UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 033-19694

FirstCity Financial Corporation

(Exact name of registrant as specified in its charter)

Delaware	76-0243729
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
6400 Imperial Drive,
Waco, TX	76712
(Address of principal executive offices)	(Zip Code)

(254) 761-2800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer x	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x

The number of shares of common stock, par value $.01 per share, outstanding at August 4, 2008 was 10,248,307.

TABLE OF CONTENTS

PART I

Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
SIGNATURES
Exhibit Index

PART I

FINANCIAL INFORMATION

Item 1.  Financial Statements.

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	June 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS
Cash and cash equivalents	$	12,316		$	23,037
Restricted cash		1,190			509
Portfolio Assets, net	147,840			122,001
Loans receivable - affiliates	18,980			5,447
Loans receivable - SBA held for sale	2,219			133
Loans receivable - SBA held for investment, net	13,692			14,234
Loans receivable - other	16,492			5,995
Equity investments	87,624			87,622
Deferred tax asset, net	20,101			20,101
Service fees receivable ($596 and $785 from affiliates, respectively)	711			842
Servicing assets - SBA loans	749			843
Other assets, net	26,709			17,355
Total Assets	$	348,623		$	298,119
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable to banks	$	230,585		$	177,329
Note payable to affiliate	8,658			—
Minority interest	3,066			3,209
Other liabilities	12,122			10,758
Total Liabilities	254,431			191,296
Commitments and contingencies (note 13)
Stockholders’ equity:
Optional preferred stock (par value $.01 per share; 98,000,000 shares authorized; no shares issued or outstanding)	—			—
Common stock (par value $.01 per share; 100,000,000 shares authorized; shares issued: 11,326,937 and 11,326,937, respectively; shares outstanding: 10,266,107 and 10,746,437, respectively)	113			113
Treasury stock, at cost: 1,060,830 shares and 580,500 shares, respectively	(9,223		)	(5,978		)
Paid in capital	101,662			101,240
Retained earnings (accumulated deficit)	(511		)	9,602
Accumulated other comprehensive income	2,151			1,846
Total Stockholders’ Equity	94,192			106,823
Total Liabilities and Stockholders’ Equity	$	348,623		$	298,119

See accompanying notes to consolidated financial statements.

2

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Revenues:
Servicing fees ($2,484 and $2,728 from affiliates for the three month periods, respectively, and $4,648 and $5,181 from affiliates for the six month periods, respectively)	$	2,706		$	2,977		$	4,906		$	5,582
Income from Portfolio Assets	5,622			5,685			10,557			10,720
Gain on sale of SBA loans held for sale, net	133			343			142			624
Interest income from SBA loans	366			606			842			914
Interest income from affiliates	483			140			633			266
Interest income from loans receivable - other	355			982			630			1,889
Revenue from controlled affiliate	859			—			1,664			—
Other income	965			538			1,619			997
Total revenues	11,489			11,271			20,993			20,992
Expenses:
Interest and fees on notes payable	3,758			4,668			7,441			8,919
Salaries and benefits	5,297			3,864			10,327			7,857
Provision for loan and impairment losses	7,090			746			10,120			1,072
Occupancy, data processing, property protection and other	4,680			4,388			8,605			8,321
Total expenses	20,825			13,666			36,493			26,169
Equity in earnings of investments	3,008			4,332			5,848			6,158
Earnings (loss) from continuing operations before income taxes and minority interest	(6,328		)	1,937			(9,652		)	981
Income tax expense	(98		)	(146		)	(289		)	(213		)
Minority interest	(53		)	15			(31		)	123
Earnings (loss) from continuing operations	(6,479		)	1,806			(9,972		)	891
Discontinued operations
Loss from discontinued operations	(50		)	—			(141		)	—
Net earnings (loss)	$	(6,529	)	$	1,806		$	(10,113	)	$	891
Basic earnings (loss) per common share are as follows:
Earnings (loss) from continuing operations	$	(0.63	)	$	0.17		$	(0.96	)	$	0.08
Discontinued operations	$	—		$	—		$	(0.01	)	$	—
Net earnings (loss) to common stockholders	$	(0.63	)	$	0.17		$	(0.97	)	$	0.08
Weighted average common shares outstanding	10,357			10,789			10,471			10,789
Diluted earnings (loss) per common share are as follows:
Earnings (loss) from continuing operations	$	(0.63	)	$	0.16		$	(0.96	)	$	0.08
Discontinued operations	$	—		$	—		$	(0.01	)	$	—
Net earnings (loss) to common stockholders	$	(0.63	)	$	0.16		$	(0.97	)	$	0.08
Weighted average common shares outstanding	10,357			11,397			10,471			11,414

See accompanying notes to consolidated financial statements.

3

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Dollars in thousands)

										Retained			Accumulated
										Earnings			Other		Total
	Common Stock			Treasury Stock				Paid in		(Accumulated			Comprehensive		Stockholders’
	Shares	Amount		Shares	Amount			Capital		Deficit)			Income		Equity
Balances, December 31, 2006	11,316,937	$	113	530,300	$	(5,571	)	$	100,562	$	7,417		$	1,372	$	103,893
Exercise of common stock options	10,000	—		—	—			35		—			—		35
Repurchase of common stock	—	—		50,200	(407		)	—		—			—		(407		)
Additional paid in capital arising from stock option compensation expense	—	—		—	—			643		—			—		643
Comprehensive income:
Net earnings for 2007	—	—		—	—			—		2,185			—		2,185
Translation adjustments	—	—		—	—			—		—			474		474
Total comprehensive income															2,659
Balances, December 31, 2007	11,326,937	$	113	580,500	$	(5,978	)	$	101,240	$	9,602		$	1,846	$	106,823
Repurchase of common stock	—	—		480,330	(3,245		)	—		—			—		(3,245		)
Additional paid in capital arising from stock option compensation expense	—	—		—	—			422		—			—		422
Comprehensive income (loss):
Net loss for the first six months of 2008	—	—		—	—			—		(10,113		)	—		(10,113		)
Translation adjustments	—	—		—	—			—		—			305		305
Total comprehensive loss															(9,808		)
Balances, June 30, 2008 (unaudited)	11,326,937	$	113	1,060,830	$	(9,223	)	$	101,662	$	(511	)	$	2,151	$	94,192

See accompanying notes to consolidated financial statements.

4

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six Months Ended
	June 30,
	2008			2007
Cash flows from operating activities:
Net earnings (loss)	$	(10,113	)	$	891
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Net loss from discontinued operations	141			—
Purchase of SBA loans held for sale	—			(18,355		)
Net principal payments (advances) on SBA loans held for sale	(4,811		)	(413		)
Proceeds from the sale of SBA loans held for sale, net	2,993			15,772
Purchases of Portfolio Assets	(47,345		)	(45,273		)
Proceeds applied to principal on Portfolio Assets	30,924			41,116
Income from Portfolio Assets	(10,557		)	(10,720		)
Capitalized interest and costs on Portfolio Assets and loans receivable	(982		)	(685		)
Provision for loan and impairment losses	10,120			1,072
Equity in earnings of investments	(5,848		)	(6,158		)
Gain on sale of SBA loans held for sale, net	(142		)	(624		)
Depreciation and amortization	1,834			1,365
Net premium amortization of loans receivable	(199		)	(164		)
Stock-based compensation expense related to stock options	422			289
Increase in restricted cash	(681		)	(500		)
Decrease (increase) in service fees receivable	131			(375		)
Increase in other assets	(9,103		)	(2,227		)
Increase in other liabilities	1,568			2,328
Net cash used in operating activities	(41,648		)	(22,661		)
Cash flows from investing activities:
Purchases of property and equipment, net	(1,220		)	(422		)
Net principal collections (advances) on loans receivable	(23,377		)	(4,499		)
Purchases of SBA loans held for investment	—			(17,406		)
Net principal collections (advances) on SBA loans held for investment	445			1,700
Contributions to Acquisition Partnerships and Servicing and Operating Entities	(2,491		)	(21,146		)
Distributions from Acquisition Partnerships and Servicing and Operating Entities	11,052			25,205
Net cash used in investing activities	(15,591		)	(16,568		)
Cash flows from financing activities:
Borrowings under note payable to affiliate	8,658			—
Borrowings under notes payable to banks	93,807			116,973
Principal payments of notes payable to banks, net	(51,773		)	(77,689		)
Payments of debt issuance costs and loan fees	(921		)	(647		)
Repurchase of common stock	(3,245		)	—
Proceeds from issuance of common stock	—			18
Net cash provided by financing activities	46,526			38,655
Net cash used in continuing operations	(10,713		)	(574		)
Cash flows from discontinued operations:
Net cash used in operating activities	(8		)	(18		)
Net cash used in discontinued operations	(8		)	(18		)
Net decrease in cash and cash equivalents	(10,721		)	(592		)
Cash and cash equivalents, beginning of period	23,037			18,472
Cash and cash equivalents, end of period	$	12,316		$	17,880
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	6,154		$	7,741
Income taxes, net of refunds received	179			48

See accompanying notes to consolidated financial statements.

5

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Dollars in thousands, except per share data)

(Unaudited)

(1)  Basis of Presentation and Summary of Significant Accounting Policies

The Company

FirstCity Financial Corporation and subsidiaries (the “Company” or “FirstCity”) is a financial services company with offices throughout the United States and Mexico, and a presence in France, Germany, Brazil and Chile. At June 30, 2008, the Company was engaged in one principal reportable segment – Portfolio Asset acquisition and resolution. The portfolio asset acquisition and resolution business involves acquiring portfolios of loans, real estate and other assets or similar single-asset investments (collectively referred to as “Portfolios” or “Portfolio Assets”). The Company generally acquires Portfolio Assets at a discount to their legal principal balances or appraised values, and then services and resolves the Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. The Company also invests in special situations and restructuring arrangements such as acquiring or financing distressed debt and businesses, originating junior- and senior-bridge loans, and executing lower middle-market buyouts.

Basis of Presentation

The unaudited consolidated financial statements of FirstCity reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly FirstCity’s consolidated financial position at June 30, 2008, its results of operations for the three and six month periods ended June 30, 2008 and 2007 and cash flows for the six month periods ended June 30, 2008 and 2007.  Certain disclosures have been condensed or omitted from these financial statements. Accordingly, these financial statements should be read with the consolidated financial statements included in the Company’s 2007 Annual Report on Form 10-K, as amended. Certain amounts in the consolidated financial statements for prior years have been reclassified to conform to current consolidated financial statement presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are particularly susceptible to significant change in the near-term relate to the estimation of future collections on Portfolio Assets used in the calculation of income and evaluation of impairment for Portfolios; interest rate environments; valuation of the deferred tax asset; prepayment speeds and valuation of servicing assets; valuation of loans receivable (including loans receivable held in securitization trusts); and income tax uncertainties. Actual results could differ materially from those estimates.

Restricted Cash

Restricted cash includes monies due on loan-related remittances received by the Company and due to third parties.

Reclassifications

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to current consolidated financial statement presentation. In all reporting periods prior to December 31, 2007, FirstCity reported payments of debt issuance costs and loan fees in cash flows from operating activities on the Consolidated Statements of Cash Flows. The Company is now reporting these items in cash flows from financing activities. Prior period amounts reported on the Consolidated Statements of Cash Flows have been adjusted to conform to this treatment which is required under U.S. generally accepted accounting principles. The total amount reclassified was $647 for the six month period ended June 30, 2007. In addition, for the six-month period ended December 31, 2007, FirstCity reported cash received on loan-related remittances and due to third parties as cash and cash equivalents on the Consolidated Balance Sheets. The Company is now reporting this amount as restricted cash on the Consolidated Balance Sheets and cash flows from operating activities on the Consolidated Statements of Cash Flows. The total amount reclassified was $509 at December 31, 2007 on the Consolidated Balance Sheets, and $500 for the six-month period ended June 30, 2007 on the Consolidated Statements of Cash Flows. Management believes that these changes to the Consolidated Statements of Cash Flows and Consolidated Balance Sheets as described above are immaterial relative to the consolidated financial statements taken as a whole. These reclassifications have the following impact on the consolidated financial statements:

6

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

	Six Months Ended
	June 30,
	2007
Consolidated Statements of Cash Flows:
Cash flows from operating activities (as reported)	$	(22,808	)
Impact of reclassification on payments of debt issuance costs and loan fees	647
Impact of reclassification on change in restricted cash	(500		)
Cash flows from operating activities (as corrected)	$	(22,661	)
Cash flows from financing activities (as reported)	$	39,302
Impact of reclassification on payments of debt issuance costs and loan fees	(647		)
Cash flows from financing activities (as corrected)	$	38,655

	December 31,
	2007
Consolidated Balance Sheets:
Cash and cash equivalents (as reported)	$	23,546
Impact of reclassification of restricted cash	(509		)
Cash and cash equivalents (as corrected)	$	23,037
Restricted cash (as reported)	$	—
Impact of reclassification of restricted cash	509
Restricted cash (as corrected)	$	509

(2)  Recently Issued and Recently Adopted Accounting Standards

Recently Issued Accounting Standards

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), an amendment to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 requires enhanced disclosures about derivative instruments and hedged items that are accounted for under SFAS No. 133 and related interpretations. SFAS 161 will be effective for the Company’s interim and annual financial statements for periods beginning after November 15, 2008, with early adoption permitted. SFAS 161 expands the disclosure requirements for derivatives and hedged items and has no impact on the Company’s accounts for any such instruments. The Company is currently evaluating the impact of adopting SFAS 161 on its financial statement disclosures.

In December 2007, FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment to ARB No. 51 (“SFAS 160”). SFAS 141R and SFAS 160 require most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require non-controlling interests (previously referred to as “minority interests”) to be reported as a component of equity, which changes the accounting for transactions with non-controlling interest holders. Both SFAS 141R and SFAS 160 are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS 141R will be applied to business combinations occurring after the effective date. SFAS 160 will be applied prospectively to all non-controlling interests, including any that arose before the effective date. The Company is currently evaluating the impact of adopting SFAS 141R and SFAS 160 on its financial condition and results of operations.

In February 2007, the FASB issued SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 provides entities an opportunity to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. Adoption of SFAS 159 is optional and, if adopted, would be effective for the Company’s 2008 fiscal year. The Company elected not to adopt SFAS 159. As such, SFAS 159 did not impact the Company’s financial condition, results of operations and cash flows, or financial statement footnote disclosures.

Recently Adopted Accounting Standards

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The adoption of SFAS 157 did not have any effect on our financial statements at the date of adoption. For additional information, refer to Note 12 of the Consolidated Financial Statements.

In February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities that are not required or permitted to be measured at fair value on a recurring basis. The Company will be required to apply SFAS 157, effective January 1, 2009, to non-financial assets and liabilities that qualified for the deferral.

7

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

(3) Discontinued Operations

Discontinued operations are comprised of two components previously reported as the Company’s residential and commercial mortgage banking business (“Mortgage”) and the consumer lending business conducted through the Company’s minority interest investment in Drive Financial Services LP (“Consumer”). In the second quarter of 2008, the Company recorded a provision of $46 related to the discontinued Mortgage operations. There was no income or loss from discontinued operations in the first six months of 2007. At June 30, 2008 and December 31, 2007, liabilities from discontinued Consumer operations of $688 and $568, respectively, which consist of state income taxes payable, were included in other liabilities.

(4)  Portfolio Assets

Portfolio Assets are summarized as follows:

	June 30,			December 31,
	2008			2007
Loan Portfolios
Loans Acquired Prior to 2005
Non-performing Portfolio Assets	$	3,686		$	4,177
Performing Portfolio Assets	915			1,266
Loans Acquired After 2004
Loans acquired with credit deterioration	117,699			97,630
Loans acquired with no credit deterioration	4,124			3,871
Outstanding balance	126,424			106,944
Allowance for loan losses	(10,454		)	(1,723		)
Carrying amount of loans, net of allowance	115,970			105,221
Real Estate Portfolios	29,958			14,832
Other	1,912			1,948
Portfolio Assets, net	$	147,840		$	122,001

In the first quarter of 2008, the Company discontinued using the income recognition model under AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”) for previously-purchased non-performing loan portfolios in Mexico. Recognition of income under SOP 03-3 is dependent on management having the ability to develop reasonable expectations as to both the timing and amount of cash flows to be collected. In the event management cannot develop a reasonable expectation of the timing and amount of cash flows expected to be collected, SOP 03-3 permits the use of the cost-recovery accounting model. Due to uncertainties related to the legal and economic environment in Mexico, management determined that it no longer has the ability to develop a reasonable expectation of the timing of cash flows to be collected, and as of January 1, 2008, began accounting for its non-performing loan portfolios in Mexico under the cost-recovery accounting model – which requires collections received to be applied first against the recorded amount of the loan or pool. When the carrying amount of the loan or pool has been reduced to zero, any additional amounts received are recognized as income. The Company evaluates at the balance sheet date if the remaining amount that is probable of collection is less than the carrying value, and if so, recognizes impairment. For subsequent increases in the actual cash flows or cash flows expected to be collected, management will reverse any existing valuation allowance for that loan or pool. At June 30, 2008, the Company’s carrying amount of non-performing loans in Mexico accounted for using the cost-recovery model in the caption “Loans Acquired After 2004 – Loans acquired with credit deterioration” in the table above approximated $14.9 million. The Company acquired $8.7 million of loan portfolios in Mexico with credit deterioration in the second quarter of 2008 that are accounted for using the cost-recovery accounting model under SOP 03-3.

On June 20, 2008, FirstCity and another investor acquired a portfolio of non-performing loans in Mexico for $8.7 million. FirstCity accounted for the investment as a consolidated Portfolio Asset at June 30, 2008 since it has a 58.0% ownership interest in the portfolio. Per terms of the purchase agreement, the other investor (42.0% ownership interest) has the option to acquire additional interests in the loan portfolio so that it would own 80.0% by paying FirstCity an amount equal to 38.0% of the portfolio’s purchase price (and FirstCity would subsequently own 20.0% of the portfolio). If the investor does not exercise its option within sixty-two days from the portfolio purchase date, then FirstCity and the investor will execute a servicing agreement that will entitle FirstCity to receive from the investor an oversight fee in the amount of $698.

Certain Portfolio Assets are pledged to secure a $100.0 million revolving loan facility between FH Partners LLC, an indirect wholly-owned affiliate of FirstCity, and Bank of Scotland. See Note 2 to the Company’s 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC” or “Commission”) on March 17, 2008 for a description of this revolving credit agreement. In addition, certain Portfolio Assets are pledged to secure notes payable of certain consolidated affiliates of FirstCity that are generally non-recourse to FirstCity or any affiliate other than the acquiring entity that incurred the debt.

8

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

Income from Portfolio Assets is summarized as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Loan Portfolios
Loans Acquired Prior to 2005
Non-performing Portfolio Assets	$	75	$	126	$	255	$	868
Performing Portfolio Assets	37		213		143		562
Loans Acquired After 2004
Loans acquired with credit deterioration	4,913		5,084		8,466		8,150
Loans acquired with no credit deterioration	97		204		209		696
Real Estate Portfolios	447		—		1,376		328
Other	53		58		108		116
Income from Portfolio Assets	$	5,622	$	5,685	$	10,557	$	10,720

The Company recorded a provision for loan and impairment losses on Portfolio Assets of approximately $9,886 for the six month period ended June 30, 2008, which is comprised of a $994 impairment charge on real estate portfolios and an $8,892 allowance for loan losses, net of recoveries.  For the six month period ended June 30, 2007, the Company recorded a provision for loan and impairment losses on Portfolio Assets of $1,003, which is comprised of a $92 impairment charge on real estate portfolios and a $911 allowance for loan losses.

The changes in the allowance for loan losses on Portfolio Assets are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Beginning Balance	$	(4,273	)	$	(567	)	$	(1,723	)	$	(333	)
Provisions	(6,287		)	(791		)	(9,154		)	(1,025		)
Recoveries	107			114			262			114
Charge Offs	—			—			162			—
Translation adjustments	(1		)	—			(1		)	—
Ending Balance	$	(10,454	)	$	(1,244	)	$	(10,454	)	$	(1,244	)

Changes in accretable yield for loans acquired after 2004 with evidence of credit deterioration are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Beginning Balance	$	31,318		$	35,670		$	35,951		$	32,339
Additions	16,898			1,967			20,213			3,236
Accretion	(3,476		)	(3,867		)	(6,734		)	(6,581		)
Reclassification from (to) nonaccretable difference	1,210			—			(2,628		)	5,165
Disposals	(1,257		)	(1,567		)	(2,451		)	(1,919		)
Translation adjustments	306			38			648			1
Ending Balance	$	44,999		$	32,241		$	44,999		$	32,241

9

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

Loans acquired during each period for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Face value at acquisition	$	64,903	$	15,653	$	74,755	$	50,550
Cash flows expected to be collected at acquisition	53,150		8,705		63,285		38,827
Basis in acquired loans at acquisition	36,252		6,738		43,072		35,591

(5)  Loans Receivable

Loans receivable – affiliates

Loans receivable – affiliates, which are designated by management as held for investment, are summarized as follows:

	June 30,		December 31,
	2008		2007
Outstanding balance	$	18,310	$	4,967
Capitalized interest	670		480
Carrying amount of loans, net	$	18,980	$	5,447

The summary of activity in loans receivable – affiliates is as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Beginning Balance	$	5,403		$	4,876		$	5,447		$	4,755
Advances	13,500			136			13,500			486
Payments received	(46		)	(52		)	(514		)	(374		)
Capitalized interest	95			79			191			144
Foreign exchange gains	28			45			356			73
Ending Balance	$	18,980		$	5,084		$	18,980		$	5,084

Loans receivable – affiliates represent advances to Acquisition Partnerships and other affiliated entities to acquire portfolios of performing and nonperforming commercial and consumer loans and other assets; and a senior debt financing arrangement with an affiliated entity to provide capital for business expansion. The loans are reported at their outstanding principal balances adjusted for unearned discounts, loan origination fees, and the allowance for loan losses. Interest is accrued when earned in accordance with the contractual terms of the loans. Interest is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs are amortized as level-yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans.  Loans receivable – affiliates are generally secured by the underlying collateral that was acquired with the loan proceeds. Advances to affiliates to acquire loan portfolios are secured by the underlying collateral of the individual notes within the portfolios, which is generally real estate and foreclosed properties; whereas the advance to the affiliate for business expansion purposes is secured by equipment and ownership interests.

Loans receivable – affiliates are evaluated for impairment by analyzing expected future cash flows and evaluating values of the underlying loan collateral. For advances secured by loan portfolios, management analyzes the expected cash flows within each pool to determine that the cash flows are sufficient to repay these notes. For the loan secured by equipment and ownership interests, management analyzes the expected future cash flows from the borrowing entity (discounted for the loan’s risk-adjusted rate), and the values of the underlying collateral, to determine whether the Company expects to ultimately collect all contractual principal and interest. The results of management’s evaluations indicated that projected cash flows

10

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

and underlying collateral are sufficient to repay the loans and no allowances for impairment are necessary. The Company recorded no provisions for impairment on loans receivable – affiliates for the six months ended June 30, 2008 and 2007.

Loans receivable – SBA held for sale

Loans receivable – SBA held for sale are summarized as follows:

	June 30,		December 31,
	2008		2007
Outstanding balance	$	2,191	$	133
Capitalized costs	28		—
Carrying amount of loans, net	$	2,219	$	133

Changes in loans receivable – SBA held for sale are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Beginning Balance	$	1,055		$	11,484		$	133		$	—
Purchases of loans	—			—			—			18,355
Originations and advances of loans	3,752			760			4,842			824
Payments received	(29		)	(224		)	(31		)	(411		)
Capitalized costs	7			—			26			—
Loans sold	(2,566		)	(7,979		)	(2,751		)	(14,539		)
Premium amortization, net	—			(211		)	—			(399		)
Ending Balance	$	2,219		$	3,830		$	2,219		$	3,830

Loans receivable – SBA held for sale represent U.S. Small Business Administration (“SBA”) loans acquired by the Company in February 2007 and SBA loan originations and advances made since such time.  SBA loans held for sale represent the portions of the loans that are guaranteed by the SBA, and are reflected at the lower of aggregate cost or estimated fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The carrying value of SBA loans held for sale is net of premiums as well as deferred origination fees and costs. Premiums and net origination fees and costs are deferred and included in the basis of the loans in calculating gains and losses upon sale. SBA loans are generally secured by the borrowing entities’ assets such as accounts, property and equipment, and other assets. The Company generally sells the guaranteed portion of each loan to a third party and retains the servicing rights. The difference between the proceeds received and the allocated carrying value of the loans sold are recognized as net gains on sales of loans.  The non-guaranteed portion is generally held in the portfolio and classified as held for investment.  The Company recorded no write-downs of SBA loans held for sale below their cost for the six months ended June 30, 2008 and 2007.

Loans receivable – SBA held for investment, net

Loans receivable – SBA held for investment are summarized as follows:

	June 30,			December 31,
	2008			2007
Outstanding balance	$	15,095		$	15,727
Allowance for loan losses	(233		)	(151		)
Discounts, net	(1,201		)	(1,346		)
Capitalized costs	31			4
Carrying amount of loans, net	$	13,692		$	14,234

11

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

Changes in loans receivable – SBA held for investment are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Beginning Balance	$	12,988		$	16,538		$	14,234		$	—
Purchases of loans	—			—			—			17,406
Originations and advances of loans	1,241			253			1,604			275
Payments received	(457		)	(1,152		)	(2,071		)	(1,977		)
Capitalized costs	20			2			27			2
Provision for SBA loan losses, net	(110		)	(69		)	(82		)	(69		)
Discount accretion, net	10			(92		)	145			(157		)
Charge offs	—			—			(165		)	—
Ending Balance	$	13,692		$	15,480		$	13,692		$	15,480

Loans receivable – SBA held for investment represent SBA loans acquired by the Company in February 2007 and SBA loan originations and advances made since such time. SBA loans held for investment are reported at their outstanding principal balances adjusted for unearned discounts, net deferred loan origination costs and the allowance for loan losses. Interest is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs as well as premiums and discounts are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. SBA loans held for investment are generally secured by the borrowing entities’ assets such as accounts, property and equipment, and other assets. The loans are evaluated for impairment based upon performance of the loans and other portfolio characteristics, such as industry concentrations and loan collateral, which also impacts management’s estimates of the impairment. The adequacy of the allowance for loan losses is reviewed by management on a regular basis and adjustments, if necessary, are reflected in operations during the periods in which they become known. Considerations in this evaluation include past and current loss experience, risks inherent in the current portfolio, and evaluation of commercial and real estate collateral as well as current economic conditions.

Changes in the allowance for loan losses related to loans receivable – SBA held for investment are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Beginning Balance	$	(123	)	$	—		$	(151	)	$	—
Provisions	(110		)	(69		)	(234		)	(69		)
Recoveries	—			—			2			—
Charge Offs	—			—			150			—
Ending Balance	$	(233	)	$	(69	)	$	(233	)	$	(69	)

Loans receivable – other

Loans receivable – other, which are designated by management as held for investment, are summarized as follows:

	June 30,			December 31,
	2008			2007
Outstanding balance	$	16,389		$	5,502
Discounts, net	(508		)	(24		)
Capitalized interest and costs	611			517
Carrying amount of loans, net	$	16,492		$	5,995

Changes in loans receivable – other are as follows:

12

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Beginning Balance	$	5,965		$	27,956		$	5,995		$	23,991
Advances	10,480			3,000			10,472			6,646
Payments received	(58		)	(2,259		)	(81		)	(2,259		)
Capitalized interest and costs	84			267			93			501
Discount accretion, net	18			58			24			119
Foreign exchange gains (losses)	3			201			(11		)	225
Ending Balance	$	16,492		$	29,223		$	16,492		$	29,223

Loans receivable – other include loans made to non-affiliated entities and are secured by the borrowing entities’ assets such as accounts receivable, inventory, property and equipment, and various other assets. The loans are reported at their outstanding principal balances adjusted for unearned discounts, loan origination fees, and the allowance for loan losses. Interest is accrued when earned in accordance with the contractual terms of the loans. Interest is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding.  Loan origination fees and direct costs are amortized as level-yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Management evaluates these loans for impairment by analyzing the expected future cash flows from the borrowing entity (discounted for the loans’ risk-adjusted rates), and the values of the underlying collateral, to determine whether the Company expects to ultimately collect all contractual principal and interest. The results of this evaluation indicated that projected cash flows and underlying collateral are sufficient to repay the loans and no allowances for impairment were necessary. The Company recorded no provisions for impairment on loans receivable – other for the six months ended June 30, 2008 and 2007.

(6)  Equity Investments

The Company has investments in Acquisition Partnerships and their general partners and investments in servicing and operating entities that are accounted for under the equity method of accounting. The condensed combined financial position and results of operations of the Acquisition Partnerships (excluding servicing entities), which include the domestic and foreign Acquisition Partnerships and their general partners, are summarized below:

Condensed Combined Balance Sheets

	June 30,		December 31,
	2008		2007
Assets	$	464,024	$	457,490
Liabilities	$	147,117	$	141,430
Net equity	316,907		316,060
	$	464,024	$	457,490
Equity investment in Acquisition Partnerships	$	76,133	$	76,078
Equity investment in servicing and operating entities	11,491		11,544
	$	87,624	$	87,622

Portfolio Assets held by certain Acquisition Partnerships are pledged to secure notes payable that are generally non-recourse to FirstCity or any affiliate other than the partnership entity that incurred the debt.

13

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

Condensed Combined Summary of Operations

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Income from Portfolio Assets	$	26,781		$	22,096		$	51,072		$	44,836
Other income	765			174			1,094			722
Revenues	27,546			22,270			52,166			45,558
Interest expense	5,337			2,801			7,213			5,808
Average cost (annualized)	14.29		%	13.79		%	9.79		%	13.00		%
Service fees	8,214			4,912			13,162			9,633
Provision for loan and impairment losses	3,388			103			8,746			6,664
Other operating costs	5,602			4,164			11,418			8,332
Foreign currency (gains) losses	(5,435		)	(3,587		)	(8,380		)	(3,322		)
Income tax and other taxes	705			(1,742		)	1,737			(1,708		)
Expenses	17,811			6,651			33,896			25,407
Equity in earnings of investments	859			759			1,636			816
Net earnings	$	10,594		$	16,378		$	19,906		$	20,967
Equity in earnings of Acquisition Partnerships	$	3,017		$	3,673		$	5,338		$	5,454
Equity in earnings of servicing and operating entities	(9		)	659			510			704
	$	3,008		$	4,332		$	5,848		$	6,158

In the first quarter of 2008, the Company discontinued using the income recognition model under SOP 03-3 for previously-purchased non-performing loan portfolios in Mexico (refer to Note 4 for a detailed discussion). In accordance with SOP 03-3, the Acquisition Partnerships now account for their non-performing loan portfolios in Mexico under the cost-recovery model – which requires collections received to be applied first against the recorded amount of the loan or pool. At June 30, 2008, the Acquisition Partnerships’ carrying amount of non-performing loans in Mexico accounted for using the cost-recovery model in the caption “Assets” in the “Condensed Combined Balance Sheets” table above approximated $156.5 million. The Acquisition Partnerships did not acquire any loan portfolios in Mexico with credit deterioration in the second quarter of 2008 that are within the scope of SOP 03-3.

The assets and equity of the Acquisition Partnerships and equity investments in the Acquisition Partnerships are summarized by geographic region below. The WAMCO Partnerships represent limited partnerships and limited liability companies in which the Company has a common ownership with Cargill.

	June 30,		December 31,
	2008		2007
Assets:
Domestic:
WAMCO Partnerships	$	70,465	$	87,086
Other	7,789		7,758
Latin America	228,975		200,780
Europe:
P.R.L. Developpement, SAS	25,645		21,794
Other	131,150		140,072
	$	464,024	$	457,490

14

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

	June 30,		December 31,
	2008		2007
Equity:
Domestic:
WAMCO Partnerships	$	38,258	$	44,309
Other	4,320		4,237
Latin America	178,236		168,108
Europe:
P.R.L. Developpement, SAS	24,034		19,728
Other	72,059		79,678
	$	316,907	$	316,060
Equity investment in Acquisition Partnerships:
Domestic:
WAMCO Partnerships	$	19,134	$	22,065
Other	2,074		2,064
Latin America	24,032		21,555
Europe:
P.R.L. Developpement, SAS	10,995		9,085
Other	19,898		21,309
	$	76,133	$	76,078

15

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

Revenues and earnings (loss) of the Acquisition Partnerships and equity in earnings (loss) of the Acquisition Partnerships are summarized by geographic region below.

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008			2007		2008			2007
Revenues:
Domestic:
WAMCO Partnerships	$	3,129		$	4,020	$	6,050		$	8,372
Other	103			352		297			597
Latin America	12,495			10,130		23,726			19,442
Europe:
P.R.L. Developpement, SAS	1,301			242		1,598			746
Other	10,518			7,526		20,495			16,401
	$	27,546		$	22,270	$	52,166		$	45,558
Net earnings:
Domestic:
WAMCO Partnerships	$	(235	)	$	2,383	$	559		$	2,982
Other	(75		)	125		(316		)	105
Latin America	3,007			8,201		5,990			6,563
Europe:
P.R.L. Developpement, SAS	1,591			1,145		2,769			1,657
Other	6,306			4,524		10,904			9,660
	$	10,594		$	16,378	$	19,906		$	20,967
Equity in earnings of Acquisition
Partnerships:
Domestic:
WAMCO Partnerships	$	(88	)	$	1,074	$	292		$	1,343
Other	(24		)	39		(138		)	21
Latin America	735			887		1,104			877
Europe:
P.R.L. Developpement, SAS	728			498		1,215			721
Other	1,666			1,175		2,865			2,492
	$	3,017		$	3,673	$	5,338		$	5,454

16

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

Combining statements of operations for the WAMCO Partnerships follow. WAMCO 30 is considered to be a significant subsidiary of FirstCity.

Three Months Ended June 30, 2008

	WAMCO			Other
	30			Partnerships			Combined
Income from Portfolio Assets	$	1,944		$	1,183		$	3,127
Other income, net	2			—			2
Revenues	1,946			1,183			3,129
Interest and fees on notes payable	(363		)	(38		)	(401		)
Provision for loan and impairment losses	(989		)	(1,304		)	(2,293		)
Servicing fees — affiliate	(138		)	(132		)	(270		)
General, administrative and operating expenses	(310		)	(90		)	(400		)
Expenses	(1,800		)	(1,564		)	(3,364		)
Net earnings (loss)	$	146		$	(381	)	$	(235	)

Three Months Ended June 30, 2007

	WAMCO			Other
	30			Partnerships			Combined
Income from Portfolio Assets	$	2,937		$	1,019		$	3,956
Other income, net	62			2			64
Revenues	2,999			1,021			4,020
Interest and fees on notes payable	(603		)	(127		)	(730		)
Provision for loan and impairment losses	577			(61		)	516
Servicing fees — affiliate	(711		)	(159		)	(870		)
General, administrative and operating expenses	(428		)	(125		)	(553		)
Expenses	(1,165		)	(472		)	(1,637		)
Net earnings	$	1,834		$	549		$	2,383

17

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

Six Months Ended June 30, 2008

	WAMCO			Other
	30			Partnerships			Combined
Income from Portfolio Assets	$	3,487		$	2,551		$	6,038
Other income, net	11			1			12
Revenues	3,498			2,552			6,050
Interest and fees on notes payable	(836		)	(96		)	(932		)
Provision for loan and impairment losses	(1,212		)	(1,704		)	(2,916		)
Servicing fees — affiliate	(252		)	(442		)	(694		)
General, administrative and operating expenses	(783		)	(166		)	(949		)
Expenses	(3,083		)	(2,408		)	(5,491		)
Net earnings	$	415		$	144		$	559

Six Months Ended June 30, 2007

	WAMCO			Other
	30			Partnerships			Combined
Income from Portfolio Assets	$	6,231		$	2,032		$	8,263
Other income, net	105			4			109
Revenues	6,336			2,036			8,372
Interest and fees on notes payable	(1,303		)	(259		)	(1,562		)
Provision for loan losses	(487		)	(476		)	(963		)
Servicing fees — affiliate	(1,055		)	(371		)	(1,426		)
General, administrative and operating expenses	(1,114		)	(325		)	(1,439		)
Expenses	(3,959		)	(1,431		)	(5,390		)
Net earnings	$	2,377		$	605		$	2,982

At June 30, 2008, the Company had $37.2 million in Euro-denominated debt for the purpose of hedging a portion of the net equity investments in Europe. In general, the type of risk hedged relates to the foreign currency exposure of net investments in Europe caused by movements in Euro exchange rates. The Company designated the hedging relationship such that changes in the net investments being hedged are expected to be offset by corresponding changes in the values of the Euro-denominated debt.

Effectiveness of the hedging relationship is measured and designated at the beginning of each month by comparing the outstanding balance of the Euro-denominated debt to the carrying value of the designated net equity investments. The net foreign currency translation gain (loss) included in accumulated other comprehensive income relating to the Euro-denominated debt was ($1.5) million for the six months ended June 30, 2008 and $156 for the same period in 2007.

(7)  Servicing Assets — SBA Loans

In accordance with SFAS No. 156, Accounting for Servicing of Financial Assets (“SFAS 156”), servicing rights purchased or resulting from the sale of loans are initially recognized at fair value at the date of acquisition or transfer. Subsequent to the date of purchase or sale, the Company elected to measure the carrying value of the servicing assets by using the amortization method – which amortizes the servicing assets in proportion to and over the period of estimated net servicing income, and evaluates servicing assets for impairment based on fair value at each reporting date. The Company evaluates the possible impairment of servicing assets based on the difference between the carrying amount and current fair value of the servicing assets. Impairment is charged to servicing fees in the period recognized.

In February 2007, the Company, through its subsidiary American Business Lending, Inc. (“ABL”), acquired a portfolio of SBA loans for $36.8 million. Included in the purchase price were the rights to service additional loans with an unpaid balance of $33.8 million. The Company recorded a servicing asset of $758 relating to these servicing rights. Additional servicing rights have been capitalized since the portfolio acquisition as a result of loans sold. Servicing rights are recognized as assets when the SBA loans are sold and the rights to service those loans are retained. The Company retains servicing responsibilities and receives servicing fees of approximately 1%.

18

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

Changes in the Company’s amortized servicing assets are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Beginning Balance	$	839		$	854		$	885		$	—
Servicing Assets capitalized	52			140			54			1,009
Servicing Assets amortized	(50		)	(55		)	(98		)	(70		)
Ending Balance	$	841		$	939		$	841		$	939
Reserve for impairment of servicing assets:
Beginning Balance	$	(110	)	$	(39	)	$	(42	)	$	—
Impairments	(1		)	(9		)	(69		)	(48		)
Recoveries	19			—			19			—
Charge Offs	—			—			—			—
Ending Balance	$	(92	)	$	(48	)	$	(92	)	$	(48	)
Ending Balance (net of reserve)	$	749		$	891		$	749		$	891
Fair value of amortized servicing assets:
Beginning balance	$	729		$	815		$	843		$	—
Ending balance	749			891			749			891

The Company relies primarily on an undiscounted cash flow model to estimate the fair value of its servicing assets. The model calculates estimated fair value of the servicing assets using predominant risk characteristics of servicing assets such as discount rate, prepayment speed, weighted average life of the underlying loans, and the interest rates of the underlying loans. The estimated fair value of servicing assets was determined using discount rates ranging from 7.50% to 11.19%, prepayment speeds of 15%, and weighted average lives ranging from 75 to 299 months. In the event future prepayments are significant or impairments are incurred and future expected cash flows are inadequate to cover the unamortized servicing assets, additional amortization or impairment charges would be recognized.

(8)  Segment Reporting

The Company is engaged in one reportable segment - Portfolio Asset acquisition and resolution.  The following is a summary of results of operations for the Portfolio Asset acquisition and resolution segment and reconciliation to losses from continuing operations for the three and six months ended June 30, 2008 and 2007.

19

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Portfolio Asset Acquisition and Resolution:
Revenues:
Servicing fees	$	2,706		$	2,977		$	4,906		$	5,582
Income from Portfolio Assets	5,622			5,685			10,557			10,720
Gain on sale of SBA loans held for sale, net	133			343			142			624
Interest income from SBA loans	366			606			842			914
Interest income from affiliates	483			140			633			266
Interest income from loans receivable - other	355			982			630			1,889
Revenue from controlled affiliate	859			—			1,664			—
Other	921			455			1,392			785
Total	11,445			11,188			20,766			20,780
Expenses:
Interest and fees on notes payable	3,758			4,668			7,441			8,919
Salaries and benefits	4,232			3,025			8,193			6,139
Provision for loan and impairment losses	7,090			746			10,120			1,072
Occupancy, data processing, property protection and other	3,930			2,741			7,162			4,733
Minority interest	53			(15		)	31			(123		)
Total	19,063			11,165			32,947			20,740
Equity in earnings of investments	3,008			4,332			5,848			6,158
Operating contribution before direct taxes	$	(4,610	)	$	4,355		$	(6,333	)	$	6,198
Operating contribution, net of direct taxes	$	(4,821	)	$	4,313		$	(6,621	)	$	6,183
Corporate Overhead:
Salaries and benefits, occupancy, professional and other income and expenses, net	1,658			2,507			3,351			5,292
Earnings (loss) from continuing operations	$	(6,479	)	$	1,806		$	(9,972	)	$	891

Revenues and equity in earnings of investments from the Portfolio Asset acquisition and resolution segment are attributable to domestic and foreign operations as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Domestic	$	7,249	$	9,382	$	13,967	$	16,349
Latin America	3,853		3,693		6,888		6,225
Europe	3,340		2,375		5,735		4,205
Other	11		70		24		159
Total	$	14,453	$	15,520	$	26,614	$	26,938

20

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

Total assets for the Portfolio Asset acquisition and resolution segment and a reconciliation to total assets are as follows:

	June 30,		December 31,
	2008		2007
Cash and cash equivalents	$	12,316	$	23,037
Restricted cash		1,190		509
Portfolio acquisition and resolution assets:
Domestic	204,234		163,078
Latin America	44,809		33,450
Europe	46,941		46,701
Other	282		371
Deferred tax asset, net	20,101		20,101
Other non-earning assets, net	18,750		10,872
Total assets	$	348,623	$	298,119

(9)  Earnings (Loss) per Common Share

Basic net earnings (loss) per common share calculations are based upon the weighted average number of common shares outstanding during the period. The dilutive effect of common share equivalents is included in the calculation of diluted earnings (loss) per share only when the effect of their inclusion would be dilutive. The calculations of basic and dilutive earnings (loss) per share were determined as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008			2007		2008			2007
Earnings (loss) from continuing operations	$	(6,479	)	$	1,806	$	(9,972	)	$	891
Loss from discontinued operations	(50		)	—		(141		)	—
Net earnings (loss) available to common shareholders	$	(6,529	)	$	1,806	$	(10,113	)	$	891
Weighted average outstanding shares of common stock (in thousands)	10,357			10,789		10,471			10,789
Dilutive effect of:
Warrants	—			323		—			328
Employee stock options	—			285		—			297
Weighted average outstanding shares of common stock and common stock equivalents	10,357			11,397		10,471			11,414
Earnings (loss) from continuing operations per share:
Basic	$	(0.63	)	$	0.17	$	(0.96	)	$	0.08
Diluted	$	(0.63	)	$	0.16	$	(0.96	)	$	0.08
Loss from discontinued operations per share:
Basic	$	—		$	—	$	(0.01	)	$	—
Diluted	$	—		$	—	$	(0.01	)	$	—
Net earnings (loss) per share:
Basic	$	(0.63	)	$	0.17	$	(0.97	)	$	0.08
Diluted	$	(0.63	)	$	0.16	$	(0.97	)	$	0.08
Dilutive shares excluded from above:
Warrants	231			—		265			—
Employee stock options	174			—		210			—

21

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

(10)  Stock-Based Compensation

The impact on the results of operations of recording stock-based compensation for the three and six month periods ended June 30, 2008 and 2007 was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Amount of compensation cost recognized in expenses	$	197	$	109	$	422	$	289
Tax benefit recognized in income	$	—	$	—	$	—	$	—
Amount capitalized as part of an asset	$	—	$	—	$	—	$	—

The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on historical volatility of the Company’s stock. The Company estimated the expected term of its unvested options by taking the average of the vesting term remaining and the contractual term of the option (“simplified method”), as illustrated in SEC Staff Accounting Bulletin No. 107. The Company uses the simplified method of estimating the expected term of the share options since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to limited instances of key employees and directors exercising their options. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The following table sets forth the weighted average assumptions used to calculate the fair value of the stock options for each respective period:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Weighted average grant date fair value	$	3.05		$	—		$	3.05		$	—
Volatility	78		%	0		%	78		%	0		%
Risk-free interest rate	3.73		%	0.00		%	3.73		%	0.00		%
Expected life in years	5			0			5			0
Dividend yield	Zero			Zero			Zero			Zero

A summary of stock option activity as of June 30, 2008 and changes during the period then ended is presented below:

					Weighted
					Average
			Weighted		Remaining
			Average		Contractual	Aggregate
			Exercise		Term	Intrinsic
	Shares		Price		(Years)	Value
Outstanding at January 1, 2008	879,150		$	6.67
Granted	30,000		4.69
Exercised	—		—
Expired	(7,500	)	29.69
Forfeited	(32,500	)	6.78
Outstanding at June 30, 2008	869,150		$	6.40	5.77	$	2,178
Exercisable at June 30, 2008	673,075		$	5.46	4.86	$	2,100

The total intrinsic value of stock options exercised during the six month periods ended June 30, 2008 and 2007 was $-0- and $9, respectively. As of June 30, 2008, there was approximately $1.0 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the stock option plans.  That cost is expected to be recognized over a weighted average period of 2.3 years.

22

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

A summary of the status and changes of FirstCity’s nonvested shares as of June 30, 2008, and changes during the six months ended June 30, 2008 is presented below:

			Weighted-
			Average
			Grant-Date
	Shares		Fair Value
Nonvested at January 1, 2008	240,950		$	6.89
Granted	30,000		$	3.05
Vested	(73,625	)	$	5.28
Forfeited	(1,250	)	$	5.26
Nonvested at June 30, 2008	196,075		$	6.92

(11)  Income Taxes

Federal income taxes are provided at a 35% rate. The Company has substantial net operating loss carryforwards for federal income tax purposes (“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 a valuation allowance to value the net deferred tax asset at a level, which more likely than not, will be realized. Realization of the deferred tax asset is determined based on management’s expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income from continuing operations prior to the 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, net of the allowance, 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. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly.

On October 1, 2007 the Entrepreneurial Tax of Unique Rate (referred to by its Spanish acronym, IETU or “Flat Tax”) in Mexico was published. The Flat Tax law was effective on January 1, 2008 and replaces the existing asset-based tax. The Flat Tax applies to a different tax base than the income tax and will be paid if the Flat Tax exceeds the income tax computed under existing law. In accordance with SFAS 109, Accounting for Income Taxes, the effects of the Flat Tax should be reflected in the consolidated financial statements. The Flat Tax has no impact on the Company’s deferred tax assets recognized as of June 30, 2008.

Beginning with the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN 48”) as of January 1, 2007, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Prior to the adoption of FIN 48, the Company generally recognized the effect of income tax positions only if such positions were probable of being sustained. Under FIN 48, income tax benefits are recognized and measured based upon a two-step model: (1) a tax position must be more-likely-than-not to be sustained based solely on its technical merits in order to be recognized; and (2) the benefit is measured as the largest dollar amount of that position that is more-likely-than-not to be sustained upon settlement. The difference between the benefit recognized for a position in accordance with this FIN 48 model and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit (“UTB”).

The gross amount of UTBs on uncertain tax positions as of June 30, 2008 totaled $577, which if recognized, would impact the Company’s effective income tax rate. A reconciliation of UTBs for the first six months of 2008 follows:

	2008
Balance at January 1, 2008	$	579
Additions based on tax positions related to the current year	—
Payments and settlements	(2		)
Balance at June 30, 2008	$	577

23

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

Over the next twelve months, due to the expiration of the statute of limitations related to certain UTBs, the Company anticipates that it is reasonably possibly that the amount of UTBs could be reduced by approximately $228, which would impact the Company’s effective tax rate. The Company records interest and penalties related to income tax uncertainties in the provision for income taxes. At June 30, 2008, interest and penalties of $178 are included in “Other liabilities” as income taxes payable.

In a letter dated March 26, 2008, the Internal Revenue Service notified FirstCity of the completion of its examination on the Company’s 2004 federal income tax return. The examination results were that no changes were made to FirstCity’s original tax return as filed. FirstCity currently files tax returns in approximately 35 states and is currently being examined in three states for the year 2004.  Tax year 1990 and subsequent years are open to federal examination, and tax year 2003 and subsequent years are open to state examination.

(12)  Fair Value

Effective January 1, 2008, the Company adopted SFAS 157, which defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure requirements about fair value measurements. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which describes three levels of inputs that may be used to measure fair value:

·Level 1 – Valuations are based upon quoted prices in active exchange markets involving identical assets and liabilities.

·Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar instruments in active markets; quoted prices and valuations for identical or similar instruments in markets that are not active; and model-based valuation techniques with significant assumptions and inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

·Level 3 – Valuations are derived from model-based techniques that use inputs and significant assumptions that are supported by little or no observable market data. Valuation techniques include the use of pricing models, discounted cash flow models and similar methodologies.

At June 30, 2008, the Company did not have any assets or liabilities that are measured at fair value on a recurring basis. However, the Company is required to measure certain financial assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value generally result from write-downs of individual assets as a result of impairment or application of lower-of-cost-or-fair value accounting. For assets measured at fair value on a non-recurring basis and carried at fair value on the balance sheet at June 30, 2008, the following table provides the level of valuation assumptions used to determine the fair value of the related individual assets or portfolios at quarter end:

									Total Losses in
	Carrying Value at June 30, 2008								Quarter Ended
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		June 30, 2008
Portfolio Assets - loans (1)	$	6,225	$	—	$	—	$	6,225	$	(2,114	)
SBA loans held for investment (1)	169		—		—		169		(110		)
Servicing assets - SBA loans	8		—		—		8		(1		)
									$	(2,225	)

(1)Represents the carrying value of impaired loans that were measured for impairment using the estimated fair value of the collateral for collateral-dependent loans. The carrying value of loans fully charged-off is zero.

The carrying value and related write-downs of “Portfolio Assets – loans” and “SBA loans held for investment” in the table above are based on collateral valuations using multiple valuation approaches that are derived from observable and unobservable inputs, adjusted for various considerations such as market conditions, economic and competitive environment, and other assets with similar characteristics (i.e. industry, geography, etc.) that, in management’s opinion, reflect elements a marketplace participant would consider. The Company classifies its fair value measurement techniques for Portfolio Assets and SBA loans as Level 3 inputs for the following reasons: (1) distressed asset acquisitions generally occur in inactive markets for which observable market prices are not

24

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

readily available (i.e. price quotations vary substantially over time and among market-makers, and pricing information is generally not released to the public); and (2) the Company’s valuation techniques that are most-significant to the fair value measurements are principally derived from assumptions and inputs that are corroborated by little or no observable market data.

The carrying value and related write-downs of “Servicing assets – SBA loans” in the table above are based on fair value measurements derived from the Company’s discounted cash flow model. This model estimates fair value of the servicing assets using predominant risk characteristics of servicing assets such as discount rate, prepayment speed, weighted average life of the underlying loans, and the interest rates of the underlying loans. The Company classifies its fair value measurement techniques for servicing assets as Level 3 inputs since the Company’s valuation techniques that are most-significant to the fair value measurements are derived from internally-developed models that are driven by assumptions and inputs that are corroborated by little or no observable market data.

Under SFAS 157, we attempt to base our fair values on the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs, when reasonably available and without undue cost, and minimize the use of unobservable inputs when developing fair value measurements in accordance with the fair value hierarchy in SFAS 157. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based principally on our own estimates and assumptions, are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset, and other such factors. Additionally, there may be inherent weaknesses in any model-driven valuation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future values.

(13)  Commitments and Contingencies

Indemnification Obligation Commitments

On September 21, 2004, FirstCity, FirstCity Consumer Corporation (“Consumer Corp.”), FirstCity Funding LP (“Funding LP”) and FirstCity Funding GP (“Funding GP”) entered into the a Securities Purchase Agreement to sell a 31% beneficial ownership interest in Drive and its general partner, Drive GP LLC, to IFA-GP, IFA-LP and MG-LP (the “2004 Securities Purchase Agreement”). In the 2004 Securities Purchase Agreement, FirstCity, Consumer Corp., Funding LP and Funding GP made various representations and warranties concerning (i) their respective organizations, (ii) their power and authority to enter into the 2004 Securities Purchase Agreement and the transactions contemplated therein, (iii) the ownership of the limited partnership interests in Drive by Funding LP, (iv) the ownership of membership interests in Drive-GP by Consumer Corp., and (iv) the capital structure of Funding LP. FirstCity, Consumer Corp., Funding LP and Funding GP also agreed to indemnify BoS (USA), IFA-GP, IFA-LP and MG-LP from damages resulting from a breach of any representation or warranty contained in the 2004 Securities Purchase Agreement or otherwise made by FirstCity, Consumer Corp. or Funding LP in connection with the transaction. The indemnity obligations under the 2004 Securities Purchase Agreement survive for a maximum period of five (5) years from November 1, 2004. Neither FirstCity, Consumer Corp., Funding LP, or Funding GP is required to make any payments as a result of the indemnity provided under the 2004 Securities Purchase Agreement until the aggregate amount payable exceeds $0.25 million, and then only for the amount in excess of $0.25 million in the aggregate; however certain representations and warranties are not subject to this $0.25 million threshold. Management of the Company believes that FirstCity will not have to pay any amounts relating to these representations and warranties.

On August 8, 2006, an Interest Purchase and Sale Agreement was entered into by and among Bidmex Holding, LLC (“Buyer”), as buyer, and Strategic Mexican Investment Partners, L.P. (“SMIP”), an affiliate of the Company and Cargill Financial Services International, Inc. (“CFSI”), (collectively, the “Sellers”), as seller, and eleven U.S. limited liability companies (“LLCs”) which invested in Mexican portfolio acquisition entities (“SRLs”) and the AIG entities as additional parties.  In the Interest Purchase and Sale Agreement, the Sellers and the LLCs made various representations and warranties concerning (i) the existence and ownership of the LLCs and the related SRLs, (ii) the assets and liabilities of the LLCs, (iii) taxes related to periods prior to August 8, 2006, and (iv) the operations of the LLCs and SRLs.  The Sellers agreed to indemnify the Buyer and AIG Entities from damages resulting from a breach of any representation or warranty contained in the Interest Purchase and Sale Agreement on a several and not joint basis according to their respective ownership percentages in each LLC as to any matter related to a particular LLC, or on the basis of 80% to CFSI and 20% to SMIP as to any matter that could not be identified to a particular LLC.  The indemnity obligation under the Interest Purchase and Sale Agreement survives for a period of the statute of limitations for matters related to taxes, existence and authority, capitalization and good standing of the LLCs and SRLs and for a period of two years from August 8, 2006, the closing date with respect to all other representations and warranties.  The Sellers are not required to make any payments as a result of the indemnity provisions of the Interest Purchase and Sale Agreement until the aggregate amount payable under that agreement and the Asset Purchase Agreement exceeds $0.25 million; however, claims related to taxes and fraud are not subject to this $0.25 million

25

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

threshold.  The Interest Purchase and Sale Agreement limits the liability of the Sellers for indemnifiable losses under the Interest Purchase and Sale Agreement and the Asset Purchase Agreement to the Aggregate Purchase Price (without duplication of amounts recovered pursuant to the terms of the Asset Purchase Agreement).  FirstCity does not believe that the potential liability would have a material adverse effect on the consolidated financial position, results of operations or liquidity of FirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships.

Also on August 8, 2006, Bidmex Holding, LLC entered into an Agreement for the Onerous Transfer of Loans and Litigious Rights (the “Asset Purchase Agreement”) between and among Residencial Oeste, S. de R.L. de C.V., as seller (the “Asset Seller”), an affiliate of CFSI and SMIP, Residencial Oeste 2, S. de R.L. de C.V., as purchaser (the “Asset Purchaser”), and CFSI, SMIP, and Bidmex Acquisition, LLC, the parent of the Asset Purchaser, as additional parties.  The Asset Purchase Agreement provides for the sale of the loan portfolio owned by the Seller to the Purchaser for a purchase price of $10.1 million on the closing date, which purchase price is part of the Aggregate Purchase Price.  In the Asset Purchase Agreement, the Asset Seller and the Sellers made various representations and warranties concerning (i) the existence and ownership of the Seller, (ii) the ownership of the loan portfolio, (iii) taxes related to periods arising prior to the closing date, and (iv) the existence of the loans comprising the loan portfolio and other matters related to the loan portfolio.  The Asset Seller agreed to indemnify the Asset Purchaser from damages resulting from a breach of any representation or warranty.  The indemnity obligation under the Asset Purchase Agreement survives for a period of the statute of limitations for matters related to existence and ownership of the Seller, ownership of the loans, and taxes for periods prior to August 8, 2006, and for a period of two years from August 8, 2006, with respect to all other representations and warranties.  The Seller is not required to make any payments as a result of the indemnity provisions of the Asset Purchase Agreement until the aggregate amount payable under that Agreement exceeds $25; however, claims related to taxes and fraud are not subject to this $25 threshold.  The Interest Purchase and Sale Agreement limits the liability of the Sellers for indemnifiable losses under the Asset Purchase Agreement to the Aggregate Purchase Price. FirstCity does not believe that the potential liability would have a material adverse effect on the consolidated financial position, results of operations or liquidity of FirstCity, its subsidiaries, its affiliates or the Acquisition Partnerships.

Commitments to Repurchase Loans

In connection with the Interest Purchase and Sale Agreement, Recuperación de Carteras Mexicanas, S. de R.L. de C.V., as optionor (“RCM”), an affiliate of SMIP and CFSI, granted a put option dated August 8, 2006 to Bidmex Holding, LLC, as optionee, related to the purchase of any loan of Solución de Activos Residenciales, S. de R.L. de C.V. or Solución de Activos Comerciales, S. de R.L. de C.V., each a Mexican SRL, if any borrower of a loan owned by those entities has filed or files a challenge in a legal proceeding related to any such loan based on, in addition to any other defense claims, a claim on grounds related to the Mexican Supreme Court Ruling that has put into issue the actions required for transfer of loans by Mexican financial institutions after August 2003, provided that any such challenge is asserted on or before the earlier of (i) the reversal of the Supreme Court Ruling, or (ii) February 1, 2008.  The purchase price for any loan under the put option is to be the allocated purchase price set by the parties for the loan, plus certain expenses related to the transfer and collection of the loan, plus any taxes paid or payable with respect to the cash flow from each loan, reduced by any cash flow received by Bidmex Holding, LLC with respect to the loan. Pursuant to the put option agreement, Bidmex Holding, LLC delivered a notice to exercise the put option on March 31, 2008 for qualifying loans with a purchase price of approximately $635, of which the Company’s share is approximately $127.

Financial Security Assurance Inc. (“FSA”), in its capacity as certificate insurer under the Pooling and Servicing Agreement, relating to the FirstCity Capital Home Equity Loan Trust 1998-2 (the “Trust”), dated as of November 1, 1998 by and among FC Capital Corp., in its capacities as seller and master servicer, and The Bank of New York, in its capacity as trustee, made demand on FC Capital Corp. to repurchase certain loans that were subject to repurchase due to fraud of third parties in connection with the origination of the loans. FC Capital Corp. agreed to provide a letter of credit in the amount of the repurchase price for the loans in lieu of being required to purchase the loans from the Trust. FirstCity has obtained and delivered to FSA, for the benefit of FC Capital Corp., an irrevocable letter of credit in the amount of $0.5 million from the Bank of Scotland.  Pursuant to the agreement with FSA, FC Capital Corp. will have the option to purchase the loans for $0.5 million prior to a call under the letter of credit.

Letters of Credit and Other Guarantees

On November 5, 2007, Fondo de Inversion Privado NPL Fund One (“PIF1”), an equity investment of FirstCity Chile, Ltda., entered into a revolving line of credit with a maximum loan amount of $15.0 million with Banco Santander Chile, S.A. The proceeds were used to acquire a loan portfolio at face value from FirstCity NPL S.A. (a consolidated affiliate of FirstCity Chile, Ltda.) and to finance the purchase of other loan portfolios from non-affiliated parties. Pursuant to terms of the credit facility, FirstCity was required

26

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

to provide a stand-by letter of credit from Bank of Scotland that would satisfy the maximum loan balance upon demand. At June 30, 2008, FirstCity had a letter of credit in the amount of $16.5 million from Bank of Scotland under the terms of FirstCity’s revolving acquisition facility with Bank of Scotland, with Banco Santander Chile, S.A. as the letter of credit beneficiary. In the event that a demand is made under the $16.5 million letter of credit, FirstCity is required to reimburse Bank of Scotland by making payment to Bank of Scotland for all amounts disbursed or to be disbursed by Bank of Scotland under the letter of credit.

On November 29, 2006, FirstCity Mexico SA de CV, a Mexican affiliate of FirstCity, entered into a revolving line of credit with a maximum loan amount in Mexican pesos equivalent to $13.8 million as of June 30, 2008, with Banco Santander, S.A. The proceeds were used to pay down the acquisition facility with the Bank of Scotland.  Pursuant to the terms of the credit facility, FirstCity Mexico SA de CV was required to provide a stand-by letter of credit from Bank of Scotland that would satisfy the loan balance upon demand.  At June 30, 2008, FirstCity had a letter of credit in the amount of $14.1 million from Bank of Scotland under the terms of FirstCity’s revolving acquisition facility with Bank of Scotland.  In the event that a demand is made under the $14.1 million letter of credit, FirstCity is required to reimburse Bank of Scotland by making payment to Bank of Scotland for all amounts disbursed or to be disbursed by Bank of Scotland under the letter of credit.

ABL, a subsidiary of FirstCity, has a $40.0 million revolving loan facility with Wells Fargo Foothill, LLC (“WFF”), as most recently amended on July 30, 2007, for the purpose of financing and acquiring SBA loans. The obligations under this facility are secured by substantially all of the assets of ABL.  At June 30, 2008, the balance of this facility was $9.7 million.  In connection with the first amendment to this facility on February 27, 2007, FirstCity provided WFF with an unconditional guaranty, up to a maximum of $5.0 million plus enforcement cost, of the obligations of ABL under the loan facility that relate to funds in the amount of $31.7 advanced by WFF to ABL in connection of a portfolio of SBA loans in February 2007. This guaranty arrangement remains in effect until the obligations incurred in connection with the advance related to the acquisition of the portfolio of SBA loans are paid in full.

FirstCity Commercial Corp. (“FirstCity Commercial”), a wholly-owned affiliate of FirstCity, provides various financial institutions with guarantees of the debt obligations of certain Acquisition Partnerships. The underlying debt financing arrangements of these Acquisitions Partnerships have various maturities ranging from September 2008 to February 2010, and are secured primarily by certain real estate held by the Acquisition Partnerships. At June 30, 2008, FirstCity Commercial’s maximum commitments under these guaranty arrangements totaled $2.5 million, and the total outstanding obligations of these Acquisition Partnerships attributed to FirstCity Commercial’s guaranty approximated $2.1 million.

Legal Proceedings

The following information supplements and amends our discussion set forth under Part I, Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Wave Tec Litigation

Superior Funding, Inc., Wave Tec Pools, Inc. and Nations Pool Supply, Inc. (collectively “Plaintiffs”) filed a Fifth Amended Petition adding additional parties related to Prosperity Bank on or about May 12, 2008, but asserting no new claims against FirstCity Servicing Corporation or FH Partners LLC, indirect wholly-owned subsidiaries of FirstCity.  Plaintiffs also sent extensive requests for production of documents and terminated the prior agreement to suspend discovery and responses have been filed by FH Partners LLC.  FirstCity Servicing Corporation and FH Partners LLC intend to contest the cases vigorously.

Other Contingent Commitments

FirstCity has minority interests in various limited-life partnerships with a net carrying value of ($321) at June 30, 2008. The estimated amount that would be paid to the minority interest holder if the instruments were to be settled at June 30, 2008 is $1.3 million.

(14)  Other Related Party Transactions

FirstCity has financing and service arrangements with certain Acquisition Partnerships and other affiliated entities, and financing arrangements with certain non-affiliated entities that are considered to be variable interest entities (“VIEs”), as defined in FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”). However, FirstCity is not deemed to be the primary beneficiary of these entities based on the provisions of FIN 46R. The Company could experience a loss in the event that cash flows

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) – (continued)

from the VIEs or the underlying collateral are not collected as expected. At June 30, 2008, FirstCity’s maximum exposure to loss as a result of its involvement with the VIEs is $49.7 million.

In June 2008, FC Acquisitions SRL de CV (“FC Acquisitions”), an indirect majority-owned Mexican affiliate of FirstCity, acquired a loan portfolio in Mexico (refer to Note 4). FC Acquisitions financed the loan portfolio purchase with a term note payable of $8.7 million to MCS Trust SA de CV (“MCS Trust”). The accounts of MCS Trust are consolidated by BMX Holding II, LLC (“BMX Holding II”) – an entity that is treated as an equity-method investment by FirstCity due to its 8.0% ownership interest in BMX Holding II. The terms of the note are summarized in the “Credit Facilities” schedule included under the caption Liquidity and Capital Resources in Part I, Item 2. of this Form 10-Q. In connection with this transaction, FirstCity Mexico, Inc., an indirect wholly-owned affiliate of FirstCity, advanced $8.7 million to BMX Holding II. At June 30, 2008, this receivable of $8.7 million was included in “Other assets” on the Company’s consolidated balance sheet.

The Company has contracted with the Acquisition Partnerships and related parties as a third party loan servicer. Servicing fees and due diligence fees (included in other income) derived from such affiliates totaled $2.5 million and $2.7 million in the second quarters of 2008 and 2007, respectively, and $4.6 million and $5.2 million in the first six months of 2008 and 2007, respectively.

FirstCity Servicing Corporation (“FCSC”), an indirect wholly-owned affiliate of the Company, and MCS et Associates (“MCS”), in which FCSC is an 11.89% shareholder as of December 31, 2007, are parties to Consulting, License and Confidentiality Agreements dated June 30, 1999 pursuant to which FCSC provides consultation services and personnel to be employed by MCS to assist in developing and managing due diligence and servicing systems. Pursuant to those agreements, MCS provides the supplied personnel with compensation, tax equalization payments, housing allowances, transportation allowance, and tax preparation. MCS also pays consulting fees to FCSC and reimburses FCSC for travel, hotel, airfare, and meal expenses incurred related to the provision of the services. In the second quarters of 2008 and 2007, FCSC received from MCS fees totaling $127 and $101, respectively, and $240 and $232 in the first six months of 2008 and 2007, respectively.

FirstCity Commercial owns 80% of FirstCity Denver Investment Corp. (“FirstCity Denver”) – a special situations platform that acquires and finances distressed debt and companies, originates junior- and senior-bridge loans, and executes lower middle market buyouts. The other 20% interest in FirstCity Denver is owned by Crestone Capital LLC, a Colorado limited liability company that is owned by Richard W. Horrigan and Stephen C. Schmeltekopf.  Mr. Horrigan, President of FirstCity Denver, and Mr. Schmeltekopf, Senior Vice President of FirstCity Denver, are employees of FirstCity Denver and have employment contracts with FirstCity Denver. In addition, Stephen Schmeltekopf is the brother of Andrew Schmeltekopf, Vice President of FirstCity.

(15)  Stockholders’ Equity

The Company has a stock repurchase plan, as authorized by the Board of Directors, that provides for the purchase of up to 1,500,000 shares of the Company’s common stock. The stock repurchase plan expires on August 30, 2009. In the second quarter of 2008, FirstCity repurchased 215,800 shares of the Company’s common stock on the open market for a total of $1.1 million.

(16)  Statements of Cash Flows

In the second quarter of 2008, the Company acquired a real estate investment property through a majority-owned subsidiary of FirstCity Denver. As part of the investment, the Company assumed a note payable of $7.6 million, and recorded a non-cash increase to Portfolio Assets for the same amount.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

FirstCity is a financial services company engaged in one principal reportable segment – Portfolio Asset acquisition and resolution. The Portfolio Asset acquisition and resolution business involves acquiring portfolios of loans, real estate and other assets or similar single-asset investments (collectively referred to as “Portfolios” or “Portfolio Assets”). The Company generally acquires Portfolio Assets at a discount to their legal principal balances or appraised values, and then services and resolves the Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. FirstCity also has a special situations platform that focuses on constructive investments in restructurings, turnarounds, businesses with robust market positions, and other special situations. This special situations platform gives FirstCity the ability to acquire or finance distressed businesses, originate junior- and senior-bridge loans, and execute lower middle-market buyouts.

During the second quarter of 2008, the Company recorded a net loss to common stockholders on a diluted basis of $6.5 million or $0.63 per common share. The operating contribution from the Portfolio Asset acquisition and resolution segment resulted in a $4.8 million operating loss for the second quarter of 2008 compared with a $4.3 million operating gain for the same period in 2007. See Results of Operations below for a more detailed review of the second quarter of 2008 compared to the second quarter of 2007.

The Company was involved in acquiring $36.7 million of portfolio investments with a face value of approximately $92.1 million in the second quarter 2008 – of which FirstCity’s investment share was $33.4 million. FirstCity’s global distribution of its second quarter 2008 investments includes $28.4 million in the United States and $5.0 million in Latin America. In addition to its portfolio acquisitions in second quarter 2008, FirstCity invested $23.9 million in the form of senior debt financing arrangements with domestic entities; $5.0 million for SBA loan originations and advances; and $3.3 million on investment property. At June 30, 2008, FirstCity’s earning assets (Portfolio Assets, equity investments, loans receivable and entity-level earning assets) totaled $296.3 million, and the global distribution of such earning assets (at carrying value) included $204.5 million in United States; $47.0 million in Europe; and $44.8 million in Latin America.

The Company’s earnings in second quarter 2008 were negatively impacted by $8.5 million of net impairment provisions – comprised of $7.1 million of net provisions recorded to our consolidated portfolios, and $1.4 million as our share of net impairment provisions recorded to portfolio assets held in our partnership interests. The global distribution of the $8.5 million of net impairment provisions recorded by the Company in second quarter 2008 includes $8.2 million in the United States, ($0.2) million in Europe, and $0.5 million in Latin America. The impairment provisions in second quarter 2008 were attributed primarily to declines in values of loan collateral and real estate assets in our domestic portfolios, and additional delays in the timing of collections of expected cash flows on domestic loan portfolios. Management believes that declines in real estate values and delayed collections are the resulting adverse effects from the subprime mortgage crisis that began in the United States in 2007. Economic uncertainties and substantial losses incurred by lending institutions have resulted in “tightened credit standards” and “restrained lending”; and excess supplies of building inventories have caused significant declines in real estate values. These events, in turn, triggered the following obstacles that hinder economic growth and stability: (1) increased defaults and foreclosures on loan collateral because borrowers cannot refinance their loans and/or continue to make payments; (2) adverse effects on businesses due to a decline in consumer spending; and (3) decreased investment by businesses due to their inability to obtain low-cost loans to finance their operations and/or growth. The impairment provisions were identified in connection with management’s regular evaluation of the collectibility of the Company’s Portfolio Assets. Management’s evaluation is inherently subjective as it requires estimates that are susceptible to revision in future periods as more information becomes available.

Considering the substantial losses reported in the financial services sector over the past year and downward pressure on economic growth due to the subprime mortgage crisis, management remains positive on the outlook of the Company. Management believes that current market conditions should not hinder FirstCity’s ability to expand its business, and that asset acquisition opportunities at attractive margins are available. As mentioned above, FirstCity was involved in acquiring $36.7 million of portfolio investments with a face value of approximately $92.1 million in the second quarter 2008 (of which FirstCity’s investment share was $33.4 million), and the Company invested an additional $32.2 million in the form of debt financing arrangements and real estate investments. In addition, FirstCity is currently evaluating 26 different transactions representing over $2.7 billion in face value of assets, although there can be no assurance that FirstCity will be able to consummate any of these transactions on acceptable terms.

In addition, in light of current market conditions that created liquidity constraints primarily as a result of the deterioration in the subprime mortgage industry and tightening credit standards in the marketplace, management believes that current market conditions will not impact FirstCity’s ability to finance its operations. Currently, FirstCity has $350.0 million of credit facility

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commitments available to (i) finance the senior debt and equity portions of portfolio and asset purchases; (ii) finance equity investments in new ventures; and (iii) provide for the issuance of letters of credit working capital loans; and a $40.0 million credit facility commitment to finance SBA loan originations and advances.

The Company’s financial results are affected by many factors including, but not limited to, fluctuations in interest rates; fluctuations in the underlying values of loan collateral, real estate and other assets; delays and declines in cash receipts on Portfolio Assets and other loans; the timing and ability to liquidate assets; and the availability of investment and asset acquisition opportunities and the Company’s ability to consummate such transactions on acceptable terms. 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.

As a result of the significant period-to-period fluctuations in the revenues and earnings of FirstCity’s Portfolio Asset acquisition and resolution business, period-to-period comparisons of the results of our continuing operations may not be meaningful. Such variances, alone or with other factors, such as conditions in the economy or the financial services industries or other developments affecting us, may result in significant fluctuations in our reported operations and in the trading prices of common stock.

Components of the results for the three and six month periods ended June 30, 2008 and 2007, respectively, are detailed below (dollars in thousands except per share data):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Portfolio Asset Acquisition and Resolution	$	(4,821	)	$	4,313		$	(6,621	)	$	6,183
Corporate overhead	(1,658		)	(2,507		)	(3,351		)	(5,292		)
Earnings (loss) from continuing operations	(6,479		)	1,806			(9,972		)	891
Loss from discontinued operations	(50		)	—			(141		)	—
Net earnings (loss) to common stockholders	$	(6,529	)	$	1,806		$	(10,113	)	$	891
Diluted earnings (loss) per common share	$	(0.63	)	$	0.16		$	(0.97	)	$	0.08

Results of Operations

The following discussion and analysis is based on the segment reporting information presented in Note 8 to the Consolidated Financial Statements of the Company included in Item 1. of this Form 10-Q, and should be read in conjunction with the Consolidated Financial Statements (including the Notes thereto) included elsewhere in this Form 10-Q.

Second Quarter 2008 Compared to Second Quarter 2007

The Company reported net losses of $6.5 million in the second quarter 2008 compared to net earnings of $1.8 million in the second quarter 2007. On a per share basis, diluted net losses to common stockholders were $0.63 in the second quarter of 2008 compared to $0.16 diluted net earnings in the second quarter of 2007.

Portfolio Asset Acquisition and Resolution

The operating contribution from the Portfolio Asset acquisition and resolution segment resulted in a $4.8 million operating loss in the second quarter of 2008 compared to a $4.3 million operating gain in the second quarter of 2007. FirstCity was involved in acquiring $36.7 million of Portfolio Asset acquisitions in second quarter 2008 with an approximate face value of $92.1 million, compared to its involvement in acquiring $91.4 million of Portfolio Asset acquisitions in second quarter 2007 with an approximate face value of $213.5 million. In second quarter 2008, FirstCity’s investment share in the Portfolio Asset acquisitions was $33.4 million – all of which were acquired through consolidated Portfolios. In second quarter 2007, the Company’s investment share in the Portfolio Asset acquisitions was $25.2 million – comprised of $11.7 million acquired through consolidated Portfolios and loan purchases and $13.5 million through Acquisition Partnerships.

FirstCity invested an additional $32.2 million in the form of debt financing arrangements and real estate investments in second quarter 2008 compared to $4.2 million in second quarter 2007.

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Servicing fee revenues.  Servicing fee revenues decreased to $2.7 million in the second quarter of 2008 from $3.0 million in the second quarter of 2007. Servicing fees from domestic Acquisition Partnerships totaled $0.4 million in second quarter 2008 compared to $1.1 million in second quarter 2007, while servicing fees from Latin American Acquisition Partnerships totaled $2.3 million in second quarter 2008 compared to $1.9 million in second quarter 2007. Contributing to the overall decrease in servicing fees is a decline in collections from loans held by domestic Acquisition Partnerships to $6.4 million in 2008 from $25.3 million in 2007. Servicing fees from domestic Acquisition Partnerships generally fluctuate depending on the timing and amount of collections received from portfolios held by these non-consolidated domestic partnerships – which generally are charged servicing fees based on the amount of collections. Since a majority of the domestic Portfolio Asset acquisitions over the past two years were purchased through consolidated Portfolios instead of investments in domestic Acquisition Partnerships, the Company expects income from consolidated Portfolio Assets to off-set the decline in servicing fee revenues.

Income from Portfolio Assets.  Income from Portfolio Assets remained constant at $5.6 million in the second quarter of 2008 compared to $5.7 million in the second quarter of 2007. FirstCity’s average investment in consolidated Portfolio Assets was $124.1 million and $121.9 million for the second quarters of 2008 and 2007, respectively. Refer to Note 4 to the Consolidated Financial Statements included in Item 1 of this Form 10-Q for a summary of income from Portfolio Assets.

Gain on sale of SBA loans held for sale.  The Company recorded a $0.1 million gain on the sales of SBA loans in second quarter 2008 with a basis in the loans sold of $2.6 million, compared to $0.3 million of gains recorded in second quarter 2007 with a basis in the loans sold of $8.2 million. Gains on SBA loan sales reflect the Company’s participation in the SBA guaranteed loan program. Under the SBA 7(a) program, the SBA guarantees up to 85 percent of the principal of a qualifying loan. The Company generally sells the guaranteed portions of originated loans into the secondary market and retains the unguaranteed portion for investment.

Interest income from SBA loans.  Interest income from SBA loans decreased to $0.4 million during the second quarter of 2008 compared to $0.6 million during the second quarter of 2007. The income decline is attributed to FirstCity’s average investment in SBA loans falling to $15.5 million for second quarter 2008 from $22.0 million for second quarter 2007.

 Interest income from affiliates.  Interest income from affiliates increased to $0.5 million in second quarter 2008 compared to $0.1 million in second quarter 2007. The increased income is attributed to FirstCity’s average investment in loans receivable – affiliate rising to $15.5 million for second quarter 2008 from $5.0 million for second quarter 2007.

Interest income from loans receivable – other.   Interest income from loans receivable – other was $0.4 million in the second quarter of 2008 and $1.0 million in the second quarter of 2007. The income decline is attributed to the Company’s decreased investment level in loans to non-affiliated entities. FirstCity’s average investment in loans receivable – other was $11.1 million and $28.3 million for the second quarters of 2008 and 2007, respectively.

Revenue from controlled affiliate.  Revenue from controlled affiliate for the second quarter 2008 is comprised of $0.9 million of revenues recorded by the Company’s majority-owned domestic railroad company that was acquired in August 2007.

Other income.  Other income for the second quarter of 2008 increased by $0.4 million in comparison to the second quarter of 2007 primarily due to a $0.1 million increase in reimbursements of due diligence costs, which vary from period to period, and a $0.1 million increase in partnership management fees.

Expenses.  Operating expenses were $19.1 million and $11.2 million in the second quarters of 2008 and 2007, respectively. The following is a discussion of the major components of operating expenses.

Interest and fees on notes payable were $3.8 million and $4.7 million in the second quarters of 2008 and 2007, respectively. FirstCity’s average outstanding debt decreased to $197.6 million in second quarter 2008 from $224.8 million in the second quarter of 2007, while the average cost of borrowings decreased to 7.6% in 2008 compared to 8.3% in 2007.

Salaries and benefits increased to $4.2 million in the second quarter of 2008 from $3.0 million in the second quarter of 2007, primarily due to additional salaries and benefits in 2008 resulting from increased staffing at ABL (SBA lending platform), FirstCity Crestone (special situations investment platform) and various other consolidated entities. The total number of personnel within the Portfolio Asset acquisition and resolution segment were 228 and 185 at June 30, 2008 and 2007, respectively.

Net provisions for loan and impairment losses totaled $7.1 million in second quarter 2008 compared to $0.7 million in second quarter 2007. The increase is attributed primarily to net impairment provisions of $7.0 million recorded in 2008 to the Company’s

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consolidated domestic portfolios. The impairment provisions in second quarter 2008 were attributed primarily to declines in values of loan collateral and real estate assets in our domestic portfolios, and additional delays in the timing of collections of expected cash flows on domestic loan portfolios. Declines in real estate values and delayed collections are the resulting adverse effects from the subprime mortgage crisis that began in the United States in 2007. The impairment provisions were identified in connection with management’s regular evaluation of the collectibility of the Company’s Portfolio Assets. Management’s evaluation is inherently subjective as it requires estimates that are susceptible to revision in future periods as more information becomes available.

Occupancy, data processing, property protection and other expenses increased to $3.9 million for the second quarter of 2008 from $2.7 million in the second quarter of 2007. The increase is primarily attributed to $0.7 million of additional property protection expenses (i.e. property taxes, insurance and legal) incurred in 2008 to protect FirstCity’s real estate security interests in its consolidated domestic and Latin American portfolios; and $0.3 million of additional foreign currency exchange losses and foreign tax expenses in second quarter 2008 compared to second quarter 2007.

Equity in earnings of investments.  Equity in earnings of investments decreased to $3.0 million in the second quarter of 2008 compared to $4.3 million in the second quarter of 2007. Equity in earnings of Acquisition Partnerships decreased to $3.0 million in 2008 from $3.7 million in 2007, and equity in earnings of servicing and operating entities decreased by $0.7 million in 2008 compared to 2007. The following is a discussion of equity in earnings from FirstCity’s Acquisition Partnerships by geographic region. Refer to Note 6 of the Consolidated Financial Statements included in Item 1 on this Form 10-Q for a summary of revenues, earnings and equity in earnings of FirstCity’s equity investments by region.

·Domestic —Total revenues reported by Domestic Acquisition Partnerships decreased to $3.2 million in second quarter 2008 from $4.4 million in 2007. Total net earnings reported by domestic partnerships decreased to a $0.3 million loss in second quarter 2008 compared to $2.5 million of net earnings in second quarter 2007. The decrease in total partnership earnings was attributed primarily to the following: (1) decrease in portfolio asset holdings (i.e. earning assets) to $73.4 million in 2008 from $102.3 million in 2007; (2) decrease in collections on cost-recovery loan portfolios and payoffs on performing loan portfolios to $4.4 million in second quarter 2008 compared to $11.9 million in second quarter 2007 – resulting in a $1.0 million decrease in income related to these portfolios in 2008 compared to 2007; and (3) increase in net provision expense to $2.3 million in second quarter 2008 from net impairment recoveries of $0.5 million in second quarter 2007. The collective activity described above translated to a decrease in FirstCity’s share of domestic partnership earnings to a $0.1 million loss for second quarter 2008 from $1.1 million of net earnings for second quarter 2007.

FirstCity’s average investment in domestic partnerships decreased to $21.8 million in second quarter 2008 from $34.2 million in 2007. As a result, FirstCity’s share of domestic partnership revenues experienced a corresponding decrease as discussed above. Since a majority of FirstCity’s domestic portfolio acquisitions over the past two years were acquired through consolidated Portfolios instead of equity investments in Acquisition Partnerships, the Company expects income from consolidated Portfolios to off-set the decline in equity in earnings from the domestic partnerships.

·Latin America — Total revenues reported by Latin American Acquisition Partnerships increased to $12.5 million in second quarter 2008 from $10.1 million in second quarter 2007. However, total net earnings reported by Latin American partnerships decreased to $3.0 million in second quarter 2008 compared to $8.2 million in second quarter 2007. The increase in total revenues reported by Latin American partnerships was attributed primarily to the following: (1) increase in portfolio asset holdings (i.e. earning assets) to $214.1 million in 2008 from $206.0 million in 2007; (2) increase in collections on cost-recovery loan portfolios to $11.4 million in second quarter 2008 compared to $6.3 million in second quarter 2007 – resulting in a $2.4 million increase in income related to these portfolios in 2008 compared to 2007; and (3) increase in foreign currency exchange gains to $5.4 million in second quarter 2008 compared to $3.6 million in second quarter 2007. The positive impact to total revenues reported by Latin American partnerships was off-set by the following: (1) increase in net provision expense to $1.6 million in second quarter 2008 from $0.6 million in second quarter 2007; (2) $1.6 million increase in interest expense in second quarter 2008 compared to second quarter 2007; (3) $1.3 million increase in property protection expense in second quarter 2008 compared to second quarter 2007; (4) $3.3 million increase in servicing fee expense in second quarter 2008 compared to second quarter 2007; and (5) $2.2 million increase in income tax expense in second quarter 2008 compared to second quarter 2007. The collective activity described above translated to a small decrease in FirstCity’s share of net earnings in Latin American partnerships to $0.7 million for second quarter 2008 from $0.9 million for second quarter 2007.

·Europe — Total revenues reported by European Acquisition Partnerships increased to $11.8 million in second quarter 2008 from $7.8 million in 2007. Total net earnings reported by European partnerships increased to $7.9 million in second quarter 2008 compared to $5.7 million in second quarter 2007. The increase in total partnership earnings was attributed primarily to

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the following: (1) increase in collections on cost-recovery loan portfolios to $5.8 million in second quarter 2008 compared to $4.6 million in second quarter 2007 – resulting in a $1.1 million increase in income related to these portfolios in 2008 compared to 2007; (2) $2.3 million increase in portfolio interest income in second quarter 2008 compared to second quarter 2007 (attributed primarily to $12.7 million of loan portfolio acquisitions and accretion rate increases on certain existing portfolios since June 2007); and (3) $0.5 million decrease in net provision expense in second quarter 2008 compared to second quarter 2007. The positive impact to net earnings reported by European partnerships was off-set by a $1.3 million increase in interest expense in second quarter 2008 compared to second quarter 2007; and a $0.6 million increase in servicing fee expense in second quarter 2008 compared to second quarter 2007. The collective activity described above translated to an increase in FirstCity’s share of European partnership earnings to $2.4 million for second quarter 2008 from $1.7 million for second quarter 2007.

Other Significant Items Affecting Operations

The following items affect the Company’s overall results of operations and are not directly related to the Portfolio Asset acquisition and resolution business discussed above.

Corporate overhead.  Net corporate overhead expenses (excluding taxes) decreased to $1.8 million in the second quarter of 2008 compared to $2.4 million in the second quarter of 2007, primarily due to $0.8 million in expenses incurred during the second quarter of 2007 relating to an independent investigation authorized by the Company’s audit committee.

Income taxes.  Provision for income tax expense approximated $0.1 million in the second quarter of 2008 and the second quarter of 2007. Refer to additional information disclosed in Note 11 to the Consolidated Financial Statements included in Item 1 on this Form 10-Q.

First Six Months of 2008 Compared to First Six Months of 2007

The Company reported net losses of $10.1 million in the first six months of 2008 compared to net earnings of $0.9 million in the first six months 2007. On a per share basis, diluted net losses to common stockholders were $0.97 in the first six months of 2008 compared to $0.08 diluted net earnings in the first six months of 2007.

Portfolio Asset Acquisition and Resolution

The operating contribution from the Portfolio Asset acquisition and resolution segment resulted in a $6.6 million operating loss in the first six months of 2008 compared to a $6.2 million operating gain in the first six months of 2007. FirstCity was involved in acquiring $56.6 million of Portfolio Asset acquisitions in the first six months of 2008 with an approximate face value of $638.1 million, compared to its involvement in acquiring $170.2 million of Portfolio Asset acquisitions in the first six months of 2007 with an approximate face value of $387.4 million. In 2008, FirstCity’s investment share in the Portfolio Asset acquisitions was $41.9 million – comprised of $40.1 million acquired through consolidated Portfolios and $1.8 million through Acquisition Partnerships. In the first six months of 2007, FirstCity’s investment share in the Portfolio Assets was $94.7 million – comprised of $77.3 million acquired through consolidated Portfolios and $17.4 million through Acquisition Partnerships.

FirstCity invested an additional $33.7 million in the form of debt financing arrangements and real estate investments in the first six months of 2008 compared to $12.0 million in the first six months of 2007.

Servicing fee revenues.  Servicing fee revenues decreased to $4.9 million in the first six months of 2008 from $5.6 million in the first six months of 2007. Servicing fees from domestic Acquisition Partnerships totaled $0.8 million in first six months of 2008 compared to $1.7 million in first six months of 2007, while servicing fees from Latin American Acquisition Partnerships totaled $4.1 million in first six months of 2008 compared to $3.9 million in first six months of 2007. Contributing to the overall decrease in servicing fees is a decline in collections from loans held by domestic Acquisition Partnerships to $17.6 million in 2008 from $42.5 million in 2007. Servicing fees from domestic Acquisition Partnerships generally fluctuate depending on the timing and amount of collections received from portfolios held by these non-consolidated domestic partnerships – which generally are charged servicing fees based on the amount of collections. Since a majority of the domestic Portfolio Asset acquisitions over the past two years were purchased through consolidated Portfolios instead of investments in domestic Acquisition Partnerships, the Company expects income from consolidated Portfolio Assets to off-set the decline in servicing fee revenues.

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Income from Portfolio Assets.  Income from Portfolio Assets remained constant at $10.6 million in the first six months of 2008 compared to $10.7 million in the first six months of 2007. FirstCity’s average investment in consolidated Portfolio Assets was $121.9 million and $114.9 million for the first six months of 2008 and 2007, respectively. Refer to Note 4 to the Consolidated Financial Statements included in Item 1 of this Form 10-Q for a summary of income from Portfolio Assets.

Gain on sale of SBA loans held for sale.  The Company recorded a $0.1 million gain on the sales of SBA loans in the first six months of 2008 with a basis in the loans sold of $2.8 million, compared to $0.6 million of gains recorded in the first six months of 2007 with a basis in the loans sold of $14.9 million. Gains on SBA loan sales reflect the Company’s participation in the SBA guaranteed loan program. Under the SBA 7(a) program, the SBA guarantees up to 85 percent of the principal of a qualifying loan. The Company generally sells the guaranteed portions of originated loans into the secondary market and retains the unguaranteed portion for investment.

Interest income from SBA loans.  Interest income from SBA loans decreased slightly to $0.8 million during the first six months of 2008 compared to $0.9 million during the first six months of 2007. The income decline is attributed to FirstCity’s average investment in SBA loans falling to $14.9 million for 2008 from $17.8 million for 2007.

 Interest income from affiliates.  Interest income from affiliates increased to $0.6 million for the first six months of 2008 compared to $0.3 million for the first six months of 2007. The increased income is attributed to FirstCity’s average investment in loans receivable – affiliate rising to $11.2 million for 2008 from $4.8 million for 2007.

Interest income from loans receivable – other.   Interest income from loans receivable – other was $0.6 million for the first six months of 2008 and $1.9 million for the first six months of 2007. The income decline is attributed to the Company’s decreased investment level in loans to non-affiliated entities. FirstCity’s average investment in loans receivable – other was $8.9 million and $27.1 million for the first six months of 2008 and 2007, respectively.

Revenue from controlled affiliate.  Revenue from controlled affiliate for the first six months of 2008 is comprised of $1.7 million of revenues recorded by the Company’s majority-owned domestic railroad company that was acquired in August 2007.

Other income.  Other income for the first six months of 2008 increased by $0.6 million in comparison to 2007 primarily due to a $0.1 million increase in reimbursements of due diligence costs, which vary from period to period, and a $0.2 million increase in partnership management fees.

Expenses.  Operating expenses were $32.9 million and $20.7 million in the first six months of 2008 and 2007, respectively. The following is a discussion of the major components of operating expenses.

Interest and fees on notes payable were $7.4 million and $8.9 million in the first six months of 2008 and 2007, respectively. FirstCity’s average outstanding debt decreased to $186.3 million in the first six months of 2008 from $211.4 million in the first six months of 2007, while the average cost of borrowings decreased to 8.0% in 2008 compared to 8.4% in 2007.

Salaries and benefits increased to $8.2 million in the first six months of 2008 from $6.1 million in the first six months of 2007, primarily due to additional salaries and benefits in 2008 resulting from increased staffing at ABL (SBA lending platform), FirstCity Crestone (special situations investment platform) and various other consolidated entities. The total number of personnel within the Portfolio Asset acquisition and resolution segment were 228 and 185 at June 30, 2008 and 2007, respectively.

Net provisions for loan and impairment losses totaled $10.1 million in the first six months of 2008 compared to $1.1 million in the first six months of 2007. The increase is attributed primarily to net impairment provisions of $9.8 million recorded in 2008 to the Company’s consolidated domestic portfolios. The impairment provisions in the first six months of 2008 were attributed primarily to declines in values of loan collateral and real estate assets in our domestic portfolios, and additional delays in the timing of collections of expected cash flows on domestic loan portfolios. Declines in real estate values and delayed collections are the resulting adverse effects from the subprime mortgage crisis that began in the United States in 2007. The impairment provisions were identified in connection with management’s regular evaluation of the collectibility of the Company’s Portfolio Assets. Management’s evaluation is inherently subjective as it requires estimates that are susceptible to revision in future periods as more information becomes available.

Occupancy, data processing, property protection and other expenses increased to $7.2 million for the first six months of 2008 from $4.7 million in the first six months of 2007. The increase is primarily attributed to $2.2 million of additional property protection

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expenses (i.e. property taxes, insurance and legal) incurred in 2008 to protect FirstCity’s real estate security interests in its consolidated domestic and Latin American portfolios.

Equity in earnings of investments.  Equity in earnings of investments decreased to $5.8 million in the first six months of 2008 compared to $6.2 million in the first six months of 2007. Equity in earnings of Acquisition Partnerships decreased to $5.3 million in 2008 from $5.5 million in 2007, and equity in earnings of servicing and operating entities increased by $0.2 million in 2008 compared to 2007. The following is a discussion of equity in earnings from FirstCity’s Acquisition Partnerships by geographic region. Refer to Note 6 of the Consolidated Financial Statements included in Item 1 on this Form 10-Q for a summary of revenues, earnings and equity in earnings of FirstCity’s equity investments by region.

·Domestic — Total revenues reported by Domestic Acquisition Partnerships decreased to $6.3 million in the first six months of 2008 from $9.0 million in 2007. Total net earnings reported by domestic partnerships decreased to $0.2 million in the first six months of 2008 compared to $3.1 million in the first six months of 2007. The decrease in total partnership earnings was attributed primarily to the following: (1) decrease in portfolio asset holdings (i.e. earning assets) to $73.4 million in 2008 from $102.3 million in 2007; (2) decrease in collections on cost-recovery loan portfolios and payoffs on performing loan portfolios to $12.6 million in the first six months of 2008 compared to $20.8 million in the first six months of 2007 – resulting in a $2.2 million decrease in income related to these portfolios in 2008 compared to 2007; and (3) increase in net provision expense to $2.9 million in the first six months of 2008 compared to $1.0 million in the first six months of 2007. The collective activity described above translated to a decrease in FirstCity’s share of net earnings in domestic partnerships to $0.2 million for the first six months of 2008 from $1.4 million for the first six months of 2007.

FirstCity’s average investment in domestic partnerships decreased to $22.9 million in the first six months of 2008 from $35.1 million in 2007. As a result, FirstCity’s share of domestic partnership revenues experienced a corresponding decrease as discussed above. Since a majority of FirstCity’s domestic portfolio acquisitions over the past two years were acquired through consolidated Portfolios instead of equity investments in Acquisition Partnerships, the Company expects income from consolidated Portfolios to off-set the decline in equity in earnings from the domestic partnerships.

·Latin America — Total revenues reported by Latin American Acquisition Partnerships increased to $23.7 million in the first six months of 2008 from $19.4 million in the first six months of 2007. However, total net earnings reported by Latin American partnerships decreased to $6.0 million in the first six months of 2008 compared to $6.6 million in the first six months of 2007. The increase in total revenues reported by Latin American partnerships was attributed primarily to the following: (1) increase in portfolio asset holdings (i.e. earning assets) to $214.1 million in 2008 from $206.0 million in 2007 (which contributed to a $4.6 million increase in interest income in 2008 compared to 2007); and (2) increase in foreign currency exchange gains to $8.4 million in the first six months of 2008 compared to $3.3 million in the first six months of 2007. The positive impact to total revenues reported by Latin American partnerships was off-set by the following: (1) $0.7 million increase in property protection expense in the first six months of 2008 compared to the first six months of 2007; (2) $3.4 million increase in servicing fee expense in the first six months of 2008 compared to first six months of 2007; and (3) $3.3 million increase in income tax expense in the first six months of 2008 compared to the first six months of 2007. The collective activity described above translated to a slight increase in FirstCity’s share of net earnings in Latin American partnerships to $1.1 million for the first six months of 2008 from $0.9 million for the first six months of 2007.

·Europe — Total revenues reported by European Acquisition Partnerships increased to $22.1 million in the first six months of 2008 from $17.1 million in 2007. Total net earnings reported by European partnerships increased to $13.7 million in the first six months of 2008 compared to $11.3 million in the first six months of 2007. The increase in total partnership earnings was attributed primarily to (1) increased in collections on cost-recovery loan portfolios to $11.7 million in the first six months of 2008 compared to $10.0 million in the first six months of 2007 – resulting in a $1.4 million increase in income related to these portfolios in 2008 compared to 2007; and (2) increased interest income earned on other portfolios to $13.5 million in the first six months of 2008 compared to $10.7 million in the first six months of 2007 (attributed primarily to $12.7 million of loan portfolio acquisitions and accretion rate increases on certain existing portfolios since June 2007). The positive impact to net earnings reported by European partnerships was off-set by a $2.1 million increase in interest expense in the first six months of 2008 compared to the first six months of 2007; and a $0.8 million increase in servicing fee expense in the first six months of 2008 compared to the first six months of 2007. The collective activity described above translated to an increase in FirstCity’s share of European partnership earnings to $4.1 million for the first six months of 2008 from $3.2 million for the first six months of 2007.

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Other Significant Items Affecting Operations

The following items affect the Company’s overall results of operations and are not directly related to the Portfolio Asset acquisition and resolution business discussed above.

Corporate overhead.  Net corporate overhead expenses (excluding taxes) decreased to $3.3 million in the first six months of 2008 compared to $5.1 million in the first six months of 2007, primarily due to $2.0 million in expenses incurred during the first six months of 2007 relating to an independent investigation authorized by the Company’s audit committee.

Income taxes.  Provision for income tax expense approximated $0.3 million in the first six months of 2008, and $0.2 in the first six months of 2007. Refer to additional information disclosed in Note 11 to the Consolidated Financial Statements included in Item 1 on this Form 10-Q.

Financial Condition

Significant changes in FirstCity’s financial condition during the first six months of 2008 resulted from the following:

Consolidated assets of $348.6 million at June 30, 2008 were $50.5 million higher than consolidated assets at December 31, 2007. The increase in consolidated assets is primarily attributed to a $60.0 million net increase in Portfolio Assets, loan investments and other receivables related to FirstCity’s investment activities; off-set by a $10.0 million decrease in cash to fund operations.

Consolidated liabilities of $254.4 million as of June 30, 2008 were $63.1 million higher than consolidated liabilities at December 31, 2007. Total notes payable increased by $61.9 million primarily to finance the Company’s investment activities in the first six months of 2008.

Portfolio Asset Acquisition and Resolution

Aggregate acquisitions by the Company are as follows (in thousands):

	Purchase		FirstCity
	Price		Investment
First six months of 2008	$	56,640	$	41,883
Total 2007	214,333		126,714
Total 2006	296,990		144,048
Total 2005	146,581		71,405
Total 2004	174,139		59,762
Total 2003	129,192		22,944

Provision for Income Taxes

The Company has substantial 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 a valuation allowance to value the net deferred tax asset at a level, which more likely than not, will be realized. Realization is determined based on management’s expectation of generating sufficient taxable income in a look forward period over the next four years. The ultimate realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income from its continuing operations 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, net of the allowance, 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. The ability of the Company to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly.

Liquidity and Capital Resources

The Company requires liquidity to fund its operations, working capital, payment of debt, repurchase of the Company’s common stock, equity for acquisition of Portfolio Assets, investments in and advances to entities formed with other investors to acquire Portfolios (“Acquisition Partnerships”) and other investments. The potential sources of liquidity are funds generated from operations,

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equity distributions from the Acquisition Partnerships, interest and principal payments on subordinated intercompany debt, dividends from the Company’s subsidiaries, borrowings from revolving lines of credit and other credit facilities, proceeds from equity market transactions, securitization and other structured finance transactions, and other special purpose short-term borrowings.

Bank of Scotland and BoS (USA), Inc.

FirstCity has a $225.0 million revolving credit facility with Bank of Scotland that matures in November 2010. The revolving loan facility is used to finance the senior debt and equity portion of portfolio and asset purchases made by FirstCity and to provide for the issuance of letters of credit and working capital loans. The obligations of FirstCity under this facility are guaranteed by substantially all of the wholly-owned subsidiaries of FirstCity and are secured by security interests in substantially all of the assets of FirstCity and its wholly-owned subsidiaries. The primary terms and key covenants of the $225.0 million revolving credit facility, as amended, are as follows:

·The maximum outstanding amount of loans and letters of credit issued under the loan facility that may be outstanding under the loan facility is $225.0 million;

·Allows loans to be made based upon a borrowing base of (a) 70% of the net present equity value of certain affiliates of FirstCity engaged in the asset and portfolio investment business, and (b) 40% of the equity investment of FirstCity and its subsidiaries in certain new ventures;

·The available interest rates under the loan facility are London Interbank Offered Rate (“LIBOR”) plus 2.00% to 2.50% per annum;

·The maximum value for assets that can be included in the borrowing base from the acquisition of portfolio assets in certain countries are as follows: Mexico - $40.0 million, Brazil - $10.0 million, Chile - $25.0 million, and Argentina or Uruguay - $6.0 million;

·The limit for loans that can be borrowed in Euros under the loan facility is $50.0 million;

·The maximum amount of letters of credit that can be issued under the loan facility is $40.0 million;

·The maximum amount of working capital loans that can be outstanding under the loan facility is $35.0 million;

·The ratio of indebtedness to tangible net worth should be equal to or less than 3.5 to 1.00 for the last day of the fiscal quarter;

·Tangible net worth should not fall below $85.0 million; and

·The ratio of cumulative current recovered and projected collections to cumulative original projected collections should not be less than 0.90 to 1.00.

At June 30, 2008, the Company was in compliance with all material covenants or other requirements set forth in the credit agreements or other agreements with Bank of Scotland.

On July 14, 2008, the Company and Bank of Scotland entered into an amendment to the revolving loan facility that added financial covenants to the loan facility which require FirstCity and all other members of the consolidated group to maintain, on a consolidated basis, a ratio of net cash flow to total interest and fee expense of not less than 5.00 to 1.00 for the four fiscal quarters then ended and a cash conversion rate of not less than 25% for the four fiscal quarters then ended. The amendment is effective as of July 14, 2008, and the additional covenants will be applicable to the fiscal quarters ending September 30, 2008 and thereafter.

FirstCity has $37.2 million in Euro-denominated debt outstanding on the $225.0 million revolving credit facility with Bank of Scotland described above for the purpose of hedging a portion of the net equity investments in Europe. In general, the type of risk hedged relates to the foreign currency exposure of net investments in Europe caused by movements in Euro exchange rates. The Company entered into the hedging relationship such that changes in the net investments being hedged are expected to be offset by corresponding changes in the values of the Euro-denominated debt. Effectiveness of the hedging relationship is measured and designated at the beginning of each month by comparing the outstanding balance of the Euro-denominated debt to the carrying value of the designated net equity investments. The net foreign currency translation gain (loss) included in accumulated other comprehensive income relating to the Euro-denominated debt was ($1.5) million for the six months ended June 30, 2008, and $156,000 for the same period in 2007.

FH Partners, LLC has a $100.0 million revolving loan facility with Bank of Scotland that provides financing for Portfolio and asset purchases by FH Partners, LLC. This revolving loan facility matures in November 2010, and is secured by all assets of FH Partners, LLC and a guaranty by FirstCity and certain of its wholly-owned subsidiaries.  The primary terms and key covenants of the $100.0 million revolving loan facility, as amended, are as follows:

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·Allows loans to be made for the acquisition of Portfolio Assets in the United States, and provides for loans to be used for other purposes with advance approval from Bank of Scotland;

·Provides that each loan may be in an amount of up to 70% of the net present value of the assets being acquired with the proceeds of the loan;

·Provides that the aggregate outstanding balances of all loans will not exceed 65% of the net present value of the assets securing the loan facility;

·Provides that FH Partners must maintain a ratio of cumulative current recovered and projected collections to cumulative original projected collections of not less than 0.90 to 1.00;

·Provides for an interest rate of LIBOR plus 2.0%; and

·Provides that all other financial covenants will mirror the key covenants of the facility that FirstCity has with Bank of Scotland.

At June 30, 2008, the Company was in compliance with all material covenants or other requirements set forth in the credit agreements or other agreements with Bank of Scotland.

On July 14, 2008, FH Partners LLC and Bank of Scotland entered into an amendment to the revolving loan facility that added financial covenants to the loan facility which require FH Partners LLC to maintain a ratio of net cash flow to total interest and fee expense of not less than 7.00 to 1.00 for the four fiscal quarters then ended and a cash conversion rate of not less than 35% for the four fiscal quarters then ended. The amendment is effective as of July 14, 2008, and the additional covenants will be applicable to the fiscal quarters ending September 30, 2008 and thereafter.

FirstCity has a $25.0 million subordinated credit agreement with BoS (USA), Inc. (“BoS (USA)”) which may be used to finance equity investments in new ventures, equity investments made in connection with portfolio and asset purchases and loans made by FirstCity and its subsidiaries to acquisition entities, provide for the issuance of letters of credit, and for working capital loans. This credit facility matures in November 2010 and is secured by substantially all of the assets of FirstCity and its wholly-owned subsidiaries and guaranteed by substantially all of FirstCity’s wholly-owned subsidiaries. The primary terms and key covenants of this $25.0 million loan facility are as follows:

·Allows loans to be made in maximum aggregate amount of $25.0 million during the term of the loan facility;

·Provides for interest rates, at FirstCity’s election, of LIBOR plus 5.0%, Bank of Scotland base or prime rate plus 3.0%, or a fixed rate for a period agreed to by FirstCity and BoS (USA) as agent;

·Allows loans to be made based upon a borrowing base of (a) 80% of the net present equity value of certain affiliates of FirstCity engaged in the asset and portfolio investment business, and (b) 90% of the equity investment of FirstCity and its subsidiaries in certain new ventures;

·Limits that the maximum value for assets that can be included in the borrowing base from the acquisition of portfolio assets in certain countries as follows (a) Mexico up to $40.0 million, (b) Brazil up to $10.0 million, (c) Chile up to $25.0 million and (d) Argentina and Uruguay up to $6.0 million;

·Provides for inclusion in the borrowing base of loans made to FirstCity Denver Investment Corp. (a majority-owned subsidiary of FirstCity) for the purpose of investing in distressed debt, special loan originations, leveraged buyouts and other special opportunities;

·Provides for inclusion in the borrowing base of certain loans made by FirstCity subsidiaries to non-affiliated entities that are secured by real estate; and

·Includes financial covenants that the ratio of indebtedness to tangible net worth should be equal to or less than 3.5 to 1.00 for the last day of each fiscal quarter, and that the ratio of cumulative current recovered and projected collections to cumulative original projected collections should not be less than 0.90 to 1.00 for each fiscal quarter.

At June 30, 2008, the Company was in compliance with all material covenants or other requirements set forth in the credit agreements or other agreements with BoS (USA).

On July 14, 2008, the Company and BoS (USA) entered into an amendment to the subordinated credit agreement that added financial covenants to the loan facility which require FirstCity and all other members of the consolidated group to maintain, on a consolidated basis, a ratio of net cash flow to total interest and fee expense of not less than 5.00 to 1.00 for the four fiscal quarters then ended and a cash conversion rate of not less than 25% for the four fiscal quarters then ended. The amendment is effective as of July 14, 2008, and the additional covenants will be applicable to the fiscal quarters ending September 30, 2008 and thereafter.

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BoS (USA) has a warrant to purchase 425,000 shares of the Company’s voting common stock at $2.3125 per share. BoS (USA) is entitled to additional warrants in connection with this existing warrant for 425,000 shares under certain specific situations to retain its ability to acquire approximately 4.86% of the Company’s voting common stock.  The warrant expires on August 31, 2010, if it is not exercised prior to that date.

Banco Santander, S.A.

FirstCity Mexico SA de CV, a Mexican affiliate of FirstCity, has a revolving line of credit with a maximum loan amount of 142,240,000 Mexican pesos with Banco Santander, S.A., which was equivalent to $13.8 million U.S. dollars at June 30, 2008.  The loan proceeds are used to pay down the acquisition facility with the Bank of Scotland. Pursuant to the terms of the credit facility, FirstCity Mexico SA de CV was required to provide a stand-by letter of credit from Bank of Scotland that would satisfy the loan balance upon demand.  At June 30, 2008, FirstCity had a letter of credit in the amount of $14.1 million from Bank of Scotland under the terms of FirstCity’s revolving acquisition facility with Bank of Scotland.  In the event that a demand is made under the $14.1 million letter of credit, FirstCity is required to reimburse Bank of Scotland by making payment to Bank of Scotland for all amounts disbursed or to be disbursed by Bank of Scotland under the letter of credit.

Wells Fargo Foothill, LLC

American Business Lending, Inc. (“ABL”), a subsidiary of FirstCity, has a $40.0 million revolving loan facility with Wells Fargo Foothill, LLC (“WFF”) for the purpose of financing and acquiring SBA loans. The obligations under this facility are secured by substantially all of the assets of ABL.  In addition, FirstCity provided WFF with an unconditional guaranty, up to a maximum of $5 million plus enforcement cost, of the obligations of ABL under the loan facility that relate to funds in the amount of $31.7 million advanced by WFF to ABL in connection of a portfolio of SBA loans in February 2007. This guaranty arrangement remains in effect until the obligations incurred in connection with the advance related to the acquisition of the portfolio of SBA loans are paid in full. The primary terms and key covenants of the $40.0 million revolving loan facility, as amended, are as follows:

·Allows advances in the maximum amount of $40.0 million (the “Maximum Credit Line”) to be made under the facility;

·Provides for a borrowing base for originating loans by which (a) the sum of (1) up to 100% of the net eligible SBA guaranteed loans originated by ABL, plus (2) up to 80% of the net eligible non-guaranteed loans originated by ABL, exceeds (b) the sum of (1) any reserves for obligations of ABL related to the bank products, plus (2) the aggregate amount, if any, of loan reserves then established and outstanding, plus (3) the aggregate amount of any other reserves established by WFF;

·Provides for a borrowing base for the portfolio of SBA loans acquired in February 2007 by which (a) the sum of (1) up to 100% of the net eligible SBA guaranteed performing loans acquired by ABL in February 2007, (provided, that such percentage shall be reduced by 5% on November 1, 2007 and on the first day of each month thereafter), plus (2) up to 80% of the net eligible non-guaranteed performing loans acquired by ABL, exceeds (b) the sum of (1) any reserves with respect to acquired performing loans related to the bank products, plus (2) the aggregate amount, if any, of loan reserves then established and outstanding, plus (3) the aggregate amount of any other reserves established by WFF;

·Provides for an interest rate of LIBOR plus 2.625% or, alternatively, the greater of (x) the Wells Fargo prime rate or (y) 7.50% per annum;

·Provides for an unused credit line fee in an amount equal to 0.25% per annum of the average daily difference during the month in question (or portion thereof) between the Maximum Credit Line and the aggregate outstanding principal amount of the advances outstanding under the facility for such month (or portion thereof);

·Provides in the event of the termination of the facility by ABL for a prepayment fee of 2.0% of the Maximum Credit Line if paid prior to December 14, 2008, and 1.0% of the Maximum Credit Line if paid during the period beginning December 15, 2008 and ending December 13, 2009; and

·Provides for a maturity date of December 14, 2009.

The security agreement executed by ABL to secure the obligations under this credit facility grants a security interest to WFF in all of the assets of ABL, except the unguaranteed portions of certain SBA-guaranteed loans, certain other assets, and the Small Business Lending Corporation license. At June 30, 2008, ABL was in compliance with all material covenants or other requirements set forth in the credit agreement or other agreements with WFF.

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Excluding the term acquisition facilities of the unconsolidated Acquisition Partnerships, as of June 30, 2008, the Company and its subsidiaries had credit facilities providing for borrowings in an aggregate principal amount of $429 million and outstanding borrowings of $239 million.

Management believes that the existing loan facilities; related fees generated from the servicing of assets; equity distributions from existing Acquisition Partnerships; collections from consolidated portfolios, loans and other investments; sales of interests in equity investments; and sales of guaranteed portions of existing and originated SBA 7(a) loans will allow the Company to meet its obligations as they come due during the next twelve months.

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 to as of July 31, 2008, and the outstanding borrowings under such facilities as of June 30, 2008.

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	Credit Facilities
	Funded and
	Unfunded		Outstanding
	Commitment		Borrowings
	Amount as of		as of
	July 31,		June 30,
	2008		2008		Interest Rate	Other Terms and Conditions
	(Dollars in millions)
Bank of Scotland $225 million portfolio acquisition and working capital facility (1)	$	225	$	122	$92 at LIBOR + 2.0% - 2.50%; $30 at 18-month fixed rate of 7.86%	Secured by equity interests and other assets of FirstCity, matures November 2010
Bank of Scotland $100 million portfolio acquisition - revolving credit	100		62		LIBOR + 2.0%	Secured by assets of FH Partners, L.P. and guaranteed by the Company, matures November 2010
Bank of Scotland $25 million subordinated delayed draw credit	25		7		prime plus 3%	Secured by security interests in assets of FirstCity and wholly-owned subsidiaries, matures November 2010
American Bank term loan for portfolio acquisition by FC Washington	1		1		Fixed 5.0%	Secured by assets of FC Washington and guaranteed by the Company, matures May 2011
Participation payable	1		1		24.49% imputed rate	Participation agreement on 33% of net cash flows received on one portfolio
Banco Santander line of credit facility	14		14		Rate based on 28 day Mexican index rate plus 1.5%	Secured by Bank of Scotland letter of credit, matures November 2008
Wells Fargo Foothill, Inc. $40 million revolving loan facility	40		10		LIBOR + 2.625% or greater of Wells Fargo prime or 7.5%	Secured by assets of American Business Lending, Inc., matures December 2009
The First National Bank of Central Texas term loan for portfolio acquisition by MPortfolio Corporation	1		1		LIBOR + 1.75%	Secured by assets of MPortfolio Corporation, matures June 2010
LaSalle Bank NA term loan	4		4		LIBOR + 2.25%	Secured by assets of East Penn Railroad LLC, matures March 2011
LaSalle Bank NA revolving loan facility	1		—		option of Base Rate (greater of prime or Federal Funds Rate + .5%) plus margin, or LIBOR plus margin	Secured by assets of East Penn Railroad LLC, matures March 2011
Merrill Lynch Mortgage Trust term loan	8		8		Fixed 6.07%	Secured by assets of Oregon Short Line Building LLC, matures April 2016
Notes payable to banks	420		230
MCS Trust SA de CV term loan	9		9		Fixed 20%	Secured by assets of FC Acquisitions, SRL de CV, matures June 2020
Note payable to affiliate	9		9
Total	$	429	$	239

(1)The Bank of Scotland facility allows loans to be made in Euros up to a maximum amount in Euros that is equivalent to $50.0 million. At June 30, 2008, the Company had approximately $37.2 million outstanding under the Euro-denominated portion of this facility.

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Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q are incorporated by reference from time to time, including, but not limited to, statements relating to the Company’s strategic objectives and future performance, which are not historical facts, may be deemed to be forward-looking statements under the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include, without limitation, statements regarding our future financial position, business strategy, and plans and objectives of management for future operations, as well as any statement that may project, indicate or imply future results, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “may,” “could,” “will be,” “will continue,” “will likely result,” “indication”  and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual results and outcomes may differ materially from those expressed in, or implied by, our forward-looking statements.

There are many important factors that could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements. Such factors include, but are not limited to, changes in general economic conditions and economic conditions in the geographic regions and industries in which the Company operates; foreign social and economic conditions; performance of the Company’s subsidiaries and affiliates; the availability of investments and investment opportunities; assumptions underlying asset performance; the level of nonperforming assets, charge-offs and impairment provisions; risks associated with foreign operations; currency exchange rate fluctuations; risks associated with start up of new businesses and entry into new markets; changes in the interest rate environment and market liquidity; fluctuations in residential and commercial real estate values; adverse movements and volatility in equity capital markets; the degree to which the Company is leveraged; the Company’s continued need for financing; availability of the Company’s credit facilities; ability to obtain additional financing from the Bank of Scotland or any other lender; the impact of certain covenants in loan agreements of the Company and its subsidiaries; risks of declining value of loans, collateral or assets; the ability of the Company to utilize NOLs; liabilities resulting from litigation and regulatory investigations that might arise from continuing and discontinued operations, including costs, expenses, settlements and judgments; changes (legislative and otherwise) in the asset securitization industry; changes in domestic or foreign tax laws, rules and regulations as well as court, Internal Revenue Service or other governmental agencies’ interpretations thereof; changes in accounting standards, rules and interpretations; and factors more fully discussed and identified in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2007, filed with the SEC on March 17, 2008 (including those discussed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”), as well as in other SEC filings of the Company. Many of these factors are beyond the Company’s control. In addition, it should be noted that past financial and operational performance of the Company is not necessarily indicative of future financial and operational performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q represent beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, the Company expressly disclaims any obligation or intention to release publicly any updates or revisions to any forward-looking statement to reflect any change in the Company’s expectations with regard thereto or any change in future events, conditions or circumstances on which any forward-looking statement is based.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company’s operations are materially impacted by net gains on sales of loans and net interest margins. The level of gains from loan sales the Company achieves is dependent on demand for the products originated. Net interest margins are dependent on the Company’s ability to maintain the spread or interest differential between the interest it charges the customer for loans and the interest the Company is charged for the financing of those loans. The following describes each component of interest bearing assets held by the Company and how each could be affected by changes in interest rates.

The Company invests in Portfolio Assets both directly through consolidated subsidiaries and indirectly through equity investments in Acquisition Partnerships. Portfolio Assets consist of investments in pools of non-homogenous assets that predominantly consist of loan and real estate assets. Earnings from these assets are based on the estimated future cash flows from such assets and recorded when those cash flows occur. The underlying loans within these pools bear both fixed and variable rates. Due to the non-performing nature and history of these loans, changes in prevailing benchmark rates (such as the prime rate or LIBOR) generally have a nominal effect on the ultimate future cash flow to be realized from the Portfolio Assets.

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Loans receivable consist primarily of loans made to affiliated entities (including Acquisition Partnerships) and non-affiliated entities, and generally bear interest at fixed rates. The repayment of the loans is generally dependent upon future cash flows of the borrowers, future cash flows of the underlying collateral, and distributions from affiliated entities. Since these loans are predominantly fixed-rate financial instruments, changes in market interest rates would not have a significant impact on the collectibility of these loans.

SBA loans receivable were $15.9 million at June 30, 2008, of which $2.2 million were related to the guaranteed portion of these loans.  The guaranteed portion is backed by the full faith and credit of the U.S. Small Business Administration, and is generally sold into the secondary market.  Virtually all of the SBA loans have variable interest rates.  Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate change in interest rates would have a minimal effect on interest income from SBA loans for the second quarter of 2008. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet, and other business developments that could affect a net increase (decrease) in assets. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate.

FirstCity had $239.2 million in debt outstanding at June 30, 2008. The Company is exposed to interest rate risk primarily through its variable rate debt, which totaled $192.0 million or 80.3% of the Company’s total debt. A 50 basis point change in interest rates would increase or decrease FirstCity’s interest expense by approximately $1.1 million annually.

Foreign Currency Risk

The Company currently has loans and equity investments in Europe, Latin America (i.e. Mexico, Argentina, Dominican Republic, Brazil and Chile) and Canada.

In Europe and in Mexico, the Company’s investments are primarily in the form of equity and represent a significant portion of the Company’s total equity investments. As previously discussed, the revolving acquisition facility with Bank of Scotland for $225.0 million provides that the Company may borrow up to a maximum amount in Euros that is equivalent to U.S. $50.0 million.  At June 30, 2008, the Company had  U.S. $37.2 million in Euro-denominated debt for the purpose of hedging a portion of the net equity investments in Europe.  In November 2006, the Company acquired a line of credit facility with Banco Santander, S.A. that provides that the Company may borrow up to a current maximum of 142,240,000 Mexican pesos. At June 30, 2008, the Company had 142,240,000 in Mexican peso-denominated debt, which was equivalent to U.S. $13.8 million.  Management of the Company feels that these loan agreements will help reduce the risk of adverse effects of currency changes on these investments.

A sharp change in the foreign currencies related to the investments in Europe, Latin America and Canada relative to the U.S. dollar could materially adversely affect the financial position and results of operations of the Company. A 5% and 10% incremental depreciation of these currencies would result in an estimated decline in the valuation of the Company’s foreign investments and are indicated in the following table. These amounts are estimates; consequently, these amounts are not necessarily indicative of the actual effect of such changes with respect to the Company’s consolidated financial position or results of operations.

43

		One U.S. dollar equals	Estimated decline in valuation of investments resulting from incremental depreciation of foreign currency of (dollars in thousands)
			5%		10%
Europe	EUR	0.63	$	2,130	$	4,076
Mexico	MXN	10.28	$	1,914	$	3,692
Argentina	ARS	3.02	$	52	$	101
Dominican Republic	DOP	34.86	$	15	$	28
Chile	CLP	513.20	$	262	$	500
Canada	CAD	1.01	$	14	$	27
Brazil	BRL	1.61	$	41	$	78

Item 4.  Controls and Procedures.

Disclosure Controls and Procedures

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed under the Exchange Act securities laws is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer.

As of the end of the period covered by this report, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective, in all material respects, in recording, processing, summarizing and reporting information required to be disclosed by the Company, within the time periods specified in the SEC’s rules and forms.

Internal Control Over Financial Reporting

Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:

·pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company;

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

44

As of the end of the period covered by this report, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

45

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings.

The following information supplements and amends our discussion set forth under Part I, Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Wave Tec Pools, Inc. Litigation

Superior Funding, Inc., Wave Tec Pools, Inc. and Nations Pool Supply, Inc. (collectively “Plaintiffs”) filed a Fifth Amended Petition adding additional parties related to Prosperity Bank on or about May 12, 2008, but asserting no new claims against FirstCity Servicing Corporation or FH Partners LLC, indirect wholly-owned subsidiaries of FirstCity.  Plaintiffs also sent extensive requests for production of documents and terminated the prior agreement to suspend discovery and responses have been filed by FH Partners LLC.  FirstCity Servicing Corporation and FH Partners LLC intend to contest the cases vigorously.

Item 1A.  Risk Factors.

There have been no material changes to the risk factors as previously disclosed under Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

The following summarizes purchases of common stock during the second quarter 2008:

				Total Number	Maximum Number
				of Shares Purchased	of Shares that May
Month	Total Number of Shares Purchased	Average Price Paid Per Share		as Part of Publicly Announced Plans or Programs (1)	Yet Be Purchased Under the Plans or Programs
April	121,300	$	5.73	121,300
May	2,900	$	4.53	2,900
June	91,600	$	4.36	91,600
Total	215,800	$	5.13	215,800	439,170

(1)  The Company has a stock repurchase program that was approved by the Board of Directors in August 2006 for the repurchase of up to 1,000,000 shares of the Company’s common stock in the open market or otherwise from time to time. On February 6, 2008, the Board of Directors approved the repurchase of an additional 500,000 shares (up to a total of 1,500,000 shares) and the plan was extended to August 30, 2009.

Item 3.  Defaults Upon Senior Securities.

None

Item 4.  Submission of Matters to a Vote of Security Holders.

The Company held its annual meeting of stockholders (the “Annual Meeting”) on June 16, 2008. The following items for business were considered at the Annual Meeting.

(a) Election of Directors

The following individuals were elected as directors to serve as members of the Company’s Board of Directors until the Company’s 2009 annual meeting of stockholders. The number of votes cast for each nominee was as follows:

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		Votes
Nominee	Votes For	Withheld
Richard E. Bean	9,854,945	154,472
C. Ivan Wilson	9,321,558	687,859
James T. Sartain	9,854,918	154,499
Dane Fulmer	9,852,435	156,982
Robert E. Garrison II	9,854,945	154,472
D. Michael Hunter	9,854,945	154,472
F. Clayton Miller	7,623,776	2,385,641

(b) Ratification of Appointment of Auditors

A proposal to ratify the Board of Directors’ appointment of KPMG LLP as the Company’s independent auditors for 2008 was approved by the stockholders. The number of votes for the proposal: 9,900,525; votes against: 94,938; abstentions: 13,953.

Item 5.  Other Information.

None

Item 6.  Exhibits.

ExhibitNumber		Description of Exhibit
2.1	—	Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995)
2.2	—	Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995)
3.1	—	Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995)
3.2	—	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated December 30, 2005 filed with the Commission on December 30, 2005)
10.1	—	Revolving Credit Agreement, dated August 26, 2005, among FH Partners, L.P., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 1, 2005)
10.2	—	Guaranty Agreement, dated August 26, 2005, executed by FirstCity Financial Corporation, FirstCity Commercial Corporation, FirstCity Europe Corporation, FirstCity Holdings Corporation, FirstCity International Corporation, FirstCity Mexico, Inc., and FirstCity Servicing Corporation for the benefit of Bank of Scotland, as agent, and lenders (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated September 1, 2005)
10.3	—	Contribution and Assumption Agreement, dated August 18, 2000, by and between Funding LP and Drive (incorporated herein by reference to Exhibit 10.42 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000)

47

10.4	—	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein by reference to Exhibit 10.19 of the Company’s Form 10-Q dated May 14, 2004).
10.5	—	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip (incorporated herein by reference to Exhibit 10.20 of the Company’s Form 10-Q dated May 14, 2004)
10.6	—	Securities Purchase Agreement dated as of September 21, 2004 by and among FirstCity Financial Corporation and certain affiliates of FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP Holdings LLC, Drive Management LP and certain affiliates of those persons. (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 27, 2004)
10.7	—	Revolving Credit Agreement, dated November 12, 2004, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.12 of the Company’s Form 10-Q dated November 15, 2004)
10.8	—	1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit A of the Company’s Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)
10.9	—	1996 Stock Option and Award Plan (incorporated herein by reference to Exhibit C of the Company’s Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)
10.10	—	2004 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company’s Schedule 14A, Definitive Proxy Statement, dated October 21, 2003)
10.11	—	Sixth Amendment to Right Of First Refusal Agreement And Due Diligence Reimbursement Agreement dated effective as of February 1, 2006 (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated February 6, 2006)
10.12	—	Asset Purchase Agreement, dated June 30, 2006, by and among FirstCity Financial Corporation and its subsidiaries, FirstCity Business Lending Corporation and American Business Lending, Inc.; and AMRESCO SBA Holdings, Inc. and NCS I, LLC (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated July 7, 2006)
10.13	—	2006 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company’s Schedule 14A, Definitive Proxy Statement, dated June 26, 2006)
10.14	—	Interest Purchase and Sale Agreement, dated August 8, 2006, by and among Bidmex Holding, LLC, and Strategic Mexican Investment Partners, L.P. and Cargill Financial Services International, Inc. and certain other parties (incorporated herein by reference to Exhibit 10.14 of the Company’s Form 10-Q dated November 9, 2006)
10.15	—	Put Option Agreement dated August 8, 2006, by and among Bidmex Holding, LLC, Recuperacion de Carteras Mexicanas, S. de R.L. de C.V., Bidmex 6, LLC, Strategic Mexican Investment Partners 2, L.P. and Cargill Financial Services International, Inc. (incorporated herein by reference to Exhibit 10.15 of the Company’s Form 10-Q dated November 9, 2006)
10.16	—	Guarantee dated August 8, 2006, executed by FirstCity Financial Corporation for the benefit of Bidmex Holding, LLC, Residencial Oeste 2 S. de R.L. de C.V., National Union Fire Insurance Company of Pittsburg, P.A., American General Life Insurance Company, and American General Life and Accident Insurance Company (incorporated herein by reference to Exhibit 10.15 of the Company’s Form 10-Q dated November 9, 2006)

48

10.17	—	Amendment No. 4 to Revolving Credit Agreement, dated as of October 31, 2006, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated November 7, 2006)
10.18	—	Management Employment Contract dated November 30, 2006, between FirstCity Business Lending Corporation, American Business Lending, Inc., and Charles P. Bell, Jr. (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated December 7, 2006)
10.19	—	Management Employment Contract dated November 30, 2006, between FirstCity Business Lending Corporation, American Business Lending, Inc., and Joe N. Smith (incorporated herein by reference to Exhibit 10.3 of the Company’s Form 8-K dated December 7, 2006)
10.20	—	Amendment No. 5 to Revolving Credit Agreement, dated as of December 14, 2006, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated December 20, 2006)
10.21	—	Loan Agreement, dated as of December 15, 2006 by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated December 28, 2006)
10.22	—	Amendment No. 1 to Loan Agreement, dated as of February 27, 2007, by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by reference to Exhibit 10.22 of the Company’s Form 10-K dated July 24, 2007)
10.23	—	Amendment No. 9 to Revolving Credit Agreement, dated as of June 29, 2007, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.23 of the Company’s Form 10-Q dated August 10, 2007)
10.24	—	Amendment No. 1 to Revolving Credit Agreement, dated June 29, 2007, among FH Partners, L.P., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.24 of the Company’s Form 10-Q dated August 10, 2007)
10.25	—	Amendment No. 2 to Loan Agreement, dated as of July 30, 2007, by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 3, 2007)
10.26	—	Amendment No. 10 to Revolving Credit Agreement, dated as of August 22, 2007, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 28, 2007)
10.27	—	Amendment No. 3 and Consent to Revolving Credit Agreement, dated August 22, 2007, among FH Partners, L.L.C., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 28, 2007)
10.28	—	Subordinated Delayed Draw Credit Agreement, dated as of September 5, 2007, among FirstCity Financial Corporation, as Borrower, and the Lenders named therein, as Lenders, and BoS (USA), Inc., as agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 10, 2007)
10.29	—	Letter agreement between FirstCity Financial Corporation and Bank of Scotland

49

		extending time period for closing of subordinate credit facility to be provided by BoS (USA,) Inc. to October 2, 2007 (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated September 10, 2007)
10.30	—	Letter agreement between FirstCity Financial Corporation and BoS (USA), Inc. extending time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to October 31, 2007 (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated October 5, 2007)
10.31	—	Letter agreement between FirstCity Financial Corporation and Bank of Scotland extending time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to October 31, 2007 (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated October 5, 2007)
10.32	—	Letter agreement between FirstCity Financial Corporation and BoS (USA), Inc. extending time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to November 16, 2007 (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated November 8, 2007)
10.33	—	Letter agreement between FirstCity Financial Corporation and Bank of Scotland which amended the Revolving Credit Agreement to extend time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to November 16, 2007 (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated November 8, 2007)
10.34	—	Amendment and Consent No. 21 to Revolving Credit Agreement, dated as of May 8, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated May 14, 2008)
10.35	—	Amendment and Consent No. 8 to Subordinated Delayed Draw Credit Agreement, dated as of May 8, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and BoS (USA), Inc., as Agent (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated May 14, 2008)
10.36	—	Amendment and Consent No. 5 to Revolving Credit Agreement, dated as of May 8, 2008, among FH Partners, LLC, as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.3 of the Company’s Form 8-K dated May 14, 2008)
10.37	—	Amendment and Consent No. 25 to Revolving Credit Agreement, dated as of July 14, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated July 18, 2008)
10.38	—	Amendment and Consent No. 12 to Subordinated Delayed Draw Credit Agreement, dated as of July 14, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and BoS (USA), Inc., as Agent (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated July 18, 2008)
10.39	—	Amendment and Consent No. 6 to Revolving Credit Agreement, dated as of July 14, 2008, among FH Partners, LLC, as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.3 of the Company’s Form 8-K dated July 18, 2008)
31.1*	—	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	—	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

50

32.1*	—	Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	—	Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

51

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRSTCITY FINANCIAL CORPORATION
By:	/s/  JAMES T. SARTAIN
	James T. Sartain
	President and Chief Executive
	Officer and Director
	(Duly authorized officer and
	Principal Executive Officer)
By:	/s/  J. BRYAN BAKER
	J. Bryan Baker
	Senior Vice President and Chief
	Financial Officer
	(Duly authorized officer and
	Principal Financial Officer)

Dated:  August 11, 2008

52

Exhibit Index

ExhibitNumber		Description of Exhibit
2.1	—	Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).
2.2	—	Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).
3.1	—	Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995).
3.2	—	Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated December 30, 2005 filed with the Commission on December 30, 2005).
10.1	—	Revolving Credit Agreement, dated August 26, 2005, among FH Partners, L.P., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 1, 2005).
10.2	—	Guaranty Agreement, dated August 26, 2005, executed by FirstCity Financial Corporation, FirstCity Commercial Corporation, FirstCity Europe Corporation, FirstCity Holdings Corporation, FirstCity International Corporation, FirstCity Mexico, Inc., and FirstCity Servicing Corporation for the benefit of Bank of Scotland, as agent, and lenders (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated September 1, 2005).
10.3	—	Contribution and Assumption Agreement, dated August 18, 2000, by and between Funding LP and Drive (incorporated herein by reference to Exhibit 10.42 of the Company’s Form 8-K dated August 25, 2000, filed with the Commission on September 11, 2000).
10.4	—	Separation Agreement and Release, dated March 31, 2004, by and between G. Stephen Fillip, FirstCity Servicing Corporation and FirstCity Financial Corporation (incorporated herein by reference to Exhibit 10.19 of the Company’s Form 10-Q dated May 14, 2004).
10.5	—	Consultant Agreement, dated April 1, 2004, by and between FirstCity Servicing Corporation and G. Stephen Fillip (incorporated herein by reference to Exhibit 10.20 of the Company’s Form 10-Q dated May 14, 2004).
10.6	—	Securities Purchase Agreement dated as of September 21, 2004 by and among FirstCity Financial Corporation and certain affiliates of FirstCity and IFA Drive GP Holdings LLC, IFA Drive LP Holdings LLC, Drive Management LP and certain affiliates of those persons. (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 27, 2004)
10.7	—	Revolving Credit Agreement, dated November 12, 2004, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.12 of the Company’s Form 10-Q dated November 15, 2004)

10.8	—	1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit A of the Company’s Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)
10.9	—	1996 Stock Option and Award Plan (incorporated herein by reference to Exhibit C of the Company’s Schedule 14A, Definitive Proxy Statement, dated March 27, 1996)
10.10	—	2004 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company’s Schedule 14A, Definitive Proxy Statement, dated October 21, 2003)
10.11	—	Sixth Amendment to Right Of First Refusal Agreement And Due Diligence Reimbursement Agreement dated effective as of February 1, 2006 (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated February 6, 2006)
10.12	—	Asset Purchase Agreement, dated June 30, 2006, by and among FirstCity Financial Corporation and its subsidiaries, FirstCity Business Lending Corporation and American Business Lending, Inc.; and AMRESCO SBA Holdings, Inc. and NCS I, LLC (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated July 7, 2006)
10.13	—	2006 Stock Option and Award Plan (incorporated herein by reference to Appendix A of the Company’s Schedule 14A, Definitive Proxy Statement, dated June 26, 2006)
10.14	—	Interest Purchase and Sale Agreement, dated August 8, 2006, by and among Bidmex Holding, LLC, and Strategic Mexican Investment Partners, L.P. and Cargill Financial Services International, Inc. and certain other parties (incorporated herein by reference to Exhibit 10.14 of the Company’s Form 10-Q dated November 9, 2006)
10.15	—	Put Option Agreement dated August 8, 2006, by and among Bidmex Holding, LLC, Recuperacion de Carteras Mexicanas, S. de R.L. de C.V., Bidmex 6, LLC, Strategic Mexican Investment Partners 2, L.P. and Cargill Financial Services International, Inc. (incorporated herein by reference to Exhibit 10.15 of the Company’s Form 10-Q dated November 9, 2006)
10.16	—	Guarantee dated August 8, 2006, executed by FirstCity Financial Corporation for the benefit of Bidmex Holding, LLC, Residencial Oeste 2 S. de R.L. de C.V., National Union Fire Insurance Company of Pittsburg, P.A., American General Life Insurance Company, and American General Life and Accident Insurance Company (incorporated herein by reference to Exhibit 10.15 of the Company’s Form 10-Q dated November 9, 2006)
10.17	—	Amendment No. 4 to Revolving Credit Agreement, dated as of October 31, 2006, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated November 7, 2006)
10.18	—	Management Employment Contract dated November 30, 2006, between FirstCity Business Lending Corporation, American Business Lending, Inc., and Charles P. Bell, Jr. (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated December 7, 2006)
10.19	—	Management Employment Contract dated November 30, 2006, between FirstCity Business Lending Corporation, American Business Lending, Inc., and Joe N. Smith (incorporated herein by reference to Exhibit 10.3 of the Company’s Form 8-K dated December 7, 2006)
10.20	—	Amendment No. 5 to Revolving Credit Agreement, dated as of December 14, 2006, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated December 20, 2006)
10.21	—	Loan Agreement, dated as of December 15, 2006 by and between American Business

		Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated December 28, 2006)
10.22	—	Amendment No. 1 to Loan Agreement, dated as of February 27, 2007, by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by reference to Exhibit 10.22 of the Company’s Form 10-K dated July 24, 2007)
10.23	—	Amendment No. 9 to Revolving Credit Agreement, dated as of June 29, 2007, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.23 of the Company’s Form 10-Q dated August 10, 2007)
10.24	—	Amendment No. 1 to Revolving Credit Agreement, dated June 29, 2007, among FH Partners, L.P., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.24 of the Company’s Form 10-Q dated August 10, 2007)
10.25	—	Amendment No. 2 to Loan Agreement, dated as of July 30, 2007, by and between American Business Lending, Inc., as Borrower, and Wells Fargo Foothill, LLC, as lender (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 3, 2007)
10.26	—	Amendment No. 10 to Revolving Credit Agreement, dated as of August 22, 2007, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 28, 2007)
10.27	—	Amendment No. 3 and Consent to Revolving Credit Agreement, dated August 22, 2007, among FH Partners, L.L.C., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 28, 2007)
10.28	—	Subordinated Delayed Draw Credit Agreement, dated as of September 5, 2007, among FirstCity Financial Corporation, as Borrower, and the Lenders named therein, as Lenders, and BoS (USA), Inc., as agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated September 10, 2007)
10.29	—	Letter agreement between FirstCity Financial Corporation and Bank of Scotland extending time period for closing of subordinate credit facility to be provided by BoS (USA,) Inc. to October 2, 2007 (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated September 10, 2007)
10.30	—	Letter agreement between FirstCity Financial Corporation and BoS (USA), Inc. extending time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to October 31, 2007 (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated October 5, 2007)
10.31	—	Letter agreement between FirstCity Financial Corporation and Bank of Scotland extending time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to October 31, 2007 (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated October 5, 2007)
10.32	—	Letter agreement between FirstCity Financial Corporation and BoS (USA), Inc. extending time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to November 16, 2007 (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated November 8, 2007)
10.33	—	Letter agreement between FirstCity Financial Corporation and Bank of Scotland which

		amended the Revolving Credit Agreement to extend time period for closing of subordinate credit facility to be provided by BoS (USA), Inc. to November 16, 2007 (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated November 8, 2007)
10.34	—	Amendment and Consent No. 21 to Revolving Credit Agreement, dated as of May 8, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated May 14, 2008)
10.35	—	Amendment and Consent No. 8 to Subordinated Delayed Draw Credit Agreement, dated as of May 8, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and BoS (USA), Inc., as Agent (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated May 14, 2008)
10.36	—	Amendment and Consent No. 5 to Revolving Credit Agreement, dated as of May 8, 2008, among FH Partners, L.L.C., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.3 of the Company’s Form 8-K dated May 14, 2008)
10.37	—	Amendment and Consent No. 25 to Revolving Credit Agreement, dated as of July 14, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated July 18, 2008)
10.38	—	Amendment and Consent No. 12 to Subordinated Delayed Draw Credit Agreement, dated as of July 14, 2008, among FirstCity Financial Corporation as Borrower and the Lenders named therein, as Lenders, and BoS (USA), Inc., as Agent (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K dated July 18, 2008)
10.39	—	Amendment and Consent No. 6 to Revolving Credit Agreement, dated as of July 14, 2008, among FH Partners, L.L.C., as Borrower, and the Lenders named therein, as Lenders, and Bank of Scotland, as Agent (incorporated herein by reference to Exhibit 10.3 of the Company’s Form 8-K dated July 18, 2008)
31.1*	—	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	—	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	—	Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	—	Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*      Filed herewith