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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D. C. 20549





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FORM 10-Q





(Mark One)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the Period Ended June 30, 2002





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




For the transition period from
 to





Commission file number 333-42623





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THE THAXTON GROUP, INC.


(Exact name of registrant as specified in its charter)





South Carolina

57-0669498(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification
No.)





1524 Pageland Highway, Lancaster, South Carolina 29720


(Address of principal executive offices)





Issuers telephone number: 803-285-4337





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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No  ̈





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.





Class

Outstanding at August 10, 2002Common Stock

6,870,900





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THE THAXTON GROUP, INC.





FORM 10-Q


June 30, 2002





TABLE OF CONTENTS





Item No.



PagePART IFINANCIAL INFORMATION1.

Financial StatementsConsolidated Balance Sheets at June 30, 2002 and December 31, 2001

2Consolidated Statements of Income for the three months ended June 30, 2002 and 2001

3Consolidated Statements of Income for the six months ended June 30, 2002 and 2001

4Consolidated Statement of Stockholder Equity for the year ended December 31, 2001 and the six-months ended June 30, 2002

5Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001

6Notes to Consolidated Financial Statements

72.

Managements Discussion and Analysis of Financial Condition and Results of Operations

123.

Quantitative and Qualitative Disclosures About Market Risk

16PART IIOTHER INFORMATION1.

Legal Proceedings

162.

Changes in Securities and Use of Proceeds

163.

Defaults Upon Senior Securities

164.

Submission of Matters to a Vote of Security Holders

165.

Other Information

166.

Exhibits and Reports on Form 8-K

16






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ITEM 1:Financial Statements





THE THAXTON GROUP, INC.





CONSOLIDATED BALANCE SHEETS


June 30, 2002 & December 31, 2001





June 30, 2002

December 31, 2001(Unaudited)ASSETSCash

$
3,809,514

$
4,096,359Finance receivables, net


172,219,777


181,255,030Premises and equipment, net


4,390,064


4,246,816Accounts receivable


1,275,578


1,813,743Accounts receivable from affiliates





113,185Repossessed automobiles


703,545


952,153Deposit


7,809,028


6,710,692Goodwill and other intangible assets


32,377,219


32,481,654Deferred tax asset, net


2,910,000


2,752,000Other assets


8,478,323


8,138,673Total assets

$
233,973,048

$
242,560,305LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesAccrued interest payable

$
2,167,372

$
2,194,814Notes payable


210,300,362


225,033,166Accounts payable


1,880,780


1,361,490Accounts payable to related parties


1,505,923


254,043Income taxes payable


2,983,065


2,270,068Employee savings plan


1,122,621


1,083,594Other liabilities


4,521,805


4,078,594Total liabilities


224,481,928


236,275,769Stockholders EquityPreferred Stock $.01 par value:Series A:  400,000 shares authorized; issued and outstanding 10,440 shares in 2002, 10,440 shares in 2001;
liquidation value $104,400 in 2002 and 2001


104


104Series C:  50,000 shares authorized issued and outstanding in 2002 and 2001; liquidation value $500,000 in
2002 and 2001


500


500Series E:  800,000 shares authorized, issued and outstanding in 2002 and 2001; liquidation value $8,000,000 in
2002 and 2001


8,000


8,000Series F:  100,000 shares authorized; issued and outstanding 20,000 shares in June 2002; liquidation value
$200,000 in 2002 and 2001.


200


200Common stock, $.01 par value, 50,000,000 shares authorized; issued and outstanding 6,871,100 in 2002; 6,849,355 shares
in 2001


68,711


68,493Additional paid-in-capital


8,869,586


8,831,599Retained earnings (accumulated deficit)


544,019


(2,624,360
)Total stockholders equity


9,491,120


6,284,536Total liabilities and stockholders equity

$
233,973,048

$
242,560,305





See accompanying notes to consolidated financial statements.




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THE THAXTON GROUP, INC.





CONSOLIDATED STATEMENTS OF INCOME


Three Months Ended June 30, 2002 and 2001


(Unaudited)





2002

2001Interest and fee income

$
18,622,223

$
17,586,979Interest expense


3,621,559


4,334,075Net interest income


15,000,664


13,252,904Provision for credit losses


4,701,404


3,634,475Net interest income after provision for credit losses


10,299,260


9,618,429Other income:Insurance premiums and commissions, net


4,074,640


3,339,247Other income


616,624


1,108,392Total other income


4,691,264


4,447,639Operating expenses:Compensation and employee benefits


7,917,681


7,779,543Telephone, computers


564,419


558,176Net occupancy


1,642,346


1,609,346Reinsurance claims expense


642,695


419,299Advertising


825,120


834,540Collection expense


159,326


225,969Travel


288,021


325,938Professional fees


349,789


258,868Office expense


563,015


621,196Amortization expense


150,751


606,637Other


574,747


260,034Total operating expenses


13,677,910


13,499,546Income before income tax expense


1,312,614


566,522Income tax expense


447,153


297,619Net income


865,461


268,903Dividends on preferred stock


145,736


189,568Net income applicable to common shareholders

$
719,725

$
79,335Net income per common sharebasic and diluted

$
0.10

$
0.01





See accompanying notes to consolidated financial statements.




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THE THAXTON GROUP, INC.





CONSOLIDATED STATEMENTS OF INCOME


Six Months Ended June 30, 2002 and 2001


(Unaudited)





2002

2001Interest and fee income

$
38,366,233

$
36,116,289Interest expense


7,313,429


9,806,699Net interest income


31,052,804


26,309,590Provision for credit losses


8,371,672


6,609,308Net interest income after provision for credit losses


22,681,132


19,700,282Other income:Insurance premiums and commissions, net


7,831,912


6,898,823Other income


2,181,659


2,307,772Total other income


10,013,571


9,206,595Operating expenses:Compensation and employee benefits


16,386,188


15,607,999Telephone, computers


1,106,511


1,156,983Net occupancy


3,260,061


3,174,396Reinsurance claims expense


932,421


644,946Advertising


1,511,918


1,488,273Collection expense


308,902


329,291Travel


563,568


548,196Professional fees


619,446


529,843Office expense


1,142,389


1,233,720Amortization expense


300,324


1,215,060Other


1,321,406


1,386,168Total operating expenses


27,453,134


27,314,875Income before income tax expense


5,241,569


1,592,002Income tax expense


1,782,997


751,281Net income


3,458,572


840,721Dividends on preferred stock


290,193


360,915Net income applicable to common shareholders

$
3,168,379

$
479,806Net income per common sharebasic and diluted

$
0.46

$
0.07





See accompanying notes to consolidated financial statements.




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THE THAXTON GROUP, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


Year Ended December 31, 2001 and Six Months Ended June 30, 2002


(Unaudited)





Common Stock


Preferred Stock

Additional Paid-in Capital


Retained Earnings


Total Stockholders EquityBalance at December 31, 2000

$
69,743


$
8,604

$
8,610,549


$
(4,929,486
)

$
3,759,410Cancelled 135,000 shares of common stock


(1,350
)





1,350







Issued 20,000 shares of Series F preferred stock






200


199,800







200,000Issued 10,000 shares of common stock as compensation


100






19,900







20,000Dividends paid on preferred stock













(729,497
)


(729,497
)Net income













3,034,623



3,034,623Balance at December 31, 2001


68,493



8,804


8,831,599



(2,624,360
)


6,284,536Issued 22,500 shares of common stock as compensation


225






44,775







45,000Repurchase of common stock


(7
)





(6,788
)






(6,795
)Dividends paid on preferred stock













(290,193
)


(290,193
)Net income













3,458,572



3,458,572Balance at June 30, 2002

$
68,711


$
8,804

$
8,869,586


$
544,019


$
9,491,120


See accompanying notes to consolidated financial statements.







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THE THAXTON GROUP, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


Six Months ended June 30, 2002 and 2001


(Unaudited)





June 30, 2002


June 30, 2001Cash flows from operating activities:Net income

$
3,458,572


$
840,721Adjustments to reconcile net income to net cash provided by operating activitiesProvision for credit losses


8,371,672



6,609,308Depreciation and amortization


1,107,403



2,016,421Deferred taxes


1,782,997



751,281Decrease in accounts receivable


651,350



690,643Non-cash compensation expense


45,000



20,000Decrease (increase) in other assets


(956,615
)


194,846Increase in accrued interest payable and other liabilities


415,770



2,212,315Net cash provided by operating activities


14,876,149



13,335,535Cash flows from investing activities:Net decrease in finance receivables


663,581



3,913,895Net capital expenditures for premises and equipment


(950,327
)


(248,142
)Cash paid for deposit with Voyager


(1,098,336
)


(289,226
)Net cash provided by investing activities


(1,385,082
)


3,376,527Cash flows from financing activities:Notes payable to affiliates


1,251,880



Repurchase of common stock


(6,795
)


Dividends paid


(290,193
)


(360,915
)Net decrease in notes payable


(14,732,804
)


(19,698,196
)Issuance (repurchase) of preferred stock






200,000Net cash used by financing activities


(13,777,912
)


(19,859,111
)Net decrease in cash


(286,845
)


(3,147,049
)Cash at beginning of period


4,096,359



4,482,553Cash at end of period

$
3,809,514


$
1,335,504





See accompanying notes to consolidated financial statements.







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THE THAXTON GROUP, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2002 and December 31, 2001


(Unaudited)





(1)    Summary of Significant Accounting
Policies





The Thaxton Group, Inc. (the Company) is incorporated under the laws of the state of
South Carolina and operates, primarily through subsidiaries. The Company operates consumer finance branches in 11 states, primarily under the names of TICO Credit, Southern Finance, and Covington Credit. The Company also operates insurance agency
branches in North and South Carolina. The Company is a diversified financial services company that is engaged primarily in consumer lending and consumer automobile sales financing to borrowers with limited credit histories, low incomes or past
credit problems. The Company also offers insurance premium financing to such borrowers. A substantial amount of the Companys premium finance business has been derived from customers of the independent insurance agencies owned by Thaxton
Insurance Group, Inc. (Thaxton Insurance), which was acquired by the Company in 1996. The Company provides reinsurance through wholly owned subsidiaries, TICO Reinsurance, Ltd. (TRL), Fitch National Reinsurance, Ltd., Soco
Reinsurance, Inc. Through another wholly owned subsidiary, Thaxton Commercial Lending, Inc., the Company makes factoring loans and collateralized commercial loans to small and medium sized businesses. All significant intercompany accounts and
transactions have been eliminated in consolidation.





The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.





Information with respect to June
30, 2002 and 2001, and the periods then ended, have not been audited by the Companys independent auditors, but in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary for the fair
presentation of the operations of the Company. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the Companys Annual Report on Form 10-K when reviewing interim financial
statements. The results of operations for the three months and six months ended June 30, 2002 are not necessarily indicative of results to be expected for the entire fiscal year.





(2)    Finance Receivables





Finance
receivables consisted of the following at June 30, 2002 and December 31, 2001:





June 30, 2002


December 31, 2001


June 30, 2001


December 31, 2000Automobile sales contracts

$
21,389,986


$
23,121,113


$
28,182,493


$
31,196,711Direct loans


185,416,695



189,163,818



167,290,913



172,506,592Mortgage loans


14,046,312



16,468,209



19,368,905



20,738,959Premium finance contracts


4,782,630



8,618,497



9,403,259



7,527,689Commercial loans


2,103,608



3,161,875



3,786,741



3,935,945Total finance receivables


227,739,231



240,533,512



228,032,311



235,905,896Unearned interest


(34,341,640
)


(36,703,784
)


(34,168,838
)


(36,841,017
)Unearned insurance premiums, net


(1,092,331
)


(1,798,520
)


(1,416,956
)


(1,966,062
)Insurance loss reserve


(9,207,565
)


(9,022,167
)


(8,003,649
)


(7,493,658
)Dealer holdback and bulk purchase discount


(2,250,005
)


(2,036,818
)


(2,373,297
)


(2,406,165
)Allowance for credit losses


(11,139,966
)


(12,012,169
)


(11,289,585
)


(11,630,555
)Deferred loan cost, net


2,512,053



2,294,976



2,340,905



2,375,207Finance receivables, net

$
172,219,777


$
181,255,030


$
173,120,891


$
177,943,646





Consumer loans include bulk purchases of receivables, auto dealer
receivables under holdback arrangements, and small consumer loan receivables. With bulk purchase arrangements, the Company typically purchases a group of receivables from an auto dealer or other retailer at a discount to par based on
managements review and assessment of the portfolio to be purchased. This discount amount is




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then maintained in an unearned income account to which losses on these loans are charged. To the extent that losses from a bulk purchase exceed
the purchase discount, the allowance for credit losses will be charged. To the extent losses experienced are less than the purchase discount, the remaining discount is accreted into income. With holdback arrangements, an automobile dealer or other
retailer will assign receivables to us on a loan-by-loan basis, typically at par. We will withhold a certain percentage of the proceeds, generally 5% to 10%, as a dealer reserve to be used to cover any losses which occur on these loans. The
agreements are structured such that all or a portion of these holdback amounts can be reclaimed by the dealer based on the performance of the receivables. To the extent that losses from these holdback receivables exceed the total remaining holdback
amount for a particular dealer, the allowance for credit losses will be charged. The amount of bulk purchase and holdback receivables, net of unearned interest and insurance, and the related holdback and discount amount outstanding were
approximately $15,675,000 and $435,000, respectively, at June 30, 2002 and $18,204,000 and $819,000, respectively at December 31, 2001.





At March 31, 2002, there were no significant concentrations of receivables in any type of property or to one borrower. These receivables are pledged as collateral for a line of credit agreement (see note 5).





Changes in the allowance for credit losses for the quarters ended June 30, 2002 and 2001, and the years ended December 31, 2001
and 2000, are as follows:





June 30, 2002


December 31, 2001


June 30, 2001


December 31, 2000Beginning balance

$
12,012,169


$
11,630,555


$
11,630,555


$
10,661,339Valuation allowance for acquired loans














838,017Provision for credit losses


8,371,672



16,583,919



6,609,308



14,657,930Charge-offs


(10,197,365
)


(18,024,265
)


(7,914,695
)


(16,052,319
)Recoveries


953,490



1,821,960



964,417



1,525,588Net charge-offs


(9,243,875
)


(16,202,305
)


(6,950,278
)


(14,526,731
)Ending balance

$
11,139,966


$
12,012,169


$
11,289,585


$
11,630,555





Our loan portfolio primarily consists of short-term loans, the
majority of which are originated or renewed during the current year. Accordingly, we estimate that fair value of the finance receivables is not materially different from carrying value.





(3)    Premises and Equipment





A summary of premises and equipment at June 30, 2002 and December 31, 2001 follows:





June 30, 2002

December 31, 2001Leasehold improvements

$
2,338,316

$
2,289,105Furniture and fixtures


3,061,586


3,054,216Equipment and automobiles


7,809,547


7,680,873Total cost


13,209,449


13,024,194Accumulated depreciation


8,819,385


8,777,378Net premises and equipment

$
4,390,064

$
4,246,816





Depreciation expense was approximately $410,000 for the quarter
ended June 30, 2002 and $807,000 year to date, compared to $400,000 for the quarter ended, and $801,000 for the six-months ended June 30, 2001.







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(4)    Intangible Assets





Intangible assets consisted of the following at June 30, 2002 and December 31, 2001.





June 30, 2002

December 31, 2001Goodwill and purchase premium


37,683,318


37,683,318Insurance expirations


2,030,601


1,890,301Total cost


39,713,919


39,573,619Less accumulated amortization


7,336,700


7,091,965Intangible assets, net

$
32,377,219

$
32,481,654





The Company acquired the majority of the intangibles in connection
with our acquisition of FirstPlus Consumer Finance. Amortization expense was approximately $300,000 for the six-months and $150,000 for the quarter ended June 30, 2002, compared to $1,215,000 for the six-months and $606,000 for the quarter ended
June 30, 2001.





Adoption of SFAS No. 142, Goodwill and Other Intangible Assets





Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which establishes financial
accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17, Intangible Assets. Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer
amortized but are reviewed at least annually for impairment.





SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level at adoption and at least annually thereafter, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of each reporting unit and compare it to the carrying value,
including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The
amount, if any, of the impairment would then be measured in the second step. After testing the valuation of the reporting units it was found that all reporting units fair values exceeded their carrying value, thus, there is no need to test for
impairment. The effect of not amortizing goodwill will be an expense savings of approximately $2.4 million for the full year, and approximately $1.2 million for the six months ended June 30, 2002.





(5)    Notes Payable and Notes Payable to Affiliates





At June 30, 2002 and 2001 and December 31, 2001 and 2000, notes payable consisted of the following:





June 30, 2002

December 31, 2001

June 30, 2001

December 31, 2000Senior Notes Payable/Lines of Credit

$
122,674,001

$
151,234,760

$
150,218,344

$
178,278,386Subordinated Notes payable to individuals with varying maturity dates and rates ranging from 5 1⁄4% to
12%


85,294,719


71,542,844


60,402,037


51,721,405Other subordinated notes payable to companies with varying maturity dates and rates ranging from 41⁄4% to
10%


2,331,642


2,255,562


2,286,837


2,605,623Total notes payable

$
210,300,362

$
225,033,166

$
212,907,218

$
232,605,414





We generally finance our operations through cash flow from
operations, borrowings under our credit facility with FINOVA Capital Corporation (FINOVA) and the sale, to public investors, of our subordinated notes.





Our credit facility with FINOVA, as amended on December 31, 2001, comprises a term loan with a balance of $11.9 million outstanding as of June 30, 2002, and a revolving
credit line used to finance consumer receivables. Maximum borrowings under the revolving credit line as of June 30, 2002 are limited to the lesser of $141 million, or 85% of eligible consumer finance receivables as defined by the agreement. Our
maximum borrowing amount decreases on a quarterly basis and decreases an additional $6 million in 2002, $16.5 million in 2003, $18 million in 2004, $18 million in 2005, and $9 million in 2006. James D. Thaxton is the guarantor for both the term loan
and the revolving loan.







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Advances under the term loan accrue interest at the prime rate + 2%. Advances
under the revolving credit line accrue interest at the prime rate + 1%. The prime rate is published by Citibank, N.A., or any other money center bank as FINOVA may select. The credit facility matures in 2006. The interest rates are adjusted monthly
to reflect fluctuations in the designated prime rate. Accrued interest on borrowings is payable monthly.





The term
loan is payable in twenty-three equal monthly principal and interest payments, which began on April 15, 2001, in the amount of $600,000, with the remaining principal balance due one month thereafter.





Under the revolving credit facility, principal is due in full on the maturity date and can be prepaid without penalty. Substantially all
of our and our subsidiaries assets secure the revolving credit facility, which requires us to comply with restrictive covenants, including financial condition covenants. As of December 31, 2001, we met all such requirements.





As of June 30, 2002, an additional $12.9 million was available under the terms of the revolving credit line to borrow against
existing collateral, with $30.1 million of total potential capacity available for borrowing against qualified finance receivables generated in future periods. As of June 30, 2002, the interest rates for borrowings were 5.75% for the revolving credit
line, and 6.75% for the term loan.





In connection with the FirstPlus acquisition, the Company assumed $2.2 million
of subordinated notes issued by Voyager Insurance Co. In November 1999, those notes were cancelled and re-issued in our name. We are confident that we have adequate availability under our primary credit facility to borrow adequate funds to liquidate
these notes, if required.





In February 1998, we began offering subordinated notes in several states by registering
$50 million of subordinated notes with the Securities and Exchange Commission (SEC). In May 2001, we registered an additional $75 million offering of subordinated notes with the SEC. The notes are sold primarily to individual investors.
The maturity terms range from daily (demand) notes to sixty-month notes. Interest rates vary based on the principal amounts and maturity dates of the notes. Notes currently being offered carry interest rates ranging from 5.25% to 8.0%. The notes are
unsecured and issued under an indenture which we entered into with The Bank of New York, as trustee, in February 1998. The terms of the indenture do not require us to comply with any financial covenants nor do they impose any material restrictions
on the operations of our business.





As of June 30, 2002, we had $81.0 million of these registered subordinated
notes outstanding and $4.3 million notes registered in predecessor state registrations. To date, we have used the proceeds from the sale of these notes to reduce, on a temporary basis, the amount of our revolving credit facility with FINOVA. We
intend to continue this note program by seeking to register additional offerings of subordinated notes with the SEC. The sale of subordinated notes is an important aspect of the financing of our business. It enables us to reduce our overall
borrowing costs, particularly during periods of increasing interest rates. In addition, it allows us to hedge the interest rate risk inherent in our variable rate senior credit facility, and to diversify our sources of borrowed funds.





We plan to continue to reduce borrowings under our senior credit facility and replace those borrowings with increasing levels
of subordinated notes. We anticipate that our cash inflow from operations, borrowings under our senior credit facility, and the proceeds from the sale of subordinated notes will be more than adequate to meet our cash outflows to fund anticipated
growth in our finance receivables, operating expenses, repayment of indebtedness, and planned capital expenditures for the year ending December 31, 2002. We estimate our cash outflow to be approximately $25 million for 2002.





(7)    Earnings Per Share Information





The following is a summary of the earnings per share calculation for the six months and quarter ended June 30, 2002 and 2001:





Six Months Ended

Three Months EndedJune 30, 2002

June 30, 2001

June 30, 2002

June 30, 2001BASIC & DILUTEDNet income from continuing operations

$
3,458,572

$
840,721

$
865,461

$
268,903Less: Dividends on preferred stock


290,193


360,915


145,736


189,568Net income applicable to common shareholders (numerator)


3,168,379


479,806


719,725


79,335Average common shares outstanding (denominator)


6,863,533


6,898,641


6,871,666


6,841,855Income per share from continuing operationsbasic and diluted

$
0.46

$
0.07

$
0.10

$
0.01





The earnings per share calculation does not include 10,440 shares
of Preferred Series A and 50,000 shares of Preferred Series C stock, which are convertible to common shares, because the effect is anti-dilutive.







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##### Table of Contents




(8)    Business Segments





The Company now has two primary segments. The consumer finance segment provides financing to consumers with limited credit histories, low
incomes or past credit problems. Revenues in the consumer finance business are derived primarily from interest and fees on loans, and the sale of credit related insurance products to its customers. The Companys insurance operations consist of
selling, on an agency basis, various lines of automobile, property and casualty, life and accident and health insurance. Revenue is generated through fees paid by the insurance for which business is placed.





The following table summarizes certain financial information concerning the Companys reportable operating segments for the quarter
ended June 30, 2002 and 2001, and the year ended December 31, 2001:





Consumer Finance

Insurance


Other

TotalJune 30, 2002 Income Statement DataTotal Revenue

47,229,658

2,035,965


364,181

$
49,629,804Net Interest Income

30,688,623




364,181


31,052,804Provision for credit losses

8,336,472




35,200


8,371,672Noninterest income

7,977,606

2,035,965





10,013,571Insurance premiums and commissions, net

5,899,464

1,932,448





7,831,912Noninterest expenses

24,893,051

2,208,452


351,631


27,453,134Depreciation and amortization

967,413

129,635


10,355


1,107,403Net income

3,564,130

(113,841
)

8,283


3,458,572Balance Sheet DataTotal assets

229,774,606

2,279,914


1,918,528


233,973,048Loans, net

170,329,576




1,890,201


172,219,777Allowance for credit losses

10,926,559




213,407


11,139,966Intangibles

30,994,776

1,382,443





32,377,219





Consumer Finance

Insurance


Other

TotalDecember 31, 2001 Income Statement DataTotal Revenue

$
93,669,290

$
3,819,716


$
1,031,122

$
98,520,128Net Interest Income


55,201,218


(668,380
)


723,776


55,256,614Provision for credit losses


16,428,712


25,777



129,430


16,583,919Noninterest income


20,374,036


3,819,686






24,193,722Insurance premiums and commissions, net


15,291,211


3,262,479






18,553,690Noninterest expenses


53,309,207


3,933,597



493,990


57,736,794Depreciation and amortization


3,724,681


323,770



17,444


4,065,895Net income


3,501,713


(533,325
)


66,235


3,034,623Balance Sheet DataTotal assets


237,387,631


2,211,886



2,960,788


242,560,305Loans, net


178,270,562






2,984,468


181,255,030Allowance for credit losses


11,834,762






177,407


12,012,169




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##### Table of Contents

Intangibles

31,184,955

1,296,699



32,481,654





Consumer Finance

Insurance


Other

TotalJune 30, 2001 Income Statement DataTotal Revenue

$
42,330,306

$
2,474,891


$
517,687

$
45,322,884Net Interest Income


26,332,843


(371,423
)


348,170


26,309,590Provision for credit losses


6,561,570


7,738



40,000


6,609,308Noninterest income


6,731,704


2,474,891






9,206,595Insurance premiums and commissions, net


4,974,164


1,924,659






6,898,823Noninterest expenses


24,770,315


2,252,121



292,439


27,314,875Depreciation and amortization


1,842,801


163,001



10,619


2,016,421Net income


902,049


(98,111
)


36,783


840,721Balance Sheet DataTotal assets


224,034,767


3,339,748



3,585,316


230,959,831Loans, net


169,519,413






3,601,478


173,120,891Allowance for credit losses


11,124,585






165,000


11,289,585Intangibles


32,275,640


1,379,990






33,655,630





ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations





GENERAL





The Thaxton Group, Inc. and its subsidiaries (the Company) were
organized in July 1978 as C.L. Thaxton & Sons, Inc., and from that date until 1991 was primarily engaged in making and servicing direct consumer loans (Direct Loans) and insurance premium finance loans (Premium Finance
Contracts) to persons with limited credit histories, low incomes, or past credit problems (Non-Prime Borrowers). In 1991, we made a strategic decision to diversify our portfolio by actively seeking to finance credit-impaired
borrowers purchases of used automobiles. Our management believed that the expertise it had developed in extending and servicing installment credit to credit-impaired borrowers would enable it to profitably finance used automobile purchases by
borrowers having similar credit profiles. The employment of additional senior and mid-level management personnel with substantial used automobile lending experience facilitated our entry into this segment of the consumer credit industry. Since 1991,
we have evolved into a diversified consumer financial services company engaged in the origination and servicing of loans made to credit-impaired borrowers; used automobile lending through the purchase and servicing of used automobile sales contracts
(Automobile Sales Contracts); insurance premium finance lending through the purchase of insurance premium finance contracts (Premium Finance Contracts); and selling insurance products on an agency basis.





The Company operates its finance businesses in South Carolina, North Carolina, Georgia, Tennessee, Virginia, Kentucky, Alabama,
Mississippi, Ohio, Oklahoma and Texas. It operates its insurance businesses in South Carolina and North Carolina.





THE INDUSTRY





The segment of the consumer finance industry in which the Company operates, which is commonly called the
non-prime credit market, provides financing to non-prime borrowers. These consumers generally do not have access to the same variety of sources of consumer credit as borrowers with long credit histories, no defaults, and stable
employment, because they do not meet the stringent objective credit standards imposed by most traditional lenders. The Company, like its competitors in the same segment of the consumer finance industry, generally charges interest to Non-prime
Borrowers at the maximum rate permitted by law or, in states such as South Carolina where there are no legal maximum rates, at competitive rates commensurate with the increased default risk and the higher cost of servicing and administering a
portfolio of loans to such borrowers. By contrast, commercial banks, captive financing subsidiaries of automobile manufacturers, and other traditional sources of consumer credit to prime borrowers typically impose more stringent credit requirements
and generally charge lower interest rates.





The premium finance industry for personal lines of insurance is also
highly fragmented. Insurance companies that engage in direct writing of insurance policies generally provide financing to their customers who need the service. Numerous small independent finance companies




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such as the Company are engaged in providing premium financing for personal lines of insurance purchased by Non-prime Borrowers through
independent insurance agents. Because the rates they charge are highly regulated, these companies compete primarily on the basis of efficiency in providing the financing and servicing the loans. A significant number of independent insurance agents
provide premium financing to their customers either directly or through affiliated entities. As banks are allowed to enter the insurance business, they also are increasingly engaging in the premium finance business.





Independent insurance agencies represent numerous insurance carriers, and typically place a customers business with the carrier
whose combination of features and price best match the customers needs. In comparison, direct agents represent only one carrier. Most carriers find use of independent agencies to be a more cost effective method of selling their products than
using a direct agent force. Competition in the independent insurance agency business is intense. There are numerous other independent agencies in most of the markets where the Companys insurance offices are located. There are also direct
agents for various insurers operating in some of these markets. The Company competes primarily on the basis of service and convenience. The Company attempts to develop and maintain long-term customer relationships through low employee turnover and
responsive service representatives and offers a broad range of insurance products underwritten by reputable insurance companies.





NET
INTEREST MARGIN





The following table presents important data relating to our net interest margin for the
six-months and three-months ended June 30, 2002 and 2001.





Three Months Ended


Six Months EndedJune 30, 2002


June 30, 2001


June 30, 2002


June 30, 2001Average Net Finance Receivables(1)

$
189,550,484


$
177,721,131


$
190,230,844


$
176,659,438Average notes payable(1)


208,036,538



214,041,846



209,690,553



216,637,138Interest and fee income(2)


18,622,223



17,586,979



38,366,233



36,116,289Interest expense(3)


3,621,559



4,334,075



7,313,429



9,806,699Net interest income


15,000,664



13,252,904



31,052,804



26,309,590Average interest rate earned(1)


39.30
%


39.58
%


40.33
%


40.89
%Average interest rate paid(1)


6.96
%


8.10
%


6.98
%


9.05
%Net interest rate spread


32.34
%


31.48
%


33.35
%


31.84
%Net interest margin(4)


31.66
%


29.83
%


32.65
%


29.79
%


---

|(1) |  | Averages are computed using month-end balances during the year presented.
|--- |  | -------------------------------------------------------------------------

|(2) |  | Excludes interest and fee income earned by Thaxton Insurance.
|--- |  | -------------------------------------------------------------

|(3) |  | Excludes interest expense paid on Thaxton Insurance related debt.
|--- |  | -----------------------------------------------------------------

|(4) |  | Net interest margin represents net interest income divided by average Net Finance Receivables.
|--- |  | ----------------------------------------------------------------------------------------------




Results of Operations for the Six Months Ended June 30, 2002 and 2001





Since December 31, 2001 we have experienced our normal liquidation of the loans we added during the fourth quarter of 2001 and have begun to build our receivable base back.
Since December 31, 2001 our gross finance receivables have decreased by $12,794,000 to $227,739,000. In the comparative six-month period ended June 30, 2001, our gross receivables declined $7,874,000 to $228,032,000. The greater decline is due to
the change in the mix of our portfolio, with declines in automobile and real estate receivables, and gains in our shorter term direct loan receivables.





Due to this change in mix of our receivables our interest income increased to $38,366,000 for the current period from $36,116,000 for the same period last year. Our interest expense decreased
significantly this year to $7,313,000 from $9,807,000 in the prior period. The decrease in expense was due to the sharp decline in the prime rate to which our debt is linked.





As expected with overall business growth our operating expenses also increased from $27,315,000 in 2001 to $28,703,000 in 2002 or 5.1%. This increase is related to normal
growth of our business.





Due to the substantial decrease in interest expense and the accounting change to not
amortize goodwill our net income increased significantly from $841,000 in the first six months of 2001 to $3,653,000 in 2002.





The income, offset by the preferred dividends paid, our stockholders equity increased to $9,686,000 from $6,285,000 at year-end.





Results of Operations for the Three Months Ended June 30, 2002 and 2001





For the three months ended our gross finance receivables have grown due to the slowing of the normal liquidation of our year end business and the increase in new receivables being added. Our gross finance receivables increased by
$4,507,000 to $227,739,000 since March 31, 2002. Comparatively in 2001 for the same period our gross receivables increased $6,451,000 to $228,032,000.




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Due to the change in the mix of our receivables our interest income increased to
$18,622,000 for the current period from $17,587,000 for the same period last year. Our interest expense actually decreased this year to $3,622,000 from $4,334,000 in the prior period. This is due to the drop in the prime interest rate.





Our operating expenses remained relatively flat, increasing from $13,500,000 in 2001 to $13,678,000 in 2002. This increase is
related to normal growth of our business and an increase in salaries from the prior year offset by lower amortization expense.





Due to our revenues growth and the decrease in interest expense our net income increased significantly from $110,000 in the second quarter of 2001 to net income of $1,060,000 in the second quarter of 2002.





CREDIT LOSS EXPERIENCE





The following table sets forth our allowance for credit losses and credit loss experience at or over the periods presented.





June 30, 2002


December 31, 2001


June 30, 2001


December 31, 2000Net finance receivables(1)

$
174,618,146


$
190,105,324


$
180,623,735


$
185,638,256Allowance for credit losses


11,139,966



12,012,169



11,289,585



11,630,555Allowance for credit losses as a percentage of net finance receivables(1)


6.38
%


6.32
%


6.25
%


6.27
%Dealer reserves and discounts on bulk purchases


2,250,005



2,036,818



2,373,297



2,406,165Dealer reserves and discounts on bulk purchases as percentage of Net Automobile Sales Contracts at period
end


14.25
%


10.58
%


8.42
%


7.71
%Allowance for credit losses and dealer reserves and discount on bulk purchases(2)


13,389,971



14,048,987



13,662,882



14,036,720Allowance for credit losses and dealer reserves as a percentage of finance receivables


7.67
%


7.39
%


7.56
%


7.56
%Provision for credit losses


8,371,672



16,583,919



6,609,308



14,657,930Charge-offs (net of recoveries)


9,243,875



16,202,305



6,950,278



14,526,731Charge-offs (net of recoveries) as a percentage of average net finance receivables(3)


10.58
%


8.32
%


7.70
%


7.83
%


---

|(1) |  | Net finance receivable balances are presented net of unearned finance charges, net unearned insurance premiums, dealer holdbacks and bulk purchase discounts,
deferred loan costs, and exclude mortgage warehoused loans and commercial finance receivables.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Excludes valuation discount for acquired loans.
|--- |  | -----------------------------------------------

|(3) |  | June 30, 2002 and 2001 are annualized for comparison purpose.
|--- |  | -------------------------------------------------------------




The following table sets forth certain information concerning our finance receivables at the end of the periods indicated:





June 30, 2002


December 31, 2001Direct finance receivables contractually past due 90 days or more

$
7,217,087


$
7,373,910Direct finance receivables outstanding


143,102,514



148,215,821Direct finance receivables contractually past due 90 days or more as a percentage of Direct finance
receivables


5.04
%


4.98
%Real estate secured receivables contractually past due 90 days or more


1,205,086



1,632,483Real estate secured receivables outstanding


14,046,311



15,731,657Real estate secured receivables contractually past due 90 days or more as a percentage of real estate secured
receivables


8.58
%


10.38
%Vehicle secured receivables contractually past due 60 days or more


1,426,630



1,090,032Vehicle secured receivables outstanding


15,789,754



17,782,135Vehicle secured receivables contractually past due 60 days or more as a percentage of vehicle secured
receivables


9.04
%


6.13
%Premium finance contracts contractually past due 60 days or more


542,049



679,091Premium finance contracts outstanding


4,640,351



8,375,711Premium finance contracts contractually past due 60 days or more as a percentage of premium finance
contracts


11.68
%


8.11
%





Finance receivable balances are presented net of unearned finance
charges.




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LIQUIDITY AND CAPITAL RESOURCES





We generally finance our operations through cash flow from operations, borrowings under our credit facility with FINOVA Capital Corporation (FINOVA) and the
sale, to public investors, of our subordinated notes.





Our credit facility with FINOVA, as amended on December 31,
2001, comprises a term loan with a balance of $11.9 million outstanding as of June 30, 2002, and a revolving credit line used to finance consumer receivables. Maximum borrowings under the revolving credit line as of June 30, 2002 are limited to the
lesser of $141 million, or 85% of eligible consumer finance receivables as defined by the agreement. Our maximum borrowing amount decreases on a quarterly basis and decreases an additional $6 million in 2002, $16.5 million in 2003, $18 million in
2004, $18 million in 2005, and $9 million in 2006. James D. Thaxton is the guarantor for both the term loan and the revolving loan.





Advances under the term loan accrue interest at the prime rate + 2%. Advances under the revolving credit line accrue interest at the prime rate + 1%. The prime rate is published by Citibank, N.A., or any other money center
bank as FINOVA may select. The credit facility matures in 2006. The interest rates are adjusted monthly to reflect fluctuations in the designated prime rate. Accrued interest on borrowings is payable monthly.





The term loan is payable in twenty-three equal monthly principal and interest payments, which began on April 15, 2001, in the amount of
$600,000, with the remaining principal balance due one month thereafter.





Under the revolving credit facility,
principal is due in full on the maturity date and can be prepaid without penalty. Substantially all of our and our subsidiaries assets secure the revolving credit facility, which requires us to comply with restrictive covenants, including
financial condition covenants. As of December 31, 2001, we met all such requirements.





As of June 30, 2002, an
additional $12.9 million was available under the terms of the revolving credit line to borrow against existing collateral, with $30.1 million of total potential capacity available for borrowing against qualified finance receivables generated in
future periods. As of June 30, 2002, the interest rates for borrowings were 5.75% for the revolving credit line, and 6.75% for the term loan.





In connection with the FirstPlus acquisition, the Company assumed $2.2 million of subordinated notes issued by Voyager Insurance Co. In November 1999, those notes were cancelled and re-issued in our
name. We are confident that we have adequate availability under our primary credit facility to borrow adequate funds to liquidate these notes, if required.





In February 1998, we began offering subordinated notes in several states by registering $50 million of subordinated notes with the Securities and Exchange Commission (SEC). In May 2001, we
registered an additional $75 million offering of subordinated notes with the SEC. The notes are sold primarily to individual investors. The maturity terms range from daily (demand) notes to sixty-month notes. Interest rates vary based on the
principal amounts and maturity dates of the notes. Notes currently being offered carry interest rates ranging from 5.25% to 8.0%. The notes are unsecured and issued under an indenture which we entered into with The Bank of New York, as trustee, in
February 1998. The terms of the indenture do not require us to comply with any financial covenants nor do they impose any material restrictions on the operations of our business.





As of June 30, 2002, we had $81.0 million of these registered subordinated notes outstanding and $4.3 million notes registered in predecessor state registrations. To date,
we have used the proceeds from the sale of these notes to reduce, on a temporary basis, the amount of our revolving credit facility with FINOVA. We intend to continue this note program by seeking to register additional offerings of subordinated
notes with the SEC. The sale of subordinated notes is an important aspect of the financing of our business. It enables us to reduce our overall borrowing costs, particularly during periods of increasing interest rates. In addition, it allows us to
hedge the interest rate risk inherent in our variable rate senior credit facility, and to diversify our sources of borrowed funds.





We plan to continue to reduce borrowings under our senior credit facility and replace those borrowings with increasing levels of subordinated notes. We anticipate that our cash inflow from operations, borrowings under our
senior credit facility, and the proceeds from the sale of subordinated notes will be more than adequate to meet our cash outflows to fund anticipated growth in our finance receivables, operating expenses, repayment of indebtedness, and planned
capital expenditures for the year ending December 31, 2002. We estimate our cash outflow to be approximately $25 million for 2002.




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ITEM 3:Quantitative and Qualitative Disclosures About Market Risk





The
Companys outstanding debt under the Revolving Credit Facility and Term Loan was $122.7 million at June 30, 2002. Interest on borrowings under these facilities is based on the prime rate. Based on the outstanding balance at June 30, 2002, a
change of 1% in the prime interest rate would cause a change in interest expense of approximately $1,227,000 on an annual basis.





The Companys outstanding receivables are not affected by external interest rate changes. This is due to the fact that the Company, like most other Non-Prime lending institutions, usually charges the maximum rate allowable by
law or, in states such as South Carolina where there are no legal maximum rates, at competitive rates commensurate with the increased default risk and the higher cost of servicing and administering a portfolio of loans to such borrowers. This causes
the interest rate risk on our outstanding receivables to be minimal.





PART II





Item 1.Legal Proceedings





None





Item 2.Changes in Securities and Use of Proceeds





None





Item 3.Defaults upon Senior Securities





None





Item 4.Submission of Matters to a Vote of Security Holders





None





Item 5.Other Information





None





Item 6.Exhibits and Reports on Form 8-K





Exhibits 99.1 and
99.2  Sarbones/Oxley Act certification by CEO and CFO.





SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.





THE THAXTON GROUP, INC. (Registrant)By:

/s/    JAMES D. THAXTONJames D. Thaxton President and
Chief Executive Officer





Date:  August 13, 2002





By:

/s/    ALLAN F. ROSSAllan F. Ross Vice President,
Treasurer, Secretary, and Chief Financial Officer





Date:  August 13, 2002




16