FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-7614
------
FIRSTCITY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 76-0243729
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6400 Imperial Drive, Waco, TX 76712
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 751-1750
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of August 8, 1997, 6,519,137
shares of Common Stock, par value $.01 per share, were outstanding.
<PAGE>
FORWARD LOOKING INFORMATION
The statements included in this Quarterly Report on Form 10-Q regarding future
financial performance and results and the other statements that are not
historical facts are forward-looking statements. The words "expect," "project,"
"estimate," "predict," "anticipate," "believes" and similar expressions are also
intended to identify forward-looking statements. Such statements are subject to
numerous risks, uncertainties and assumptions, including but not limited to, the
uncertainties relating to industry and market conditions, natural disasters and
other catastrophes, and other risks and uncertainties described in this
Quarterly Report on Form 10-Q and in FirstCity Financial Corporation's other
filings with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
HISTORICAL
-------------------
JUNE 30,
1997
PRO FORMA JUNE 30, DECEMBER
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (NOTE 2) 1997 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS............................................. $21,561 $15,066 $11,441
PURCHASED ASSET POOLS, NET............................................ 115,052 115,052 76,747
LOAN RECEIVABLES, NET............................................ 49,254 33,393 30,890
MORTGAGE LOANS HELD FOR SALE..................................... 221,481 - -
EQUITY INVESTMENTS IN AND ADVANCES TO ACQUISITION
PARTNERSHIPS..................................................... 22,674 22,674 21,761
SERVICING RIGHTS................................................. 48,345 2,128 2,665
CLASS "A" CERTIFICATE OF FIRSTCITY LIQUIDATING TRUST............. - - 53,617
RECEIVABLE FROM FIRSTCITY LIQUIDATING TRUST...................... 24,265 24,265 -
RECEIVABLE FOR SERVICING ADVANCES AND ACCRUED INTEREST........... 30,010 1,008 395
DEFERRED TAX BENEFIT............................................. 17,100 17,100 16,500
OTHER ASSETS, NET................................................ 23,493 23,380 13,197
-------- --------------------- ----------------
TOTAL ASSETS................................................$573,235 $254,066 $227,213
======== ===================== ================
LIABILITIES, SPECIAL PREFERRED STOCK AND SHAREHOLDERS' EQUITY
LIABILITIES:
NOTES PAYABLE, SECURED...........................................$396,466 $116,112 $91,924
NOTES PAYABLE TO OTHERS.......................................... 3,907 3,907 4,747
OTHER LIABILITIES................................................ 35,609 8,849 2,712
--------- --------------------- ----------------
TOTAL LIABILITIES..................................... 435,982 128,868 99,383
--------- --------------------- ----------------
COMMITMENTS AND CONTINGENCIES......................... - - -
SPECIAL PREFERRED STOCK, INCLUDING DIVIDENDS OF $1,515, PRO
FORMA, $1,515 AND $1,938, RESPECTIVELY (NOMINAL STATED
VALUE OF $21 PER SHARE; 2,500,000 SHARES AUTHORIZED;
ISSUED AND OUTSTANDING: 1,923,481, PRO FORMA,
1,923,481, AND 2,460,911, RESPECTIVELY).................... 41,908 41,908 53,617
SHAREHOLDERS' EQUITY:
OPTIONAL PREFERRED STOCK (PAR VALUE $.01 PER SHARE;
100,000,000 SHARES AUTHORIZED; NO SHARES ISSUED OR
OUTSTANDING).......................................... - - -
COMMON STOCK (PAR VALUE $.01 PER SHARE; 100,000,000
SHARES AUTHORIZED; ISSUED AND OUTSTANDING:
6,518,137, PRO FORMA, 4,937,151 AND 4,932,360
SHARES, RESPECTIVELY)................................. 65 49 49
PAID IN CAPITAL............................................ 30,116 23,293 23,182
RETAINED EARNINGS.......................................... 65,164 59,948 50,982
--------------- --------------------- ----------------
TOTAL SHAREHOLDERS' EQUITY............................ 95,345 83,290 74,213
--------------- --------------------- ----------------
TOTAL LIABILITIES, SPECIAL PREFERRED STOCK AND
SHAREHOLDERS' EQUITY............................. $573,235 $254,066 $227,213
=============== ===================== ================
See accompanying notes to consolidated financial statements.
3
</TABLE>
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (NOTE 2)
-----------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PROCEEDS FROM DISPOSITION AND PAYMENTS
RECEIVED ON PURCHASED ASSET POOLS..... $ 15,280 $ 13,683 $ 15,280 $ 13,683
COST OF PURCHASED ASSET POOLS.............. 10,389 9,731 10,389 9,731
------------------- ----------------- ----------------- -----------------
NET GAIN ON PURCHASED ASSET POOLS..... 4,891 3,952 4,891 3,952
OTHER INCOME:
SERVICING FEES........................ 1,660 2,855 5,074 5,769
INTEREST INCOME ON CLASS"A"
CERTIFICATE...................... 1,515 3,116 1,515 3,116
OTHER INTEREST INCOME................. 3,449 2,196 3,989 3,278
GAIN ON SALES OF MORTGAGE LOANS....... - - 8,407 5,986
RENTAL INCOME ON PURCHASED REAL
ESTATE POOLS..................... 87 1,448 87 1,448
OTHER................................. 899 339 4,332 1,067
------------------- ----------------- ----------------- -----------------
12,501 13,906 28,295 24,616
------------------- ----------------- ----------------- -----------------
EXPENSES:
INTEREST ON SENIOR SUBORDINATED NOTES
PAYABLE.......................... - 1,178 - 1,178
INTEREST ON OTHER NOTES PAYABLE....... 3,302 2,448 3,815 2,653
PROVISION FOR LOAN LOSSES............. 1,357 - 1,357 -
SALARIES AND BENEFITS................. 2,646 2,547 10,395 7,632
AMORTIZATION.......................... 803 836 2,407 2,253
OTHER GENERAL AND ADMINISTRATIVE...... 3,730 3,278 8,425 6,273
------------------- ----------------- ----------------- -----------------
11,838 10,287 26,399 19,989
------------------- ----------------- ----------------- -----------------
EQUITY IN EARNINGS OF ACQUISITION
PARTNERSHIPS.......................... 2,772 916 2,772 916
------------------- ----------------- ----------------- -----------------
EARNINGS FROM OPERATIONS BEFORE
INCOME TAXES..................... 3,435 4,535 4,668 5,543
PROVISION (BENEFIT) FOR INCOME TAXES....... (215) (14,370) 229 (13,995)
------------------- ----------------- ----------------- -----------------
NET EARNINGS..................... $ 3,650 $18,905 $ 4,439 $ 19,538
=================== ================= ================= =================
MINORITY INTEREST IN INCOME OF
SUBSIDIARY 69 - 69 -
SPECIAL PREFERRED DIVIDENDS................ 1,515 1,938 1,515 1,938
------------------- ----------------- ----------------- -----------------
NET EARNINGS TO COMMON
SHAREHOLDERS $ 2,066 $16,967 $ 2,855 $ 17,600
=================== ================= ================= =================
NET EARNINGS PER SHARE..................... $ 0.42 $ 3.45 $ 0.44 $ 2.71
=================== ================= ================= =================
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,936 4,921 6,517 6,502
=================== ================= ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (NOTE 2)
------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PROCEEDS FROM DISPOSITION AND PAYMENTS
RECEIVED ON PURCHASED ASSET POOLS......... $ 30,122 $ 27,678 $ 30,122 $ 27,678
COST OF PURCHASED ASSET POOLS.................. 19,930 19,062 19,930 19,062
------------------- ----------------- ----------------- ----------------
NET GAIN ON PURCHASED ASSET POOLS......... 10,192 8,616 10,192 8,616
OTHER INCOME:
SERVICING FEES............................ 9,522 5,373 16,391 10,284
INTEREST INCOME ON CLASS"A"
CERTIFICATE.......................... 3,174 7,428 3,174 7,428
OTHER INTEREST INCOME..................... 6,228 3,286 7,519 5,371
GAIN ON SALES OF MORTGAGE LOANS........... - - 15,283 11,886
RENTAL INCOME ON PURCHASED REAL
ESTATE POOLS......................... 157 1,935 157 1,935
OTHER..................................... 1,252 597 7,639 2,758
------------------- ----------------- ----------------- ----------------
30,525 27,235 60,355 48,278
------------------- ----------------- ----------------- ----------------
EXPENSES:
INTEREST ON SENIOR SUBORDINATED NOTES
PAYABLE.............................. - 3,552 - 3,552
INTEREST ON OTHER NOTES PAYABLE........... 5,909 4,579 6,864 5,020
PROVISION FOR LOAN LOSSES................. 2,155 - 2,155 -
SALARIES AND BENEFITS..................... 5,711 5,116 20,688 14,909
AMORTIZATION.............................. 1,756 1,661 4,908 3,995
OTHER GENERAL AND ADMINISTRATIVE.......... 7,349 5,892 15,816 11,188
------------------- ----------------- ----------------- ----------------
22,880 20,800 50,431 38,664
------------------- ----------------- ----------------- ----------------
EQUITY IN EARNINGS OF ACQUISITION
PARTNERSHIPS.............................. 4,313 1,630 4,313 1,630
------------------- ----------------- ----------------- ----------------
EARNINGS FROM OPERATIONS BEFORE
INCOME TAXES......................... 11,958 8,065 14,237 11,244
PROVISION (BENEFIT) FOR INCOME TAXES........... (251) (14,230) 581 12,952)
------------------- ----------------- ----------------- ----------------
NET EARNINGS......................... $12,209 $ 22,295 $13,656 $24,196
=================== ================= ================= ================
MINORITY INTEREST IN INCOME
OF SUBSIDIARY....................... 69 - 69 -
SPECIAL PREFERRED DIVIDENDS.................... 3,174 3,876 3,174 3,876
------------------- ----------------- ----------------- ----------------
NET EARNINGS TO COMMON SHAREHOLDERS............ $ 8,966 $ 18,419 $10,413 $20,320
=================== ================= ================= ================
NET EARNINGS PER SHARE......................... $ 1.82 $ 3.74 $ 1.60 $ 3.12
=================== ================= ================= =================
WEIGHTED AVERAGE SHARES
OUTSTANDING......................... 4,934 4,921 6,515 6,502
=================== ================= ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF TOTAL
COMMON COMMON PAID IN RETAINED SHAREHOLDERS'
(DOLLARS IN THOUSANDS) SHARES STOCK CAPITAL EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1996..................... 4,921,422 $49 $22,916 $23,286 $46,251
EXERCISE OF WARRANTS, OPTIONS AND
EMPLOYEE STOCK PURCHASE PLAN............... 10,938 - 266 - 266
NET EARNINGS FOR 1996......................... - - - 35,405 35,405
PREFERRED STOCK DIVIDENDS.................. - - - (7,709) (7,709)
------------------- ------------- -------------- --------- ------------
BALANCES, DECEMBER 31, 1996................... 4,932,360 49 23,182 50,982 74,213
------------------- ------------- -------------- --------- ------------
EXERCISE OF WARRANTS, OPTIONS AND
EMPLOYEE STOCK PURCHASE PLAN............... 4,791 - 111 - 111
NET EARNINGS, AFTER MINORITY INTEREST
IN INCOME OF SUBSIDIARY, FOR THE SIX
MONTHS ENDED JUNE 30, 1997.................... - - - 12,140 12,140
PREFERRED STOCK DIVIDENDS..................... - - - (3,174) (3,174)
------------------- ------------- -------------- --------- ------------
BALANCES, JUNE 30, 1997....................... 4,937,151 $49 $23,293 $59,948 $83,290
=================== ============= ============== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS............................................................... $12,209 $22,295
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES, NET OF EFFECT OF ACQUISITIONS:
COST OF COLLECTIONS.................................................. 19,930 19,062
PURCHASE AND ORIGINATION OF ASSET POOLS AND LOANS.................... (70,233) (32,778)
PROVISION FOR LOAN LOSSES............................................ 2,155 -
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS....................... (4,313) (1,630)
COLLECTIONS ON PERFORMING ASSET POOLS................................ 46,288 3,510
DEFERRED INCOME TAX BENEFIT.......................................... (600) (14,600)
DEPRECIATION AND AMORTIZATION........................................ 2,056 2,320
INCREASE IN OTHER ASSETS............................................. (18,984) (4,949)
INCREASE (DECREASE) IN OTHER LIABILITIES............................. 4,536 (2,048)
------------------ --------------------
NET CASH USED IN OPERATING ACTIVITIES................................ (6,956) (8,818)
------------------ --------------------
CASH FLOWS FROM INVESTING ACTIVITIES, NET OF EFFECT OF
ACQUISITIONS:
ADVANCES TO ACQUISITION PARTNERSHIPS AND AFFILIATES........................ - (235)
PAYMENTS ON ADVANCES TO ACQUISITION PARTNERSHIPS AND AFFILIATES............ 1,029 551
PRINCIPAL AND SPECIAL PREFERRED PAYMENTS ON CLASS "A" CERTIFICATE.......... 33,807 53,345
PROPERTY AND EQUIPMENT, NET................................................ (552) (397)
ACQUISITION OF SUBSIDIARIES................................................ 1,118 (302)
CONTRIBUTIONS TO ACQUISITION PARTNERSHIPS.................................. (11,378) (13,376)
DISTRIBUTIONS FROM ACQUISITION PARTNERSHIPS................................ 7,759 4,296
------------------ -------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES............................ 31,783 43,882
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES, NET OF EFFECT OF
ACQUISITIONS:
BORROWINGS UNDER NOTES PAYABLE.......................................... 162,417 71,424
PAYMENTS OF NOTES PAYABLE .............................................. (161,897) (55,194)
PAYMENT OF SENIOR SUBORDINATED NOTES PAYABLE ........................... - (53,345)
PURCHASE OF SPECIAL PREFERRED STOCK.................................. (12,567) -
PROCEEDS FROM ISSUING COMMON STOCK...................................... 111 17
DISTRIBUTIONS TO MINORITY INTEREST...................................... (5,669) -
DIVIDENDS PAID.......................................................... (3,597) -
------------------ -------------------
NET CASH USED IN FINANCING ACTIVITIES................................ (21,202) (37,098)
------------------ -------------------
NET INCREASE (DECREASE) IN CASH.................................................. $3,625 $(2,034)
CASH, BEGINNING OF PERIOD........................................................ 11,441 8,370
------------------ -------------------
CASH, END OF PERIOD.............................................................. $15,066 $6,336
================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
INTEREST................................................................ $5,159 $7,844
================== ===================
INCOME TAXES............................................................ $104 $116
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
FIRSTCITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
(1) Basis of Presentation
---------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates include
the estimation of future collections on purchased asset pools used in
the calculation of net gain on purchased asset pools. Actual results
could differ materially from those estimates.
The unaudited consolidated financial statements of FirstCity Financial
Corporation ("FirstCity" or the "Company") reflect, in the opinion of
management, all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly FirstCity's financial position
at June 30, 1997, the results of operations and the cash flows for the
three month and six month periods ended June 30, 1997 and 1996.
Certain amounts in the financial statements for prior periods have been
reclassified to conform with current financial statement presentation.
(2) Merger
------
The merger of FirstCity and Harbor Financial Group, Inc. ("Harbor") was
completed July 1, 1997. FirstCity issued 1,580,986 shares of common
stock in exchange for 100% of Harbor's outstanding capital stock.
Harbor originates and services residential loans, home improvement
loans and commercial mortgages. Harbor had approximately $12 million in
equity, assets of over $300 million and 700 employees prior to the
merger. The merger was accounted for as a pooling of interests.
The unaudited pro forma balance sheet presented in the consolidated
financial statements assumes the Harbor merger occurred June 30, 1997.
The unaudited pro forma statements of income presented in the
consolidated financial statements assume the Harbor merger occurred
January 1, 1996. No adjustments were necessary to reflect the pro forma
balance sheet or statements of income. The unaudited pro forma
statements of income do not purport to be indicative of the results of
operations which would have actually resulted had the above described
transaction occurred on January 1, 1996, or future results of
operations to be achieved by FirstCity, after its merger with Harbor.
(3) Purchased Asset Pools and Loan Receivables
------------------------------------------
The purchased asset pools and loan receivables are summarized as
follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, December 31,
Pro Forma 1997 1996
<S> <C> <C> <C>
---------------------- --------------------------- ---------------------------
Non-performing asset pools:
Loans.................................... $311,825 $311,825 $294,244
Real estate assets....................... 27,850 27,850 7,995
---------------------- --------------------------- ---------------------------
339,675 339,675 302,239
Performing asset pools................... 17,109 17,109 14,944
Purchased real estate pools.............. 20,575 20,575 25,303
---------------------- --------------------------- ---------------------------
Total purchased asset pools.............. 377,359 377,359 342,486
Discount required to reflect purchased asset
pools at amortized cost................. (262,307) (262,307) (265,739)
---------------------- --------------------------- ---------------------------
Purchased asset pools, net.................... 115,052 115,052 76,747
Construction loans receivable............ 15,861 - -
8
<PAGE>
FIRSTCITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands)
Automobile and consumer finance receivables..... 37,333 37,333 33,583
Allowance for losses............................ (3,940) (3,940) (2,693)
-------------------- --------------------------- ---------------------------
Loan receivables, net........................... 49,254 33,393 30,890
Purchased asset pools and loan receivables,
net.................................. $164,306 $148,445 $107,637
==================== =========================== ===========================
</TABLE>
The purchased asset pools and loan receivables are pledged to secure
non-recourse notes payable.
The activity in the allowance for loan losses is summarized as follows:
Six Months Ended
June 30,
------------------------------------
1997 1996
----------------- --------------
Balances, beginning of period $2,693 $ -
Provision for loan losses 2,155 -
Discounts acquired 4,936 4,308
Reduction in contingent liabilities 458 -
Charge off activity:
Principal balances charged off (7,460) (639)
Recoveries 1,158 -
----------------- --------------
Net charge offs (6,302) (639)
----------------- --------------
Balances, end of period $3,940 $3,669
================== ==============
During 1997, a note recorded at the time of original purchase of the
initial automobile finance receivables pool and contingent on the
ultimate performance of the pool was adjusted to reflect a reduction in
anticipated payments under that liability obligation. The reduction in
this recorded liability increased the amount of allowance for losses.
(4) Mortgage Loans Held for Sale
Mortgage loans held for sale include loans collateralized by first lien
mortgages on one-to-four family residences as follows:
June 30, 1997
Pro Forma
---------------------------
Residential mortgage loans........ $217,336
Unearned premiums................ 4,145
---------------------------
$221,481
---------------------------
(5) Acquisition Partnerships
The Company has investments in partnerships and related general
partners that are accounted for on the equity method. The condensed
combined financial position and results of operations of the
acquisition partnerships and general partners are summarized below:
9
<PAGE>
FIRSTCITY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
Condensed Combined Balance Sheets
June 30, December 31,
1997 1996
---------------------- ---------------------
Assets........................ $ 143,080 $ 196,533
====================== =====================
Liabilities................... $ 101,521 $ 144,094
Net equity.................... 41,559 52,439
---------------------- ---------------------
$ 143,080 $ 196,533
====================== =====================
Company's equity in
acquisition partnerships.. $ 22,674 $ 21,761
====================== =====================
Condensed Combined Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------- ----------------------------------------
1997 1996 1997 1996
------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Collections..................................... $ 36,039 $ 35,902 $ 57,116 $ 61,224
Gross margin.................................... 11,249 10,418 17,725 18,604
Interest income on performing asset pools....... 1,822 2,065 3,728 3,833
Net income.................................. 6,276 1,842 9,101 3,281
================== ================== =================== ==================
Company's equity in net income of
acquisition partnerships.................... $ 2,772 $ 916 $ 4,313 $ 1,630
================== ================== =================== ==================
</TABLE>
(6) Class "A" Certificate of FirstCity Liquidating Trust ("Trust")
--------------------------------------------------------------
FirstCity is the sole holder of the Class "A" Certificate of the Trust.
Redemptions by the Trust of the balance due on the Class "A"
Certificate were used to retire the senior subordinated notes payable.
Pursuant to a June 1997 agreement with FirstCity, the Trust is retiring
its obligation to FirstCity under the Class A Certificate by paying
FirstCity $22.75 per share for the 1,923,481 outstanding special
preferred shares at June 30, 1997, the 1997 second quarter dividend of
$.7875 per share, and 15% interest from June 30, 1997, on any unpaid
portion of the settlement amount. In the first six months of 1997,
FirstCity paid dividends of $3.6 million on special preferred stock and
purchased $11.3 million liquidation preference (537,430 shares) of
special preferred stock with distributions from the Trust. On June 30,
1997, the Trust distributed $21.0 million cash to FirstCity under the
June 1997 agreement discussed above. In July 1997 the Trust distributed
an additional $15.5 million to FirstCity under such agreement, reducing
the receivable from the Trust to approximately $7.4 million. In the
opinion of management, sufficient funds will be available from the
Trust to retire any unpaid amounts under the above mentioned agreement.
Also related to the Trust, First City received $6.8 million (recorded
as servicing fees) in the first quarter as a result of the termination
of the Investment Management Agreement.
(7) Preferred Stock
---------------
In June 1997, FirstCity offered to exchange one share of special
preferred stock for one share of adjusting rate new preferred stock.
The new preferred stock has a redemption value of $21.00 per share and
cumulative quarterly cash dividends at the annual rate of $3.15 per
share through September 30, 1998, adjusting to $2.10 per share through
the redemption date of September 30, 2005. FirstCity may redeem the new
preferred stock after September 30, 2003 for $21 per share plus accrued
dividends. The new preferred stock carries no voting rights except in
the event of non-payment of dividends. 1,066,196 shares of special
preferred stock were accepted for exchange for a like number of shares
of new preferred stock subsequent to quarter end.
At June 30, 1997, accrued dividends totaled $1.5 million, or $.7875 per
share, and were paid on July 15, 1997 to holders of the special
preferred stock.
10
<PAGE>
FIRSTCITY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements - (continued)
(Dollars in thousands)
(8) Income Taxes
------------
Federal income taxes are provided at a 35% rate. Net operating loss
carryforwards are available to FirstCity and are recognized as an
offset to the provision in the period during which the benefit is
realized. During the first six months of 1997, FirstCity recognized a
deferred tax benefit of $.6 million ($14.6 million in the first six
months of 1996). Realization of the resulting net deferred tax asset is
dependent upon generating sufficient taxable income prior to expiration
of the net operating loss carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the
recorded deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be adjusted in
the future if estimates of future taxable income during the
carryforward period change.
(9) Commitments and Contingencies
-----------------------------
FirstCity has pledged a portion of its interest in the future
distributions (after FirstCity's initial investment has been returned)
of certain acquisition partnerships to Cargill Financial
Services Corporation ("Cargill") (the subordinated debt lender to the
partnerships) under a Residual Share Agreement (the
"Agreement"). Under the Agreement, this pledge is limited to twice
FirstCity's original investment in the respective partnerships. In the
opinion of management, this pledge does not currently represent a
material contingent claim on the future distributions from the
acquisition partnerships to FirstCity.
The Company is involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of
such matters will not have a material adverse impact on the
consolidated financial condition, results of operations or liquidity of
the Company.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
------------------------------------------------------------------------
FirstCity Financial Corporation (the Company or FirstCity) reported earnings for
the second quarter and six months ended June 30, 1997 of $3.7 million and $12.2
million, respectively. After dividends on the Company's preferred stock,
earnings were $2.1 million and $9.0 million for the quarter and year-to-date,
respectively.
On a per share basis, the Company earned $.42 for the quarter ended June 30,
1997 and $1.82 for the 1997 six month period. Prior year's earnings per share of
$3.74 for the first six months included $2.97 in deferred tax benefits. Included
in the 1997 six month totals were approximately $6.8 million, or $1.38 per
share, of settlement proceeds derived from the first quarter termination of the
Investment Management Agreement with the FirstCity Liquidating Trust ("Trust").
FirstCity culminated its merger with Harbor Financial Group, Inc. ("Harbor") of
Houston on July 1, 1997. The earnings data above do not include the restated
effects of the Harbor merger which will be reflected in future financial results
of the combined companies in that the merger was accounted for as a pooling of
interests. On an historical restated basis (the basis on which future results
will be reported), earnings and per share data for the quarter and six month
periods ended June 30, 1997 are as follows:
Six
Quarter Months
Ended Ended
------------------- ------------------
June 30, 1997
----------------------------------------------
Net earnings (millions)......... $ 2.9 $ 10.4
Per share....................... $ 0.44 $ 1.60
Pro forma EPS tax adjustment... $ 0.06 $ 0.11
Pro forma EPS............. $ 0.50 $ 1.71
The historical data above reflect tax provisions made by Harbor on the basis of
its pre tax earnings during the periods presented. As a member of FirstCity's
consolidated tax group, Harbor's future earnings will be subject to FirstCity's
net operating loss carryforwards (NOL). The effect of the pro forma application
of the NOL on the quarterly and six month totals above is to increase per share
earnings by $.06 and $.11 per share, respectively, to $.50 and $1.71 per share,
for the quarter and six months ended June 30, 1997.
As a result of the merger with Harbor, the Company's 1997 third quarter results
will reflect some one-time transactions to record the expenses of the merger and
a revaluation of the recorded tax benefits expected to be realized from Harbor's
earnings stream. Merger expenses, including financial advisory, legal and
accounting fees incurred are estimated at approximately $1.4 million. The tax
benefits to be realized have not been determined, but will be based upon a
conservative evaluation of the tax savings estimated to be derived from the
ability to shelter Harbor's earnings with FirstCity's NOL. In the past,
FirstCity has recorded tax benefits based upon the tax savings expected to be
realized over a two to three year forward looking period.
During the quarter, collections on managed assets reflected the Company's
emphasis on a variety of exit strategies to dispose of assets. A $21 million
performing loan sale by the acquisition partnerships completed in the second
quarter pushed partnership portfolio collections to $36 million for the quarter.
The Company expects to have similar sales of performing loans in the future. In
addition, the Company completed two structured financings during the quarter.
The first was approximately $90 million securitization of a variety of assets
from the acquisition partnerships and owned portfolios. The second was a $35
million securitization of a portfolio of auto receivables from the Company's
auto finance subsidiary. In both cases, the Company recognized no significant
gain on the transaction.
Servicing fees for the quarter were $1.7 million, reflecting the collection
levels achieved at the partnerships during the quarter. Servicing fees are down
from the prior year's quarter due to the termination of the Trust Investment
Management Agreement in 1997's first quarter.
Asset origination and acquisition during the quarter continued to reflect the
Company's emphasis on the development of its origination activities. During the
quarter, portfolio acquisition (both within acquisition partnerships and wholly
12
<PAGE>
owned portfolios) of $11 million increased the year to date acquisitions to $58
million. Automobile finance receivable origination of $20 million increased the
year-to-date production to $50 million. Harbor continued to see its mortgage
loan production grow as $707 million was originated during the second quarter
(up from $523 million in the first quarter of 1997) bringing the year-to-date
origination totals to $1,230 million.
At quarter end, FirstCity and its subsidiaries' managed asset portfolios
consisted of the following by business segment, including mortgage loans managed
at Harbor:
June 30, 1997
--------------------------------------------------
$ Amount # of
(millions) Assets
-------------------- ---------------------
Portfolio Acquisition:
Wholly-owned $ 479 11,520
Acquisition partnerships 224 1,012
Serviced for others 86 4,702
Consumer Assets 39 4,479
Mortgage Loans (por forma):
Residential 4,248 55,645
Commercial 1,817 768
Pursuant to a June 1997 agreement with FirstCity, the Trust is retiring its
obligation to FirstCity under the Class A Certificate by paying FirstCity $22.75
per share for the 1,923,481 outstanding special preferred shares at June 30,
1997, the 1997 second quarter dividend of $.7875 per share, and 15% interest
from June 30, 1997, on any unpaid portion of the settlement agreement. Under
this agreement, FirstCity assumes the obligation for the payments of the par
value and the dividends of the special preferred stock. On June 30, 1997, the
Trust distributed $21.0 million cash to FirstCity under the June 1997 agreement.
In July 1997, the Trust distributed $15.5 million to FirstCity under such
agreement, reducing the receivable from the Trust to approximately $7.4 million.
Separately, the Company subsequent to quarter end completed an exchange offer
whereby 1,066,196 shares of outstanding special preferred stock were tendered
for a like number of shares of new redeemable preferred stock.
13
<PAGE>
HISTORICAL RESULTS OF OPERATIONS
The following table summarizes FirstCity's performance in the second quarter and
first six months of 1997 and 1996.
<TABLE>
<CAPTION>
HISTORICAL CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
====================================================================================================================================
Six Months Ended
Second Quarter June 30,
-------------------------------------- ----------------------------------
(Amounts in thousands, except per share data) 1997 1996 1997 1996
------------------ ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Income:
Net gain on purchased asset pools...................... $4,891 $3,952 $10,192 $8,616
Servicing fees......................................... 1,660 2,855 9,522 5,373
Interest income on Class "A" Certificate.............. 1,515 3,116 3,174 7,428
Other interest income.................................. 3,449 2,196 6,228 3,286
Rental income on purchased real estate pools .......... 87 1,448 157 1,935
Other income........................................... 899 339 1,252 597
----------------- -------------
------------------ -----------------
Subtotal 12,501 13,906 30,525 27,235
------------------ ----------------- ----------------- -------------
Expenses:
Interest on senior subordinated notes payable.......... - 1,178 - 3,552
Interest on other notes payable........................ 3,302 2,448 5,909 4,579
Provision for loan losses.............................. 1,357 - 2,155 -
Salaries and benefits.................................. 2,646 2,547 5,711 5,116
Amortization........................................... 803 836 1,756 1,661
Travel................................................. 513 468 837 718
Occupancy.............................................. 725 601 1,404 1,140
Legal and accounting................................... 416 577 717 1,159
Other general and administrative expense............... 2,076 1,632 4,391 2,875
----------------- -------------
------------------ -----------------
Subtotal 11,838 10,287 22,880 20,800
------------------ ----------------- ----------------- -------------
Equity earnings of acquisition partnerships............ 2,772 916 4,313 1,630
------------------ ----------------- ----------------- -------------
Earnings before income taxes........................... 3,435 4,535 11,958 8,065
------------------ ----------------- ----------------- -------------
Provision (benefit) for income taxes................... (215) (14,370) (251) (14,230)
------------------ ----------------- ----------------- -------------
Net earnings........................................... $3,650 $18,905 $12,209 $22,295
================== ================= ================= =============
Minority interest in income of subsidiary.............. 69 - 69 -
Special preferred dividends............................ 1,515 1,938 3,174 3,876
------------------ ----------------- ----------------- -------------
Net earnings to common................................. $2,066 $16,967 $8,966 $18,419
================== ================= ================= =============
Net earnings per share................................. $ 0.42 $ 3.45 $ 1.82 $ 3.74
================== ================= ================= =============
Average shares outstanding............................. 4,936 4,921 4,934 4,921
================== ================= ================= =============
Return on average equity .............................. 9.9% 120.8% 22.4% 69.7%
====================================================================================================================================
</TABLE>
14
<PAGE>
The following table analyzes the composition of FirstCity's major revenue
sources:
<TABLE>
<CAPTION>
ANALYSIS OF REVENUE SOURCES
- --------------------------------------------------------------------------------
Second Six Months Ended
Quarter June 30,
------------------------------- -----------------------------------
(Dollars in thousands) 1997 1996 1997 1996
------------- -------------- ---------------- ----------------
RESULTS DERIVED FROM PURCHASED OR ORIGINATED ASSET POOLS
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
NON-PERFORMING ASSET POOLS:
Asset portfolios purchased(1).......................... $ 3,220 $ 899 $ 3,220 $ 28,365
$ collected............................................ 15,280 13,683 30,122 27,678
Net gain on collections................................ 4,891 3,952 10,192 8,616
Profit margin on purchased asset pools................. 32.01% 28.88% 33.84% 31.13%
PERFORMING ASSET POOLS:
Asset portfolios purchased(1).......................... $ 2,237 $ - $ 2,237 $ 25,525
Loans originated....................................... 21,980 - 53,104 -
Interest income........................................ 3,231 1,829 5,777 2,476
SERVICE FEE REVENUES
- ------------------------------------------------------------
ACQUISITION PARTNERSHIPS
$ collected............................................ $ 36,039 $35,902 $ 57,116 $ 61,224
Service fee revenue ................................... 1,510 1,354 2,383 2,295
Average service fee %.................................. 4.19% 3.77% 4.17% 3.75%
TRUST
$ collected:
FDIC receivable.................................... $ - $ - $ - $ 17,698
Other trust assets................................. - 38,443 - 62,318
Service fee revenue(2)................................. - 1,124 - 2,260
Average service fee %.................................. - 2.92% - 2.82%
OTHER AFFILIATED ENTITIES
Service fee revenue.................................... $ 216 $ 377 $ 405 $ 818
EQUITY EARNINGS IN
ACQUISITION PARTNERSHIPS
------------------------------------------------------------
Asset portfolios purchased.................................. $ 5,493 $ 1,490 $ 52,730 $ 76,188
Average FirstCity investment................................ 26,669 28,584 25,566 23,381
Equity earnings in investments.............................. 2,772 916 4,313 1,630
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Asset portfolios purchased exclude FirstCity's acquisition of the remaining
50% of an acquisition partnership in the first quarter of 1997.
(2) Excludes $6,800 received as a result of terminating Investment
Management Agreement in the first quarter of 1997.
</FN>
</TABLE>
15
<PAGE>
The following table analyzes operations of FirstCity's acquisition partnerships:
<TABLE>
<CAPTION>
ANALYSIS OF ACQUISITION PARTNERSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
Second Six Months Ended
Quarter June 30,
-------------------------------------- ------------------------------------------
(Dollars in thousands) 1997 1996 1997 1996
------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
GAINS ON DISPOSITION OF ASSET POOLS
Gross collections $36,039 $35,902 $57,116 $61,224
Cost of collections 24,790 25,484 39,391 42,620
------------------ ------------------- ------------------- -------------------
Total gain on disposition of
asset pools $11,249 $10,418 $17,725 $18,604
================== =================== =================== ===================
Variance from previous year due to:
Collection levels $40 $(4,624) $(1,248) $(8,772)
Gross profit margins 788 2,217 396 3,848
Mix 3 (756) (27) (1,355)
------------------ ------------------- ------------------- -------------------
Total variance from previous year $831 $(3,163) $(879) $(6,279)
================== =================== =================== ===================
INTEREST INCOME
Performing asset pools $1,822 $2,065 $3,728 $3,833
Other (105) - 186 -
COST OF BORROWING
Interest expense $3,154 $7,172 $6,158 $12,914
Average borrowings 131,592 230,837 133,949 212,927
Average rate 9.59% 12.43% 9.19% 12.13%
OTHER EXPENSES
Service fee expense $1,534 $1,455 $2,378 $2,421
Legal 643 571 1,224 1,117
Property protection 1,303 1,107 2,266 1,996
Other 56 336 512 708
------------------ ------------------- ------------------- -------------------
Total other expenses $3,536 $3,469 $6,380 $6,242
================== =================== =================== ===================
NET INCOME $6,276 $1,842 $9,101 $3,281
----------
================== =================== =================== ===================
</TABLE>
- --------------------------------------------------------------------------------
HISTORICAL SECOND QUARTER 1997 COMPARED TO HISTORICAL SECOND QUARTER 1996
Net earnings for the second quarter of 1997 were $3.7 million compared to $18.9
million (including a $14.6 million deferred tax benefit) in the second quarter
of 1996. Net earnings to common shareholders in 1997 were $2.1 million compared
to $17.0 million in 1996. On a per share basis, earnings attributable to common
equity were $.42 for 1997 compared to $3.45 per share ($.48 excluding the
deferred tax benefit) for 1996.
NET GAIN ON PURCHASED ASSET POOLS
The net gain on purchased asset pools increased 24% to $4.9 million in 1997 from
$4.0 million in 1996. The average investment in purchased asset pools in 1997 of
$91.4 million was less than the average investment levels for such period in
1996 of $97.0 million. The profit margin on collections in 1997 was 32% as
compared to 29% in 1996.
SERVICING FEES
Servicing fee income reported during the quarter was $1.7 million (no fees from
liquidation of Trust assets were included because of termination of the
Investment Management Agreement) compared to $2.9 million in 1996. Excluding
fees related to Trust assets, servicing fees were relatively flat in the second
quarter of 1997 as compared to 1996.
16
<PAGE>
INTEREST INCOME AND EXPENSE
Interest income on the Trust Class A Certificate represents reimbursement to
FirstCity (by the Trust) of interest expense on the senior subordinated notes
(none in 1997 because the notes were redeemed by July, 1996) and accrual of
dividends of $1.5 million on special preferred stock. Interest income,
principally from performing loans, rose 57% to $3.4 million in 1997 due to loans
at National Auto Funding Corp. ("NAF"), which was acquired in the second quarter
of 1996. Interest expense on other notes payable rose in proportion to higher
combined volumes of debt associated with the purchase of asset pools, equity
investment in acquisition partnerships and operating subsidiaries.
OTHER INCOME AND EXPENSE
Rental income on purchased real estate pools declined $1.4 million from the
second quarter of 1996 because of the liquidation of the majority of income
producing real estate assets in late 1996. On this and other real estate
purchases, the net operating income derived from such assets is recognized as
other income, while gains on sales are recognized upon disposition of the asset.
FirstCity augmented the allowance for loan losses associated with the NAF
portfolio by providing a $1.4 million provision in 1997.
GENERAL AND ADMINISTRATIVE EXPENSE
Salaries and benefits, amortization and other general and administrative
expenses increased $.5 million, reflecting higher personnel costs and property
expenses associated with the growth of the Company.
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS
Equity in earnings of acquisition partnerships in 1997 increased $1.9 million
from 1996, partially as a result of the securitizations and refinancing in the
latter part of 1996. Collections in the acquisition partnerships were flat.
Higher gross profit margins increased earnings by $.8 million. This increase
coupled with lower interest expense ($4.0 million) and higher overall profits
interest in the partnerships by FirstCity in 1997 as compared to 1996 resulted
in a higher equity earnings to FirstCity.
INCOME TAXES
Federal income taxes are provided at a 35% rate applied to taxable income. The
Company believes NOLs are available to it after July 3, 1995, and are recognized
as an offset to the provision in the period during which the benefit is
realized. A deferred tax benefit of $.3 million was recorded in the second
quarter of 1997, as compared to $14.6 million in the second quarter of 1996.
Realization of the resulting net deferred tax asset is dependent upon generating
sufficient taxable income prior to expiration of the NOLs. Although realization
is not assured, management believes it is more likely than not that all of the
recorded deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be adjusted in the future if
estimates of future taxable income during the carry forward period change.
HISTORICAL FIRST SIX MONTHS 1997 COMPARED TO HISTORICAL FIRST SIX MONTHS 1996
Net earnings for the first six months of 1997 were $12.2 million (including $6.8
million related to the termination of the Investment Management Agreement)
compared to $22.3 million, including the $14.6 million deferred tax benefit, in
the first six months of 1996. Net earnings to common shareholders in 1997 were
$9.0 million, compared to $18.4 million in 1996. On a per share basis, earnings
attributable to common equity were $1.82 for 1997 compared to $3.74 per share
($.78 excluding the deferred tax benefit) for 1996.
NET GAIN ON PURCHASED ASSET POOLS
The net gain on purchased asset pools increased 18% to $10.2 million in 1997
from $8.6 million in 1996. The average investment in purchased asset pools in
1997 of $90.2 million was below the average investment levels for such period in
1996 of $95.2 million. The profit margin on collections in 1997 was 34% as
compared to 31% in 1996.
SERVICING FEES
Servicing fee income reported during the first six months of $9.5 million
included the receipt of a $6.8 million cash payment related to the termination
of the Investment Management Agreement between the Company and the Trust, under
which the Company serviced Trust assets. The $6.8 million represents servicing
fees projected to have been earned by FirstCity upon liquidation of Trust
assets, principally in 1997. On a comparative basis, servicing fees from the
Trust in the 1996 period were $2.3 million. Excluding fees related to Trust
assets, servicing fees were relatively flat in the first six months of 1997 as
compared to 1996.
17
<PAGE>
INTEREST INCOME AND EXPENSE
Interest income on the Trust Class A Certificate represents reimbursement to
FirstCity (by the Trust) of interest expense on the senior subordinated notes
(none in 1997 because the notes were redeemed by July, 1996) and accrual of
dividends of $3.2 million on special preferred stock. Interest income,
principally from performing loans, rose 90% to $6.2 million in 1997 due to loans
at NAF, which was acquired in the second quarter of 1996. Interest expense on
other notes payable rose in proportion to higher combined volumes of debt
associated with the purchase of asset pools, equity investment in acquisition
partnerships and operating subsidiaries.
OTHER INCOME AND EXPENSE
Rental income on purchased real estate pools declined $1.8 million from the
first six months of 1996 because of the liquidation of the majority of income
producing real estate assets in late 1996. FirstCity augmented the allowance for
loan losses associated with the NAF portfolio by recording a $2.2 million
provision in 1997.
GENERAL AND ADMINISTRATIVE EXPENSE
Salaries and benefits, amortization and other general and administrative
expenses increased $2.1 million, reflecting higher personnel costs and property
expenses associated with the growth of the Company
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS
Equity in earnings of acquisition partnerships in 1997 increased $2.7 million
from 1996, partially as a result of the securitizations and refinancing in the
latter part of 1996. Collections in the acquisition partnerships decreased $4.1
million, or 6.7%, and caused a decrease in gross profit of $1.2 million. Higher
gross profit margins increased earnings by $.4 million. Lower interest expense
($6.8 million), and higher overall profits interest in the partnerships by
FirstCity in 1997 as compared to 1996 also augmented earnings.
INCOME TAXES
Federal income taxes are provided at a 35% rate applied to taxable income. The
Company believes NOLs are available to it after July 3, 1995, and are recognized
as an offset to the provision in the period during which the benefit is
realized. A deferred tax benefit of $.6 million was recorded in the first six
months of 1997 as compared to $14.6 million in 1996.
18
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
The following table summarizes FirstCity's performance in the second quarter and
first six months of 1997 and 1996, assuming the merger with Harbor occurred
January 1, 1996.
- --------------------------------------------------------------------------------
PRO FORMA CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Second Quarter Six Months Ended
June 30,
-------------------------------------- ------------------------------------
(Amounts in thousands, except per share data) 1997 1996 1997 1996
------------------ ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Income:
Net gain on purchased asset pools..................... $4,891 $3,952 $10,192 $8,616
Servicing fees........................................ 5,074 5,769 16,391 10,284
Interest income on Class "A" Certificate............. 1,515 3,116 3,174 7,428
Other interest income................................. 3,989 3,278 7,519 5,371
Gain on sales of mortgage loans....................... 8,407 5,986 15,283 11,886
Rental income on purchased real estate pools ......... 87 1,448 157 1,935
Other income.......................................... 4,332 1,067 7,639 2,758
---------------- ---------------- --------------- ----------------
Subtotal 28,295 24,616 60,355 48,278
---------------- ---------------- ---------------- ----------------
Expenses:
Interest on senior subordinated notes payable......... - 1,178 - 3,552
Interest on other notes payable....................... 3,815 2,653 6,864 5,020
Provision for loan losses............................. 1,357 - 2,155 -
Salaries and benefits................................. 10,395 7,632 20,688 14,909
Amortization.......................................... 2,407 2,253 4,908 3,995
Travel................................................ 857 697 1,445 1,110
Occupancy............................................. 3,879 2,599 6,978 4,759
Legal and accounting.................................. 533 647 920 1,293
Other general and administrative expense.............. 3,156 2,330 6,473 4,026
------------------ ----------------- ---------------- ----------------
Subtotal 26,399 19,989 50,431 38,664
------------------ ----------------- ---------------- ----------------
Equity earnings of acquisition partnerships........... 2,772 916 4,313 1,630
------------------ ----------------- ---------------- ----------------
Earnings before income taxes.......................... 4,668 5,543 14,237 11,244
------------------ ----------------- ---------------- ----------------
Provision (benefit) for income taxes.................. 229 (13,995) 581 (12,952)
------------------ ----------------- ---------------- ----------------
Net earnings.......................................... $4,439 $19,538 $13,656 $24,196
================== ================= ================ ================
Minority interest in income of subsidiary............. 69 - 69 -
Special preferred dividends........................... 1,515 1,938 3,174 3,876
------------------ ----------------- ---------------- ----------------
Net earnings to common................................ $2,855 $17,600 $10,413 $20,320
================== ================= ================ ================
Net earnings per share................................ $ 0.44 $ 2.71 $ 1.60 $ 3.12
================== ================= ================ ================
Average shares outstanding............................ 6,517 6,502 6,515 6,502
================== ================= ================ ================
Return on average equity ............................. 12.1% 107.6% 30.1% 106.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PRO FORMA SECOND QUARTER 1997 COMPARED TO PRO FORMA SECOND QUARTER 1996
Net earnings for the second quarter of 1997 were $4.4 million compared to $19.5
million (including a $14.6 million deferred tax benefit) in the second quarter
of 1996. Net earnings to common shareholders in 1997 were $2.9 million compared
to $17.6 million in 1996. On a per share basis, earnings attributable to common
equity were $.44 for 1997 compared to $2.71 per share ($.46 excluding the
deferred tax benefit) for 1996.
NET GAIN ON PURCHASED ASSET POOLS
The net gain on purchased asset pools increased 24% to $4.9 million in 1997 from
$4.0 million in 1996. The average investment in purchased asset pools in 1997 of
$91.4 million was less than the average investment levels for such period in
1996 of $97.0 million. The profit margin on collections in 1997 was 32% as
compared to 29% in 1996.
19
<PAGE>
SERVICING FEES
Servicing fee income reported during the quarter was $5.1 million (no fees from
liquidation of Trust assets were included because of termination of the
Investment Management Agreement) compared to $5.8 million in 1996. Excluding
fees related to Trust assets, servicing fees increased 9.2% in the second
quarter of 1997.
INTEREST INCOME AND EXPENSE
Interest income on the Trust Class A Certificate represents reimbursement to
FirstCity (by the Trust) of interest expense on the senior subordinated notes
(none in 1997 because the notes were redeemed by July, 1996) and accrual of
dividends of $1.5 million on special preferred stock. Interest income,
principally from performing loans, rose 22% to $4.0 million in 1997 due to loans
at NAF, which was acquired in the second quarter of 1996. Interest expense on
other notes payable rose in proportion to higher combined volumes of debt
associated with the purchase of asset pools, equity interest in acquisition
partnerships and operating subsidiaries.
GAIN ON SALES OF MORTGAGE LOANS
The gain on sales of mortgage loans increased 40% from $6.0 million in 1996 to
$8.4 million in 1997 due to greater volumes of loans sold.
OTHER INCOME AND EXPENSE
Rental income on purchased real estate pools declined $1.4 million from the
second quarter of 1996 because of the liquidation of the majority of income
producing real estate assets in late 1996. On this and other real estate
purchases, the net operating income derived from such assets is recognized as
other income, while gains on sales are recognized upon disposition of the asset.
Other income increased $3.3 million from 1996 due to a $2.3 million increase in
the gain on sale of servicing rights in Harbor Financial Group. FirstCity
augmented the allowance for loan losses associated with the NAF portfolio by
providing a $1.4 million provision in 1997.
GENERAL AND ADMINISTRATIVE EXPENSE
Salaries and benefits, amortization and other general and administrative
expenses increased $5.1 million, reflecting higher personnel costs and property
expenses associated with the expansion of the mortgage business at Harbor
(through its acquisition of Hamilton Mortgage) and the creation of the
automobile finance operations at NAF.
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS
Equity in earnings of acquisition partnerships in 1997 increased $1.9 million
from 1996, partially as a result of the securitizations and refinancing in the
latter part of 1996. Collections in the acquisition partnerships were flat.
Higher gross profit margins increased earnings by $.8 million. This increase
coupled with lower interest expense ($4.0 million) and higher overall profits
interest in the partnerships by FirstCity in 1997 as compared to 1996 resulted
in a higher equity earnings to FirstCity.
INCOME TAXES
Federal income taxes are provided at a 35% rate applied to taxable income. The
Company believes NOLs are available to it after July 3, 1995, and are recognized
as an offset to the provision in the period during which the benefit is
realized. A deferred tax benefit of $.3 million was recorded in the second
quarter of 1997, as compared to $14.6 million in the second quarter of 1996.
Realization of the resulting net deferred tax asset is dependent upon generating
sufficient taxable income prior to expiration of the NOLs. Although realization
is not assured, management believes it is more likely than not that all of the
recorded deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be adjusted in the future if
estimates of future taxable income during the carry forward period change.
PRO FORMA FIRST SIX MONTHS 1997 COMPARED TO PRO FORMA FIRST SIX MONTHS 1996
Net earnings for the first six months of 1997 were $13.7 million (including $6.8
million related to the termination of the Investment Management Agreement)
compared to $24.2 million, including the $14.6 million deferred tax benefit, in
the first six months of 1996. Net earnings to common shareholders in 1997 were
$10.4 million, compared to $20.3 million in 1996. On a per share basis, earnings
attributable to common equity were $1.60 for 1997 compared to $3.12 per share
($.88 excluding the deferred tax benefit) for 1996.
20
<PAGE>
NET GAIN ON PURCHASED ASSET POOLS
The net gain on purchased asset pools increased 18% to $10.2 million in 1997
from $8.6 million in 1996. The average investment in purchased asset pools in
1997 of $90.2 million was below the average investment levels for such period in
1996 of $95.2 million. The profit margin on collections in 1997 was 34% as
compared to 31% in 1996.
SERVICING FEES
Servicing fee income reported during the first six months of $16.4 million
included the receipt of a $6.8 million cash payment related to the termination
of the Investment Management Agreement between the Company and the Trust, under
which the Company serviced Trust assets. The $6.8 million represents servicing
fees projected to have been earned by FirstCity upon liquidation of Trust
assets, principally in 1997. On a comparative basis, servicing fees from the
Trust in the 1996 period were $2.3 million. Excluding fees related to Trust
assets, servicing fees increased 20% in the first six months of 1997.
INTEREST INCOME AND EXPENSE
Interest income on the Trust Class A Certificate represents reimbursement to
FirstCity (by the Trust) of interest expense on the senior subordinated notes
(none in 1997 because the notes were redeemed by July, 1996) and accrual of
dividends of $3.2 million on special preferred stock. Interest income,
principally from performing loans, rose 40% to $7.5 million in 1997 due to loans
at NAF, which was acquired in the second quarter of 1996. Interest expense on
other notes payable rose in proportion to higher combined volumes of debt
associated with the purchase of asset pools, equity interest in acquisition
partnerships and operating subsidiaries.
GAIN ON SALES OF MORTGAGE LOANS
The gain on sales of mortgage loans increased 29% from $11.9 million in 1996 to
$15.3 million in 1997 due to greater volumes of loans sold.
OTHER INCOME AND EXPENSE
Rental income on purchased real estate pools declined $1.8 million from the
first six months of 1996 because of the liquidation of the majority of income
producing real estate assets in late 1996. Other income increased $4.9 million
over 1996 primarily due to a $3.5 million increase in the gain on sale of
servicing rights in Harbor Financial Group. FirstCity augmented the allowance
for loan losses associated with the NAF portfolio by recording a $2.2 million
provision in 1997.
GENERAL AND ADMINISTRATIVE EXPENSE
Salaries and benefits, amortization and other general and administrative
expenses increased $11.3 million, reflecting higher personnel costs and property
expenses associated with the expansion of the mortgage business at Harbor
(through its acquisition of Hamilton Mortgage) and the creation of the
automobile finance operations at NAF.
EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS
Equity in earnings of acquisition partnerships in 1997 increased $2.7 million
from 1996, partially as a result of the securitizations and refinancing in the
latter part of 1996. Collections in the acquisition partnerships decreased $4.1
million, or 6.7%, and caused a decrease in gross profit of $1.2 million. Higher
gross profit margins increased earnings by $.4 million. Lower interest expense
($6.8 million), and higher overall profits interest in the partnerships by
FirstCity in 1997 as compared to 1996 also augmented earnings.
INCOME TAXES
Federal income taxes are provided at a 35% rate applied to taxable income. The
Company believes NOLs are available to it after July 3, 1995, and are recognized
as an offset to the provision in the period during which the benefit is
realized. A deferred tax benefit of $.6 million was recorded in the first six
months of 1997 as compared to $14.6 million in 1996.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table analyzes the components of portfolio and corporate debt,
capital positions at the Company and in the acquisition partnerships and
associated leverage ratios of FirstCity and the acquisition partnerships:
<TABLE>
<CAPTION>
ANALYSIS OF COMBINED DEBT AND EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------- --------------- -------------- --------------
(Dollars in thousands) 1997 1996 1997 1996
---------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
AVERAGE DEBT OUTSTANDING:
Borrowing by acquisition partnerships, non-recourse $ 131,592 $ 230,837 $ 133,949 $ 212,927
Borrowings secured by purchased asset pools, non-recourse 36,386 62,660 42,478 67,092
Borrowings secured by mortgage operations, non-recourse 288,461 171,828 262,487 158,828
Borrowings secured by automobile receivables, non-recourse 50,604 10,212 41,979 5,134
Other secured corporate borrowings, with recourse 26,885 29,232 26,582 22,438
------------ --------------- -------------- -------------
Total average debt outstanding, pro forma $ 533,928 $ 504,769 $ 507,475 $ 466,419
COMBINED EQUITY AT QUARTER END:
FirstCity Financial Corporation, pro forma $ 95,345 $ 74,263 $ 95,345 $ 74,263
Minority interest in acquisition partnerships 24,050 26,687 24,050 26,687
------------ --------------- -------------- -------------
Total equity, pro forma $ 119,395 $ 100,950 $ 119,395 $ 100,950
LEVERAGE RATIOS:
Average debt (excluding senior subordinated debt)
to combined equity, pro forma 4.5:1 5.0:1 4.3:1 4.6:1
AVERAGE COST OF FUNDS:
Borrowing by acquisition partnerships, non-recourse 9.6% 12.4% 9.2% 12.1%
Borrowings secured by purchased asset pools, non-recourse 10.7 9.6 10.3 9.7
Borrowing secured by mortgage operations, non-recourse 5.9 5.6 5.9 5.6
Borrowings secured by automobile receivables, non-recourse 8.8 8.8 8.7 8.7
Other secured corporate borrowings, with recourse 9.8 10.4 9.9 10.1
- ----------------------------------------------------------------
</TABLE>
Note - The above table excludes senior subordinated debt in the 1996 period.
Data gives effect to Harbor merger consummated on July 1, 1997.
Generally, the liquidity needs of FirstCity are for operations, payment of debt,
equity for acquisitions of purchased asset pools, investments in and advances to
acquisition partnerships and other investments by the Company. The sources of
liquidity are funds generated from operations, equity distributions from
acquisition partnerships and short term borrowings from revolving lines of
credit and other specific purpose short term borrowings.
FirstCity contributed equity to acquisition partnerships totaling $11.4 million
to facilitate the purchase of $52.7 million in portfolios of assets in the first
six months of 1997 and also acquired $5.5 million in purchased asset pools. In
1997, FirstCity borrowed $18.0 million and repaid $33.9 million under a credit
facility provided by Cargill, decreasing the balance under that facility to $3.5
million at quarter end. Such facility matures on August 31, 1997, and is secured
by substantially all of the unencumbered equity interest in subsidiaries and
acquisition partnerships and certain other assets of the Company.
In 1997, NAF borrowed $32.2 million under a $50 million Warehouse Credit
Agreement with ContiTrade Services L.L.C. to purchase and originate auto loans
and repaid $46.7 million with the securitizations proceeds and equity infusions
from FirstCity. Increases in loan originations may require additional equity
infusions into NAF to comply with the borrowing base terms of the Warehouse
Credit Agreement.
Currently, Harbor Financial Group has a credit facility of $330 million with a
group of banks lead by Texas Commerce Bank, Houston. The facility, currently
maturing in March of 1998, is used to finance their mortgage warehouse
operations as well as other activities. Harbor is currently discussing with the
banks the renewal and expansion of this facility to fund the anticipated growth
in mortgage operations.
In the first six months of 1997, FirstCity paid dividends on its special
preferred stock of $3.6 million. The Company also purchased approximately $11.3
million (liquidation preference) of special preferred stock with the proceeds of
distributions from the Trust on the Class A Certificate. On June 30, 1997, the
Trust distributed $21.0 million cash
22
<PAGE>
to FirstCity under the June 1997 agreement with the Trust to retire the Trust
Class A Certificate. In July 1997, the Trust distributed $15.5 million to
FirstCity, reducing the receivable from the Trust to approximately $7.4 million.
In the future, FirstCity anticipates being able to raise capital through public
debt or equity offerings, thus enhancing the investment and growth opportunities
of the Company. The Company believes that these and other sources of liquidity,
including refinancing the Cargill credit facility to the extent necessary,
securitizations, and funding from senior lenders providing funding for
acquisition partnership formation and direct portfolio and business
acquisitions, should prove adequate to continue to fund the Company's
contemplated investment activities. At June 30, 1997, total common equity was
$83.3 million ($95.3 million, pro forma) and is considered by management
adequate to support the current capital requirements and planned growth of the
Company.
23
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders (the "Annual
Meeting") on June 27, 1997. The following items of business were
considered at the Annual Meeting:
(a) Election of Directors
All standing directors other than David Palmer, who declined
to stand for reelection, were elected as directors to serve as
members of the Company's Board of Directors until the
Company's 1998 annual meeting of shareholders. The number of
votes cast for each nominee was as follows:
Votes Cast Votes
Nominee For Against Abstained
- --------------------------------------------------------------------------------
James R. Hawkins 4,508,531 0 4,043
C. Ivan Wilson 4,508,723 0 3,851
James T. Sartain 4,508,723 0 3,851
Rick R. Hagelstein 4,508,723 0 3,851
Matt A. Landry, Jr. 4,508,723 0 3,851
Richard E. Bean 4,508,723 0 3,851
Bart A. Brown, Jr. 4,508,723 0 3,851
Donald J. Douglass 4,508,723 0 3,851
David W. MacLennan 4,508,723 0 3,851
(b) Approval of Harbor Merger
The Harbor Merger was approved by the shareholders as follows:
Votes Cast Votes
For Against Unvoted Abstentions
--------------------------------------------------------
Harbor Merger 3,515,619 5,735 982,001 9,219
(c) Ratification of Appointment of Auditors
A proposal to ratify the Board of Directors' appointment of
KPMG Peat Marwick LLP as the Company's independent Auditors
for 1997 was approved by the shareholders. The number of
votes for the proposal: 4,500,981; votes withheld: 2,681;
abstentions: 8,912.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.1
Financial Data Schedule. (Exhibit 27.1 is being submitted as
an exhibit only in the electronic format of this Quarterly
Report on Form 10-Q being submitted to the Securities and
Exchange Commission. Exhibit 27.1 shall not be deemed filed
for purposes of Section 11 of the Securities Act of 1933,
Section 18 of the Securities Act of 1934, as amended, or
Section 323 of the Trust Indenture Act of 1939, as amended,
or otherwise be subject to the liabilities of such sections,
nor shall it be deemed a part of any registration statement
to which it relates.)
(b) Reports on Form 8-K.
None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRSTCITY FINANCIAL CORPORATION
By /s/ Gary H. Miller
--------------------------------
Name: Gary H. Miller
Title: Senior Vice President and
Chief Financial Officer
(Duly authorized officer and
chief accounting officer
of the Registrant)
August 14, 1997
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 15,066
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 164,306
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 254,066
<CURRENT-LIABILITIES> 0
<BONDS> 120,019
41,908
0
<COMMON> 49
<OTHER-SE> 83,241
<TOTAL-LIABILITY-AND-EQUITY> 254,066
<SALES> 30,122
<TOTAL-REVENUES> 54,768
<CGS> 19,930
<TOTAL-COSTS> 19,930
<OTHER-EXPENSES> 14,816
<LOSS-PROVISION> 2,155
<INTEREST-EXPENSE> 5,909
<INCOME-PRETAX> 11,958
<INCOME-TAX> (251)
<INCOME-CONTINUING> 12,209
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,966
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.82
</TABLE>
