-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R1DdS/bVgtx+WBcD1RltePJKOXWwvKf4Bi+EXj/SiWJiLtdp8qm6pNXsT7Kj8U7x 5N5Mj5T8FR/Cc4uMPXLZcw== 0000909518-97-000675.txt : 19971117 0000909518-97-000675.hdr.sgml : 19971117 ACCESSION NUMBER: 0000909518-97-000675 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTCITY FINANCIAL CORP CENTRAL INDEX KEY: 0000828678 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 760243729 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26500 FILM NUMBER: 97721903 BUSINESS ADDRESS: STREET 1: 6400 IMPERIAL DRIVE CITY: WACO STATE: TX ZIP: 76712 BUSINESS PHONE: 8177511750 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CITY BANCORPORATION OF TEXAS INC/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CITY ACQUISITION CORP DATE OF NAME CHANGE: 19880523 10-Q 1 10Q FOR PERIOD END 09/30/97 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 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 OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (254) 751-1750 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 Sections 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 7, 1997, 6,520,104 shares of Common Stock, par value $.01 per share, were outstanding. FORWARD LOOKING INFORMATION The statements included in this Quarterly Report on Form 10-Q regarding future financial performance and results and the other statements that are not historical facts are forward-looking statements. The words "expect," "project," "estimate," "predict," "anticipate," "believes" and similar expressions are also intended to identify forward-looking statements. Such statements are subject to numerous risks, uncertainties and assumptions, including but not limited to, the uncertainties relating to industry and market conditions, natural disasters and other catastrophes, and other risks and uncertainties described in this Quarterly Report on Form 10-Q and in FirstCity Financial Corporation's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 - ----------------------------------------------------------------------------------------------- ASSETS ------ CASH AND CASH EQUIVALENTS................................. $29,308 $16,995 PURCHASED ASSET POOLS AND LOAN RECEIVABLES, NET........... 195,916 118,561 MORTGAGE LOANS HELD FOR SALE.............................. 248,015 134,974 EQUITY INVESTMENTS IN AND ADVANCES TO ACQUISITION PARTNERSHIPS 23,428 21,761 CLASS "A" CERTIFICATE OF FIRSTCITY LIQUIDATING TRUST...... - 53,617 RECEIVABLE FROM FIRSTCITY LIQUIDATING TRUST............... 1,684 - SERVICING RIGHTS.......................................... 57,311 39,864 RECEIVABLE FOR SERVICING ADVANCES AND ACCRUED INTEREST.... 19,876 22,380 DEFERRED TAX BENEFIT,NET.................................. 30,141 14,068 OTHER ASSETS, NET......................................... 29,683 18,082 --------------- --------------- TOTAL ASSETS........................................ $635,362 $440,302 =============== =============== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY - ---------------------------------------------------------------- LIABILITIES: NOTES PAYABLE, SECURED................................. $428,825 $270,585 NOTES PAYABLE TO OTHERS................................ 3,755 4,747 OTHER LIABILITIES...................................... 50,274 26,853 --------------- --------------- TOTAL LIABILITIES................................... 482,854 302,185 --------------- --------------- COMMITMENTS AND CONTINGENCIES....................... - - SPECIAL PREFERRED STOCK, INCLUDING DIVIDENDS OF $669 AND $1,938, RESPECTIVELY (NOMINAL STATED VALUE OF $21 PER SHARE; 2,500,000 SHARES AUTHORIZED; ISSUED AND OUTSTANDING: 849,777 AND 2,460,911 SHARES, RESPECTIVELY)........................ 18,515 53,617 ADJUSTING RATE PREFERRED STOCK, INCLUDING DIVIDENDS OF $846 AT SEPTEMBER 30, 1997 (REDEMPTION VALUE OF $21 PER SHARE; 2,000,000 SHARES AUTHORIZED; 1,073,704 SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1997)....................... 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 SHARES AUTHORIZED; ISSUED AND OUTSTANDING: 6,520,067 AND 6,513,346 SHARES, RESPECTIVELY)............................... 65 65 PAID IN CAPITAL........................................ 30,248 29,773 RETAINED EARNINGS...................................... 80,287 54,662 --------------- --------------- TOTAL SHAREHOLDERS' EQUITY.......................... 110,600 84,500 --------------- --------------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY............................. $635,362 $440,302 =============== ===============
See accompanying notes to consolidated financial statements. 3 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------- PROCEEDS FROM DISPOSITION AND PAYMENTS RECEIVED ON PURCHASED ASSET POOLS $ 13,700 $ 10,646 $43,822 $ 38,324 COST OF PURCHASED ASSET POOLS.... 9,743 6,292 29,673 25,354 ------------- ------------- ------------ ------------- NET GAIN ON PURCHASED ASSET POOLS 3,957 4,354 14,149 12,970 OTHER INCOME: SERVICING FEES................... 5,437 8,258 21,828 18,542 INTEREST INCOME ON CLASS"A" CERTIFICATE................... 330 2,236 3,504 9,664 NET MORTGAGE WAREHOUSE INCOME.... 701 130 1,993 2,179 OTHER INTEREST INCOME............ 2,893 2,122 9,120 5,444 GAIN ON SALES OF MORTGAGE LOANS.. 13,474 3,714 28,757 15,600 RENTAL INCOME ON PURCHASED REAL ESTATE POOLS......................... 68 674 225 2,609 OTHER............................ 1,375 1,699 9,014 4,457 ------------- ------------- ------------ ------------- 28,235 23,187 88,590 71,465 ------------- ------------- ------------ ------------- EXPENSES: INTEREST ON SENIOR SUBORDINATED NOTES PAYABLE....................... - 340 - 3,892 INTEREST ON OTHER NOTES PAYABLE.. 2,331 3,131 9,195 8,151 PROVISION FOR LOAN LOSSES........ 2,076 1,000 4,231 1,000 SALARIES AND BENEFITS............ 11,900 5,970 32,588 20,879 AMORTIZATION..................... 2,091 1,782 6,999 5,777 MERGER RELATED EXPENSES.......... 1,618 - 1,618 - OTHER GENERAL AND ADMINISTRATIVE. 9,656 6,037 25,472 17,225 ------------- ------------- ------------ ------------- 29,672 18,260 80,103 56,924 ------------- ------------- ------------ ------------- EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS..................... 1,798 2,623 6,111 4,253 ------------- ------------- ------------ ------------- EARNINGS FROM OPERATIONS BEFORE INCOME TAXES.................. 361 7,550 14,598 18,794 PROVISION (BENEFIT) FOR INCOME TAXES (16,078) 759 (15,497) (12,193) ------------- ------------- ------------ ------------- NET EARNINGS.................. $16,439 $6,791 $30,095 $30,987 ============= ============= ============ ============= MINORITY INTEREST IN INCOME (LOSS) OF SUBSIDIARY....................... (251) - (182) - REDEEMABLE PREFERRED DIVIDENDS...... 1,514 1,896 4,688 5,772 ------------- ------------- ------------ ------------- NET EARNINGS TO COMMON SHAREHOLDERS $ 15,176 $ 4,895 $25,589 $ 25,215 ============= ============= ============ ============= NET EARNINGS PER SHARE.............. $ 2.33 $ 0.75 $ 3.93 $ 3.88 ============= ============= ============ ============= WEIGHTED AVERAGE SHARES OUTSTANDING 6,519 6,503 6,516 6,502 ============= ============= ============ =============
See accompanying notes to consolidated financial statements. 4 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NUMBER OF TOTAL COMMON COMMON PAID IN RETAINED SHAREHOLDERS' (DOLLARS IN THOUSANDS) SHARES STOCK CAPITAL EARNINGS EQUITY - ------------------------------------------------------------------------------------------------------------------- BALANCES, JANUARY 1, 1996........ 6,502,408 $65 $29,186 $24,674 $53,925 EXERCISE OF WARRANTS, OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN... 10,938 - 266 - 266 NET EARNINGS FOR 1996............ - - - 37,697 37,697 PREFERRED STOCK DIVIDENDS...... - - - (7,709) (7,709) OTHER.......................... - - 321 - 321 ----------------- ------------- -------------- ------------- ----------------- BALANCES, DECEMBER 31, 1996...... 6,513,346 65 29,773 54,662 84,500 EXERCISE OF WARRANTS, OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN... 6,721 - 154 - 154 NET EARNINGS, AFTER MINORITY INTEREST IN INCOME OF SUBSIDIARY, FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997........................... - - - 30,277 30,277 PREFERRED STOCK DIVIDENDS........ - - - (4,688) (4,688) OTHER............................ - - 321 36 357 ----------------- ------------- -------------- ------------- ----------------- BALANCES, SEPTEMBER 30, 1997..... 6,520,067 $65 $30,248 $80,287 $110,600 ================= ============= ============== ============= =================
See accompanying notes to consolidated financial statements. 5 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- (DOLLARS IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET EARNINGS.......................................... $30,095 $30,987 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH USED IN OPERATING ACTIVITIES, NET OF EFFECT OF ACQUISITIONS: COST OF COLLECTIONS................................ 29,673 25,354 PURCHASE AND ORIGINATION OF ASSET POOLS AND LOANS.. (89,498) (39,786) PURCHASE GAIN ON SALES OF SERVICING RIGHTS, NET.... (4,529) (1,799) INCREASE IN MORTGAGE LOANS HELD FOR SALE........... (113,041) (11,867) INCREASE IN CONSTRUCTION LOANS RECEIVABLE.......... (10,400) (8,813) ORIGINATED MORTGAGE SERVICING RIGHTS............... (27,044) (15,260) PURCHASES OF MORTGAGE SERVICING RIGHTS............. (4,813) (12,404) PROCEEDS FROM SALES OF MORTGAGE SERVICING RIGHTS... 14,807 7,659 PROVISION FOR LOAN LOSSES.......................... 4,231 1,000 EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS..... (6,111) (4,253) COLLECTIONS ON PERFORMING ASSET POOLS.............. 55,118 6,804 INCREASE IN NET DEFERRED TAX ASSET................. (16,073) (12,578) DEPRECIATION AND AMORTIZATION...................... 8,740 6,754 INCREASE IN OTHER ASSETS........................... (33,426) (17,615) INCREASE IN OTHER LIABILITIES...................... 25,834 6,840 -------------- -------------- NET CASH USED IN OPERATING ACTIVITIES...... (136,437) (38,977) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES, NET OF EFFECT OF ACQUISITIONS: ADVANCES TO ACQUISITION PARTNERSHIPS AND AFFILIATES... - (235) PAYMENTS ON ADVANCES TO ACQUISITION PARTNERSHIPS AND AFFILIATES 1,029 709 ACQUISITION OF SUBSIDIARIES........................... 1,118 (302) PROCEEDS FROM SALES OF LOANS HELD FOR INVESTMENT...... 307 112 PAYMENTS RECEIVED ON LOANS HELD FOR INVESTMENT........ 102 30 REPURCHASES OF LOANS FROM INVESTORS................... (1,912) (1,196) PRINCIPAL AND SPECIAL PREFERRED PAYMENTS ON CLASS "A" CERTIFICATE....................................... 41,361 105,690 PROPERTY AND EQUIPMENT, NET........................... (2,061) (1,927) CONTRIBUTIONS TO ACQUISITION PARTNERSHIPS............. (12,392) (17,524) DISTRIBUTIONS FROM ACQUISITION PARTNERSHIPS........... 9,840 14,953 -------------- ------------ NET CASH PROVIDED BY INVESTING ACTIVITIES.......... 37,392 100,310 -------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES, NET OF EFFECT OF ACQUISITIONS: BORROWINGS UNDER NOTES PAYABLE...................... 6,251,936 3,344,675 PAYMENTS OF NOTES PAYABLE .......................... (6,114,844) (3,295,008) PAYMENT OF SENIOR SUBORDINATED NOTES PAYABLE ....... - (105,690) PURCHASE OF SPECIAL PREFERRED STOCK................. (12,567) - PROCEEDS FROM ISSUING COMMON STOCK.................. 154 53 DISTRIBUTIONS TO MINORITY INTEREST.................. (5,609) - DIVIDENDS PAID...................................... (5,112) - -------------- ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 114,223 (55,970) -------------- ------------ NET INCREASE IN CASH...................................... $12,313 $5,363 CASH, BEGINNING OF PERIOD................................. 16,995 13,322 -------------- ------------ CASH, END OF PERIOD....................................... $29,308 $18,685 ============== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: INTEREST............................................ $20,982 $17,242 ============== ============ INCOME TAXES........................................ $480 $138 ============== ============ NON-CASH INVESTING ACTIVITIES: PAYMENT ON CLASS "A" CERTIFICATE IN FORM OF PERFORMING LOAN ...................................... $15,340 $- ============== ============
See accompanying notes to consolidated financial statements. 6 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997 (Dollars in thousands) (1) Basis of Presentation --------------------- 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 asset pools used in the calculation of net gain on purchased asset pools. Actual results could differ materially from those estimates. 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 September 30, 1997, the results of operations and the cash flows for the three month and nine month periods ended September 30, 1997 and 1996. Certain amounts in the financial statements for prior periods have been reclassified to conform with current financial statement presentation. (2) Merger and Acquisition ---------------------- The merger of FirstCity and Harbor Financial Group, Inc. ("Harbor") was completed July 1, 1997. FirstCity issued 1,580,986 shares of common stock in exchange for 100% of Harbor's outstanding capital stock. Harbor originates and services residential loans, home improvement loans and commercial mortgages. Harbor had approximately $12 million in equity, assets of over $300 million and 700 employees prior to the merger. The merger was accounted for as a pooling of interests; therefore, the consolidated financial statements of FirstCity have been restated to reflect the merger as if it occurred January 1, 1996. Net revenues, earnings to common and earnings per share before and after pooling of interests are summarized as follows: Three Nine Months Months Ended Ended -------------- --------------- September 30, 1996 --------------------------------- (Dollars in thousands, except per share data) Net revenues (including equity earnings): Before 1997 pooling.................. $17,088 $45,953 1997 pooling......................... 8,722 29,765 After 1997 pooling................... 25,810 75,718 Net earnings to common: Before 1997 pooling.................. $4,212 $22,631 1997 pooling......................... 683 2,584 After 1997 pooling................... 4,895 25,215 Net earnings per share: Before 1997 pooling.................. $0.86 $4.60 1997 pooling......................... (0.11) (0.72) After 1997 pooling................... 0.75 3.88 7 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997 (Dollars in thousands) On May 15, 1997, Harbor acquired substantially all of the fixed assets of MIG Financial Corporation ("MIG"), a $1.7 billion mortgage servicing portfolio of primarily commercial mortgage loans, and MIG's commercial mortgage operations headquartered in Walnut Creek, California for an aggregate purchase price of $4 million plus the assumption of certain liabilities. The assets purchased consisted of servicing rights, fixed assets and the business relationships of MIG. MIG's asset revenues and historical earnings are insignificant to the total assets and results of operations of Harbor. The transaction was recorded as an asset purchase. MIG originated about $400 million in commercial mortgage loans in 1996. The transaction was funded by $1.3 million of senior debt and $2.6 million of subordinated debt. FirstCity provided the $2.6 million subordinated loan in connection with such transaction. The terms of the loan reflected market terms for such loans made on an arms'-length basis. (3) Purchased Asset Pools and Loan Receivables ------------------------------------------ The purchased asset pools and loan receivables are summarized as follows: September 30, December 31, 1997 1996 ------------- ----------- Non-performing asset pools: Loans................................ $306,939 $294,244 Real estate assets................... 15,454 7,995 ------------- ----------- 322,393 302,239 Performing asset pools.................... 31,099 15,958 Construction loans receivable............. 20,309 9,910 Automobile and consumer finance receivables 51,543 33,583 Allowance for losses...................... (6,399) (2,693) ------------- ----------- 96,552 56,758 Purchased real estate pools............... 21,703 25,303 ------------- ----------- Total purchased asset pools and loan receivables..................... 440,648 384,300 Discount required to reflect purchased asset pools at carrying value.............. (244,732) (265,739) ------------- ----------- Purchased asset pools and loan receivables, net .................... $195,916 $118,561 ============= =========== The purchased asset pools and loan receivables are pledged to secure non-recourse notes payable. 8 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands) The activity in the allowance for loan losses is summarized as follows: Nine Months Ended September 30, --------------------------------- 1997 1996 -------------- --------------- Balances, beginning of period $2,693 $- Provision for loan losses 4,231 1,000 Discounts acquired 9,182 4,772 Reduction in contingent liabilities 458 1,000 Charge off activity: Principal balances charged off (12,157) (4,130) Recoveries 1,992 635 -------------- --------------- Net charge offs (10,165) (3,495) -------------- --------------- Balances, end of period $6,399 $3,277 ============== =============== During 1997 and 1996, 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 under that liability obligation. The reductions in this recorded liability increased the amount of allowance for losses. (4) 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: September 30, December 31, 1997 1996 -------------------- ------------------ Residential mortgage loans...... $244,116 $132,050 Unearned premiums............... 3,899 2,924 -------------------- ------------------ $248,015 $134,974 ==================== ================== (5) Acquisition Partnerships ------------------------ The Company has investments in partnerships and related general partners that are accounted for on the equity method. The condensed combined financial position and results of operations of the acquisition partnerships and general partners are summarized below: Condensed Combined Balance Sheets September 30, December 31, 1997 1996 --------------- ------------- Assets.................... $ 176,965 $ 240,733 =============== ============= Liabilities............... $ 103,871 $ 144,094 Net equity................ 73,094 96,639 --------------- ------------- $ 176,965 $ 240,733 =============== ============= Company's equity in acquisition partnerships $ 23,428 $ 21,761 =============== ============= 9 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands)
Condensed Combined Statements of Income Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ----------- Collections.......................... $ 41,086 $ 89,683 $ 105,417 $ 150,907 Gross margin......................... 9,294 13,229 29,524 31,833 Interest income on performing asset pools 2,208 1,392 5,936 5,225 Net income........................... 5,679 3,765 16,694 7,046 ============ ============ ============ =========== Company's equity in net income of acquisition partnerships.......... $ 1,798 $ 2,623 $ 6,111 $ 4,253 ============ ============ ============ ===========
In the third quarter of 1996, FirstCity recognized $2.0 million in servicing fees in connection with the sale and securitization of $75 million of performing loans from acquisition partnerships. During the third quarter of 1996, a majority of the debt of the acquisition partnerships was refinanced, resulting in a $7 million equity distribution to FirstCity. (6) Class "A" Certificate of FirstCity Liquidating Trust ("Trust") -------------------------------------------------------------- FirstCity is the sole holder of the Class "A" Certificate of the Trust. Distributions from the Trust in respect of the Class "A" Certificate were used to retire the senior subordinated notes payable. Pursuant to a June 1997 agreement with FirstCity, the Trust's obligation to FirstCity under the Class A Certificate was terminated (other than the Trust's obligation to reimburse FirstCity for certain expenses) in exchange for the Trust's agreement to pay FirstCity an amount equal to $22.75 per share for the 1,923,481 outstanding shares of First City's special preferred shares at June 30, 1997, the 1997 second quarter dividend of $.7875 per share, and 15% interest from June 30, 1997, on any unpaid portion of the settlement amount. In the first nine months of 1997, FirstCity paid dividends of $5.1 million on special preferred stock and purchased $11.3 million liquidation preference (537,430 shares) of special preferred stock with distributions from the Trust. The Trust has distributed $42.4 million (including a $15.3 million performing loan) to FirstCity under the June 1997 agreement discussed above, reducing the receivable from the Trust to $1.7 million. In the opinion of management, sufficient funds will be available from the Trust to retire any unpaid amounts under the above mentioned agreement and the above-referenced loan. FirstCity also received $6.8 million (recorded as servicing fees) from the Trust in the first quarter of 1997 in exchange for the termination of the Investment Management Agreement. (7) Preferred Stock --------------- In June 1997, FirstCity offered to exchange one share of special preferred stock for one share of new adjusting rate preferred stock. The new preferred stock has a redemption value of $21.00 per share and cumulative quarterly cash dividends at the annual rate of $3.15 per share through September 30, 1998, adjusting to $2.10 per share through the redemption date of September 30, 2005. FirstCity may redeem the new preferred stock after September 30, 2003 for $21 per share plus accrued dividends. The new preferred stock carries no voting rights except in the event of non-payment of dividends. 1,073,704 shares of special preferred stock were accepted for exchange for a like number of shares of new preferred stock in the third quarter of 1997. At September 30, 1997, 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 October 15, 1997. 10 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands) (8) Income Taxes ------------ Federal income taxes are provided at a 35% rate. Net operating loss carryforwards are available to FirstCity and are recognized as an offset to the provision in the period during which the benefit is realized. During the first nine months of 1997, FirstCity recognized a deferred tax benefit of $13.9 million (compared to $14.6 million in the first nine months of 1996). Realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income prior to expiration of the net operating loss carryforwards. 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 carryforward period change. (9) 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. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- FirstCity Financial Corporation reported earnings for the third quarter and nine months ended September 30, 1997, of $16.4 million and $30.1 million, respectively. After dividends on the Company's preferred stock, earnings were $15.2 million and $25.6 million for the quarter and year-to-date, respectively. On a per share basis, the Company earned $2.33 for the third quarter and $3.93 for the nine-month period. The results were significantly impacted by certain items related to the merger with Harbor Financial completed on July 1, 1997. Most notable was the positive impact of the recognition of $13.3 million of deferred tax benefits. This tax credit is a result of the Company's reassessment of its valuation allowance (reserve) related to FirstCity's substantial net operating loss carryforward asset. The upward revaluation reflects the Company's estimates of its ability to utilize additional tax benefits due to the increasing earnings stream from Harbor. Also during the third quarter, FirstCity booked expenses associated with the merger of $1.6 million. In the third quarter, FirstCity completed its second performing loan sale with the current quarter's sale totaling approximately $21 million. The impact of this sale, combined with normal quarterly collections, resulted in acquisition partnership collections of $41.1 million for the quarter. The Company intends to utilize the performing-asset sale vehicle where possible in the future to maximize the net present value of the assets it owns. On the mortgage side, the Company has opted to retain servicing which in the past Harbor had been selling to generate cash flow. The retention as opposed to sale of servicing resulted in reduced gains on sale of servicing from the prior quarter's level. However, over time, the retention of this asset should result in increased servicing fee revenues and improving gross margins. Quarterly and year-to-date operating expense comparisons were reflective of the second quarter 1997 acquisition by Harbor of MIG Financial, a commercial mortgage operation located in California. Also contributing to the growth was the additional staffing required by Harbor to support its strong growth in originations and servicing. Asset originations in 1997 are as follows: Third 1997 YTD Quarter ------------ ------------ ($ in millions) Commercial Division: Acquisition partnerships.............. $ 8.1 $ 60.9 Wholly owned portfolio................ 1.3 6.8 ------------ ------------ Total $ 9.4 $ 67.7 Consumer Division: Auto finance receivables.............. $ 18.4 $ 68.4 Mortgage Division: Conventional loans.................... $ 886.4 $2,014.4 Non-conforming mortgages.............. 46.7 88.2 Commercial mortgage loans............. 177.3 219.8 Consumer loans........................ 13.0 31.2 ------------ ------------ Total $1,123.4 $2,353.6 At quarter-end, the Company entered into a contractual commitment to invest approximately $5 million to acquire distressed asset portfolio from a French bank. The transaction is expected to close in the fourth quarter. 12 At quarter-end, FirstCity and its subsidiaries' managed asset portfolios consisted of the following by business segment: September 30, 1997 ------------------------------------- Amount* # of ($ in millions) Assets Commercial Division: Wholly owned: Performing............................ $14 659 Non-performing........................ 424 10,648 Acquisition partnerships: Performing............................ 78 151 Non-performing........................ 154 775 Serviced for others...................... 45 1,520 ----------------- ----------------- Total $715 13,753 ================= ================= Consumer Division: Auto finance receivables................ $78 10,877 Student loans........................... 5 1,616 ----------------- ----------------- Total $83 12,493 ================= ================= Mortgage Division: Residential Conventional.......................... $3,725 43,887 FHA/VA................................ 558 11,198 Other................................. 21 346 Commercial............................... 1,721 551 ----------------- ----------------- Total $6,025 55,982 ================= ================= * Legal claim Pursuant to a June 1997 agreement with FirstCity, the Trust's obligation to FirstCity under the Class A Certificate was terminated (other than the Trust's obligation to reimburse FirstCity for certain expenses) in exchange for the Trust's agreement to pay FirstCity an amount equal to $22.75 per share for the 1,923,481 shares of FirstCity's outstanding special preferred shares at June 30, 1997, the 1997 second quarter dividend of $.7875 per share, and 15% interest from June 30, 1997, on any unpaid portion of the settlement agreement. Under this agreement, FirstCity assumes the obligation for the payments of the par value and the dividends of the special preferred stock. The Trust has distributed $42.4 million (including a $15.3 million performing loan) to FirstCity under the June 1997 agreement, reducing the receivable from the Trust to $1.7 million. Separately, the Company completed an exchange offer in the third quarter of 1997 whereby 1,073,704 shares of outstanding special preferred stock were tendered for a like number of shares of new redeemable preferred stock. 13 RESULTS OF OPERATIONS The following table summarizes FirstCity's performance in the third quarter and first nine months of 1997 and 1996. The financial statements of FirstCity have been restated to reflect the merger with Harbor as if it occurred January 1, 1996.
- ---------------------------------------------------------------------------------------------- CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS - ---------------------------------------------------------------------------------------------- Third Quarter Nine Months Ended September 30, ------------------------ ----------------------- (Amounts in thousands, except per share data) 1997 1996 1997 1996 ------------ ----------- ---------- ----------- Income: Net gain on purchased asset pools...... $3,957 $4,354 $14,149 $12,970 Servicing fees......................... 5,437 8,258 21,828 18,542 Interest income on Class "A" Certificate 330 2,236 3,504 9,664 Net mortgage warehouse income.......... 701 130 1,993 2,179 Other interest income.................. 2,893 2,122 9,120 5,444 Gain on sales of mortgage loans........ 13,474 3,714 28,757 15,600 Rental income on purchased real estate pools 68 674 225 2,609 Other income........................... 1,375 1,699 9,014 4,457 ------------ ----------- ---------- ----------- Subtotal 28,235 23,187 88,590 71,465 ------------ ----------- ---------- ----------- Expenses: Interest on senior subordinated notes payable - 340 - 3,892 Interest on other notes payable........ 2,727 2,956 9,195 7,720 Provision for loan losses.............. 2,076 1,000 4,231 1,000 Salaries and benefits.................. 11,873 5,976 32,588 20,885 Amortization........................... 2,091 1,783 6,999 5,778 Travel................................. 622 425 1,903 1,446 Occupancy.............................. 3,078 2,067 8,184 5,691 Legal and accounting................... 774 496 1,733 1,798 Merger related expenses................ 1,618 - 1,618 - Other general and administrative expense 4,813 3,217 13,652 8,714 ------------ ----------- ---------- ----------- Subtotal 29,672 18,260 80,103 56,924 ------------ ----------- ---------- ----------- Equity earnings of acquisition partnerships 1,798 2,623 6,111 4,253 ------------ ----------- ---------- ----------- Earnings before income taxes........... 361 7,550 14,598 18,794 ------------ ----------- ---------- ----------- Provision (benefit) for income taxes... (16,078) 759 (15,497) (12,193) ------------ ----------- ---------- ----------- Net earnings........................... $16,439 $6,791 $30,095 $30,987 ============ =========== ========== =========== Minority interest in income (loss) of subsidiary............................. (251) - (182) - Redeemable preferred dividends......... 1,514 1,896 4,688 5,772 ------------ ----------- ---------- ----------- Net earnings to common................. $15,176 $4,895 $25,589 $25,215 ============ =========== ========== =========== Net earnings per share................. $ 2.33 $ 0.75 $ 3.93 $ 3.88 ============ =========== ========== =========== Average shares outstanding............. 6,519 6,503 6,516 6,502 ============ =========== ========== =========== Return on average equity .............. 55.1% 25.5% 34.3% 50.9% - -----------------------------------------------------------------------------------------
14 The following table analyzes the composition of FirstCity's major revenue sources:
ANALYSIS OF REVENUE SOURCES - ------------------------------------------------------------------------------------------ Third Nine Months Ended Quarter September 30, --------------------- ---------------------- (Dollars in thousands) 1997 1996 1997 1996 ---------- --------- ---------- ---------- RESULTS DERIVED FROM PURCHASED OR ORIGINATED ASSET POOLS - --------------------------------------------- NON-PERFORMING ASSET POOLS: Asset portfolios purchased(1)............ $1,300 $ - $2,237 $2,840 $ collected.............................. 13,700 10,646 43,822 38,324 Net gain on collections.................. 3,957 4,354 14,149 12,970 Profit margin on purchased asset pools... 28.88% 40.90% 32.29% 33.84% PERFORMING ASSET POOLS: Asset portfolios purchased(1)............ $ - $ - $4,520 $25,525 Loans originated......................... 18,377 5,540 68,447 5,540 Interest income.......................... 2,181 1,766 7,958 4,242 GAINS ON SALES OF MORTGAGE LOANS: Mortgage loan production................. $1,123,408 $489,751 $2,353,565 $1,453,969 Gain on sales of mortgage loans.......... 13,474 3,714 28,757 15,600 Gain percentage......................... 1.20% 0.76% 1.22% 1.07% SERVICE FEE REVENUES - --------------------------------------------- MORTGAGE SERVICING Average servicing portfolio: Residential........................... $3,693,000 $3,224,000 $3,623,000 $2,572,000 Commerical............................ 1,726,000 - 1,760,000 - Subserviced........................... 625,000 812,00 761,000 793,000 -------- --------- ---------- ---------- Total servicing portfolio............. 6,044 4,036 6,144 3,365 Service fee revenue ..................... 3,842 3,396 10,711 8,307 Annualized service fee rate.............. 0.25% 0.34% 0.23% 0.33% ACQUISITION PARTNERSHIPS $ collected.............................. $32,664 $89,683 $89,780 $150,907 Service fee revenue ..................... 1,211 3,268 3,594 5,563 Average service fee %.................... 3.71% 3.64% 4.00% 3.69% TRUST $ collected: FDIC receivable....................... $- $ - $- $17,698 Other trust assets.................... - 41,583 - 103,901 Service fee revenue(2)................... - 1,260 - 3,520 Average service fee %.................... - 3.03% - 2.89% OTHER AFFILIATED ENTITIES Service fee revenue...................... $ 384 $334 $ 723 $1,152 EQUITY EARNINGS IN ACQUISITION PARTNERSHIPS - --------------------------------------------- Asset portfolios purchased.................. $ 8,141 $ 9,557 $ 60,871 $ 85,745 Average FirstCity investment................ 22,550 26,947 24,650 24,414 Equity earnings in investments.............. 1,798 2,623 6,111 4,253 - ------------------------------------------------------------------------------------------ (1)Asset portfolios purchased exclude FirstCity's acquisition of the remaining 50% of an acquisition partnership in the first quarter of 1997. (2)Excludes $6,800 received as a result of terminating Investment Management Agreement in the first quarter of 1997.
15 The following table analyzes operations of FirstCity's acquisition partnerships:
ANALYSIS OF ACQUISITION PARTNERSHIPS - ---------------------------------------------------------------------------------------- Third Nine Months Ended Quarter September 30, ------------------------- -------------------------- (Dollars in thousands) 1997 1996 1997 1996 ------------ ------------ ------------ ------------ GAINS ON DISPOSITION OF ASSET POOLS - ----------------------------------- Gross collections $41,086 $89,683 $105,417 $150,907 Cost of collections 31,792 76,454 75,893 119,074 ------------ ------------ ------------ ------------ Total gain on disposition of asset pools $9,294 $13,229 $29,524 $31,833 ============ ============ ============ ============ Variance from previous year due to: Collection levels $(7,169) $12,195 $(9,596) $3,024 Gross profit margins 7,057 (5,696) 10,431 (7,794) Mix (3,823) (5,623) (3,144) (633) ------------ ------------ ------------ ------------ Total variance from previous year $(3,935) $876 $(2,309) $(5,403) ============ ============ ============ ============ INTEREST INCOME - --------------- Performing asset pools $2,208 $1,392 $5,936 $5,225 Other 315 287 501 383 COST OF BORROWING - ----------------- Interest expense $2,287 $5,215 $8,445 $18,169 Average borrowings 98,981 192,305 123,405 204,750 Average rate 9.2% 10.9% 9.1% 11.8% OTHER EXPENSES - -------------- Service fee expense $1,511 $3,037 $4,178 $5,458 Legal 668 557 1,891 1,674 Property protection 1,056 1,730 3,322 4,458 Other 616 604 1,431 636 ------------ ------------ ------------ ------------ Total other expenses $3,851 $5,928 $10,822 $12,226 ============ ============ ============ ============ NET INCOME $5,679 $3,765 $16,694 $7,046 - ---------- ============ ============ ============ ============ - ----------------------------------------------------------------------------------------
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996 Net earnings for the third quarter of 1997 were $16.4 million (including a $13.3 million deferred tax benefit) compared to $6.8 million in the third quarter of 1996. Net earnings to common shareholders in 1997 were $15.2 million compared to $4.9 million in 1996. On a per share basis, earnings attributable to common equity were $2.33 per share for 1997 ($0.29 excluding the deferred tax benefit) compared to $0.75 per share for 1996. NET GAIN ON PURCHASED ASSET POOLS The net gain on purchased asset pools decreased 9.1% to $4.0 million in 1997 from $4.4 million in 1996. The average investment in purchased asset pools in 1997 was $112 million as compared to $104.5 million in 1996. The profit margin on collections in 1997 was only 29% as compared to 41% in 1996. 16 SERVICING FEES Servicing fee income reported during the quarter was $5.4 million (no fees from liquidation of Trust assets were included because of termination of the Investment Management Agreement) compared to $8.3 million in 1996. Servicing fees in 1996 included $2.0 million related to a $75 million securitization of acquisition partnership loans and $1.3 million in fees related to Trust assets. INTEREST INCOME AND EXPENSE Interest income on the Trust Class A Certificate represents reimbursement to FirstCity (by the Trust) of interest expense on the senior subordinated notes (none in 1997 because the notes were redeemed by July, 1996), accrual of dividends on special preferred stock through June 30, 1997, and interest paid under a June 1997 agreement to retire the A Certificate. Other interest income, principally from performing loans, rose 36% to $2.9 million in 1997 due to loans at NAF. Interest expense on other notes payable declined due to lower interest rates on debt associated with the purchase of asset pools, equity interest in acquisition partnerships and operating subsidiaries. GAIN ON SALES OF MORTGAGE LOANS The gain on sales of mortgage loans increased 263% from $3.7 million in 1996 to $13.5 million in 1997 due to greater volumes of loans sold and a higher percentage gain on production during the quarter. OTHER INCOME AND EXPENSE Rental income on purchased real estate pools declined $.6 million from the third quarter of 1996 because of the liquidation of the majority of income producing real estate assets in late 1996. On this and other real estate purchases, the net operating income derived from such assets is recognized as other income, while gains on sales are recognized upon disposition of the asset. FirstCity augmented the allowance for loan losses associated with the NAF portfolio by recording a $2.1 million provision in 1997. GENERAL AND ADMINISTRATIVE EXPENSE Salaries and benefits, amortization and other general and administrative expenses increased $10.9 million, reflecting higher personnel costs and property expenses associated with the expansion of the mortgage business at Harbor (through its acquisition of Hamilton Mortgage in 1996 and MIG Financial in 1997) and $1.6 million of merger related expenses. EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS Equity in earnings of acquisition partnerships in 1997 decreased $.8 million from 1996. Collections in the acquisition partnerships were down $49 million, reflecting a large securitization of loans in 1996, and caused a decrease in gross profit of $7.2 million. Higher gross profit margins increased earnings by $7.1 million. Lower interest expense ($2.9 million) was offset by a lower overall profits interest in the partnerships of FirstCity in 1997 as compared to 1996, resulting in lower equity earnings to FirstCity. INCOME TAXES Federal income taxes are provided at a 35% rate applied to taxable income. The Company believes NOLs are available to it after July 3, 1995, and are recognized as an offset to the provision in the period during which the benefit is realized. A deferred tax benefit of $13.3 million was recorded in the third quarter of 1997. Additionally, pre- merger income tax liabilities of Harbor of $2.9 million were reversed. Realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income prior to expiration of the NOLs. 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. FIRST NINE MONTHS 1997 COMPARED TO FIRST NINE MONTHS 1996 Net earnings for the first nine months of 1997 were $30.1 million (including a $13.9 million deferred tax benefit and $6.8 million related to the termination of the Investment Management Agreement) compared to $31.0 million, including a $14.6 million deferred tax benefit, in the first nine months of 1996. Net earnings to common shareholders in 1997 were $25.6 million, compared to $25.2 million in 1996. On a per share basis, earnings attributable to common equity 17 were $3.93 ($1.79 excluding the deferred tax benefit) for 1997 compared to $3.88 per share ($1.63 excluding the deferred tax benefit) for 1996. NET GAIN ON PURCHASED ASSET POOLS The net gain on purchased asset pools increased 9.1% to $14.1 million in 1997 from $13.0 million in 1996. The average investment in purchased asset pools in 1997 of $96.4 million was below the average investment levels for such period in 1996 of $97.7 million. The profit margin on collections in 1997 was 32% as compared to 34% in 1996. SERVICING FEES Servicing fee income reported during the first nine months of $21.8 million included the receipt of a $6.8 million cash payment related to the termination of the Investment Management Agreement between the Company and the Trust, under which the Company serviced Trust assets. The $6.8 million represents servicing fees projected to have been earned by FirstCity upon liquidation of Trust assets, principally in 1997. On a comparative basis, servicing fees from the Trust in the 1996 period were $3.5 million. Excluding fees related to Trust assets, servicing fees were flat, year to year. INTEREST INCOME AND EXPENSE Interest income on the Trust Class A Certificate represents reimbursement to FirstCity (by the Trust) of interest expense on the senior subordinated notes (none in 1997 because the notes were redeemed by July, 1996), accrual of dividends of $3.2 million on special preferred stock through June 30, 1997, and interest paid under a June 1997 agreement to retire the A Certificate. Other interest income, principally from performing loans, rose 68% to $9.1 million in 1997 due to loans at NAF, which was acquired in the second quarter of 1996. Interest expense on other notes payable rose in relation to higher combined volumes of debt associated with the purchase of asset pools, equity interest in acquisition partnerships and operating subsidiaries. GAIN ON SALES OF MORTGAGE LOANS The gain on sales of mortgage loans increased 84% from $15.6 million in 1996 to $28.8 million in 1997 due to greater volumes of loans sold and a higher percentage gain on production during the year. OTHER INCOME AND EXPENSE Rental income on purchased real estate pools declined $2.4 million from the first nine months of 1996 because of the liquidation of the majority of income producing real estate assets in late 1996. Other income increased $4.6 million over 1996 primarily due to a $2.7 million increase in the gain on sale of servicing rights in Harbor Financial Group. FirstCity augmented the allowance for loan losses associated with the NAF portfolio by recording a $4.2 million provision in 1997. GENERAL AND ADMINISTRATIVE EXPENSE Salaries and benefits, amortization and other general and administrative expenses increased $22.4 million, reflecting higher personnel costs and property expenses associated with the expansion of the mortgage business at Harbor (through its acquisition of Hamilton Mortgage and MIG Financial), the creation of the automobile finance operations at NAF and $1.6 million of merger related expenses. EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS Equity in earnings of acquisition partnerships in 1997 increased $1.9 million from 1996, partially as a result of the securitizations and refinancing in the latter part of 1996. Collections in the acquisition partnerships decreased $45 million, primarily because of a large securitization in 1996, and caused a decrease in gross profit of $9.6 million. Higher gross profit margins increased earnings by $10.4 million. Coupled with lower interest expense ($9.7 million), the earnings to FirstCity in 1997 increased as compared to 1996. INCOME TAXES Federal income taxes are provided at a 35% rate applied to taxable income. The Company believes NOLs are available to it after July 3, 1995, and are recognized as an offset to the provision in the period during which the benefit is realized. A deferred tax benefit of $13.9 million was recorded in the first nine months of 1997 as compared to $14.6 million in 1996. 18 LIQUIDITY AND CAPITAL RESOURCES The following table analyzes the components of portfolio and corporate debt, capital positions at the Company and in the acquisition partnerships and associated leverage ratios of FirstCity and the acquisition partnerships:
ANALYSIS OF COMBINED DEBT AND EQUITY - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ---------------------- (Dollars in thousands) 1997 1996 1997 1996 ----------- ----------- ---------- ---------- AVERAGE DEBT OUTSTANDING: - ------------------------ Borrowings by acquisition partnerships, non-recourse $ 98,981 $ 192,305 $123,405 $204,750 Borrowings secured by purchased asset pools, non-recourse 96,619 51,511 71,043 61,860 Borrowings secured by mortgage operations, non-recourse 357,673 167,710 294,564 160,810 Borrowings secured by automobile receivables, non-recourse 15,255 25,868 32,973 12,840 Other secured corporate borrowings, with recourse 8,173 31,602 20,545 25,652 ----------- ----------- ---------- ---------- Total average debt outstanding $ 576,701 $ 468,996 $542,530 $465,912 COMBINED EQUITY AT QUARTER END: - ------------------------------ FirstCity Financial Corporation $ 110,600 $ 79,524 $110,600 $ 79,524 Minority interest in acquisition partnerships 49,666 23,465 49,666 23,465 ----------- ----------- ---------- ---------- Total equity $ 160,266 $ 102,989 $160,266 $102,989 LEVERAGE RATIOS: - --------------- Average debt (excluding senior subordinated debt) to combined equity 3.6:1 4.6:1 3.4:1 4.5:1 AVERAGE COST OF FUNDS: - --------------------- Borrowings by acquisition partnerships, non-recourse 9.2% 10.9% 9.1% 11.8% Borrowings secured by purchased asset pools, non-recourse 7.7 10.5 8.6 9.9 Borrowings secured by mortgage operations, non-recourse 6.0 5.2 5.9 5.5 Borrowings secured by automobile receivables, non-recourse 8.9 8.6 8.8 8.5 Other secured corporate borrowings, with recourse 8.6 10.6 9.7 10.2 - ----------------------------------------------------------------------------------------------------
Note - The above table excludes senior subordinated debt in the 1996 period. Generally, the liquidity needs of FirstCity are for operations, payment of debt, retirement of the preferred stock, equity for acquisitions of purchased asset pools, investments in and advances to acquisition partnerships and other investments by the Company. The sources of liquidity are funds generated from operations, equity distributions from acquisition partnerships and short term borrowings from revolving lines of credit and other specific purpose short term borrowings. FirstCity contributed equity to acquisition partnerships totaling $12.4 million to facilitate the purchase of $60.9 million in portfolios of assets in the first nine months of 1997 and also acquired $6.8 million in purchased asset pools. In 1997, FirstCity borrowed $18.4 million and repaid $37.8 million under a credit facility provided by Cargill, decreasing the balance under that facility to zero at quarter end. Such facility matures on December 31, 1997, and is secured by substantially all of the unencumbered equity interest in subsidiaries and acquisition partnerships and certain other assets of the Company. In 1997, NAF borrowed $43.7 million under a $50 million Warehouse Credit Agreement with ContiTrade Services L.L.C. to purchase and originate auto loans and repaid $48.7 million with the securitizations proceeds and equity infusions from FirstCity. Increases in loan originations may require additional equity infusions into NAF to comply with the borrowing base terms of the Warehouse Credit Agreement. Currently, Harbor Financial Group has a credit facility of $330 million with a group of banks lead by Texas Commerce Bank, Houston. The facility, currently maturing in March of 1998, is used to finance Harbor's mortgage warehouse operations as well as other activities. Harbor is currently discussing with the banks the renewal and expansion of this facility to fund the anticipated growth in mortgage operations. In the first nine months of 1997, FirstCity paid dividends on its special preferred stock of $5.1 million. The Company also purchased approximately $11.3 million (liquidation preference) of special preferred stock with the proceeds of distributions from the Trust on the Class A Certificate. The Trust has distributed $42.4 million (including a $15.3 19 million performing loan) to FirstCity under the June 1997 agreement with the Trust to retire the Trust Class A Certificate, reducing the receivable from the Trust to $1.7 million. In the future, FirstCity anticipates being able to raise capital through public debt or equity offerings, thus enhancing the investment and growth opportunities of the Company. The Company believes that these and other sources of liquidity, including refinancing the Cargill credit facility to the extent necessary, securitizations, and funding from senior lenders providing funding for acquisition partnership formation and direct portfolio and business acquisitions, should prove adequate to continue to fund the Company's contemplated investment activities. At September 30, 1997, total common equity was $110.6 million and is considered by management adequate to support the current capital requirements and planned growth of the Company. PART II - OTHER INFORMATION Item 6.1 Exhibits and Reports on Form 8-K (a)Exhibits 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. Form 8-K dated July 1, 1997. ---------------------------- Items reported: Item 2 (Acquisition or Disposition of Assets). ------------------------------------------------------------ Financial statements filed: -------------------------- (a) Financial statements of businesses acquired. (i)Financial statements of Harbor Financial Group, Inc. and Subsidiaries 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 ------------------------------------- Name: Matt A. Landry Title: Executive Vice President, Managing Director and Senior Financial Officer (Duly authorized officer and principal financial officer of the Registrant) By /s/ Gary H. Miller ------------------------------------- Name: Gary H. Miller Title: Senior Vice President and Chief Financial Officer (Duly authorized officer and chief accounting officer of the Registrant) Dated: November 14 , 1997 20 EXHIBIT INDEX Exhibit No. Description - ---------- ----------- 27.1 Financial Data Schedule. EX-27 2 FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from the financial statements contained in the body of the accompanying Form 10-Q and is qualified in its entirety by reference to such financial statements. 9-MOS DEC-31-1996 SEP-30-1997 29,308 0 248,015 0 195,916 0 0 0 635,362 0 432,580 41,908 0 65 110,535 635,362 43,822 124,374 29,673 29,673 66,677 4,231 9,195 14,598 (15,497) 30,095 0 0 0 25,589 3.93 3.93
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