-----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, JGZ8RJqPtqS9yZWIe6FqsBwd3ba1O8TYb77dgvjtljGsd/bW/U9ras66cPVZhpgc FkCA2Zz8M4dVCxfgTLgouQ== 0000909518-98-000329.txt : 19980518 0000909518-98-000329.hdr.sgml : 19980518 ACCESSION NUMBER: 0000909518-98-000329 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 98626050 BUSINESS ADDRESS: STREET 1: P O BOX 8216 CITY: WACO STATE: TX ZIP: 767148216 BUSINESS PHONE: 8177511750 MAIL ADDRESS: STREET 1: P O BOX 8216 CITY: WACO STATE: TX ZIP: 767148216 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 3/31/98 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 MARCH 31, 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 Offices) (Zip Code) (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 May 8, 1998 was 7,573,534. 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
March 31, 1998 December 31, 1997 ------------------------- ------------------------ (DOLLARS IN THOUSANDS, ASSETS EXCEPT PER SHARE DATA) Cash and cash equivalents.......................................... $42,306 $31,605 Portfolio Assets, net.............................................. 74,566 89,951 Loans receivable, net.............................................. 70,601 90,115 Mortgage loans held for sale....................................... 1,048,678 533,751 Investment securities.............................................. 21,338 6,704 Equity investments in and advances to Acquisition Partnerships..... 38,460 35,529 Mortgage servicing rights.......................................... 88,304 69,634 Receivable for servicing advances and accrued interest............. 25,177 21,410 Deferred tax benefit, net.......................................... 31,384 30,614 Other assets, net.................................................. 28,322 30,806 ------------------------- ------------------------ Total Assets................................................ $1,469,136 $940,119 ========================= ======================== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY Liabilities: Notes payable.................................................. $1,267,798 $750,781 Other liabilities.............................................. 39,891 34,672 ------------------------- ------------------------ Total Liabilities........................................... 1,307,689 785,453 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: 6,573,433 and 6,526,510 shares, respectively)............................................... 66 65 Paid in capital................................................ 31,811 29,509 Retained earnings.............................................. 87,662 83,184 ------------------------- ------------------------ Total Shareholders' Equity.................................. 119,539 112,758 ------------------------- ------------------------ Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity.................................................... $1,469,136 $940,119 ========================= ========================
See accompanying notes to consolidated financial statements. 3 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, --------------------------------------------- 1998 1997 -------------------- --------------------- (In thousands, except per share data) Revenues: Gain on sale of mortgage loans....................... $20,269 $5,321 Net mortgage warehouse income........................ 1,722 766 Gain on sale of mortgage servicing rights............ -- 2,266 Servicing fees: Mortgage.......................................... 4,694 3,571 Other............................................. 1,113 7,862 Gain on resolution of Portfolio Assets............... 3,097 5,301 Equity in earnings of Acquisition Partnerships....... 3,214 1,541 Rental income on real estate Portfolios.............. 81 70 Interest income...................................... 3,799 2,779 Other income......................................... 4,037 1,161 Interest income on Class A Certificate............... -- 1,659 -------------------- --------------------- Total revenues.................................... 42,026 32,297 Expenses: Interest on other notes payable...................... 3,418 2,862 Salaries and benefits................................ 16,017 8,991 Amortization: Mortgage servicing rights......................... 3,176 1,547 Other............................................. 432 953 Provision for loan losses............................ 2,352 798 Occupancy, data processing, communication and other.. 11,691 7,577 -------------------- --------------------- Total expenses.................................... 37,086 22,728 Net earnings before minority interest, preferred dividends and income taxes..................................... 4,940 9,569 Benefit (provision) for income taxes................. 641 (352) -------------------- --------------------- Net earnings before minority interest and preferred dividends............................................ 5,581 9,217 Minority interest.................................... (215) -- Preferred dividends.................................. 1,515 1,659 -------------------- --------------------- Net earnings to common shareholders...................... $4,281 $7,558 ==================== ===================== Net earnings per common share-- basic.................... $0.66 $1.16 Net earnings per common share-- diluted.................. $0.64 $1.14 Weighted average common shares outstanding-- basic....... 6,531 6,514 Weighted average common shares outstanding-- diluted..... 6,678 6,613
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' SHARES STOCK CAPITAL EARNINGS EQUITY --------------- --------------- --------------- --------------- ------------------ BALANCES, JANUARY 1, 1997.............. 6,513,346 $65 $29,783 $54,954 $84,802 Exercise of warrants, options and employee stock purchase plan.......... 13,164 -- 318 -- 318 Change in subsidiary year end.......... -- -- -- (1,195) (1,195) Net earnings, after minority interest, of 1997 or .......................... -- -- -- 35,628 35,628 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 employee stock purchase plan.......... 5,923 -- 153 -- 153 Issuance of common stock to acquire the minority interest of subsidiary....... 41,000 1 2,149 -- 2,150 Net earnings, after minority interest, of three months ended March 31, 1998 or -- -- -- 5,796 5,796 Foreign currency translation and other adjustments........................... -- -- -- 197 197 Preferred dividends.................... -- -- -- (1,515) (1,515) --------------- --------------- --------------- --------------- ------------------ BALANCES, MARCH 31, 1998............... 6,573,433 $66 $31,811 $87,662 $119,539 =============== =============== =============== =============== ==================
See accompanying notes to consolidated financial statements. 5
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, ------------------------------------------ 1998 1997 ------------------- -------------------- Cash flows from operating activities: Net earnings........................................ $5,581 $9,217 Adjustments to reconcile net earnings to net cash used in operating activities, net of effect of acquisitions: Proceeds from resolution of Portfolio Assets...... 16,976 14,842 Gain on resolution of Portfolio Assets............ (3,097) (5,301) Purchase of Portfolio Assets...................... (43,017) (15,829) Origination of automobile receivables............. (29,000) (29,775) Gain on sale of mortgage servicing rights......... -- (2,266) Increase in mortgage loans held for sale.......... (479,035) (29,389) Increase in construction loans receivable......... (2,815) (4,006) Originated mortgage servicing rights.............. (21,845) (8,175) Purchases of mortgage servicing rights............ (46) (49) Proceeds from sale of mortgage servicing rights... -- 9,750 Provision for loan losses......................... 2,352 798 Equity in earnings of Acquisition Partnerships.... (3,214) (1,541) Proceeds from performing Portfolio Assets......... 49,054 4,719 Increase in net deferred tax asset................ (1,768) (300) Depreciation and amortization..................... 4,070 2,848 Increase in other assets.......................... (8,412) (11,707) Increase (decrease) in other liabilities.......... 10,183 (1,441) ------------------- -------------------- Net cash used in operating activities........ (504,033) (67,605) ------------------- -------------------- Cash flows from investing activities, net of effect of acquisitions: Advances to Acquisition Partnerships................ -- 1,029 Proceeds from sales of and payments on loans held for investment........................................ 2,678 6 Repurchases of loans from investors................. (2,627) (361) Principal payments on Class A Certificate........... -- 10,274 Property and equipment, net......................... (1,529) (643) Contributions to Acquisition Partnerships........... (7,597) (10,170) Distributions from Acquisition Partnerships......... 8,053 5,185 ------------------- -------------------- Net cash provided by (used in) investing activities (1,022) 5,320 ------------------- -------------------- Cash flows from financing activities, net of effect of acquisitions: Borrowings under notes payable...................... 4,111,339 1,355,031 Payments of notes payable........................... (3,594,221) (1,289,055) Purchase of special preferred stock................. -- (8,336) Proceeds from issuance of common stock.............. 153 76 Preferred dividends paid............................ (1,515) (1,938) ------------------- -------------------- Net cash provided by financing activities.... 515,756 55,778 ------------------- -------------------- Net increase in cash.................................. $10,701 $(6,507) Cash, beginning of period............................. 31,605 16,096 ------------------- -------------------- Cash, end of period................................... $42,306 $9,589 =================== ==================== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest.......................................... $15,718 $5,633 Income taxes...................................... 94 --
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 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 March 31, 1998, the results of operations and the cash flows for the three month periods ended March 31, 1998 and 1997. Additionally, the Company's merger with Harbor Financial Group, Inc. ("Mortgage Corp.") on July 1, 1997 is accounted for as a pooling of interests. The accompanying consolidated financial statements are 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 March 31, 1998, the Company issued 41,000 shares of common stock to acquire the four percent minority interest in its subsidiary, Harbor Financial Mortgage Corporation. This interest had been acquired by the minority shareholder through the exercise of warrants in Harbor Financial Mortgage Corporation at year end 1997. 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. The consolidated financial statements of the Company have been restated to reflect the Harbor Merger as if it occurred on January 1, 1995. On May 15, 1997, Mortgage Corp. acquired substantially all of the assets of MIG Financial Corporation ("MIG"), MIG's $1.7 billion commercial mortgage servicing portfolio, 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 in a transaction accounted for as a purchase. The assets purchased consisted of servicing rights, fixed assets and the business relationships of MIG. MIG's assets, revenues and historical earnings are insignificant to the total assets and results of operations of the Company. The transaction was funded by $1.3 million of senior debt and $2.6 million of subordinated debt. The Company provided the $2.6 million subordinated loan in connection with such transaction. The terms of the loan reflected market terms for comparable loans made on an arms'-length basis. 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 ended March 31, 1997, before and after the Harbor Merger are summarized as follows: Three Months Ended March 31, 1997 ------------------------------------- Net revenues (including equity earnings): Before 1997 pooling................... $19,565 1997 pooling.......................... 12,732 After 1997 pooling.................... 32,297 Net earnings to common shareholders: Before 1997 pooling................... $6,900 1997 pooling.......................... 658 After 1997 pooling.................... 7,558 Net earnings per common share - diluted: Before 1997 pooling................... $1.40 1997 pooling.......................... (0.26) After 1997 pooling.................... 1.14 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: March 31, December 31, 1998 1997 ---------------- ---------------- Non-performing Portfolio Assets............ $117,448 $130,657 Performing Portfolio Assets................ 10,013 16,131 Real estate Portfolios..................... 19,985 22,777 ---------------- ---------------- Total Portfolio Assets................. 147,446 169,565 Discount required to reflect Portfolio Assets at carrying value.............. .. (72,880) (79,614) ---------------- ---------------- Portfolio Assets, net.................. $74,566 $89,951 ================ ================ Portfolio Assets are pledged to secure non-recourse notes payable. (4) LOANS RECEIVABLE Loans receivable are summarized as follows: March 31, December 31, 1998 1997 ----------------- --------------- Construction loans receivable.................. $22,409 $19,594 Residential mortgage and other loans held for investment................................. 8,575 6,386 Automobile and consumer finance receivables.... 49,260 73,417 Allowance for loan losses...................... (9,643) (9,282) ----------------- --------------- Loans receivable, net...................... $70,601 $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: Three Months Ended March 31, -------------------------- 1998 1997 ------------ ------------ Balances, beginning of period............ $9,282 $2,693 Provision for loan losses............... 2,352 798 Discounts acquired...................... 4,474 3,032 Reduction in contingent liabilities..... -- 458 Allocation of reserves to sold loans.... (2,802) -- Charge off activity: Principal balances charged off....... (4,589) (3,360) Recoveries........................... 926 383 ------------ ------------ Net charge offs................... (3,663) (2,977) ------------ ------------ Balances, end of period.................. $9,643 $4,004 ============ ============ 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: March 31, December 31, 1998 1997 ------------------ -------------------- Residential mortgage loans............ $1,025,152 $522,970 Unamortized premiums and discounts.... 23,526 10,781 ------------------ -------------------- $1,048,678 $533,751 ================== ==================== (6) 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 March 31, December 31, 1998 1997 ------------------- --------------------- Assets............................ $280,730 $338,484 =================== ===================== Liabilities....................... $178,576 $250,477 Net equity........................ 102,154 88,007 ------------------- --------------------- $280,730 $338,484 =================== ===================== Company's equity in Acquisition Partnerships...................... $38,460 $35,529 =================== ===================== 9 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED COMBINED SUMMARY OF EARNINGS Three Months Ended March 31, ------------------------------- 1998 1997 ------------- ---------------- Proceeds from resolution of Portfolio Assets... $57,558 $24,504 Gross margin................................... 18,533 7,701 Interest income on performing portfolio assets. 2,453 1,906 Net earnings................................... $9,123 $3,589 ============= ================ Company's equity in eanings in Acquisition Partnerships.............................. $3,214 $1,541 ============= ================ (7) PREFERRED STOCK AND SHAREHOLDER'S 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 estimated expenses) of $34.4 million were used to retire debt. 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. The Company has the right to repurchase these warrants forty-five days following such notice, for $1.00 if the closing price of the Company's common stock exceeds $31.25 for ten of fifteen trading days. Such condition was satisfied on April 28, 1998. Approximately 497,000 of the warrants are outstanding and each warrant allows the holder to purchase one share of common stock at a price of $25 per share. The holders of warrants may exercise their options at any time prior to the end of the forty-five day period referred to above (i.e., prior to June 26, 1998). If all warrants are exercised, the proceeds to the Company should be approximately $12.4 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 March 31, 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 April 15, 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 March 31, --------------------------------------- 1998 1997 ------------------ ------------------- Net earnings to common shareholders....................... $4,281 $7,558 ================== =================== Weighted average common shares outstanding - basic........ 6,531 6,514 Effect of dilutive securities: Assumed exercise of stock options..................... 73 55 Assumed exercise of warrants.......................... 74 44 ------------------ ------------------- Weighted average common shares outstanding - diluted............................................... 6,678 6,613 ================== =================== Net earnings per common share - basic..................... $0.66 $1.16 Net earnings per common share - diluted................... $0.64 $1.14
10 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 March 31, 1998 and December 31, 1997 was $(58) and $44, respectively, and total comprehensive income for the three months ended March 31, 1998 and 1997 was $(102) and $0, respectively. The adoption of this statement had no material impact on net earnings or shareholders' equity. (8) 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 realized. During the first three months of 1998, FirstCity recognized a deferred tax benefit of $.8 million (compared to $.3 million in the first three 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. (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. 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 March 31, 1998, advances of $.2 million had been made under the obligation. 11 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.
ANALYSIS OF REVENUES AND EXPENSES First Quarter First Quarter 1998 1997 --------------------- --------------------- (In thousands, except per share data) MORTGAGE BANKING: Revenues: Net mortgage warehouse income....................... $1,722 $766 Gain on sale of mortgage loans...................... 20,269 5,321 Servicing fees...................................... 4,694 3,571 Other............................................... 2,004 3,075 --------------------- --------------------- Total............................................. 28,689 12,733 Expenses: Salaries and benefits............................... 12,935 5,926 Amortization of mortgage servicing rights........... 3,176 1,547 Interest on other notes payables.................... 501 255 Occupancy, data processing, communication and other. 8,104 3,959 --------------------- --------------------- Total............................................. 24,716 11,687 --------------------- --------------------- Operating contribution before direct taxes............ $3,973 $1,046 ===================== ===================== Operating contribution, net of direct taxes........... $3,884 $658 ===================== ===================== PORTFOLIO ASSET ACQUISITION AND RESOLUTION: Revenues: 12 ANALYSIS OF REVENUES AND EXPENSES First Quarter First Quarter 1998 1997 --------------------- --------------------- (In thousands, except per share data) Gain on resolution of Portfolio Assets.............. $3,097 $5,301 Equity in earnings of Acquisition Partnerships...... 3,214 1,541 Servicing fees (1).................................. 729 7,828 Other............................................... 1,998 1,115 --------------------- --------------------- Total............................................. 9,038 15,785 Expenses: Salaries and benefits............................... 1,167 1,636 Interest on other notes payable..................... 1,476 1,452 Asset level expenses, occupancy, data processing and other............................................. 2,212 3,232 --------------------- --------------------- Total............................................. 4,855 6,320 --------------------- --------------------- Operating contribution before direct taxes............ $4,183 $9,465 ===================== ===================== Operating contribution, net of direct taxes........... $4,169 $9,365 ===================== ===================== CONSUMER LENDING: Revenues: Interest income.................................... $2,566 $2,016 Servicing fees and other........................... 390 41 --------------------- --------------------- Total............................................ 2,956 2,057 Expenses: Salaries and benefits.............................. 1,112 484 Provision for loan losses.......................... 2,352 798 Interest on other notes payable.................... 880 722 Occupancy, data processing and other............... 1,107 799 --------------------- --------------------- Total............................................ 5,451 2,803 --------------------- --------------------- Operating contribution before direct taxes........... $(2,495) $(746) ===================== ===================== Operating contribution, net of direct taxes.......... $(2,495) $(747) ===================== ===================== Total operating contribution, net of direct taxes......... $5,558 $9,276 ===================== ===================== CORPORATE OVERHEAD: Interest income on Class A Certificate (2)............ $ -- $1,659 Salaries and benefits, occupancy, professional and other income and expenses, net............................ (512) (2,018) --------------------- --------------------- Total............................................... (512) (359) Deferred tax benefit.................................. 750 300 --------------------- --------------------- Net earnings before preferred dividends............... 5,796 9,217 Preferred dividends................................... 1,515 1,659 --------------------- --------------------- Net earnings to common shareholders................. $4,281 $7,558 ===================== =====================
SHARE DATA: Net earnings per common share-- basic................. $0.66 $1.16 Net earnings per common share-- diluted............... $0.64 $1.14 Weighted average common shares outstanding-- basic.... 6,531 6,514 Weighted average common shares outstanding-- diluted.. 6,678 6,613 (1) Includes $6.8 million received as a result of terminating the investment Management Agreement with FirstCity Liquidating Trust in first quarter 1997. (2) Represents dividends on preferred stock accrued or paid prior to June 30, 1997.
FIRST QUARTER FIRST QUARTER 1998 1998 ORIGINATION AND OTHER FINANCIAL DATA: Mortgage Corp. Origination of residential mortgage loans: Conventional...................................... $1,360,865 $410,096 Agency............................................ 331,228 83,231 13 FIRST QUARTER FIRST QUARTER 1998 1998 Home equity....................................... 58,261 11,045 Other............................................. 19,913 7,903 --------------------- --------------------- Total........................................... $1,770,267 $512,275 ===================== ===================== Origination of commercial mortgage loans: Correspondent..................................... $113,265 $ -- Construction...................................... 15,596 10,757 --------------------- --------------------- Total........................................... $128,861 $10,757 ===================== ===================== Capital Corp. Acquisition of Home Equity Loans.................... $36,416 $ -- Portfolio Asset acquisition and resolution activity: Aggregate purchase price of assets purchased........ $51,971 $47,237 Proceeds............................................ 16,976 14,842 Consumer Corp. Aggregate of automobile and other consumer receivables......................................... $33,375 $31,124
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 First Quarter First Quarter 1998 1997 ---------------------- ---------------------- (DOLLARS IN THOUSANDS) WAREHOUSE INVENTORY: Average inventory balance......................... $229,533 $63,993 Net mortgage warehouse income: Dollar amount..................................... 1,722 766 Percentage of average inventory balance........... 0.75% 1.20% GAIN ON SALE OF MORTGAGE LOANS: Gain on sale of mortgage loans as a percentage of loans sold: Residential.................................... 1.46% 1.05% Home Equity.................................... 4.54% 3.65% OMSR income as a percentage of residential mortgage loans sold............................ 1.81% 1.77% SERVICING REVENUES: Average servicing portfolios: Residential.................................... $4,553,543 $3,457,680 Commercial..................................... 1,470,923 148,872 Sub-serviced................................... 813,040 818,463 Servicing fees: Residential.................................... $4,284 $3,332 Commercial..................................... 238 43 Sub-serviced................................... 172 196 ---------------------- ---------------------- Total........................................ 4,694 3,571 Annualized servicing fee percentage: Residential.................................... 0.38% 0.39% Commercial..................................... 0.06% 0.12% Sub-serviced................................... 0.08% 0.10% Gain on sale of servicing rights.................. $ -- $2,266 Amortization of servicing rights: 14 ANALYSIS OF SELECTED REVENUES AND EXPENSES MORTGAGE BANKING First Quarter First Quarter 1998 1997 ---------------------- ---------------------- (DOLLARS IN THOUSANDS) Servicing rights amortization.................. 3,176 1,547 Servicing rights amortization as a percentage of average residential servicing portfolio (annualized)................................. 0.28% 0.18% PERSONNEL: Personnel expenses................................ $12,935 $5,926 Number of personnel (at period end): Production..................................... 442 272 Servicing...................................... 119 111 Other.......................................... 602 321 ---------------------- ---------------------- Total........................................ 1,163 704 ====================== ======================
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 First Quarter First Quarter 1998 1997 ---------------------- ---------------------- (DOLLARS IN THOUSANDS) GAIN ON RESOLUTION OF PORTFOLIO ASSETS: Average investment: Nonperforming Portfolios....................... $49,619 $45,431 Performing Portfolios.......................... 14,212 8,100 Real estate Portfolios......................... 18,307 23,833 Gain on resolution of Portfolio Assets: Nonperforming Portfolios....................... $2,263 $3,971 Performing Portfolios.......................... 299 -- Real estate Portfolios......................... 535 1,330 ---------------------- ---------------------- Total $3,097 $5,301 ====================== ====================== Interest income on performing Portfolios.......... $1,070 $490 Gross profit percentage on resolution of Portfolio Assets: Nonperforming Portfolios....................... 22.40% 37.36% Performing Portfolios.......................... 7.99% -- Real estate Portfolios......................... 17.08% 31.60% Weighted average gross profit percentage....... 18.24% 35.72% Interest yield on performing Portfolios........... 30.12% 24.20% SERVICING FEE REVENUES: Acquisition partnerships....................... $660 $873 Trust.......................................... -- 6,800 Affiliates..................................... 69 155 ---------------------- ---------------------- Total........................................ $729 $7,828 ====================== ====================== PERSONNEL: Personnel expenses................................ $1,167 $1,636 Number of personnel (at period end): Production..................................... 10 11 Servicing...................................... 64 95 ---------------------- ---------------------- Total........................................ 74 106 ====================== ====================== 15 ANALYSIS OF SELECTED REVENUES AND EXPENSES PORTFOLIO ASSET ACQUISITION AND RESOLUTION First Quarter First Quarter 1998 1997 ---------------------- ---------------------- (DOLLARS IN THOUSANDS) Interest expense: Average debt................................. $75,709 $61,483 Interest expense............................. 1,446 1,430 Average yield (annualized)................... 7.64% 9.30%
The following chart presents selected information regarding the revenues and expenses of the Acquisition Partnerships.
ANALYSIS OF SELECTED REVENUES AND EXPENSES ACQUISITION PARTNERSHIPS First Quarter First Quarter 1998 1997 ---------------------- ---------------------- (DOLLARS IN THOUSANDS) GAIN ON RESOLUTION OF PORTFOLIO ASSETS: Gain on resolution of Portfolio Assets............ $18,533 $7,701 Gross profit percentage on resolution of Portfolio Assets............................... 32.20% 31.43% Interest income on performing Portfolios.......... 2,453 1,906 Other interest income............................. 170 291 INTEREST EXPENSE: Interest expense............................. $3,941 $3,004 Average yield (annualized)................... 7.17% 8.87% OTHER EXPENSES: Servicing fees............................... $1,421 $1,003 Legal........................................ 408 581 Property protection.......................... 1,036 963 Other........................................ 5,227 758 ---------------------- ---------------------- Total other expenses...................... 8,092 3,305 ---------------------- ---------------------- NET EARNINGS................................. $9,123 $3,589 ====================== ======================
16 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 First Quarter First Quarter 1998 1997 ---------------------- ---------------------- (DOLLARS IN THOUSANDS) INTEREST INCOME: Average loans and investments: Auto........................................... $56,473 $43,288 Investments.................................... 13,880 -- Interest income: Auto........................................... $2,236 $2,013 Investments.................................... 327 -- Average yield (annualized): Auto........................................... 15.84% 18.60% Investments.................................... 9.42% -- SERVICING FEE REVENUES: Affiliates..................................... $384 $34 PERSONNEL: Personnel expenses................................ $1,112 $484 Number of personnel (at period end): Production..................................... 56 18 Servicing...................................... 79 38 ---------------------- ---------------------- Total........................................ 135 56 ====================== ====================== INTEREST EXPENSE: Average debt................................. $40,791 $32,635 Interest expense............................. 880 695 Average yield (annualized)................... 8.63% 8.52% BENEFIT (PROVISION) FOR INCOME TAXES
As a result of the Merger, 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. FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997 The Company reported net earnings before minority interest and preferred dividends of $5.6 million in 1998 (including a $0.8 million deferred tax benefit) compared to $9.2 million in 1997. Net earnings to common shareholders were $4.3 million in 1998 compared to $7.6 million in 1997. On a per share basis, basic net earnings attributable to common shareholders were $0.66 in 1998 compared to $1.16 in 1997. 17 Diluted net earnings per common share were $0.64 in 1998 compared to $1.14 in 1997. The first quarter 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 Mortgage Corp. experienced significant revenue growth in the first quarter of 1998 relative to 1997 increasing to $28.7 million from $12.7 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 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 281% to $20.3 million in 1998 from $5.3 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 recognized in 1998 compared to 1997 is the result of the sale of approximately $1.3 billion of mortgage loans in first quarter 1998 (compared to 0.5 billion in the first quarter 1997) and the overall mix and pricing of the loans sold. Net mortgage warehouse income. Net mortgage warehouse income increased by 125% to $1.7 million in 1998 from $.8 million in 1997. This increase 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 31.4% to $4.7 million in 1998 from $3.6 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 Financial Corporation ("MIG"), a commercial loan origination and servicing company based in California with a $1.6 billion commercial mortgage servicing portfolio. Other revenues. Other revenues decreased by 34.8% to $2.0 million in 1998 from $3.1 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 111% to $24.7 million in 1998 from $11.7 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 compared to 1997. Salaries and benefits increased by $7.0 million in 1998 compared to 1997 reflecting the 459 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 compared to 1997. Amortization of mortgage servicing rights increased in 1998 compared to 1997 as a result of the substantially larger investment in mortgage servicing rights in 1998 compared to 1997. 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 as compared to 1997. Occupancy expense increased by $1.4 million in 1998 compared to 1997 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 compared to 1997 resulted from the substantial increases in the production and servicing volumes experienced during 1998. 18 Portfolio Asset Acquisition and Resolution Commercial Corp. purchased $52.0 million of Portfolio Assets during 1998 for its own account and through the Acquisition Partnerships compared to $47.2 million in acquisitions in 1997. Commercial Corp's quarter end investment in Portfolio Assets decreased to $74.6 million in 1998 from $78.9 million in 1997. Commercial Corp. invested $8.7 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 increased by 14.4% to $17.0 million in 1998 from $14.8 million in 1997. The net gain on resolution of Portfolio Assets decreased by 41.6% to $3.1 million in 1998 from $5.3 million in 1997 as the result of a lower gross profit percentage in 1998 compared to 1997. The gross profit percentage on the proceeds from the resolution of Portfolio Assets in 1998 was 18.2% as compared to 35.7% in 1997. Equity in earnings of Acquisition Partnerships. Proceeds from the resolution of Portfolio Assets for the Acquisition Partnerships increased by 135% to $57.6 million in 1998 from $24.5 million in 1997 while the gross profit percentage on proceeds increased to 32.2% in 1998 from 31.4% in 1997. Interest income in the Acquisition Partnerships increased $0.5 million while interest expense also increased by $0.9 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 quarter 1998 as compared to 1997. Other expenses of the Acquisition Partnerships increased by $4.8 million in 1998 generally reflecting costs associated with the resolution of Portfolio Assets in Europe which generated proceeds of $41.7 million. The net result was an overall increase in the net income of the Acquisition Partnerships of 154% to $9.1 million in 1998 from $3.6 million in 1997. As a result, Commercial Corp.'s equity earnings from Acquisition Partnerships increased by 109% to $3.2 million in 1998 from $1.5 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 29.1% to $0.7 million in 1998 from $1.0 million in 1997 as a result of decreased domestic collection levels in the Acquisition Partnerships and affiliated entities. Other revenues. Other revenues increased to $2.0 million in 1998 compared to $1.1 million in 1997 principally as a result of interest income derived from Performing Purchased Asset Portfolios in 1998 as compared to 1997. Operating expenses. Operating expenses declined to $4.9 million in 1998 from $6.3 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 when Portfolios being serviced in the closed offices reached final resolution. Interest on other notes payable was relatively flat period to period. Asset level expenses incurred in connection with the servicing of Portfolio Assets decreased in 1998 compared to 1997 as a result of the decrease in investments in Portfolio Assets in 1998 compared to 1997. 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, 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. Interest income. Interest income on consumer loans increased by 27.3% to $2.6 million in 1998 from $2.0 million in 1997, reflecting increased levels of loan origination activity in 1998 as compared to 1997 and an increase in the average balance of aggregate loans held by Consumer Corp. during 1998. Interest expense. Interest expense increased by 21.9% to $0.9 million in 1998 from $0.7 million in 1997 as a result of an increase in the average outstanding level of borrowings secured by automobile receivables to $40.8 million in 1998 from 19 $32.6 million in 1997. The average rate at which such borrowings incurred interest increased to 8.6% from 8.5% for the same period. Operating expenses. Salaries and benefits increased by 130% to $1.1 million in 1998 from $0.5 million in 1997 as a result of the increased levels of operating activity in 1998 as compared to 1997. Provision for loan losses. The provision for loan losses on automobile receivables increased by 195% to $2.4 million in 1998 from $0.8 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. 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. Securitization of automobile loans. During the second quarter of 1997, Consumer Corp. completed its first sale and securitization of automobile loans and during the first quarter 1998, the second such sale was completed. Consumer Corp. has retained subordinated interests in the form of nonrated tranches and excess spreads resulting from the securitization transaction and reflected an aggregate of $21.1 million in such interests at March 31, 1998. Other Items Affecting Net Income 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 accrual of dividends through June 30, 1997, of $1.7 million on special preferred stock. Company level interest expense increased by 29.6% to $0.6 million in 1998 from $0.4 million in 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 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 $0.8 million in 1998 as compared to a benefit of $0.3 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. 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 estimated expenses) of $34.4 million were used to retire debt. 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 providing funding 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. 20 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 credit facilities to which the operating subsidiaries are parties are 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 March 31, 1998 the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $1,898 million and outstanding borrowings of $1,264 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 as of May 1, 1998 and the outstanding borrowings under such facilities as of March 31, 1998.
CREDIT FACILITIES Outstanding Principal borrowings as of Other terms and amount March 31, 1998 Interest rate conditions ------ -------------- ------------- --------------- (DOLLARS IN MILLIONS) FIRSTCITY Company Credit Facility............... $ 50 $ 33(1) LIBOR + 5.0% Secured by the assets of 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....... 667 581 LIBOR + 0.5% to Revolving line to 2.5% warehouse residential mortgage loans, expires March 31, 1999 Supplemental warehouse facility............... 36 9 LIBOR + 0.5% to Revolving line to 2.25% warehouse residential mortgage loans and related receivables, expires March 31, 1999 Open warehouse facility............... 650 453 Fed Funds + 0.5% to Open facility to fund 1.0% committed loans to FNMA and other Operating line........... 45 45 LIBOR + 2.25% Revolving operating line secured by the unencumbered assets of Harbor, expires December 15, 2002 CAPITAL CORP. Warehouse facility....... 200 --(2) LIBOR + 0.75% Repurchase agreement to facilitate the acquisition of Home Equity Loans, expires March 30, 1999 Warehouse facility......... 36 35 Fixed 6.85% Repurchase agreement to facilitate the acquisition of Home Equity Loans, expires June 13, 1998 21 CREDIT FACILITIES Outstanding Principal borrowings as of Other terms and amount March 31, 1998 Interest rate conditions ------ -------------- ------------- --------------- (DOLLARS IN MILLIONS) COMMERCIAL CORP. Portfolio acquisition facility............... 100 19 LIBOR + 2.5% Acquisition facility to acquire Portfolio Assets, expires February 28, 1999 French acquisition facility............... 15 8 French franc LIBOR + Acquisition facility to fund 3.5% equity investments in French Portfolio Assets, expires March 31, 1999. Guaranteed by Commercial Corp. and the Company. Term acquisition facilities............. 48 48 Fixed at 7.66% Acquisition facilities for existing Portfolio Assets. Secured by assets of Acquisition Partnerships, various maturities CONSUMER CORP. Warehouse facility....... 50 32 LIBOR + 3% Revolving line secured by automobile receivables, expires May 17, 1998 UNCONSOLIDATED ACQUISITION PARTNERSHIPS Term acquisition 60 60 Fixed at 7.51% to Senior and subordinated facilities............... 10.17%, LIBOR + 3% loans secured by Portfolio to 6.5% and Prime + Assets, various maturities 2% to 7%
- --------------------------- (1) Outstanding borrowings as of March 31, 1998 represent borrowings under the Company's $35.0 million revolving credit facility with Cargill Financial, which terminated on April 9, 1998. Outstanding borrowings under the new Company Credit Facility with an international bank as of May 1, 1998 were $37.6 million. (2) The facility was entered into as of March 31, 1998. Outstanding borrowings under the facility as of May 1, 1998 were $77.9 million. 22 FIRSTCITY. THE COMPANY CREDIT FACILITY IS A REVOLVING CREDIT FACILITY WITH AN INTERNATIONAL BANK AND IS SECURED BY THE ASSETS OF THE COMPANY, INCLUDING A PLEDGE OF THE STOCK OF SUBSTANTIALLY ALL OF ITS OPERATING SUBSIDIARIES AND ITS EQUITY INTERESTS IN THE ACQUISITION PARTNERSHIPS. AT MAY 1, 1998, THE AMOUNT OUTSTANDING UNDER THE FACILITY TOTALED APPROXIMATELY $37.6 MILLION. THE COMPANY CREDIT FACILITY MATURES ON APRIL 30, 1999. MORTGAGE CORP. CURRENTLY, MORTGAGE CORP. HAS A PRIMARY WAREHOUSE FACILITY OF $667 MILLION WITH A GROUP OF BANKS LED BY CHASE BANK, HOUSTON. THE FACILITY, WHICH MATURES IN MARCH 1999, IS USED TO FINANCE MORTGAGE WAREHOUSE OPERATIONS AS WELL AS OTHER ACTIVITIES. THE $667 MILLION FACILITY IS PRICED AT LIBOR PLUS A DIFFERENT MARGIN TO LIBOR FOR EACH OF THE SUB-LIMITS WITHIN THE FACILITY. THE PRIMARY WAREHOUSE COMPONENTS OF THE FACILITY ARE PRICED AT LIBOR PLUS FROM 1.375% TO 1.625%, DEPENDING UPON THE STATUS OF THE WAREHOUSE COLLATERAL SECURING THE LOAN. IN ADDITION TO ITS PRIMARY WAREHOUSE FACILITY, MORTGAGE CORP. MAINTAINS A $36 MILLION SUPPLEMENTAL FACILITY PRICED AT LIBOR PLUS 0.5% TO 2.25%. IN ADDITION, MORTGAGE CORP. HAS AN ADDITIONAL REVOLVING OPERATING LINE WITH SUCH BANKS OF $45 MILLION, WHICH BEARS INTEREST AT A RATE OF LIBOR PLUS 2.25%. THE BANKS ARE OBLIGATED TO FUND LOANS UNDER SUCH LINE THROUGH MARCH 31, 1999, ALTHOUGH FINAL MATURITY OF ANY THEN OUTSTANDING LOANS MAY BE EXTENDED, AT MORTGAGE CORP.'S ELECTION, TO DECEMBER 15, 2002. MORTGAGE CORP. CONSIDERS THESE FACILITIES ADEQUATE FOR ITS CURRENT AND ANTICIPATED LEVELS OF ACTIVITY IN ITS MORTGAGE OPERATIONS. THE COMPANY HAS EXECUTED A PERFORMANCE GUARANTEE IN FAVOR OF THE LENDING BANK GROUP IN THE EVENT OF OVERDRAFTS ARISING IN MORTGAGE CORP.'S FUNDING ACCOUNTS. AN OVERDRAFT COULD OCCUR IN THE EVENT OF THE PRESENTMENT OF A LOAN CLOSING DRAFT TO THE DRAWEE BANK PRIOR TO RECEIPT OF FULL CLOSED LOAN DOCUMENTATION FROM THE CLOSING AGENT. THE RECEIPT OF DOCUMENTS BY THE LENDING BANK WOULD RELEASE FUNDS UNDER THE WAREHOUSE FACILITY TO COVER THE CLOSING DRAFT PRIOR TO THE PRESENTMENT OF THE DRAFT, IN NORMAL CIRCUMSTANCES. THE POSSIBILITY EXISTS, THEREFORE, FOR AN OVERDRAFT IN MORTGAGE CORP.'S FUNDING ACCOUNT. THE PERFORMANCE GUARANTEE BY THE COMPANY IN FAVOR OF THE LENDING BANK GROUP IS TO COVER SUCH OVERDRAFTS THAT ARE NOT CLEARED IN A SPECIFIED PERIOD OF TIME. IN ADDITION, MORTGAGE CORP. HAS A $650 MILLION WAREHOUSE FACILITY FOR LOANS TO BE RESOLD TO FNMA AND OTHER INVESTORS. CAPITAL CORP. CAPITAL CORP. FUNDS ITS ACTIVITIES WITH EQUITY INVESTMENTS AND SUBORDINATED DEBT FROM THE COMPANY AND A $200 MILLION REPURCHASE FACILITY WITH A NATIONALLY RECOGNIZED INVESTMENT BANKING FIRM. THE REPURCHASE FACILITY FUNDS THE PURCHASE OF ELIGIBLE HOME EQUITY LOANS ACQUIRED BY CAPITAL CORP. THE FACILITY ACCRUES AT LIBOR PLUS 0.75% AND MATURES ON MARCH 30, 1999. CAPITAL CORP. IS IN THE PROCESS OF NEGOTIATING FOR ADDITIONAL NONRECOURSE WAREHOUSE CREDIT AND SECURITIZATION FACILITIES WITH OTHER NATIONALLY RECOGNIZED INVESTMENT BANKING FIRMS TOTALING $300 MILLION. FUNDING FOR HOME EQUITY LOANS PURCHASED BY CAPITAL CORP. IS PROVIDED, IN PART, UNDER MORTGAGE CORP.'S WAREHOUSE CREDIT FACILITY AND IS SUBJECT TO MORTGAGE CORP.'S SUB-LIMIT FOR HOME EQUITY LOANS MEETING THE CRITERIA ESTABLISHED IN MORTGAGE CORP.'S WAREHOUSE CREDIT AGREEMENT. THE REMAINDER OF CAPITAL CORP.'S HOME EQUITY LOAN WAREHOUSE IS FUNDED UNDER A LOAN REPURCHASE AGREEMENT WITH NOMURA SECURITIES, INC. ("NOMURA"). THE REPURCHASE AGREEMENT EXPIRES ON JUNE 13, 1998. COMMERCIAL CORP. COMMERCIAL CORP. FUNDS ITS ACTIVITIES WITH EQUITY INVESTMENTS AND SUBORDINATED DEBT FROM THE COMPANY AND NONRECOURSE FINANCING PROVIDED BY A VARIETY OF BANK AND INSTITUTIONAL LENDERS. SUCH LENDERS PROVIDE FUNDS TO THE SPECIAL PURPOSE ENTITIES FORMED FOR THE PURPOSE OF ACQUIRING PORTFOLIO ASSETS OR TO ACQUISITION PARTNERSHIPS FORMED FOR THE PURPOSE OF CO-INVESTING IN ASSET POOLS WITH OTHER INVESTORS, PRINCIPALLY CARGILL FINANCIAL. COMMERCIAL CORP. RECENTLY ENTERED INTO A CREDIT FACILITY WITH NOMURA IN THE AMOUNT OF $100 MILLION, PRICED AT LIBOR PLUS 2.50%, THE PROCEEDS OF WHICH FUND UP TO 85% OF THE PURCHASE PRICE OF PORTFOLIO ASSETS ACQUIRED BY COMMERCIAL CORP. OR THE ACQUISITION PARTNERSHIPS. THIS FACILITY MATURES ON FEBRUARY 28, 1999. COMMERCIAL CORP. BELIEVES THAT SUCH FACILITY, WHEN COMBINED WITH THE CASH FLOW FROM ITS EXISTING PORTFOLIO ASSETS AND ITS INVESTMENT IN EQUITIES OF ACQUISITION PARTNERSHIPS, IS ADEQUATE TO MEET ITS CURRENT AND ANTICIPATED LIQUIDITY NEEDS. A COMMERCIAL CORP. SUBSIDIARY RECENTLY ENTERED INTO A $15 MILLION DOLLAR EQUIVALENT FRENCH FRANC FACILITY FOR USE IN PORTFOLIO PURCHASES IN FRANCE, WHICH FACILITY ACCRUES INTEREST AT LIBOR PLUS 3.50%, MATURES ON MARCH 31, 1999 AND IS GUARANTEED BY COMMERCIAL CORP. AND THE COMPANY. CONSUMER CORP. CONSUMER CORP. FUNDS ITS ACTIVITIES WITH EQUITY INVESTMENTS AND SUBORDINATED DEBT FROM THE COMPANY AND A LIMITED RECOURSE $50 MILLION WAREHOUSE CREDIT FACILITY WITH CONTITRADE SERVICES L.L.C. ("CONTITRADE"). FUNDS ARE ADVANCED UNDER THE FACILITY IN ACCORDANCE WITH AN ELIGIBLE LOAN BORROWING BASE WITH THE FACILITY PRICED AT LIBOR PLUS 3.0%. LOANS ARE ELIGIBLE FOR INCLUSION IN THE BORROWING BASE IF THEY MEET DOCUMENTED UNDERWRITING STANDARDS AS APPROVED BY CONTITRADE AND ARE NOT DELINQUENT BEYOND TERMS ESTABLISHED IN THE LOAN AGREEMENT. AT VARIOUS TIMES, THE SIZE OF THE FACILITY HAS BEEN IN EXCESS OF THE $50 MILLION COMMITTED AMOUNT BASED UPON APPROVALS BY THE LENDER. UNDER THE TERMS OF THE CREDIT FACILITY, THE COMPANY GUARANTEES 25% OF THE AMOUNT OUTSTANDING UNDER THE FACILITY FROM TIME TO TIME IN ADDITION TO AN UNDERTAKING BY THE COMPANY TO SUPPORT THE LIQUIDITY REQUIREMENTS REQUIRED IN SECURITIZATION TRANSACTIONS. THE CONTITRADE FACILITY MATURES ON MAY 17, 1998. A RENEWED AND EXTENDED FACILITY WITH CONTITRADE IS UNDER FINAL REVIEW FOR EXECUTION. THE TERMS FOR THIS RENEWED FACILITY ARE SIMILAR TO THOSE DESCRIBED ABOVE. 23 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 the Financial Data Schedule. (Exhibit 27.1 is being submitted as an exhibit only in 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 s purposes of Section 11 of the Securities Act of 1933, Section 18 of the Securitie Act of 1934, as amended, or Section 323 of the Trust Indenture Act of 1939, as t be amended, or otherwise be subject to the liabilities of such sections, nor shall i 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. Form 8-K dated April 29, 1998: Items reported: Item 5 (Other Events) 24 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 and accounting officer of the Registrant) Dated: May 15, 1998 25 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 198 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 MAR-31-1998 42,308 0 1,048,678 0 145,167 0 0 0 1,469,136 0 1,267,798 41,908 0 66 119,473 1,469,136 16,976 55,905 13,879 13,879 31,316 2,352 3,418 4,940 (641) 5,581 0 0 0 4,281 0.66 0.64
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