FirstCity Financial Agrees to Settle Lawsuit Over Prudential Proceeds

FirstCity Financial Corporation (Nasdaq: FCFC) today announced that it has reached a preliminary agreement to settle the lawsuit involving the disputed ownership of approximately $18.6 million of proceeds from the demutualization of Prudential Insurance Company. A court-ordered mediation was held on November 18, 2008 and following the unsuccessful mediation the mediator submitted the mediator’s proposal to the three claimants. The mediator’s proposal accepted by the claimants on November 25, 2008 provides for each of the parties to receive 25% of the demutualization proceeds (approximately $4,650,000 each) upon approval of the settlement by the trial court, and for the remaining 25% ($4,650,000) to be held pending the determination of the appeal by the Court of Appeals. The remaining 25% will be distributed to FirstCity if the Court of Appeals affirms the summary judgment granted by the trial court in favor of FirstCity. In the event of any other ruling by the Court of Appeals, the remaining 25% will be split one-third to each party (approximately $1,550,000 each).

The trial court’s approval of the settlement is necessary. If the trial court does not approve the settlement the parties will be restored to their positions in the suit prior to the acceptance of the mediator’s proposal.

The effect of the agreement is that FirstCity would receive in total approximately $9,300,000 of the demutualization proceeds (50%), if the Court of Appeals affirms the summary judgment granted in 2006 by the trial court in favor of FirstCity, and alternatively, if the Court of Appeals does not affirm the decision in favor of FirstCity, FirstCity will receive $6,200,000 (33.3%) of the demutualization proceeds. Details of the lawsuit and settlement are more fully described in a Form 8-K filed with the SEC today. The mediator’s proposal provides that the initial $4,650,000 of proceeds will be distributed to FirstCity upon approval of the settlement by the trial court, with the remaining proceeds payable to FirstCity (either $1,550,000 or $4,650,000) distributed upon issuance of a decision by the Court of Appeals.

Separately, the Company disclosed today that it expects to recognize a non-cash charge by increasing its valuation allowance against its deferred tax asset in its fourth quarter of 2008. While the amount of the increase in the valuation allowance has not yet been determined, FirstCity expects it to approximate substantially the entire $20.1 million asset amount on the balance sheet at September 30, 2008.

The financial covenants in Company’s lending facilities with the Bank of Scotland and BoS (USA) have been amended to take into account this non-cash charge. The amendments to the loan facilities are detailed in a Form 8-K filed with the SEC today.

James T. Sartain, President and CEO, said, "In connection with the preparation of fourth quarter financial statements, we conducted a review of FirstCity’s deferred tax asset and identified the need to increase the valuation allowance against it. The increase in the valuation allowance will likely result in a substantial non-cash charge to income, but the charge will not adversely impact FirstCity’s operations, our credit facilities, or our relationship with our primary lender. Furthermore, a valuation allowance does not affect FirstCity’s net operating loss carry forwards, as we still retain $231 million of these carry forwards and can use them to off-set future taxable income."

FirstCity Financial Corporation is a diversified financial services company with operations dedicated primarily to portfolio asset acquisition and resolution with offices in the U.S. and with affiliate organizations in Europe and Latin America.