| Consolidated |
| Consolidated |
| Unconsolidated |
| Total |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Face Value |
| $ | 3,321 |
| $ | 4,137 |
| $ | 173,155 |
| $ | 180,613 |
|
Total purchase price |
| $ | 1,892 |
| $ | 3,104 |
| $ | 87,748 |
| $ | 92,744 |
|
Total equity invested by all investors |
| $ | 1,912 |
| $ | 3,104 |
| $ | 89,053 |
| $ | 94,069 |
|
Total equity invested by FirstCity |
| $ | 1,912 |
| $ | 2,794 |
| $ | 22,263 |
| $ | 26,969 |
|
Total number of Portfolio Assets |
| 5 |
| 5 |
| 269 |
| 279 |
|
The table below provides a summary of our Portfolio Assets as of June 30, 2012 and December 31, 2011. Our Purchased Credit-Impaired Loans are categorized based on the common risk characteristics that management generally uses for pooling purposes (when management elects to pool purchased loans).
|
| June 30, |
| December 31, |
| ||
|
| 2012 |
| 2011 |
| ||
|
| (Dollars in thousands) |
| ||||
Loan Portfolios: |
|
|
|
|
| ||
Purchased Credit-Impaired Loans |
|
|
|
|
| ||
Domestic: |
|
|
|
|
| ||
Commercial real estate |
| $ | 47,211 |
| $ | 73,154 |
|
Business assets |
| 9,229 |
| 10,742 |
| ||
Other |
| 3,253 |
| 3,754 |
| ||
Latin America - commercial real estate |
| — |
| 50 |
| ||
Europe - commercial real estate |
| 3,820 |
| 4,267 |
| ||
Other |
| 5,457 |
| 5,904 |
| ||
Outstanding balance |
| 68,970 |
| 97,871 |
| ||
Allowance for loan losses |
| (617 | ) | (781 | ) | ||
Total Loan Portfolios, net |
| 68,353 |
| 97,090 |
| ||
|
|
|
|
|
| ||
Real estate held for sale, net |
| 14,320 |
| 26,856 |
| ||
|
|
|
|
|
| ||
Total Portfolio Assets, net |
| $ | 82,673 |
| $ | 123,946 |
|
The following table provides a summary of the changes in the allowance for loan losses related to our loan Portfolio Assets:
|
| Purchased Credit-Impaired Loans |
| Other |
|
|
| |||||||||
|
| Domestic |
|
|
|
|
| |||||||||
|
| Commercial |
| Business |
|
|
|
|
|
|
| |||||
(dollars in thousands) |
| Real Estate |
| Assets |
| Other |
| Other |
| Total |
| |||||
Beginning balance, January 1, 2012 |
| $ | 553 |
| $ | 185 |
| $ | 38 |
| $ | 5 |
| $ | 781 |
|
Provisions |
| 405 |
| 97 |
| 5 |
| 25 |
| 532 |
| |||||
Recoveries |
| — |
| (44 | ) | — |
| — |
| (44 | ) | |||||
Charge offs |
| (543 | ) | (68 | ) | (31 | ) | (10 | ) | (652 | ) | |||||
Ending balance, June 30, 2012 |
| $ | 415 |
| $ | 170 |
| $ | 12 |
| $ | 20 |
| $ | 617 |
|
Due to uncertainties related primarily to estimating the timing and/or amount of collections on Purchased Credit-Impaired Loans as a result of the current economic environment, the Company accounts for certain of these loans and loan pools on a non-accrual income-recognition method of accounting (cost-recovery or cash basis). Under U.S. GAAP, the interest method (i.e. accrual method) of accounting is not appropriate for Purchased Credit-Impaired Loans if management does not have the ability to develop a reasonable expectation of both the timing and amount of future cash flows to be collected. Refer to Note 1 of the consolidated financial statements for additional information and accounting policies related to our Purchased Credit-Impaired Loans. The following tables provide a summary of the Company’s loan Portfolio Assets, including Purchased Credit-Impaired Loans, by income-recognition method as of June 30, 2012 and December 31, 2011 (dollars in thousands):
|
| June 30, 2012 |
| ||||||||||||||||
|
| Income-Accruing Loans |
| Non-Accrual Loans |
|
|
| ||||||||||||
|
| Purchased |
|
|
| Purchased Credit- |
|
|
|
|
| ||||||||
|
| Credit- |
|
|
| Impaired Loans |
| Other |
|
|
| ||||||||
|
| Impaired |
|
|
|
|
| Cost recovery |
|
|
|
|
| ||||||
|
| Loans |
| Other |
| Cash basis |
| basis |
| Cash basis |
| Total |
| ||||||
United States |
| $ | — |
| $ | 4,914 |
| $ | 34,208 |
| $ | 24,888 |
| $ | 522 |
| $ | 64,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Germany |
| — |
| — |
| 3,306 |
| 515 |
| — |
| 3,821 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mexico (1) |
| — |
| — |
| — |
| 4,863 |
| — |
| 4,863 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | — |
| $ | 4,914 |
| $ | 37,514 |
| $ | 30,266 |
| $ | 522 |
| $ | 73,216 |
|
|
| December 31, 2011 |
| ||||||||||||||||
|
| Income-Accruing Loans |
| Non-Accrual Loans |
|
|
| ||||||||||||
|
| Purchased |
|
|
| Purchased Credit- |
|
|
|
|
| ||||||||
|
| Credit- |
|
|
| Impaired Loans |
| Other |
|
|
| ||||||||
|
| Impaired |
|
|
|
|
| Cost recovery |
|
|
|
|
| ||||||
|
| Loans |
| Other |
| Cash basis |
| basis |
| Cash basis |
| Total |
| ||||||
United States |
| $ | 9,429 |
| $ | 4,749 |
| $ | 50,133 |
| $ | 27,313 |
| $ | 1,149 |
| $ | 92,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Germany |
| — |
| — |
| 3,700 |
| 567 |
| — |
| 4,267 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mexico (1) |
| — |
| — |
| — |
| 4,851 |
| — |
| 4,851 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | 9,429 |
| $ | 4,749 |
| $ | 53,833 |
| $ | 32,731 |
| $ | 1,149 |
| $ | 101,891 |
|
(1) Classified and reported as “Assets held for sale” on FirstCity’s consolidated balance sheets. In July 2012, the Company sold certain Mexican subsidiaries that had holdings in these held-for-sale loan Portfolio Assets. See Note 3 of the consolidated financial statements for additional information.
Lower Middle-Market Company Capital Investments — Special Situations Platform Business Segment
Revenues with respect to the Company’s Special Situations Platform business segment consist primarily of (i) interest and fee income from loan investments; (ii) revenues from majority-owned operating entities; and (iii) equity income from unconsolidated investments accounted for under the equity method of accounting.
Investments by FirstCity Denver since its inception in April 2007 are summarized below:
|
| Total |
| FirstCity Denver’s Investment |
| ||||||||
(Dollars in thousands) |
| Investment |
| Debt |
| Equity |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
First six months of 2012 |
| $ | 1,000 |
| $ | 1,000 |
| $ | — |
| $ | 1,000 |
|
Total 2011 |
| 3,301 |
| 1,200 |
| 2,101 |
| 3,301 |
| ||||
Total 2010 |
| 13,739 |
| 8,825 |
| 4,395 |
| 13,220 |
| ||||
Total 2009 |
| 20,058 |
| 12,023 |
| 392 |
| 12,415 |
| ||||
Total 2008 |
| 28,750 |
| 16,650 |
| 3,256 |
| 19,906 |
| ||||
Total 2007 |
| 22,314 |
| 5,630 |
| 5,900 |
| 11,530 |
| ||||
Provision for Income Taxes
The Company has a substantial amount of U.S. deferred tax assets attributable primarily to net operating loss carryforwards (“NOLs”) and differences between the carrying amounts and tax bases of Acquisition Partnership investments for U.S. federal income tax purposes. The deferred tax assets attributable to the NOLs can be used to off-set the tax liability associated with the Company’s
pre-tax earnings until the earlier of their expiration or utilization. The Company recognizes deferred tax assets and liabilities in both the U.S. and non-U.S. jurisdictions based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates, if any, would be recognized in earnings in the period that includes the enactment date. We reduce the carrying amounts of deferred tax assets through a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically by the Company based on the more-likely-than-not realization threshold criterion. In this assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other factors, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, excess of appreciated asset value over the tax basis of net assets, impact of gains or charges from one-time events, the duration of statutory carryforward periods, the Company’s experience with utilizing available operating loss and tax credit carryforwards, and tax planning strategies. In making such assessments, significant weight is given to evidence that can be objectively verified. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws between our projected operating performance, our actual results and other factors. At June 30, 2012, the Company carried a full valuation allowance for its U.S. deferred tax assets due to the lack of sufficient objective evidence regarding the realization of these assets in the foreseeable future. We will continue to evaluate the deferred tax asset valuation allowance balances in all of our U.S. and foreign subsidiaries throughout 2012 to determine the appropriate level of valuation allowances.
Liquidity and Capital Resources
Overview
The Company requires liquidity to fund its operations, Portfolio Asset acquisitions, investments in and advances to Acquisition Partnerships, capital investments in privately-held lower middle-market companies, other debt and equity investments, repayments of bank borrowings and other debt, and working capital to support our growth. Historically, our primary sources of liquidity have been funds generated from operations (primarily loan and real estate collections and service fees), equity distributions from the Acquisition Partnerships and other subsidiaries, interest and principal payments on subordinated intercompany debt, dividends from the Company’s subsidiaries, borrowings from credit facilities with external lenders, and other special-purpose short-term borrowings. At June 30, 2012, the Company had $18.5 million of cash on its consolidated balance sheet that could only be used to settle the liabilities of certain consolidated variable interest entities (see Note 15 of the consolidated financial statements for additional information) and, as such, was not available for our general operations.
Our ability to fund operations and make new investments is dependent on (1) anticipated cash flows from our unencumbered Portfolio Assets and equity investments; (2) our current holdings of unencumbered cash; (3) residual cash flows from the pledged assets and equity investments after full repayment of our term loan facilities with Bank of Scotland and Bank of America (as discussed below); (4) cash leak-through provisions included in our term loan facilities with Bank of Scotland and Bank of America (as discussed below); and (5) our investment agreement with Värde (as discussed below). Many factors, including general economic conditions, are essential to our ability to generate cash flows. Fluctuations in our collections, investment income, credit availability, and adverse changes in other factors could have a negative impact on our ability to generate sufficient cash flows to support our business. Despite disruptions, uncertainty and volatility in the credit markets in recent years, we continue to have access to liquidity in both our PAA&R and Special Situations business segments through our unencumbered cash and Portfolio Assets, credit facility commitments with third-party lenders, and/or the investment agreement with Värde. While management believes that these cash flow sources will provide FirstCity with funding and liquidity to support its operations and investment activities over the next twelve months, FirstCity continues to actively seek additional sources of liquidity and alternative funding sources. We remain cognizant about the uncertainty and volatility in U.S. financial markets that currently present challenges for businesses in accessing liquidity and capital, and the resulting impact on our liquidity considerations and operations.
Bank of Scotland and Bank of America Loan Facilities
A substantial majority of FirstCity’s U.S. and international Portfolio Asset investments (and related equity investments) and Special Situations investments transacted prior to July 2010 were funded by senior-secured acquisition loan facilities that were provided by Bank of Scotland and its subsidiaries (including BoS (USA), Inc.) (collectively, “Bank of Scotland”). These loan facilities were combined and refinanced in June 2010 into a single $268.6 million term loan facility (“Reducing Note Facility”). The Reducing Note Facility capped FirstCity’s financing arrangements with Bank of Scotland, and as such, Bank of Scotland had no further
obligation to provide financing to fund FirstCity’s investment activities and operations after June 2010. In December 2011, FirstCity refinanced the Reducing Note Facility with Bank of Scotland. As a result, FirstCity’s debt obligation under the Reducing Note Facility was divided into two separate term loan facilities with Bank of Scotland, and the Company concurrently closed on a new $50.0 million term loan facility with Bank of America (net proceeds from this term loan were applied against the Reducing Note Facility at closing). The assets and related cash flows that had served as collateral under the Reducing Note Facility with Bank of Scotland, were allocated and respectively pledged as collateral among the Company’s new term loan facilities with Bank of Scotland and Bank of America (i.e. FirstCity did not pledge additional assets as security interests in these new loan facilities). Given the nature of the term loan facilities, Bank of Scotland and Bank of America have no obligation to provide FirstCity with financing to fund new Portfolio Assets investments under terms of their respective credit facilities that resulted from the December 2011 debt refinancing arrangement. However, FirstCity was able to significantly reduce its aggregate future cash outlay to Bank of Scotland and Bank of America under these new loan facilities in comparison to the repayment terms under the former Reducing Note Facility with Bank of Scotland — which, in turn, will provide more liquidity to fund future investment opportunities. Additional information regarding our debt refinancing arrangement with Bank of Scotland and the resulting two new term loan facilities with them, along with our new loan facility with Bank of America, is included under the heading “Credit Facilities” below.
FNBCT Loan Facility
FC Investment has a $15.0 million revolving loan facility with FNBCT for the purpose of financing the purchase of loans and other assets, to make investments in equity interests in or capital contributions to affiliates which are owned with other investors, and for working capital. At June 30, 2012, the unpaid principal balance under this revolving loan facility was $2.0 million. Additional information regarding this loan facility is included under the heading “Credit Facilities” below.
Investment Agreement with Värde
FirstCity and Värde are parties to an investment agreement, effective April 1, 2010, whereby Värde may invest, at its discretion, in distressed loan portfolios and similar investment opportunities alongside FirstCity, subject to the terms and conditions contained in the agreement. The primary terms of the investment agreement are as follows:
· FirstCity will act as the exclusive servicer for the investment portfolios;
· FirstCity will provide Värde with a “right of first refusal” with regard to distressed asset investment opportunities in excess of $3.0 million sourced by FirstCity;
· FirstCity, at its determination, will co-invest between 5%-25% in each investment;
· FirstCity will receive a $200,000 monthly retainer in exchange for its services and commitments;
· FirstCity will receive a base servicing fee (based on investment portfolio collections) and will be eligible to receive additional incentive-based servicing fees (depending on the performance of the portfolios acquired); and
· FirstCity will be eligible to receive incentive-based management fees (depending on the aggregate amount and performance of the portfolios acquired).
The investment agreement has a termination date of June 30, 2015, which is subject to consecutive automatic one-year extensions without any action by FirstCity and Värde. FC Servicing will be the servicer for all of the acquisition entities formed by FC Diversified and Värde (subject to removal by Värde on a pool-level basis under certain conditions). The parties may terminate the Investment Agreement prior to June 30, 2015 under certain conditions.
The cash flows from the assets and equity interests from the Company’s Portfolio Asset investments made in connection with the investment agreement with Värde, which are held by FC Investment Holdings and its subsidiaries, are not subject to the security interest requirements of the Bank of Scotland and Bank of America loan facilities described below.
Cash Flow Activity
Consolidated Cash Flows
The following table summarizes our consolidated cash flow activity for YTD 2012 and YTD 2011 (in thousands):
|
| Six Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2012 |
| 2011 |
| ||
Net cash used in operating activities |
| $ | (2,870 | ) | $ | (6,076 | ) |
Net cash provided by investing activities |
| 50,410 |
| 67,008 |
| ||
Net cash used in financing activities |
| (49,253 | ) | (76,345 | ) | ||
Effect of exchange rate changes on cash and cash equivalents |
| (50 | ) | 738 |
| ||
Net decrease in cash and cash equivalents |
| $ | (1,763 | ) | $ | (14,675 | ) |
Our operating activities used cash of $2.9 million in YTD 2012 and $6.1 million in YTD 2011. Net cash used by our operating activities in YTD 2012 was comprised primarily of $12.5 million of net earnings; a $4.2 million net increase from SBA lending and loan sales activity; $13.8 million of net non-cash reductions for Portfolio Asset income accretion and gains; a $6.5 million non-cash deduction for equity income from our unconsolidated subsidiaries; and $1.8 million of non-cash deductions attributed to gains recognized on SBA loan sales and a business combination. Net cash used by our operating activities in YTD 2011 was comprised primarily of $12.5 million of net earnings; an $8.6 million net increase from SBA lending and loan sales activity; $19.1 million of net non-cash reductions for Portfolio Asset income accretion and gains; $5.2 million of non-cash deductions for equity earnings from our unconsolidated subsidiaries (i.e. equity-method investments); and $1.8 million of non-cash deductions attributed to gains recognized on SBA loan sales and an equity investment sale. The remaining changes in all periods were due to net changes in other accounts related to our operating activities.
Our investing activities provided cash of $50.4 million in YTD 2012 and $67.0 million in YTD 2011. Net cash provided by investing activities in YTD 2012 was attributable primarily to $47.4 million of Portfolio Asset principal collections (net of purchases) and $23.6 million of distributions from our unconsolidated subsidiaries, off-set partially by $18.4 million of contributions to our unconsolidated subsidiaries (to fund Portfolio Asset investments acquired by our Acquisition Partnerships) and a $2.9 million decrease in cash upon the deconsolidation of a subsidiary. Net cash provided by investing activities in YTD 2011 was attributable primarily to $75.6 million of Portfolio Asset principal collections (net of purchases) and $20.0 million of distributions from our unconsolidated subsidiaries — off-set partially by $22.8 million of contributions to our unconsolidated subsidiaries (to fund Portfolio Asset investments acquired by our Acquisition Partnerships); $2.4 million of investment security purchases (net of principal pay-downs); $0.5 million paid for business combinations (net of cash acquired); and $1.1 million of net principal advances on loan investments. The remaining changes in all periods were due to net changes in other accounts related to our investing activities.
Our financing activities used cash of $49.3 million in YTD 2012 and $76.3 million in YTD 2011. In YTD 2012, net cash used by financing activities was attributable primarily to $43.6 million of net principal payments on notes payable (net of borrowings) and loan fee payments, and $5.7 million of cash distributions to noncontrolling interests. In YTD 2011, net cash used by financing activities was attributable primarily to $61.3 million of net principal payments on notes payable (net of borrowings) and loan fee payments; $10.7 million of cash distributions to noncontrolling interests; and a $4.3 million reduction in secured borrowings related to SBA loan sales activity. The remaining changes in the periods were due primarily to net changes in other accounts related to our financing activities.
Cash paid for interest on our credit facilities and other borrowings approximated $1.7 million and $5.9 million for YTD 2012 and YTD 2011, respectively. FirstCity’s average outstanding debt decreased to $163.1 million for YTD 2012 from $271.2 million for YTD 2011, while the average cost of borrowings decreased to 3.9% in YTD 2012 compared to 5.8% in YTD 2011. The decrease in the Company’s debt level since June 30, 2011 is primarily a result of principal payments on our Bank of Scotland loan facility, combined with the results from our refinancing this loan facility with Bank of Scotland in December 2011. The decrease in the Company’s average cost of borrowings was due primarily to the lower interest charged on our Bank of Scotland loan facility (as refinanced in December 2011) compared to the interest rate under the loan facility that we had with Bank of Scotland in 2011. Refer to the heading “Credit Facilities” below for more information on the Company’s loan facilities with Bank of Scotland.
Cash Flows from Consolidated Railroad Operations
The following is an analysis of the cash flows related to FirstCity’s majority-owned railroad operations for YTD 2012 and YTD 2011. The cash flow effects described below are included in the Company’s analysis of its consolidated cash flows for YTD 2012 and YTD 2011, as applicable, as discussed above. All significant intercompany balances and transactions have been eliminated in consolidation.
The operating activities of the railroad subsidiary provided cash of $1.0 million in YTD 2012 due primarily to net earnings of $1.8 million, net of a $0.9 million non-cash deduction for gain on a business combination. The railroad subsidiary’s investing activities used cash of $3.0 million in YTD 2012, primarily for the purchase of a rail-served debris transfer station. The railroad subsidiary’s financing activities provided cash of $2.0 million in YTD 2012 from net borrowings on bank notes payable.
The operating activities of the railroad subsidiary provided cash of $1.5 million for YTD 2011, attributable primarily to $1.1 million of net earnings. The railroad subsidiary’s investing activities used cash of $0.8 million for YTD 2011, attributable primarily to $0.9 million for property and equipment purchases. The railroad subsidiary’s financing activities provided cash of $0.4 million for YTD 2011, attributable to $0.5 million of net borrowings, off-set partially by $0.2 million of distributions to the noncontrolling equity owners and FirstCity (eliminated in consolidation).
Credit Facilities
Bank of Scotland Credit Facilities
In June 2010, FirstCity refinanced its then-existing acquisition loan facilities with Bank of Scotland and closed on a $268.6 million Reducing Note Facility Agreement (“Reducing Note Facility”) that provided for repayment to Bank of Scotland over time as cash flows from the underlying assets securing the term loan facility were realized. The Company’s outstanding indebtedness and letter of credit obligations under its then-existing loan facilities with Bank of Scotland were refinanced by the Reducing Note Facility. This term loan facility capped FirstCity’s financing arrangements with Bank of Scotland, and as such, Bank of Scotland had no further obligation to provide financing to fund FirstCity’s investment activities and operations after June 2010. The Reducing Note Facility was secured by substantially all of the assets of FirstCity’s subsidiaries that were subject to the obligations of the former loan facilities with Bank of Scotland. FC Investment Holdings and its subsidiaries, which hold investments made in connection with FirstCity’s investment agreement with Värde (discussed above), and various other investments that FirstCity originated subsequent to June 2010, were not subject to the security interest requirements of the Reducing Note Facility.
In December 2011, FirstCity entered into an agreement to amend and restate the Reducing Note Facility with Bank of Scotland, which had an unpaid principal balance of approximately $173.2 million at closing. As a result, FirstCity’s primary obligation under the Reducing Note Facility, as amended (defined as “BoS Facility A”), was reduced by the assumption of $25.0 million of debt (defined as “BoS Facility B”) by a newly-formed, wholly-owned subsidiary of FirstCity, combined with a $53.4 million reduction primarily from proceeds obtained by FirstCity from its new $50.0 million credit facility with Bank of America (“BoA Loan”) and other cash payments at closing. FirstCity’s remaining $94.8 million debt obligation under BoS Facility A (post-closing) carries a 0.25% annual interest rate through maturity (December 2014), and allows for repayment over time as cash flows from the underlying pledged assets are realized. FirstCity’s $25.0 million debt obligation under BoS Facility B does not bear interest, and allows for repayment over time as cash flows from the underlying pledged assets, if any, are realized (FirstCity has not received any significant cash flows from these underlying assets and has not allocated any value to these assets for the past two years). As a result of its December 2011 debt refinancing arrangements, FirstCity was able to significantly reduce its aggregate future cash outlay to Bank of Scotland and Bank of America under these new loan facilities in comparison to the repayment terms under the former Reducing Note Facility with Bank of Scotland — which, in turn, will provide more liquidity in the future to fund investment opportunities.
BoS Facility A — Bank of Scotland
At June 30, 2012, the unpaid principal balance on BoS Facility A was $71.9 million and the unamortized fair value discount was $2.0 million. The unpaid principal balance included $10.6 million in Euro-denominated debt that FirstCity uses to partially off-set its business exposure to foreign currency exchange risk attributable to its net equity investments in Europe. The primary terms and conditions of FC Commercial’s loan facility with Bank of Scotland under BoS Facility A are as follows:
· Release of assets of FH Partners (the “FH Partners Assets”) which secured the Reducing Note Facility to allow FH Partners to pledge the FH Partners Assets as collateral for the BoA Loan (Bank of Scotland was granted a subordinated security interest in these assets);
· Repayment will be made over time (no scheduled amortization) as cash flows are realized from the pledged assets (primarily loans, real estate and equity investments) other than the FH Partners Assets;
· Additional repayment will be made from residual cash flows from the FH Partners Assets from excess cash flow released to FH Partners under the loan facility for the BoA Loan (“FH Partners Excess Cash Flow”) and after the payment of the BoA Loan;
· Fixed annual interest rate equal to 0.25%;
· Maturity date of December 19, 2014;
· Unlimited guaranty provided by FirstCity for the repayment of the indebtedness under BoS Facility A;
· No advances will be made under this loan facility, except for draws on an outstanding letter of credit in the amount of $7.2 million;
· FirstCity will receive a management fee after payment to Bank of Scotland of interest and fees, certain expenses and other items, which is equal to 10% of the monthly collections from the underlying pledged assets other than the FH Partners Assets, and 5% of the of the monthly collections from the FH Partners Assets as FH Partners Excess Cash Flow is paid to Bank of Scotland (i.e. cash “leak-through”), which fees are not required to be applied to the debt owed to Bank of Scotland; the 5% management fee related to the FH Partners Assets is in addition to a 5% servicing fee paid under the loan facility for the BoA Loan and is deferred on a cumulative basis until the FH Partners Excess Cash Flow is paid to Bank of Scotland;
· After payment of the BoA Loan, FirstCity will receive a management fee equal to 10% of any monthly collections from the FH Partners Assets, after payment to Bank of Scotland of interest and fees, certain expenses and other items;
· FirstCity may designate a portion of the aggregated outstanding balance under this loan facility to be denominated in Euros up to a maximum amount equivalent to $27.5 million (USD);
· FirstCity must maintain a minimum tangible net worth (as defined) of $90.0 million;
· Release of FC Commercial, FH Partners, FLBG Corp, FirstCity, and certain FirstCity subsidiaries obligated under the Reducing Note Facility from liability for payment to Bank of Scotland or BoS-USA for the $25.0 million loan principal amount assumed by FLBG2 (under BoS Facility B with BoS-USA); and
· Guaranty provided by FLBG Corp. and a substantial majority of its subsidiaries, which are the entities that were primarily subject to the obligations of the Reducing Note Facility (the “Covered Entities”).
This loan facility is secured by substantially all of the assets of the Covered Entities. FH Partners provides a subordinated guaranty of the BoS Facility A (subordinated to the BoA Loan) and a subordinated security interest in the FH Partners Assets. FC Servicing does not guarantee the BoS Facility A, but provides a non-recourse security interest in certain equity interests owned by it and in most of the servicing fees from agreements entered into prior to the execution of the Reducing Note Facility.
BoS Facility A contains covenants, representations and warranties on the part of FirstCity, FC Commercial and FLBG Corp. that are typical for a loan facility of this type. In addition, BoS Facility A contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of Scotland may accelerate the indebtedness under this loan facility. At June 30, 2012, FirstCity was in compliance with all covenants or other requirements set forth in BoS Facility A.
BoS Facility B — Bank of Scotland
At June 30, 2012, the Company did not have a recorded carrying value on its consolidated balance sheet for BoS Facility B (this debt instrument was initially recorded at its estimated fair value of $-0- on the loan closing date). The primary terms and conditions of FLBG2’s $25.0 million debt obligation with BoS-USA under BoS Facility B are as follows:
· Source of repayment will be derived solely from future cash flows, if any, from the assets of FLBG2 (loans with nominal value — see discussion below);
· No interest accrues under this loan facility (subject to default interest provisions);
· Maturity date of December 19, 2014 (see discussion below); and
· FirstCity will receive a management fee equal to 10% of the monthly collections on the assets of FLBG2 (i.e. cash “leak-through”), if any, after payment to BoS-USA of any fees.
The assets of FLBG2 consist of loans transferred to it by the Covered Entities for nominal consideration. FirstCity has not received any significant cash flows from the assets of FLBG2 and has not allocated any value to such assets for the past two years. FLBG2 has no assets other than the loans pledged to this loan facility, and has no intent to actively pursue collection of these assets. FLBG2 has no alternative sources of income or liquidity. FirstCity and its other subsidiaries are not obligated to provide any additional funds or capital to FLBG2, do not guaranty the repayment of BoS Facility B, and do not intend to contribute any funds to FLBG2 or pay any amounts owed by FLBG2 under BoS Facility B (before or after its maturity).
At maturity of the BoS Facility B, there will likely be a default by FLBG2 as no collections are projected by FirstCity to be
received from the assets of FLBG2. The sole recourse of Bank of Scotland on any such default will be to foreclose on the assets of FLBG2. Any default will not have a material adverse effect on FirstCity, as there is no carrying value for this loan facility on FirstCity’s consolidated balance sheet.
BoS Facility B contains limited covenants, representations and warranties on the part of FLGB2 in light of the nature of the assets of FLBG2 and the lack of liquidity or sources of funds for FLBG2. In addition, BoS Facility B contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of Scotland may accelerate the indebtedness under this loan facility. At June 30, 2012, FLBG2 was in compliance with all covenants or other requirements set forth in BoS Facility B.
Bank of America
In December 2011, FH Partners, as borrower, and Bank of America, as lender, entered into a $50.0 million term loan facility (“BoA Loan”) that allows for repayment over time as cash flows from the underlying assets securing this loan facility are realized. FirstCity used the proceeds from this loan facility to reduce the principal balance outstanding under the Reducing Note Facility, as amended (as described above). At June 30, 2012, the unpaid principal balance under this loan facility was $32.0 million. The primary terms and conditions under the BoA Loan are as follows:
· Minimum principal payments through maturity so that the total principal balance outstanding does not exceed the following amounts on the dates indicated: $45.0 million at June 30, 2012; $30.0 million at December 31, 2012; $25.0 million at June 30, 2013; $20.0 million at December 31, 2013; $15.0 million at June 30, 2014; and $10.0 million at December 31, 2014 (initial maturity);
· Initial maturity date of December 31, 2014, which may be extended one year (subject to certain terms and conditions);
· Variable annual interest rate based on LIBOR daily floating rate plus 2.75%;
· FirstCity will receive a servicing fee equal to 5% of the monthly collections (i.e. cash “leak-through”) from the pledged assets after payment to Bank of America of interest, fees and required principal payment reductions;
· Minimum debt service coverage ratio (defined) of 1.4 to 1.0 (beginning with the quarterly period ended March 31, 2012); and
· FC Servicing must maintain a minimum net worth of $1.0 million.
The BoA Loan contains covenants, representations and warranties on the part of FH Partners that are typical for a loan facility of this type. In addition, the BoA Loan contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of America may accelerate the indebtedness under this loan facility. At June 30, 2012, FH Partners was in compliance with all covenants or other requirements set forth in the BoA Loan.
FNBCT Loan Facility
FC Investment has a $15.0 million revolving loan facility with FNBCT for the purpose of financing the purchase of loans and other assets, to make investments in equity interests in or capital contributions to affiliates which are owned with other investors, and for working capital. At June 30, 2012, the unpaid principal balance under this revolving loan facility was $2.0 million. This credit facility matures in August 2013, and is secured by substantially all of the assets of FC Investment and its subsidiaries. In addition, FirstCity provided FNBCT with an unlimited guaranty for the repayment of the indebtedness under this revolving loan facility. The primary terms and key covenants of this loan facility are described in Note 8 of the consolidated financial statements. At June 30, 2012, FC Investment was in compliance with all covenants or other requirements set forth in the credit agreement or other agreements with FNBCT.
WFCF Loan Facility
ABL has a $25.0 million revolving loan facility with WFCF for the purpose of financing and acquiring SBA loans. At June 30, 2012, the unpaid principal balance under this revolving loan facility was $19.4 million. This credit facility matures in January 2015, and is secured by substantially all of the assets of ABL. In addition, FirstCity provided WFCF with an unconditional limited guaranty for all of ABL’s obligations up to a maximum of $5.0 million plus enforcement costs. The primary terms and key covenants of this
loan facility are described in Note 8 of the consolidated financial statements. At June 30, 2012, ABL was in compliance with all covenants or other requirements set forth in the credit agreement or other agreements with WFCF.
The following table summarizes the material terms of the credit facilities of FirstCity and its consolidated subsidiaries and the outstanding borrowings under such facilities as of June 30, 2012 and December 31, 2011 (dollars in thousands):
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| Outstanding |
| Outstanding |
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| Borrowings |
| Borrowings |
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| as of |
| as of |
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| June 30, |
| December 31, |
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Description |
| Interest Rate |
| Other Terms and Conditions |
| 2012 |
| 2011 |
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Bank of Scotland reducing note facility, net of unamortized discount [1] [2] |
| 0.25% fixed |
| Secured by substantially all assets and subsidiaries of FC Commercial (excluding FH Partners) and guaranteed by FirstCity, matures December 2014 |
| $ | 69,867 |
| $ | 86,579 |
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BOS (USA) reducing note facility ($25.0 million term note) [1] |
| None |
| Secured by all assets of FLBG2, matures December 2014 |
| — |
| — |
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Bank of America term note [1] |
| LIBOR + 2.75% |
| Secured by all assets of FH Partners, matures December 2014 |
| 31,971 |
| 49,228 |
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WFCF $25.0 million revolving loan facility [3] |
| Alternate interest rates based on Wells Fargo base rate plus 4.25%, LIBOR plus 4.25%, or 7.5% |
| Secured by assets of ABL and guaranteed by FirstCity up to $5.0 million, matures January 2015 |
| 19,428 |
| 21,405 |
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FNBCT $15.0 million revolving loan facility [4] |
| Greater of WSJ prime rate or 4.0% |
| Secured by assets of FC Investment and its subsidiaries, and guaranteed by FirstCity, matures August 2013 |
| 2,000 |
| — |
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Non-recourse bank notes payable of various U.S. Portfolio Entities |
| Interest rates ranging from 3.0% to 5.0% (weighted average interest rate of 4.2%) |
| Secured by assets (primarily Portfolio Assets) of the underlying entities, various maturities through October 2015 |
| 7,492 |
| 18,113 |
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Non-recourse bank notes payable of consolidated railroad subsidiaries: |
| Prime Rate + margin (0.50-1.50%) or LIBOR + margin (2.25-3.25%) |
| Secured by assets of the subsidiaries |
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Term loan |
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| Matures March 2016 |
| 3,281 |
| 3,531 |
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$1.0 million revolving facility |
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| Matures March 2014 |
| — |
| — |
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$5.0 million acquisition facility |
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| Advances mature March 2016; unused commitment matures March 2013 |
| 3,950 |
| 1,625 |
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Non-recourse bank note payable of real estate investment entity [5] |
| 6.07% fixed |
| Secured by real estate property owned by the entity |
| — |
| 7,361 |
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Other notes and debt obligations |
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| 1,884 |
| 2,094 |
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Total notes payable and other debt obligations |
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| $ | 139,873 |
| $ | 189,936 |
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[1] In December 2011, FirstCity entered into a debt refinancing arrangement with Bank of Scotland that resulted in the amendment and restatement of the Reducing Note Facility (“BoS Facility A”) and a new loan agreement with BOS (USA) (“BoS Facility B”). In connection with this debt refinancing arrangement, FirstCity also obtained a new credit facility with Bank of America. This debt refinancing transaction was accounted for as a debt extinguishment and, as such, BoS Facility A and BoS Facility B were initially recorded at their estimated fair values of $91.6 million and $-0-, respectively, in December 2011.
[2] The unamortized discount on this loan facility at June 30, 2012 and December 31, 2011 was $2.0 million and $3.1 million, respectively. Also, the carrying value of this loan facility included $10.6 million and $13.2 million denominated in Euros at June 30, 2012 and December 31, 2011, respectively.
[3] This revolving loan facility was amended and restated on January 31, 2012 (see Note 8 of the consolidated financial statements).
[4] FC Investment, a FirstCity wholly-owned subsidiary, obtained this revolving loan facility in May 2012 (see Note 8 of the consolidated financial statements).
[5] FirstCity de-recognized this note payable from its consolidated balance sheet in March 2012 upon acquisition of the underlying real estate property by the creditor and legal release from the obligation in a foreclosure transaction (see Note 4 for additional information). This non-cash activity did not have a material impact on the Company’s results of operations for the six-month period ended June 30, 2012.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements relate primarily to indemnification obligations and guaranty agreements (refer to Note 18 of the consolidated financial statements). We do not believe that these or any other off-balance sheet arrangements have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to investors. However, there can be no assurance that such arrangements will not have any such future effects on the Company.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding our expected financial position, future financial performance, overall trends, liquidity and capital needs, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. In this context, words such as “anticipates,” “believes,” “expects,” “estimates,” “plans,” “intends,” “could,” “should,” “will,” “may” and similar words or expressions are intended to identify forward-looking statements and are not historical facts.
These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. For a discussion on the risks, uncertainties and assumptions that affect our business, operating results and financial condition, you should carefully review the “CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS” qualification and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2011 Form 10-K, and Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.
We are also subject to other risks detailed herein or detailed from time-to-time in our filings with the SEC. The listed risks referenced above are not intended to be exhaustive and the order in which the risks appear is not intended as an indication of their relative weight or importance. We operate in continually changing business environments, and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the impact, if any, of these new risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.
You are cautioned that our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions, which change over time. Actual results, developments and outcomes may differ materially from those expressed in, or implied by, our forward-looking statements. The forward-looking statements speak only as of the date the statement is made, and we have no obligation to publicly update or revise our forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of our principal executive officer and principal financial officer, or persons performing similar functions, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms relating to FirstCity, including our consolidated subsidiaries, and was accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There have been no material developments regarding any matters disclosed under Part I, Item 3 “Legal Proceedings” in our 2011 Form 10-K.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
Exhibit |
| Description of Exhibit |
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10.1* | — | Loan Agreement dated May 16, 2012 between FC Investment Holdings Corporation, as borrower, and FirstCity Financial Corporation, as guarantor, and First National Bank of Central Texas, as lender. |
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10.2* | — | Commercial Guaranty dated May 16, 2012 between FC Investment Holdings Corporation, as borrower, and FirstCity Financial Corporation, as guarantor, and First National Bank of Central Texas, as lender |
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31.1* | — | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.1* | — | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2* | — | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1* | — | Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2* | — | Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS** | — | XBRL Instance Document |
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101.SCH** | — | XBRL Taxonomy Extension Schema Document |
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101.CAL** | — | XBRL Taxonomy Calculation Linkbase Document |
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101.LAB** | — | XBRL Taxonomy Label Linkbase Document |
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101.PRE** | — | XBRL Taxonomy Presentation Linkbase Document |
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101.DEF** | — | XBRL Taxonomy Definition Linkbase Document |
* Filed herewith.
** In accordance with Rule 406T of Regulation S-T, the XBRL information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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 | |
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Dated: August 14, 2012 |
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| By: | /s/ JAMES T. SARTAIN |
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| James T. Sartain |
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| President and Chief Executive |
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| Officer and Director |
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| (Duly authorized officer and |
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| Principal Executive Officer) |
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| By: | /s/ J. BRYAN BAKER |
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| J. Bryan Baker |
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| Senior Vice President and |
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| Chief Financial Officer |
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| (Duly authorized officer and |
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| Principal Financial and |
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| Accounting Officer) |