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corresp

October 13, 2005

Via EDGAR and Fax ((202) 772-9205

Mr. Larry Spirgel

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, DC 20549-3561

    Re:

    FirstCity Financial Corporation

    Form 10-K for the year ended December 31, 2004

    Filed March 21, 2005

    Form 10-Q for the quarter ended June 30, 2005

    Filed on August 12, 2005

    File No.: 033-19694

Dear Mr. Spirgel:

On behalf of FirstCity Financial Corporation (the “Company” or “FirstCity”), I submit the following
responses to your comments received on September 30, 2005 concerning your review of the
above-referenced filings. The Company’s responses to your comment letter are outlined below in the
sequential order in which the comments appear in the comment letter.

Financial Statements

Consolidated Statements of Operations, page 41

    1.

    We note your presentation of “Equity in earnings of investments” as revenues. Note that
“Equity in earnings of investments” is not considered revenues. In future filings, please
reclassify this item outside revenues in accordance with Rule 5-03.13 of Regulation S-X.

In accordance with Rule 5-03.13 of Regulation S-X, “if justified by the circumstances, this item
[Equity in earnings of unconsolidated subsidiaries and 50 percent or less owned persons] may be
presented in a different position and a different manner (see §210.4-01(a)).” Based on
§210.4-01(a), “Financial statements should be filed in such form and order, and should use such
generally accepted terminology, as will best indicate their significance and character in the light
of the provisions applicable thereto. The information required with respect to any statement shall
be furnished as a minimum requirement to which shall be added such further material information as
is necessary to make the required statements, in the light of the circumstances under which they
are made, not misleading.”

The Company’s principal business is portfolio asset acquisition and resolution through both
wholly-owned subsidiaries and unconsolidated partnerships. Equity earnings from these partnerships
represent a significant portion of our principal operations (41% of total revenues for 2004). We
understand your comment to reclassify this item outside revenues and respectfully request the Staff
to consider our particular facts and circumstances, as we feel that “Equity in earnings of
investments” is better reflected as revenues on our consolidated statements of operations.

Securities and Exchange Commission

October 13, 2005

Page 2

Note 1. Summary of Significant Accounting Policies, page 44

(c) Principles of Consolidation

    2.

    We note your accounting for the Acquisition Partnerships under the equity method of
accounting and your disclosure on page 54 that they are variable interest entities (‘VIE’)
under FIN 46R. Also you state that you are not the primary beneficiaries, in this regard
please address the following comments.

    a.

    Provide us a listing of these entities, and include the information which shows the
amounts of your share in general partner interests and limited partner interests, and the
amounts of loan receivable held for investment, if applicable, related to each individual
entity. Also, provide in your response the annual servicing fee income and the interest
income earned from each individual entity.

    b.

    Provide us your analysis to support your basis that you are not the primary
beneficiaries of these VIE in light of the significance of the amounts of distributions,
servicing fee income and interest income earned. Refer to paragraph 14 of FIN 46R.

    c.

    For each individual VIE, identify for us the primary beneficiary who would absorb the
majority of the VIE’s expected losses or expected residual returns or both and explain to
us why.

Upon initial involvement with an entity, FirstCity first determines whether the entity is a VIE and
second, determines the primary beneficiary if the entity is a VIE. The primary beneficiary is
determined in accordance with paragraph 14 of FIN 46R, which states “an enterprise shall
consolidate a variable interest entity if that enterprise has a variable interest (or combination
of variable interests) that will absorb a majority of the entity’s expected losses if they occur,
receive a majority of the entity’s expected residual returns if they occur, or both. An enterprise
shall consider the rights and obligations conveyed by its variable interests and the relationship
of its variable interests with variable interests held by other parties to determine whether its
variable interests will absorb a majority of a variable interest entity’s expected losses, receive
a majority of the entity’s expected residual returns, or both. A direct or indirect ability to make
decisions that significantly affect the results of the activities of a variable interest entity is
a strong indication that an enterprise has one or both of the characteristics that would require
consolidation of the variable interest entity. If one enterprise will absorb a majority of a
variable interest entity’s expected losses and another enterprise will receive a majority of that
entity’s expected residual returns, the enterprise absorbing a majority of the losses shall
consolidate the variable interest entity.”

FirstCity reconsiders whether it is the primary beneficiary of a VIE in accordance with paragraph
15 of FIN 46R, which states “an enterprise with an interest in a variable interest entity shall
reconsider whether it is the primary beneficiary of the entity if the entity’s governing documents
or the contractual arrangements among the parties involved change. The primary beneficiary also
shall reconsider its initial decision to consolidate a variable interest entity if the primary
beneficiary sells or otherwise disposes of all or part of its variable interest to unrelated
parties. A holder of a variable interest that is not the primary beneficiary also shall reconsider
whether it is the primary beneficiary of a variable interest entity if the enterprise acquires
newly issued interests in the entity or a portion of the primary beneficiary’s interest in the
entity.”

For the VIEs that FirstCity is involved with (summarized in the following schedule), most of the
entities are structured such that it is clear who the primary beneficiary is because the expected
losses are allocated to one major investor (typically, one investor will have a majority equity
ownership as well as senior and/or subordinated notes receivable from the VIE). In a few cases,
the majority of expected losses are absorbed equally between two or more major investors. In these
instances, we look at whether FirstCity will receive a majority of the entity’s expected residual
returns. FirstCity’s servicing fees and interest income are considered in the analysis of the
expected residual returns in addition to equity in earnings.

Securities and Exchange Commission

October 13, 2005

Page 3

The following schedule summarizes the VIEs that FirstCity was involved with as of December 31,
2004 and shows the Company’s share in general partner interests and limited partner interests, and
the amounts of loan receivable held for investment, if applicable, related to each individual
entity. Also included is the annual servicing fee income and the interest income earned from each
individual entity.

Our analysis to support our basis that we are not the primary beneficiaries of these VIEs is
included following the table. In all but one of these entities (FCS Creamer, Ltd.), the equity and
debt structure is such that FirstCity clearly does not absorb a majority of the entity’s expected
losses due to its relative insignificant ownership percentage. For FCS Creamer, Ltd., FirstCity
and another investor share equally in the expected losses of the entity. Therefore, we compared
the contractual service fees received by FirstCity to the contractual brokerage commissions
received by the other investor to determine who will receive a majority of the expected residual
returns.

    Service

    Interest

    Primary

    FirstCity's % Share

    Loans

    Fees

    Income

    Beneficiary

    Entity Name

    General

    Limited

    Receivable

    Income

    Earned

    Analysis

    FCS Creamer Ltd.

    0.25%

    49.75
    %

    $
    —

    $
    —

    $
    —

    A

    FCS Fischer, Ltd.

    0.30%

    24.70
    %

    1,537,188

    16,391

    182,068

    B

    SAI, SA

    22.50
    %

    547,636

    —

    17,923

    C

    Namex, LLC

    22.22
    %

    117,077

    35,689

    22,033

    D

    BIDMEX, LLC

    3.21
    %

    1,595,485

    1,820,382

    —

    D

    BIDMEX II, LLC

    4.12
    %

    1,311,233

    1,539,299

    —

    D

    BIDMEX 3, LLC

    10.02
    %

    2,460,467

    800,324

    —

    D

    BIDMEX 4, LLC

    20.00
    %

    1,781,251

    1,185,988

    481,995

    D

    BIDMEX 5, LLC

    20.00
    %

    1,067,674

    367,831

    266,982

    D

    BIDMEX 6, LLC

    10.00
    %

    567,880

    501,472

    164,526

    D

    BIDMEX 7, LLC

    25.00
    %

    1,092,634

    501,798

    278,342

    D

    BIDMEX 8, LLC

    20.00
    %

    461,855

    391,612

    114,537

    D

    BIDMEX 9, LLC

    15.00
    %

    5,650,028

    712,255

    608,469

    D

    BIDMEX 10, LLC

    25.00
    %

    1,131,800

    20,305

    79,787

    D

    Renova Financial Trust

    10.00
    %

    1,932,479

    —

    —

    E

Primary Beneficiary Analysis

    A.

    One independent third party private investor with a .25% general partner
interest and a 49.75% limited partner interest in FCS Creamer, Ltd. will receive a
majority of the expected residual returns as a result of receiving a 3% brokerage
commission on all sales proceeds as compared to FirstCity’s 2% service fee on all
sales proceeds. There were no sales in 2004 and, thus, no service fee income was
recorded by FirstCity in 2004. Expected losses will be shared equally by the
investors.

    B.

    For FCS Fischer, Ltd., the majority of the expected losses will be absorbed
by one independent third party private investor. This investor has a 25% ownership
interest and funded approximately 84% of the initial capitalization of the partnership
in the form of senior and subordinated notes. FirstCity also has a 25% ownership
interest and funded approximately 14% of the initial capitalization through a
subordinated note. Since inception, this entity has paid back the senior note;
however, this would not be an event requiring a reassessment of the primary
beneficiary in accordance with paragraph 15 of FIN 46R.

Securities and Exchange Commission

October 13, 2005

Page 4

    C.

    SAI, SA is a French entity that was funded entirely with notes to the partnership from
affiliates of the equity holders in the same percentage as their equity interests, and
thus had zero equity at risk. One independent third party private investor owns a 55%
interest in the equity and the debt compared to FirstCity’s 22.5% interest in equity
and debt. Therefore, this other investor would clearly absorb a majority of the
allocated expected losses.

    D.

    The Mexican partnerships were all funded with approximately 5% equity and 95%
notes payable to affiliates of the equity holders in the same percentage as their
equity interests. In all of these entities, FirstCity’s ownership interest in the
equity and debt is insignificant compared to the other major independent third party
investors such that it is clear that a majority of the expected losses would be
allocated to one of those independent third party investors. Beginning in 2003,
FirstCity and the other investors amended seven loan agreements from Mexican
Acquisition Partnerships to provide for no interest to be payable with respect to
periods after the effective date of the amendments. While the amendments to the loan
agreements constituted an event requiring a reassessment of the primary beneficiary,
this did not change the initial assessment of primary beneficiary.

    E.

    Renova Financial Trust was funded at the end of 2004 with approximately 15%
equity and 85% senior and subordinated notes payable to affiliates of the equity
holders in the same percentage as their equity interests. FirstCity’s 10% ownership
interest in the equity and debt is insignificant compared to the other major
independent third party investors such that it is clear that a majority of the
expected losses would be allocated to one of those independent third party investors.

    3.

    Please tell us how you determined that separate financial statements under Rule 3-09 of
Regulation S-X were not required for your investments in the Acquisition Partnerships —
Europe and for the Mexican Acquisition Partnerships. Supplementally provide us with your
supporting calculations for 2004, 2003 and 2002.

Separate financial statements for the European and Mexican Acquisition Partnerships were not
required under Rule 3-09 of Regulation S-X as none of the individual partnerships met the 20
percent test based on the definition of a significant subsidiary under either the first or third
condition set forth in §210.3-01(w) of Regulation S-X.

The first condition under §210.3-01(w) is not met by any of the partnerships as the Company’s
investments in and advances to individual equity investments do not exceed 20% of the consolidated
total assets. For FirstCity, consolidated total assets are significant enough that this condition
has never been met.

Likewise, the third condition under §210.3-01(w) was not met by any of the European and Mexican
partnerships. Each year, the Company compares the income from continuing operations before income
taxes, extraordinary items and cumulative effect of accounting change to the average of income for
the last five years. For 2004, 2003 and 2002, the actual income was used as it was higher than the
average income. The Company’s calculations for the prescribed income test are as follows:

Securities and Exchange Commission

October 13, 2005

Page 5

    2004

    2003*

    2002*

    Earnings from continuing operations

    $
    5,011,000

    $
    9,707,000

    $
    5,943,000

    Add:

    Provision for income taxes

    75,000

    240,000

    153,000

    Extraordinary items

    —

    —

    —

    Cumulative effect of a change in accounting principle

    —

    —

    —

    Income from continuing operations before income taxes,
extraordinary items and cumulative effect of a change
in accounting principle of the subsidiary

    $
    5,086,000

    $
    9,947,000

    $
    6,096,000

    Average income for last five years

    $
    2,436,000

    $
    3,704,000

    $
    1,871,000

    Higher of actual or average income

    5,086,000

    9,947,000

    6,096,000

    20
    %

    20
    %

    20
    %

    Significant subsidiary threshold

    $
    1,017,200

    $
    1,989,400

    $
    1,219,200

* The 2003 and 2002 threshold calculations were based on income from continuing operations as
originally reported on the annual reports for those years. In 2004, the Company sold its
investment in Drive Financial Services, LP. As a result, the consolidated financial statements
were reclassified for all prior periods to reflect such operations as “Earnings from discontinued
operations.”

Equity in earnings (losses) of the European and Mexican Acquisition Partnerships ranged from
$(371,144) to $957,320 in 2004, $(869,148) to $633,836 in 2003 and $(847,727) to $571,557 in 2002.
In all cases, no individual partnership met the 20% threshold prescribed under
Rule 3-09 of
Regulation S-X, and thus, separate financial statements were not required.

Form 10-Q For the Quarterly Period Ended June 30, 2005

Liquidity and Capital Resources, page 6

    4.

    You state that “the Company had $11.3 million in Euro-denominated debt for t