FirstCity Begins Mission Of Buying Bad Loans With Indiana Acquisition

It is less than two months since the survivor of the former First City Bancorporation of Texas emerged from Chapter 11 bankruptcy protection, but already the company is putting its $650 million of tax-loss carryforwards to good use.

FirstCity Financial Corp., which emerged from the reorganization of First City Bancorp. as a buyer of distressed financial assets, announced Thursday that it was buying all of Diversified Financial Systems Inc., of Fort Wayne, Ind., and an affiliated company, Diversified Performing Assets Inc.

The deal will cost $10.85 million in cash and notes and will give the new company about $70 million in distressed loans and loan-related assets, as well as servicing rights on another $25 million of assets.

James Sartain, president and chief operating officer of FirstCity, said the company's reorganization plan called for making acquisitions of this kind.

"We would hope that there will be future opportunities with companies like Diversified," he said.

The deal marks the return to operating status for the successor of the former bank holding company. On Oct. 31, 1992, regulators seized its bank subsidiaries, forcing the holding company to file for bankruptcy protection. In turn, First City Bancorp. sued the Federal Deposit Insurance Corp. in federal court, alleging the seizure was premature. The FDIC denied any wrongdoing.

As part of the reorganization plan, the new FirstCity dropped all claims against the FDIC in return for the release of over $300 million in cash and other assets. Last month, much of the cash was used to acquire about $200 million of loans that were being managed by Texas Commerce Bank and Frost National Bank.

At the same time, the company merged with Waco, Tex.-based J-Hawk Corp. The shareholders of privately held J-Hawk received 49.9% of the new FirstCity to retain the value of the tax-loss carryforwards.

So far, the market seems to like the story.

Frank Anderson, an analyst with Stephens Inc. in Dallas, said prices for FirstCity's securities have risen steadily since the company emerged from Chapter 11. After trading at book value of $8 a share on July 3, FirstCity's common stock has more than doubled, to close at $17.50 a share on Aug. 9.

Mr. Anderson pointed out that the company has a plausible story to tell, given past successes of J-Hawk in managing distressed assets. However, the new company will need to prove itself to a wider audience.

"The whole key is if they are able to meet their earnings estimates," he said.

Mr. Sartain said the deal with Diversified will broaden the company's focus beyond troubled large commercial assets and into smaller consumer loans.

"Diversified has been in this business as long as we have," he said. "We believe this deal gives us a different arena in which we can play more effectively."

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