Agreement and Plan of Merger

On December 20, 2012, FirstCity Financial Corporation, a Delaware corporation (the "Company"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with Hotspurs Holdings LLC, a Delaware limited liability company ("Parent"), and Hotspurs Acquisition Corporation, a Delaware corporation ("Merger Subsidiary"). Parent and Merger Subsidiary are affiliates of investment funds managed by Värde Partners, Inc. ("Värde"), an alternative investment fund manager. The Merger Agreement provides that, subject to the terms and conditions thereof, Merger Subsidiary will merge with and into the Company (the "Merger"), with the Company continuing as the surviving corporation (the "Surviving Corporation"). The Merger Agreement was negotiated on behalf of the Company by the strategic review committee (the "SRC") of the Board of Directors of the Company (the "Board") consisting of independent directors, with the assistance of legal and financial advisors. Based on the recommendation of the SRC, the full Board reviewed and unanimously approved the Merger Agreement and the transactions contemplated thereby on December 20, 2012.

Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock, par value $0.01 per share, of the Company (other than (i) shares held by the Company, Parent or their respective wholly-owned subsidiaries and (ii) shares held by stockholders who properly exercise and perfect their appraisal rights) will cease to be outstanding and will be converted into the right to receive $10.00 in cash, without interest (the "Merger Consideration") on the terms and subject to the conditions set forth in the Merger Agreement. In addition, pursuant to the Merger Agreement,
(i) each option to acquire shares of common stock of the Company that is not fully exercisable as of the date of the Merger Agreement will automatically become fully vested and exercisable immediately prior to the effective time of the Merger and, at the effective time of the Merger, will be converted into the right to receive an amount in cash, without interest, equal to (A) the excess, if any, of the Merger Consideration over the per share exercise price of such stock option multiplied by (B) the aggregate number of shares into which such stock option was exercisable immediately prior to the effective time of the Merger and (ii) each issued and outstanding share of restricted common stock will vest in full immediately prior to the effective time of the Merger and, at the effective time of the Merger, will be converted into the right to receive the Merger Consideration, without interest, on the terms and subject to the conditions set forth in the Merger Agreement.

The Company has made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants (i) regarding the conduct of the business of the Company and its subsidiaries prior to the consummation of the Merger, (ii) not to solicit, initiate, knowingly facilitate or knowingly encourage any acquisition proposals (other than those related to the Merger Agreement or the Merger) or, subject to certain exceptions, participate in discussions or negotiations regarding, or furnish any non-public information relating to, acquisition proposals (other than the transactions contemplated by the Merger Agreement or the Merger) or (iii) subject to certain exceptions, not to withdraw or modify in a manner adverse to Parent or Merger Subsidiary, the recommendation of the Board that the Company's stockholders adopt and approve the Merger Agreement. In the event that the Company receives an acquisition proposal that the Board determines is superior to the Merger, Parent will have an opportunity to match the terms of such acquisition proposal, subject to certain requirements.

Consummation of the Merger is subject to various customary conditions, including
(i) the approval and adoption of the Merger Agreement by the holders of at least a majority of the issued and outstanding shares of the Company's common stock,
(ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (iii) the absence of any applicable law or governmental order prohibiting or restraining the consummation of the Merger and (iv) the accuracy of certain representations and warranties of the parties and compliance by the parties with their respective covenants or obligations under the Merger Agreement (subject to customary materiality qualifiers). In addition, Parent's and Merger Subsidiary's obligation to consummate the Merger is further conditioned upon the absence of a Company Material Adverse Effect (as defined in the Merger Agreement).

The Merger Agreement contains certain termination rights, including the right, subject to certain exceptions, of either party to terminate the Merger Agreement if the Merger is not consummated on or prior to July 31, 2013, and of the Company to terminate the Merger Agreement to accept a "Superior Proposal" as defined in the Merger Agreement. Upon the termination of the Merger Agreement by the Company or Parent upon specified conditions, the Company will be required to pay Parent a termination fee of $2.0 million and reimburse Parent and Merger Subsidiary up to a maximum of $1.0 million of expenses. Upon the termination of the Merger Agreement

by the Company upon other specified conditions, Parent will be required to pay the Company a termination fee of $5.0 million and reimburse the Company up to a maximum of $1.0 million of expenses. Additionally, as an alternative to the receipt of the termination fee, the Company may seek specific performance of Parent's obligations under the Merger Agreement, as well as specific performance of the Equity Commitment Letter (as described below), under certain circumstances.

The representations, warranties and covenants of the Company set forth in the Merger Agreement (i) were made solely for purposes of the Merger Agreement,
(ii) may be subject to important exceptions, qualifications, limitations and supplemental information agreed upon by the contracting parties, (iii) subject to the terms and conditions of the Merger Agreement, will not survive the closing of the Merger, (iv) are subject to materiality standards which may differ from what may be viewed as material to investors and (v) were made only as of the date of the Merger Agreement or such other date as specified in the Merger Agreement. Accordingly, the Merger Agreement is included with this filing only to provide investors with information regarding the terms of the Merger Agreement and not to provide investors with any other factual information regarding the Company or its business. Investors should not rely on the representations, warranties and covenants or any descriptions thereof in the Merger Agreement as characterizations of the actual state of facts or condition of the Company or any of its subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Company's public disclosure.

The foregoing description of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, which is attached hereto as Exhibit 2.1, and is incorporated by reference herein.

Equity Commitment Letter

On December 20, 2012, Parent obtained certain equity financing commitments in an equity commitment letter (the "Equity Commitment Letter") for the purpose of financing the transactions contemplated by the Merger Agreement and paying related fees and expenses. Pursuant to the Equity Commitment Letter, investment funds affiliated with Värde (the "Värde Funds") committed to purchase, on or prior to closing, an aggregate of approximately $107.1 million in equity from Parent on the terms and subject to the conditions of the Equity Commitment Letter. The commitment of the Värde Funds is subject to (i) the execution and delivery of the Merger Agreement, (ii) the satisfaction or waiver of the conditions to Parent and Merger Subsidiary's obligations to effect the closing in the Merger Agreement and (iii) the substantially simultaneous closing of the Merger.

The Company is not a party to the Equity Commitment Letter but it is an express third party beneficiary and has the express right to specific performance of the equity financing. Pursuant to the Merger Agreement, the Company may specifically enforce the Värde Funds' obligations under the Equity Commitment Letter upon the occurrence of certain conditions, including the failure of Parent and Merger Subsidiary to effect the closing of the Merger.

The Equity Commitment Letter will terminate upon the earlier of (i) the closing of the Merger, (ii) a valid termination of the Merger Agreement, (iii) the funding of the aggregate commitment by the Värde Funds as contemplated by the Merger Agreement, (iv) the payment by the Värde Funds of their guaranteed obligations under the Limited Guarantee (as described below), (v) the assertion . . .

On December 20, 2012, the Compensation Committee (the "Committee") of the Board took the following actions with regard to the compensation of the Company's executive officers and directors. The Committee recommended that the Board approve a bonus pool for executive officers of $3.75 million, subject to potential adjustments for impairments recorded in the Company's financial statements for the year ending December 31, 2012. In addition, the Committee recommended that the Company award the following bonuses to its executive officers for their services provided in 2012.

                             Amount of 2012
Name of Executive Officer      Cash Bonus
James T. Sartain            $      1,150,000
Mark B. Horrell             $        575,000
Terry R. DeWitt             $        575,000
James C. Holmes             $        575,000
Jim W. Moore                $        400,000
J. Bryan Baker              $        400,000
Joe S. Greak                $         75,000

The Committee recommended that the Company pay 75% of these bonuses to the executive officers before December 31, 2012 and the remainder of the bonuses in accordance with ordinary practice after the delivery of the Company's audited financial statements for the year ending December 31, 2012, subject to potential adjustments for impairments recorded in these financial statements. The Committee further recommended that the Board approve the Management Agreements with Messrs. DeWitt, Horrell and Holmes, the Separation Agreements with Messrs. Baker, Greak and Moore and the Retirement Agreement with Mr. Sartain, as described herein.

Finally, the Committee recommended that the Board approve the payment of a $30,000 fee to each non-employee director that was not a member of the SRC for their services provided over the past twelve months and their services to be provided to the Company through the closing of the Merger. The Committee recommended that $15,000 of this payment be paid prior to December 31, 2012, with the remainder to be paid to the directors prior to March 31, 2013. In addition, the Committee determined that since no restricted stock would be issued to directors in 2013 it would recommend that each non-employee director of the Board be paid a $15,000 cash fee as compensation for his services for each calendar quarter during 2013. Following the unanimous recommendation of the Committee of the approval of the compensation arrangements described herein, the full Board unanimously approved these compensation arrangements on December 20, 2012.

The information in Item 1.01 is incorporated herein by reference.

Exhibit No.                                Description
2.1*          Agreement and Plan of Merger, dated as of December 20, 2012, by and
              among Hotspurs Holdings LLC, Hotspurs Acquisition Corporation and
              FirstCity Financial Corporation.

10.1          Equity Commitment Letter, dated as of December 20, 2012, by and among
              The Värde Fund X (Master) L.P., Värde Investment Partners, L.P.,
              Värde Investment Partners (Offshore) Master, L.P., The Värde Fund
              VI-A, L.P. and Hotspurs Holdings LLC.

10.2          Limited Guarantee, dated as of December 20, 2012, by and among The
              Värde Fund X (Master) L.P., Värde Investment Partners, L.P., Värde
              Investment Partners (Offshore) Master, L.P., The Värde Fund VI-A,
              L.P. and FirstCity Financial Corporation.

10.3          Support Agreement, dated as of December 20, 2012, by and among
              Hotspurs Holdings LLC and certain stockholders of FirstCity Financial
              Corporation.

10.4          Separation Agreement, dated as of December 20, 2012, by and between
              Jim W. Moore and FirstCity Financial Corporation.

10.5          Separation Agreement, dated as of December 20, 2012, by and between
              J. Bryan Baker and FirstCity Financial Corporation.

10.6          Separation Agreement, dated as of December 20, 2012, by and between
              Joe S. Greak and FirstCity Financial Corporation.

10.7          Retirement and Consulting Agreement, dated as of December 20, 2012,
              by and between James T. Sartain and Värde Partners, Inc.

Cautionary Statement Regarding Forward-Looking Statements

This Form 8-K may include forward-looking statements that relate to the Company's or management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future and may be deemed to be forward-looking statements. These statements are based upon management's beliefs, assumptions and expectations, taking into account currently available information, and are subject to uncertainly and changes in circumstances. These statements are not statements of historical fact. Forward-looking statements involve risks, uncertainties and other factors which may cause actual results to differ materially from those expressed in any forward looking statements. These factors include, but are not limited to,
(i) the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement, (ii) the outcome of any legal proceedings that may be instituted against the Company and other persons following announcement of the Merger Agreement, (iii) the inability to complete the Merger due to the failure to obtain stockholder approval or the failure to satisfy the other conditions to the completion of the Merger, including the expiration or termination of the waiting period under the HSR Act, (iv) risks that the proposed transaction disrupts the Company's current plans and operations and the potential difficulties in employee retention as a result of the Merger, (v) the ability to recognize the benefits of the Merger, (vi) the amount of costs, fees, expenses and charges related to the Merger and the actual terms of certain financings that will be obtained for the Merger,
(vii) legislative developments, (viii) changes in tax and other laws, and
(ix) other risks to the consummation of the transaction, including the risk that the transaction will not be consummated within the expected time period or at all.

The Company may also not be able to complete the proposed transaction on the terms described in this report, other acceptable terms or at all as a result of various other factors, including the risk factors and other risks that are described from time to time in the Company's filings with the Securities and Exchange Commission (the "SEC") including but not limited to its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and its Current Reports on Form 8-K, filed with the SEC and available through the Company's website, which contain a more detailed discussion of the Company's business, including risks and uncertainties that may affect future results. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. Information in this Current Report on Form 8-K may be superseded by more recent information or statements, which may be disclosed in subsequent filings with the SEC or otherwise. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statements are based, in whole or in part, except as required under applicable law.

Additional Information and Where to Find It

In connection with the proposed transaction, the Company will file a proxy statement and other materials with the SEC. The Company and its directors, executive officers and certain other members of its management and employees may be deemed to be "participants" in the solicitation of proxies from its shareholders in connection with the proposed transaction. Information regarding the interests of such directors and executive officers is included in the Definitive Proxy Statement on Schedule 14A filed with the SEC on October 26, 2012 with respect to the 2012 Annual Meeting of Shareholders of the Company as well as other proxy statements and Annual Reports on Form 10-K, previously filed with the SEC, and information concerning all of the Company participants in the solicitation will be included in the proxy statement and other materials to be filed with the SEC in connection with the proposed transaction. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE PROXY STATEMENT CAREFULLY AND IN ITS ENTIRETY WHEN IT BECOMES AVAILABLE BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. Investors and security holders may obtain a free copy of the proxy statement (when available) and other documents filed by the Company at the Company's website, www.fcfc.com, or at the SEC's website, www.sec.gov. The proxy statement and other relevant documents may also be obtained for free from the Company by directing such request to:

FirstCity Financial Corporation

Attn: Corporate Secretary

P.O. Box 8216

Waco, Texas 76714-8216

Telephone: (866) 652-1810