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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

Commission file number 033-19694

FirstCity Financial Corporation
(Exact name of registrant as specified in its charter)

(254) 761-2800
(Registrant's Telephone Number, Including Area Code)

         Securities registered pursuant to Section 12(b) of the Act:

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         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 ý    No o

         Indicate by check 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.

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

         The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2010 was $58,991,383 based on the closing price of the common stock of $6.66 per share on such date as reported on the NASDAQ Global Select Market.

         The number of shares of the registrant's common stock outstanding at March 25, 2011 was 10,279,464.

DOCUMENTS INCORPORATED BY REFERENCE

         Part III of this Form 10-K incorporates certain information by reference to the earlier filed of (i) an amendment to this Annual Report on Form 10-K or (ii) the definitive proxy statement for the 2011 Annual Meeting of Stockholders.

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FIRSTCITY FINANCIAL CORPORATION
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K 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. Risks, uncertainties and assumptions that affect our business, operating results and financial condition include, but are not limited to:

•

general political, economic or industry conditions, either domestically or internationally, may be less favorable than expected and may affect our access to capital, our ability to fund investments, the success of our business, and our stock price;



•

volatility and disruptions in the functioning of financial markets and related liquidity issues could continue or worsen and, therefore, may adversely impact our business, financial condition and results of operations;



•

our liquidity and ability to raise capital to finance and fund our operations and investments may be limited;



•

the sufficiency of our funds generated from operations, existing cash, available borrowings and available investment capital to finance our current operations and future investment activity;



•

changes in the credit or capital markets that could affect our ability to borrow money or raise capital to purchase and service portfolio assets or invest capital in domestic middle-market companies;



•

we may incur significant credit losses due to downward trends in general economic conditions and real estate markets;



•

changes in the business practices of credit originators, financial institutions and governmental agencies in terms of selling loan portfolios and other financial assets may affect the availability of portfolio assets offered for sale;



•

declining values in the collateral securing our loan portfolios and deterioration in residential and commercial real estate markets may adversely affect our results of operations;



•

changes in the performance and creditworthiness of our borrowers and other counterparties may adversely impact our business, financial condition and results of operations;



•

availability of portfolio asset and domestic middle-market investment opportunities, and our ability to consummate such investments and transactions on acceptable terms and at appropriate prices;



•

the degree and nature of competition in the business segments, industries and geographic regions in which we invest and operate;



•

our ability to sustain relationships with our acquisition partnership investors, and to find other suitable investment partners;

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•

our ability to satisfy covenants related to our debt agreements;



•

our ability to project future cash collections and develop critical assumptions and estimates underlying portfolio asset performance;



•

our financial statements are based in part on assumptions and estimates which, if wrong, could cause unexpected losses in the future;



•

our ability to manage risks associated with growth and entry into new businesses and foreign markets;



•

our ability to employ and retain qualified employees;



•

natural disasters including, but not limited to, hurricanes, tornadoes, earthquakes, fires and floods, may disrupt the local economies in the geographic regions in which we operate which, in turn, may adversely affect the ability of our borrowers to repay their debts, condition of assets that collateralize our loans, and our results of operations;



•

our ability to utilize all of our estimated net operating loss carryforwards and deferred tax assets;



•

changes in domestic and foreign government regulations, including bankruptcy or collections laws, that affect our ability to collect sufficient amounts on our portfolio assets and negatively impact our business segments;



•

our ability to comply with the federal, state and local statutes and regulations in the business segments, geographic regions and jurisdictions in which we operate;



•

adverse fluctuations and volatility in foreign currency exchange rates may adversely impact our results of operations and value of foreign investments;



•

changes in or interpretation of domestic or foreign tax, monetary or fiscal policies, rules and regulations may adversely affect our operations;



•

changes in accounting policies or accounting standards, and changes in how accounting standards are interpreted or applied, could materially affect how we report our financial results and condition;



•

our ability to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder; and



•

legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly involving our business segments and underlying subsidiaries.

        We are also subject to other risks detailed herein or detailed from time-to-time in our filings with the Securities and Exchange Commission. These listed risks 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.

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PART I

Item 1.    Business.

General

        FirstCity Financial Corporation, a Delaware corporation, is a specialty 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 Form 10-K, we mean FirstCity Financial Corporation and subsidiaries (consolidated). The Company engages in two major business segments—Portfolio Asset Acquisition and Resolution business segment and Special Situations Platform business segment.

        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, generally at a discount to their legal principal balances or appraised values, and services and resolves these assets in an effort to maximize the present value of the ultimate cash recoveries.

        The Company engages in its Special Situations Platform business through its majority ownership in a special-purpose investment entity that 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 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 and common equity warrants. The Company also engages in other investment activities, including leveraged buyouts and distressed debt transactions, through its Special Situations Platform business.

        The Company became a publicly-held institution in July 1995 through its acquisition by merger of First City Bancorporation of Texas, Inc. ("FCBOT"), a former bank holding company that had been engaged in a proceeding under Chapter 11 of the U.S. Bankruptcy Code since November 1992. As a result of the merger, the Company's common stock, $.01 par value per share, became publicly held.

Access to Public Filings and Additional Information

        FirstCity maintains an internet website at www.fcfc.com. Information contained on our website is not part of this Annual Report on Form 10-K. Stockholders of the Company and the public may access our periodic and current reports (including annual, quarterly and current reports on Form 10-K, Form 10-Q and Form 8-K, respectively, and any amendments to those reports) as filed with or furnished to the Securities and Exchange Commission ("SEC"). We make this information available through the "Investors" section of our website as soon as reasonably practicable after we electronically file the information with or furnish it to the SEC. This information may be reviewed, downloaded and printed, free of charge, from our website at any time. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC at www.sec.gov.

        FirstCity also provides public access to our Code of Business Conduct and Ethics, and the charters of the following committees of our Board of Directors: the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee. The Code of Business Conduct and Ethics and committee charters may be viewed free of charge through the "Investors" link of our website at www.fcfc.com.

        Stockholders of the Company and the public may obtain copies of any of these reports and documents free of charge by writing to: FirstCity Financial Corp., Attn: Investor Relations, 6400 Imperial Dr., Waco, Texas 76712.

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Overall Business Strategy

        The Company has strategically aligned its operations into two major business segments—the Portfolio Asset Acquisition and Resolution business and Special Situations Platform business. 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 (i.e. liquidates) such Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. FirstCity's entry into its Special Situations Platform business began in April 2007 with the formation of FirstCity Denver Investment Corp. ("Special Situations" or "FirstCity Denver")—a majority-owned special-purpose investment entity which was designed to provide the Company with another investment platform to leverage the skills and expertise of management and other business partners by seeking out additional investment opportunities involving corporate restructurings and distressed debt, and negotiating and structuring such investments to manage our risk while providing attractive risk-adjusted returns. In the Special Situations Platform business, FirstCity provides investment capital to privately-held middle-market companies through flexible capital structuring arrangements and focuses on restructurings, turnarounds, businesses with robust market positions, and other special situations.

        Although we are operating in a challenging economic environment, both domestically and internationally, our primary objective remains to utilize the skills, experience and expertise of our management and business partners by identifying, evaluating, pricing, acquiring, servicing and resolving Portfolio Assets to maximize ultimate cash collections; and to identify and invest capital in middle-market investment opportunities to provide attractive risk-adjusted returns. To enhance our position in the specialty financial services industry, FirstCity's business strategies include the following:

Portfolio Asset Acquisition and Resolution Business

•

Increase the Company's investments in domestic Portfolio Assets acquired from financial services entities, government agencies and other market participants for our own account, thereby leveraging our management team's considerable experience in acquiring distressed assets from market-sellers in an industry fueled by challenges experienced in the financial services sector.



•

Increase the Company's investments in domestic Portfolio Assets acquired through special-purpose investment entities formed with one or more other co-investors, thereby capitalizing on the skills, expertise and resources of business partners to identify and source Portfolio Asset acquisition opportunities, pool our extensive and diverse experience and knowledge of distressed asset markets, and provide additional financing alternatives to fund Portfolio Asset acquisitions.



•

Seek emerging opportunities in international markets, on a selective basis, to acquire, manage, service and resolve Portfolio Assets, either for the Company's own account or through special-purpose investment entities formed with one or more other co-investors.



•

Capitalize on the Company's servicing expertise to enter into new markets with servicing arrangements that provide for reimbursement of costs of entry and operations, plus an incentive servicing fee after certain economic thresholds are met, without requiring substantial equity investments.

Special Situations Platform Business

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Generate current income and capital appreciation by growing our existing special situations investments and potentially investing in additional opportunities involving privately-held middle-market companies to provide an attractive risk-adjusted return. Our special situations investments will primarily take the form of senior and junior financing arrangements, but may

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also include other types of investments, including direct equity investments, common equity warrants, leveraged buyouts and distressed debt transactions.

Overall

•

Identify and acquire, through non-traditional niche sources, distressed assets and other asset classes that meet the Company's investment criteria, which may involve the utilization of special acquisition structures.



•

Maximize growth in operations, thereby permitting the utilization of the Company's remaining net operating loss carryforwards ("NOLs").



•

Continue to maximize shareholder value through monetizing our Portfolio Asset and Special Situations investments.

Portfolio Asset Acquisition and Resolution Business Segment

        In the Portfolio Asset Acquisition and Resolution ("PAA&R") business, the Company acquires Portfolio Assets, generally at a discount to their legal principal balances or appraised values ("Face Value"), and services and resolves such Portfolio Assets in an effort to maximize the present value of the ultimate cash recoveries. The amounts paid for the Portfolio Assets reflect FirstCity's determination that it is probable the Company will be unable to collect all amounts due according to their underlying contractual terms.

        The Company began operating in the financial services sector in 1986 as an acquirer of distressed assets from the Federal Deposit Insurance Corporation and the Resolution Trust Corporation. From its original office in Waco, Texas, with a staff of four professionals, the Company's asset acquisition and resolution business expanded to become an active participant in the financial services sector, an industry fueled by challenges experienced throughout the world. Through the years, the Company also began acquiring assets from healthy financial institutions interested in eliminating non-performing assets from their portfolios.

        FirstCity acquires Portfolio Assets for its own account or through investment entities formed with one or more co-investors (each such entity, referred to as an "Acquisition Partnership"). Since inception, FirstCity and the Acquisition Partnerships have acquired over $11.7 billion in Face Value of Portfolio Assets, with FirstCity's equity investment approximating $947.9 million. Information related to FirstCity's Portfolio Asset investments in 2010 and 2009 is included under the heading "Portfolio Asset Acquisitions—Portfolio Asset Acquisition and Resolution Business Segment" in Part II, Item 7 of this Annual Report on Form 10-K.

Industry Overview and Sources of Portfolio Assets

        The purchase and resolution of underperforming and non-performing assets is an industry that is driven by several factors including:

•

increasing debt levels;



•

increasing defaults of underlying receivables;



•

challenges presented by a decline in general economic conditions in the U.S. and internationally;



•

increasing levels of troubled and failed financial institutions in the U.S.; and



•

mounting debt and pressure on financial services entities to remove non-performing or unattractive assets from their balance sheets.

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        Deteriorating economic conditions in recent years have augmented the trend of financial institutions, government agencies and other sellers to package and sell asset portfolios to investors (generally at a discount) as a means of disposing of non-performing loans or other surplus or non-strategic assets. Financial institutions are also selling underperforming and non-performing assets to improve their regulatory capital positions (pursuant to state and federal regulations, commercial banks and insurance companies are generally required to allocate more regulatory capital to underperforming and non-performing assets). Sales of such assets improve the seller's balance sheet (i.e. asset quality and capital positions), reduce overhead costs, reduce staffing requirements, and avoid management and personnel distractions associated with the intensive and time-consuming task of resolving loans and disposing of real estate.

        More recently, however, marketplace and legislative responses to the continued financial turmoil affecting the global banking systems and financial markets have resulted in a rise in the number of financial institution consolidations and a supply constraint caused by the sellers' reluctance to trade distressed assets—which reduces the supply of distressed assets for sale in the marketplace. We believe, however, that as a result of the difficulty in servicing and resolving these underperforming and non-performing assets, and the desire of financial institutions, government entities and other entities to shed these assets for reasons described above, the supply of Portfolio Assets available for purchase will gradually increase over the coming years.

Portfolio Assets

        FirstCity acquires and manages Portfolio Assets, which are generally purchased at a discount to Face Value by FirstCity or through Acquisition Partnerships. The Portfolio Assets are generally non-homogeneous assets, including loans of varying qualities that are unsecured or secured by diverse collateral types and real estate. Some of the secured 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 either on real estate, business assets or other collateral cash flow.

        FirstCity seeks to resolve Portfolio Assets through (i) a negotiated settlement with the borrower in which the borrower pays all or a discounted amount of the loan, (ii) conversion of the loan into a performing asset through servicing efforts followed by either a sale of the loan to a third party or retention of the loan by FirstCity or the Acquisition Partnerships, or (iii) foreclosure and sale of the collateral securing the loan. FirstCity typically resolves its Portfolio Assets within 12 to 60 months of acquisition, with a majority of such assets liquidated within the first 36 months.

        FirstCity has substantial experience acquiring, managing and resolving a wide variety of asset types and classes. As a result, it does not limit itself as to the types of Portfolio Assets it will evaluate and purchase. FirstCity's willingness to acquire Portfolio Assets is generally determined by factors including the information that is available regarding the assets in a Portfolio, the price at which the Portfolio can be acquired and the expected net cash flows from the resolution of such assets. FirstCity and the Acquisition Partnerships have acquired Portfolio Assets in virtually all states throughout the U.S., and various countries in Europe and Latin America. FirstCity believes that its willingness to acquire non-homogeneous Portfolio Assets without regard to geographic location provides it with an advantage over certain competitors that limit their activities to either a specific asset type or geographic location.

        FirstCity also seeks to capitalize on emerging opportunities in foreign countries, on a limited and selective basis, in which the market for non-performing loans of the type generally purchased by FirstCity is less efficient than the market for such assets in the United States. FirstCity has equity interests in European and Latin American servicing companies, and in conjunction with these servicing entities, the Company pursues opportunities, on a selective basis, with the servicing entities' investors to purchase pools of Portfolio Assets in these regions.

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Sources of Portfolio Assets

        FirstCity develops its Portfolio Asset opportunities through a variety of sources. Since the activities or contemplated activities of expected sellers are generally publicized in industry publications and through other similar sources, FirstCity monitors such publications and similar sources. FirstCity also maintains relationships with a variety of parties involved as sellers or as brokers or agents for sellers. Many of the brokers and agents concentrate by asset type and have become familiar with FirstCity's acquisition criteria and periodically approach FirstCity with identified opportunities. In addition, business referrals from other investors in Acquisition Partnerships, repeat business from previous sellers, focused marketing by FirstCity and the nationwide presence of FirstCity are important sources of business.

        FirstCity identifies investment opportunities in foreign markets in much the same manner as in the United States. In varying degrees of volume and efficiency, the markets in Europe and Latin America all include sellers of non-performing assets. FirstCity's established presence in Latin America and Europe provides a strong base for the identification, valuation, and acquisition of assets in those countries, as well as in adjacent markets. FirstCity identifies partners who have contacts within various foreign markets and/or can assist in locating Portfolio Asset investment opportunities with FirstCity. FirstCity's identification of investment opportunities in foreign markets is more-selective and limited than the pursuit of such investment opportunities in U.S. markets.

Asset Analysis and Underwriting

        Prior to making an offer to acquire Portfolio Assets, FirstCity performs an evaluation of the underlying assets that comprise the Portfolio. For non-homogeneous Portfolio Assets, FirstCity evaluates all individual assets determined to be significant to the total of the proposed purchase. If the Portfolio Assets are homogenous in nature, a sample of the assets comprising the Portfolio may be selected for evaluation. The evaluation of individual assets generally includes analyzing the credit and collateral file or other due diligence information supplied by the seller. Based upon such seller-provided information, FirstCity undertakes additional evaluations of the asset, that, to the extent permitted by the seller, may include site visits to, and environmental reviews of, the property securing the loan or the asset proposed to be purchased. FirstCity also analyzes relevant local economic and market conditions based on information obtained from its prior experience in the market or from other sources, such as local appraisers, real estate principals, realtors and brokers.

        The evaluation includes an analysis of an asset's projected cash flow and sources of repayment, including the availability of third party guarantees. FirstCity values loans (and other assets included in a portfolio) on the basis of its estimate of the present value of estimated cash flow to be derived in the resolution process. Once the cash flow estimates for a proposed purchase and the financing and partnership structure, if any, are finalized, FirstCity can complete the determination of its proposed purchase price for the targeted Portfolio Assets. Portfolio Asset acquisitions are subject to purchase and sale agreements between the seller and the purchasing affiliate of FirstCity.

        The analysis and underwriting procedure in foreign markets follows the same due diligence process and philosophy as that employed by the Company domestically. Additional risks are evaluated in foreign markets, including economic factors (inflation or deflation), currency strength, short and long-term market stability and political concerns. These risks are evaluated and priced into the cost of the acquisition.

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Servicing

Portfolio Assets

        After a Portfolio is acquired, FirstCity assigns the Portfolio Assets to account servicing officers who are independent of the personnel that performed the due diligence evaluation in connection with the purchase of the Portfolio. Portfolio Assets are serviced either at the Company's headquarters or in one of FirstCity's other offices. FirstCity may establish servicing operations in locations in close proximity to significant concentrations of Portfolio Assets. Such offices are reviewed for closing after the assets in the geographic region surrounding the office are substantially resolved. The assigned account servicing officer develops a business plan and budget for each asset based upon an independent review of the cash flow projections developed during the investment evaluation, physical inspections of assets or collateral underlying the related loans, evaluation of local market conditions and discussions with the relevant borrower. Budgets are periodically reviewed and revised as necessary. FirstCity employs loan-tracking software and other operational systems that are generally similar to systems used by commercial banks, but which have been enhanced to track both the collected and the projected cash flows from Portfolio Assets.

        The Company generally does not capitalize and carry on its balance sheet the servicing rights related to its Portfolio Assets because servicing is not contractually separated from the underlying assets by sale or securitization of the assets with servicing retained (or separate purchase or assumption of the servicing), and FirstCity does not have the risks and rewards of ownership of the servicing rights. FirstCity services, in all material respects, the Portfolio Assets owned for its own account, the Portfolio Assets owned by the Acquisition Partnerships and, to a very limited extent, certain Portfolio Assets owned by third parties. In connection with the Acquisition Partnerships in the United States, FirstCity generally earns a servicing fee, which is based on a percentage of gross cash collections generated (rather than a management fee based on the Face Value of the asset being serviced). The rate of servicing fee charged is generally a function of the average Face Value of the assets within each pool being serviced (the larger the average Face Value of the assets in a Portfolio, the lower the fee percentage within the prescribed range), the type of assets and the level of servicing required on each asset. Many of the servicing arrangements with U.S. Acquisition Partnerships also entitle FirstCity to additional compensation in the form of an incentive servicing fee after certain economic thresholds are met (refer to FirstCity's investment agreement with a co-investor under the heading "Relationships with Other Investors in Acquisition Partnerships" below). For the Mexican Acquisition Partnerships, FirstCity earns a servicing fee based on costs of servicing plus a profit margin. The Company also has certain consulting contracts with its Mexican investment entities pursuant to which the Company is entitled to additional compensation for servicing once a specified return to the investors has been achieved. The Acquisition Partnerships in Europe and South America are serviced by various entities in which the Company maintains an equity interest in the servicing entities. In all cases, service fees are recognized as they are earned in accordance with the servicing agreements.

Structure and Financing of Portfolio Asset Purchases

        Portfolio Assets are either acquired for the account of a FirstCity subsidiary or through the Acquisition Partnerships. Portfolio Assets acquired directly by a FirstCity subsidiary may be funded with equity financing provided by a third party lender, loans made by FirstCity to its subsidiaries, and/or other secured debt that is recourse only to the FirstCity subsidiary acquiring the Portfolio Assets. Portfolio Assets owned directly by an Acquisition Partnership may be funded with equity contributions, loans made by a co-investor and/or FirstCity or one of its subsidiaries, financing provided by third parties, and/or other secured debt that is recourse only to the Acquisition Partnership.

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        Each domestic Acquisition Partnership is a separate legal entity, (generally a limited liability company, but may also take the form of a limited partnership, trust, corporation or other type of legal business structure). FirstCity and an investor typically form a new special-purpose investment entity that owns the Acquisition Partnership. FirstCity generally has an effective ownership interest ranging from 15-50% in a majority of the domestic Acquisition Partnerships. Värde Investment Partners, L.P. and its affiliates are the co-investors in a substantial majority of our domestic Acquisition Partnerships currently in existence. In addition, in 2010, a majority of FirstCity's investments in Portfolio Assets through domestic Acquisition Partnerships was transacted under the terms of an investment agreement with Värde Investment Partners, L.P. (see additional discussion under the heading "Relationships with Other Investors in Acquisition Partnerships" below).

        In foreign markets, FirstCity evaluates the establishment of the Acquisition Partnership ownership structures and in conjunction with its co-investors, performs significant due diligence and planning on the tax, licensing, and other ownership issues of the particular country. As in the United States, each foreign Acquisition Partnership is a separate legal entity, generally formed as the equivalent of a limited liability company or a liquidating trust. For the European and Latin American Acquisition Partnerships, FirstCity generally has an effective ownership interest in the underlying entities ranging from 10-50%.

        When Acquisition Partnerships are funded with acquisition financing, the debt is usually secured only by the assets of the individual entity, and are non-recourse to the Company, its co-investors and the other Acquisition Partnerships. FirstCity believes that this legal structure insulates the Company and the other Acquisition Partnerships from certain potential risks, while permitting FirstCity to share in the economic benefits of each Acquisition Partnership.

        A substantial majority of FirstCity's domestic and international Portfolio Asset investments (and related equity investments) transacted prior to July 2010, for its own account and through Acquisition Partnerships, were funded by senior-secured acquisition financing that was provided by Bank of Scotland. These senior acquisition loan facilities provided by Bank of Scotland were combined and refinanced in June 2010 into a single term-loan facility, which provides for repayment to Bank of Scotland over time as cash flows from the underlying assets securing this term-loan facility are realized. This term-loan facility capped FirstCity's financing arrangements with Bank of Scotland, and as such, Bank of Scotland had no further obligation to provide financing to fund FirstCity's investments in Portfolio Assets, for its own account or through Acquisition Partnerships, after June 2010. Additional information regarding this loan facility is included under the heading "Relationship with Bank of Scotland" below.

        Subsequent to June 2010, FirstCity funded (and intends to continue funding) its share of investments in Portfolio Assets, for its own account and through Acquisition Partnerships, with holdings in unencumbered cash and with cash flows generated by various investments (originated subsequent to June 2010) and servicing platforms that are not pledged to secure Bank of Scotland's term-loan facility. In addition, FirstCity intends to use portions of cash generated by the assets pledged to Bank of Scotland to fund future investment activity (under terms of the term-loan facility agreement discussed under the heading "Relationship with Bank of Scotland" below). For Portfolio Assets acquired by FirstCity for its own account subsequent to June 2010, the Company seeks to leverage its equity investments with non-recourse debt financing provided by third-party lenders. Such financing arrangements may be obtained at variable interest rates with negotiated spreads to the base rates, and secured by cash flows from the Portfolio Assets. In addition, the financing arrangements may allow, under certain conditions, distributions to FirstCity before the debt is repaid in full. By subsequently leveraging its equity investments in Portfolio Assets for its own account, FirstCity will have the ability to use the borrowed monies to fund additional investment opportunities.

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        While management intends to continue utilizing the aforementioned financing arrangements, cash flow sources and investment agreements to provide FirstCity with the necessary financing and funding to support its current and future investment activities, FirstCity continues to actively seek additional sources of liquidity and alternative funding sources. Discussions related to FirstCity's liquidity are included under the heading "Liquidity and Capital Resources" in Part II, Item 7 of this Annual Report on Form 10-K.

Relationships with Other Investors in Acquisition Partnerships

        Värde Investment Partners, L.P. ("Värde"), a private investor in distressed securities and assets, and certain of its affiliates, are investors in a substantial majority of our domestic Acquisition Partnerships (see additional discussion below). In addition, American International Group, Inc., a publicly-held international insurance organization, and certain of its affiliates, are investors in a substantial majority of our Latin American Acquisition Partnerships. Although management believes that our relationship with each of these investors is excellent, there can be no assurance that such relationships will continue in the future. The termination or disruption of our investing relationship with either of these investors could adversely impact the results of our Acquisition Partnerships. The consequences of a disturbance in our relationships with these investors could be exacerbated due to the significant influence that they respectively exert as majority-owners in a substantial majority of our domestic and Latin American Acquisition Partnerships. If our current relationship with either investor deteriorates, or if we are unable to find another suitable investor for our domestic or Latin American Acquisition Partnerships in the event an investing relationship is terminated, our results of operations and financial condition could be materially adversely affected.

        FirstCity and Värde are parties to 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 with Värde, which are held by FC Investment Holdings Corporation ("FC Investment Holdings") (a wholly-owned subsidiary of FirstCity) and its subsidiaries, are not subject to the security interest requirements of Bank of Scotland's term-loan facility described below.

Relationship with Bank of Scotland plc

        FirstCity has had a significant relationship with Bank of Scotland plc and its subsidiaries (including BoS(USA), Inc.) (collectively, "Bank of Scotland") since 1997. Bank of Scotland has provided various loan facilities to FirstCity and its subsidiaries since such time to finance the Company's senior debt and

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equity portion of Portfolio Asset purchases, to finance equity investments in new ventures and special situations investments, to provide for the issuance of letters of credit, and for working capital loans.

        In June 2010, FirstCity refinanced its then-existing acquisition loan facilities with Bank of Scotland and closed on a $268.6 million Reducing Note Facility Agreement ("Reducing Note Facility") that provides for repayment to Bank of Scotland over time as cash flows from the underlying assets securing the term-loan facility are realized. The Company's outstanding indebtedness and letter of credit obligations under its then-existing loan facilities with Bank of Scotland were refinanced into the Reducing Note Facility. This term-loan facility capped FirstCity's financing arrangements with Bank of Scotland, and as such, Bank of Scotland had no further obligation to provide financing to fund FirstCity's investment activities and operations after June 2010.

        The Reducing Note Facility is secured by substantially all of the assets of FirstCity's subsidiaries that were subject to the obligations of the former loan facilities with Bank of Scotland. FC Investment Holdings and its subsidiaries, which hold investments made in connection with FirstCity's investment agreement with Värde (discussed above), and various other investments that FirstCity originated subsequent to June 2010, are not subject to the security interest requirements of the Reducing Note Facility. Among other material terms of the Reducing Note Facility, 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). FirstCity intends to use the cash flows from the cash leak-through to fund future investment opportunities. Refer to Notes 2 and 9 of the Company's 2010 consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K ("2010 consolidated financial statements") for additional information related to the primary details and terms underlying the Reducing Note Facility.

Business Strategy of Portfolio Asset Acquisition and Resolution Business

        Historically, FirstCity has leveraged its expertise in asset resolution and servicing by investing in a wide variety of asset types across a broad geographic scope. FirstCity continues to follow this investment strategy and seeks expansion opportunities into new asset classes and geographic areas when it believes it can achieve attractive risk adjusted returns. The following items are significant elements of FirstCity's business strategy in its PAA&R business:

•

Traditional markets.  FirstCity believes it will continue to invest in Portfolio Assets acquired from financial institutions, governmental agencies and other sellers, either for its own account or through investment entities formed with one or more co-investors (i.e. Acquisition Partnerships).



•

Niche markets.  FirstCity believes it will continue to pursue investment opportunities in profitable private market niches. The niche investment opportunities that FirstCity has pursued to date include (i) the acquisition of improved or unimproved real estate, including excess retail sites, (ii) periodic purchases of single financial or real estate assets from financial institutions with which FirstCity has established relationships, and (iii) periodic purchases of single financial or real estate assets from a variety of other sellers that are familiar with the Company's reputation for acting quickly and efficiently.



•

Foreign markets.  FirstCity believes that the foreign markets for Portfolio Assets are less developed than the U.S. market, and therefore provide an opportunity to achieve attractive risk-adjusted returns. FirstCity has purchased Portfolio Assets in countries in Europe and Latin America, and expects to continue to seek investment opportunities, on a limited and selective basis, outside the United States.

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•

SBA lending.  The Company believes that the ability to acquire and originate SBA loans through its wholly-owned subsidiary, American Business Lending, Inc. (a small business lending company licensed by the U.S. Small Business Administration), provides diversity that creates growth opportunity within the U.S. market.

Special Situations Platform Business Segment

        FirstCity's entry into its Special Situations Platform ("Special Situations" or "FirstCity Denver") business began in 2007 with the formation of FirstCity Denver—a majority-owned special-purpose investment entity which was designed to provide the Company with another investment platform to leverage the skills and expertise of management and other business partners by seeking out additional investment opportunities involving corporate restructurings and distressed debt, and negotiating and structuring such investments to manage our risk while providing attractive risk-adjusted returns. Through its Special Situations business, FirstCity provides investment capital to privately-held middle-market companies through flexible capital structuring arrangements. FirstCity'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 12 to 60 months. We invest primarily in U.S. middle-market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive.

        Our investment opportunities in middle-market companies target restructurings, turnarounds, businesses with robust market positions, and other special situations. The nature of our capital investments primarily takes the form of senior and junior financing arrangements, but also includes direct equity investments and common equity warrants. FirstCity also engages in other investment activities, including leveraged buyouts and distressed debt transactions, through its Special Situations business. The composition of our investments will change over time given our views on, among other factors, the economic and credit environments that impact our operations.

        Since inception, FirstCity has been involved in middle-market transactions, through its Special Situations business, with total investment values approximating $84.9 million. In connection with these investments, FirstCity provided $57.0 million of investment capital to privately-held middle-market companies—$43.1 million in the form of debt investments and $13.9 million as equity investments. Information related to FirstCity's Portfolio Asset investments in 2010 and 2009 is included under the heading "Portfolio Asset Acquisitions—Portfolio Asset Acquisition and Resolution Business Segment" in Part II, Item 7 of this Annual Report on Form 10-K.

Market Opportunity

        We believe the environment for investing in middle-market companies is attractive for the following reasons:

•

We believe middle-market companies have faced increasing difficulty in accessing the capital markets due to the severe dislocation in the credit markets, and capital-constraints and underwriting limitations experienced by commercial banks.



•

We believe recent disruptions within the credit markets generally have resulted in a reduction in competition and a more lender-friendly environment for our special situations platform due to a decline in the scope and availability of middle-market financing arrangements.



•

We believe consolidation among commercial financial institutions has reduced their service and product offerings to middle-market business.



•

We believe the current economic downturn has resulted in defaults and covenant breaches by middle-market companies, which will require new capital to shore-up liquidity or provide new capital through restructuring.

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Sources of Investments

        FirstCity has established an extensive referral network comprised of investment bankers, private equity firms, trade organizations, commercial bankers, attorneys, businesses and financial brokers. Our origination efforts include calling on and visiting these contacts and other middle-market intermediaries to generate deal flow. In addition, we maintain an extensive database of middle-market professionals and participants, which enables us to monitor and evaluate the middle-market investing environment. This database is used to help us assess whether we are penetrating our target markets and to accurately track terms and pricing. We expect that our ability to leverage these relationships and transaction information will continue to result in the referral of investment opportunities to us.

Investment Selection

        FirstCity Denver chooses investments based on the investment experience of its professionals and a detailed investment analysis for each investment opportunity. We selectively narrow prospective investment opportunities through a process designed to identify the most attractive opportunities. We follow a rigorous process based on:

•

a comprehensive analysis of the company's creditworthiness, including a quantitative and qualitative assessment of the company's business;



•

an evaluation of management and their economic incentives;



•

an analysis of business strategy and industry trends; and



•

an in-depth examination of capital structure, financial results and projections.

        We seek to identify companies that exhibit superior fundamental risk-reward profiles and strong defensible business franchises while focusing on the relative value of the security in the company's capital structure.

Due Diligence

        If an investment opportunity merits pursuit, FirstCity Denver engages in an intensive due diligence process that involves research into the target company, its management, its industry, its growth prospects, and its ability to withstand adverse conditions. Though each transaction involves a somewhat different approach, the due diligence steps that we generally undertake include:

•

meeting with the target company's management to get an insider's view of the business, and to probe for potential weaknesses in business prospects;



•

checking management's backgrounds and references;



•

performing a detailed review of historical financial performance and the quality of earnings;



•

visiting headquarters and company operations and meeting with top and middle-level executives;



•

contacting customers and vendors to assess both business prospects and standard practices;



•

conducting a competitive analysis, and comparing the company to its main competitors on an operating, financial, market share and valuation basis;



•

researching the industry for historic growth trends and future prospects as well as identifying future exit alternatives (including Wall Street research, industry association and general news);



•

assessing asset value and the ability of physical infrastructure and information systems to handle anticipated growth; and



•

investigating legal risks and financial and accounting systems.

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        After completion of the due diligence process, the investment team involved in the transaction prepares a written investment analysis. Senior management involved in the transaction reviews the analysis, and if they are in favor of making the potential investment, the analysis is then presented to the investment committee for consideration. After an investment has been approved by the investment committee, a more-extensive due diligence process is employed by the transaction team. Additional due diligence with respect to any investment may be conducted on our behalf by attorneys, independent accountants, and other third-party consultants and research firms prior to the closing of the investment, as appropriate on a case-by-case basis.

Investment Structure

        FirstCity Denver's investments in middle-market companies primarily take the form of first- and second-lien loans and mezzanine debt. We tailor the terms of our debt investments to the facts and circumstances of the transaction and the prospective company, negotiating a structure that aims to protect our rights and manage our risk while creating incentives for the company to achieve its business plan and improve its profitability.

        For first- and second-lien senior loans, we generally obtain security interests in the company's assets that will serve as collateral in support of repayment of loans. This collateral may take the form of first- or second-priority liens on the assets of the company.

        We generally structure our mezzanine investments as subordinated loans that provide for relatively high, fixed interest rates that provide us with significant current income. These loans typically have interest-only payments in the early months, with amortization of principal deferred to the later term of the loans. In addition, our mezzanine investments will generally be collateralized by a subordinate lien on some or all of the assets of the company.

        In some cases, our debt investments may provide for a portion of the interest payable to be payment-in-kind interest. To the extent interest is payment-in-kind, it will be payable through the increase of the principal amount of the loan by the amount of interest due on the then-outstanding aggregate principal amount of the loan.

        In general, our debt investments include financial covenants and terms that require the company to reduce leverage over time, thereby enhancing credit quality. These methods may include, among other things: (i) maintenance leverage covenants; (ii) maintenance cash flow covenants; and (iii) indebtedness incurrence prohibitions. In addition, limitations on asset sales and capital expenditures prevent a company from changing the nature of its business or capitalization without our consent.

        Our debt investments may include equity features, such as carried interests and warrants to obtain or buy a minority interest in the company. Carried equity interests and warrants that we receive in connection with our debt investments may require only a nominal cost to obtain or exercise, and thus, as the middle-market company appreciates in value, we may achieve additional investment returns from these equity interests.

        When we provide financing, we may obtain equity interests in the company. We generally seek to structure our equity investments as non-control investments to provide us with minority rights and event-driven or time-driven economic incentives. On occasion, our equity investments may take the form of direct control-oriented investments in connection with buyout transactions.

Financing and Funding Investment Activity

        A substantial portion of FirstCity Denver's investment activities prior to July 2010 was funded under a senior-secured loan facility that was provided by Bank of Scotland. This senior loan facility and other outstanding loan facilities provided to FirstCity by Bank of Scotland were combined and refinanced in June 2010 into a single term-loan facility, which provides for repayment to Bank of

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Scotland over time as cash flows from the underlying assets securing this term-loan facility are realized. This term-loan facility capped FirstCity's financing arrangements with Bank of Scotland, and as such, ended FirstCity's ability to fund FirstCity Denver's investment activities through Bank of Scotland's loan facility after June 2010. Additional information regarding this loan facility is included under the heading "Relationship with Bank of Scotland" above.

        Subsequent to June 2010, FirstCity Denver supported (and intends to continue supporting) its investment activities with holdings in unencumbered cash and cash flows generated by its portfolio companies. In addition, FirstCity intends to use portions of cash generated by the assets pledged to Bank of Scotland to fund future investment activity in its Special Situations business (under terms of the term-loan facility agreement discussed under the heading "Relationship with Bank of Scotland" above). Furthermore, FirstCity Denver typically seeks to refinance its loan facilities provided to portfolio companies in which it also holds an equity interest with non-recourse debt financing provided by third-party lenders. By subsequently seeking-out a third-party lender to take-out its debt investments to these portfolio companies, FirstCity Denver will receive debt repayment proceeds and possibly equity distributions, and use the monies to fund other investment opportunities.

        While management intends to continue utilizing the aforementioned financing arrangements and cash flow sources to provide FirstCity Denver with the necessary financing and funding to support its current and future investment activities, FirstCity continues to actively seek additional sources of liquidity and alternative funding sources. Discussions related to FirstCity's liquidity are included under the heading "Liquidity and Capital Resources" in Part II, Item 7 of this Annual Report on Form 10-K.

Government Regulation

        The Company does not have a primarily regulatory or supervisory agency that governs and supervises the operations and activities conducted by its PAA&R and Special Situations business segments. However, certain aspects of the Company's business are subject to regulation under various domestic federal, state and local statutes and regulations and various foreign laws and regulations that impose requirements and restrictions affecting, among other things, disclosures to obligors, the terms of secured transactions, collection, repossession and claims handling procedures, multiple qualification and licensing requirements for conducting business in various jurisdictions, and other trade practices. Furthermore, our small business lending platform is licensed by and subject to regulation and examination by the U.S. Small Business Administration. Additional laws and regulations, or amendments to existing laws and regulations, may be enacted that could impose additional restrictions on our investment, lending and servicing activities—which in turn could adversely impact our results of operations.

        On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act ("Dodd-Frank Act") was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as corporate governance, "say on pay" and proxy access. Our efforts to comply with these requirements are likely to result in an increase in expenses and a diversion of management's time from other business activities. We are subject to changing rules and regulations of federal and state governments as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the NASDAQ Global Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress.

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Competition

Portfolio Asset Acquisition and Resolution Business Segment

        The Portfolio Asset Acquisition and Resolution business is highly competitive. Some of the Company's principal competitors are substantially larger and have considerably greater financial resources than the Company. As such, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some competitors may be better-suited than the Company to acquire Portfolio Assets, to pursue new business opportunities, or to survive periods of industry consolidation. Generally, there are three aspects of the distressed asset acquisition and resolution business: due diligence, asset management, and servicing. The Company is a major participant in all three arenas. In comparison, certain of our competitors have historically competed primarily as portfolio purchasers and have customarily engaged other parties to conduct due diligence on potential purchases and to service acquired assets, and certain other competitors have historically competed primarily as servicing companies.

        The Company believes that its ability to acquire, service and resolve Portfolio Assets for its own account and through Acquisition Partnerships will be a significant component of the Company's overall future growth. Portfolio Asset acquisitions are often based on competitive bidding—which involves the risks of bidding too low (which generates no business) or bidding too high (which could result in the purchase of a Portfolio at an economically unattractive price).

Special Situations Platform Business Segment

        The Company's primary competition to provide financing to middle-market companies includes public and private funds, commercial and investment banks, commercial financing companies, insurance companies and, to the extent they provide an alternative form of financing, private equity funds. Many of our existing and potential competitors are substantially larger and have considerably greater financial and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. We use industry information available to our investment management team to assess investment risks and determine appropriate pricing for our investments in middle-market companies. Furthermore, we believe the relationships of our professionals enable us to learn about, and compete effectively for, investment opportunities with attractive middle-market companies in the industries in which we seek to invest.

Employees

        The Company had 264 employees as of December 31, 2010. The Company had 365 employees at December 31, 2009, including 97 employees attributable to a manufacturing company that FirstCity Denver acquired and consolidated in December 2009, but later de-consolidated in 2010 when it ceased having a controlling interest. FirstCity believes that it has been successful in attracting quality employees and that employee relations are good.

Foreign Operations

        We have investments in various Acquisition Partnerships and servicing entities in Europe and Latin America. Revenues outside of the U.S. are a material part of our business, as they accounted for more than 16% of our consolidated revenues and equity in earnings of subsidiaries for each of the fiscal years ended December 31, 2010 and 2009. See Note 18 of the Company's 2010 consolidated financial statements for summarized information relating to the Company's foreign revenues.

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        The Company has determined that the local currency is the functional currency for its operations outside the United States (primarily Europe and Latin America). We translate the results for our foreign subsidiaries and affiliates from the designated functional currency to the U.S. dollar using average exchange rates during the relevant period, while we translate assets and liabilities at the exchange rate in effect at the reporting date. Since our revenues in foreign operations are denominated in non-U.S. currencies, fluctuations in exchange rates relative to the U.S. dollar could have a material adverse effect on our earnings and assets. In addition, changes in exchange rates associated with U.S. dollar-denominated assets and liabilities result in foreign currency transaction gains and losses.

        Since we report our results of operations in U.S. dollars, changes in relative foreign currency valuations from our foreign operations may result in reductions in our reported revenues, operating income and earnings, as well as a reduction in the carrying value of our foreign-related assets. Accordingly, if the values of local currencies in foreign countries in which certain of our subsidiaries and affiliates conduct business depreciate relative to the U.S. dollar, we would expect our operating results in future periods, and the value of our assets held in local currencies, to be adversely impacted.

        Refer to Note 18 of the Company's 2010 consolidated financial statements for financial information on our revenues and assets by geographic area.

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 1B.    Unresolved Staff Comments.

        None.

Item 2.    Properties.

        The Company occupies approximately 66,000 square feet of office space, all of which is leased. The following is a list as of December 31, 2010 of the principal physical properties that are used by our significant business segments.

        The Company leases its principal executive offices and primary domestic servicing offices under a non-cancellable operating lease, which expires October 31, 2020. All other office and facility leases of the Company and its consolidated subsidiaries expire in various years through 2013. We believe that these facilities are suitable and adequate for the business that we currently conduct. However, we periodically review our space requirements and may acquire new space to meet the needs of our business, or consolidate and dispose of facilities that are no longer required.

Item 3.    Legal Proceedings.

        FirstCity and certain of its subsidiaries and affiliates (including Acquisition Partnerships) are involved in various claims and legal proceedings which are incidental to the ordinary course of our business. We initiate lawsuits against borrowers and are occasionally countersued by them in such

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actions. From time to time, other types of lawsuits are brought against us. In view of the inherent difficulty of predicting the outcome of pending legal actions and proceedings, the Company cannot state with certainty the eventual outcome of any such proceedings. Based on current knowledge, management does not believe that liabilities, if any, arising from any ordinary course proceeding will have a material adverse effect on the consolidated financial condition, operations, results of operations or liquidity of the Company.

Wave Tec Pools, Inc. Litigation

        On March 20, 2007, Superior Funding, Inc., Wave Tec Pools, Inc. and Nations Pool Supply, Inc. (collectively, the "Obligors") filed a petition adding FH Partners (formerly FH Partners, L.P.), FC Servicing, and FirstCity Financial Corporation as defendants in a suit filed by the Obligors against State Bank and Cole Harmonson. FirstCity was subsequently served with notice of non-suit without prejudice in the suit in April 2007. The Obligors' claims related to alleged breaches by FH Partners and FC Servicing in connection with an agreement related to a loan from State Bank to Obligors that was purchased by FH Partners from State Bank in December 2006. The Obligors alleged that they entered into a line-of-credit with State Bank, and that due to an error by State Bank, the Obligors borrowed more on the line-of-credit than was allowed under the borrowing base under that agreement. Obligors alleged that State Bank agreed that the default would be cured if the Obligors pledged additional property to secure the loans. Obligors alleged that State Bank refused to honor its agreement concerning the pledge of the additional property and cure of the payment default. Obligors additionally asserted that FH Partners and FC Servicing were aware of State Bank's wrongful conduct and continued that conduct by failing to honor the agreement, and that FH Partners and FC Servicing were obligated to mitigate their damages. Obligors alleged that they sustained actual damages of $165 million as a result of the joint actions of State Bank, Cole Harmonson, FH Partners and FC Servicing. In October 2007, FH Partners filed a collection suit against the Obligors to recover the balance of the debt owed under the loans and loan agreement and to foreclose the security interests securing the loans. In September 2009, the Obligors filed a non-suit without prejudice of FH Partners and FC Servicing in the original suit filed against State Bank and other parties. The claims of the Obligors in the original suit have been raised as counterclaims in the collection suit initiated by FH Partners. The Obligors proceeded to trial in the original suit as to their claims against Prosperity Bank, the successor to State Bank, and Harmonson. The suit went to trial in October 2009, and the trial court ruled in favor of the defendants, finding that the Obligors' loan was in default prior to the sale of the loan to FH Partners. Prosperity Bank settled with the Obligors in exchange for their agreement to not appeal the court's ruling. FH Partners filed a motion for summary judgment to deny Obligor's claims for reformation and conspiracy in the collection suit, which was granted by the court in August 2010. However, the court denied FH Partners' additional motion to strike the jury demand filed by the Obligors (as the loan agreement contains an enforceable jury-waiver provision), which prompted FH Partners to file a writ of mandamus to compel the trial court to grant the motion. In its ruling on the mandamus appeal, the court of appeals ruled that FH Partners, as State Bank's assignee, owns the right to enforce the jury-waiver provision in the loan agreement. FirstCity does not have sufficient information to estimate any potential liability or probability of liability, but is unaware of any factual or legal basis for liability. Given the magnitude of the Obligors' wrongdoing and the lack of any evidence of any wrongdoing on the part of FC Servicing or FH Partners, management believes that an unfavorable outcome in the lawsuit seems remote, and FH Partners intends to pursue collection of the loan.

FCLT Litigation

        FirstCity, FCLT Loans Asset Corp. ("FCLT"), First-City National Bank of Houston, and JP Morgan Chase Bank were defendants in an interpleader suit filed by Prudential Financial, Inc. ("Prudential") in 2005. The suit disputed the ownership of approximately $18.6 million of proceeds

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from the sale of Prudential stock and dividends from the demutualization of Prudential in December 2000. The shares of Prudential stock related to group annuity contracts purchased by First-City National Bank of Houston, as trustee of the First City Bancorporation Employee Retirement Trust, to fund obligations to participants in the First City Bancorporation Employee Retirement Plan n connection with termination of the Plan and the Trust in 1987. Timothy J. Blair was subsequently added as a third party defendant, as representative of a class of former employee beneficiaries, with an alleged interest in the demutualization proceeds.

        Following various court rulings and mediation proceedings, FirstCity, FCLT and Mr. Blair, individually and as representative of a class of former employee beneficiaries, entered into an agreement in 2009 which provided for the settlement of the pending lawsuit and provided for each party to receive one-third of the demutualization proceeds, which totaled approximately $18.6 million at the time of settlement, net of $0.3 million retained by JP Morgan to pay certain fees and expenses. In December 2009, FirstCity received approximately $6.1 million as its share of the settlement proceeds. The final settlement is non-appealable, and each party released the other parties from all claims related to the lawsuit.

Item 4.    Reserved.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

        The Company's common stock is traded on the NASDAQ Global Select Market under the symbol FCFC. The number of holders of record of common stock on March 26, 2011 was approximately 674, as provided by American Stock Transfer and Trust Company, the Company's transfer agent. The following table displays the high and low sales prices for the Company's common stock for the periods indicated:

        The Company has never declared or paid a dividend on the common stock. The Company currently intends to retain future earnings to finance its growth and development and therefore does not anticipate that it will declare or pay any dividends on the common stock in the foreseeable future. Any future determination as to payment of dividends will be made at the discretion of the Board of Directors of the Company and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors that the Board of Directors deems relevant. Certain loan facilities to which the Company and its subsidiaries are parties contain restrictions relating to the payment of dividends and other distributions.

        The following table presents information about our purchases of our common shares during the fiscal quarter ended December 31, 2010:

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        The following table provides information as of December 31, 2010 with respect to the shares of our common stock that may be issued under the Company's equity compensation plans:

Item 6.    Selected Financial Data.

        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 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following discussion and analysis should be read in conjunction with the Company' consolidated financial statements and related footnotes.

Overview

        FirstCity is a multi-national specialty financial services company headquartered in Waco, Texas with offices throughout the United States and Mexico and a presence in Europe and South America. FirstCity, as an opportunistic investor, focuses on distressed asset investment opportunities in both domestic and, to a lesser extent, international markets, and distressed transaction and special situations investment opportunities in domestic middle-market companies. The Company has strategically aligned its operations into 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 (i.e. liquidates) 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 co-investors (each such entity, an "Acquisition Partnership").

        Through its Special Situations Platform business, 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 and common equity warrants. The Company also engages in other investment activities, including leveraged buyouts and distressed debt transactions, through its Special Situations Platform business.

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Summary Financial Results

        The decline in global economic conditions that began in 2008 continued through 2010. Despite the challenging economic environment, FirstCity recorded net earnings of $12.5 million, or $1.23 per common share on a fully diluted basis, in 2010 (compared to net earnings of $18.7 million, or $1.83 per common share on a fully diluted basis, in 2009). Components of FirstCity's results of operations for the fiscal years ended 2010 and 2009 are presented in the tables below.

        As an opportunistic investor in the distressed asset and special situations markets, FirstCity's mix of revenues and earnings in its business segments will significantly fluctuate from period-to-period. Refer to the heading "Results of Operations" below for a detailed review of the Company's operations for the comparative periods presented in the table above.

        Portfolio Asset Acquisition and Resolution.    The Company's earnings related to its Portfolio Asset Acquisition and Resolution business segment decreased to $4.8 million in 2010 from $18.3 million in 2009. The decrease in earnings in 2010 compared to 2009 was primarily due to a $7.9 million decrease in Portfolio Assets income (due primarily to a shift in the income-recognition methods used by management for certain of the Company's Portfolio Assets to non-accrual income methods (cost-recovery or cash basis) from the interest-accrual income method over the past 12-18 months), a $2.0 million increase in net impairment provisions recorded to consolidated loan and real estate assets, a $5.1 million increase in net income attributable to noncontrolling interests, a $2.0 million increase in interest and fees on notes payable, and a $1.3 million increase in asset-level expenses, off-set partially by $3.1 million of additional business combination gains recognized in 2010 compared to 2009, and a

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$3.3 million gain that was recorded in 2010 on the sale of an investment security. Refer to the heading "Results of Operations" below for a detailed review of the Company's operations in this business segment for the comparative periods presented in the table above.

        Special Situations Platform.    The Company's earnings related to its Special Situations Platform business segment increased to $15.7 million in 2010 from $1.8 million in 2009. The increase in earnings in 2010 compared to 2009 was primarily due to a $15.4 million increase in equity in earnings of unconsolidated subsidiaries (attributed primarily to a significant increase in revenues reported by an equity-method investee that manufactures prefabricated buildings) and a $4.8 million business combination gain that was recorded in 2010 (reported as discontinued operations—see below), off-set partially by a $2.0 million increase in net impairment provisions recorded to consolidated loans and a $2.8 million increase in net income attributable to noncontrolling interests.

        In December 2010, the Company disposed of its consolidated coal mine operation (a controlled-oriented investment in our Special Situations Platform business). Accordingly, the results of operations from our coal mine subsidiary are reported as discontinued operations within our Special Situations Platform business segment for the nine-month period ended December 31, 2010 (we acquired a controlling interest in this subsidiary in April 2010). Refer to the heading "Results of Operations" below for additional discussion on the discontinued operations and a detailed review of the Company's operations in this business segment for the comparative periods presented in the table above.

        Corporate and Other.    Costs and expenses not allocable to our Portfolio Asset Acquisition and Resolution and Special Situations Platform business segments, consisting primarily of certain corporate salaries and benefits, accounting fees and legal expenses, decreased to $8.0 million in 2010 from $8.2 million in 2009. Also, 2009 included $6.1 million of income related to a lawsuit settlement (none in 2010).

Summary Investment Activity

        In 2010, FirstCity and its investment partners acquired $225.8 million of domestic Portfolio Asset investments with a face value of approximately $420.4 million—of which FirstCity's investment acquisition share was $67.7 million. In addition to its Portfolio Asset acquisitions in 2010, FirstCity invested $56.0 million in non-Portfolio Asset investments, consisting of $20.6 million in the form of SBA loan originations and advances; $17.6 million of equity investments (U.S. and European Acquisition Partnerships); $13.2 million in the form of equity and debt investments under its Special Situations Platform; and $4.5 million of other investments. In 2009, FirstCity and its investment partners acquired $200.6 million of domestic Portfolio Asset investment with a face value of approximately $410.1 million—of which FirstCity's investment acquisition share was $147.7 million. In addition to the Portfolio Asset acquisitions in 2009, FirstCity invested $46.3 million in non-Portfolio Asset investments, consisting of $21.6 million in the form of SBA loan originations and advances; $11.2 million in the form of equity investments in European Acquisition Partnerships; $12.4 million in the form of equity and debt investments under its Special Situations Platform; and $1.1 million of other investments.

        At December 31, 2010, the carrying value of FirstCity's earning assets (primarily Portfolio Assets, equity investments, loans receivable, and entity-level earning assets) approximated $400.5 million—compared to $366.2 million a year ago. The global distribution of FirstCity's earning assets (at carrying value) at December 31, 2010 included $292.4 million in the United States; $68.6 million in Europe; and $39.5 million in Latin America.

        Refer to the headings "Portfolio Asset Acquisitions—Portfolio Asset Acquisition and Resolution Business Segment" and "Middle-Market Company Capital Investments—Special Situations Platform Business Segment" below for additional information related to our investment activities and composition.

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Management's Outlook

        Our revenues consist primarily of (1) income from our Portfolio Assets, loan investments and Acquisition Partnerships; (2) servicing fee income and incentive income based on the performance of the portfolio assets that we manage; and (3) income generated by our debt and equity investments (consolidated and unconsolidated) in privately-held middle-market companies. Our ability to maintain and grow revenues depends on our ability to secure investment opportunities, obtain financing for transactions, and to consummate investments and deliver attractive risk-adjusted returns. Our ability to execute this strategy depends upon a number of market conditions—including the strength and liquidity of U.S. and global economies and financial markets.

        While we are seeing signs of improvement and stabilization in U.S. and global economic conditions and financial markets, these conditions and markets remain challenging and their recovery has been imbalanced. Despite substantial losses reported in the financial services sector in recent years, and continued volatility and uncertainty in U.S. and global economies and financial markets, management remains positive on the outlook of the Company and believes that current market conditions should not hinder FirstCity's ability to expand its business. While disruptions and uncertainty in the markets may adversely affect our existing positions, we believe such conditions generally present significant new investment opportunities for distressed asset acquisition and special situations transactions. Currently, however, we believe that challenging market conditions and government-implemented programs and regulations have reduced transaction flow in the marketplace, and that distressed asset prices have yet to fall to levels commensurate with expectations of market participants. Due to the difficulty and challenges related to servicing and resolving these underperforming and non-performing assets, we believe that financial institutions and other entities will actively seek to shed these assets over time as economic conditions and financial markets stabilize and government-imposed restrictions lapse. Sales of such assets improve the sellers' financial position (i.e. asset quality and capital positions), reduce overhead costs and staffing requirements, and reduce management and personnel distractions associated with the intensive and time-consuming task of resolving loans and disposing of real estate.

        Market commentators and analysts have expressed the belief that it will take some time for the U.S. and global economies and financial markets to fully recover, but it is not clear if adverse conditions will again intensify. As a result, the continued challenging economic conditions could still materially and adversely impact (i) our ability to price and fund new distressed asset and middle-market capital investment opportunities on attractive terms; (ii) the ability of our borrowers to repay or refinance their debt obligations to us; (iii) the value of the underlying real estate properties and other assets securing our purchased and originated loan investments; and/or (iv) the financial condition, operations and liquidity of the underlying servicing and operating entities in which we have an equity investment. There can be no assurance that the value of our Portfolio Assets, loan investments and other investment assets, or the performance of our equity-method investees and consolidated subsidiaries, will not be negatively impacted by challenging economic conditions which could have a negative impact on our future results.

        In addition to various other debt and equity investment opportunities, we continue to seek distressed asset investment opportunities under our investment agreement with Värde (see Note 2 of the Company's 2010 consolidated financial statements for additional information). The Company's involvement in these investments will come in the form of minority ownership (ranging from 5% to 25% at FirstCity's determination) of an acquisition entity formed by FirstCity and Värde. FirstCity will also be the servicer for the acquisition entities formed with Värde. FirstCity's increased holdings in the minority-owned, unconsolidated acquisition entities under this investment agreement represent a shift in the Company's portfolio asset acquisition history over the past 2-3 years—which primarily consisted of consolidated portfolio assets. As such, in the context of the Company's Portfolio Asset Acquisition and Resolution business segment, management expects to see a gradual shift in the composition of FirstCity's income attributed to distressed asset investments to "Equity in earnings of unconsolidated

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subsidiaries" (unconsolidated equity-method investments) from "Income from Portfolio Assets" (consolidated portfolio assets). Management also expects to see a gradual increase in service fee income over time related to the performance of our servicing responsibilities related to these unconsolidated acquisition entities. Refer to the heading "Results of Operations" below for additional information related to our Portfolio Asset Acquisition and Resolution operations.

        Our ability to make new investments is dependent on (1) the cash leak-through and overhead allowance provisions included in our term-loan facility with Bank of Scotland (see Note 9 of the Company's 2010 consolidated financial statements for additional information); (2) residual cash flows from the pledged assets and equity investments after full repayment of the Bank of Scotland debt; (3) our current holdings of unencumbered cash and portfolio assets; and (4) our investment agreement in place with Värde (see Note 2 of the Company's 2010 consolidated financial statements for additional information). While management believes that these cash flow sources will provide FirstCity with funding and liquidity to support its operations and investment activities, FirstCity continues to actively seek additional sources of liquidity and alternative funding sources.

Results of Operations

        The following discussion and analysis is based on the segment reporting information presented in Note 18 to the Company's 2010 consolidated financial statements, and should be read in conjunction with the consolidated financial statements (including the notes thereto) included elsewhere in this Form 10-K.

        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, pricing 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 liquidity to fund our investment activity and operations, 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.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

        FirstCity's net earnings to common stockholders totaled $12.5 million in 2010 compared to $18.7 million in 2009. On a per share basis, diluted net earnings to common stockholders were $1.23 in 2010 compared to $1.83 in 2009.

Portfolio Asset Acquisition and Resolution Business Segment

        Through our Portfolio Asset Acquisition and Resolution ("PAA&R") business segment, FirstCity and its investment partners acquired $225.8 million of Portfolio Assets in 2010 with an approximate face value of $420.4 million, compared to the Company's involvement in acquiring $200.6 million of Portfolio Assets in 2009 with an approximate face value of $410.1 million. In 2010, FirstCity's investment acquisition share in the Portfolio Asset acquisitions was $67.7 million—consisting of $31.6 million acquired through consolidated Portfolios and $36.1 million acquired through unconsolidated Portfolios. In 2009, FirstCity's investment acquisition share in Portfolio Asset acquisitions was $147.7 million—consisting of $144.7 million acquired through consolidated Portfolios and $3.0 million acquired through unconsolidated Portfolios. Generally speaking, income recognized from our investments in consolidated Portfolio Assets is reported as "Income from Portfolio Assets" on

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our consolidated statements of operations, whereas income from our investments in unconsolidated subsidiaries that acquire Portfolio Assets is reported as "Equity in earnings of unconsolidated subsidiaries." Furthermore, since we function as the servicer for the vast majority of our domestic and Latin American unconsolidated Portfolio Assets, we also recognize fee income related to the performance of our servicing responsibilities. This fee income is reported as "Servicing fees" on our consolidated statements of operations. We also generate service fee income from our domestic and Latin American consolidated Portfolio Assets that we service; however, this income is eliminated in consolidation and, as such, is not included on our consolidated statements of operations.

        In 2010, FirstCity invested an additional $42.8 million in non-Portfolio Asset investments in the form of SBA loan originations and advances, direct equity investments, and other loan investments, compared to $33.9 million of additional non-Portfolio Asset investments in the form of SBA loan originations and advances, direct equity investments, and other investments in 2009. Refer to the heading "Portfolio Asset Acquisitions—Portfolio Asset Acquisition and Resolution Business Segment" below for additional information related to our investment activities and composition in our PAA&R segment.

        Our PAA&R business segment reported $4.8 million of earnings in 2010 compared to $18.3 million of earnings in 2009. The following is a summary of the results of operations for the Company's PAA&R business segment for 2010 and 2009:

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        Servicing fee revenues.    Servicing fee revenues decreased to $8.7 million in 2010 from $9.1 million in 2009. Servicing fees from domestic Acquisition Partnerships totaled $2.5 million in 2010 compared to $2.3 million in 2009, while servicing fees from Latin American Acquisition Partnerships totaled $6.2 million in 2010 and $6.9 million in 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 increase in servicing fees from domestic Acquisition Partnerships was due primarily to the impact of an increase in collections from unconsolidated domestic partnerships to $61.4 million for 2010 from $30.1 million for 2009; off-set partially by $0.6 million of additional performance-based servicing fees recognized in 2009 compared to 2010. 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 2010 compared to 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 decreased to $46.0 million in 2010 compared to $53.8 million in 2009. The net decrease in income from Portfolio Assets was attributed primarily to a shift in the income-recognition methods used by management for certain of the Company's existing and newly-acquired Portfolio Assets to non-accrual income methods (cost-recovery or cash basis) from the interest-accrual income method over the past 12-18 months. We apply non-accrual income-recognition methods to Portfolio Assets, as applicable, due to uncertainties related to estimating the timing and/or amount of collections as a result of the current economic environment. As such, income accretion from Portfolio Assets decreased by $13.4 million in 2010 compared to 2009. This income decrease was off-set partially by $5.5 million of additional Portfolio Asset liquidation income and gains recognized in 2010 compared to 2009. Collections from consolidated Portfolio Assets decreased to $125.7 million in 2010 from $177.6 million in 2009 (including a $60.6 million decrease in domestic Portfolio Asset collections). However, FirstCity was able to recognize significantly-higher margins on its consolidated European Portfolio Asset liquidations in 2010 compared to 2009, due primarily to $8.6 million of additional collections from these Portfolio Assets in 2010 compared to 2009. Refer to Note 1 of the Company's 2010 consolidated financial statements for a summary of our income-recognition accounting policies related to Portfolio Assets, and Note 5 of the consolidated financial statements for a summary of income from Portfolio Assets.

        Gain on sale of SBA loans held for sale.    The Company recorded $0.7 million of gains on the sales of SBA loans in 2010 with a $7.9 million net basis in the loans sold, compared to $1.3 million of gains recorded in 2009 with a $22.5 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. At December 31, 2010, the Company had approximately $0.4 million of deferred gains on SBA loans sales (with a $3.9 million net basis) that were accounted for as secured borrowings on such date (pursuant to the Company's adoption, effective January 1, 2010, of the FASB's guidance on accounting for transfers of financial assets—refer to Note 1 of the Company's 2010 consolidated financial statements). The Company did not have any deferred gains on SBA loan sales at December 31, 2009.

        Gain on sale of investment securities.    In 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. No such sales were recorded in 2009.

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        Interest income from SBA loans.    Interest income from SBA loans remained relatively constant at $1.2 million in 2010 compared to $1.3 million in 2009. FirstCity's average investment level in SBA loans held-for-investment approximated $15.2 million for 2010 compared to $15.6 million for 2009.

        Interest income from loans receivable—affiliates.    Interest income from loans receivable—affiliates decreased to $1.8 million for 2010 compared to $2.1 million for 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 $11.5 million for 2010 compared to $13.9 million for 2009.

        Interest income from loans receivable—other.    Interest income from loans receivable—other decreased by $0.4 million for 2010 compared to 2009. The Company did not recognize interest income from loans receivable—other in 2010 from its non-affiliated loan investments because management accounted for such loans under the non-accrual method of accounting during the entire period. FirstCity's average investment in loans receivable—other in its PAA&R segment was $4.8 million in 2010 (accounted for under the non-accrual method), compared to its average investment in such loans of $6.7 million in 2009 (included $3.1 million accounted for under the non-accrual method).

        Other income.    Other income for 2010 increased by $1.1 million in comparison to 2009 primarily due to $1.8 million of due diligence fee income recognized by FirstCity in 2010 under its investment agreement with Värde (effective April 2010—see Note 2 of the Company's 2010 consolidated financial statements for additional information) and $0.3 million of additional other due diligence income recorded in 2010 compared to 2009 (attributable to increased bidding and investment activity in 2010 compared to 2009), off-set partially by a $0.4 million decrease in interest income in 2010 compared to 2009 as a result of the Company selling its beneficial interest in securitized financial assets in 2010.

        Costs and expenses.    Operating costs and expenses approximated $52.8 million in 2010 compared to $46.0 million in 2009. The following is a discussion of the major components of the Company's operating costs and expenses in its PAA&R business segment:

        Interest expense and fees on notes payable totaled $15.7 million for 2010 and $13.6 million for 2009. FirstCity's average outstanding debt in its PAA&R segment increased to $290.1 million in 2010 from $284.6 million in 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 to 5.4% in 2010 compared to 4.8% in 2009, primarily due to the higher interest and fees charged on our Reducing Note Facility with Bank of Scotland (closed in June 2010) compared to the interest rates and fees under the loan facilities we had in place with Bank of Scotland last year.

        Salaries and benefits increased to $15.6 million in 2010 from $14.8 million in 2009, due primarily to increased costs related to base salaries, payroll taxes, employee benefits and bonuses in the PAA&R segment in 2010 compared to 2009. The total number of personnel within the PAA&R segment was 205 and 210 at December 31, 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 $6.3 million in 2010 and $4.2 million in 2009. The $6.3 million of net impairment provisions in 2010 were attributed primarily to declines in values of real estate properties and loan collateral related to our domestic Portfolio Assets and loans. 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 continuance of challenging economic conditions and disruptions in the financial, capital and real estate markets will ultimately have on our financial results. These conditions could adversely impact our business if commercial real estate properties experience a

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significant and prolonged decline in value or 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.

        Asset-level expenses, which generally represent costs incurred by FirstCity to manage consolidated Portfolio Assets in its PAA&R business segment, support foreclosed properties and to protect its security interests in loan collateral, increased to $7.3 million in 2010 from $5.9 million in 2009. The increased level of expenses is attributed primarily to the Company's increased holdings in foreclosed real estate properties, which totaled $36.1 million at December 31, 2010 compared to $17.1 million a year ago, and an increase in the Company's average investment level in consolidated Portfolio Assets to $209.9 million for 2010 from $202.3 million for 2009.

        Other costs and expenses in the Company's PAA&R segment increased to $7.9 million for 2010 from $7.4 million for 2009, primarily due to $0.9 million of additional foreign currency exchange losses attributed to our consolidated foreign operations in 2010 compared to 2009 (attributed to our consolidated European and Latin American operations).

        Equity in losses of unconsolidated subsidiaries.    Equity in losses of unconsolidated subsidiaries (Acquisition Partnership and servicing entities) from our PAA&R segment increased by $0.5 million in 2010 compared to 2009. Equity in losses of our unconsolidated Acquisition Partnerships totaled $5.7 million in 2010 compared to $0.2 million in 2009, whereas equity in earnings of our unconsolidated servicing entities increased to $4.0 million of earnings in 2010 compared to $1.0 million of losses in 2009. Our share of equity in earnings and losses from these equity-method investees will vary period-to-period depending on the profitability of the underlying entities and the composition of FirstCity's ownership mix in the respective entities that report earnings or losses in a period. The following is a discussion of equity in earnings from FirstCity's Acquisition Partnerships (by geographic region) and servicing entities. Refer to Note 7 of the Company's 2010 consolidated financial statements for a summary of revenues, earnings and equity in earnings (loss) of FirstCity's equity investments by region.

•

Domestic—Total combined revenues reported by our U.S. Acquisition Partnerships (FirstCity share 15%-50%) increased to $15.2 million in 2010 compared to $9.6 million in 2009. In addition, total combined net earnings reported by domestic partnerships increased to $5.4 million in 2010 compared to $2.8 million in 2009. The increase in total revenues and net earnings in 2010 compared to 2009 was attributable primarily to an increase in collections to $61.4 million in 2010 from $30.1 million in 2009; which was off-set partially by the following: (1) a $2.6 million increase in net impairment provisions recorded by these partnerships in 2010 compared to 2009, including $2.0 million of additional impairment recorded in the fourth quarter of 2010 ("Q4 2010") compared to the fourth quarter of 2009 ("Q4 2009"); (2) a $1.2 million increase in service fee expense; and (3) a $2.9 million decline in interest and accretion income in 2010 compared to 2009 due primarily 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 for income-recognition purposes 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. Although total revenues and net earnings reported by our domestic Acquisition Partnerships increased in 2010 compared to 2009, the collective activity described above translated to a decrease in FirstCity's share of domestic partnership net earnings to a $0.2 million loss for 2010 compared to $1.2 million of earnings for 2009. This $1.4 million unfavorable swing is attributed to the composition of FirstCity's ownership mix in the domestic Acquisition Partnerships that reported net earnings and losses in 2010 compared to 2009. FirstCity's average investment in domestic Acquisition Partnerships increased to

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$24.1 million for 2010 from $13.8 million for 2009, due primarily to increased investment activity in newly-formed domestic Acquisition Partnerships under FirstCity's investment agreement with Värde (see Note 2 of the Company's 2010 consolidated financial statements for additional information). In light of FirstCity's increased holdings in domestic Portfolio Assets acquired through equity-method investments in unconsolidated Acquisition Partnerships instead of consolidated Portfolio Assets over the past year, the Company expects equity in earnings of domestic Acquisition Partnerships to gradually increase over time in comparison to income from consolidated Portfolio Assets.

•

Latin America—Total combined revenues reported by our Latin American Acquisition Partnerships (FirstCity's share 8%-50%) increased to $18.4 million in 2010 from $11.9 million in 2009. Total combined net losses reported by our Latin American partnerships decreased to $1.4 million in 2010 compared to $6.2 million 2009. The increase in total partnership revenues and the lower net losses reported by these partnerships in 2010 compared to 2009 was attributable partly to an increase in collections to $28.7 million in 2010 compared to $26.3 million in 2009. While collections increased modestly, the primary reason for the increased revenues was attributed to the liquidation of a single asset (with a nominal cost basis) by a Latin American partnership in 2010 that generated a gain of approximately $3.1 million. Further contributing to the lower net losses reported by these partnerships in 2010 compared to 2009 was a $2.2 million decline in property protection and servicing fee expenses recorded in 2010 compared to 2009, and $0.7 million of additional foreign currency exchange gains recorded in 2010 compared to 2009 (including $4.0 million of additional foreign currency exchange gains recorded in Q4 2010 compared to Q4 2009). The significant increase in foreign currency exchange gains recorded by these partnerships in Q4 2010 compared to Q4 2009 stemmed from the translation impact to their U.S. dollar-denominated debt (due to the higher appreciation in value of the Mexican peso relative to the U.S. dollar in Q4 2010 compared to Q4 2009). These favorable results reported by our Latin American Acquisition Partnerships were off-set partially by the following: (1) a $6.5 million decline in interest and accretion income in 2010 compared to 2009 due primarily to an increase in the level of Latin American 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); (2) $3.0 million of additional tax-related expense recorded in 2010 compared to 2009 (primarily related to increased income from collections in Brazil combined with reversals of certain value-added tax receivables in Mexico); and (3) $0.8 million of additional net impairment provisions recorded in 2010 compared to 2009. The collective activity described above translated to FirstCity's share of Latin American partnership losses totaling $0.7 million in 2010 and $0.8 million in 2009. FirstCity's average investment in Latin American Acquisition Partnerships decreased to $16.8 million for 2010 compared to $17.8 million for 2009.



•

Europe—Total combined revenues reported by European Acquisition Partnerships (FirstCity's share 22.5%-50.0%) decreased to $4.7 million in 2010 from $16.5 million in 2009. In addition, total combined net earnings reported by these European partnerships decreased sharply to $15.6 million in losses for 2010 from $1.6 million in losses for 2009. The decrease in total partnership revenues and increase in total net losses reported by our European Acquisition Partnerships was attributed primarily to a decrease in collections to $18.6 million in 2010 compared to $30.7 million in 2009, and $3.7 million of additional impairment provisions recorded in 2010 (occurring in Q4 2010) compared to 2009. The impairment provisions were recorded primarily by the European Acquisition Partnerships that were wholly-acquired and consolidated by FirstCity in December 2010 (refer to Note 3 of the Company's 2010 consolidated financial statements). These unfavorable results reported by our European Acquisition Partnerships were off-set partially by a $2.3 million decline in property protection and servicing fee expenses recorded in 2010 compared to 2009. Further contributing to the

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decline in European partnership revenues was the decrease in the level of Portfolio Asset holdings by these Acquisition Partnerships over the past two years (see paragraph below). The collective activity described above translated to an unfavorable increase in FirstCity's share of European Acquisition Partnership net losses to $4.9 million in losses for 2010 from $0.6 million in losses for 2009.

FirstCity's average investment in European Acquisition Partnerships decreased to $5.7 million for 2010 from $12.3 million for 2009—which contributed to a decline in European partnership collections and FirstCity's share of European partnership revenues as discussed above. In light of FirstCity's step-acquisition transactions and resulting consolidations of sixteen French entities (former unconsolidated European Acquisition Partnerships) in May 2009 and eight German entities (formerly unconsolidated European Acquisition Partnerships) in December 2010, the Company expects income from consolidated Portfolio Assets to off-set the decline in European partnership revenues.

•

Servicing Entities—Total combined revenues reported by our foreign unconsolidated servicing entities (FirstCity's share 11.9%-50.0%) increased to $58.1 million in 2010 from $47.9 million in 2009, and total combined net earnings reported by these entities improved to $10.7 million in net earnings for 2010 from $2.0 million of net losses for 2009. The increase in total net earnings reported by these servicing entities was attributed primarily to (1) additional investment income of $11.5 million recorded in 2010 compared to 2009, including $5.1 million of the increase in Q4 2010 compared to Q4 2009 (primarily due to increased investment activity conducted by a European servicing entity in 2010); (2) a $0.8 million decrease in net impairment provisions recorded in 2010 compared to 2009; and (3) a $0.5 million decrease in income tax provisions in 2010 compared to 2009 as a result of our ability to recognize foreign tax benefits associated with U.S. GAAP adjustments to an unconsolidated European servicing entity's local financial statements, combined with the timing of income tax payments made by the foreign servicing entity in its local jurisdiction. While the income tax provisions decreased in 2010 compared to 2009, the income tax provisions actually increased by $2.0 million in Q4 2010 compared to Q4 2009 (due primarily to increased profitability reported by our European servicing entity and recognition of temporary timing differences related to the previously-established foreign tax benefit mentioned above). The collective activity described above translated to an increase in FirstCity's share of net earnings from its foreign servicing entities to $4.0 million in earnings for 2010 from $1.0 million in losses for 2009.

        Gain on business combinations.    In 2010, the Company recognized $4.6 million of business combination gains (including $3.7 million in Q4 2010) attributable to step-acquisition transactions in which the Company acquired controlling interests in three U.S. Acquisition Partnerships (March 2010) and eight European Acquisition Partnerships (December 2010). The Company owned noncontrolling equity interests in these entities prior to the transactions. Under business combination accounting guidance, the Company's previously-held noncontrolling interests in these entities were re-measured to fair value on the respective acquisition dates—which resulted in the Company's recognition of a $0.9 million gain related to the domestic Acquisition Partnerships transaction and a $3.7 million gain related to the European Acquisition Partnerships transaction. In 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. Under business combination accounting guidance, 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. Refer to Note 3 of the Company's 2010 consolidated financial statements for additional information on these transactions.

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        Net income attributable to noncontrolling interests.    Net income attributable to noncontrolling interests represents the portions of net earnings that are attributable to our co-investors in our consolidated Acquisition Partnerships (FirstCity's ownership in these consolidated partnerships ranges from 50%-90%). The amount of net income attributable to noncontrolling interests in these consolidated Acquisition Partnerships increased to $10.3 million for 2010 from $5.2 million for 2009. This increase is attributed to an increase in net earnings from these consolidated Acquisition Partnerships in 2010 compared to 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), especially the consolidated European Acquisition Partnerships.

Special Situations Platform Business Segment

        Our Special Situations Platform business segment ("Special Situations" or "FirstCity Denver") reported significantly higher net earnings of $15.7 million in 2010 compared to $1.8 million of net earnings in 2009. In 2010, FirstCity Denver provided $13.2 million of investment capital to privately-held middle-market companies in the form of debt and direct equity investments ($4.6 million financed through an investee entity's debt), compared to $12.4 million of investment capital provided to such companies in the form of debt and equity in 2009. Since its inception in April 2007, FirstCity Denver has been involved in middle-market transactions with total investment values of $84.9 million, and has provided $57.1 million of investment capital in connection with these investments.

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        The following is summary of the results of operations (continuing and discontinued operations) for the Company's Special Situations Platform business segment for 2010 and 2009:

        Interest income from loans receivable.    Interest income from loans receivable increased to $2.4 million in 2010 from $2.1 million in 2009. FirstCity Denver's average investment in loans receivable was $18.6 million for 2010—including $2.3 million accounted for under the cost recovery method. For 2009, FirstCity Denver's average investment in loans receivable was $20.0 million—including $2.5 million accounted for under the cost recovery method.

        Revenue, costs and expenses from railroad operations.    Revenue, costs and expenses from railroad operations represents the results of operations recorded by FirstCity Denver's majority-owned railroad

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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 $1.5 million in 2010 compared to 2009 due to an increase in rail car movement services performed in 2010 compared to 2009. Total costs and expenses attributable to the railroad operations increased by $0.6 million in 2010 compared to 2009 due to the growth in the railroad operations in the periods compared.

        Revenue, costs and expenses from manufacturing operations.    Revenue, costs 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 communications transmission equipment and software solutions) through June 30, 2010. FirstCity acquired a controlling interest in this company in December 2009; however, on June 30, 2010, FirstCity Denver ceased to have a controlling interest, but retained a noncontrolling interest and elevated economic interests, in this manufacturing subsidiary. As such, on June 30, 2010, FirstCity Denver deconsolidated this subsidiary and began accounting for its retained investment in the manufacturing entity using the equity-method of accounting. Consequently, subsequent to June 30, 2010, FirstCity Denver no longer reported the individual revenue and expense line-items of the manufacturing entity's operations in its consolidated statement of operations (rather, FirstCity Denver recorded its share of the subsidiary's net earnings and losses as "Equity in earnings of unconsolidated subsidiaries"). Refer to Note 3 of the Company's 2010 consolidated financial statements for additional information on this transaction. The subsidiary's sales in 2010 (through June 30, 2010) were composed of $6.7 million related to equipment and $3.8 million related to software solutions. In 2010, 32% of the subsidiary's sales were made to international customers.

        Other income.    Other income in 2010 decreased modestly by $0.3 million in comparison to 2009, primarily due to $1.2 million of gains recognized by FirstCity Denver's consolidated subsidiaries in 2009 (mainly railroad operations) in connection with property and equipment sales compared to $0.3 million of such gains recorded in 2010. The decrease in other income in 2010 was off-set partially by an increase in ancillary income generated by FirstCity Denver's consolidated subsidiaries in 2010 compared to 2009.

        Expenses—Other.    Other expenses increased by $1.8 million in 2010 compared to 2009 primarily due to $2.0 million of additional net impairment provisions recorded on real estate properties and loan investments in 2010 compared to 2009. The impairment provisions were identified in connection with management's regular evaluation of the collectibility of FirstCity Denver's 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. This process also requires estimates that are susceptible to significant revision as more information becomes available. It remains unclear what impact the continuance of challenging economic conditions and disruptions in the financial, capital and real estate markets will ultimately have on our financial results. These conditions could adversely impact our business if borrowers cannot continue to make payments, or if the values of our underlying loan collateral and real estate properties continue to decline. Therefore, we cannot provide assurance that, in any particular future period, we will not incur additional impairment provisions.

        Equity in earnings of unconsolidated subsidiaries.    Equity in earnings of unconsolidated subsidiaries significantly increased to $16.3 million in 2010 from $0.9 million in 2009. The increase in 2010 was due primarily to $16.4 million of additional equity in earnings recorded by FirstCity Denver in 2010 compared to 2009 (including an additional $2.2 million in Q4 2010 compared to Q4 2009) for its share of net earnings from an equity-method investee engaged in the business of manufacturing prefabricated buildings. This manufacturing entity reported significantly-higher net earnings in 2010 related to building orders and a short-term lease agreement with a single customer. The entity's business dealings with this customer were completed in Q4 2010 and do not extend beyond such time.

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        The increase in equity in earnings for 2010 was also due in part to $0.4 million of additional equity in earnings recorded by FirstCity Denver in 2010 compared to 2009 for its share of net earnings from its former equity-method investment in the coal mine operation (FirstCity Denver consolidated this subsidiary effective April 1, 2010—refer to discussion above) and newly-obtained direct equity-method investment in a coal mine equipment subsidiary (refer to Note 3 of the Company's 2010 consolidated financial statements for additional information on this transaction). The increase in equity in earnings for 2010 was off-set partially by $1.5 million of additional equity in losses recorded by FirstCity Denver in 2010 compared to 2009 for its share of net losses from equity-method investments in a restaurant management entity and multiple manufacturing concerns (including a new equity-method investment effective in the third quarter of 2010 in a wireless communications equipment and software solutions entity that was formerly accounted for as a consolidated subsidiary until FirstCity Denver ceased having a controlling interest in the entity effective June 30, 2010—refer to Note 3 of the Company's 2010 consolidated financial statements for additional information). The increased losses reported by these entities in 2010 were due primarily to lower-than-expected sales volumes during the period.

        Gain on business combinations.    In December 2009, FirstCity Denver acquired an 87.45% equity interest in a business involved in the radio broadcast equipment industry. The fair value of the acquired net assets of the business exceeded FirstCity Denver's purchase price by $0.8 million—which was recognized as a bargain purchase gain under business combination accounting standards. Refer to Note 3 of the Company's 2010 consolidated financial statements for additional information on this transaction. As discussed below, FirstCity Denver also recognized a $4.8 million business combination gain when it obtained control of a coal mine subsidiary (formerly an equity-method investment) in April 2010. FirstCity Denver disposed of this subsidiary in December 2010, and as such, this gain was reclassified to discontinued operations (see discussions below).

        Net income attributable to noncontrolling interests.    The amount of net income attributable to noncontrolling interests related to FirstCity Denver, an 80%-owned subsidiary of FirstCity, increased to $3.1 million for 2010 compared to $0.4 million for 2009. The increase in 2010 was due primarily to additional net earnings reported by FirstCity Denver in 2010 compared to 2009 (mainly related to an increase in equity in earnings from unconsolidated subsidiaries and a business combination gain as discussed below).

        Discontinued operations.    The results of discontinued operations consist of activities related to FirstCity Denver's consolidated coal mine operation. Effective April 2010, FirstCity Denver obtained control of the coal mine operation (which was an equity-method investment of FirstCity Denver at the time) when the controlling ownership interest held by the then-majority shareholder was redeemed (which increased FirstCity Denver's ownership in the entity to 88.8% from 39.5%). Under business combination accounting guidance, FirstCity Denver's previously-held noncontrolling interest in the coal mine operation was re-measured to fair value on the date control was obtained—which resulted in FirstCity Denver's recognition of a $4.8 million business combination gain Refer to Note 3 of the Company's 2010 consolidated financial statements for additional information on this transaction.

        The coal mine entity generated revenue under a short-term coal sales contract with a major utility company. In December 2010, the coal mine operation completed performance on its coal sales contract. The coal mine operations ceased as a result of the contract termination since it did not have other coal sales contracts. As a result, FirstCity Denver dissolved the coal mine subsidiary in December 2010. The results of operations from our coal mine subsidiary were reclassified to discontinued operations for the nine-month period ended December 31, 2010 (the period when FirstCity Denver held a controlling interest). Earnings attributed to these discontinued operations, which totaled $4.0 million for the nine-month period ended December 31, 2010 were comprised of $42.4 million of operating revenues, $43.2 million of operating costs, and the $4.8 million business combination gain.

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Other Significant Items Affecting Operations

        The following items affect the Company's overall results of operations and are not directly allocated to the Portfolio Asset Acquisition and Resolution or the Special Situations Platform business segments discussed above.

        Income from lawsuit settlement.    In December 2009, FirstCity recorded $6.1 million of other income in connection with the settlement of a lawsuit. Refer to Note 21 of the Company's 2010 consolidated financial statements for additional information.

        Corporate.    Corporate and administrative costs and expenses, consisting primarily of certain salaries and benefits, accounting fees and legal expenses, decreased to $8.0 million in 2010 from $8.2 million in 2009.

        Income taxes.    Provision for income taxes remained steady at $2.3 million in 2010 compared to $2.2 million in 2009. Refer to Note 14 of the Company's 2010 consolidated financial statements for additional information on income taxes.

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. Generally speaking, income recognized from our investments in consolidated portfolio assets is reported as "Income from Portfolio Assets" on our consolidated statements of operations, whereas income from our investments in unconsolidated subsidiaries that acquire portfolio assets is reported as "Equity in earnings of unconsolidated subsidiaries." Furthermore, since we function as the servicer for the vast majority of our domestic and Latin American unconsolidated portfolio assets, we also recognize fee income related to the performance of our servicing responsibilities. This fee income is reported as "Servicing fees" on our consolidated statements of operations. We also generate service fee income from our domestic and Latin American consolidated portfolio assets that we service; however, this income is eliminated in consolidation and, as such, is not included on our consolidated statements of operations.

        The following table includes information related to Portfolio Assets acquired by the Company in 2010 and 2009.

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