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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, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7614
FIRSTCITY FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0243729
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6400 IMPERIAL DRIVE, WACO, TX 76712
(Address of Principal Executive (Zip Code)
Offices)
(254) 751-1750
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
The number of shares of common stock, par value $.01 per share,
outstanding at August 1, 1998 was 8,260,582.
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q may contain forward-looking
statements. The factors identified under Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations are important factors
(but not necessarily all of the important factors) that could cause actual
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company.
When any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. When, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The words "believe," "expect," "estimate," "project," "anticipate" and similar
expressions identify forward-looking statements.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
JUNE 30, 1998 DECEMBER 31, 1997
-------------------- --------------------
ASSETS
Cash and cash equivalents $30,531 $31,605
Portfolio Assets, net 68,476 89,951
Loans receivable, net 55,912 90,115
Mortgage loans held for sale 1,021,185 533,751
Investment securities 43,046 6,935
Equity investments in and advances to Acquisition Partnerships 36,076 35,529
Mortgage servicing rights 124,242 69,634
Receivable for servicing advances and accrued interest 34,040 21,410
Deferred tax benefit, net 32,185 30,614
Other assets, net 64,346 30,575
-------------------- --------------------
Total Assets $1,510,039 $940,119
==================== ====================
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $1,227,966 $750,781
Other liabilities 68,164 34,672
-------------------- --------------------
Total Liabilities 1,296,130 785,453
Commitments and contingencies -- --
Redeemable preferred stock:
Special preferred stock, including dividends of $669 (nominal stated value of
$21 per share; 2,500,000 shares authorized;
849,777 shares issued and outstanding) 18,515 18,515
Adjusting rate preferred stock, including dividends of $846
(redemption value of $21 per share; 2,000,000 shares authorized;
1,073,704 shares issued and outstanding) 23,393 23,393
Shareholders' equity:
Optional preferred stock (par value $.01 per share; 98,000,000
shares authorized; no shares issued or outstanding) -- --
Common stock (par value $.01 per share; 100,000,000 authorized;
issued and outstanding: 8,260,582 and 6,526,510 shares, 83 65
respectively)
Paid in capital 78,091 29,509
Retained earnings 93,827 83,184
-------------------- --------------------
Total Shareholders' Equity 172,001 112,758
-------------------- --------------------
Total Liabilities, Redeemable Preferred Stock and Shareholders' $1,510,039 $940,119
Equity ==================== ====================
See accompanying notes to consolidated financial statements.
3
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- ------------ ------------ -------------
Revenues:
Gain on sale of mortgage and other loans $28,303 $7,999 $48,572 $13,320
Gain on sale of automobile loans 2,434 -- 2,434 --
Net mortgage warehouse income 2,395 526 4,117 1,292
Gain on sale of mortgage servicing rights -- 2,263 -- 4,529
Servicing fees:
Mortgage 5,588 3,414 10,282 6,985
Other 1,250 1,660 2,363 9,522
Gain on resolution of Portfolio Assets 2,839 4,891 5,936 10,192
Equity in earnings of Acquisition Partnerships 1,523 2,772 4,737 4,313
Rental income on real estate Portfolios 75 87 156 157
Interest income 2,898 3,449 6,697 6,228
Other income 2,239 2,409 6,276 3,570
Interest income on Class A Certificate -- 1,515 -- 3,174
-------------- ------------ ------------ -------------
Total revenues 49,544 30,985 91,570 63,282
Expenses:
Interest on other notes payable 3,304 3,650 6,722 6,512
Salaries and benefits 20,447 10,293 36,464 19,284
Amortization:
Mortgage servicing rights 4,126 1,596 7,302 3,143
Other 373 812 805 1,765
Provision for loan losses 575 1,357 2,927 2,155
Provision for valuation of mortgage servicing rights 500 -- 500 --
Occupancy, data processing, communication and other 13,121 8,608 24,812 16,185
-------------- ------------ ------------ -------------
Total expenses 42,446 26,316 79,532 49,044
Net earnings before minority interest, preferred 7,098 12,038
dividends and income taxes 4,669 14,238
Benefit (provision) for income taxes 755 (230) 1,396 (582)
-------------- ------------ ------------ -------------
Net earnings before minority interest and preferred 7,853 4,439 13,434 13,656
dividends
Minority interest 229 69 14 69
Preferred dividends 1,515 1,515 3,030 3,174
-------------- ------------ ------------ -------------
Net earnings to common shareholders $6,109 $2,855 $10,390 $10,413
============== ============ ============ =============
Net earnings per common share-- basic $0.84 $0.44 $1.51 $1.60
Net earnings per common share-- diluted $0.83 $0.44 $1.47 $1.58
Weighted average common shares outstanding-- basic 7,243 6,517 6,889 6,517
Weighted average common shares outstanding-- diluted 7,401 6,549 7,045 6,575
See accompanying notes to consolidated financial statements.
4
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NUMBER OF COMMON PAID IN RETAINED TOTAL
COMMON SHARES STOCK CAPITAL EARNINGS SHAREHOLDERS'
EQUITY
-------------- -------------- -------------- -------------- -----------------
BALANCES, JANUARY 1, 1997 6,513,346 $65 $29,783 $54,954 $84,802
Exercise of warrants, options and 13,164 -- 318 -- 318
employee stock purchase plan
Change in subsidiary year end -- -- -- (1,195) (1,195)
Net earnings, after minority -- -- -- 35,628 35,628
interest, for 1997
Preferred dividends -- -- -- (6,203) (6,203)
Other -- -- (592) -- (592)
-------------- -------------- -------------- -------------- -----------------
BALANCES, DECEMBER 31, 1997 6,526,510 65 29,509 83,184 112,758
Exercise of warrants, options and 491,922 5 12,275 -- 12,280
employee stock purchase plan
Issuance of common stock to acquire 41,000 1 2,149 -- 2,150
the minority interest of subsidiary
Issuance of common stock in public 1,201,150 12 34,158 -- 34,170
offering
Net earnings, after minority -- -- -- 13,420 13,420
interest, for six months ended June
30, 1998
Foreign currency translation and -- -- -- 253 253
other adjustments
Preferred dividends -- -- -- (3,030) (3,030)
-------------- -------------- -------------- -------------- -----------------
BALANCES, JUNE 30, 1998 8,260,582 $83 $78,091 $93,827 $172,001
============== ============== ============== ============== =================
See accompanying notes to consolidated financial statements.
5
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
--------------------------------
1998 1997
-------------- --------------
Cash flows from operating activities:
Net earnings before minority interest and preferred $13,434 $13,656
dividends
Adjustments to reconcile net earnings to net cash
used in
operating activities, net of effect of acquisitions:
Proceeds from resolution of Portfolio Assets 30,032 30,122
Gain on resolution of Portfolio Assets (5,936) (10,192)
Purchase of Portfolio Assets and loans receivable, (11,827) (20,791)
net
Origination of automobile receivables (57,762) (50,071)
Gain on sale of mortgage servicing rights -- (4,529)
Increase in mortgage loans held for sale (487,434) (87,131)
Increase in construction loans receivable (9,569) (5,488)
Originated mortgage servicing rights (62,409) (20,981)
Purchases of mortgage servicing rights (69) (5,677)
Proceeds from sale of mortgage servicing rights -- 13,826
Provision for loan losses and valuation of mortgage 3,427 2,155
servicing rights
Equity in earnings of Acquisition Partnerships (4,737) (4,313)
Proceeds from performing Portfolio Assets and loans 57,491 46,457
receivable, net
(Increase) decrease in net deferred tax asset (1,571) 13
Depreciation and amortization 9,185 7,360
Increase in other assets (32,221) (34,246)
Increase in other liabilities 38,775 11,795
-------------- --------------
Net cash used in operating activities (521,191) (118,035)
-------------- --------------
Cash flows from investing activities:
Payments on advances to acquisition partnerships and -- 1,029
affiliates
Acquisition of subsidiaries -- 1,118
Principal payments on Class A Certificate -- 33,807
Property and equipment, net (3,269) (1,752)
Contributions to Acquisition Partnerships (13,581) (11,378)
Distributions from Acquisition Partnerships 15,653 7,759
-------------- --------------
Net cash provided by (used in) investing (1,197) 30,583
activities
-------------- --------------
Cash flows from financing activities:
Borrowings under notes payable 10,630,721 4,754,364
Payments of notes payable (10,152,827) (4,640,385)
Purchase of special preferred stock -- (12,567)
Proceeds from issuance of common stock 46,450 111
Distributions to minority interest -- (5,669)
Preferred dividends paid (3,030) (3,597)
Other increases in paid in capital -- 311
-------------- --------------
Net cash provided by financing activities 521,314 92,568
-------------- --------------
Net increase (decrease) in cash $(1,074) $5,116
Cash, beginning of period 31,605 16,445
-------------- --------------
Cash, end of period $30,531 $21,561
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $28,867 $15,621
Income taxes $231 $104
See accompanying notes to consolidated financial statements.
6
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements of FirstCity Financial
Corporation ("FirstCity" or the "Company") reflect, in the opinion of
management, all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly FirstCity's financial position at June
30, 1998, the results of operations and the cash flows for the three month and
six month periods ended June 30, 1998 and 1997. Additionally, the Company's
merger with Harbor Financial Group, Inc. ("Mortgage Corp.") on July 1, 1997 has
been accounted for as a pooling of interests. The accompanying consolidated
financial statements have been retroactively restated to reflect the pooling of
interests.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include the estimation of future
collections on purchased portfolio assets used in the calculation of net gain on
resolution of portfolio assets, interest rate environments, prepayment speeds of
loans in servicing portfolios, collectibility on loans held in inventory and for
investment. Actual results could differ materially from those estimates. Certain
amounts in the financial statements for prior periods have been reclassified to
conform with current financial statement presentation.
(2) MERGERS AND ACQUISITIONS
On July 1, 1997, the Company merged with Mortgage Corp. (the "Harbor
Merger"). The Company issued 1,580,986 shares of its common stock in exchange
for 100% of Mortgage Corp.'s outstanding capital stock in a transaction
accounted for as a pooling of interests. Mortgage Corp. originates and services
residential and commercial mortgage loans. Mortgage Corp. had approximately $12
million in equity, assets of over $300 million and 700 employees prior to the
Harbor Merger.
At year end 1997, an unrelated party exercised warrants to acquire a
four percent minority interest in Mortgage Corp.'s subsidiary, Harbor Financial
Mortgage Corporation. On March 31, 1998, the Company issued 41,000 shares of
common stock in exchange for the four percent minority interest in this
subsidiary.
7
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net revenues, net earnings to common shareholders and net earnings
per common share, for the three months and six months ended June 30, 1997,
before and after the Harbor Merger are summarized as follows:
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
1997 1997
------------------------- ------------------
Net revenues (including equity earnings):
Before 1997 pooling $15,273 $34,838
1997 pooling 15,712 28,444
After 1997 pooling 30,985 63,282
Net earnings to common shareholders:
Before 1997 pooling $2,066 $8,966
1997 pooling 789 1,447
After 1997 pooling 2,855 10,413
Net earnings per common share - diluted:
Before 1997 pooling $0.42 $1.79
1997 pooling 0.02 (0.21)
After 1997 pooling 0.44 1.58
In the first quarter of 1997, FirstCity received $6.8 million (recorded
as servicing fees) from the FirstCity Liquidating Trust (the "Trust") for
termination of the Investment Management Agreement.
(3) PORTFOLIO ASSETS
Portfolio Assets are summarized as follows:
JUNE 30, DECEMBER
1998 31,1997
---------------- ---------------
Non-performing $106,757 $130,657
Performing 12,187 16,131
Real estate 16,721 22,777
---------------- ---------------
Total 135,665 169,565
Discount required to reflect Portfolio Assets at (67,189) (79,614)
carrying value
---------------- ---------------
Portfolio Assets, net $68,476 $89,951
================ ===============
Portfolio Assets are pledged to secure non-recourse notes payable.
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows:
JUNE 30, DECEMBER 31,
1998 1997
----------------- -----------------
Construction loans receivable $29,163 $19,594
Residential mortgage and other loans held for 8,364 6,386
investment
Automobile and consumer finance receivables 24,876 73,417
Allowance for loan losses (6,491) (9,282)
----------------- -----------------
Loans receivable, net $55,912 $90,115
================= =================
8
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The activity in the allowance for loan losses is summarized as follows
for the periods indicated:
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------- ------------
Balances, beginning of period $9,282 $2,693
Provision for loan losses 2,852 2,155
Discounts acquired 8,649 4,936
Reduction in contingent liabilities -- 458
Allocation of reserves to sold loans (7,602) --
Charge off activity:
Principal balances charged off (8,956) (7,460)
Recoveries 2,266 1,158
------------- ------------
Net charge offs (6,690) (6,302)
------------- ------------
Balances, end of period $6,491 $3,940
============= ============
During 1997, a note recorded at the time of original purchase of the
initial automobile finance receivables pool and contingent on the ultimate
performance of the pool was adjusted to reflect a reduction in anticipated
payments due pursuant to the contingency. The reduction in the recorded
contingent liability was recorded as an increase in the allowance for losses.
(5) MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale include loans collateralized by first lien
mortgages on one-to-four family residences as follows:
JUNE 30, 1998 DECEMBER 31,1997
-------------- ------------------
Residential mortgage loans $993,677 $522,970
Unamortized premiums and discounts 27,508 10,781
-------------- ------------------
$1,021,185 $533,751
============== ==================
(6) INVESTMENT SECURITIES
The Company has investment securities (investments) consisting of rated
securities, retained interests and related interest only strips (collectively
referred to as residual interests) which are all attributable to loans sold
through securitization transactions by the Company. The investments are
accounted for in accordance with SFAS No.115, "Accounting for Investments in
Certain Debt and Equity Marketable Securities" and classified as available for
sale. Accordingly, the Company records these investments at estimated fair
value. The increases or decreases in estimated fair value are recorded as
unrealized gains or losses in the accompanying consolidated statement of
shareholders' equity. The determination of fair value is based on the present
value of the anticipated excess cash flows using valuation assumptions unique to
each securitization. As of June 30, 1998 and December 31, 1997 the Company had
recorded no unrealized gain or loss on the investments. Investments are
comprised of the following as of the dates indicated.
JUNE 30, DECEMBER
1998 31,1997
---------------- ---------------
Rated securities $2,801 $ --
Interest only strips 19,849 3,396
Retained interests 20,164 3,308
Other securities 88 --
Accrued interest 144 231
---------------- ---------------
Investment securities $43,046 $6,935
================ ===============
9
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The activity in investments for the six months ended June 30, 1998 and the year
ended December 31, 1997 is as follows:
JUNE 30, DECEMBER
1998 31,1997
---------------- ---------------
Balance, beginning of period $6,935 $ --
Cost allocated from securitizations 37,175 6,925
Interest accreted. 688 548
Increase in other securities, net 88 --
Cash received from trusts (1,840) (538)
---------------- ---------------
Balance, end of period $43,046 $6,935
================ ===============
The investments are valued using discount rates ranging from 12% to 15% for both
home equity and consumer residual interests. Estimated loss rates range from
1.5% to 14% and prepayment assumptions range from 12% to 30% and 3% to 5% on
home equity and consumer residual interests, respectively.
(7) INVESTMENTS IN ACQUISITION PARTNERSHIPS
The Company has investments in Acquisition Partnerships and their general
partners that are accounted for on the equity method. The condensed combined
financial position and results of operations of the Acquisition Partnerships,
which include the domestic and foreign Acquisition Partnerships and their
general partners, are summarized below:
CONDENSED COMBINED BALANCE SHEETS
JUNE 30, DECEMBER
1998 31,1997
--------------- ----------------
Assets $278,649 $338,484
=============== ================
Liabilities $186,025 $250,477
Net equity 92,624 88,007
--------------- ----------------
$278,649 $338,484
=============== ================
Company's equity in Acquisition Partnerships $36,076 $35,529
=============== ================
CONDENSED COMBINED SUMMARY OF EARNINGS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------- ------------ ------------
Proceeds from resolution of Portfolio Assets $30,070 $91,068 $87,628 $115,652
Gross margin 9,110 11,857 27,643 19,558
Interest income on performing portfolio 2,169 1,822 4,622 3,728
assets
Net earnings $3,860 $7,424 $12,982 $11,015
============ ============= ============ ============
Company's equity in earnings of Acquisition $1,523 $2,772 $4,737 $4,313
Partnerships ============ ============= ============ ============
(8) PREFERRED STOCK AND SHAREHOLDERS' EQUITY
In May 1998, the Company closed the public offering of 1,542,150 shares
of FirstCity common stock, of which 341,000 shares were sold by selling
shareholders. Net proceeds (after expenses) of $34.2 million were used to retire
debt.
10
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 11, 1998, the Company notified holders of its outstanding
warrants to purchase shares of common stock that it was exercising its option to
repurchase such warrants for $1.00 each. In June 1998, as a result of such
notification, warrants representing 471,380 shares of common stock were
exercised for an aggregate warrant purchase price of $11.8 million.
In the first six months of 1997, the Company purchased 537,430 shares
of special preferred stock. In the third quarter of 1997, 1,073,704 shares of
special preferred stock were exchanged for a like number of shares of adjusting
rate preferred stock. At June 30, 1998, accrued dividends totaled $.7 million
for special preferred stock and $.8 million for adjusting rate preferred stock,
or $.7875 per share, and were paid on July 15, 1998.
On July 17, 1998 the Company filed a shelf registration statement with
the Securities and Exchange Commission which allows the Company to issue up to
$250 million in debt and equity securities from time to time in the future. The
registration statement became effective July 28, 1998.
Earnings per share ("EPS") has been calculated in conformity with SFAS
No. 128, Earnings Per Share, and all prior periods have been restated. A
reconciliation between the weighted average shares outstanding used in the basic
and diluted EPS computations is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ---------- ------------ ----------
Net earnings to common shareholders $6,109 $2,855 $10,390 $10,413
=========== ========== ============ ==========
Weighted average common shares outstanding - basic 7,243 6,517 6,889 6,517
Effect of dilutive securities:
Assumed exercise of stock options 78 32 76 45
Assumed exercise of warrants 80 -- 80 13
----------- ---------- ------------ ----------
Weighted average common shares outstanding - diluted 7,401 6,549 7,045 6,575
=========== ========== ============ ==========
Net earnings per common share - basic $0.84 $0.44 $1.51 $1.60
Net earnings per common share - diluted $0.83 $0.44 $1.47 $1.58
The Company adopted Financial Accounting Standards Board Statement No.
130, Reporting Comprehensive Income ("SFAS 130") as of January 1, 1998. SFAS 130
establishes standards for reporting and displaying comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. SFAS 130 also requires the accumulated balance of
other comprehensive income to be displayed separately in the equity section of
the consolidated balance sheet. The accumulated balance of other comprehensive
income at each of June 30, 1998 and December 31, 1997 was $(1) and $44,
respectively, and other comprehensive income for the six months ended June 30,
1998 and 1997 was $(45) and $0, respectively. The adoption of this statement had
no material impact on net earnings or shareholders' equity.
(9) INCOME TAXES
Federal income taxes are provided at a 35% rate. Net operating loss
carry forwards ("NOLs") are available to FirstCity and are recognized as an
offset to the provision in the period during which the benefit is determined to
be realizable. During the first six months of 1998, FirstCity recognized a
deferred tax benefit of $1.5 million (compared to $.6 million in the first six
months of 1997). Realization of the resulting net deferred tax asset is
dependent upon generating sufficient taxable income prior to expiration of the
net operating loss carry forwards. Although realization is not assured,
management believes it is more likely than not that all of the recorded deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be adjusted in the future if estimates of future
taxable income during the carry forward period change.
11
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the consolidated financial condition,
results of operations or liquidity of the Company.
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is a 50% owner in an entity that is obligated to advance up
to $2.5 million toward the acquisition of Portfolio Assets from financial
institutions in California. At June 30, 1998, advances of $.2 million had been
made under the obligation.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a diversified financial services company engaged in
residential and commercial mortgage banking ("Mortgage Corp."), Portfolio Asset
acquisition and resolution ("Commercial Corp.") and consumer lending ("Consumer
Corp."). The mortgage banking business involves the origination, acquisition and
servicing of residential and commercial mortgage loans and the subsequent
warehousing, sale or securitization of such loans through various public and
private secondary markets. The Portfolio Asset acquisition and resolution
business involves acquiring Portfolio Assets at a discount to Face Value and
servicing and resolving such Portfolios in an effort to maximize the present
value of the ultimate cash recoveries. The Company also seeks opportunities to
originate and retain high yield commercial loans to businesses and to finance
real estate projects that are unable to access traditional lending sources. The
consumer lending business involves the acquisition, origination, warehousing,
securitization and servicing of consumer receivables. The Company's current
consumer lending operations are focused on the acquisition of sub-prime
automobile receivables.
The Company's financial results are affected by many factors including
levels of and fluctuations in interest rates, fluctuations in the underlying
values of real estate and other assets, and the availability and prices for
loans and assets acquired in all of the Company's businesses. The Company's
business and results of operations are also affected by the availability of
financing with terms acceptable to the Company and the Company's access to
capital markets, including the securitization markets.
The Harbor Merger, which occurred in July 1997, was accounted for as a
pooling of interests. The Company's historical financial statements have
therefore been retroactively restated to include the financial position and
results of operations of Mortgage Corp. for all periods presented. As a result
of the significant period to period fluctuations in the revenues and earnings of
the Company's Portfolio Asset acquisition and resolution business, period to
period comparisons of the Company's results of operations may not be meaningful.
ANALYSIS OF REVENUES AND EXPENSES
The following table summarizes the revenues and expenses of each of the
Company's businesses and presents the contribution that each business makes to
the Company's operating margin.
SUMMARY OF REVENUES AND EXPENSES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SECOND QUARTER SIX MONTHS ENDED
JUNE 30,
--------------------------------- ------------------------------
1998 1997 1998 1997
--------------- -------------- ------------- -------------
MORTGAGE BANKING:
Revenues:
Net mortgage warehouse income $2,395 $526 $4,117 $1,292
Gain on sale of mortgage loans 28,303 7,999 48,572 13,320
Servicing fees 5,588 3,414 10,282 6,985
Other 1,552 3,773 3,556 6,848
--------------- -------------- ------------- -------------
Total 37,838 15,712 66,527 28,445
Expenses:
Salaries and benefits 17,216 7,647 30,151 13,573
Amortization of mortgage servicing rights 4,126 1,596 7,302 3,143
Provision for valuation of mortgage servicing rights 500 -- 500 --
Interest on other notes payables 486 304 987 559
Occupancy, data processing, communication and other 9,410 4,887 17,514 8,846
--------------- -------------- ------------- -------------
Total 31,738 14,434 56,454 26,121
--------------- -------------- ------------- -------------
Operating contribution before direct taxes $6,100 $1,278 $10,073 $2,324
=============== ============== ============= =============
Operating contribution, net of direct taxes $6,100 $833 $9,984 $1,491
=============== ============== ============= =============
PORTFOLIO ASSET ACQUISITION AND RESOLUTION:
Revenues:
Gain on resolution of Portfolio Assets $2,839 $4,891 $5,936 $10,192
Equity in earnings of Acquisition Partnerships 1,523 2,772 4,737 4,313
Servicing fees (1) 666 1,554 1,395 9,382
13
SECOND QUARTER SIX MONTHS ENDED
JUNE 30,
--------------------------------- ------------------------------
1998 1997 1998 1997
--------------- -------------- ------------- -------------
Other 512 1,001 2,510 2,033
--------------- -------------- ------------- -------------
Total 5,540 10,218 14,578 25,920
Expenses:
Salaries and benefits 1,100 1,268 2,267 2,883
Interest on other notes payable 1,336 1,762 2,812 3,214
Asset level expenses, occupancy, data processing and 1,886 2,835 4,098 6,033
other
--------------- -------------- ------------- -------------
Total 4,322 5,865 9,177 12,130
--------------- -------------- ------------- -------------
Operating contribution before direct taxes $1,218 $4,353 $5,401 $13,790
=============== ============== ============= =============
Operating contribution, net of direct taxes $1,223 $4,348 $5,392 $13,685
=============== ============== ============= =============
CONSUMER LENDING:
Revenues:
Gain on sale of automobile loans $2,434 $ -- $2,434
$ --
Interest income 2,659 2,777 5,225 4,869
Servicing fees and other 653 186 1,043 234
--------------- -------------- ------------- -------------
Total 5,746 2,963 8,702 5,103
Expenses:
Salaries and benefits 1,292 592 2,404 1,097
Provision for loan losses 500 1,357 2,852 2,155
Interest on other notes payable 939 1,113 1,819 1,835
Occupancy, data processing and other 1,658 761 2,765 1,594
--------------- -------------- ------------- -------------
Total 4,389 3,823 9,840 6,681
=============== ============== ============= =============
Operating contribution before direct taxes $1,357 $(860) $(1,138) $(1,578)
=============== ============== ============= =============
Operating contribution, net of direct taxes $1,357 $(862) $(1,138) $(1,581)
=============== ============== ============= =============
Total operating contribution, net of
direct taxes $8,680 $4,319 $14,238 $13,595
=============== ============== ============= =============
CORPORATE OVERHEAD:
Interest income on Class A Certificate (2) $ -- $1,515 $3,174
$ --
Salaries and benefits, occupancy, professional and (1,806) (1,764) (2,318) (3,782)
other income and expenses, net
Deferred tax benefit 750 300 1,500 600
--------------- -------------- ------------- -------------
Net earnings before preferred dividends 7,624 4,370 13,420 13,587
Preferred dividends 1,515 1,515 3,030 3,174
--------------- -------------- ------------- -------------
Net earnings to common shareholders $6,109 $2,855 $10,390 $10,413
=============== ============== ============= =============
SHARE DATA:
Net earnings per common share-- basic $0.84 $0.44 $1.51 $1.60
Net earnings per common share-- diluted $0.83 $0.44 $1.47 $1.58
Weighted average common shares outstanding - basic 7,243 6,517 6,889 6,517
Weighted average common shares outstanding - diluted 7,401 6,549 7,045 6,575
(1) Includes $6.8 million received as a result of terminating the Investment
Management Agreement with FirstCity Liquidating Trust in first quarter 1997.
(2) Prior to June 30, 1997, income was received from FirstCity Liquidating Trust
equal to the Company's preferred stock dividend obligation.
ORIGINATION AND OTHER FINANCIAL DATA:
Mortgage Corp.:
SECOND QUARTER SIX MONTHS ENDED
JUNE 30,
--------------------------------- ------------------------------
1998 1997 1998 1997
--------------- -------------- ------------- -------------
Origination of residential mortgage loans:
Conventional $1,584,727 $466,256 $2,945,592 $876,352
Agency 377,364 118,060 708,592 201,291
14
SECOND QUARTER SIX MONTHS ENDED
JUNE 30,
--------------------------------- ------------------------------
1998 1997 1998 1997
--------------- -------------- ------------- -------------
Home equity 89,022 48,477 147,284 59,522
Other 37,075 16,235 56,987 24,138
--------------- -------------- ------------- -------------
Total $2,088,188 $649,028 $3,858,455 $1,161,303
=============== ============== ============= =============
Origination of commercial mortgage loans:
Correspondent $67,985 $42,474 $181,250 $42,474
Construction 12,767 15,623 28,363 26,380
--------------- -------------- ------------- -------------
Total $80,752 $58,097 $209,613 $68,854
=============== ============== ============= =============
Acquisition of Home Equity Loans $69,312 $ -- $105,728 $ --
Commercial Corp.:
Aggregate purchase price of assets acquired $17,869 $10,949 $69,840 $58,187
Proceeds from resolution 43,126 106,348 117,660 145,774
Consumer Corp.:
Aggregate acquisition of automobile and other $33,255 $21,980 $66,630 $53,104
consumer receivables
MORTGAGE BANKING
The following table presents selected information regarding the
revenues and expenses of the Company's mortgage banking business.
ANALYSIS OF SELECTED REVENUES AND EXPENSES
MORTGAGE BANKING
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
SECOND QUARTER JUNE 30,
------------------------------- --------------------------
1998 1997 1998 1997
--------------- ------------- ----------- -------------
WAREHOUSE INVENTORY:
Average inventory balance $745,982 $207,978 $907,195 $226,474
Net mortgage warehouse income:
Dollar amount 2,395 526 4,117 1,292
Annualized percentage of average inventory 1.28% 1.01% 0.91% 1.14%
balance
GAIN ON SALE OF MORTGAGE LOANS:
Gain on sale of mortgage loans as a
percentage of loans sold:
Residential 1.15% 1.21% 1.26% 1.13%
Home Equity 4.43% 4.44% 4.59% 4.20%
Securitized Home Equity 1.24% -- 1.24% --
OMSR income as a percentage of residential 1.78% 1.68% 1.80% 1.72%
mortgage loans sold
SERVICING REVENUES:
Average servicing portfolios:
Residential $5,621,502 $3,496,301 $5,119,061 $3,462,207
Commercial 1,388,470 978,812 1,433,898 623,561
Sub-serviced 1,099,795 833,533 960,261 824,958
Servicing fees:
Residential $5,123 $2,991 $9,407 $6,323
Commercial 247 210 485 253
Sub-serviced 218 213 390 409
--------------- ------------- ----------- -------------
Total $5,588 $3,414 $10,282 $6,985
Annualized servicing fee percentage:
Residential 0.36% 0.34% 0.37% 0.37%
Commercial 0.07% 0.09% 0.07% 0.08%
Sub-serviced 0.08% 0.10% 0.08% 0.10%
Gain on sale of servicing rights $-- $2,263 $ -- $4,529
Amortization of servicing rights:
Servicing rights amortization $4,126 $1,596 $7,302 $3,143
15
SIX MONTHS ENDED
SECOND QUARTER JUNE 30,
------------------------------- --------------------------
1998 1997 1998 1997
--------------- ------------- ----------- -------------
Servicing rights amortization as a 0.29% 0.18% 0.29% 0.18%
percentage of average residential servicing
portfolio (annualized)
PERSONNEL:
Personnel expenses $17,216 $7,647 $30,151 $13,573
Number of personnel (at period end):
Production 511 313
Servicing 146 120
Other 710 338
--------------- -------------
Total 1,367 771
=============== =============
PORTFOLIO ASSET ACQUISITION AND RESOLUTION
During the first quarter of 1997, the Trust terminated the Investment
Management Agreement and paid Commercial Corp. a termination payment of $6.8
million representing the present value of servicing fees projected to have been
earned by Commercial Corp. upon the liquidation of the assets of the Trust,
which was expected to occur principally in 1997. The following table presents
selected information regarding the revenues and expenses of the Company's
Portfolio Asset acquisition and resolution business.
ANALYSIS OF SELECTED REVENUES AND EXPENSES
PORTFOLIO ASSET ACQUISITION AND RESOLUTION
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
SECOND QUARTER JUNE 30,
------------------------------- --------------------------
1998 1997 1998 1997
--------------- ------------- ----------- -------------
GAIN ON RESOLUTION OF PORTFOLIO ASSETS:
Average investment:
Nonperforming Portfolios $42,201 $57,445 $46,005 $51,667
Performing Portfolios 13,177 8,335 14,956 8,314
Real estate Portfolios 17,639 21,773 18,053 22,810
Gain on resolution of Portfolio
Assets:
Nonperforming Portfolios $1,626 $4,057 $3,889 $8,029
Performing Portfolios -- -- 299 --
Real estate Portfolios 1,213 834 1,748 2,163
--------------- --------------- ------------ -----------
Total $2,839 $4,891 $5,936 $10,192
=============== =============== ============ ===========
Interest income on performing Portfolios $455 $571 $1,186 $1,061
Gross profit percentage on
resolution of Portfolio Assets:
Nonperforming Portfolios 20.37% 32.05% 21.97% 34.47%
Performing Portfolios -- -- 7.99% --
Real estate Portfolios 22.26% 31.82% 20.35% 31.67%
Weighted average gross profit percentage 21.74% 32.01% 19.77% 33.84%
Interest yield on performing 13.81% 27.40% 15.86% 25.52%
Portfolios (annualized)
SERVICING FEE REVENUES:
Acquisition partnerships $648 $1,510 $1,308 $2,383
Trust -- -- -- 6,800
Affiliates 18 44 87 199
--------------- --------------- ------------ -----------
Total $666 $1,554 $1,395 $9,382
=============== =============== ============ ===========
PERSONNEL:
Personnel expenses $1,100 $1,268 $2,267 $2,883
Number of personnel (at period end):
Production 11 11
Servicing 70 92
--------------- ---------------
Total 81 103
=============== ===============
16
SIX MONTHS ENDED
SECOND QUARTER JUNE 30,
------------------------------- --------------------------
1998 1997 1998 1997
--------------- ------------- ----------- -------------
Interest expense:
Average debt $70,641 $81,298 $73,589 $71,038
Interest expense 1,336 1,703 2,812 3,154
Average yield (annualized) 7.56% 8.38% 7.64% 8.88%
The following chart presents selected information regarding the revenues and
expenses of the Acquisition Partnerships.
ANALYSIS OF SELECTED REVENUES AND EXPENSES
ACQUISITION PARTNERSHIPS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
SECOND QUARTER JUNE 30,
------------------------------- --------------------------
1998 1997 1998 1997
--------------- ------------- ----------- -------------
GAIN ON RESOLUTION OF PORTFOLIO ASSETS:
Gain on resolution of Portfolio $9,110 $11,857 $27,643 $19,558
Assets
Gross profit percentage on resolution of 30.30% 13.02% 31.55% 16.91%
Portfolio Assets
Interest income on performing Portfolios 2,169 1,822 4,622 3,728
Other income 163 567 333 858
INTEREST EXPENSE:
Interest expense $3,016 $3,174 $6,957 $6,158
Average yield (annualized) 7.03% 9.59% 7.04% 9.19%
OTHER EXPENSES:
Servicing fees $1,364 $1,664 $2,785 $2,667
Legal 577 643 985 1,224
Property protection 958 1,303 1,994 2,266
Other 1,667 38 6,895 814
----------------- ---------------- ------------- -----------
Total other expenses 4,566 3,648 12,659 6,971
----------------- ---------------- ------------- -----------
NET EARNINGS $3,860 $7,424 $12,982 $11,015
================= ================ ============= ===========
17
CONSUMER LENDING
The following chart presents selected information regarding the
revenues and expenses of Consumer Corp.'s consumer lending business.
ANALYSIS OF SELECTED REVENUES AND EXPENSES
CONSUMER LENDING
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
SECOND QUARTER JUNE 30,
------------------------------- --------------------------
1998 1997 1998 1997
--------------- ------------- ----------- -------------
INTEREST INCOME:
Average loans and investments:
Auto $45,697 $59,158 $51,085 $51,223
Investments 22,677 3,463 18,278 1,732
Interest income:
Auto $2,221 $2,517 $4,470 $4,530
Investments 392 78 689 78
Average yield (annualized):
Auto 19.44% 17.02% 17.50% 17.69%
Investments 6.91% 9.01% 7.54% 9.01%
SERVICING FEE REVENUES:
Affiliates $584 $106 $968 $140
PERSONNEL:
Personnel expenses $1,292 $592 $2,404 $1,097
Number of personnel (at period end):
Production 67 45
Servicing 97 20
--------------- ----------------
Total 164 65
=============== ================
INTEREST EXPENSE:
Average debt $41,521 $50,438 $41,158 $41,586
Interest expense 939 1,113 1,819 1,808
Average yield (annualized) 9.05% 8.83% 8.84% 8.69%
BENEFIT (PROVISION) FOR INCOME TAXES
The Company has substantial federal NOLs, which can be used to offset
the tax liability associated with the Company's pre-tax earnings until the
earlier of the expiration or utilization of such NOLs. The Company accounts for
the benefit of the NOLs by recording the benefit as an asset and then
establishing an allowance to value the net deferred tax asset at a value
commensurate with the Company's expectation of being able to utilize the
recognized benefit in the next three to four year period. Such estimates are
reevaluated on a quarterly basis with the adjustment to the allowance recorded
as an adjustment to the income tax expense generated by the quarterly earnings.
Significant events that change the Company's view of its currently estimated
ability to utilize the tax benefits, such as the Harbor Merger in the third
quarter of 1997, result in substantial changes to the estimated allowance
required to value the deferred tax benefits recognized in the Company's periodic
financial statements. Similar events could occur in the future, and would impact
the quarterly recognition of the Company's estimate of the required valuation
allowance associated with its NOLs.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements of the Company (including the Notes
thereto) included elsewhere in this Quarterly Report on Form 10-Q.
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
The Company reported net earnings before minority interest and
preferred dividends of $7.9 million in the second quarter of 1998 (including a
$.8 million deferred tax benefit) compared to $4.4 million in the second quarter
of 1997. Net earnings to common shareholders were $6.1 million in 1998 compared
to $2.9 million in 1997. On a per share basis, basic net earnings attributable
to common shareholders were $.84 in 1998 compared to $.44 in 1997. Diluted net
earnings per common share were $.83 in 1998 compared to $.44 in 1997.
18
Mortgage Banking
Mortgage Corp. experienced significant revenue growth in the second
quarter of 1998 relative to 1997 increasing to $37.8 million from $15.7 million.
The direct retail group ("Direct Retail") and the broker retail group ("Broker
Retail") origination networks experienced substantial growth in levels of
origination volume reflecting, in part, the level of capital that has been
contributed to Mortgage Corp. by the Company following the Harbor Merger and
relatively lower market interest rates in 1998 compared to 1997. Such revenue
growth was partially offset by increases in operating expenses associated with
the increased levels of origination volume.
The Company entered the mortgage conduit business in August 1997 with
the formation of FirstCity Capital Corporation ("Capital Corp."). Capital Corp.
has generated interest revenue from its acquired Home Equity Loans, has incurred
interest expense to finance the acquisition of such loans and has incurred
general and administrative expenses in its start-up phase.
Gain on sale of mortgage loans. Gain on sale of mortgage loans
increased by 254% to $28.3 million in 1998 from $8.0 million in 1997. This
increase was the result of substantial increases in the levels of residential
mortgage loan origination generated principally by the Broker Retail network of
Mortgage Corp. and, to a lesser extent, the Direct Retail network of Mortgage
Corp., and the resulting sales of such loans to government agencies and other
investors. The change in the gain on sale percentage is the result of the sale
of approximately $2.3 billion of mortgage loans in 1998 (compared to $.6 billion
in 1997) and the overall mix and pricing of the loans sold.
Net mortgage warehouse income. Net mortgage warehouse income increased
by 355% to $2.4 million in 1998 from $.5 million in 1997. This is the result of
a significant increase in the average balance of loans held in inventory during
the year coupled with an increase in the spread earned between the interest rate
on the underlying mortgages and the interest cost of the warehouse credit
facility.
Servicing fee revenues. Servicing fee revenues increased by 64% to $5.6
million in 1998 from $3.4 million in 1997 as a result of an increase in the size
of the servicing portfolio. The average residential servicing portfolio
increased $2.1 billion over second quarter 1997, to a level of $5.6 billion,
accounting for the majority of the increase in the servicing fee revenue.
Other revenues. Other revenues decreased by 59% to $1.6 million in 1998
from $3.8 million in 1997. This decrease resulted from Mortgage Corp.'s decision
to retain, rather than sell, servicing rights in 1998. The sale of servicing
rights in 1997 resulted in a gain on sale of $2.3 million.
Operating expenses. Operating expenses of Mortgage Corp. increased by
120% to $31.7 million in 1998 from $14.4 million in 1997. The expansion of the
Broker Retail and Direct Retail operation as well as the commencement of Capital
Corp.'s operations in late 1997 also contributed to the period to period
increases. The acquisition of MIG in 1997, which was accounted for as a purchase
by Mortgage Corp., produced higher relative totals for all components of
Mortgage Corp.'s operating expenses in 1998.
Salaries and benefits increased by $9.6 million in 1998 reflecting the
596 additional staff required to support the increase in origination volumes
derived principally from the Broker Retail network and, to a lesser extent, the
Direct Retail network, and the increase in the size and number of loans in the
residential and commercial servicing portfolios in 1998.
Amortization of mortgage servicing rights increased in 1998 as a result
of the substantially larger investment in mortgage servicing rights in 1998. In
consideration of the uncertainty as to the direction of future interest rates,
the Company has begun, through periodic provisions, to build an allowance
against any future valuation impairments of the mortgage servicing rights.
During the quarter the Company added $.5 million to this provision, resulting in
a total allowance of $1.0 million, or .84% of total mortgage servicing rights.
Interest on other notes payable (the portion not associated with Mortgage
Corp.'s warehouse credit facility) increased due to increased working capital
borrowings during 1998.
Occupancy expense increased by $.5 million in 1998 as the result of the
opening or acquisition of several new offices in the Broker Retail and Direct
Retail networks. Increases in data processing, communication and other expenses
in 1998 resulted from the substantial increases in production and servicing
volumes.
Portfolio Asset Acquisition and Resolution
Commercial Corp. purchased $17.9 million of Portfolio Assets during the
second quarter of 1998 for its own account and through the Acquisition
Partnerships compared to $10.9 million of acquisitions in the second quarter of
1997. Commercial Corp.'s quarter end investment in Portfolio Assets decreased to
$68.5 million in 1998 from $90.0 million in 1997. Commercial Corp. invested $8.2
million in equity in Portfolio Assets in 1998 compared to $6.2 million in 1997.
Net gain on resolution of Portfolio Assets. Proceeds from the
resolution of Portfolio Assets decreased by 15% to $13.1 million in 1998 from
$15.3 million in 1997. The net gain on resolution of Portfolio Assets decreased
by 42% to $2.8 million in 1998 from $4.9 million in 1997 as the result of a
lower gross profit percentage in 1998. The gross profit percentage on the
proceeds from the resolution of Portfolio Assets in 1998 was 21.7% as compared
to 32.0% in 1997.
Equity in earnings of Acquisition Partnerships. Proceeds from the
resolution of Portfolio Assets for the Acquisition Partnerships decreased by 67%
to $30.1 million in 1998 from $91.1 million in 1997 while the gross profit
percentage on proceeds increased to 30.3% in 1998 from 13.0% in 1997. Other
expenses of the Acquisition Partnerships increased by $.9 million in 1998
generally reflecting costs associated with the resolution of Portfolio Assets in
Europe which generated proceeds of $16.2 million. The net result was an overall
decrease in the net income of the Acquisition Partnerships of 48% to $3.9
million in 1998 from $7.4 million in 1997. As a result, Commercial Corp.'s
equity earnings from Acquisition Partnerships decreased by 45% to $1.5 million
in 1998 from $2.8 million in 1997.
Servicing fee revenues. Servicing fees decreased by 57% to $.7 million
in 1998 from $1.6 million in 1997 as a result of lower domestic collection
levels in the Acquisition Partnerships and affiliated entities.
Other revenues. Other revenues decreased to $.5 million in 1998 from
$1.0 million in 1997.
Operating expenses. Operating expenses declined to $4.3 million in 1998
from $5.9 million in 1997 primarily as a result of reduced salaries and benefits
and lower asset level expenses.
Salaries and benefits declined in 1998 as a result of the consolidation
of some of the servicing offices (Portfolios being serviced in the closed
offices reached final resolution).
Interest on other notes payable declined $.4 million primarily as a
result of lower average borowings.
Asset level expenses incurred in connection with the servicing of
Portfolio Assets decreased in 1998 as a result of the decrease in investments in
Portfolio Assets in 1998. Occupancy and other expenses decreased as a result of
the consolidation of servicing offices in 1998.
Consumer Lending
Consumer Corp.'s revenues and expenses in 1997 were derived principally
from its original sub-prime automobile financing program. Consumer Corp.
terminated its obligations to the financial institutions participating in such
program effective as of January 31,
19
1998. In late 1997 Consumer Corp., through its 80% owned subsidiary, Funding
Corp., established a new sub-prime automobile financing program through which it
originates automobile loans through direct relationships with franchised
automobile dealerships. Substantially all of Consumer Corp.'s activities are
expected to be conducted through Funding Corp. during 1998.
Gain on sale of automobile loans. Funding Corp. completed a
securitization of $50 million in automobile loans, recognizing a gain of $2.4
million in the second quarter of 1998. Consumer Corp. has retained subordinated
interests in the form of nonrated tranches and excess spreads resulting from
three securitization transactions it has completed reflecting an aggregate
investment of $34.1 million in such interests at June 30, 1998.
Interest and other income. Interest income on consumer loans was
relatively flat in the second quarter of 1998 as compared to the second quarter
of 1997. Other income increased $.5 million due to an increase in service fee
revenues from securitization trusts.
Interest expense. Interest expense decreased by 16% to $.9 million in
1998 from $1.1 million in 1997 as a result of a decrease in the average
outstanding level of borrowings secured by automobile receivables to $41.5
million in 1998 from $50.4 million in 1997. The average rate at which such
borrowings incurred interest increased to 9.05% from 8.83% for the same period.
Operating expenses. Salaries and benefits increased by 118% to $1.3
million in 1998 from $.6 million in 1997 as a result of the increased levels of
operating activity in 1998. Other expenses increased $.9 million due to the
growth of the origination and servicing operations.
Provision for loan losses. The provision for loan losses on automobile
receivables decreased by 63% to $.5 million in 1998 from $1.4 million in 1997.
Consumer Corp. previously increased its rate of provision for loan losses based
on its determination that the discount rate at which it acquired loans under its
prior origination program did not properly provide for the losses expected to be
realized on the acquired loans. The origination program currently operated by
Funding Corp. generally allows for the acquisition of loans from automobile
dealerships at a larger discount from par than Consumer Corp.'s original
financing program. The Company believes that such acquisition prices more
closely approximate the expected loss per occurrence on the loans originated. To
the extent that Funding Corp. cannot match such discount to expected losses,
additional provisions might, in the future, be required to properly provide for
the risk of loss on the loans originated. The Company expects to incur
provisions for loan losses in 1998 on automobile loans acquired by it during
early 1998 through its previous origination program.
20
Other Items Affecting Net Earnings
The following items affect the Company's overall results of operations
and are not directly related to any one of the Company's businesses discussed
above.
Corporate overhead. Interest income on the Class A Certificate during
the second quarter of 1997 represents reimbursement to the Company from the
Trust of dividends through June 30, 1997, of $1.5 million on special preferred
stock. Company level interest expense was relatively flat year to year . Other
corporate income increased due to interest earned on the excess liquidity
derived from the Trust's redemption of the Class A Certificate. Salary and
benefits, occupancy and professional fees account for the majority of other
overhead expenses, which remained relatively flat compared to 1997.
Income taxes. Federal income taxes are provided at a 35% rate applied
to taxable income and are offset by NOLs that the Company believes are available
to it as a result of the Merger. The tax benefit of the NOLs is recorded in the
period during which the benefit is realized. The Company reported a deferred tax
benefit of $.8 million in 1998 as compared to a benefit of $.3 million in 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
The Company reported net earnings before minority interest and
preferred dividends of $13.4 million in the first six months of 1998 (including
a $1.5 million deferred tax benefit) compared to $13.7 million in the first six
months of 1997. Net earnings to common shareholders were $10.4 million in both
periods. On a per share basis, basic net earnings attributable to common
shareholders were $1.51 in 1998 compared to $1.60 in 1997. Diluted net earnings
per common share were $1.47 in 1998 compared to $1.58 in 1997. The 1997 results
reflect the positive effect of the $6.8 million, or $1.03 per share, payment
from the Trust in settlement of the Investment Management Agreement.
Mortgage Banking
Gain on sale of mortgage loans. Gain on sale of mortgage loans
increased by 265% to $48.6 million in the first six months of 1998 from $13.3
million in the first six months of 1997. This increase was the result of
substantial increases in the levels of residential mortgage loan origination
generated principally by the Broker Retail network of Mortgage Corp. and, to a
lesser extent, the Direct Retail network of Mortgage Corp., and the resulting
sales of such loans to government agencies and other investors. The change in
the gain on sale percentage is the result of the sale of approximately $3.5
billion of mortgage loans in 1998 (compared to $1.1 billion in 1997) and the
overall mix and pricing of the loans sold.
Net mortgage warehouse income. Net mortgage warehouse income increased
by 219% to $4.1 million in 1998 from $1.3 million in 1997. This is the result of
a significant increase in the average balance of loans held in inventory during
the year offset by a decrease in the spread earned between the interest rate on
the underlying mortgages and the interest cost of the warehouse credit facility
as the overall levels of interest rates on residential mortgage loans reached
their lowest levels in several years.
Servicing fee revenues. Servicing fee revenues increased by 47% to
$10.3 million in 1998 from $7.0 million in 1997 as a result of an increase in
the size of the servicing portfolio. Mortgage Corp. substantially increased its
commercial mortgage servicing portfolio and its ability to originate commercial
mortgage loans for correspondents and conduit lenders with the purchase, in the
second quarter of 1997, of MIG.
Other revenues. Other revenues decreased by 48% to $3.6 million in 1998
from $6.8 million in 1997. This decrease resulted from Mortgage Corp.'s decision
to retain, rather than sell, servicing rights in 1998. The sale of servicing
rights in 1997 resulted in a gain on sale of $4.5 million.
Operating expenses. Operating expenses of Mortgage Corp. increased by
116% to $56.5 million in 1998 from $26.1 million in 1997. The expansion of the
Broker Retail and Direct Retail operation as well as the commencement of Capital
Corp.'s operations in late 1997 also contributed to the period to period
increases. The acquisition of MIG in 1997, which was accounted for as a purchase
by Mortgage Corp., produced higher relative totals for all components of
Mortgage Corp.'s operating expenses in 1998.
Salaries and benefits increased by $16.6 million in 1998 reflecting the
additional staff required to support the increase in origination volumes derived
principally from the Broker Retail network and, to a lesser extent, the Direct
Retail network, and the increase in the size and number of loans in the
residential and commercial servicing portfolios in 1998.
Amortization of mortgage servicing rights increased in 1998 as a result
of the substantially larger investment in mortgage servicing rights in 1998.
Interest on other notes payable (the portion not associated with Mortgage
Corp.'s warehouse credit facility) increased due to increased working capital
borrowings during 1998.
21
Occupancy expense increased by $3 million in 1998 as the result of the
opening or acquisition of several new offices in 1997 in the Broker Retail and
Direct Retail networks. Increases in data processing, communication and other
expenses in 1998 resulted from the substantial increases in production and
servicing volumes.
Portfolio Asset Acquisition and Resolution
Commercial Corp. purchased $69.8 million of Portfolio Assets during the
first six months of 1998 for its own account and through the Acquisition
Partnerships compared to $58.2 million of acquisitions in the first six months
of 1997. Commercial Corp.'s quarter end investment in Portfolio Assets decreased
to $68.5 million in 1998 from $90.0 million in 1997. Commercial Corp. invested
$16.9 million in equity in Portfolio Assets in 1998 compared to $12.3 million in
1997.
Net gain on resolution of Portfolio Assets. Proceeds from the
resolution of Portfolio Assets were flat year to year. The net gain on
resolution of Portfolio Assets decreased by 42% to $5.9 million in 1998 from
$10.2 million in 1997 as the result of a lower gross profit percentage in 1998.
The gross profit percentage on the proceeds from the resolution of Portfolio
Assets in 1998 was 19.8% as compared to 33.8% in 1997.
Equity in earnings of Acquisition Partnerships. Proceeds from the
resolution of Portfolio Assets for the Acquisition Partnerships decreased by 24%
to $87.6 million in 1998 from $115.7 million in 1997 while the gross profit
percentage on proceeds increased to 31.6% in 1998 from 16.9% in 1997. Interest
income in the Acquisition Partnerships increased $.9 million and interest
expense increased $.8 million in 1998 as a result of increased levels of
interest earning assets and interest bearing liabilities carried by the
Acquisition Partnerships in the first six months of 1998 as compared to 1997.
Other expenses of the Acquisition Partnerships increased by $5.7 million in 1998
generally reflecting costs associated with the resolution of Portfolio Assets in
Europe which generated proceeds of $58.2 million. The net result was an overall
increase in the net income of the Acquisition Partnerships of 18% to $13.0
million in 1998 from $11.0 million in 1997. As a result, Commercial Corp.'s
equity earnings from Acquisition Partnerships increased by 9.8% to $4.7 million
in 1998 from $4.3 million in 1997.
Servicing fee revenues. Servicing fees reported during 1997 included
the receipt of a $6.8 million cash payment related to the early termination of a
servicing agreement between the Company and the Trust, under which the Company
serviced the assets of the Trust. The $6.8 million payment represents the
present value of servicing fees projected to have been earned by Commercial
Corp. upon liquidation of the Trust assets, which was expected to occur
principally in 1997. Excluding fees related to Trust assets, servicing fees
decreased by 46% to $1.4 million in 1998 from $2.6 million in 1997 as a result
of lower domestic collection levels in the Acquisition Partnerships and
affiliated entities.
Other revenues. Other revenues increased to $2.5 million in 1998
compared to $2.0 million in 1997 principally as a result of interest income
derived from Performing Purchased Asset Portfolios in 1998.
Operating expenses. Operating expenses declined to $9.2 million in 1998
from $12.1 million in 1997 primarily as a result of reduced salaries and
benefits, lower asset level expenses and reduced amortization expense.
Salaries and benefits declined in 1998 as a result of the consolidation
of some of the servicing offices (Portfolios being serviced in the closed
offices reached final resolution).
Interest on other notes payable declined $.4 million.
Asset level expenses incurred in connection with the servicing of
Portfolio Assets decreased in 1998 as a result of the decrease in investments in
Portfolio Assets in 1998. Occupancy and other expenses decreased as a result of
the consolidation of servicing offices in 1998.
Consumer Lending
Interest and other income. Interest income increased by 7.3% to $5.2
million in the first six months of 1998 from $4.9 million in the first six
months of 1997, reflecting increased levels of loan origination activity in 1998
and an increase in the average balance of investments held by Consumer Corp.
during 1998. Other income increased $.8 million due to increased service fee
revenue from securitization trusts.
Interest expense. Interest expense was relatively flat period to
period.
Operating expenses. Salaries and benefits increased by 119% to $2.4
million in 1998 from $1.1 million in 1997 as a result of the increased levels of
operating activity in 1998. Other expenses increased $1.2 million due to the
growth in the origination and servicing operations.
22
Provision for loan losses. The provision for loan losses on automobile
receivables increased by 32% to $2.9 million in 1998 from $2.2 million in 1997.
Consumer Corp. increased its rate of provision for loan losses based on its
determination that the discount rate at which it acquired loans under its
previous origination program did not properly provide for the losses expected to
be realized on the acquired loans.
Other Items Affecting Net Earnings.
The following items affect the Company's overall results of operations
and are not directly related to any one of the Company's businesses discussed
above.
Corporate overhead. Interest income on the Class A Certificate during
1997 represents reimbursement to the Company from the Trust of dividends through
June 30, 1997, of $3.2 million on special preferred stock. Company level
interest expense increased by 22% to $1.1 million in the first six months of
1998 from $.9 million in the first six months of 1997 as a result of higher
volumes of debt associated with the equity required to purchase Portfolio
Assets, equity interests in Acquisition Partnerships and capital support to
operating subsidiaries. Other corporate income increased due to interest earned
on the excess liquidity derived from the Trust's redemption of the Class A
Certificate. Salary and benefits, occupancy and professional fees account for
the majority of other overhead expenses, which decreased in 1998 compared to
1997, as a result of the decrease in the amount of executive and other officer
bonuses granted in 1998.
Income taxes. Federal income taxes are provided at a 35% rate applied
to taxable income and are offset by NOLs that the Company believes are available
to it as a result of the Merger. The tax benefit of the NOLs is recorded in the
period during which the benefit is realized. The Company reported a deferred tax
benefit of $1.5 million in 1998 as compared to a benefit of $.6 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Company requires liquidity to fund its operations,
working capital, payment of debt, equity for acquisition of Portfolio Assets,
investments in and advances to the Acquisition Partnerships, investments in
expanding businesses to support their growth, retirement of and dividends on
preferred stock, and other investments by the Company. The potential sources of
liquidity are funds generated from operations, equity distributions from the
Acquisition Partnerships, interest and principal payments on subordinated debt
and dividends from the Company's subsidiaries, short-term borrowings from
revolving lines of credit, proceeds from equity market transactions,
securitization and other structured finance transactions and other special
purpose short-term borrowings.
On July 17, 1998 the Company filed a shelf registration statement with
the Securities and Exchange Commission which allows the Company to issue up to
$250 million in debt and equity securities from time to time in the future. The
registration statement became effective July 28, 1998. In May 1998, the Company
closed the public offering of 1,542,150 shares of FirstCity common stock, of
which 341,000 shares were sold by selling shareholders. Net proceeds (after
expenses) of $34.2 million were used to retire debt. In June 1998, the Company
received $11.8 million from the exercise of warrants.
In the future, the Company anticipates being able to raise capital
through a variety of sources including, but not limited to, public debt or
equity offerings (subject to limitations related to the preservation of the
Company's NOLs), thus enhancing the investment and growth opportunities of the
Company. The Company believes that these and other sources of liquidity,
including refinancing and expanding the Company's revolving credit facility to
the extent necessary, securitizations, and funding from senior lenders for
Acquisition Partnership investments and direct portfolio and business
acquisitions, should prove adequate to continue to fund the Company's
contemplated activities and meet its liquidity needs.
The Company and each of its major operating subsidiaries have entered
into one or more credit facilities to finance its respective operations. Each of
the operating subsidiary credit facilities is nonrecourse to the Company and the
other operating subsidiaries, except as discussed below.
Excluding the term acquisition facilities of the unconsolidated
Acquisition Partnerships, as of June 30, 1998 the Company and its subsidiaries
had credit facilities providing for borrowings in an aggregate principal amount
of $1,992 million and outstanding borrowings of $1,225 million. The following
table summarizes the material terms of the credit facilities to which the
Company, its major operating subsidiaries and the Acquisition Partnerships were
parties and the outstanding borrowings under such facilities as of June 30,
1998.
23
CREDIT FACILITIES
OUTSTANDING
PRINCIPAL BORROWINGS AS OF
AMOUNT JUNE 30, 1998 INTEREST RATE OTHER TERMS AND CONDITIONS
------ ------------- ------------- --------------------------
(DOLLARS IN MILLIONS)
FIRSTCITY
Company Credit Prime or Secured by the assets of
Facility $ 50 $ 1 LIBOR + 2.625% the Company, expires April
30, 1999
Term fixed asset
facility 1 1 Fixed 9.25% Secured by certain fixed
assets, expires January 1,
2001
MORTGAGE CORP.
Warehouse facility 670 497 LIBOR + 0.5% to 2.5% Revolving line to warehouse
residential mortgage loans,
expires March 31, 1999
Supplemental warehouse
facility 36 25 LIBOR + 0.5% to 2.25% Revolving line to warehouse
residential mortgage loans
and related receivables,
expires March 31, 1999
FNMA warehouse
facility 700 495 Fed Funds+ 0.5% to 1.0% Open facility to fund
committed loans to FNMA and
other
Operating line 47 45 LIBOR + 2.25% Revolving operating line
secured by the unencumbered
assets of Harbor, expires
December 15, 2002
CAPITAL CORP.
Warehouse facility 200 28 LIBOR + 0.75% Repurchase agreement to
facilitate the acquisition
of Home Equity Loans,
expires March 30, 1999
Warehouse facility 48 4 Fixed 6.85% Repurchase agreement to
facilitate the acquisition
of Home Equity Loans,
expired July 31, 1998
COMMERCIAL CORP.
Portfolio acquisition Acquisition facility to
facility 100 36 LIBOR + 2.5% acquire Portfolio Assets,
expires February 28, 1999
(includes $23 million
advanced to unconsolidated
Acquisition Partnerships
24
OUTSTANDING
PRINCIPAL BORROWINGS AS OF
AMOUNT JUNE 30, 1998 INTEREST RATE OTHER TERMS AND CONDITIONS
------ ------------- ------------- --------------------------
(DOLLARS IN MILLIONS)
French acquisition
facility 15 9 French franc LIBOR + 3.5% Acquisition facility to
fund equity investments in
French Portfolio Assets,
expires March 31, 1999.
Guaranteed by Commercial
Corp. and the Company.
Term facility (1) 15 -- Prime + 7% Term facility to finance
the purchase of mortgage
servicing rights from
Mortgage Corp., expires
October 30, 1998.
Guaranteed by the Company
Term acquisition
facilities 40 40 Fixed at 7.66% Acquisition facilities for
existing Portfolio Assets.
Secured by portfolio
assets. Expires June 5, 2002
CONSUMER CORP.
Warehouse facility 70 54 LIBOR + 3% Revolving line secured by
automobile receivables,
expires May 31, 1999
UNCONSOLIDATED
ACQUISITION PARTNERSHIPS Senior and subordinated
Term acquisition 62 62 Fixed at 7.51% to 10.17%, loans secured by Portfolio
facilities LIBOR + 3% to 6.5% and Assets, various maturities
Prime + 2% to 7%
- ---------------------------------
(1) The facility was entered into as of July 24, 1998. Outstanding borrowings
under the facility as of July 27, 1998 were $15 million.
25
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders (the "Annual
Meeting") on May 21, 1998. The following items of business were considered at
the Annual Meeting.
(a) Election of Directors
All standing directors were elected as directors to serve as
members of the Company's Board of Directors until the Company's 1999
annual meeting of shareholders. The number of votes cast for each
nominee was as follows:
Votes Cast Votes
Nominee For Against Abstained
------------------------- ----------------------- ----------------------- -------------------------
James R. Hawkins 5,721,876 0 6,826
C. Ivan Wilson 5,724,452 0 4,250
James T. Sartain 5,724,452 0 4,250
Rick R. Hagelstein 5,724,452 0 4,250
Matt A. Landry, Jr. 5,724,452 0 4,250
Richard J. Gillen 5,724,452 0 4,250
Richard E. Bean 5,724,452 0 4,250
Bart A. Brown, Jr. 5,724,452 0 4,250
Donald J. Douglass 5,724,452 0 4,250
David W. MacLennan 5,724,452 0 4,250
Thomas E. Smith 5,724,452 0 4,250
(b) Ratification of Appointment of Auditors
A proposal to ratify the Board of Directors' appointment of
KPMG Peat Marwick LLP as the Company's independent auditors for 1998 was
approved by the shareholders. The number of votes for the proposal: 5,712,478;
votes withheld: 8,236; abstentions: 7,988.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 -- Joint Plan of Reorganization by First City Bancorportion of Texas,
Inc., Official Committee of Equity Security Holders and J-Hawk
Corporation, with the Participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code,
Case No. 392-39474-HCA-11 (incorporated by reference herein to
Exhibit 2.1 of the Company's Current Report on Form 8-K dated July
3, 1995 filed with the Commission on July 18, 1995)
2.2 -- Agreement and Plan of Merger, dated as of July 3, 1995, by and
between First City Bancorporation of Texas, Inc. and J-Hawk
Corporation (incorporated herein by reference to Exhibit 2.2 of the
Company's Current Report on Form 8-K dated July 3, 1995 filed with
the Commission on July 18, 1995)
4.1 -- Amended and Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995)
26
4.2 -- Certificate of Designations of the New Preferred Stock ($0.01 par
value) of the Company (incorporated herein by reference to Exhibit
4.1 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997)
4.3 -- Bylaws of the Company (incorporated herein by reference to Exhibit
3.2 of the Company's Current Report on Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995)
4.4 -- Registration Rights Agreement, dated July 1, 1997, among the
Company, Richard J. Gillen, Bernice J. Gillen, Harbor Financial
Mortgage Company Employees Pension Plan, Lindsey Capital
Corporation, Ed Smith and Thomas E. Smith (incorporated herein by
reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997)
10.1 -- Master Repurchase Agreement Governing Purchases and Sales of
Mortgage Loans, dated as of July 1998, between Lehman Commercial
Paper Inc. and FHB Funding Corp.
10.2 -- Warehouse Credit Agreement, dated as of April 30, 1998, among
ContiTrade Services, L.L.C., FirstCity Consumer Lending Corporation,
FirstCity Auto Receivables L.L.C. and FirstCity Financial
Corporation
10.3 -- Servicing Agreement, dated as of April 30, 1998, among FirstCity
Auto Receivables L.L.C., FirstCity Servicing Corporation of
California, FirstCity Consumer Lending Corporation and ContiTrade
Services L.L.C.
10.4 -- Security and Collateral Agent Agreement, dated as of April 30, 1998,
among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C.
and Chase Bank of Texas, National Association
10.5 -- Loan Agreement, dated as of July 24, 1998, between FirstCity
Commercial Corporation and CFSC Capital Corp. XXX
10.6 -- Loan Agreement, dated April 8, 1998, between Bank of Scotland and
the Company
10.7 -- First Amendment to Loan Agreement, dated July 20, 1998, between Bank
of Scotland and the Company
27.1 -- Financial Data Schedule. (Exhibit 27.1 is being submitted as an
exhibit only in the electronic format of this Quarterly Report on
Form 10-Q being submitted to the Securities and Exchange Commission.
Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of
the Securities Act of 1933, Section 18 of the Securities Act of
1934, as amended, or Section 323 of the Trust Indenture Act of 1939,
as amended, or otherwise be subject to the liabilities of such
sections, nor shall it be deemed a part of any registration
statement to which it relates.)
(b) Reports on Form 8-K.
The following Current Report on Form 8-K pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 was filed by the
Registrant with the Commission:
1. A Form 8-K was filed, dated April 29, 1998, regarding the first
quarter results.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRSTCITY FINANCIAL CORPORATION
By: /s/ Matt A. Landry, Jr.
--------------------------------------
Name: Matt A. Landry, Jr.
Title: Executive Vice President and Chief
Administrative Officer
(Duly authorized officer and principal
financial and accounting officer of
the Registrant)
Dated: August 13, 1998
28
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
2.1 -- Joint Plan of Reorganization by First City Bancorportion of Texas,
Inc., Official Committee of Equity Security Holders and J-Hawk
Corporation, with the Participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code,
Case No. 392-39474-HCA-11 (incorporated by reference herein to
Exhibit 2.1 of the Company's Current Report on Form 8-K dated July
3, 1995 filed with the Commission on July 18, 1995)
2.2 -- Agreement and Plan of Merger, dated as of July 3, 1995, by and
between First City Bancorporation of Texas, Inc. and J-Hawk
Corporation (incorporated herein by reference to Exhibit 2.2 of the
Company's Current Report on Form 8-K dated July 3, 1995 filed with
the Commission on July 18, 1995)
4.1 -- Amended and Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K dated July 3, 1995 filed with the
Commission on July 18, 1995)
4.2 -- Certificate of Designations of the New Preferred Stock ($0.01 par
value) of the Company (incorporated herein by reference to Exhibit
4.1 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997)
4.3 -- Bylaws of the Company (incorporated herein by reference to Exhibit
3.2 of the Company's Current Report on Form 8-K dated July 3, 1995
filed with the Commission on July 18, 1995)
4.4 -- Registration Rights Agreement, dated July 1, 1997, among the
Company, Richard J. Gillen, Bernice J. Gillen, Harbor Financial
Mortgage Company Employees Pension Plan, Lindsey Capital
Corporation, Ed Smith and Thomas E. Smith (incorporated herein by
reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997)
10.1 -- Master Repurchase Agreement Governing Purchases and Sales of
Mortgage Loans, dated as of July 1998, between Lehman Commercial
Paper Inc. and FHB Funding Corp.
10.2 -- Warehouse Credit Agreement, dated as of April 30, 1998, among
ContiTrade Services, L.L.C., FirstCity Consumer Lending Corporation,
FirstCity Auto Receivables L.L.C. and FirstCity Financial
Corporation
10.3 -- Servicing Agreement, dated as of April 30, 1998, among FirstCity
Auto Receivables L.L.C., FirstCity Servicing Corporation of
California, FirstCity Consumer Lending Corporation and ContiTrade
Services L.L.C.
10.4 -- Security and Collateral Agent Agreement, dated as of April 30, 1998,
among FirstCity Auto Receivables L.L.C., ContiTrade Services L.L.C.
and Chase Bank of Texas, National Association
10.5 -- Loan Agreement, dated as of July 24, 1998, between FirstCity
Commercial Corporation and CFSC Capital Corp. XXX
10.6 -- Loan Agreement, dated April 8, 1998, between Bank of Scotland and
the Company
10.7 -- First Amendment to Loan Agreement, dated July 20, 1998, between Bank
of Scotland and the Company
27.1 -- Financial Data Schedule. (Exhibit 27.1 is being submitted as an
exhibit only in the electronic format of this Quarterly Report on
Form 10-Q being submitted to the Securities and Exchange Commission.
Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of
the Securities Act of 1933, Section 18 of the Securities Act of
1934, as amended, or Section 323 of the Trust Indenture Act of 1939,
as amended, or otherwise be subject to the liabilities of such
sections, nor shall it be deemed a part of any registration
statement to which it relates.)