10-Q

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, 2010
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

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

Large accelerated filer £	Accelerated filer £
Non-accelerated filer £	Smaller reporting company x
(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 10, 2010 was 10,187,714.

TABLE OF CONTENTS

PART I
Item 1.	Financial Statements	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Operations	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	65
PART II OTHER INFORMATION		66
Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Reserved	66
Item 5.	Other Information	66
Item 6.	Exhibits	67
SIGNATURES		68

PART I

FINANCIAL INFORMATION

Item 1.  Financial Statements

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	June 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Cash and cash equivalents	$	50,573		$	80,368
Restricted cash	1,641			1,364
Portfolio Assets:
Loan portfolios, net of allowance for loan losses of $45,719 and $65,825, respectively	189,047			197,946
Real estate held for sale	23,186			17,051
Real estate held for investment, net	9,153			9,387
Total Portfolio Assets	221,386			224,384
Loans receivable:
Loans receivable - affiliates, net of allowance for loan losses of $500 and $67, respectively	21,867			26,122
Loans receivable - SBA held for sale	7,697			821
Loans receivable - SBA held for investment, net of allowance for loan losses of $346 and $490, respectively	15,165			15,445
Loans receivable - other, net of allowance for loan losses of $1,083 and $-0-, respectively	14,654			10,233
Total loans receivable, net	59,383			52,621
Investment securities available for sale	1,394			1,836
Equity investments	91,640			71,491
Service fees receivable ($602 and $809 from affiliates, respectively)	656			850
Servicing assets - SBA loans	876			1,056
Other assets, net	38,425			31,104
Total Assets (1)	$	465,974		$	465,074
LIABILITIES AND EQUITY
Liabilities:
Notes payable to banks and other	$	305,561		$	305,888
Note payable to affiliate	7,760			7,838
Other liabilities	30,099			26,077
Total Liabilities	343,420			339,803
Commitments and contingencies (Note 19)
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: 11,687,714 and 11,483,824, respectively ; shares outstanding: 10,187,714 and 9,983,824, respectively)	117			115
Treasury stock, at cost: 1,500,000 shares	(10,923		)	(10,923		)
Paid in capital	104,881			103,326
Accumulated deficit	(10,163		)	(18,329		)
Accumulated other comprehensive income (loss)	(1,274		)	3,460
FirstCity Stockholders’ Equity	82,638			77,649
Noncontrolling interests	39,916			47,622
Total Equity	122,554			125,271
Total Liabilities and Equity	$	465,974		$	465,074

(1) Our consolidated assets at June 30, 2010 include the following assets of certain variable interest entities (“VIEs”) that can only be used to settle the liabilities of those VIEs: Cash and cash equivalents, $28.0  million; Portfolio Assets, $216.9 million; Loans receivable, $59.8 million; Equity investments, $61.9 million; Other assets, $37.1 million; and Total assets, $403.6 million.

See accompanying notes to consolidated financial statements.

2

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Revenues:
Finance and Servicing:
Servicing fees ($1,551 and $2,137 from affiliates for the three month periods, respectively, and $3,446 and $4,264 from affiliates for the six month periods, respectively)	$	1,743	$	2,403	$	3,746	$	4,795
Income from Portfolio Assets	14,622		14,077		26,085		23,120
Gain on sale of SBA loans held for sale, net	163		610		163		610
Gain on sale of investment securities	3,250		—		3,250		—
Interest income from SBA loans	313		295		581		641
Interest income from loans receivable - affiliates	773		939		1,727		1,862
Interest income from loans receivable - other	229		364		361		793
Other income	1,565		1,118		2,696		1,998
	22,658		19,806		38,609		33,819
Manufacturing, Railroad and Coal Mine:
Operating revenues - manufacturing	6,107		—		10,466		—
Operating revenues - railroad	1,192		705		2,457		1,452
Operating revenues - coal mine	13,100		—		13,100		—
Other	4		150		4		1,070
	20,403		855		26,027		2,522
Total revenues	43,061		20,661		64,636		36,341
Costs and expenses:
Finance and Servicing:
Interest and fees on notes payable to banks and other	3,334		3,125		6,376		6,134
Interest and fees on note payable to affiliate	400		444		792		877
Salaries and benefits	6,001		5,796		11,072		10,607
Provision for loan and impairment losses	2,625		677		4,327		1,783
Asset-level expenses	2,103		1,417		3,724		2,654
Other	3,306		1,903		6,502		4,949
	17,769		13,362		32,793		27,004
Manufacturing, Railroad and Coal Mine:
Cost of revenues and operating costs - manufacturing	5,952		—		10,788		—
Cost of revenues and operating costs - railroad	627		535		1,233		1,026
Cost of revenues and operating costs - coal mine	13,295		—		13,295		—
	19,874		535		25,316		1,026
Total costs and expenses	37,643		13,897		58,109		28,030
Earnings before other revenue and income taxes	5,418		6,764		6,527		8,311
Equity in earnings of unconsolidated subsidiaries	1,816		1,198		4,045		1,052
Gain on business combinations	4,838		1,455		5,729		1,455
Earnings before income taxes	12,072		9,417		16,301		10,818
Income tax expense	1,205		440		719		849
Net earnings	10,867		8,977		15,582		9,969
Less: Net income attributable to noncontrolling interests	2,802		1,231		7,416		1,579
Net earnings attributable to FirstCity	$	8,065	$	7,746	$	8,166	$	8,390
Basic earnings per share	$	0.81	$	0.79	$	0.82	$	0.85
Diluted earnings per share	$	0.80	$	0.76	$	0.81	$	0.84

See accompanying notes to consolidated financial statements.

3

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Six Months Ended
	June 30,
	2010			2009
Net earnings	$	15,582		$	9,969
Other comprehensive income (loss):
Net unrealized gain (loss) on securities available for sale	(972		)	310
Reclassification adjustment for unrealized gain on security available for sale included in net earnings	(1,352		)	—
Foreign currency translation adjustments	(4,795		)	2,487
Total other comprehensive income (loss)	(7,119		)	2,797
Total comprehensive income	8,463			12,766
Less comprehensive (income) loss attributable to noncontrolling interests:
Net income	(7,416		)	(1,579		)
Net unrealized loss on securities available for sale	250			—
Foreign currency translation adjustments	2,135			(216		)
Comprehensive income attributable to FirstCity	$	3,432		$	10,971

See accompanying notes to consolidated financial statements.

4

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands)

	FirstCity Stockholders
											Accumulated
											Other			Non-
	Common		Treasury			Paid in		Accumulated			Comprehensive			controlling			Total
	Stock		Stock			Capital		Deficit			Income (Loss)			Interests			Equity
Balances, December 31, 2008	$	113	$	(10,923	)	$	101,875	$	(37,073	)	$	(3,726	)	$	15,609		$	65,875
Net earnings	—		—			—		8,390			—			1,579			9,969
Change in net unrealized gain on securities available for sale	—		—			—		—			310			—			310
Foreign currency translation adjustments	—		—			—		—			2,271			216			2,487
Stock-based compensation expense	—		—			130		—			—			—			130
Purchases of subsidiary shares in noncontrolling interests	—		—			774		—			—			(3,591		)	(2,817		)
Investments in majority-owned entities	—		—			—		—			—			25,410			25,410
Distributions to noncontrolling interests	—		—			—		—			—			(2,245		)	(2,245		)
Balances, June 30, 2009	$	113	$	(10,923	)	$	102,779	$	(28,683	)	$	(1,145	)	$	36,978		$	99,119
Balances, December 31, 2009	$	115	$	(10,923	)	$	103,326	$	(18,329	)	$	3,460		$	47,622		$	125,271
Net earnings	—		—			—		8,166			—			7,416			15,582
Change in net unrealized gain on securities available for sale	—		—			—		—			(2,074		)	(250		)	(2,324		)
Foreign currency translation adjustments	—		—			—		—			(2,660		)	(2,135		)	(4,795		)
Exercise of common stock options	—		—			50		—			—			—			50
Issuance of common stock	2					888											890
Stock-based compensation expense	—		—			327		—			—			—			327
Purchases of subsidiary shares in noncontrolling interests	—		—			—		—			—			(40		)	(40		)
Other activity	—		—			290		—			—			(329		)	(39		)
Investments in majority-owned entities	—		—			—		—			—			5,129			5,129
Distributions to noncontrolling interests	—		—			—		—			—			(17,497		)	(17,497		)
Balances, June 30, 2010	$	117	$	(10,923	)	$	104,881	$	(10,163	)	$	(1,274	)	$	39,916		$	122,554

See accompanying notes to consolidated financial statements.

5

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Six Months Ended
	June 30,
	2010			2009
				See Note 1
Cash flows from operating activities:
Net earnings	$	15,582		$	9,969
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Net principal advances on SBA loans held for sale	(8,882		)	(11,437		)
Proceeds from sales of SBA loans held for sale, net	2,317			13,819
Proceeds applied to income from Portfolio Assets	2,126			10,460
Income from Portfolio Assets	(26,085		)	(23,120		)
Capitalized interest and costs on Portfolio Assets and loans receivable	(369		)	(768		)
Provision for loan and impairment losses	4,327			1,783
Foreign currency transaction losses (gains), net	1,095			(300		)
Equity in earnings of unconsolidated subsidiaries	(4,045		)	(1,052		)
Gain on sale of SBA loans held for sale, net	(163		)	(610		)
Gain on sale of railroad property	—			(920		)
Gain on business combinations	(5,729		)	(1,455		)
Gain on sale of investment security	(3,250		)	—
Depreciation and amortization	5,788			1,991
Net premium amortization of loans receivable	(164		)	(33		)
Stock-based compensation expense	327			130
Decrease (increase) in restricted cash	(579		)	102
Decrease (increase) in service fees receivable	194			(336		)
Increase in other assets	(1,587		)	(965		)
Deferred income tax benefit	(563		)	—
Increase in other liabilities	2,732			5,379
Net cash provided by (used in) operating activities	(16,928		)	2,637
Cash flows from investing activities:
Purchases of property and equipment, net	(711		)	(1,358		)
Proceeds from sale of railroad property	—			1,350
Cash paid for business combinations, net of cash acquired	(1,570		)	(7,149		)
Decrease in cash from deconsolidation of subsidiary	(875		)	—
Net principal advances on loans receivable	(3,151		)	(1,611		)
Net principal payments (advances) on SBA loans held for investment	252			(2,020		)
Purchase of investment securities available for sale	(1,360		)	—
Proceeds from sale of investment security	3,250			—
Net principal payments on investment securities available for sale	732			2,242
Purchases of Portfolio Assets	(25,166		)	(134,966		)
Proceeds applied to principal on Portfolio Assets	68,760			71,629
Contributions to unconsolidated subsidiaries	(30,865		)	(1,222		)
Distributions from unconsolidated subsidiaries	4,493			7,034
Net cash provided by (used in) investing activities	13,789			(66,071		)
Cash flows from financing activities:
Borrowings under notes payable to banks and other	41,101			137,604
Principal payments of notes payable to affiliates	(79		)	—
Principal payments of notes payable to banks and other, net	(55,831		)	(84,570		)
Payments of debt issuance costs and loan fees	(2,342		)	(647		)
Proceeds from secured borrowings, net	2,602			—
Contributions from noncontrolling interests	4,581			22,270
Distributions to noncontrolling interests	(17,497		)	(2,245		)
Cash paid for subsidiary shares in noncontrolling interests	(40		)	(2,796		)
Proceeds from issuance of common stock	940			—
Net cash provided by (used in) financing activities	(26,565		)	69,616
Effect of exchange rate changes on cash and cash equivalents	(91		)	236
Net increase (decrease) in cash and cash equivalents	(29,795		)	6,418
Cash and cash equivalents, beginning of period	80,368			19,103
Cash and cash equivalents, end of period	$	50,573		$	25,521
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	4,829		$	4,852
Income taxes, net of refunds	124			90

See accompanying notes to consolidated financial statements.

6

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

Nature of Operations

FirstCity Financial Corporation, a Delaware corporation, is a financial services company headquartered in Waco, Texas with offices throughout the United States and Mexico and a presence in Europe and South America. When we refer to “FirstCity,” “the Company,” “we,” “our” or “us” in this Quarterly Report on Form 10-Q, we mean FirstCity Financial Corporation and subsidiaries (consolidated).

The Company engages in two major business segments — Portfolio Asset Acquisition and Resolution and Special Situations Platform. The Portfolio Asset Acquisition and Resolution business has been the Company’s core business segment since it commenced operations in 1986. In the Portfolio Asset Acquisition and Resolution business, the Company acquires portfolios of performing and non-performing loans and other assets (collectively, “Portfolio Assets” or “Portfolios”), generally at a discount to their legal principal balances or appraised values, and services and resolves such Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. FirstCity acquires the Portfolio Assets for its own account or through investment entities formed with one or more other co-investors (each such entity, an “Acquisition Partnership”). The Company engages in its Special Situations Platform business through its majority ownership in an investment company that was formed in April 2007. Through its Special Situations Platform, the Company provides investment capital to privately-held middle-market companies through flexible capital structuring arrangements to generate an attractive risk-adjusted return. These capital investments primarily take the form of senior and junior financing arrangements, but also include direct equity investments, common equity warrants, distressed debt transactions, and leveraged buyouts. Refer to Note 18 for additional information on the Company’s major business segments.

Basis of Presentation

The accompanying unaudited consolidated financial statements in this Form 10-Q were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations. The interim results of operations disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Certain amounts in the consolidated financial statements and disclosures for prior periods were reclassified to conform to the current period presentation. These interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2009, as amended (“2009 Form 10-K”).

The consolidated financial statements in this Form 10-Q include the accounts of FirstCity, its wholly-owned and majority-owned subsidiaries, and certain variable interest entities (“VIEs”). All significant intercompany transactions and balances have been eliminated in consolidation. We consolidate all VIEs where we are the primary beneficiary as prescribed by the Financial Accounting Standards Board’s (the “FASB”) accounting guidance on the consolidation of VIEs. The primary beneficiary of a VIE is the party that has the power to direct the activities that most-significantly impact the economic performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. Refer to Note 16 for more information.

The Company does not consolidate equity investments in 20%- to 50%-owned entities that are not VIEs where the Company does not have an effective controlling interest, or equity investments in 20%- to 50%-owned entities that are VIEs where the Company is not the primary beneficiary. Rather, such investments are accounted for under the equity-method of accounting since the Company has the ability to exercise significant influence over the investees’ operating and financial policies. The Company also accounts for its unconsolidated equity investments in less than 20%-owned entities under the equity-method of accounting. FirstCity has the ability to exercise significant influence over the operating and financial policies of these entities, despite its comparatively smaller ownership percentage, due primarily to its active participation in the policy-making process as well as its involvement in the daily management activities.

7

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Correction of an Error in Previously Issued Consolidated Statements of Cash Flows

The Company determined that it has incorrectly reported certain amounts related to Portfolio Asset activities as “Cash flows from operating activities” in the consolidated statements of cash flows for all reporting periods prior to September 30, 2009. Upon subsequent review, the Company determined that applicable Portfolio Asset transactions, primarily purchases and principal collections, should be reported as “Cash flows from investing activities.” In this Form 10-Q, for reasons described below, the Company is revising its consolidated statement of cash flows for the prior reporting period so that applicable Portfolio Asset transactions are reported as “Cash flows from investing activities” instead of “Cash flows from operating activities.” All financial information contained in this Form 10-Q gives effect to these revisions. The revisions did not result in a change to the Company’s previously-reported revenues, expenses, net earnings (loss), cash and cash equivalents, or stockholders’ equity.

Company management considered all of the relevant quantitative and qualitative factors related to the correction of the error under Securities and Exchange Commission (“SEC”) guidance on considering the effects of prior period misstatements when quantifying misstatements in the current period financial statements, and determined that the impact on previously-issued financial statements was not material. Therefore, the Company is revising the prior period consolidated statement of cash flows for the immaterial error in this Form 10-Q and is not amending previously-filed reports.

The following tables reconcile the Company’s consolidated statement of cash flows from the previously-reported results to the revised results for the six-month period ended June 30, 2009:

	Six Months Ended
	June 30,
	2009
	(Dollars in thousands)
Consolidated Statements of Cash Flows:
Cash flows from operating activities (as reported)	$	(60,700	)
Impact of revision on purchases of Portfolio Assets	134,966
Impact of revision on proceeds applied to principal on Portfolio Assets	(71,629		)
Cash flows from operating activities (as revised)	$	2,637
Cash flows from investing activities (as reported)	$	(2,734	)
Impact of revision on purchases of Portfolio Assets	$	(134,966	)
Impact of revision on proceeds applied to principal on Portfolio Assets	71,629
Cash flows from investing activities (as revised)	$	(66,071	)

Out-of-Period Adjustments

In the first quarter of 2010, upon the determination that deferred tax items related to our foreign jurisdictions had been misstated by $1.5 million as of December 31, 2009, the Company recorded a $1.0 million adjustment to deferred tax benefit and a $0.5 million adjustment to equity in earnings of unconsolidated subsidiaries in order to properly state the net deferred tax asset.  The adjustment was not material to our consolidated financial statements for the quarterly or year-to-date periods ended March 31, 2010 or June 30, 2010 or the year ended December 31, 2009.

In addition, in the first quarter of 2010, the Company recorded certain loan impairments that included $1.2 million in impairments that should have been recorded during the year ended December 31, 2009. The out-of-period adjustments were not material to our consolidated financial statements for the quarterly or year-to-date periods ended March 31, 2010 or June 30, 2010 or the year ended December 31, 2009.

8

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates that are particularly susceptible to significant change in the near-term relate to the estimation of future collections on Portfolio Assets used in the calculation of income from Portfolio Assets; valuation of deferred tax assets and assumptions used in the calculation of income taxes; valuation of servicing assets, investment securities, loans receivable (including loans receivable held in securitization trusts), and real estate; valuation of assets, liabilities, non-controlling interests and contingencies attributable to business combinations; guarantee obligations and indemnifications; and legal contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, along with volatile financial, real estate and foreign currency markets, have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Portfolio Assets

The Company invests in Portfolio Assets and services and resolves such Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. The Portfolio Assets are generally non-homogeneous assets, including loans of varying qualities that are secured by diverse collateral types and real estate. Some Portfolio Assets are loans for which resolution is tied primarily to the real estate securing the loan, while others may be collateralized business loans, the resolution of which may be based on the cash flows of the business or the underlying collateral.

The following is a description of the classifications and related accounting policies for the Company’s significant classes of Portfolio Assets:

Purchased Credit-Impaired Loans

The Company accounts for acquired loans and loan portfolios with evidence of credit deterioration since origination (“Purchased Credit-Impaired Loans”) at fair value on the acquisition date. The amounts paid for Purchased Credit-Impaired Loans reflect the Company’s determination that the loans have experienced deterioration in credit quality since origination and that it is probable the Company will be unable to collect all amounts due according to the contractual terms of the underlying loans. At acquisition, the Company reviews each individual loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, the Company determines whether each such loan is to be accounted for individually or whether such loans will be assembled into static pools based on common risk characteristics (primarily loan type and collateral). Static pools of individual loan accounts may be established and accounted for as a single economic unit for the recognition of income, principal payments and loss provision. Once a static loan pool is established, individual accounts are generally not added to or removed from the pool (unless the Company sells, forecloses or writes-off the loan). At acquisition, the Company determines the excess of the scheduled contractual payments over all cash flows expected to be collected for the loan or loan pool as an amount that should not be accreted (“nonaccretable difference”). The excess of the cash flows from the loan or loan pool expected to be collected at acquisition over the initial investment (“accretable difference”) is recognized as interest income over the remaining life of the loan or loan pool on a level-yield basis (“accretable yield”). The discount (i.e. the difference between the cost of each loan or loan pool and the related aggregate contractual receivable balance) is not recorded because the Company does not expect to fully collect each contractual receivable balance. As a result, these loans and loan pools are recorded at cost (which approximates fair value) at the time of acquisition.

The Company accounts for Purchased Credit-Impaired Loans using either the interest method or a non-accrual method (through application of the cost-recovery or cash basis method of accounting). Application of the interest method is dependent on management’s ability to develop a reasonable expectation as to both the timing and amount of cash flows expected to be collected. In the event the Company cannot develop or establish a reasonable expectation as to both the timing and amount of cash flows expected to be collected, the Company uses the cost-recovery or cash basis method of accounting.

9

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Interest method of accounting.  Under the interest method, an effective interest rate, or internal rate of return (“IRR”), is applied to the cost basis of the loan or loan pool. The excess of the contractual cash flows over expected cash flows cannot be recognized as an adjustment of income or expense or on the balance sheet. The IRR that is calculated when the loan is purchased remains constant as the basis for subsequent impairment testing (performed at least quarterly) and income recognition. Subsequent decreases in projected cash flows do not change the IRR, but are recognized as an impairment of the cost basis of the loan or loan pool (to maintain the then-current IRR), and are reflected in the consolidated statements of operations through provisions charged to operations, with a corresponding valuation allowance offsetting the loan or loan pool in the consolidated balance sheets. FirstCity establishes valuation allowances for loans and loan pools acquired with credit deterioration to reflect only those losses incurred after acquisition — that is, the cash flows expected at acquisition that are no longer expected to be collected. Significant increases in actual or expected future cash flows are used first to reverse any existing valuation allowance for that loan or loan pool, and any remaining increase may be recognized prospectively through an upward adjustment of the IRR over the remaining life of the loan or loan pool. Any increase to the IRR then becomes the new benchmark for impairment testing and income recognition. Income from loans and loan pools accounted for under the interest method is accrued based on the IRR of each loan or loan pool applied to the respective adjusted cost basis. Gross collections in excess of the interest accrual and impairments will reduce the carrying value of the loan or loan pool, while gross collections less than the interest accrual will increase the carrying value. The IRR is calculated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models.

Cost-recovery method of accounting.  If the amount and timing of future cash collections on a loan are not reasonably estimable, the Company accounts for such asset on the cost-recovery method. Under the cost-recovery method, no income is recognized until the Company has fully collected the cost of the loan, or until such time as the Company considers the timing and amount of collections to be reasonably estimable and begins to recognize income based on the interest method as described above. At least quarterly, the Company performs an evaluation to determine if the remaining amount that is probable of collection is less than the carrying value of the loan or loan pool, and if so, recognizes impairment through provisions charged to operations. The carrying value of Purchased Credit-Impaired Loans accounted for under the cost-recovery method approximated $66.4 million (including $2.5 million of loans pending management’s post-purchase evaluation) at June 30, 2010, and $96.3 million (including $12.7 million of loans pending management’s post-purchase evaluation) at December 31, 2009.

Cash basis method of accounting.  If only the amount of future cash collections on a loan is reasonably estimable, the Company accounts for such asset on an individual loan basis under the cash basis method of accounting. Under the cash basis method, no income is recognized unless collections are received during the period, or until such time as the Company considers the timing of collections to be reasonably estimable and begins to recognize income based on the interest method as described above. Income is recognized for the difference between the collections and a pro-rata portion of cost on a loan. Cost allocation is based on a proration of actual collections divided by total projected collections on the loan. Significant increases in future cash flows may be recognized prospectively as income over the remaining life of the loan through increased amounts allocated to income when collections are subsequently received. Subsequent decreases in projected cash flows are recognized as impairment of the loan’s cost basis to maintain a constant cost allocation based on initial projections. Management implemented the cash basis method of accounting for such eligible loans in 2009 as a result of increased uncertainty in the timing of future collections (attributable primarily to the borrowers’ inability to obtain financing to refinance the loans). The carrying value of Purchased Credit-Impaired Loans accounted for under the cash basis method approximated $112.7 million and $42.1 million at June 30, 2010 and December 31, 2009, respectively.

UBN Loan Portfolio

In September 2008, the Company, through a wholly-owned subsidiary, acquired an additional ownership interest in UBN, SA (“UBN”) in a transaction that was accounted for as a step acquisition under FASB’s business combination accounting guidance. As a result of the transaction, UBN became a consolidated subsidiary of the Company. As such, FirstCity added UBN’s loan portfolio to its consolidated balance sheet in September 2008. On the date of the acquisition, the amount of loans and allowance for loan losses related to UBN’s loan portfolio approximated $69.1 million (including $67.3 million of non-performing loans) and $66.6 million, respectively.

The allowance for loan losses on the UBN loan portfolio represents management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. Management establishes an allowance for loan losses through a provision charged to operations when a loan is determined to be impaired. A loan is considered to be impaired when, based on current information and events, it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Loans are

10

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

charged-off against the allowance when all possible means of collection have been exhausted and the remaining balance due is deemed uncollectible. At least quarterly, management evaluates the need for an allowance on an individual-loan basis for the UBN loan portfolio by considering information about specific borrower situations, legal collection proceedings, estimated collateral values, general economic conditions, and other factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available.

Real Estate

Portfolio Assets consisting of real estate include properties that were purchased from a variety of sellers or acquired through loan foreclosure. Rental income, net of expenses, is generally recognized when received. The Company accounts for its real estate properties on an individual-asset basis as opposed to a pool basis. The following is a description of the classifications and related accounting policies for the Company’s various classes of real estate Portfolio Assets:

Classification and Impairment Evaluation

Real estate held for sale primarily includes real estate acquired through loan foreclosure. The Company classifies a property as held for sale if (1) management commits to a plan to sell the property; (2) the Company actively markets the property in its current condition for a price that is reasonable in comparison to its fair value; and (3) management considers the sale of such property within one year of the balance sheet date to be probable. Real estate held for sale is stated at the lower of cost or fair value less estimated disposition costs. Real estate is not depreciated while it is classified as held for sale. Impairment losses are recorded if a property’s fair value less estimated disposition costs is less than its carrying amount, and charged to operations in the period the impairment is identified.

Real estate held for investment generally includes acquired properties and is carried at cost less depreciation and amortization, as applicable. The Company classifies a property as held for investment if the property is still under development and/or management does not expect the property to be sold within one year of the balance sheet date. The Company periodically reviews its property held for investment for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Recoverability of property held for investment is measured by comparison of the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the property. If the property is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property exceeds its fair value. Fair value is determined by discounted cash flows or market comparisons.

Cost Capitalization and Allocation

Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of cost (i.e. the underlying loan’s carrying value) or estimated fair value less disposition costs at the date of foreclosure — establishing a new cost basis. The amount, if any, by which the carrying value of the underlying loan exceeds the property’s fair value less estimated disposition costs at the foreclosure date is charged as a loss against operations. Expenditures for repairs, maintenance, and other holding costs are charged to operations as incurred.

Real estate properties acquired through a purchase transaction are initially recorded at the cost of the acquisition. The cost of acquired property includes the purchase price of the property, legal fees, and certain other acquisition costs. Subsequent to acquisition, the Company capitalizes capital improvements and expenditures related to significant betterments and replacements, including costs related to the development and improvement of the property for its intended use. Expenditures for repairs, maintenance, and other holding costs are charged to operations as incurred.

Disposition of Real Estate

Gains on disposition of real estate are recognized upon the sale of the underlying property if the transaction qualifies for gain recognition under the full accrual method, as prescribed by the FASB’s accounting guidance on real estate sales transactions. If the transaction does not meet the criteria for the full accrual method of profit recognition based on our assessment, we account for the sale based on an appropriate deferral method determined by the nature and extent of the buyer’s investment and our continuing involvement.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Loans Receivable

The portion of U.S. Small Business Administration (“SBA”) loans that are guaranteed by the SBA are classified by management as loans held for sale. These loans are recorded at the lower of aggregate cost or estimated fair value. The fair value of SBA loans held for sale is based primarily on what secondary markets are currently offering for loans with similar characteristics, or the contractual price for loan sales already consummated but which cannot be recognized as accounting sales until the expiration of a recourse period. Net unrealized losses, if any, are recognized through a valuation allowance through a charge to income. The carrying value of SBA loans held for sale is net of premiums as well as deferred origination fees and costs. Premiums and net origination fees and costs are deferred and included in the basis of the loans in calculating gains and losses upon sale. SBA loans are generally secured by the borrowing entities’ assets such as accounts receivable, property and equipment, and other business assets. The Company generally sells the guaranteed portion of each loan to a third-party investor and retains the servicing rights. The non-guaranteed portion of SBA loans is classified as held for investment. As described in Note 2, effective January 1, 2010, the Company adopted new accounting guidance that requires SBA loan transactions subject to the SBA’s 90-day premium recourse provision to be accounted for initially as secured borrowings rather than asset sales. After the premium recourse provision has elapsed, the transaction will be recorded as a sale and the resulting net gain on sale will be recognized — which is based on the difference between the proceeds received and the allocated carrying value of the loan sold.

Loans receivable consisting of loans made to affiliated entities (including Acquisition Partnerships and other equity-method investees) and non-affiliated entities, and the non-guaranteed portion of SBA loans, are classified by management as held for investment. These loans are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans. Loan origination fees and costs, as well as purchase premiums and discounts, are amortized as level-yield adjustments over the respective loan terms. Unamortized net fees, costs, premiums or discounts are recognized upon early repayment or sale of the loan. Repayment of the loans is generally dependent upon future cash flows of the borrowers, future cash flows of the underlying collateral, and distributions made from affiliated entities. Interest is accrued when earned in accordance with the contractual terms of the loans. Interest is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding.

The Company evaluates the need for impairment on loans receivable held for investment on an individual-loan basis at least quarterly by reviewing the collectibility of the loans in light of various factors, as applicable, such as estimated future cash receipts of the borrower or underlying collateral, historical experience, estimated value of underlying collateral, prevailing economic conditions, and industry concentrations. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. We consider a loan to be impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan’s contractual terms (including scheduled interest payments). When management identifies a loan as impaired, we measure the impairment based on discounted future cash flows, except when the source of repayment is the operation or liquidation of the collateral. In these cases, we use the current fair value of the collateral, less estimated selling costs, instead of discounted cash flows. When a loan is determined to be impaired, we cease to accrue interest on the note and interest previously accrued but not collected becomes part of our recorded investment in the loan and is collectively reviewed for impairment. When ultimate collectibility of the impaired note is in doubt, all collections are applied to reduce the principal amount of such notes until the principal has been recovered, and collections thereafter are recognized as interest income. We return a loan to accrual status when we determine that the collectibility of principal and interest is reasonably assured. Impairment losses are charged against an allowance account through provisions charged to operations in the period impairment is identified. Loans are written-off against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered remote.

Revenue Recognition — Special Situations Platform Subsidiaries

The Company’s manufacturing subsidiary, which engages principally in the design, production and sale of wireless transmission equipment and software solutions, recognizes revenue derived from the sale of equipment upon shipment of the product. Revenue associated with software solutions is recognized ratably over the period of the underlying agreements. Effective June 30, 2010, the Company began accounting for its investment in this manufacturing subsidiary as an equity-method investment (instead of a controlled, consolidated subsidiary) — refer to Note 3 for additional information.

The Company’s consolidated railroad subsidiary, which interchanges rail cars with connecting carriers and provides rail freight services for on-line customers, recognizes freight revenue at the time the shipment is either delivered to or received from the

12

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

connecting carrier at the point of interchange. Industrial switching and other service revenues are recognized as such services are provided.

The Company’s consolidated coal mine subsidiary, which engages primarily in the purchase and sale of coal and coal-related products, generates revenue under a short-term coal sales contract with a major utility company (the contract is scheduled to expire on or around December 2010). Revenue is recognized when coal is delivered to the customer at an agreed-upon destination as specified in the related contract (at which point title and risk of loss passes to the customer). The Company consolidated the coal mine subsidiary effective April 1, 2010 after it obtained control of the entity at such time (refer to Note 3 for additional information).

(2)  New Accounting Guidance

Consolidation of Variable Interest Entities (“VIEs”)

Effective January 1, 2010, the Company adopted the FASB’s accounting guidance on the consolidation of VIEs (issued in June 2009). This new guidance eliminates the exemption for QSPEs; revises previous guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a VIE with a qualitative approach focused on identifying which enterprise has both the power to direct the activities of the VIE that most-significantly impacts the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits that could be significant to the entity; requires reconsideration of whether an entity is a VIE when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE and additional disclosures about an enterprise’s involvement in VIEs. The adoption of this guidance did not have a material impact on our consolidated financial statements. Refer to Note 16 for additional information about the Company’s involvement with VIEs.

Transfers of Financial Assets

Effective January 1, 2010, the Company adopted the FASB’s guidance on accounting for transfers of financial assets (issued in June 2009). This guidance amends previous guidance which, among other changes, eliminates the concept of a QSPE, changes the requirements for de-recognizing financial assets, defines the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale, and requires additional disclosures. The recognition and measurement provisions are effective for transfers occurring on or after January 1, 2010. The new accounting guidance delays the Company’s recognition of the sale of guaranteed portions of SBA loans until expiration of the 90-day premium recourse provision, and requires such transactions to be accounted for initially as a secured borrowing. As such, the Company did not recognize any gains related to SBA loan sales for the first three months of 2010. Once the premium recourse provision has elapsed, the transaction will be recorded as a sale with the guaranteed portion of the SBA loan and the secured borrowing removed from the balance sheet and the resulting gain on sale recorded. Refer to Notes 1 and 5 for additional information.

Fair Value

In January 2010, the FASB issued new accounting guidance that amended existing guidance for fair value disclosures. This guidance requires separate disclosures of significant transfers of items in and out of Levels 1 and 2 in the fair value hierarchy and the reasons for the transfers; requires disclosure of purchases, sales, issuances and settlements activity on a gross (rather than net) basis relative in the Level 3 reconciliation of fair value measurements for assets and liabilities measured at fair value on a recurring basis; and clarifies, among other things, that fair value measurement disclosures should be provided for each class of assets and liabilities, and that disclosures of inputs and valuation techniques should be provided for both recurring and non-recurring Level 2 and Level 3 fair value measurements. We adopted this new guidance for the quarterly period ended March 31, 2010, except for the requirement to provide Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which will be effective beginning the first quarter of 2011. Since this guidance is disclosure-only in nature, our adoption of the guidance did not significantly impact the Company’s consolidated financial statements. Refer to Note 15 for additional information.

Subsequent Events

In March 2010, the FASB issued guidance that amends existing guidance (issued in May 2009) that established the general standards of accounting and disclosure for subsequent events. Among other things, the new guidance eliminates the requirement for

13

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEC filers, as defined in the guidance, to disclose the date through which subsequent events have been evaluated. That change is effective immediately. SEC filers continue to be required to evaluate subsequent events through the date the financial statements are issued. Although the new guidance eliminates the requirement for SEC filers to disclose the date through which subsequent events have been evaluated, it does not prohibit SEC filers from disclosing such date. The new guidance also clarifies the requirement to disclose the date through which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Loan Modifications and Loan Pool Accounting

In April 2010, the FASB issued guidance that clarifies the accounting for loan modifications when the loan is part of a pool that is accounted for as a single asset. The new guidance provides that modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. This guidance does not affect the accounting for loans that are not accounted for within pools. Loans accounted for individually continue to be subject to the troubled debt restructuring accounting provisions. The new guidance also allows entities to make a one-time election to terminate accounting for loans in a pool, which may be made on a pool-by-pool basis, upon adoption of this new guidance. We early-adopted the provisions of this new guidance, as permitted, effective April 1, 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements.

(3)  Business Combinations and Deconsolidation of a Subsidiary

Coal Mine Operation — Business Combination

Effective April 1, 2010, the Company, through its majority-owned Special Situations Platform subsidiary, obtained control of an equity-method investee (coal mine operation) after the investee acquired and redeemed the 55.5% ownership interest held by the then-majority shareholder in exchange for a $4.6 million note payable. As a result of the equity interest redemption, the Company’s ownership interest in the investee increased to 88.8% from 39.5% and the coal mine operation became a consolidated subsidiary of the Company. The transfer of a controlling interest in the investee to the Company was accounted for as a business combination, and accordingly, all of the assets and liabilities of the coal mine operation were measured at fair value on the date control was obtained and included in the Company’s consolidated balance sheet, net of intercompany account balances that were eliminated in consolidation. The following table reflects the estimated fair value of the coal mine operation’s identifiable assets and liabilities, and the estimated fair value of the noncontrolling interest, that were included in the Company’s consolidated balance sheet at April 1, 2010 (in thousands):

Cash	$	1,597
Coal supply agreement (1)	13,092
Accounts receivable and other assets (1)	3,699
Total assets	$	18,388
Note payable	$	4,615
Coal purchase agreement (2)	2,394
Intercompany liability (3)	4,086
Accounts payable and other liabilities (2)	2,415
Total liabilities	$	13,510
Noncontrolling interest	$	548

(1)  Included in “Other assets” on the Company’s consolidated balance sheet as of June 30, 2010.

(2)  Included in “Other liabilities” on the Company’s consolidated balance sheet as of June 30, 2010.

(3)  Eliminated in consolidation with the Company’s consolidated financial statements.

In addition to measuring the subsidiary’s assets and liabilities at fair value at the date control was obtained on April 1, 2010, the Company’s carrying value of its previously-held equity-method investment in the coal mine subsidiary was re-measured to fair value under accounting guidance applicable to business combinations. The fair value of the Company’s total interest in the subsidiary after

14

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

the business combination exceeded the carrying value of its previously-held equity interest by approximately $4.8 million, which the Company recognized as “Gain on business combinations” in its consolidated statement of operations for the six-month period ended June 30, 2010. The Company’s carrying value of its previously-held equity investment in the coal mine subsidiary included the effects of the investee’s distribution of a wholly-owned equipment subsidiary (i.e. spin-off transaction), effective April 1, 2010, to the owners in proportion to their then-existing ownership percentages. The spin-off transaction effected by the investee was recorded at carrying value and the Company’s proportionate share of equity in the distributed entity approximated $2.7 million — which it continued to record as an equity-method investment after the spin-off.

The Company’s application of business combination accounting in connection with obtaining control of the coal mine subsidiary resulted in the Company’s recognition of an asset for an above-market-price coal supply agreement and a liability for an above-market-price coal purchase agreement. The fair values of the coal supply and coal purchase agreements were based on discounted cash flow calculations of the difference between the expected contract revenues and costs based on the stated contractual terms and the estimated net contract revenues and costs derived from applying forward-market commodity prices as of April 1, 2010. The discount rate used for the calculations was obtained from independent pricing reflecting broker market quotes. The coal supply asset and coal purchase liability are being amortized over the actual amount of tons shipped under each contract (which are both scheduled to expire in December 2010).

Domestic Acquisition Partnerships — Business Combinations

On March 31, 2010, the Company acquired an additional 50% ownership interest in three domestic Acquisition Partnerships for $4.4 million. As a result of this transaction, the Company’s ownership interest in each of these entities increased to 100% and the Company obtained control of such entities, resulting in these Acquisition Partnerships becoming consolidated subsidiaries of the Company. The transaction was accounted for as a business combination, and accordingly, all of the assets and liabilities of these Acquisition Partnerships were measured at fair value on the acquisition date and included in the Company’s consolidated balance sheet. The following table reflects the fair value of the Acquisition Partnerships’ assets and liabilities that were included in the Company’s consolidated balance sheet on the acquisition date (in thousands):

Recognized amounts of identified assets acquired and liabilities assumed (at fair value):

Cash	$	1,427
Portfolio Assets	21,765
Other assets	82
Total assets	$	23,274
Notes payable to banks	$	13,811
Other liabilities	235
Total liabilities	$	14,046

Pursuant to accounting provisions applicable to business combinations, the Company’s carrying value of its previously-held equity-method investments in these Acquisition Partnerships was re-measured to fair value at the acquisition date. The fair value of the Company’s previously-held equity interests exceeded the aggregate carrying values by approximately $0.9 million. As such, the Company recognized a $0.9 million gain attributable to the re-measurement of its previously-held equity interests on the acquisition date (included in “Gain on business combinations” in the Company’s consolidated statement of operations for the six-month period ended June 30, 2010).

Manufacturing Subsidiary — Deconsolidation

In December 2009, the Company, through its majority-owned Special Situations Platform subsidiary, acquired a majority controlling interest in a manufacturing subsidiary (involved in the design, production and sale of wireless transmission equipment and software solutions). The manufacturing subsidiary’s accounts and results of operations have been included in the Company’s consolidated financial statements since the acquisition. However, effective June 30, 2010, the Company and the noncontrolling owners consented to certain amendments to the subsidiary’s operating agreement that resulted in the Company ceasing to have a controlling interest, but retaining a noncontrolling interest and elevated economic interests, in the manufacturing entity. Accordingly, the Company deconsolidated and removed the carrying values of the manufacturing subsidiary’s assets ($9.9 million) and liabilities ($9.6 million) and the carrying value of the noncontrolling interest ($39,000) attributed to the subsidiary from its consolidated balance sheet

15

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

on June 30, 2010. The Company also recorded its retained noncontrolling interest in the manufacturing entity at estimated fair value of approximately $0.3 million at June 30, 2010. No gain or loss was recognized by the Company as a result of deconsolidating this subsidiary. On June 30, 2010, the Company began to account for its retained investment in the manufacturing entity using the equity-method of accounting; consequently, the Company will no longer report the individual revenue and expense line-items of the manufacturing entity’s operations in its consolidated statement of operations (rather, the Company will record its share of the subsidiary’s net earnings as “Equity in earnings of unconsolidated subsidiaries” beginning July 1, 2010).

(4)  Portfolio Assets

Portfolio Assets are summarized as follows:

	June 30, 2010
	(Dollars in thousands)
	Outstanding		Allowance for		Outstanding
	Balance		Loan Losses		Balance, net
Loan Portfolios:
Purchased Credit-Impaired Loans	$	180,495	$	868	$	179,627
Purchased performing loans	3,664		9		3,655
UBN:
Non-performing loans	46,730		44,773		1,957
Performing loans	1,018		—		1,018
Other	2,859		69		2,790
Total	$	234,766	$	45,719	$	189,047

	December 31, 2009
	(Dollars in thousands)
	Outstanding		Allowance for		Outstanding
	Balance		Loan Losses		Balance, net
Loan Portfolios:
Purchased Credit-Impaired Loans	$	192,920	$	6,927	$	185,993
Purchased performing loans	3,986		25		3,961
UBN:
Non-performing loans	60,929		58,624		2,305
Performing loans	1,555		—		1,555
Other	4,381		249		4,132
Total	$	263,771	$	65,825	$	197,946

	June 30,		December 31,
	2010		2009
	(Dollars in thousands)
Real Estate Portfolios:
Real estate held for sale	$	23,186	$	17,051
Real estate held for investment, net (1)	9,153		9,387
Total	$	32,339	$	26,438

(1)Includes lease-related intangible balances (net) of approximately $0.7 million and $0.8 million at June 30, 2010 and December 31, 2009, respectively.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Income from Portfolio Assets is summarized as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
	(Dollars in thousands)
Loan Portfolios:
Purchased Credit-Impaired Loans	$	12,716	$	13,530	$	22,740	$	22,253
Purchased performing loans	66		94		126		173
UBN	92		42		636		275
Other	99		241		388		429
Real Estate Portfolios	1,649		170		2,195		(10		)
Income from Portfolio Assets	$	14,622	$	14,077	$	26,085	$	23,120

For the six-month period ended June 30, 2010, the Company recorded provisions for loan and impairment losses, net of recoveries, by a charge to income of $2.6 million — which is composed of a $1.9 million provision for loan losses, net of recoveries, and a $0.7 million impairment charge on real estate portfolios. For the six-month period ended June 30, 2009, the Company recorded a provision for loan and impairment losses on Portfolio Assets of $0.7 million — which is composed of a $0.4 million impairment charge on real estate portfolios and a $0.3 million provision for loan losses, net of recoveries.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning Balance	$	(59,853	)	$	(71,922	)	$	(65,825	)	$	(76,365	)
Provisions	(1,113		)	581			(2,325		)	(660		)
Recoveries	297			70			460			382
Charge-offs	9,726			6,220			11,409			7,647
Translation adjustments	5,224			(4,031		)	10,562			(86		)
Ending Balance	$	(45,719	)	$	(69,082	)	$	(45,719	)	$	(69,082	)

Accretable yield represents the amount of income the Company can expect to generate over the remaining life of its existing Purchased Credit-Impaired Loans based on estimated future cash flows as of June 30, 2010 and December 31, 2009. Reclassifications from nonaccretable difference to accretable yield primarily result from the Company’s increase in its estimates of future cash flows. Reclassifications to nonaccretable difference from accretable yield primarily results from the Company’s decrease in its estimates of future cash flows. Changes in accretable yield related to the Company’s Purchased Credit-Impaired Loans for the three- and six-month periods ended June 30, 2010 and 2009 are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning Balance	$	10,176		$	56,640		$	12,923		$	58,114
Additions	—			12,146			—			23,077
Accretion	(222		)	(5,562		)	(2,126		)	(10,460		)
Reclassification from nonaccretable difference	(2,493		)	(1,022		)	(2,142		)	1,459
Disposals	(2,082		)	(2,381		)	(2,941		)	(6,193		)
Transfer to non-accrual	(2,885		)	(8,652		)	(3,039		)	(13,284		)
Translation adjustments	(45		)	1,767			(226		)	223
Ending Balance	$	2,449		$	52,936		$	2,449		$	52,936

17

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Acquisitions of Purchased Credit-Impaired Loans for the three- and six-month periods ended June 30, 2010 and 2009, respectively, are summarized in the table below:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
	(Dollars in thousands)
Face value at acquisition	$	17,219	$	112,058	$	51,756	$	252,830
Cash flows expected to be collected at acquisition, net of adjustments	9,819		83,306		38,618		164,428
Basis in acquired loans at acquisition	6,251		64,497		24,365		134,688

(5)  Loans Receivable

The following is a composition of the Company’s loans receivable by loan type and region:

	June 30,		December 31,
	2010		2009
	(Dollars in thousands)
Domestic:
Commercial and industrial:
Affiliates, net of allowance for loan losses of $67	$	10,952	$	13,177
SBA, net of allowance for loan losses of $346 and $490, respectively	22,862		16,266
Other	8,049		1,402
Real estate:
Other, net of allowance for loan losses of $1,083 and $-0-, respectively	6,605		8,831
Foreign - commercial and industrial:
Affiliates, net of allowance for loan losses of $433 and $-0-, respectively	10,915		12,945
Total loans, net	$	59,383	$	52,621

Loans receivable — affiliates

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

	June 30,			December 31,
	2010			2009
	(Dollars in thousands)
Outstanding balance	$	21,243		$	24,757
Allowance for loan losses	(500		)	(67		)
Discounts, net	(193		)	(237		)
Capitalized interest	1,317			1,669
Carrying amount of loans, net	$	21,867		$	26,122

18

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A summary of activity in loans receivable — affiliates follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning Balance	$	23,816		$	27,827		$	26,122		$	27,080
Advances	400			2,852			550			5,152
Payments received	(660		)	(1,333		)	(2,890		)	(2,610		)
Capitalized interest	88			88			137			169
Provision for loan impairment	(433		)	—			(433		)	—
Discount accretion, net	22			—			44			—
Other noncash adjustments (1)	(1,001		)	—			(1,001		)	—
Foreign exchange gains (losses)	(365		)	312			(662		)	(45		)
Ending Balance	$	21,867		$	29,746		$	21,867		$	29,746

(1)Represents the removal of a $4.1 million loan to a former equity-method investee (coal mine subsidiary) upon consolidation of the entity effective April 1, 2010, and the addition of a $3.1 million loan to a former consolidated entity (manufacturing subsidiary) upon the deconsolidation of the entity effective June 30, 2010. Refer to Note 3 for additional information.

Loans receivable — affiliates represent (1) advances to Acquisition Partnerships and other affiliates to acquire portfolios of performing and non-performing commercial and consumer loans and other assets; and (2) senior debt financing arrangements with equity-method investees to provide capital for business expansion and operations. 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), whereas advances to affiliates for capital investments and working capital are generally secured by business assets (i.e. accounts receivable, inventory and equipment). The Company recorded $0.4 million of net provisions for impairment on loans receivable — affiliates for the six months ended June 30, 2010. The Company recorded no provisions for impairment for the six-month period ended June 30, 2009.

At June 30, 2010, the Company’s recorded investment in impaired and non-accrual loans receivable — affiliates totaled $0.8 million. The average recorded investment in these impaired and non-accrual loans approximated $0.1 million for the six-month period ended June 30, 2010. At June 30, 2010, the Company had $0.4 million of valuation allowances specifically related to these loans.

Loans receivable — SBA held for sale

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

	June 30,		December 31,
	2010		2009
	(Dollars in thousands)
Outstanding balance	$	7,616	$	821
Capitalized costs, net of fees	81		—
Carrying amount of loans, net	$	7,697	$	821

19

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning Balance	$	4,895		$	9,720		$	821		$	4,901
Originations and advances of loans	4,860			6,787			8,889			11,600
Payments received	—			(88		)	(7		)	(163		)
Capitalized costs	31			(99		)	83			(18		)
Loans sold, net	(2,089		)	(12,828		)	(2,089		)	(12,828		)
Ending Balance	$	7,697		$	3,492		$	7,697		$	3,492

Loans receivable — SBA held for sale represent the portions of SBA loans acquired and originated by the Company that are guaranteed by the SBA. These loans are secured by the borrowing entities’ assets such as accounts, property, equipment and other business assets. The Company recorded no write-downs of SBA loans held for sale below their cost for the six months ended June 30, 2010 and 2009.

At June 30, 2010, SBA loans held for sale include $2.4 million in guaranteed portions of SBA loans sold and subject to a 90-day premium recourse provision. In accordance with FASB’s accounting guidance on transfers of financial assets (issued in June 2009) that became effective in the first quarter of 2010, an off-setting secured borrowing has been recorded and is included in “Other liabilities” in the Company’s consolidated balance sheet. After the premium recourse provision has elapsed, the Company will record the transaction as a sale with the guaranteed portion of the SBA loan and the secured borrowing removed from the balance sheet and the resulting gain on sale recorded. Refer to Note 2 for additional information.

Loans receivable — SBA held for investment, net

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

	June 30,			December 31,
	2010			2009
	(Dollars in thousands)
Outstanding balance	$	16,497		$	17,072
Allowance for loan losses	(346		)	(490		)
Discounts, net	(1,105		)	(1,245		)
Capitalized costs	119			108
Carrying amount of loans, net	$	15,165		$	15,445

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning Balance	$	15,156		$	15,673		$	15,445		$	14,405
Originations and advances of loans	572			1,163			1,050			2,767
Payments received	(499		)	(405		)	(1,316		)	(793		)
Capitalized costs	7			17			10			43
Change in allowance for loan losses	(100		)	(63		)	144			(78		)
Discount accretion, net	31			(182		)	88			(141		)
Charge-offs	(2		)	—			(256		)	—
Ending Balance	$	15,165		$	16,203		$	15,165		$	16,203

20

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Loans receivable — SBA held for investment represent the non-guaranteed portions of SBA loans purchased and originated by the Company. These loans are secured by the borrowing entities’ assets such as accounts, property, equipment and other business assets. The Company recorded net impairment provisions to SBA loans held for investment of $112,000 and $78,000 for the six-month periods ended June 30, 2010 and 2009, respectively.

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,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning Balance	$	(246	)	$	(49	)	$	(490	)	$	(34	)
Provisions	(110		)	(76		)	(192		)	(97		)
Recoveries	8			13			80			19
Charge-offs	2			—			256			—
Ending Balance	$	(346	)	$	(112	)	$	(346	)	$	(112	)

At June 30, 2010, the Company’s recorded investment in impaired and non-accrual loans receivable — SBA held for investment totaled $0.6 million. The average recorded investment in these impaired and non-accrual loans approximated $0.4 million for the six-month period ended June 30, 2010. At June 30, 2010, the Company had $0.2 million of valuation allowances specifically related to these loans.

Loans receivable — other

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

	June 30,			December 31,
	2010			2009
	(Dollars in thousands)
Outstanding balance	$	15,530		$	9,992
Allowance for loan losses	(1,083		)	—
Discounts, net	(38		)	(7		)
Capitalized interest and costs	245			248
Carrying amount of loans, net	$	14,654		$	10,233

Changes in loans receivable — other are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning Balance	$	12,878		$	13,411		$	10,233		$	13,533
Advances	5,374			1,381			10,552			3,368
Payments received	(3,039		)	(2,170		)	(5,061		)	(4,299		)
Capitalized interest and costs	—			26			(2		)	44
Change in allowance for loan losses	(567		)	(967		)	(1,083		)	(967		)
Discount accretion, net	8			2			15			9
Foreign exchange losses	—			15			—			10
Ending Balance	$	14,654		$	11,698		$	14,654		$	11,698

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, real estate and various other assets. The Company recorded impairment provisions on loans receivable — other of approximately $1.1 million and $1.0 million for the six-month periods ended June 30, 2010 and 2009, respectively.

21

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Changes in the allowance for loan losses related to loans receivable — other are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning Balance	$	(516	)	$	—		$	—		$	—
Provisions	(567		)	(967		)	(1,083		)	(967		)
Charge-offs	—			—			—			—
Ending Balance	$	(1,083	)	$	(967	)	$	(1,083	)	$	(967	)

At June 30, 2010, the Company’s recorded investment in impaired and non-accrual loans receivable — other totaled $6.6 million. The average recorded investment in these impaired and non-accrual loans approximated $7.8 million for the six-month period ended June 30, 2010. At June 30, 2010, the Company had $1.1 million of valuation allowances specifically related to these loans.

(6)  Equity Investments

The Company has equity investments in Acquisition Partnerships and their general partners, and equity investments in various 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 (which include the domestic and foreign Acquisition Partnerships and their general partners) and the servicing and operating entities (collectively, the “Equity Investees”), are summarized as follows:

Condensed Combined Balance Sheets

	June 30,		December 31,
	2010		2009
	(Dollars in thousands)
Acquisition Partnerships:
Assets	$	359,993	$	282,999
Liabilities	$	63,331	$	97,135
Net equity	296,662		185,864
	$	359,993	$	282,999
Servicing and operating entities:
Assets	$	143,731	$	134,384
Liabilities	$	87,946	$	79,375
Net equity	55,785		55,009
	$	143,731	$	134,384
Total:
Assets	$	503,724	$	417,383
Liabilities	$	151,277	$	176,510
Net equity	352,447		240,873
	$	503,724	$	417,383
Equity investment in Acquisition Partnerships	$	55,050	$	41,029
Equity investment in servicing and operating entities	36,590		30,462
	$	91,640	$	71,491

22

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Condensed Combined Summary of Operations

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Acquisition Partnerships:
Revenues	$	8,292		$	11,092		$	15,410		$	21,502
Costs and expenses	10,103			(2,473		)	20,278			17,408
Net earnings (loss)	$	(1,811	)	$	13,565		$	(4,868	)	$	4,094
Servicing and operating entities:
Revenues	$	19,328		$	16,143		$	45,540		$	36,871
Costs and expenses	16,005			18,601			33,974			37,584
Net earnings (loss)	$	3,323		$	(2,458	)	$	11,566		$	(713	)
Equity in earnings (loss) of Acquisition Partnerships	$	(275	)	$	2,133		$	(883	)	$	1,242
Equity in earnings (loss) of servicing and operating entities	2,091			(935		)	4,928			(190		)
	$	1,816		$	1,198		$	4,045		$	1,052

In March 2010, the Company acquired a controlling interest in three domestic Acquisition Partnerships in which it previously held a noncontrolling interest in each such entity. In addition, in April 2010, the Company obtained a controlling interest in a coal mine subsidiary in which it previously held a noncontrolling interest. As a result of these transactions, the Acquisition Partnerships and coal mine subsidiary converted from equity-method investments to consolidated subsidiaries of the Company. As such, the assets, liabilities and equity of these entities are not included in the applicable balance sheet tables above and below at June 30, 2010; and their results of operations from the respective transaction dates are not included in the applicable earnings tables above and below for the six-month period ended June 30, 2010. Furthermore, in connection with the activity related to the coal mine subsidiary, the Company obtained a direct noncontrolling interest in an equipment subsidiary that was previously wholly-owned and consolidated by the coal mine subsidiary (obtained through a spin-off transaction effected by the coal mine subsidiary in April 2010). As such, the assets, liabilities and equity of this equipment subsidiary are included in the applicable balance sheet tables above and below at June 30, 2010; and its results of operations from the transaction date are included in the applicable earnings tables above and below for the six-month period ended June 30, 2010. Refer to Note 3 for additional information related to these transactions.

On June 30, 2010, the Company entered into an arrangement with a then-consolidated manufacturing subsidiary that resulted in the Company ceasing to have a controlling interest, but retaining a noncontrolling interest, in the entity. As a result, the manufacturing subsidiary converted to an equity-method investment from a consolidated subsidiary of the Company. As such, the assets, liabilities and equity of this manufacturing subsidiary are included in the applicable balance sheet tables above and below at June 30, 2010. Refer to Note 3 for additional information related to this transaction.

At June 30, 2010 and December 31, 2009, the Acquisition Partnerships’ total carrying value of loans accounted for under non-accrual methods of accounting (i.e. cost-recovery or cash basis method) approximated $300.0 million and $180.0 million, respectively.

The combined assets and equity of the Equity Investees, and the Company’s carrying value of its equity investments in the Equity Investees, are summarized by geographic region below.

23

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	June 30,			December 31,
	2010			2009
	(Dollars in thousands)
Combined assets of the Equity Investees:
Domestic:
Acquisition Partnerships	$	173,113		$	58,190
Operating entities	56,475			31,481
Latin America:
Acquisition Partnerships	132,670			139,214
Servicing entities	9,843			13,328
Europe:
Acquisition Partnerships	54,210			85,595
Servicing entities	77,413			89,575
	$	503,724		$	417,383
Combined equity of the Equity Investees:
Domestic:
Acquisition Partnerships	$	169,325		$	36,696
Operating entities	12,574			5,574
Latin America:
Acquisition Partnerships	110,525			115,768
Servicing entities	(1,026		)	427
Europe:
Acquisition Partnerships	16,812			33,400
Servicing entities	44,237			49,008
	$	352,447		$	240,873
Company’s carrying value of its equity investments in the Equity Investees:
Domestic:
Acquisition Partnerships	$	32,508		$	13,575
Operating entities	5,581			1,659
Latin America:
Acquisition Partnerships	17,144			17,532
Servicing entities	1,788			2,677
Europe:
Acquisition Partnerships	5,398			9,922
Servicing entities	29,221			26,126
	$	91,640		$	71,491

24

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Revenues and earnings (losses) of the Equity Investees, and the Company’s share of equity in earnings (losses) of those entities, are summarized by geographic region below. The tables below include individual entities and combined entities under common management that are considered to be significant subsidiaries of FirstCity at June 30, 2010.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Revenues of the Equity Investees:
Domestic:
Acquisition Partnerships	$	782		$	2,966		$	2,610		$	4,606
Teton Buildings LLC (operating entity)	2,388			(991		)	4,450			155
Other operating entities	4,898			5,183			12,899			13,038
Latin America:
Acquisition Partnerships	6,927			2,912			10,324			5,437
Servicing entity	2,346			3,036			4,510			5,324
Europe:
Acquisition Partnerships	584			5,214			2,476			11,459
MCS et Associes (servicing entity)	8,903			7,548			21,906			15,710
Other servicing entities	792			1,367			1,775			2,644
	$	27,620		$	27,235		$	60,950		$	58,373
Net earnings (loss) of the Equity Investees:
Domestic:
Acquisition Partnerships	$	(222	)	$	1,310		$	543		$	1,414
Teton Buildings LLC (operating entity)	1,570			(218		)	2,828			(344		)
Other operating entities	947			(1,743		)	2,441			362
Latin America:
Acquisition Partnerships	(299		)	11,344			(2,132		)	(1,029		)
Servicing entity	(185		)	(409		)	(1,450		)	(935		)
Europe:
Acquisition Partnerships	(1,291		)	911			(3,280		)	3,709
MCS et Associes (servicing entity)	1,223			(50		)	8,130			223
Other servicing entities	(231		)	(38		)	(382		)	(19		)
	$	1,512		$	11,107		$	6,698		$	3,381
Company’s equity in earnings (loss) of the Equity Investees:
Domestic:
Acquisition Partnerships	$	(95	)	$	515		$	37		$	516
Teton Buildings LLC (operating entity)	1,256			(28		)	1,853			(22		)
Other operating entities	550			(614		)	999			219
Latin America:
Acquisition Partnerships	165			1,391			45			(253		)
Servicing entity	(93		)	(204		)	(725		)	(467		)
Europe:
Acquisition Partnerships	(346		)	227			(966		)	979
MCS et Associes (servicing entity)	416			(83		)	2,864			83
Other servicing entities	(37		)	(6		)	(62		)	(3		)
	$	1,816		$	1,198		$	4,045		$	1,052

At June 30, 2010, the Company had $23.2 million in Euro-denominated debt for the purpose of hedging a portion of the Company’s net equity investments in Europe. Refer to Note 11 for additional information.

25

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(7)  Servicing Assets — SBA Loans

The Company recognizes servicing assets through the sale of originated SBA loans when the rights to service those loans are retained. Servicing rights resulting from the sale of loans are initially recognized at fair value at the date of transfer. The Company subsequently measures the carrying value of the servicing assets by using the amortization method, which amortizes the servicing assets in proportion to and over the period of estimated net servicing income, and evaluates servicing assets for impairment based on fair value at each reporting date. The Company evaluates the possible impairment of servicing assets based on the difference between the carrying amount and current fair value of the servicing assets. Impairment is charged to servicing fees in the period recognized.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Beginning Balance	$	960		$	739		$	1,115		$	785
Servicing Assets capitalized	40			312			40			312
Servicing Assets amortized	(51		)	(50		)	(206		)	(96		)
Ending Balance	$	949		$	1,001		$	949		$	1,001
Reserve for impairment of servicing assets:
Beginning Balance	$	(71	)	$	(44	)	$	(59	)	$	(63	)
Impairments	(3		)	(16		)	(15		)	(16		)
Recoveries	1			33			1			52
Ending Balance	$	(73	)	$	(27	)	$	(73	)	$	(27	)
Ending Balance (net of reserve)	$	876		$	974		$	876		$	974
Fair value of amortized servicing assets:
Beginning balance	$	985		$	695		$	1,162		$	722
Ending balance	$	971		$	974		$	971		$	974

The Company relies primarily on a discounted cash flow model to estimate the fair value of its servicing assets. This model calculates estimated fair value of the servicing assets using significant assumptions including a discount rate of 12.5% and prepayment speeds of 14.0% to 15.0% (depending on certain characteristics of the related loans). 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)  Notes Payable — Senior Credit Facilities with Bank of Scotland plc and BoS(USA), Inc.

On June 25, 2010, FirstCity Commercial Corporation (“FC Commercial”) and FH Partners LLC (“FH Partners”), as borrowers, and FLBG Corporation (“FLBG Corp.”), as guarantor, all of which are wholly-owned subsidiaries of FirstCity, and Bank of Scotland and BoS(USA), Inc. (collectively, “Bank of Scotland”), as lenders, entered into a Reducing Note Facility Agreement (“Reducing Note Facility”). In addition, on June 25, 2010, FirstCity executed a Limited Guaranty Agreement guarantying payment of the indebtedness under the Reducing Note Facility to a maximum amount of $75.0 million.

The Reducing Note Facility amended and restated the following loan facilities previously provided by Bank of Scotland to FirstCity and FH Partners: (a) Revolving Credit Agreement dated November 12, 2004, as amended, to FirstCity ($225.0 million loan facility); (b) Revolving Credit Agreement dated August 26, 2005, as amended, to FH Partners ($100.0 million loan facility); and (c) Subordinated Delayed Draw Credit Agreement dated September 5, 2007, as amended, to FirstCity ($25.0 million loan facility) (collectively, “Existing Credit Agreements”). The Existing Credit Agreements were guaranteed by substantially all of the wholly-owned subsidiaries of FirstCity and secured by substantially all of the assets of FirstCity and its wholly-owned subsidiaries. The outstanding indebtedness and existing letter of credit obligations under the Existing Credit Agreements in the amount of $268.6 million were refinanced into the Reducing Note Facility, which provides for a scheduled amortization over 3 years ($43.6 million in the first year, $80.0 million in the second year, $60.0 million in the first nine months of the third year, and $85.0 million due on June 25, 2013, the maturity date).

26

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The material terms of the Reducing Note Facility and related agreements are as follows:

·FirstCity provides a limited guaranty for the repayment of the indebtedness under the Reducing Note Facility to a maximum amount of $75.0 million, plus costs of enforcement and certain contingent indemnities;

·No advances will be made under the loan facility, except for draws on outstanding letters of credit in the amount of $22.35 million which are included in the amount of the loan facility;

·Repayment will be made from the cash flow from assets and equity investments which were pledged to secure the Existing Credit Agreements;

·FirstCity will receive unencumbered cash of 20% of the monthly net cash flows (i.e. cash “leak-through”) up to $25.0 million, after (a) payment to Bank of Scotland of interest and fees; and (b) payment of a scheduled overhead allowance to FirstCity Servicing Corporation (“FC Servicing”), a wholly-owned subsidiary of FirstCity, of $38.9 million over 3 years ($1.5 million per month for the first year, $1.03 million per month for the second year, and $0.7 million per month for the third year);

·Provides for a fluctuating interest rate equal to, at FC Commercial’s option, either (a) the greater of (i) one month London Interbank Offering Rate (“LIBOR”) plus 3.5% (subject to LIBOR floor of 1.0%) or (ii) 4.5%, or (b) Bank of Scotland’s prime rate plus 3.0%;

·Allows FC Commercial and FH Partners to designate a portion of the debt under the Reducing Note Facility to be borrowed in Euros up to a maximum amount of Euros equivalent to USD $27.5 million;

·Requires FirstCity to maintain a minimum tangible net worth (as defined) requirement of $60.0 million; and

·Provides for an upfront fee to be paid to Bank of Scotland in the amount of $2.0 million, payable as follows: $0.7 million paid on March 26, 2010 (in connection with an extension of the Existing Credit Facilities), $0.7 million on June 25, 2010, and payments of $0.2 million from the cash flow of the pledged assets on the first day of July, August, September and October 2010.

The Reducing Note Facility is guaranteed by FLBG Corp. and all of its subsidiaries (“Covered Entities”), which represent the entities that were subject to the obligations of the Existing Credit Facilities other than FirstCity and FC Servicing. The Reducing Note Facility is secured by substantially all of the assets of the Covered Entities. FC Investment Holdings Corporation (a newly-formed wholly-owned subsidiary of FirstCity) and its current and future subsidiaries, or other entities in which such subsidiaries own any equity interest (“Non-Covered Entities”), are not subject to, do not guarantee and do not provide security interests in their assets to secure the Reducing Note Facility. FC Servicing only provides a non-recourse security interest in certain equity interests owned by it and in most of the servicing fees from previously-existing agreements which secured the Existing Credit Facilities. FC Servicing does not provide a security interest in servicing agreements entered into with the Non-Covered Entities or in any of its other assets and does not guarantee the Reducing Note Facility.

The Reducing Note Facility contains covenants, representations and warranties on the part of FLBG Corp., FC Commercial and FH Partners that are typical for transactions of this type. In addition, the Reducing Note Facility contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of Scotland may accelerate the indebtedness under the Reducing Note Facility.

(9)  Stockholders’ Equity

On June 29, 2010, the Company issued and sold 150,000 shares of its common stock to an accredited investor pursuant to a securities purchase agreement at a price of $5.93 per share, resulting in aggregate proceeds of $0.9 million.

(10)  Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is composed of the following as of June 30, 2010 and December 31, 2009:

27

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	June 30,			December 31,
	2010			2009
	(Dollars in thousands)
Cumulative foreign currency translation adjustments	$	(1,705	)	$	956
Net unrealized gains on securities available for sale (1)	431			2,504
Total accumulated other comprehensive income (loss)	$	(1,274	)	$	3,460

(1)Includes $0.5 million and $1.4 million at June 30, 2010 and December 31, 2009, respectively, attributable to FirstCity’s proportionate share of net unrealized gains recorded by an investee accounted for under the equity-method of accounting.

(11)  Foreign Currency Exchange Risk Management

We use Euro-denominated debt as a non-derivative financial instrument to partially off-set the Company’s business exposure to foreign currency exchange risk attributable to our net investments in Europe. Our focus is to manage the economic risks associated with our European subsidiaries, which are the foreign currency exchange risks that will ultimately be realized when we exchange one currency for another. To help protect the Company’s net investment in certain of its European subsidiary operations from adverse changes in foreign currency exchange rates, we denominate a portion of our debt in the same functional currency used by the European subsidiaries. At June 30, 2010, the Company carried $23.2 million in Euro-denominated debt and designated the debt as a non-derivative hedge of its net investment in certain European subsidiaries. The Company designated the hedging relationship such that changes in the net investments being hedged are expected to be naturally off-set by corresponding changes in the value of the Euro-denominated debt. We consider our investments in European subsidiaries to be denominated in a relatively stable currency and of a long-term nature.

The effective portion of the net foreign investment hedge is reported in accumulated other comprehensive income (loss) as part of the cumulative translation adjustment. Any ineffective portion of the net foreign investment hedge is recognized in earnings as other income (expense) during the period of change. Effectiveness of the hedging relationship is measured and designated at the beginning of each month by comparing the outstanding balance of the Euro-denominated debt to the carrying value of the designated net equity investments.

At June 30, 2010 and December 31, 2009, the carrying value and line item caption of the Company’s non-derivative instrument was reported on the consolidated balance sheets as follows (in thousands):

Non-Derivative
Instrument in
Net Investment	Balance Sheet	Carrying Value at:
Hedging Relationship	Location	June 30, 2010		December 31, 2009
Euro-denominated debt	Notes payable to banks	$	23,235	$	24,824

28

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The effect of the non-derivative instrument qualifying and designated as a hedging instrument in net foreign investment hedges on the consolidated financial statements for the three- and six-month month periods ended June 30, 2010 and 2009 was as follows (in thousands):

							Amount of Gain (Loss)
							Recognized in Income
	Amount of Gain (Loss)						(Ineffective Portion and
	Recognized in AOCI						Amount Excluded from
Non-Derivative	(Effective Portion)					Location of Gain (Loss)	Effectiveness Testing)
Instrument in	Three Months Ended					Reclassified from	Three Months Ended
Net Investment	June 30,					AOCI into Income	June 30,
Hedging Relationship	2010		2009			(Effective Portion)	2010		2009
Euro-denominated debt	$	1,849	$	(1,753	)	Other income (expense)	$	—	$	—

						Amount of Gain (Loss)
						Recognized in Income
	Amount of Gain (Loss)					(Ineffective Portion and
	Recognized in AOCI					Amount Excluded from
Non-Derivative	(Effective Portion)				Location of Gain (Loss)	Effectiveness Testing)
Instrument in	Six Months Ended				Reclassified from	Six Months Ended
Net Investment	June 30,				AOCI into Income	June 30,
Hedging Relationship	2010		2009		(Effective Portion)	2010		2009
Euro-denominated debt	$	3,391	$	259	Other income (expense)	$	—	$	—

(12)  Income Taxes

We are subject to income taxes in both the United States and the non-U.S. jurisdictions in which we operate. Income tax expense for the three- and six-month periods ended June 30, 2010 and 2009 is composed of the following components:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010			2009
	(Dollars in thousands)
State current income tax expense	$	242	$	353	$	544		$	549
Federal current income tax expense	171		—		171			—
Foreign current income tax expense	564		4		585			202
Foreign deferred income tax expense (benefit)	228		83		(581		)	98
Total	$	1,205	$	440	$	719		$	849

The Company recognizes deferred tax assets and liabilities in both the U.S. and foreign jurisdictions based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss and tax credit carryforwards. The Company’s deferred tax assets, net of valuation allowances, totaled $0.4 million at June 30, 2010 (included in “Other assets” in our consolidated balance sheet) and $-0- at December 31, 2009. The increase in the net deferred tax assets during the six-month period ended June 30, 2010 relates to our ability to recognize foreign tax benefits associated with U.S. GAAP adjustments to a consolidated foreign subsidiary’s local financial statements, combined with the timing of income tax payments made by the foreign subsidiary in its local jurisdiction. The recognition of these foreign tax benefits is not dependent upon future taxable income in the subsidiary’s foreign jurisdiction, but rather upon reversal of the U.S. GAAP adjustments in future periods.

The Company also has a substantial amount of domestic deferred tax assets attributable primarily to net operating loss and capital loss carryforwards for U.S. federal income tax purposes, and differences between the carrying amounts and the tax bases of

29

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Acquisition Partnership investments. At June 30, 2010 and December 31, 2009, the Company established a full valuation allowance for its U.S. deferred tax assets due to the lack of sufficient objective evidence regarding the realization of these assets in the foreseeable future. We will continue to evaluate the deferred tax asset valuation allowance balances in all of our U.S. and foreign subsidiaries throughout 2010 to determine the appropriate level of valuation allowances.

(13)  Stock-Based Compensation

Accounting for stock-based compensation requires that the cost resulting from all stock-based payments be recognized in the financial statements based on the grant-date fair value of the award. The Company’s stock-based compensation expense consists of stock options and restricted stock awards (2010 only). We recognized stock-based compensation cost of approximately $0.2 million and $0.3 million for the three- and six-month periods ended June 30, 2010, respectively, and $25,000 and $0.1 million for the three- and six-month periods ended June 30 2009, respectively.

Stock Options

A summary of the Company’s stock options and related activity as of and for the six months ended June 30, 2010 is presented below:

					Weighted
					Average
			Weighted		Remaining
			Average		Contractual	Aggregate
			Exercise		Term	Intrinsic
	Shares		Price		(Years)	Value
						(in thousands)
Options outstanding at January 1, 2010	921,400		$	7.10
Granted	—		—
Exercised	(25,000	)	2.00
Expired	(31,000	)	9.09
Forfeited	—		—
Options outstanding at June 30, 2010	865,400		$	7.18	6.10	$	645
Options exercisable at June 30, 2010	545,900		$	7.06	4.49	$	645

The total intrinsic value of stock options exercised during the six-month period ended June 30, 2010 was $0.1 million. As of June 30, 2010, there was approximately $1.3 million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted average period of 1.4 years.

Restricted Stock Awards

In February 2010, the Company granted 28,890 restricted stock awards that vest in one installment on the first anniversary of the date of grant. The grant-date fair value of each award was $5.97 — which was based on the grant-date fair value of our common stock. Holders of the restricted stock awards have voting rights, and vesting of the grants is based on their continued service. Sales of the restricted stock are prohibited until the awards vest. At June 30, 2010, the Company had 28,890 outstanding, unvested restricted stock awards with total unrecognized compensation cost of $0.1 million to be recognized over a weighted average period of 0.3 years.

(14)  Net Earnings per Common Share

Earnings per share (“EPS”) is presented for both basic EPS and diluted EPS. We compute basic EPS by dividing net earnings available to common stockholders by the weighted-average number of common shares outstanding during the year. Diluted EPS is computed by dividing net earnings available to common stockholders by the weighted-average number of common shares outstanding during the year, plus the dilutive effect of common stock equivalents such as stock options and warrants. We exclude these common stock equivalents from the computation of diluted EPS when the effect of inclusion would be anti-dilutive.

30

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Basic and diluted net earnings per common share were computed as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
	(Dollars in thousands, except per share data)
Net earnings	$	10,867	$	8,977	15,582		9,969
Less: net income attributable to the noncontrolling interest	2,802		1,231		7,416		1,579
Net earnings attributable to FirstCity	$	8,065	$	7,746	$	8,166	$	8,390
Weighted average outstanding shares of common stock (in thousands)	10,009		9,832		10,000		9,832
Dilutive effect of:
Warrants	—		181		—		99
Dilutive effect of stock options	108		122		101		52
Weighted average outstanding shares of common stock and common stock equivalents	10,117		10,135		10,101		9,983
Net earnings per share:
Basic	$	0.81	$	0.79	$	0.82	$	0.85
Diluted	$	0.80	$	0.76	$	0.81	$	0.84

(15)  Fair Value

Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. The accounting guidance on fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

·Level 1 — Valuations are based upon quoted prices (unadjusted) in active exchange markets involving identical assets and liabilities that the Company has the ability to access at the measurement date.

·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.

The level of fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is most-significant to the fair value measurement in its entirety.

31

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Assets Measured at Fair Value on a Recurring Basis

The table below presents the Company’s balances of assets measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009. The Company did not have any liabilities that were measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009.

	At June 30, 2010
(Dollars in thousands)	Level 1		Level 2	Level 3	Total
Investment securities available for sale:
Marketable equity security	$	701	—	—	$	701
Asset-backed security	—		—	692	692
	$	701	—	692	$	1,393

	At December 31, 2009
(Dollars in thousands)	Level 1		Level 2	Level 3	Total
Investment security available for sale:
Asset-backed security	$	—	—	1,836	$	1,836

The Company measures fair value for its asset-backed securities using discounted cash flow models based on assumptions and inputs that are corroborated by little or no observable market data (Level 3 measurement). The Company uses this measurement technique because pricing information and market-participant assumptions for its asset-backed securities are not readily accessible and frequently released to the public. At June 30, 2010 and December 31, 2009, the carrying value of the Company’s asset-backed securities (at fair value) approximated $0.7 million and $1.8 million, respectively. The table below summarizes the changes to these Level 3 assets measured at fair value on a recurring basis for the three- and six-month periods ended June 30, 2010 and 2009, respectively:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2010			2009			2010			2009
Balance, beginning of period	$	1,530		$	4,279		$	1,836		$	5,251
Total net gains (losses) for the period included in:
Net income	3,250			—			3,250			—
Other comprehensive income (loss)	(1,457		)	(9		)	(1,115		)	(16		)
Purchases, sales, issuances and settlements, net	(2,612		)	(1,277		)	(3,260		)	(2,242		)
Foreign currency translation adjustments	(19		)	—			(19		)	—
Net transfers into Level 3	—			—			—			—
Balance, end of period	$	692		$	2,993		$	692		$	2,993

There were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 3 fair value measurements during the three- or six-month periods ended June 30, 2010 and 2009.

Assets Measured at Fair Value on a Non-Recurring Basis

The Company may be required, from time to time, to measure certain financial and non-financial assets at fair value on a non-recurring basis. These adjustments to fair value generally result from write-downs of financial and non-financial assets as a result of impairment or application of lower-of-cost or fair value accounting. For assets measured at fair value on a non-recurring basis that were still on the Company’s consolidated balance sheet at June 30, 2010 and December 31, 2009, the following table provides the fair value hierarchy and the carrying value of the related individual assets at each respective period end:

32

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	Carrying Value at June 30, 2010
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Portfolio Assets - loans (1)	$	—	$	—	$	353	$	353
Loans receivable - SBA held for investment (1)	—		—		838		838
Loans receivable - other (1)	—		—		1,917		1,917
Real estate held for sale (2)	—		6,606		—		6,606

	Carrying Value at December 31, 2009
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Portfolio Assets - loans (1)	$	—	$	—	$	12,460	$	12,460
Loans receivable - SBA held for investment (1)	—		—		829		829
Real estate held for sale (2)	—		7,231		—		7,231

(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.

(2)Represents the carrying value of foreclosed real estate properties that were impaired and measured at fair value subsequent to their initial classification as foreclosed assets.

The following table presents the decrease in value of certain assets held at the respective period end that were measured at fair value on a non-recurring basis for which a fair value adjustment was included in the Company’s results of operations during the respective period: 

	Six Months ended
	June 30,
(Dollars in thousands)	2010			2009
Portfolio Assets - loans (1)	$	(494	)	$	(735	)
Loans receivable - SBA held for investment (1)	(102		)	—
Loans receivable - other (1)	(1,168		)	—
Real estate held for sale (2)	(738		)	(461		)
Total	$	(2,502	)	$	(1,196	)

(1)Represents write-downs of loans based on the estimated fair value of the collateral for collateral-dependent loans.

(2)Represents losses on foreclosed real estate properties that were measured at fair value subsequent to their initial classification as foreclosed assets.

The fair values of “Portfolio Assets — loans,” “Loans receivable - SBA held for investment” and “Loans receivable - other,” as measured on a non-recurring basis, are based on collateral valuations using observable and unobservable inputs, adjusted for various considerations such as market conditions, economic and competitive environment, and other assets with similar characteristics (i.e. type, location, etc.) that, in management’s opinion, reflect elements a market participant would consider. The Company classifies its fair value measurement techniques for these assets as Level 3 inputs for the following reasons: (1) distressed asset transactions generally occur in inactive markets for which observable market prices are not 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 fair value of “Real estate held for sale,” as measured on a non-recurring basis, is generally based on collateral valuations using observable inputs.

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. 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 collateral valuations adjusted for the economic and competitive environment, the characteristics of the asset, and other such factors. Additionally, there may be inherent weaknesses in any 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.

33

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis

In addition to the methods and assumptions we use to measure the fair value of financial instruments as discussed in the section above, we used the following methods and assumptions to estimate the fair value of our financial instruments that are not recorded at fair value in their entirety on a recurring basis in the Company’s consolidated balance sheets. The fair value estimates were based on pertinent information that was available to management as of the respective dates. The fair value estimates have not been revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented. The amounts provided herein are estimates of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e. not a forced transaction, such as liquidation or distressed sale). Because active markets do not exist for a significant portion of the Company’s financial instruments, management used present value techniques and other valuation models to estimate the fair values of its financial instruments. These valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts which could be realized in a current exchange. The Company believes the imprecision of an estimate could be significant.

Cash and Cash Equivalents:  The carrying amount of cash and cash equivalents approximated fair value at June 30, 2010 and December 31, 2009.

Loans Receivable Held-for-Sale:  Loans held-for-sale (primarily SBA loans held-for-sale) are carried on the Company’s consolidated balance sheet at the lower of cost or fair value. The fair value of loans held-for-sale is generally based on what secondary markets are currently offering for loans with similar characteristics, or prices of the Company’s SBA loan transactions that were previously consummated and pending sales accounting treatment. At June 30, 2010 and December 31, 2009, the carrying amount of loans held-for-sale approximated $7.7 million and $0.8 million, respectively, and the estimated fair values approximated $8.2 million and $0.9 million, respectively.

Loan Portfolio Assets and Loans Receivable:  Estimated fair values of loan Portfolio Assets and fixed-rate loans receivable are generally determined using a discounted cash flow model, adjusted by an amount for estimated losses, that employs market discount rates and other adjustments that would be expected to be made by a market participant. The estimated fair value for variable-rate loans that re-price frequently is based on carrying values adjusted for estimated credit losses and other adjustments that would be expected to be made by a market participant. The estimated fair value for impaired loans is generally based on collateral valuations using observable and unobservable inputs, adjusted for various considerations that would be expected to be made by a market participant; or discounted cash flow models that employ market discount rates and other adjustments that would be expected to be made by a market participant. Management’s estimates and assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market and specific borrower information. At June 30, 2010 and December 31, 2009, the carrying amounts of Portfolio Assets — loans and loans receivable (including accrued interest) approximated $244.6 million and $253.0 million, respectively, and the estimated fair values approximated $360.8 million and $371.1 million, respectively.

Servicing Assets:  The fair value of servicing assets is based on a combination of a discounted cash flow model of future net servicing income and analysis of current market data to estimate the fair value of our servicing assets. The key assumptions used to calculate estimated fair value of the servicing assets include prepayment speeds and discount rate. The fair value estimate excludes the value of servicing rights for loans sold with 90-day premium recourse provisions in which the servicing rights have not been capitalized. See Note 7 for the carrying amount and estimated fair values of servicing assets as of June 30, 2010 and December 31, 2009.

Notes Payable:  Management believes the interest rates and terms on its debt obligations approximate the rates and terms currently offered by other lenders for similar debt instruments of comparable terms. As such, management believes that the carrying amount of notes payable approximates fair value at June 30, 2010 and December 31, 2009.

Note Payable to Affiliate:  Estimated fair value of the Company’s note payable to affiliate (including related interest payable) is based on the present value of future projected cash flows using a discount rate that reflects the risks inherent in those cash flows. At June 30, 2010 and December 31, 2009, the carrying amount of the note and interest payable to affiliate was $11.0 million and $10.3 million, respectively, and the estimated fair values approximated $7.1 million and $6.5 million, respectively.

34

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(16)  Variable Interest Entities

In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with entities that involve variable interests. Variable interests are generally defined as contractual, ownership or other economic interests in an entity that change with fluctuations in the entity’s net asset value. If certain characteristics are present in these transactions, the entity is subject to a variable interests consolidation analysis, and consolidation is based on variable interests, and not solely on ownership of the entity’s outstanding voting stock. In making the determination as to whether an entity is considered to be a variable interest entity (“VIE”), we first perform a qualitative analysis, which requires certain subjective decisions regarding our assessments, including, but not limited to, the design of the entity, the variability that the entity was designed to create and pass along to its interest holders, the rights of the parties, and the purpose of the arrangement. If we cannot conclude after a qualitative analysis whether an entity is a VIE, we perform a quantitative analysis.

If an entity is determined to be a VIE, we determine if our variable interest causes us to be considered the primary beneficiary. We are the primary beneficiary and are required to consolidate the entity if we have the power to direct the activities of the VIE that most-significantly impact the entity’s economic performance and we have the obligation to absorb losses or the right to receive returns that could be significant to the entity. The assessment of the party that has the power to direct the activities of the VIE may require significant management judgment when more than one party has power, or more than one party is involved in the design of the VIE but no party has the power to direct the ongoing activities that could be significant. We are required to continually assess whether we are the primary beneficiary and, therefore, may consolidate a VIE through the duration of our involvement.

The following provides a summary for which the Company has entered into significant transactions with different types of VIEs:

Acquisition Partnership VIEs — The Company is involved with Acquisition Partnerships that were formed with one or more investors to invest in Portfolio Assets. These Acquisition Partnerships are typically financed through debt and/or equity provided by the investors (including FirstCity). Certain of these Acquisition Partnerships are VIEs because generally they do not have sufficient equity to finance their activities without additional subordinated financial support, or the investors do not have the ability to make significant decisions about the Acquisition Partnership’s activities. The voting interests for all but three of the Acquisition Partnership VIEs are either wholly-owned or majority-owned by non-affiliated investors, and the Company determined that it was not the primary beneficiary of these minority-owned Acquisition Partnership VIEs. However, the Company is deemed to be the primary beneficiary for three Acquisition Partnership VIEs in which the Company and respective non-affiliated investors each hold equal ownership and voting interests. The investors and third-party creditors, including FirstCity, generally have recourse only to the extent of the assets held by the Acquisition Partnership VIEs. Certain third-party creditors have recourse to both FirstCity and the non-affiliated investors where we jointly provide a guaranty to the Acquisition Partnership VIE. The Company does not generally provide financial support to any Acquisition Partnership VIE beyond that which is contractually required, but may provide additional liquidity alongside the non-affiliated investors to fund additional investments.

Operating Entity VIEs — The Company has significant variable interests with various commercial enterprise entities (attributable primarily to certain equity and debt investments made by FirstCity Denver — our Special Situations Platform business). FirstCity provided financing in the form of debt and/or equity to help finance the activities of the Operating Entity VIEs. These Operating Entities are VIEs because generally they do not have sufficient equity to finance their activities without additional subordinated financial support. The voting interests for all of the Operating Entity VIEs are either wholly-owned or majority-owned by non-affiliated investors, and the Company determined that it was not the primary beneficiary of these minority-owned Operating Entity VIEs. The investors and creditors, including FirstCity, generally have recourse only to the extent of the assets held by the Operating Entity VIEs. The Company does not generally provide financial support to any Operating Entity VIE beyond that which is contractually required.

Special-Purpose Investment Entity VIEs – The Company has significant variable interests with special-purpose investment entities that were created to invest in Portfolio Assets, debt and equity investments, and various other types of investments. Certain of these special-purpose investment entities are VIEs because they do not have sufficient equity to finance their activities without additional subordinated financial support. The Company owns all of the voting and equity interests in the Special-Purpose Investment Entity VIEs, and the Company was determined to be the primary beneficiary of these entities. A third-party creditor has recourse to FirstCity up to $75.0 million under a limited guaranty provision related to the debt of these entities, which is collateralized by their assets, only to the extent that such pledged assets of the Special-Purpose Investment Entity VIEs do not generate sufficient cash to service and repay the debt (see Note 8). The Company does not generally provide financial support to the Special-Purpose Investment Entity VIEs beyond that which is contractually required.

The following table displays the carrying amount and classification of assets and liabilities of the Company’s consolidated VIEs, for which the Company does not hold a majority voting interest, that are included in its consolidated balance sheet as of June 30, 2010. We record third-party ownership in these consolidated VIEs in “Noncontrolling interests” in our consolidated balance sheet.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	Acquisition
	Partnership VIEs
	(Dollars in thousands)
Cash	$	1,675
Portfolio Assets, net	44,367
Other assets	14
Total assets of consolidated VIEs	$	46,056
Total liabilities of consolidated VIEs	$	156

The following table summarizes the carrying amounts of the assets included in the Company’s consolidated balance sheet and the maximum loss exposure as of June 30, 2010 related to the Company’s variable interests in unconsolidated VIEs.

	Assets on FirstCity’s Consolidated Balance Sheet				FirstCity’s Maximum
	Loans		Equity		Exposure
Type of VIE	Receivable		Investment		to Loss (1)
	(Dollars in thousands)
Acquisition Partnership VIEs	$	1,414	$	2,255	$	5,498
Operating Entity VIEs	14,004		1,228		15,232
Total	$	15,418	$	3,483	$	20,730

(1)Includes maximum exposure to loss attributable to FirstCity’s debt guarantees provided for certain Acquisition Partnership VIEs.

(17)  Other Related Party Transactions

The Company has contracted with the Acquisition Partnerships and related parties as a third party loan servicer. Servicing fees and due diligence fees (included in other income) derived from such affiliates totaled $1.6 million and $2.1 million for the three month periods ended June 30, 2010 and 2009, respectively, and $3.4 million and $4.3 million for the six month periods ended June 30, 2010 and 2009, respectively.

FC Servicing and MCS et Associates (“MCS”), an equity-method investee of FirstCity in which FC Servicing has a direct 11.89% ownership interest, are parties to certain agreements in which FC Servicing provides consultation services and personnel to be employed by MCS to assist in developing and managing due diligence and servicing systems. Under these agreements, MCS provides the supplied personnel with compensation, tax equalization payments, housing allowances, transportation allowance, and tax preparation services. MCS also pays consulting fees to FC Servicing and reimburses FC Servicing for travel, hotel, airfare, and meal expenses incurred related to the provision of the services. FirstCity recorded fees from MCS of $0.1 million during each of the three-month periods ended June 30, 2010 and 2009, and $0.2 million during each of the six-month periods ended June 30, 2010 and 2009.

Through a series of related-party transactions in 2008, FC Acquisitions SRL de CV (“FC Acquisitions”), a majority-owned Mexican subsidiary of FirstCity, acquired a loan portfolio in Mexico. The final funding for this transaction resulted in a note payable to MCS Trust SA de CV (“MCS Trust”) by FC Acquisitions, and a note receivable from MCS Trust held by BMX Holding III LLC (“BMX Holding III”), a majority-owned subsidiary of FirstCity. The accounts of MCS Trust are consolidated by BMX Holding II, a FirstCity equity-method investee in which it has an 8.0% ownership interest. At June 30, 2010 and December 31, 2009, the note receivable held by BMX Holding III had a carrying amount of $7.8 million (included in “Loans receivable — affiliates” on the Company’s consolidated balance sheet), and accrued interest of $3.3 million and $2.5 million, respectively (included in “Other assets, net” on the Company’s consolidated balance sheet). At June 30, 2010 and December 31, 2009, the note payable to MCS Trust had a carrying amount of $7.8 million (reported as “Notes payable to affiliate” on the Company’s consolidated balance sheet), and accrued interest of $3.3 million and $2.5 million, respectively (included in “Other liabilities” on the Company’s consolidated balance sheet). Should the note payable be forgiven at some future date, the corresponding note receivable would be forgiven as well.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(18)  Segment Reporting

At June 30, 2010 and 2009, the Company was engaged in two major business segments — Portfolio Asset Acquisition and Resolution business and Special Situations Platform business.

In the Portfolio Asset Acquisition and Resolution business, the Company acquires and resolves Portfolio Assets, which are generally acquired at a discount to their legal principal balance or appraised value. Purchases may be in the form of pools of assets or individual assets. The Portfolio Assets are generally aggregated, including loans of varying qualities that are secured or unsecured by diverse collateral types and real estate. Some Portfolio Assets are loans for which resolution is linked primarily to the real estate securing the loan, while others may be collateralized business loans for which resolution may be based either on real estate, business assets or other collateral cash flow. Portfolio Assets are acquired on behalf of the Company or its consolidated subsidiaries, and on behalf of domestic and foreign Acquisition Partnerships in which a partially-owned affiliate of the Company is the general partner and the Company and other investors are limited partners. The Company services, manages and ultimately resolves or otherwise disposes of substantially all Portfolio Assets acquired by the Company, its Acquisition Partnerships, or other related entities. The Company services such assets until they are collected or sold.

The Company engages in its Special Situations Platform business through its majority ownership interest in FirstCity Denver — which was formed in April 2007. Through its Special Situations Platform business, the Company provides investment capital to privately-held middle-market companies through flexible capital structuring arrangements. The nature of the capital investments primarily takes the form of senior and junior financing arrangements, but also includes direct equity investments, common equity warrants, distressed debt transactions, and leveraged buyouts. FirstCity Denver’s primary investment objective is to generate both current income and capital appreciation through debt and equity investments, and to generally structure the investments to be repaid or exited in 24 to 60 months.

Operating segment revenues and profitability, and a reconciliation to net earnings for the three and six months ended June 30, 2010 and 2009, are as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010		2009			2010		2009
	(Dollars in thousands)
Portfolio Asset Acquisition and Resolution:
Total revenues	$	21,813	$	18,969		$	36,535	$	32,266
Operating contribution, net of direct taxes	$	5,048	$	11,138		$	6,141	$	12,054
Special Situations Platform:
Total revenues	$	21,202	$	1,575		$	28,012	$	3,913
Operating contribution (loss), net of direct taxes	$	5,263	$	(1,132	)	$	5,978	$	205
Total operating contribution, net of direct taxes	$	10,311	$	10,006		$	12,119	$	12,259
Corporate Overhead:
Salaries and benefits and other income and expenses, net	2,067		2,157			3,773		3,779
Income tax expense	179		103			180		90
Net earnings attributable to FirstCity	$	8,065	$	7,746		$	8,166	$	8,390

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Revenues and equity in earnings of investments from the Special Situations Platform segment are all attributable to domestic operations. Revenues and equity in earnings of unconsolidated equity-method 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,
	2010		2009		2010		2009
	(Dollars in thousands)
Domestic	$	15,828	$	15,785	$	24,209	$	25,518
Latin America	2,908		4,355		4,693		5,274
Europe	3,087		661		8,826		2,313
Other	—		8		—		16
Total	$	21,823	$	20,809	$	37,728	$	33,121

Total assets for each of the segments and a reconciliation to total assets follows:

	June 30,		December 31,
	2010		2009
	(Dollars in thousands)
Cash and cash equivalents	$	50,573	$	80,368
Restricted cash	1,641		1,364
Portfolio acquisition and resolution assets:
Domestic	253,784		225,406
Latin America	40,161		41,248
Europe	47,573		57,888
Special situations platform assets	46,162		41,688
Other non-earning assets, net	26,080		17,112
Total assets	$	465,974	$	465,074

(19)  Commitments and Contingencies

Legal Proceedings

There have been no material developments regarding any matters disclosed under Part I, Item 3 “Legal Proceedings” in our 2009 Form 10-K.

Investment Agreement with Värde Investment Partners, L.P.

Effective April 1, 2010, FC Diversified Holdings LLC (“FC Diversified”) and FC Servicing, wholly-owned subsidiaries of FirstCity, and Värde Investment Partners, L.P. (“Värde”), entered into an Investment Agreement that provides, among other things, a “right of first refusal” provision. Pursuant to the Investment Agreement, FC Diversified and FC Servicing granted Värde a right of first refusal to participate in distressed asset investment opportunities in which the aggregate amount of the proposed investment is to exceed $3.0 million. FC Diversified and FC Servicing are required to follow a prescribed notice procedure pursuant to which Värde has the option to participate in a proposed investment, whether in the form of a direct purchase, equity investment or loan, by requiring that the purchase, acquisition or loan be effected through an acquisition entity formed by FC Diversified (or its affiliate) and Värde (or its affiliate). An affiliate of FC Diversified will own from 5% to 25% of the acquisition entity at FC Diversified’s determination. The Investment Agreement has a termination date of June 30, 2015, which is subject to consecutive automatic one-year extensions without any action by FC Diversified, FC Servicing and Värde. FC Servicing will be the servicer for all of the acquisition entities formed by FC Diversified and Värde. The parties may terminate the Investment Agreement prior to June 30, 2015 under certain conditions.

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Indemnification Obligation Commitments

On August 8, 2006, an Interest Purchase and Sale Agreement (“IP&S Agreement”) was entered into by and among Bidmex Holding LLC (“Bidmex Holding”), as buyer, and Strategic Mexican Investment Partners L.P. (“SMIP”), a wholly-owned subsidiary of FirstCity, 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 IP&S 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 Bidmex Holding and AIG Entities from damages resulting from a breach of any representation or warranty contained in the IP&S 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 IP&S 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. The Sellers are not required to make any payments as a result of the indemnity provisions of the IP&S Agreement until the aggregate amount payable under that agreement and the Asset Purchase Agreement (defined below) exceeds $250,000; however, claims related to taxes and fraud are not subject to this $250,000 threshold. The IP&S Agreement limits the liability of the Sellers for indemnifiable losses to the Aggregate Purchase Price (defined below) (without duplication of amounts recovered pursuant to the terms of the Asset Purchase Agreement). At this time, management does not believe that this potential obligation will have a material adverse impact on the Company’s consolidated results of operations, financial position or liquidity.

Also on August 8, 2006, Bidmex Holding 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 provided for the sale of the loan portfolio owned by the Asset Seller to the Asset 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. 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 $25,000; however, claims related to taxes and fraud are not subject to this $25,000 threshold. The IP&S Agreement limits the liability of the Sellers for indemnifiable losses under the Asset Purchase Agreement to the Aggregate Purchase Price. At this time, management does not believe that this potential obligation will have a material adverse impact on the Company’s consolidated results of operations, financial position or liquidity.

Subordinated Equity Investment

During the period from December 1998 to March 2005, FirstCity Mexico Inc. and SMIP, each wholly-owned subsidiaries of FirstCity, and CFSI and, in some instances, other investors, acquired 12 residential and commercial non-performing loan portfolios from financial institutions in Mexico (the “Mexican Portfolios”). Each portfolio was acquired by a Mexican limited liability company (each a “Mexican SRL”) that was owned by a Delaware limited liability company formed by each investor group.  On August 8, 2006, SMIP and National Union Fire Insurance Company of Pittsburgh, Pa., American General Life Insurance Company and American General Life and Accident Insurance Company, affiliates of AIG Global Asset Management Holdings Corp. (collectively the “AIG Entities”) formed Bidmex Holding for the purpose of acquiring the Mexican Portfolios by purchasing the interests of Cargill and SMIP in eleven of the Mexican limited liability companies (the “LLCs”) and purchasing the loan portfolio of one of the Mexican limited liability companies (the “Purchased Portfolio”) for an aggregate purchase price of U.S. $119.3 million as of that date (the “Aggregate Purchase Price”). SMIP acquired 15% of the membership interests in Bidmex Holding. A 9% interest acquired by SMIP is of equivalent standing to membership interests held by the AIG affiliates representing 85% of the membership interests. The remaining 6% membership interest acquired by SMIP is subordinate to the other owners of interests in Bidmex Holding, who will receive the return of and a return on their contribution equivalent to an 9% internal rate of return with respect to their interests prior to SMIP receiving the return of and a return on its capital contribution equivalent to a 9% internal rate of return with respect to its 6% interest. At June 30, 2010, the carrying value of SMIP’s membership interests in Bidmex Holding that is included in the Company’s consolidated balance sheet approximated $11.6 million ($5.3 million for the 9% membership interest and $6.3 million for the 6% membership interest).

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FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Guarantees and Letters of Credit

FC Commercial and FH Partners, as borrowers, have a term loan with Bank of Scotland. FirstCity provides a limited guaranty for the repayment of the indebtedness under this loan to a maximum amount of $75.0 million, plus costs of enforcement and certain contingent indemnities. At June 30, 2010, the unpaid principal balance on this loan was $244.8 million. Refer to Note 8 for additional information.

American Business Lending, Inc. (“ABL”), a wholly-owned subsidiary of FirstCity, has a $25.0 million revolving loan facility with Wells Fargo Capital Finance (“WFCF”). The obligations under this facility are secured by substantially all of the assets of ABL, and FirstCity provides WFCF with an unconditional guaranty on ABL’s obligations under the loan facility up to a maximum of $5.0 million plus enforcement cost. At June 30, 2010, the unpaid principal balance on this loan facility was $15.4 million.

FC Commercial provides guarantees to various financial institutions related to their financing arrangements with certain Acquisition Partnerships. The underlying financing arrangements of these Acquisitions Partnerships have various maturities ranging from July 2010 to September 2012, and are secured primarily by certain real estate properties held by the Acquisition Partnerships. At June 30, 2010, the unpaid debt obligations of these Acquisition Partnerships attributed to FC Commercial’s underlying guaranties approximated $1.4 million.

Fondo de Inversion Privado NPL Fund One (“PIF1”), an equity-method investment of FirstCity, has a credit facility with Banco Santander Chile, S.A. with an unpaid principal balance of $9.0 million at June 30, 2010. PIF1 uses the credit facility to finance the purchases of loan portfolios. Pursuant to terms of the credit facility, FirstCity was required to provide a stand-by letter of credit from Bank of Scotland that would satisfy the current loan balance upon demand. At June 30, 2010, FirstCity had a letter of credit in the amount of $9.75 million from Bank of Scotland under the terms of FirstCity’s loan 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 $9.75 million letter of credit, FirstCity would be required to reimburse Bank of Scotland by making payment to Bank of Scotland for all amounts disbursed or to be disbursed by Bank of Scotland under the letter of credit.

FirstCity Mexico SA de CV, a wholly-owned Mexican affiliate of FirstCity, has a loan agreement with Banco Santander, S.A. that allows loans to be made in Mexican pesos. At June 30, 2010, the Company had 142,240,000 in Mexican peso-denominated debt, which was equivalent to $11.2 million U.S. dollars. 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, 2010, FirstCity had a letter of credit in the amount of $12.6 million from Bank of Scotland under the terms of FirstCity’s loan facility with Bank of Scotland.  In the event that a demand is made under the $12.6 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.

Environmental Matters

The Company generally retains environmental consultants to conduct or update environmental assessments in connection with the Company’s foreclosed and acquired real estate properties. These environmental assessments have not revealed environmental conditions that the Company believes will have a material adverse effect on its business, assets, financial condition, results of operations or liquidity, and the Company is not otherwise aware of environmental conditions with respect to properties that the Company believes would have such a material adverse effect. However, from time to time, environmental conditions at the Company’s properties have required and may in the future require environmental testing and/or regulatory filings, as well as remedial action. Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action.

Limited-Life Subsidiaries

At June 30, 2010, the estimated settlement value of the Company’s noncontrolling interests in consolidated limited-life subsidiaries approximated $2.4 million. The Company’s carrying value of the noncontrolling interests recognized on the consolidated balance sheet related to these limited-life subsidiaries approximated $0.8 million at June 30, 2010.

40

FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Income Taxes

We are subject to income taxes in both the United States and the non-U.S. jurisdictions in which we operate. Certain of our entities are under examination by the relevant taxing authorities for various tax years. We regularly assess the potential outcome of current and future examinations in each of the taxing jurisdictions when determining the adequacy of the provision for income taxes. We have only recorded financial statement benefits for tax positions which we believe reflect the “more-likely-than-not” criteria incorporated in the FASB’s authoritative guidance on accounting for uncertainty in income taxes, and we have established income tax reserves in accordance with this authoritative guidance where necessary. Once a financial statement benefit for a tax position is recorded or a tax reserve is established, we adjust it only when there is more information available or when an event occurs necessitating a change. While we believe that the amount of the recorded financial statement benefits and tax reserves reflect the more-likely-than-not criteria, it is possible that the ultimate outcome of current or future examinations may result in a reduction to the tax benefits previously recorded on the financial statements or may exceed the current income tax reserves in amounts that could be material.

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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 that engages in two major business segments — Portfolio Asset Acquisition and Resolution and Special Situations Platform. The Portfolio Asset Acquisition and Resolution business has been the Company’s core business segment since it commenced operations in 1986. In the Portfolio Asset Acquisition and Resolution business, the Company acquires portfolios of performing and non-performing loans and other assets (collectively, “Portfolio Assets” or “Portfolios”), generally at a discount to their legal principal balances or appraised values, and services and resolves such Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. Through its Special Situations Platform, the Company provides investment capital to privately-held middle-market companies through flexible capital structuring arrangements to generate an attractive risk-adjusted return. These capital investments primarily take the form of senior and junior financing arrangements, but also include direct equity investments, common equity warrants, distressed debt transactions, and leveraged buyouts.

FirstCity recorded net earnings of $8.1 million, or $0.80 per common share diluted, for the second quarter of 2010 (“Q2 2010”), compared to $7.7 million, or $0.76 per common share diluted, for the second quarter of 2009 (“Q2 2009”). Components of FirstCity’s results of operations for the three and six-month periods ended June 30, 2010 and 2009, respectively, are detailed below (dollars in thousands, except per share data):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(Dollars in thousands, except per share data)
Portfolio Asset Acquisition and Resolution	$	5,048		$	11,138		$	6,141		$	12,054
Special Situations Platform	5,263			(1,132		)	5,978			205
Operating contribution	10,311			10,006			12,119			12,259
Corporate overhead	(2,246		)	(2,260		)	(3,953		)	(3,869		)
Net earnings attributable to FirstCity	$	8,065		$	7,746		$	8,166		$	8,390
Diluted earnings per common share	$	0.80		$	0.76		$	0.81		$	0.84

Refer to Results of Operations below for a detailed review of the Company’s operations for Q2 2010 compared to Q2 2009.

In Q2 2010, FirstCity and its investment partners acquired $141.6 million of domestic Portfolio Asset investments with a face value of approximately $251.0 million — of which FirstCity’s investment acquisition share was $28.1 million. In addition to its Portfolio Asset acquisitions in Q2 2010, FirstCity invested $22.6 million in non-portfolio investments, consisting of $5.4 million in the form of SBA loan originations and advances; $8.1 million in the form of debt and equity investments ($4.6 million financed through investee entity’s debt) under its Special Situations Platform (“FirstCity Denver”); $6.6 million of equity investments in foreign partnerships; and $2.5 million of other debt and equity investments.

At June 30, 2010, the carrying value of FirstCity’s earning assets (primarily Portfolio Assets, equity investments, loans receivable and entity-level earning assets) approximated $387.7 million — compared to $366.2 million at December 31, 2009 and $383.2 million a year ago. The global distribution of FirstCity’s earning assets (at carrying value) at June 30, 2010 included $299.9 million in the United States; $47.6 million in Europe; and $40.2 million in Latin America.

Net Impairment Provisions

The Company incurred $3.2 million of net impairment provisions in Q2 2010 compared to $2.0 million of net impairment provisions in Q2 2009. Our net impairment provisions in Q2 2010 were composed of $2.6 million of net provisions recorded to our consolidated loans and portfolios, and $0.6 million as our share of net impairment provisions recorded to loans and portfolios held in our unconsolidated Acquisition Partnerships. The global distribution of the $3.2 million net impairment provisions recorded by the Company in Q2 2010 included $2.3 million in the United States, $0.2 million in Latin America, and $0.7 million in Europe. These impairment provisions were attributed primarily to declines in values of loan collateral and real estate assets in our domestic loans and portfolios, and changes in future cash flow estimates from our foreign loans and portfolios. The impairment provisions were identified in connection with management’s quarterly evaluation of the collectibility of the Company’s Portfolio Assets and loans receivable. The process for evaluating and measuring impairment is critical to our financial results, as it requires subjective and complex judgments due to the need to make estimates about the impact of matters that are uncertain. This process also requires estimates that

42

are susceptible to significant revision as more information becomes available. It remains unclear what impact the illiquid markets, real estate value declines and the overall economic slowdown will ultimately have on our financial results. These conditions could adversely impact our business if borrowers cannot refinance their loans and/or continue to make payments — which in turn could lead to rising loan defaults and foreclosures on loan collateral. Therefore, we cannot provide assurance that, in any particular future period, we will not incur additional impairment provisions.

Foreign Currency Transaction Gains

The combined impact of foreign currency transactions from the Company’s consolidated and unconsolidated foreign operations resulted in a $0.6 million foreign currency exchange loss in Q2 2010 (compared to a combined impact of $2.2 million in foreign currency transaction gain in Q2 2009). The Company’s combined foreign currency exchange loss in Q2 2010 was attributable primarily to our European operations (due to the weakening of the Euro against the U.S. dollar during Q2 2010). It remains unclear what impact that weakened global economic conditions will have on our financial holdings and investments from our European and Latin American operations. As such, we cannot provide assurance that, in any particular future period, we will not incur foreign currency transaction losses.

Management’s Outlook

Despite substantial losses reported in the financial services sector over the past two years and continued volatility in U.S. and global economies and financial markets, 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 distressed asset acquisition and middle-market transaction opportunities at attractive prices and returns are available. As discussed above, FirstCity’s investment level for Q2 2010 totaled $50.7 million.

As reported in our June 30, 2010 news release and in our Current Report on Form 8-K filed with the SEC on July 1, 2010, FirstCity and Bank of Scotland reached agreement and closed on a $268.6 million Reducing Note Facility Agreement (“Reducing Note Facility”) that allows for repayment to Bank of Scotland over time as cash flows from the underlying assets securing the loan facility are realized. The Company’s outstanding indebtedness and existing letter of credit obligations under its then-existing loan facilities with Bank of Scotland were refinanced into the Reducing Note Facility. The terms of the Reducing Note Facility, among other things, allow FirstCity to receive unencumbered cash of 20% of the monthly net cash flows from the pledged assets (i.e. cash “leak-through”) up to $25.0 million after (i) payment to Bank of Scotland of interest and fees and (ii) payment of a scheduled overhead allowance to FirstCity of $38.9 million over three years. Refer to Liquidity and Capital Resources below for additional terms and information related to the Reducing Note Facility.

In addition, as reported in the June 30, 2010 news release and Current Report on Form 8-K filed with the SEC on July 1, 2010 mentioned above, FirstCity and Värde entered into an Investment Agreement, effective April 1, 2010, whereby Värde may invest up to $750 million, at its discretion, alongside FirstCity in distressed loan portfolios and similar investment opportunities, subject to the terms and conditions contained in the agreement. The primary terms of the Investment Agreement are as follows:

·FirstCity will act as the exclusive servicer for the investment portfolios;

·FirstCity will provide Värde with a “right of first refusal” with regard to distressed asset investment opportunities in excess of $3 million sourced by FirstCity;

·FirstCity, at its determination, will co-invest between 5%-25% in each investment;

·FirstCity will receive a $200,000 monthly retainer in exchange for its services and commitments;

·FirstCity will receive a base servicing fee (based on investment portfolio collections) and will be eligible to receive additional incentive-based servicing fees (depending on the performance of the portfolios acquired); and

·FirstCity will be eligible to receive incentive-based management fees (depending on the aggregate amount and performance of the portfolios acquired).

The cash flows from the assets and equity interests from the Company’s investments made in connection with the Investment Agreement are not subject to the security interest requirements of Bank of Scotland’s Reducing Note Facility described above. Further details about the structure of the Investment Agreement with Värde and the terms of the Investment and Securities Purchase Agreements are included in the above-mentioned press release and Current Report on Form 8-K.

We believe that the Investment Agreement in place with Värde, combined with (1) the cash leak-through and overhead allowance provisions included in Bank of Scotland’s Reducing Note Facility (described above); (2) our estimates of residual cash flows from the pledged assets and equity investments after full repayment of the Bank of Scotland debt; and (3) our current holdings of unencumbered cash and portfolio assets, will provide FirstCity with additional funding and liquidity to support its operations and investment activities.

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Results of Operations

The following discussion and analysis is based on the segment reporting information presented in Note 18 to the consolidated financial statements of the Company included in Item 1 of this Form 10-Q, and should be read in conjunction with the consolidated financial statements (including the notes thereto) included elsewhere in this Form 10-Q.

As a result of significant period-to-period fluctuations in our revenues and earnings, period-to-period comparisons of the results of our operations may not be meaningful. The Company’s financial results are impacted by many factors including, but not limited to, general economic conditions; fluctuations in interest rates and foreign currency exchange rates; fluctuations in the underlying values of real estate and other assets; the timing and ability to collect and liquidate assets; increased competition from other market players in the industries in which we operate; and the availability, prices and terms for Portfolio Assets, middle-market transactions and other investments in all of the Company’s businesses. The Company’s business and results of operations are also impacted by the availability of financing with terms acceptable to the Company, and our access to capital markets. Such factors, individually or combined with other factors, may result in significant fluctuations in our reported operations and in the trading price of our common stock.

Q2 2010 Compared to Q2 2009

Net earnings to common stockholders totaled $8.1 million in Q2 2010 compared to net earnings of $7.7 million in Q2 2009. On a per share basis, diluted net earnings to common stockholders were $0.80 in Q2 2010 compared to $0.76 in Q2 2009.

Portfolio Asset Acquisition and Resolution

The operating contribution from the Portfolio Asset Acquisition and Resolution (“PAA&R”) segment resulted in a $5.0 million operating gain in Q2 2010 compared to an $11.1 million operating gain for the same period in 2009. FirstCity and its investment partners acquired $141.6 million of Portfolio Assets in Q2 2010 with an approximate face value of $251.0 million, compared to the Company’s involvement in acquiring $67.1 million of Portfolio Assets in Q2 2009 with an approximate face value of $117.8 million. In Q2 2010, FirstCity’s investment share in the Portfolio Asset acquisitions was $28.1 million — with $5.9 million acquired through consolidated Portfolios and $22.2 million acquired through unconsolidated Portfolios. In Q2 2009, FirstCity’s investment share in Portfolio Asset acquisitions was $48.6 million — with $48.0 million acquired through consolidated Portfolios. In Q2 2010, FirstCity invested an additional $14.5 million in non-portfolio investments in the form of SBA loan originations and advances, direct equity investments, and other loan investments, compared to $7.9 million of additional non-portfolio investments in the form of SBA loan originations and advances, and $11.2 million in direct equity investments (attributable primarily to European entity acquisitions), in Q2 2009.

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The following is a summary of the results of operations for the Company’s PAA&R business segment for the three-month periods ended June 30, 2010 and 2009:

	Three Months Ended
	June 30,
	2010			2009
	(Dollars in thousands)
Portfolio Asset Acquisition and Resolution:
Revenues:
Servicing fees	$	1,743		$	2,403
Income from Portfolio Assets	14,622			14,077
Gain on sale of SBA loans held for sale, net	163			610
Gain on sale of investment securities	3,250			—
Interest income from SBA loans	313			295
Interest income from loans receivable - affiliates	459			553
Interest income from loans receivable - other	—			207
Other income	1,263			824
Total revenues	21,813			18,969
Expenses:
Interest and fees on notes payable	3,616			3,438
Salaries and benefits	4,253			3,952
Provision for loan and impairment losses, net of recoveries	2,057			(290		)
Asset-level expenses	1,941			1,244
Other	2,274			908
Total expenses	14,141			9,252
Equity in net earnings of unconsolidated subsidiaries	10			1,840
Gain on business combinations	—			1,455
Net income attributable to noncontrolling interests	(1,595		)	(1,611		)
Operating contribution before direct taxes	$	6,087		$	11,401
Operating contribution, net of direct taxes	$	5,048		$	11,138

Servicing fee revenues.  Servicing fee revenues decreased to $1.7 million in Q2 2010 from $2.4 million in Q2 2009. Servicing fees from domestic Acquisition Partnerships totaled $0.1 million in Q2 2010 compared to $0.5 million in Q2 2009, while servicing fees from Latin American Acquisition Partnerships totaled $1.5 million in Q2 2010 and $1.7 million in Q2 2009. Servicing fees from domestic Acquisition Partnerships are generally based on a percentage of the collections received from Portfolio Assets held by these unconsolidated partnerships; whereas servicing fees from Latin American Acquisition Partnerships are generally based on the cost of servicing plus a profit margin. The decline in servicing fees from domestic Acquisition Partnerships for Q2 2010 in comparison to Q2 2009 was attributable primarily to a decline in collections from unconsolidated domestic partnerships to $2.5 million for Q2 2010 compared to $9.9 million for Q2 2009. The decline in servicing fees from the Latin American Acquisition Partnerships was attributable to a decrease in the servicing costs related to those unconsolidated partnerships in Q2 2010 compared to Q2 2009 (i.e. the lower the servicing costs incurred by these partnerships, the lower the service fee income recognized by the Company).

Income from Portfolio Assets.  Income from Portfolio Assets increased to $14.6 million in Q2 2010 compared to $14.1 million in Q2 2009. The increase in income from Portfolio Assets is attributed primarily to an increase in FirstCity’s average investment in consolidated Portfolio Assets in its PAA&R segment to $221.0 million for Q2 2010 compared to $205.6 million for Q2 2009. Refer to Note 4 of 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 $0.2 million gain on the sales of SBA loans in Q2 2010 with a $2.1 million net basis in the loans sold, compared to a $0.6 million gain on the sales of SBA loans in Q2 2009 with a $13.2 million net basis in the loans sold. Gains on SBA loan sales reflect the Company’s participation in the SBA guaranteed loan program. Under the SBA 7(a) program, the SBA guarantees up to 90 percent of the principal on a qualifying loan. The Company generally sells the guaranteed portions of originated loans into the secondary market and retains the unguaranteed portion for investment.

Gain on sale of investment securities.  In Q2 2010, the Company recognized a $3.3 million gain related to the sale of its investment security that represented a beneficial interest in securitized financial assets.

Interest income from SBA loans.  Interest income from SBA loans remained constant at $0.3 million for both Q2 2010 and Q2 2009.

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Interest income from loans receivable — affiliates.  Interest income from loans receivable — affiliates decreased to $0.5 million in Q2 2010 compared to $0.6 million for Q2 2009. The interest income decline is attributed primarily to a decline in FirstCity’s average investment level in loans receivable — affiliates in its PAA&R segment to $11.6 million for Q2 2010 compared to $14.2 million for Q2 2009.

Interest income from loans receivable — other.   Interest income from loans receivable — other decreased by $0.2 million for Q2 2010 compared to Q2 2009. The decline in interest income in Q2 2010 compared to Q2 2009 is attributable to FirstCity’s increased holdings in Q2 2010 of such loans accounted for under the non-accrual method of accounting. FirstCity’s average investment in loans receivable — other in its PAA&R segment was $5.0 million in Q2 2010 (all of which were accounted for under the non-accrual method during the entire period), compared to its average investment in such loans of $7.0 million in Q2 2009 (all of which were income-accruing loans during the entire period).

Other income.  Other income from the Company’s PAA&R segment increased to $1.3 million in Q2 2010 compared to $0.8 million for Q2 2009, primarily due to $0.7 million of additional due diligence income recorded in Q2 2010 compared to Q2 2009 as a result of increased investment activity in Q2 2010 compared to Q2 2009.

Expenses.  Operating expenses approximated $14.1 million and $9.3 million in Q2 2010 and Q2 2009, respectively. The following is a discussion of the major components of operating expenses.

Interest expense and fees on notes payable totaled $3.6 million and $3.4 million for Q2 2010 and Q2 2009, respectively. FirstCity’s average outstanding debt in its PAA&R segment increased to $298.2 million in Q2 2010 from $291.4 million in Q2 2009 — primarily to finance its increased investment activity and to provide working capital to support future growth. The Company’s average cost of borrowings increased slightly to 4.9% in Q2 2010 compared to 4.7% in Q2 2009.

Salaries and benefits totaled $4.3 million and $4.0 million in Q2 2010 and Q2 2009, respectively. The total number of personnel within the PAA&R segment was 207 and 209 at June 30, 2010 and 2009, respectively.

Net provisions for loan and impairment losses on consolidated Portfolio Assets and loans receivable in our PAA&R segment totaled $2.1 million in Q2 2010. Net recoveries for loan and impairment losses totaled $0.3 million in Q2 2009. The $2.1 million of net impairment provisions in Q2 2010 were attributed primarily to declines in values of loan collateral and real estate assets in our domestic loans and Portfolios, which was responsible for $1.6 million of the Company’s consolidated net provisions recorded in Q2 2010. The impairment provisions were identified in connection with management’s quarterly evaluation of the collectibility of the Company’s Portfolio Assets and loans receivable. The process for evaluating and measuring impairment is critical to our financial results, as it requires subjective and complex judgments due to the need to make estimates about the impact of matters that are uncertain. This process also requires estimates that are susceptible to significant revision as more information becomes available. It remains unclear what impact the illiquid markets, real estate value declines and the overall economic slowdown will ultimately have on our financial results. Therefore, we cannot provide assurance that, in any particular future period, we will not incur additional impairment provisions.

Asset-level expenses, which generally represent costs incurred by FirstCity to manage consolidated Portfolio Assets, support foreclosed properties and to protect its security interests in loan collateral, increased to $1.9 million in Q2 2010 from $1.2 million in Q2 2009. The increased level of expenses is attributed primarily to the Company’s increased holdings in consolidated Portfolio Assets (the Company’s average investment in consolidated Portfolio Assets in its PAA&R segment totaled $221.0 million for Q2 2010 compared to $205.6 million for Q2 2009).

Other costs and expenses in the Company’s PAA&R segment increased to $2.3 million for Q2 2010 from $0.9 million for Q2 2009, due to $0.6 million of foreign currency exchange losses attributed to our consolidated foreign operations in Q2 2010 compared to $0.9 million of foreign currency exchange gains recognized in Q2 2009 — a $1.5 million unfavorable swing (attributed mainly to our consolidated European operations). The Euro currency weakened against the U.S. dollar in Q2 2010 compared to Q2 2009.

Equity in earnings of unconsolidated subsidiaries.  Equity in earnings of unconsolidated subsidiaries (Acquisition Partnership and servicing entities) from our PAA&R segment decreased by $1.8 million in Q2 2010 compared to Q2 2009. Equity in earnings of our unconsolidated Acquisition Partnerships was $0.3 million in losses for Q2 2010 compared to $2.1 million in earnings for Q2 2009, whereas equity in earnings of our unconsolidated servicing entities increased to $0.3 million of earnings in Q2 2010 compared to $0.3 million of losses in Q2 2009. The following is a discussion of equity in earnings from FirstCity’s Acquisition Partnerships (by

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geographic region) and servicing entities. Refer to Note 6 of the consolidated financial statements included in Item 1 of this Form 10-Q for a summary of revenues, earnings and equity in earnings of FirstCity’s equity-method investments by region.

·Domestic — Total revenues reported by domestic Acquisition Partnerships decreased to $0.8 million in Q2 2010 compared to $3.0 million in Q2 2009. In addition, total net earnings reported by domestic partnerships decreased to $0.2 million in net losses for Q2 2010 compared to $1.3 million in net earnings for Q2 2009. The decrease in total revenues and net earnings in Q2 2010 compared to Q2 2009 was attributable primarily to a decrease in collections to $2.5 million in Q2 2010 from $9.9 million in Q2 2009; and a $0.9 million decline in interest and accretion income in Q2 2010 compared to Q2 2009 due to an increase in the level of domestic partnership loan portfolios accounted for on a non-accrual method of accounting (cost-recovery or cash basis) instead of the interest method (i.e. accrual method). Under U.S. GAAP, the interest method of accounting is not appropriate if management does not have the ability to develop a reasonable expectation of both the timing and amount of future cash flows to be collected. The collective activity described above translated to a decrease in FirstCity’s share of domestic partnership earnings to $0.1 million in losses for Q2 2010 from $0.5 million in earnings for Q2 2009. FirstCity’s average investment in domestic Acquisition Partnerships increased to $19.0 million for Q2 2010 from $13.9 million for Q2 2009, due primarily to increased investment activity by newly-formed domestic Acquisition Partnerships under FirstCity’s investment agreement with Värde.

·Latin America — Total revenues reported by Latin American Acquisition Partnerships increased to $6.9 million in Q2 2010 from $2.9 million in Q2 2009. However, total net earnings reported by Latin American partnerships decreased significantly to $0.3 million in losses for Q2 2010 compared to $11.3 million in earnings for Q2 2009. Total collections from Latin American partnerships increased to $10.0 million in Q2 2010 compared to $5.8 million in Q2 2009. The significant change in net earnings reported by the Latin American partnerships in Q2 2010 compared to Q2 2009 was due primarily to foreign currency exchange losses of $0.8 million recorded by these partnerships in Q2 2010 compared to $13.9 million of foreign currency exchange gains recorded in Q2 2009 — a $14.7 million unfavorable swing. The significant foreign currency exchange gains recorded by these partnerships in Q2 2009 stemmed from the translation impact to their U.S. dollar-denominated debt from an approximate 12% devaluation of the Mexican peso during the period (compared to an approximate 1.5% appreciation of the Mexican peso during Q2 2010). The collective activity described above translated to an unfavorable decline in FirstCity’s share of earnings in Latin American partnerships to $0.2 million in earnings for Q2 2010 compared to $1.4 million in earnings for Q2 2009. FirstCity’s average investment in Latin American Acquisition Partnerships remained relatively flat at $17.2 million for Q2 2010 compared to $17.5 million for Q2 2009.

·Europe — Total revenues reported by European Acquisition Partnerships decreased to $0.6 million in Q2 2010 from $5.2 million in Q2 2009. In addition, total net earnings reported by the European partnerships decreased to $1.3 million in losses in Q2 2010 from $0.9 million in earnings for Q2 2009. The decrease in total partnership revenues and net earnings reported by the European partnerships was attributed primarily to (1) decrease in collections to $2.0 million in Q2 2010 compared to $6.3 million in Q2 2009; off-set partially by a decrease in net impairment provisions to $1.1 million in Q2 2010 from $2.7 million in Q2 2009. In addition, contributing to the decline in European partnership revenues was the decrease in Portfolio Asset holdings by these Acquisition Partnerships over the past two years (see paragraph below). The collective activity described above translated to a decrease in FirstCity’s share of European partnership earnings to $0.3 million in losses for Q2 2010 from $0.2 million in earnings for Q2 2009.

FirstCity’s average investment in European Acquisition Partnerships decreased to $6.2 million for Q2 2010 from $12.8 million for Q2 2009 — which contributed to a decline in FirstCity’s share of European partnership revenues as discussed above. In light of FirstCity’s step-acquisition transaction and resulting consolidation of sixteen French entities (former unconsolidated European Acquisition Partnerships) in May 2009, the Company expects income from consolidated Portfolio Assets to off-set the decline in European partnerships revenues.

·Servicing Entities — Total revenues reported by our foreign unconsolidated servicing entities remained relatively steady at $12.0 million in Q2 2010 compared to $12.0 million in Q2 2009; however, total net earnings reported by these entities improved to $0.8 million of net earnings in Q2 2010 from $0.5 million of net losses in Q2 2009. The increase in net earnings reported by the underlying servicing entities was attributed primarily to a $1.2 million decline in operating costs and expenses in Q2 2010 compared to Q2 2009. The collective activity described above translated to an increase in FirstCity’s share of earnings from our servicing entities to $0.3 million in earnings for Q2 2010 from $0.3 million in losses for Q2 2009.

Gain on business combinations.   In Q2 2009, the Company recorded a $1.5 million gain attributable to a step acquisition transaction in which the Company acquired a controlling financial interest in certain French Acquisition Partnerships. The Company

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owned a noncontrolling equity interest in these entities prior to the transaction. Pursuant to business combination accounting standards, the Company measured the assets and liabilities of these partnerships at fair value on the acquisition date, and the Company re-measured to fair value the carrying value of its previously-held equity-method investments in the partnerships. The fair value of the Company’s total interests in the partnerships after the step acquisition exceeded the carrying value of its previously-held equity interests by $1.5 million — which resulted in the Company’s recognition of the $1.5 million gain.

Net income attributable to noncontrolling interests.  The amount of net income attributable to noncontrolling interests remained constant at $1.6 million for both Q2 2010 and Q2 2009. The Company’s carrying value of noncontrolling interests on its consolidated balance sheets attributed to consolidated Acquisition Partnerships, which represents the equity in these consolidated subsidiaries not attributable to FirstCity, increased to $37.1 million at June 30, 2010 from $36.2 million at June 30, 2009.

Special Situations Platform Business Segment

The operating contribution from the Special Situations Platform business segment (“FirstCity Denver”) resulted in a $5.3 million operating gain in Q2 2010 compared to a $1.1 million operating loss in Q2 2009. In Q2 2010, FirstCity Denver provided $8.1 million of investment capital to privately-held middle-market companies in the form of debt and direct equity investments ($4.6 million financed through investee entity’s debt), compared to $3.2 million of investment capital provided to such companies in the form of debt and direct equity investments in Q2 2009. Since its inception in April 2007, FirstCity Denver has been involved in middle-market transactions with total investment values in excess of $84.5 million, and has provided $56.7 million of investment capital in connection with these investments.

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The following is a summary of the results of operations for the Company’s Special Situations Platform business segment for Q2 2010 and Q2 2009:

	Three Months Ended
	June 30,
	2010			2009
	(Dollars in thousands)
Special Situations Platform:
Revenues:
Interest income from loans receivable	$	543		$	544
Operating revenue - railroad	1,192			705
Operating revenue - manufacturing	6,107			—
Operating revenue - coal mine	13,100			—
Other income	260			326
Total revenues	21,202			1,575
Expenses - Railroad Operations:
Interest and fees on notes payable	37			20
Salaries and benefits	260			236
Other	330			279
Total railroad expenses	627			535
Expenses - Manufacturing Operations:
Salaries and benefits	1,189			—
Cost of sales	3,468			—
Other	1,295			—
Total manufacturing expenses	5,952			—
Expenses - Coal Mine Operations:
Interest and fees on notes payable	37			—
Salaries and benefits	67			—
Cost of sales	9,310			—
Amortization	3,461			—
Other	420			—
Total coal mine expenses	13,295			—
Expenses - Other:
Interest and fees on notes payable	118			116
Salaries and benefits	444			278
Provision for loan and impairment losses	568			967
Other	385			475
Total other expenses	1,515			1,836
Total expenses	21,389			2,371
Equity in net earnings (loss) of unconsolidated subsidiaries	1,806			(642		)
Gain on business combinations	4,838			—
Net (income) loss attributable to noncontrolling interests	(1,207		)	380
Operating contribution (loss) before taxes	$	5,250		$	(1,058	)
Operating contribution (loss), net of direct taxes	$	5,263		$	(1,132	)

Interest income from loans receivable.   Interest income from loans receivable in the second quarter of 2010 remained constant in comparison to Q2 2009. FirstCity Denver’s average investment in loans receivable was $19.6 million for Q2 2010 — including $2.3 million accounted for under the non-accrual method of accounting. For Q2 2009, FirstCity Denver’s average investment in loans receivable was $20.8 million.

Revenue and expenses from railroad operations.  Revenue and expenses from railroad operations represents the results of operations recorded by FirstCity Denver’s majority-owned railroad companies (engaged primarily in interchanging rail cars with connecting carriers and providing rail freight services for on-line customers). Revenue from railroad operations increased by $0.5

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million in Q2 2010 compared to Q2 2009 due to an increase in rail car movement services performed in Q2 2010 compared to Q2 2009. Total expenses in Q2 2010 attributable to the railroad operations remained relatively constant in comparison to Q2 2009.

Revenue and expenses from manufacturing operations.  Revenue and expenses from manufacturing operations represents the consolidated results of operations recorded by FirstCity Denver’s manufacturing company (engaged principally in the design, production and sale of wireless transmission equipment and software solutions) that it acquired in December 2009. The company’s sales in Q2 2010 were composed of $4.3 million related to equipment and $1.8 million related to software solutions. In Q2 2010, 38% of the company’s sales were made to international customers. On June 30, 2010, FirstCity Denver ceased to have a controlling interest, but retained a noncontrolling interest and elevated economic interests, in the manufacturing subsidiary. As such, on June 30, 2010, FirstCity Denver deconsolidated the balance sheet accounts of this subsidiary and began to account for its retained investment in the manufacturing entity using the equity-method of accounting. Consequently, FirstCity Denver will no longer report the individual revenue and expense line-items of the manufacturing entity’s operations in its consolidated statement of operations (rather, FirstCity Denver will record its share of the subsidiary’s net earnings as “Equity in earnings of unconsolidated subsidiaries” beginning July 1, 2010). Refer to Note 3 to the consolidated financial statements included in Item 1 of this Form 10-Q for additional information on this transaction.

Revenue and expenses from coal mine operations.  Revenue and expenses from coal mine operations represents the consolidated results of operations recorded by FirstCity Denver’s majority-owned coal mine subsidiary (engaged primarily in the purchase and sale of coal and coal-related products) since April 1, 2010 — the date FirstCity Denver increased its ownership interest and obtained a controlling interest in the entity. The coal mine entity generates revenue under a short-term coal sales contract with a major utility company. FirstCity Denver’s application of business combination accounting in connection with obtaining control of the coal mine subsidiary resulted in the recognition of an asset for the coal supply agreement and a liability for a coal purchase agreement. The coal supply asset and coal purchase liability are being amortized over the actual amount of tons shipped under each contract (which are both scheduled to expire in December 2010). Refer to Note 3 to the consolidated financial statements included in Item 1 of this Form 10-Q for additional information on this transaction.

Other income.  Other income in Q2 2010 remained relatively constant in comparison to Q2 2009.

Expenses — Other.  Other expense decreased by $0.3 million in Q2 2010 compared to Q2 2009 primarily due to a $0.4 million decrease in net impairment provisions recorded in Q2 2010 on middle-market company debt investments. The impairment provisions were identified in connection with management’s regular evaluation of the collectibility of FirstCity Denver’s loan investments. The process for evaluating and measuring impairment is critical to our financial results, as it requires subjective and complex judgments due to the need to make estimates about the impact of matters that are uncertain; and estimates that are susceptible to significant revision as more information becomes available.

Equity in net earnings of unconsolidated subsidiaries.  Equity in net earnings of unconsolidated subsidiaries totaled $1.8 million in Q2 2010 and $0.6 million in losses in Q2 2009 — which is composed primarily of FirstCity Denver’s equity earnings in its equity-method investments related to the coal mine operation and multiple manufacturing concerns. In Q2 2010, FirstCity Denver’s share of net earnings in unconsolidated subsidiaries was composed primarily of $0.8 million in earnings from its newly-obtained direct equity-method investment in a coal mine equipment subsidiary (refer to Note 3 to the consolidated financial statements included in Item 1 of this Form 10-Q for additional information on this transaction) and $1.1 million in earnings from manufacturing entities. For Q2 2009, FirstCity Denver’s equity in earnings attributable to the coal mine’s operations approximated $0.5 million; however, FirstCity Denver’s share of net earnings in the coal mine was off-set by its share ($1.1 million) of a one-time charge incurred by the coal mine company in Q2 2009 to relinquish its future reclamation liability. As discussed above, FirstCity Denver stopped accounting for the coal mine operation under the equity-method of accounting effective April 1, 2010 after it obtained a controlling interest in the subsidiary.

First Six Months of 2010 Compared to First Six Months of 2009

Net earnings to common stockholders totaled $8.2 million in the first six months of 2010 (“YTD 2010”) compared to net earnings of $8.4 million in the first six months of 2009 (“YTD 2009”). On a per share basis, diluted net earnings to common stockholders were $0.81 in YTD 2010 compared to $0.84 in YTD 2009.

Portfolio Asset Acquisition and Resolution

The operating contribution from the Portfolio Asset Acquisition and Resolution (“PAA&R”) segment resulted in a $6.1 million operating gain in YTD 2010 compared to a $12.1 million operating gain for YTD 2009. FirstCity and its investment partners acquired

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$159.7 million of Portfolio Assets in YTD 2010 with an approximate Face Value of $285.5 million, compared to its involvement in acquiring $137.3 million of Portfolio Assets in YTD 2009 with an approximate Face Value of $258.5 million. In YTD 2010, FirstCity’s investment share in Portfolio Asset acquisitions was $42.7 million — with $20.5 million acquired through consolidated Portfolios and $22.2 million through unconsolidated Portfolios. In YTD 2009, FirstCity’s investment share in the Portfolio Asset acquisitions was $113.5 million — primarily acquired through consolidated Portfolios. In YTD 2010, FirstCity invested an additional $23.5 million in non-portfolio investments in the form of SBA loan originations and advances, direct equity investments, and other loan investments, compared to $14.4 million of additional non-portfolio investments in the form of SBA loan originations and advances, as well as $11.2 million in direct equity investments (attributable primarily to European entity acquisitions), in YTD 2009.

The following is a summary of the results of operations for the Company’s PAA&R business segment for YTD 2010 and YTD 2009:

	Six Months Ended
	June 30,
	2010			2009
	(Dollars in thousands)
Portfolio Asset Acquisition and Resolution:
Revenues:
Servicing fees	$	3,746		$	4,795
Income from Portfolio Assets	26,085			23,120
Gain on sale of SBA loans held for sale, net	163			610
Gain on sale of investment securities	3,250			—
Interest income from SBA loans	581			641
Interest income from loans receivable - affiliates	936			1,089
Interest income from loans receivable - other	—			414
Other income	1,774			1,597
Total revenues	36,535			32,266
Expenses:
Interest and fees on notes payable	6,937			6,762
Salaries and benefits	8,100			7,521
Provision for loan and impairment losses, net of recoveries	3,158			816
Asset-level expenses	3,436			2,350
Other	4,391			3,021
Total expenses	26,022			20,470
Equity in net earnings (loss) of unconsolidated subsidiaries	1,193			855
Gain on business combinations	891			1,455
Net income attributable to noncontrolling interests	(6,071		)	(1,528		)
Operating contribution before direct taxes	$	6,526		$	12,578
Operating contribution, net of direct taxes	$	6,141		$	12,054

Servicing fee revenues.  Servicing fee revenues decreased to $3.7 million in YTD 2010 from $4.8 million in YTD 2009. Servicing fees from domestic Acquisition Partnerships totaled $0.3 million in YTD 2010 compared to $1.0 million in YTD 2009, while servicing fees from Latin American Acquisition Partnerships totaled $3.2 million in YTD 2010 and $3.5 million in YTD 2009. Servicing fees from domestic Acquisition Partnerships are generally based on a percentage of the collections received from Portfolio Assets held by these unconsolidated partnerships; whereas servicing fees from Latin American Acquisition Partnerships are generally based on the cost of servicing plus a profit margin. The decline in servicing fees from domestic Acquisition Partnerships for YTD 2010 in comparison to YTD 2009 was attributable primarily to a decline in collections from unconsolidated domestic partnerships to $7.9 million for YTD 2010 compared to $14.4 million for YTD 2009. The decline in servicing fees from the Latin American Acquisition Partnerships was attributable to a decrease in the servicing costs related to those unconsolidated partnerships in YTD 2010 compared to YTD 2009 (i.e. the lower the servicing costs incurred by these partnerships, the lower the service fee income recognized by the Company).

Income from Portfolio Assets.  Income from Portfolio Assets increased to $26.1 million in YTD 2010 compared to $23.1 million in YTD 2009. The increase in income from Portfolio Assets is attributed primarily to an increase in FirstCity’s average investment in consolidated Portfolio Assets in its PAA&R segment increased to $214.7 million for YTD 2010 from $181.2 million for YTD 2009.

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Refer to Note 4 of 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 $0.2 million gain on the sales of SBA loans in YTD 2010 with a $2.1 million net basis in the loans sold, compared to a $0.6 million gain on the sales of SBA loans in YTD 2009 with a $13.2 million net basis in the loans sold. Gains on SBA loan sales reflect the Company’s participation in the SBA guaranteed loan program. Under the SBA 7(a) program, the SBA guarantees up to 90 percent of the principal on a qualifying loan. The Company generally sells the guaranteed portions of originated loans into the secondary market and retains the unguaranteed portion for investment.

Gain on sale of investment securities.  In YTD 2010, the Company recognized a $3.3 million gain related to the sale of its investment security that represented a beneficial interest in securitized financial assets.

Interest income from SBA loans.  Interest income from SBA loans remained constant at $0.6 million for both YTD 2010 and YTD 2009.

Interest income from loans receivable — affiliates.  Interest income from loans receivable — affiliates decreased slightly to $0.9 million in YTD 2010 compared to $1.1 million YTD 2009. The interest income decline is attributed to a decline in FirstCity’s average investment level in loans receivable — affiliates in its PAA&R segment to $12.1 million for YTD 2010 compared to $14.1 million for YTD 2009.

Interest income from loans receivable — other.   Interest income from loans receivable — other decreased by $0.4 million for YTD 2010 compared to YTD 2009. The decline in interest income in YTD 2010 compared to YTD 2009 is attributable to FirstCity’s increased holdings in YTD 2010 of such loans accounted for under the non-accrual method of accounting. FirstCity’s average investment in loans receivable — other in its PAA&R segment was $5.3 million in YTD 2010 (all of which were accounted for under the non-accrual method during the entire period), compared to its average investment in such loans of $7.2 million in YTD 2009 (all of which were income-accruing loans during the entire period).

Other income.  Other income from the Company’s PAA&R segment remained relatively constant at $1.8 million in YTD 2010 compared to $1.6 million in YTD 2009.

Expenses.  Operating expenses approximated $26.0 million and $20.5 million in YTD 2010 and YTD 2009, respectively. The following is a discussion of the major components of operating expenses.

Interest expense and fees on notes payable totaled $6.9 million for YTD 2010 and $6.8 million for YTD 2009. FirstCity’s average outstanding debt in its PAA&R segment increased to $294.1 million in YTD 2010 from $274.3 million in YTD 2009 — primarily to finance its increased investment activity and to provide working capital to support future growth. The Company’s average cost of borrowings in its PAA&R segment decreased slightly to 4.7% in YTD 2010 compared to 4.9% in YTD 2009.

Salaries and benefits increased to $8.1 million in YTD 2010 from $7.5 million in YTD 2009, due primarily to increased costs related to base salaries, payroll taxes and employee benefits in the PAA&R segment in YTD 2010 compared to YTD 2009. The total number of personnel within the PAA&R segment was 207 and 209 at June 30, 2010 and 2009, respectively.

Net provisions for loan and impairment losses on our consolidated Portfolio Assets and loans receivable in our PAA&R segment totaled $3.2 million in YTD 2010 and $0.8 million in YTD 2009. The $3.2 million of net impairment provisions in YTD 2010 were attributed primarily to declines in values of loan collateral and real estate assets in our domestic loans and Portfolios, which was responsible for $2.6 million of the Company’s consolidated net provisions recorded in YTD 2010. The impairment provisions were identified in connection with management’s quarterly evaluation of the collectibility of the Company’s Portfolio Assets and loans receivable. The process for evaluating and measuring impairment is critical to our financial results, as it requires subjective and complex judgments due to the need to make estimates about the impact of matters that are uncertain. This process also requires estimates that are susceptible to significant revision as more information becomes available. It remains unclear what impact the illiquid markets, real estate value declines and the overall economic slowdown will ultimately have on our financial results. Therefore, we cannot provide assurance that, in any particular future period, we will not incur additional impairment provisions.

Asset-level expenses, which generally represent costs incurred by FirstCity to manage consolidated Portfolio Assets, support foreclosed properties and to protect its security interests in loan collateral, increased to $3.4 million in YTD 2010 from $2.4 million in YTD 2009. The increased level of expenses is attributed primarily to the Company’s increased holdings in consolidated Portfolio

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Assets (the Company’s average investment in consolidated Portfolio Assets in its PAA&R segment totaled $214.7 million for YTD 2010 compared to $181.2 million for YTD 2009).

Other costs and expenses in the Company’s PAA&R segment increased to $4.4 million for YTD 2010 from $3.0 million for YTD 2009, due to $1.1 million of foreign currency exchange losses attributed to our consolidated foreign operations in YTD 2010 compared to $0.3 million of foreign currency exchange gains recognized in YTD 2009 — a $1.4 million unfavorable swing (attributed mainly to our consolidated European operations). The Euro currency weakened against the U.S. dollar in YTD 2010.

Equity in earnings of unconsolidated subsidiaries.  Equity in earnings of unconsolidated subsidiaries (Acquisition Partnership and servicing entities) from our PAA&R segment increased by $0.3 million in YTD 2010 compared to YTD 2009. Equity in earnings of our unconsolidated Acquisition Partnerships was $0.9 million in losses for YTD 2010 compared to $1.2 million in earnings for YTD 2009, whereas equity in earnings of our unconsolidated servicing entities increased to $2.1 million of earnings in YTD 2010 compared to $0.4 million of losses in YTD 2009. The following is a discussion of equity in earnings from FirstCity’s Acquisition Partnerships (by geographic region) and servicing entities. Refer to Note 6 of the consolidated financial statements included in Item 1 of this Form 10-Q for a summary of revenues, earnings and equity in earnings of FirstCity’s equity-method investments by region.

·Domestic — Total revenues reported by domestic Acquisition Partnerships decreased to $2.6 million in YTD 2010 compared to $4.6 million in YTD 2009. In addition, total net earnings reported by domestic partnerships decreased to $0.5 million in YTD 2010 compared to $1.4 million in YTD 2009. The decrease in total revenues and net earnings in YTD 2010 compared to YTD 2009 was attributable primarily to a decrease in collections to $7.8 million in YTD 2010 from $14.4 million in YTD 2009; and a $1.9 million decline in interest and accretion income in YTD 2010 compared to YTD 2009 due to an increase in the level of domestic partnership loan portfolios accounted for on a non-accrual method of accounting (cost-recovery or cash basis) instead of the interest method (i.e. accrual method). Under U.S. GAAP, the interest method of accounting is not appropriate if management does not have the ability to develop a reasonable expectation of both the timing and amount of future cash flows to be collected. The collective activity described above translated to a decrease in FirstCity’s share of domestic partnership earnings to $37,000 for YTD 2010 from $0.5 million for YTD 2009. FirstCity’s average investment in domestic Acquisition Partnerships increased to $16.6 million for YTD 2010 from $14.4 million for YTD 2009, due primarily to increased investment activity by newly-formed domestic Acquisition Partnerships under FirstCity’s investment agreement with Värde.

·Latin America — Total revenues reported by Latin American Acquisition Partnerships increased to $10.3 million in YTD 2010 from $5.4 million in YTD 2009. However, the Latin American partnerships reported total net losses of $2.1 million in YTD 2010 compared to $1.0 million YTD 2009. Total collections from Latin American partnerships increased to $16.1 million in YTD 2010 compared to $11.9 million in YTD 2009. The increased net losses reported by the Latin American partnerships in YTD 2010 compared to YTD 2009 was due primarily to (1) a $2.7 million decrease in foreign currency exchange gains recognized by these partnerships in YTD 2010 compared to YTD 2009; (2) $1.9 million of additional net impairment provisions recorded in YTD 2010 compared to YTD 2009; and (3) $1.3 million of additional tax expense recorded in YTD 2010 compared to YTD 2009. The collective activity described above translated to a modest increase in FirstCity’s share of earnings in Latin American partnerships to $45,000 in earnings for YTD 2010 compared to $0.3 million in losses for YTD 2009. FirstCity’s average investment in Latin American Acquisition Partnerships remained relatively flat at $17.3 million for YTD 2010 compared to $17.8 million for YTD 2009.

·Europe — Total revenues reported by European Acquisition Partnerships decreased to $2.5 million in YTD 2010 from $11.5 million in YTD 2009. In addition, total net earnings reported by the European partnerships decreased sharply to $3.3 million in losses in YTD 2010 from $3.7 million in earnings for YTD 2009. The decrease in total partnership revenues and net earnings reported by the European partnerships was attributed primarily to a decrease in collections to $9.9 million in YTD 2010 compared to $15.4 million in YTD 2009; off-set partially by a decrease in net impairment provisions to $2.6 million in YTD 2010 from $3.6 million in YTD 2009. In addition, contributing to the decline in European partnership revenues and net earnings was the decrease in Portfolio Asset holdings by these Acquisition Partnerships over the past two years (see paragraph below). The collective activity described above translated to a decrease in FirstCity’s share of European partnership earnings to $1.0 million in losses for YTD 2010 from $1.0 million in earnings for YTD 2009.

FirstCity’s average investment in European Acquisition Partnerships decreased to $7.2 million for YTD 2010 from $13.0 million for YTD 2009 — which contributed to a decline in FirstCity’s share of European partnership revenues as discussed above. In light of FirstCity’s step-acquisition transaction and resulting consolidation of sixteen French entities (former

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unconsolidated European Acquisition Partnerships) in May 2009, the Company expects income from consolidated Portfolio Assets to off-set the decline in European partnerships revenues.

·Servicing Entities — Total revenues reported by our foreign unconsolidated servicing entities increased to $28.2 million in YTD 2010 from $23.7 million in YTD 2009, and total net earnings reported by these entities improved to $6.3 million in YTD 2010 from $0.7 million of net losses in YTD 2009. The increase in net earnings reported by the underlying servicing entities was attributed primarily to (1) additional investment income of $4.0 million recorded in YTD 2010 compared to YTD 2009; and (2) a $2.2 million decrease in income tax provisions in YTD 2010 compared to YTD 2009 as a result of our ability to recognize foreign tax benefits associated with U.S. GAAP adjustments to an unconsolidated foreign servicing entity’s local financial statements, combined with the timing of federal income tax payments made by the foreign servicing entity in its local jurisdiction. The collective activity described above translated to an increase in FirstCity’s share of earnings from our servicing entities to $2.1 million in earnings for YTD 2010 from $0.4 million in losses for YTD 2009.

Gain on business combinations.  In YTD 2010, the Company recorded a $0.9 million gain attributable to a step acquisition transaction in which the Company acquired a controlling financial interest in three domestic Acquisition Partnerships. The Company owned a noncontrolling equity interest in these entities prior to the transaction. Pursuant to business combination accounting standards, the Company’s previously-held noncontrolling interests in these entities were re-measured to fair value on the acquisition date) — which resulted in the Company’s recognition of the $0.9 million gain. Refer to Note 3 of the consolidated financial statements included in Item 1 of this Form 10-Q for additional information on this transaction. In YTD 2009, the Company recorded a $1.5 million gain attributable to a step acquisition transaction in which the Company acquired a controlling financial interest in certain French Acquisition Partnerships. The Company owned a noncontrolling equity interest in these entities prior to the transaction. Pursuant to business combination accounting standards, the Company’s previously-held noncontrolling interests in the French entities were re-measured to fair value on the acquisition date (May 2009) — which resulted in the Company’s recognition of the $1.5 million gain.

Net income attributable to noncontrolling interests.  Noncontrolling interest expense represents the portion of net earnings that is attributable to our co-investors in our majority-owned, consolidated Acquisition Partnerships. The amount of net income attributable to noncontrolling interests increased to $6.1 million for YTD 2010 from $1.5 million for YTD 2009. This increase is attributed to an increase in net earnings from these majority-owned, consolidated Acquisition Partnerships in YTD 2010 compared to YTD 2009 (i.e. an increase in the amount of net earnings reported by these majority-owned entities translates to an increase in the amount of net earnings apportioned to the noncontrolling investors).

Special Situations Platform Business Segment

The operating contribution from the Special Situations Platform business segment (“FirstCity Denver”) totaled $6.0 million in YTD 2010 compared to $0.2 million in YTD 2009. In YTD 2010, FirstCity Denver provided $12.9 million of investment capital to privately-held middle-market companies in the form of debt and direct equity investments ($4.6 million financed through investee entity’s debt), compared to $5.6 million of investment capital provided to such companies in the form of debt and equity in YTD 2009. Since its inception in April 2007, FirstCity Denver has been involved in middle-market transactions with total investment values in excess of $84.5 million, and has provided $56.7 million of investment capital in connection with these investments.

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The following is a summary of the results of operations for the Company’s Special Situations Platform business segment for the YTD 2010 and YTD 2009:

	Six Months Ended
	June 30,
	2010			2009
	(Dollars in thousands)
Special Situations Platform:
Revenues:
Interest income from loans receivable	$	1,152		$	1,152
Operating revenue - railroad	2,457			1,452
Operating revenue - manufacturing	10,466			—
Operating revenue - coal mine	13,100			—
Other income	837			1,309
Total revenues	28,012			3,913
Expenses - Railroad Operations:
Interest and fees on notes payable	74			55
Salaries and benefits	537			479
Other	622			492
Total railroad expenses	1,233			1,026
Expenses - Manufacturing Operations:
Salaries and benefits	2,396			—
Cost of sales	6,011			—
Other	2,381			—
Total manufacturing expenses	10,788			—
Expenses - Coal Mine Operations:
Interest and fees on notes payable	37			—
Salaries and benefits	67			—
Cost of sales	9,310			—
Amortization	3,461			—
Other	420			—
Total coal mine expenses	13,295			—
Expenses - Other:
Interest and fees on notes payable	231			231
Salaries and benefits	740			471
Provision for loan and impairment losses	1,169			967
Other	769			924
Total other expenses	2,909			2,593
Total expenses	28,225			3,619
Equity in net earnings of unconsolidated subsidiaries	2,852			197
Gain on business combinations	4,838			—
Net income attributable to noncontrolling interests	(1,345		)	(51		)
Operating contribution before taxes	$	6,132		$	440
Operating contribution, net of direct taxes	$	5,978		$	205

Interest income from loans receivable.   Interest income from loans receivable in YTD 2010 remained constant in comparison to YTD 2009. FirstCity Denver’s average investment in loans receivable was $19.1 million for YTD 2010 — including $2.6 million accounted for under the cost recovery method. For YTD 2009, FirstCity Denver’s average investment in loans receivable was $19.7 million.

Revenue and expenses from railroad operations.  Revenue and expenses from railroad operations represents the results of operations recorded by FirstCity Denver’s majority-owned railroad companies (engaged primarily in interchanging rail cars with connecting carriers and providing rail freight services for on-line customers). Revenue from railroad operations increased by $1.0

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million in YTD 2010 compared to YTD 2009 due to an increase in rail car movement services performed in the first six months of 2010. Total expenses in YTD 2010 attributable to the railroad operations remained relatively constant in comparison to YTD 2009.

Revenue and expenses from manufacturing operations.  Revenue and expenses from manufacturing operations represents the consolidated results of operations recorded by FirstCity Denver’s manufacturing company (engaged principally in the design, production and sale of wireless transmission equipment and software solutions) that it acquired in December 2009. The company’s sales in YTD 2010 were composed of $6.7 million related to equipment and $3.8 million related to software solutions. In YTD 2010, 32% of the company’s sales were made to international customers. On June 30, 2010, FirstCity Denver ceased to have a controlling interest, but retained a noncontrolling interest and elevated economic interests, in the manufacturing subsidiary. As such, on June 30, 2010, FirstCity Denver deconsolidated the balance sheet accounts of this subsidiary and began to account for its retained investment in the manufacturing entity using the equity-method of accounting. Consequently, FirstCity Denver will no longer report the individual revenue and expense line-items of the manufacturing entity’s operations in its consolidated statement of operations (rather, FirstCity Denver will record its share of the subsidiary’s net earnings as “Equity in earnings of unconsolidated subsidiaries” beginning July 1, 2010). Refer to Note 3 to the consolidated financial statements included in Item 1 of this Form 10-Q for additional information on this transaction.

Revenue and expenses from coal mine operations.  Revenue and expenses from coal mine operations represents the consolidated results of operations recorded by FirstCity Denver’s majority-owned coal mine subsidiary (engaged primarily in the purchase and sale of coal and coal-related products) since April 1, 2010 — the date FirstCity Denver increased its ownership interest and obtained a controlling interest in the entity. The coal mine entity generates revenue under a short-term coal sales contract with a major utility company. FirstCity Denver’s application of business combination accounting in connection with obtaining control of the coal mine subsidiary resulted in the recognition of an asset for the coal supply agreement and a liability for a coal purchase agreement. The coal supply asset and coal purchase liability are being amortized over the actual amount of tons shipped under each contract (which are both scheduled to expire in December 2010). Refer to Note 3 to the consolidated financial statements included in Item 1 of this Form 10-Q for additional information on this transaction.

Other income.  Other income in YTD 2010 decreased by $0.5 million in comparison to YTD 2009 primarily due to $0.9 million of gains recognized by FirstCity Denver’s railroad operations in YTD 2009 in connection with property and equipment sales (no significant amounts of gains on the sales of property and equipment were recognized in YTD 2010).

Expenses — Other.  Other expense increased by $0.3 million in YTD 2010 compared to YTD 2009 primarily due to $0.2 million of additional net impairment provisions recorded on middle-market company debt investments in YTD 2010 compared to YTD 2009. The impairment provisions were identified in connection with management’s regular evaluation of the collectibility of FirstCity Denver’s loan investments. The process for evaluating and measuring impairment is critical to our financial results, as it requires subjective and complex judgments due to the need to make estimates about the impact of matters that are uncertain; and estimates that are susceptible to significant revision as more information becomes available.

Equity in net earnings of in unconsolidated subsidiaries.  Equity in net earnings of unconsolidated subsidiaries totaled $2.9 million in YTD 2010 and $0.2 million in YTD 2009 — which is composed primarily of FirstCity Denver’s equity earnings in its equity-method investments related to the coal mine operation and multiple manufacturing concerns. In YTD 2010, FirstCity Denver’s share of net earnings in unconsolidated subsidiaries was composed primarily of $0.9 million in earnings from its former equity-method investment in a coal mine operation (FirstCity Denver consolidated this subsidiary effective April 1, 2010 — refer to discussion above), $0.8 million in earnings from its newly-obtained direct equity-method investment coal mine equipment subsidiary (refer to Note 3 to the consolidated financial statements included in Item 1 of this Form 10-Q for additional information on this transaction), and $1.2 million in earnings from manufacturing entities. For YTD 2009, FirstCity Denver’s equity in earnings attributable to the coal mine’s operations approximated $1.3 million; however, FirstCity Denver’s share of net earnings in the coal mine was off-set by its share ($1.1 million) of a one-time charge incurred by the coal mine company in YTD 2009 to relinquish its future reclamation liability.

Financial Condition

Significant changes in FirstCity’s financial condition during the first six months of 2010 resulted from the following:

Consolidated assets of $466.0 million at June 30, 2010 were $0.9 million higher than consolidated assets at December 31, 2009. The increase in consolidated assets was attributed primarily to (1) a $20.1 million increase in equity-method investments due to increased investment activity in YTD 2010 attributed to existing and newly-formed Acquisition Partnerships (primarily domestic); (2) a $6.2 million net increase in other assets attributed to the Company’s consolidation of a coal mine operation and deconsolidation of a

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manufacturing subsidiary in YTD 2010 (refer to Note 3 to the consolidated financial statements included in Item 1 of this Form 10-Q for additional information on these transactions); and (3) a $6.9 million net increase in SBA loans held for sale due to increased loan originations and advances in YTD 2010; off-set partially by (1) a $29.8 million decrease in cash (refer to the consolidated statement of cash flows in Item 1 of this Form 10-Q for additional information on cash changes); and (2) a $3.0 million net decrease in the Company’s consolidated Portfolio Assets in YTD 2010.

Consolidated liabilities of $343.4 million as of June 30, 2010 were $3.6 million higher than consolidated liabilities at December 31, 2009. The increase in consolidated liabilities was attributed primarily to a $2.7 million net increase in other liabilities due to the Company’s consolidation of a coal mine operation and deconsolidation of a manufacturing subsidiary in YTD 2010 (refer to Note 3 to the consolidated financial statements included in Item 1 of this Form 10-Q for additional information on these transactions).

FirstCity’s reported amount of noncontrolling interests (included as a component of equity) decreased by $7.7 million since December 31, 2009 primarily due to $17.5 million of distributions to noncontrolling interests in YTD 2010, off-set partially by $7.4 million of net earnings and $5.1 million of investments in majority-owned entities attributed to noncontrolling interests. Refer to the consolidated statement of stockholders’ equity in Item 1 of this Form 10-Q for additional information on these changes.

Portfolio Asset Acquisitions — Portfolio Asset Acquisition and Resolution Business Segment

Revenues with respect to the Company’s PAA&R business segment consist primarily of (i) income from Portfolio Assets and loans receivable; (ii) gains on the disposition and settlement of Portfolio Assets and other assets; and (iii) servicing fees from Acquisition Partnerships for the performance of servicing activities related to the assets held in unconsolidated Acquisition Partnerships. The Company also records equity in earnings of unconsolidated Acquisition Partnerships and servicing entities accounted for under the equity-method of accounting.

Portfolio Asset acquisitions by the Company for YTD 2010 and the last five full fiscal years are as follows:

	Purchase		FirstCity
	Price		Investment
	(Dollars in thousands)
First six months of 2010	$	159,680	$	42,727
Total 2009	200,590		147,654
Total 2008	89,314		72,307
Total 2007	214,333		126,714
Total 2006	296,990		144,048
Total 2005	146,581		71,405

The table below provides a summary of our loan Portfolio Assets as of June 30, 2010 and December 31, 2009. Our Purchased Credit-Impaired Loans are categorized based on the common risk characteristics that management generally uses for pooling purposes (when management elects to pool groups of purchased loans).

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	June 30,			December 31,
	2010			2009
	(Dollars in thousands)
Loan and Loan Pool Type
Purchased Credit-Impaired Loans
Domestic:
Commercial real estate	$	133,563		$	138,485
Business assets	22,452			26,983
Other	7,038			3,906
Latin America	10,251			10,545
Europe	7,191			13,001
UBN loan portfolio:
Non-performing loans	46,730			60,929
Performing loans	1,018			1,555
Other	6,523			8,367
Outstanding balance	234,766			263,771
Allowance for loan losses	(45,719		)	(65,825		)
Carrying amount, net	$	189,047		$	197,946

The following table provides a summary of the changes in the allowance for loan losses related to our Loan Portfolio Assets:

	Purchased Credit-Impaired Loans														Other
	Domestic
	Commercial			Business						Latin
(dollars in thousands)	Real Estate			Assets			Other			America		Europe			UBN			Other			Total
Beginning Balance, January 1, 2010	$	5,914		$	394		$	390		$	100	$	128		$	58,624		$	275		$	65,825
Provisions	1,485			142			87			117		368			—			126			2,325
Recoveries	(70		)	—			(7		)	—		—			(382		)	(1		)	(460		)
Charge offs	(7,196		)	(260		)	(434		)	—		(243		)	(2,955		)	(321		)	(11,409		)
Translation adjustments	—			—			—			—		(48		)	(10,514		)	—			(10,562		)
Ending Balance, June 30, 2010	$	133		$	276		$	36		$	217	$	205		$	44,773		$	79		$	45,719

Due to uncertainties related primarily to estimating the timing and/or amount of collections on Purchased Credit-Impaired Loans as a result of the current economic environment, the Company’s levels of such loans and loan pools accounted for on a non-accrual method of accounting (cost-recovery or cash basis) increased to $179.1 million at June 30, 2010 from $138.4 million at December 31, 2009. Under U.S. GAAP, the interest method (i.e. accrual method) of accounting is not appropriate if management does not have the ability to develop a reasonable expectation of both the timing and amount of future cash flows to be collected. Refer to Note 1 of the consolidated financial statements included in Item 1 of this Form 10-Q for additional information and accounting policies related to our Purchased Credit-Impaired Loans. The following tables provide a summary of the Company’s Purchased Credit-Impaired Loans by income-recognition method as of June 30, 2010 and December 31, 2009 (dollars in thousands):

	June 30, 2010
	Income-Accruing Loans				Non-Accrual Loans
	Purchased				Purchased Credit-
	Credit-				Impaired Loans				Other
	Impaired						Cost recovery				Cost recovery
	Loans		Other		Cash basis		basis		Cash basis		basis		Real Estate		Total
United States	$	527	$	4,760	$	105,765	$	56,316	$	1,685	$	—	$	32,339	$	201,392
France	—		1,018		4,068		7		—		1,957		—		7,050
Germany	—		—		2,911		—		—		—		—		2,911
Mexico	—		—		—		10,033		—		—		—		10,033
Total	$	527	$	5,778	$	112,744	$	66,356	$	1,685	$	1,957	$	32,339	$	221,386

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	December 31, 2009
	Income-Accruing Loans				Non-Accrual Loans
	Purchased				Purchased Credit-
	Credit-				Impaired Loans				Other
	Impaired						Cost recovery				Cost recovery
	Loans		Other		Cash basis		basis		Cash basis		basis		Real Estate		Total
United States	$	42,385	$	5,323	$	42,125	$	78,165	$	2,770	$	—	$	26,438	$	197,206
France	—		1,555		—		7,648		—		2,305		—		11,508
Germany	5,225		—		—		—		—		—		—		5,225
Mexico	—		—		—		10,445		—		—		—		10,445
Total	$	47,610	$	6,878	$	42,125	$	96,258	$	2,770	$	2,305	$	26,438	$	224,384

Middle-Market Company Capital Investments — Special Situations Platform Business Segment

Revenues with respect to the Company’s Special Situations Platform business segment consist primarily of (i) interest and fee income from loan investments; (ii) revenues from majority-owned operating entities; and (iii) equity in earnings of unconsolidated investments accounted for under the equity-method of accounting.

Investments by FirstCity Denver since its inception in April 2007 are summarized below:

	Total		FirstCity Denver’s Investment
(Dollars in thousands)	Investment		Debt		Equity		Total
First six months of 2010	$	13,416	$	8,650	$	4,247	$	12,897
Total 2009	20,058		12,023		392		12,415
Total 2008	28,750		16,650		3,256		19,906
Total 2007	22,314		5,630		5,900		11,530

Provision for Income Taxes

The Company has substantial net operating loss carryforwards (“NOLs”) for U.S. federal income tax purposes which can be used to off-set 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 these NOLs, and other income tax items in both the U.S. and the non-U.S. jurisdictions in which we operate, under the asset and liability method. Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically by the Company based on the more-likely-than-not realization threshold criterion. In the assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other factors, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, excess of appreciated asset value over the tax basis of net assets, the duration of statutory carryforward periods, the Company’s experience with utilizing available operating loss and tax credit carryforwards, and tax planning strategies. In making such assessments, significant weight is given to evidence that can be objectively verified. At June 30, 2010, the Company carried a full valuation allowance for its U.S. deferred tax assets due to the lack of sufficient objective evidence regarding the realization of these assets in the foreseeable future. We will continue to evaluate the deferred tax asset valuation allowance balances in all of our U.S. and foreign subsidiaries throughout 2010 to determine the appropriate level of valuation allowances.

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Liquidity and Capital Resources

Overview

The Company requires liquidity to fund its operations, Portfolio Asset acquisitions, investments in and advances to Acquisition Partnerships, capital investments in privately-held middle-market companies, other investments, repayments of bank borrowings and other debt, and working capital to support our growth. Historically, our primary sources of liquidity have been funds generated from operations (primarily loan collections and service fees), equity distributions from the Acquisition Partnerships and other subsidiaries, interest and principal payments on subordinated intercompany debt, dividends from the Company’s subsidiaries, borrowings from credit facilities with external lenders, and other special-purpose short-term borrowings.

Cash generated from our operations and investments is dependent primarily upon our ability to collect on our consolidated Portfolio Assets (and Portfolio Assets in our Acquisition Partnerships) and loan investments. Many factors, including general economic conditions, are essential to our ability to generate cash flows. Fluctuations in our collections, investment income, credit availability, and adverse changes in other factors, could have a negative impact on our ability to generate sufficient cash flows to support our business. Despite recent credit market conditions, we have continued to have access to liquidity in both our Portfolio Asset Acquisition and Resolution and Special Situations Platform business segments through our credit facility commitments with our external lenders. As discussed below, the Company refinanced its credit facilities with its primary external lender, and executed an investment agreement with a privately-held, registered investment firm.

Credit Facilities Renewal with Bank of Scotland and BoS(USA) (collectively, “Bank of Scotland”)

As reported in our June 30, 2010 news release and in our Current Report on Form 8-K filed with the SEC on July 1, 2010, FirstCity and Bank of Scotland reached agreement and closed on a $268.6 million Reducing Note Facility Agreement (“Reducing Note Facility”) that allows for repayment to Bank of Scotland over time as cash flows from the underlying assets securing the loan facility are realized. The Company’s outstanding indebtedness and existing letter of credit obligations under its then-existing loan facilities with Bank of Scotland were refinanced into the Reducing Note Facility. Refer to Credit Facilities below for the primary terms of this note facility.

Investment Agreement with Värde Investment Partners, L.P. (“Värde”)

As reported in the June 30, 2010 news release and Current Report on Form 8-K filed with the SEC on July 1, 2010 mentioned above, FirstCity and Värde entered into an Investment Agreement, effective April 1, 2010, whereby Värde may invest up to $750 million, at its discretion, alongside FirstCity in distressed loan portfolios and similar investment opportunities, subject to the terms and conditions contained in the agreement. The primary terms of the Investment Agreement are as follows:

·FirstCity will act as the exclusive servicer for the investment portfolios;

·FirstCity will provide Värde with a “right of first refusal” with regard to distressed asset investment opportunities in excess of $3 million sourced by FirstCity;

·FirstCity, at its determination, will co-invest between 5%-25% in each investment;

·FirstCity will receive a $200,000 monthly retainer in exchange for its services and commitments;

·FirstCity will receive a base servicing fee (based on investment portfolio collections) and will be eligible to receive additional incentive-based servicing fees (depending on the performance of the portfolios acquired); and

·FirstCity will be eligible to receive incentive-based management fees (depending on the aggregate amount and performance of the portfolios acquired).

The cash flows from the assets and equity interests from the Company’s investments made in connection with the Investment Agreement, which are held by FC Investment Holdings Corporation and its subsidiaries, are not subject to the security interest requirements of Bank of Scotland’s Reducing Note Facility described above.

We believe that the Investment Agreement in place with Värde, combined with (1) the cash leak-through and overhead allowance provisions included in Bank of Scotland’s Reducing Note Facility (described above); (2) our estimates of residual cash flows from the pledged assets and equity investments after full repayment of the Bank of Scotland debt; and (3) our current holdings of unencumbered cash and portfolio assets, will provide FirstCity with additional funding and liquidity to support its operations and investment activities.

Consolidated Statements of Cash Flows

The following is an analysis of the cash flows related to FirstCity’s consolidated operations for the six-month periods ended June 30, 2010 and 2009:

Our operating activities used cash of $16.9 million and provided cash of $2.6 million for the six-month periods ended June 30, 2010 and 2009, respectively. For the six-month period ended June 30, 2010, net cash used in operations was attributable primarily to $8.9 million of net principal advances on SBA loans held for sale; $26.1 million of non-cash deductions for income accretion and gains on Portfolio Assets; $4.0 million of non-cash deductions for equity earnings from equity-method investments; and $9.0 million of non-cash deductions attributed to gains recognized on business combination transactions and the sale of an investment security — off-set partially by $15.6 million of net earnings; $2.3 million of proceeds from SBA loan sales; $2.1 million of proceeds applied to income from Portfolio Assets; and $10.1 million of non-cash add-backs related to provisions for loan and impairment losses, depreciation and amortization (including $3.5 million of net amortization attributable to the coal supply and coal purchase contracts on the balance sheet of our consolidated coal mine subsidiary). Net cash provided by operations for the six-month period ended June 30, 2009 was attributable primarily to $10.0 million of net earnings; $13.8 million of proceeds from SBA loan sales; $10.5 million of proceeds applied to income from Portfolio Assets; and $3.8 million of non-cash add-backs related to provisions for loan and impairment losses, depreciation and amortization — off-set partially by $11.4 million of net principal advances on SBA loans held for sale; $1.1 million of non-cash deductions for equity earnings from equity-method investments; and $2.4 million non-cash deductions attributed to gains recognized on a business combination transaction and sales of property and equipment. The remaining changes in the periods were due primarily to net changes in other accounts related to our operating activities.

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Our investing activities provided cash of $13.8 million and used cash of $66.1 million for the six-month periods ended June 30, 2010 and 2009, respectively. For the six-month period ended June 30, 2010, net cash provided by investing activities was attributable primarily to $43.6 million of principal collections on Portfolio Assets (net of purchases); $4.5 million of distributions from our equity-method investments; and $3.3 million of proceeds from the sale of an investment security — off-set partially by $30.9 million of contributions to our equity-method investments; $2.9 million of net advances and originations for loan investments; $1.6 million paid for business combinations (net of cash acquired); and $0.9 million reduction in cash attributed to the deconsolidation of our manufacturing subsidiary. Net cash used in investing activities for the six-month period ended June 30, 2009 was attributable primarily to $63.3 million of Portfolio Assets purchases (net of principal collections); $3.6 million of net advances and originations for loan investments; $7.1 million paid for a business combination (net of cash acquired); $1.4 million of property and equipment purchases; and $1.2 million of contributions to our equity-method investments — off-set partially by $7.0 million of distributions from our equity-method investments; $2.2 million of principal payments on an investment security; and $1.4 million of proceeds from property and equipment sales. The remaining changes in the periods were due primarily to net changes in other accounts related to our investing activities.

Our financing activities used cash of $26.6 million and provided cash of $69.6 million for the six-month periods ended June 30, 2010 and 2009, respectively. For the six-month period ended June 30, 2010, net cash used in financing activities was attributable primarily to $17.2 million of principal payments on notes payable and loan fee payments (net of borrowings), and $17.5 million of distributions to noncontrolling interests — off-set partially by $4.6 million of contributions from noncontrolling interests primarily to acquire Portfolio Assets through consolidated subsidiaries; $1.0 million of proceeds from the issuance of common stock; and $2.6 million of proceeds from secured borrowings related to SBA loan sale transactions (net of principal repayments). Net cash provided by financing activities for the six-month period ended June 30, 2009 was attributable primarily to $52.4 million of net borrowings to finance our Portfolio Asset acquisitions and other investments (net of principal repayments and loan fee payments), and $22.3 million of contributions from noncontrolling interests primarily to acquire Portfolio Assets through consolidated subsidiaries — off-set partially by $2.2 million of distributions to noncontrolling interests and $2.8 million of cash paid to acquire subsidiary shares in noncontrolling interests. The remaining changes in the periods were due primarily to net changes in other accounts related to our financing activities.

Cash paid for interest expense approximated $4.8 million and $4.9 million for the six-month periods ended June 30, 2010 and 2009. Substantially all of our interest expense was paid on our credit facilities and other borrowings. FirstCity’s average outstanding debt increased to $305.5 million for the first six months of 2010 from $285.3 million for the first six months of 2009, while the average cost of borrowings decreased to 4.8% in 2010 compared to 5.0% in 2009. The increase in the Company’s debt level since June 30, 2009 is a result of increased net borrowings to finance the Company’s growth and investment transactions.

Statements of Cash Flows — Consolidated Railroad, Coal Mine and Manufacturing Operations

The following is an analysis of the cash flows related to FirstCity’s majority-owned railroad and coal mine subsidiaries for the six-month periods ended June 30, 2010 and 2009, as applicable. The cash flow effects described below are included in the Company’s analysis of its consolidated cash flows for the six-month periods ended June 30, 2010 and 2009, as applicable, as discussed above. The cash flows related to FirstCity’s majority-owned manufacturing subsidiary were not material to the Company’s consolidated cash flows.

Railroad Operations Statements of Cash Flows

The following is an analysis of the cash flows related to FirstCity’s majority-owned railroad operation for the six-month periods ended June 30, 2010 and 2009. All significant intercompany balances and transactions have been eliminated in consolidation.

The operating activities of the railroad subsidiary provided cash of $1.5 million for the first six months of 2010, attributable primarily to $1.2 million of net earnings. The railroad subsidiary’s investing activities used cash of $0.6 million for 2010, attributable to property and equipment purchases. The railroad subsidiary’s financing activities used cash of $0.4 million for 2010, attributable to $0.2 million of principal payments on a bank note payable and $0.2 million of distributions to the noncontrolling equity owners and FirstCity (eliminated in consolidation).

The operating activities of the railroad subsidiary provided cash of $0.9 million for the first six months of 2009 — attributable primarily to $1.3 million of net earnings and a $0.7 million increase in other liabilities; off-set partially by a $1.1 million non-cash deduction related to gains recognized from property and equipment sales. The railroad subsidiary’s investing activities provided cash of $0.3 million for 2009 — attributable to $1.5 million of proceeds from property and equipment sales; off-set by $1.2 million of property and equipment purchases. The railroad subsidiary’s financing activities used cash of $1.3 million for 2009, attributable primarily to $1.4 million of payments to the noncontrolling equity owners and FirstCity (parent company) through distributions and principal repayments on a capital note (eliminated in consolidation).

Coal Mine Operations Statement of Cash Flows

The following is an analysis of the cash flows related to FirstCity’s majority-owned coal mine operation for the three-month period ended June 30, 2010 (FirstCity consolidated the coal mine subsidiary effective April 1, 2010 after it obtained control of the entity at such time — refer to Note 3 of the consolidated financial statements included in Item 1 of this Form 10-Q for additional information). All significant intercompany balances and transactions have been eliminated in consolidation.

The operating activities of the coal mine subsidiary provided cash of $2.4 million for the three-month period ended June 30, 2010 — attributable primarily to a $1.0 million increase in other liabilities and a $3.5 million non-cash add-back for amortization; off-set partially by $0.3 million of net losses and a $1.7 million decrease in other assets. The financing activities of the coal mine subsidiary used $2.2 million of cash for the three-month period ended June 30, 2010, attributed primarily to $0.5 million of principal repayments no a note payable and $1.6 million of payments to the noncontrolling equity owner and FirstCity (parent company) through distributions and principal repayments on a capital note (eliminated in consolidation). The coal mine subsidiary did not record any cash flows from investing activities during the three-month period ended June 30, 2010.

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Credit Facilities

FirstCity Commercial Corporation (“FC Commercial”) and FH Partners LLC (“FH Partners”), as borrowers, and FLBG Corporation (“FLBG Corp.”), as guarantor, all of which are wholly-owned subsidiaries of FirstCity, have a $268.6 term note facility (“Reducing Note Facility”) with Bank of Scotland. The Reducing Note Facility amended and restated the following loan facilities previously provided by Bank of Scotland to FirstCity and FH Partners: (a) Revolving Credit Agreement dated November 12, 2004, as amended, to FirstCity ($225.0 million loan facility); (b) Revolving Credit Agreement dated August 26, 2005, as amended, to FH Partners ($100.0 million loan facility); and (c) Subordinated Delayed Draw Credit Agreement dated September 5, 2007, as amended, to FirstCity ($25.0 million loan facility) (collectively, “Existing Credit Agreements”). The Existing Credit Agreements were guaranteed by substantially all of the wholly-owned subsidiaries of FirstCity and secured by substantially all of the assets of FirstCity and its wholly-owned subsidiaries. The outstanding indebtedness and existing letter of credit obligations under the Existing Credit Agreements in the amount of $268.6 million were refinanced into the Reducing Note Facility, which provides for a scheduled amortization over 3 years ($43.6 million in the first year, $80.0 million in the second year, $60.0 million in the first nine months of the third year, and $85.0 million due on June 25, 2013, the maturity date).

The material terms of the Reducing Note Facility and related agreements are as follows:

·FirstCity provides a limited guaranty for the repayment of the indebtedness under the Reducing Note Facility to a maximum amount of $75.0 million, plus costs of enforcement and certain contingent indemnities;

·No advances will be made under the loan facility, except for draws on outstanding letters of credit in the amount of $22.35 million which are included in the amount of the loan facility;

·Repayment will be made from the cash flow from assets and equity investments which were pledged to secure the Existing Credit Agreements;

·FirstCity will receive unencumbered cash of 20% of the monthly net cash flows (i.e. cash “leak-through”) up to $25.0 million, after (a) payment to Bank of Scotland of interest and fees; and (b) payment of a scheduled overhead allowance to FirstCity Servicing Corporation (“FC Servicing”), a wholly-owned subsidiary of FirstCity, of $38.9 million over 3 years ($1.5 million per month for the first year, $1.03 million per month for the second year, and $0.7 million per month for the third year);

·Provides for a fluctuating interest rate equal to, at FC Commercial’s option, either (a) the greater of (i) one month London Interbank Offering Rate (“LIBOR”) plus 3.5% (subject to LIBOR floor of 1.0%) or (ii) 4.5%, or (b) Bank of Scotland’s prime rate plus 3.0%;

·Allows FC Commercial and FH Partners to designate a portion of the debt under the Reducing Note Facility to be borrowed in Euros up to a maximum amount of Euros equivalent to USD $27.5 million;

·Requires FirstCity to maintain a minimum tangible net worth (as defined) requirement of $60.0 million; and

·Provides for an upfront fee to be paid to Bank of Scotland in the amount of $2.0 million, payable as follows: $0.7 million paid on March 26, 2010 (in connection with an extension of the Existing Credit Facilities), $0.7 million on June 25, 2010, and payments of $0.2 million from the cash flow of the pledged assets on the first day of July, August, September and October 2010.

The Reducing Note Facility is guaranteed by FLBG Corp. and all of its subsidiaries (“Covered Entities”), which represent the entities that were subject to the obligations of the Existing Credit Facilities other than FirstCity and FC Servicing. The Reducing Note Facility is secured by substantially all of the assets of the Covered Entities. FC Investment Holdings Corporation (a newly-formed wholly-owned subsidiary of FirstCity) and its current and future subsidiaries, or other entities in which such subsidiaries own any equity interest (“Non-Covered Entities”), are not subject to, do not guarantee and do not provide security interests in their assets to secure the Reducing Note Facility. FC Servicing only provides a non-recourse security interest in certain equity interests owned by it and in most of the servicing fees from previously-existing agreements which secured the Existing Credit Facilities. FC Servicing does not provide a security interest in servicing agreements entered into with the Non-Covered Entities or in any of its other assets and does not guarantee the Reducing Note Facility.

The Reducing Note Facility contains covenants, representations and warranties on the part of FLBG Corp., FC Commercial and FH Partners that are typical for transactions of this type. In addition, the Reducing Note Facility contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under,

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certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of Scotland may accelerate the indebtedness under the Reducing Note Facility. At June 30, 2010, FC Commercial and FH Partners were in compliance with all covenants or other requirements set forth in the Reducing Note Facility or related agreements.

FirstCity has $23.2 million in Euro-denominated debt on the Reducing Note Facility for the purpose of hedging a portion of the Company’s net equity investments in Europe. Refer to Note 11 to our consolidated financial statements included in Item 1 of this Form 10-Q for additional information.

Banco Santander, S.A.

FirstCity Mexico SA de CV, a Mexican affiliate of FirstCity, has a term note with Banco Santander, S.A. with an unpaid principal balance of 142,240,000 Mexican pesos at June 30, 2010, which was equivalent to $11.2 million U.S. dollars on that date. 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, 2010, FirstCity had a letter of credit in the amount of $12.6 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 $12.6 million letter of credit, FirstCity would be required to reimburse Bank of Scotland by making payment to Bank of Scotland for all amounts disbursed or to be disbursed by Bank of Scotland under the letter of credit.

Wells Fargo Foothill, LLC

At June 30, 2010, ABL had a $25.0 million revolving loan facility with Wells Fargo Capital Finance (“WFCF”) for the purpose of financing and acquiring SBA loans. This credit facility matures in January 2012 and is secured by substantially all of the assets of ABL. In addition, FirstCity provides WFCF with an unconditional guaranty for all of ABL’s obligations up to a maximum of $5.0 million plus enforcement costs. The primary terms and key covenants of this loan facility are described in our 2009 Form 10-K. At June 30, 2010, ABL was in compliance with all covenants or other requirements set forth in the credit agreement or other agreements with WFCF.

The following table summarizes the material terms of the credit facilities of FirstCity and its consolidated subsidiaries and the outstanding borrowings under such facilities as of June 30, 2010 and December 31, 2009.

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			Outstanding		Outstanding
			Borrowings		Borrowings
			as of		as of
			June 30,		December 31,
	Interest Rate	Other Terms and Conditions	2010		2009
			(Dollars in thousands)
Notes payable to banks and other:
Bank of Scotland reducing note facility (includes $23.2 million denominated in Euros at June 30, 2010)	Election of (a) greater of (i) one-month LIBOR plus 3.5% (subject to LIBOR floor of 1.0%) or (ii) 4.5%, or (b) Bank of Scotland’s prime rate of 3.0%	Secured by substantially all assets and equity investments of FirstCity Commerical Corp. and FH Partners LLC and guaranteed by FirstCity up to $75.0 million, matures June 2013	$	244,759	$	—
Bank of Scotland $225 million revolving loan facility (included $24.8 million denominated in Euros at December 31, 2009)	LIBOR-indexed plus 2.5%	Secured by substantially all assets of FirstCity and certain subsidiaries and guaranteed by by substantially all of FirstCity’s consolidated subsidiaries, refinanced June 2010	—		182,324
Bank of Scotland $100 million revolving loan facility	LIBOR-indexed plus 2.0%	Secured by all assets of FH Partners LLC and guaranteed by FirstCity and certain of its consolidated subsidiaries, refinanced June 2010	—		58,506
BoS(USA) $25 million subordinated credit agreement	LIBOR + 5.0%	Secured by substantially all assets of FirstCity and certain subsidiaries and guaranteed by substantially all of FirstCity’s consolidated subsidiaries, refinanced June 2010	—		25,000
WFCF $25 million revolving loan facility	Alternate interest rates based on Wells Fargo base rate plus margin, LIBOR plus margin, or 7.5%	Secured by assets of ABL and guaranteed by FirstCity up to $5.0 million, matures January 2012	15,420		10,694
Banco Santander term loan denominated in Mexican pesos	28-day Mexican index rate (TIIE) plus 2.0%	Secured by Bank of Scotland letter of credit, matures November 2010, commitment amount 142.2 million MXN	11,040		10,986
Bank of America term loan	Greater of (prime or federal funds rate plus 0.5%) plus margin, or LIBOR plus margin	Secured by assets of FirstCity’s consolidated railroad subsidiaries, matures March 2011	2,904		3,086
Bank of America $1 million revolving loan facility	Greater of (prime or federal funds rate + 0.5%) plus margin, or LIBOR plus margin	Secured by assets of FirstCity’s consolidated railroad subsidiaries, matures March 2011	395		395
Bank of America term note	LIBOR plus 1.65%	Secured by all assets of Wamco 30, Ltd.	12,171		—
Merrill Lynch Mortgage Trust term loan	6.07% fixed	Secured by assets of Oregon Short Line Building, matures April 2016	7,398		7,452
B.E.S.V. term loan denominated in Euros	Various rates at 1-month Eurobor + 3.5% or 3-month Eurobor + 3.0%	Secured by assets of UBN, various maturities ranging from May 2012 to May 2013	5,788		5,433
Other notes and participations payable			5,686		2,012
			305,561		305,888
Note payable to affiliate:
MCS Trust SA de CV term loan	20.0% fixed	Secured by assets of FC Acquisitions, SRL de CV, matures June 2020	7,760		7,838
Total notes payable			$	313,321	$	313,726

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Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding our expected financial position, future financial performance, overall trends, liquidity and capital needs, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. In this context, words such as “anticipates,” “believes,” “expects,” “estimates,” “plans,” “intends,” “could,” “should,” “will,” “may” and similar words or expressions are intended to identify forward-looking statements and are not historical facts.

These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. For a discussion on the risks, uncertainties and assumptions that affect our business, operating results and financial condition, you should carefully review the “CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS” qualification and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2009 Form 10-K, and Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

We are also subject to other risks detailed herein or detailed from time-to-time in our filings with the SEC. The listed risks referenced above are not intended to be exhaustive and the order in which the risks appear is not intended as an indication of their relative weight or importance. We operate in continually changing business environments, and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the impact, if any, of these new risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.

You are cautioned that our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions, which change over time. Actual results, developments and outcomes may differ materially from those expressed in, or implied by, our forward-looking statements. The forward-looking statements speak only as of the date the statement is made, and we have no obligation to publicly update or revise our forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s management evaluated, with the participation of our principal executive officer and principal financial officer, or persons performing similar functions, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms relating to FirstCity, including our consolidated subsidiaries, and was accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.  Legal Proceedings.

There have been no material developments regarding any matters disclosed under Part I, Item 3 “Legal Proceedings” in our 2009 Form 10-K.

Item 1A.  Risk Factors.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

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

On June 29, 2010, we issued and sold 150,000 shares of our common stock to Värde Investment Partners L.P. pursuant to the terms of a securities purchase agreement at a per share price of $5.93, resulting in aggregate proceeds to us of $889,500.

The issuance and sale of common stock described above was made in reliance upon exemptions from registration afforded by Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission under the Securities Act relating to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.

No underwriters were involved in the issuance and/or sale of the foregoing securities. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock described above included appropriate legends setting forth that the securities have not been registered and the applicable restrictions on transfer.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Reserved.

Item 5.  Other Information.

None.

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Item 6.  Exhibits.

Exhibit Number		Description of Exhibit
10.57*	—	Reducing Note Facility Agreement, dated June 25, 2010, among FirstCity Financial Corporation and FH Partners LLC, as Borrowers, FLBG Corporation, as Guarantor, Bank of Scotland plc and BoS(USA), Inc., as Lenders, and Bank of Scotland plc, acting through its New Your Branch, as Agent and Collateral Agent
10.58*	—	Limited Guaranty Agreement, dated June 25, 2010, by FirstCity Financial Corporation, as Guarantor, in favor of Bank of Scotland plc, acting through its New York Branch, as Agent, for the benefit of Bank of Scotland plc and BoS(USA), Inc., as Lenders and parties to the Reducing Note Facility Agreement dated June 25, 2010
10.59*	—	Form of Investment Agreement, dated June 29, 2010, by and between FC Diversified Holdings LLC and FirstCity Servicing Corporation and Värde Investment Partners, L.P. (confidential treatment has been requested for this exhibit and confidential portions have been filed with the Securities and Exchange Commission)
10.60*	—	Securities Purchase Agreement, dated June 29, 2010, by and among FirstCity Financial Corporation and Värde Investment Partners, L.P.
10.61*	—	Form of Restricted Stock Award Agreement under the FirstCity Financial Corporation 2010 Stock Option and Award Plan
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.

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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
Dated: August 16, 2010
	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)

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EX-10.57

Exhibit 10.57

Execution Copy

REDUCING NOTE FACILITY AGREEMENT

among

FIRSTCITY COMMERCIAL CORPORATION

and

FH PARTNERS LLC

as Borrowers

and

FLBG CORPORATION

as a Guarantor

BANK OF SCOTLAND PLC
AND BOS (USA) INC.

as Lenders,

with

BANK OF SCOTLAND PLC,

acting through its New York Branch,

as Agent and Collateral Agent

Dated as of June 25, 2010

REDUCING NOTE FACILITY AGREEMENT

REDUCING NOTE FACILITY AGREEMENT, dated as of June 25, 2010 among FIRSTCITY COMMERCIAL CORPORATION, a Texas corporation (“FC Commercial”), FH PARTNERS LLC, a Texas limited liability company (“FH Partners”) (FC Commercial and FH Partners each a “Borrower” and together, the “Borrowers”), FLBG CORPORATION, a Texas corporation, as Guarantor (“FLBG”), the financial institutions from time to time party hereto as Senior Lenders (the “Senior Lenders”), and BoS (USA) Inc., a Delaware corporation (“BoS (USA)”)(the “Subordinated Lender” and together with the Senior Lenders, the “Lenders”) and BANK OF SCOTLAND PLC, acting through its New York branch, as agent for Lenders (in such capacity, “Agent”) and as collateral agent for Lenders(in such capacity, “Collateral Agent”).

W I T N E S S E T H :

WHEREAS, the Borrowers’ Affiliate, FirstCity Financial Corporation, a Delaware corporation (“FCFC”), and the Lenders and the Agent are parties to a certain Revolving Credit Agreement dated as of November 12, 2004 (as the same has been amended from time to time, the “Revolving Credit Agreement”);

WHEREAS, FH Partners and the Lenders and the Agent are parties to a certain Revolving Credit Agreement dated as of August 26, 2005 (as the same has been amended from to time to time, the “FH Partners Credit Agreement”) evidencing loans thereunder (such loans, together with the loans under the Revolving Credit Agreement, collectively, the “Senior Loan”);

WHEREAS, FCFC and BoS (USA). are parties to a certain Subordinated Delayed Draw Credit Agreement dated as of September 5, 2007 (as the same has been amended from time to time, the “Subordinated Credit Agreement”) evidencing loans thereunder (the “Subordinated Loan”) (the Revolving Credit Agreement, the FH Partners Credit Agreement and the Subordinated Credit Agreement together, the “Existing Credit Agreements”);

WHEREAS, the Borrowers and FCFC have requested that the Lenders permit the Existing Credit Agreements to be consolidated, amended and restated in their entirety by this Agreement;

WHEREAS , it is the intent of the parties hereto that this Agreement shall be an amendment of the Existing Credit Agreements and not a novation thereof;

WHEREAS, the Lenders are willing to permit the Existing Credit Agreements to be consolidated, amended and restated in their entirety by this Agreement and Borrowers hereby shall assume the obligations under the Existing Credit Agreements as consolidated, amended and restated in their entirety by this Agreement; and

WHEREAS, the parties hereto agree that the Lenders shall have no obligation to provide any additional Loans or issue any new Letters of Credit under the Existing Credit Agreements, under this Agreement or under any other agreement, instrument or Loan Documents, except for Loans to be made upon presentment of the existing Letters of Credit (as defined herein) as set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

Section 1.DEFINITIONS.

(a)Terms used in this Agreement which are defined in Annex I hereto shall have the meanings specified in such Annex I hereto (unless otherwise defined herein) and shall include in the singular number the plural and in the plural number the singular.

(b)Unless otherwise specified, each reference in this Agreement or in any other Loan Document to a Loan Document shall mean such Loan Document as the same may from time to time be amended, extended, restated, supplemented or otherwise modified.

(c)All references to Sections in this Agreement or in Annex I hereto shall be deemed references to Sections in this Agreement unless otherwise specified.

(d)As used in this Agreement and the other Loan Documents, the terms “including” and “such as” are illustrative and not limitative.

Section 2.THE OUTSTANDING LOANS.

2.1The Outstanding Loans and Letters of Credit.

(a)On and as of the date hereof, the outstanding principal balance of the loans (each a “Loan” and collectively the “Loans”) and Letters of Credit under the respective Existing Credit Agreements is as follows:

Revolving Credit Agreement	-	$	174,616,768.94
LC Outstandings	-	$	22,350,000
FH Partners Credit Agreement	-	$	46,641,875.14
Subordinated Credit Agreement	-	$	25,000,000
Total:		$	268,608,644.08

On and as of the date hereof, the outstanding balance of Loans made in Euros is €19,673,574.44 (the equivalent of $24,605,372.65US Dollars).

The existing Loans under the respective Existing Credit Agreements will be amended and restated pursuant to the terms of this Agreement.  The aggregate outstanding principal amount of Loans made in Euros under this Agreement shall not exceed the equivalent of $27,500,000.  Unless otherwise provided herein, all Loans denominated in Euros shall be made, maintained and continued as Eurocurrency Loans.

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(b)The Lenders have no obligation under this Agreement, under the Existing Credit Agreements or under any other agreement, instrument or Loan Documents to make any additional Loans to the Borrowers or to any Affiliates of either Borrower, except as provided in Section 2A.4(b).

(c)FCFC will have no obligation or liability for payment of the Loans or any other obligations under this Agreement or the Existing Credit Agreements, except as set forth in and pursuant to the Limited Guaranty.

2.2The Notes.  Borrowers’ joint and several obligation to pay the principal of, and interest on, the Loans of each Lender shall be evidenced by promissory notes payable to the order of such Lender, each substantially in the form of Exhibit A-1, with respect to the Senior Loan (such note, the “Senior Note”), and Exhibit A-2, with respect to the Subordinated Loan. (such note, a “Subordinated Note”, and, together with the Senior Note, the “Notes”).

(a)Each Note delivered to each Lender shall be: (i) dated the Effective Date; (ii) in an original principal amount, with respect to each Lender, as set forth on Schedule 2.2(a) hereto; and (iii) payable in full on the Maturity Date.

(b)The Notes shall be, and hereby are, secured by the Collateral and the Security Documents.

(c)For the avoidance of doubt, the Borrowers and the Lenders acknowledge that (i) the Subordination Agreement, as amended on the date hereof, remains in full force and effect and (ii) payments to the Borrower under this Agreement shall be allocated among the Loans as directed from time to time by the Agent in accordance with the Subordination Agreement.

2.3Mandatory Prepayments and Repayments of Loans.

(a)On or before the end of each quarter, the Borrowers shall prepay the Loans in any amount necessary to reduce the Total Outstanding to the amount specified below for such quarter, as follows:

September 30, 2010:	$	260,000,000
December 31, 2010:	$	250,000,000
March 31, 2011:	$	240,000,000
June 30, 2011:	$	225,000,000
September 30, 2011:	$	205,000,000
December 31, 2011:	$	185,000,000
March 31, 2012:	$	165,000,000
June 30, 2012:	$	145,000,000
September 30, 2012:	$	125,000,000
December 31, 2012:	$	100,000,000
March 31, 2013:	$	85,000,000

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(b)Borrowers shall repay the unpaid principal amount of all Loans, together with all unpaid interest thereon and all other fees and amounts due with respect thereto, in full on the Maturity Date.

(c)In the event the aggregate outstanding principal amount of Loans made in Euros under this Agreement exceeds the equivalent of $27,500,000, Borrowers shall prepay such Loans until the aggregate outstanding principal amount of Loans made in Euros under this Agreement no longer exceeds the equivalent of $27,500,000.

(d)No amounts prepaid or repaid in accordance with the provisions of this Section 2.3 may be reborrowed.

2.4Voluntary Prepayments of Loans.  Borrowers may, upon not less than three (3) Business Days prior written notice to Agent (which notice Agent shall promptly transmit to Lenders in writing or by telephone, and if by telephone, confirmed as soon as possible thereafter in writing) prepay the Loans in whole at any time, or from time to time in part in amounts of not less than 250,000 units of the relevant currency equal to or greater than an amount of the Dollar Equivalent of which is $250,000 (and, if greater, in integral multiples of 50,000 units of the relevant currency), without premium or penalty; provided that at the time of any such prepayment, Borrowers shall pay all interest accrued on the principal amount so prepaid and all other fees and amounts (including, without limitation, the Upfront Fee and any breakage costs to Lenders) due hereunder or under the Loan Documents.  All notices pursuant to this Section 2.4 shall be irrevocable and result in the principal amount of Loans specified therein becoming due and payable on the prepayment date specified therein.  In no event may amounts prepaid under this Section 2.4 be reborrowed.

2.5Currency Fluctuations, etc.

(a)Not later than 1:00 p.m., New York City time, on each Payment Date, Agent shall (i) determine the Exchange Rate as of such date if at such time there are outstanding Eurocurrency Loans denominated in Euros and (ii) give notice thereof to Lenders and Borrowers.  The Exchange Rate so determined shall be effective on the first Business Day immediately following the relevant Borrowing Date or Payment Date (a “Reset Date”) and shall remain effective until the next succeeding Reset Date.

(b)Not later than 5:00 p.m., New York City time, on each Reset Date, Agent shall (i) determine the Dollar Equivalent of the Eurocurrency Loans in Euros then outstanding (after giving effect to any Eurocurrency Loans to be made or repaid on such date) and (ii) notify Lenders and Borrowers of the results of each determination.

SECTION 2A.  LETTERS OF CREDIT

SECTION 2A.1.  Outstanding Letters of Credit.  Set forth on Schedule 2A.1 is a list of all irrevocable letters of credit (each a “Letter of Credit” and collectively, the “Letters of Credit”) outstanding in connection with the Existing Credit Agreements, setting forth the principal amount, beneficiary and maturity date of each thereof.  The Lenders have no obligation under this Agreement, under the Existing Credit Agreements or under any other agreement, instrument or Loan Documents to issue additional Letters of Credit.

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SECTION 2A.2.  No Extensions.  The parties acknowledge that, notwithstanding any contrary provision set forth in the Letters of Credit or any other agreement, the Letters of Credit shall not be subject to any extension beyond their respective expiry dates.  The parties further acknowledge that this Agreement shall constitute notice under any Letter of Credit that the expiry date of such Letter of Credit shall not be extended.

SECTION 2A.3.  Fees and Expenses.  (a) Borrowers agree to pay to Agent for distribution to Senior Lenders (pro rata, based upon their pro rata shares of the LC Outstandings as determined in accordance with Section 2A.6) a non-refundable letter of credit fee with respect to each Letter of Credit equal to, per annum (calculated on the basis of a 360-day year and the actual number of days elapsed), (x) 3.5%, times (y) the Stated Amount of such Letter of Credit, such fee to be paid quarterly in advance on the fourth Business Day of each March, June, September and December thereafter (each a “Letter of Credit Fee”).  In addition, Borrowers further agree to pay to the Issuer for its own account the Issuer’s standard, documentary and processing charges and all other administrative expenses of the Issuer in connection with the maintenance of each Letter of Credit.

(b)  If any Regulatory Change shall at any time (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against letters of credit issued by the Issuer or participated in by any Lender or Lender Assignee, or (ii) subject letters of credit issued by the Issuer or participations therein held by any Lender or Lender Assignee to any assessment or other cost or (iii) impose on the Issuer or any Lender or Lender Assignee any other or similar condition regarding any Letter of Credit, the commitment or obligation of the Issuer to issue Letters of Credit hereunder or any Lender’s or Lender Assignee’s participation therein and the result of any event referred to in clause (i), (ii) or (iii) above shall be to increase the cost to the Issuer or any Lender or Lender Assignee of agreeing to issue, issuing or maintaining any Letter of Credit or its participation therein by an amount which the Issuer or such Lender or Lender Assignee shall deem to be material (which increase in cost shall be the result of the reasonable allocation by the Issuer or such Lender or Lender Assignee of the aggregate of such cost increases resulting from such events), then and in each case upon demand from time to time by the Issuer or such Lender or Lender Assignee (furnished to Borrowers by Agent), provided such demand is made no later than six months after such Issuer, Lender or Lender Assignee obtains knowledge of such Regulatory Change, Borrowers shall promptly pay to Agent (for the account of such Issuer, Lender or Lender Assignee, as the case may be) additional amounts which shall be sufficient to compensate the Issuer (or such Lender or Lender Assignee) for such increased cost from the date of such change, together with interest on each such amount from the date demanded by the Issuer (or such Lender or Lender Assignee) until payment in full thereof (after as well as before judgment) at a rate per annum equal to the Applicable Rate from time to time in effect.  A certificate of the Issuer (or such Lender or Lender Assignee) submitted to Borrowers as to any additional amount or amounts (including calculations thereof, in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on Borrowers.  In determining such amount or amounts, the Issuer (or such Lender or Lender Assignee) may use any method of averaging and attribution as it (in its reasonable discretion) shall deem applicable.

(c)  The provisions of this Section 2A.3 and Section 2A.5 shall survive any termination of this Agreement and the payment in full of the Loans and the LC Obligations.

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SECTION 2A.4.  Disbursements.  (a) The Issuer will notify Borrowers and Agent promptly of the presentment for payment of any Letter of Credit together with notice of the date (the “Disbursement Date”) such payment shall be made.  Subject to the terms and provisions of such Letter of Credit and this Agreement, the Issuer shall make such payment to the beneficiary (or its designee) of such Letter of Credit.

(b)  Prior to 11:00 a.m. Closing Office Time on the Disbursement Date, a Loan will be deemed made by the Senior Lenders hereunder and evidenced by the Senior Note to reimburse the Issuer to Agent at the Closing Office for all amounts disbursed or to be disbursed by the Issuer on that day (the “Disbursement”) under such Letter of Credit (the “Reimbursement Obligation”); provided, however, that neither Borrowers nor Lenders shall be obligated to reimburse the Issuer for any wrongful Disbursement made by the Issuer under any Letter of Credit as a result of acts or omissions constituting gross negligence or willful misconduct on the part of the Issuer.  Borrowers shall notify the Lenders if they object to the funding of any Loan to pay a Reimbursement Obligation as a result of the gross negligence or willful misconduct of the Issuer.

SECTION 2A.5.  Nature of Reimbursement Obligations.  Borrowers shall assume all risks of the acts, omissions, or misuse of any Letter of Credit by the beneficiary thereof.  Neither the Issuer (except to the extent of its own gross negligence or willful misconduct), Agent nor any Lender shall be responsible for:

(a) the form, validity, sufficiency, accuracy, genuineness, or legal effect of any Letter of Credit or of any draft, demand or other document, instrument or other paper relating to, or presented under, any Letter of Credit, or any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged;

(b) the form, validity, sufficiency, accuracy, genuineness, or legal effect of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof in whole or in part, which may prove to be invalid or ineffective for any reason;

(c) failure of the beneficiary to comply fully with conditions required in order to demand payment under any Letter of Credit;

(d) errors, omissions, interruptions, or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex, telecopier or otherwise; or

(e) any loss or delay in the transmission or otherwise of any document or draft required in order to make a Disbursement under any Letter of Credit or of the proceeds thereof.

None of the foregoing shall affect, impair, or prevent the vesting of any of the rights or powers granted the Issuer, Agent or Lenders hereunder.  In furtherance and extension and not in limitation or derogation of any of the foregoing, any action taken or omitted to be taken by the Issuer in good faith shall be binding upon Borrowers, Agent, Lenders and each Lender Assignee and shall not put the Issuer (except to the extent of its own gross negligence or willful misconduct), Agent or any Lender or Lender Assignee under any resulting liability to Borrowers

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nor put the Issuer under any resulting liability to Agent or any Lender or Lender Assignee.  Nothing herein shall constitute a waiver by Borrowers of any of its rights against any beneficiary of any Letter of Credit.

2A.6  Other Senior Lenders’ Participation.  Each Letter of Credit is deemed issued on behalf of the Senior Lenders (including the Issuer), pro rata, based upon the percentage that each Senior Lender’s outstanding Loans and participations in Letters of Credit represents of all Senior Lenders’ Loans and participations in Letters of Credit), and each Senior Lender is deemed to have irrevocably purchased from the Issuer a participation in such Letter of Credit equal to such Senior Lender’s pro rata share of the Stated Amount.  Each Senior Lender shall, to the extent of such pro rata share, promptly reimburse the Issuer for any Reimbursement Obligation which has not been promptly funded by a Loan by the Senior Lenders in accordance with Section 2A.4(b).  For the avoidance of doubt, any such Loan to the Issuer by Senior Lenders shall (notwithstanding that Borrowers may at the time be the subject of a proceeding of the type described in Section 9.8) be treated as Loans made by the Senior Lenders to Borrowers for all purposes of this Agreement.

Section 3.INTEREST.

3.1Rate of Interest.  Subject to the provisions of Section 3.3, Borrowers agree, jointly and severally, to pay interest in respect of the unpaid principal amount of the Loans from the date hereof until maturity (whether by acceleration or otherwise) for each period from and including each Payment Date to but excluding the immediately following Payment Date at a rate per annum equal to, at the Borrower’s option, either (x) the greater of (i) LIBOR plus 350 basis points or (ii) 4.5%, or (y) the Base Rate plus 300 basis points (such rate, the “Applicable Rate”).

3.2Interest Payment Dates.  Interest on and prior to maturity in respect of each Loan shall be payable in arrears (i) on each Payment Date; (ii) upon any repayment or prepayment (to the extent accrued on the principal amount so repaid or prepaid); and (iii) at maturity (whether by acceleration or otherwise) and, after maturity, on demand.

3.3Past Due Rate.  Each Loan (and any overdue interest in respect of each Loan) shall bear interest for each day on which an Event of Default exists (after as well as before judgment), payable on demand, at a rate per annum equal to 5% in excess of the Applicable Rate in effect on such day (such rate, the “Past-Due Rate”).

3.4Capital Adequacy.  If any Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted after the date hereof, it being agreed that “adopted after the date hereof” shall include compliance by a Lender or any lending office or holding company of a Lender with any Basel Law whether or not such Basel Law was in effect, applicable or phased in on or prior to or after the date hereof pursuant to or arising out of the July 1988 report of the Basel Committee on Banking Regulations and Supervisory Practices entitled “International Convergence of Capital Measurement and Capital Standards” or pursuant to or arising out of any report, agreement or convention of  any international banking group adopted subsequent to such 1988 report (said laws, rules, regulations and guidelines pursuant to or arising out of such 1988 report or any such subsequently adopted report, agreement or convention being sometimes collectively herein referred to as “Basel Laws”), or the adoption after the date hereof

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of any other law, rule, regulation or guideline regarding capital adequacy (any such other law, rule, regulation or guideline being sometimes herein referred to as “Other Laws”), or any change in any of the foregoing (after the date hereof in respect of Other Laws; before or after the date hereof in respect of Basel Laws) or in the enforcement or interpretation or administration of any of the foregoing (after the date hereof in respect of Other Laws; before or after the date hereof in respect of Basel Laws) by any Government Authority, central bank or comparable agency charged with the enforcement or interpretation or administration thereof, or compliance by any Lender (or any lending office of any Lender) or any holding company of any Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of its Loans or any of its obligations hereunder to a level below that which such Lender or such Lender’s holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then, upon demand by such Lender (or by Agent on such Lender’s behalf), Borrowers shall pay to such Lender from time to time such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered, together with interest on each such amount from the date demanded until payment in full (after as well as before judgment) thereof at the Base Rate. Each Lender shall endeavor to give Borrowers notice of its intention to require compensation under this Section 3.4 within a reasonable time after the loan officer of such Lender with responsibility for this Agreement becomes aware of its entitlement to such compensation under this Section 3.4, but no failure to give any such notice shall affect or relieve Borrowers of any of Borrowers’ obligations under this Section 3.4 or under any other provision of this Agreement or any other Loan Document or result in any obligation or liability of Agent or any Lender to Borrowers or any other Person.  A certificate of a Lender as to the amount required to be paid by Borrowers under this Section 3.4 and showing in reasonable detail the basis for the calculation thereof shall, absent manifest error, be final and conclusive (it being understood that in no event shall any Lender be required to disclose in such certificate or otherwise any non-public information). In determining such amount or amounts, a Lender may use any method of averaging and attribution as it (in its sole and absolute discretion) shall deem applicable.

3.5Determination of Rate of Borrowing.  As soon as practicable after 10:00 A.M. (New York time) on each Eurocurrency Interest Determination Date, Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the rate of interest (the “Rate of Borrowing”) which shall be applicable to the Eurocurrency Loans for the next succeeding Eurocurrency Interest Period and shall promptly give notice thereof in writing or by telephone (confirmed in writing) to Borrowers and Lenders.

3.6Substituted Rate of Borrowing.

(a)In the event that on any Eurocurrency Interest Determination Date any Lender shall have reasonably determined (which determination shall be final and conclusive and binding upon all parties but, with respect to the following clauses (i), (ii)(y) and (ii)(z), shall be made only after consultation with Agent on the date of such determination) that:

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(i)by reason of any changes arising after the date of this Agreement affecting the interbank Eurocurrency market or affecting the position of such Lender in such market, adequate and fair means do not exist for ascertaining the applicable Rate of Borrowing by reference to LIBOR with respect to the Eurocurrency Loans as to which an interest rate determination is then being made; or

(ii)by reason of (x) the requirements of Regulation D, (y) any change after the date hereof in any other applicable law or governmental rule, regulation or order (or any interpretation thereof and including the enactment of any new law or governmental rule, regulation or order) or (z) other circumstances affecting such Lender or the interbank Eurocurrency market or the position of such Lender in such market (such as for example but not limited to a change in official reserve requirements or increased capital reserves required or imposed by any regulatory authority or entity (domestic or foreign) having jurisdiction over or with respect to such Lender to the extent not provided for in clause (ii)(x) above), LIBOR shall not represent the effective pricing to such Lender for U.S. dollar deposits of comparable amounts for the relevant periods;

then, and in any such event, Lender so affected shall on such date give notice of such determination in writing or by telephone (confirmed in writing) to Borrowers and to Agent.  Thereafter, Borrowers shall pay to such Lender, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its reasonable discretion shall determine) as shall be required to cause such Lender to receive interest with respect to its Eurocurrency Loan for the Eurocurrency Interest Period following such Eurocurrency Interest Determination Date and for any succeeding Eurocurrency Interest Period with respect to which such changes or requirements apply (each such period, an “Affected Interest Period”) at a rate per annum equal to 2.75% in excess of the effective pricing to such Lender for U.S. dollar deposits to make or maintain its Eurocurrency Loans, provided that in the case of any such determination pursuant to clause (ii)(x), the written notice from such Lender to Agent and Borrowers on the relevant Eurocurrency Interest Determination Date shall specify (x) any such amount on account thereof theretofore incurred, and such amount shall be paid at such time and (y) the additional amount required to be paid with respect to the relevant Affected Interest Period (with such amount so stated to be final with respect to the relevant Affected Interest Period) and such additional amount shall be paid at the same time, and together with, the interest otherwise payable in respect of such Eurocurrency Loans for such Affected Interest Period.  A certificate as to additional amounts owed any such Lender, showing in reasonable detail the basis for the calculation thereof, submitted to Borrowers by such Lender through Agent shall, absent manifest error, be final and conclusive and binding upon all of the parties hereto.

(b)In lieu of paying additional moneys to any Lender affected by Section (a), other than clause (ii)(x) thereof (any such Lender, together with any Lender affected by Section 3.7(a), an “Affected Lender”), Borrowers may (subject to Section 3.8), by giving notice in writing or by telephone (confirmed in writing) to the Affected Lender, Agent and the other Lenders on such Eurocurrency Interest Determination Date, (x) require the Affected Lender to convert its Eurocurrency Loan then outstanding or requested that is so affected into a Base Rate Loan on the first day of the Affected Interest Period, such notice to pertain only to the Loans of the Affected Lender and to have no effect on the obligations of the other Lenders to maintain

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Eurocurrency Loans, or (y) terminate the obligations of Lenders to maintain Loans as, or convert Loans into, Eurocurrency Loans and in such event, on the first day of what would have been the next Eurocurrency Interest Period, all Eurocurrency Loans shall be outstanding as Base Rate Loans.

3.7Required Termination and Prepayment.

(a)In the event that at any time any Affected Lender shall have reasonably determined (which determination shall be final and conclusive and binding upon all parties) that the continuation of its Eurocurrency Loans has become unlawful by compliance by such Lender in good faith with any law, governmental rule, regulation, guideline or order, the Affected Lender shall on such date give notice in writing or by telephone (confirmed in writing) to Agent and Borrowers of such determination.  The obligation of the Affected Lender to maintain its Eurocurrency Loan or Loans so affected shall be terminated and Borrowers shall forthwith and in any event no later than the earliest of (x) the termination of the Eurocurrency Interest Period in effect at the time any such determination pursuant to this Section 3.7(a) is made or (y) five (5) Business Days after receipt of notice from an Affected Lender under this Section 3.7(a), take one of the actions specified in Section 3.7(b).  If by the earliest of (x) or (y) Borrowers have not exercised one of the options specified in Section 3.7(b), Borrowers shall be deemed to have exercised the option set forth in clause (iii) of Section 3.7(b) and to have given the notice specified therein.

(b)Upon receiving any notification provided in Section 3.7(a), Borrowers may (subject to Section 3.8) exercise one of the following options:

(i)If the determination by an Affected Bank relates only to Base Rate Loans then being requested by Borrowers to be converted to Eurocurrency Loans pursuant to a Notice of Conversion, Borrowers may, by giving notice in writing to Agent and Lenders prior to the date on which such Eurocurrency Loan is to be converted, withdraw such Notice of Conversion for all Lenders;

(ii)Upon written notice to Lenders, Borrowers may terminate the obligations of Lenders to maintain Loans as, or convert Loans into, Eurocurrency Loans and in such event, Borrowers shall, not later than the time specified in subsection 3.7(a), convert all Eurocurrency Loans into Base Rate Loans by giving notice thereof to Agent and Lenders.

(iii)Borrowers may, by giving notice in writing to the Affected Lender, Agent and the other Lenders require the Affected Lender to keep outstanding as a Base Rate Loan the Base Rate Loan which then have been converted, such notice to pertain only to the affected Base Rate Loans of the Affected Lender and to have no effect on the obligations of the other Lenders to maintain Eurocurrency Loans.

3.8Compensation.  Borrowers shall compensate each Lender, upon written request by such Lender (which request shall be made through Agent and shall set forth the basis for requesting such amounts), for all losses, expenses and liabilities (including, without limitation, any interest paid by such Lender to lenders of funds borrowed by it to carry its Eurocurrency Loans to Borrowers, losses sustained by such Lender in connection with the liquidation or re-

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employment of such funds and all other funding losses) which such Lender may sustain: (i) if for any reason a conversion of any Eurocurrency Loan does not occur on a date specified therefor pursuant to Section 3.6, 3.7 or 3.10, or any conversion into a Eurocurrency Loan does not occur on the date specified therefor in Section 3.10, (ii) if for any reason any prepayment or repayment or conversion of any of its Eurocurrency Loans occurs on a date which is not the last day of a Eurocurrency Interest Period applicable thereto, (iii) if any prepayment, repayment or conversion of any of its Eurocurrency Loans occurs on such last day of the Eurocurrency Interest Period applicable thereto in any amount in excess of the amount notified to Agent in writing not less than three Business Days prior to such last day of such Eurocurrency Interest Period, (iv) if any prepayment, repayment or conversion of any of its Eurocurrency Loans occurs without at least three Business Days prior written notice thereof having been given to Agent, (v) if any prepayment or repayment of any of its Eurocurrency Loans is not made on any date specified in a notice thereof given by Borrowers or if any prepayment or repayment contemplated or required by a Waterfall Certificate is not made on the Payment Date following the date such Waterfall Certificate is delivered, or (vi) as a consequence of any default under this Agreement.

3.9Eurocurrency Interest Period Determination.

(a)Each Eurocurrency Interest Period for any Loan shall commence on a Payment Date and expire on the succeeding Payment Date.

(b)No Eurocurrency Interest Period in respect of any Loan shall extend beyond its stated maturity date.

(c)Subject to Section 3.9(e), if Agent shall not have received written notice from Borrowers on or prior to 11:00 a.m. (Closing Office time) at least three Business Days prior to a Payment Date that Borrowers have elected to convert all or a portion of Loans outstanding as Eurocurrency Loans to Base Rate Loans in accordance with the other provisions of this Agreement, Borrowers shall be deemed to have elected to have such Loans (or portion thereof, as the case may be) continued as Eurocurrency Loans for a new Eurocurrency Interest Period.

(d)Unless the Majority Lenders specifically agree in writing, no Eurocurrency Interest Period may be selected at any time that a Default or Event of Default exists and Borrowers shall be deemed to have elected to convert such Eurocurrency Loans into Base Rate Loans.

(e)Borrowers shall not be permitted to maintain as Eurocurrency Loans any Loans if the outstanding amount of such Loans to be maintained as Eurocurrency Loans is less than 1,000,000 units of the relevant currency, and an amount the Dollar Equivalent of which is equal to or greater than $1,000,000, or an integral multiple of 100,000 units of the relevant currency in excess thereof.

3.10Conversions.  Borrowers shall have the option to convert, on any Payment Date, all or any portion of Loans from Base Rate Loans to Eurocurrency Loans or (provided that such Loan was made in Dollars) from Eurocurrency Loans to Base Rate Loans; provided that (i) after giving effect to any such conversion the amount outstanding as a Eurocurrency Loans, if any, shall be equal to $1,000,000 or an integral multiple of $100,000 in excess thereof, and the

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amount outstanding as Base Rate Loans, if any, shall not be less than $20,000; and (ii) unless the Majority Lenders specifically agree in writing, no conversion to Eurocurrency Loans shall be permitted at any time that a Default or Event of Default exists.  Each such conversion shall be effected by Borrowers giving Agent written notice thereof (a “Notice of Conversion”) on or prior to 11:00 a.m. (Closing Office time) at least three (3) Business Days prior to a Payment Date, specifying the amount of Loans to be converted.

Section 4.FEE.  Borrowers agree to pay to Agent, for the ratable account of each Lender (based upon their pro rata shares of the outstanding Loans) an upfront fee (the “Upfront Fee”) in the amount of $2,025,000, which fee shall be due and payable in full as follows:

(a)Agent and Lenders acknowledge the payments of the amount of $682,500 to the Agent on March 26, 2010, which amount shall be a credit against the Upfront Fee;

(b)On the Effective Date, the amount of $675,000; and

(c)On the first day of July, August, September and October 2010, the amount of $166,875.

Section 5.PAYMENTS; PERMITTED DISTRIBUTIONS.

5.1Currency of Payments.  All payments of principal and interest on Loans and under the Notes shall be made to Agent in immediately available funds in the currency of the applicable Loan for which payment is being made.

5.2Payments on Non-Business Days.  Whenever any payment to be made hereunder or under the Notes shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest shall be payable at the applicable rate during such extension.  Borrowers hereby authorize and direct Agent and each Lender to charge any account of a Borrower maintained at any office of Agent or such Lender with the amount of any principal, interest or fee when the same becomes due and payable under the terms hereof or of the Notes; provided, however, that neither Agent nor any Lender shall be under any obligation to charge any such account.

5.3Payment Date and Distribution of Funds.

(a)After giving effect to any mandatory prepayment owing or that will become due and payable on or before the last day of calendar month in which the Payment Date in question occurs pursuant to Section 2.3(a) of this Agreement and except following the occurrence and during the continuation of an Event of Default, in which case the distribution of Cash Flow shall be controlled by the Agent, all funds in the Cash Flow Cash Collateral Account, the Cash Collateral Account-Servicing and the FCI Distribution Account (“Cash Flow”) shall be distributed by Borrowers or the Agent on the fourth to last Business Day of each month (each, a “Payment Date”) pursuant to the distribution statement prepared by Borrowers and approved in writing by Agent (or at any other times as may be agreed upon from time to time by Borrowers, Agent and Lenders) in accordance with the following priority and amounts and applied as follows and as illustrated in Schedule 5.3(a) to this Agreement:

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(i)First, to the payment to Agent, for the account of Lenders (subject to Section 2.2(c) of this Agreement), of all interest on the Loans which is then due and payable and any Letter of Credit Fee payable pursuant to Section 2A.3(a) or Upfront Fee payable pursuant to Section 4;

(ii)Second, to the payment to Agent, for the account of Lenders, an amount equal to all of any fees, late charges and other fees and expenses (other than those paid in Section 5.3(a)(i) above), including in respect of a Cold Back-up Servicer under Section 7.20 of this Agreement, which are then due and payable to Agent and/or Lenders under this Agreement or any of the other Loan Documents or which will become so due and payable on or before the last day of the calendar month in which the Payment Date in question occurs;

(iii)Third, to FC Commercial as requested by it to fund the FC Commercial Protective Advance Account up to the maximum amount of $1,000,000 or such greater amount approved in writing by the Agent and Lenders, and to FHP as requested by it to fund the FH Protective Advance Account up to the maximum amount of $1,000,000 or such greater amount approved in writing by the Agent and the Lenders.

(iv)Fourth, to the payment to FC Servicing, of the following Overhead Allowance amounts during the following periods:

Period	Amount
May, 2010 – April, 2011	$	1,500,000 per month
May, 2011 – April, 2012	$	1,029,676 per month
May, 2012 – April, 2013	$	715,636 per month

(v)Fifth, to the payment (the “Leak-Through Allowance”) to Borrowers of twenty percent (20%) of all remaining Cash Flow until aggregate payments under this Section 5.3(a)(v) equal Twenty-five Million Dollars ($25,000,000), and thereafter no further amounts as a Leak-Through Allowance; and

(vi)Sixth, to the payment to Agent, for the account of Lenders.

5.4Net Payments; Application.

(a)All payments hereunder and under the Loan Documents (including, without limitation, repayments and prepayments pursuant to Section 2) shall be made by Borrowers to Agent, except as otherwise provided in this Agreement in freely transferable U.S. dollars, and in same day funds at the Closing Office without setoff or counterclaim and in such amounts as may be necessary in order that all such payments (after (i) withholding for or on account of any present or future taxes, levies, imposts, duties or other similar charges of whatsoever nature imposed on the amounts described above by any government or any political subdivision or taxing authority thereof, other than any tax (other than such taxes referred to in clause (ii) below) imposed on a Lender pursuant to the income tax laws of the jurisdiction where such Lender’s principal or lending office or offices are located (collectively, the “Taxes”) and (ii) 

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deduction of an amount equal to any taxes on or measured by the net income payable to such Lender with respect to the amount by which the payments required to be made by this Section 5.4 exceed the amount otherwise specified to be paid under this Agreement and the Notes) shall not be less than the amounts otherwise specified to be paid under this Agreement and the Notes.  With respect to each such deduction or withholding imposed in respect of any payment by or on behalf of Borrowers, Borrowers shall promptly (and in no event later than 30 days thereafter) furnish to Agent such certificates, receipts and other documents as may be required to establish any tax credit, exemption or reduction in rate to which any Lender or holder of a Note may be entitled.  Each Lender, other than a Lender organized and existing under the laws of the United States of America or any political subdivision thereof, agrees to furnish Borrowers, as soon as practicable after any written request of Borrowers to such effect, any executed form reasonably requested by Borrowers such as IRS Form W-8BEN or W-8ECI, and any other applicable form as to such Lender’s entitlement, if any, to exemption from, or a reduced rate of, or its subjection to, United States withholding tax on amounts payable to it hereunder by Borrowers or under the Notes of Borrowers and each such Lender undertakes to use its best efforts promptly to notify Borrowers of any material change in any information, statement or form so furnished to Borrowers; provided, however, that any failure on the part of any Lender to furnish any such information, statements or forms shall in no way affect the obligations of Borrowers or the rights of any Lender under the terms of this Agreement or of the Notes.

5.5Distribution by Agent.  All payments received by Agent on behalf of Lenders on account of principal and interest under this Agreement or the Notes or on account of any fees payable for the account of Lenders shall be promptly distributed by Agent to Lenders (in the type of funds received by Agent) as follows: (i) if in respect of principal of any Loans made to Borrowers, then to each Lender in accordance with the Subordination Agreement; (ii) if in respect of interest on the Loans, then to each Lender in accordance with the Subordination Agreement; (iii) if in respect of fees, then to Lenders in accordance with their entitlement thereto (based on each Lender’s share of the Upfront Fee); and (iv) if in respect of a payment under Section 3 other than an interest payment hereof, to each Lender in accordance with its entitlement thereto.  For the avoidance of doubt, none of the Borrowers, FCFC or the Guarantors shall have any liability to the Agent or the Lenders arising from the manner in which the funds are allocated among the Lenders by the Agent.

Section 6.CONDITIONS PRECEDENT TO EFFECTIVENESS

This Agreement shall become effective on the date hereof (the “Effective Date”) when each of the parties hereto has signed and delivered the same as herein required and each of the following conditions have been satisfied to the satisfaction of Agent (or waived by Agent in writing):

6.1Default, etc.  On the Effective Date (both before and after giving effect to the occurrence of the Effective Date assuming such Date has occurred) there shall exist no Default or Event of Default and all representations and warranties made by the Loan Parties herein or in the other Loan Documents or otherwise by the Loan Parties in writing in connection herewith or therewith shall be true and correct in all material respects with the same effect as though such representations and warranties have been made at and as of such time.

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6.2Notes.  Agent shall have received for each of Lenders the Notes, each duly executed and completed by Borrowers.

6.3Supporting Documents of Borrowers.  There shall have been delivered to Agent (with sufficient copies for each of the Lenders) such information and copies of documents (if any), approvals (if any) and records (certified where appropriate) of corporate and legal proceedings (if any) in addition to those listed on the Closing Checklist as Agent or any Lender may have reasonably requested relating to the Loan Parties’ entering into and performance of the Loan Documents or any other agreements or documents related thereto or contemplated thereby.

6.4Officer’s Certificate.  There shall have been delivered to Agent (with sufficient copies for each of Lenders) a certificate of an Executive Officer of each Borrower certifying, as of the Effective Date, compliance with the conditions of Section 6.1 and the absence of any Material Adverse Changes of the type referred to in Section 6.8.

6.5Certifications; Financial Statements.  Borrowers shall have delivered to Agent such financial statements and certifications of financial statements as Agent may have requested, which statements shall include, in any event, month end financial statements of the type required by Section 7.1(a) and certified by the CFO as of the most recent month ending no later than ninety (90) days prior to the Effective Date and the annual audited financial statements required for FCFC for the Fiscal Year most recently ended (or the prior Fiscal Year, if less than 105 days have passed since the end of a Fiscal Year) accompanied by the certifications required by Section 7.1(d).

6.6Approvals and Consents.  All orders, permissions, consents, approvals, licenses, authorizations and validations of, and filings, recordings and registrations with, and exemptions by (all of the foregoing, “Requisite Consents”), any Government Authority, or any other Person, required to authorize or required in connection with the execution, delivery and performance of this Agreement or the other Loan Documents and the transactions contemplated hereby and thereby by any Loan Party shall have been obtained (and, if so requested, furnished to Agent, with sufficient copies for Lenders).

6.7Legal Opinions.  Agent shall have received legal opinions (in sufficient counterparts for each of Lenders) dated the Effective Date from Haley & Olson P.C., counsel to Borrowers and each other Loan Party, in form and substance satisfactory to Agent.

6.8Adverse Change.  There shall have been, in Agent’s opinion, no Material Adverse Change since December 31, 2009.  Neither Agent nor any Loan Party shall have become aware of any previously undisclosed information with respect to any Loan Party which, in Agent’s opinion, would have a Material Adverse Effect

6.9Change in Law; No Opposition.  (i) No change shall have occurred in applicable law or in applicable regulations thereunder or in the interpretations thereof by any Governmental Authority which, in the opinion of any Lender, would make it illegal for such Lender to make one or more Loans hereunder; and (ii) no suit, action or proceeding shall be pending or threatened before or by any Governmental Authority seeking to restrain or prohibit the making of any Loan or the consummation of the transactions contemplated hereby.

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6.10All Proceedings to be Satisfactory.   All corporate, partnership, limited liability company and legal proceedings and all instruments, documents and papers in connection with the transactions contemplated by this Agreement and the other Loan Documents and the other documents referred to herein shall be satisfactory in form and substance to Agent, and Agent and each Lender shall have received all such information and copies of all documents which Agent or such Lender may reasonably have requested in connection herewith, such documents where appropriate to be certified by proper corporate officials or governmental authorities.

6.11Checklist Documents.  The documentation set forth on the Closing Checklist (Schedule 6.11), including, without limitation, the Guaranties, Pledge Agreements and Security Agreements, related confirmations listed thereon, the Subordination Agreement and the Back-Up Servicing Agreement, satisfactory to Agent in form and substance, shall have been delivered to Agent, and such other actions referred to on such Schedule and in such documentation shall have been taken.

6.12Intercompany Security Agreements.  Each Primary Obligor shall have delivered (i) intercompany security agreements (or confirmations thereof) in form and substance satisfactory to Agent securing each such Person’s obligations under its Pledged Note together with such other documents and instruments relating thereto and records of company proceedings and (ii) if requested by Agent, legal opinions, as Agent may reasonably request.

6.13UCC Statements.  Lien search results confirming the absence of any perfected Liens prior to Lenders’ and of any other Liens other than Liens permitted hereunder shall have been delivered to Agent and all actions with respect to the Liens created by the Security Documents as are necessary or appropriate to perfect such Liens shall have been taken.

6.14Fees and Expenses.  The fees referred to in Section 4 of this Agreement and the legal fees and expenses of Agent’s New York counsel and (if any) local or special counsel in connection with the transactions contemplated by this Agreement shall have been paid in full.

6.15Release by FCFC.  Borrowers shall have caused the execution and delivery by FCFC and its Affiliates to the Lenders of a release in form, scope and substance satisfactory to the Lenders (the “Release”).

6.16Collateral Assignment of Service Bureau.  FC Servicing and the Lenders shall have executed and delivered a collateral assignment of that certain Information Technology Services Agreement, dated February 7, 2006, between Fidelity Information Services, Inc. and FC Servicing (the “ITSA Agreement”), such collateral assignment to be in form, scope and substance satisfactory to the Lenders.

6.17Valuation Certificate.  Borrowers shall have delivered to the Lenders a Valuation Certificate in the form of Schedule 6.17 (the “Valuation Certificate”) signed by the Treasurer of the Borrowers which will set forth the Aggregate Net Present Equity Value of each Borrower and Portfolio Entity.

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Section 7.AFFIRMATIVE COVENANTS.

Each Borrower and FLBG warrants, represents and covenants to the Lenders and Agent that, so long as this Agreement is in effect and until all of the Loans, together with interest and all other obligations (including Deemed Disbursements and Reimbursement Obligations and fees and disbursements in connection therewith) are paid in full,  each Borrower will (unless it shall have first procured the written consent of the Majority Lenders to do otherwise) (i) perform the obligations set forth in this Section 7, (ii) cause each Primary Obligor, Wholly-Owned Subsidiary and other Loan Party to perform the obligations set forth in this Section 7 which are applicable to such Person and (iii) exercise commercially reasonable efforts to cause each Material Portfolio Entity to perform the obligations set forth in this Section 7 which are applicable to such Person.

7.1Financial Statements.  Each Borrower will furnish to Agent and each Lender:

(a)As soon as available and in any event within forty-five (45) days after the close of each calendar month, as at the end of such month and for the period commencing at the end of the previous Fiscal Year and ending with the end of such month, a consolidated and consolidating balance sheet of FC Commercial and the other members of the Consolidated Group, and the related statement of operations for such period, all certified by the CFO of each Borrower and of each other member of the Consolidated Group as being prepared in accordance with GAAP and to present fairly the financial position and results of operation of such Person for such period;

(b)As soon as available but not later than one hundred five (105) days after the close of each Fiscal Year of FC Commercial, as at the end of and for the Fiscal Year just closed, an audited consolidated balance sheet of FC Commercial and the other members of the Consolidated Group, the related statement of operations (including income statement) and a reconciliation of capital for such year, all certified on an unqualified basis by a firm of independent certified public accountants selected by Borrowers and acceptable to Agent in Agent’s sole and absolute discretion;

(c)As soon as available but not later than one hundred five (105) days after the close of each Fiscal Year of FC Commercial, as at the end of and for the Fiscal Year just closed, an unaudited consolidating balance sheet of FC Commercial and the other members of the Consolidated Group, the related statements of operations (including income statement) and a reconciliation of capital for such year, prepared by the CFO of each Borrower;

(d)Concurrently with the delivery of the financial statements described in subsection (b) above, a certificate of the aforesaid independent certified public accountants certifying to Agent that based upon their examination of the affairs of FCFC, performed in connection with the preparation of said financial statements, FCFC is in compliance with the covenants set forth in the Limited Guaranty, or, if FCFC is not in compliance, the nature of the noncompliance therewith;

(e)Concurrently with delivery to its stockholders, copies of all financial and other information delivered by FCFC or a Borrower, as the case may be, to such Persons, including without limitation, its proxy statements and annual reports to stockholders.  Within two (2) Business Days after delivery to the SEC by FCFC or a Borrower, as the case may be, which

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in all cases shall be on a timely basis in accordance with the applicable document and the Securities Laws, copies of all reports and other filings filed by FCFC or a Borrower, as the case may be with the SEC, including without limitation, all reports on Forms 10K, 10Q or 8K promulgated under the Securities Exchange Act of 1934, as amended, and all registration statements filed under the Securities Act of 1933, as amended;

(f)Concurrently with delivery of the financial statements required pursuant to Section 7.1(a) and (b) hereof, a certificate executed by the President, Treasurer or CFO of each Borrower that (A) no Event of Default or Default has occurred and is continuing under this Agreement, (B) each Borrower is in compliance with the covenants set forth in Section 8.17 hereof; and (C) no event of default and no event or condition which, with the passage of time or the giving of notice or both, would constitute an event of default has occurred and is continuing under any other Indebtedness Instrument (“Other Indebtedness Instrument Unmatured Default”) or, if an Event of Default or Default has occurred under this Agreement or an event of default or Other Indebtedness Instrument Unmatured Default has occurred under any other Indebtedness Instrument, setting forth the details of such event and the action which each Borrower proposes to take with respect thereto;

(g)Promptly upon receipt thereof, copies of all detailed financial reports and Management Letters, if any, submitted to any member of the Consolidated Group by the Auditors, in connection with each annual or interim audit of their respective books by such Auditors;

(h)As soon as possible and in any event (A) within thirty (30) days after a Loan Party, or any of the respective ERISA Affiliates of any Loan Party, knows that any Termination Event described in clause (i) of the definition of Termination Event with respect to any Pension Plan has occurred or is expected to occur and (B) within ten (10) days after a Loan Party or any of its ERISA Affiliates knows that any other Termination Event with respect to any Pension Plan has occurred or is expected to occur, a statement of the CFO of FLBG and of each Borrower describing such Termination Event and the action, if any, which the affected Loan Party or ERISA Affiliate proposes to take with respect thereto;

(i)Promptly and in any event within five (5) Business Days after receipt thereof by a Loan Party or any of its ERISA Affiliates from the PBGC, copies of each notice received by such Person of the PBGC’s intention to terminate any Pension Plan or to have a trustee appointed to administer any Pension Plan, any notice of noncompliance issued by the PBGC with respect to a proposed standard termination of a Pension Plan, and any notice issued by the PBGC with respect to a proposed distress termination of a Pension Plan;

(j)Promptly and in any event within thirty (30) days after the filing thereof with the IRS, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Pension Plan;

(k)Promptly and in any event within five (5) Business Days after receipt thereof by a Loan Party or any of its ERISA Affiliates from a Multiemployer Plan sponsor, a copy of each notice received by such Person concerning (x) the imposition or amount of withdrawal liability under Subtitle E of Title IV of ERISA or (y) any determination by a

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Multiemployer Plan sponsor that such Multiemployer Plan is, or is expected to be, in “reorganization” (within the meaning of Section 4241 of ERISA) or “insolvent” (within the meaning of Section 4245 of ERISA), or has incurred or is expected to incur an “accumulated funding deficiency” (within the meaning of Section 302 of ERISA or Section 412 of the Code);

(l)Upon request of Agent made from time to time, a copy of any Pension Plan sponsored, contributed to, participated in or maintained by a Borrower or any ERISA Affiliate; and

(m)With reasonable promptness, such other information respecting the business, properties, operations, prospects or condition (financial or otherwise) of any member of the Consolidated Group and any other Primary Obligor and, to the extent reasonably available, any other Related Entity as Agent or any Lender may from time to time in writing reasonably request provided, that neither Borrower shall be required to furnish to Agent or any Lender any such information relating to a Portfolio Entity if (i) the Charter Documents of, or Shareholder Agreement relating to, such Person, in each case as in effect on the date of formation of such Person, prohibit such disclosure and (ii) notice of such prohibition on disclosure is provided to Agent within five days of formation of such Person (any such restriction, a “Disclosure Restriction”).

7.2Other Required Notices and Covenants.

(a)Each Borrower and FLBG shall notify Agent promptly after obtaining knowledge of:

(i)except as otherwise previously disclosed, any event or occurrence which Borrower has determined could have a Material Adverse Effect as a result of a loss or decline in value of the Assets of a Borrower, FLBG, any other Primary Obligor, any Portfolio Entity or any Related Entity due to casualty or any other adverse occurrence and the estimated (or actual, if available) amount of such loss or decline;

(ii)the institution of (x) any suit or administrative proceeding which if determined adversely to a Borrower, FLBG, any other Primary Obligor, any Portfolio Entity or any Related Entity is reasonably likely to or could reasonably be expected to result in a Material Adverse Effect, and (y) any other suit or administrative proceeding against a Borrower, FLBG, any other Primary Obligor or any Portfolio Entity in which the uninsured amount involved is $750,000 or more, such notice to be given on or prior to the end of the calendar month in which the applicable event occurs;

(iii)a Borrower, FLBG any other Primary Obligor or any Material Portfolio Entity becoming subject to any Charge, restriction, judgment, decree or order which could reasonably be expected to materially adversely affect the operations, financial conditions or business of such Person, or any other Portfolio Entity or any Related Entity becoming subject to any Charge, restriction, judgment, decree or order if the same could reasonably be expected to materially adversely affect the operations, financial conditions or business of a Borrower, FLBG, any other Primary Obligor, or any Material Portfolio Entity;

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(iv)the commencement of any lockout, strike or walkout relating to any labor contract to which a Borrower, FLBG, any other Primary Obligor, any Portfolio Entity or any Related Entity is a party, if the same could reasonably be expected to have a Material Adverse Effect;

(v)except as otherwise previously disclosed, any event or occurrence in respect of a Borrower, FLBG, any other Primary Obligor, any Portfolio Entity or any Related Entity which could reasonably be expected to have a Material Adverse Effect;

(vi)the occurrence of (x) a default by a Borrower, FLBG, FCFC, any other Primary Obligor, any Portfolio Entity, any Related Entity or any other Loan Party under any agreement, document or instrument to which such Person is a party which could reasonably be expected to have a Material Adverse Effect, or (y) any default by a Borrower, FLBG, FCFC, any other Primary Obligor or any other Loan Party which could reasonably be expected to materially and adversely affect any such Person’s ability to perform its respective obligations under the Loan Documents;

(vii)the filing of a petition by or against a Borrower, FLBG, any other Primary Obligor, any Portfolio Entity, any Related Entity or any other Loan Party under any section or chapter of the United States Bankruptcy Code or any similar law or regulation or if any such Person shall make an assignment for the benefit of its creditors or if any case or proceeding is filed by or against any such Person for its dissolution or liquidation;

(viii)the making of an application for the appointment of a receiver, trustee or custodian for any of the Assets of a Borrower, FLBG, any other Primary Obligor, any Material Portfolio Entity, any Related Entity or any other Loan Party, other than a Non-Default Voluntary Custodial Arrangement;

(ix)the exercise by any holder of any option, warrant or right to purchase any Equity Interest in a Borrower, FLBG, any other Primary Obligor or any Material Portfolio Entity;

(x)the issuance or sale of any Securities by a Borrower, FLBG, any other Primary Obligor or any Portfolio Entity, whether or not permitted pursuant to the terms hereof; and

(xi)the occurrence of the REO Post—25% Time.

(b)On the 20th day of each month, each Borrower shall deliver to Agent (i) Waterfall Certificates in respect of each Asset Pool and Portfolio Entity, certified by an Executive Officer of each Borrower; and (ii) a Summary Waterfall Certificate in respect of all Asset Pools; and (iii) a report in the form attached hereto as Exhibit B setting forth the computation of the Aggregate Undistributed Funds of all Portfolio Entities.

(c)(i)  Each Borrower shall give Agent notice that a Portfolio Entity has become a Material Portfolio Entity (due to the amount of Assets contributed to it on the date of its formation or an increase in Assets thereafter) within thirty (30) days of such Person becoming a Material Portfolio Entity.

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(ii)Each Borrower shall give Agent notice that an Immaterial Entity has ceased to constitute an Immaterial Entity (due to an increase in the fair market value of its assets or such company engaging in any business) within thirty (30) days of such Person ceasing to constitute an Immaterial Entity and shall promptly deliver to Lender a revised Schedule 10.34 to reflect such change.

(iii)Each Borrower shall give Agent notice of the dissolution or full liquidation of, or the suspension or discontinuation of business by, any Portfolio Entity, not less than thirty (30) days prior to such dissolution, liquidation, suspension or discontinuation.

(d)On or before the fourth to last Business Day of each month, each Borrower shall deliver to Agent a Portfolio Protection Expense Report in the form of Schedule 7.2(d) hereto (the “Portfolio Protection Expense Report”) showing as of the close of business on the last Business Day of the preceding calendar month the balances of the FC Commercial Protective Advance Account, the FH Protective Advance Account and the FCI Distribution Account, the aggregate amount retained by Portfolio Entities to pay Portfolio Protection Expenses not theretofore paid, the aggregate amount of Portfolio Protection Expenses theretofore paid and the aggregate amount of Portfolio Protection Expenses withheld (in the aggregate) by such Persons during the immediately preceding calendar month.  Borrower shall provide to the Agent such other information with respect thereto as Agent may reasonably request.

(e)Each Borrower shall give Agent notice of the transfer of any property by a Portfolio Entity to one of its REO Affiliates within thirty (30) days of any such transfer and such other information as Agent may request with respect thereto promptly following such request.

(f)On or before the fourth to last Business Day of each month, Borrower shall deliver to Agent a Valuation Certificate signed by the Treasurer of the Borrowers.

(g)Each Borrower shall give Agent notice of the occurrence of an Adverse Waterfall Event within thirty days of such occurrence.

(h)If a Borrower at any time has knowledge of any servicer default, servicing termination event, amortization event or similar event or condition occurring or existing under any agreement relating to the securitization of Assets of any Primary Obligor or other Loan Party or securitization entity established by any Primary Obligor or other Loan Party, such Borrower shall immediately notify Agent thereof.

(i)Borrower shall notify Agent if the amount of Aggregate Undistributed Funds at any time exceeds $5,000,000.

7.3Payment of Charges.

(a)Other than charges payable by First X or First B, Each Borrower, each Primary Obligor, each Material Portfolio Entity, and each Wholly-Owned Subsidiary other than any REO Affiliate shall pay promptly when due and discharge all Charges.  In the event a Borrower, any Primary Obligor, any Material Portfolio Entity or any Wholly-Owned Subsidiary other than an REO Affiliate, at any time or times hereafter, shall fail to pay the Charges or to

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obtain such discharges as required herein, such Borrower shall so advise Agent thereof in writing.  Agent may, without waiving or releasing any obligation, covenant or agreement of either Borrower or any Event of Default or Default, in its sole and absolute discretion, at any time or times thereafter, make such payment, or any part thereof, or obtain such discharge and take any other action with respect thereto which Agent deems advisable.  All sums so paid by Agent and any expenses relating thereto, including reasonable attorneys’ fees, court costs, expenses and other charges, shall be part of the Obligations, payable by Borrowers to Agent on demand.  Notwithstanding the foregoing, a Borrower, any Primary Obligor, any Material Portfolio Entity or any Wholly-Owned Subsidiary may permit or suffer the Charges to attach to its Assets on the conditions that: (i) such Borrower or the applicable Primary Obligor, Material Portfolio Entity or Wholly-Owned Subsidiary, in good faith, shall be contesting the same in an appropriate proceeding diligently pursued; (ii) enforcement thereof against any Assets of such Borrower or any applicable Material Portfolio Entity or Wholly-Owned Subsidiary shall be stayed; and (iii) appropriate reserves therefor shall have been established on the Records of such Borrower or the applicable Primary Obligor, Material Portfolio Entity or Wholly-Owned Subsidiary in accordance with GAAP.

7.4Insurance.  Each Borrower, FLBG, each Primary Obligor, each Portfolio Entity (other than any Foreign Portfolio Entity), each REO Affiliate and each Wholly-Owned Subsidiary at each of such respective Person’s sole cost and expense, shall keep and maintain: (i) policies of insurance against all hazards and risks ordinarily insured against by other owners or users of properties in similar business or as reasonably requested in writing by Agent; and (ii) public liability insurance relating to such Person’s ownership and use of its Assets; provided, however, no such Person shall be required to maintain the insurance referred to in clause (i) as to any Asset if the Net Present Value of the Asset is less than $100,000.  All such policies of insurance shall be in form, with insurers and in such amounts as may be satisfactory to Agent.  Each Borrower shall deliver to Agent the original (or certified) copy of each policy of insurance and evidence of payment of all premiums for each such policy.  Such policies of insurance of each Borrower, Primary Obligors and Wholly-Owned Subsidiaries (except those of public liability) shall contain an endorsement, in form and substance acceptable to Agent, showing losses payable to Agent for the ratable benefit of Lenders (excluding any losses payable to the lenders under any Approved Portfolio Leverage Arrangement).  Such endorsement or an independent instrument furnished to Agent, shall provide that all insurance companies will give Agent at least thirty (30) days prior written notice before any such policy or policies of insurance shall be altered or canceled and that no act or default of a Borrower or any other Person shall affect the right of Agent for the ratable benefit of Lenders, to recover under such policy or policies of insurance in case of loss or damage (excluding any losses payable to the lenders under any Approved Portfolio Leverage Arrangement).  Upon request by Agent and, whether or not such request is made, upon the occurrence of an Event of Default or Default, each Borrower hereby directs all insurers under such policies of insurance (except those of public liability) to pay all proceeds payable thereunder directly to Agent (excluding any losses payable to the lenders under any Approved Portfolio Leverage Arrangement).  Upon request by Agent and upon the occurrence of an Event of Default or Default, each Borrower, irrevocably, appoints Agent (and all officers, employees or agents designated by Agent) as such Borrower’s true and lawful agent and attorney-in-fact for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of such Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all

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determinations and decisions with respect to such policies of insurance.  In the event a Borrower, any Primary Obligor, any Portfolio Entity, any REO Affiliate or any Wholly-Owned Subsidiary at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then Agent, without waiving or releasing any obligation, covenant or agreement of a Borrower or any Event of Default or Default, may at any time or times thereafter (but shall be under no obligation to do so) obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto which Agent deems advisable.  All sums so disbursed by Agent, including reasonable attorneys’ fees, court costs, expenses and other charges relating thereto, shall be part of the Obligations, payable by Borrowers to Agent on demand.  Agent shall also be named as an additional insured with respect to each Borrower’s, each Primary Obligor’s and each Wholly-Owned Subsidiary’s liability insurance.

7.5Maintenance of Records.  Each Borrower will keep, and will cause FLBG, each other Primary Obligor and each Wholly-Owned Subsidiary other than REO Affiliates to keep, at all times books of record and account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs, and each such Person will provide, and will cause each such other Person to provide, adequate protection against loss or damage to such books of record and account.

7.6Preservation of Existence.  Each Borrower, FLBG, each other Primary Obligor, each Material Portfolio Entity, and each Subsidiary of a Borrower other than an Immaterial Entity, REO Affiliate or a Harbor Debtor, will maintain and preserve its respective corporate, limited liability company or partnership existence, rights, privileges and franchises in its jurisdiction of organization, and qualify and remain qualified to do business in, and maintain its rights, privileges and franchises in each other jurisdiction which in the opinion of the respective board of directors, manager, general partner or other governing Person thereof continue to be advantageous to it and shall comply in all material respects with all applicable Legal Requirements.  Without limiting the generality of the foregoing, each Borrower agrees to (and to cause each such other Person to) qualify to do business as a foreign corporation in each jurisdiction where the nature of its business and the operations conducted by it therein require it to be so qualified; provided that notwithstanding the foregoing, Agent and Lenders acknowledge that it is contemplated that the Borrowers, Primary Obligors and Portfolio Entities will be liquidating their assets and that a Primary Obligor or any Portfolio Entity may be dissolved or merged into another Primary Obligor or Portfolio Entity upon the liquidation of all assets of any such Person that can be reasonably expected to be collected or sold.

7.7Preservation of Assets.  Each Borrower, FLBG and each other Primary Obligor will keep its property material to the conduct of its business in good repair, working order and condition and from time to time make all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, so that the business carried on by it may be conducted at all times in accordance with prudent business management.

7.8Inspection of Books and Assets.  Each Borrower, FLBG and each other Primary Obligor shall permit Agent, Lenders and each of their respective representatives reasonable access during normal business hours to its properties and personnel, and shall disclose and make available to Agent and Lenders all books, papers and records relating to the Assets, stock

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ownership, properties, operations, obligations, and liabilities of each Borrower, FLBG, each other Primary Obligor and their respective Subsidiaries (and shall use commercially reasonable efforts to cause each other Portfolio Entity to do the same), including, but not limited to, all books of account (including the general ledger), tax records, minute books of meetings of boards of directors (and any committees thereof) and shareholders, organizational documents, bylaws, material contracts and agreements, filings with any regulatory authority, accountants’ work papers (other than those that are the property of its independent outside auditors), litigation files, loan files, plans affecting employees, and any other business or prospects in which Lenders may have a reasonable interest in connection with the Loans, provided that such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations, and provided further that in the event that any of the foregoing are in the control of any third party, each Borrower, FLBG and each other Primary Obligor shall use its reasonable best efforts to cause such third party to provide access to such materials to Agent and Lenders who shall request the same.  In the event that a Borrower, FLBG or any other Primary Obligor is prohibited by law from providing any of the access referred to in the preceding sentence to Agent and Lenders, it shall use its commercially reasonable efforts to obtain waivers thereof promptly so as to permit such access.  Each Borrower, FLBG and each other Primary Obligor shall make the directors, officers, employees and agents and authorized representatives (including counsel and independent public accountants) of such Borrower, FLBG, other Primary Obligor, and their respective Subsidiaries (and shall use its commercially reasonable efforts to cause each other Portfolio Entity to do the same) to confer with Agent and Lenders and their respective representatives, provided that (i) such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations and (ii) unless a Default or Event of Default exists, counsel to Borrowers, FLBG and each other Primary Obligor shall be permitted to be present at any meeting among Borrowers’, FLBG’s or such Primary Obligor’s independent public accountants and Agent or Lenders.

7.9Payment of Indebtedness.  Each Borrower, FLBG, each other Primary Obligor, each Material Portfolio Entity and, subject to the final sentence of this Section 7.9, each Wholly-Owned Subsidiary will duly and punctually pay, or cause to be paid, the principal of and the interest on all Indebtedness heretofore or hereafter incurred or assumed by such Person, when and as the same shall become due and payable, provided that neither a Borrower, nor any Primary Obligor, any Wholly-Owned Subsidiary or any Material Portfolio Entity shall be required to pay any Indebtedness (other than Indebtedness incurred under this Agreement or any other Loan Document) while the same is being contested by it in good faith and by appropriate proceedings so long as each Borrower or such Primary Obligor or Wholly-Owned Subsidiary or Material Portfolio Entity (as the case may be) shall have set aside on its books appropriate reserves in accordance with GAAP with respect thereto and title to any property of each Borrower or the applicable Primary Obligor or Wholly-Owned Subsidiary or Material Portfolio Entity is not jeopardized.  The provisions of this Section 7.9 do not relate to Indebtedness of FC Capital or other Wholly-Owned Subsidiaries which are REO Affiliates.

7.10Further Assurances.  Each Borrower, FLBG, each other Primary Obligor, each Wholly-Owned Subsidiary and each other Loan Party will, and will cause each of its respective Subsidiaries to, make, execute or endorse, and acknowledge and deliver or file, all such vouchers, invoices, notices, and certifications and additional agreements, undertakings, conveyances, transfers, assignments, or further assurances, and take any and all such other

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action, as Agent or any Lender may, from time to time, deem necessary or proper in connection with this Agreement, the obligations of such Person hereunder or under the Notes or any of the other Loan Documents to which such Person is a party, or for the better assuring and confirming unto Collateral Agent or Agent on behalf of Lenders, with the first priority, all or any part of the security for the Obligations.

7.11Notice of Default.  Forthwith and in any event within five (5) days after a Borrower shall have obtained knowledge of the existence of a Default or Event of Default, such Borrower will deliver to Agent a certificate signed by an Executive Officer of such Borrower setting forth the details of such event, the period of existence thereof, and what action such Borrower proposes to take with respect thereto.

7.12Reserves.  Each Borrower, FLBG, each other Primary Obligor and, subject to the last sentence of this Section 7.12, each Wholly-Owned Subsidiary, will set up on its books of its earnings, reserves for bad debt in accordance with GAAP and in an aggregate amount deemed adequate in the judgment of such Person and accepted by the outside auditors in their annual audits and each Borrower shall use its commercially reasonable efforts to cause each other Material Portfolio Entity to do the same.  The provisions of this Section 7.12 shall not apply to any Wholly-Owned Subsidiary which is an REO Affiliate, or any Immaterial Entity.

7.13Representation and Warranties; Covenants as to Other Persons, Amendment of Schedules.

(a)To the extent any representation or warranty contained herein refers to an event or state of facts which exists on or after the date hereof, on or after the Execution Date or on or after the Effective Date or on or after the date of any Loan and which exists during the term hereof or at the time of any or each Loan hereunder, to the extent not already a covenant, said representation or warranty shall be deemed to be an affirmative covenant by each Borrower to take all actions, omit to take such actions or cause such actions to be taken which shall be necessary or desirable to cause such representation or warranty to be true and accurate at all times during the term hereof.  To the extent any representation, warranty or covenant herein (including the covenants set forth in Section 8 and in this Section 7) relates to any Primary Obligor, other Subsidiary or any other Loan Party, it shall be deemed to be a covenant of each Borrower to cause such Person to comply with or otherwise perform such representation, warranty or covenant, whether or not a Borrower has the legal, corporate or other ability to cause such compliance or performance.  To the extent any representation, warranty or covenant herein (including the covenants set forth in Section 8 and in this Section 7) relates to any Person other than a Primary Obligor, other Subsidiary or any other Loan Party it shall be deemed to be a covenant of each Borrower to exercise commercially reasonable efforts to cause such Person to comply with or otherwise perform such representation, warranty or covenant, whether or not a Borrower has the legal, corporate or other ability to cause such compliance or performance.

(b)No delivery of any new or supplemented Schedule to this Agreement (whether or not such delivery is required by this Agreement or any other Loan Document) shall waive or cure any Default or Event of Default which would occur absent such delivery (other than a Default or Event of Default arising solely from the breach of an obligation to deliver such

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Schedule and other than as may be set forth in writing in a consent or amendment (if any) pursuant to which any such new or supplemented Schedule is delivered).

7.14Perform Obligations.  Each Borrower, FLBG and each other Loan Party shall duly and punctually pay and perform each of its obligations under the Loan Documents to which it is a party, in accordance with the terms hereof and thereof.

7.15Cooperation.  At Agent’s request, each Borrower will meet from time to time with (and provide then available financial information to) other financial institutions to which any Lender may wish to grant participations in the Loans, including potential Lender Assignees and potential Purchasing Lenders.

7.16Approvals and Consents.  In the event that any approval, consent or non-objection need be obtained by a Borrower, FLBG, any other Primary Obligor or other Loan Party from, or a notice or other filing need be filed by a Borrower or any such other Person, with, any Governmental Authority in connection with the execution, delivery and performance of this Agreement or any Loan Document by a Borrower or any such other Person, each Borrower and FLBG shall take and cause such other Person (as applicable) to take, all actions reasonably necessary to obtain any such approval, consent or non-objection or file such notice or other filing as promptly as practicable, and Lenders agree to cooperate with Borrowers and FLBG in obtaining or filing the same.

7.17Payment of Dividends from Primary Obligors and Subsidiaries.  In furtherance and not in limitation of other provisions hereof (including Section 8.22) regarding required distributions, to the extent necessary to enable it to make payments of the Obligations in accordance with the terms hereof, unless prohibited by applicable law, each Borrower shall cause dividends to be paid to it by each Primary Obligor and each other Wholly-Owned Subsidiary of a Borrower (whether in existence as of the date hereof or hereafter formed or acquired) in amounts which are sufficient to enable Borrowers to satisfy their payment obligations under the terms hereof.

7.18Stay, Extension and Usury Laws.  Each Borrower covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive it from paying all or any portion of the principal of, premium, if any, or interest on the Notes, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of its obligations under the Notes, and each Borrower (to the extent it may lawfully do so) hereby expressly waives all benefits or advantages of any such law.

7.19Compliance with Laws.  Each Borrower shall comply with, and shall cause each Primary Obligor, each other Subsidiary and each other Loan Party to comply with, and shall exercise commercially reasonable efforts to cause each Portfolio Entity to comply with, all laws, rules, regulations and governmental orders (federal, state and local), including all Environmental Laws, having applicability to it or to the business or businesses at any time conducted by it, where the failure to so comply would have, or could reasonably be expected to have, a Material Adverse Effect.

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7.20Back-Up Servicer.  The Borrowers shall reimburse the Lenders for amounts up to $12,000 paid by the Lenders to a Cold Back-Up Servicer selected by the Lenders to act as a back-up servicer to FC Servicing, and the Borrowers shall use commercially reasonable efforts to cooperate with, and provide all information reasonably requested by, such Cold Back-Up Servicer selected by the Lenders, all subject to and as contemplated by the back-up servicing agreement entered into as of the date hereof by Borrowers and Cold Back-Up Servicer and assigned as collateral to the Collateral Agent.  The Borrowers shall cooperate with, and permit, Lenders to designate a replacement for any Cold Back-Up Servicer

Section 8.NEGATIVE COVENANTS.

Each Borrower and FLBG warrants and represents to and covenants to Lenders and Agent that, so long as this Agreement is in effect and all of the Loans, together with interest and all other obligations incurred hereunder are paid in full, each Borrower will perform the obligations set forth in this Section 8 (unless it shall have first procured the written consent of the Majority Lenders to do otherwise), and, except as provided in the following paragraph, will cause each Primary Obligor, Subsidiary, and other Loan Party to, and will use commercially reasonable efforts to cause each Portfolio Entity-50% and other Material Portfolio Entity to, perform the obligations set forth in this Section 8 which are applicable to such Person (unless it shall have first procured the written consent of the Majority Lenders to do otherwise).

For the purposes of this Section 8, the terms Primary Obligor, Subsidiary, Loan Party, Related Entity, Portfolio Entity and Portfolio Entity-50% shall not mean or include any Crestone Portfolio Entities or any Person owned by a Crestone Portfolio Entity, FC Capital (or any of its Subsidiaries), MSC, Servicios Integrales de Cobranze, S.A. Chile, UBN, SAS or any Portfolio Entity in which MCS and/or UBN, SAS owns 50% or more of the equity interests of such entity; provided that Borrowers will provide notice to Agent of any event, occurrence or action by any such Person that would otherwise constitute a breach of this Section 8 and Agent and Lenders may prohibit such event, occurrence or action if such event, occurrence or action would, in the opinion of the Lenders, have a Material Adverse Effect on the Borrowers.

8.1Amend Charter Documents; Engage in Same Type of Business.

(a)None of either Borrower, any Primary Obligor, any Subsidiary or any Portfolio Entity-50%  shall (i) make or consent to any change: (i) in its Charter Documents, in any Shareholder Agreement or in its capital structure or (ii) make any change in any of its business objectives, purposes and operations, including by undertaking additional business activities or (iii) waive any material right under its Charter Documents or any Shareholder Agreement.  None of either Borrower, any Primary Obligor, any Subsidiary or any Portfolio Entity-50%  shall engage in any business not of the same general type as those conducted by it on the Execution Date or, in the case of a newly formed entity, any business not of the same general type as those conducted by a Borrower, any Primary Obligor, any Portfolio Entity-50% or any other Subsidiary (as the case may be) on the Execution Date. Without limiting the foregoing, no Subsidiary which is a Portfolio Entity and no Portfolio Entity-50%  shall engage in any business other than purchasing Asset Pools in accordance with the terms hereof and causing such Asset Pools to be serviced in accordance with Section 8.24.

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(b)None of either Borrower, any Subsidiary or any Portfolio Entity-50% shall enter into any Shareholder Agreement after the Execution Date other than a Permitted Shareholder Agreement.

8.2Liens.  None of either Borrower, any Subsidiary (other than an REO Affiliate) or any Portfolio Entity-50%, will grant, contract, create, incur, assume or suffer or permit to exist any Lien upon or with respect to, or by transfer or otherwise subject to the prior payment of any indebtedness (other than the Loans), any of its Assets, whether now owned or hereafter acquired, except (i) Permitted Liens or (ii)  in the case of an REO Affiliate, Liens in favor of its REO Owner and non-consensual Charges.

8.3Other Indebtedness.  None of either Borrower, any Subsidiary or any Portfolio Entity-50% will contract, create, incur, assume or suffer to exist any Indebtedness, except:

(i)the Loans and the obligations of a Borrower in respect of the LC Obligations;

(ii)other Indebtedness existing on the Effective Date listed on Schedule 10.19 to this Agreement;

(iii)Indebtedness of any Portfolio Entity incurred under Approved Portfolio Leverage Arrangements;

(iv)Indebtedness of any Portfolio Entity to which no proceeds of any Loans were, directly or indirectly, advanced or contributed;

(v)unsecured trade payables incurred in the ordinary course of business;

(vi)in the case of any REO Affiliates, Indebtedness owed to its REO Owner and trade payables incurred in the ordinary course of business and, to the extent constituting Indebtedness, Charges incurred by such REO Affiliate;

(vii)Indebtedness to the extent permitted by Section 8.12(a)(i)-(iii);

(viii)Indebtedness of Portfolio Entities in respect of loans permitted to be made by FC Servicing and FirstCity Mexico, S.A. de C.V. pursuant to Section 8.12(a)(v);

(ix)Indebtedness of any Subsidiary or Portfolio Entity-50% payable to a Borrower or a Wholly-Owned Subsidiary;

(x)Guaranty Equivalents to the extent permitted under Section 8.12(b);

(xi)Indebtedness of FirstCity Denver Investment Corp. payable to FC Commercial related to loans made by FC Commercial to enable FC Denver Investment Corp. to fund loans to Crestone Portfolio Entities under the Crestone Facility; and

(xii)Up to $5,000,000 in aggregate principal Indebtedness incurred by FCS Creamer, Ltd., FCS Lancaster, Ltd., FCS Wood Ltd., FCS Wildhorse Ltd. and Brazos

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River Partnership One, L.P. or other REO Affiliates to finance developmental expenses of real property owned by such entities.

8.4Sell Assets.  None of either Borrower, any Subsidiary or any Portfolio Entity-50% shall assign, sell or transfer any of its Assets to any Person, other than in the ordinary course of business and for fair and adequate consideration (and, in the case of Assets constituting Equity Interests, only to the extent permitted by Section 8.8(a)); provided that the foregoing shall not restrict (i) an REO Affiliate from transferring its Assets to the Person which owns all of its equity interests or to any other Person which is not a Subsidiary or Affiliate of either Borrower or such REO Affiliate or (ii) any Person which owns all of the equity interests in an REO Affiliate from transferring distressed notes secured by real estate (and such real estate security) to such REO Affiliate.

8.5Attachment.  None of either Borrower, any Subsidiary or any Portfolio Entity-50% shall permit or suffer any levy, attachment, seizure, or restraint to be made of, upon or affecting any of its Assets or permit any of its Assets to be subject to a writ of distress, if the same would have a Material Adverse Effect.

8.6Receiver.  None of either Borrower, any Subsidiary or any Portfolio Entity-50% shall permit or suffer any receiver, trustee or assignee for the benefit of creditors, or any other custodian to be appointed to take possession of all or any of its Assets, or for all or any of its Assets to come within the possession of any receiver, trustee, assignee for the benefit of creditors or custodian, other than a custodian pursuant to a Non-Default Voluntary Custodial Arrangement, if the same would have a Material Adverse Effect.

8.7Mergers, Acquisitions.  None of either Borrower, any Primary Obligor (other than FLBG) or any Material Portfolio Entity shall wind up, liquidate or dissolve its affairs or merge or consolidate with, be acquired by or acquire the stock or assets of or make any investment in (other than a capital contribution to provide for payment of Portfolio Protection Expenses), any Person, whether by merger, consolidation, purchase of stock or assets or otherwise, or create any new Subsidiary other than an REO Affiliate (or agree to do any of the foregoing at any future time) or fail to maintain its corporate, partnership or limited liability company or other formal existence, provided that notwithstanding the foregoing, Agent and Lenders acknowledge that it is contemplated that the Borrowers, Primary Obligors and Portfolio Entities will be liquidating their assets and that any Primary Obligor or any Portfolio Entity may be dissolved or merged into another Primary Obligor or Portfolio Entity upon the liquidation of all assets of any such Person that can be reasonably expected to be collected or sold.

8.8Stock Transfers.

(a)Except (i) as permitted pursuant to Section 8.8(b), (ii) for the sale of Equity Interests in a Subsidiary for fair market price, the proceeds of which are distributed pursuant to Section 5.3 hereof, (iii) with respect to quotas issued to FirstCity Chile II in connection with direct and indirect contributions of capital from distributions or dividends from NPL Fund Two, Private Investment Fund, or (iv) for options, warrants or other rights to purchase Equity Interests in a Borrower pursuant to plans or instruments described in Schedule 10.5(c) as amended from time to time with Majority Lenders’ written consent and for Equity Interests in a

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Borrower issued upon exercise thereof, none of any Borrower, any Subsidiary or any Portfolio entity-50% shall (x) grant any option, warrant or other right to purchase any Equity Interest in a Borrower, any Subsidiary or any Portfolio Entity-50% or (y) issue any other Equity Interests, or (ii) transfer any Equity Interests (whether its own or Equity Interests issued by any Person other than itself) without, in each case, the prior written consent of Majority Lenders.

(b)Notwithstanding anything to the contrary contained herein, each Borrower shall have the right to offer and sell equity Securities of such Borrower under the following terms and conditions: (x) such Borrower shall deliver notice to Agent, within twenty-four (24) hours of any filing with the SEC; (y) such Borrower shall fully and timely comply with all Securities Laws and with all terms and provisions of the underwriting agreement pursuant to which such Securities are offered for sale; and (z) the prospectus and all other selling materials used by such Borrower in such offering shall not contain any misstatement of material fact or omit to state any fact which would render the statements contained therein false or misleading.

8.9Adverse Transactions.  None of either Borrower, any Subsidiary or any Portfolio Entity-50% shall enter into any transaction which materially and adversely affects its ability to perform its obligations under the Loan Documents or to pay any other Indebtedness.

8.10Investments.

(a)Subject to the further limitations set forth in Sections 8.10(b) and (c), after the Execution Date, neither Borrower, any Subsidiary or any Portfolio Entity-50% shall make any investment in Equity Interests of any Person other than (i) investments in Equity Interests owned as of the date of this Agreement, (ii) direct or indirect contributions by Primary Obligors to capital of Portfolio Entities to be used by such entities (a) to pay development expenses related to real estate or (b) to pay Portfolio Protection Expenses, (iii) investments by any such Person (other than by a Portfolio Entity) in the ordinary course of business or (iv) with respect to quotas issued by FirstCity Chile II in connection with direct and indirect contributions of capital from distributions or dividends from NPL Fund Two, Private Investment Fund.

(b)As used in Sections 8.10(a) and (c) “investment” shall include, but not be limited to contributions to the capital of a Person.

(c)In furtherance, and not in limitation, of other restrictions herein and in the other Loan Documents on contributions, loans, gifts, investments and Guaranty Equivalents, none of Borrower, any Subsidiary or any Portfolio Entity-50% shall make capital contributions, loans or gifts to, investments in or enter into or issue any Guaranty Equivalent with respect to the obligations of any entity identified on Schedule 10.37 or any other Immaterial Entity at any time during the term hereof.

8.11Dividends.  Neither Borrower will, and neither Borrower will permit any Subsidiary or any Portfolio Entity-50% to, authorize, declare, or pay any dividends or return any capital to its stockholders as such or authorize or make any other distribution, payments or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration any shares of any class of its capital stock now or hereafter outstanding or any options, warrants or other securities (now or hereafter

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outstanding) convertible into or exercisable for any equity or other securities of a Borrower, any Subsidiary or any Portfolio Entity-50% or set aside funds for any of the foregoing and neither Borrower will permit any Subsidiary or any Portfolio Entity-50% to purchase any Equity Interests of a Borrower, or set aside funds for any of the foregoing (any such authorization, declaration, payment, dividend, return of capital, distribution, delivery, redemption, retirement, purchase, acquisition or setting aside of funds, a “Dividend”), provided, that (i) any Subsidiary or Portfolio Entity-50% may declare or pay Dividends to a Borrower or any Wholly-Owned Subsidiary and (ii) any Subsidiary or Portfolio Entity-50% may pay cash Dividends to holders of its shares of stock, partnership interests, limited liability company interests or similar equity interests generally so long as the Borrower or its respective Subsidiaries which own such equity interests in the Person paying such Dividends receives at least its proportionate share thereof (based on its relative holdings of such equity interests in the Person paying such Dividends).

8.12Loan; Guaranty Debt.

(a)Except as set forth on Schedule 8.12(a), none of either Borrower, any Subsidiary or any Portfolio Entity-50% shall make any loan to any Person, or otherwise invest in or acquire any note, bond, other debt instruments or obligations of or issued by any Person except (i) the acceptance by FH Partners, a Subsidiary or a Portfolio Entity-50% of a note from its 100% owned REO Affiliate evidencing the deferred purchase price of a mortgage note sold to such REO Affiliate by FH Partners, such Subsidiary or Portfolio Entity-50% or a portion of the purchase price for the real property in the event that the REO Affiliate acquires the real property (1) at a foreclosure sale or through a foreclosure proceeding, (2) from the mortgagor in either full or partial satisfaction of the related debt, or (3) by purchase from FH Partners, the Subsidiary or Portfolio Entity-50%; (ii) the acceptance by an REO Affiliate, a Latin American Acquisition Entity or a European Acquisition Entity of a note from the transferee of real property sold by such REO Affiliate, Latin American Acquisition Entity or European Acquisition Entity (as the case may be) in the ordinary course of business evidencing a portion of the deferred purchase price of such property; (iii) in the case of FC Servicing and FirstCity Mexico, S.A. de C.V., short term servicer advances in the ordinary course of business with respect to portfolios which they are servicing in aggregate principal amount at any one time outstanding not in excess of $5,000,000, on a combined basis; and (iv) direct or indirect loans by Primary Obligors to Subsidiaries and Portfolio Entities to be used by such entities (a) to pay development expenses related to real estate or (b) to pay Portfolio Protection Expenses; (v) SBA Loans made by ABL in accordance with the SBA Rules and Regulations; and (vi) loans made by FC Commercial to FirstCity Denver Investment Corp. to enable FirstCity Denver Investment Corp. to fund loans to Crestone Portfolio Entities under the Crestone Facility for Portfolio Protection Expenses.

(b)Except as set forth on Schedule 8.12(b), none of either Borrower, any Subsidiary or any Portfolio Entity-50% shall enter into or issue any Guaranty Equivalents.

8.13Issue Power of Attorney.  Except pursuant to the other provisions of this Agreement or the Security Documents to which Agent is a party, none of either Borrower, any Subsidiary or any Portfolio Entity-50% shall issue any power of attorney or other contract or agreement giving any Person power or control over the day-to-day operations of any such Person’s business; provided that,  any Primary Obligor, any Portfolio Entity, FirstCity do Brazil, Ltda., FirstCity Argentina Corporation, First South America LLC, FirstCity Recovery S.A.,

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FirstCity Mexico, S.A. de C.V. and Servicios Efectivos de Recuperacion, S. de R.L. de C.V. shall have the right to grant powers of attorney necessary to conduct business outside the United States, to pursue or consummate asset acquisitions outside the United States and to collect or liquidate Assets or pursue litigation related Assets outside the United States, which are undertaken in the ordinary course of such respective company’s business.

8.14Amendment of Credit Agreements.   None of either Borrower, any Subsidiary or any Portfolio Entity-50% shall amend, modify or extend (or agree to amend, modify or extend or give any notice of any sort the result of which would amend, modify or extend (whether or not, without limitation, any such extension would occur pursuant to a renewal or extension option contained therein or any other term thereof)) any note, credit agreement, security agreement or other document, instrument or agreement evidencing or securing Indebtedness of such entity; provided that a Borrower, any Subsidiary or any Portfolio Entity-50% may extend the term of any credit facilities or loans permitted under the terms of this Agreement under financial terms no more onerous than those provided for in the applicable existing credit facility or then-existing market credit terms.

8.15Payments for Consent.  None of either Borrower or any Subsidiary or any Portfolio Entity-50% shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Lender as an inducement to any consent, waiver or amendment of any of the terms or provisions of any Loan Document unless such consideration is paid to all Lenders.

8.16Limitations on Dividends and Other Payment Restrictions Affecting Subsidiaries.  Except as herein provided, neither Borrower shall, and each Borrower shall not permit any Subsidiary, or any Portfolio Entity-50% to, create, assume or otherwise cause or suffer to exist or to become effective any consensual encumbrance or restriction on the ability of any such Person to:

(i)pay any dividends or make any other distribution on its Stock or other Equity Interests to a Borrower or any of its Subsidiaries;

(ii)make payments on or in respect to any Indebtedness owed to a Borrower, any Subsidiary; or

(iii)make loans or advances to a Borrower or any of its Subsidiaries or to guarantee Indebtedness of a Borrower or any of its Subsidiaries;

other than, in the case of (i), (ii) and (iii),

(1)restrictions with respect to a Subsidiary other than a Portfolio Entity, a Primary Obligor or an REO Affiliate imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all the assets (which term may include the capital stock) of such Subsidiary provided that such restrictions terminate upon the closing of such sale or disposition or termination of such agreement;

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(2)to the extent the same result in a restriction of non-cash in-kind distributions of such assets, restrictions on the transfer by any Subsidiary other than a Portfolio Entity, a Primary Obligor or an REO Affiliate of non-cash assets which are subject to Permitted Liens;

(3)restrictions existing under any agreement which refinances or replaces any of the agreements containing the restrictions in clauses (1) or (5), provided that the terms and conditions of any such restrictions are not materially less favorable to the Lenders or materially more burdensome to the applicable Person bound thereby than those under the agreement evidencing or relating to the Indebtedness refinanced or replaced;

(4)Permitted Restrictions on payment of dividends by a Subsidiary of a Borrower under a loan agreement listed on Schedule 10.19 to which such  Subsidiary is a party;

(5)restrictions under this Agreement;

(6)Permitted Restrictions imposed under Approved Portfolio Leverage Arrangements;

(7)Permitted Restrictions on the payment of dividends by a Portfolio Entity-50% under credit agreements under which such Portfolio Entity-50% is a borrower; and

(8)restrictions of the payment of dividends by ABL as set forth in the ABL Facility Agreement and restrictions of the ability of ABL to make payments on indebtedness outstanding under the ABL Capital Note as set forth in the subordination agreement referred to therein.

and other than in the case of (iii), a consensual encumbrance or restriction on the ability of any Subsidiary other than a Wholly-Owned Subsidiary or any Portfolio Entity-50% to make a loan or advance to or guarantee Indebtedness of a Borrower or any of its Subsidiaries.

8.17Financial Covenants.  In the event that any Financial Statement required to be delivered pursuant to Section 7.1(a) or Section 7.1(b) or any certificate required to be delivered pursuant to Section 7.1(f) hereof (in the case of any such certificate required in connection with monthly financial statements, at the end of any month which is also a fiscal quarter end date) is not delivered within 10 days after the date required therefor pursuant to such Section, each Borrower shall be deemed to be in default of this Section 8.17 for purposes of Section 9.3 hereof.

8.18Accounting Changes.  None of either Borrower, any Subsidiary or any Portfolio Entity-50% will make any significant change in (x) accounting treatment and reporting practices except as permitted or required by GAAP or Legal Requirements or (y) unless Agent consents thereto in writing (which consent shall not be unreasonably withheld), its Fiscal Year; provided that in any such case, if any such change would affect any computation required by Section 8.17 hereof or any amount required to be paid by Section 2.3 hereof, appropriate amendment shall

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have been made to this Agreement with respect thereto (or, in the case of change required at such time by a Legal Requirement, appropriate amendment is made to this Agreement contemporaneous with such change and, and if such amendment is not made, each Borrower shall be deemed in default under Section 8.17).

8.19Related Transactions.  Neither Borrower has and neither Borrower shall, and neither Borrower shall permit any Subsidiary or any Portfolio Entity-50% to, enter into any transactions with any Affiliate or Associate, including, without limitation, agreements for the purchase, sale or exchange of property or the rendering of any services to or by any Affiliate or Associate of a Borrower or any Parent, or enter into, assume or suffer to exist any employment, management, administration, advisory or consulting contract with any Affiliate or Associate of a Borrower or any Parent or, in each of the foregoing cases, with any officer, director or partner of any Affiliate or Associate of a Borrower or any Parent or modify any Fee Agreement unless, in any such case, such transaction (a) is otherwise not in violation of this Agreement or any other Loan Document and (b) is in the ordinary course of its business and is upon fair and reasonable terms no less favorable to a Borrower, such Subsidiary or such Portfolio Entity-50% (as the case may be) than such Person would obtain in a comparable arm’s-length transaction with a Person not an Affiliate or Associate; provided, that the foregoing shall not restrict a Subsidiary from entering into a transaction contemplated by the definition of “REO Affiliate” to sell real estate (or distressed notes secured by real estate) to its wholly owned REO Affiliate.

8.20Leasebacks.  None of either Borrower, any Subsidiary or any Portfolio Entity-50% will enter into any arrangement with any bank, insurance company or other lender or investor providing for the leasing to any of the foregoing Persons of real property (i) which at the time has been or is to be sold or transferred by any of the foregoing Persons to such lender or investor, or (ii) which has been or is being acquired from another Person by such lender or investor or on which one or more buildings or facilities have been or are to be constructed by such lender or investor for the purpose of leasing such property to a Borrower, any Subsidiary  or any Portfolio Entity-50%.

8.21Compliance with ERISA.  Neither Borrower nor any Subsidiary (each, an “Applicable Person”) will (i) terminate, or permit any of its Subsidiaries to terminate, any Pension Plan so as to result in any material (in the opinion of Agent or the Majority Lenders) liability of any such Person or Subsidiary to the PBGC, (ii) permit to exist the occurrence of any Reportable Event (as defined in Section 4043 of ERISA), or any other event or condition, which presents a material (in the opinion of Agent or the Majority Lenders) risk of such a termination by the PBGC of any Pension Plan, (iii) allow, or permit any of its Subsidiaries to allow, the aggregate amount of “benefit liabilities” (within the meaning of Section 4001(a)(16) of ERISA) under all Pension Plans of which any Applicable Person or any ERISA Affiliate is a “contributing sponsor” (within the meaning of Section 4001(a)(13) of ERISA) to exceed $100,000, (iv) allow, or permit any of its Subsidiaries to allow, any Plan to incur an “accumulated funding deficiency” (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, (v) engage, or permit any of its Subsidiaries or any Plan to engage, in any “prohibited transaction” (within the meaning of Section 406 of ERISA or Section 4975 of the Code) resulting in any material (in the opinion of Agent or the Majority Lenders and considered by itself or together with all other such liabilities of a Borrower and all ERISA Affiliates) liability to any Applicable Person or any ERISA Affiliate, (vi) allow, or permit any of

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its Subsidiary to allow, any Plan to fail to comply with the applicable provisions of ERISA and the Code in any material respect, (vii) fail, or permit any of its Subsidiaries to fail, to make any required contribution to any Multiemployer Plan, or (viii) completely or partially withdraw, or permit any of its Subsidiaries to completely or partially withdraw, from a Multiemployer Plan, if such complete or partial withdrawal will result in any material (in the opinion of Agent or the Majority Lenders) withdrawal liability under Title IV of ERISA.  No Loan Party or Subsidiary, other than a Borrower and Subsidiaries that are not Portfolio Entities has or shall at any time have any employees.

8.22Distributions to Primary Obligors and a Borrower.

(a)Each calendar month, each Borrower shall (i) cause each Portfolio Entity and each REO Affiliate to distribute to a Primary Obligor, on or prior the Payment Date occurring in such month, the Portfolio Entity Proceeds, and (ii) cause each such Primary Obligor to pay to such Borrower, upon receipt, each such Dividend received by such Primary Obligor under clause (i) above by prepaying the applicable Pledged Note or intercompany receivable and, if no amount then remains outstanding thereunder, by distributing any remaining portion of such distribution as a Dividend (in accordance with Section 8.11) to such Borrower.

(b)Each Borrower shall cause each amount required to be distributed or paid to such Borrower or any Primary Obligor pursuant to this Section 8.22 to be distributed or paid to such Borrower or such Primary Obligor by deposit or wire transfer directly to the Cash Flow Cash Collateral Account.

8.23Capital Expenditures.  Neither Borrower will make any Capital Expenditures and neither Borrower will permit any of its Subsidiaries to make any Capital Expenditures without the prior written consent of the Lenders, except that Borrowers and their Subsidiaries may make Capital Expenditures in an aggregate amount (excluding the capitalization of insurance premiums) not in excess of $2,000,000, net of any reimbursement for Capital Expenditures made to Regional Rail, LLC, East Penn Railroad LLC or Middletown & New Jersey Railroad, LLC and other Persons owned by the Crestone Portfolio Entities during each fiscal year.

8.24Servicing.

(a)Each Borrower shall ensure that FC Servicing or Minn Servicing is the servicer for each Subsidiary and Portfolio Entity-50% which is a US Person, except as to (a) ABL, which will service all loans originated or acquired by ABL, (b) each Crestone Portfolio Entity, whose assets will be serviced by FirstCity Crestone LLC, and (c) each Person owned by the Crestone Portfolio Entities.

(b)Each Borrower shall (i) cause FC Servicing to deposit all fee income and all other funds received by it not constituting Servicing Restricted Funds to the Cash Collateral Account-Servicing upon receipt of each such amount and (ii) cause Minn Servicing to distribute to FC Servicing all fee income and all other funds received by it not constituting Servicing Restricted Funds by wiring all such amounts directly to the Cash Collateral Account-Servicing upon receipt of each such amount.

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8.25Portfolio Entity Ownership.  In furtherance and not in limitation of Section 8.8(a), each Borrower shall ensure (x) that there is no change in the percentage of Equity Interests issued by any Portfolio Entity and owned by any Subsidiary from that reflected on Schedule 10.5(b); provided that Equity Interests in a Portfolio Entity may be sold for a fair market price, the proceeds of which are distributed pursuant to Section 5.3.

8.26Activities of Portfolio Entity.  In furtherance and not in limitation of the other restrictions set forth in this Agreement, each Borrower shall ensure that no Subsidiary which is a Portfolio Entity and no Portfolio Entity-50% engages in any activity other than owning Asset Pools and shall have no Assets other than such Asset Pools, collections thereon and interests in REO Affiliates of which it is the REO Owner, or the ownership of Incidental Equity Interests, provided, that (i) a Subsidiary or a Portfolio Entity-50% doing business outside the United States may own the type of assets an REO Affiliate would own (if it had an REO Affiliate of which it were the REO Owner); (ii) each REO Affiliate shall be formed in respect of a specific REO Owner and shall not hold assets other than from such REO Owner; (iii) ABL may originate and service SBA Loans in accordance with the SBA Rules and Regulations; and (iv) Crestone Portfolio Entities and Person owned by Crestone Portfolio Entities may continue to engage in the activities in which they are presently engaging.

Section 9.EVENTS OF DEFAULT.

Upon the occurrence of any of the following specified events (each an “Event of Default”):

9.1Principal and Interest.  Borrowers shall fail to make due and punctual payment of any principal, interest or other amount due hereunder or under any Note or any other Loan Document; provided, that the failure to make any interest payment when due shall not constitute an Event of Default if such interest payment is made within three (3) days of the date when due and a Borrower has not been late in making any other interest payment on any Note more than once in the preceding twelve (12) months; or

9.2Representations and Warranties.  Any representation, warranty, statement, report or certificate made or delivered by a Borrower or any other Loan Party or any officer, director, manager or authorized employee or agent thereof herein or in any other Loan Document or otherwise in writing by such Person in connection with any of the foregoing or in any certificate, report or other statement furnished pursuant to or in connection with any of the foregoing, shall be breached or shall prove to be untrue in any material respect; or

9.3Negative and Certain Other Covenants.  A Borrower shall fail to perform or observe, or shall fail to cause (or as to a Portfolio Entity-50% use its commercially reasonable efforts to cause) any Subsidiary, Portfolio Entity-50% or any other Loan Party or other Person covered thereby to perform or observe, any term, covenant or agreement to be performed or observed by a Borrower or such Subsidiary, Portfolio Entity-50%, Loan Party or other Person, as the case may be, pursuant to Section 7.11 or Section 8; or

9.4Other Covenants.  A Borrower shall fail to perform or observe, or shall fail to cause Subsidiary, Portfolio Entity, other Loan Party or other Person covered thereby to perform

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or observe, any term, covenant or agreement to be performed or observed by a Borrower or such Subsidiary, Portfolio Entity, other Loan Party or other Person, as the case may be, pursuant to any of the provisions of this Agreement, including, without limitation, Section 2.3 (other than those referred to in Sections 9.1, 9.2 or 9.3) or any other Loan Document and such default (which shall be capable of cure) shall continue unremedied for a period of thirty (30) days, after the earlier of the date on which (x) Agent or any Lender gives each Borrower notice thereof, or (y) a Borrower obtains knowledge of such default; or

9.5Other Indebtedness of Borrower.  Any Applicable Indebtedness of a Borrower (i) shall be declared to be or shall become due and payable prior to the stated maturity thereof or (ii) shall not be paid as and when the same becomes due and payable; or any other event of default shall occur and be continuing under any other Indebtedness Instrument (other than a Loan Document) relating to any Indebtedness of a Borrower in excess of $15,000,000 and, if a cure period is applicable thereto, such default shall not be cured within fifteen (15) days after the occurrence thereof; or

9.6Other Indebtedness of other Loan Parties.

Any Applicable Indebtedness of any Primary Obligor or other Loan Party (i) shall be declared to be or shall become due and payable prior to the stated maturity thereof or (ii) shall not be paid as and when the same becomes due and payable; or any other event of default shall occur and be continuing under any other Indebtedness Instrument (other than a Loan Document) relating to any Indebtedness of such Person in excess of $15,000,000 and, if a cure period is applicable thereto, such default shall not be cured within fifteen (15) days after the occurrence thereof; or

9.7Guaranty.  The breach by FCFC or any Guarantor of any term or provision of, or the occurrence of any default under, any Guaranty or other agreement, instrument or document delivered in connection therewith to which FCFC or such guarantor is a party, which breach or default is in the opinion of Agent, material, or any other such breach or default (other than such a material breach or default) occurs and is not cured within the time, if any, specified therefor therein or fifteen (15) days thereafter, if no such time is specified or such time is less than fifteen (15) days; or if any such Guaranty is at any time not in full force and effect; or if FCFC or any Guarantor shall assert that it is not liable with respect to any Guaranty to which it is a party;

9.8Insolvency.  (i) A Borrower, any Primary Obligor or any other Loan Party (Borrower and each of the other foregoing Persons being a “Section 9.8 Entity”) shall make an assignment for the benefit of creditors or a composition with creditors; or (ii) any Section 9.8 Entity shall admit in writing its inability to pay its debts as they mature, shall file a petition in bankruptcy, shall be adjudicated insolvent or bankrupt, shall petition or apply to any tribunal for the appointment of any receiver, liquidator, trustee or custodian of or for it or any of its Assets; or (iii) any application is made by any other Person for the appointment of any receiver, liquidator, trustee or custodian for any Section 9.8 Entity or for any of the Assets of any Section 9.8 Entity; or (iv) any Section 9.8 Entity shall commence any proceedings relating to it under any bankruptcy, reorganization, arrangement, readjustment of debt, receivership, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (v) there shall be commenced against any Section 9.8 Entity any such proceeding which shall remain

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undismissed for a period of sixty (60) days or more, or any order, judgment or decree approving the petition in any such proceeding shall be entered; or (vi) any Section 9.8 Entity shall by any act or failure to act indicate its consent to, approval of or acquiescence in, any such proceeding or in the appointment of any receiver, liquidator, trustee or custodian (other than a custodian under Non-Default Voluntary Custodial Arrangements) of or for it or any of its Assets, or shall suffer any such appointment to exist; or (vii) any Section 9.8 Entity shall take any action for the purpose of effecting any of the foregoing; or any court of competent jurisdiction shall assume jurisdiction with respect to any such proceeding or a receiver or trustee or other officer or representative of a court or of creditors, or any court, governmental officer or agency, shall under color of legal authority, take and hold possession of any substantial part of the property or Assets of any Section 9.8 Entity; or (viii) any Section 9.8 Entity shall become insolvent (howsoever such insolvency may be evidenced) or shall be unable to pay its debts as they mature (except that the occurrence of any condition set forth in this clause (viii) with respect to FC Mexico, so long as FC Mexico is paying its debts as they mature, shall not constitute an Event of Default under this Section 9.8 unless the occurrence of any such condition with respect to FC Mexico is an Event of Default under any other clause of this Section 9.8); or

9.9Security Documents.  The breach by a Borrower or any other Loan Party of any term or provision of, or the occurrence of any default under, any Security Document or other Loan Document (other than this Agreement) or other agreement, instrument or document delivered in connection therewith to which such Person is a party, which breach or default is in the opinion of Agent, material, or any other such breach or default (other than such a material breach or default) occurs and is not cured within the time, if any, specified therefor therein or fifteen days thereafter, if no such time is specified or such time is less than fifteen (15) days; or if any such Security Document or Loan Document is at any time not in full force and effect; or any of the Security Documents shall fail to grant to Agent on behalf of Lenders the Liens (if any) intended to be created thereby; or if any Loan Party shall assert that it is not liable with respect to any Security Document to which it is a party; or FCFC or any Primary Obligor shall assert that it is not liable as a guarantor under the Guaranty to which it is party; or

9.10Notice of Charge.  Except as expressly permitted pursuant to Section 7.3, if a notice of any Charge is filed of record with respect to all or any of the Assets of a Borrower, any Primary Obligor, any Material Portfolio Entity or any Wholly-Owned Subsidiary (other than any  REO Affiliate); or

9.11Judgments.

(a)Any final non-appealable judgment for the payment of money in excess of $1,000,000 (after giving effect to any amount covered by insurance as to which the insurer shall not have denied or questioned its obligation to pay) shall be rendered against a Borrower or any Primary Obligor and the same shall remain in effect for a period of ten (10) days after entry of such judgment; or

(b)Final judgment for the payment of money in excess of $1,000,000 shall be rendered against a Borrower or any Primary Obligor, and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed or diligently contested in good faith by appropriate proceedings; or

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(c)If for the purpose of obtaining judgment in any court it is necessary to convert a sum due from a Borrower in the currency expressed to be payable herein (the “specified currency”) into another currency, the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures Agent could purchase the specified currency with other such currency at Agent’s New York branch on the Business Day that is on or immediately following the day on which final judgment is entered.  The obligations of a Borrower in respect of any sum due to any Lender or Agent hereunder shall, notwithstanding any judgment in a currency other than the specified currency, be discharged only to the extent that on the Business Day following receipt by such Lender or Agent, as the case may be, of any sum adjudged to be so due in such other currency such Lender or Agent as the case may be, may in accordance with normal banking procedures purchase the specified currency with such other currency.  If the amount of the specified currency so purchased is less than the sum originally due to such Lender or Agent, as the case may be, in the specified currency, each Borrower agrees, to the fullest extent it may effectively do so, as a separate obligation and notwithstanding any such judgment, to indemnify such Lender or Agent, as the case may be, against such loss, and if the amount of the specified currency so purchased exceeds the sum originally due to any Lender or Agent, as the case may be, in the specified currency, such Lender or Agent, as the case may be, agrees to remit such excess to the appropriate Borrower.

9.12Stock Issuance or Transfer.  Except as expressly permitted pursuant to the terms hereof, if any Subsidiary or Portfolio Entity-50% issues to (except upon formation of a Person permitted by this Agreement) or transfers to any Person any Stock or other Equity Interests; or

9.13ERISA.  Any ERISA Affiliate of a Borrower or of any other Applicable Person under Section 8.21 which is not a Subsidiary of a Borrower or such Applicable Person shall fail in the performance or observance of any term, provision or agreement with respect to a Plan or Multiemployer Plan set forth in Section 8.21 as if such ERISA Affiliate were a Subsidiary of a Borrower or an Applicable Person; or

9.14Material Effect Defaults.  To the extent that the same does not constitute an Event of Default under any other provision of this Section 9, a default by a Borrower or any Primary Obligor shall occur under any agreement, document or instrument (other than this Agreement or any of the other Loan Documents) now or hereafter existing, to which a Borrower or any Primary Obligor is a party and the effect of such default could reasonably be expected to have a Material Adverse Effect; or

9.15Change in Control.  A Change in Control shall occur (for purposes hereof, a “Change in Control” shall mean the occurrence of any of the following events after the date hereof:  (i) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), is or becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly, or indirectly, of more than fifty percent (50%) of the aggregate voting power of all classes of Capital Stock of a Borrower or of FCFC entitled to vote generally in an election of directors; (ii) a Borrower or FCFC is merged with or into another corporation or another corporation is merged with or into a Borrower or FCFC with the effect that immediately after such transaction the stockholders of such Borrower or FCFC, as the case may be, immediately prior to such

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transaction hold less than a majority in interest of the total voting power entitled to vote in the election of directors, managers or trustees of the entity surviving the transaction; or (iii) to the extent not otherwise then constituting an Event of Default, all or substantially all of the Assets of a Borrower, FCFC or another Primary Obligor are sold to any person or persons (as an entirety in one transaction or a series of related transactions).  For purposes of this Section 9.15, “Capital Stock” of any Person means any and all shares, interests, participations or other equivalents in the equity (however designated) of such Person and any rights (other than debt securities convertible into an equity interest), warrants or options to acquire an equity interest in such Person); or

9.16Management.  If, without the prior written consent of Lenders, a Key Employee ceases to be employed full-time with FC Servicing, a Borrower or FC, such occurrence shall be an Event of Default unless FC Servicing, such Borrower or FC, as the case may be, employs a replacement officer having the duties of such Key Employee acceptable to Lenders in their reasonable discretion within sixty (60) days after such Key Employee ceases to be employed; or

9.17Court Orders.  To the extent not otherwise constituting an Event of Default, if a Borrower, any Primary Obligor or any other Loan Party is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business or affairs and such Person consents (by action, inaction or otherwise) to such order or such order remains in effect for a period of thirty (30) days; or

9.18Dissolution.  If a Borrower, any Primary Obligor or any other Loan Party shall dissolve, fully liquidate or suspend or discontinue its business; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, Agent may (and shall, if instructed in writing by the Majority Lenders) by written notice to each Borrower declare the principal of and accrued interest on the Loans of each Borrower to be, whereupon the same shall forthwith become, due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower; provided that if any Event of Default described in Section 9.8 shall occur with respect to a Borrower, the result which would otherwise occur only upon the giving of written notice by Agent to each Borrower as herein described shall occur automatically, without the giving of any such notice; further provided that notwithstanding the foregoing, Agent and Lenders acknowledge that it is contemplated that the Borrowers, Primary Obligors and Portfolio Entities will be liquidating their assets and that any Primary Obligor or Portfolio Entity may be dissolved or merged into another Primary Obligor or Portfolio Entity upon the liquidation of all assets of any such Person that can reasonably be expected to be collected or sold.

Section 10.GENERAL REPRESENTATIONS AND WARRANTIES AND RELATED COVENANTS.

In order to induce Lenders to enter into this Agreement, to maintain the Loans and to maintain the Letters of Credit, provided for herein, each Loan Party party hereto makes the following representations, covenants and warranties, both as of the Execution Date and (after giving effect to the transactions contemplated hereby to occur on the Effective Date) as of the Effective Date (unless otherwise specified), which representations, covenants and warranties

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shall survive the execution and delivery of this Agreement and the other documents and instruments referred to herein:

10.1Organization.

(a)Each Borrower, Primary Obligor, and FLBG is and at all times hereafter shall be a corporation or limited liability company, as the case may be, duly organized and validly existing and in good standing under the laws of its jurisdiction or organization and qualified or licensed to do business and in good standing in all states in which the laws thereof require such Borrower to be so qualified and/or licensed and in which the failure to so qualify could have a Material Adverse Effect, including, without limitation, the State of Texas.  Schedule 10.1(a) identifies each jurisdiction in which a Borrower has qualified or been licensed to do business and describes the nature and current status of any such qualification or license.

(b)Each Primary Obligor and each Portfolio Entity and each other Loan Party is a corporation or limited liability company or a limited partnership, duly organized and validly existing and in good standing under the laws of the state or foreign jurisdiction of its organization.

(c)Each Primary Obligor and other Loan Party is and at all times hereafter shall be qualified or licensed to do business and in good standing in all states in which the laws thereof require such Primary Obligor and such other Loan Party to be so qualified and/or licensed.

(d)Each Portfolio Entity is and at all times hereafter shall be qualified or licensed to do business and in good standing in all states in which the laws thereof require such Portfolio Entity to be so qualified and/or licensed and in which the failure to so qualify could have a Material Adverse Effect.  Schedule 10.1(d) identifies each jurisdiction in which each Primary Obligor, Portfolio Entity, Related Entity and each other Loan Party has qualified or been licensed to do business and describes the nature and current status of any such qualification or license.

(e)Schedule 10.1(e) lists all Shareholder Agreements to which a Borrower, any Subsidiary, any Portfolio Entity-50% or any other holder of any Equity Interest in a Pledged Entity is a party.

10.2Entity Power.

(a)Each Borrower has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and the other Loan Documents to which it is a party.

(b)Each Primary Obligor and each other Loan Party has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform those Loan Documents  to which it is a party.

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10.3Violation of Charter Documents.

(a)The execution, delivery and/or performance by each Borrower of this Agreement and the other Loan Documents to which it is a party and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate and shareholder action and none of such execution, delivery, performance or consummation shall, by the lapse of time, the giving of notice or otherwise, constitute a violation of any Legal Requirement or a breach of any provision contained in the Charter Documents of a Borrower, or contained in any agreement, instrument or document to which a Borrower is now or hereafter a party or by which it or any of its Assets is or may become bound, other than agreements, instruments or documents that are immaterial to a Borrower and the breach of which could not have a Material Adverse Effect.

(b)The execution, delivery and/or performance by each Primary Obligor and other Loan Party of each Loan Document to which it is a party and the consummation of each such Person of the transactions contemplated hereby have been duly authorized by all necessary corporate, partnership or limited liability company action (as the case may be) and other action by the holders of the Equity Interests thereof and none of such execution, delivery, performance or consummation shall, by the lapse of time, the giving of notice or otherwise, constitute a violation of any Legal Requirement or a breach of any provision contained in the Charter Documents of such Primary Obligor or such other Loan Party, or contained in any agreement, instrument or document to which such Primary Obligor or such other Loan Party is now or hereafter a party or by which it or any of its Assets is or may become bound, other than agreements, instruments or documents that are immaterial to such Primary Obligor and other Loan Party and the breach of which could not have a Material Adverse Effect.

10.4Enforceability.

(a)This Agreement and the other Loan Documents to which a Borrower is a party are and will be the legal, valid and binding agreements of each Borrower, enforceable in accordance with their respective terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally, and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law); and

(b)Those other Loan Documents to which each other Loan Party is a party are and will be the legal, valid and binding agreements of such Loan Party, enforceable in accordance with their respective terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally, and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law).

10.5Ownership.

(a)Schedule 10.5(a) sets forth all classes of Stock of each Borrower, as of December 31, 2009, the shareholders thereof (other than members of the general public), addresses of each shareholder, and number of shares owned by each Shareholder as of such date;

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(b)Schedule 10.5(b) sets forth all classes of Stock and/or other Equity Interests (other than options, warrants and rights to acquire Stock or other Equity Interests) issued by each Primary Obligor, each Portfolio Entity and each Related Entity, the shareholders and other equity holders thereof, and the addresses, number of shares and/or partnership interests owned by each Shareholder or equity holder.

(c)Schedule  10.5(c) sets forth all options, warrants and other rights to acquire Stock or other Equity Interests of each Borrower, any Primary Obligor, any Portfolio Entity, any Related Entity and any other Pledged Entity, the nature of such option, warrant or right and the conditions for the exercise thereof.  Lenders hereby expressly consent to the transfer, issuance or conveyance of Stock and/or other Equity Interests of each Borrower in accordance with such options, warrants and rights; provided that the same does not result in a Change of Control.

(d)All Equity Interests of each Borrower, each Primary Obligor, each Portfolio Entity, each Related Entity and each other Loan Party have been duly and validly issued, are fully paid and are non-assessable.

10.6Fictitious Names.

(a)Each of the fictitious names, if any, used by a Borrower during the five (5) year period preceding the Execution Date is set forth on Schedule 10.6 attached hereto (as amended from time to time) and none of such fictitious names are registered trademarks or tradenames with the U.S. Patent and Trademark Office, except as set forth in Schedule 10.6;

(b)Each of the fictitious names, if any, used by each Primary Obligor, Material Portfolio Entity and any other Loan Party, during the five (5) year period preceding the Execution Date is set forth on Schedule 10.6 attached hereto (as amended from time to time), and none of such fictitious names are registered trademarks or trade names with the U.S. Patent and Trademark Office; provided that, variations on the corporate name of any Primary Obligor, Portfolio Entity or any other Loan Party in states where used solely for qualifying to do business therein shall and have been excluded from such schedule, with Lender’s consent and approval.

10.7Title.

(a)Schedule 10.7 is a true, accurate and complete list of all Liens relating to the Collateral on the Execution Date and Effective Date.

(b)Each of First X and First B shall at all times own fee title to its respective holdings of real estate subject to no liens other than the Permitted Liens.

(c)Each Borrower, each Primary Obligor, Portfolio Entity and other Loan Party shall at all times have indefeasible and merchantable title to and ownership of all of its Assets except to the extent the failure to do so could not reasonably be expected to have a Material Adverse Effect.

10.8Financial Warranty.  Except as set forth on Schedule 10.8, each Borrower (a) is paying its debts as they mature, (b) owns property which, at a fair valuation, is greater than the

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sum of its debt, and (c) has capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage. Except as set forth on Schedule 10.8, each Primary Obligor and each Material Portfolio Entity: (i) is paying its respective debts as they mature, (ii) owns property which, at a fair valuation, is greater than the sum of its debt and (iii) has capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage.

10.9Proceedings.  Except as set forth on Schedule 10.9, there are no actions or proceedings which are pending or threatened against a Borrower, any Primary Obligor, any Material Portfolio Entity or any other Loan Party which could reasonably be expected to have a Material Adverse Effect.  None of the actions or proceedings referred to on Schedule 10.9 could have a Material Adverse Effect.

10.10Government Contracts.  Except as set forth on Schedule 10.10, neither Borrower, nor any Primary Obligor, Material Portfolio Entity or other Loan Party is a party to any government contracts.

10.11Adequate Licenses.  Each Borrower, and each Primary Obligor, Portfolio Entity and other Loan Party possesses adequate Assets, licenses, patents, copyrights, trademarks and trade names to continue to conduct its business as previously conducted by it and as contemplated in the foreseeable future except such licenses, patents, copyrights, trademarks and trade names the failure of which to obtain could not be reasonably expected to have a Material Adverse Effect.

10.12Government Permits;  Approvals and Consents.

(a)Except for matters which could not result in a Material Adverse Effect, each Borrower and each Primary Obligor, each Portfolio Entity  and each other Loan Party has been and is in good standing with respect to and has obtained all governmental permits, certificates, consents and franchises necessary to continue to conduct its business as previously conducted prior to the date hereof and prior to the Execution Date and to own or lease and operate its properties as now owned or leased by it.  None of said permits, certificates, consents or franchises contain any term, provision, condition or limitation more burdensome than such as are generally applicable to Persons engaged in the same or similar business as the applicable Person.

(b)Except for those consents and other items set forth on Schedule 10.12, neither Borrower, nor any Primary Obligor, Material Portfolio Entity or other Loan Party requires the approval, consent, waiver, order, permission, license, authorization, registration or validation of, or filing with or exemption by, any Government Authority or any other Person (including but not limited to shareholders, partners, members, equity owners, holders of Indebtedness Instruments, or any owner of any lien upon the Assets of any one or more of them or their Affiliates) for the execution and delivery of, and the consummation of the transactions contemplated by, this Agreement and the other Loan Documents, including but not limited to the borrowing of any Loans, the pledge of the Collateral, and the payment and performance of all Obligations.  Each Borrower and each other Primary Obligor, Material Portfolio Entity and other Loan Party have received the consents and other items described on Schedule 10.12 and has

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delivered a copy thereof to Agent, which consents are in full force and effect, unmodified and unamended on the date hereof and on the Execution Date.

10.13Charge; Restrictions.

(a)On the Execution Date and on the Effective Date, neither Borrower, nor any Primary Obligor nor any Portfolio Entity or any other Loan Party is a party to (nor are any of such Person’s Assets otherwise subject to) any contract or agreement or restriction, judgment, decree or order that could have a Material Adverse Effect.

(b)On the Execution Date and on the Effective Date, none of either Borrower, nor any Primary Obligor, Material Portfolio Entity, or any other Loan Party is subject to (nor are any such Person’s Assets otherwise subject to) any Charge (other than Charges owed by First B or First X).

10.14Compliance with Laws.  Except for matters which could not result in a Material Adverse Effect, neither Borrower, nor any Primary Obligor nor any Portfolio Entity  nor any other Loan Party is in violation of any applicable statute, regulation, order or ordinance of the United States of America, of any state, city, town, municipality, county or of any other jurisdiction, or of any agency thereof, including the Federal Reserve Board, in any respect.

10.15Compliance with Indebtedness Instruments.  Other than those defaults set forth on Schedule 10.15, neither Borrower is in default under any Indebtedness Instrument or any other material agreement to which it is a party.  Other than those defaults set forth on Schedule 10.15, no Primary Obligor, Material Portfolio Entity, or any other Loan Party is in default under any Indebtedness Instrument.

10.16Financials.  The Financial Statements delivered by each Borrower, any Primary Obligor, Material Portfolio Entity or any other Loan Party to Agent, fairly and accurately present the Assets, liabilities and financial conditions and results of operations of such Borrower, and such other Persons described therein as of and for the periods ending on such dates and have been prepared in accordance with GAAP applied on a basis consistently followed in all material respects throughout the periods involved.

10.17Tax Returns.  Each Borrower and each other member of the Consolidated Group has filed or caused to be filed all tax returns which are required to be filed, and has paid all Charges shown to be due and payable on said returns or on any assessments made against it or any of its property, and all other Charges imposed on it or any of its properties by any Governmental Authority, except for Charges arising at any time after the Effective Date, which a Borrower is disputing in accordance with the final sentence of Section 7.3.

10.18No Material Adverse Change.  Except as set forth in Schedule 10.18, since December 31, 2009, no event or circumstance has occurred that had, has or could reasonably be expected to have a Material Adverse Effect.

10.19No Indebtedness.  None of either Borrower, any Primary Obligor, Portfolio Entity, Wholly-Owned Subsidiary or other Loan Party (i) has any Indebtedness except for Indebtedness described in Schedule 10.19, Schedule 10.20 and Schedule 8.12(a) and except for

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Indebtedness permitted by this Agreement which (other than in the case of MCS, any Latin American Acquisition Entity  or any European Acquisition Entity ) is reflected in the most recent Financial Statements delivered pursuant to 7.1(a) or (b) (except for any such Indebtedness permitted by this Agreement (x) incurred since such most recent Financial Statements were delivered, or (y) constituting unsecured trade payables arising in the ordinary course of business since the dates reflected in the December 31, 2009 Financial Statements that is not Indebtedness for borrowed money or Indebtedness of any REO Affiliate to its REO Parent evidenced by a note payable to such REO Parent and in each case, only to the extent, if any, not required by GAAP to be reflected in Financial Statements) or (ii) has guaranteed any indebtedness or entered into or issued any Guaranty Equivalent (other than as a result of the endorsement of any instrument of items of payment for deposit or collection in the ordinary course of business or as otherwise expressly permitted pursuant to the terms hereof) in respect of the obligations of any Person.

10.20Affiliate Notes.  Attached hereto as Schedule 10.20 is a true, accurate and complete schedule of all promissory notes made by any Affiliate payable to the order of a Borrower, a Wholly-Owned Subsidiary, a Portfolio Entity or a Related Entity, other than the Pledged Notes and the Excluded Notes.

10.21No Liability on Lenders or Agent.  None of the execution, delivery and performance by a Borrower or any other Loan Party of this Agreement and/or the other Loan Documents will impose on or subject any of the Lenders or the Agent to any liability, whether fixed or contingent, in respect of any Environmental Law, whether relating to the operation of a Borrower’s business or otherwise.  None of the Lenders’ or the Agent’s exercise of any of the rights or remedies described in this Agreement or in any of the other Loan Documents shall constitute a breach of any provision contained in any agreement, instrument or document concerning the assignment or license of, or the payment of royalties for, any patents, patent rights, trade names, trademarks, trade secrets, know-how, copyrights or any other form of intellectual property now or at any time or times hereafter protected as such by any applicable law.

10.22Affiliates.  Schedule 10.22 attached hereto is a true, accurate and complete schedule of each Borrower’s Affiliates as of the Effective Date, together with a description of such Borrower’s relationship to each such Affiliate.

10.23Real Property; Environmental Issues.  Except as set forth on Schedule 10.23, neither Borrower, any Loan Party, any Primary Obligor, any Portfolio Entity or any Related Entity other than First X, First B, FCS Creamer, Ltd., FCS Wood Ltd., and FCS Wildhorse Ltd., FCS Lancaster Ltd., the Crestone Portfolio Entities and Persons owned by the Crestone Portfolio Entities, Brazos River Partnership One, L.P., any REO Affiliate, any Latin American Acquisition Entity or European Acquisition Entity now owns or, in the case of US Persons, leases or at any time in the five (5) years preceding the Execution Date has owned or leased any real property.  Neither Borrower, any Primary Obligor, any Portfolio Entity, any Related Entity, any Immaterial Entity, or any other Loan Party has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other Governmental Authority concerning any action or omission resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment with respect to any real property.

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10.24Investment Company Act and Public Utility Holding Company Act.  Neither Borrower nor any Primary Obligor nor any other Loan Party or the entering into of any Loan Documents, nor the issuance of the Notes is subject to any of the provisions of the Investment Company Act of 1940, as amended.  Neither Borrower, nor any Primary Obligor or any other Loan Party is a “holding company” as defined in the Public Utility Holding Company Act of 1935, as amended, or subject to any other federal or state statute or regulation limiting its ability to incur Indebtedness for money borrowed.

10.25Disclosure.  Neither this Agreement nor any other Loan Document nor any statement, list, certificate or other document or information, nor any schedules to this Agreement or any other Loan Document, delivered or to be delivered to Lenders or Agent, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make statements contained herein or therein, in light of the circumstances in which they are made, not misleading.  Copies of all documents delivered to Lenders and/or Agent pursuant to this Section 10 or any other provision of this Agreement are true, correct and complete copies thereof and include all amendments, restatements, supplements and other modifications thereto and thereof.

10.26Qualification.

(a)Solely by reason of (and without regard to any other activities of Lenders and/or Agent in any state in which Assets of the a Borrower, any Primary Obligor, any Portfolio Entity, any Related Entity or other Loan Party are located) the entering into and performance of this Agreement, the Notes, the other Loan Documents and the documents, instruments and agreements delivered in connection therewith by Lenders and/or Agent will not constitute doing business by Lenders and/or Agent in any of such states or result in any liability of Lenders and/or Agent for taxes or other governmental charges; and qualification by Lenders and/or Agent to do business in such jurisdiction is not necessary in connection with, and the failure to so qualify will not affect, the enforcement of, or exercise of any rights or remedies under, any of such documents.

(b)No “business activity,” “doing business” or similar report or notice is required to be filed by the Lenders and/or Agent in any such jurisdiction in connection with the Loans or the transactions contemplated by this Agreement or any other Loan Document, and the failure to file any such report or notice will not affect the enforcement of, or the exercise of any rights or remedies under, this Agreement or any of the other Loan Documents.

(c)SEC Filings.  The Borrowers have filed and made available to the Agent and Lenders each form, registration statement, schedule, report, proxy statement and document required to be filed by FCFC with the SEC since January 1, 2006 (collectively, the “SEC Reports”).  Except as set forth on Schedule 10.26, the SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Laws and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in the SEC Reports or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  FCFC is the only Loan Party required to file pursuant to the Exchange Act.  Since

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January 1, 2006, FCFC has made all filings with the SEC in a timely manner (except as set forth on Schedule 10.26, each of which filing deficiencies was subsequently cured in a manner that brought FCFC into full compliance with law) as required by law and no event has occurred that requires an additional filing or any amendment to a prior filing, which has not been made or filed.

10.27Federal Reserve Margin Regulations; Use of Proceeds

(a)Neither Borrower, any Primary Obligor, any Portfolio Entity, any Related Entity or any other Loan Party or member of the Consolidated Group or Subsidiary of any of the foregoing is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System).  No part of the proceeds of any Loan will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock.

(b)Neither the Loans nor the use of proceeds therefrom will result in a violation of any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended), or any ruling issued thereunder or any enabling legislation or Presidential Executive Order in connection therewith.

10.28Intellectual Property.  All patents, trademarks, registered copyrights and trade names of a Borrower, each Primary Obligor, each Material Portfolio Entity and each other Loan Party are listed in Schedule 10.28 to this Agreement; all of those so listed are in full force and effect.  If any member of the Consolidated Group at any time acquires, establishes, invents or develops any patent, trademark, copyright or trade name that is or becomes material to such Person’s business or operations, it will promptly notify Agent of same and take such action as Agent shall request to grant to Collateral Agent or Agent on behalf of Lenders a perfected, first priority security interest in same.

10.29Compliance with ERISA.  No Loan Party or Subsidiary, other than FC Servicing or a Borrower and Subsidiaries that are not Portfolio Entities has or shall at any time have any employees.  Schedule 10.29 describes the Pension Plans to which Borrower or any ERISA Affiliates may have obligations.  Each Loan Party and each ERISA Affiliate and each Plan and the trusts maintained pursuant to such plans are in compliance in all material respects with the presently applicable provisions of Sections 401 through and including 417 of the Code and of ERISA and (i) no event which constitutes a Reportable Event as defined in Section 4043 of ERISA has occurred and is continuing with respect to any Plan which is or was covered by Title IV of ERISA, (ii) no Plan which is subject to Part 3 of Subtitle B of Title 1 of ERISA has incurred any “accumulated funding deficiency” (within the meaning of Section 302 of ERISA or Section 412 of the Code) whether or not waived, and (iii) no written notice of liability has been received with respect to any Loan Party or any Subsidiary for any “prohibited transaction” (within the meaning of Section 4975 of the Code or Section 406 of ERISA), nor has any such prohibited transaction resulting in liability to any Loan Party or ERISA Affiliate occurred.

Neither any Loan Party nor any ERISA Affiliate (i) has incurred any liability to the PBGC (or any successor thereto under ERISA), or to any trustee of a trust established under

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Section 4049 of ERISA, in connection with any Plan (other than liability for premiums under Section 4007 or ERISA), (ii) has incurred any withdrawal liability under Subtitle E of Title IV of ERISA in connection with any Plan which is a Multiemployer Plan, nor (iii) has contributed or has been obligated to contribute on or after September 26, 1980, to any “multiemployer plan” (within the meaning of Section 3(37) of ERISA) which is subject to Title IV of ERISA.

The consummation of the transactions contemplated by this Agreement (i) will not give rise to any liability on behalf of any Loan Party or any ERISA Affiliate under Title IV of ERISA to the PBGC (other than ordinary and usual PBGC premium liability), to the trustee of a trust established pursuant to Section 4049 of ERISA, or to any Multiemployer Plan, and (ii) will not constitute a “prohibited transaction” under Section 406 of ERISA or Section 4975 of the Code.

10.30The Security Documents.

(a)Each Security Document heretofore delivered grants, and each Security Document hereafter delivered when delivered will grant a Lien in the properties or rights intended to be covered thereby (the “Collateral”) which (i) will constitute a valid and enforceable security interest under the Uniform Commercial Code of the State (x) in which the Collateral is located and (y) by which any Security Document is governed (as applicable, the “UCC”), (ii) will be entitled to all of the rights, benefits and priorities provided by the UCC, and (iii) when such Security Documents or financing statements with respect thereto are filed and recorded as required by the UCC, will be superior and prior to the rights of all third Persons now existing or hereafter arising whether by way of mortgage, pledge, lien, security interest, encumbrance or otherwise, except for Permitted Liens, and will provide Agent and Lenders the first priority.  All such action as is necessary in law has been taken, or prior to the Effective Date will have been taken, to establish and perfect the security interest of Agent and Lenders in the Collateral and to entitle Lenders or Agent on behalf of Lenders to exercise the rights and remedies provided in each of the Security Documents and the UCC, as applicable, and no filing, recording, registration or giving of notice or other action is required in connection therewith except such as has been made or given or will have been made or given prior to such dates.  All filing and other fees and all recording or other tax payable with respect to the recording of any of the Security Documents and UCC financing statements have been paid or provided for.

(b)In furtherance (and not in limitation) of Section 10.30(a), after giving effect to the Pledge Agreements and Security Agreements listed on Schedule 10.30(b), each Borrower and each Primary Obligor will have granted Collateral Agent a Lien of the first priority on (x) each Pledged Note and on each other note, instrument or other evidence of indebtedness, other than any Excluded Note, in which it has any right, title or interest; and (y) each Equity Interest, other than Equity Interests in Excluded Entities, in which it has any right, title or interest, including, without limitation, each Equity Interest issued to it by any Portfolio Entity acquiring any Asset Pool.

10.31Other Loan Documents.  All representations and warranties contained in the other Loan Documents are true and correct.

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10.32Fee Agreements.  Attached hereto as Schedule 10.32 is a true, accurate and complete schedule, as of the Effective Date, of all Fee Agreements to which a Borrower or any Primary Obligor, or Material Portfolio Entity is a party.

10.33Securitization Agreements.  Attached hereto as Schedule 10.33 is a true, accurate and complete schedule as of the Execution Date of all sales and servicing agreements and similar agreements relating to securitizations to which a Borrower, any Primary Obligor or any other Subsidiary of a Borrower is a party.

10.34Immaterial Entities.  Schedule 10.34 lists each Affiliate of a Borrower that does not engage in any business and that has assets of with a fair market value of less than $100,000.  The aggregate fair market value of Assets of all entities listed on Schedule 10.34 does not exceed $1,500,000.

10.35Waterfall Restrictions.  No loan agreement or other borrowing arrangement of any Portfolio Entity contains any provision (x) pursuant to which such agreement or arrangement would cross-default to a loan agreement or other borrowing arrangement of any other Portfolio Entity or to a different loan agreement or other borrowing arrangement of such Portfolio Entity or (y) which would in any way restrict, reduce or prohibit distributions by a Portfolio Entity on account of any event or condition with respect to any Affiliate of such Portfolio Entity or with respect to that Portfolio Entity under any other borrowing or credit arrangement.

10.36Wholly Owned Subsidiary Interests.  Attached as Schedule 10.36 hereto is a true and complete list, as of the Effective Date, of each Wholly-Owned Subsidiary which owns Equity Interests issued by any other Person other than an REO Affiliate of such Wholly-Owned Subsidiary,

10.37REO Affiliates.  Attached as Schedule 10.37 hereto is a true and complete list, as of the Effective Date, of each REO Affiliate.

10.38Material Portfolio Entities.  Attached hereto as Schedule 10.38 is a true and complete list, as of the Effective Date, of each Material Portfolio Entity.

Section 11.AGENT.

11.1Appointment.  Lenders hereby irrevocably appoint Bank of Scotland plc, acting through its New York branch, to act as Agent hereunder Agent (in such capacity, the “Agent”), and as Collateral Agent, subject to the Collateral Agency Agreement (in such capacity, the “Collateral Agent”), “Assignee” and “Secured Party” (or in any other similar representative capacity designated in any Security Document) under the Security Documents.  Each Lender hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, Agent to take such action on its behalf under the provisions of this Agreement, the Notes, the Security Documents, the other Loan Documents and any other instruments and agreements referred to therein and to exercise such powers thereunder as are specifically delegated to or required of it by the terms thereof and such other powers as are reasonably incidental thereto; provided that Agent shall not take any action to realize upon any security interest in any of the Collateral, or release any substantial portion of the Collateral,

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without the consent of the Majority Lenders.  Agent may perform any of its duties under any of the Loan Documents by or through its agents or employees.

11.2Nature of Duties.  Agent shall have no duties or responsibilities except those expressly set forth in the Loan Documents.  Neither Agent nor any of its officers, directors, employees or agents shall be liable to any Lender for any action taken or omitted by it under any of the Loan Documents, or in connection therewith unless caused by its or their gross negligence or willful misconduct.  Nothing in the Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon Agent any obligations in respect of the Loan Documents except as expressly set forth therein.  The duties of Agent under the Loan Documents shall be mechanical and administrative in nature and Agent shall not have by reason of its duties under the Loan Documents a fiduciary relationship in respect of any Lender.  Agent agrees to deliver promptly to each Lender (i) copies of notices received by it pursuant to Sections 7.1, 7.2 and 7.11 of this Agreement, and (ii) copies of all documents required to be delivered hereunder by a Borrower to Lenders directly but that are not so delivered to any Lender (but were delivered to Agent) if such Lender notifies Agent that it has not received such document or documents, specifying same.

11.3Lack of Reliance.  Independently and without reliance on Agent, each Lender to the extent it deems appropriate has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Loan Parties in connection with the making and the continuance of the Loans hereunder and the taking or not taking of any action in connection herewith, (ii) its own appraisal of the creditworthiness of the Loan Parties and (iii) its own independent investigation and appraisal of the Collateral; and, except as expressly provided in the Loan Documents, Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the date hereof or at any time or times thereafter.  Agent shall not be responsible to any Lender for any recitals, statements, representations or warranties herein or in any certificate or other document delivered in connection herewith or for the authorization, execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, or sufficiency of any of the Loan Documents, the financial condition of the Loan Parties or the condition of any of the Collateral, or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of any of the Loan Documents, the financial condition of the Loan Parties or the existence or possible existence of any Event of Default or Default.

11.4Certain Rights.  If Agent requests instructions from Lenders or Majority Lenders with respect to any interpretation, act or action (including failure to act in connection with this Agreement or any of the other Loan Documents) Agent shall be entitled to refrain from such act or taking such actions unless and until it shall have received instructions from Lenders or the Majority Lenders, as the case may be; and Agent shall not incur liability to any Person by so refraining.  Without limiting the foregoing, no Lender shall have any right of action whatsoever against Agent as a result of Agent acting or refraining from acting hereunder or under any of the other Loan Documents in accordance with the instructions of the Majority Lenders (as to matters requiring the consent of the Majority Lenders) or all Lenders (as to matters requiring the consent of all Lenders).  Agent shall be fully justified in failing or refusing to take any action under any Loan Document unless, if it requests, it shall first be indemnified to its satisfaction by Lenders

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against any and all liability and expense which may be incurred by it by reason of taking, continuing to take or not taking any such action.

11.5Reliance.  Agent shall be entitled to rely upon any written notice or any telephone message believed by it to be genuine or correct and to have been signed, sent or made by the proper Person, and, with respect to all legal matters pertaining to the Loan Documents and its duties thereunder, upon advice of counsel selected by it.

11.6Indemnification.  To the extent Agent is not reimbursed or indemnified by the Borrowers, Lenders will reimburse and/or indemnify Agent, in proportion to the aggregate amount of their respective Loans outstanding under this Agreement, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred or sustained by or asserted against Agent, acting pursuant hereto or any of the other Loan Documents in its capacity provided for in this Section 11, in any way relating to or arising out of this Agreement, or any of the other Loan Documents, provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent’s gross negligence or willful misconduct.  The obligations of Lenders under this Section 11.6 shall survive the repayment of the Notes and the Loans and the termination of this Agreement and the other Loan Documents.

11.7Agent, Individually.  With respect to its obligations under this Agreement, the Loans made by it and any Note issued to or held by it, Agent shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender or holder of a Note.  The terms “Lender”, “holders of Notes” or any similar terms shall, unless the context clearly otherwise indicates, not exclude Agent in its individual capacity as a Lender or holder of a Note.  Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with the Loan Parties and their Subsidiaries as if it were not acting pursuant hereto, and may accept fees and other consideration from the Loan Parties and their Subsidiaries for services as Agent in connection with this Agreement and the other Loan Documents and for services otherwise than as Agent without having to account for the same to Lenders.

11.8Holders of Notes.  Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been received by Agent.  Any request, authority or consent of any Person, who at the time of making such request or of giving such authority or consent is the payee of any Note, shall be conclusive and binding on any subsequent holder, transferee, assignee or payee of such Note or of any Note or Notes issued in exchange therefor.

11.9Resignation.  Agent may resign at any time from the performance of all its functions and duties hereunder and under the other Loan Documents by giving thirty (30) days prior written notice to each Borrower and each Lender.  Such resignation shall take effect upon the expiration of such 30-day period or upon the earlier appointment of a successor.  Notwithstanding any such resignation, the provisions of Sections 11.6 and 12.3 shall inure also to the benefit of each Agent who has so resigned with respect to the period it served as Agent.  In case of the resignation of Agent, the Majority Lenders, with the prior consent of Borrowers,

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which consent may not be unreasonably withheld, may appoint a successor by a written instrument signed by the Majority Lenders.  Any successor shall execute and deliver to Agent an instrument accepting such appointment, and thereupon such successor, without further act, shall become vested with all the estates, properties, rights, powers, duties and trusts of Agent hereunder and with like effect as if originally named as “Agent” herein and therein, and upon request, the predecessor Agent shall take all actions and execute all documents necessary to give effect to the foregoing.  In the event Agent’s resignation becomes effective at a time when no successor has been named, all notices, other communications and payments hereunder required to be given by or to Agent shall be sufficiently given if given by the Majority Lenders (or all Lenders, if the consent of all Lenders is required therefor hereunder) or to each Lender, as the case may be.  In such event, all powers specifically delegated to Agent may be exercised by the Majority Lenders and the Majority Lenders shall be entitled to all rights of Agent hereunder.

11.10Reimbursement.  Without limiting the provisions of Section 11.6, Lenders and Agent hereby agree that Agent shall not be obligated to make available to any Person any sum which Agent is expecting to receive for the account of that Person until Agent has determined that it has received that sum.  Agent may, however, disburse funds prior to determining that the sums which Agent expects to receive have been finally and unconditionally paid to Agent, if Agent wishes to do so.  If and to the extent that Agent does disburse funds and it later becomes apparent that Agent did not then receive a payment in an amount equal to the sum paid out, then any Person to whom Agent made the funds available shall, on demand from Agent:

(a)refund Agent the sum paid to that Person; and

(b)reimburse Agent for the additional amount certified by Agent as being necessary to indemnify Agent against any funding or other cost, loss, expense or liability sustained or incurred by Agent as a result of paying out the sums before receiving it; provided, however, that if such funds were made available to any Lender, such additional amount shall be limited to interest on the sum to be repaid, for each day from the date such amount was disbursed until the date repaid to Agent, at (for the first three (3) days) the customary rate set by Agent for correction of errors among banks, and thereafter at the Base Rate (or, if greater and in respect of a Loan, the rate from time to time prevailing on such Loan).

Section 12.MISCELLANEOUS.

12.1Calculations and Financial Data.  Calculations hereunder (including, without limitation, calculations used in determining, or in any certificate of any Loan Party delivered reflecting compliance by any Loan Party with the provisions of this Agreement) shall be made and financial data required hereby shall be prepared both as to classification of items and as to amount in accordance with GAAP, consistent with the audited Financial Statements described in Section 10.16; provided that for purposes of Section 8.17 no effect shall be given to any change in GAAP from those in effect on December 31, 2009.

12.2Amendment and Waiver.  Except as otherwise provided, no provision of any of the Loan Documents may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the Majority Lenders (or Agent on their behalf) and, if a Borrower is a party thereto, such Borrower, except that waivers of provisions relating to a Loan

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Party’s performance or non-performance of its obligations hereunder or thereunder need not be signed by such Loan Party or any other Loan Party; provided however that the written consent of Agent shall also be required to change, waive, discharge or terminate provisions of Section 11 and the written consent of the Issuing Bank shall also be required to change, waive, discharge or terminate provisions of Section 2A; and provided further that without the consent of all of Lenders (or Agent on their behalf) no change, waiver, discharge or termination may be made that would increase the amount of any Loans of any Lender, decrease the principal of any Loan; decrease the interest rate payable on any Loan; decrease the amount of any fee; extend the Maturity Date of any Loan; change the definition of “Majority Lenders” or modify this Section 12.2.  Any such change, waiver, discharge or termination shall be effective only in the specific instance and for the specific purposes for which made or given.

12.3Expenses; Indemnification.

(a)Whether or not the transactions hereby contemplated shall be consummated, each Borrower and FLBG, jointly and severally agree to pay all out-of-pocket costs and expenses of (x) Agent incurred in connection with the preparation, execution, delivery, negotiation administration, filing and recording of, and (y) Agent and Lenders incurred in connection with the amendment (including any waiver or consent) or modification of (including any amendment, waiver, consent or modification at any time requested by a Borrower, whether or not same is finalized or executed), any failure of a Borrower to perform or observe any provision of, and enforcement of or preservation of any rights under, this Agreement, the other Loan Documents, the making and repayment of the Loans, and the payment of all interest and fees, including, without limitation, (A) the fees and expenses of Sullivan & Worcester LLP, counsel for Agent, and any special or local counsel retained by Agent or Lenders, and with respect to enforcement, the reasonable fees and expenses of counsel for Agent or any Lender, (B) the reasonable fees and expenses of accountants, other consultants, appraisers and other professionals retained by Agent in connection with the transactions contemplated hereunder, and (C) printing, travel, title insurance, mortgage recording, filing, communication and signing taxes and costs.

(b)Each Borrower and FLBG, jointly and severally, agrees to pay, and to save Agent and Lenders harmless from (x) all present and future stamp, filing and other similar taxes, fees or charges (including interest and penalties, if any), which may be payable in connection with the Loan Documents or the issuance of the Notes or any modification of any of the foregoing, and (y) all finder’s and broker’s fees in connection with the transactions contemplated by this Agreement or the other Loan Documents.

(c)Each Borrower and FLBG, jointly and severally, agrees to indemnify, pay and hold harmless Agent, each Lender, any Lender Assignee and each holder of a Note and their respective present and future officers, directors, employees and agents (collectively, the “Indemnified Parties”) from and against all liability, losses, damages and expenses (including, without limitation, legal fees and expenses) arising out of, or in any way connected with, or as a result of (i) the execution and delivery of this Agreement or the other Loan Documents or the documents or transactions contemplated hereby and thereby or the performance by the parties hereto or thereto of their respective obligations hereunder and thereunder or relating thereto; or (ii) any claim, action, suit, investigation or proceeding (in each case, regardless of whether or not

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the Indemnified Party is a party thereto or target thereof) in any way relating to a Borrower, any Primary Obligor, any Portfolio Entity, any Related Entity or Subsidiary of any thereof or any Collateral or any Affiliate of a Borrower or any Subsidiary of any such Affiliate or in any way relating to any of the foregoing Persons or any other Loan Party, or any Affiliate of any of the foregoing in respect of this Agreement, any other Loan Documents or any other document or transaction in connection herewith or therewith or relating hereto or thereto; or (iii) any actual or alleged violation by a Borrower, any Primary Obligor, any Portfolio Entity, any Related Entity, any Loan Party, any Affiliate of any of the foregoing Persons or any Subsidiary of any of the foregoing Persons (or any predecessor in interest of any of them) of any Environmental Law; provided that neither FLBG nor either Borrower shall be liable to an Indemnified Party for any portion of such liabilities, losses, damages and expenses sustained or incurred as a direct result of the gross negligence or willful misconduct of Agent, any Lender or such Indemnified Party.  Each Lender shall endeavor to give each Borrower and FLBG notice of any material claim, action, suit or proceeding (if not restricted by applicable law, regulation or Government Authority from so doing or unless the same would be inconsistent with a request from a Government Authority) referred to in clause (ii) which has been filed against such Lender within a reasonable time after the loan officer of such Lender with responsibility for this Agreement becomes aware of the same, but no failure to give any such notice shall affect, or relieve a Borrower or FLBG of, any of such Borrower’s or FLBG’s obligations under this Section 12.3 or under any other provision of this Agreement or any other Loan Document or result in any obligation or liability of Agent or any Lender to a Borrower or FLBG or any other Person.

(d)All obligations provided for in this Section 12.3 and Sections 3.4, 5.2 and 11.6 shall survive any termination of this Agreement and the Loans and the payment in full of the Obligations.

12.4Benefits of Agreement; Descriptive Headings.

(a)This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns, and, in particular, shall inure to the benefit of the holders from time to time of the Notes; provided, however, that no Loan Party that is party hereto may assign or transfer any of its rights or obligations hereunder without the prior written consent of Agent and Lenders and any such purported assignment or transfer shall be void.  In furtherance of the foregoing, each Lender shall be entitled at any time to grant participations in the whole or any part of its rights and/or obligations under this Agreement, the Loan Documents or any Loan or Note to any Person; provided, however, that no Lender Assignee shall be permitted by the terms of its participation agreement with the relevant Lender to require such Lender to take or omit to take any action hereunder except to the extent that if Lender Assignee were a Lender hereunder, its consent to taking or omitting to take such action would be required by the terms of the second proviso of Section 12.2 hereto.  No such participation pursuant to this Section 12.4(a) shall relieve any Lender from its obligations hereunder and a Borrower need deal solely with Agent and Lenders with respect to waivers, modifications and consents to this Agreement, the Loan Documents or the Notes.  Any such participant is referred to in this Agreement as a “Lender Assignee”.  Each Borrower agrees that the provisions of Sections 3.4, 5.4 and 12.3 shall run to the benefit of each Lender Assignee and its participations or interests herein, and any Lender may enforce such provisions on behalf of any such Lender Assignee; provided, however, that if any Lender grants a participation in the

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whole or any part of its rights and/or obligations pursuant to this Section 12.4(a), then the amounts that a Borrower is required to pay pursuant to this Agreement (including, without limitation, additional amounts made pursuant to Section 5.4) shall not exceed the amounts that a Borrower would have been required to pay to such Lender pursuant to this Agreement had such Lender not granted such participation.  Each Borrower hereby further agrees that any such Lender Assignee may, to the fullest extent permitted by applicable law, exercise the right of setoff with respect to such participation (and in an amount up to the amount of such participation) as fully as if such Lender Assignee were the direct creditor of a Borrower.  Upon the grant of a participation in accordance with the foregoing, each Borrower shall execute such documents and do such acts as any Lender may reasonably request to effect such assignment.  Any Lender may furnish any information concerning the Loan Parties in its possession from time to time to Lender Assignees (including prospective Lender Assignees) and prospective Purchasing Lenders.  Each Lender shall notify each Borrower of any participation granted by it pursuant to this Section 12.4(a) but neither the approval of a Borrower nor that of any other Loan Party shall be required for any such participation.  Neither Borrower shall be responsible for any due diligence costs or legal expenses of such Lender Assignees in connection with their entering into such participation.

(b)The descriptive headings of the various provisions of this Agreement and the other Loan Documents are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.

(c)Any Lender may at any time assign to any other Lender or any affiliate of any Lender, or (subject to obtaining the prior written consent of each Borrower (but no other Loan Party), such consent not to be unreasonably withheld) to one or more additional banks or financial institutions (“Purchasing Lenders”), all or any part of its Loans and corresponding Note pursuant to a Transfer Supplement (“Transfer Supplement”), the form and substance satisfactory to Agent; provided, however, that each such assignment shall be for an amount not less than $1,000,000 (or, if Lender’s Loan at the time is less, such amount) and integral multiples of $500,000 above such amount, or such other amount or multiple to which Agent may consent.  Upon (i) such execution of such Transfer Supplement, (ii) delivery of an executed copy thereof to each Borrower and Agent, (iii) payment by such Purchasing Lender to such transferor Lender of an amount equal to the purchase price agreed between such transferor Lender and such Purchasing Lender, (iv) payment by the Purchasing Lender to Agent of a $3,000 processing fee, and (v) any consent of a Borrower required by the first sentence of this Section 12.4(c), such Purchasing Lender shall for all purposes be a Lender party to this Agreement and shall have all the rights and obligations of a Lender under this Agreement to the same extent as if it were an original party hereto and thereto with the percentage share of the Loans set forth in Schedule I to such Transfer Supplement, and no further consent or action by a Borrower, any other Loan Party, Lenders or Agent shall be required.  Such Transfer Supplement shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of the percentage of the Notes and Loans (and related rights and obligations) held by the transferor Lender and the Purchasing Lender arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender pursuant to the Transfer Supplement.  Upon the consummation of any transfer to a Purchasing Lender pursuant to this Section 12.4(c), the transferor Lender, Agent and each Borrower shall make appropriate arrangements so that, if required, a replacement Note or

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Notes (dated the same date as the Note or Notes being replaced) is issued to such Purchasing Lender and a new Note or Notes (dated the same date as the Note or Notes being replaced) or, as appropriate, a replacement Note or Notes (dated the same date as the Note or Notes being replaced) is issued to such Purchasing Lender, in each case in principal amounts reflecting their  outstanding Loans, as adjusted pursuant to such Transfer Supplement.

(d)Notwithstanding anything to the contrary contained herein or in any of the Loan Documents, unless Agent, a Borrower or a Lender otherwise requests with respect to any specific exhibit, exhibits to this Agreement shall not be required to be attached to the execution or any other copy of this Agreement, and any references in this Agreement or the other Loan Documents to such exhibits as “Exhibits hereto,” “Exhibits to this Agreement” or words of similar effect shall be deemed to refer to such exhibit as executed by the parties thereto and delivered on the Effective Date.

12.5Notices, Requests, Demands, etc.  Except as otherwise expressly provided herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be deemed to have been duly given or made when delivered if sent by Federal Express or other similar overnight delivery service, or three (3) Business Days after mailing (when mailed, postage prepaid, by registered or certified mail, return receipt requested) or (in the case of telex, telegraphic, telecopier or cable notice) when delivered to the telex, telegraph, telecopier or cable company, or (in the case of telex or telecopier notice sent over a telex or telecopier owned or operated by a party hereto or electronic mail) when sent; in each case addressed as follows, except that notices and communications to Agent pursuant to Section 2 and Section 9 shall not be effective until received by Agent: (i) if to Agent, at the Closing Office, (ii) if to a Lender, at the address specified with its signature below or (if a Purchasing Lender) on the applicable Transfer Supplement, and (iii) if to a Loan Party, at its address specified with its signature below (Attention: President), or to such other addresses as any of the parties hereto may hereafter specify to the others in writing, provided that communications with respect to a change of address shall be deemed to be effective when actually received.

12.6Governing Law.  THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO THE EXTENT LAWFUL TO CHOICE OF LAW DOCTRINE THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION, except (as to any other Loan Document) to the extent specifically set forth otherwise in that Loan Document.

12.7Counterparts; Telecopies.  This Agreement and the other Loan Documents may be executed in any number of counterparts, and by the different parties hereto and thereto on the same or separate counterparts, each of which when so executed and delivered shall be deemed to be an original; all the counterparts for each such Loan Document shall together constitute one and the same agreement.  Telecopied signatures hereto and to the other Loan Documents shall be of the same force and effect as an original of a manually signed copy.

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12.8Waiver; Remedies Cumulative; Payment of Claims; Full Recourse.

(a)No failure or delay on the part of Agent or any Lender in exercising any right, power or privilege under this Agreement or any other Loan Document, and no course of dealing between a Borrower, any Primary Obligor, any Portfolio Entity, any Related Entity or any other Loan Party or any Subsidiary thereof and Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.  No notice to or demand on a Borrower, any Primary Obligor, any Portfolio Entity, any Related Entity or any other Loan Party or any Subsidiary thereof in any case shall entitle such Person to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of Agent or any Lender to any other or further action in any circumstances without notice or demand.

(b)The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which Agent or any Lender would otherwise have pursuant to such documents or at law or equity.

(c)In furtherance and not in limitation of the other rights and remedies of Agent and the Lenders, upon the occurrence of an Event of Default or Default, Agent, in its sole and absolute discretion, without waiving or releasing any covenant, agreement or other obligation of a Borrower or any Default or Event of Default, may at any time or times hereafter, but shall be under no obligation to, pay, acquire and/or accept an assignment of any security interest, lien, encumbrance or claim asserted by any Person against the Assets of a Borrower, or any Primary Obligor, or any Wholly-Owned Subsidiary.  All sums paid by Agent in respect thereof and all reasonable costs and expenses (including, without limitation, fees and expenses of counsel to Agent) relating thereto incurred by Agent or for which Agent becomes obligated on account thereof shall be part of the Obligations payable by a Borrower to Agent on demand and any amount not paid on demand shall bear interest at the Past Due Rate.

(d)Each Borrower’s obligations to pay principal, interest, fees and other amounts when due under this Agreement and the other Loan Documents is absolute and unconditional and a full recourse obligation of each Borrower, notwithstanding any fact or circumstance and, without limiting the generality of the foregoing, whether or not there are funds available in the Cash Flow Cash Collateral Account for application to any such obligation.

12.9Acknowledgement of Consents.  Notwithstanding anything to the contrary in this Agreement or any other Loan Document, Agent and Lenders hereby acknowledge and agree that any document of consent or waiver referred to on Schedule 12.9 shall remain in full force and effect with respect to this Agreement.

12.10Recoveries; Pro Rata Sharing.

(a)Any Recoveries (after deduction and payment of all expenses and costs permitted by this Agreement, the Security Documents or applicable law) shall be applied pro rata against the Loans held by Lenders until satisfaction in full of all amounts due thereunder.

(b)Lenders agree among themselves that, with respect to all sums received by Lenders applicable to the payment of the principal of or interest on the Notes (except as

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otherwise provided in Section 3.4, 5.4 or 5.5), equitable adjustment will be made between Lenders so that, in effect, all such sums shall be shared ratably by each of Lenders (in accordance with the outstanding principal amount of their respective applicable Loans) whether received by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker’s lien, by counterclaim or cross-action or by the enforcement of any or all of the Notes or otherwise.  If any Lender receives any payment on its Notes of a sum or sums in excess of its pro rata portion (except as otherwise provided in Section 3.4, 5.4 or 5.5), then such Lender receiving such excess payment shall purchase for cash from the other Lenders with outstanding Loans to a Borrower an interest in their Note or Notes in such amount as shall result in a ratable participation by all of Lenders in the aggregate unpaid amount of applicable Notes then outstanding; provided, however, that if all or any portion of such excess payment is thereafter recovered by such Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest.  Each Borrower hereby agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 12.10(b) may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of setoff) with respect to such participation as fully as if such Lender were the direct creditor of a Borrower in the amount of such participation.  The foregoing Section 12.10(b) shall in all events be subject to the Subordination Agreement.

12.11Jurisdiction.  EACH BORROWER AND FLBG HEREBY AGREES THAT ANY LEGAL ACTION OR PROCEEDING AGAINST IT WITH RESPECT TO THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS OR THE DOCUMENTS DELIVERED IN CONNECTION HEREWITH OR THEREWITH MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AS AGENT OR ANY LENDER MAY ELECT, AND, BY EXECUTION AND DELIVERY HEREOF, EACH BORROWER AND FLBG ACCEPTS AND CONSENTS FOR ITSELF AND IN RESPECT TO ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND AGREES THAT SUCH JURISDICTION SHALL BE EXCLUSIVE, UNLESS WAIVED BY AGENT AND THE MAJORITY LENDERS IN WRITING, WITH RESPECT TO ANY ACTION OR PROCEEDING BROUGHT BY IT AGAINST AGENT OR ANY LENDER AND ANY QUESTIONS RELATING TO USURY.  EACH BORROWER AGREES THAT SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK SHALL APPLY TO THE LOAN DOCUMENTS AND WAIVES ANY RIGHT TO STAY OR TO DISMISS ANY ACTION OR PROCEEDING BROUGHT BEFORE SAID COURTS ON THE BASIS OF FORUM NON CONVENIENS.  EACH BORROWER AND FLBG HEREBY IRREVOCABLY CONSENTS THAT ALL PROCESS SERVED OR BROUGHT AGAINST A BORROWER WITH RESPECT TO ANY SUCH PROCEEDING IN ANY SUCH COURT IN NEW YORK SHALL BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT IF SENT BY REGISTERED MAIL, OR (IF PERMITTED BY LAW) BY FEDERAL EXPRESS OR OTHER SIMILAR OVERNIGHT COURIER SERVICE, TO SUCH LOAN PARTY AT ITS ADDRESS SET FORTH BELOW ITS SIGNATURE TO THIS AGREEMENT (OR SUCH OTHER ADDRESS AS AGENT IS NOTIFIED OF IN ACCORDANCE WITH THE PROVISIONS OF SECTION 12.5).  NOTHING HEREIN SHALL AFFECT THE RIGHT OF AGENT OR LENDERS TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR

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SHALL LIMIT THE RIGHT OF AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST ANY LOAN PARTY IN THE COURTS OF ANY OTHER JURISDICTION.

12.12Severability.  If any provision of this Agreement shall be held or deemed to be or shall, in fact, be illegal, inoperative or unenforceable, the same shall not affect any other provision or provisions herein contained or render the same invalid, inoperative or unenforceable to any extent whatever.

12.13Right of Set-off.  In addition to any rights now or hereafter granted under applicable law or otherwise and not by way of limitation of any such rights, upon the occurrence of an Event of Default each of Lenders is hereby authorized at any time or from time to time, without notice to any Loan Party or to any other Person, any such notice being hereby expressly waived, to set-off and to appropriate and apply any and all deposits (general or special, time or demand, provisional or final) and any other indebtedness at any time held or owing by such Lender to or for the credit or the account of such Loan Party against and on account of the obligations and liabilities of such Loan Party now or hereafter existing under any of the Loan Documents irrespective of whether or not any demand shall have been made thereunder and although said obligations, liabilities or claims, or any of them, shall be contingent or unmatured.  Lender or Lenders exercising any rights granted under this Section 12.13 shall thereafter notify the affected Loan Party and Agent of such action; provided that the failure to give such notice shall not affect the validity of such set-off and application.

12.14No Third Party Beneficiaries.  This Agreement is solely for the benefit of Agent and Lenders and each Borrower and the respective successors and assigns of Agent and Lenders and nothing contained herein shall be deemed to confer upon anyone other than a Borrower any right to insist on or to enforce the performance or observance of any of the obligations of Agent or Lenders contained herein.  All conditions to the obligations of Lenders to make Loans hereunder are imposed solely and exclusively for the benefit of Lenders and their respective successors and assigns and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms and no other Person shall under any circumstances be deemed to be beneficiary of such conditions.

12.15Survival; Integration.

(a)Each of the representations, warranties, terms, covenants, agreements and conditions contained in this Agreement shall specifically survive the execution and delivery of this Agreement and the other Loan Documents and the making of the Loans and shall, unless otherwise expressly provided, continue in full force and effect until the Loans together with interest thereon, the fees and compensation of Agent, and all other sums payable hereunder or thereunder have been indefeasibly paid in full.

(b)This Agreement, together with the other Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and thereof and supersedes  all prior agreements, written or oral, on the subject matter hereof and thereof.  In the event of any direct conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control and govern; provided that the inclusion of supplemental rights or remedies in favor of Agent or Lenders in any other Loan

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Document shall not be deemed a conflict with this Agreement.  Each Loan Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof.

12.16Domicile of Loans.  Any Lender may make, maintain or transfer any of its Loans hereunder to, or for the account of, any branch office, subsidiary or affiliate of such Lender.

12.17No Usury.  It is expressly stipulated and agreed to be the intent of Agent, Lenders and Borrowers to comply at all times with applicable usury laws.  If at any time such laws would ever render usurious any amount called for under any of the Loan Documents, then it is the express intention of the parties hereto that such excess amount be immediately credited on the applicable Notes, or if the applicable Notes have been fully paid, refunded by Lenders (pro rata in accordance with their respective principal amount of the affected Loans), to Borrowers (and Borrowers shall accept such refund) and the provisions hereof and thereof be immediately deemed to be reformed to comply with the then applicable laws, without the necessity of the execution of any further documents, but so as to permit the recovery to the fullest amount otherwise called for hereunder and thereunder.  Any such crediting or refunding shall not cure or waive any default by Borrowers under the Loan Documents.  If at any time following any such reduction to the interest rate payable by Borrowers there remains unpaid any principal amounts under the Notes and the maximum interest rate permitted by applicable law is increased or eliminated, then the interest rate payable to Lenders shall be readjusted, to the full extent permitted by applicable law, so that the total amount of interest thereunder payable by Borrowers to Lenders shall be equal to the amount of interest which would have been paid by Borrowers without giving effect to applicable usury laws.  Each Borrower agrees, however, that in determining whether or not any interest payable under the Notes or any of the other Loan Documents exceeds the highest rate permitted by law, any non-principal payment (except payments specifically stated in the Notes or such other Loan Documents to be “interest”), including fees and commissions and all other sums payable hereunder or thereunder or in connection herewith or therewith, shall be deemed, to the full extent permitted by law, to be an expense, fee, premium or penalty rather than interest.

12.18Waiver of Jury Trial.  EACH BORROWER, FLBG, AGENT AND EACH LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF A BORROWER, ANY PARTNER THEREOF, ANY OTHER LOAN PARTY, AGENT OR LENDERS.  THIS PROVISION IS A MATERIAL INDUCEMENT FOR AGENT AND LENDERS ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

12.19Waiver by Borrower.  EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT OR REQUIRED BY LAW, EACH BORROWER AND FLBG WAIVES (A) PRESENTMENT, DEMAND AND PROTEST, NOTICE OF PROTEST, NOTICE OF PRESENTMENT, DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER,

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ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY ANY OF LENDERS AND/OR AGENT ON WHICH A BORROWER MAY IN ANY WAY BE LIABLE; (B) ALL RIGHTS TO NOTICE AND A HEARING PRIOR TO AGENT’S TAKING POSSESSION OR CONTROL OF, OR TO  REPLEVY, ATTACHMENT OR LEVY UPON THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING ANY OF LENDERS AND/OR AGENT TO EXERCISE ANY OF ITS RESPECTIVE REMEDIES; AND (C) THE BENEFIT OF ALL VALUATION, APPRAISEMENT, EXTENSION AND EXEMPTION LAWS.

12.20Waiver of Marshaling.  All rights of marshaling of Assets of a Borrower, including any such right with respect to the Collateral, are hereby waived by each Borrower.

12.21Waiver of Claims; Release by Borrowers.

(a)Each Borrower and FLBG releases Lenders and Agent from any and all causes of action or claims which a Borrower may now or hereafter have for any asserted loss or damage to a Borrower claimed to be caused by or arising from any act or omission to act on the part of any Lenders and/or Agent, their respective officers, agents or employees, except, in the case of any Lender or Agent, the willful misconduct or gross negligence of such Lender or Agent (as the case may be).

(b)Each Borrower and FLBG hereby acknowledges, agrees and affirms, as of the Execution Date and as of the Effective Date, that it possesses no claims, defenses, offsets, recoupment or counterclaims of any kind or nature against or with respect to the enforcement of this Agreement, any other Loan Document or any amendments thereto, or any of the Existing Credit Agreements, as amended, or documents delivered pursuant thereto (collectively, the “Claims”), nor does a Borrower and FLBG now have knowledge of any facts that would or might give rise to any Claims.  If facts now exist which would or could give rise to any Claim against or with respect to the enforcement of this Agreement or any other Loan Document, as may have been amended by the amendments thereto, or any of the Existing Credit Agreements, as amended, or documents delivered pursuant thereto, each Borrower and FLBG hereby unconditionally, irrevocably and unequivocally waives and fully releases any and all such Claims as if such Claims were the subject of a lawsuit, adjudicated to final judgment from which no appeal could be taken and therein dismissed with prejudice.

12.22Confidentiality.  Agent and each Lender, severally and with respect to itself only, covenants and agrees that any information obtained by Agent or such Lender pursuant to this Agreement shall be held in confidence (it being understood that documents provided to Agent hereunder may in all cases be distributed by Agent to Lenders) except that Agent or such Lender may disclose such information (i) to its officers, directors, employees, agents, counsel, accountants, auditors, advisors or representatives, (ii) to the extent such information has become available to the public other than as a result of a disclosure by or through Agent or such Lender, (iii) to the extent such information was available to Agent or such Lender in a capacity other than Agent or Lender hereunder or on a nonconfidential basis prior to its disclosure to Agent or such Lender hereunder, (iv) with the consent of each Borrower, (v) to actual or prospective Lender Assignees or Purchasing Lenders or (vi) to the extent Agent or such Lender should be (A) 

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required in connection with any legal or regulatory proceeding or (B) requested by any Government Authority to disclose such information.

Section 13.FINAL AGREEMENT.

THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE MATTERS COVERED HEREBY AND THEREBY AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

Section 14.NON-COVERED ENTITIES.

Notwithstanding any other provision of this Agreement, no provision of this Agreement shall be applicable to FC Investment Holdings Corporation, FC Diversified Holdings LLC, FC Highway 6 Holdings LLC, FC Imperial Holdings LLC, VFC Partners 4 LLC, VFC Partners 5 LLC, FC Capital or any of their subsidiaries or other entities in which such Persons own any equity interest and no such Person shall be a Primary Obligor, Subsidiary, Loan Party, Portfolio Entity, Portfolio Entity-50%, Affiliate, Associate, Guarantor, Immaterial Entity, Parent, Pledged Entity, Related Entity or Wholly-Owned Subsidiary for any purpose of this Agreement.  In addition, this Agreement shall not be applicable or refer to FirstCity Financial Corporation or FC Servicing except to the extent expressly provided herein by reference to FirstCity Financial Corporation or FCFC, in the former case, and FirstCity Servicing Corporation or FC Servicing, in the latter case.

[remainder of page intentionally left blank]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officers as of the date first above written.

FIRSTCITY COMMERCIAL CORPORATION

a Texas corporation, as Borrower

By:

Title:

6400 Imperial Drive (delivery only)

Waco, Texas 76710

P.O. Box 8216 (mail)

Waco, Texas 76714-8216

254-761-2953 (telecopier)

jholmes@fcfc.com (electronic mail)

FH PARTNERS LLC

a Texas limited liability company, as Borrower

By:

Title:

6400 Imperial Drive (delivery only)

Waco, Texas 76710

P.O. Box 8216 (mail)

Waco, Texas 76714-8216

254-761-2953 (telecopier)

jholmes@fcfc.com (electronic mail)

[signature page to Reducing Note Facility Agreement]

FLBG CORPORATION

a Texas corporation, as Guarantor

By:

Title:

6400 Imperial Drive (delivery only)

Waco, Texas 76710

P.O. Box 8216 (mail)

Waco, Texas 76714-8216

254-761-2953 (telecopier)

jholmes@fcfc.com (electronic mail)

BANK OF SCOTLAND PLC, acting through its New York branch, individually as Senior Lender and as Collateral Agent and Agent

By:

Title:

BOS (USA) INC.

a Delaware corporation, as Subordinated Lender

By:

Title:

[signature page to Reducing Note Facility Agreement]

EXHIBITS

Annex IDefinitions

Exhibit A-1 Senior Note

Exhibit A-2 Subordinated Note

Exhibit B - Report Setting Forth the Computation of the Aggregate Undistributed Funds of all Portfolio Entities.

Exhibit C - - Form of Asset Pool Acquisition Certificate

Exhibit D - - Eligible Asset Pool

Exhibit E - - Permitted Shareholder Agreements/Arrangements

Exhibit F - - Net Present Value

LIST OF SCHEDULES

Schedule 2.2(a) -	Original Principal Amount
Schedule 2A.1 -	Outstanding Letters of Credit
Schedule 5.3(a) -	Distribution of Funds
Schedule 6.11 -	Closing Checklist
Schedule 7.2(d)	Portfolio Protection Report
Schedule 8.12(a) -	Loan; Guaranty Debt
Schedule 8.12(b) -	Guaranty Equivalents
Schedule 10.1(a) -	Organization of Borrower
Schedule 10.1(d) -	Organization of Each Primary Obligor, Portfolio Entity, Related Entity and Each Other Loan Party
Schedule 10.1(e) -	Shareholder Agreements
Schedule 10.5(a) -	Classes of Stock of Borrower
Schedule 10.5(b) -	Classes of Stock and/or Other Equity Interests Issued by Each Primary Obligor, Each Portfolio Entity and Each Related Entity, the Shareholders and Other Equity Holders
Schedule 10.5(c) -	Options, Warrants and Other Rights to Acquire Stock or Other Equity Interests of Borrower, any Primary Obligor, any Portfolio Entity, any Related Entity and any Other Pledged Entity
Schedule 10.6 -	Fictitious Names
Schedule 10.7 -	Liens Relating to the Collateral
Schedule 10.8 -	Financial Warranty
Schedule 10.9 -	Proceedings
Schedule 10.10 -	Government Contracts
Schedule 10.12 -	Government Permits; Approvals and Consents
Schedule 10.15 -	Defaults under any Indebtedness Instrument
Schedule 10.18 -	Material Adverse Change
Schedule 10.19 -	Indebtedness Existing on the Effective Date
Schedule 10.20 -	Affiliate Notes
Schedule 10.22 -	Affiliates
Schedule 10.23 -	Real Property; Environmental Issues
Schedule 10.26(c) -	SEC Filings
Schedule 10.28 -	Intellectual Property
Schedule 10.29 -	Compliance with ERISA
Schedule 10.30(b) -	Pledge Agreements and Security Agreements
Schedule 10.32 -	Fee Agreements
Schedule 10.33 -	Securitization Agreements
Schedule 10.34 -	Immaterial Entity
Schedule 10.36 -	Wholly Owned Subsidiary Interests
Schedule 10.37 -	REO Affiliates
Schedule 10.38 -	Material Portfolio Entities
Schedule 12.9 -	Consents Which Remain in Effect

ANNEX I

DEFINITIONS

As used in the Reducing Note Facility Agreement to which this Annex I is annexed, the following terms shall have the meanings herein specified or as specified in the Section of such Agreement or in such other document herein referenced:

“ABL” shall mean American Business Lending, Inc., a Texas corporation.

“ABL Capital Note” shall mean that certain Promissory Note by ABL to the order of Borrower, dated December 15, 2006, in the maximum principal amount of $4,000,000.

“ABL Facility” shall mean that certain Loan Agreement between ABL and Wells Fargo Foothill, LLC, dated as of December 15, 2006, together with the “Loan Documents” as therein defined, as the same may be amended, restated or otherwise modified from time to time with the prior written consent of the Lenders.

“Adverse Waterfall Event” shall mean with respect to any Portfolio Entity owning more than one Asset Pool or Assets in addition to those contained in its initial Asset Pool, that any lender to such Portfolio Entity has for any reason diverted (whether to make up for a shortfall with respect to any other pool or asset or otherwise) any portion of collections from any Asset Pool of such Portfolio Entity to a different  asset or asset pool (or waterfall with respect thereto) of such Portfolio Entity or otherwise subsidized any other such asset or asset pool with collections from any Asset Pool or otherwise restricted distributions from, or reduced waterfall amounts arising from, collections of any Asset Pool on account of any condition or occurrence other than a condition or occurrence arising directly from such Asset Pool.

“Affected Interest Period” — Section 3.6(a)

“Affected Lender” — Section 3.6(a)

“Affiliate” shall mean any Person (i) in which Borrower and/or any Parent, individually, jointly and/or severally, now or at any time or times hereafter, have an equity or other ownership interest equal to or in excess of twenty—five percent (25%) of the total equity of or other ownership interests in such Person, and/or (ii) which directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with either or both Borrowers and/or (iii) which is an officer or director of either Borrower or any Primary Obligor.  For purposes of this definition, “control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Stock, by contract or otherwise, and in any case shall include direct or indirect ownership (beneficially or of record) of, or direct or indirect power to vote, 25% or more of the outstanding shares of any class of capital stock of such Person (or in the case of a Person that is not a corporation, 25% or more of any class of equity interest).  Notwithstanding the foregoing, none of the Harbor Debtors shall be deemed to be an Affiliate for the purposes of this Agreement other than Section 8.20.  “Affiliate” shall not include any Non-Covered Entity.

“Agent” — introductory paragraph.

“Aggregate Net Present Equity Value” shall mean the sum of the Net Present Equity Value of each Portfolio Entity.

“Aggregate Undistributed Funds” shall mean, on any date of determination, the sum of the amounts determined by multiplying (i) the FC Percentage of each Portfolio Entity, times (ii) the amount of funds held by such Portfolio Entity (which for purposes of this definition shall include the operating funds of the general partner of any limited partnership which is the Portfolio Entity) which are not (w) held in a lockbox account, nor (x) held by such Portfolio Entity for the payment (a) of indebtedness to a Permitted Portfolio Company Creditor of such Portfolio Entity due within the next 30 days or (b) Portfolio Protection Expenses, nor (y) retained by a Portfolio Company Creditor thereof pursuant to a covenant under a loan agreement between such creditor and such Portfolio Entity as in effect on the Execution Date, of which Agent has been given written notice, nor (z) held by ABL.

“Agreement” or “Loan Agreement” shall mean this Reducing Note Facility Agreement, as it may from time to time be amended, extended, restated, supplemented or otherwise modified.

“Applicable Indebtedness” of any Person shall mean all Indebtedness of such Person other than trade payables incurred in the ordinary course of business which are not evidenced by an Indebtedness Instrument.

“Applicable Person” — Section 8.21.

“Applicable Rate” — Section 3.1.

“Approved Portfolio Leverage Arrangement” shall mean (i) each borrowing arrangement between a Portfolio Entity and a financial institution existing as of the Effective Date and (ii) each future borrowing arrangement between a Portfolio Entity and a financial institution on terms and conditions reasonably satisfactory to Agent (as indicated in writing by Agent). Without limiting the scope of Agent’s discretion pursuant to the preceding sentence,  (i) no borrowing arrangement shall be deemed an Approved Portfolio Leverage Arrangement if such arrangement cross–defaults to a credit arrangement of any other Portfolio Entity or contains any provisions which would in any way restrict, reduce or prohibit distributions by a Portfolio Entity on account of any event or condition with respect to any Affiliate of such Portfolio Entity; and (ii) references herein to an Approved Portfolio Leverage Arrangement shall be limited to such borrowing arrangements governed by the terms of the loan agreement and other documents in the form delivered to Agent at the time such arrangements were approved by Agent, as amended, supplemented or otherwise modified with the written consent of Agent.

“Asset” shall mean any real, personal and intangible property of a Person, including, without limitation, accounts, chattel paper, contract rights, letters of credit, instruments and documents, equipment , general intangibles, inventory, leases, options, licenses, real property, and Equity Interests issued by any other Person whether now existing or hereafter acquired or arising.

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“Asset Pool” shall mean (x) in connection with the acquisition thereof by an Eligible Portfolio Entity or the origination of an Asset by a Crestone Portfolio Entity, a portfolio of loans or one or more Assets described in an Asset Pool Acquisition Certificate, and (y) in all other contexts, all Assets of a Portfolio Entity.

“Asset Pool Acquisition Certificate” shall mean a certificate from an Executive Officer of Borrower in the form of Exhibit C to the Agreement, to which is attached (as contemplated by the form of such certificate) the asset purchase agreement relating to the Assets proposed to be purchased, and, if not previously provided to Agent or if amended, restated or otherwise modified since previously provided, the Charter Documents for the purchasing Portfolio Entity and any Shareholders Agreement entered into or proposed to be entered into by the holders of the Equity Interests of such Portfolio Entity.

“Associate”, when used to indicate a relationship with a Person, shall mean (i) another Person (other than a Loan Party or a Subsidiary thereof) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person or an immediate member of his family serves as trustee or in a similar capacity, and (iii) any relative or spouse of such Person or any relative of such spouse.  “Associate” shall not include any Non-Covered Entity.

“Auditors” shall mean KPMG LLP or other independent certified public accountants of recognized standing selected by Borrowers and FLBG and satisfactory to Agent.

“Back-Up Servicing Agreement” shall mean the Back-Up Servicing Agreement, dated as of the date hereof, between FC Servicing and the Cold Back-Up Servicer.

“Base” — Section 8.17(a).

“Base Rate” — shall mean, for any day, the higher of (x) the fluctuating interest rate per annum, in effect from time to time, established by Bank of Scotland Plc in New York as its base, prime or reference rate for U.S. domestic commercial loans in Dollars, (y) the Federal Funds Rate in effect on such day plus 1% or (z) one-month LIBOR plus 1%.  Any change in the interest rate resulting from a change in the Base Rate shall be effective as of the opening of business on the day on which such change becomes effective; it is understood and agreed that the aforesaid rates and the Base Rate are reference rates only and do not necessarily represent the lowest or best rate actually charged to any customer.

“Base Rate Loan” — shall mean any Loan during any period that it bears interest determined by reference to the Base Rate.

“Basel Laws” — Section 3.4.

“Borrower” and “Borrowers” — introductory paragraph.

“Borrower Pledge Agreements” shall mean (i) the Pledge Agreement, dated as of the date hereof, by and between FC Commercial and Collateral Agent and (ii) the Pledge Agreement, dated as of the date hereof, by and between FH Partners and Collateral Agent.

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“BoS (USA)” — introductory paragraph.

“Business Day” shall mean any day that is not a Saturday, Sunday or legal holiday in the State of New York,  the State of Texas, the State of Connecticut (or any other State where the CFCCA is maintained) or a day on which banking institutions chartered by the State of New York, the State of Texas, the State of Connecticut (or any other State where the CFCCA is maintained) or the United States are legally required or authorized to close, and, when used in connection with LIBOR, means any such Business Day which is also a day on which deposits in Dollars and Euros may be dealt in on the London interbank market.

“Capital Expenditures” shall mean, with respect to any Person, all expenditures by such Person which should be capitalized in accordance with GAAP, including all purchases of property, plant and equipment, and including all such expenditures with respect to fixed or capital Assets (including, without limitation, expenditures for maintenance and repairs which  should be capitalized in accordance with GAAP) and the amount of obligations under Capitalized Leases incurred by such Person.

“Capital Stock” — Section 9.15.

“Capitalized Lease” shall mean any lease which is, or is required under GAAP to be, capitalized on the balance sheet of the lessee at such time, and “Capitalized Lease Obligation” of any Person at any time shall mean the aggregate amount of rental expenses which is, or is required under GAAP to be, capitalized on the books of such Person under Capitalized Leases.

“Cash Collateral Account-Servicing” shall mean shall mean the account at the Depositary specified in the Cash Collateral Agreement-Servicing and in the letter agreement between the Collateral Agent and the Depositary relating thereto or such other account, if any, which is specified in a cash collateral agreement (in form and substance satisfactory to Agent) between FC Servicing and Collateral Agent and related letter agreement (in form and substance satisfactory to the Collateral Agent) between the Collateral Agent and the depositary bank with respect to such other account.

“Cash Flow” — Section 5.3(a).

“Cash Flow Cash Collateral Account” and “CFCCA” shall mean the account at the Depositary specified by account number in the Cash Collateral Agreement and in the letter agreement between the Collateral Agent and the Depositary relating thereto or such other account, if any, which is specified by account number in a cash collateral agreement (in form and substance satisfactory to Agent) between Borrower and Collateral Agent and letter agreement (in form and substance satisfactory to the Collateral Agent) between the Collateral Agent and the depositary bank with respect to such other account.

“CFO”, as to any Loan Party shall mean such Loan Party’s chief financial officer.

“Change in Control” — Section 9.15.

“Charges” shall mean all national, Federal, state, county, city, municipal and/or other governmental (or any instrumentality, division, agency, body or department thereof, including

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without limitation the PBGC) taxes, levies, assessments, charges, liens, claims or encumbrances upon and/or relating to the Obligations, a Person’s Assets, a Person’s business, a Person’s ownership and/or use of any of its Assets, a Person’s income and/or gross receipts and/or a Person’s ownership and/or use of any of its Assets.

“Charter Document” shall mean (i) with respect to a corporation: its certificate or articles of incorporation or association and its by–laws or comparable documents under non–US laws; (ii) with respect to a partnership: its partnership agreement, certificate of partnership (if a limited partnership) and its certificate of doing business under an assumed name (if a general partnership); (iii) with respect to a trust, its trust agreement or declaration of trust; and (iv) with respect to a limited liability company, its certificate of formation and operating agreement or analogous documents; in each case, with such other similar documents as Agent shall request or specify.

“Claims” — Section 12.21(b).

“Closing Checklist” shall mean the Closing Checklist in the form of Schedule 6.11 to the Agreement.

“Closing Office” shall mean the office of Agent at 1095 Avenue of the Americas, New York, New York 10036 or such other office as may be designated in writing to Borrowers by Agent.

“Closing Office Time” shall mean the local time in effect at the Closing Office.

“Code” shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time.

“Cold Back-up Servicer” shall mean (1) an entity engaged principally in providing data collection in connection with servicing loan portfolios and other investment vehicles or (2) a banking institution.

“Collateral” — Section 10.30.

“Collateral Agency Agreement” shall mean that certain Collateral Agency Agreement, dated as of the date hereof, between Agent, Collateral Agent, Lenders and Borrowers.

“Collateral Agent” shall mean Agent in its capacity as agent under one or more of the Security Documents and its successor and assigns (Agent, in such capacity, being sometimes referred to herein and in other Loan Documents as the “Collateral Agent” is such capacity he is only referred to as the Collateral Agent and sometimes as the “Agent”).

“Collateral Assignment of Contract” — shall mean the Collateral Assignment of Contract, dated as of the date hereof, made by FC Servicing to Collateral Agent.

“Consolidated Group” shall mean FC Commercial and its consolidated Subsidiaries, other than the Harbor Debtors.

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“Crestone Facility” shall mean a $32 million line of credit provided by FirstCity Denver Investment Corp. to Crestone Portfolio Entities used for the acquisition and origination of Assets and payment of expenses related to those Assets which is secured by a first priority lien on all assets of the Crestone Portfolio Entities and a $2 million line of credit to be provided by FirstCity Denver Investment Corp. to FirstCity Crestone LLC to be used exclusively for working capital purposes.

“Crestone Notes” shall mean the promissory notes issued from time to time under the Crestone Facility, as the same may be amended, restated or otherwise modified from time to time with the prior written consent of the Lenders.

“Crestone Portfolio Entity” shall mean FC Crestone 07 Corp., FC Crestone Colorado 07 LLC, FC Crestone 08 Corp., FC Crestone 09 Corp., FC Crestone 2009 Corp. and FC Crestone 2010 Corp.

“Default” shall mean any event which with notice or lapse of time, or both, would become an Event of Default.

“Disbursement” — Section 2A.4(b).

“Disbursement Date” — Section 2A.4(a).

“Disclosure Restriction” — Section 7.1 (m).

“Dividend” — Section 8.11.

“Dollar Equivalent” shall mean, on any date of determination, with respect to any amount in Euros, the equivalent in Dollars of such amount, determined by Agent using the Exchange Rate then in effect.

“Dollars”, “U.S. $”, “$” and “U.S. dollars” shall mean the lawful currency of the United States of America.

“Effective Date” — Section 6.

“Eligible Asset Pool” shall mean an Asset Pool, held by a Portfolio Entity from an Eligible Seller for an all cash purchase price, which (unless Agent in its discretion otherwise consents in writing) conforms in every respect with the requirements of Exhibit D to the Agreement.

“Eligible Portfolio Entity” shall mean a partnership, corporation, trust, or limited liability company or, if not formed in the United States, a similar foreign organized entity which is a Portfolio Entity of which (i) if such Portfolio Entity is a US Person, not less than 50% of each class of Equity Interests is owned directly or indirectly by Borrower or a Primary Obligor, (ii) no Equity Interests thereof owned directly or indirectly by Borrower or a Primary Obligor are pledged to any Person other than Agent, for the benefit of the Lenders, provided that the Equity Interests of a Crestone Portfolio Entity may be pledged to secure the Crestone Facility, so long as the Crestone Notes and documents securing the Crestone Facility are assigned to Agent to secure

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the obligations of Borrower herein, (iii) the Charter Documents and Shareholder Agreements result in Permitted Shareholder Arrangements, (iv) which has no Indebtedness other than Indebtedness under an Indebtedness Instrument (a) pursuant to Approved Portfolio Leverage Arrangements, or with respect to ABL, the ABL Facility, (b) incurred to pay development expenses related to real estate, or (c) loaned to it by the owners of the Equity Interests of the Portfolio Entity to pay Property Improvement Expenses, and (vi) in respect of which no Disclosure Restriction exists.

“Environmental Laws” shall mean all laws, common law, statutes, rules and regulations, and all judgments, decrees, franchises, orders or permits, issued, promulgated, approved or entered thereunder by any Government Authority relating to pollution or protection of the environment or occupational health and safety, including, without limitation, those relating to emissions, discharges, releases or threatened releases of any waste, pollutant, chemical, hazardous material, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum–derived substance or waste, or any constituent of any such pollutant material, substance or waste, into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any waste, pollutant, chemical, hazardous material, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum–derived substance or waste.

“Equity Interests” shall mean any equity interests issued by any Person, including, without limitation, Stock (including, without limitation, common stock and preferred stock), partnership interests or limited liability company interests, any other securities convertible into, or exercisable for, any of the foregoing or other securities of such Person, and options and warrants or other rights to acquire any of the foregoing.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

“ERISA Affiliate” shall mean any Person which is from time to time a member of a controlled group or a group under common control with any Loan Party within the meaning of Sections 414(b), 414(c), 414(m) or 414(o) of the Code or Section 4001(a)(14) of ERISA.

“Euros” shall mean the single currency of the European Union as constituted by the Treaty on the European Union.

“Eurocurrency Interest Determination Date” shall mean the date as of which LIBOR is determined, which shall be two Business Days prior to the commencement of a Eurocurrency Interest Period.

“Eurocurrency Interest Period” shall mean, with respect to each Eurocurrency Loan, the interest period applicable pursuant to Section 3.9(a) hereof.

“Eurocurrency Loan” shall mean a Loan during any period that it bears interest determined by reference to LIBOR.

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“European Acquisition Entity” shall mean a Foreign Portfolio Entity which has acquired Assets that originated in Europe.

“Event of Default” shall mean each of the Events of Default defined in Section 9.

“Exchange Act” — Section 9.15.

“Exchange Rate” shall mean with respect to Euros on a particular date, the rate at which Euros may be exchanged into Dollars in London on a spot basis, as set forth on the display page of the Reuters System applicable to Euros two Business Days prior to such date as reasonably determined by Agent.  In the event that such rate does not appear on any Reuters display page, the Exchange Rate with respect to Euros shall be determined by reference to such other publicly available service for displaying exchange rates as may be agreed upon by Agent and Borrower or, in the absence of such agreement, such Exchange Rate shall instead be determined by reference to Agent’s spot rate of exchange quoted to prime banks in London in the London interbank market where its foreign currency exchange operations in respect to Euros are then being conducted, at or about noon, local time, two Business Days prior to such date for the purchase of Dollars with Euros, for delivery on a spot basis; provided, however, that if at the time of such determination, for any reason, no such rate is being quoted and no other methods for determining the Exchange Rate can be determined as set forth above, Agent may use any reasonable method it deems applicable to determine such rate, and such determination shall be conclusive absent manifest error.

“Excluded Entities” shall mean each Person listed on Schedule I—(EE).

“Excluded Notes” shall mean those notes listed on Schedule I—(EN).

“Execution Date” shall mean the date on which all parties to this Agreement shall have signed a copy this Agreement (whether the same or different copies) and shall have delivered the same to Agent.

“Executive Officer” shall mean the President of Borrower, the CFO of Borrower or any Senior Vice President of a Borrower.

“Existing Credit Agreements” — Recitals.

“FC Capital” shall mean FC Capital Corp., a New York corporation.

“FC Commercial” shall mean FirstCity Commercial Corporation, a Texas corporation.

“FC Mexico” shall mean FirstCity Mexico, Inc., a Texas corporation.

“FC Percentage” (x) with respect to any Portfolio Entity or any other Person shall mean the percentage of outstanding shares of stock, limited liability company interests or partnership interests (or, in the case of a non-US entity, similar equity interests) of such Portfolio Entity or Person owned directly or indirectly by FLBG or FC Servicing, (y) with respect to any Asset Pool or any Asset owned by an Portfolio Entity, the FC Percentage with respect to such Portfolio

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Entity, and (z) with respect to any Asset Pool or any Asset owned by any REO Affiliate, the FC Percentage of the Portfolio Entity which is the parent of the REO Affiliate.

“FC Holdings Real Property Financing Loans” shall mean the FCS Lancaster Loan.

“FC Servicing” shall mean FirstCity Servicing, Inc., a Texas corporation.

“FCFC” — Recitals.

“FCI Distribution Account” shall mean account number FR76 3000 4008 1800 0121 9939 227 maintained by FCI at BNP Paribas for deposit of Portfolio Entity Proceeds of European Acquisition Entities and any distributions from MCS.

“FCM” shall mean FirstCity Mexico, S.A. de C.V.

“FCS Lancaster Loan” shall mean that certain loan in an original principal amount not in excess of $2,200,000.00 made by FC Holdings to FCS Lancaster, Ltd. on or about December 29, 2005.

“Fee Agreements” shall mean any partnership agreement, management agreement, consulting agreement, or other agreement pursuant to which Borrower, any Primary Obligor or any Related Entity is to be paid fees, distributions, allocations, expense reimbursements, consideration, salary or other compensation in consideration for providing management, personnel or services, in any form whatsoever, from any Affiliate or from any other Person.  Services to be rendered under Fee Agreements may include, but not be limited to consulting, collecting revenues, paying operating expenses not paid directly by others, and providing clerical and bookkeeping services.

“FH Partners” — Recitals.

“FH Partners Credit Agreement” — Recitals.

“Financial Statements” shall mean, with respect to any Person, the statement of financial position (balance sheet) and the statement of earnings, cash flow, and stockholders’ (or partners’ or members) equity of such Person.

“First B” shall mean First B Realty L.P., a Texas limited partnership.

“First X” shall mean First X Realty L.P., a Texas limited partnership.

“Fiscal Year” shall mean each January 1 to December 31 period.  “Fiscal Year” followed by a year means the Fiscal Year with its Fiscal Year–End in such calendar year.

“FLBG” — Introductory paragraph.

“Foreign Portfolio Entity” shall mean a Portfolio Entity domiciled in or with a principal place of business in a country other than the United States or which has acquired Assets located outside of the United States.

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“GAAP” shall mean generally accepted accounting principles (as promulgated by the Financial Accounting Standards Board or any successor entity) in the United States provided, that when with respect to a Person which is not a US Person, GAAP shall mean the equivalent in such Person’s jurisdiction of organization.

“Government Authority” shall mean any nation or government, any state or political subdivision thereof, any agency, authority, regulatory body, bureau, central bank, commission, department or instrumentality of any of the foregoing or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

“Guarantor” shall mean each Primary Obligor and any other Person which is a guarantor under any Guaranty.  “Guarantor” shall not include any Non-Covered Entity.

“Guaranty” shall mean any one or more of the guaranties delivered pursuant to Section 6 and each other guaranty agreement delivered in respect of the Obligations, as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified.

“Guaranty Equivalent” shall mean any agreement, document or instrument pursuant to which a Person directly or indirectly guarantees, becomes surety for, endorses, assumes, agrees to indemnify the obligee of any other Person against, or otherwise agrees, becomes or remains liable (contingently or otherwise) for, such obligation, other than (i) by endorsements of instruments in the ordinary course of business or (ii) indemnification of sellers of assets related to breaches of confidential agreements and obligations related to performance of purchase and sale agreements in the conduct of the Asset acquisition business.  Without limitation, a Guaranty Equivalent shall be deemed to exist if a Person agrees, becomes or remains liable (contingently or otherwise), directly or indirectly: (i) to purchase or assume, or to supply funds for the payment, purchase or satisfaction of, an obligation; (ii) to make any loan, advance, capital contribution or other investment in, or a purchase or lease of any property or services from, a Person; (iii) to maintain the solvency of such Person; (iv) to enable such Person to meet any other financial condition; (v) to enable such Person to satisfy any obligation or to make any payment; (vi) to assure the holder of an obligation against loss; (vii) to purchase or lease property or services from such Person regardless of the non–delivery of or failure to furnish of such property or services; or (viii) in respect of any other transaction the effect of which is to assure the payment or performance (or payment of damages or other remedy in the event of nonpayment or nonperformance) of any obligation.

“Harbor Debtors” shall mean, collectively, (i) Harbor Financial Mortgage Corp., (ii) NAF, Inc. (f/k/a New America Financial, Inc.), (iii) Hamilton Financial Services Corp., (iv) Community National Mortgage Corp., (v) CalCap, Inc. and (vi) Harbor Financial Group, Inc, and any Subsidiary of any such Person.

“Immaterial Entity” shall mean each Person listed on Schedule 10.37; provided, that if any such Person engages in business or has assets with an aggregate fair market value of $100,000 or more, such Person shall cease to constitute an Immaterial Entity.  “Immaterial Entity” shall not include any Non-Covered Entity.

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“Incidental Equity Interests” shall mean Equity Interests in a Person acquired by a Portfolio Entity or Related Entity in settlement of collection of an asset in the portfolio of such Portfolio Entity or Related Entity if such Equity Interests so acquired (i) constitute Equity Interests in a Person engaged in a business unrelated to the business of the Consolidated Group and such Person is not Borrower or an Affiliate of Borrower or a Person in which or in an Affiliate of which any other Equity Interest is owned by Borrower, any Primary Obligor or any Related Entity at the time such Equity Interest is so acquired; and (ii) have a value of less than $500,000.

“Indebtedness” shall mean, with respect to any Person (without duplication): (i) all obligations on account of money borrowed by, or credit extended to or on behalf of, or for or on account of deposits with or advances to, such Person; (ii) all obligations of such Person evidenced by bonds, debentures,  notes or similar instruments; (iii) all obligations of such Person for the deferred purchase price of property or services other than trade payables incurred in the ordinary course of business and on terms customary in the trade; (iv) all obligations secured by a Lien on property owned by such Person (whether or not assumed); and all obligations of such Person under Capitalized Leases (without regard to any limitation of the rights and remedies of the holder of such Lien or the lessor under such Capitalized Lease to repossession or sale of such property); (v) the face amount of all letters of credit issued for the account of such Person and, without duplication, the unreimbursed amount of all drafts drawn thereunder, and all other obligations of such Person associated with such letters of credit or draws thereon; (vi) all obligations of such Person in respect of acceptances or similar obligations issued for the account of such Person; (vii) all obligations of such Person under a project financing or similar arrangement; (viii) all obligations of such Person under any interest rate or currency protection agreement, interest rate or currency future, interest rate or currency option, interest rate or currency swap or cap or other interest rate or currency hedge agreement; and (ix) all obligations and liabilities with respect to unfunded vested benefits under any “employee benefit plan” or with respect to withdrawal liabilities incurred under ERISA by Borrower or any ERISA Affiliate to a “multiemployer plan”, as such terms are defined under the Employee Retirement Income Security Act of 1974.

“Indebtedness Instrument” shall mean any note, mortgage, indenture, chattel mortgage, deed of trust, loan agreement, hypothecation agreement, Guaranty Equivalent, pledge agreement, security agreement, financing statement or other document, instrument or agreement evidencing or securing the payment of or otherwise relating to the borrowing of monies.  Indebtedness Instruments shall include, but not be limited to the Loan Documents.

“Indemnified Party” — Section 12.3(c).

“IRS” shall mean the Internal Revenue Service of the United States.

“Issuer” shall mean the Bank of Scotland in its capacity as a Lender hereunder and not in its capacity as Agent.  References to the Lenders in this Agreement and the other Loan Documents (when used to refer to Bank of Scotland) shall (without duplication) include such Lender as Issuer.

“ITSA Agreement” — Section 6.16.

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“Key Employee” shall mean James Sartain, James Holmes and James Moore, or any Person who the Lenders may hereafter approve as a replacement for any such Person or prior replacement from time to time as Key Employees; at no time shall there be more than three (3) Key Employees.

“Latin American Acquisition Entity” shall mean a Foreign Portfolio Entity which has acquired Assets that originated in a Latin American country.

“LC Obligations” shall mean the aggregate amount (without duplication) of all LC Outstandings.

“LC Outstandings” shall mean the aggregate Stated Amount (as reduced from time to time) of all Letters of Credit issued hereunder and outstanding at any point in time.

“Leak-Through Allowance” — Section 5.3(a)(vi).

“Legal Requirements” shall mean, with respect to any Person, all laws, common law, statutes, rules and regulations of any Government Authority to which such Person or any of its assets is subject or any judgment, decree, franchise, order or permit of any Government Authority applicable to such Person or any of its assets.

“Lender Assignee” — Section 12.4(a).

“Lenders” — introductory paragraph.

“Letter of Credit” shall mean a letter of credit issued pursuant to Section 2A.1(a).

“Letter of Credit Fee”  — Section 2A.3(a).

“LIBOR” shall mean, for each Eurocurrency Interest Period, (x) the per annum rate of interest at which U.S. Dollar or Euro deposits in the amount of the outstanding principal balance of the Loan are or would be offered for such Eurocurrency Interest Period in the London interbank market at 11:00 A.M. London time two Business Days prior to the start of such Eurocurrency Interest Period as published by the British Bankers’ Association as the “Interest Settlement Rate” for such period, divided by (y) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including without limitation any marginal, emergency, supplemental, special or other reserves required by applicable law) applicable to any member bank of the Federal Reserve System in the United States in respect of Eurocurrency funding or liabilities.

“Lien” shall mean any mortgage, deed of trust, security deed, pledge, security interest, encumbrance, lien or other charge of any kind or any other agreement or arrangement having the effect of conferring security (including any agreement to give any of the foregoing, any assignment or lease in the nature thereof, and any conditional sale or other title retention agreement), any lien arising by operation of law, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction (or any similar or  comparable law of any jurisdiction that has not enacted the Uniform Commercial Code).

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“ Limited Guaranty” shall mean the Limited Guaranty Agreement dated the Closing Date executed by FCFC in favor of the Lenders.

“Limited Guaranty Agreement” shall mean that certain Limited Guaranty Agreement, made of the date hereof, by FCFC in favor of Agent.

“Loan Commitment” shall mean as to each Lender, the amount set forth opposite its name on Schedule 2.1 under the heading “Loan Commitment” as such amount may be modified by the provisions of any Transfer Supplement from time to time entered into and as the same may from time to time be reduced or terminated pursuant to Section 2.8(b) , Section 9 or any other Section of the Agreement.

“Loan Documents” shall mean, individually and collectively, this Agreement, the Notes, the Letters of Credit, the Guaranties, the Pledge Agreements, the Security Agreements, the other Security Documents and all other instruments and agreements heretofore or from time to time hereafter executed by or on behalf of Borrowers, any Primary Obligor, any Related Entity or any other Loan Party in connection herewith or therewith, in each case as amended, extended, restated, supplemented or otherwise modified from time to time.  Without limiting the generality of the foregoing, each amendment to (or constituting part of) this Agreement or any other Loan Document and each instrument and agreement (including, without limitation, consents or waivers, but excluding any amendment, consent or waiver executed prior to the Effective Date) executed in connection with any Loan Document shall be deemed to be a Loan Document for all purposes of the Agreement and the other Loan Documents.

“Loan Party” shall mean, individually and collectively, Borrowers, each Primary Obligor and each other Person, which has executed any Security Document as a pledgor or grantor of collateral thereunder.  “Loan Party” shall not include any Non-Covered Entity.

“Loan(s)” — Section 2.1(a).

“Loans Outstandings” as of any particular date shall mean the aggregate outstanding principal amount of Loans as of such date in Dollars, after converting all Loans outstanding in Euros to the Dollar Equivalent, based on the Exchange Rate as determined on the immediately preceding Reset Date.

“Majority Lenders” as of a particular date shall mean the holders of at least 51% of the aggregate unpaid principal amount of all Loans at the particular time outstanding.

“Management Letter” shall mean any correspondence or report submitted by the Auditors to a Loan Party’s chief executive officer, its Board of Directors or any committee thereof containing comments and suggestions concerning a Loan Party’s accounting procedures and systems based upon the work done by the Auditors during their annual or other audit.

“Material Adverse Change” shall mean a material adverse change in (i) the business, properties, operations, prospects or condition (financial or otherwise) of Borrower, the Primary Obligors, Portfolio Entities and the Related Entities, taken as a whole or (ii)  the ability of Borrower or any other Loan Party to perform, or of Agent to enforce, any of the Obligations.

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“Material Adverse Effect” shall mean an effect that would result in a Material Adverse Change.

“Material Portfolio Entity” shall mean each Portfolio Entity, each Person listed on Schedule I—(MPE) and each other Portfolio Entity (other than a Foreign Portfolio Entity) with a Net Present Equity Value of $5,000,000 or more.  Each such  Person, which at any time constitutes a Material Portfolio Entity shall continue to constitute a Material Portfolio Entity until the time (if any) when Borrower sends to Agent written notice (a “Redesignation Notice”) executed by an Executive Officer of Borrower certifying, as to such Person that the Net Present Equity Value of such Person (the “Subject MPE”) is below $5,000,000 and has been below $5,000,000 for the preceding period of 90 consecutive days or more, and requesting that such Subject MPE no longer constitute a Material Portfolio Entity.   Provided that Borrower provides such additional information, if any, that Agent may request with respect to such Subject MPE and that Agent has not given Borrower notice that it disputes such redesignation of such Subject MPE  within 30 days after receiving such Redesignation Notice or, if later, within 30 days after Agent received additional information (if any) requested by it with respect to such requested redesignation, the Subject MPE shall cease to constitute a Material Portfolio Entity (until, the time, if any, that such Subject MPE  again satisfies the criteria applicable to Material Portfolio Entities).

“Maturity Date” shall mean June 25, 2013.

“MCS” shall mean MCS et Associes S.A.

“Minn Servicing” shall mean FirstCity Serving of Minnesota, Inc.

“Multiemployer Plan” shall mean any employee benefit plan which is a “multiemployer plan” within the meaning of Section 3(37) of ERISA and to which any Loan Party or any ERISA Affiliate of either Borrower contributes or has been obligated to contribute.

“Multiparty Pledge Agreement “ — shall mean that certain Pledge Agreement, dated as of the date hereof, by and between FC Europe, FC International, FC Mexico, FLBG, FLBG Holdings Investment LP, FLBG Holdings GP Corp., FLBG Holdings Corp. and Collateral Agent.

“Net Collections” with respect to a Portfolio Entity for any applicable period shall mean the gross aggregate amount received during such period by the Portfolio Entity on account of the Assets of the Portfolio Entity (including, in addition, amounts received by any REO Affiliate of such Portfolio Entity) or collateral therefor, and including amounts received on account of such Assets prior to the commencement of such period which were paid to or for the benefit of such Portfolio Entity during such period, reduced by (a) amounts which were paid directly to the Permitted Portfolio Company Creditor of such Portfolio Entity under an Approved Portfolio Leverage Arrangement or amounts which were remitted to such Creditor, in either case pursuant to the requirements of such Approved Portfolio Leverage Arrangement, which, in any such case, have not been released by such Creditor to (or for the benefit of) such Portfolio Entity (and/or any REO Affiliate thereof), (b) servicing fees, custodial fees and lockbox bank fees related to such Assets paid by such Portfolio Entity during such period, (c) escrow payments or deposits

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made by any obligor related to an Asset, (d) reasonable accounting and legal fees paid by the Portfolio Entity related to the operation of the Portfolio Entity, and (e) Portfolio Protection Expenses related to the Assets of the Portfolio Entity or its related REO Affiliate.

“Net Present Equity Value” shall mean, with respect to any Person, the amount determined by multiplying (x) the FC Percentage in respect of such Person and (y) the amount by which (A) the Net Present Value of the Assets of such Person exceeds (B) the sum of (i) outstanding Indebtedness of such Person under any Approved Portfolio Leverage Arrangements and (ii) indebtedness for money borrowed by, or for any monetary judgment rendered against, such Person; in the case of the determination of the Net Present Equity Value of an REO Affiliate the outstanding Indebtedness of the REO Owner under any Approved Portfolio Leverage Arrangements shall be allocated proportionately between the REO Affiliate and the REO Owner.

“Net Present Value” as to any Asset or Asset Pool, the net present value of all reasonably projected future collections from such Asset(s) reduced by reasonable and necessary collection expenses and discounted using the “ASR NPV” discount rate assignments utilized by the Portfolio Entity in making such determinations for each Asset as set forth on Exhibit F to the Agreement, as adjusted from time to time with the approval of Agent; all of which determinations must be reasonably satisfactory to Agent.

“Non-Covered Entity” shall mean FC Investment Holdings Corporation, FC Diversified Holdings LLC, FC Highway 6 Holdings LLC, FC Imperial Holdings LLC, VFC Partners 4 LLC, VFC Partners 5 LLC, FC Capital Corp. or any of their subsidiaries or other entities in which such persons own any equity interest.

“Non-Default Voluntary Custodial Arrangement” shall mean an arrangement to perfect a lien in favor of Agent or the holder of a different Permitted Lien, in each case, on certain specified Assets of a Person entered into voluntarily by a Portfolio Entity or Related Entity at a time when no Default or Event of Default has occurred and is continuing.

“Notes” — Section 2.2.

“Notice of Conversion” — Section 3.10

“Obligations” shall mean (x) with respect to each Loan Party other than Borrower, all obligations of such Loan Party with respect to the repayment or performance of any obligations (monetary or otherwise) of Borrower arising under or in connection with this Agreement, the Notes or any other Loan Document, and (y) with respect to Borrower, all obligations of Borrower with respect to the repayment or performance of obligations (monetary or otherwise) arising under or in connection with this Agreement, Letters of Credit, the Notes or any other Loan Document.

“Other Indebtedness Instrument Unmatured Default” — Section 7.1(f).

“Other Laws” — Section 3.4.

“Overhead Allowance” — Section 5.6(a).

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“Parent” shall mean any Person now or at any time hereafter owning or controlling (alone or with Borrower, any Subsidiary and/or any other Person) at least a majority of the issued and outstanding Stock or other ownership interest of Borrower or any Subsidiary.  For purposes of this definition, “control” shall have the same meaning ascribed to such term in the definition of “Affiliate”.  Notwithstanding the forgoing, no Person shall be a Parent which is not a Parent of Borrower or a 51% or more owned subsidiary, directly or indirectly, of Borrower.  “Parent” shall not include any Non-Covered Entity.

“Past–Due Rate” — Section 3.3.

“Payment Date” — Section 5.3.

“PBGC” shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA.

“Pension Plan” shall mean any employee pension benefit plan subject to Title IV of ERISA and maintained by any Loan Party or any ERISA Affiliate of any Loan Party or any such plan to which any Loan Party or any ERISA Affiliate is or has been required to contribute on behalf of any of its employees, other than a Multiemployer Plan.

“Permitted Liens” shall mean (i) any liens created pursuant to the Loan Documents in favor of Agent for the benefit of Lenders and Agent to secure the Obligations; (ii)  liens for Charges which are not yet due and payable, or claims and unfunded liabilities under ERISA not yet due and payable or which are being contested in good faith by appropriate proceedings diligently pursued; (iii) liens arising in connection with worker’s compensation, unemployment insurance, old age pensions and social security benefits which are not overdue or are being contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest any proceedings commenced for the enforcement of such lien shall have been duly suspended and such provision for the payment of such lien has been made on the books of Borrower (or the applicable Affiliate) as may be required by GAAP; (iv) liens incurred in the ordinary course of business to secure the performance of statutory obligations arising in connection with progress payments or advance payments due under contracts with the United States Government or any agency thereof entered into in the ordinary course of business; (v) any liens securing Indebtedness of Borrower (or any Affiliate) to any Persons in an amount not greater than $250,000 for each such Person, provided the aggregate amount of Indebtedness secured by all such liens shall not exceed $500,000; (vi) Charges relating to Assets of First B and First X; (vii) as to any Affiliate, other than Borrower, a Primary Obligor or a Portfolio Entity, purchase money liens securing permitted indebtedness incurred in connection with the acquisition of Assets and other indebtedness incurred under the credit agreement under which such permitted indebtedness to acquire such Assets was incurred so long as such liens encumber only the Assets acquired, (viii) as to any Affiliate, other than Borrower or a Primary Obligor or a Portfolio Entity, liens relating to permitted Indebtedness incurred in connection with the warehousing of Assets or the securitization of Assets, so long as such liens encumber only the Assets warehoused or securitized; (ix) those liens disclosed on Schedule (PL); (x) liens on Assets of a Portfolio Entity in favor of the Person providing financing under an Approved Portfolio Leverage Arrangement in respect of the acquisition of Assets acquired pursuant to such Approved Portfolio Leverage Arrangement to the extent such liens are required by, and secure

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only obligations under, such Approved Portfolio Leverage Arrangement; and (xi) liens on real property of a Portfolio Entity or an REO Affiliate in favor of a Person providing financing of development expenses related to such real property which is permitted under Section 8.3(x).

“Permitted Portfolio Company Creditor” shall mean those creditors of a Portfolio Entity which have provided loans pursuant to Approved Portfolio Leveraged Arrangement.

“Permitted Restrictions” on the payment of dividends by a Person shall mean provisions (i) of an Approved Portfolio Leverage Arrangement, or (ii) of a loan agreement, as in effect when first entered into, to which such Person is a party as borrower which prohibit such Person from paying dividends for either of the following reasons:

(x)           the funds from being distributed are required to satisfy a leverage or required reserve amount covenant (but only if such covenant would not reasonably be expected to significantly impair such Person’s ability to pay dividends if anticipated cash flows are received as and when anticipated and in approximately the amounts anticipated); and

(y)           such dividends are restricted when there exists an event of default of a customary type to be found in such agreements and that also permits the relevant lender to accelerate the maturity of indebtedness outstanding under such agreement.

“Permitted Shareholder Agreement” shall mean a Shareholder Agreement with terms permitted by Exhibit E.

“Permitted Shareholder Arrangements” shall mean arrangements which would arise from a Permitted Shareholder Agreement.

“Person” shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, a trust, an unincorporated association, a joint venture or other entity or a government or an agency or political subdivision thereof.

“Plan” shall mean any “employee benefit plan” (within the meaning of Section 3(3) of ERISA) maintained by any Loan Party or any ERISA Affiliate or any such plan to which any Loan Party or any ERISA Affiliate is or has been required to contribute on behalf of any of its employees, other than a Multiemployer Plan.

“Pledge Agreement” means each of (or, as the context requires, any of) the Borrower Pledge Agreements, Multiparty Pledge Agreement, Collateral Assignment of Contract and any other pledge agreement made for the benefit of the Lenders by the Borrowers or the Affiliates.

“Pledged Entity” shall mean any Person any Equity Interest in which has been pledged to Agent to secure the Obligations.  “Pledged Entity” shall not include any Non-Covered Entity.

“Pledged Notes” shall mean those certain promissory notes listed on Schedule I—(PN) and any other promissory notes which have been delivered to Agent and in which the Collateral Agent holds a perfected security interest of the first priority pursuant to a Pledge Agreement to which the Collateral Agent is party.

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“Portfolio Entity” shall mean any entity (other than an REO Affiliate or an Immaterial Entity) in which Borrower or a Primary Obligor is directly or indirectly an equity owner and which was formed for the purpose of acquiring Asset Pools, including FHP, and shall also include Bosque Leasing, L.P. (which is owned by Bosque Asset Corp. and Bosque GP Corp.).  “Portfolio Entity” shall not include any Non-Covered Entity.

“Portfolio Entity—50%” shall mean any Portfolio Entity of which Borrower or any Subsidiary directly or indirectly owns exactly 50% of the voting interests or any class of other Equity Interests of such Portfolio Entity.  “Portfolio Entity-50%” shall not include any Non-Covered Entity.

“Portfolio Entity Proceeds” for any Portfolio Entity in respect of any Payment Date shall mean the sum of (I) the FC Percentage of the Net Collections, plus (II) any proceeds from a sale or transfer of any Equity Interests issued by such Portfolio Entity to FC Commercial or other Wholly Owned Subsidiary, as applicable, plus (III) the FC Percentage of any proceeds of a sale or transfer of any Equity Interests issued by any REO Affiliate related to such Portfolio Entity; (it being understood that any reference in this definition to any sale or transfer of Equity Interests issued by any Portfolio Entity or REO Affiliate shall not be construed to affect or modify any prohibition thereof or requirement for the obtaining of any consent relating thereto set forth elsewhere in this Agreement).

“Portfolio Protection Expense Report” — Section 7.2(d).

“Portfolio Protection Expenses” with respect to a Portfolio Entity shall mean expenses or other amounts which (w) such Portfolio Entity has reasonably determined are necessary to advance to one of its REO Affiliates for reasonable and necessary expenses to preserve or protect real property owned by such REO Affiliate, or (x) constitute reasonable and customary, necessary leasing commissions, reasonable and necessary tenant improvement costs paid by such Portfolio Entity or REO Affiliate pursuant to a written lease or capital improvements to such property required in order for the property to be so leased, or (y) such Portfolio Entity has reasonably determined are necessary to protect other Assets securing indebtedness owed to such Portfolio Entity, or (z) constitute obligor funding obligations, such expenses or other amounts to constitute Portfolio Protection Expenses when amounts therefor are retained by such Portfolio Entity or REO Affiliate or, if earlier, when such expenses or other amounts are paid.

“Primary Obligor” shall mean any of (i) FC International; (ii) FC Mexico; (iii) FC Europe; and (iv) any other Guarantor and Primary Obligors shall mean all of the foregoing collectively.  “Primary Obligor” shall not include any Non-Covered Entity.

“Purchasing Lenders” — Section 12.4(c).

“Rate of Borrowing” — Section 3.5.

“Records” shall mean all books, records, computer records, computer software, ledger cards, programs and other computer materials, customer and supplier lists, invoices, orders and other property and general intangibles at any time evidencing or relating to Assets.

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“Recoveries” shall mean any funds, or substitution of receipts or collateral, received by the Lenders or Agent (a) from the sale, collection or other disposition of Collateral pursuant to the Security Documents, or (b) from any distribution to any of the Lenders or Agent, or abandonment to any of them, or substitute Liens or payment given to any of them pursuant to events or proceedings of the nature referred to in Section 9.8 of the Agreement, or otherwise, which distribution or abandonment pertains to the Collateral.

“Regulatory Change” means, relative to any Lender, Collateral Agent or Agent, any change after the Effective Date in any (or the adoption after the Effective Date of any new):

(a)           United States Federal, state or local law or foreign law applicable to Agent, Collateral Agent or Lender; or

(b)           regulation, interpretation, directive, or request (whether or not having the force of law) applying to Agent or any Lender of any Government Authority charged with the interpretation or administration of any law referred to in clause (a) or of any fiscal, monetary, central bank or other authority having jurisdiction over Agent, Collateral Agent or Lender.

“Reimbursement Obligation” Section 2A.4(g).

“Related Entity” shall mean each entity identified on Schedule  I—(RE), as well as, subject to the final sentence of this definition, any other entity, other than a Primary Obligor, Portfolio Entity, or Immaterial Entity, any Equity Interest of which is owned by Borrower, any Primary Obligor, any Portfolio Entity, any Immaterial Entity or any other Related Entity. Notwithstanding the foregoing, no Immaterial Entity or any Harbor Debtor shall constitute a Related Entity.  “Related Entity” shall not include any Non-Covered Entity.

“Release” — Section 6.15.

“REO Affiliate” shall mean a Person, other than Borrower, a Primary Obligor or a Material Portfolio Entity, which is a corporation, limited liability company or partnership 100% of the Equity Interests in which are owned by a Portfolio Entity (the “REO Owner”) (or, in the case of such an entity which is a limited partnership, 100% of the limited partnership interest of which is owned by the REO Owner and 100% of the interest in the general partner is owned by the REO Owner), which Person has been established solely to acquire, from the REO Owner or a seller from which the Portfolio Entity is acquiring other Assets, title to (and owns no Assets other than) parcels of real property (or distressed notes secured by real property for purposes of obtaining title to real property securing such loans) in exchange for, with respect to each such parcel, a promissory note in a principal amount no less than 96% of the value (as reasonably determined by the REO Owner and the REO Affiliate) of the property; provided  that no Person shall constitute or continue to constitute an REO Affiliate if (A) such Person acquires property from any Person other than (x) the REO Owner or a Person from whom the REO Owner is acquiring other Assets, or (y) in the case where it has acquired a note from the REO Owner solely for purposes of acquiring title to the real property securing such note, the obligor of such note; or (B) engages in any business other than business incidental to owning and selling the parcels of real property so acquired by such REO Affiliate.

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“REO Excess Value Adjustment” shall mean the amount, if any, by which the Net Present Equity Value of all REO Affiliates exceeds 25% of the Aggregate Net Present Equity Value.

“REO Post—25% Time” shall mean any time on or after the Net Present Equity Value of all REO Affiliates exceeds 25% of the Aggregate Net Present Equity Value, until two Business Days after Borrower gives Agent written notice along with evidence satisfactory to Agent that such Net Present Equity Value of Assets of REO Affiliates no longer so exceeds 25 % of the Aggregate Net Present Equity Value.

“Reportable Event” shall mean a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder.

“Requisite Consents” — Section 6.6.

“Reset Date” — Section 2.5.

“Revolving Credit Agreement” — Recitals.

“SBA” shall mean the United States Small Business Administration or any other federal agency administering the SBA Act.

“SBA Act” shall mean the Small Business Act of 1953, as in effect from time to time.

“SBA Loans” shall mean any loans made by ABL to small businesses and partially guaranteed by SBA, all originated in accordance with the SBA Rules and Regulations and pursuant to the authorization contained in Section 7(a) of the SBA Act.

“SBA Rules and Regulations” shall mean the SBA Act, any other legislation binding on the SBA relating to financial transactions, and any loan guaranty agreement and rules and regulations promulgated from time to time under the SBA Act, and any SBA Standard Operating Procedures and Official Notices, all as from time to time in effect.

“SEC” shall mean the Securities and Exchange Commission.

“SEC Reports” — Section 10.26(c).

“Securities” shall have the meaning ascribed to that term in the Securities Act of 1934.

“Securities Laws” shall mean all applicable Federal and state securities laws and regulations promulgated pursuant thereto.

“Security Agreements” shall mean any one or more of the security agreements delivered pursuant to Section 6C and each other security agreement heretofore or from time to time hereafter delivered in respect of the Obligations, as each such agreement may be from time to time amended, extended, restated, supplemented or otherwise modified.

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“Security Documents” shall be the collective reference to (x) each of the agreements referred to in Section 6 (or on the Closing Checklist referred to therein) pursuant to which Collateral is or was granted or is or was intended to be granted, directly or indirectly, to Agent on behalf of the Lenders, (y) each agreement entered into after the Execution Date pursuant to which any collateral is or was granted or is or was intended to be granted, directly or indirectly, to Agent on behalf of the Lenders and any other Person (if any) sharing an interest in such collateral, and (z) all amendments, supplements or other modifications to such agreements or replacements thereof.  Without limiting the generality of the foregoing, each Security Agreement, each Pledge Agreement, each cash collateral agreement securing any Obligation, each depositary bank acknowledgement relating to any bank account of any Loan Party, each other agreement pursuant to which any obligations are subordinated to any of the Obligations (whether pursuant to a subordination agreement, subordination provisions in any other agreement or instrument or otherwise), each Pledged Note, and each security agreement securing the obligations under any Pledged Note shall constitute Security Documents.  However, as to a Loan Party, the term “Security Document” shall not include any such document as to which such Loan Party is released from all its obligations thereunder by Agent or the Lenders in accordance with the terms hereof or thereof.

“Servicing Restricted Funds” means funds received by FC Servicing or Minn Servicing in the ordinary course of such company’s servicing business for the account of Persons other than FC Servicing, Minn Servicing, Borrower or any other Subsidiary of Borrower.

“Senior Lender” — introductory paragraph.

“Senior Loan” — recitals.

“Senior Note” — Section 2.2.

“Shareholder Agreement” shall mean any agreement (other than a certificate of incorporation, customary by–laws, a limited liability company formation certificate or a partnership formation certificate but including resolutions of any Person owning any Equity Interests in such Person) among any holders of Equity Interests issued by Borrower, any Primary Obligor or any Related Entity relating to the management of any such Person or any of the rights or privileges of any holders of Equity Interests of any such Person.

“Stated Amount” shall mean, as to each Letter of Credit, the maximum amount payable thereunder to the beneficiary thereof upon compliance with the terms and conditions stated therein, as such amount may be reduced from time to time.

“Stock” shall mean all shares and other Equity Interests issued by a corporation, whether voting or non–voting, including but not limited to, common stock, warrants, preferred stock, convertible debentures, and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing.

“Subordinated Credit Agreement” — Recitals.

“Subordinated Lender” — Introductory paragraph.

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“Subordinated Loan” — Recitals.

“Subordinated Note” — Section 2.2.

“Subordination Agreement” shall mean the Subordination Agreement dated as of October 31, 2007 by and among BoS (USA), the Agent and FC, as amended and restated on the date hereof.

“Subsidiary” of any Person (the “First Person”) shall mean any other Person more than 50% of the indicia of equity rights (whether capital stock or otherwise) of which is at the time owned, directly or indirectly by the First Person and/or by one or more of such First Person’s Subsidiaries other than the Harbor Debtors and Immaterial Entities.  Unless otherwise indicated, references to Subsidiaries shall refer to Subsidiaries of Borrower.  “Subsidiary” shall not include any Non-Covered Entity.

“Summary Waterfall Certificate” shall mean a certificate in a form approved by Agent which sets forth summary information as to all Waterfall Certificates being delivered on or about the same day as such certificate

“Tangible Net Worth”, at any time, shall mean the total of shareholders’ equity (including capital stock (both common and preferred), additional paid–in capital and retained earnings after deducting treasury stock of a Person), less the sum of the total amount of any intangible Assets, which, for purposes of this definition, shall include, without limitation, general intangibles and, if applicable, all accounts receivable not incurred in the ordinary course of business from any Affiliate of such Person or any loans to directors or officers of any Affiliate of such Person, unamortized deferred charges and good will, all as determined in accordance with GAAP.

“Taxes” — Section 5.4.

“Termination Event” shall mean (i) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30–day notice to the PBGC under such regulations), or (ii) the withdrawal of any Loan Party or any of its ERISA Affiliates from a Pension Plan during a plan year in which it was a “substantial employer” as defined in Section 4001(a)(2) of ERISA, or (iii) the issuance of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA, or (iv) receipt by any Loan Party or any ERISA Affiliate of notice of the PBGC’s intention to terminate any Pension Plan or to have a trustee or the PBGC appointed to administer any Pension Plan or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan.

“Total Outstandings” as of a particular date shall mean the sum of (i) Loans Outstandings on such date and (ii) LC Obligations on such date.

“Transfer Supplement” — Section 12.4(c).

“Transfer” shall mean any sale, conveyance, lease or other disposition (and “Transferred”, “Transferring” and other variations thereof shall have correlative meanings).

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“UCC” — Section 10.30.

“United States”, “US” or “U.S.” shall mean the United States of America.

“Upfront Fee” — Section 4.4.

“US Person” shall mean a Person formed under the laws of the United States, any of the 50 states or the District of Columbia or any territory of the United States.

“Valuation Certificate” — Section 6.18.

“Waterfall Certificate” in respect of any Payment Date shall mean a completed made by FLBG in a form approved by Agent which sets forth information with respect to Net Collections of an Asset Pool during the preceding period to which such certificate is applicable and such other information as Agent shall require.

“Wave Litigation” shall mean FH Partners LLC v. Superior Funding, Inc., Wave Tec Pools, Inc., Nations Pool Supply, Inc., Jason B. Herring and Kimberly McCormick aka Kimberly Herring.

“Wholly-Owned Subsidiary” shall mean any Subsidiary of Borrower of which all of the outstanding shares of stock, limited liability company interests or partnership interests (as the case may be) are owned by Borrower and/or one or more wholly owned direct or indirect Subsidiaries of Borrower.  “Wholly-Owned Subsidiary” shall not include any Non-Covered Entity.

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EX-10.58

Exhibit 10.58

Execution Copy

LIMITED GUARANTY AGREEMENT

This LIMITED GUARANTY AGREEMENT (this “Agreement”) made as of June 25, 2010 by FirstCity Financial Corporation, a Delaware corporation (the “Guarantor”), in favor of Bank of Scotland Plc, acting through its New York Branch, as Agent (in such capacity, and including its successors and assigns in such capacity, the “Agent”), for the benefit of the lenders (the “Lenders”) from time to time party to the Reducing Note Facility Agreement referred to below.  Unless otherwise defined herein, capitalized terms shall have the respective meanings assigned to them in the Reducing Note Facility Agreement.

W I T N E S S E T H :

WHEREAS, FirstCity Commercial Corporation, a Texas corporation, FH Partners LLC, a Texas limited liability company (together with FirstCity Commercial Corporation, the “Borrowers”, and each individually, a “Borrower”), FLBG Corporation, a Texas corporation, Bank of Scotland Plc, acting through its New York Branch (the “Agent”), and the financial institutions party thereto (the “Lenders”) are party to the Reducing Note Facility Agreement dated as of the date hereof (the “Reducing Note Facility Agreement”);

WHEREAS, the Guarantor will derive substantial direct and indirect benefit from the execution and delivery by the Borrowers of the Reducing Note Facility Agreement; and

WHEREAS, in connection with the execution and delivery of the Reducing Note Facility Agreement, and as a condition precedent to the effectiveness thereof, the Guarantor is required to enter into this Guaranty Agreement;

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each party hereto hereby agrees as follows:

1.The Guaranty.  (a)  Subject to the limitation of Section 1(b), the Guarantor hereby unconditionally and irrevocably guarantees as primary obligor and not merely as surety the full and prompt payment when due and payable (whether upon maturity, by acceleration or otherwise) of the obligations of each of the Borrowers (including without limitation all interest which may be payable thereon prior to or during the pendency of any insolvency or similar proceeding with respect to such Borrower) with respect to payment of the indebtedness under the Reducing Note Facility Agreement as evidenced by the notes executed pursuant to the terms of the Reducing Note Facility Agreement and letters of credit under the Reducing Note Facility Agreement (the “Guarantied Obligations”).  If any or all of such Guarantied Obligations become due and payable, the Guarantor unconditionally promises to pay such indebtedness to the Agent on behalf of the Lenders, or order, on demand, together with any and all expenses which may be incurred by the Lenders or the Agent in collecting any of the indebtedness which is part of the Guarantied Obligations, subject to the terms of Section 1(b).  If the Agent or the Lenders are prevented by law from accelerating any of the indebtedness in accordance with the terms of any

agreement or instrument governing same, the Agent shall be entitled to receive hereunder from the Guarantor, upon demand therefor, the sum which would have otherwise been due had such acceleration occurred.  The word “indebtedness” is used in this Agreement in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of each of the Borrowers which are part of the Guarantied Obligations, in each case heretofore, now or hereafter made, incurred or created, whether voluntarily or involuntarily, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether or not such indebtedness is from time to time reduced, or extinguished and thereafter increased or incurred, whether such Borrower may be liable individually or jointly with others, whether or not recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, and whether or not such indebtedness may be or hereafter become otherwise unenforceable.  Without limiting the generality of the foregoing, the Guarantor acknowledges that this guaranty is a guaranty of payment, not a guaranty of collection.

(b)Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of the Guarantor hereunder and under the other Loan Documents (said maximum liability, its “Maximum Guaranteed Amount”) shall in no event exceed the lesser of (i) such amount which can be guaranteed by the Guarantor under applicable federal and state laws relating to the insolvency of debtors and (ii) 75,000,000 plus an amount equal to any losses incurred by Lenders arising from the failure of the Guarantor to pay federal income taxes as required in Section 10(q) which result in a levy or other enforcement proceeding by the United States Internal Revenue Service that reduces the cash flow from or results in a loss of Collateral or security interests or pledges securing the Guarantied Obligations (and any expenses of the Collateral Agent and Lenders related to defense of the Collateral from any such enforcement proceedings).

(c)The Guarantor agrees that the indebtedness may at any time and from time to time exceed the Maximum Guaranteed Amount without impairing this Agreement or affecting the rights and remedies of the Agent and the Lenders hereunder; provided that under no circumstance shall the liability of the Guarantor exceed the Maximum Guaranteed Amount.

(d)No payment or payments made by any Borrower, any other guarantor or any other Person or received or collected by the Agent or any Lender from any Borrower, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time in reduction of or in payment of the indebtedness shall be deemed to modify, reduce, release or otherwise affect the liability of the Guarantor hereunder which shall, notwithstanding any such payment or payments other than payments made to the Agent by the Guarantor or payments received or collected by the Agent from the Guarantor, remain liable for the indebtedness up to its Maximum Guaranteed Amount until the indebtedness is indefeasibly paid in full; provided that all such payments are applied to the Guarantied Obligations.

(e)Notwithstanding any other provision of this Agreement, the Guarantor and the Agent agree that payments made to the Guarantor, FirstCity Diversified Holdings LLC or FirstCity Servicing Corporation pursuant to Section 5.3 of the Reducing Note Facility Agreement are not in violation of this Agreement, and that no such payment shall increase the liability of Guarantor to pay the Guarantied Obligations subject to the Maximum Guaranteed

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Amount, nor shall any such payment be required to be returned, paid or delivered to the Agent for any reason.

2.Bankruptcy.  Additionally, the Guarantor unconditionally and irrevocably guarantees the payment of any and all Guarantied Obligations of each of the Borrowers, subject to the Maximum Guarantied Amount, whether or not due or payable, upon the occurrence in respect of such Borrower of any of the events specified in Section 9 of the Reducing Note Facility Agreement (including, without limitation, Section 9.8 thereof) and unconditionally promises to pay such Guarantied Obligations, subject to the Maximum Guaranteed Amount, to the Agent on behalf of the Lenders, or order, on demand, in lawful money of the United States, without setoff or counterclaim.

3.Nature of Liability.  The liability of the Guarantor hereunder is exclusive and independent of any security or other guaranty of the indebtedness of any Borrower whether executed by the Guarantor or by any other party, and the liability of the Guarantor hereunder shall not be affected or impaired by (a) any direction as to application of payment by any Borrower or by any other party, (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the indebtedness of any Borrower, (c) any payment on or in reduction of any such other guaranty or undertaking, (d) any dissolution or termination of any Borrower, or (e) any payment made to the Agent or to any or all Lenders on the indebtedness which such Agent, Lender or Lenders are required to repay to any Borrower, whether pursuant to a court order, in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding and the Guarantor waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding.

4.Independent Obligation.  (a)  The obligations of the Guarantor hereunder are independent of the obligations of any other guarantor or any Borrower, and any security for or other guarantee of the indebtedness of any Borrower, and a separate action or actions may be brought and prosecuted against the Guarantor whether or not action is brought against any other guarantor or any Borrower or any security held by the Agent and without pursuing any other remedy, and whether or not any other guarantor or any Borrower be joined in any such action or actions.  The Guarantor waives to the fullest extent permitted by law, the benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof.  Any payment by any Borrower or other circumstance which operates to toll any statute of limitations as to any Borrower shall operate to toll the statute of limitations as to the Guarantor.  The rights of the Agent and the Lenders under this Agreement will not be exhausted by any action or inaction by the Agent or the Lenders until all of the indebtedness has been indefeasibly paid in full.

(b)The liability of the Guarantor hereunder is not affected or impaired by any direction or application of payment by any Borrower or by any other party, or by any other guarantee or undertaking of any other guarantor or any other party as to the indebtedness of any Borrower, by any payment on, or in reduction of, any such other guarantee or undertaking, by the termination, revocation or release of any obligations under the Reducing Note Facility Agreement or of any other guarantor, or by any payment made to the Agent or the Lenders on the indebtedness which the Agent or the Lenders repay to any Borrower or any other guarantor or other person or entity, whether pursuant to court order, in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding or any other fact or circumstance which would otherwise excuse the obligation of a guarantor or surety, and the Guarantor waives

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any right to the deferral or modification of the Guarantor’s obligations hereunder by reason of any such proceeding, fact or circumstance.  This Agreement shall continue to be effective in accordance with its terms, or be reinstated, as the case may be, if at any time payment, or any part thereof, of or with respect to any of the indebtedness is rescinded or must otherwise be restored or returned by the Agent or a Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Borrower or any other payor thereof, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any Borrower or any other payor thereof or any substantial part of its property, or otherwise, all as though such payments had not been made.

5.Authorization.  The Guarantor authorizes the Agent and the Lenders without notice or demand, and without affecting or impairing the Guarantor’s liability hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the Guarantied Obligations of any Borrower or any part thereof, including any increase or decrease of the rate of interest thereon, (b) take and hold security from any Borrower, any guarantor or any other party for the payment of this guaranty or the indebtedness and subordinate, compromise, exchange, enforce, waive and release any such security or accept additional or substituted security, (c) apply such security and direct the order or manner of sale thereof as the Agent or Collateral Agent in its discretion may determine and (d) release, add or substitute any one or more endorsers, guarantors or other obligors.  Any modifications, renewals and extensions of the indebtedness may be made at any time by the Agent on behalf of the Lenders, and the Guarantor shall be fully liable for any such modifications, renewals or extensions.  The Agent on behalf of the Lenders may take any of the foregoing actions upon any terms and conditions as the Agent may elect, without giving notice to the Guarantor or obtaining the consent of the Guarantor and without affecting the liability of the Guarantor to the Agent or the Lenders.

6.Reliance.  It is not necessary for the Lenders or the Agent to inquire into the capacity or powers of any Borrower or the officers, directors, partners or agents acting or purporting to act on its behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder.  The Guarantor assumes full responsibility for keeping fully informed of the financial condition of each Borrower and all other circumstances affecting such Borrower’s ability to perform its obligations to the Agent and the Lenders, and agrees that neither the Agent nor any Lender will have any duty to report to the Guarantor any information which the Agent or any Lender receives about any Borrower’s financial condition or any circumstances bearing on its ability to perform, and expressly waives any right to receive such information and any defense based upon failure to receive such information.

7.Subordination.  Notwithstanding the indebtedness of the Borrowers as set forth in the Reducing Note Facility Agreement, any indebtedness of any Borrower now or hereafter held by the Guarantor, whether in connection with this Agreement or whether completely independent of this Agreement and the indebtedness, is hereby subordinated to the indebtedness of the Borrowers to the Lenders; and such indebtedness of any Borrower to the Guarantor shall be collected, enforced and received by the Guarantor as trustee for the Lenders and be paid over to the Lenders on account of the indebtedness of such Borrower to the Lenders, but without affecting or impairing in any manner the liability of the Guarantor under the other provisions of this Agreement.  The Guarantor further agrees that it will not assert any claim against any

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Borrower until all indebtedness to the Agent and the Lenders has been completely satisfied.  Prior to the transfer by the Guarantor of any note or negotiable instrument evidencing any indebtedness of any Borrower to the Guarantor, the Guarantor shall mark such note or negotiable instrument with a legend that the same is subject to this subordination.

8.Waivers of Defenses.  The Guarantor waives, except as otherwise provided in this Agreement:

(a)all statutes of limitation as to the indebtedness, this Agreement or otherwise as a defense to any action brought against the Guarantor by the Agent or any Lender, to the fullest extent permitted by law;

(b)any defense based upon any legal disability of any Borrower or any discharge or limitation of the liability of any Borrower to the Agent or the Lenders, whether consensual or arising by operation of law or any bankruptcy, insolvency, or debtor-relief proceeding, or from any other cause;

(c)presentment, demand, protest and notice of any kind;

(d)any defense based upon or arising out of any defense which any Borrower may have to the payment or performance of any part of the indebtedness;

(e)any defense based upon any disbursements by the Agent or the Lenders to any Borrower pursuant to any agreements or instruments governing the indebtedness whether same be deemed an additional advance or be deemed to be paid out of any special interest or other fund accounts, as constituting unauthorized payments hereunder or amounts not guaranteed by this Agreement;

(f)all rights to participate in any security held by the Agent or the Lenders for the indebtedness;

(g)irregularity or unenforceability of any agreement or instrument representing or governing the indebtedness;

(h)any request that the Agent or a Lender be diligent or prompt in making demands hereunder or under any agreement or instrument representing or governing the indebtedness; and

(i)any other defense in law or equity (except the defense that the indebtedness has been indefeasibly paid in full) which, under applicable law, would release the obligation of a guarantor or surety, until the indebtedness has been indefeasibly paid in full.

9.Representations and Warranties.  In order to induce the Lenders to accept this Agreement the Guarantor makes the following representations, covenants and warranties, which representations, covenants and warranties shall survive the execution and delivery of this Agreement and the other documents and instruments referred to herein:

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9.1Organization.

The Guarantor is and at all times hereafter shall be a corporation, duly organized and validly existing and in good standing under the laws of the State of Delaware and qualified or licensed to do business and in good standing in all states in which the laws thereof require the Guarantor to be so qualified and/or licensed and in which the failure so to qualify could have a Material Adverse Effect, including, without limitation, the State of Texas.  Schedule 9.1(a) identifies each jurisdiction in which the Guarantor has qualified or been licensed to do business and describes the nature and current status of any such qualification or license.

9.2Entity Power.

The Guarantor has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement.

9.3Violation of Charter Documents.

The execution, delivery and/or performance by the Guarantor of this Agreement and the consummation of the transactions contemplated hereunder have been duly authorized by all necessary corporate and shareholder action and none of such execution, delivery, performance or consummation shall, by the lapse of time, the giving of notice or otherwise, constitute a violation of any Legal Requirement or a breach of any provision contained in the Charter Documents of the Guarantor, or contained in any agreement, instrument or document to which the Guarantor is now or hereafter a party or by which it or any of its Assets is or may become bound, other than agreements, instruments or documents that are immaterial to the Guarantor the breach of which could not have a Material Adverse Effect.

9.4Enforceability.

This Agreement is and will be the legal, valid and binding agreement of the Guarantor, enforceable in accordance with its terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally, and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law).

9.5Ownership.

(a)Schedule 9.5(a) sets forth all classes of stock of the Guarantor, as of December 31, 2009, the shareholders thereof (other than members of the general public), addresses of each shareholder, and number of shares owned as of such date.

(b)Schedule 9.5(b) sets forth all classes of stock and/or other Equity Interests (other than options, warrants and rights to acquire Stock or other Equity Interests) issued by each Primary Obligor, each Portfolio Entity and each Related Entity, the shareholders and other equity holders thereof, and the addresses, number of shares and/or partnership interests owned.

(c)Schedule 9.5(c) sets forth all options, warrants and other rights to acquire Stock or other Equity Interests of the Guarantor, any Primary Obligor, any Portfolio Entity, any Related Entity and any other Pledged Entity, the nature of such option, warrant or right and the

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conditions for the exercise thereof.  Lenders hereby expressly consent to the transfer, issuance or conveyance of Stock and/or other Equity Interests of the Guarantor in accordance with such options, warrants and rights; provided that the same does not result in a Change of Control.

(d)All Equity Interests of the Guarantor, each Primary Obligor, each Portfolio Entity, each Related Entity and each other Loan Party have been duly and validly issued, are fully paid and are non-assessable.

9.6Financial Warranty.

The Guarantor (i) is paying its debts as they mature, (ii) owns property which, at a fair valuation, is greater than the sum of its debt, and (iii) has capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage.

9.7Proceedings.

Except as set forth on Schedule 9.7, there are no actions or proceedings which are pending or threatened against the Guarantor which could reasonably be expected to have a Material Adverse Effect.  None of the actions or proceedings referred to on Schedule 9.7 could have a Material Adverse Effect.

9.8Adequate Licenses.

The Guarantor possesses adequate Assets, licenses, patents, copyrights, trademarks and tradenames to continue to conduct its business as previously conducted by it and as contemplated in the foreseeable future except such licenses, patents, copyrights, trademarks and trade names the failure of which to obtain could not be reasonably expected to have a Material Adverse Effect.

9.9Government Permits;  Approvals and Consents.

(a)Except for matters which could not result in a Material Adverse Effect, the Guarantor has been and is in good standing with respect to all governmental permits, certificates, consents and franchises necessary to continue to conduct its business as previously conducted prior to the date hereof to own or lease and operate its properties as now owned or leased by it.  None of said permits, certificates, consents or franchises contain any term, provision, condition or limitation more burdensome than such as are generally applicable to Persons engaged in the same or similar business as the applicable Person.

(b)The Guarantor does not require the approval, consent, waiver, order, permission, license, authorization, registration or validation of, or filing with or exemption by, any Government Authority or any other Person (including but not limited to shareholders, partners, members, equity owners, holders of Indebtedness Instruments, or any owner of any lien upon the Assets of any one or more of them or their Affiliates) for the execution and delivery of, and the consummation of the transactions contemplated by, this Agreement.

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9.10Restrictions.

(a)The Guarantor is not a party to (nor are any of its Assets otherwise subject to) any contract or agreement or restriction, judgment, decree or order that could have a Material Adverse Effect.

(b)The Guarantor is not subject to (nor are any of its Assets otherwise subject to) any Charge.

9.11Compliance with Laws.

Except for matters which could not result in a Material Adverse Effect, the Guarantor is not in violation of any applicable statute, regulation, order or ordinance of the United States of America, of any state, city, town, municipality, county or of any other jurisdiction, or of any agency thereof, including the Federal Reserve Board, in any respect.

9.12Compliance with Indebtedness Instruments.

The Guarantor is not in default under any Indebtedness Instrument or any other material agreement to which it is a party.

9.13Financials.

The Financial Statements delivered by the Guarantor to Agent fairly and accurately present the Assets, liabilities and financial conditions and results of operations of the Guarantor, and such other Persons described therein as of and for the periods ending on such dates and have been prepared in accordance with GAAP and such principles have been applied on a basis consistently followed in all material respects throughout the periods involved.

9.14Tax Returns.

The Guarantor has filed or caused to be filed all tax returns which are required to be filed, and has paid all Charges shown to be due and payable on said returns or on any assessments made against it or any of its property, and all other Charges imposed on it or any of its properties by any Governmental Authority.

9.15No Material Adverse Change.

Since December 31, 2009, no event or circumstance has occurred that had, has or could reasonably be expected to have a Material Adverse Effect.

9.16No Indebtedness.

The Guarantor (i) has no Indebtedness except for Indebtedness reflected in the most recent Financial Statements (except for any such Indebtedness (x) incurred since such most recent Financial Statements were delivered and identified on Schedule 9.15, or (y) constituting unsecured trade payables arising in the ordinary course of business since the dates reflected in the December 31, 2009 Financial Statements) or (ii) has guaranteed any indebtedness or entered into or issued any Guaranty Equivalent (other than as a result of the endorsement of any

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instrument of items of payment for deposit or collection in the ordinary course of business or as otherwise expressly permitted pursuant to the terms hereof) in respect of the obligations of any Person.

9.17Affiliates.

Schedule 9.17 attached hereto is a true, accurate and complete schedule of the Guarantor’s Affiliates, together with a description of the Guarantor’s relationship to each such Affiliate.

9.18Investment Company Act and Public Utility Holding Company Act.

Neither the Guarantor nor the issuance of this Agreement is subject to any of the provisions of the Investment Company Act of 1940, as amended.  The Guarantor is not a “holding company” as defined in the Public Utility Holding Company Act of 1935, as amended, or subject to any other federal or state statute or regulation limiting its ability to incur Indebtedness for money borrowed.

9.19SEC Filings.

The Guarantor has filed and made available to the Agent and Lenders each form, registration statement, schedule, report, proxy statement and document required to be filed by the Guarantor with the SEC since January 1, 2006 (collectively, the “SEC Reports”).  Except as set forth on Schedule 9.19, the SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Laws and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in the SEC Reports or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  Since January 1, 2006, the Guarantor has made all filings with the SEC in a timely manner (except as set forth on Schedule 9.19, each of which filing deficiencies was subsequently cured in a manner that brought the Guarantor into full compliance with law) as required by law and no event has occurred that requires an additional filing or any amendment to a prior filing, which has not been made or filed.

10.Waiver of Subrogation; Certain Covenants of Guarantors.

(a)The Guarantor hereby irrevocably waives (but only until the final indefeasible payment and satisfaction of all Guarantied Obligations due to the Agent and the Lenders) any claim or other rights which it may now have or hereafter acquire against any Borrower or any other guarantor that arise from the existence, payment, performance or enforcement of the Guarantor’s obligations under this Agreement or any other Loan Document, including (without limitation) any right of subrogation, reimbursement, exoneration, contribution, indemnification, any right to participate in any claim or remedy of the Lenders and the Agent against any Borrower or any other guarantor or any collateral which the Agent or any Lender now has or hereafter acquires, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law including (without limitation) the right to take or receive from such Borrower, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights.  If any amount shall be paid

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to the Guarantor in violation of the preceding sentence and the Guarantied Obligations shall not have been paid in full, such amount shall be deemed to have been paid to the Guarantor for the benefit of, and held in trust for the benefit of, the Lenders and the Agent and shall forthwith be paid to the Agent on behalf of the Lenders to be credited and applied upon the Guarantied Obligations, whether matured or unmatured in accordance with the terms of the Reducing Note Facility Agreement.  The Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Reducing Note Facility Agreement and that the waiver set forth in this Agreement is knowingly made in contemplation of such benefits.

(b)The Guarantor and the Agent agree that any payments made to Guarantor, FirstCity Diversified Holdings LLC and FirstCity Servicing Corporation pursuant to Section 5.3 of the Reducing Note Facility Agreement are not paid in violation of this Section 10(a) and no such payment shall be required to be returned, paid or delivered to the Agent or the Lenders for any reason.

(c)The Guarantor hereby agrees that it shall, at the end of each fiscal quarter:

(i)maintain a Tangible Net Worth equal to or greater than an amount equal to $60,000,000 for the last day of the fiscal quarter then ended.

(d)The Guarantor hereby agrees that it shall give Agent notice within forty-five (45) days after it merges with or acquires an interest in any Person.

(e)The Guarantor shall at all times cause the Consolidated Group to be comprised of the entities constituting the Consolidated Group as of the date hereof and shall permit only those mergers, dispositions or other transactions among such entities as are permitted by the Facility Agreement; provided that this provision shall not prohibit the formation of REO Affiliates.

(f)Concurrently with delivery to its stockholders, the Guarantor shall deliver to Agent copies of all financial and other information delivered by the Guarantor to such stockholders, including, without limitation, its proxy statements and annual reports to stockholders.  Within two (2) Business Days after delivery to the SEC by the Guarantor, which in all case shall be on a timely basis in accordance with the applicable document and the Securities Laws, copies of all reports and other filings filed by the Guarantor with the SEC, including, without limitation, all reports on Forms 10K, 10Q or 8K promulgated under the Securities Exchange Act of 1934, as amended, and all registration statements and amendments thereto filed under the Securities Act of 1933, as amended.

(g)The Guarantor shall notify Agent promptly after obtaining knowledge of:

(i)any event or occurrence which the Guarantor has determined could have a Material Adverse Effect.  “Material Adverse Effect” shall mean an effect that would result in a Material Adverse Change.  “Material Adverse Change” shall mean a material adverse change in the business, properties, operations, prospectus or condition (financial or otherwise) of the Guarantor;

(ii)the institution of (x) any suit or administrative proceeding which if determined adversely to the Guarantor is reasonably likely to or could reasonably be expected to

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result in a Material Adverse Effect, and (y) any other suit or administrative proceeding against the Guarantor in which the uninsured amount involved is $5,000,000 or more, such notice to be given on or prior to the end of the calendar month in which the applicable event occurs;

(iii)The Guarantor becoming subject to any Charge, restriction, judgment, decree or order which could reasonably be expected to have a Material Adverse Effect;

(iv)the commencement of any lockout, strike or walkout relating to any labor contract to which the Guarantor is a party, if the same could reasonably be expected to have a Material Adverse Effect;

(v)any event or occurrence in respect of the Guarantor which could reasonably be expected to have a Material Adverse Effect;

(vi)the occurrence of (x) a default by the Guarantor under any agreement, document or instrument to which the Guarantor is a party which could reasonably be expected to have a Material Adverse Effect, or (y) any default by the Guarantor which could reasonably be expected to materially and adversely affect the Guarantor’s ability to perform its obligations under this Agreement;

(vii)the filing of a petition by or against the Guarantor under any section or chapter of the United States Bankruptcy Code or any similar law or regulation or if the Guarantor shall make an assignment for the benefit of its creditors or if any case or proceeding is filed by or against the Guarantor for its dissolution or liquidation; and

(viii)the making of an application for the appointment of a receiver, trustee or custodian for any of the Assets of the Guarantor.

(h)Insurance.  The Guarantor, at its sole cost and expense, shall keep and maintain: (i) policies of insurance against all hazards and risks ordinarily insured against by other owners or users of properties in similar business; and (ii) public liability insurance relating to the Guarantor’s ownership and use of its Assets; provided, however, the Guarantor shall not be required to maintain the insurance referred to in clause (i) as to any Asset if the Net Present Value of the Asset is less than $100,000.

(i)Preservation of Existence.  The Guarantor will maintain and preserve its corporate existence, rights, privileges and franchises in the State of Delaware, and qualify and remain qualified to do business in, and maintain its rights, privileges and franchises in each other jurisdiction which in the opinion of its board of directors continue to be advantageous to it and shall comply in all material respects with all applicable Legal Requirements.  Without limiting the generality of the foregoing, the Guarantor agrees to qualify to do business as a foreign corporation in each jurisdiction where the nature of its business and the operations conducted by it therein require it to be so qualified.

(j)Preservation of Assets.  The Guarantor will keep its property material to the conduct of its business in good repair, working order and condition and from time to time make all needful and proper repairs, renewals, replacements, extensions, additions, betterments

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and improvements thereto, so that the business carried on by it may be conducted at all times in accordance with prudent business management.

(k)Inspection of Books and Assets.  The Guarantor shall permit Agent, Lenders and each of their respective representatives reasonable access during normal business hours to its properties and personnel, and shall disclose and make available to Agent and Lenders all books, papers and records relating to the Assets, stock ownership, properties, operations, obligations, and liabilities of the Guarantor, including, but not limited to, all books of account (including the general ledger), tax records, minute books of meetings of boards of directors (and any committees thereof) and shareholders, organizational documents, bylaws, material contracts and agreements, filings with any regulatory authority, accountants’ work papers (other than those that are the property of its independent outside auditors), litigation files, loan files, plans affecting employees, and any other business or prospects in which Lenders may have a reasonable interest in connection with the Facility Agreement and this Agreement, provided that such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations, and provided further that in the event that any of the foregoing are in the control of any third party, the Guarantor shall use its reasonable best efforts to cause such third party to provide access to such materials to Agent and Lenders who shall request the same.  In the event that the Guarantor is prohibited by law from providing any of the access referred to in the preceding sentence to Agent and Lenders, it shall use its commercially reasonable efforts to obtain waivers thereof promptly so as to permit such access.  The Guarantor shall make its directors, officers, employees and agents and authorized representatives (including counsel and independent public accountants) to confer with Agent and Lenders and their respective representatives, provided that (i) such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations and (ii) unless a Default or Event of Default exists, counsel to the Guarantor shall be permitted to be present at any meeting between the Guarantor’s independent public accountants and Agent or Lenders.

(l)Compliance with Laws.  The Guarantor shall comply with all laws, rules, regulations and governmental orders (federal, state and local), including all Environmental Laws, having applicability to it or to the business or businesses at any time conducted by it, where the failure to so comply would have, or could reasonably be expected to have, a Material Adverse Effect.

(m)Dissolution; Existence.  The Guarantor shall not wind up, liquidate or dissolve its affairs or fail to maintain its corporate, existence.

(n)Adverse Transactions.  The Guarantor shall not enter into any transaction which materially and adversely affects its ability to perform its obligations under this Agreement.

(o)Accounting Changes.  The Guarantor will not make any significant change in (x) accounting treatment and reporting practices except as permitted or required by GAAP or Legal Requirements or (y) unless Agent consents thereto in writing (which consent shall not be unreasonably withheld), its Fiscal Year.

(p)Dividends.  The Guarantor will not authorize, declare, or pay any dividends or return any capital to its stockholders as such or authorize or make any other distribution, payments or delivery of property or cash to its stockholders as such, or redeem,

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retire, purchase or otherwise acquire, directly or indirectly, for a consideration any shares of any class of its capital stock now or hereafter outstanding or any options, warrants or other securities (now or hereafter outstanding) convertible into or exercisable for any equity or other securities of the Guarantor or set aside funds for any of the foregoing and the Guarantor will not permit any Subsidiary or any Portfolio Entity-50% to purchase any Equity Interests of the Guarantor, or set aside funds for any of the foregoing.

(q)Tax Returns.  The Guarantor shall timely file or caused to be filed all federal tax returns which are required to be filed, and pay all Charges shown to be due and payable on said returns or on any assessments made against it or any of its property.

11.Default.  The Agent may declare the Guarantor in default under this Agreement, and may exercise all of its rights hereunder and demand payment of the Guarantied Obligations subject to the Maximum Guaranteed Amount; if:

(a)the Guarantor fails to perform any of its obligations under, or meet any covenant of the Guarantor provided in, Section 10(c), 10(p) or 10(q) of this Agreement, or fails to perform any of its other obligations under this Agreement or meet any other covenant of the Guarantor provided for herein, which as to any such other obligation or other covenant other than a monetary payment obligation of the Guarantor could be reasonably expected to materially and adversely affect the Guarantor’s ability to perform its payment obligations under this Agreement;

(b)any Event of Default under any other Loan Document occurs and is continuing that involves a payment default by the Borrowers or that results in the acceleration of the Guarantied Obligations;

(c)any Indebtedness of the Guarantor in excess of $30,000,000 (whether evidenced by a single facility or in the aggregate by more than one facility) (i) shall be declared to be or shall become due and payable prior to the stated maturity thereof and, if a cure period is applicable thereto, such default shall not be cured within the applicable cure period, or (ii) shall not be paid as and when the same becomes due and payable, and, in either case, could be reasonably expected to materially and adversely affect the Guarantor’s ability to perform its payment obligations under this Agreement, and;

(d)the Guarantor becomes the subject of any bankruptcy, insolvency, arrangement, reorganization, moratorium, or other debtor-relief proceeding under any law, whether now existing or hereafter enacted, or upon the appointment of a receiver for, or the attachment, restraint of or making or levying of any order of court or legal process affecting, the property of such Guarantor; or

(e)any representation, warranty, statement, report or certificate made or delivered by the Guarantor or any officer, director, manager or authorized employee or agent thereof herein or in any other Loan Document or otherwise in writing by such Person in connection with any of the foregoing or in any certificate, report or other statement furnished pursuant to or in connection with any of the foregoing, shall be breached or shall prove to be untrue in any material respect, but only in the event that such breach or falsity could be reasonably expected to materially and adversely affect the Guarantor’s ability to perform its payment obligations under this Agreement; or

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(f)a Change in Control shall occur (for purposes hereof, a Change in Control shall mean the occurrence of any of the following events after the date hereof:  (i) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), is or becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly, or indirectly, of more than fifty percent (50%) of the aggregate voting power of all classes of Capital Stock of the Guarantor entitled to vote generally in an election of directors; (ii) the Guarantor is merged with or into another corporation or another corporation is merged with or into the Guarantor with the effect that immediately after such transaction the stockholders of the Guarantor immediately prior to such transaction hold less than a majority in interest of the total voting power entitled to vote in the election of directors, managers or trustees of the entity surviving the transaction; or (iii) to the extent not otherwise then constituting an Event of Default, all or substantially all of the Assets of the Guarantor are sold to any person or persons (as an entirety in one transaction or a series of related transactions) (for purposes hereof, “Capital Stock” of any Person means any and all shares, interests, participations or other equivalents in the equity (however designated) of such Person and any rights (other than debt securities convertible into an equity interest), warrants or options to acquire an equity interest in such Person).

12.Right of Setoff.  In addition to all rights of setoff or lien against any moneys, securities or other property of the Guarantor given to the Agent and the Lenders by law, upon the occurrence of any default under any agreement or instrument governing any of the Indebtedness or under this Agreement, the Agent and each Lender is authorized at any time and from time to time following an Event of Default, without notice to the Guarantor or to any other person or entity, any such notice being hereby expressly waived by the Guarantor, to set-off and apply any and all deposits (general) and any other indebtedness at any time held or owing by the Agent or any Lender to or for the credit or the account of the Guarantor against and on account of the obligations of the Guarantor under this Agreement, irrespective of whether or not the Agent or such Lender shall have made any demand hereunder or any demand for payment of any Indebtedness and although said obligations, liabilities or claims, or any of them, shall be contingent or unmatured.

13.Costs and Expenses.  Guarantor agrees to pay the Agent’s and the Lenders’ reasonable and documented out-of-pocket costs and expenses, including but not limited to reasonable legal fees and disbursements, incurred in any effort to collect or enforce this Agreement, whether or not any lawsuit is filed (the “Enforcement Costs”).

14.Cumulative Remedies.  No delay or failure by the Agent or any Lender to exercise any right or remedy against, or to require performance by, any Borrower or the Guarantor or any other party shall be construed as a waiver of that right, remedy or requirement.  All remedies of the Agent and the Lenders against each Borrower and the Guarantor are cumulative.  All powers of the Agent and the Lenders to exercise any right or remedy against, or to require performance by, any Loan Party shall remain in full force and effect until specifically waived or released by an instrument in writing executed by the Agent and the Lenders.

15.Governing Law.  THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.

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16.Jurisdiction.  The Guarantor hereby agrees that ANY LEGAL ACTION OR PROCEEDING AGAINST THE GUARANTOR WITH RESPECT TO THIS AGREEMENT OR ANY OTHER AGREEMENTS OR DOCUMENTS CONTEMPLATED HEREBY OR REFERRED TO HEREIN MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AS THE AGENT MAY ELECT, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT THE GUARANTOR ACCEPTS AND CONSENTS FOR ITSELF AND IN RESPECT TO ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND AGREES THAT SUCH JURISDICTION SHALL BE EXCLUSIVE, unless waived by the Agent in writing, with respect to any action or proceeding brought by it against the Agent or any Lender and any questions relating to usury, and further consents (to the extent permitted by applicable law) to the service of process in any such action or proceeding being made upon the Guarantor by mail at the address stated alongside its name on the signature page hereof or at such other address as the Agent is notified of in writing in accordance with Section 19 hereof.  Nothing herein shall limit the right of the Agent or the Lenders to bring proceedings against the Guarantor in the courts of any other jurisdiction.  The Guarantor covenants that it is and will remain subject to service of process in the State of New York so long as any of the indebtedness is outstanding.

17.Severability.  If any one or more of the provisions contained in this Agreement or any document executed in connection herewith shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired.

18.Taxes.  All payments hereunder shall be made by the Guarantor to the Agent without setoff or counterclaim and in such amounts as may be necessary in order that all such payments received by the Agent, after withholding for or on account of any present or future taxes, levies, imposts, duties or other similar charges of whatsoever nature imposed on the amounts payable by the Guarantor hereunder by any government or any political subdivision or taxing authority thereof shall not be less than the amount required to be received by the Agent hereunder.  In addition, the Guarantor shall on demand indemnify the Agent for all income taxes on additional amounts paid pursuant to the preceding sentence.  With respect to each such deduction or withholding, the Guarantor shall promptly (and in no event later than 30 days thereafter) furnish to the Agent such certificates, receipts and other documents as may be required to establish any tax credit, exemption or reduction in rate related thereto.

19.Notices, Requests, Demands, Etc.  Except as otherwise expressly provided herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be deemed to have been duly given or made when delivered if sent by Federal Express or other similar overnight delivery service, or three Business Days after mailing (when mailed, postage prepaid, by registered or certified mail, return receipt requested) or (in the case of telex, telegraphic, telecopier or cable notice) when delivered to the telex, telegraph, telecopier or cable company, or (in the case of telex or telecopier notice sent over a telex or telecopier owned or operated by a party hereto) when sent; in each case addressed to the party entitled to receive same to the address stated alongside its name on the signature page hereto (or to such other address as any party hereto may hereafter specify to the other in writing); provided that communications with respect to a change of address shall be deemed to be effective when actually received.

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20.Amendment.  No provisions of this Agreement shall be waived, amended or supplemented except by a written instrument executed by the Agent and the Guarantor.

21.Miscellaneous.  The provisions of this Agreement will bind and benefit the successors and assigns of the Guarantor, the Agent and the Lenders.  The term “Borrowers” will mean both the named Borrowers and any other person or entity at any time assuming or otherwise becoming primarily liable on all or any part of the Indebtedness.  The descriptive headings used in this Agreement are for convenience only and shall not be deemed to affect the meaning or construction of any provision hereof.

22.Waiver of Claims.  The Guarantor hereby acknowledges, agrees and affirms that it possesses no claims, defenses, offsets, recoupment or counterclaims of any kind or nature against or with respect to the enforcement of this Agreement or any other Loan Document or any amendments thereto (collectively, the “Claims”), nor does the Guarantor now have knowledge of any facts that would or might give rise to any Claims.  If facts now exist which would or could give rise to any Claim against or with respect to the enforcement of this Agreement or any other Loan Document, as any of the foregoing may have been amended by the amendments thereto, the Guarantor hereby unconditionally, irrevocably and unequivocally waives and fully releases any and all such Claims as if such Claims were the subject of a lawsuit, adjudicated to final judgment from which no appeal could be taken and therein dismissed with prejudice.

23.Counterparts.  This Agreement may be executed in any number of counterparts, and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.  Telecopied signatures hereto shall be of the same force and effect as an original of a manually signed copy.

24.WAIVER OF JURY TRIAL.  EACH OF THE AGENT AND THE GUARANTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY AND ALL RIGHTS EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT RELATED HERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE AGENT, THE LENDERS, ANY BORROWER, THE GUARANTOR OR ANY OTHER LOAN PARTY.  THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT ENTERING INTO THIS AGREEMENT AND SUCH OTHER AGREEMENTS AND DOCUMENTS AND FOR THE LENDERS AND THE ISSUER ENTERING INTO THE REDUCING NOTE FACILITY REFERRED TO ON THE FIRST PAGE HEREOF.

25.Attorney’s Fees.  If any legal action is brought by the Guarantor or the Agent, it is expressly agreed that the prevailing party in such legal action shall be entitled to recover from the other party reasonable attorneys’ fees in addition to any other relief that may be awarded.

26.Integration.

THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO WITH

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RESPECT TO THE MATTERS COVERED HEREBY AND THEREBY AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[remainder of page intentionally left blank]

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IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly executed as of the date first above written.

Address:

6400 Imperial Drive (delivery only)		FIRSTCITY FINANCIAL CORPORATION
Waco, Texas 76710
		By:
P.O. Box 8216 (mail)			Name:
Waco, Texas 76714-8216			Title:
254-761-2953 (telecopier)
ACCEPTED BY:
Bank of Scotland Plc, acting through its New York Branch, in its capacity as Agent under this Agreement and agent under the Reducing Note Facility Agreement.		1095 Avenue of the Americas
		New York, New York 10036
		(212) 883-6610 (telecopier)
By:
	Name:
	Title:

[Signature page to Guaranty Agreement]

EX-10.59

Exhibit 10.59

THE COMPANY HAS REQUESTED AN ORDER FROM THE SECURITIES AND EXCHANGE COMMISSION (THE “COMMISSION”) PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, GRANTING CONFIDENTIAL TREATMENT TO SELECTED PORTIONS.  ACCORDINGLY, THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THIS EXHIBIT, AND HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.  OMITTED PORTIONS ARE INDICATED IN THIS EXHIBIT WITH “*****”.

INVESTMENT AGREEMENT

THIS INVESTMENT AGREEMENT (the “Agreement”) is made and entered into this 29th day of June 2010, to be effective as of the 1st day of April , 2010 (the “Effective Date”), by and between FC Diversified Holdings LLC, a Texas limited liability company (“FC Diversified”) and FirstCity Servicing Corporation, a Texas corporation (“Servicing”), on the one hand, and Värde Investment Partners, L.P., a Delaware limited partnership (“Värde”), on the other hand (each of FC Diversified, Servicing and Värde, a “Party,” and collectively, the “Parties”).

W I T N E S S E T H

WHEREAS, FirstCity Affiliates may from time to time receive invitations to participate in Investment Opportunities;

WHEREAS, the Parties intend that Värde and its Affiliates will have the exclusive right to participate in all Qualified Investment Opportunities up to an amount equal to SEVEN HUNDRED FIFTY MILLION AND NO/100 DOLLARS (U.S. $750,000,000.00) in the manner provided herein, which participation will be within the sole and absolute discretion of Värde; and

WHEREAS, the Parties intend that Servicing will conduct and manage due diligence with respect to Investments on behalf of FC Diversified, Värde and each Acquisition Entity, as provided in this Agreement, in consideration of certain compensation set forth in this Agreement, provided that such conduct and management shall not be a delegation of authority to Servicing or any other FirstCity Affiliate regarding Värde’s decision as to whether or not to participate in a Qualified Investment Opportunity;

NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the Parties agree as follows:

ARTICLE 1.DEFINITIONS.

As used in this Agreement, the following terms shall have the following meanings:

“Acquisition” means a transaction involving the direct or indirect acquisition of, or making of a loan or other investment with respect to, an Investment by an Acquisition Entity, or any other transaction which Värde and FC Diversified agree in writing is to constitute an Acquisition.

“Acquisition Entity” means each entity formed by Värde or one or more Affiliates of Värde and a Prospective Acquirer for the purpose of acquiring Investments.

“Affiliate” means with respect to any Person, any Person:

(a)which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such Person;

(b)which beneficially owns or holds 50% or more of any class of the Voting Equity of such Person; or

(c)of which 50% or more of the Voting Equity is beneficially owned or held by such Person.

The term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Equity, other voting securities, by contract or otherwise.

“Agreed Budget” has the meaning specified in Section 2.8.D.i. of this Agreement.

“Agreement” has the meaning specified in the introduction to this Agreement.

“Bankruptcy Code” means Title 11 of the United States Code, 11. U.S.C. §§ 101 et. seq.

“Bid” has the meaning specified in Section 2.8.D. of this Agreement.

“Business Day” means any day on which banks are open for business in Connecticut, Minnesota, and Texas.

“Debtor Relief Law” means applicable liquidation, conservatorship, receivership, bankruptcy, moratorium, rearrangement, insolvency, reorganization, or similar law, proceeding, or device, including, without limitation, the Bankruptcy Code, providing for the relief of debtors from time to time in effect and generally affecting the rights of creditors.

“Dollar,” “dollar,” “$,” “U.S. dollar/Dollar,” and “USD” each means the lawful currency of the United States of America.

“Due Diligence Expenses” shall mean and include all and only the following third party expenses incurred by any party hereto, to the extent set forth in the Agreed Budget: (i) external legal and other third party and out-of-pocket expenses incurred for the benefit of the Acquisition Entity in connection with the review and analysis of the Investments or incurred by the Parties or their Affiliates in connection with analysis of the Qualified Investment Opportunity or negotiation with the Seller (but shall not include payroll expenses and overhead); and (ii) any external legal or third party or out-of-pocket expenses incurred in connection with the Seller negotiations or preparation of definitive documentation (including, without limitation, if applicable, the purchase agreement).

“Effective Date” has the meaning specified in the introduction to this Agreement.

“Excluded Investment” means (a) an Investment Opportunity involving an expected Investment Amount of less than the Investment Threshold, (b) the acquisition of the stock or other equity ownerships of a Person if the primary purpose of the acquisition is other than the

Investment Agreement between FC Diversified Holdings LLC, FirstCity Servicing Corporation

and Värde Investment Partners, L.P. dated June 29, 2010

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acquisition of distressed assets or investments, (c) any distressed loan portfolio investment opportunity presented to FC Diversified or a FirstCity Affiliate by a third-party investor, provided a FirstCity Affiliate is presently participating in such loan portfolio investment opportunity, (d) investments or loans made by American Business Lending, Inc., FirstCity Denver Investment, Inc., FirstCity Denver Investment Corp. (or any other FirstCity Affiliate formed with Crestone Principal Investors LLC or its Affiliates), FirstCity Mexico, S.A. de C.V, FirstCity Investimentos Ltda., HMCS Investment GmbH, HMCS Real Estate GmbH, MCS et Associes, SA, Servicios Integrales de Cobranza, S.A. Chile, UBN, SAS or any entity in which one or more of those Persons own 50% or more of the equity interests of such entity, provided such distressed loan portfolios and similar assets is not offered or available to any other FirstCity Affiliate, (e) any product for which Värde shall have delivered to FC Diversified a negative Transaction Response or a Värde Withdrawal Notice, or failed to deliver a Transaction Response on or before the Transaction Response Date, from and after the date of delivery of such response or notice to FC Diversified, or after the Transaction Response Date, as applicable; provided that if any FirstCity Affiliate presents any such Excluded Investment to Värde in a Transaction Notice, the Excluded Investment included in the Transaction Notice shall constitute an Investment for all purposes of this Agreement, but only as to that Investment Opportunity and any resulting Acquisition related to that Investment Opportunity, (f) any real estate that is to be occupied by a FirstCity Affiliate for operational (as opposed to investment) purposes; and (g) Investment Opportunities that are exercised by one or more Key Principals solely for their personal account.

“FC Diversified” has the meaning specified in the introduction to this Agreement, and any permitted successors and assigns as provided herein.

“FirstCity Affiliates” means FC Diversified, Servicing, FirstCity Financial, the Key Principals, and any Affiliates of FC Diversified, Servicing, FirstCity Financial or the Key Principals.

“FirstCity Financial” means FirstCity Financial Corporation, a Delaware corporation.

“FirstCity Withdrawal Notice” has the meaning specified in Section 2.3(a) of this Agreement.

“Incentive Fee” has the meaning contained in Section 2.9 of this Agreement.

“Investment” means the subject of any Investment Opportunity other than with respect to Excluded Investments.

“Investment Amount” means the aggregate contributions made by the Prospective Acquirer and Värde or an Affiliate of Värde to an Acquisition Entity in connection with an Investment, including the initial Acquisition and subsequent contributions or loans made by the members of the Acquisition Entity related to the Investment, not to include any borrowing incurred by the Acquisition Entity upon the initial acquisition of the Investment.

“Investment Opportunity” means an opportunity to participate in single and bulk asset purchases of real estate, financial assets, equity or debt investments in entities or financial institutions and other potential investments reviewed by any FirstCity Affiliate.

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“Investment Period” means periods determined as follows:

(i)The initial “Investment Period” will be the period between the Effective Date and the earlier to occur of October 1, 2010, the Termination Date or the date on which the aggregate amount of the Investment Amounts first equals or exceeds $250,000,000.

(ii)Each subsequent “Investment Period” will commence on the date immediately following the end of the preceding Investment Period and will end on the earlier to occur of the date that is six (6) months after the commencement date of such Investment Period, the Termination Date or the date on which the aggregate amount of the Investment Amounts made after such commencement date first equals or exceeds $250,000,000. In no event will an Investment Period extend beyond the Termination Date.

“Investment Pool” means all Investments acquired as the result of Acquisitions made during an Investment Period.

“Investment Threshold” means $3,000,000.

“Key Principals” means James Sartain, James Moore, James Holmes, Terry DeWitt or Mark Horrell.

“Material Adverse Circumstance” means any event, condition, obligation, liability or circumstance or set of events, conditions, obligations, liabilities or circumstances or any change(s), including, without limitation, changes in federal or state laws or regulations, which (i) has, had or would reasonably be expected to have any material adverse effect upon or change in the profitability, validity or enforceability of this Agreement or the transactions contemplated by this Agreement, taken as a whole, or (ii) has been or would reasonably be expected to materially impair the ability of FC Diversified or Servicing to perform their respective obligations under this agreement or the transactions contemplated hereby.

“Monthly Retainer” means a monthly payment from Värde to Servicing in the amount of $200,000 per month through the Termination Date as compensation for the right of first refusal in favor of Värde contained in Article 2 of this Agreement.

“Notice(s)” has the meaning specified in Section 6.9 of this Agreement.

“Party” and “Parties” have the meanings specified in the introduction to this Agreement.

“Person” means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign or domestic state or political subdivision thereof or any agency of such state or subdivision.

“Prospective Acquirer” has the meaning specified in Section 2.2(a) of this Agreement.

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“Qualified Investment Opportunity” means an Investment Opportunity with respect to an Investment.

“Representing Party “ has the meaning specified in Article IV of this Agreement.

“Seller” means the seller of an Investment in the case of an asset purchase, or the borrower, in the case of an Investment that is a loan origination.

“Servicing” has the meaning specified in the introduction to this Agreement, and any permitted successors and assigns as provided herein.

“Servicing Agreement” has the meaning specified in Section 2.8.C. of this Agreement.

“Stock Purchase Agreement” means the Stock Purchase Agreement in the form attached hereto as Exhibit D.

“Termination Date” has the meaning specified in Section 2.1(c) of this Agreement.

“Transaction Notice” has the meaning specified in Section 2.2(a) of this Agreement.

“Transaction Response” has the meaning specified in Section 2.2(a) of this Agreement.

“Transaction Response Date” has the meaning specified in Section 2.2(a) of this Agreement.

“Värde Withdrawal Notice” has the meaning specified in Section 2.3(b) of this Agreement.

“Värde” has the meaning specified in the introduction to this Agreement, and any permitted successors and assigns as provided herein.

“Voting Equity” means securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions) of such corporation or, in the case of a Person which is not a corporation, securities or similar equity or partnership interests which entitle the holder thereof to elect, select or control the management or policies of such Person.  “Voting Equity” does not include warrants prior to the exercise of such warrants.

ARTICLE 2.VÄRDE RIGHT OF FIRST REFUSAL.

Section 2.1General Scope.

(a)From the Effective Date through the Termination Date, no FirstCity Affiliate shall purchase or otherwise acquire a direct or indirect interest in, any Investment or hold discussions with any party other than a FirstCity Affiliate, Värde or an Affiliate of Värde regarding investment or co-investment in a Qualified Investment Opportunity, except in accordance with the terms of this Article 2 or with an express written waiver from Värde.

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(b)The terms of this Agreement are applicable to Acquisitions made on or after the Effective Date. Värde, FC Diversified and Servicing acknowledge that the following acquisitions made after the Effective Date are Acquisitions pursuant to the terms and conditions of this Agreement for all purposes: (a) the acquisition on May 25, 2010 of the Intervest Portfolio from Intervest National Bank and Intervest Mortgage Corporation by VFC Partners 4, LLC; and (b) the acquisition on June 11, 2010 by VFC Partners 5 LLC of the Waterfield Bank portfolio from the Federal Deposit Insurance Corporation as receiver of Waterfield Bank. Notwithstanding anything to the contrary herein, the purchase of the “Purchased Shares” as defined in that certain Investment Agreement dated as of May 21, 2010 by and among Värde Investment Partners, L.P., Intervest Bancshares Corporation and FC Highway 6 Holdings LLC will not be subject to the terms of this Agreement.

(c)The “Termination Date” means June 30, 2015, but will be subject to consecutive automatic one-year extensions without any action on the part of the Parties on July 1 of each year beginning July 1, 2015; provided, however, that the “Termination Date,” including any such extensions, may be accelerated as provided in this Agreement or by the mutual written agreement of the Parties.

Section 2.2Notice Procedures.

(a)In the event that any FirstCity Affiliate (a “Prospective Acquirer”) shall obtain a Qualified Investment Opportunity prior to the Termination Date, such Prospective Acquirer or Servicing shall promptly first give written notice to Värde by delivering a notice substantially in the form of Exhibit A hereto containing the information set forth in Section 2.7 (the “Transaction Notice”). Thereafter, on or before the fifth (5th) Business Day after delivery of a duly completed Transaction Notice to Värde (the “Transaction Response Date”), together with all required supporting information, Värde shall complete and return to the Prospective Acquirer or Servicing the cover page of the Transaction Notice (the “Transaction Response”) indicating whether Värde has an interest in the subject Investment Opportunity.  Upon execution of an affirmative Transaction Response, Värde shall be responsible for payment of its pro rata share (based on the investment percentages set forth in the Transaction Notice) of the Due Diligence Expenses incurred and contracted for with respect to the Qualified Investment Opportunity, subject to the terms and limitations expressly set forth in this Agreement.  Upon execution of an affirmative Transaction Response, regardless of whether of not the Termination Date has passed, unless and until Värde delivers a Withdrawal Notice in accordance with Section 2.3(b), no FirstCity Affiliate shall hold discussions with Persons other than Affiliates of Värde regarding such Qualified Investment Opportunity or participate in such Qualified Investment Opportunity other than as contemplated by the Transaction Notice. In the event that Värde fails to timely return the Transaction Response or Värde responds negatively in the Transaction Response, then Värde and any Affiliate of Värde shall be free to proceed with the acquisition of the Qualified Investment Opportunity, directly or indirectly, either by itself or with any other Person, regardless of whether or not any FirstCity Affiliate pursues such Qualified Investment Opportunity.

(b)Nothing in this Agreement, any Servicing Agreement or any organizational document with respect to an Acquisition Entity is or shall be intended to constitute a delegation of any authority to any FirstCity Affiliate by Värde or any Affiliate of Värde with respect to the decision to participate in a Qualified Investment Opportunity, which decision shall be within the

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sole and absolute discretion of Värde.  In no event will this Agreement be construed as a “sub-advisory agreement” as that term is used in the Investment Company Act of 1940.

Section 2.3Due Diligence/Withdrawal.

(a)Notwithstanding anything to the contrary in Section 2.2 above, if after delivery of a Transaction Notice to Värde, for which Värde has timely returned (or subsequently timely returns) a Transaction Response, the Prospective Acquirer determines through due diligence or otherwise that the Prospective Acquirer has no further interest in pursuing the possible acquisition of such Qualified Investment Opportunity, the Prospective Acquirer or Servicing shall advise Värde in writing that the Prospective Acquirer has withdrawn its interest in participating in the acquisition of the Investment, such notice to be in the form of Exhibit B hereto (a “FirstCity Withdrawal Notice”) and shall not thereafter acquire any interest in such Investment, except with Värde’s prior written consent. Upon receiving a FirstCity Withdrawal Notice from any Prospective Acquirer or Servicing, then (i) Värde shall be free to proceed with the Qualified Investment Opportunity, directly or indirectly, either by itself or with any other Person and the determination of whether such Investment will be acquired by an Acquisition Entity and/or serviced by Servicing will be made by Värde in its sole and absolute discretion, and (ii) if Värde or any Affiliate of Värde acquires the subject Investment, such Investment will not be included in an Investment Pool and no Incentive Fee will be payable with respect to such Investment. The Prospective Acquirer shall have no responsibility for any Due Diligence Expenses contracted for by Värde or any Affiliate of Värde in connection with such Investment after receipt of such FirstCity Withdrawal Notice.  If Värde or any Affiliate of Värde acquires such Investment, Värde shall reimburse the Prospective Acquirer for any Due Diligence Expenses paid or reimbursed by the Prospective Acquirer with respect to such Investment in accordance with the applicable Agreed Budget.

(b)Notwithstanding anything to the contrary in Section 2.2 above, if after Värde has timely returned a Transaction Response, Värde determines through due diligence or otherwise that Värde has no further interest in pursuing the Qualified Investment Opportunity, Värde shall advise the Prospective Acquirer or Servicing in writing that it has withdrawn its interest in pursuing the Qualified Investment Opportunity in the form of Exhibit C hereto (a “Värde Withdrawal Notice”) and shall not thereafter acquire any interest in such Investment, except with the Prospective Acquirer’s prior written consent. Värde shall have no responsibility for any Due Diligence Expenses contracted for by any FirstCity Affiliate in connection with such Investment after receipt of such Värde Withdrawal Notice.  If any FirstCity Affiliate acquires such Investment, Servicing or FC Diversified shall reimburse Värde for any Due Diligence Expenses paid or reimbursed by Värde with respect to such Investment in accordance with the applicable Agreed Budget.

(c)Notwithstanding anything to the contrary in Section 2.2 or subparts (a) and (b) of this Section 2.3, neither Värde nor any Affiliate of Värde nor any FirstCity Affiliate may withdraw from an offer to acquire an Investment (i) after submission of a bid for the purchase of the Investment unless the Seller has informed the Prospective Acquirer that the Seller does not or will not accept such bid, or (ii) after such bid has been accepted by the Seller unless the other Party consents in writing to the withdrawal.  Any withdrawal under this Section 2.3 shall be effective upon the receipt by the other Party of the written notice of withdrawal or upon the date of such consent, as the case may be.  Any Party so electing to withdraw under this Section 2.3

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agrees not to hinder or compete in any way with the other Party’s efforts to proceed with the acquisition of the Investment and further agrees that the remaining other Party may bid for the Investment on terms satisfactory to the remaining Party without the withdrawing Party’s participation.  Any Party electing to withdraw from a bid for the acquisition of Investment shall pay its pro rata share (relative to its equity percentage described in the Transaction Notice) of the Due Diligence Expenses for all expenses incurred or accrued through the date of receipt by the other Party of the written notice to withdraw or upon the date of such consent, as applicable.

Section 2.4Expenses. Subject to Section 2.3, for any Qualified Investment Opportunities for which Värde has completed an affirmative Transaction Response, each of Värde and FC Diversified agree to bear their pro rata share (relative to their respective equity percentages described in the Transaction Notice) of the Due Diligence Expenses related to such Investment Opportunity.  Out-of-pocket Due Diligence Expenses may be reimbursed to Servicing in full or in part, by the investing entities or the Acquisition Entity, in which case Servicing shall refund any portion of such expenses previously reimbursed to it.  Except as it may otherwise be agreed between the Parties, reimbursement of Servicing and refunds by Servicing for domestic transaction expenses previously reimbursed to it shall be in U.S. Dollars.

Section 2.5Rejection/Deemed Rejection.  If Värde rejects the proposal contained in the Transaction Notice, fails to deliver a Transaction Response by the Transaction Response Date, or delivers a Värde Withdrawal Notice, the Prospective Acquirer or any other FirstCity Affiliate shall be free to proceed with the acquisition of the Investment (a “Rejected Transaction”) and may participate in the Investment Opportunity, directly or indirectly, either by itself or with any other Person.  The rejection by Värde of a Transaction Notice from any one Prospective Acquirer shall not be considered as or deemed to be a rejection by Värde of a Transaction Notice from any other Prospective Acquirer, nor shall Värde’s failure to deliver a Transaction Response or delivery of a Värde Withdrawal Notice to Servicing or any one Prospective Acquirer be considered as or deemed to be a failure to deliver a Transaction Response or delivery of a Värde Withdrawal Notice to any other Prospective Acquirer.

Section 2.6Estoppel.

(a)In the event that Värde indicates an affirmative interest in an Investment by returning an affirmative Transaction Response to a Prospective Acquirer, each Prospective Acquirer may rely on such interest or notice as indicating that Värde is not, either directly or indirectly, attempting to, and Värde agrees that neither Värde, nor any Värde Affiliate will, acquire an interest in the subject Investment, unless the Prospective Acquirer has delivered a FirstCity Withdrawal Notice pursuant to Section 2.3(a).

(b)In the event that Prospective Acquirer or Servicing submits a Transaction Notice to Värde, Värde may rely on such Transaction Notice as indicating that no FirstCity Affiliate is directly or indirectly, attempting to, and FirstCity agrees that no FirstCity Affiliate will, acquire an interest in the subject Investment, unless the Transaction Notice has been, or is deemed to be, rejected pursuant to Section 2.2(a) or Värde has delivered a Värde Withdrawal Notice pursuant to Section 2.3(b).

Section 2.7Terms of Transaction Notice.  The Transaction Notice shall describe, in reasonable detail, the subject Investment and shall set forth the terms relating to the Qualified Investment Opportunity, and in addition: (a) an investment percentage in the Qualified

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Investment Opportunity to be acquired by the Prospective Acquirer (through the Acquisition Entity), which investment percentage shall not be less than 5% or more than 25% unless otherwise agreed by Värde; and (b) other material terms related to the Qualified Investment Opportunity then known by Servicing.

Section 2.8Terms of Acquisition.The Acquisition of any Investment pursuant to a Transaction Notice will be subject to the following terms and conditions:

A.Acquisition Entities. Each Acquisition Entity will be a Delaware limited liability company, or other form of entity agreed to by Värde and FC Diversified, which will be formed pursuant to a mutually agreed form of limited liability company agreement. Each Acquisition Entity will establish a collection account at a bank approved by Värde.

B.Transaction Notice.  The Acquisition will be pursuant to the terms set forth in the Transaction Notice, except as mutually agreed in writing by the Parties.

C.Servicing Agreement. Servicing and each Acquisition Entity will enter into a mutually agreed form of Servicing Agreement (each, a “Servicing Agreement”).

D.Development of Bid.  The Parties agree to work together in good faith to determine the amount of, and to submit to the Seller a bid for or offer to purchase any Investment (a “Bid”) for which Värde has submitted an affirmative Transaction Response.  The Parties agree to take the following actions in connection with any Bid:

i.Värde, Servicing and FC Diversified, or the Prospective Acquirer if other than FC Diversified, in the event that a FirstCity Affiliate is contemplated to invest in the Investment Opportunity, will endeavor to mutually agree to develop and revise, as needed the Agreed Budget. In addition, Servicing will promptly provide to Värde when available, copies of any sale or other transactional materials related to the Qualified Investment Opportunity, and Servicing will provide and update Värde with estimates of Due Diligence Expenses to be incurred in connection with the subject Investment (the “Agreed Budget”). Any revisions to the Agreed Budget must be approved in writing by Värde.

ii.The Parties will obtain from the Seller additional information necessary to make a preliminary pricing decision for the Bid. The Parties shall share with each other all such information obtained from the Seller and will cooperate in good faith to make a preliminary determination of the amount of the Bid and will otherwise cooperate and work in good faith together during the due diligence process.

iii.Based upon the preliminary pricing for the Bid, Värde and FC Diversified, or the Prospective Acquirer if other than FC Diversified, will determine if there needs to be any adjustment of the ownership percentages as set forth in the Transaction Notice.

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iv.Servicing will keep Värde apprised as to the identity and cost of third party service providers proposed to be utilized in connection with the implementation of the Asset Business Plan.

v.Upon conclusion of final due diligence, Värde and FC Diversified, or the Prospective Acquirer if other than FC Diversified, will evaluate the results. A conclusion will be reached by the Parties as to which course of action to pursue: (i) submit the Bid based on final due diligence results, or (ii) decline to submit any Bid. At this time, or at any time prior thereto, if Värde or FC Diversified, or the Prospective Acquirer if other than FC Diversified, does not agree with the course of action to pursue, then it may opt by written notice to the other Parties not to participate further, in the Investment Opportunity subject to and in accordance with Section 2.3 of this Agreement.

vi.Upon concluding the final due diligence, negotiating the investment amounts for each Party (in the event a FirstCity Affiliate is participating as an investor in the Investment Opportunity), and an affirmative decision by the Parties to make the Bid, the Bid will be made to the Seller. The Bid will be made subject to the terms of the bid package or other conditions made by or agreed with the Seller and will have such other terms, provisions, pricing and conditions as the Parties shall mutually agree.

Section 2.9Incentive Fee. Provided the aggregate amount of the Investment Amounts, for one more Investment Pools, equals or exceeds $250,000,000, Värde agrees that it will pay or cause to be paid to FC Diversified an amount (the “Incentive Fee”) equal to *****(1) of all distributions (“Member Distributions”) paid to the members of the Acquisition Entity or Acquisition Entities with respect to each Investment Pool after such members have received (i) a return of all capital contributions made with respect to the Investments in such Investment Pool plus (ii) *****(1) per annum return thereon.  The Incentive Fee will be paid quarterly in arrears on each April 15, July 15, October 15 and January 15.  For the sake of clarity, to the extent that there have been Member Distributions prior to the date on which the aggregate amount of the Investment Amounts for such Investment Pool(s) equals or exceeds $250,000,000, then the first payment of the Incentive Fee shall include payment of any deferred Incentive Fee with respect to such Member Distributions. All Incentive Fee payments hereunder shall be made by wire transfer or ACH of immediately available U.S. funds to an account or accounts designated by FC Diversified.  In the event that the due date of any payment is not a Business Day, then the due date of the payment shall be the next Business Day.

(1)  THE COMPANY HAS REQUESTED AN ORDER FROM THE SECURITIES AND EXCHANGE COMMISSION (THE “COMMISSION”) PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, GRANTING CONFIDENTIAL TREATMENT TO SELECTED PORTIONS.  ACCORDINGLY, THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THIS EXHIBIT, AND HAVE BEEN FILED SEPARATELY WITH THE COMMISSION.  OMITTED PORTIONS ARE INDICATED IN THIS EXHIBIT WITH “*****”.

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ARTICLE 3.PORTFOLIO DUE DILIGENCE; MONTHLY RETAINER AND TRANSACTION EXPENSES.

Section 3.1Identification of Qualified Investment Opportunities; Due Diligence.

(a)From the Effective Date through the Termination Date, Servicing will use commercially reasonable efforts to identify and present to Värde Qualified Investment Opportunities.

(b)With respect to Qualified Investment Opportunities that are subject to an accepted Transaction Notice, Servicing agrees to conduct due diligence with respect to the subject Qualified Investment Opportunity for the benefit of FC Diversified, Värde (but subject to Section 2.2(b)) and the respective Acquisition Entity in a diligent manner.  Such due diligence duty shall include such responsible investigation as FC Diversified and Värde shall deem appropriate to satisfy the investment objectives of FC Diversified and Värde, as shall be expressed from time to time. Servicing shall make available sufficient personnel having appropriate training, skill and experience to conduct and direct all such due diligence on Qualified Investment Opportunities.  Servicing shall cause any material information available to Servicing with respect to such Qualified Investment Opportunities to be made available to the other Parties on a timely basis and each Party shall make any due diligence findings by such Party with respect to such Qualified Investment Opportunities available to the other Parties on a timely basis.

Section 3.2Monthly Retainer; Payments by Värde.  Värde agrees that, from the Effective Date through the Termination Date, Värde will pay Servicing the Monthly Retainer as compensation for the right of first refusal in favor of Värde contained in Article 2 of this Agreement.  The Monthly Retainer for the period commencing on the Effective Date and ending on May 31, 2010 in the amount of $400,000 and the Monthly Retainer for June 2010 in the amount of $200,000 shall be paid to Servicing simultaneously with the execution of this Agreement; thereafter, the Monthly Retainer to be paid by Värde to Servicing shall be due and paid in arrears on or before the fifth (5th) day of each month.  The Monthly Retainer shall be paid in U.S. Dollars.  In addition, Värde shall reimburse Servicing for any Due Diligence Expenses incurred and contracted for with respect to the Qualified Investment Opportunity as set forth in Section 2.4, which reimbursement shall be due to Servicing within thirty (30) days of date of invoice and provided such invoice contains reasonable supporting information.  All payments due to Servicing hereunder shall be made by wire transfer or ACH of immediately available U.S. funds to an account or accounts designated by Servicing.  In the event that the due date of any payment is not a day upon which banks are open in the United States, then the due date of the payment shall be the next Business Day.

ARTICLE 4.CERTAIN COVENANTS, REPRESENTATIONS AND WARRANTIES.

Each Party as a “Representing Party” makes the following representations and warranties to the other Parties as of the date first written above and as of the Effective Date and covenants that the following representations and warranties will be continually reaffirmed and remain true and correct at all times during the term of this Agreement:

(a)Organization and Standing.  The Representing Party is a duly organized and validly legal entity under the laws of its state of organization as first described above and in good standing under the laws of such state with all requisite power and authority to own and operate its properties and assets and to conduct the businesses in which it is engaged or proposes to engage.

(b)Power and Authority.  The Representing Party has all requisite power and authority to execute, deliver and carry out the terms and provisions of this Agreement, and the

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Representing Party has duly and properly taken all necessary action to permit and authorize the execution, delivery and performance of this Agreement.  This Agreement has been duly authorized, executed and delivered by the Representing Party, and constitutes a legal, valid and binding obligation of the Representing Party, enforceable against it in accordance with its terms, subject to the effect, if any, of general principles of equity.

(c)Compliance with Other Instruments.  The Representing Party is not in violation of, or in default under, any terms of its organizational documents, or any agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets are subject, or any judgment, decree, order, statute, rule or governmental regulation applicable to it, which violation or default would have a material adverse effect on the Representing Party or its ability to perform its duties under this Agreement.  The execution, delivery and performance of this Agreement, the consummation of the transactions contemplated herein and the compliance with the terms and provisions hereof, will not contravene any material provision of law, statute, rule or regulation to which the Representing Party or any Affiliate of the Representing Party is subject or any material judgment, decree, franchise, order, governmental regulation or permit applicable to the Representing Party or any Affiliate of the Representing Party and will not violate, conflict with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of any lien, mortgage, pledge or encumbrance upon any of the property or assets of the Representing Party or any Affiliate of the Representing Party pursuant to the terms of any indenture, mortgage, deed of trust, agreement or other instrument to which the Representing Party or any Affiliate of the Representing Party is a party or by which it or its properties or assets are bound or may be subject.

(d)Compliance with Laws.  The Representing Party has duly complied with, and its assets, business operations and leaseholds are in compliance in all material respects with, the provisions of all federal, state and local laws, rules and regulations applicable to the Representing Party and its assets or the conduct of its businesses.

(e)Litigation.  There are no actions, suits, proceedings or investigations pending, or to the knowledge of the Representing Party, threatened against or affecting the Representing Party, any Affiliate of the Representing Party, or their property or assets, nor is there any outstanding judgment, order, writ, injunction, decree or award affecting the Representing Party or any Affiliate of the Representing Party before any court or before any federal, state, municipal or other governmental department, commission, board, bureau or agency, which, either separately or in the aggregate, could have a material adverse effect on the Representing Party or its ability to perform its duties under this Agreement.

(f)No Materially Adverse Contracts, Etc.  Neither the Representing Party nor any Affiliate of the Representing Party is obligated under any contract or agreement or under any law, regulation or decree, which materially and adversely affects its ability to perform its obligations under this Agreement.

ARTICLE 5.DEFAULT; REMEDIES.

Section 5.1An “Event of Default” shall exist on the part of a Party if any of the following occurs:

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(i)Payment Default.  If a Party or any Affiliate of a Party fails to make any payment required to be made under this Agreement within three (3) Business Days after written notice of nonpayment by the Party hereunder to whom such payment is required to be made.

(ii)Covenant Defaults. Other than subparts (iv), (v) and (vi) of this Article 5, if a Party or an Affiliate of a Party fails fully and timely to perform or observe any non-monetary covenant, agreement, or warranty contained in this Agreement for thirty (30) calendar days following the occurrence of such failure.

(iii)Warranties or Representations. If any statement or representation made by or on behalf of a Party or an Affiliate of a Party in this Agreement or any other item furnished to another Party pursuant to this Agreement, is false, misleading, or incorrect in any material respect as of the date made or reaffirmed.

(iv)Insolvency. If a Party becomes insolvent or otherwise generally unable to pay its debts as and when they become due or payable.

(v)Involuntary Proceedings. If a case is commenced or a petition is filed against a Party under any Debtor Relief Law or if a receiver, conservator, liquidator, or trustee of a Party or of any material asset of a Party is appointed by court order and such order remains in effect for more than thirty (30) days, or if any material asset of a Party is sequestered by court order and such order remains in effect for more than thirty (30) days.

(vi)Voluntary Proceedings. If a Party voluntarily seeks, consents to, or acquiesces in the benefit of any provision of any Debtor Relief Law, whether now or hereafter in effect, consents to the filing of any petition against it under such law, makes an assignment for the benefit of its creditors, admits in writing its inability to pay its debts generally as they become due, or consents to or suffers the appointment of a receiver, trustee, liquidator, or conservator for it or any part of its assets.

(vii)Key Principals. If any Key Principal (or any replacement(s) approved by Värde in writing, which approval shall not be unreasonably withheld, conditioned or delayed) shall fail to have a material managerial or administrative role in the transactions contemplated by this Agreement.

(viii)Affirmative Misconduct. The occurrence of fraud, intentional misrepresentation, theft or criminal conduct on the part of any FirstCity Affiliate in connection with performance of its duties or obligations under this Agreement or the transactions contemplated by this Agreement.

(ix)Affirmative Misconduct with Conditions. The occurrence of fraud, intentional misrepresentation, theft or criminal conduct on the part of any FirstCity Affiliate in connection with performance of its duties or obligations under this Agreement or the transactions contemplated by this Agreement, provided that (A) such fraud, intentional misrepresentation, theft or criminal conduct results in financial loss to Värde or any Affiliate of Värde of $250,000.00 or more, (B) a FirstCity Affiliate does not reimburse Värde for such financial loss within ten (10) days following notice from Värde to FC Diversified, and (C) such fraud, intentional misrepresentation, theft or criminal conduct continues following notice from Värde to FC Diversified; provided, however, that the preceding subparts (B) and (C) shall not apply to the

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extent that the fraud, intentional misrepresentation, theft or criminal conduct was conceived by, or conducted with the knowledge of, any Key Principal.

Section 5.2Remedies.

(a)Upon the occurrence of an Event of Default on the part of FC Diversified or Servicing, in addition to any other remedies available to Värde hereunder, Värde may accelerate the Termination Date.  In addition, if the Event of Default is pursuant to subpart (ix) of Article and Värde shall have no further obligation to pay the Incentive Fee or the Monthly Retainer.

(b)Upon the occurrence of an Event of Default on the part of Värde, in addition to any other remedies available to FC Diversified and Servicing hereunder, FC Diversified may accelerate the Termination Date.

(c)Upon the acceleration of the Termination Date, with or without cause, all rights, covenants, agreements representations and warranties shall survive, except to the extent such rights, covenants, agreements representations and warranties expressly terminate on the Termination Date.  All rights, covenants, agreements representations and warranties shall survive the creation of each Acquisition Entity and the closing of the acquisition of each Investment.

(d)In addition to the matters specified in Sections 5.2(a) and 5.2(b), each Party to this Agreement shall have all remedies available to it by applicable statute or at common law, including, without limitation all equitable rights and remedies, provided that no party to this Agreement shall be liable for any punitive, consequential or special damages.  In the event that any party pursues its rights and remedies under this Agreement, the prevailing party shall be entitled to recover all reasonable costs and expenses (including reasonable attorneys’ fees and disbursements) incurred in its successful prosecution or defense of any claim or action.  FC Diversified, Servicing and Värde acknowledge that a breach of a provision(s) of this Agreement hereof will cause irreparable harm to the other party, for which there may be no adequate remedy at law and for which the ascertainment of damages would be difficult. Therefore, the non-breaching party shall be entitled, in addition to, and without having to prove the inadequacy of, other remedies at law (including without limitation damages for prior breaches hereof), to specific performance of this Agreement, as well as injunctive relief (without being required to post bond or other security).

Section 5.3Acceleration of Termination Date Without Cause or Material Adverse Change.

(a)Prior to June 30, 2011, Värde may accelerate the Termination Date without cause by providing one hundred eighty (180) days prior written notice to FC Diversified and Servicing, which acceleration shall be effective upon the later of (i) the date that is one hundred eighty (180) days after the receipt of the notice of such acceleration by FC Diversified and Servicing, and (ii) such later date as is specified in the notice, but not later than December 31, 2011.  In addition, commencing November 1, 2011, any Party may accelerate the Termination Date without cause by providing not less than sixty (60) days prior written notice to the other Parties.

(b)Värde may accelerate the Termination Date upon the occurrence of a Material Adverse Circumstance by providing sixty (60) days prior written notice to FC Diversified and Servicing of the occurrence of a Material Adverse Circumstance, which acceleration shall be

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effective upon the later of (i) the date that is sixty (60) days after the receipt of the notice of such acceleration by FC Diversified and Servicing, and (ii) such later date as is specified in the notice.

(c)Except as provided in the last sentence of Section 5.2(a), Värde shall remain liable for and continue to pay Incentive Fees as to any Acquisition made prior to the Termination Date, when such Incentive Fees would be payable under this Agreement, notwithstanding the termination of this Agreement pursuant to subparts (a) or (b) of this Section 5.3.  The Monthly Retainer payable to Servicing will be paid through the accelerated Termination Date.

Section 5.4Indemnification.

(a)Each Party, as the “Indemnifying Party” will indemnify, defend and hold harmless the other Parties and their successors and assigns (as the “Indemnified Parties”) from and against any and all actual costs, expenses, losses, claims (including claims of third parties), damages, and liabilities to the extent that such actual cost, expense, loss, claim, damage, or liability arose as a direct result of the Indemnifying Party’s breach of the terms, covenants or undertakings on the part of this Agreement which, if true or proven, would constitute such a breach, or as a direct result of any negligence, gross negligence or other willful misconduct of the Indemnifying Party (“Indemnified Claims”).

(b)The Indemnifying Party shall be entitled to participate in the Indemnified Claim at their own expense and, except as otherwise provided below, to the extent Indemnifying Party so desires, they may assume the defense thereof with counsel mutually satisfactory to the Indemnifying Party and the Indemnified Parties. After notice from the Indemnifying Party to the Indemnified Parties of its election to assume the defense thereof, Indemnifying Party shall not be liable to Indemnified Parties under this Agreement or otherwise for any expenses subsequently incurred by Indemnified Parties in connection with the defense of such Indemnified Claim other than reasonable costs of investigation, payment for time spent by Indemnified Parties as provided herein or as otherwise provided herein. Indemnified Party shall have the right to employ its own counsel in such Indemnified Claim, but all expenses related thereto incurred after notice from Indemnifying Party of its assumption of the defense shall be at Indemnified Party’s expense unless: (i) the employment of counsel by Indemnified Party has been authorized by the Indemnifying Party, (ii) Indemnified Party has provided an opinion of counsel reasonably satisfactory to Indemnifying Party to the effect that there may be a conflict of interest between Indemnified Party and Indemnifying Party in the defense of the Indemnified Claim, or (iii) Indemnifying Party shall not have employed counsel promptly to assume the defense of such Indemnified Claim.

(c)Indemnification under this Section 5.4 will include reasonable fees and expenses of external counsel and expenses of litigation and is in addition to any other remedy available to the Indemnified Party under this Agreement.  If an Indemnifying Party will have made any indemnity payments pursuant to this Section 5.4 and the Indemnified Party thereafter collects any of such amounts from others, the Indemnified Party will promptly repay such amounts to the Indemnifying Party, without interest.  Under no circumstances shall an Indemnifying Party hereunder be liable to the Indemnified Party where the Indemnified Party’s losses are due entirely to the Indemnified Party’s own gross negligence or willful misconduct.  Indemnitor shall not settle any Indemnified Claim in any manner that would impose any admission, fine,

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damages, penalty or limitation on, or otherwise adversely affect, the Indemnified Party without Indemnified Party’s written consent.

ARTICLE 6.MISCELLANEOUS.

Section 6.1Effective Date.  This Agreement shall become effective as of the Effective Date.  It is a condition to the effective delivery of this Agreement that the Stock Purchase Agreement be fully executed and delivered by all parties thereto.

Section 6.2Confidentiality.  The Parties agree that the terms of this Agreement and the transactions described herein are confidential (the “Confidential Information”). The Parties each agrees that they shall not disclose any Confidential Information other than (1) to Affiliates and investors having a reasonable basis to receive the Confidential Information and who are advised of the confidential nature of the Confidential Information, (2) employees, representatives, managers, officers, directors attorneys, and accountants of the Parties and their Affiliates and investors, (2) as may be required by law (including tax reporting) or by a court of law, and (3) to the extent such information is in the public domain. The Parties shall direct each of their representatives to comply with the terms of this Section 6.2 and shall be responsible for any breaches thereof.  No Party will use another Party’s name in any advertising or promotional materials without the prior written consent of the Party whose name is proposed to be used.

Section 6.3Amendments. This Agreement may not be amended or modified and the provisions hereof may not be waived without the prior written consent of all the Parties.

Section 6.4Transferability of Agreement.  This Agreement shall be binding upon the Parties and their respective successors and permitted assigns. No interest in this Agreement shall be transferable without the written consent of all the other Parties, except that (i) Värde may assign its interest in this Agreement to Värde or any Affiliate of Värde without such written consent, (ii) Värde may not unreasonably withhold, condition or delay consent to an assignment by FC Diversified of its interest in this Agreement to a FirstCity Affiliate, and (iii) Värde may not unreasonably withhold, condition or delay consent to an assignment by Servicing of its rights, duties and obligations under this Agreement to another directly or indirectly wholly-owned subsidiary of FirstCity Financial Corporation.  No assignment of this Agreement shall relieve any Party of any liability or responsibility for the covenants, agreements, representations or warranties of such Party under this Agreement.

Section 6.5Governing Law; Jurisdiction; Venue. This Agreement and any questions concerning the interpretation or enforcement thereof shall be governed by and construed in accordance with the laws of the State of Minnesota (the “Governing State”).  The Parties each hereby irrevocably submit to the jurisdiction of any state or federal court sitting in the Governing State over any suit, action or proceeding arising out of or relating to this Agreement. The Parties irrevocably waives, to the fullest extent permitted by law, any objection that the Parties may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in any such court and any claims that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.

Section 6.6Enforceability of Agreement.  Should any one or more of the provisions of this Agreement be determined to be illegal or unenforceable, all other provisions, nevertheless, shall remain effective and binding on the Parties.

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Section 6.7Nature of Obligations.  The obligations of all the Parties shall be considered to be several and not joint obligations.

Section 6.8Titles.  Titles of the Sections of this Agreement are merely for convenience in reading and shall not be construed to alter, modify or interpret the meaning of the provisions under said titles.

Section 6.9Notices.

(a)Unless otherwise required or provided by this Agreement, all demands, notices, approvals and other communications hereunder (individually and collectively, “Notice(s)”) shall be in writing and shall be served personally, delivered by facsimile or sent by a national overnight delivery or courier company, or by United States registered or certified mail, postage prepaid return receipt requested, and addressed as set forth below.  Any such Notices shall be deemed delivered upon delivery or refusal to accept delivery as indicated in writing by the Person attempting to make personal service, on the United States Postal Service return receipt, or by similar written advice from the overnight delivery company; provided, however, that if any such Notice shall be sent by telecopier to the telecopier number, if any, set forth above, such Notice shall be deemed given at the time and on the date of machine transmittal (except if sent after 5:00 p.m. recipient’s time, then the notice shall be given at 9:00 a.m. on the next Business Day) if the sending party receives a written send verification on its machine and sends a duplicate Notice on the same day or the next Business Day by personal service, registered or certified United States mail, or overnight delivery in the manner described above. Each party hereto shall make an ordinary, good faith effort to ensure that it will accept or receive Notices that are given in accordance with this Section 6.9, and that any Person to be given Notice actually receives such Notice. Any party to whom Notices are to be sent pursuant to this Loan Agreement may from time to time change its address and/or facsimile number for future communication hereunder by giving Notice in the manner prescribed herein to all other Parties, provided that the address and/or facsimile number change shall not be effective until five (5) Business Days after the Notice of change has been given.

If to FC Diversified or any FirstCity Affiliate:	If to Servicing:
FC Diversified Holdings LLC	FirstCity Servicing Corporation
P. O. Box 8216 (mail)	P. O. Box 8216 (mail)
Waco, Texas 76714-8216	Waco, Texas 76714-8216
6400 Imperial Drive (delivery only)	6400 Imperial Drive (delivery only)
Attention:  Legal Department	Attention:  James C. Holmes
Facsimile No.:  (254) 761-2953	Facsimile No.:  (254) 761-2953
E-mail address if specified herein:	E-mail address if specified herein:
jholmes@fcfc.com	jholmes@fcfc.com

If to Värde: With a Copy to:

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Värde Investment Partners, L.P.	Leonard, Street and Deinard
c/o Värde Partners, L.P.	Professional Association
8500 Normandale Lake Blvd.	150 South Fifth Street, Suite 2300
Suite 1500	Minneapolis, MN 55402
Minneapolis, MN 55437	Attention: Andrew Lee
Attention: Christopher N. Giles and Jeffrey Thuringer	Facsimile No.:  (612) 335-1657
Facsimile No.:  (952) 893-9613
	Copies not required for electronic mail deliveries.
E-mail address if specified herein:
cgiles@varde.com and jthuringer@varde.com

(b)Notwithstanding anything to the contrary herein, delivery of Transaction Notices, Transaction Reponses, FirstCity Withdrawal Notices and Värde Withdrawal Notices may be made by electronic mail if delivered to the e-mail address(es) specified in Section 6.9(a).  Such materials shall be deemed received on the later of: (i) the same Business Day of transmittal, as shown on the sender’s confirmation of transmittal, if the transmittal time is shown as 2PM Central Time or earlier, or (ii) the Business Day following the day shown on the sender’s confirmation of transmittal, if the transmittal time is shown as being after 2PM Central Time, or (iii) the next Business Day, if the transmittal day shown on the sender’s confirmation of transmittal is not a Business Day.

Section 6.10Not a Partnership or Joint Venture.  This Agreement is not intended to evidence or create a partnership or joint venture relationship between any of the Parties

Section 6.11Independent Activities.

(a)Except as provided in Section 2.2(a) of this Agreement, neither this Agreement nor any obligation undertaken pursuant hereto shall prohibit or restrict Värde or Affiliates of Värde from engaging in, or advising other parties in connection with, any investments, business activities or projects of any kind, regardless of whether or not such investments, business activities or projects are competitive with the activities of any FirstCity Affiliate.

(b)Nothing in this Agreement is intended to restrict any FirstCity Affiliate from raising capital in a FirstCity Affiliate through debt or equity.

Section 6.12Entire Agreement. This Agreement shall constitute the full and entire understanding and agreement of the Parties and there are no further or other agreements or undertakings written or oral, in effect between the Parties relating to the subject matter hereof unless expressly referred to herein. All prior negotiations, agreements, representations, warranties, statements and undertakings concerning the subject matter hereof between the Parties are superseded by this Agreement.

Section 6.13Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different Parties in separate counterparts, each of which when so

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executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument.

[End of Page - Signature Page to Follow]

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

FC DIVERSIFIED HOLDINGS LLC

By:

Name:

Title:

FIRSTCITY SERVICING CORPORATION

By:

Name:

Title:

VÄRDE INVESTMENT PARTNERS, L.P., a Delaware limited partnership

By: Värde Investment Partners G.P., LLC, a Delaware limited liability company, its General Partner

By: Värde Partners, L.P., a Delaware limited partnership, its Managing Member

By: Värde Partners, Inc., a Delaware corporation, its General Partner

By:

Name:

Its:

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EXHIBIT A

TRANSACTION NOTICE

FCSC#

PACKAGE NAME

BID DATE

BOOK/REO VALUE

NO. OF ASSETS

ASSET TYPE

ESTIMATED CLOSING DATE

VÄRDE PARTICIPATION (75% to 95%)

FIRSTCITY PARTICIPATION (5% to 25%)

COLLECTION FEE

NOTICE DATE:                                       20

TO:Värde Investment Partners, L.P.

c/o Värde Partners, L.P.

8500 Normandale Lake Blvd., Suite 1500

Minneapolis, MN 55437

Attention:   Christopher N. Giles

VIA FACSIMILE:               (952) 893-9613

FROM:FirstCity Servicing Corporation

Attached hereto is information regarding an Investment Opportunity (as such term is defined in that certain Investment Agreement effective as of April 1, 2010 (the “Agreement”) between FC Diversified Holdings LLC, FirstCity Servicing Corporation and Värde Investment Partners, L.P.  [                                              , as the Prospective Acquirer, has received the Investment Opportunity and intends to participate as an investor as set forth in this Transaction Notice. Insert and complete if a FirstCity Affiliate will be participating in the Investment Opportunity.]

Please indicate in the space below whether you have an interest in the subject Investment Opportunity.

FirstCity Servicing Corporation

By:

Name:

Title:

Date:

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oYes, we have an interest in pursuing the Investment Opportunity and will be responsible for payment of our pro rata share of the due diligence expense as set forth in the Agreement.

oNo, we do not have any interest in the subject Investment Opportunity.

VÄRDE INVESTMENT PARTNERS, L.P., a Delaware limited partnership

By: Värde Investment Partners G.P., LLC, a Delaware limited liability company, its General Partner

By: Värde Partners, L.P., a Delaware limited partnership, its Managing Member

By: Värde Partners, Inc., a Delaware corporation, its General Partner

By:

Name:

Its:

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EXHIBIT B

FIRSTCITY WITHDRAWAL NOTICE

JHC#

PACKAGE NAME

BID DATE

NOTICE DATE:                                       20

TO:Värde Investment Partners, L.P.

c/o Värde Partners, L.P.

8500 Normandale Lake Blvd., Suite 1500

Minneapolis, MN 55437

Attention:   Christopher N. Giles

VIA FACSIMILE:               (952) 893-9613

FROM:

FirstCity Servicing Corporation submitted to you a Transaction Notice with respect to the above referenced package for which you sent an affirmative Transaction Response. FC Diversified Holdings LLC and its Affiliates have determined that they have no further interest in pursuing the possible acquisition of the Investment Opportunity and provide this Withdrawal Notice to you pursuant to Section 2.3(a) of that certain Investment Agreement dated effective as of April 1, 2010, between FC Diversified Holdings LLC, FirstCity Servicing Corporation, and Värde Investment Partners, L.P.  Neither FC Diversified Holdings LLC, FirstCity Servicing Corporation, nor any FirstCity Affiliate will be responsible for any Due Diligence Expenses contracted for by Värde or any Affiliate of Värde after your receipt of this Withdrawal Notice.

By:

Name:

Title:

Date:

EXHIBIT C

VÄRDE WITHDRAWAL NOTICE

FCSC#

PACKAGE NAME

BID DATE

NOTICE DATE:                                       20

TO:FirstCity Services Corporation

P. O. Box 8216 (mail)

Waco, Texas  76714-8216

6400 Imperial Drive (delivery only)

Attention:   Legal Department

VIA FACIMILE: (254) 761-2953

FROM:Värde Investment Partners, L.P.

FirstCity Servicing Corporation submitted to Värde Investment Partners, L.P. (“Värde”) a Transaction Notice with respect to the above referenced package for which Värde sent an affirmative Transaction Response.  Värde has determined that it has no further interest in pursuing the possible acquisition of the Investment Opportunity and provides this Withdrawal Notice to you pursuant to Section 2.3(b) of that certain Investment Agreement effective as of April 1, 2010, between FC Diversified Holdings LLC, FirstCity Servicing Corporation and Värde Investment Partners, L.P.

Värde will not be responsible for any Due Diligence Expenses contracted for by any FirstCity Affiliate after your receipt of this withdrawal notice.

VÄRDE INVESTMENT PARTNERS, L.P., a Delaware limited partnership

By: Värde Investment Partners G.P., LLC, a Delaware limited liability company, its General Partner

By: Värde Partners, L.P., a Delaware limited partnership, its Managing Member

By: Värde Partners, Inc., a Delaware corporation, its General Partner

By:

Name:

Its:

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EXHIBIT D

FORM OF STOCK PURCHASE AGREEMENT

EX-10.60

Exhibit 10.60

SECURITIES PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of June 29, 2010, is entered into by and among FirstCity Financial Corporation, a Delaware corporation (the “Company”), and Värde Investment Partners, L.P., a Delaware limited partnership (the “Investor”).

BACKGROUND

A.            The Company and the Investor are executing and delivering this Agreement in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act.

B.            The Investor wishes to purchase, and the Company wishes to sell, upon the terms and conditions stated in this Agreement, that number of shares of the common stock, par value $0.01 per share, of the Company (the “Common Stock”) as prescribed herein.

C.            The Common Stock issued pursuant to this Agreement is referred to herein as the “Securities.”

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and the Investor agree as follows:

ARTICLE I
DEFINITIONS

1.1          Definitions.  In addition to the terms defined elsewhere in this Agreement, the following terms have the meanings indicated:

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act.

“Agreement” has the meaning set forth in the Preamble.

“Business Day” means any day other than Saturday, Sunday, any day which shall be a federal legal holiday in the United States or any day on which national banking institutions in The State of New York are authorized or required by law or other governmental action to close.

“Closing” has the meaning set forth in Section 2.1(c).

“Closing Date” has the meaning set forth in Section 2.1(c).

“Common Stock” has the meaning set forth in the Preamble.

“Company” has the meaning set forth in the Preamble.

“Company Counsel” means Haley & Olson, P.C., counsel to the Company.

“Contingent Obligation” has the meaning set forth in Section 3.1(x).

“Disclosure Materials” has the meaning set forth in Section 3.1(g).

“8-K Filing” has the meaning set forth in Section 4.5.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“GAAP” has the meaning set forth in Section 3.1(g).

“Indebtedness” has the meaning set forth in Section 3.1(x).

“Indemnified Party” has the meaning set forth in Section 5.3(c).

“Indemnifying Party” has the meaning set forth in Section 5.3(c).

“Insolvent” has the meaning set forth in Section 3.1(h).

“Investment” has the meaning set forth in Section 2.1(a).

“Investor” has the meaning set forth in the Preamble.

“Lien” means any lien, charge, claim, security interest, encumbrance, right of first refusal or other restriction.

“Losses” means any and all losses, claims, damages, liabilities, settlement costs and expenses, including, without limitation, reasonable attorneys’ fees.

“Material Adverse Effect” means any event, circumstance, change, occurrence or state of facts that (i) has a material adverse effect on the business, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole (other than events, circumstances, changes, occurrences or any state of facts relating to (A) any change in general economic conditions that affect the industries in which the Company and its Subsidiaries conduct their business, so long as such changes or conditions do not adversely affect the Company and its Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other similarly situated participants in the industries or markets in which they operate, (B)  general legal, regulatory, political, business, economic, financial or securities market conditions in the United States or elsewhere (including fluctuations, in and of themselves, in the price of the Common Stock), (C) the negotiation, execution or the announcement of this Agreement, the undertaking and performance or observance of the obligations contemplated by this Agreement or necessary to consummate the transactions or the

2

consummation of any transaction by the Company, including the impact thereof on relationships, contractual or otherwise, with customers, suppliers, distributors, partners or employees, (D) acts of war, insurrection, sabotage or terrorism, not having a disproportionate effect on the Company and its Subsidiaries, taken as a whole, relative to other participants in the industries or markets in which the Company and its Subsidiaries operate, (E) changes in GAAP or the accounting rules or regulations of the SEC, (F) the effect of incurring out-of-pocket expenses in connection with negotiating, entering into, performing or consummating the transactions contemplated by this Agreement, or (G) the failure, in and of itself, by the Company to meet any internal or published projections, forecasts or revenue or earnings predictions for any period ending on or after the date of this Agreement (it being understood that the causes underlying such failure may be considered in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur)) or (ii) prevents the Company from performing its obligations under this Agreement; provided, that “material” and “materially” have correlative meanings.

“Material Permits” has the meaning set forth in Section 3.1(s).

“Options” means any outstanding rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

“Person” has the meaning set forth in Section 3.1(x).

“Piggyback Registration” has the meaning set forth in Section 5.1(a).

“Previously Disclosed” with regard to the Company means any information contained in any periodic or current report filed with the SEC since January 1, 2009, or otherwise disclosed in a specific section of this Agreement; provided that information which, on its face, reasonably should indicate to the reader that it relates to another provision of this Agreement, shall also be deemed to be Previously Disclosed with respect to such other provision.

“Prior Disclosure” has the meaning set forth in Section 3.2(f).

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, a partial proceeding, such as a deposition), whether commenced or threatened in writing.

“Purchase Price” has the meaning set forth in Section 2.1(b).

“Registrable Securities” means the Common Stock issued pursuant to the Transaction Documents, together with any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing.

“Regulation D” has the meaning set forth in the Preamble.

“SEC” has the meaning set forth in the Preamble.

“SEC Reports” has the meaning set forth in Section 3.1(g).

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“Securities” has the meaning set forth in the Preamble.

“Securities Act” has the meaning set forth in the Preamble.

“Short Sales” has the meaning set forth in Section 3.2(i).

“Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market (other than the OTC Bulletin Board), or (ii) if the Common Stock is not listed or quoted on a Trading Market (other than the OTC Bulletin Board), a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is not listed or quoted on any Trading Market, a day on which the Common Stock is quoted in the over-the-counter market as reported by the Pink Sheets LLC (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business Day.

“Trading Market” means whichever of the New York Stock Exchange, the American Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market or OTC Bulletin Board on which the Common Stock is listed or quoted for trading on the date in question.

“Transaction” has the meaning set forth in Section 3.2(i).

“Transaction Documents” means this Agreement, the schedules and exhibits attached hereto, and the Transfer Agent Instructions.

“Transfer Agent” means American Stock Transfer & Trust Company, or any successor transfer agent for the Company.

“Transfer Agent Instructions” means, with respect to the Company, the Irrevocable Transfer Agent Instructions, in the form of Exhibit D, executed by the Company and delivered to and acknowledged in writing by the Transfer Agent.

ARTICLE II
PURCHASE AND SALE

2.1          Closing.

(a)           At the Closing (as defined below), the Investor will purchase 150,000 shares of Common Stock (the “Investment”) as calculated pursuant to Section 2.1(b) below.

(b)           The purchase price for the Common Stock constituting the Investment shall be $889,500.00 (the “Purchase Price”) reflecting the closing trading price of the Common Stock on the Trading Day immediately preceding the date hereof of $5.93 per share.  At the Closing, the Company shall issue to the Investor 150,000 shares of Common Stock.

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(c)           Subject to the terms and conditions of this Agreement, the issuance, sale and purchase of the Common Stock constituting the Investment shall take place at a closing (the “Closing”) to be held at a mutually agreeable location on the date hereof, or at such other date and time as may be agreed upon by the Company and the Investor (the date upon which the Closing occurs is referred to herein as the “Closing Date”).

2.2          Closing Deliveries.

(a)           At the Closing, the Company shall deliver or cause to be delivered to the Investor the following:

(i)            a copy of the Company’s irrevocable instructions to the Transfer Agent instructing the Transfer Agent to deliver, on an expedited basis, one or more stock certificates, free and clear of all restrictive and other legends (except as expressly provided in Section 4.1(b) hereof), evidencing the Investment registered in the name of the Investor;

(ii)           an executed copy of the Investment Agreement, to be effective as of April 1, 2010, by and among FC Diversified Holdings LLC, FirstCity Servicing Corporation and Värde;

(iii)          a legal opinion of Company Counsel, in the form of Exhibit B, executed by such counsel and delivered to the Investor; and

(iv)          a certificate of the Secretary of the Company, dated as of the Closing Date, (a) certifying the resolutions adopted by the Board of Directors of the Company approving the transactions contemplated by this Agreement and the other Transaction Documents and the issuance of the Securities, (b) certifying the current versions of the certificate of incorporation, as amended and by-laws of the Company and (c) certifying as to the signatures and authority of persons signing the Transaction Documents and related documents on behalf of the Company.

(b)           At the Closing, the Investor shall deliver or cause to be delivered to the Company the Purchase Price in United States dollars and in immediately available funds, by wire transfer to an account designated in writing to the Investor by the Company for such purpose.

ARTICLE III
REPRESENTATIONS AND WARRANTIES

3.1          Representations and Warranties of the Company.. Except as Previously Disclosed, the Company hereby represents and warrants to the Investor as follows:

(a)           Subsidiaries.  The Company owns or controls, directly or indirectly, all of the capital stock or comparable equity interests of each of its subsidiaries free and clear of any Lien other than Liens granted to Bank of Scotland, plc and BoS (USA), Inc. which secure Indebtedness disclosed in the SEC Reports and Schedule 3.1(h), and all issued and outstanding shares of capital stock or comparable equity interest of each such subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights.

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(b)           Organization and Qualification. The Company is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with the requisite legal authority to own and use its properties and assets and to carry on its business as currently conducted.  The Company is not in violation of any of the provisions of its certificate or articles of incorporation, bylaws or other organizational or charter documents.  The Company is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.

(c)           Authorization; Enforcement. The Company has the requisite corporate authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents to which it is a party and otherwise to carry out its obligations hereunder and thereunder.  The execution and delivery of each of the Transaction Documents to which it is a party by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company and no further consent or action is required by the Company, its Board of Directors or its stockholders.  Each of the Transaction Documents to which it is a party has been (or upon delivery will be) duly executed by the Company and is, or when delivered in accordance with the terms hereof, will constitute, the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

(d)           No Conflicts.  The execution, delivery and performance by the Company of the Transaction Documents to which it is a party and the consummation by the Company of the transactions contemplated hereby and thereby do not, and will not, (i) conflict with or violate any provision of the Company’s certificate or articles of incorporation, bylaws or other organizational or charter documents, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any material agreement, credit facility, debt or other instrument (evidencing a Company debt or otherwise) or other material understanding to which the Company is a party or by which any property or asset of the Company is bound, or affected, or (iii) result in a material violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including, assuming the accuracy of the representations and warranties of the Investor set forth in Section 3.2 hereof, federal and state securities laws and regulations and the rules and regulations of any self-regulatory organization to which the Company or its securities are subject, including all applicable Trading Markets), or by which any property or asset of the Company is bound or affected.

(e)           The Securities.  The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully

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paid and nonassessable, free and clear of all Liens and will not be subject to preemptive or similar rights of stockholders (other than those imposed by the Investor).

(f)            Capitalization.  The aggregate number of shares and type of all authorized, issued and outstanding classes of capital stock, options and other securities of the Company (whether or not presently convertible into or exercisable or exchangeable for shares of capital stock of the Company) is set forth in Schedule 3.1(f) hereto.  All outstanding shares of capital stock are duly authorized, validly issued, fully paid and nonassessable and have been issued in compliance in all material respects with all applicable securities laws.  Except as disclosed in Schedule 3.1(f) hereto, the Company did not have outstanding on the date hereof any other options, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or entered into any agreement giving any Person any right to subscribe for or acquire, any shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock.  Except as set forth on Schedule 3.1(f) hereto, and except for customary adjustments as a result of stock dividends, stock splits, combinations of shares, reorganizations, recapitalizations, reclassifications or other similar events, there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) and the issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Investor) and will not result in a right of any holder of securities to adjust the exercise, conversion, exchange or reset price under such securities.  To the knowledge of the Company, except as disclosed in the SEC Reports and any Schedules 13D or 13G filed with the SEC pursuant to Rule 13d-1 of the Exchange Act by reporting persons or in Schedule 3.1(f) hereto, no Person or group of related Persons beneficially owns (as determined pursuant to Rule 13d-3 under the Exchange Act), or has the right to acquire, by agreement with or by obligation binding upon the Company, beneficial ownership of in excess of 5% of the outstanding Common Stock.

(g)                           SEC Reports; Financial Statements.  Except as set forth on Schedule 3.1(g), the Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the 12 months preceding the date hereof on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension.  Such reports required to be filed by the Company under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, together with any materials filed or furnished by the Company under the Exchange Act, whether or not any such reports were required being collectively referred to herein as the “SEC Reports” and, together with this Agreement and the Schedules to this Agreement, the “Disclosure Materials.”  As of their respective dates (or, if amended or superseded by a filing prior to the Closing Date, then on the date of such filing), the SEC Reports filed by the Company complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the SEC promulgated thereunder, and none of the SEC Reports, when filed (or, if amended or superseded by a filing prior to the Closing Date, then on the date of such filing) by the Company, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto as in effect at the time of filing (or, if amended or

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superseded by a filing prior to the Closing Date, then on the date of such filing).  Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements and the notes thereto, and except that unaudited financial statements may not contain all footnotes required by GAAP or may be condensed or summary statements, and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, year-end audit adjustments.  All material agreements to which the Company or any Subsidiary is a party or to which the property or assets of the Company or any Subsidiary are subject are included as part of or identified in the SEC Reports, to the extent such agreements are required to be included or identified pursuant to the rules and regulations of the SEC.

(h)           Material Changes; Undisclosed Events, Liabilities or Developments; Solvency.   Since the date of the latest audited financial statements included within the SEC Reports, except as disclosed in the SEC Reports or in Schedule 3.1(h) hereto, (i) there has been no event, occurrence or development that, individually or in the aggregate, has had or that would result in a Material Adverse Effect, (ii) the Company has not incurred any material liabilities other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or not required to be disclosed in filings made with the SEC, (iii) the Company has not altered its method of accounting or changed its auditors, except as disclosed in its SEC Reports, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders, in their capacities as such, or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, except as disclosed in its SEC Reports, and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock-based plans.  The Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact that would reasonably lead a creditor to do so.  The Company is not as of the date hereof, and after giving effect to the transactions contemplated hereby to occur at the Closing will not be Insolvent (as defined below).  For purposes of this Section 3.1(h), “Insolvent” means (i) the present fair saleable value of the Company’s assets is less than the amount required to pay the Company’s total Indebtedness (as defined in Section 3.1(x)), (ii) the Company is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, (iii) the Company intends to incur or believes that it will incur debts that would be beyond its ability to pay as such debts mature, or (iv) the Company has unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted.

(i)            Absence of Litigation.  Except as disclosed in the SEC Reports, there is no action, suit, claim, or Proceeding, or, to the Company’s knowledge, inquiry or investigation, before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company that could, individually or in the aggregate, have a Material Adverse Effect.

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(j)            Compliance.  The Company is not in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company under), nor has the Company received written notice of a claim that it is in default under or that it is in violation of, any material indenture, loan or credit agreement or any other material agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived).  The Company is in material compliance with all orders of any court, arbitrator or governmental body.  The Company is in material compliance with all statutes, rules or regulations of any governmental authority.

(k)           Title to Assets.  The Company does not own any real property.  The Company has good and marketable title in all personal property owned by it that is material to the business of the Company free and clear of all Liens, except for Liens held by Bank of Scotland and BoS (USA), Inc. to secure Indebtedness as disclosed in the SEC Reports and in Schedule 3.1(h).  Any real property and facilities held under lease by the Company is held by it under valid, subsisting and enforceable leases with which the Company is in material compliance.

(l)            No General Solicitation; Placement Agent’s Fees.  Neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities.  The Company shall be responsible for the payment of any placement agent’s fees, financial advisory fees, or brokers’ commission (other than for persons engaged by the Investor or its investment advisor) relating to or arising out of the issuance of the Securities pursuant to this Agreement.  The Company shall pay, and hold the Investor harmless against, any liability, loss or expense (including, without limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in connection with any such claim for fees arising out of the issuance of the Securities pursuant to this Agreement.

(m)            Private Placement; Investment Company.  Neither the Company nor any of its Affiliates nor, any Person acting on the Company’s behalf has, directly or indirectly, at any time within the past six months, made any offer or sale of any security or solicitation of any offer to buy any security under circumstances that would (i) eliminate the availability of the exemption from registration under Regulation D under the Securities Act in connection with the offer and sale by the Company of the Securities as contemplated hereby or (ii) cause the offering of the Securities pursuant to the Transaction Documents to be integrated with prior offerings by the Company for purposes of any applicable law, regulation or stockholder approval provisions, including, without limitation, under the rules and regulations of any Trading Market.  Assuming the accuracy of the representations and warranties of the Investor set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Investor as contemplated hereby. The sale and issuance of the Securities hereunder does not contravene the rules and regulations of any Trading Market on which the Common Stock is listed or quoted.  The Company is not required to be registered as, and is not an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

(n)           Listing and Maintenance Requirements.  The Company has not, in the 12 months preceding the date hereof, received notice (written or oral) from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in

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compliance with the listing or maintenance requirements of such Trading Market.  The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

(o)           Registration Rights.  Except as described in Schedule 3.1(o), the Company has not granted or agreed to grant to any Person any rights (including “piggy-back” registration rights) to have any securities of the Company registered with the SEC or any other governmental authority that have not expired or been satisfied or waived.

(p)           Application of Takeover Protections.  The Company and its Board of Directors have taken all necessary action, if any, to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s charter documents or the laws of its state of incorporation that is or could become applicable to the Investor as a result of the Investor and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including, without limitation, as a result of the Company’s issuance of the Securities and the Investor’s ownership of the Securities.  The Company’s charter documents prohibit any Person from acquiring five percent (5%) or more of the Common Stock.

(q)           Acknowledgment Regarding Investors’ Purchase of Securities.  Based upon the assumption that the transactions contemplated by this Agreement are consummated in all material respects in conformity with the Transaction Documents, the Company acknowledges and agrees that the Investor is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby.  The Company further acknowledges that the Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by the Investor or any of its representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Investor’s purchase of the Securities.  The Company further represents to the Investor that the Company’s decision to enter into this Agreement has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its advisors and representatives.

(r)            Insurance.  The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses and locations in which the Company is engaged.

(s)            Regulatory Permits.  The Company possesses all material certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct business as presently conducted and described in the SEC Reports (“Material Permits”) and the Company has not received any written notice of proceedings relating to the revocation or modification of any Material Permit.

(t)            Transactions With Affiliates and Employees.  Except as set forth or incorporated by reference in the Company’s SEC Reports, none of the officers, directors or employees of the Company is presently a party to any transaction with the Company that would be

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required to be reported on Form 10-K by Item 13 thereof pursuant to Regulation S-K Item 404(a) (other than for ordinary course services as employees, officers or directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any such officer, director or employee or, to the Company’s knowledge, any corporation, partnership, trust or other entity in which any such officer, director, or employee has a substantial interest or is an officer, director, trustee or partner.

(u)           Internal Accounting Controls.  The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(v)           Sarbanes-Oxley Act. The Company is in compliance in all material respects with applicable requirements of the Sarbanes-Oxley Act of 2002 and applicable rules and regulations promulgated by the SEC thereunder.

(w)          Foreign Corrupt Practices.  The Company, nor to the knowledge of the Company, any director, officer, agent, employee or other Person acting on behalf of the Company has, in the course of its actions for, or on behalf of, the Company (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee or to any foreign or domestic political parties or campaigns from corporate funds; (iii) violated or is in violation in any material respect of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

(x)           Indebtedness.  Except as disclosed in the SEC Reports or in Schedule 3.1(h), the Company (i) does not have any outstanding Indebtedness (as defined below), (ii) is not in violation of any term of or is in default under any material contract, agreement or instrument relating to any Indebtedness, and (iii) is not a party to any contract, agreement or instrument relating to any Indebtedness, the performance of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse Effect.    For purposes of this Agreement:  (x) “Indebtedness” of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds

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of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with generally accepted accounting principles, consistently applied for the periods covered thereby, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; and (z) “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, a government or any department or agency thereof and any other legal entity.

(y)           Tax Status.  The Company (i) has made or filed all foreign, federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and (iii) has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply.  There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

3.2          Representations and Warranties of the Investor.  The Investor hereby represents and warrants to the Company as follows:

(a)           Organization; Authority.  The Investor is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate, partnership or other power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder.  The purchase by the Investor of the Securities hereunder has been duly authorized by all necessary corporate, partnership or other action on the part of the Investor.  This Agreement has been duly executed and delivered by the Investor and constitutes the valid and binding obligation of the Investor, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

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(b)           No Public Sale or Distribution.  The Investor is (i) acquiring the Common Stock in the ordinary course of business for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities laws, and the Investor does not have a present arrangement to effect any distribution of the Securities to or through any person or entity; provided, however, that by making the representations herein, the Investor does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act.

(c)           Investor Status.  At the time the Investor was offered the Securities, it was, at the date hereof it is, and on the Closing Date it will be an “accredited investor” as defined in Rule 501(a) under the Securities Act or a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act.  The Investor is not a registered broker dealer registered under Section 15(a) of the Exchange Act, or a member of the Financial Industry Regulatory Authority, Inc. or an entity engaged in the business of being a broker dealer.  Except as otherwise disclosed in writing to the Company on Exhibit A-2 (attached hereto) on or prior to the date of this Agreement, the Investor is not affiliated with any broker dealer registered under Section 15(a) of the Exchange Act, or a member of the Financial Industry Regulatory Authority, Inc. or an entity engaged in the business of being a broker dealer.

(d)         General Solicitation.  The Investor is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media, broadcast over television or radio, disseminated over the Internet or presented at any seminar or any other general solicitation or general advertisement.

(e)           Experience of the Investor.  The Investor, either alone or together with its representatives has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment.  The Investor understands that it must bear the economic risk of this investment in the Securities indefinitely, and is able to bear such risk and is able to afford a complete loss of such investment.

(f)            Access to Information.  The Investor acknowledges that it has reviewed the Disclosure Materials and has been afforded:  (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information (other than material nonpublic information) about the Company and its financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; (iii) has been provided, subject to a confidentiality agreement, a copy of the Reducing Note Facility Agreement to be entered into among Bank of Scotland, plc, as agent, collateral agent and lender, BoS (USA), Inc., as lender, FirstCity Commercial Corporation and FH Partners, LLC, as borrowers, and FLBG Corporation, as guarantor, of even date with this Agreement, and the Limited Guaranty Agreement executed by Company in favor of Bank of Scotland, plc, as agent for the benefit of the lenders, also of even date with this Agreement (the “Prior Disclosure”); and (iv) the opportunity to obtain such additional information

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that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment.  Neither such inquiries nor any other investigation conducted by or on behalf of the Investor or its representatives or counsel shall modify, amend or affect the Investor’s right to rely on the truth, accuracy and completeness of the Disclosure Materials and the Company’s representations and warranties contained in the Transaction Documents.  The Investor acknowledges receipt of copies of the SEC Reports and the Prior Disclosure.

(g)           No Governmental Review.  The Investor understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

(h)           No Conflicts.  The execution, delivery and performance by the Investor of this Agreement and the consummation by the Investor of the transactions contemplated hereby will not (i) result in a violation of the organizational documents of the Investor or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Investor is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to the Investor, except in the case of clauses (ii) and (iii) above, for such that are not material and do not otherwise affect the ability of the Investor to consummate the transactions contemplated hereby.

(i)            Prohibited Transactions; Confidentiality.  Neither the Investor, directly or indirectly, nor any Person acting on behalf of or pursuant to any understanding with the Investor, has engaged in any purchases or sales in the securities, including derivatives, of the Company (including, without limitation, any Short Sales (a “Transaction”) involving any of the Company’s securities) since the time that the Investor was first contacted by the Company or any other Person regarding an investment in the Company.  The Investor covenants that neither it nor any Person acting on its behalf or pursuant to any understanding with the Investor will engage, directly or indirectly, in any Transactions in the securities of the Company (including Short Sales) prior to the time the transactions contemplated by this Agreement are publicly disclosed.  “Short Sales” include, without limitation, all “short sales” as defined in Rule 200 promulgated under Regulation SHO under the Exchange Act and all types of direct and indirect stock pledges, forward sale contracts, options, puts, calls, short sales, swaps, derivatives and similar arrangements (including on a total return basis), and sales and other transactions through non-U.S. broker-dealers or foreign regulated brokers.

(j)            Restricted Securities.  The Investor understands that the Securities are characterized as “restricted securities” under the U.S. federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act only in certain limited circumstances.

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(k)           Legends.                It is understood that, except as provided in Section 4.1(b) of this Agreement, certificates evidencing such Securities may bear the legend set forth in Section 4.1(b).

(l)            No Legal, Tax or Investment Advice.  The Investor understands that nothing in this Agreement or any other materials presented by or on behalf of the Company to the Investor in connection with the purchase of the Securities constitutes legal, tax or investment advice.  The Investor has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Securities.

ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES

4.1          Transfer Restrictions.

(a)           The Investor covenants that the Securities will only be disposed of pursuant to an effective registration statement under, and in compliance with the requirements of, the Securities Act or pursuant to an available exemption from the registration requirements of the Securities Act, and in compliance with any applicable state securities laws.  In connection with any transfer of Securities other than pursuant to an effective registration statement or to the Company, or pursuant to Rule 144 of the Securities Act, the Company may require the transferor to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration under the Securities Act.  Notwithstanding the foregoing, the Company hereby consents to and agrees to register on the books of the Company and with its Transfer Agent, without any such legal opinion, except to the extent that the Transfer Agent requests such legal opinion, any transfer of Securities by the Investor to an Affiliate of the Investor, provided that the transferee certifies to the Company that it is an “accredited investor” as defined in Rule 501(a) under the Securities Act and provided that such Affiliate does not request any removal of any existing legends on any certificate evidencing the Securities.

(b)           The Investor agrees to the imprinting, until no longer required by this Section 4.1(b), of the following legend on any certificate evidencing any of the Securities:

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.

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Certificates evidencing the Securities shall not be required to contain such legend or any other legend (i) while a registration statement covering the resale of the Securities is effective under the Securities Act, (ii) when any Securities are eligible for sale pursuant to Rule 144 of the Securities Act, or (iii) if the holder provides the Company with a legal opinion (and the documents upon which the legal opinion is based) reasonably acceptable to the Company to the effect that the legend is not required under applicable requirements of the Securities Act (including controlling judicial interpretations and pronouncements issued by the staff of the SEC).

4.2          Furnishing of Information.  Until the date that the Investor may sell all of the Securities under Rule 144 of the Securities Act (or any successor provision), the Company covenants to use its commercially reasonable efforts to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act.

4.3          Integration.  The Company shall not, and shall use its commercially reasonable efforts to ensure that no Affiliate thereof shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Investor or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.

4.4          Reservation of Securities.  The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations to issue such Securities under the Transaction Documents.  In the event that at any time the then authorized shares of Common Stock are insufficient for the Company to satisfy its obligations to issue such Securities under the Transaction Documents, the Company shall promptly take such actions as may be required to increase the number of authorized shares.

4.5          Securities Laws Disclosure; Publicity.  Following execution of this Agreement the Company shall, within the time period required by the rules and regulations of the SEC, file a Current Report on Form 8-K with the SEC (the “8-K Filing”) describing the terms of the transactions contemplated by the Transaction Documents and including as exhibits to such Current Report on Form 8-K the Transaction Documents (including the schedules and the name, and address of the Investor and the amount of Securities purchased).  Thereafter, the Company shall timely file any filings and notices required by the SEC or applicable law with respect to the transactions contemplated hereby.

ARTICLE V
REGISTRATION RIGHTS

5.1          Piggyback Registration.

(a)           If at any time the Company shall determine to prepare and file with the SEC a registration statement relating to an offering for its own account or the account of others under the

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Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or its then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, and the Investor is not then eligible to sell all of its Registrable Securities under Rule 144 of the Securities Act, the Company shall send to the Investor written notice of such determination and, if within ten (10) days after receipt of such notice, the Investor shall so request in writing (which request shall specify the Registrable Securities intended to be disposed of by the Investor), the Company will cause the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Investor, to the extent required to permit the disposition of the Registrable Securities so to be registered (a “Piggyback Registration”), provided that if at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of all of such securities, the Company may, at its election, give written notice of such determination to the Investor and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay expenses in accordance with the terms hereof), and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities being registered pursuant to this Section 5.1 for the same period as the delay in registering such other securities.

(b)           In the case of an underwritten public offering, if the managing underwriter(s) or underwriter(s) should object to the inclusion of the Registrable Securities in such registration statement, then if the Company after consultation with the managing underwriter should reasonably determine that the inclusion of such Registrable Securities would materially adversely affect the offering contemplated in such registration statement, and based on such determination recommends inclusion in such registration statement of fewer or none of the Registrable Securities of the Investor, then (x) the number of Registrable Securities of the Investor included in such registration statement shall be reduced if the Company after consultation with the underwriter(s) recommends the inclusion of fewer Registrable Securities, or (y) none of the Registrable Securities of the Investor shall be included in such registration statement if the Company after consultation with the underwriter(s) recommends the inclusion of none of such Registrable Securities; provided, however, that if securities are being offered for the account of other persons or entities as well as the Company, such reduction shall not represent a greater fraction of the number of Registrable Securities intended to be offered by the Investor than the fraction of similar reductions imposed on such other persons or entities (other than the Company).

(c)           Notwithstanding the registration obligations set forth in this Section 5.1, in the event the SEC informs the Company that all of the Registrable Securities then outstanding cannot, as a result of the application of Rule 415 of the Securities Act, be registered for resale as a secondary offering on a single registration statement, the Company agrees to promptly (a) inform the Investor thereof and use its commercially reasonable efforts to file amendments to the initial registration statement as required by the SEC and/or (b) withdraw the initial registration statement and file a new registration statement, in either case covering the maximum number of Registrable Securities permitted to be registered by the SEC, on Form S-3, Form S-1 or such other form available to the Company to register for resale the Registrable Securities as a secondary offering; provided, that prior

17

to filing such amendment or new registration statement, the Company shall be obligated to use its commercially reasonable efforts to advocate with the SEC for the registration of all of the Registrable Securities in accordance with the SEC guidance, including without limitation, Compliance and Disclosure Interpretation 612.09.  Notwithstanding any other provision of this Agreement, if any SEC guidance sets forth a limitation of the number of Registrable Securities or other shares of Common Stock permitted to be registered on a particular Registration Statement as a secondary offering (and notwithstanding that the Company used diligent efforts to advocate with the SEC for the registration of all or a greater number of Registrable Securities), the number of Registrable Securities or other shares of Common Stock to be registered on such registration statement will be reduced on a pro rata basis. In the event the Company amends the initial registration statement or files a new registration statement, as the case may be, under clauses (a) or (b) above, the Company will use its commercially reasonable efforts to file with the SEC, as promptly as allowed by SEC or SEC guidance provided to the Company or to registrants of securities in general, one or more registration statements on Form S-3, Form S-1 or such other form available to the Company to register for resale those Registrable Securities that were not registered for resale on the initial registration statement, as amended, or the new registration statement.

5.2          Registration Expenses.  The Company shall pay all fees and expenses incident to the performance of or compliance with Article V of this Agreement by the Company, including without limitation (a) all registration and filing fees and expenses, including without limitation those related to filings with the SEC, any Trading Market and in connection with applicable state securities or Blue Sky laws, (b) printing expenses (including without limitation expenses of printing certificates for Registrable Securities), (c) messenger, telephone and delivery expenses, (d) fees and disbursements of counsel for the Company, (e) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement, and (f) all listing fees to be paid by the Company to the Trading Market.

5.3          Indemnification

(a)           Indemnification by the Company.  The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless the Investor, and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each Person who controls the Investor within the meaning of the Exchange Act and the rules and regulations promulgated thereunder, to the fullest extent permitted by applicable law, from and against any and all Losses, as incurred, arising out of or relating to (i) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (ii) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (iii) any cause of action, suit or claim brought or made against such Indemnified Party (as defined in Section 5.3(c) below) by a third party arising out of the transactions contemplated by this Agreement (unless, and only to the extent that, such action, suit or claim is based, including in part, upon a breach of the Investor’s representations, warranties or covenants under the Transaction Documents or any conduct by the Investor that constitutes fraud, gross negligence or willful misconduct) or (iv) any untrue or alleged untrue statement of a material fact contained in a registration statement or prospectus filed by the Company pursuant to Section 5.1 or in any amendment or supplement thereto or in any Company preliminary prospectus, or arising

18

out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except to the extent, but only to the extent, that (A) such untrue statements, alleged untrue statements, omissions or alleged omissions are based solely upon information regarding the Investor furnished in writing to the Company by the Investor for use therein, or to the extent that such information relates to the Investor or the Investor’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved by the Investor in writing expressly for use in the registration statement, or (B) with respect to any prospectus, if the untrue statement or omission of material fact contained in such prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented, if such corrected prospectus was timely made available by the Company to the Investor, and the Investor seeking indemnity hereunder was advised in writing not to use the incorrect prospectus prior to the use giving rise to Losses.

(b)           Indemnification by the Investor.  The Investor shall indemnify and hold harmless the Company and its Affiliates and each of their respective officers, directors, partners, employees and agents, and each Person who controls the Company within the meaning of the Exchange Act and the rules and regulations promulgated thereunder, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising solely out of any untrue statement of a material fact contained in any registration statement, any prospectus, or in any amendment or supplement thereto, or arising out of or relating to any omission of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, but only to the extent that (i) such untrue statements or omissions are based solely upon information regarding the Investor furnished to the Company by the Investor in writing expressly for use therein, or to the extent that such information relates to the Investor or the Investor’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by the Investor expressly for use in the registration statement (it being understood that the information provided by the Investor to the Company in Exhibits A-1, A-2 and A-3 and the Plan of Distribution set forth on Exhibit C, as the same may be modified by the Investor and other information provided by the Investor to the Company in or pursuant to the Transaction Documents constitutes information reviewed and expressly approved by the Investor in writing expressly for use in the registration statement), such prospectus or in any amendment or supplement thereto.  In no event shall the liability of the Investor hereunder be greater in amount than the dollar amount of the net proceeds received by the Investor upon the sale of the Registrable Securities giving rise to such indemnification obligation.

(c)           Conduct of Indemnification Proceedings.  If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal

19

or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party.

An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless:  (i) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (ii) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (iii) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of separate counsel shall be at the expense of the Indemnifying Party).  It shall be understood, however, that the Indemnifying Party shall not, in connection with any one such Proceeding (including separate Proceedings that have been or will be consolidated before a single judge) be liable for the fees and expenses of more than one separate firm of attorneys at any time for all Indemnified Parties, which firm shall be appointed by a majority of the Indemnified Parties.  The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld.  No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

All reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within 20 Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder).

(d)           Contribution.  If a claim for indemnification under Section 5.3(a) or (b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations.  The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to

20

information and opportunity to correct or prevent such action, statement or omission.  The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5.3(c), any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5.3(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph.  Notwithstanding the provisions of this Section 5.3(d), the Investor shall not be required to contribute, in the aggregate, any amount in excess of the amount by which the net proceeds actually received by the Investor from the sale of the Registrable Securities subject to the Proceeding exceed the amount of any damages that the Investor has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.  No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

5.4          Dispositions.  The Investor agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the registration statement and shall sell its Registrable Securities in accordance with the Plan of Distribution set forth in the prospectus.

ARTICLE VI
MISCELLANEOUS

6.1          Termination.  This Agreement may be terminated by the Company or the Investor, by written notice to the other parties, if the Closing has not been consummated by June 30, 2010; provided that no such termination will affect the right of any party to sue for any breach by the other party.

6.2          Fees and Expenses.  Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.  The Company shall pay all Transfer Agent fees, stamp taxes and other taxes and duties levied in connection with the sale and issuance of the applicable Securities.

6.3          Entire Agreement.  The Transaction Documents, together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.  At or after the Closing, and without further consideration, the Company will execute

21

and deliver to the Investor such further documents as may be reasonably requested in order to give practical effect to the intention of the parties under the Transaction Documents.

6.4          Notices.  Any notice, request, instruction or other document to be given hereunder by any party to the other will be in writing and will be deemed to have been duly given (a) on the date of delivery if delivered personally or by telecopy or facsimile, upon confirmation of receipt, (b) on the first business day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.

·If to the Investor:

Värde Investment Partners, L.P.
8500 Normandale Lake Blvd., Suite 1500
Minneapolis, MN 55437
Attn: Christopher N. Giles
Tel: 952-646-2062
Fax: 952-893-9613
Email: cgiles@varde.com

with a copy to (which copy alone shall not constitute notice):

Andrew P. Lee
Leonard, Street and Deinard
Professional Association
150 S. Fifth Street
Minneapolis, MN  55402
Telephone No.: 612-335-1881
Fax No.: 612-335-1657
E-Mail Address: andrew.lee@Leonard.com

·If to the Company:

FirstCity Financial Corporation
6400 Imperial Drive (Delivery only)
Waco, TX 76714-8216
P.O. Box 8216 (mail)

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Waco, TX 76712
Attn: James T. Sartain
Tel: 254-761-2800
Fax: 254-761-2950
Email: jsartain@fcfc.com

with a copy to (which copy alone shall not constitute notice):

Brian D. Barnard
Haynes and Boone, LLP
201 Main Street, Suite 2200
Fort Worth, Texas 76102
Telephone No.: 817-347-6605
Fax No.: 817-348-2303
E-Mail Address: brian.barnard@haynesboone.com

6.5          Amendments; Waivers.  No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and the Investor or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought.  No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.

6.6          Construction.  The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.  The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

6.7          Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns.  The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Investor.  The Investor may assign its rights under this Agreement to any Person to whom the Investor assigns or transfers any Securities, provided (i) such transferor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company after such assignment, (ii) the Company is furnished with written notice of (x) the name and address of such transferee or assignee and (y) the Registrable Securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment, the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, (iv) such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions hereof that apply to the “Investor” and (v) such transfer shall have been made in accordance with the applicable requirements of this Agreement and with all laws applicable thereto.

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6.8No Third-Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except that each Indemnified Party is an intended third party beneficiary of Section 5.3 and (in each case) may enforce the provisions of such Section directly against the parties with obligations thereunder.

6.9Governing Law.  This Agreement shall be governed by, enforced under, and construed in accordance with the laws of the State of Texas without regard to conflict of law principles.  Any and all disputes arising under or related to this Agreement, or the obligations contained herein, shall be brought only in a federal or state court of competent jurisdiction in McLennan County, Texas.

6.10Survival.  Each of the representations and warranties set forth in this Agreement shall survive the Closing under this Agreement but only for a period of twelve (12) months following the Closing Date (or until final resolution of any claim or action arising from the breach of any such representation and warranty, if notice of such breach was provided prior to the end of such period) and thereafter shall expire and have no further force and effect; provided that the representations and warranties in Sections 3.1(a), 3.1(b), 3.1(c), 3.1(e), 3.1(f), 3.2(a), 3.2(b) and 3.2(c) shall survive indefinitely and the representations and warranties in Section 3.1(y) shall survive until the expiration of the applicable statutory periods of limitations.  Except as otherwise provided herein, all covenants and agreements contained herein shall survive for the duration of any statutes of limitations applicable thereto or until, by their respective terms, they are no longer operative.

6.11Execution.  This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission or email attachment, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or email-attached signature page were an original thereof.

6.12Severability.  If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

6.13Replacement of Securities.  If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and the execution by the holder thereof of a customary lost certificate affidavit of that fact and an agreement to indemnify and hold harmless the Company for any losses in connection therewith.  The applicants for a new certificate or instrument under such

24

circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities.

6.14Remedies.  In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Investor and the Company will be entitled to seek specific performance under the Transaction Documents.  The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agree to waive in any action for specific performance of any such obligation (other than in connection with any action for a temporary restraining order) the defense that a remedy at law would be adequate.

SIGNATURE PAGE TO FOLLOW

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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

FIRSTCITY FINANCIAL CORPORATION

By:

Name:

Title:

VÄRDE INVESTMENT PARTNERS, L.P.

By Värde Investment Partners G.P., LLC, Its General Partner

By Värde Partners, L.P., Its Managing Member

By Värde Partners, Inc., Its General Partner

By:

Name:

Title:

SIGNATURE PAGE

Exhibit A

INSTRUCTION SHEET FOR INVESTOR

(to be read in conjunction with the entire Securities Purchase Agreement)

A.Complete the following items in the Securities Purchase Agreement:

1.Complete and execute the Investor Signature Page.  The Agreement must be executed by an individual authorized to bind the Investor.

2.Exhibit A-1 - - Stock Certificate Questionnaire:

Provide the information requested by the Stock Certificate Questionnaire;

3.Exhibit A-2 - - Registration Statement Questionnaire:

Provide the information requested by the Registration Statement Questionnaire.

4.Exhibit A-3 - - Investor Certificate:

Provide the information requested by the Investor Certificate.

5.Return, via facsimile, the signed Securities Purchase Agreement including the properly completed Exhibits A-1 through A-3, to:

Facsimile:

Telephone:

Attn:

6.After completing instruction number five (5) above, deliver the original signed Securities Purchase Agreement including the properly completed Exhibits A-1 through A-3 to:

Address:

B.Instructions regarding the wire transfer of funds for the purchase of the Securities will be telecopied to the Investor by the Company at a later date.

Exhibit A-1

FIRSTCITY FINANCIAL CORPORATION

STOCK CERTIFICATE QUESTIONNAIRE

	Please provide us with the following information:
1.	The exact name that the Securities are to be registered in (this is the name that will appear on the stock certificate(s)). You may use a nominee name if appropriate:
2.	The relationship between the Investor of the Securities and the Registered Holder listed in response to item 1 above:
3.	The mailing address, telephone and telecopy number and email address of the Registered Holder listed in response to item 1 above:
4.	The Tax Identification Number of the Registered Holder listed in response to item 1 above:

Exhibit A-2

FIRSTCITY FINANCIAL CORPORATION

REGISTRATION STATEMENT QUESTIONNAIRE

In connection with the Registration Statement, please provide us with the following information regarding the Investor.

1.  Please state your organization’s name exactly as it should appear in the Registration Statement:

Except as set forth below, your organization does not hold any equity securities of the Company on behalf of another person or entity.

State any exceptions here:

If the Investor is not a natural person, please identify the natural person or persons who will have voting and investment control over the Securities owned by the Investor:

2.  Address of your organization:

Telephone:

Fax: 

Contact Person: 

3.  Have you or your organization had any position, office or other material relationship within the past three years with the Company or its affiliates?  (Include any relationships involving you or any of your affiliates, officers, directors, or principal equity holders (5% or more) that has held any

position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years.)

o  Yes                           o  No

If yes, please indicate the nature of any such relationship below:

4.  Are you the beneficial owner of any other securities of the Company?  (Include any equity securities that you beneficially own or have a right to acquire within 60 days after the date hereof, and as to which you have sole voting power, shared voting power, sole investment power or shared investment power.)

o  Yes                           o  No

If yes, please describe the nature and amount of such ownership as of a recent date.

5.  Except as set forth below, you wish that all the shares of the Company’s common stock beneficially owned by you or that you have the right to acquire from the Company be offered for your account in the Registration Statement.

State any exceptions here:

6.  Have you made or are you aware of any arrangements relating to the distribution of the shares of the Company pursuant to the Registration Statement?

o  Yes                           o  No

If yes, please describe the nature and amount of such arrangements.

7.FINRA Matters

(a)State below whether (i) you or any associate or affiliate of yours are a member of the FINRA, a controlling shareholder of a FINRA member, a person associated with a member, a direct or indirect affiliate of a member, or an underwriter or related person with respect to the proposed offering; (ii) you or any associate or affiliate of yours owns any stock or other securities of any FINRA member not purchased in the open market; or (iii) you or any associate or affiliate of yours has made any outstanding subordinated loans to any FINRA member. If you are a general or limited partnership, a no answer asserts that no such relationship exists for you as well as for each of your general or limited partners.

Yes:	No:
o	o

If “yes,” please identify the FINRA member and describe your relationship, including, in the case of a general or limited partner, the name of the partner:

If you answer “no” to Question 7(a), you need not respond to Question 7(b).

(b)State below whether you or any associate or affiliate of yours has been an underwriter, or a controlling person or member of any investment banking or brokerage firm which has been or might be an underwriter for securities of the Corporation or any affiliate thereof including, but not limited to, the common stock now being registered.

Yes:	No:
o	o

If “yes,” please identify the FINRA member and describe your relationship, including, in the case of a general or limited partner, the name of the partner.

ACKNOWLEDGEMENT

The undersigned hereby agrees to notify the Company promptly of any changes in the foregoing information which should be made as a result of any developments, including the passage of time.  The undersigned also agrees to provide the Company and the Company’s counsel any and all such further information regarding the undersigned promptly upon request in connection with the preparation, filing, amending, and supplementing of the Registration Statement (or any prospectus contained therein).  The undersigned hereby consents to the use of all such information in the Registration Statement.

The undersigned understands and acknowledges that the Company will rely on the information set forth herein for purposes of the preparation and filing of the Registration Statement.

The undersigned understands that the undersigned may be subject to serious civil and criminal liabilities if the Registration Statement, when it becomes effective, either contains an untrue statement of a material fact or omits to state a material fact required to be stated in the Registration Statement or necessary to make the statements in the Registration Statement not misleading.  The undersigned represents and warrants that all information it provides to the Company and its counsel is currently accurate and complete and will be accurate and complete at the time the Registration Statement becomes effective and at all times subsequent thereto, and agrees to notify the Company immediately of any misstatement of a material fact in the Registration Statement, and of the omission of any material fact necessary to make the statements contained therein not misleading.

Dated:
	Name
	Signature
	Name and Title of Signatory

Exhibit A-3

FIRSTCITY FINANCIAL CORPORATION

CERTIFICATE FOR CORPORATE, PARTNERSHIP, LIMITED LIABILITY COMPANY,
TRUST, FOUNDATION AND JOINT INVESTORS

If the Investor is a corporation, partnership, limited liability company, trust, pension plan, foundation, joint Investor (other than a married couple) or other entity, an authorized officer, partner, or trustee must complete, date and sign this Certificate.

CERTIFICATE

The undersigned certifies that the representations and responses below are true and accurate:

(a)The Investor has been duly formed and is validly existing and has full power and authority to invest in the Company.  The person signing on behalf of the undersigned has the authority to execute and deliver the Securities Purchase Agreement on behalf of the Investor and to take other actions with respect thereto.

(b)Indicate the form of entity of the undersigned:

oLimited Partnership

oGeneral Partnership

oLimited Liability Company

oCorporation

oRevocable Trust (identify each grantor and indicate under what circumstances the trust is revocable by the grantor): 

(Continue on a separate piece of paper, if necessary.)

oOther type of Trust (indicate type of trust and, for trusts other than pension trusts, name the grantors and beneficiaries):

(Continue on a separate piece of paper, if necessary.)

oOther form of organization (indicate form of organization (

                                                                                                                                                      &nbs p;                                                              ).

(c)Indicate the approximate date the undersigned entity was formed:                                             .

(d)In order for the Company to offer and sell the Securities in conformance with state and federal securities laws, the following information must be obtained regarding your investor status.  Please initial each category applicable to you as an investor in the Company.

o1.A bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity;

o2.A broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934;

o3.An insurance company as defined in Section 2(13) of the Securities Act;

o4.An investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act;

o5.A Small Business Investment Company licensed by the U.S.  Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958;

o6.A plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000;

o7.An employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

o8.A private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;

o9.Any partnership or corporation or any organization described in Section 501(c)(3) of the Internal Revenue Code or similar business trust, not formed for the specific purpose of acquiring the Shares, with total assets in excess of $5,000,000;

o10.A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Shares, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of the Exchange Act;

o11.An entity in which all of the equity owners qualify under any of the above subparagraphs.  If the undersigned belongs to this investor category only, list the equity owners of the undersigned, and the investor category which each such equity owner satisfies:

(Continue on a separate piece of paper, if necessary.)

Please set forth in the space provided below the (i) states, if any, in the U.S. in which you maintained your principal office during the past two years and the dates during which you maintained your office in each state, (ii) state(s), if any, in which you are incorporated or otherwise organized and (iii) state(s), if any, in which you pay income taxes.

Dated:                                   , 2010

Print Name of Investor

Name:

Title:

(Signature and title of authorized officer, partner or trustee)

Exhibit B

OPINION OF COMPANY COUNSEL

Exhibit C

PLAN OF DISTRIBUTION

The selling stockholders may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions.  These sales may be at fixed or negotiated prices.  The selling stockholders may use any one or more of the following methods when selling shares:

·ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

·block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

·purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

·an exchange distribution in accordance with the rules of the applicable exchange;

·privately negotiated transactions;

·short sales;

·broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

·a combination of any such methods of sale; and

·any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales.  Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated.  The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.  Any profits on the resale of shares of common stock by a broker-dealer acting as principal might be deemed to be underwriting discounts or commissions under the Securities Act.  Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by a selling stockholder.  The selling stockholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act.

The selling stockholders may from time to time pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock

from time to time under this prospectus after we have filed a supplement to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 supplementing or amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.

The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus and may sell the shares of common stock from time to time under this prospectus after we have filed a supplement to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 supplementing or amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.

The selling stockholders and any broker-dealers or agents that are involved in selling the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales.  In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

We are required to pay all fees and expenses incident to the registration of the shares of common stock.  We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

The selling stockholders have advised us that they have not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares of common stock, nor is there an underwriter or coordinating broker acting in connection with a proposed sale of shares of common stock by any selling stockholder.  If we are notified by any selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of shares of common stock, if required, we will file a supplement to this prospectus.  If the selling stockholders use this prospectus for any sale of the shares of common stock, they will be subject to the prospectus delivery requirements of the Securities Act.

The anti-manipulation rules of Regulation M under the Securities Exchange Act of 1934 may apply to sales of our common stock and activities of the selling stockholders.

Exhibit D

COMPANY TRANSFER AGENT INSTRUCTIONS

American Stock Transfer & Trust Company

[Address]

Attention:  [              ]

Ladies and Gentlemen:

Reference is made to that certain Securities Purchase Agreement, dated as of June      , 2010 (the “Agreement”), by and among FirstCity Financial Corporation, a Delaware corporation (the “Company”), and Värde Investment Partners, L.P., a Delaware limited partnership (the “Holder”), pursuant to which the Company is issuing to the Holder shares (the “Common Shares”) of Common Stock of the Company, par value $0.01 per share (the “Common Stock”).

In connection with the consummation of the transactions contemplated by the Agreement, this letter shall serve as our irrevocable authorization and direction to you:

(i) to issue an aggregate of [               ] shares of our Common Stock in the names and denominations set forth on Annex I attached hereto. The certificates should bear the legend set forth on Annex II attached hereto and “stop transfer” instructions should be placed against their subsequent transfer.  Kindly deliver the certificates to the respective delivery addresses set forth on Annex I via hand delivery or overnight courier.  We confirm that these shares will be validly issued, fully paid and non-assessable upon issuance; and

(ii) to issue (provided that you are the transfer agent of the Company at such time) certificates for shares of Common Stock upon transfer or resale of the Common Shares and receipt by you of certificate(s) for the Common Shares so transferred or sold (duly endorsed or accompanied by stock powers duly endorsed, in each case with signatures guaranteed and otherwise in form eligible for transfer).

You acknowledge and agree that so long as you have previously received (a) written confirmation from the Company’s legal counsel that either (i) a registration statement covering resales of the Common Shares has been declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), or (ii) the Common Shares are eligible for sale in conformity with Rule 144 under the Securities Act (“Rule 144”) and (b) if applicable, a copy of such registration statement, then, unless otherwise required by law, within three (3) business days of your receipt of certificates representing the Common Shares, you shall issue the certificates representing the Common Shares to the Holder or its transferees, as the case may be, registered in the names of such Holder or transferees, as the case may be, and such certificates shall not bear any legend restricting transfer of the Common Shares thereby and should not be subject to any stop-transfer restriction.  Any certificates tendered for transfer shall be endorsed or with stock powers attached, signatures guaranteed, and otherwise in form necessary to affect transfer.

A form of written confirmation from the Company’s outside legal counsel that a registration statement covering resales of the Common Shares has been declared effective by the SEC under the Securities Act is attached hereto as Annex II.

Please be advised that the Holder is relying upon this letter as an inducement to enter into the Agreement and, accordingly, the Holder is a third party beneficiary to these instructions.

Please execute this letter in the space indicated to acknowledge your agreement to act in accordance with these instructions.  Should you have any questions concerning this matter, please contact our counsel, Brian D. Barnard at (817) 347-6605.

Very truly yours,
FIRSTCITY FINANCIAL CORPORATION
By:
	Name:
	Title:

THE FOREGOING INSTRUCTIONS ARE

ACKNOWLEDGED AND AGREED TO

this         day of                      , 2010

AMERICAN STOCK TRANSFER & TRUST COMPANY
By:
	Name:
	Title:
Enclosures

ANNEX I

SCHEDULE OF INVESTORS

ANNEX II

FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT

American Stock Transfer & Trust Company

[Address]

Attention:  [              ]

Re:FirstCity Financial Corporation

Ladies and Gentlemen:

We are counsel to FirstCity Financial Corporation, a Delaware corporation (the “Company”), and have represented the Company in connection with that certain Securities Purchase Agreement, dated as of June      , 2010 (the “Securities Purchase Agreement”), entered into by and among the Company and Värde Investment Partners, L.P., a Delaware limited partnership (the “Purchaser”), pursuant to which the Company issued to the Purchaser shares of Common Stock of the Company, par value $0.01 per share (the “Common Shares”).  Pursuant to the Securities Purchase Agreement, the Company agreed to register the resale of the Common Shares (the “Registrable Securities”) under the Securities Act of 1933, as amended (the “Securities Act”). In connection with the Company’s obligations under the Securities Purchase Agreement, on [                    ], the Company filed a Registration Statement on Form S-3 (File No. 333-                    ]) (the “Registration Statement”) with the Securities and Exchange Commission (the “Commission”) relating to the Registrable Securities which names the Purchaser as a selling shareholder thereunder.

In connection with the foregoing, we advise you that a member of the SEC’s staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the Securities Act at [              ]  [a.m.][p.m.] on [                    ], and we have no knowledge, after telephonic inquiry of a member of the staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the Commission and the Registrable Securities are available for resale under the Securities Act pursuant to the Registration Statement.

This letter shall serve as our standing notice to you that the Common Shares may be freely transferred by the Purchaser pursuant to the Registration Statement so long as the Purchaser certifies that it will comply with the plan of distribution description in connection with sales or transfers of the Common Shares set forth in the Registration Statement and with the prospectus delivery requirements of the Securities Act, to the extent such delivery requirement are applicable. You need not require further letters from us to effect any future legend-free issuance or reissuance of shares of the Common Shares to the Purchaser or the transferees of the Purchaser, as the case may be, as contemplated by the Company’s Irrevocable Transfer Agent Instructions dated                     .

Schedule 3.1(f)

Capitalization

The authorized capital stock of the Company consists of 100,000,000 shares of the common stock, par value $0.01 per share, of the Company (the “Common Stock”) and 98,000,000 shares of preferred stock, par value $0.01 per share, of the Company (the “Preferred Stock”).  As of the close of business on June 28, 2010, there were 10,508,824 shares of Common Stock outstanding (and 1,500,000 shares of treasury stock) and no shares of Preferred Stock outstanding.

At the close of business on June 28, 2010, there were (i) 865,400 options for Common Stock outstanding and (ii) 28,890 shares of restricted stock outstanding.

Schedule 3.1(g)

SEC Reports; Financial Statements

Form 8-K filed on March 31, 2010, related to acquisition on December 11, 2009, by the Company, through a majority-owned subsidiary, of 87.45% of the common stock of BEI Holding Corporation was not timely filed.

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Schedule 3.1(h)

Material Changes; Undisclosed Events, Liabilities or Developments; Solvency.

On June 25, 2010, FirstCity Commercial Corporation and FH Partners LLC, indirect subsidiaries of the Company, as borrowers, FLBG Corporation, a direct subsidiary of the Company, as guarantor, and Bank of Scotland Plc, acting through its New York Branch, as agent, and the financial institutions party thereto as lenders (the “Lenders”) entered in a Reducing Note Facility Agreement (the “Reducing Note Facility Agreement”), which amended and restated the following loan facilities provided by the Lenders to the Company and FH Partners LLC:

(a) that certain Revolving Credit Agreement dated as of November 12, 2004, among the Company, the Lenders and the Agent (as amended from time to time, the “Revolving Credit Agreement”);

(b) that certain Revolving Credit Agreement dated as of August 26, 2005, among FH Partners LLC, the Lenders and the Agent (as amended from to time to time, the “FH Partners Credit Agreement”);

(c) that certain Subordinated Delayed Draw Credit Agreement dated as of September 5, 2007, between the Company and BoS (USA), Inc. (as amended from time to time, the “Subordinated Credit Agreement”) (the Revolving Credit Agreement, the FH Partners Credit Agreement and the Subordinated Credit Agreement together, the “Existing Credit Agreements”);

On June 25, 2010, the Company executed a Limited Guaranty Agreement guaranteeing the payment of up to 75,000,000 plus an amount equal to any losses incurred by Lenders arising from the failure of the Guarantor to pay federal income taxes as required in Section 10(q) of the Limited Guaranty Agreement which result in a levy or other enforcement proceeding by the United States Internal Revenue Servicer that reduces the cash flow from or results in a loss of collateral or security interests or pledges securing the guarantied obligations (and any expenses of the Collateral Agent and Lenders related to defense of the Collateral from any such enforcement proceedings) under Reducing Note Facility Agreement, in favor of Bank of Scotland Plc, acting through its New York Branch, as Agent (in such capacity, and including its successors and assigns in such capacity, the “Agent”), for the benefit of the lenders (the “Lenders”) from time to time party to the Reducing Note Facility Agreement referred to below.

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Schedule 3.1(o)

Registration Rights

None

EX-10.61

Exhibit 10.61

RESTRICTED STOCK AWARD AGREEMENT

FIRSTCITY FINANCIAL CORPORATION

2010 STOCK OPTION AND AWARD PLAN

1.             Grant of Award.  Pursuant to the FirstCity Financial Corporation 2010 Stock Option and Award Plan (the “Plan”) of FirstCity Financial Corporation, a Delaware corporation (“FIRSTCITY”), FIRSTCITY grants to

(the “Participant”),

effective as of                               , 2010 (the “Date of Grant”), an award of                                            (        ) shares of Restricted Stock (the “Awarded Shares”), subject to the terms and conditions of this Agreement.

2.             Subject to Plan.  This Agreement is subject to the terms and conditions of the Plan, and the terms of the Plan shall control to the extent not otherwise inconsistent with the provisions of this Agreement.  To the extent the terms of the Plan are inconsistent with the provisions of this Agreement, the Plan shall control.  The capitalized terms used herein that are defined in the Plan shall have the meanings assigned to them in the Plan.  This Agreement is subject to any rules promulgated pursuant to the Plan by the Board or the Committee and communicated to the Participant in writing.

3.             Vesting.  Except as specifically provided in this Agreement, including, without limitation, the limitations set forth in Section 2, the Awarded Shares shall vest as follows:                                                                                                                                                                           &nb sp; , provided the Participant is employed by (or, if the Participant is a Director, is providing services to) FIRSTCITY or a Subsidiary on that date.  Notwithstanding the foregoing, the Awarded Shares shall immediately become one hundred percent (100%) vested on the first to occur of (i) the Participant’s termination of service due to his or her death or Disability or (ii) a Change in Control.

4.             Forfeiture and Disgorgement.  The Awarded Shares that are not vested in accordance with Section 3 shall be forfeited upon the Participant’s termination of service for any reason other than due to his death or Disability.  Upon forfeiture, all of the Participant’s rights with respect to the forfeited Awarded Shares shall cease and terminate without any further obligations on the part of FIRSTCITY. Upon forfeiture of the Awarded Shares, the forfeited Awarded Shares shall be transferred to FIRSTCITY without further action  by the Participant.

5.             Restrictions on Awarded Shares.  Subject to the provisions of the Plan and the terms of this Agreement, from the Date of Grant until the date the Awarded Shares are vested in accordance with Section 3 and are no longer subject to forfeiture in accordance with Section 4 (the “Restriction Period”), the Participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber or dispose of any of the Awarded Shares.  Except for these limitations, the Committee may in its sole discretion, remove any or all of the restrictions on such Awarded Shares whenever it may determine that, by reason of changes in applicable laws or changes in circumstances after the date of this Agreement, such action is appropriate.

6.             Legend.  The following legend shall be placed on all certificates representing Awarded Shares:

On the face of the certificate:

“Transfer of this stock is restricted in accordance with conditions printed on the reverse of this certificate.”

On the reverse:

“The shares of stock evidenced by this certificate are subject to and transferable only in accordance with the terms and conditions of that certain FirstCity Financial Corporation 2010 Stock Option and Award Plan, a copy of which is on file at the principal office of FIRSTCITY in Waco, Texas and that certain Restricted Stock Award Agreement dated as of                           , 2010, by and between FIRSTCITY and                                   .  No transfer or pledge of the shares evidenced hereby may be made except in accordance with and subject to the provisions of said Plan and Award Agreement.  By acceptance of this certificate, any holder, transferee or pledgee hereof agrees to be bound by all of the provisions of said Plan and Award Agreement.”

The following legend shall be inserted on a certificate evidencing Shares issued under the Plan if the shares were not issued in a transaction registered under the applicable federal and state securities laws:

“Shares of stock represented by this certificate have been acquired by the holder for investment and not for resale, transfer or distribution, have been issued pursuant to exemptions from the registration requirements of applicable state and federal securities laws, and may not be offered for sale, sold or transferred other than pursuant to effective registration under such laws, or in transactions otherwise in compliance with such laws, and upon evidence satisfactory to FIRSTCITY of compliance with such laws, as to which FIRSTCITY may rely upon an opinion of counsel satisfactory to FIRSTCITY.”

All Awarded Shares owned by the Participant shall be subject to the terms of this Agreement and shall be represented by a certificate or certificates bearing the foregoing legend.

7.             Delivery of Certificates.  Upon a grant of Restricted Stock, a stock certificate (or certificates) representing the number of Shares of Restricted Stock granted to the Participant shall be registered in the Participant’s account or retained in the physical possession of FIRSTCITY until such Awarded Shares are free of restriction under this Agreement.  Certificates for Awarded Shares shall be delivered to the Participant promptly after, and only after, the Restriction Period has expired without forfeiture pursuant to Section 4.   In connection with the issuance of a certificate for Restricted Stock, the Participant shall endorse such certificate in blank or execute a stock power in a form satisfactory to FIRSTCITY in blank and deliver such certificate and executed stock power to FIRSTCITY.

8.             Voting.  Subject to Section 4 and Section 5 above, the Participant, as record holder of the Awarded Shares, has all of the rights of a stockholder of FIRSTCITY, including the right to vote the shares,

2

and the right to receive any dividends thereon; provided, however, that this Section 8 shall not create any voting right where the holders of such Awarded Shares otherwise have no such right.

9.             Adjustment of Number of Awarded Shares and Related Matters.  The number of Awarded Shares shall be subject to adjustment in accordance with Sections 4.3, 12.1-12.4 and Section 13 of the Plan.

10.          Participant’s Representations.  Notwithstanding any of the provisions hereof, the Participant hereby agrees that he will not acquire any Awarded Shares, and that FIRSTCITY will not be obligated to issue any Awarded Shares to the Participant hereunder, if the issuance of such shares shall constitute a violation by the Participant or FIRSTCITY of any provision of any law or regulation of any governmental authority.  Any determination in this connection by FIRSTCITY shall be final, binding, and conclusive.  The obligations of FIRSTCITY and the rights of the Participant are subject to all applicable laws, rules, and regulations.

11.          The Participant’s Acknowledgments.  The Participant  acknowledges receipt of a copy of the Plan which is annexed hereto, and represents that he is familiar with the terms and provisions thereof, and hereby accepts these Awarded Shares subject to all of the terms and provisions thereof.  The Participant hereby agrees to accept as binding, conclusive, and final all decisions or interpretations of the Committee or the Board, as appropriate, upon any questions arising under this Agreement.

12.          Specific Performance. The parties acknowledge that remedies at law will be inadequate remedies for breach of this Agreement and consequently agree that this Agreement shall be enforceable by specific performance.  The remedy of specific performance shall be cumulative of all of the rights and remedies at law or in equity of the parties under this Agreement.

13.          Law Governing.  This Agreement shall be governed by, construed, and enforced in accordance with the laws of the State of Delaware (excluding any conflict of laws rule or principle of Delaware law that might refer the governance, construction, or interpretation of this Agreement to the laws of another state).

14.          No Right to Continue Service or Employment.  Nothing herein shall be construed to confer upon the Participant the right to continue in the employ or to provide services to FIRSTCITY or any Subsidiary, whether as an Employee or as an Director, or interfere with or restrict in any way the right of FIRSTCITY or any Subsidiary to discharge the Participant as an Employee or Director at any time.

15.          Legal Construction.  In the event that any one or more of the terms, provisions, or agreements that are contained in this Agreement shall be held by a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect for any reason, the invalid, illegal, or unenforceable term, provision, or agreement shall not affect any other term, provision, or agreement that is contained in this Agreement and this Agreement shall be construed in all respects as if the invalid, illegal, or unenforceable term, provision, or agreement had never been contained herein.

16.          Covenants and Agreements as Independent Agreements.  Each of the covenants and agreements that are set forth in this Agreement shall be construed as a covenant and agreement independent of any other provision of this Agreement.  The existence of any claim or cause of action of the Participant against FIRSTCITY, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by FIRSTCITY of the covenants and agreements that are set forth in this Agreement.

17.          Entire Agreement.  This Agreement supersedes any and all other prior understandings and agreements, either oral or in writing, between the parties with respect to the subject matter hereof and constitutes the sole and only agreements between the parties with respect to the said subject matter.  All prior negotiations and agreements between the parties with respect to the subject matter hereof are merged into this

3

Agreement.  Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement or the Plan and that any agreement, statement or promise that is not contained in this Agreement or the Plan shall not be valid or binding or of any force or effect.

18.          Counterparts.  This Agreement may be executed in separate counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

19.          Parties Bound.  The terms, provisions, and agreements that are contained in this Agreement shall apply to, be binding upon, and inure to the benefit of the parties and their respective heirs, executors, administrators, legal representatives, and permitted successors and assigns, subject to the limitation on assignment expressly set forth herein.  No person or entity shall be permitted to acquire any Awarded Shares without first executing and delivering an agreement in the form satisfactory to FIRSTCITY making such person or entity subject to the restrictions on transfer contained herein.

20.          Waiver.   Neither the failure nor any delay on the part of any party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any right, remedy, power or privilege, nor shall any waiver of any right, remedy, power, or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence.

21.          Modification.  No change or modification of this Agreement shall be valid or binding upon the parties unless the change or modification is in writing and signed by the parties.  Notwithstanding the preceding sentence, FIRSTCITY may amend the Plan to the extent permitted by the Plan.

22.          Headings.  The headings that are used in this Agreement are used for reference and convenience purposes only and do not constitute substantive matters to be considered in construing the terms and provisions of this Agreement.

23.          Gender and Number.  Words of any gender used in this Agreement shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, and vice versa, unless the context requires otherwise.

24.          Notice.  Any notice required or permitted to be delivered hereunder shall be deemed to be delivered only when actually received by FIRSTCITY or by the Participant, as the case may be, at the addresses set forth below, or at such other addresses as they have theretofore specified by written notice delivered in accordance herewith:

a.             Notice to FIRSTCITY shall be addressed and delivered as follows:

FirstCity Financial Corporation

Attn:

Facsimile:

b.             Notice to the Participant shall be addressed and delivered as set forth on the signature page.

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25.          Tax Requirements.  The Participant is hereby advised to consult immediately with his own tax advisor regarding the tax consequences of this Agreement, the method and timing for filing an election to include this Agreement in income under Section 83(b) of the Code, and the tax consequences of such election.  By execution of this Agreement, the Participant agrees that if the Participant makes such an election, the Participant shall provide FIRSTCITY with written notice of such election in accordance with the regulations promulgated under Section 83(b) of the Code.

*******************

5

IN WITNESS WHEREOF, FIRSTCITY has caused this Agreement to be executed by its duly authorized officer, and the Participant, to evidence his consent and approval of all the terms hereof, has duly executed this Agreement, as of the date specified in Section 1 hereof.

COMPANY

FIRSTCITY FINANCIAL CORPORATION

By:

Name:

Title:

PARTICIPANT:

Signature

Name:

Address:

6

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF EXECUTIVE OFFICER

I, James T. Sartain, certify that:

(1)I have reviewed this Quarterly Report on Form 10-Q of FirstCity Financial Corporation (“registrant”);

(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 16, 2010

/s/ JAMES T. SARTAIN

James T. Sartain

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF FINANCIAL OFFICER

I, J. Bryan Baker, certify that:

(1)I have reviewed this Quarterly Report on Form 10-Q of FirstCity Financial Corporation (“registrant”);

(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 16, 2010

/s/ J. BRYAN BAKER

J. Bryan Baker

Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, James T. Sartain, President and Chief Executive Officer of FirstCity Financial Corporation (“registrant”), certify, to the best of my knowledge and belief, that:

(1)the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2010 (“Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2)the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the registrant as of, and for, the periods presented in the Form 10-Q.

Date: August 16, 2010	/s/ James T. Sartain
	James T. Sartain
	President and Chief Executive Officer

The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, J. Bryan Baker, Chief Financial Officer of FirstCity Financial Corporation (“registrant”), certify, to the best of my knowledge and belief, that:

(1)the Quarterly Report of the registrant on Form 10-Q for the quarter ended June 30, 2010 (“Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2)the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the registrant as of, and for, the periods presented in the Form 10-Q.

Date: August 16, 2010	/s/ J. Bryan Baker
	J. Bryan Baker
	Chief Financial Officer

The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.