Note Payable - Senior Credit Facility with Bank of Scotland plc and BoS(USA), Inc.

9 Months Ended

Sep. 30, 2011

Note Payable - Senior Credit Facility with Bank of Scotland plc and BoS(USA), Inc.

Note Payable - Senior Credit Facility with Bank of Scotland plc and BoS(USA), Inc.

(9)  Note Payable — Senior Credit Facility with Bank of Scotland plc and BoS(USA), Inc.

In June 2010, FirstCity Commercial Corporation (“FC Commercial”) and FH Partners LLC (“FH Partners”), as borrowers, both wholly-owned subsidiaries of FirstCity, combined and refinanced the Company’s loan facilities with Bank of Scotland plc and BoS(USA), Inc. (collectively, “Bank of Scotland”), as lenders, and closed on a $268.6 million Reducing Note Facility Agreement (“Reducing Note Facility”). The Company’s outstanding indebtedness and letter of credit obligations under its then-existing loan facilities with Bank of Scotland (“Prior Credit Agreements”) were refinanced into the Reducing Note Facility, which provides for repayment to Bank of Scotland over time as cash flows from the underlying assets securing this loan facility are realized.

The unpaid principal balance on this loan facility at September 30, 2011 was $183.5 million, which included $18.9 million in Euro-denominated debt that FirstCity uses to partially off-set its business exposure to foreign currency exchange risk attributable to its net equity investments in Europe (see Note 11). Under terms of the Reducing Note Facility, the Company is required to make principal payments to reduce the unpaid principal balance outstanding on this term-loan facility to $185.0 million at December 31, 2011, $100.0 million at December 31, 2012, and the remainder due at maturity (June 2013).

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

· Limited guaranty provided by FirstCity Financial Corporation 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 $22.4 million which are included in the amount of the loan facility ($11.9 million was advanced in October 2010);

· Repayment will be made from the cash flow from assets and equity investments which were pledged to secure the Prior 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);

· 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%;

· FC Commercial and FH Partners may 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; and

· FirstCity must maintain a minimum tangible net worth (as defined) requirement of $60.0 million.

The Reducing Note Facility is guaranteed by FLBG Corp. (a wholly-owned subsidiary of FirstCity) and all of its subsidiaries (collectively, “Covered Entities”), which represent the entities that were subject to the obligations of the Prior Credit Agreements 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 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 Prior Credit Agreements. 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. The limited guaranty provided by FirstCity Financial Corporation contains covenants, representations and warranties on its part and customary events of default that are typical for transactions of this type. In the event that an event of default occurs and is continuing under the Reducing Note Facility or the limited guaranty, Bank of Scotland may accelerate the indebtedness under the Reducing Note Facility and exercise its rights under the limited guaranty. At September 30, 2011, FirstCity was in compliance with all covenants or other requirements set forth in the Reducing Note Facility and the limited guaranty provided by FirstCity Financial Corporation.