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| FCFC > SEC Filings for FCFC > Form 10-Q on 14-Aug-2012 | All Recent SEC Filings |
14-Aug-2012
Quarterly Report
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 the United States and, to a lesser extent, international markets, and distressed transaction and special situations investment opportunities in U.S. lower 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 lower 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.
Our revenues consist primarily of (1) income and gains from our Portfolio Assets and loan investments (including SBA lending activities); (2) equity income from our Acquisition Partnerships; (3) servicing fee income and incentive fee income from Acquisition Partnerships based on the performance of our servicing activities on the assets held by these unconsolidated partnerships; and (4) income generated by our debt and equity investments (consolidated and unconsolidated) in privately-held lower middle-market companies.
Summary Financial Results
FirstCity recorded net earnings of $1.5 million, or $0.14 per common share on a fully diluted basis, for the three-month period ended June 30, 2012 ("Q2 2012"), compared to net earnings of $2.4 million, or $0.24 per common share on a fully diluted basis, for the three-month period ended June 30, 2011 ("Q2 2011"). FirstCity recorded net earnings of $9.9 million, or $0.93 per common share diluted, for the six-month period ended June 30, 2012 ("YTD 2012"), compared to $6.2 million, or $0.60 per common share diluted, for the six-month period ended June 30, 2011 ("YTD 2011"). Components of FirstCity's results of operations for the three- and six-month periods ended June 30, 2012 and 2011 are presented in the tables below.
Three Months Ended
June 30, 2012
(Dollars in thousands)
Portfolio Asset Special
Acquisition Situations Corporate
and Resolution Platform and Other Total
Revenues $ 11,862 $ 2,332 $ 100 $ 14,294
Costs and expenses (9,430 ) (2,556 ) (2,267 ) (14,253 )
Equity income from
unconsolidated subsidiaries 1,790 291 - 2,081
Gain on business
combinations - 935 - 935
Income tax (expense) benefit 54 (9 ) (50 ) (5 )
Net income attributable to
noncontrolling interests (1,184 ) (381 ) - (1,565 )
Net earnings (loss) $ 3,092 $ 612 $ (2,217 ) $ 1,487
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Three Months Ended
June 30, 2011
(Dollars in thousands)
Portfolio Asset Special
Acquisition Situations Corporate
and Resolution Platform and Other Total
Revenues $ 14,547 $ 2,323 $ 48 $ 16,918
Costs and expenses (10,879 ) (1,836 ) (2,070 ) (14,785 )
Equity income from
unconsolidated subsidiaries 1,661 1,622 - 3,283
Gain on business
combinations 278 - - 278
Income tax (expense) benefit (1,216 ) (34 ) 226 (1,024 )
Net income attributable to
noncontrolling interests (1,787 ) (455 ) - (2,242 )
Net earnings (loss) $ 2,604 $ 1,620 $ (1,796 ) $ 2,428
Six Months Ended
June 30, 2012
(Dollars in thousands)
Portfolio Asset Special
Acquisition Situations Corporate
and Resolution Platform and Other Total
Revenues $ 29,036 $ 4,860 $ 185 $ 34,081
Costs and expenses (18,592 ) (4,429 ) (5,180 ) (28,201 )
Equity income from
unconsolidated subsidiaries 6,322 226 - 6,548
Gain on business
combinations - 935 - 935
Income tax expense (708 ) (29 ) (101 ) (838 )
Net income attributable to
noncontrolling interests (2,137 ) (536 ) - (2,673 )
Net earnings (loss) $ 13,921 $ 1,027 $ (5,096 ) $ 9,852
Six Months Ended
June 30, 2011
(Dollars in thousands)
Portfolio Asset Special
Acquisition Situations Corporate
and Resolution Platform and Other Total
Revenues $ 33,096 $ 4,519 $ 80 $ 37,695
Costs and expenses (21,568 ) (3,630 ) (3,798 ) (28,996 )
Equity income from
unconsolidated subsidiaries 3,380 1,774 - 5,154
Gain on business
combinations 278 - - 278
Gain on sale of subsidiaries 5 - - 5
Income tax (expense) benefit (1,782 ) (33 ) 189 (1,626 )
Net income attributable to
noncontrolling interests (5,820 ) (537 ) - (6,357 )
Net earnings (loss) $ 7,589 $ 2,093 $ (3,529 ) $ 6,153
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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 net earnings related to its Portfolio Asset Acquisition and Resolution business segment improved to $3.1 million in Q2 2012 from $2.6 million in Q2 2011. The increase in net earnings in Q2 2012 compared to Q2 2011 was attributed primarily to a $2.3 million decrease in interest expense, a $1.3 million decrease in income tax expense, a $0.9 million increase in servicing fee income, and a $0.7 million decline in asset-level expenses; off-set partially by a $3.2 million decrease in Portfolio Assets income, and a combined negative impact of $1.5 million due to unfavorable foreign currency exchange rate fluctuations attributed to our consolidated and unconsolidated foreign operations.
Refer to the heading "Results of Operations" below for a detailed discussion of the Company's operations in this business segment for the comparative periods presented in the table above.
Special Situations Platform. The Company's net earnings from its Special Situations Platform business segment decreased to $0.6 million in Q2 2012 compared to $1.6 million in Q2 2011. The decrease in net earnings in Q2 2012 compared to Q2 2011 was attributed primarily to a $1.3 million decrease in equity income from unconsolidated subsidiaries, off-set partially by a $0.9 million business combination gain in Q2 2012. Refer to the heading "Results of Operations" below for a detailed discussion of the Company's operations in this business segment for the comparative periods presented in the table above.
Corporate and Other. Net 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, legal and other professional expenses, and accounting fees, increased to $2.2 million for Q2 2012 compared to $1.8 million for Q2 2011.
Summary Investment Activity
In Q2 2012, FirstCity and its investment partners acquired $48.3 million of U.S. Portfolio Asset investments with an aggregate face value of approximately $88.7 million - of which FirstCity's investment acquisition share was $10.3 million. In addition to its Portfolio Asset acquisitions in Q2 2012, FirstCity invested $6.8 million in non-portfolio investments, including $6.6 million in the form of SBA loan originations and advances, and $0.2 million in the form of equity investments. In Q2 2011, FirstCity and its investment partners acquired $81.7 million of U.S. Portfolio Asset investments with a face value of approximately $163.4 million - of which FirstCity's investment acquisition share was $22.2 million. In addition to its Portfolio Asset acquisitions in Q2 2011, FirstCity invested $7.4 million in non-portfolio investments, consisting of $6.3 million in the form of SBA loan originations and advances, $0.9 million in the form of equity investments, and $0.2 million in the form of investment securities.
At June 30, 2012, the carrying value of FirstCity's earning assets (primarily Portfolio Assets, equity investments, loans receivable and entity-level earning assets) approximated $258.3 million - compared to $308.7 million at December 31, 2011 and $355.3 million at June 30, 2011. The global distribution of FirstCity's earning assets (at carrying value) at June 30, 2012 included $208.7 million in the United States; $32.5 million in Europe; and $17.1 million in Latin America. Since mid-2010, a significant majority of our Portfolio Asset investments have been acquired through minority-owned, unconsolidated U.S. Acquisition Partnerships (instead of majority-owned, consolidated Portfolio Asset investments) under terms of an investment agreement with Värde Investment Partners, L.P. ("Värde"). As such, total footings of our consolidated earning assets have experienced a corresponding decrease, resulting primarily from a decline in our holdings of consolidated Portfolio Assets.
Refer to the headings "Portfolio Asset Acquisitions - Portfolio Asset Acquisition and Resolution Business Segment" and "Lower Middle-Market Company Capital Investments - Special Situations Platform Business Segment" below for additional information related to our investment activities and composition.
Management's Outlook
Our revenues consist primarily of (1) income and gains from our Portfolio Assets and loan investments (including SBA lending activities); (2) equity income from our Acquisition Partnerships; (3) servicing fee income and incentive fee income from Acquisition Partnerships based on the performance of our servicing activities on the assets held by these unconsolidated partnerships; and (4) income generated by our debt and equity investments (consolidated and unconsolidated) in privately-held lower 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 continue to see 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. More recently, U.S. debt ceiling and fiscal policy concerns, together with uncertainty related to sovereign debt conditions in Europe, have increased volatility and uncertainty that could adversely affect the U.S. and global financial markets and economic conditions. The recent economic recession in general, combined with the disruptions in the financial and capital markets in particular, have negatively impacted market liquidity and increased the cost of debt and equity capital.
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 lower 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.
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.
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 18 of the consolidated financial statements included in Item 1 of this Form 10-Q). 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 minority-owned, unconsolidated acquisition entities under this investment agreement since mid-2010 represent a shift in the Company's portfolio asset acquisition history - which primarily consisted of consolidated portfolio assets prior to such time. 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 income from unconsolidated 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 and fund operations is dependent on
(1) anticipated cash flows from unencumbered Portfolio Assets and equity
investments; (2) our current holdings of unencumbered cash; (3) residual cash
flows from the pledged assets and equity investments after full repayment of our
term loan facilities with Bank of Scotland and Bank of America (see Note 8 of
the consolidated financial statements); (4) cash leak-through provisions
included in our term loan facilities with Bank of Scotland and Bank of America;
and (5) our investment agreement with Värde. 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.
We remain cognizant about the uncertainty and volatility in U.S. financial
markets that currently present challenges for businesses in accessing liquidity
and capital, and the resulting impact on our liquidity considerations and
operations.
Results of Operations
The following discussion and analysis is based on the segment reporting information presented in Note 17 to the consolidated financial statements of the Company included in Item 1 of this Form 10-Q, and should be read in conjunction with the consolidated financial statements (including the notes thereto) included elsewhere in this Form 10-Q.
As a result of significant period-to-period fluctuations in our revenues and earnings, period-to-period comparisons of the results of our operations may not be meaningful. The Company's financial results are impacted by many factors including, but not limited to, general economic, political and industry conditions; volatility and disruptions in the functioning of financial markets; fluctuations in interest rates and foreign currency exchange rates; fluctuations in the underlying values of real estate and other collateral securing our loan portfolios; the timing and ability to collect and liquidate assets; changes in the performance and creditworthiness of our borrowers and other counterparties; increased competition from other market participants in the industries in which we operate; the availability, pricing and terms of Portfolio Assets, lower middle-market transactions and other investment opportunities in all of the Company's businesses; and changes in government regulations, statutes and tax or fiscal policies. The Company's business and results of operations are also impacted by the availability of liquidity to fund its investment activity and operations, and our access to credit and capital markets. Such factors, individually or combined with other factors, may result in significant fluctuations in our reported operations and in the trading price of our common stock.
Q2 2012 Compared to Q2 2011
FirstCity's net earnings to common stockholders totaled $1.5 million in Q2 2012 compared to net earnings of $2.4 million in Q2 2011. On a per share basis, diluted net earnings to common stockholders were $0.14 in Q2 2012 compared to $0.24 in Q2 2011.
Portfolio Asset Acquisition and Resolution
Through our Portfolio Asset Acquisition and Resolution ("PAA&R") business segment, FirstCity and its investment partners acquired $48.3 million of Portfolio Assets in Q2 2012 with an approximate face value of $88.7 million, compared to the Company's involvement in acquiring $81.7 million of Portfolio Assets in Q2 2011 with an approximate face value of $163.4 million. In Q2 2012, FirstCity's investment acquisition share in the Portfolio Asset acquisitions was $10.3 million - consisting of $1.4 million acquired through consolidated portfolio entities and $8.9 million acquired through unconsolidated Acquisition Partnerships. In Q2 2011, FirstCity's investment acquisition share in the Portfolio Asset acquisitions was $22.2 million - consisting of $1.9 million acquired through consolidated portfolio entities and $20.3 million acquired through unconsolidated Acquisition Partnerships. Generally speaking, income recognized from our investments in consolidated Portfolio Assets is reported as "Income from Portfolio Assets" on our consolidated statements of earnings, whereas income from our investments in unconsolidated subsidiaries that acquire Portfolio Assets is reported as "Equity income from unconsolidated subsidiaries." Furthermore, since we perform as the servicer for the vast majority of our U.S. 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 earnings. We also generate service fee income from our U.S. 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 earnings.
In Q2 2012, FirstCity invested an additional $6.8 million in non-portfolio investments in the form of SBA loan originations and advances and other investments, compared to $7.4 million in non-portfolio investments in the form of SBA loan originations and advances and other investments in Q2 2011. 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 $3.1 million of net earnings in Q2 2012 compared to $2.6 million of net earnings in Q2 2011. The following is a summary of the results of operations for the Company's PAA&R business segment for Q2 2012 and Q2 2011:
Three Months Ended
June 30,
2012 2011
(Dollars in thousands)
Portfolio Asset Acquisition and Resolution:
Revenues:
Servicing fees $ 3,397 $ 2,480
Income from Portfolio Assets 5,865 9,098
Gain on sale of SBA loans held for sale, net 284 646
Interest income from SBA loans 382 325
Interest income from loans receivable -
affiliates - 396
Other income 1,934 1,602
Total revenues 11,862 14,547
Costs and expenses:
Interest and fees on notes payable to banks and
other 1,315 3,630
Salaries and benefits 3,988 4,105
Provision for loan and impairment losses, net
of recoveries 769 178
Asset-level expenses 832 1,553
Other costs and expenses 2,526 1,413
Total expenses 9,430 10,879
Equity income of unconsolidated subsidiaries 1,790 1,661
Gain on business combination - 278
Income tax (expense) benefit 54 (1,216 )
Net income attributable to noncontrolling
interests (1,184 ) (1,787 )
Net earnings $ 3,092 $ 2,604
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Servicing fee revenues. Servicing fee revenues increased to $3.4 million in Q2 2012 from $2.5 million in Q2 2011. Servicing fees from U.S. Acquisition Partnerships totaled $1.9 million in Q2 2012 compared to $1.0 million in Q2 2011, while servicing fees from Latin American Acquisition Partnerships totaled $1.3 million in Q2 2012 and $1.4 million in Q2 2011. Servicing fees from U.S. 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 U.S. Acquisition Partnerships in Q2 2012 compared to Q2 2011 was attributable to an increase in collections from unconsolidated U.S. partnerships to $57.1 million in Q2 2012 from $29.8 million in Q2 2011, which resulted in a $1.0 million increase in service fee income.
Since mid-2010, a majority of the Company's U.S. Portfolio Asset investments have been acquired through equity-method investments in unconsolidated Acquisition Partnerships under the Värde investment agreement instead of consolidated Portfolio Assets. As such, the Company expects service fee income from its unconsolidated U.S. Acquisition Partnerships to gradually increase over time. Refer to the heading "Equity income from unconsolidated subsidiaries" below for information on our unconsolidated U.S. Acquisition Partnership activities.
Income from Portfolio Assets. Income from Portfolio Assets, comprised primarily of liquidation income and gains and accretion income from Portfolio Assets, decreased to $5.9 million in Q2 2012 from $9.1 million in Q2 2011.
Collections from our consolidated Portfolio Assets decreased to $23.5 million in Q2 2012 from $34.5 million in Q2 2011, which contributed to a $1.7 million . . .
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