Liquidity and Capital Resources	12 Months Ended
Dec. 31, 2012
Liquidity and Capital Resources
Liquidity and Capital Resources	2. Liquidity and Capital Resources The Company requires liquidity to fund its operations, Portfolio Asset acquisitions, investments in and advances to Acquisition Partnerships, capital investments in privately-held lower middle-market companies, other debt and equity investments, repayments of bank borrowings and other debt, and working capital to support our growth. Historically, our primary sources of liquidity have been funds generated from operations (primarily loan and real estate collections and service fees), equity distributions from the Acquisition Partnerships and other subsidiaries, interest and principal payments on subordinated intercompany debt, dividends from the Company's subsidiaries, borrowings from credit facilities with external lenders, and other special-purpose short-term borrowings. At December 31, 2012, the Company had $24.1 million of cash on its consolidated balance sheet that could only be used to settle the liabilities of certain consolidated VIEs (see Note 19). Our ability to fund operations and make new investments is dependent on (1) anticipated cash flows from our 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 (as discussed below); (4) cash leak-through provisions included in our term loan facilities with Bank of Scotland and Bank of America (as discussed below); and (5) our investment agreement with Värde Investment Partners, L.P. (as discussed below). Many factors, including general economic conditions, are essential to our ability to generate cash flows. Fluctuations in our collections, investment income, credit availability, and adverse changes in other factors could have a negative impact on our ability to generate sufficient cash flows to support our business. Historically, the Company's primary sources of funding for purchasing distressed loan portfolios were loans under credit facilities with third-party lenders, other special purpose short-term borrowings, funds generated from operations, equity distributions from acquisition entities and other subsidiaries and interest and principal payments on subordinated intercompany debt. A substantial majority of the Company's portfolio investments prior to July 2010 were funded through loan facilities provided by Bank of Scotland and BoS(USA), Inc. Although Bank of Scotland had provided financing to the Company for several years, following Lloyds Banking Group's acquisition of Bank of Scotland, Bank of Scotland and BoS(USA), Inc. placed the Company's revolving loan facility in a wind-down structure. In June 2010, the facilities with Bank of Scotland and BoS(USA), Inc. were restructured into one facility with a principal amount of $268.6 million ("Reducing Note Facility") under which Bank of Scotland and BoS(USA), Inc. had no further obligations to provide financing to the Company. The Reducing Note Facility permitted a monthly cash leak-through to the Company to cover the overhead of the ongoing business and a cash flow leak-through of 20% of cash flows up to a maximum amount of $20 million after the payment of interest and overhead allowance. The lack of a corporate line of credit substantially restricted the Company's ability to acquire loan portfolios. As a result, the Company's source of funding for acquisitions was primarily limited to its unencumbered cash flow from operations and the cash flow leak-through, and the Company began to seek alternative sources of funding, which ultimately proved to be unachievable as the Company was never able to replace this source of funding. Due to a lack of funding, the Company was unable to pursue an aggressive acquisition strategy for its own account and almost all of the Company's new acquisitions were off-balance sheet in the form of minority interests (ranging from 10% to 20%) in acquisition entities controlled by larger firms. The Company was unable to obtain financing to purchase investments for its own account on reasonable terms. As a result, the Company's balance sheet began to shrink as its existing portfolios matured and new acquisitions were off-balance sheet and the value of its servicing platform diminished. The following is a summary of FirstCity's investment agreement and primary external lending facilities that it uses to finance and provide liquidity for equity and loan investments, Portfolio Asset acquisitions, Acquisition Partnership investments, capital investments, and working capital: Investment Agreement with Värde Investment Partners, L.P. ("VIP") FirstCity, through its wholly-owned subsidiaries FC Diversified Holdings LLC ("FC Diversified") and FirstCity Servicing Corporation ("FC Servicing"), and VIP are parties to an investment agreement, effective April 1, 2010, whereby VIP may invest, at its discretion, in distressed loan portfolios and similar investment opportunities alongside FirstCity, subject to the terms and conditions contained in the agreement. The primary terms of the agreement are as follows: • FirstCity will act as the exclusive servicer for the investment portfolios; • FirstCity will provide VIP 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 investment agreement has a termination date of June 30, 2015, which is subject to consecutive automatic one-year extensions without any action by FirstCity and VIP. FC Servicing will be the servicer for all of the acquisition entities formed by FC Diversified and VIP (subject to removal by VIP on a pool-level basis under certain conditions). The parties may terminate the investment agreement prior to June 30, 2015 under certain conditions. The cash flows from the assets and equity interests from the Company's Portfolio Asset investments made in connection with the investment agreement with VIP, which are held by FC Investment Holdings Corporation ("FC Investment") (a wholly-owned subsidiary of FirstCity) and its subsidiaries, are not subject to the security interest requirements of the Bank of Scotland and Bank of America loan facilities described below. Bank of Scotland Credit Facilities Reducing Note Facility—Bank of Scotland 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 provided for repayment to Bank of Scotland over time as cash flows from the underlying assets securing the term loan facility were realized. The Company's outstanding indebtedness and letter of credit obligations under its then-existing loan facilities with Bank of Scotland were refinanced by 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 was 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 and its subsidiaries, which hold investments made in connection with FirstCity's investment agreement with VIP (discussed above), and various other investments that FirstCity originated subsequent to June 2010, were not subject to the security interest requirements of the Reducing Note Facility. In December 2011, FirstCity entered into an agreement to amend and restate the Reducing Note Facility with Bank of Scotland, which had an unpaid principal balance of approximately $173.2 million at closing. As a result, FirstCity's primary obligation under the Reducing Note Facility, as amended ("BoS Facility A"), was reduced by the assumption of $25.0 million of debt ("BoS Facility B") by a newly-formed, wholly-owned subsidiary of FirstCity, combined with a $53.4 million reduction primarily from proceeds obtained by FirstCity from its new $50.0 million credit facility with Bank of America ("BoA Loan") and other cash payments at closing. FirstCity's remaining $94.8 million debt obligation under BoS Facility A (post-closing) carries a 0.25% annual interest rate through maturity (December 2014), and allows for repayment over time as cash flows from the underlying pledged assets are realized. FirstCity's $25.0 million debt obligation under BoS Facility B does not bear interest, and allows for repayment over time as cash flows from the underlying pledged assets, if any, are realized (FirstCity has not received any significant cash flows from these underlying assets and has not allocated any value to these assets for the past three years). As a result of its December 2011 debt refinancing arrangements, FirstCity was able to significantly reduce its aggregate future cash outlay to Bank of Scotland and Bank of America under these new loan facilities in comparison to the repayment terms under the former Reducing Note Facility with Bank of Scotland—which, in turn, will provide more liquidity in the future to fund investment opportunities. BoS Facility A—Bank of Scotland At December 31, 2012, the unpaid principal balance on BoS Facility A was $31.1 million and the unamortized fair value discount was $1.1 million. Prior to December 2012, a portion of the unpaid principal balance included Euro-denominated debt that FirstCity used to partially off-set its business exposure to foreign currency exchange risk attributable to its net equity investments in Europe (see Note 12). The Euro-denominated debt was paid off in December out of proceeds from the sale of the Company's investment in UBN, SAS (see Note 3). The primary terms and conditions of FC Commercial's loan facility with Bank of Scotland under BoS Facility A are as follows: • Release of assets of FH Partners LLC (the "FH Partners Assets") which secured the Reducing Note Facility to allow FH Partners LLC to pledge the FH Partners Assets as collateral for the BoA Loan (Bank of Scotland was granted a subordinated security interest in these assets); • Repayment will be made over time (no scheduled amortization) as cash flows are realized from the pledged assets (primarily loans, real estate and equity investments) other than the FH Partners Assets; • Additional repayment will be made from residual cash flows from the FH Partners Assets from excess cash flow released to FH Partners LLC under the loan facility for the BoA Loan ("FH Partners Excess Cash Flow") and after the payment of the BoA Loan; • Fixed annual interest rate equal to 0.25%; • Maturity date of December 19, 2014; • Unlimited guaranty provided by FirstCity for the repayment of the indebtedness under BoS Facility A; • No advances will be made under this loan facility, except for draws on an outstanding letter of credit in the amount of $5.4 million; • FirstCity will receive a management fee after payment to Bank of Scotland of interest and fees, certain expenses and other items, which is equal to 10% of the monthly collections from the underlying pledged assets other than the FH Partners Assets, and 5% of the of the monthly collections from the FH Partners Assets as FH Partners Excess Cash Flow is paid to Bank of Scotland (i.e. cash "leak-through"), which fees are not required to be applied to the debt owed to Bank of Scotland; the 5% management fee related to the FH Partners Assets is in addition to a 5% servicing fee paid under the loan facility for the BoA Loan and is deferred on a cumulative basis until the FH Partners Excess Cash Flow is paid to Bank of Scotland; • After payment of the BoA Loan, FirstCity will receive a management fee equal to 10% of any monthly collections from the FH Partners Assets, after payment to Bank of Scotland of interest and fees, certain expenses and other items; • FirstCity must maintain a minimum tangible net worth (as defined in the amended and restated reducing note facility agreement with Bank of Scotland) of $90.0 million; • Release of FC Commercial, FH Partners, FLBG Corp, FirstCity, and certain FirstCity subsidiaries obligated under the Reducing Note Facility from liability for payment to Bank of Scotland or BoS-USA for the $25.0 million loan principal amount assumed by FLBG2 (under BoS Facility B with BoS-USA); and • Guaranty provided by FLBG Corp. and a substantial majority of its subsidiaries, which are the entities that were primarily subject to the obligations of the Reducing Note Facility (the "Covered Entities"). This loan facility is secured by substantially all of the assets of the Covered Entities. FH Partners LLC provides a subordinated guaranty of the BoS Facility A (subordinated to the BoA Loan) and a subordinated security interest in the FH Partners Assets. FC Servicing does not guarantee the BoS Facility A, but provides a non-recourse security interest in certain equity interests owned by it and in most of the servicing fees from agreements entered into prior to the execution of the Reducing Note Facility. BoS Facility A contains covenants, representations and warranties on the part of FirstCity, FC Commercial and FLBG Corp. that are typical for a loan facility of this type. In addition, BoS Facility A contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of Scotland may accelerate the indebtedness under this loan facility. At December 31, 2012, FirstCity was in compliance with all covenants or other requirements set forth in BoS Facility A. BoS Facility B—Bank of Scotland At December 31, 2012, the Company did not have a recorded carrying value on its consolidated balance sheet for BoS Facility B (as described under the heading Reducing Note Facility—Bank of Scotland above). The primary terms and conditions of FLBG2's $25.0 million debt obligation with BoS-USA under BoS Facility B are as follows: • Source of repayment will be derived solely from future cash flows from the assets of FLBG2, if any (loans with nominal value—see discussion below); • No interest accrues under this loan facility (subject to default interest provisions); • Maturity date of December 19, 2014 (see discussion below); and • FirstCity will receive a management fee equal to 10% of the monthly collections on the assets of FLBG2 (i.e. cash "leak-through"), if any, after payment to BoS-USA of any fees. The assets of FLBG2 consist of loans transferred to it by the Covered Entities for nominal consideration. FirstCity has not received any significant cash flows from the assets of FLBG2 and has not allocated any value to such assets for the past three years. FLBG2 has no assets other than the loans pledged to this loan facility, and has no intent to actively pursue collection of these assets. FLBG2 has no alternative sources of income or liquidity. FirstCity and its other subsidiaries are not obligated to provide any additional funds or capital to FLBG2, do not guaranty the repayment of BoS Facility B, and do not intend to contribute any funds to FLBG2 or pay any amounts owed by FLBG2 under BoS Facility B (before or after its maturity). At maturity of the BoS Facility B, there will likely be a default by FLBG2 as no collections are projected by FirstCity to be received from the assets of FLBG2. The sole recourse of Bank of Scotland on any such default will be to foreclose on the assets of FLBG2. Any default will not have a material adverse effect on FirstCity, as there is no carrying value for this loan facility on FirstCity's consolidated balance sheet. BoS Facility B contains limited covenants, representations and warranties on the part of FLGB2 in light of the nature of the assets of FLBG2 and the lack of liquidity or sources of funds for FLBG2. In addition, BoS Facility B contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of Scotland may accelerate the indebtedness under this loan facility. At December 31, 2012, FLBG2 was in compliance with all covenants or other requirements set forth in BoS Facility B. Bank of America On December 20, 2011, FH Partners LLC, as borrower, and Bank of America, as lender, entered into a $50.0 million term loan facility ("BoA Loan") that allows for repayment over time as cash flows from the underlying assets securing this loan facility are realized. FirstCity used the proceeds from this loan facility to reduce the principal balance outstanding under the Reducing Note Facility (as described above). At December 31, 2012, the unpaid principal balance under this loan facility was $16.2 million. The primary terms and conditions under the BoA Loan are as follows: • Minimum principal payments through maturity so that the total principal balance outstanding does not exceed the following amounts on the dates indicated: $45.0 million at June 30, 2012; $30.0 million at December 31, 2012; $25.0 million at June 30, 2013; $20.0 million at December 31, 2013; $15.0 million at June 30, 2014; and $10.0 million at December 31, 2014 (initial maturity); • Initial maturity date of December 31, 2014, which may be extended one year (subject to certain terms and conditions); • Variable annual interest rate based on LIBOR daily floating rate plus 2.75%; • FirstCity will receive a servicing fee equal to 5% of the monthly collections (i.e. cash "leak-through") from the pledged assets after payment to Bank of America of interest, fees and required principal payment reductions; • Minimum debt service coverage ratio (defined) of 1.4 to 1.0 (beginning with the quarterly period ended March 31, 2012); and • FC Servicing must maintain a minimum net worth of $1.0 million. The BoA Loan contains covenants, representations and warranties on the part of FH Partners LLC that are typical for a loan facility of this type. In addition, the BoA Loan contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of America may accelerate the indebtedness under this loan facility. At December 31, 2012, FH Partners LLC was in compliance with all covenants or other requirements set forth in the BoA Loan. Wells Fargo Capital Finance On January 31, 2012, American Business Lending, Inc. ("ABL"), a FirstCity wholly-owned subsidiary, and Wells Fargo Capital Finance ("WFCF") entered into an Amended and Restated Loan Agreement ("WFCF Credit Facility") that amended and restated the existing $25.0 million loan facility agreement, as amended. The WFCF Credit Facility is a $25 million revolving loan facility that provides funding for ABL to finance and acquire SBA 7(a) loans, and is secured by substantially all of ABL's assets. The unpaid principal balance on this loan facility at December 31, 2012 was $15.2 million. In addition, FirstCity provides WFCF with an unconditional guaranty for all of ABL's obligations up to a maximum of $5.0 million plus enforcement costs. The primary terms and conditions of the WFCF Credit Facility are as follows: • Provides for maximum outstanding borrowings of up to $25.0 million ("Maximum Credit Line"); • Provides for a borrowing base for originating loans based on the amount by which the sum of (i) ABL-originated SBA guaranteed loans (up to 100%) and non-guaranteed loans (60%-80%) plus (ii) certain previously-purchased performing loans (up to 80%), exceeds the aggregate amount, if any, of loan reserves established by ABL and/or WFCF on the borrowing base loans; • Outstanding borrowings bear interest at alternate annual rates equal to (i) LIBOR rate plus 3.50% for LIBOR rate loans; (ii) base rate (higher of LIBOR rate or Wells Fargo prime rate) plus 0.75% for base rate loans; or (iii) base rate plus 0.75% otherwise; • Provides for a prepayment fee in the event of ABL's termination of the credit facility equal to 3.0% of the Maximum Credit Line if prepayment is made on or before January 31, 2013, or 2.0% of the Maximum Credit Line if prepayment is made between January 31, 2013 and January 30, 2015; and • Provides for an initial maturity date of January 31, 2015 (which may be extended upon agreement by WFCF and ABL). The WFCF Credit Facility includes covenants that are customary for a loan facility of this type, including maximum capital expenditure levels and financial covenants related to minimum tangible net worth levels, maximum indebtedness to tangible net worth ratio, maximum delinquent and defaulted loan levels, maximum loan charge-off levels, and minimum net interest coverage levels. In addition, the WFCF Credit Facility contains representations and warranties of ABL that are typical for a loan facility of this type. The WFCF Credit Facility also contains customary events of default, including but not limited to, failure to make required payments; failure to comply with certain agreements or covenants; change of control; certain events of bankruptcy and insolvency; and failure to pay certain judgments. In the event that an event of default occurs and is continuing, WFCF may accelerate the indebtedness under this loan facility. At December 31, 2012, ABL was in compliance with all covenants or other requirements set forth in the WFCF Credit Facility. First National Bank of Central Texas Loan Facility FC Investment has a $15.0 million revolving loan facility (the "FNBCT Loan Facility") with First National Bank of Central Texas ("FNBCT") for the purpose of financing the purchase of loans and other assets, to make investments in equity interests in or capital contributions to affiliates which are owned with other investors, and for working capital. At December 31, 2012, the unpaid principal balance under this revolving loan facility was $2.0 million. The primary terms and conditions of the FNBCT Loan Facility are as follows: • Provides maximum outstanding borrowings up to $15.0 million; • The loan facility is secured by security interests in substantially all of the assets of FC Investment and its subsidiaries (the "Covered Entities"). FirstCity Servicing Corporation ("FC Servicing"), a FirstCity wholly-owned subsidiary, provides a security interest in servicing fees payable to it by the Covered Entities and the non-wholly owned portfolio entities owned by the Covered Entities. FC Servicing does not provide a security interest in servicing agreements entered into with the Covered Entities, or in any of its other assets and does not guaranty the obligations under this loan facility; • Provides that no advance will be made that causes the outstanding balance of the loan facility to exceed an amount equal to 25.0% of the net present value of the equity interests and loans and other assets owned by the Covered Entities which are pledged to secure the loan facility reduced by any reserves established by FNBCT related to the pledged loans and other assets and the pledged equity interests ("Net Present Collateral Value"); • Provides for a fluctuating interest rate equal to the greater of (i) the rate of interest published in the Wall Street Journal as the prime rate of commercial banks, or (ii) 4.0%; • Provides for a maturity date of August 15, 2013; • Provides that all net cash flow from the pledged assets be deposited into a pledged account with FNBCT on a monthly basis, and for funds to be distributed out of the pledged account and applied in the following manner and priority: (i) to interest due under the loan facility, (ii) to fees and expenses due under the loan facility, (iii) payment of principal outstanding under the loan facility in an amount required to reduce the outstanding principal balance of the loan as is required so that the principal balance of the loan is equal to 25.0% of the Net Present Collateral Value, (iv) payment of principal if an event of default has occurred, (v) payment of the principal in such additional amount as may be determined by FNBCT in its discretion, and (vi) any remaining balance to FC Investment; • Provides that FNBCT is only required to fund up to $7.5 million, with the balance of the commitment under the revolving loan facility to be funded by a participating bank in the loan facility; • Provides for (i) an administration fee of $25,000 for the period through the maturity date, which fee was paid at closing, (ii) a facility fee in the amount of $93,750 for the period through the maturity date, which fee was paid at closing, and (iii) a non-utilization fee payable following each calendar quarter equal to 0.50% of the average daily amount by which the outstanding principal amount of the revolving loan during the preceding calendar quarter is less than $15.0 million, provided, in the event the financial institution participating in the revolving loan fails to advance its pro-rata share of any advance in a circumstance in which FNBCT is funding the advance, the non-utilization fee shall be calculated based on the average daily amount by which the total amount funded by FNBCT from its own funds during the preceding calendar quarter is less than $7.5 million; • FC Investment must maintain a minimum interest coverage ratio, based on net cash flows from the pledged assets, of 2.0 to 1.0 (on a consolidated basis); • FC Investment must maintain a minimum tangible net worth (defined) of $75.0 million (on a consolidated basis); and • The FNBCT Loan Facility and other loan documents do not create any security interest in the property of, or impose any contractual limitations upon, FirstCity Commercial Corporation, FH Partners LLC, FLBG Corporation or any of their subsidiaries, which are FirstCity subsidiaries and are parties to, or provide guaranties or security interests with respect to, FirstCity's loan facility with Bank of Scotland. In addition to the foregoing, the FNBCT Loan Facility contains representations, warranties and certain other covenants on the part of FC Investment, FirstCity and the other Covered Entities that are typical for a loan facility of this type. Furthermore, the FNBCT Loan Facility and related loan documents contain customary events of default, including, failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, FNBCT may accelerate the indebtedness under this loan facility. At December 31, 2012, FC Investment was in compliance with all covenants or other requirements set forth in the FNBCT Loan facility.

2. Liquidity and Capital Resources

The Company requires liquidity to fund its operations, Portfolio Asset acquisitions, investments in and advances to Acquisition Partnerships, capital investments in privately-held lower middle-market companies, other debt and equity investments, repayments of bank borrowings and other debt, and working capital to support our growth. Historically, our primary sources of liquidity have been funds generated from operations (primarily loan and real estate collections and service fees), equity distributions from the Acquisition Partnerships and other subsidiaries, interest and principal payments on subordinated intercompany debt, dividends from the Company's subsidiaries, borrowings from credit facilities with external lenders, and other special-purpose short-term borrowings. At December 31, 2012, the Company had $24.1 million of cash on its consolidated balance sheet that could only be used to settle the liabilities of certain consolidated VIEs (see Note 19).

Our ability to fund operations and make new investments is dependent on (1) anticipated cash flows from our 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 (as discussed below); (4) cash leak-through provisions included in our term loan facilities with Bank of Scotland and Bank of America (as discussed below); and (5) our investment agreement with Värde Investment Partners, L.P. (as discussed below). Many factors, including general economic conditions, are essential to our ability to generate cash flows. Fluctuations in our collections, investment income, credit availability, and adverse changes in other factors could have a negative impact on our ability to generate sufficient cash flows to support our business.

Historically, the Company's primary sources of funding for purchasing distressed loan portfolios were loans under credit facilities with third-party lenders, other special purpose short-term borrowings, funds generated from operations, equity distributions from acquisition entities and other subsidiaries and interest and principal payments on subordinated intercompany debt. A substantial majority of the Company's portfolio investments prior to July 2010 were funded through loan facilities provided by Bank of Scotland and BoS(USA), Inc.

Although Bank of Scotland had provided financing to the Company for several years, following Lloyds Banking Group's acquisition of Bank of Scotland, Bank of Scotland and BoS(USA), Inc. placed the Company's revolving loan facility in a wind-down structure. In June 2010, the facilities with Bank of Scotland and BoS(USA), Inc. were restructured into one facility with a principal amount of $268.6 million ("Reducing Note Facility") under which Bank of Scotland and BoS(USA), Inc. had no further obligations to provide financing to the Company. The Reducing Note Facility permitted a monthly cash leak-through to the Company to cover the overhead of the ongoing business and a cash flow leak-through of 20% of cash flows up to a maximum amount of $20 million after the payment of interest and overhead allowance. The lack of a corporate line of credit substantially restricted the Company's ability to acquire loan portfolios. As a result, the Company's source of funding for acquisitions was primarily limited to its unencumbered cash flow from operations and the cash flow leak-through, and the Company began to seek alternative sources of funding, which ultimately proved to be unachievable as the Company was never able to replace this source of funding.

Due to a lack of funding, the Company was unable to pursue an aggressive acquisition strategy for its own account and almost all of the Company's new acquisitions were off-balance sheet in the form of minority interests (ranging from 10% to 20%) in acquisition entities controlled by larger firms. The Company was unable to obtain financing to purchase investments for its own account on reasonable terms. As a result, the Company's balance sheet began to shrink as its existing portfolios matured and new acquisitions were off-balance sheet and the value of its servicing platform diminished.

The following is a summary of FirstCity's investment agreement and primary external lending facilities that it uses to finance and provide liquidity for equity and loan investments, Portfolio Asset acquisitions, Acquisition Partnership investments, capital investments, and working capital:

Investment Agreement with Värde Investment Partners, L.P. ("VIP")

FirstCity, through its wholly-owned subsidiaries FC Diversified Holdings LLC ("FC Diversified") and FirstCity Servicing Corporation ("FC Servicing"), and VIP are parties to an investment agreement, effective April 1, 2010, whereby VIP may invest, at its discretion, in distressed loan portfolios and similar investment opportunities alongside FirstCity, subject to the terms and conditions contained in the agreement. The primary terms of the agreement are as follows:

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FirstCity will act as the exclusive servicer for the investment portfolios;

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FirstCity will provide VIP with a "right of first refusal" with regard to distressed asset investment opportunities in excess of $3 million sourced by FirstCity;

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FirstCity, at its determination, will co-invest between 5%-25% in each investment;

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FirstCity will receive a $200,000 monthly retainer in exchange for its services and commitments;

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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

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FirstCity will be eligible to receive incentive-based management fees (depending on the aggregate amount and performance of the portfolios acquired).

The investment agreement has a termination date of June 30, 2015, which is subject to consecutive automatic one-year extensions without any action by FirstCity and VIP. FC Servicing will be the servicer for all of the acquisition entities formed by FC Diversified and VIP (subject to removal by VIP on a pool-level basis under certain conditions). The parties may terminate the investment agreement prior to June 30, 2015 under certain conditions.

The cash flows from the assets and equity interests from the Company's Portfolio Asset investments made in connection with the investment agreement with VIP, which are held by FC Investment Holdings Corporation ("FC Investment") (a wholly-owned subsidiary of FirstCity) and its subsidiaries, are not subject to the security interest requirements of the Bank of Scotland and Bank of America loan facilities described below.

Bank of Scotland Credit Facilities

Reducing Note Facility—Bank of Scotland

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 provided for repayment to Bank of Scotland over time as cash flows from the underlying assets securing the term loan facility were realized. The Company's outstanding indebtedness and letter of credit obligations under its then-existing loan facilities with Bank of Scotland were refinanced by 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 was 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 and its subsidiaries, which hold investments made in connection with FirstCity's investment agreement with VIP (discussed above), and various other investments that FirstCity originated subsequent to June 2010, were not subject to the security interest requirements of the Reducing Note Facility.

In December 2011, FirstCity entered into an agreement to amend and restate the Reducing Note Facility with Bank of Scotland, which had an unpaid principal balance of approximately $173.2 million at closing. As a result, FirstCity's primary obligation under the Reducing Note Facility, as amended ("BoS Facility A"), was reduced by the assumption of $25.0 million of debt ("BoS Facility B") by a newly-formed, wholly-owned subsidiary of FirstCity, combined with a $53.4 million reduction primarily from proceeds obtained by FirstCity from its new $50.0 million credit facility with Bank of America ("BoA Loan") and other cash payments at closing. FirstCity's remaining $94.8 million debt obligation under BoS Facility A (post-closing) carries a 0.25% annual interest rate through maturity (December 2014), and allows for repayment over time as cash flows from the underlying pledged assets are realized. FirstCity's $25.0 million debt obligation under BoS Facility B does not bear interest, and allows for repayment over time as cash flows from the underlying pledged assets, if any, are realized (FirstCity has not received any significant cash flows from these underlying assets and has not allocated any value to these assets for the past three years). As a result of its December 2011 debt refinancing arrangements, FirstCity was able to significantly reduce its aggregate future cash outlay to Bank of Scotland and Bank of America under these new loan facilities in comparison to the repayment terms under the former Reducing Note Facility with Bank of Scotland—which, in turn, will provide more liquidity in the future to fund investment opportunities.

BoS Facility A—Bank of Scotland

At December 31, 2012, the unpaid principal balance on BoS Facility A was $31.1 million and the unamortized fair value discount was $1.1 million. Prior to December 2012, a portion of the unpaid principal balance included Euro-denominated debt that FirstCity used to partially off-set its business exposure to foreign currency exchange risk attributable to its net equity investments in Europe (see Note 12). The Euro-denominated debt was paid off in December out of proceeds from the sale of the Company's investment in UBN, SAS (see Note 3). The primary terms and conditions of FC Commercial's loan facility with Bank of Scotland under BoS Facility A are as follows:

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Release of assets of FH Partners LLC (the "FH Partners Assets") which secured the Reducing Note Facility to allow FH Partners LLC to pledge the FH Partners Assets as collateral for the BoA Loan (Bank of Scotland was granted a subordinated security interest in these assets);

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Repayment will be made over time (no scheduled amortization) as cash flows are realized from the pledged assets (primarily loans, real estate and equity investments) other than the FH Partners Assets;

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Additional repayment will be made from residual cash flows from the FH Partners Assets from excess cash flow released to FH Partners LLC under the loan facility for the BoA Loan ("FH Partners Excess Cash Flow") and after the payment of the BoA Loan;

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Fixed annual interest rate equal to 0.25%;

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Maturity date of December 19, 2014;

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Unlimited guaranty provided by FirstCity for the repayment of the indebtedness under BoS Facility A;

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No advances will be made under this loan facility, except for draws on an outstanding letter of credit in the amount of $5.4 million;

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FirstCity will receive a management fee after payment to Bank of Scotland of interest and fees, certain expenses and other items, which is equal to 10% of the monthly collections from the underlying pledged assets other than the FH Partners Assets, and 5% of the of the monthly collections from the FH Partners Assets as FH Partners Excess Cash Flow is paid to Bank of Scotland (i.e. cash "leak-through"), which fees are not required to be applied to the debt owed to Bank of Scotland; the 5% management fee related to the FH Partners Assets is in addition to a 5% servicing fee paid under the loan facility for the BoA Loan and is deferred on a cumulative basis until the FH Partners Excess Cash Flow is paid to Bank of Scotland;

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After payment of the BoA Loan, FirstCity will receive a management fee equal to 10% of any monthly collections from the FH Partners Assets, after payment to Bank of Scotland of interest and fees, certain expenses and other items;

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FirstCity must maintain a minimum tangible net worth (as defined in the amended and restated reducing note facility agreement with Bank of Scotland) of $90.0 million;

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Release of FC Commercial, FH Partners, FLBG Corp, FirstCity, and certain FirstCity subsidiaries obligated under the Reducing Note Facility from liability for payment to Bank of Scotland or BoS-USA for the $25.0 million loan principal amount assumed by FLBG2 (under BoS Facility B with BoS-USA); and

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Guaranty provided by FLBG Corp. and a substantial majority of its subsidiaries, which are the entities that were primarily subject to the obligations of the Reducing Note Facility (the "Covered Entities").

This loan facility is secured by substantially all of the assets of the Covered Entities. FH Partners LLC provides a subordinated guaranty of the BoS Facility A (subordinated to the BoA Loan) and a subordinated security interest in the FH Partners Assets. FC Servicing does not guarantee the BoS Facility A, but provides a non-recourse security interest in certain equity interests owned by it and in most of the servicing fees from agreements entered into prior to the execution of the Reducing Note Facility.

BoS Facility A contains covenants, representations and warranties on the part of FirstCity, FC Commercial and FLBG Corp. that are typical for a loan facility of this type. In addition, BoS Facility A contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of Scotland may accelerate the indebtedness under this loan facility. At December 31, 2012, FirstCity was in compliance with all covenants or other requirements set forth in BoS Facility A.

BoS Facility B—Bank of Scotland

At December 31, 2012, the Company did not have a recorded carrying value on its consolidated balance sheet for BoS Facility B (as described under the heading Reducing Note Facility—Bank of Scotland above). The primary terms and conditions of FLBG2's $25.0 million debt obligation with BoS-USA under BoS Facility B are as follows:

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Source of repayment will be derived solely from future cash flows from the assets of FLBG2, if any (loans with nominal value—see discussion below);

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No interest accrues under this loan facility (subject to default interest provisions);

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Maturity date of December 19, 2014 (see discussion below); and

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FirstCity will receive a management fee equal to 10% of the monthly collections on the assets of FLBG2 (i.e. cash "leak-through"), if any, after payment to BoS-USA of any fees.

The assets of FLBG2 consist of loans transferred to it by the Covered Entities for nominal consideration. FirstCity has not received any significant cash flows from the assets of FLBG2 and has not allocated any value to such assets for the past three years. FLBG2 has no assets other than the loans pledged to this loan facility, and has no intent to actively pursue collection of these assets. FLBG2 has no alternative sources of income or liquidity. FirstCity and its other subsidiaries are not obligated to provide any additional funds or capital to FLBG2, do not guaranty the repayment of BoS Facility B, and do not intend to contribute any funds to FLBG2 or pay any amounts owed by FLBG2 under BoS Facility B (before or after its maturity).

At maturity of the BoS Facility B, there will likely be a default by FLBG2 as no collections are projected by FirstCity to be received from the assets of FLBG2. The sole recourse of Bank of Scotland on any such default will be to foreclose on the assets of FLBG2. Any default will not have a material adverse effect on FirstCity, as there is no carrying value for this loan facility on FirstCity's consolidated balance sheet.

BoS Facility B contains limited covenants, representations and warranties on the part of FLGB2 in light of the nature of the assets of FLBG2 and the lack of liquidity or sources of funds for FLBG2. In addition, BoS Facility B contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of Scotland may accelerate the indebtedness under this loan facility. At December 31, 2012, FLBG2 was in compliance with all covenants or other requirements set forth in BoS Facility B.

Bank of America

On December 20, 2011, FH Partners LLC, as borrower, and Bank of America, as lender, entered into a $50.0 million term loan facility ("BoA Loan") that allows for repayment over time as cash flows from the underlying assets securing this loan facility are realized. FirstCity used the proceeds from this loan facility to reduce the principal balance outstanding under the Reducing Note Facility (as described above). At December 31, 2012, the unpaid principal balance under this loan facility was $16.2 million. The primary terms and conditions under the BoA Loan are as follows:

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Minimum principal payments through maturity so that the total principal balance outstanding does not exceed the following amounts on the dates indicated: $45.0 million at June 30, 2012; $30.0 million at December 31, 2012; $25.0 million at June 30, 2013; $20.0 million at December 31, 2013; $15.0 million at June 30, 2014; and $10.0 million at December 31, 2014 (initial maturity);

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Initial maturity date of December 31, 2014, which may be extended one year (subject to certain terms and conditions);

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Variable annual interest rate based on LIBOR daily floating rate plus 2.75%;

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FirstCity will receive a servicing fee equal to 5% of the monthly collections (i.e. cash "leak-through") from the pledged assets after payment to Bank of America of interest, fees and required principal payment reductions;

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Minimum debt service coverage ratio (defined) of 1.4 to 1.0 (beginning with the quarterly period ended March 31, 2012); and

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FC Servicing must maintain a minimum net worth of $1.0 million.

The BoA Loan contains covenants, representations and warranties on the part of FH Partners LLC that are typical for a loan facility of this type. In addition, the BoA Loan contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, Bank of America may accelerate the indebtedness under this loan facility. At December 31, 2012, FH Partners LLC was in compliance with all covenants or other requirements set forth in the BoA Loan.

Wells Fargo Capital Finance

On January 31, 2012, American Business Lending, Inc. ("ABL"), a FirstCity wholly-owned subsidiary, and Wells Fargo Capital Finance ("WFCF") entered into an Amended and Restated Loan Agreement ("WFCF Credit Facility") that amended and restated the existing $25.0 million loan facility agreement, as amended. The WFCF Credit Facility is a $25 million revolving loan facility that provides funding for ABL to finance and acquire SBA 7(a) loans, and is secured by substantially all of ABL's assets. The unpaid principal balance on this loan facility at December 31, 2012 was $15.2 million. In addition, FirstCity provides WFCF with an unconditional guaranty for all of ABL's obligations up to a maximum of $5.0 million plus enforcement costs. The primary terms and conditions of the WFCF Credit Facility are as follows:

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Provides for maximum outstanding borrowings of up to $25.0 million ("Maximum Credit Line");

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Provides for a borrowing base for originating loans based on the amount by which the sum of (i) ABL-originated SBA guaranteed loans (up to 100%) and non-guaranteed loans (60%-80%) plus (ii) certain previously-purchased performing loans (up to 80%), exceeds the aggregate amount, if any, of loan reserves established by ABL and/or WFCF on the borrowing base loans;

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Outstanding borrowings bear interest at alternate annual rates equal to (i) LIBOR rate plus 3.50% for LIBOR rate loans; (ii) base rate (higher of LIBOR rate or Wells Fargo prime rate) plus 0.75% for base rate loans; or (iii) base rate plus 0.75% otherwise;

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Provides for a prepayment fee in the event of ABL's termination of the credit facility equal to 3.0% of the Maximum Credit Line if prepayment is made on or before January 31, 2013, or 2.0% of the Maximum Credit Line if prepayment is made between January 31, 2013 and January 30, 2015; and

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Provides for an initial maturity date of January 31, 2015 (which may be extended upon agreement by WFCF and ABL).

The WFCF Credit Facility includes covenants that are customary for a loan facility of this type, including maximum capital expenditure levels and financial covenants related to minimum tangible net worth levels, maximum indebtedness to tangible net worth ratio, maximum delinquent and defaulted loan levels, maximum loan charge-off levels, and minimum net interest coverage levels.

In addition, the WFCF Credit Facility contains representations and warranties of ABL that are typical for a loan facility of this type. The WFCF Credit Facility also contains customary events of default, including but not limited to, failure to make required payments; failure to comply with certain agreements or covenants; change of control; certain events of bankruptcy and insolvency; and failure to pay certain judgments. In the event that an event of default occurs and is continuing, WFCF may accelerate the indebtedness under this loan facility. At December 31, 2012, ABL was in compliance with all covenants or other requirements set forth in the WFCF Credit Facility.

First National Bank of Central Texas Loan Facility

FC Investment has a $15.0 million revolving loan facility (the "FNBCT Loan Facility") with First National Bank of Central Texas ("FNBCT") for the purpose of financing the purchase of loans and other assets, to make investments in equity interests in or capital contributions to affiliates which are owned with other investors, and for working capital. At December 31, 2012, the unpaid principal balance under this revolving loan facility was $2.0 million. The primary terms and conditions of the FNBCT Loan Facility are as follows:

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Provides maximum outstanding borrowings up to $15.0 million;

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The loan facility is secured by security interests in substantially all of the assets of FC Investment and its subsidiaries (the "Covered Entities"). FirstCity Servicing Corporation ("FC Servicing"), a FirstCity wholly-owned subsidiary, provides a security interest in servicing fees payable to it by the Covered Entities and the non-wholly owned portfolio entities owned by the Covered Entities. FC Servicing does not provide a security interest in servicing agreements entered into with the Covered Entities, or in any of its other assets and does not guaranty the obligations under this loan facility;

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Provides that no advance will be made that causes the outstanding balance of the loan facility to exceed an amount equal to 25.0% of the net present value of the equity interests and loans and other assets owned by the Covered Entities which are pledged to secure the loan facility reduced by any reserves established by FNBCT related to the pledged loans and other assets and the pledged equity interests ("Net Present Collateral Value");

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Provides for a fluctuating interest rate equal to the greater of (i) the rate of interest published in the Wall Street Journal as the prime rate of commercial banks, or (ii) 4.0%;

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Provides for a maturity date of August 15, 2013;

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Provides that all net cash flow from the pledged assets be deposited into a pledged account with FNBCT on a monthly basis, and for funds to be distributed out of the pledged account and applied in the following manner and priority: (i) to interest due under the loan facility, (ii) to fees and expenses due under the loan facility, (iii) payment of principal outstanding under the loan facility in an amount required to reduce the outstanding principal balance of the loan as is required so that the principal balance of the loan is equal to 25.0% of the Net Present Collateral Value, (iv) payment of principal if an event of default has occurred, (v) payment of the principal in such additional amount as may be determined by FNBCT in its discretion, and (vi) any remaining balance to FC Investment;

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Provides that FNBCT is only required to fund up to $7.5 million, with the balance of the commitment under the revolving loan facility to be funded by a participating bank in the loan facility;

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Provides for (i) an administration fee of $25,000 for the period through the maturity date, which fee was paid at closing, (ii) a facility fee in the amount of $93,750 for the period through the maturity date, which fee was paid at closing, and (iii) a non-utilization fee payable following each calendar quarter equal to 0.50% of the average daily amount by which the outstanding principal amount of the revolving loan during the preceding calendar quarter is less than $15.0 million, provided, in the event the financial institution participating in the revolving loan fails to advance its pro-rata share of any advance in a circumstance in which FNBCT is funding the advance, the non-utilization fee shall be calculated based on the average daily amount by which the total amount funded by FNBCT from its own funds during the preceding calendar quarter is less than $7.5 million;

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FC Investment must maintain a minimum interest coverage ratio, based on net cash flows from the pledged assets, of 2.0 to 1.0 (on a consolidated basis);

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FC Investment must maintain a minimum tangible net worth (defined) of $75.0 million (on a consolidated basis); and

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The FNBCT Loan Facility and other loan documents do not create any security interest in the property of, or impose any contractual limitations upon, FirstCity Commercial Corporation, FH Partners LLC, FLBG Corporation or any of their subsidiaries, which are FirstCity subsidiaries and are parties to, or provide guaranties or security interests with respect to, FirstCity's loan facility with Bank of Scotland.

In addition to the foregoing, the FNBCT Loan Facility contains representations, warranties and certain other covenants on the part of FC Investment, FirstCity and the other Covered Entities that are typical for a loan facility of this type. Furthermore, the FNBCT Loan Facility and related loan documents contain customary events of default, including, failure to make required payments, failure to comply with certain agreements or covenants, failure to pay, or default under, certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. In the event that an event of default occurs and is continuing, FNBCT may accelerate the indebtedness under this loan facility. At December 31, 2012, FC Investment was in compliance with all covenants or other requirements set forth in the FNBCT Loan facility.